<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-4
PRE-EFFECTIVE AMENDMENT NO. 1
Registration Statement Under the Securities Act of 1933
----------
WESTERN SIERRA BANCORP
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6021 68-0390121
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
----------
4011 PLAZA GOLDORADO CIRCLE,
CAMERON PARK, CALIFORNIA 95682,
(530) 677-5600
(Address and Telephone Number of Principal Executive Offices)
----------
4011 PLAZA GOLDORADO CIRCLE
CAMERON PARK, CALIFORNIA 95682
(Address of Principal Place of Business)
----------
GARY D. GALL
PRESIDENT & CEO
4011 PLAZA GOLDORADO CIRCLE
CAMERON PARK, CALIFORNIA 95682
(530) 677-5600
(Name, Address and Telephone of Agent for Service)
----------
Copy to:
Gary Steven Findley, Esq.
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
(714) 630-7136
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
OF THE SECURITIES TO THE PUBLIC:
As soon as practicable after the effective date.
----------
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. [ ]
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.
[ ]_________________________.
----------
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> 2
WESTERN SIERRA BANCORP
CROSS-REFERENCE SHEET ITEMS IN
FORM S-4 AND PROSPECTUS PURSUANT TO
ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
Item No. Form S-4 Caption Location in Prospectus
- -------- ----------------------------------------- ----------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Same
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Same
of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed SUMMARY INFORMATION, RISK
Charges and Other Information FACTORS
4. Terms of the Transaction SUMMARY INFORMATION, THE LAKE MERGER AND
RELATED TRANSACTIONS, THE ROSE MERGER
AND RELATED TRANSACTIONS, DESCRIPTION OF
THE CAPITAL STOCK OF THE BANCORP, LAKE
AND ROSE.
5. Pro Forma Financial Information PRO FORMA FINANCIAL STATEMENTS
6. Material Contracts with the Company being THE LAKE MERGER AND RELATED
Acquired TRANSACTIONS-Interests of Certain
Persons in the Lake Merger and Material
Contracts with Lake and its Affiliates,
THE ROSE MERGER AND RELATED
TRANSACTIONS-Interests of Certain
Persons in the Rose Merger and Material
Contracts with Rose and its Affiliates.
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts and Counsel THE LAKE MERGER AND RELATED
TRANSACTIONS-Opinions of Financial
Advisors, THE ROSE MERGER AND RELATED
TRANSACTIONS-Opinion of Rose's Financial
Advisor and EXPERTS
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
10. Information with Respect to S-3 Registrants Not Applicable
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information with respect to Registrants SUMMARY NFORMATION, THE LAKE MERGER AND
other than S-2 or S-3 Registrants RELATED TRANSACTIONS, THE ROSE MERGER
AND RELATED TRANSACTIONS, DESCRIPTION OF
THE CAPITAL STOCK OF THE BANCORP, LAKE AND
ROSE, MARKET PRICES, DIVIDENDS, PRO FORMA
FINANCIAL STATEMENTS, REGULATORY CAPITAL
ADEQUACY, AND FINANCIAL STATEMENTS OF THE
BANCORP.
15. Information with Respect to Registrants Not Applicable
other than S-3 Companies
16. Information with Respect to S-2 or S-3 Not Applicable
Companies
17. Information with Respect to Companies SUMMARY INFORMATION, THE LAKE MERGER AND
other than S-3 or S-2 Companies RELATED TRANSACTIONS, THE ROSE MERGER
AND RELATED TRANSACTIONS, DESCRIPTION OF
THE CAPITAL STOCK OF THE BANCORP, LAKE AND
ROSE, MARKET PRICES, DIVIDENDS, PRO FORMA
FINANCIAL STATEMENTS, REGULATORY CAPITAL
ADEQUACY, AND FINANCIAL STATEMENTS OF LAKE
AND ROSE.
18. Information if Proxies, Consents or SUMMARY INFORMATION AND
Authorizations are to be Solicited INTRODUCTION
19. Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited or in
an Exchange Offer
</TABLE>
ii
<PAGE> 4
WESTERN SIERRA BANCORP
4011 PLAZA GOLDORADO CIRCLE
CAMERON PARK, CALIFORNIA 95682
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
___________, 1998
TO THE SHAREHOLDERS OF
WESTERN SIERRA BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to the call of its board of directors, a
Special Meeting of Shareholders (the "Bancorp Meeting") of Western Sierra
Bancorp (the "Bancorp") will be held at Western Sierra National Bank's principal
office located at 4011 Plaza Goldorado Circle, Cameron Park, California, on
______day, ___________, 1998 at ____ p.m. for the purpose of considering and
voting upon the following matters:
1. APPROVAL OF THE LAKE AGREEMENT. To consider and vote upon the approval
of the principal terms of the Agreement and Plan of Reorganization and
Merger by and among the Bancorp, LMC Merger Company and Lake Community
Bank ("Lake") dated May 27, 1998 and the transactions contemplated
thereby (the "Lake Agreement") providing for the merger of Lake with the
Bancorp's subsidiary corporation, LMC Merger Company, and the exchange
of shares of Bancorp Common Stock for shares of Lake Common Stock as
further described in the accompanying Joint Proxy Statement/Prospectus
and in the Lake Agreement which is included as Exhibit I to the Joint
Proxy Statement/Prospectus.
2. APPROVAL OF THE ROSE AGREEMENT. To consider and vote upon the approval
of the principal terms of the Agreement and Plan of Reorganization and
Merger by and among the Bancorp and Roseville 1st Community Bancorp
("Rose") dated July 2, 1998 and the transactions contemplated thereby
(the "Rose Agreement") providing for the merger of Rose with the
Bancorp, and the exchange of shares of Bancorp Common Stock for shares
of Rose Common Stock as further described in the accompanying Joint
Proxy Statement/Prospectus and in the Rose Agreement which is included
as Exhibit II to the Joint Proxy Statement/Prospectus.
3. TRANSACTION OF OTHER BUSINESS. To transact such other business as may
properly come before the Bancorp Meeting and any adjournment or
adjournments thereof.
The Board of Directors has fixed the close of business on November __, 1998 as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Bancorp Meeting.
BY ORDER OF THE
BOARD OF DIRECTORS
__________, 1998 Osvaldo I. Scariot, Secretary
APPROVAL OF THE PROPOSALS REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF BANCORP COMMON STOCK. THEREFORE, YOU ARE
REQUESTED TO VOTE ON THE PROPOSALS BY SIGNING AND RETURNING THE ENCLOSED PROXY
AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE BANCORP MEETING
IN PERSON. THE ENCLOSED PROXY IS SOLICITED BY THE BANCORP'S BOARD OF DIRECTORS.
YOU MAY REVOKE YOUR PROXY PRIOR TO THE TIME IT IS VOTED BY FILING WITH THE
SECRETARY OF THE BANCORP AN INSTRUMENT REVOKING IT OR A DULY EXECUTED PROXY
BEARING A LATER DATE, OR BY ATTENDING THE BANCORP MEETING AND VOTING IN PERSON.
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE BANCORP
MEETING SO THAT WE CAN ARRANGE ADEQUATE ACCOMMODATIONS.
<PAGE> 5
LAKE COMMUNITY BANK
805 ELEVENTH STREET
LAKEPORT, CALIFORNIA 95453
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
___________, 1998
TO THE SHAREHOLDERS OF LAKE COMMUNITY BANK:
NOTICE IS HEREBY GIVEN that, pursuant to the call of its board of directors, a
Special Meeting of Shareholders (the "Lake Meeting") of Lake Community Bank
("Lake") will be held at Lake's principal office located at 805 Eleventh Street,
Lakeport, California, on ______day, ___________, 1998 at 5:00 p.m. for the
purpose of considering and voting upon the following matters:
1. APPROVAL OF THE LAKE AGREEMENT. To consider and vote upon the approval
of the principal terms of the Agreement and Plan of Reorganization and
Merger by and among Western Sierra Bancorp (the "Bancorp"), LMC Merger
Company and Lake dated May 27, 1998 and the transactions contemplated
thereby (the "Lake Agreement") providing for the merger of Lake with the
Bancorp's subsidiary corporation, LMC Merger Company, and the exchange
of shares of Bancorp Common Stock for shares of Lake Common Stock as
further described in the accompanying Joint Proxy Statement/Prospectus
and in the Lake Agreement which is included as Exhibit I to the Joint
Proxy Statement/Prospectus.
2. TRANSACTION OF OTHER BUSINESS. To transact such other business as may
properly come before the Lake Meeting and any adjournment or
adjournments thereof.
The Board of Directors has fixed the close of business on November __, 1998 as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Lake Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
__________, 1998 Pat Price, Secretary
APPROVAL OF THE LAKE AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF LAKE COMMON STOCK. THEREFORE, YOU ARE
REQUESTED TO VOTE ON THE LAKE AGREEMENT BY SIGNING AND RETURNING THE ENCLOSED
PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE LAKE
MEETING IN PERSON. THE ENCLOSED PROXY IS SOLICITED BY LAKE'S BOARD OF DIRECTORS.
YOU MAY REVOKE YOUR PROXY PRIOR TO THE TIME IT IS VOTED BY FILING WITH THE
SECRETARY OF LAKE AN INSTRUMENT REVOKING IT OR A DULY EXECUTED PROXY BEARING A
LATER DATE, OR BY ATTENDING THE LAKE MEETING AND VOTING IN PERSON. PLEASE
INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE LAKE MEETING SO
THAT WE CAN ARRANGE ADEQUATE ACCOMMODATIONS.
<PAGE> 6
ROSEVILLE 1ST COMMUNITY BANCORP
1801 DOUGLAS BOULEVARD
ROSEVILLE, CALIFORNIA 95661
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
___________, 1998
TO THE SHAREHOLDERS OF ROSEVILLE 1ST COMMUNITY BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to the call of its board of directors, a
Special Meeting of Shareholders (the "Rose Meeting") of Roseville 1st Community
Bancorp ("Rose") will be held at Roseville 1st National Bank's principal office
located at 1801 Douglas Boulevard, Roseville, California, on ______day,
___________, 1998 at ____ p.m. for the purpose of considering and voting upon
the following matters:
1. APPROVAL OF THE ROSE AGREEMENT. To consider and vote upon the approval
of the principal terms of the Agreement and Plan of Reorganization and
Merger by and among the Western Sierra Bancorp (the "Bancorp") and Rose
dated July 2, 1998 and the transactions contemplated thereby (the "Rose
Agreement") providing for the merger of Rose with the Bancorp, and the
exchange of shares of Bancorp Common Stock for shares of Rose Common
Stock as further described in the accompanying Joint Proxy Statement/
Prospectus and in the Rose Agreement which is included as Exhibit II to
the Joint Proxy Statement/Prospectus.
2. TRANSACTION OF OTHER BUSINESS. To transact such other business as may
properly come before the Rose Meeting and any adjournment or
adjournments thereof.
The Board of Directors has fixed the close of business on November __, 1998 as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Rose Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
__________, 1998 Thomas C. Warren, Secretary
APPROVAL OF THE ROSE AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF ROSE COMMON STOCK. THEREFORE, YOU ARE
REQUESTED TO VOTE ON THE ROSE AGREEMENT BY SIGNING AND RETURNING THE ENCLOSED
PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE ROSE
MEETING IN PERSON. THE ENCLOSED PROXY IS SOLICITED BY ROSE'S BOARD OF DIRECTORS.
YOU MAY REVOKE YOUR PROXY PRIOR TO THE TIME IT IS VOTED BY FILING WITH THE
SECRETARY OF ROSE AN INSTRUMENT REVOKING IT OR A DULY EXECUTED PROXY BEARING A
LATER DATE, OR BY ATTENDING THE ROSE MEETING AND VOTING IN PERSON. PLEASE
INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE ROSE MEETING SO
THAT WE CAN ARRANGE ADEQUATE ACCOMMODATIONS.
<PAGE> 7
JOINT PROXY STATEMENT OF
WESTERN SIERRA BANCORP,
LAKE COMMUNITY BANK
AND
ROSEVILLE 1ST COMMUNITY BANCORP
AND PROSPECTUS OF
WESTERN SIERRA BANCORP
<PAGE> 8
JOINT PROXY STATEMENT/PROSPECTUS
This Joint Proxy Statement of Western Sierra Bancorp, Lake Community Bank and
Roseville 1st Community Bancorp and Prospectus of Western Sierra Bancorp ("Joint
Proxy Statement/Prospectus") is being furnished to the shareholders of Western
Sierra Bancorp, a California corporation (the"Bancorp"), to the shareholders of
Lake Community Bank, a California state-chartered bank ("Lake") and to the
shareholders of Roseville 1st Community Bancorp, a California corporation
("Rose"), in connection with the special meetings to be held by each of them.
The Special Meeting of Shareholders of the Bancorp (the "Bancorp Meeting") will
be held on _____day, ________, 1998, at ____ _.m. at 4011 Plaza Goldorado
Circle, Cameron Park, California. The Special Meeting of Shareholders of Lake
(the "Lake Meeting") will be held on ______day, _______, 1998, at ____ _.m. at
805 Eleventh Street, Lakeport, California. The Special Meeting of Shareholders
of Rose (the "Rose Meeting") will be held on ____day, _______, 1998, at ____
_.m. at 1801 Douglas Boulevard, Roseville, California.
Shareholders of the Bancorp will vote: (i) upon a proposal to approve the
Agreement and Plan of Reorganization and Merger by and between the Bancorp and
Lake dated as of May 27, 1998 and the transactions contemplated thereby (the
"Lake Agreement"), providing for the merger (the "Lake Merger") of the Bancorp's
wholly-owned subsidiary, LMC Merger Company ("LMC") with and into Lake with Lake
being the surviving entity pursuant to the terms of the Lake Agreement; (ii)
upon a proposal to approve the Agreement and Plan of Reorganization and Merger
by and between the Bancorp and Rose dated as of July 2, 1998 and the
transactions contemplated thereby (the "Rose Agreement"), providing for the
merger (the "Rose Merger") of Rose and the Bancorp with the Bancorp being the
surviving entity pursuant to the terms of the Rose Agreement; and (iii) upon
such other business as may properly come before the Bancorp Meeting, including
any adjournments thereof.
Shareholders of Lake will vote: (i) upon a proposal to approve the Lake
Agreement and the transactions contemplated thereby, including the Lake Merger;
and (ii) upon such other business as may properly come before the Lake Meeting,
including any adjournments thereof.
Shareholders of Rose will vote: (i) upon a proposal to approve the Rose
Agreement and the transactions contemplated thereby, including the Rose Merger;
and (ii) upon such other business as may properly come before the Rose Meeting,
including any adjournments thereof.
The executive offices of the Bancorp are located at 4011 Plaza Goldorado Circle,
Cameron Park, California 95682, (530) 677-5600.
The executive offices of Lake are located at 805 Eleventh Street, Lakeport,
California 95453, (707) 262-3310.
The executive offices of Rose are located at 1801 Douglas Boulevard, Roseville,
California 95661, (916) 773-3333.
WHILE THE BANCORP AND LAKE ANTICIPATE THAT THE LAKE MERGER WILL BE APPROVED BY
THE COMMISSIONER OF THE CALIFORNIA DEPARTMENT OF FINANCIAL INSTITUTIONS (THE
"DFI"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") AND THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM (THE "FRB") AND THE ROSE MERGER HAS BEEN
APPROVED BY THE FRB, THE SHARES OF BANCORP COMMON STOCK TO BE ISSUED IN THE LAKE
MERGER AND THE ROSE MERGER HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), ANY STATE SECURITIES REGULATORS, THE DFI, THE FDIC OR
THE FRB NOR HAVE ANY OF THE REGULATORS DETERMINED THAT THE JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is _________, 1998.
i
<PAGE> 9
Information in this Joint Proxy Statement/Prospectus relating to the Bancorp has
been prepared from information which has been furnished by the Bancorp.
Information which relates to Lake has been prepared from information furnished
by Lake. Information which relates to Rose has been prepared from information
furnished by Rose.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/
PROSPECTUS OR THAT TO WHICH WE HAVE REFERRED YOU. NEITHER THE BANCORP, ROSE OR
LAKE HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THE JOINT PROXY STATEMENT/
PROSPECTUS NOR ANY DISTRIBUTION OF SHARES OF BANCORP COMMON STOCK MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE AFFAIRS OF THE BANCORP, LAKE OR ROSE SINCE THE DATE OF THIS
JOINT PROXY STATEMENT/PROSPECTUS.
This Joint Proxy Statement/Prospectus is first being mailed to shareholders of
the Bancorp, Lake and Rose on or about __________, 1998.
FOR A DISCUSSION OF CERTAIN FACTORS IMPORTANT TO THE DECISION TO APPROVE THE
LAKE AGREEMENT AND THE ROSE AGREEMENT, SEE "RISK FACTORS" ON PAGE 23.
AVAILABLE INFORMATION
The Bancorp, until this time, has not been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and therefore has not filed any reports, proxy statements and other
information with the SEC other than materials associated with the registration
statement for the securities to be issued pursuant to the Lake Merger and the
Rose Merger. Rose was subject to the informational requirements of the Exchange
Act, and in accordance therewith, Rose filed reports, proxy statements and other
information with the SEC. Rose was given a suspension of the duty to file
reports with the SEC, effective with the first quarter of 1998. Materials filed
by the Bancorp and Rose can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C., the Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois, and the New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York. Copies can
also be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C., at prescribed rates.
Lake is subject to the informational requirements of the Exchange Act as
administered by the FDIC, and files reports, proxy statements and other
information with the FDIC. Materials filed by Lake can be inspected and copies
can be obtained from the Registration and Disclosure Section of the FDIC, 1176
F. Street, N.W., Room 643, Washington, D.C., at prescribed rates.
The Bancorp has filed with the SEC a Registration Statement on Form S-4 under
the Securities Act of 1933 (the "Securities Act") relating to the shares of
Bancorp Common Stock to be issued in connection with the Lake Merger and the
Rose Merger (together with any amendments thereto, the "Registration
Statement"). This Joint Proxy Statement/Prospectus also contains the Prospectus
of the Bancorp filed as part of the Registration Statement but does not contain
all of the information set forth in the Registration Statement. The Registration
Statement may be inspected and copied, at prescribed rates, at the public
reference facilities maintained by the SEC at the addresses set forth above.
ii
<PAGE> 10
Statements contained in this Joint Proxy Statement/Prospectus about another
document are not necessarily complete. If you want to know the details about
another document, you need to read that particular document which will be either
an Exhibit to the Joint Proxy Statement/Prospectus or an Exhibit contained in
the Registration Statement filed with the SEC.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS INCLUDED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING
STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS,"
"CONSIDERS" AND WORDS OF SIMILAR IMPORT, ARE CONSIDERED TO BE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS OF THE
BANCORP, LAKE OR ROSE TO BE MATERIALLY DIFFERENT FROM THE FUTURE RESULTS
EXPRESSED OR IMPLIED BY FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG
OTHERS, THE FOLLOWING: (1) UNFORSEEN COMPETITIVE PRESSURE IN THE BANKING
INDUSTRY WHICH REDUCES REVENUES; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT
THAT REDUCE INTEREST MARGINS; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY
OR REGIONALLY, THAT ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER
THINGS, A DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY
ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND (6) CHANGES
IN SECURITIES MARKETS; AND OTHER FACTORS DISCUSSED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. SHAREHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS. THE BANCORP, LAKE AND ROSE DISCLAIM ANY DUTY TO
UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY CHANGES TO ANY
OF THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
iii
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE LAKE MERGER AND THE ROSE MERGER........................................................ 1
SUMMARY INFORMATION..................................................................................................... 4
Corporations Soliciting Proxies.......................................................................... 4
Meeting Dates and Locations.............................................................................. 4
Purposes of the Meetings................................................................................. 5
Vote Required - Lake Agreement........................................................................... 5
Vote Required - Rose Agreement........................................................................... 5
The Lake Merger.......................................................................................... 6
The Rose Merger.......................................................................................... 6
Independence of the Lake Merger and the Rose Merger...................................................... 6
Terms of the Lake Merger; Conversion of Shares and Options............................................... 6
Terms of the Rose Merger; Conversion of Shares and Options............................................... 7
Reasons for the Lake Merger and Managements' Recommendations............................................. 8
Reasons for the Rose Merger and Managements' Recommendations............................................. 9
Opinions of Financial Advisors - Lake Merger............................................................. 9
Opinion of Financial Advisor - Rose Merger............................................................... 9
Certain Federal and California Income Tax Consequences of the Lake Merger................................ 9
Certain Federal and California Income Tax Consequences of the Rose Merger................................ 10
Appraisal Rights - Lake Merger........................................................................... 10
Appraisal Rights - Rose Merger........................................................................... 10
Interests of Certain Persons in the Lake Merger
and Material Contracts with Lake and its Affiliates........................................ 10
Interests of Certain Persons in the Rose Merger
and Material Contracts with Rose and its Affiliates........................................ 11
Conditions to the Lake Merger............................................................................ 12
Conditions to the Rose Merger............................................................................ 12
Lake Effective Time...................................................................................... 13
Rose Effective Time...................................................................................... 13
Accounting Treatment of the Lake Merger.................................................................. 13
Accounting Treatment of the Rose Merger.................................................................. 13
Certain Financial Information............................................................................ 13
Regulatory Capital Adequacy.............................................................................. 20
Certain Differences in Rights of Shareholders............................................................ 21
Market Prices of Bancorp Common Stock and Lake Common Stock.............................................. 22
Market Prices of Bancorp Common Stock and Rose Common Stock.............................................. 23
RISK FACTORS ......................................................................................................... 23
Risk Factors Relating to the Lake Merger and the Rose Merger............................................. 23
Risk Factors Relating to the Industry.................................................................... 24
Risks Relating to the Bancorp............................................................................ 25
INTRODUCTION ......................................................................................................... 26
Matters to be Considered at the Shareholders' Meetings................................................... 26
Record Dates ........................................................................................... 27
Outstanding Securities and Voting Rights................................................................. 27
</TABLE>
iv
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
PAGE
----
<S> <C>
Recommendations of the Boards of Directors............................................................. 28
Revocability of Proxies................................................................................ 28
Cost of Solicitation of Proxies........................................................................ 29
Beneficial Ownership of Principal Shareholders and Management.......................................... 29
THE LAKE MERGER AND RELATED TRANSACTIONS.............................................................................. 34
General ............................................................................................... 34
Background and Reasons for the Lake Merger............................................................. 35
Lake Conversion Rate and Exchange of Shares and Options................................................ 36
Interests of Certain Persons in the Lake Merger
and Material Contracts with Lake and its Affiliates...................................... 38
Regulatory Approval and Lake Effective Time............................................................ 39
Conditions to the Lake Merger.......................................................................... 39
Waiver, Amendment, and Termination..................................................................... 41
Liquidated Damages..................................................................................... 42
Opinions of Financial Advisors......................................................................... 42
Certain Federal and California Income Tax Consequences................................................. 49
Rights of Dissenting Shareholders of Lake and the Bancorp.............................................. 50
THE ROSE MERGER AND RELATED TRANSACTIONS.............................................................................. 52
General ............................................................................................... 52
Background and Reasons for the Rose Merger............................................................. 53
Rose Conversion Rate and Exchange of Shares and Options................................................ 57
Interests of Certain Persons in the Rose Merger
and Material Contracts with Rose and its Affiliates...................................... 58
Regulatory Approval and Rose Effective Time............................................................ 60
Conditions to the Rose Merger.......................................................................... 60
Waiver, Amendment, and Termination..................................................................... 61
Liquidated Damages..................................................................................... 62
Opinion of Rose's Financial Advisor.................................................................... 62
Certain Federal and California Income Tax Consequences................................................. 66
Rights of Dissenting Shareholders of Rose and the Bancorp.............................................. 67
DESCRIPTION OF THE CAPITAL STOCK OF THE
BANCORP, LAKE AND ROSE................................................................................. 69
The Bancorp ......................................................................................... 69
Lake .................................................................................................. 70
Rose .................................................................................................. 71
The Bancorp Following the Lake Merger and the Rose Merger.............................................. 71
MARKET PRICES ....................................................................................................... 72
The Bancorp ........................................................................................... 72
Lake .................................................................................................. 72
Rose .................................................................................................. 73
</TABLE>
v
<PAGE> 13
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIVIDENDS ............................................................................................................ 73
The Bancorp ......................................................................................... 73
Lake .................................................................................................. 74
Rose................................................................................................... 74
The Bancorp Following the Lake Merger and the Rose Merger.............................................. 75
PRO FORMA FINANCIAL STATEMENTS........................................................................................ 75
Lake Merger ......................................................................................... 75
Rose Merger ......................................................................................... 85
The Bancorp Following the Lake Merger and the Rose Merger.............................................. 95
REGULATORY CAPITAL ADEQUACY........................................................................................... 105
DESCRIPTION OF THE BANCORP............................................................................................ 107
Business............................................................................................... 107
Summary of Earnings.................................................................................... 110
The Bancorp's Management's Discussion and Analysis
of Financial Condition And Results of Operations......................................... 111
Management............................................................................................. 132
Certain Transactions................................................................................... 137
DESCRIPTION OF LAKE................................................................................................... 138
Business............................................................................................... 138
Summary of Earnings.................................................................................... 140
Lake's Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................... 141
Management............................................................................................. 163
Certain Transactions................................................................................... 167
DESCRIPTION OF ROSE................................................................................................... 168
Business............................................................................................... 168
Summary of Earnings.................................................................................... 171
Rose's Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................... 173
Management............................................................................................. 195
Certain Transactions................................................................................... 198
INFORMATION CONCERNING THE BANCORP, LAKE AND ROSE..................................................................... 198
Competition............................................................................................ 198
Effect of Governmental Policies and Recent Legislation................................................. 199
Current Accounting Developments........................................................................ 199
Recent Legislation and Other Changes................................................................... 200
Pending Legislation and Regulations.................................................................... 203
</TABLE>
vi
<PAGE> 14
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE BANCORP FOLLOWING THE
LAKE MERGER AND THE ROSE MERGER....................................................................... 204
Business.............................................................................................. 204
Management............................................................................................ 204
Limitation of Liability and Indemnification........................................................... 205
Independent Public Accountants........................................................................ 206
EXPERTS.............................................................................................................. 206
LEGAL MATTERS........................................................................................................ 206
OTHER BUSINESS....................................................................................................... 207
INDEX TO FINANCIAL STATEMENTS........................................................................................ 208
</TABLE>
Exhibit I Agreement and Plan of Reorganization and Merger by and among
the Bancorp, LMC Merger Company and Lake
Exhibit II Agreement and Plan of Reorganization and Merger by and among
the Bancorp and Rose
Exhibit III Opinion of The Findley Group
Exhibit IV Opinion of The Banc Stock Group, Inc.
Exhibit V Opinion of The Banc Stock Group, Inc.
Exhibit VI Sections 1300-1304 of the California General Corporation Law
vii
<PAGE> 15
QUESTIONS AND ANSWERS ABOUT THE LAKE MERGER AND THE ROSE MERGER
Q. Why is this document so large?
A. This document contains information regarding two separate mergers. One
of the mergers is between Lake Community Bank and a subsidiary of
Western Sierra Bancorp. This merger is referred to as the Lake Merger.
The other merger is between Roseville 1st Community Bancorp and
Western Sierra Bancorp. This merger is referred to as the Rose Merger.
We also refer to Western Sierra Bancorp as the "Bancorp," Lake
Community Bank as "Lake" and Roseville 1st Community Bancorp as
"Rose."
Q. Do I really need to read this whole thing?
A. Yes. This document includes information about the Bancorp, Lake and
Rose, and since both the Lake Merger and the Rose Merger may occur,
shareholders of the Bancorp, Lake and Rose should be informed about
all three entities.
Q. Why is Lake merging with a subsidiary of the Bancorp?
A. Lake is a bank which is headquartered in Lakeport, California. The
Bancorp is a bank holding company and the owner of Western Sierra
National Bank, which is a bank headquartered in Cameron Park,
California. The Bancorp was looking for an opportunity to expand its
bank holding company structure by acquiring a bank which makes its
market in another area of Northern California. Lake was looking for an
opportunity to provide its shareholders with stock of a company which
has more trading available. For corporate reasons, Lake will be merged
with a subsidiary of the Bancorp so that Lake will become a subsidiary
bank of the Bancorp following the Lake Merger. To review the reasons
for the Lake Merger in greater detail and related uncertainties, see
pages 35 through 36 and 23.
Q. Why is Rose merging with the Bancorp?
A. Rose is a bank holding company and the owner of Roseville 1st National
Bank, which is a bank headquartered in Roseville, California. The
Bancorp is a bank holding company and the owner of Western Sierra
National Bank, which is a bank headquartered in Cameron Park,
California. The Bancorp was looking for an opportunity to expand its
bank holding company structure by acquiring another bank which makes
its market in the Sacramento area of Northern California. Rose was
looking for an opportunity to provide its shareholders with stock of a
company which has more trading available. To review the reasons for
the Rose Merger in greater detail and related uncertainties, see pages
53 through 56 and 23.
1
<PAGE> 16
Q. What happens if the shareholders approve the Lake Merger?
A. If you are a shareholder of the Bancorp, you will retain your shares
in the Bancorp which will then have Lake as a subsidiary bank. Your
percentage ownership of Bancorp Common Stock will be reduced as the
Bancorp will issue new shares of Bancorp Common Stock to the Lake
shareholders. If you are a shareholder of Lake, you will become a
shareholder of the Bancorp and your shares of Lake Common Stock will
be exchanged for shares of Bancorp Common Stock based upon a
conversion rate that will be determined prior to the Lake Merger.
However, both the shareholders of the Bancorp and Lake have the right
to exercise dissenters' rights which are more fully discussed on pages
50 through 52, and in that case, you will not remain or become a
shareholder of the Bancorp.
Q. What happens if the shareholders approve the Rose Merger?
A. If you are a shareholder of the Bancorp, you will retain your shares
in the Bancorp which will then have Rose's subsidiary bank, Roseville
1st National Bank, as a subsidiary bank. Your percentage ownership of
Bancorp Common Stock will be reduced as the Bancorp will issue new
shares of Bancorp Common Stock to the Rose shareholders. If you are a
shareholder of Rose, you will become a shareholder of the Bancorp and
your shares of Rose Common Stock will be exchanged for shares of
Bancorp Common Stock based upon a conversion rate that will be
determined prior to the Rose Merger. However, both the shareholders of
the Bancorp and Rose have the right to exercise dissenters' rights
which are more fully discussed on pages 67 through 69, and in that
case, you will not remain or become a shareholder of the Bancorp.
Q. How will the Lake shareholders and the Bancorp shareholders benefit
from the Lake Merger?
A. The Boards of Directors of the Bancorp and Lake believe the
shareholders of Lake and the Bancorp will benefit by being owners of a
company that is better able to compete in its industry than either
Lake or the Bancorp individually.
Q. How will the Rose shareholders and the Bancorp shareholders benefit
from the Rose Merger?
A. The Boards of Directors of the Bancorp and Rose believe the
shareholders of Rose and the Bancorp will benefit by being owners of a
company that is better able to compete in its industry than either
Rose or the Bancorp individually.
Q. What do I need to do now?
A. You need to read the Joint Proxy Statement/Prospectus and sign your
proxy card and mail it to us in the enclosed return envelope as soon
as possible. The Boards of Directors of each of the Bancorp and Lake
unanimously recommend that you vote "FOR" approval of the Lake Merger,
and the Boards of Directors of each of the Bancorp and Rose
unanimously recommend that you vote "FOR" approval of the Rose Merger.
Q. Should I send in my stock certificates now?
A. No. If you are a Lake shareholder, and the Lake Merger is approved,
the Bancorp will send you written instructions for exchanging your
Lake Common Stock certificates. If you are a Rose shareholder, and the
Rose Merger is approved, the Bancorp will send you written
instructions for exchanging your Rose Common Stock certificates.
2
<PAGE> 17
Q. If I am a Lake shareholder, how many shares of Bancorp Common Stock
will I receive if the Lake Merger is consummated?
A. Lake shareholders will receive shares of Bancorp Common Stock based
upon the calculation of the Lake Conversion Rate. The Lake Conversion
Rate will be determined at the end of the month before the Lake Merger
is completed. The Lake Conversion Rate will be calculated using Lake's
shareholders' equity, the number of shares of Lake Common Stock
outstanding and the market price for Bancorp Common Stock. Both the
Bancorp and Lake anticipate that the Lake Conversion Rate will be in
range of .6 to .8 shares of Bancorp Common Stock for each share of
Lake Common Stock. For a detailed discussion of the Lake Conversion
Rate and anticipated results, read pages 36 through 38, including the
table contained on page 37.
Q. If I am a Rose shareholder, how many shares of Bancorp Common Stock
will I receive if the Rose Merger is consummated?
A. Rose shareholders will receive shares of Bancorp Common Stock based
upon the calculation of the Rose Conversion Rate. The Rose Conversion
Rate will be determined at the end of the month before the Rose Merger
is completed. The Rose Conversion Rate will be calculated using Rose's
shareholders' equity and the number of shares of Rose Common Stock
outstanding, and the Bancorp's shareholders' equity and the number of
shares of Bancorp Common Stock outstanding. However, the Bancorp's
information will not reflect the prior consummation of the Lake Merger
if the Lake Merger occurs before the Rose Merger. Both the Bancorp and
Rose anticipate that the Rose Conversion Rate will be in range of 1.1
to 1.3 shares of Bancorp Common Stock for each share of Rose Common
Stock. For a detailed discussion of the Rose Conversion Rate and
anticipated results, read pages 57-58.
Q. Will I receive any cash if the Lake Merger is consummated?
A. The answer is no in that the Lake Merger provides a stock for stock
exchange. However, cash will be paid for fractional shares and will be
paid to shareholders who dissent. If there are too many dissenters,
the Lake Merger will not be consummated.
Q. Will I receive any cash if the Rose Merger is consummated?
A. The answer is no in that the Rose Merger provides a stock for stock
exchange. However, cash will be paid for fractional shares and will be
paid to shareholders who dissent. If there are too many dissenters,
the Rose Merger will not be consummated.
Q. Will I receive future dividends?
A. The Bancorp has never paid any cash dividends and does not have any
present intention to do so in the near future. However, the Bancorp
has paid stock dividends in the past and does anticipate continuing to
do so in the future.
Q. What are the tax consequences in the Lake Merger and the Rose Merger?
A. The exchange of shares of Lake Common Stock or Rose Common Stock will
generally be tax-free for federal income tax purposes for Lake
shareholders and Rose shareholders, respectively. To review the tax
consequences in greater detail, read pages 49-50 and 66-67.
Q. When do you expect the Lake Merger to be completed?
A. The Lake Merger is expected to be completed thirty days after the
shareholders' meetings.
Q. When do you expect the Rose Merger to be completed?
A. The Rose Merger is expected to be completed thirty days after the
shareholders' meetings.
3
<PAGE> 18
Q. What happens if only the Lake Merger is approved and the Rose Merger
is not approved?
A. The Lake Merger will be completed if approved, regardless of whether
or not the Rose Merger is approved. The Lake Merger and the Rose
Merger are independent of one another.
Q. What happens if only the Rose Merger is approved and the Lake Merger
is not approved?
A. The Rose Merger will be completed if approved, regardless of whether
or not the Lake Merger is approved. The Rose Merger and the Lake
Merger are independent of one another.
SUMMARY INFORMATION
The following is a summary of certain information contained in this Joint Proxy
Statement/Prospectus. The summary is not complete. A more detailed discussion is
contained in other parts of this Joint Proxy Statement/Prospectus and in the
Agreement and Plan of Reorganization and Merger by and between Western Sierra
Bancorp, LMC Merger Company and Lake Community Bank dated May 27, 1998 and the
transactions contemplated thereby (the "Lake Agreement") attached to this Joint
Proxy Statement/Prospectus as Exhibit I and in the Agreement and Plan of
Reorganization and Merger by and between Western Sierra Bancorp and Roseville
1st Community Bancorp dated July 2, 1998 and the transactions contemplated
thereby (the "Rose Agreement") attached to this Joint Proxy Statement/Prospectus
as Exhibit II.
CORPORATIONS SOLICITING PROXIES
Western Sierra Bancorp (the "Bancorp") is a bank holding company incorporated in
California. The Bancorp's wholly-owned subsidiary, Western Sierra National Bank
("WSNB") is a national banking association with branches serving El Dorado and
Placer Counties in California. WSNB also has a loan production office in
Sacramento County, California. WSNB is a member of the Federal Reserve System
and its deposits are insured under the Federal Deposit Insurance Act up to the
applicable limits thereof. The Bancorp's and WSNB's main office and corporate
offices are located at 4011 Plaza Goldorado Circle, Cameron Park, California.
WSNB also has six branch offices, five of which are located in El Dorado County,
California and one of which is located in Placer County, California.
Lake Community Bank ("Lake") is a California state-chartered bank serving
Lakeport, California and surrounding communities and is an insured bank under
the Federal Deposit Insurance Act up to the applicable limits thereof. Lake's
main banking office and corporate offices are located at 805 Eleventh Street,
Lakeport, California. It also has two offices located at 1377 South Main Street,
Lakeport, California and 4280 Main Street, Kelseyville, California. Lake is in
the process of consolidating its Main Street, Lakeport office with Lake's
headquarters office located on Eleventh Street in Lakeport.
Roseville 1st Community Bancorp ("Rose") is a bank holding company incorporated
in California. Rose's wholly-owned subsidiary, Roseville 1st National Bank
("R1NB"), is a national banking association serving Placer, Sacramento and Butte
Counties in California. R1NB is a member of the Federal Reserve System and its
deposits are insured under the Federal Deposit Insurance Act up to the
applicable limits thereof. Rose's and R1NB's main office and corporate offices
are located at 1801 Douglas Boulevard, Roseville, California. R1NB also has one
branch office located in Placer County, California and one loan production
office located in Butte County, California.
MEETING DATES AND LOCATIONS
The Special Meeting of Shareholders of the Bancorp (the "Bancorp Meeting") will
be held at the Bancorp's main office, 4011 Plaza Goldorado Circle, Cameron Park,
California, at _:00 p.m., on ____day, _________, 1998.
4
<PAGE> 19
The Special Meeting of Shareholders of Lake (the "Lake Meeting") will be held at
Lake's main office, 805 Eleventh Street, Lakeport, California, at ______.m., on
____day, _______, 1998.
The Special Meeting of Shareholders of Rose (the "Rose Meeting") will be held at
Rose's main office, 1801 Douglas Boulevard, Roseville, California, at ______.m.,
on ____day, _______, 1998.
PURPOSES OF THE MEETINGS
The Bancorp Meeting has been called to vote upon (i) a proposal to approve the
Lake Agreement, (ii) a proposal to approve the Rose Agreement, and (iii) such
other matters as may properly come before the Bancorp Meeting including any
adjournment or adjournments thereof. (See "INTRODUCTION--Matters to be
Considered at the Bancorp Meeting and the Lake Meeting" and "INTRODUCTION--
Matters to be Considered at the Bancorp Meeting and the Rose Meeting.")
The Lake Meeting has been called to vote upon (i) a proposal to approve the Lake
Agreement, and (ii) such other matters as may properly come before the Lake
Meeting including any adjournment or adjournments thereof. (See
"INTRODUCTION--Matters to be Considered at the Bancorp Meeting and the Lake
Meeting.")
The Rose Meeting has been called to vote upon (i) a proposal to approve the Rose
Agreement, and (ii) such other matters as may properly come before the Rose
Meeting including any adjournment or adjournments thereof. (See
"INTRODUCTION--Matters to be Considered at the Bancorp Meeting and the Rose
Meeting.")
VOTE REQUIRED - LAKE AGREEMENT
Approval of the Lake Agreement requires the affirmative vote of the holders of a
majority of the outstanding shares of Bancorp Common Stock and of Lake Common
Stock. On October 1, 1998, there were 981,448 shares of Bancorp Common Stock
outstanding. The Bancorp directors and executive officers and their affiliates
owned approximately 33.3% of the outstanding shares of Bancorp Common Stock as
of October 1, 1998. On October 1, 1998, there were 1,298,296 shares of Lake
Common Stock outstanding. The Lake directors and executive officers and their
affiliates owned approximately 18.8% of the outstanding shares of Lake Common
Stock as of October 1, 1998. Lake's directors who own approximately 17.7% of the
outstanding shares of Lake Common Stock have agreed to vote "FOR" approval of
the Lake Agreement. Therefore, holders of only approximately an additional 32.4%
of shares of Lake Common Stock outstanding will be necessary to approve the Lake
Merger.
The effect of broker nonvotes is that such votes are not counted as being voted;
however such votes are counted for purposes of determining a quorum. The effect
of a vote of abstention on any matter is that such vote is not counted as a vote
for or against the matter, but is counted as an abstention.
VOTE REQUIRED - ROSE AGREEMENT
Approval of the Rose Agreement requires the affirmative vote of the holders of a
majority of the outstanding shares of Bancorp Common Stock and of Rose Common
Stock. On October 1, 1998, there were 981,448 shares of Bancorp Common Stock
outstanding. The Bancorp directors and executive officers and their affiliates
owned approximately 33.3% of the outstanding shares of Bancorp Common Stock as
of October 1, 1998. On October 1, 1998, there were 370,805 shares of Rose Common
Stock outstanding. The Rose directors and executive officers and their
affiliates owned approximately 44.8% of the outstanding shares of Rose Common
Stock as of October 1, 1998. Rose's directors who own approximately 44.5% of the
outstanding shares of Rose Common Stock have agreed to vote "FOR" approval of
the Rose Agreement. Therefore, holders of only approximately an additional 5.6%
of shares of Rose Common Stock outstanding will be necessary to approve the Rose
Merger.
5
<PAGE> 20
The effect of broker nonvotes is that such votes are not counted as being voted;
however such votes are counted for purposes of determining a quorum. The effect
of a vote of abstention on any matter is that such vote is not counted as a vote
for or against the matter, but is counted as an abstention.
THE LAKE MERGER
During the past two years, the Bancorp has been expanding its services to the
businesses and residents of El Dorado and Placer Counties through its branch
operations and in Sacramento County through its loan production office. In early
1998 the Bancorp had preliminary discussions with Lake regarding a potential
merger of the two institutions. After discussions between the Bancorp and Lake,
the parties executed a Confidentiality Agreement dated February 27, 1998,
whereby the Bancorp would acquire Lake through a stock-for-stock merger
transaction.
On May 27, 1998, the Bancorp and Lake entered into the Lake Agreement, which
provides for the merger of Lake with the Bancorp's wholly-owned subsidiary, LMC
Merger Company ("LMC") with Lake as the surviving corporation and the conversion
of the outstanding shares of no par value common stock of Lake ("Lake Common
Stock") into the right to receive newly issued shares of no par value per share
common stock of the Bancorp ("Bancorp Common Stock") (the "Lake Merger").
THE ROSE MERGER
During the past two years, the Bancorp has been expanding its services to the
businesses and residents of El Dorado and Placer Counties through its branch
operations and in Sacramento County through its loan production office. In early
1998 the Bancorp had preliminary discussions with Rose regarding a potential
merger of the two institutions. After discussions between the Bancorp and Rose,
the parties executed a Letter of Intent dated June 11, 1998, whereby the Bancorp
would acquire Rose through a stock-for-stock merger transaction.
On July 6, 1998, the Bancorp and Rose entered into the Rose Agreement, which
provides for the merger of Rose with and into the Bancorp and the conversion of
the outstanding shares of no par value common stock of Rose ("Rose Common
Stock") into the right to receive newly issued shares of Bancorp Common Stock
(the "Rose Merger"). For convenience, the Rose Agreement was dated as of July 2,
1998.
INDEPENDENCE OF THE LAKE MERGER AND THE ROSE MERGER
The consummation of the Lake Merger is not dependent upon the consummation of
the Rose Merger and the consummation of the Rose Merger is not dependent upon
the consummation of the Lake Merger. See also "RISK FACTORS."
TERMS OF THE LAKE MERGER; CONVERSION OF SHARES AND OPTIONS
OUTSTANDING SHARES OF LAKE COMMON STOCK. Each share of Lake Common Stock which
is outstanding immediately prior to the Lake Merger (other than shares to which
its holders have exercised and perfected dissenters' rights) will automatically
be converted into the right to receive that number of shares of Bancorp Common
Stock which is equal to the Lake Conversion Rate. The "Lake Conversion Rate" is
a fraction, the numerator of which is the Per Share Merger Price, and the
denominator of which is the Bancorp Average Trading Price. The "Per Share Merger
Price" means the sum of Lake's total shareholders' equity as adjusted pursuant
to the Lake Agreement as of the month end before the calendar month in which the
Lake Effective Time occurs (the "Lake Determination Date") multiplied by 1.75
with the total product divided by the total number of shares of Lake Common
Stock outstanding at the date of the Lake Merger. Perry-Smith & Co., LLP, the
independent public accountants of the Bancorp and Lake will calculate the Per
Share Merger Price. The "Bancorp Average Trading Price" means the average
trading price for Bancorp Common Stock during the thirty calendar day period
prior to the Lake
6
<PAGE> 21
Determination Date. However, if the Bancorp Average Trading Price is above
$20.00 per share, the Bancorp Average Trading Price shall be $20.00 per share.
If the Bancorp Average Trading Price is below $17.00 per share, the Bancorp
Average Trading Price shall be $17.00 per share. A detailed discussion of the
calculation of the Lake Conversion Rate is provided in the section entitled "THE
LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of
Shares and Options" herein.
For purposes of illustration only, assuming (i) September 30, 1998 is used as
the Lake Determination Date for calculating a pro forma Lake Conversion Rate,
(ii) the Bancorp Average Trading Price is $17.00 per share, (iii) Lake's total
shareholders' equity as adjusted pursuant to the Lake Agreement is $9,433,383,
and (iv) there are 1,298,296 shares of Lake Common Stock outstanding, the Lake
Conversion Rate would be .7480. Accordingly, if the assumptions used in arriving
at this pro forma Lake Conversion Rate were to remain unchanged until the
consummation of the Lake Merger, each share of Lake Common Stock would be
converted into .7480 shares of Bancorp Common Stock.
THE ACTUAL LAKE CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH
ABOVE. See "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and
Exchange of Shares and Options."
No fractional shares of Bancorp Common Stock will be issued in the Lake Merger.
Instead, shareholders of Lake will receive an amount in cash equal to the
product (rounded to the nearest hundredth) obtained by multiplying (a) Bancorp
Market Value Per Share by (b) the fraction of a share of Bancorp Common Stock to
which such holder would otherwise be entitled. "Bancorp Market Value Per Share"
means the last trade price of Bancorp Common Stock prior to the Lake Effective
Time. (See "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and
Exchange of Shares and Options.")
Upon the consummation of the Lake Merger, LMC will be merged with and into Lake,
and each outstanding share of Lake Common Stock, other than shares to which its
holders have exercised and perfected dissenters' rights, will be automatically
converted into the right to receive the number of shares of Bancorp Common Stock
that is equal to the Lake Conversion Rate. Each certificate which represents
Bancorp Common Stock prior to the Lake Merger will remain outstanding and will
automatically and for all purposes be deemed to represent the same number of
shares of Bancorp Common Stock. (See "THE LAKE MERGER AND RELATED
TRANSACTIONS--Lake Conversion Rate and Exchange of Shares and Options.")
OUTSTANDING STOCK OPTIONS FOR SHARES OF LAKE COMMON STOCK. All outstanding
rights with respect to Lake Common Stock pursuant to existing stock options for
shares of Lake Common Stock will be converted into and become equivalent rights
with respect to shares of Bancorp Common Stock at the Lake Conversion Rate with
a corresponding adjustment in the option price.
TERMS OF THE ROSE MERGER; CONVERSION OF SHARES AND OPTIONS
OUTSTANDING SHARES OF ROSE COMMON STOCK. Each share of Rose Common Stock which
is outstanding prior to the Rose Merger (other than shares to which its holders
have exercised and perfected dissenters' rights) will automatically be converted
into the right to receive that number of shares of Bancorp Common Stock which is
equal to the Rose Conversion Rate. The "Rose Conversion Rate" is a fraction, the
numerator of which is the Rose Book Value Per Share, and the denominator of
which is the Bancorp Book Value Per Share. The "Rose Book Value Per Share" means
the sum of Rose's total shareholders' equity as adjusted pursuant to the Rose
Agreement as of the month end before the calendar month in which the Rose
Effective Time occurs (the "Rose Determination Date"), divided by the total
number of shares of Rose Common Stock outstanding at the date of the Rose Merger
as adjusted pursuant to the Rose Agreement. Perry-Smith & Co., LLP , the
independent public accountants of the Bancorp and Rose will calculate the Rose
Book Value Per Share. The "Bancorp Book Value Per Share" means the sum of
7
<PAGE> 22
the Bancorp's total shareholders' equity as adjusted pursuant to the Rose
Agreement as of the Rose Determination Date, divided by the total number of
shares of Bancorp Common Stock outstanding at the date of the Rose Merger as
adjusted pursuant to the Rose Agreement. Furthermore, the Bancorp Book Value Per
Share shall not reflect the prior consummation of the Bancorp's acquisition of
Lake. Perry-Smith & Co., LLP will also calculate the Bancorp Book Value Per
Share. A detailed discussion of the calculation of the Rose Conversion Rate is
provided in the section entitled "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose
Conversion Rate and Exchange of Shares and Options" herein.
For purposes of illustration only, assuming (i) September 30, 1998 is used as
the Rose Determination Date for calculating a pro forma Rose Conversion Rate,
(ii) the Rose Book Value Per Share is $12.54, and (iii) the Bancorp Book Value
Per Share is $10.41, the Rose Conversion Rate would be 1.2048. Accordingly, if
the assumptions used in arriving at this pro forma Rose Conversion Rate were to
remain unchanged until the consummation of the Rose Merger, each share of Rose
Common Stock would be converted into 1.2048 shares of Bancorp Common Stock.
THE ACTUAL ROSE CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH
ABOVE.
No fractional shares of Bancorp Common Stock will be issued in the Rose Merger.
Instead, shareholders of Rose will receive an amount in cash equal to the
product (rounded to the nearest hundredth) obtained by multiplying (a) Bancorp
Market Value Per Share by (b) the fraction of a share of Bancorp Common Stock to
which such holder would otherwise be entitled. "Bancorp Market Value Per Share"
means the last trade price of Bancorp Common Stock prior to the Rose Effective
Time. (See "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion Rate and
Exchange of Shares and Options.")
Upon the consummation of the Rose Merger, Rose will be merged with and into the
Bancorp and each outstanding share of Rose Common Stock, other than shares to
which its holders have exercised and perfected dissenters' rights, will be
automatically converted into the right to receive the number of shares of
Bancorp Common Stock that is equal to the Rose Conversion Rate. Each certificate
which represents Bancorp Common Stock prior to the Rose Merger will remain
outstanding and will automatically and for all purposes be deemed to represent
the same number of shares of Bancorp Common Stock. (See "THE ROSE MERGER AND
RELATED TRANSACTIONS--Rose Conversion Rate and Exchange of Shares and Options.")
OUTSTANDING STOCK OPTIONS FOR SHARES OF ROSE COMMON STOCK. All outstanding
rights with respect to Rose Common Stock pursuant to existing stock options for
shares of Rose Common Stock will be converted into and become equivalent rights
with respect to shares of Bancorp Common Stock at the Rose Conversion Rate with
a corresponding adjustment in the option price.
REASONS FOR THE LAKE MERGER AND MANAGEMENTS' RECOMMENDATIONS
The Boards of Directors of Lake and the Bancorp believe each institution has the
capability to expand its respective markets and the financial services it offers
its customers. The Boards of Directors of both corporations believe that the
combined financial strength and management of the Bancorp and Lake will enable
Lake and WSNB as the subsidiary banks to better meet their respective customers'
needs for financial services, expand into new markets and compete in today's
financial services environment. (See "THE LAKE MERGER AND RELATED
TRANSACTIONS--Reasons for the Lake Merger.")
Approval of the Lake Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of both Lake Common Stock and Bancorp Common
Stock. LAKE'S BOARD OF DIRECTORS AND THE BANCORP'S BOARD OF DIRECTORS
UNANIMOUSLY RECOMMEND A VOTE "FOR" APPROVAL OF THE LAKE MERGER.
8
<PAGE> 23
REASONS FOR THE ROSE MERGER AND MANAGEMENTS' RECOMMENDATIONS
The Boards of Directors of Rose and the Bancorp believe each institution has the
capability to expand their respective markets and the financial services they
offer their customers. The Boards of Directors of both corporations believe that
the combined financial strength and management of the Bancorp and Rose will
enable R1NB and WSNB as the subsidiary banks to better meet their respective
customers' needs for financial services, expand into new markets and compete in
today's financial services environment. (See "THE ROSE MERGER AND RELATED
TRANSACTIONS--Reasons for the Rose Merger.")
Approval of the Rose Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of both Rose Common Stock and Bancorp Common
Stock. ROSE'S BOARD OF DIRECTORS AND THE BANCORP'S BOARD OF DIRECTORS
UNANIMOUSLY RECOMMEND A VOTE "FOR" APPROVAL OF THE ROSE MERGER.
OPINIONS OF FINANCIAL ADVISORS - LAKE MERGER
The investment banking firm of The Findley Group ("TFG") rendered its opinion to
the Bancorp's Board of Directors that the terms of the Lake Merger are fair,
from a financial point of view, to the shareholders of the Bancorp. A copy of
the opinion is attached to this Joint Proxy Statement/Prospectus as Exhibit III.
(See "THE LAKE MERGER AND RELATED TRANSACTIONS--Opinions of Financial
Advisors--Opinion of the Bancorp's Financial Advisor.")
The investment banking firm of The Banc Stock Group, Inc. ("BSG") rendered its
opinion to Lake's Board of Directors that the terms of the Lake Merger are fair,
from a financial point of view, to the shareholders of Lake. A copy of the
opinion is attached to this Joint Proxy Statement/Prospectus as Exhibit IV. (See
"THE LAKE MERGER AND RELATED TRANSACTIONS--Opinions of Financial
Advisors--Opinion of Lake's Financial Advisor.")
OPINION OF FINANCIAL ADVISOR - ROSE MERGER
The investment banking firm of The Banc Stock Group, Inc. ("BSG") rendered its
opinion to Rose's Board of Directors that the terms of the Rose Merger are fair,
from a financial standpoint, to the shareholders of Rose. A copy of the opinion
is attached to this Joint Proxy Statement/Prospectus as Exhibit V. (See "THE
ROSE MERGER AND RELATED TRANSACTIONS--Opinion of Rose's Financial Advisor.")
CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES OF THE LAKE MERGER
Perry-Smith & Co., LLP has issued an opinion as to certain material federal and
California state income tax consequences of the Lake Merger. The issuance of the
opinion is a condition to the consummation of the Lake Merger. The opinion
states that the Lake Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code") and the Bancorp and Lake will each be a party
to that reorganization within the meaning of Section 368(b) of the Code.
ALL SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION IN "THE LAKE MERGER AND
RELATED TRANSACTIONS--CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES" IN
ADDITION TO THE OTHER SECTIONS OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES TO THEM OF THE LAKE MERGER UNDER FEDERAL, STATE, LOCAL AND ANY
OTHER APPLICABLE TAX LAWS.
9
<PAGE> 24
CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES OF THE ROSE MERGER
Perry-Smith & Co., LLP has issued an opinion as to certain material federal and
California state income tax consequences of the Rose Merger. The issuance of the
opinion is a condition to the consummation of the Rose Merger. The opinion
states that the Rose Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code and the Bancorp
and Rose will each be a party to that reorganization within the meaning of
Section 368(b) of the Code.
ALL SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION IN "THE ROSE MERGER AND
RELATED TRANSACTIONS--CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES" IN
ADDITION TO THE OTHER SECTIONS OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES TO THEM OF THE ROSE MERGER UNDER FEDERAL, STATE, LOCAL AND ANY
OTHER APPLICABLE TAX LAWS.
APPRAISAL RIGHTS - LAKE MERGER
If you are a shareholder of either the Bancorp or Lake, you may dissent from the
Lake Merger and demand payment in cash equal to the fair value of your shares,
provided that you follow certain procedures set forth in Sections 1300-1304 of
the California General Corporation Law. Dissenting shares, the holders of which
have not effectively withdrawn or lost their dissenters rights, will not be
converted pursuant to the Lake Agreement. One of the conditions to the
consummation of the Lake Merger is that the holders of no more than 10% of the
outstanding shares of Lake Common Stock shall have exercised dissenter's rights.
Dissenters of the Bancorp will be included in this calculation. Dissenters'
rights shall be deemed to be exercised to the extent at the Lake Effective Time
the holders of such shares have complied with the California General Corporation
Law concerning dissenters' rights. (See "THE LAKE MERGER AND RELATED
TRANSACTIONS--Rights of Dissenting Shareholders" and Exhibit VI.)
APPRAISAL RIGHTS - ROSE MERGER
If you are a shareholder of either the Bancorp or Rose, you may dissent from the
Rose Merger and demand payment in cash equal to the fair value of your shares,
provided that you follow certain procedures set forth in Sections 1300-1304 of
the California General Corporation Law. Dissenting shares, the holders of which
have not effectively withdrawn or lost their dissenters rights, will not be
converted pursuant to the Rose Agreement. One of the conditions to the
consummation of the Rose Merger is that the holders of no more than 10% of the
outstanding shares of Rose Common Stock shall have exercised dissenter's rights.
Dissenters of the Bancorp will be included in this calculation. Dissenters'
rights shall be deemed to be exercised to the extent at the Rose Effective Time
the holders of such shares have complied with the California General Corporation
Law concerning dissenters' rights. (See "THE ROSE MERGER AND RELATED
TRANSACTIONS--Rights of Dissenting Shareholders" and Exhibit VI.)
INTERESTS OF CERTAIN PERSONS IN THE LAKE MERGER
AND MATERIAL CONTRACTS WITH LAKE AND ITS AFFILIATES
Upon consummation of the Lake Merger, the existing directors of the Bancorp and
three directors of Lake shall be appointed as directors of the Bancorp to serve
until the next annual meeting of shareholders of the Bancorp and until their
successors are elected and qualified. At the Lake Effective Time, there shall be
nine members of the Board of Directors of Lake; three will be selected by the
Bancorp, and six will be current directors of Lake. The six existing directors
of Lake who shall serve as directors of Lake are Donald L. Browning, F. Ilene
Dumont, John Helms, Billie L. Holmes, May G. Noble and Howard ("Bud") Van Lente.
These directors of Lake shall serve for at least a two
10
<PAGE> 25
year period after the Lake Effective Time. It is currently anticipated that
John Helms, Gary E. Nordine and Bud Van Lente will be the directors of Lake who
will join the Board of Directors of the Bancorp and that Charles W. Bacchi, Gary
D. Gall and Douglas A. Nordell will be selected by the Bancorp to join the Board
of Directors of Lake. For information on each of these individuals, and the
other directors of the Bancorp and Lake, see "INTRODUCTION--Beneficial Ownership
of Principal Shareholders and Management"; "DESCRIPTION OF THE
BANCORP--Management;" and "DESCRIPTION OF LAKE--Management."
In addition, each director of Lake has entered into a director's agreement with
the Bancorp wherein each director has agreed to vote in favor of the Lake
Merger. (See also "THE LAKE MERGER AND RELATED TRANSACTIONS--Interests of
Certain Persons in the Lake Merger and Material Contracts with Lake and its
Affiliates.")
Upon consummation of the Lake Merger, Gary Nordine, the past President of Lake,
will receive a severance payment of $145,000 (net of taxes), with the tax
liability being shared equally by the Bancorp and Lake. In recognition of
Mr. Nordine's retirement as of October 31, 1998, the severance payment to
Mr. Nordine is not contingent upon his being employed by Lake as of the Lake
Effective Time. Mr. Nordine will continue to receive his monthly salary, but no
other benefits, from November 1 through November 30, 1998. Mr. Nordine also has
an Executive Retirement Agreement with Lake which provides that Lake will pay
Mr. Nordine $36,000 a year, in monthly payments, for a period of ten (10) years,
commencing in January 1999.
Gary D. Gall, who is currently the President and Chief Executive Officer of the
Bancorp and WSNB, and Lesa Fynes, who is currently the Controller of the Bancorp
and Senior Vice President and Chief Financial Officer of WSNB, are expected to
serve in the same positions with the Bancorp and WSNB following the Lake Merger.
In addition, Stephanie M. Marsh, who is currently the Senior Vice President and
Chief Administrative Officer of WSNB, and Kirk Dowdell, who is currently the
Senior Vice President and Chief Credit Officer of WSNB, are expected to serve in
those positions with both the Bancorp and WSNB following the Lake Merger. It is
also anticipated that Douglas A. Nordell, who is the Executive Vice President of
Rose and who became President and Chief Executive Officer of Lake upon Mr.
Nordine's retirement, will serve as President and Chief Executive Officer of
Lake following the Lake Merger. In addition, it is anticipated that Brandt
Peterson, who is currently Senior Vice President and Senior Loan Officer of
Lake, and Doreen Pendleton, who is currently Controller of Lake, will continue
to serve with Lake in those positions following the Lake Merger. (See "THE LAKE
MERGER AND RELATED TRANSACTIONS--Interests of Certain Persons in the Lake Merger
and Material Contracts with Lake and its Affiliates.")
INTERESTS OF CERTAIN PERSONS IN THE ROSE MERGER AND MATERIAL CONTRACTS WITH ROSE
AND ITS AFFILIATES
Upon consummation of the Rose Merger, the existing directors of the Bancorp and
four directors of Rose shall be appointed as directors of the Bancorp to serve
until the next annual meeting of shareholders of the Bancorp and until such
successors are elected and qualified. At the Rose Effective Time, there shall be
ten members of the Board of Directors of R1NB; two will be selected by the
Bancorp, and eight will be the existing directors of R1NB. In addition, at the
Rose Effective Time, the existing Board of Directors of WSNB shall be increased
by two persons to be selected by Rose. The Bancorp's Chairman of the Board shall
be an attendee of the Board of Directors of R1NB and all committees of the Board
of Directors of R1NB. It is currently anticipated that Kirk Doyle, Howard
("Skip") Jahn, Thomas Manz and Richard C. Seeba will be the directors of Rose
who will join the Board of Directors of the Bancorp and that Gary D. Gall and
Richard L. Golemon will be the directors of the Bancorp who will join the Board
of Directors of R1NB. It is also currently anticipated that Thomas Manz and
Richard C. Seeba will be selected by Rose to join the Board of Directors of
WSNB. For information on each of these individuals, and the other directors of
the Bancorp and Rose, see "INTRODUCTION--Beneficial Ownership of Principal
Shareholders and Management;" "DESCRIPTION OF THE BANCORP--Management;" and
"DESCRIPTION OF ROSE--Management."
11
<PAGE> 26
In addition, each director of Rose has entered into a director's agreement with
the Bancorp wherein each director has agreed to vote in favor of the Rose
Merger. (See also "THE ROSE MERGER AND RELATED TRANSACTIONS--Interests of
Certain Persons in the Rose Merger and Material Contracts with Rose and its
Affiliates" and "DESCRIPTION OF ROSE--Management.")
Gary D. Gall, who is currently the President and Chief Executive Officer of the
Bancorp and WSNB, and Lesa Fynes, who is currently the Controller of the Bancorp
and Senior Vice President and Chief Financial Officer of WSNB, are expected to
serve in the same positions with the Bancorp and WSNB following the Rose Merger.
In addition, Stephanie M. Marsh, who is currently the Senior Vice President and
Chief Administrative Officer of WSNB, and Kirk Dowdell, who is currently the
Senior Vice President and Chief Credit Officer of WSNB, are expected to serve in
those positions with both the Bancorp and WSNB following the Rose Merger. In
addition, Richard C. Seeba, who is currently serving as the President and Chief
Executive Officer of Rose and R1NB, will continue to serve in those capacities
with R1NB and will serve as an Executive Vice President of the Bancorp, and
Thomas C. Warren, who is currently serving as the Senior Vice President and
Chief Financial Officer of Rose and R1NB, will serve as the Senior Vice
President and Chief Financial Officer of the Bancorp and R1NB following the Rose
Merger. (See "THE ROSE MERGER AND RELATED TRANSACTIONS--Interests of Certain
Persons in the Rose Merger and Material Contracts with Rose and its
Affiliates.")
CONDITIONS TO THE LAKE MERGER
There are a number of conditions which must be met before the Lake Merger is
completed. Among such conditions are (i) the Lake Merger must be approved by the
shareholders of Lake and the Bancorp; (ii) all regulatory approvals must be
obtained; (iii) the Bancorp's Registration Statement must be effective under the
Securities Act ; (iv) Perry-Smith & Co., LLP must have issued an opinion, dated
at the Lake Effective Time, that the Lake Merger may be accounted for as a
pooling of interests; (v) the Bancorp and Lake shall have received opinions of
counsel for the other party; (vi) no lawsuit shall have been instituted or
threatened regarding the Lake Merger; and (vii) the holders of no more than 10%
of the outstanding shares of Lake Common Stock shall have exercised dissenters'
rights. Dissenters of the Bancorp shall be included in this calculation. On
______, 1998, the Federal Deposit Insurance Corporation (the "FDIC") approved
the Lake Merger subject to approval of the shareholders of the Bancorp and Lake,
on ________, 1998, the Board of Governors of the Federal Reserve System (the
"FRB") approved the Lake Merger subject to approval of the shareholders of the
Bancorp and Lake, and on ________, 1998, the Commissioner of the California
Department of Financial Institutions (the "DFI") approved the Lake Merger
subject to approval of the shareholders of the Bancorp and Lake. (See "THE LAKE
MERGER AND RELATED TRANSACTIONS--Conditions to the Lake Merger.")
CONDITIONS TO THE ROSE MERGER
There are a number of conditions which must be met before the Rose Merger is
completed. Among such conditions are (i) the Rose Merger must be approved by the
shareholders of Rose and the Bancorp; (ii) all regulatory approvals must be
obtained; (iii) the Bancorp's Registration Statement must be effective under the
Securities Act ; (iv) Perry-Smith & Co., LLP must have issued an opinion, dated
at the Rose Effective Time, that the Rose Merger may be accounted for as a
pooling of interests; (v) the Bancorp and Rose shall have received opinions of
counsel for the other party; (vi) no lawsuit shall have been instituted or
threatened regarding the Rose Merger; and (vii) the holders of no more than 10%
of the outstanding shares of Rose Common Stock shall have exercised dissenters'
rights. Dissenters of the Bancorp shall be included in this calculation. On
September 17, 1998, the FRB approved the Rose Merger subject to approval of the
shareholders of the Bancorp and Rose. (See "THE ROSE MERGER AND RELATED
TRANSACTIONS--Conditions to the Rose Merger.")
12
<PAGE> 27
LAKE EFFECTIVE TIME
If the Lake Agreement is approved by the respective shareholders of the Bancorp
and Lake and all necessary conditions are satisfied, the Lake Merger shall be
effective when the Agreement to Merge by and among Lake, the Bancorp and LMC
shall have been filed with the Secretary of State of the State of California
(the "Lake Effective Time.") It is anticipated that the Lake Merger will be
consummated during the fourth quarter of this year. (See "THE LAKE MERGER AND
RELATED TRANSACTIONS--Regulatory Approvals and Lake Effective Time.")
ROSE EFFECTIVE TIME
If the Rose Agreement is approved by the respective shareholders of the Bancorp
and Rose and all necessary conditions are satisfied, the Rose Merger shall be
effective when the Agreement of Merger by and between Rose and the Bancorp shall
have been filed with the Secretary of State of the State of California (the
"Rose Effective Time"). It is anticipated that the Rose Merger will be
consummated during the fourth quarter of this year. (See "THE ROSE MERGER AND
RELATED TRANSACTIONS--Regulatory Approvals and Rose Effective Time.")
ACCOUNTING TREATMENT OF THE LAKE MERGER
The Bancorp intends that the Lake Merger will be accounted for under the pooling
of interests method of accounting. (See "PRO FORMA FINANCIAL STATEMENTS.")
ACCOUNTING TREATMENT OF THE ROSE MERGER
The Bancorp intends that the Rose Merger will be accounted for under the pooling
of interests method of accounting. (See "PRO FORMA FINANCIAL STATEMENTS.")
CERTAIN FINANCIAL INFORMATION
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN THIS "CERTAIN FINANCIAL
INFORMATION" SECTION. THEREFORE, THE INFORMATION SET FORTH HEREIN SHOULD BE
CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE BANCORP, LAKE
AND ROSE ON AN INDIVIDUAL AND CONSOLIDATED BASIS.
The following sets forth certain comparative historical and pro forma financial
data for the Bancorp, Lake and Rose. For information concerning the assumptions
on which the pro forma financial information is based, see "PRO FORMA FINANCIAL
STATEMENTS." The pro forma financial information is not necessarily indicative
of the results which would have been realized had the Lake Merger been
consummated at the beginning of the periods presented or had the Rose Merger
been consummated at the beginning of the periods presented. This summary should
be read in conjunction with the Financial Statements and notes to the Financial
Statements included elsewhere in this Joint Proxy Statement/Prospectus. All
dollar amounts are in thousands, except per share data.
13
<PAGE> 28
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Nine
except per share numbers) Months Ended
September 30, Year Ended December 31,
------------------------ ------------------------------------------------------------------
The Bancorp 1998 1997 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 7,004 $ 6,168 $ 8,430 $ 6,441 $ 5,684 $ 4,001 $ 3,374
Interest expense 2,601 2,217 3,051 2,185 1,875 1,028 1,038
Net interest income 4,403 3,951 5,379 4,256 3,809 2,973 2,336
Provision for credit losses 250 193 243 458 80 36 130
Net interest income after
provision for credit losses 4,153 3,758 5,136 3,798 3,729 2,937 2,206
Noninterest income 1,842 1,343 2,037 1,692 1,227 657 833
Noninterest expense 4,688 3,940 5,531 4,282 3,928 3,223 2,871
Income before income taxes 1,307 1,161 1,642 1,208 1,028 371 168
Taxes on income 472 453 639 470 377 134 68
Net income $ 835 $ 708 $ 1,003 $ 738 $ 651 $ 237 $ 100
PER SHARE DATA:
Net income-basic $ 0.86 $ 0.73 $ 1.08 $ 0.97 $ 0.96 $ 0.39 $ 0.16
Net income-diluted $ 0.80 $ 0.70 $ 1.02 $ 0.94 $ 0.94 $ 0.35 $ 0.15
Shares outstanding-
end of period(1) 981,448 938,857 946,021 796,948 598,057 517,600 517,600
Average shares out-
standing-basic(2) 970,810 965,403 932,531 759,017 681,030 612,828 612,828
Average shares out-
standing-diluted(2) 1,038,285 1,009,311 986,706 782,318 689,696 668,143 668,143
Book value per share(3) $ 10.59 $ 9.15 $ 9.51 $ 9.69 $ 8.62 $ 8.31 $ 7.95
FINANCIAL POSITION
Total assets $ 135,281 $ 107,769 $ 108,860 $ 83,461 $ 71,050 $ 58,214 $ 50,107
Total net loans and leases 73,819 70,029 68,191 60,902 49,245 41,003 29,026
Total deposits 123,729 98,400 98,709 74,927 63,106 52,907 45,853
Total shareholders' equity $ 10,393 $ 8,594 $ 8,998 $ 7,720 $ 5,155 $ 4,300 $ 4,116
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.96% 0.97% 1.01% 0.97% 1.00% 0.44% 0.20%
Return on average
shareholders' equity 12.59% 12.03% 12.66% 12.20% 13.76% 5.63% 2.46%
Average shareholders'
equity to average assets 7.62% 8.10% 7.97% 7.95% 7.28% 7.77% 8.17%
Net charge-offs to average loans 0.31% 0.00% 0.00% 0.73% 0.11% 0.08% 0.82%
Allowance for credit losses as a
percentage of period-end loans 1.37% 1.27% 1.37% 1.15% 1.30% 1.49% 2.06%
</TABLE>
- ---------------
(1) Shares outstanding-end of period have not been retroactively adjusted for
the effect of stock dividends.
(2) Average shares outstanding and common stock equivalents have been
retroactively adjusted for the effect of stock dividends in the calculation
of earnings per share.
(3) Book value per share is determined by dividing the total shareholders'
equity by the number of shares outstanding at the end of the respective
periods.
(4) Annualized for the nine months ended September 30, 1998 and 1997.
14
<PAGE> 29
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Nine
except per share numbers) Months Ended Year Ended
September 30, December 31,
------------------------ ------------------------------------------------------------------
Lake 1998 1997 1997 1996 1995 1994 1993
---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 4,839 $ 4,868 $ 6,560 $ 6,847 $ 7,002 $ 6,024 $ 6,327
Interest expense 1,916 1,895 2,562 2,845 3,056 2,046 2,458
Net interest income 2,923 2,973 3,998 4,002 3,946 3,978 3,869
Provision for credit losses 270 270 263 477 210 285 420
Net interest income after
provision for credit losses 2,653 2,703 3,735 3,525 3,736 3,693 3,449
Noninterest income 504 413 630 678 681 638 504
Noninterest expense 2,657 2,408 3,222 3,524 3,301 2,980 2,613
Income before income taxes 500 708 1,143 679 1,116 1,351 1,340
Taxes on income 147 258 377 203 335 485 451
Net income $ 353 $ 450 $ 766 $ 476 $ 781 $ 866 $ 889
PER SHARE DATA:
Net income-basic $ 0.28 $ 0.36 $ 0.62 $ 0.38 $ 0.63 $ 0.70 $ 0.73
Net income-diluted $ 0.27 $ 0.35 $ 0.59 $ 0.36 $ 0.59 $ 0.66 $ 0.66
Shares outstanding-
end of period(1) 1,298,296 1,240,546 1,240,546 1,240,546 1,240,046 1,238,846 1,218,746
Average shares
outstanding-basic(2) 1,265,387 1,240,546 1,240,546 1,240,491 1,239,791 1,228,796 1,218,971
Average shares
outstanding-diluted(2) 1,329,428 1,276,729 1,297,954 1,308,758 1,315,310 1,304,622 1,347,472
Cash dividends declared $ 0.00 $ 0.00 $ 0.27 $ 0.20 $ 0.20 $ 0.20 $ 0.00
Book value per share(3) $ 7.27 $ 6.98 $ 6.98 $ 6.57 $ 6.50 $ 5.92 $ 5.49
FINANCIAL POSITION
Total assets $ 85,041 $ 85,034 $ 85,520 $ 82,502 $ 90,947 $ 76,217 $ 79,026
Total net loans and leases 53,777 53,753 53,210 52,091 52,839 48,765 46,245
Total deposits 74,871 75,813 76,039 73,537 81,592 68,094 72,024
Total shareholders' equity $ 9,433 $ 8,660 $ 8,660 $ 8,149 $ 8,066 $ 7,339 $ 6,686
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.56% 0.74% 0.93% 0.55% 0.97% 1.13% 1.15%
Return on average
shareholders' equity 5.25% 7.18% 9.05% 5.91% 10.08% 12.35% 14.24%
Average shareholders'
equity to average assets 10.65% 10.27% 10.25% 9.33% 9.59% 9.13% 8.05%
Net charge-offs to average loans 0.15% 0.69% 0.40% 1.23% 0.19% 0.28% 0.48%
Allowance for credit losses as
a percentage of period-end loans 2.11% 1.63% 1.75% 1.70% 2.08% 2.07% 1.85%
Dividend payout ratio 0.00% 0.00% 43.73% 52.12% 31.76% 28.61% 0.00%
</TABLE>
- ---------------
(1) Shares outstanding-end of period have not been retroactively adjusted for
the effect of stock dividends.
(2) Average shares outstanding and common stock equivalents have been
retroactively adjusted for the effect of stock dividends in the calculation
of earnings per share.
(3) Book value per share is determined by dividing the total shareholders'
equity by the number of shares outstanding at the end of the respective
periods.
(4) Annualized for the nine months ended September 30, 1998 and 1997.
15
<PAGE> 30
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Nine
except per share numbers) Months Ended Year Ended
September 30, December 31,
-------------------- --------------------------------------------------------
Rose 1998 1997 1997 1996 1995 1994 1993
---- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 2,990 $ 2,844 $ 3,895 $ 3,028 $ 2,664 $ 2,082 $ 1,660
Interest expense 1,303 1,198 1,664 1,331 1,288 876 708
Net interest income 1,687 1,646 2,231 1,697 1,376 1,206 952
Provision for credit losses 105 126 564 89 55 50 23
Net interest income after
provision for credit losses 1,582 1,520 1,667 1,608 1,321 1,156 929
Noninterest income 415 220 341 228 126 200 18
Noninterest expense 1,594 1,175 1,693 1,330 1,145 971 818
Income before income taxes 403 565 315 506 302 385 129
Taxes on income 161 226 133 204 104 80 54
Net income $ 242 $ 339 $ 182 $ 302 $ 198 $ 305 $ 75
PER SHARE DATA:
Net income-basic $ 0.75 $ 1.06 $ 0.57 $ 0.94 $ 0.62 $ 0.95 $ 0.23
Net income-diluted $ 0.72 $ 1.04 $ 0.56 $ 0.93 $ 0.61 $ 0.95 $ 0.23
Shares outstanding-
end of period(1) 370,805 319,972 319,972 319,972 319,572 319,572 319,572
Average shares
outstanding-basic(2) 320,158 319,972 319,972 319,872 319,572 319,572 319,572
Average shares
outstanding-diluted(2) 333,661 324,648 324,648 324,622 324,530 319,572 319,572
Book value per share(3) $ 12.69 $ 12.88 $ 12.39 $ 11.80 $ 10.85 $ 10.23 $ 9.27
FINANCIAL POSITION
Total assets $ 53,371 $ 47,947 $ 50,588 $ 38,708 $ 31,905 $ 26,387 $ 22,507
Total net loans and leases 30,796 31,945 34,125 27,091 22,725 18,595 17,180
Total deposits 48,476 43,538 46,350 34,687 28,269 22,776 19,318
Total shareholders' equity $ 4,704 $ 4,121 $ 3,964 $ 3,775 $ 3,467 $ 3,269 $ 2,964
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.66% 1.05% 0.41% 0.86% 0.64% 1.17% 0.36%
Return on average
shareholders' equity 7.97% 11.45% 4.54% 8.23% 5.83% 9.79% 2.56%
Average shareholders'
equity to average assets 8.26% 9.21% 8.98% 10.43% 10.98% 11.98% 14.12%
Net charge-offs to average loans 2.14% 0.39% 0.30% 0.09% 0.14% 0.16% 0.08%
Allowance for credit losses as a
percentage of period-end loans 0.95% 0.90% 2.07% 0.92% 0.80% 0.84% 0.79%
</TABLE>
- ---------------
(1) Shares outstanding-end of period have not been retroactively adjusted for
the effect of stock dividends.
(2) Average shares outstanding and common stock equivalents have been
retroactively adjusted for the effect of stock dividends in the calculation
of earnings per share.
(3) Book value per share is determined by dividing the total shareholders'
equity by the number of shares outstanding at the end of the respective
periods.
(4) Annualized for the nine months ended September 30, 1998 and 1997.
16
<PAGE> 31
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
THE BANCORP AND LAKE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share numbers) Nine Months Ended Year Ended
September 30, December 31,
----------------------- --------------------------------------------------------------
The Bancorp and Lake 1998 1997 1997 1996 1995 1994 1993
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 11,843 $ 11,036 $ 14,990 $ 13,288 $ 12,686 $ 10,025 $ 9,701
Interest expense 4,517 4,112 5,613 5,030 4,931 3,074 3,496
Net interest income 7,326 6,924 9,377 8,258 7,755 6,951 6,205
Provision for credit losses 520 463 506 935 290 321 550
Net interest income after
provision for credit losses 6,806 6,461 8,871 7,323 7,465 6,630 5,655
Noninterest income 2,346 1,756 2,667 2,370 1,908 1,295 1,337
Noninterest expense 7,345 6,348 8,753 7,806 7,229 6,203 5,484
Income before income taxes 1,807 1,869 2,785 1,887 2,144 1,722 1,508
Taxes on income 619 711 1,016 673 712 619 519
Net income $ 1,188 $ 1,158 $ 1,769 $ 1,214 $ 1,432 $ 1,103 $ 989
PER SHARE DATA:
Net income-basic $ 0.62 $ 0.61 $ 0.95 $ 0.72 $ 0.89 $ 0.72 $ 0.65
Net income-diluted $ 0.58 $ 0.59 $ 0.90 $ 0.69 $ 0.86 $ 0.67 $ 0.59
Shares outstanding-end of period(1) 1,952,573 1,866,785 1,873,949 1,724,876 1,525,611 1,444,257 1,429,222
Average shares outstanding-basic(1) 1,917,319 1,693,331 1,860,459 1,686,904 1,608,394 1,531,967 1,524,618
Average shares outstanding-diluted(1) 2,032,697 1,964,304 1,957,576 1,761,269 1,673,548 1,644,000 1,676,052
Cash dividends declared $ 0.00 $ 0.00 $ 0.18 $ 0.14 $ 0.16 $ 0.17 $ 0.00
Book value per share(2) $ 10.15 $ 9.24 $ 9.42 $ 9.20 $ 8.67 $ 8.06 $ 7.56
Book value per share equivalent-Lake(3) $ 7.60 $ 6.91 $ 7.05 $ 6.88 $ 6.48 $ 6.03 $ 5.65
FINANCIAL POSITION
Total assets $ 220,322 $ 192,803 $ 194,380 $ 165,963 $ 161,997 $ 134,431 $ 129,133
Total net loans and leases 127,596 123,782 121,401 112,993 102,084 89,768 75,271
Total deposits 198,600 174,213 174,748 148,464 144,698 121,001 117,877
Total shareholders' equity $ 19,826 $ 17,254 $ 17,658 $ 15,869 $ 13,221 $ 11,639 $ 10,802
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.79% 0.87% .97% .75% .98% .84% .78%
Return on average shareholders' equity 8.90% 9.52% 10.79% 8.60% 11.47% 9.82% 9.60%
Average shareholders'
equity to average assets 8.89% 9.09% 9.00% 8.68% 8.56% 8.57% 8.09%
Net charge-offs to average loans 0.25% 0.31% 0.18% 0.99% 0.15% 0.20% 0.61%
Allowance for credit losses as a
percentage of period-end loans 1.68% 1.43% 1.54% 1.41% 1.70% 1.81% 1.93%
Dividend payout ratio 0.00% 0.00% 18.93% 20.44% 17.32% 22.48% 0.00%
</TABLE>
- ---------------
(1) Shares outstanding and average shares outstanding were determined by
adding the outstanding shares and the weighted average shares for Lake
before the combination multiplied by the Lake Conversion Rate of .7480
to the outstanding shares and the weighted average shares for the
Bancorp before the combination at the beginning of all periods
presented. The Lake Conversion Rate is based on the formula included at
"THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and
Exchange of Shares and Options" using Lake's shareholders' equity and
outstanding shares at September 30, 1998 and the Bancorp Average Trading
Price of $17.00 per share.
(2) Book value per share is determined by dividing the combined
shareholders' equity by the shares outstanding-end of period calculated
as explained at (1) above.
(3) Book value per share equivalent Lake is determined by multiplying the
book value per share by the Lake Conversion Rate of .7480. This
represents the equivalent Lake shareholder book value per share of Lake
shares.
(4) Annualized for the nine months ended September 30, 1998 and 1997.
17
<PAGE> 32
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
THE BANCORP AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share numbers) Nine Months Ended Year Ended
September 30, December 31,
----------------------- --------------------------------------------------------------
The Bancorp and Rose 1998 1997 1997 1996 1995 1994 1993
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 9,994 $ 9,012 $ 12,325 $ 9,469 $ 8,348 $ 6,083 $ 5,034
Interest expense 3,904 3,415 4,715 3,516 3,163 1,904 1,746
Net interest income 6,090 5,597 7,610 5,953 5,185 4,179 3,288
Provision for credit losses 355 319 807 547 135 86 153
Net interest income after
provision for credit losses 5,735 5,278 6,803 5,406 5,050 4,093 3,135
Noninterest income 2,257 1,563 2,378 1,920 1,353 857 851
Noninterest expense 6,282 5,115 7,224 5,612 5,073 4,194 3,689
Income before income taxes 1,710 1,726 1,957 1,714 1,330 756 297
Taxes on income 633 679 772 674 481 214 122
Net income $ 1,077 $ 1,047 $ 1,185 $ 1,040 $ 849 $ 542 $ 175
PER SHARE DATA:
Net income-basic $ 0.79 $ 0.78 $ 0.90 $ 0.91 $ 0.80 $ 0.54 $ 0.18
Net income-diluted $ 0.75 $ 0.75 $ 0.86 $ 0.89 $ 0.79 $ 0.51 $ 0.17
Shares outstanding-end of period(1) 1,428,194 1,324,359 1,331,523 1,182,450 983,077 902,620 902,620
Average shares outstanding-basic(1) 1,356,536 1,350,905 1,318,033 1,144,399 1,066,050 997,848 997,848
Average shares outstanding-diluted(1) 1,440,280 1,400,447 1,377,842 1,173,423 1,080,690 1,053,163 1,053,163
Cash dividends declared 0 0 0 0 0 0 0
Book value per share(2) $ 10.57 $ 9.60 $ 9.73 $ 9.72 $ 8.77 $ 8.39 $ 7.84
Book value per share equivalent-Rose(3) $ 12.74 $ 11.57 $ 11.73 $ 11.71 $ 10.57 $ 10.10 $ 9.45
FINANCIAL POSITION
Total assets $ 188,652 $ 155,716 $ 159,448 $ 122,169 $ 102,955 $ 84,601 $ 72,614
Total net loans and leases 104,615 101,974 102,316 87,993 71,970 59,598 46,206
Total deposits 172,205 141,938 145,058 109,614 91,375 75,683 65,171
Total shareholders' equity $ 15,097 $ 12,715 $ 12,962 $ 11,495 $ 8,622 $ 7,569 $ 7,080
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.87% 1.00% 0.82% 0.93% 0.88% 0.68% 0.25%
Return on average shareholders' equity 11.14% 11.83% 9.93% 10.70% 10.45% 7.40% 2.50%
Average shareholders'
equity to average assets 7.81% 8.44% 8.28% 8.73% 8.47% 9.14% 9.92%
Net charge-offs to average loans 0.88% 0.12% 0.10% 0.54% 0.12% 0.10% 0.57%
Allowance for credit losses as a
percentage of period-end loans 1.25% 1.16% 1.61% 1.08% 1.14% 1.29% 1.59%
</TABLE>
- ---------------
(1) Shares outstanding and average shares outstanding were determined by
adding the outstanding shares and the weighted average shares for Rose
before the combination multiplied by the Rose Conversion Rate of 1.2048
to the outstanding shares and the weighted average shares for the
Bancorp before the combination at the beginning of all periods
presented. The Rose Conversion Rate is based on the formula included at
"THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion Rate and
Exchange of Shares and Options" using shareholders' equity and
outstanding shares at September 30, 1998.
(2) Book value per share is determined by dividing the combined
shareholders' equity by the shares outstanding-end of period calculated
as explained at (1) above.
(3) Book value per share equivalent Rose is determined by multiplying the
book value per share by the Rose Conversion Rate of 1.2048. This
represents the equivalent Rose shareholder book value per share of Rose
shares.
(4) Annualized for the nine months ended September 30, 1998 and 1997.
18
<PAGE> 33
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share numbers) Nine Months Ended Year Ended
September 30, December 31,
----------------------- --------------------------------------------------------------
The Bancorp, Lake and Rose 1998 1997 1997 1996 1995 1994 1993
- -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income and loan fees $ 14,833 $ 13,880 $ 18,885 $ 16,316 $ 15,350 $ 12,107 $ 11,361
Interest expense 5,820 5,310 7,277 6,361 6,219 3,950 4,204
Net interest income 9,013 8,570 11,608 9,955 9,131 8,157 7,157
Provision for credit losses 625 589 1,070 1,024 345 371 573
Net interest income after
provision for credit losses 8,388 7,981 10,538 8,931 8,786 7,786 6,584
Noninterest income 2,761 1,976 3,008 2,598 2,034 1,495 1,355
Noninterest expense 8,939 7,523 10,446 9,136 8,374 7,174 6,302
Income before income taxes 2,210 2,434 3,100 2,393 2,446 2,107 1,637
Taxes on income 780 937 1,149 877 816 699 573
Net income $ 1,430 $ 1,497 $ 1,951 $ 1,516 $ 1,630 $ 1,408 $ 1,064
PER SHARE DATA:
Net income-basic $ 0.62 $ 0.66 $ 0.87 $ 0.73 $ 0.82 $ 0.73 $ 0.56
Net income-diluted $ 0.59 $ 0.64 $ 0.83 $ 0.70 $ 0.79 $ 0.69 $ 0.52
Shares outstanding-end of period(1) 2,399,319 2,252,288 2,259,452 2,110,379 1,910,632 1,829,277 1,814,242
Average shares outstanding-basic(1) 2,303,045 2,278,834 2,245,962 2,072,286 1,993,414 1,916,988 1,909,639
Average shares outstanding-diluted(1) 2,434,692 2,355,440 2,348,712 2,152,374 2,064,542 2,029,021 2,061,072
Cash dividends declared(2) $ 0.00 $ 0.00 $ 0.15 $ 0.12 $ 0.13 $ 0.14 $ 0.00
Book value per share(3) $ 10.22 $ 9.49 $ 9.57 $ 9.31 $ 8.73 $ 8.15 $ 7.59
Book value per share equivalent-Lake(4) $ 7.65 $ 7.10 $ 7.16 $ 6.96 $ 6.53 $ 6.10 $ 5.68
Book value per share equivalent-Rose(5) $ 12.32 $ 11.43 $ 11.53 $ 11.21 $ 10.52 $ 9.82 $ 9.14
FINANCIAL POSITION
Total assets $ 273,693 $ 240,750 $ 244,968 $ 204,671 $ 193,902 $ 160,818 $ 151,640
Total net loans and leases 158,392 155,727 155,527 140,084 124,809 108,363 92,451
Total deposits 247,076 217,751 221,098 183,151 172,967 143,777 137,195
Total shareholders' equity $ 24,530 $ 21,375 $ 21,622 $ 19,644 $ 16,688 $ 14,908 $ 13,766
SELECTED FINANCIAL RATIOS(6):
Return on average assets 0.77% 0.90% 0.86% 0.77% 0.92% 0.90% 0.72%
Return on average shareholders' equity 8.73% 9.90% 9.56% 8.52% 10.27% 9.81% 8.04%
Average shareholders'
equity to average assets 8.77% 9.11% 9.00% 8.99% 8.98% 9.13% 8.94%
Net charge-offs to average loans 0.64% 0.33% 0.20% 0.83% 0.15% 0.19% 0.53%
Allowance for credit losses as a
percentage of period-end loans 1.54% 1.32% 1.66% 1.31% 1.54% 1.64% 1.72%
Dividend payout ratio 0.00% 0.00% 17.17% 16.37% 15.22% 17.61% 0.00%
</TABLE>
- ---------------
(1) Shares outstanding and average shares outstanding were determined by
adding the outstanding shares and the weighted average shares for Lake
before the combination multiplied by the Lake Conversion Rate of .7480
to the outstanding shares and the weighted average shares for Rose
before the combination multiplied by the Rose Conversion Rate of 1.2048
to the outstanding shares and the weighted average shares for the
Bancorp before the combination at the beginning of all periods
presented. The Lake Conversion Rate and the Rose Conversion Rate are
based on the formulas included at "THE LAKE MERGER AND RELATED
TRANSACTIONS--Lake Conversion Rate and Exchange of Shares and Options"
and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion Rate and
Exchange of Shares and Options" using the respective shareholders'
equity and outstanding shares at September 30, 1998 and the Bancorp
Average Trading Price of $17.00 per share.
(Footnotes continued on the following page.)
19
<PAGE> 34
(2) Cash dividends declared were determined by dividing the combined dollar
amount of dividends declared by the outstanding shares-end of period
calculated as explained at (1) above.
(3) Book value per share is determined by dividing the combined
shareholders' equity by the outstanding shares-end of period calculated
as explained at (1) above.
(4) Book value per share equivalent Lake is determined by multiplying the
book value per share by the Lake Conversion Rate of .7480. This
represents the equivalent Lake shareholder book value per share of Lake
shares.
(5) Book value per share equivalent Rose is determined by multiplying the
book value per share by the Rose Conversion Rate of 1.2048. This
represents the equivalent Rose shareholder book value per share of Rose
shares.
(6) Annualized for the nine months ended September 30, 1998 and 1997.
REGULATORY CAPITAL ADEQUACY
The following table sets forth, as of September 30, 1998, the regulatory capital
ratios of the Bancorp, Lake and Rose on a historical basis, the Bancorp on a pro
forma basis assuming consummation of the Lake Merger, the Bancorp on a pro forma
basis assuming consummation of the Rose Merger, the Bancorp on a pro forma basis
assuming consummation of both the Lake Merger and the Rose Merger, and the
minimum regulatory capital ratios.
<TABLE>
<CAPTION>
The
Minimum Bancorp Lake Rose
------- ------- ---- ----
<S> <C> <C> <C> <C>
Leverage ratio 5.0% 8.5% 11.0% 9.3%
Tier 1 risk-based
capital ratio 4.0% 11.2% 13.5% 11.7%
Total risk-based
capital ratio 8.0% 12.4% 14.8% 12.4%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Lake Merger
------- -----------
<S> <C> <C>
Leverage ratio 5.0% 9.5%
Tier 1 risk-based
capital ratio 4.0% 12.2%
Total risk-based
capital ratio 8.0% 13.4%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Rose Merger
------- -----------
<S> <C> <C>
Leverage ratio 5.0% 8.7%
Tier 1 risk-based
capital ratio 4.0% 11.3%
Total risk-based
capital ratio 8.0% 12.4%
</TABLE>
20
<PAGE> 35
<TABLE>
<CAPTION>
The Bancorp Following
Both the Lake Merger
Minimum and the Rose Merger
------- ---------------------
<S> <C> <C>
Leverage ratio 5.0% 9.5%
Tier 1 risk-based
capital ratio 4.0% 12.1%
Total risk-based
capital ratio 8.0% 13.2%
</TABLE>
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
The provisions of the Articles of Incorporation of the Bancorp contain
provisions not included in the Articles of Incorporation of either Lake or Rose.
Certain of these provisions are discussed below. In addition, certain of the
provisions of the Bylaws of Lake and Rose may differ immaterially from the
provisions of the Bylaws of the Bancorp. However, because each of the Bancorp,
Lake and Rose is incorporated under the laws of the State of California, the
Bancorp does not expect that shareholders of Lake and Rose who become
shareholders of the Bancorp will experience significant differences in the
corporate governance of the Bancorp from that of Lake or Rose, as the case may
be. See also "DESCRIPTION OF THE CAPITAL STOCK OF THE BANCORP, LAKE AND ROSE,"
and "DIVIDENDS."
CERTAIN PROVISIONS OF THE BANCORP'S ARTICLES OF INCORPORATION. The Bancorp's
Articles of Incorporation (the "Bancorp Articles") have provisions which may
have the effect of preventing a change in control of the Bancorp in certain
circumstances. These provisions will be controlling upon consummation of the
Lake Merger and/or the Rose Merger and shareholders of Lake and/or Rose will
thereafter be subject to such provisions. Specifically, the Bancorp Articles
provide that the shareholder vote required to approve a "Business Combination"
(as defined) shall be at least 66-2/3% of the Bancorp's outstanding shares of
voting stock voting together as a single class. A "Business Combination" is
defined as any (i) merger or consolidation of the Bancorp or a subsidiary of the
Bancorp where the shareholders of the Bancorp immediately prior to such merger
or consolidation will own immediately after such merger or consolidation (A) no
equity securities of the surviving entity after such merger or consolidation or
(B) equity securities (excluding options, warrants and rights) of the surviving
entity after such merger or consolidation with less than 50% of the voting power
of the surviving entity after such merger or consolidation or (ii) any sale,
exchange, transfer or other disposition of 50% or more of the assets of the
Bancorp or combined assets of the Bancorp and its subsidiaries.
Since it is not anticipated that following either the Lake Merger or the Rose
Merger that the shareholders of the Bancorp will own less than 50% of the
outstanding shares of Bancorp Common Stock, the 66-2/3% vote requirement does
not apply to these two transactions.
CERTAIN PROVISIONS OF LAKE'S ARTICLES OF INCORPORATION. Lake's Articles of
Incorporation (the "Lake Articles") have provisions which may have the effect of
delaying or preventing a change in control of Lake in certain circumstances.
Certain of these provisions would effectively become inoperative upon
consummation of the Lake Merger. The following discussion is qualified in its
entirety by the specific provisions of the Lake Articles.
Consideration of Factors Other Than Price. The Lake Articles provide that, when
evaluating any proposed tender or exchange offer for Lake's voting stock or any
proposed transaction with any other person which would constitute a "Business
Combination," the Board of Directors of Lake may consider the best interests of
Lake as a whole, including without limitation: giving due consideration to the
interests of Lake's shareholders; whether the proposed
21
<PAGE> 36
transaction might violate applicable laws; not only the consideration being
offered in the proposed transaction in relation to the then current market price
for Lake's stock, but also the market price for such stock over a period of
years, the estimated price which might be achieved in a negotiated sale of Lake
as a whole or in part or through liquidation, the premiums over market price for
the securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and Lake's financial
condition and future prospects; and the social, economic and legal effects on
the employees, customers, suppliers and other constituents of Lake and on the
communities in which Lake conducts its business.
Shareholder Action by Written Consent. Under California law, generally, any
action which may be taken at any annual or special meeting of shareholders of a
corporation may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares of the corporation 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. The Lake Articles provide that as a condition to shareholder action by
written consent, the Board of Directors of Lake, by resolution, shall have
previously approved any such action.
Anti-Greenmail Provision. The Lake Articles also provide that any direct or
indirect repurchase by Lake of outstanding shares of voting stock of Lake
("Voting Stock") from any person (or group of affiliated persons) known to Lake
to be a beneficial owner of five percent or more of the Voting Stock (an
"Interested Shareholder"), who has acquired beneficial ownership of any Voting
Stock within a period of less than two years immediately prior to the date of
the proposed repurchase (or the date of an agreement in respect thereof) at a
per share price in excess of the Fair Market Value (as defined) at the time of
such repurchase by Lake shall require the approval of a majority of the shares
of Voting Stock, excluding Voting Stock beneficially owned by such Interested
Shareholder, except for (i) a tender or exchange offer by Lake for a class of
Capital Stock (as defined) made available on the same terms to all holders of
such class of Capital Stock, or (ii) purchases made pursuant to an open market
purchase program approved by a majority of Continuing Directors (as defined)
provided that such purchases are effected on the open market and are not the
result of a privately negotiated transaction. Additionally, any amendment or
repeal of this provision, or the adoption of provisions inconsistent with this
provision, must be approved by the affirmative vote of a majority of the shares
of Voting Stock, excluding Voting Stock beneficially owned by any Interested
Shareholder, voting together as a single class.
CERTAIN PROVISIONS OF ROSE'S ARTICLES OF INCORPORATION. Rose's Articles of
Incorporation (the "Rose Articles") do not contain any provisions which are not
already included in the Bancorp Articles. However, the Rose Articles also do not
contain the provision found in the Bancorp Articles which may have the effect of
preventing a change in control of the entity in certain circumstances.
MARKET PRICES OF BANCORP COMMON STOCK AND LAKE COMMON STOCK
Bancorp Common Stock is not listed on any stock exchange, nor is it listed with
NASDAQ. Bancorp Common Stock is thinly traded, and there is no established
public market for Bancorp Common Stock. The following table sets forth the
average of the last reported bid and asked price per share for Bancorp Common
Stock and Lake Common Stock on May 27, 1998, the trading day prior to the public
announcement of the Lake Merger and equivalent per share price for Lake Common
Stock based on the price of Bancorp Common Stock:
22
<PAGE> 37
<TABLE>
<CAPTION>
Historical Equivalent Pro Forma
Market Value Per Share Market Value(1)
---------------------------- --------------------
Lake The Bancorp Lake
-------- ----------- --------------------
<S> <C> <C> <C>
May 27, 1998 $ 7.75 $ 20.25 $ 15.15
</TABLE>
- -----------------
(1) The equivalent pro forma market value per share of Lake Common Stock
represents the last reported sales price per share of Bancorp Common
Stock multiplied by the Lake Conversion Rate of .7480. THE ACTUAL LAKE
CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH ABOVE. See
also, "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate
and Exchange of Shares and Options."
MARKET PRICES OF BANCORP COMMON STOCK AND ROSE COMMON STOCK
Bancorp Common Stock is not listed on any stock exchange, nor is it listed with
NASDAQ. Bancorp Common Stock is thinly traded, and there is no established
public market for Bancorp Common Stock. The following table sets forth the
average of the last reported bid and asked price per share for Bancorp Common
Stock and Rose Common Stock on June 11, 1998, the trading day prior to the
public announcement of the Rose Merger and equivalent per share price for Rose
Common Stock based on the price of Bancorp Common Stock:
<TABLE>
<CAPTION>
Historical Equivalent Pro Forma
Market Value Per Share Market Value(1)
--------------------------- --------------------
Rose The Bancorp Rose
-------- ----------- --------------------
<S> <C> <C> <C>
June 11, 1998 $ 8.00 $ 21.00 $ 25.30
</TABLE>
- ---------------
(1) The equivalent pro forma market value per share of Rose Common Stock
represents the last reported sales price per share of Bancorp Common
Stock multiplied by the Rose Conversion Rate of 1.2048. THE ACTUAL ROSE
CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH ABOVE. See
also, "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion Rate
and Exchange of Shares and Options."
RISK FACTORS
RISK FACTORS RELATING TO THE LAKE MERGER AND THE ROSE MERGER
PROSPECTS OF THE BANCORP AFTER THE LAKE MERGER AND THE ROSE MERGER AND ABILITY
TO INTEGRATE OPERATIONS. The earnings, financial condition and prospects of the
Bancorp after the Lake Merger and/or the Rose Merger will depend in part on the
Bancorp's ability to successfully integrate the operations and management of
Lake, R1NB and WSNB. There is no assurance that the Bancorp will be able to
effectively and profitably integrate the operations and management of Lake, R1NB
and WSNB. In addition, there is no assurance that the Bancorp will be able to
realize any revenue improvement or cost savings as a result of the Lake Merger
and/or the Rose Merger. There is no assurance that any cost savings which are
realized will not be offset by losses in revenues or other charges to earnings.
In addition, to the extent that present customers are not retained by the
combined company or additional expenses are incurred in retaining them, there
could be adverse effects on future results of operations of the Bancorp
following the Lake Merger and/or the Rose Merger. Realization of improvement in
profitability is dependent, in part, on the extent to which the revenues of
Lake, R1NB and the Bancorp are maintained and enhanced.
PERFORMANCE OF COMBINED LOAN PORTFOLIOS. The Bancorp's performance and prospects
after the Lake Merger and/or the Rose Merger also will be dependent to a
significant extent on the performance of the combined loan portfolios of Lake,
R1NB and WSNB, and ultimately on the financial condition of their borrowers and
other customers. The existing loan portfolios of Lake, R1NB and WSNB differ to
some extent in the types of borrowers,
23
<PAGE> 38
industries and credits represented. In addition, there are differences in the
documentation, classifications, credit ratings and management of the portfolios.
As a result, the Bancorp has established a centralized loan administration and
policy which will oversee each of WSNB's, Lake's and R1NB's loan portfolio. The
performance of the combined loan portfolios will be adversely affected if there
are any future adverse trends in any such factors.
STABILITY OF ACQUIRED DEPOSITS. There is no assurance that the amount of
deposits at any of Lake's and/or R1NB's branch offices will not decrease between
the date of this Joint Proxy Statement/Prospectus and the date the Lake Merger
and/or the Rose Merger is completed, or at any time thereafter. If the amount of
the deposits declines before or after the Lake Merger and/or the Rose Merger,
the Bancorp's return on equity may be reduced because the amount of leverage on
the Bancorp's capital will be less than currently anticipated by the Bancorp's
management. Although the Bancorp anticipates that some of Lake's and/or R1NB's
depositors will choose to move their deposits elsewhere, the achievement of the
anticipated benefits of the Lake Merger and/or the Rose Merger requires a
substantial portion of the deposits to remain with the Bancorp after each of the
Lake Merger and the Rose Merger. The market for financial services is extremely
competitive and there is no assurance that Lake's and/or R1NB's current deposit
customers will remain depositors of Lake and/or R1NB after the Lake Merger
and/or the Rose Merger. See "RISK FACTORS--Risk Factors Relating to the
Industry--Competition."
RISK FACTORS RELATING TO THE INDUSTRY
INTEREST RATE RISK. Bank earnings depend largely on the relationship between the
cost of funds, primarily deposits, and the yield on earning assets. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence the interest
rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of nonperforming assets. Fluctuations in interest
rates affect the demand by customers for the Bancorp's, Lake's and Rose's
products and services. The Bancorp, Lake and Rose are subject to interest rate
risk to the degree that their interest-bearing liabilities reprice or mature
more slowly or more rapidly or on a different basis than their interest-earning
assets. Given the Bancorp's, Lake's and Rose's current volume and mix of
interest-bearing liabilities and interest-earning assets, the Bancorp's, Lake's
and Rose's combined interest rate spread could be expected to increase during
times of rising interest rates and, conversely, to decrease during times of
falling interest rates. Therefore, significant declines in interest rates may
have an adverse effect on the Bancorp's, Lake's and Rose's combined results of
operations.
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION. The operations of the Bancorp,
Lake and Rose are primarily located in Northern California and are concentrated
along the Highway 50 and Highway 80 corridors in the eastern Sacramento region
and the Lake County area. As a result of this geographic concentration, the
Bancorp's, Lake's and Rose's results depend largely upon economic conditions in
these areas, particularly, with respect to Lake, in the tourism and outdoor
recreation industries, and with respect to the Bancorp and Rose, in the small
businesses and real estate development in the eastern Sacramento region.
GOVERNMENT REGULATION AND MONETARY POLICY. The banking industry is subject to
extensive federal and state supervision and regulation. Such regulation limits
the manner in which the Bancorp, Lake and Rose conduct their respective
businesses, undertake new investments and activities and obtain financing. This
regulation is designed primarily for the protection of the deposit insurance
funds and consumers, and not for the benefit of holders of the Bancorp's, Lake's
or Rose's securities. Financial institution regulation has been the subject of
significant legislation in recent years, and may be the subject of further
significant legislation in the future, none of which is in the control of the
Bancorp, Lake or Rose. Significant new laws or changes in, or repeals of,
existing laws may adversely affect the Bancorp's, Lake's or Rose's results.
Further, federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions for financial
institutions, primarily through open market operations in United States
government securities, the discount rate for bank borrowings and bank reserve
24
<PAGE> 39
requirements. Any material change in these conditions would be likely to have a
material impact on the Bancorp's, Lake's and Rose's respective results of
operations.
COMPETITION. The banking and financial services business in California
generally, and the Bancorp's, Lake's and Rose's market areas specifically, is
highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial services
providers. The Bancorp, Lake and Rose compete for loans, deposits and customers
for financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services than the Bancorp, Lake or Rose.
There can be no assurance that the Bancorp, Lake or Rose will be able to compete
effectively in their markets, and the results of operations of the Bancorp, Lake
and Rose could be adversely affected if circumstances affecting the nature or
level of competition change.
CREDIT QUALITY. A significant source of risk for financial institutions such as
the Bancorp, Lake or Rose arises from the possibility that losses will be
sustained because borrowers, guarantors and related parties may fail to perform
in accordance with the terms of their loans. The Bancorp, Lake and Rose have
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
each company's respective management believes are appropriate to minimize this
risk by assessing the likelihood of nonperformance, tracking loan performance
and diversifying the respective credit portfolios. Such policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect the respective companies' results of operations.
RISKS RELATING TO THE BANCORP
CONCENTRATION OF LENDING ACTIVITIES. At September 30, 1998, approximately 72% of
the Bancorp's, Lake's and Rose's loans were secured by real estate. The Bancorp
makes loans mainly in its market areas for the purpose of real estate
development, real estate construction and permanent commercial construction, as
well as SBA lending. With the consummation of the Lake Merger and the Rose
Merger, the portfolio will also include consumer and agricultural related loans.
The ability of the Bancorp to continue to originate real estate secured loans
may be impaired by adverse changes in local and regional economic conditions in
the real estate market, increasing interest rates, or by acts of nature
(including earthquakes and flooding, either of which may cause uninsured damage
and other loss of value to real estate that secures the Bancorp's loans). Due to
the concentration of the Bancorp's real estate collateral, such events could
have a significant adverse impact on the value of such collateral in which case
the Bancorp may not recover adequate value from liquidation of collateral to
cover the carrying value of the loans.
ENVIRONMENTAL LIABILITIES. In the course of its business, the Bancorp, Lake and
Rose have acquired, and may in the future acquire, through foreclosure,
properties securing loans it has originated or purchased which are in default.
Primarily with respect to commercial real estate loans, there is a risk that
hazardous substances could be discovered on such properties after acquisition by
the Bancorp. In such event, the Bancorp might be required to remove such
substances from the affected properties at its sole cost and expense. There is
no assurance that the cost of such removal would not substantially exceed the
value of affected properties , that the Bancorp would have adequate remedies
against the prior owner or other responsible parties or that the Bancorp would
not find it difficult or impossible to sell the affected properties.
YEAR 2000 COMPUTER CONSIDERATION. Many existing programs use only two digits to
identify a year in the date datum field (e.g., "98" for "1998"). As a result,
the Bancorp, like most other companies, will face a potentially
25
<PAGE> 40
serious information systems (computer) problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the year 2000. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000.
The Bancorp began the process of identifying the changes required to its
software and hardware in 1997, in consultation with software and hardware
providers, a consulting firm and bank regulators. While the Bancorp believes it
is taking all appropriate steps to assure that its information systems are
prepared for the year 2000, it is dependent on vendor and consumer compliance to
some extent. The Bancorp is requiring its systems and software vendors to
represent that the service and products provided are, or will be, year 2000
compliant, and has initiated a program of testing compliance. The Bancorp
estimates that its costs relating to year 2000 compliance will be at least
$264,000 and may be significantly more. The year 2000 problem is pervasive and
complex as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. Consequently, no assurance can
be given that year 2000 compliance can be achieved without costs and
uncertainties that might affect future financial results or cause reported
financial information not to be necessarily indicative of future operating
results or future financial condition.
TRADING MARKET OF BANCORP COMMON STOCK; CASH DIVIDENDS. There has been a limited
trading market for Bancorp Common Stock, and no assurances can be given that an
active trading market for such stock will develop subsequent to either the Lake
Merger or the Rose Merger. Bancorp Common Stock is not listed on any stock
exchange and is not included for quotation by NASDAQ. The limited trading market
for Bancorp Common Stock may make difficult the sale of shares of Bancorp Common
Stock issued in the Lake Merger and the Rose Merger. The Bancorp has not paid
any cash dividends since its inception, and the Bancorp's management does not
contemplate the payment of any cash dividends in the near future. See also
"DIVIDENDS" herein.
INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished to the shareholders of the
Bancorp, Lake and Rose in connection with the solicitation of proxies by the
Boards of Directors of the Bancorp, Lake and Rose for use at their respective
meetings of shareholders for the purpose of considering and voting upon the
matters set forth in their respective notices of meeting.
The information contained herein concerning the Bancorp has been furnished by
the Bancorp and is its responsibility. The information contained herein
concerning Lake has been furnished by Lake and is its responsibility. The
information contained herein concerning Rose has been furnished by Rose and is
its responsibility.
The mailing of this Joint Proxy Statement/Prospectus commenced on or about
_______, 1998.
The consummation of the Lake Merger is not dependent upon the consummation of
the Rose Merger and the consummation of the Rose Merger is not dependent upon
the consummation of the Lake Merger.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETINGS
The Bancorp Meeting and the Lake Meeting have been called to consider and vote
upon the Lake Agreement, pursuant to which Lake will be merged with and into
LMC, the wholly-owned subsidiary of the Bancorp and thereafter Lake will be the
surviving corporation of the Lake Merger and a wholly-owned subsidiary of the
Bancorp. In addition, the Bancorp Meeting and the Rose Meeting have been called
to consider and vote upon the Rose Agreement, pursuant to which Rose will be
merged with and into the Bancorp and Rose's wholly-owned subsidiary,
26
<PAGE> 41
R1NB, will be a wholly-owned subsidiary of the Bancorp. The proposed merger and
related transactions by and among the Bancorp, LMC and Lake are herein called
the "Lake Merger" and the proposed merger and related transactions by and
between the Bancorp and Rose are herein called the "Rose Merger."
RECORD DATES
THE BANCORP. The close of business on November __, 1998 has been fixed as the
record date (the "Bancorp Record Date") for the determination of the Bancorp
shareholders entitled to notice of, and to vote at, the Bancorp Meeting.
LAKE. The close of business on November __, 1998 has been fixed as the record
date ("Lake Record Date") for the determination of Lake shareholders entitled to
notice of, and to vote at, the Lake Meeting.
ROSE. The close of business on November __, 1998 has been fixed as the record
date ("Rose Record Date") for the determination of Rose shareholders entitled to
notice of, and to vote at, the Rose Meeting.
OUTSTANDING SECURITIES AND VOTING RIGHTS
THE BANCORP. There were issued and outstanding a total of 981,448 shares of
Bancorp Common Stock as of the Bancorp Record Date held by approximately 331
record holders. Each holder of Bancorp Common Stock will be entitled to one
vote, in person or by Proxy, for each share of Bancorp Common Stock standing in
his or her name on the books of the Bancorp as of the Bancorp Record Date on any
matter submitted to a vote of the shareholders at the Bancorp Meeting.
Approval of the Lake Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Bancorp Common Stock and approval of the
Rose Merger also requires the affirmative vote of the holders of a majority of
the outstanding shares of Bancorp Common Stock.
The effect of broker nonvotes is that such votes are not counted as being voted;
however such votes are counted for purposes of determining a quorum. The effect
of a vote of abstention on any matter is that such vote is not counted as a vote
for or against the matter, but is counted as an abstention.
LAKE. There were issued and outstanding 1,298,296 shares of Lake Common Stock as
of the Lake Record Date held by approximately 850 record holders. Each holder of
Lake Common Stock will be entitled to one vote, in person or by Proxy, for each
share of Lake Common Stock standing in his or her name on Lake's books as of the
Lake Record Date on any matter submitted to the vote of the shareholders at the
Lake Meeting.
Approval of the Lake Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Lake Common Stock.
The effect of broker nonvotes is that such votes are not counted as being voted;
however such votes are counted for purposes of determining a quorum. The effect
of a vote of abstention on any matter is that such vote is not counted as a vote
for or against the matter, but is counted as an abstention.
ROSE. There were issued and outstanding 370,805 shares of Rose Common Stock as
of the Rose Record Date held by approximately 303 record holders. Each holder of
Rose Common Stock will be entitled to one vote, in person or by Proxy, for each
share of Rose Common Stock standing in his or her name on Rose's books as of the
Rose Record Date on any matter submitted to the vote of the shareholders at the
Rose Meeting.
27
<PAGE> 42
Approval of the Rose Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Rose Common Stock.
The effect of broker nonvotes is that such votes are not counted as being voted;
however such votes are counted for purposes of determining a quorum. The effect
of a vote of abstention on any matter is that such vote is not counted as a vote
for or against the matter, but is counted as an abstention.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Boards of Directors of the Bancorp and Lake have each unanimously voted in
favor of the proposals relating to the Lake Merger, and the individual members
of Lake's Board of Directors have indicated that, as provided in the Lake
Agreement, they will vote all shares of Lake Common Stock as to which they have
voting power "FOR" approval of the Lake Agreement. Both the Boards of Directors
of the Bancorp and Lake recommend that their respective shareholders also vote
"FOR" approval of the Lake Agreement. (See "INTRODUCTION--Beneficial Ownership
of Principal Shareholders and Management.")
The Boards of Directors of the Bancorp and Rose have also each unanimously voted
in favor of the proposals relating to the Rose Merger, and the individual
members of Rose's Board of Directors have indicated that, as provided in the
Rose Agreement, they will vote all shares of Rose Common Stock as to which they
have voting power "FOR" approval of the Rose Agreement. Both the Board of
Directors of the Bancorp and Rose recommend that their respective shareholders
also vote "FOR" approval of the Rose Agreement. (See "INTRODUCTION--Beneficial
Ownership of Principal Shareholders and Management.")
As of the Bancorp Record Date, the directors and executive officers of the
Bancorp held approximately 33.3% of the outstanding shares of Bancorp Common
Stock entitled to vote at the Bancorp Meeting. Each of these directors and
executive officers has indicated that they intend to vote "FOR" approval of the
Lake Agreement and "FOR" approval of the Rose Agreement.
As of the Lake Record Date, the directors and executive officers of Lake held
approximately 18.8% of the outstanding shares of Lake Common Stock entitled to
vote at the Lake Meeting and Lake directors holding approximately 17.7% of such
shares have entered into director's agreements providing that they will each
vote "FOR" approval of the Lake Agreement. Therefore holders of only 419,319
additional shares of Lake Common Stock are needed to approve the Lake Agreement.
(See "THE LAKE MERGER AND RELATED TRANSACTIONS--Interests of Certain Persons in
the Lake Merger and Material Contracts with Lake and its Affiliates.")
As of the Rose Record Date, the directors and executive officers of Rose held
approximately 44.8% of the outstanding shares of Rose Common Stock entitled to
vote at the Rose Meeting and Rose directors holding approximately 44.5% of such
shares have entered into director's agreements providing that they will each
vote "FOR" approval of the Rose Agreement. Therefore holders of only 20,288
additional shares of Rose Common Stock are needed to approve the Rose Agreement.
(See "THE ROSE MERGER AND RELATED TRANSACTIONS--Interests of Certain Persons in
the Rose Merger and Material Contracts with Rose and its Affiliates.")
REVOCABILITY OF PROXIES
A Proxy for use at the Bancorp Meeting, the Lake Meeting or the Rose Meeting, as
the case may be, is enclosed. A shareholder executing and returning a Proxy may
revoke it at any time before the vote is taken by filing with the Secretary of
the Bancorp, the Secretary of Lake, or the Secretary of Rose, as the case may
be, an instrument revoking it or a duly executed Proxy bearing a later date. In
addition, the powers of the proxyholders will be suspended if the person
executing the Proxy is present at the Bancorp Meeting, the Lake Meeting or the
Rose
28
<PAGE> 43
Meeting, as the case may be, and elects to vote in person by advising the
chairman of the Bancorp Meeting, the Lake Meeting or the Rose Meeting, as the
case may be, of his or her election to vote in person, and voting in person at
the Bancorp Meeting, the Lake Meeting or the Rose Meeting, as the case may be.
Subject to such revocation or suspension, all shares represented by a properly
executed Proxy received in time for the Bancorp Meeting, the Lake Meeting or the
Rose Meeting, as the case may be, will be voted by the proxyholders in
accordance with the instructions specified on the Proxy. If no directions are
given to the contrary on such Proxy, the shares of Bancorp Common Stock and Lake
Common Stock represented by such Proxy will be voted "FOR" approval of the Lake
Agreement at their respective meetings and the shares of Bancorp Common Stock
and Rose Common Stock represented by such Proxy will be voted "FOR" approval of
the Rose Agreement at their respective meetings. It is not anticipated that any
matters will be presented at the Bancorp Meeting, the Lake Meeting or the Rose
Meeting other than as set forth in the respective notices of the meetings. If,
however, other matters are properly presented at any of the meetings, the Proxy
will be voted in accordance with the best judgment and discretion of the
proxyholders.
COST OF SOLICITATION OF PROXIES
The expense of preparing, assembling, printing and mailing this Joint Proxy
Statement/Prospectus and the material used in this solicitation of Proxies shall
be shared by the Bancorp, Lake and Rose. It is contemplated that Proxies will be
solicited through the mail, but officers, directors and regular employees of the
Bancorp, Lake and Rose may solicit Proxies for their respective meetings
personally. Although there is no formal agreement to do so, the Bancorp, Lake
and Rose may reimburse banks, brokerage houses and other custodians, nominees
and fiduciaries for their reasonable expenses in forwarding these proxy
materials to their principals. In addition, the Bancorp, Lake and Rose may pay
for and utilize the services of individuals or companies not regularly employed
by any of them in connection with the solicitation of Proxies for their
respective meetings if the Board of Directors of the Bancorp, Lake or Rose
determines that this is advisable.
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
THE BANCORP PRINCIPAL SHAREHOLDERS. The Bancorp's Board of Directors knows of no
person who owns beneficially more than 5% of the outstanding shares of Bancorp
Common Stock as of October 1, 1998 except for the persons set forth in the
following table:
<TABLE>
<CAPTION>
The Bancorp Common Stock
Beneficially Owned(2)
-------------------------
Relationship Number of Percent
Name and Address(1) with the Bancorp Shares of Class
- ------------------ ---------------------- --------- --------
<S> <C> <C> <C>
Robert G. Albrecht Director 79,700 8.0%
Gary D. Gall Director and CEO 55,770 5.6%
Osvaldo I. Scariot Director 86,334 8.8%
Joseph A. Surra Director and Chairman 51,425 5.2%
Patrick Hopper Shareholder 88,078 9.0%
</TABLE>
- -------------------
(1) Messrs. Albrecht's, Gall's, Scariot's and Surra's address is c/o Western
Sierra Bancorp, 4011 Plaza Goldorado Circle, Cameron Park, California
95682. Mr. Hopper's address is 2624 Pebble Gold Avenue, Henderson,
Nevada 89014.
(Footnotes on the following page.)
29
<PAGE> 44
(2) The beneficial owner of a security is a person who, directly or
indirectly, through any contract arrangement, understanding,
relationship, or otherwise has or shares: (a) voting power which
includes the power to vote, or to direct the voting of, such security or
(b) investment power which includes the power to dispose, or to direct
the disposition, of such security. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares subject to options
presently exercisable or exercisable within 60 days of October 1, 1998
are deemed to be beneficially owned by the holder but are not treated as
outstanding for computing the beneficial ownership of any other person.
THE BANCORP MANAGEMENT. The following table sets forth as of October 1, 1998,
the number of shares of Bancorp Common Stock beneficially owned by each director
and named executive officer of the Bancorp and by all the Bancorp directors and
executive officers as a group.
<TABLE>
<CAPTION>
The Bancorp Common Stock Percent
Beneficial Owner Beneficially Owned of Class(1)
- ---------------- ------------------------ -----------
<S> <C> <C>
Directors and Named Executive Officers:
- ---------------------------------------
Robert G. Albrecht 79,700(2) 8.0
Charles W. Bacchi 7,181(3) *
Barbara L. Cook 6,477 *
William J. Fisher 8,487(4) *
Gary D. Gall 55,770(5) 5.6
Richard L. Golemon 43,741(6) 4.4
Harold S. Prescott, Jr. 48,389(7) 4.9
Darol B. Rasmussen 43,466(8) 4.4
Osvaldo I. Scariot 86,334(9) 8.8
Joseph A. Surra 51,425(10) 5.2
Stephanie M. Marsh 4,412(11) *
All Directors and Executive 389,032(12) 37.3
Officers as a Group (12 in all)
</TABLE>
- ----------------------
* Less than 1%.
(1) Includes shares subject to options held by the directors and executive
officers that are exercisable within 60 days of October 1, 1998. These
are treated as issued and outstanding for the purpose of computing the
percentages of each director, named executive officer and the directors
and executive officers as a group, but not for the purpose of computing
the percentage of class of any other person.
(2) Mr. Albrecht has shared voting and investment powers as to 62,061 of
these shares. The amount includes 17,639 shares acquirable by exercise
of stock options.
(3) Mr. Bacchi has shared voting and investment powers as to 3,217 of these
shares. The amount includes 3,964 shares acquirable by exercise of stock
options.
(4) Mr. Fisher has shared voting and investment powers as to 3,823 of these
shares. The amount includes 4,664 shares acquirable by exercise of stock
options.
(5) Mr. Gall has shared voting and investment powers as to 25,316 of these
shares as to which 24,021 shares were owned by Mr. Gall as co-trustee
for WSNB's KSOP and the Bancorp's Employee Stock Ownership Plan
("ESOP"). The amount includes 16,962 shares acquirable by exercise of
stock options.
(6) Mr. Golemon has shared voting and investment powers as to 24,021 of
these shares as co-trustee for WSNB's KSOP and the Bancorp's ESOP. The
amount includes 4,664 shares acquirable by exercise of stock options.
(Footnotes continued on the following page.)
30
<PAGE> 45
(7) Mr. Prescott has shared voting and investment powers as to 43,725 of
these shares. The amount includes 4,664 shares acquirable by exercise of
stock options.
(8) Dr. Rasmussen has shared voting and investment powers as to 11,760 of
these shares.
(9) Mr. Scariot has shared voting and investment powers as to all of these
shares.
(10) Mr. Surra has shared voting and investment powers as to 46,761 of these
shares as to which 24,021 shares were owned by Mr. Surra as co-trustee
for WSNB's KSOP and the Bancorp's ESOP. The amount includes 4,664 shares
acquirable by exercise of stock options.
(11) Ms. Marsh has shared voting and investment powers as to 622 of these
shares. The amount includes 3,532 shares acquirable by exercise of stock
options.
(12) The amount includes 62,073 shares acquirable by exercise of stock
options.
As of October 1, 1998, no director or executive officer of the Bancorp owned any
shares of Lake Common Stock or Rose Common Stock. However, the Bancorp's ESOP,
of which Messrs. Gall, Golemon and Surra have shared voting and investment
powers, purchased 1,000 shares of Lake Common Stock.
LAKE PRINCIPAL SHAREHOLDERS. Lake's Board of Directors knows of no person who
owns beneficially more than 5% of the outstanding shares of Lake Common Stock as
of October 1, 1998 except for the persons set forth in the following table:
<TABLE>
<CAPTION>
Lake Common Stock
Beneficially Owned
--------------------
Relationship Number of Percent
Name and Address with the Bancorp Shares of Class
- ----------------------------------- ---------------- --------- --------
<S> <C> <C> <C>
Financial Institutions Partners II, Shareholder 116,943(1) 9.0%
L.P. and Hovde Capital, L.L.C
1629 Colonial Parkway
Inverness, Illinois 60067
</TABLE>
- ----------------------
(1) Based on information contained in an acquisition statement, as amended,
under Section 13(d) of the Securities Exchange Act of 1934 dated
February 23, 1998 received by Lake from Financial Institutions Partners
II, L.P. and Hovde Capital, L.L.C., which acquisition statement states
that Hovde Capital, L.L.C. is the general partner of Financial
Institutions Partners II, L.P.
LAKE MANAGEMENT. The following table sets forth as of October 1, 1998, the
number of shares of Lake Common Stock beneficially owned by each director and
named executive officer and by all directors and executive officers as a group.
31
<PAGE> 46
<TABLE>
<CAPTION>
Lake Common Stock Percent
Beneficial Owner Beneficially Owned of Class(1)
- ---------------- ------------------ -----------
<S> <C> <C>
Directors and Named Executive Officers:
- ---------------------------------------
Donald L. Browning, M.D. 52,800(2) 4.0%
F. Ilene Dumont 2,000 *
John Helms 52,650 4.1%
Billie L. Holmes 52,000(3) 4.0%
May Noble 44,280(2) 3.4%
Gary E. Nordine 41,350(4) 3.1%
Lawrence A. Rogers 46,600(2) 3.5%
Howard "Bud" Van Lente 36,000(2) 2.7%
All Directors and Executive Officers
as a Group (9 in all) 359,406(5) 25.4%
</TABLE>
- ------------------
* Less than 1%.
(1) Includes shares subject to options held by the directors and executive
officers that are exercisable within 60 days of October 1, 1998. These
are treated as issued and outstanding for the purpose of computing the
percentages of each director, named executive officer and the directors
and executive officers as a group, but not for the purpose of computing
the percentage of class of any other person.
(2) Includes 20,000 shares acquirable upon the exercise of stock options.
(3) Includes 5,000 shares acquirable upon the exercise of stock options.
(4) Includes 17,850 shares acquirable upon the exercise of stock options.
(5) Includes 35,700 shares and 80,000 shares, respectively, subject to
presently exercisable employee and nonemployee options granted pursuant
to Lake's 1984 Stock Option Plan.
As of October 1, 1998, no director or principal officer of Lake owned any shares
of Bancorp Common Stock.
ROSE PRINCIPAL SHAREHOLDERS. Rose's Board of Directors knows of no person who
owns beneficially more than 5% of the outstanding shares of Rose Common Stock as
of October 1, 1998, except for the persons set forth in the following table:
<TABLE>
<CAPTION>
Rose Common Stock
Beneficially Owned(2)
---------------------
Number of Percent
Name and Address(1) Relationship with Rose Shares of Class
- ------------------- ------------------------ --------- --------
<S> <C> <C> <C>
Ernest E. Johnson, M.D. Director 24,428 6.6%
Kenneth Leung Director 20,000 5.4%
Thomas Manz Chairman of the Board 39,301 10.6%
Douglas A. Nordell Executive Vice President 21,204 5.7%
Richard C. Seeba President and Director 51,509 13.9%
</TABLE>
- -----------------
(1) Dr. Johnson's and Messrs. Leung's, Manz's, Nordell's and Seeba's address
is c/o Roseville 1st Community Bancorp, 1801 Douglas Boulevard,
Roseville, California 95661.
(Footnotes continued on following page.)
32
<PAGE> 47
(2) The beneficial owner of a security is a person who, directly or
indirectly, through any contract arrangement, understanding,
relationship, or otherwise has or shares: (a) voting power which
includes the power to vote, or to direct the voting of, such security or
(b) investment power which includes the power to dispose, or to direct
the disposition, of such security. The beneficial owner of a security is
also a person who, directly or indirectly, creates or uses a trust,
proxy, power of attorney, pooling arrangement or any other contract,
arrangement, or device with the purpose or effect of divesting himself
of beneficial ownership of a security or preventing the vesting of such
beneficial ownership. The percentage of beneficial ownership is
calculated assuming 370,805 shares of Rose Common Stock outstanding on
October 1, 1998. Beneficial ownership is determined in accordance with
the rules of the SEC and generally includes voting or investment power
with respect to securities. Shares subject to options presently
exercisable or exercisable within 60 days of October 1, 1998 are deemed
to be beneficially owned by the holder but are not treated as
outstanding for computing the beneficial ownership of any other person.
ROSE MANAGEMENT. The following table sets forth as of October 1, 1998, the
number of shares of Rose Common Stock beneficially owned by each director and
named executive officer and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
Rose Common Stock Percent
Beneficial Owner Beneficially Owned of Class(1)
- ---------------- ------------------ ----------
<S> <C> <C>
Directors and Named Executive Officers(2):
- ------------------------------------------
Patrick I. Abare 17,064 4.6%
Stephen F. Caulkins 8,105(3) 2.2%
D. Mark Davis 2,097 *
Kirk Doyle 10,704 2.9%
Howard "Skip" Jahn 14,767 4.0%
Ernest E. Johnson, M.D. 24,428 6.6%
Kenneth Leung 20,000 5.4%
Thomas Manz 39,301(4) 10.6%
James Otto 8,656 2.3%
Randall Scagliotti, DVM 15,266 4.1%
Richard C. Seeba 51,509(5) 13.9%
All Directors and Executive(2) 202,319(6) 54.6%
Officers as a Group (13 in all)
</TABLE>
- ------------------
* Less than 1%.
(1) Includes shares subject to options held by the directors and executive
officers that are exercisable within 60 days of October 1, 1998. These
are treated as issued and outstanding for the purpose of computing the
percentages of each director, named executive officer and the directors
and executive officers as a group, but not for the purpose of computing
the percentage of class of any other person.
(2) For purposes of this paragraph, the term "named executive officer" means
those officers who receive in excess of $100,000 per year in salary and
bonus and the term "executive officer" means the President/Chief
Executive Officer, the Executive Vice President/Chief Operating Officer
and the Senior Vice President/Chief Financial Officer.
(3) Mr. Caulkins' amount includes 6,500 shares acquirable by exercise of
stock options.
(4) Mr. Manz has shared voting and investment powers as to 16,391 shares
which he votes as a trustee of the R1NB 401(k) Plan. The amount also
includes 4,500 shares acquirable by exercise of stock options.
(5) Mr. Seeba has shared voting and investment powers as to 16,391 shares
which he votes as a trustee of the R1NB 401(k) Plan. The amount also
includes 3,000 shares acquirable by exercise of stock options.
(6) The amount includes 20,000 shares acquirable by exercise of stock
options.
33
<PAGE> 48
As of October 1, 1998, no director or executive officer of Rose owned any shares
of Bancorp Common Stock.
PRINCIPAL SHAREHOLDERS OF THE BANCORP FOLLOWING THE LAKE MERGER. The Boards of
Directors of the Bancorp and Lake anticipate that if the Lake Merger is
consummated, no one will own beneficially more than 5% of the Bancorp Common
Stock. (See "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and
Exchange of Shares and Options.")
PRINCIPAL SHAREHOLDERS OF THE BANCORP FOLLOWING THE ROSE MERGER. The Boards of
Directors of the Bancorp and Rose anticipate that if the Rose Merger is
consummated, Robert G. Albrecht, Osvaldo I. Scariot and Patrick Hopper will own
beneficially more than 5% of the Bancorp Common Stock. (See "THE ROSE MERGER AND
RELATED TRANSACTIONS--Rose Conversion Rate and Exchange of Shares and Options.")
PRINCIPAL SHAREHOLDERS OF THE BANCORP FOLLOWING THE LAKE MERGER AND THE ROSE
MERGER. The Boards of Directors of the Bancorp, Lake and Rose anticipate that if
both the Lake Merger and the Rose Merger are consummated, no one will own
beneficially more than 5% of the Bancorp Common Stock.
THE LAKE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the Joint Proxy Statement/Prospectus contains information
furnished by the Boards of Directors of the Bancorp and Lake in connection with
the solicitation of Proxies for the Bancorp Meeting and the Lake Meeting,
respectively, to approve the Lake Agreement, providing for the merger of Lake
with LMC, the wholly-owned subsidiary of the Bancorp.
The shareholders of each of the Bancorp and Lake will be asked to consider and
vote upon the Lake Agreement, pursuant to which Lake will be merged with LMC
with Lake being the surviving corporation of the Lake Merger ("Surviving
Corporation of the Lake Merger") under the Articles of Incorporation of Lake.
Upon consummation of the Lake Merger, the authorized and issued capital stock of
LMC, all of which shall be owned by the Bancorp immediately prior to the Lake
Effective Time, on and after the Lake Effective Time, pursuant to the Lake
Agreement and without any further action on the part of Bancorp or LMC shall be
exchanged on a one-for-one basis for shares of common stock of the Surviving
Corporation of the Lake Merger; each share of Lake Common Stock (other than
shares to which its holders have exercised and perfected dissenters' rights)
shall be converted at the Lake Effective Time into and become the right to
receive that number of shares of Bancorp Common Stock equal to the Lake
Conversion Rate, subject to adjustment, if any, as provided in the Lake
Agreement as defined in "SUMMARY INFORMATION--Terms of the Lake Merger;" all
assets of LMC will be transferred to the Surviving Corporation of the Lake
Merger; and all liabilities of LMC will be assumed by the Surviving Corporation
of the Lake Merger. (See "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake
Conversion Rate and Exchange of Shares and Options.")
Consummation of the Lake Merger is subject to the satisfaction of certain
conditions set forth in the Lake Agreement. (See "THE LAKE MERGER AND RELATED
TRANSACTIONS--Conditions to the Lake Merger" below.) Neither the Bancorp nor
Lake is aware of any reason why any of the conditions to the Lake Merger will
not be satisfied. However, no assurance can be given that such conditions will
be satisfied.
A copy of the Lake Agreement is attached to this Joint Proxy
Statement/Prospectus as Exhibit I and incorporated herein by this reference.
SUMMARIES OF CERTAIN PROVISIONS OF THE LAKE AGREEMENT SET
34
<PAGE> 49
FORTH HEREIN ARE NOT COMPLETE STATEMENTS THEREOF AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE LAKE AGREEMENT.
BACKGROUND AND REASONS FOR THE LAKE MERGER
THE BANCORP'S ANALYSIS. During the past two years, the Bancorp has been
expanding its services to the businesses and residents of El Dorado and Placer
Counties through its branch operations and of Sacramento County through its loan
production office. During February 1998, the Bancorp had preliminary discussions
with Lake regarding a potential merger of the two institutions. After
consideration, the Bancorp's Board of Directors and Senior Management determined
that the merger of Lake with LMC provided an opportunity for the Bancorp to
serve the Lake County market area through the acquisition of a bank with offices
in Lakeport and Kelseyville. In addition, the Bancorp's Board of Directors
believes the Lake Merger will help the Bancorp to achieve increased benefits
through asset diversification; will provide an opportunity to increase the
number of outstanding shares and liquidity of Bancorp Common Stock; and will be
accretive to the shareholders of the Bancorp. After discussions between the
Bancorp and Lake, the parties executed a Confidentiality Agreement dated
February 27, 1998, whereby the Bancorp would acquire Lake through a
stock-for-stock merger transaction. Thereafter, on May 27, 1998, the Bancorp and
Lake entered into the Lake Agreement whereby the Bancorp would operate Lake as a
wholly-owned bank subsidiary. The Bancorp currently has no plans to merge Lake
with either WSNB or R1NB.
The Board of Directors of the Bancorp believes the Lake Merger to be in the best
interests of the Bancorp, its shareholders and banking customers. The Board of
Directors of the Bancorp expects the Bancorp, following the Lake Merger, to be
stronger in terms of capital, management, growth opportunities and profitability
than is either corporation at present.
The Bancorp has been profitable and has shown strong asset growth over the past
several years. Following the Lake Merger, Lake will have the advantage of the
consolidation and centralization of certain management functions and certain
resulting economies of scale. Furthermore, it is believed that the Lake Merger
will result in a bank which will be a strong and viable independent financial
institution better able to compete with the major banks in the areas now served
by Lake.
LAKE'S ANALYSIS. On May 27, 1998, the Bancorp and Lake entered into the Lake
Agreement. Present at the Lake Board of Directors meeting were representatives
of Lake's legal counsel, Lillick & Charles LLP and Lake's financial advisor ,
The Banc Stock Group, Inc. ("BSG"). At the meeting the representative of BSG
orally presented its fairness opinion.
In determining to approve the Lake Agreement and recommend that Lake's
shareholders approve and authorize the Lake Agreement, the Lake Board of
Directors consulted with Lake's senior management, its financial advisor, as
well as its legal counsel, and considered a number of factors, including: (i)
the increased liquidity to be provided to Lake's shareholders by receiving
shares of Bancorp Common Stock in exchange for their shares of Lake Common
Stock; (ii) the economic conditions and prospects for the markets in which Lake
operates, and competitive pressures in the financial services industry in
general and the banking industry in particular; (iii) the enhancement of Lake's
competitiveness and its ability to serve its customers, depositors, creditors,
other constituents and the communities in which it operates as a result of a
business combination with another Northern California bank holding company, such
as the Bancorp; (iv) information concerning the business, results of operations,
asset quality and financial condition of Lake and the Bancorp on a stand-alone
and combined basis, and the future growth prospects of Lake and the Bancorp
following the Lake Merger; (v) the cost savings and operational synergies which
the management of Lake believes may be achieved as a result of the Lake Merger;
(vi) an assessment that, in the current economic environment, expansion through
acquisition by another financial institution is most economically advantageous
to
35
<PAGE> 50
Lake's shareholders when compared to other alternatives such as de novo branch
openings or branch acquisitions; (vii) the terms and conditions of the Lake
Agreement and related agreements; (viii) BSG's analysis of the financial
condition, results of operations, business, prospects and stock price of Lake
and comparison of Lake to other banks and bank holding companies operating in
its industry; (ix) an analysis of the terms of other acquisitions in the banking
industry; (x) the opinion of BSG to the effect that, as of the date of the
opinion, the Lake Conversion Rate as set forth in the Lake Agreement is fair,
from a financial point of view, to the holders of Lake Common Stock; (xi) the
expectation that the Lake Merger will constitute a tax-free reorganization for
federal income tax purposes; and (xii) the expectation that the Lake Merger will
be treated as a pooling-of-interests for accounting purposes.
The above discussion of the factors considered by the Lake Board of Directors is
not intended to be exhaustive. In view of the variety and nature of the factors
considered by the Lake Board of Directors, the Lake Board of Directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
The Board of Directors of Lake believes the Lake Merger to be in the best
interests of Lake, its shareholders and banking customers. Following the Lake
Merger, Lake will have the advantage of the consolidation and centralization of
certain management functions and certain resulting economies of scale.
Furthermore, it is believed that the Lake Merger will result in a bank which
will be a strong and viable independent financial institution better able to
compete with the major banks in the areas now served by Lake.
LAKE CONVERSION RATE AND EXCHANGE OF SHARES AND OPTIONS
LAKE CONVERSION RATE. Each share of Lake Common Stock which is outstanding
immediately prior to the Lake Merger (other than shares to which its holders
have exercised and perfected dissenters' rights) will automatically be canceled
and will be converted into the right to receive that number of shares of Bancorp
Common Stock which is equal to the Lake Conversion Rate. The "Lake Conversion
Rate" is a fraction, the numerator of which is the Per Share Lake Merger Price,
and the denominator of which is the Bancorp Average Trading Price. The "Per
Share Lake Merger Price" means the sum of Lake's total shareholders' equity as
adjusted pursuant to the Lake Agreement as of the month end before the calendar
month in which the Lake Effective Time occurs (the "Lake Determination Date")
multiplied by 1.75 with the total product divided by the total number of shares
of Lake Common Stock outstanding at the date of the Lake Merger. Perry-Smith &
Co., LLP, the independent public accountants for the Bancorp and Lake, will
calculate the Per Share Lake Merger Price. The "Bancorp Average Trading Price"
means the average trading price for Bancorp Common Stock as determined for a
thirty calendar day period prior to the Lake Determination Date. However, if the
Bancorp Average Trading Price is above $20.00 per share, the Bancorp Average
Trading Price shall be $20.00 per share. If the Bancorp Average Trading Price is
below $17.00 per share, the Bancorp Average Trading Price shall be $17.00 per
share.
For purposes of illustration only, assuming (i) September 30, 1998 is used as
the Lake Determination Date for calculating a pro forma Lake Conversion Rate,
(ii) the Bancorp Average Trading Price is $17.00 per share, (iii) Lake's total
shareholders' equity as adjusted pursuant to the Lake Agreement is $9,433,383,
and (iv) there are 1,298,296 shares of Lake Common Stock outstanding, the Lake
Conversion Rate would be .7480. Accordingly, if the assumptions used in arriving
at this sample Lake Conversion Rate were to remain unchanged until the
consummation of the Lake Merger, each share of Lake Common Stock would be
converted into .7480 shares of Bancorp Common Stock. Assuming the holders of all
of the shares of Lake Common Stock convert their shares into Bancorp Common
Stock at the Lake Conversion Rate of .7480 there would be approximately
1,952,573 shares of Bancorp Common Stock outstanding immediately following the
consummation of the Lake Merger, comprised of 981,448 outstanding shares of
Bancorp Common Stock and approximately 971,125 shares of Bancorp Common Stock
issued as a result of the Lake Conversion Rate. If any of the assumptions used
in arriving at this pro forma Lake Conversion Rate were to change prior to the
consummation of the Lake Merger, the Lake Conversion Rate
36
<PAGE> 51
would likely be different. The following table sets forth estimates of the Lake
Conversion Rate assuming changes in the Bancorp Average Trading Price in
twenty-five cent (.25) increments with Lake's total shareholders' equity as
adjusted pursuant to the Lake Agreement remaining at $9,433,383 and the number
of shares of Lake Common Stock remaining at 1,298,296 for a Per Share Lake
Merger Price of $12.72.
<TABLE>
<CAPTION>
Bancorp Lake
Average Trading Price Conversion Rate
--------------------- ---------------
<S> <C>
$ 17.00 0.7480
$ 17.25 0.7371
$ 17.50 0.7266
$ 17.75 0.7164
$ 18.00 0.7064
$ 18.25 0.6967
$ 18.50 0.6873
$ 18.75 0.6782
$ 19.00 0.6692
$ 19.25 0.6605
$ 19.50 0.6521
$ 19.75 0.6438
$ 20.00 0.6358
</TABLE>
THE ACTUAL LAKE CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH
ABOVE.
No fractional shares of Bancorp Common Stock will be issued in the Lake Merger.
Instead, shareholders of Lake will receive an amount in cash equal to the
product (rounded to the nearest hundredth) obtained by multiplying (a) Bancorp
Market Value Per Share by (b) the fraction of a share of Bancorp Common Stock to
which such holder would otherwise be entitled. "Bancorp Market Value Per Share"
means the last trade of Bancorp Common Stock prior to the Lake Effective Time.
EXCHANGE PROCEDURE. Each holder of a certificate representing shares of Lake
Common Stock shall surrender such certificate, duly endorsed as the Bancorp may
require, to American Securities Transfer and Trust as the exchange agent (the
"Lake Exchange Agent"). Each holder shall then receive in exchange (i) a
certificate representing the number of whole shares of Bancorp Common Stock to
which the holder shall have become entitled based upon the Lake Conversion Rate
and (ii) a check for any fractional share. Upon surrender for cancellation to
the Lake Exchange Agent of one or more certificates for shares of Lake Common
Stock ("Lake Certificates"), accompanied by the Transmittal Letter which will be
sent to the Lake shareholders, the Lake Exchange Agent shall, promptly after the
Lake Effective Time, deliver to each holder of such surrendered Lake
Certificates new certificates representing the appropriate number of shares of
Bancorp Common Stock ("New Certificates") and checks for payment of fractional
shares.
Until Lake Certificates have been surrendered and exchanged, each outstanding
Lake Certificate shall be deemed for all corporate purposes to represent the
number of shares of Bancorp Common Stock into which the number of shares of Lake
Common Stock shown thereon have been converted. No dividends or other
distributions which are declared on Bancorp Common Stock will be paid to persons
otherwise entitled to receive the same until the Lake Certificates have been
surrendered in exchange for New Certificates in the manner herein provided, but
upon such surrender, such dividends or other distributions, from and after the
Lake Effective Time, will be paid to such persons in accordance
37
<PAGE> 52
with the terms of such Bancorp Common Stock. In no event shall the persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
No shareholder will be liable for any transfer taxes unless a certificate for
Bancorp Common Stock is to be issued in a name other than the shareholder's. It
shall be a condition of such issuance that the person requesting such issuance
shall properly endorse the Lake Certificates and shall pay to the Bancorp or the
Lake Exchange Agent any transfer taxes owed for that transfer or for any prior
transfer or establish to the satisfaction of the Bancorp or the Lake Exchange
Agent that such taxes have been paid or are not payable.
If any holder of Lake Common Stock is unable to surrender his or her Lake
Certificates because the certificates have been lost or destroyed, the holder
may instead deliver an affidavit and indemnity undertaking in form and substance
and, if required, with surety satisfactory to the Lake Exchange Agent and the
Bancorp.
EXCHANGE OF OUTSTANDING STOCK OPTIONS FOR SHARES OF LAKE COMMON STOCK. All
outstanding rights with respect to Lake Common Stock pursuant to existing stock
options for shares of Lake Common Stock will be converted into and become
outstanding rights with respect to shares of Bancorp Common Stock at the Lake
Conversion Rate with a corresponding adjustment in the option price.
INTERESTS OF CERTAIN PERSONS IN THE LAKE MERGER AND MATERIAL CONTRACTS WITH LAKE
AND ITS AFFILIATES
In considering the recommendations of the Boards of Directors of the Bancorp and
Lake for approval of the Lake Merger, the shareholders of the Bancorp and Lake
should be aware that certain members of the Boards of Directors of the Bancorp
and Lake may have substantial interest with respect to the Lake Merger as set
forth below.
Upon consummation of the Lake Merger, three directors of Lake shall be appointed
as directors of the Bancorp to serve until the next annual meeting of
shareholders of the Bancorp and until such successors are elected and qualified.
At the Lake Effective Time, there shall be nine members of the Board of
Directors of Lake; three will be selected by the Bancorp, and six will be
current directors of Lake. The six existing directors of Lake shall serve as
directors of Lake for at least a two year period after the Lake Effective Time.
It is presently anticipated that John Helms, Gary E. Nordine, and Howard ("Bud")
Van Lente will be appointed as directors of the Bancorp, that Donald L.
Browning, F. Ilene Dumont, John Helms, Billy L. Holmes, May G. Noble and Bud Van
Lente will continue to serve as directors of Lake, and that Charles W. Bacchi,
Gary D. Gall and Douglas A. Nordell will be appointed as new directors of Lake.
In addition, each director of Lake has entered into a director's agreement with
the Bancorp which provides that the director agrees: (i) to recommend that the
shareholders of Lake approve the Lake Agreement, and to advise Lake's
shareholders to reject any subsequent proposal or offer received by Lake
relating to any purchase, sale, acquisition, merger or other form of business
combination involving Lake or any of its assets, equity securities or debt
securities and to proceed with the transactions contemplated by the Lake
Agreement, unless Lake's Board of Directors has been advised by outside legal
counsel that, in the exercise of such director's fiduciary duties, a director of
Lake should not take such action; (ii) not to take any action that will alter or
affect in any way the right to vote the shares of Lake Common Stock, except (x)
with the prior written consent of the Bancorp or (y) to change such right from
that of a shared right of the director to vote the shares of Lake Common Stock
to a sole right of the director to vote the shares of Lake Common Stock; and
(iii) to vote all shares of Lake Common Stock as to which such director has
voting power in favor of the Lake Merger.
38
<PAGE> 53
The director's agreements also provide that the directors shall not for a period
of three years after the Lake Effective Time, directly or indirectly, without
the prior written consent of the Bancorp, own more than 1% of, organize, manage,
operate, finance or participate in the ownership, management, operation or
financing of, or be connected as an officer, director, employee, principal,
agent or consultant to any financial institution whose deposits are insured by
the FDIC that has its head office or a branch office within 50 miles of the head
office of Lake.
Upon consummation of the Lake Merger, Gary Nordine, the past President of Lake,
will receive a severance payment of $145,000 (net of taxes), with the tax
liability being shared equally by the Bancorp and Lake. In recognition of
Mr. Nordine's retirement as of October 31, 1998, the severance payment to
Mr. Nordine is not contingent upon his being employed by Lake as of the Lake
Effective Time. Mr. Nordine will continue to receive his monthly salary, but no
other benefits, from November 1 through November 30, 1998. Mr. Nordine also has
an Executive Retirement Agreement with Lake which provides that Lake will pay
Mr. Nordine $36,000 a year, in monthly payments, for a period of ten (10) years,
commencing in January 1999.
Gary D. Gall, who is currently the President and Chief Executive Officer of the
Bancorp and WSNB, and Lesa Fynes, who is currently the Controller of the Bancorp
and Senior Vice President and Chief Financial Officer of WSNB, are expected to
serve in the same positions with the Bancorp and WSNB following the Lake Merger.
In addition, Stephanie M. Marsh, who is currently the Senior Vice President and
Chief Administrative Officer of WSNB, and Kirk Dowdell, who is currently the
Senior Vice President and Chief Credit Officer of WSNB, are expected to serve in
those positions with both the Bancorp and WSNB following the Lake Merger. It is
also anticipated that Douglas A. Nordell, who is the Executive Vice President of
Rose and who became President and Chief Executive Officer of Lake upon
Mr. Nordine's retirement, will serve as President and Chief Executive Officer of
Lake following the Lake Merger. In addition, it is anticipated that Brandt
Peterson, who is currently Senior Vice President and Senior Loan Officer of
Lake, and Doreen Pendleton, who is currently Controller of Lake, will continue
to serve with Lake in those positions following the Lake Merger. It is
anticipated that most other present officers and employees of the Bancorp and
Lake will initially continue in the same or similar capacities with the Bancorp
and Lake at the same or comparable compensation levels. For information
regarding the Bancorp's employee benefit plans see the descriptions of the
Bancorp's employee benefit plans below in "DESCRIPTION OF THE BANCORP--
Management--Compensation of Executive Officers."
REGULATORY APPROVAL AND LAKE EFFECTIVE TIME
The Lake Merger was approved by the DFI on ________, 1998, by the FDIC on
________, 1998 and by the FRB on ________, 1998. THE APPROVAL OF THE LAKE MERGER
BY THE DFI, THE FDIC AND THE FRB IS NOT A RECOMMENDATION OR ENDORSEMENT OF THE
LAKE MERGER BY ANY OF THE DFI, THE FDIC OR THE FRB. The consummation of the Lake
Merger is anticipated to take place on a day ("Lake Closing Date") which shall
not, however, be later than thirty (30) days after (i) the receipt of the last
required regulatory approval and expiration of all applicable waiting periods,
and (ii) satisfaction of the conditions precedent to the obligations of each of
the Bancorp and Lake or the written waiver of such conditions by the Bancorp or
Lake, as applicable. The Lake Merger shall become effective at the Lake
Effective Time. It is presently anticipated that the Lake Merger will be
consummated during the fourth quarter of this year.
CONDITIONS TO THE LAKE MERGER
The Lake Agreement provides that the consummation of the Lake Merger is subject
to various conditions which must be satisfied before the consummation of the
Lake Merger, including the following:
39
<PAGE> 54
1. The Lake Agreement and the Lake Merger shall have been approved by the
vote of the holders of a majority of the outstanding stock of the
Bancorp and Lake, respectively;
2. All approvals or permits required to be obtained, and all waiting
periods required to expire, for the Lake Merger shall have been obtained
or expired, without the imposition of any materially burdensome
condition on any party to the Lake Merger as determined by the party
affected;
3. There shall not be any action taken, or any law, regulation or order
enacted, enforced or deemed applicable to the Lake Merger, by any
government entity which: (i) makes the consummation of the Lake Merger
illegal; (ii) requires the divestiture by the Bancorp of any material
asset or of a material portion of the business of the Bancorp; or (iii)
imposes any condition upon the Bancorp or its subsidiaries which in the
judgment of the Bancorp would be materially burdensome;
4. The Bancorp's Registration Statement shall have become effective under
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in
effect. No action or proceeding shall have been instituted to restrain
or prohibit the transactions contemplated in the Lake Agreement;
5. The Bancorp and Lake shall have received a determination from
Perry-Smith & Co., LLP that the Lake Merger will qualify for the pooling
of interests accounting method;
6. The representations and warranties of each of the Bancorp and Lake set
forth in the Lake Agreement shall be true in all materials respects as
of the Lake Effective Time; each of the Bancorp and Lake shall have duly
performed and complied in all material respects with all agreements
required by the Lake Agreement, except where the failure to so perform
and comply would not have or would not be reasonably likely to have a
material adverse effect on Lake or Lake as the Surviving Corporation of
the Lake Merger; and none of the events or conditions entitling either
party to terminate the Lake Agreement shall have occurred and be
continuing;
7. The Bancorp and Lake shall have received certificates of officers of the
other party stating that the representations and warranties as set forth
in the Lake Agreement are true and correct, and opinions of counsel for
the other party;
8. No action, suit or proceeding shall have been instituted or threatened
before any court or governmental body seeking to challenge or restrain
the transactions contemplated by the Lake Agreement which presents a
substantial risk that such transactions will be restrained or that
either the Bancorp or Lake may suffer material damages;
9. The holders of no more than 10% of the outstanding shares of Lake Common
Stock have exercised dissenters' rights. Dissenters of the Bancorp shall
be included in such calculation;
10. There shall not have been any change in the consolidated financial
condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of the Bancorp and its
subsidiaries, taken as a whole, from December 31, 1997 to the Lake
Effective Time that results in a material adverse effect as to the
Bancorp and its subsidiaries, taken as a whole;
11. No event or circumstance shall have occurred which has had or could
reasonably be expected to have a material adverse effect on Lake; and
40
<PAGE> 55
12. Each of the Bancorp and Lake shall have received a written opinion from
a recognized company experienced in providing business valuations and
fairness opinions, selected by the Bancorp or Lake, respectively,
confirming the fairness of the terms of the Lake Merger to the Bancorp
and its shareholders from a financial perspective, and to Lake and its
shareholders from a financial perspective, respectively, and such
opinions shall not have been withdrawn prior to the Lake Effective Time.
On ______, 1998, the FDIC approved the Lake Merger subject to approval of the
shareholders of LMC and Lake, on _______, 1998, the FRB approved the Lake Merger
subject to approval of the shareholders of the Bancorp and Lake, and on _______,
1998, the DFI approved the Lake Merger subject to approval of the shareholders
of the Bancorp and Lake. In addition, on May 27, 1998, TFG rendered its written
opinion to the Bancorp's Board of Directors that the terms of the Lake Merger
are fair, from a financial point of view, to the shareholders of the Bancorp and
on May 27, 1998, BSG rendered its written opinion to Lake's Board of Directors
that the terms of the Lake Merger are fair, from a financial point of view, to
the shareholders of Lake.
WAIVER, AMENDMENT, AND TERMINATION
Any term or provision of the Lake Agreement, other than regulatory approval or
any of the provisions required by law, may be waived in writing at any time by
the party which is, or whose shareholders are, entitled to the benefits thereof.
The Lake Agreement provides that it may be terminated prior to the Lake
Effective Time:
1. By mutual consent of the Boards of Directors of the Bancorp and Lake;
2. By the Bancorp or Lake upon the failure to satisfy any conditions
specified in the Lake Agreement if such failure is not caused by any
action or inaction of the party requesting termination;
3. By the Bancorp or Lake if a Lake Acquisition Event, as defined below,
involving the other party shall have occurred;
4. By either the Bancorp or Lake if there shall have been a material breach
of any of the representations or warranties of the other party, which
breach, in the reasonable opinion of the terminating party, by its
nature cannot be cured or is not cured prior to the Lake Closing and
which breach would, in the reasonable opinion of the terminating party,
individually or in the aggregate, have, or be reasonably likely to have,
a material adverse effect on the breaching party, or upon the
consummation of the Lake Merger;
5. By the Bancorp or Lake after the occurrence of a default by the other
party and the continuance of such default for a period of 20 business
days after written notice of such default, if such default, in the
reasonable opinion of the terminating party, cannot be cured prior to
the Lake Closing;
6. By the Bancorp or Lake if the updated schedules to the Lake Agreement
(the "Lake Closing Schedules") prepared and delivered by the other party
disclose the occurrence of an event or the existence of any facts or
circumstances, not previously disclosed, that has had or could
reasonably be expected to have a material adverse effect on the other
party, or on the consummation of the Lake Merger; or
7. By the Bancorp or Lake upon the failure of any of the conditions
specified in the Lake Agreement to have been satisfied prior to December
31, 1998.
41
<PAGE> 56
A "Lake Acquisition Event" is defined as a public announcement of an intent to
enter into a letter of intent or an agreement with any other entity (other than
Lake or the Bancorp) to effect an acquisition or failure to publicly oppose a
tender offer for the acquisition of either Lake's or the Bancorp's shares or an
exchange offer for the shares of either Lake or the Bancorp for shares of the
offering entity.
LIQUIDATED DAMAGES
If a Lake Acquisition Event occurs involving Lake, then Lake shall pay to the
Bancorp the sum of Five Hundred Thousand Dollars ($500,000) in cash. If a Lake
Acquisition Event occurs involving the Bancorp, then the Bancorp shall pay to
Lake the sum of Five Hundred Thousand Dollars ($500,000) in cash.
If there is a termination of the Lake Agreement by Lake as a result of the
revocation of the Lake Fairness Opinion; or a termination of the Lake Agreement
by the Bancorp because (i) Lake's shareholders do not approve the Lake
Agreement, or (ii) of a breach of Lake's representations or warranties, a
default by Lake, or disclosure in the Lake Closing Schedules of a material
adverse event, then, Lake shall pay to the Bancorp the sum of Two Hundred
Thousand Dollars ($200,000), in cash; provided, however, that if Lake enters
into an acquisition agreement within one hundred eighty (180) days following any
termination by the Bancorp as provided in the Lake Agreement, Lake shall pay to
the Bancorp an additional Three Hundred Thousand Dollars ($300,000) in cash.
If there is a termination of the Lake Agreement by the Bancorp as a result of
the revocation of the Bancorp Fairness Opinion; or a termination of the Lake
Agreement by Lake because (i) the Bancorp's shareholders do not approve the Lake
Agreement, or (ii) of a breach of the Bancorp's representations and warranties,
a default by the Bancorp, or disclosure in Lake Closing Schedules of a material
adverse event, then, the Bancorp shall pay to Lake the sum of Two Hundred
Thousand Dollars ($200,000), in cash; provided, however, that if a Lake
Acquisition Event occurs involving the Bancorp within one hundred eighty (180)
days following any termination by Lake as provided in the Lake Agreement, the
Bancorp shall pay to Lake an additional Three Hundred Thousand Dollars
($300,000) in cash.
OPINIONS OF FINANCIAL ADVISORS
OPINION OF THE BANCORP'S FINANCIAL ADVISOR.
General. Pursuant to oral discussions in early March 1998 and confirmed in
writing by an engagement letter executed on May 8, 1998 (the "Engagement
Letter"), the Bancorp engaged TFG to advise the Bancorp in connection with the
consideration by the Bancorp's Board of Directors of the acquisition of one or
more companies in the banking industry in Northern California. TFG is a
nationally recognized investment banking firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, private placements and valuations for
corporate and other purposes. The Bancorp selected TFG as its financial advisor
on the basis of its experience in transactions similar to the Lake Merger and
its reputation in the banking and investment communities. TFG did not determine
the consideration to be paid by the Bancorp in the Lake Merger. The Bancorp,
through the negotiations with Lake, determined the Lake Conversion Rate.
The Bancorp's Board of Directors handled the Bancorp's negotiations for the Lake
Merger. Pursuant to authority granted to him, Gary D. Gall, President and Chief
Executive Officer of the Bancorp received an oral opinion from TFG on March 27,
1998, that the consideration to be paid by the Bancorp in the Lake Merger based
on the negotiations as they then existed and when taken as a whole was fair to
the shareholders of the Bancorp from a financial perspective as of such date.
The Bancorp then commenced preparation of the Lake Agreement. By action taken
May 19, 1998, the Bancorp's Board of Directors approved the essential terms of
the Lake Merger and entry
42
<PAGE> 57
into the Lake Agreement for the Lake Merger embodying those terms. At the May
19, 1998 meeting of the Bancorp's Board of Directors, TFG delivered its oral
opinion, subsequently confirmed in its written opinion dated May 27, 1998, that
the consideration to be paid by the Bancorp pursuant to the Lake Agreement, when
taken as a whole, is fair to the shareholders of the Bancorp from a financial
perspective as of the date thereof.
No limitations were imposed by the Bancorp on TFG with respect to the
investigations made or procedures followed in rendering its opinion. The full
text of TFG's written opinion to the Bancorp's Board of Directors, which sets
forth the assumptions made, matters considered, and limitations of the review of
TFG, is attached to this Joint Proxy Statement/Prospectus as Exhibit III and is
incorporated herein by reference and should be read carefully and in its
entirety in connection with this Joint Proxy Statement/Prospectus. The following
summary of TFG's opinion is qualified in its entirety by reference to the full
text of the opinion. TFG's opinion is addressed to the Bancorp's Board of
Directors only and does not constitute a recommendation to any shareholder of
the Bancorp as to how such shareholder should vote at the Bancorp Meeting.
In connection with its opinion, TFG, among other things: (a) reviewed certain
publicly available financial and other data with respect to the Bancorp and
Lake, including the financial statements for recent years and interim periods to
March 31, 1998, and certain other relevant financial and operating data relating
to the Bancorp and Lake made available to TFG from published sources and from
the internal records of the Bancorp and Lake; (b) reviewed the Lake Agreement;
(c) reviewed certain historical market prices and trading volumes of shares of
Bancorp Common Stock; (d) compared the Bancorp and Lake from a financial point
of view with certain other companies that TFG deemed to be relevant; (e)
considered the financial terms, to the extent publicly available, of selected
recent business combinations of companies that TFG deemed to be comparable, in
whole or in part, to the Lake Merger; (f) reviewed and discussed with
representatives of the management of the Bancorp certain information of a
business and financial nature regarding the Bancorp and Lake furnished to TFG by
the Bancorp and Lake, including financial forecasts and related assumptions of
the Bancorp and Lake; (g) made inquiries regarding and discussed the Lake Merger
and the Lake Agreement and other matters related thereto with the Bancorp; and
(h) performed such other analyses and examinations as TFG deemed appropriate.
In connection with its review, TFG did not independently verify any of the
foregoing information, and relied on such information and assumed such
information was complete and accurate in all material respects. With respect to
the financial forecasts for the Bancorp and Lake provided to TFG by their
respective managements, TFG assumed for purposes of its opinion that such
forecasts were reasonably prepared on bases reflecting the best available
estimates and judgments of such managements at the time of preparation as to the
future financial performance of the Bancorp and Lake and that such forecasts
provided a reasonable basis upon which TFG could form its opinion. TFG also
assumed that there were no material changes in the Bancorp's or Lake's assets,
financial condition, results of operations, business, or prospects since the
dates of the last financial statements made available to TFG. TFG relied on
advice of counsel to the Bancorp as to all legal matters with respect to the
Bancorp, the Lake Merger, the Joint Proxy Statement/Prospectus and the Lake
Agreement. In addition, TFG is not expert in the evaluation of loan portfolios
for purposes of assessing the adequacy of the allowances for losses with respect
thereto and assumed, with the consent of the Bancorp, that such allowances for
each of the Bancorp and Lake were in the aggregate adequate to cover such
losses. In addition, TFG did not make an independent evaluation, appraisal, or
physical inspection of the assets or individual properties of the Bancorp or
Lake and was not furnished with any such appraisals. Further, TFG's opinion was
based on economic, monetary, and general market and other conditions existing as
of the date of the opinion and on the assumption that the Lake Agreement will be
consummated in accordance with the terms thereof, without any amendments
thereto, and without waiver by the Bancorp of any of the conditions to its
obligations thereunder.
Set forth is a brief summary of the report presented by TFG to the Bancorp's
Board of Directors in connection with the confirmation of its earlier oral
opinion.
43
<PAGE> 58
Analysis of Selected Bank Merger Transactions. TFG reviewed the consideration
paid in recently completed transactions whereby certain banks were acquired.
Specifically, TFG reviewed over 71 recent transactions involving acquisitions of
selected banks in California completed since January 1996 (the "California
Acquisitions"). For each bank acquired in such transactions, TFG compiled
figures illustrating, among other things, the ratio of the premium (i.e.,
purchase price in excess of tangible book value) to deposits, purchase price to
book value, and purchase price to previous year's earnings.
The figures for banks acquired or to be acquired in the California Acquisitions
produced: (a) a median percentage of premium to deposits of 6.50%; (b) a median
multiple of purchase price to book value of 1.63; and (c) a median multiple of
purchase price to previous year's earnings of 17.10. In comparison, assuming
that the consideration to be paid in the Lake Merger equals 0.677 shares of
Bancorp Common Stock (a Lake Conversion Rate of one share of Lake Common Stock
per 0.677 shares of Bancorp Common Stock) and that the Bancorp Average Trading
Price equals $18.00 per share, TFG determined that the consideration to be paid
by the Bancorp in the Lake Merger represented a percentage of premium to
deposits of 8.67%, a multiple of purchase price to book value of 1.75 and a
multiple of purchase price to previous year's earnings of 20.1. Assuming that
the consideration to be paid in the Lake Merger equals 0.677 shares of Bancorp
Common Stock (a Lake Conversion Rate of one share of Lake Common Stock per 0.677
shares of Bancorp Common Stock) and that the Bancorp Book Value Per Share equals
$10.26, TFG determined that the consideration to be paid by the Bancorp in the
Lake Merger represented a percentage of premium to deposits of 0.0, a multiple
of purchase price to book value of 0.99 and a multiple of purchase price to
previous year's earnings of 11.46.
No other company or transaction used in the above analysis as a comparison is
identical to the Bancorp, Lake, or the Lake Merger. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which the Bancorp, Lake, and the Lake Merger
are being compared.
Contribution Analysis. TFG analyzed the contribution of each of the Bancorp and
Lake to, among other things, common equity and net income of the pro forma
combined companies for the year ended December 31, 1997. This analysis showed,
among other things, that based on pro forma combined balance sheets and income
statements for the Bancorp and Lake as of December 31, 1997, the Bancorp would
have contributed 56.5% of the deposits, 52.3% of shareholders' equity and 57.7%
of the 1997 net income of the combined companies. Assuming that the
consideration to be paid in the Lake Merger equals a Lake Conversion Rate of one
share of Lake Common Stock per 0.677 shares of Bancorp Common Stock, the Bancorp
shareholders would own 53.2% of the combined companies.
Dilution Analysis. Using estimates of future earnings prepared by Lake's
management and estimates of future earnings prepared by the Bancorp's
management, TFG compared the calendar year 1998 estimated earnings per share of
Lake Common Stock and Bancorp Common Stock to the calendar year 1998 estimated
earnings per share of the common stock of the pro forma combined companies.
Based on such analysis and based upon the Bancorp issuing approximately 855,000
shares of Bancorp Common Stock, the proposed transaction would be dilutive to
the Bancorp's earnings per share in 1998, prior to projected break-even revenue,
enhancements and cost savings of 10% of Lake's budgeted 1998 noninterest expense
or $3,500,000. The Bancorp's management informed TFG that it estimated that the
potential revenue enhancements and costs savings could be achieved, which would
result in the proposed transaction being accretive to the Bancorp's
shareholders.
Comparable Company Analysis. Using public and other available information, TFG
compared certain financial ratios of the Bancorp and Lake (including the ratio
of net income to average total assets ("return on average assets"), the ratio of
net income to average total equity ("return on average equity"), the ratio of
average equity to average assets
44
<PAGE> 59
and certain credit ratios for the year ended December 31, 1997) to a peer group
consisting of 20 selected banks located in California. No company used in the
analysis is identical to the Bancorp or Lake. The analysis necessarily involved
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies. The results of this analysis
indicated that the Bancorp performed slightly ahead of peer group level on the
basis of profitability in 1997 and Lake performed slightly below peer group
levels on the basis of profitability in 1997. The Bancorp's return on average
assets and return on average equity for 1997 were above peer group levels,
inclusive of its interest spread factors (interest earned on assets minus
interest paid on liabilities). The Bancorp's performance in 1997, continuing
through March 31, 1998, showed consistency with peer group levels concerning
nonperforming assets. The Bancorp's noninterest expense, inclusive of payroll
expense, quarters expense and other related noninterest expenses were higher
than peer group level. Lake's return on average assets, return on average equity
for 1997 was slightly below peer group levels. In addition, delinquent loans and
nonperforming loans were higher than peer group levels. The combined entity will
be on an average with peer group performance with regard to return on average
assets, return on average equity and slightly below nonperforming asset figures.
Under the transaction, the Lake Conversion Rate is based upon the shareholders'
equity of Lake on the Lake Determination Date, taking into consideration fully
funded loan loss reserves and other appropriate reserves and expenses that are
required for the Lake Merger.
The foregoing summarizes the material portions of TFG's report, but does not
purport to be a complete description of the presentation by TFG to the Bancorp's
Board of Directors or of the analyses performed by TFG. The preparation of a
fairness opinion is not necessarily susceptible to partial analysis or summary
description. TFG believes that its analyses and the summary set forth above must
be considered as a whole and that selecting a portion of its analyses and the
factors considered, without considering all analyses and factors, would create
an incomplete view of the process underlying the analyses set forth in its
presentation to the Bancorp's Board of Directors. In addition, TFG may have
given certain analyses more or less weight than other analyses and may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be TFG's view of the actual value of the Bancorp, Lake,
or the combined company. The fact that any specific analysis has been referred
to in the summary above is not meant to indicate that such analysis was given
greater weight than any other analysis.
In performing its analyses, TFG made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Bancorp or Lake. The
analyses performed by TFG are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of TFG's
analysis of the fairness of the Lake Agreement to the Bancorp's shareholders
from a financial perspective and were provided to the Bancorp's Board of
Directors in connection with the delivery of TFG's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which any securities may
trade at the present time or at any time in the future. TFG used in its analyses
various projections of future performance prepared by the management of the
Bancorp. The projections are based on numerous variables and assumptions which
are inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.
As described above, TFG's opinion and presentation to the Bancorp's Board of
Directors were among the many factors taken into consideration by the Bancorp's
Board of Directors in making its determination to approve the Lake Agreement.
The Bancorp paid TFG $10,000 for the opinion in connection with the transaction.
TFG is owned by Gary Steven Findley, counsel to the Bancorp.
45
<PAGE> 60
OPINION OF LAKE'S FINANCIAL ADVISOR. Lake's Board of Directors retained The Banc
Stock Group, Inc. ("BSG") pursuant to an engagement letter dated February 27,
1998 (the "BSG Engagement Letter"), to provide financial advisory services with
respect to a proposed Lake Merger of Lake with the Bancorp's wholly-owned
subsidiary, LMC, by rendering an opinion as to the fairness of the Lake
Conversion Rate from a financial point of view to Lake's shareholders. Lake
retained BSG as investment bankers to determine the fairness, from a financial
point of view, to the holders of shares of Lake Common Stock of the
consideration to be received by Lake in the Lake Merger. Pursuant to the Lake
Agreement, each holder of shares of Lake Common Stock will receive, in exchange
for his or her shares of Lake Common Stock, shares of Bancorp Common Stock. The
transaction is based on a share value for Lake of 1.75 times Lake's book value
to be exchanged based on the determined market value per share of Bancorp Common
Stock for each share of Lake Common Stock subject to certain adjustments as
described in the Lake Agreement.
BSG has acted for Lake and for the Board of Directors of Lake as financial
advisor in connection with this transaction and has received a fee of $20,000
for advisory services and $16,500 for BSG's written fairness opinion to the
Board of Directors of Lake on the Lake Merger (the"Lake Fairness Opinion"). BSG
has previously provided investment banking and financial advisory services to
Lake. BSG has not provided investment banking or financial advisory services to
the Bancorp. BSG is not a market maker in shares of Lake Common Stock. Lake's
Board of Directors selected BSG to act as its advisor on the basis of BSG's
expertise and experience in the banking industry. BSG is an independent
financial services firm, specializing in the researching, buying, holding and
selling stock of publicly and privately traded community banks for its portfolio
and portfolios of its clients, and as part of its investment banking activities,
is regularly engaged in the valuation of banks and their securities in
connection with mergers and other types of acquisitions, negotiated
underwritings, stock navigation programs, and other purposes.
No limitations were imposed by Lake on BSG with respect to the investigations
made or procedures followed in rendering its opinion. BSG issued the Lake
Fairness Opinion that the Lake Conversion Rate as set forth in the Lake
Agreement is fair, from a financial point of view, to the holders of the shares
of Lake Common Stock on May 27, 1998. The full text of the Lake Fairness Opinion
sets forth the assumptions made, procedures followed, matters considered,
accuracy of data reviewed, and limitations on the scope of the Lake Fairness
Opinion. The Lake Fairness Opinion should be read carefully and in its entirety
in connection with this Joint Proxy Statement/Prospectus. The following summary
of the Lake Fairness Opinion is qualified in its entirety by reference to the
full text of the Lake Fairness Opinion which is attached to this Joint Proxy
Statement/Prospectus as Exhibit IV.
In arriving at the Lake Fairness Opinion, BSG has reviewed and analyzed, among
other things, the following: (i) the Lake Agreement; (ii) certain publicly
available financial and other data with respect to Lake and the Bancorp
including consolidated financial statements and recent years and interim periods
to March 31, 1998; (iii) publicly available information concerning other banks
and holding companies, the trading markets for their securities and the nature
and terms of certain other merger transactions BSG believed relevant to its
inquiry; and (iv) evaluations and analyses prepared and presented to the Board
of Directors of Lake thereof in connection with the Lake Merger. BSG has held
discussions with senior management of Lake and of the Bancorp concerning their
past and current operations, financial condition and prospects, as well as the
results of regulatory examinations.
BSG has reviewed with senior management of Lake earnings projections for Lake as
a stand-alone entity, assuming the Lake Merger does not occur, prepared by Lake.
BSG has reviewed with senior management of the Bancorp earnings projections as a
stand-alone entity, assuming the Lake Merger does not occur, prepared by the
Bancorp. BSG has also reviewed with the senior management of both Lake and the
Bancorp the projected operating cost savings reasonably expected by the Bancorp
resulting from the Lake Merger. Certain pro forma financial projections for the
combined companies and for Lake and the Bancorp as stand-alone entities were
derived by BSG based upon the projections and growth assumptions discussed
above, as well as BSG's own assessment of general economic,
46
<PAGE> 61
market and financial conditions. In certain cases, such combined pro forma
financial projections included projected operating cost savings derived by BSG
based upon the projections discussed above and believed by BSG to be realizable
in the Lake Merger.
In conducting the review and in arriving at the Lake Fairness Opinion, BSG
relied upon and assumed the accuracy and completeness of the financial and other
information provided to BSG or publicly available. BSG has not assumed any
responsibility for independent verification of the same. BSG has relied upon the
management of both Lake and the Bancorp as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefor) provided to BSG. BSG has
assumed that such forecasts, projections and projected operating cost savings
reflect the best currently available estimates and judgements of the applicable
managements. BSG has also assumed, without assuming any responsibility for the
independent verification of same, that the aggregate allowances for loan losses
for Lake and the Bancorp are adequate to cover such losses. BSG has not made or
obtained any evaluations or appraisals of the property of Lake or the Bancorp,
nor has BSG examined any individual loan credit files. For purposes of this
opinion, BSG has assumed that the Lake Merger will have the tax, accounting and
legal effects (including, without limitation, that the Lake Merger will be
accounted for as a pooling of interests) described in the Lake Agreement and
assumed the accuracy of the disclosures set forth in the Lake Agreement. The
Lake Fairness Opinion is limited to the fairness, from a financial point of
view, to the holders of shares of Lake Common Stock of the Lake Conversion Rate
as described in the Lake Agreement and does not address Lake's underlying
business decision to proceed with the Lake Merger.
BSG has considered such financial and other factors as it has deemed appropriate
under the circumstances, including among others the following: (i) the
historical and current financial positions and results of operations of Lake and
the Bancorp, including interest income, interest expense, net interest income,
net interest margin, provision for loan losses, noninterest income, noninterest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of nonperforming assets, loan losses and the
reserve for loan losses, all as set forth in the financial statements for Lake
and for the Bancorp; (ii) the assets and liabilities for Lake and the Bancorp,
including the loan, investment and mortgage portfolios, deposits, other
liabilities, historical and current liability sources and costs and liquidity;
and (iii) the nature and terms of certain other merger transactions involving
banks and bank holding companies. BSG has also taken into account its assessment
of general economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and its
knowledge of the banking industry generally. The Lake Fairness Opinion is
necessarily based only upon conditions as they exist and can be evaluated on the
date hereof and the information made available to BSG through the date hereof.
Set forth below is a brief summary of the Lake Fairness Opinion dated May 27,
1998. For purposes of its report, BSG found that Lake had approximately
1,445,521 outstanding shares of Lake Common Stock (fully diluted) as of the
report date. BSG performed in-depth financial analysis and peer group comparison
on the subject institution. Analysis was prepared utilizing both "quantitative
and qualitative" factors relating to overall performance benchmarking. Key
indicators have been offered based on accepted industry standards as well as
regulatory indicators of satisfactory bank performance.
Comparison Analysis. The valuation analyzed the contribution of Lake and the
Bancorp to total assets, total loans, total deposits, total equity capital, and
net income of the pro forma combined institution as of December 31, 1997. This
analysis was undertaken without regard to the effect of merger costs or
projected synergies realized by the proposed Lake Merger.
This analysis showed that based on the pro forma financial statements of the
combined company as of December 31, 1997, Lake would contribute approximately
44% of total assets, approximately 43.8% of total loans, approximately 43.5% of
total deposits, approximately 50% of total equity capital, and approximately 42%
of net income.
47
<PAGE> 62
Multiple of Book Value Method. This valuation approach is formulated on the
purchase prices and multiples of book values based on recent transactions for
institutions involved in mergers and acquisitions utilizing both a national and
regional index.
In BSG's opinion, the multiple factor of 1.4 - 3.0 is representative of the
current values of sound and profitable banks referencing similar operating
platforms with a multiple of 1.8 specifically utilized in determining the
valuation multiple of book for Lake. Utilizing the Multiple of Book Value
Method, (based on the March 31, 1998 call report) the acquisition value, as of
the Lake Fairness Opinion report date is as follows:
$8,760,000 (Lake equity) X 1.8 (multiple) = $15,768,000
Multiple of Equity Return Method. This is the primary method of determining fair
market value and used extensively in valuation analysis. This valuation
preparation must take into account regional market transactions as well as
validating the forward earnings potential of Lake to demonstrate an ability to
support an institution's current and future earnings capacity calculations.
Return multiples for the industry for profitable and financially sound
institutions are in the range of 14 to 20 times equity return. For the purpose
of this valuation a multiple of 15 times earnings will be utilized based on
known market conditions and institutions performance. Based on the equity return
of Lake utilizing most recent fiscal year-end with comparison to current
annualized estimated equity return calculates a value of $11,490,000.
$766,000 Estimated Equity Return X 15 (Multiple) = $11,490,000
Market Value Method. This method of determining the price of an institution's
per share market value is based on existing and previously documented stock
transactions. These transactions provide an indication of an institution's per
share value. In BSG's opinion, despite the fact that the shares of Lake Common
Stock are very thinly traded, a market does exist and is most likely limited by
combined local community influences of low liquidity, ownership levels, and/or
low investor market interest and awareness. Based on the determined per share
price of $7.25 (the reported transaction price of the most recent trades), the
fair market value of Lake is calculated accordingly:
Per Share Value $7.25 X Total Outstanding Shares 1,240,546
= Fair Market Value $8,993,958.50
Valuation Summary.
<TABLE>
<S> <C>
Multiple of Book Value Method $15,768,000
Multiple of Equity Return Method $11,490,000
Market Value Method $ 8,993,958.50
Average $12,083,986
</TABLE>
The fair market value of Lake, based on the averaging of total market value
methods of all of the shares would be $12,083,986. Realizing that the current
market value is trading at a multiple of 1.03 X book value, primarily due to
stock liquidity issues, market value analysis for premium calculation purposes
is being dropped from the averaging formula. A control price market value
premium of $13,629,000 is being utilized to reflect the approximate value of
Lake.
The individual cost associated on a per share basis would be $10.99.
48
<PAGE> 63
In BSG's opinion, based on the information compiled and analyzed within the Lake
Fairness Opinion, the actual valuation on a per share basis, taking into account
financial condition and performance, blockage factors, discount/premium,
liquidity, and number of shares being valued, is $10.99 per share fair market
value for a control price premium on outstanding shares of Lake Common Stock or
$9.43 fully diluted.
In performing its analyses, BSG made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Lake or the Bancorp. The
analyses performed are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of BSG's analysis
as to the fairness of the consideration to the holders of shares of Lake Common
Stock in the Lake Merger. The analyses do not purport to be appraisals or to
reflect the prices at which Lake might actually be sold or the prices at which
any securities may trade at the present time or in the future.
A representative of BSG participated in the May 27, 1998 meeting of the Board of
Directors of Lake and provided a verbal summary of the Lake Fairness Opinion.
BSG provided the Lake Fairness Opinion dated May 27, 1998 regarding the
fairness, from a financial point of view, of the consideration to be received by
Lake in the proposed Lake Merger, based on the information then available.
CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES
The following is a summary description of certain material federal and
California income tax consequences of the Lake Merger. This summary is not a
complete description of all tax consequences of the Lake Merger. Each
shareholder's individual circumstances may affect the tax consequences of the
Lake Merger to him or her. In addition, the summary does not address the tax
consequences of the Lake Merger under applicable state or local laws, other than
with respect to California law. CONSEQUENTLY, EACH LAKE SHAREHOLDER IS ADVISED
TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
LAKE MERGER.
An opinion of Perry-Smith & Co., LLP, independent accountants for the Bancorp
and Lake, has been delivered to the Bancorp to the effect that for federal and
related California income tax purposes, under current law, assuming that the
Lake Merger and related transactions will take place as described in the Lake
Agreement, the Lake Merger will constitute a reorganization under Section 368 of
the Code. Assuming the opinion is not withdrawn or changed due to changes in
laws, or otherwise, prior to the date of the Lake Merger, certain material
federal and related California income tax consequences of the Lake Merger, in
the opinion of Perry-Smith & Co., LLP, will be as follows:
(a) No gain or loss will be recognized by Lake or the Bancorp in the
Lake Merger;
(b) The basis and holding periods of the assets of Lake will
carryover to the Bancorp;
(c) No gain or loss will be recognized by the holders of Lake Common
Stock upon their receipt of Bancorp Common Stock upon conversion
of their Lake Common Stock;
(d) The receipt of cash in lieu of fractional share interests of
Bancorp Common Stock by holders of Lake Common Stock will result
in gain or loss equal to the difference between such payment and
the tax basis allocated to their fractional share interests.
Whether such gain or loss will constitute capital gain or loss
for a particular shareholder will depend upon whether that
shareholder's Lake Common Stock is held as a capital asset at
the date of the Lake Merger;
49
<PAGE> 64
(e) The receipt of cash upon exercise of dissenters rights by
holders of Bancorp Common Stock or Lake Common Stock will result
in gain or loss equal to the difference between such payment and
the tax basis of their shares. Whether such gain or loss shall
constitute capital gain or loss for a particular shareholder
will depend upon: 1) whether that shareholder's Bancorp Common
Stock or Lake Common Stock is held as a capital asset at the
date of the Lake Merger, and 2) whether the requirements of
Section 302(b) of the Code are met with respect to that
shareholder's exchange;
(f) The tax basis of Bancorp Common Stock received by the holders of
Lake Common Stock will be the same as the tax basis of the Lake
Common Stock converted in the Lake Merger; and
(g) The holding period of Bancorp Common Stock in the hands of the
shareholders of Lake will include the period during which the
Lake Common Stock converted in the Lake Merger was held,
provided such Lake Common Stock was held as a capital asset on
the date of the Lake Merger.
In developing its opinion, Perry-Smith & Co., LLP relied upon facts and
representations provided to it by the Bancorp's management and Lake's management
and made no independent determination with respect to them. In addition,
Perry-Smith & Co., LLP's opinion was based upon the analysis of the current
Code, the California and Revenue Taxation Code, the Regulations thereunder,
current case law, and published rulings. The foregoing are subject to change,
and such change may be retroactively effective. If so, Perry-Smith & Co., LLP's
opinion may be affected and may not be relied upon. Perry-Smith & Co., LLP
assumes no responsibility to update its opinion after the date of the Lake
Merger because of such change. Further any variation or differences in the facts
or representations, for any reason, may affect Perry-Smith & Co., LLP's opinion,
perhaps in an adverse manner, and make it inapplicable.
RIGHTS OF DISSENTING SHAREHOLDERS OF LAKE AND THE BANCORP
Shareholders of Lake and the Bancorp who do not vote in favor of the Lake Merger
either by voting against the Lake Merger or by abstaining from voting are
entitled to certain rights under Chapter 13 of the California General
Corporation Law ("Chapter 13"). Chapter 13 is reprinted in Exhibit VI to this
Joint Proxy Statement/Prospectus. Please note that all references in Chapter 13
and in this section to a "shareholder" are to the record holder of dissenting
shares. A person having a beneficial interest in shares of Bancorp Common Stock
or Lake Common Stock held of record in the name of another person, such as a
broker or nominee, and wishing to exercise his or her dissenter's rights should
act promptly to cause the shareholder of record to follow the steps summarized
below properly and in a timely manner to perfect his or her dissenter's rights
with respect to such shares.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by Exhibit VI which is
incorporated herein by reference. This discussion and Exhibit VI should be
reviewed carefully by any shareholders who wish to exercise dissenters' rights
or who wish to preserve the right to do so since failure to comply with the
procedures set forth in Chapter 13 will result in the loss of dissenters'
rights.
If the Lake Merger is consummated, those shareholders of the Bancorp or Lake who
elect to exercise their dissenters' rights and who properly and timely perfect
such rights will be entitled to receive the "fair market value", in cash, of
their shares. Pursuant to Section 1300(a) of the California General Corporation
Law, such "fair market value" would be determined as of May 27, 1998, the day
before the first announcement of the terms of the Lake Merger, excluding any
appreciation caused by the Lake Merger. See "MARKET PRICES."
If the Lake Agreement is approved at the Bancorp Meeting and the Lake Meeting,
the Bancorp and Lake will within 10 days of such approval mail a notice to the
holders of record of shares of Bancorp Common Stock and Lake Common Stock which
were not voted in favor of the Lake Agreement stating that the required
shareholder approval
50
<PAGE> 65
of the Lake Merger was obtained (the "Lake Notice of Approval"). The Lake Notice
of Approval will set forth the price determined by the Bancorp or Lake, as
applicable, to represent the "fair market value" of any dissenting shares, and
will set forth the procedures (which are also described below) to be followed by
dissenting shareholders who wish to pursue further their statutory rights. The
procedures include a timely written demand that must be made on the Bancorp or
Lake, as applicable, in order to perfect the right to dissent. The Lake Notice
of Approval will include a copy of Sections 1300 through 1304 of the California
General Corporation Law.
Under Section 1301(a) of the California General Corporation Law, the statement
in the Lake Notice of Approval of the determination of the fair market value of
Bancorp Common Stock or Lake Common Stock, as applicable, will constitute an
offer by the Bancorp or Lake, as applicable, to purchase from its shareholders
any dissenting shares at the price stated, assuming the Lake Merger is
consummated. However, the determination by the Bancorp or Lake, as applicable,
of fair market value is not binding on its shareholders, and if a dissenting
shareholder chooses not to accept that offer, he or she has the right during a
period of six months following the mailing of the Lake Notice of Approval to
commence a lawsuit to have the fair market value, as described in Section
1300(a), determined by a court. The fair market value as determined by the court
in those circumstances could be higher or lower than the amount offered by the
Bancorp or Lake, as applicable, in the Lake Notice of Approval and any such
determination would be binding on both the dissenting shareholder or
shareholders involved in the lawsuit and the Bancorp or Lake, as applicable.
Any holder of record of Bancorp Common Stock or Lake Common Stock, as
applicable, who wishes to exercise dissenters' rights (or to preserve the right
to do so) must make a written demand upon the Bancorp or Lake, as applicable,
that the Bancorp or Lake, as applicable, pay such shareholder in cash the fair
market value of his or her dissenting shares (as defined above).
Such demand by holders of Bancorp Common Stock should be sent to Western Sierra
Bancorp, 4011 Plaza Goldorado Circle, Cameron Park, California 95682, Attention:
President. Such written demand must state the number of shares held of record by
such shareholder and the number of shares which such shareholder demands that
the Bancorp purchase for cash and must also contain a statement of the amount
which such shareholder claims to be the fair market value of the dissenting
shares, as of the day before the announcement of the proposed Lake Merger. That
statement will constitute an offer by such shareholder to sell his or her
dissenting shares to the Bancorp at that price. The certificates for shares of
Bancorp Common Stock must also be included with the written demand.
Such demand by holders of Lake Common Stock should be sent to Lake Community
Bank, 805 Eleventh Street, Lakeport, California 95453, Attention: President.
Such written demand must state the number of shares held of record by such
shareholder and the number of shares which such shareholder demands that Lake
purchase for cash and must also contain a statement of the amount which such
shareholder claims to be the fair market value of the dissenting shares, as of
the day before the announcement of the proposed Lake Merger. That statement will
constitute an offer by such shareholder to sell his or her dissenting shares to
Lake at that price. The certificates for shares of Lake Common Stock must also
be included with the written demand.
A proxy card directing a vote against the Lake Merger is not sufficient to meet
the requirements for a written demand. Such written demand and the dissenting
shareholder's share certificate(s) must be received by the Bancorp or Lake, as
applicable, within thirty (30) days after the date on which the Lake Notice of
Approval was mailed to such shareholder. The certificate(s) will be stamped or
endorsed with a statement that the shares are dissenting shares and returned to
the dissenting shareholder.
In addition, such shareholders may not have voted in favor of approval of the
Lake Agreement, either in person or by proxy. A shareholder may vote in favor of
approval of the Lake Agreement as to part of his or her shares without
51
<PAGE> 66
jeopardizing the dissenting status of those shares not voted in favor of
approval of the Lake Agreement. However, a shareholder should clearly specify
the number of shares not voted in favor of approval of the Lake Agreement.
If the shareholder votes in favor of approval of the Lake Agreement (either in
person or by proxy) or if the Bancorp or Lake, as applicable, does not receive
his or her written demand within thirty (30) days after the Lake Notice of
Approval was mailed to the shareholder (or if the shareholder otherwise fails to
comply in a timely manner with the procedures of Chapter 13 as described herein
or contained in Exhibit VI, such shareholder shall be bound by the terms of the
Lake Agreement and shall lose the right to receive the fair market value of his
or her shares in cash.
Dissenting shares may lose their status as such if any of the following occurs:
the Lake Merger is abandoned; the shares are transferred before being submitted
to the Bancorp or Lake, as applicable, for endorsement; the shareholder
withdraws his or her demand with the consent of the Bancorp or Lake, as
applicable, in the absence of an agreement between the shareholder and the
Bancorp or Lake, as applicable, as to the price of his or her shares; or the
shareholder fails to file suit against the Bancorp or Lake, as applicable, or
otherwise fails to become a party to such suit within six months following the
mailing of the Lake Notice of Approval.
The Bancorp or Lake, as applicable, will pay the fair market value of dissenting
shares at the later of 30 days following an agreement as to the amount to be
paid or within 30 days after all statutory and contractual conditions to the
Lake Merger are satisfied; provided that in the event that such payment cannot
be made due to the provisions set forth in California Financial Code Section 640
et seq. or California General Corporation Law Section 500 et seq. dealing with
restrictions on a corporation's ability to distribute funds or assets to a
shareholder, then those shareholders holding dissenting shares shall become
creditors of the Bancorp or Lake, as applicable, and their claims will be
payable as soon as permissible under such provisions. (See "DESCRIPTION OF THE
CAPITAL STOCK OF THE BANCORP, LAKE AND ROSE" and "MARKET PRICES" herein.)
The foregoing summarizes certain provisions of Chapter 13 of the California
General Corporation Law, but shareholders of the Bancorp or Lake, as applicable,
considering the exercise of their rights under those sections should read in
full Chapter 13, which is reproduced in Exhibit VI and should consult their own
legal advisors. The receipt of cash payment for dissenting shares will result in
recognition of gain or loss for federal income tax purposes by such dissenting
shareholders. (See "THE LAKE MERGER AND RELATED TRANSACTIONS--Certain Federal
and California Income Tax Consequences," above.)
THE ROSE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the Joint Proxy Statement/Prospectus contains information
furnished by the Boards of Directors of the Bancorp and Rose in connection with
the solicitation of Proxies for the Bancorp Meeting and the Rose Meeting,
respectively, to approve the Rose Agreement, providing for the merger of Rose
with and into the Bancorp.
The shareholders of each of the Bancorp and Rose will be asked to consider and
vote upon the Rose Agreement, pursuant to which Rose will be merged with and
into the Bancorp with the Bancorp being the surviving corporation of the Rose
Merger ("Surviving Corporation of the Rose Merger") under the Articles of
Incorporation of the Bancorp. Following the Rose Effective Time, R1NB will
become a wholly-owned subsidiary of the Bancorp. Upon consummation of the Rose
Merger, each share of Rose Common Stock (other than shares to which its holders
have exercised and perfected dissenters' rights) shall be converted at the Rose
Effective Time into and become the right to receive that number of shares of
duly authorized, validly issued, fully paid and nonassessable shares of Bancorp
Common Stock equal to the Rose Conversion Rate, subject to adjustment, if any,
as provided in the Rose Agreement
52
<PAGE> 67
as defined in "SUMMARY INFORMATION--Terms of the Rose Merger;" all assets of
Rose will be transferred to the Bancorp as the Surviving Corporation of the Rose
Merger; and all liabilities of Rose will be assumed by the Bancorp as the
Surviving Corporation of the Rose Merger. (See "THE ROSE MERGER AND RELATED
TRANSACTIONS--Rose Conversion Rate and Exchange of Shares and Options.")
Consummation of the Rose Merger is subject to the satisfaction of certain
conditions set forth in the Rose Agreement. (See "THE ROSE MERGER AND RELATED
TRANSACTIONS--Conditions to the Rose Merger" below.) Neither the Bancorp nor
Rose is aware of any reason why any of the conditions to the Rose Merger will
not be satisfied. However, no assurance can be given that such conditions will
be satisfied.
A copy of the Rose Agreement is attached to this Joint Proxy
Statement/Prospectus as Exhibit II and incorporated herein by this reference.
SUMMARIES OF CERTAIN PROVISIONS OF THE ROSE AGREEMENT SET FORTH HEREIN DO NOT
PURPORT TO BE COMPLETE STATEMENTS THEREOF AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO THE PROVISIONS OF THE ROSE AGREEMENT.
BACKGROUND AND REASONS FOR THE ROSE MERGER
THE BANCORP'S ANALYSIS. During the past two years, the Bancorp has been
expanding its services to the businesses and residents of the El Dorado and
Placer Counties through its branch operations and in Sacramento County through
its loan production office. In early 1998 the Bancorp had preliminary
discussions with Rose regarding a potential merger of the two institutions.
After consideration, the Bancorp's Board of Directors and Senior Management
determined that the merger of Rose with the Bancorp provided an opportunity for
the Bancorp to increase its services to the Placer County market area through
the acquisition of an additional bank with offices in Roseville and Granite Bay.
In addition, the Bancorp's Board of Directors believes the Rose Merger will help
the Bancorp to achieve increased benefits through asset diversification; will
provide an opportunity to increase the number of outstanding shares and
liquidity of Bancorp Common Stock; and will be accretive to the shareholders of
the Bancorp. After discussions between the Bancorp and Rose, the parties
executed a Letter of Intent dated June 11, 1998, whereby the Bancorp would
acquire Rose through a stock-for-stock merger transaction. The Bancorp would
then operate R1NB as a wholly-owned bank subsidiary.
The Board of Directors of the Bancorp believes the Rose Merger to be in the best
interests of the Bancorp, its shareholders and banking customers. The Board of
Directors of the Bancorp expects the Bancorp as the Surviving Corporation of the
Rose Merger to be stronger in terms of capital, management, growth opportunities
and profitability than is either corporation at present.
Both the Bancorp and Rose have been profitable and have shown strong asset
growth over the past several years. Following the Rose Merger, R1NB will have
the advantage of the consolidation and centralization of certain management
functions and certain resulting economies of scale. Furthermore, it is believed
that the Rose Merger will result in a bank which will be a strong and viable
independent financial institution better able to compete with the major banks in
the areas now served by Rose.
ROSE'S ANALYSIS. Beginning in the early Spring of 1998, Richard C. Seeba,
President and Chief Executive Officer of Rose, and Gary D. Gall, President of
the Bancorp, met and informally discussed a possible business combination
between Rose and the Bancorp. Following the initial meeting, additional meetings
and discussions were held by Richard C. Seeba, Thomas Manz, Chairman of the
Board of Rose, Douglas A. Nordell, Executive Vice President and Chief Operating
Officer of Rose, and Kirk Doyle, a director of Rose, with Gary D. Gall, Joseph
A. Surra, Chairman of the Board of the Bancorp, and Robert G. Albrecht and
Osvaldo I. Scariot, directors of the Bancorp.
53
<PAGE> 68
In April, 1998, Ted Mason, the President of Humboldt Bancorp ("Humboldt"), a
bank holding company with its principal operations in Eureka, California,
contacted Mr. Seeba regarding a possible business combination between Rose and
Humboldt.
On April 14, 1998, a special meeting of the Rose Board of Directors was held to
consider an initial proposal from the Bancorp regarding a business combination
between Rose and the Bancorp. Mr. Seeba presented the terms of the proposal
which provided for the exchange of Rose Common Stock for Bancorp Common Stock in
a merger based on the book value of Bancorp Common Stock and Rose Common Stock.
The Rose Board of Directors discussed the Bancorp Common Stock, including the
market therefor and discussed certain potential benefits of a business
combination with another bank holding company, including (i) the liquidity that
could be provided to Rose's shareholders, (ii) the enhancement of Rose's
competitiveness and its ability to serve its customers, depositors, creditors,
other constituents and the communities in which it operates, and (iii) the cost
savings and operational synergies which could be achieved through consolidation
of back office and other functions and economies of scale. The Rose Board of
Directors also discussed the advantages and risks of remaining independent.
At the April 14, 1998 meeting, Mr. Seeba informed the Rose Board of Directors
that Humboldt was also interested in discussing a possible business combination
with Rose. The Rose Board of Directors resolved that Rose should further analyze
the proposal from the Bancorp and open discussions with Humboldt regarding a
possible business combination. The Rose Board of Directors also decided to
retain Rose's auditors to review and analyze certain financial aspects of the
Bancorp proposal.
On May 2, 1998, a mutual confidentiality agreement was entered into between Rose
and the Bancorp and detailed financial and business information was exchanged.
The Bancorp and Rose each commenced a detailed due diligence investigation. In
connection with its due diligence investigation, members of Rose's senior
management conducted a review of the Bancorp's loan portfolio.
During May 1998, members of senior management of Rose met with representatives
of Humboldt to discuss a possible business combination between Rose and
Humboldt. On May 20, 1998, Mr. Seeba, Mr. Manz and Mr. Nordell met with Ted
Mason and other senior officers of Humboldt at Humboldt's offices in Eureka,
California, and were provided with general information regarding Humboldt's
business and operations and its interest in the Sacramento/Roseville market. At
the same time, members of Rose's senior management continued discussions with
the Bancorp regarding its proposal.
At the May 21, 1998 meeting of the Rose Board of Directors, Gary D. Gall and
Joseph A. Surra were introduced to the Rose Board of Directors and gave the Rose
Board of Directors a presentation of their views regarding a business
combination between Rose and the Bancorp, including the earnings potential from
combining back office operations and sharing costs associated with delivering
new products while retaining the market identity and community presence of the
individual banks owned by the Bancorp. Following the presentation, Mr. Gall and
Mr. Surra answered questions from the Rose directors. After Mr. Gall and Mr.
Surra departed, the Rose Board of Directors further discussed the issues
concerning a business combination between Rose and the Bancorp.
On June 1, 1998, a special meeting of the Rose Board of Directors was held to
consider a letter of interest from Humboldt regarding a business combination
with Rose and to compare the terms thereof to the Bancorp proposal. At the
meeting, Mr. Seeba described the meetings with representatives of Humboldt and
the aspects of Humboldt's operation they were able to observe during their
visit. The Rose Board of Directors discussed the terms of the Humboldt proposal
which, similar to the Bancorp proposal, provided for an exchange of Humboldt
common stock for Rose Common Stock in a merger based on the book value of
Humboldt common stock and Rose Common Stock. The Rose Board of Directors
compared the common stock of Humboldt to the Bancorp Common Stock and noted that
both Humboldt common stock and the Bancorp Common Stock were trading at
approximately twice book value
54
<PAGE> 69
and were traded through market makers and that there was slightly more trading
volume in the Bancorp Common Stock. The Rose Board of Directors also compared
the Bancorp's and Humboldt's respective operations and management philosophies.
The Rose Board of Directors discussed the customer service and operational
issues raised by Humboldt's geographic location and determined that although
Humboldt and the Bancorp were both viable candidates for a business combination,
a business combination with the Bancorp would be more compatible with Rose
because of the Bancorp's close geographic proximity to the communities served by
Rose's operations. The Rose Board of Directors determined that the close
geographic proximity could facilitate consolidation of operations, achievement
of economies of scale and delivery of customer services which could, in turn,
facilitate future growth and increase earnings potential. The Rose Board of
Directors also determined that it could increase business prospects. In
addition, the Rose Board of Directors compared the Humboldt and the Bancorp
proposals regarding management of the acquiring company after the business
combination and determined that the Bancorp proposal, which provided that Rose
would have four seats on the Bancorp Board of Directors following the Rose
Merger, offered greater board representation than the Humboldt proposal which
provided for two seats on the Humboldt board after the proposed business
combination. Following comparison of the two proposals, the Rose Board of
Directors determined that it was in the best interests of Rose's shareholders to
terminate discussions with Humboldt and to continue negotiations with the
Bancorp.
On June 10, 1998, a special meeting of the Rose Board of Directors was held to
discuss the results of Rose's due diligence investigation and a proposed
nonbinding letter of intent to be entered into between Rose and the Bancorp. The
Rose Board of Directors discussed the results of Rose's due diligence
investigation, including the loan review conducted by members of Rose's senior
management. The Rose Board of Directors determined that from a due diligence
perspective, Rose was prepared to execute a letter of intent. The Rose Board of
Directors then discussed the terms of the proposed letter of intent which
provided that Rose would be merged with and into the Bancorp and, as a result,
R1NB would become a wholly-owned subsidiary of the Bancorp. Shareholders of Rose
would receive shares of Bancorp Common Stock in exchange for their shares of
Rose Common Stock. The exchange formula would be based on the book value per
share of Rose Common Stock and Bancorp Common Stock as of the close of business
in the month prior to the Rose Effective Time. The Rose Board of Directors
determined that, based on the terms of the letter of intent, including the fact
that it was nonbinding, and other factors, such as the Rose Merger being
structured to be treated as tax-free reorganization under Section 368 of the
Code and as a pooling-of-interests for accounting purposes, it was in the best
interests of Rose's shareholders to enter into the letter of intent and proceed
to negotiate a definitive agreement with the Bancorp. Pursuant to the letter of
intent, Rose agreed to negotiate exclusively with the Bancorp for a limited
period in order to attempt to reach agreement on the terms and conditions of a
legally binding definitive acquisition agreement.
On July 1, 1998, the Board of Directors of Rose met again to discuss the
proposed transaction. A representative of Pillsbury, Madison & Sutro LLP
("Pillsbury") attended the meeting. Rose senior management attended and made
presentations to the Rose Board of Directors on the status of the negotiations
and discussions, the principal terms of the proposed Rose Agreement, the
remaining open issues under negotiation, the required regulatory approvals and
board composition and management of Rose and the Bancorp following the Rose
Merger. The Rose Board of Directors also considered the material terms of the
proposed salary continuation agreements for Messrs. Seeba, Nordell and Warren
that the Bancorp expected to assume in connection with the Rose Merger, and the
terms of a proposed director/shareholder agreement between each of Rose's
directors and the Bancorp.
At a special meeting of the Rose Board of Directors on July 6, 1998, the Board
of Directors of Rose unanimously resolved to approve the Rose Agreement and the
transactions contemplated thereby, subject to receipt and approval of a
favorable opinion as to the fairness of the consideration to be received by Rose
shareholders in the Rose Merger. A representative of Pillsbury attended the
meeting. The Rose Board of Directors also determined that the four directors of
Rose who would serve on the Bancorp Board of Directors would be Kirk Doyle,
Howard ("Skip") Jahn, Thomas Manz and Richard C. Seeba.
55
<PAGE> 70
On July 6, 1998, the parties completed their negotiations and discussions and
Rose and the Bancorp entered into the Rose Agreement. For convenience, the Rose
Agreement was dated as of July 2, 1998.
Following the July 6, 1998 Rose Board of Directors meeting, Rose senior
executives consulted with a representative of Pillsbury and conferred with
certain directors about the selection of an investment banking firm to render a
fairness opinion to the Rose Board of Directors. Thereafter, The Banc Stock
Group, Inc. ("BSG") was engaged.
On or about August 26, 1998, BSG delivered its written opinion to the Rose Board
of Directors to the effect that, as of the date of the opinion, the Rose
Conversion Rate as set forth in the Rose Agreement is fair, from a financial
point of view, to the holders of Rose Common Stock.
On September 17, 1998, the Rose Board of Directors met again to consider, among
other things, BSG's written fairness opinion dated August 26, 1998. The Rose
Board of Directors conducted a thorough discussion of BSG's fairness opinion and
determined that the condition to its approval set forth in the Rose Agreement
had been satisfied. The Rose Board of Directors affirmed its approval of the
Rose Agreement and resolved that the Rose Agreement and the transactions
contemplated thereby are fair to, and in the best interests of, Rose and its
shareholders, and to recommend to the shareholders of Rose that they approve and
authorize the Rose Agreement.
In determining to approve the Rose Agreement and recommend that Rose's
shareholders approve and authorize the Rose Agreement, the Rose Board of
Directors consulted with Rose's senior management, as well as its legal counsel,
and considered a number of factors, including: (i) the increased liquidity to be
provided to Rose's shareholders by receiving shares of Bancorp Common Stock in
exchange for their shares of Rose Common Stock; (ii) the economic conditions and
prospects for the markets in which Rose operates, and competitive pressures in
the financial services industry in general and the banking industry in
particular; (iii) the enhancement of Rose's competitiveness and its ability to
serve its customers, depositors, creditors, other constituents and the
communities in which it operates as a result of a business combination with
another Northern California bank holding company, such as the Bancorp; (iv)
information concerning the business, results of operations, asset quality and
financial condition of Rose and the Bancorp on a stand-alone and combined basis,
and the future growth prospects of Rose and the Bancorp following the Rose
Merger; (v) the cost savings and operational synergies which the management of
Rose believes may be achieved as a result of the Rose Merger; (vi) an assessment
that, in the current economic environment, expansion through acquisition by
another financial institution is most economically advantageous to Rose's
shareholders when compared to other alternatives such as de novo branch openings
or branch acquisitions; (vii) the terms and conditions of the Rose Agreement and
related agreements; (viii) BSG's analysis of the financial condition, results of
operations, business, prospects and stock price of Rose and comparison of Rose
to other banks and bank holding companies operating in its industry; (ix) an
analysis of the terms of other acquisitions in the banking industry; (x) the
opinion of BSG to the effect that, as of the date of the opinion, the Rose
Conversion Rate as set forth in the Rose Agreement is fair, from a financial
point of view, to the holders of Rose Common Stock; (xi) the expectation that
the Rose Merger will constitute a tax-free reorganization for federal income tax
purposes; and (xii) the expectation that the Rose Merger will be treated as a
pooling-of-interests for accounting purposes.
The foregoing discussion of the factors considered by the Rose Board of
Directors is not intended to be exhaustive. In view of the variety and nature of
the factors considered by the Rose Board of Directors, the Rose Board of
Directors did not find it practicable to assign relative weights to the specific
factors considered in reaching its decision.
THE BOARD OF DIRECTORS OF ROSE HAS UNANIMOUSLY APPROVED THE ROSE AGREEMENT AND
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE ROSE AGREEMENT.
56
<PAGE> 71
ROSE CONVERSION RATE AND EXCHANGE OF SHARES AND OPTIONS
ROSE CONVERSION RATE. Each share of Rose Common Stock which is outstanding
immediately prior to the Rose Merger (other than shares to which its holders
have exercised and perfected dissenters' rights) will automatically be canceled
and will be converted into the right to receive that number of shares of Bancorp
Common Stock which is equal to the Rose Conversion Rate. The "Rose Conversion
Rate" is a fraction, the numerator of which is the Rose Book Value Per Share,
and the denominator of which is the Bancorp Book Value Per Share.
The "Rose Book Value Per Share" means the sum of Rose's total shareholders'
equity as of the month end before the calendar month in which the Rose Effective
Time occurs (the "Rose Determination Date"), (after expensing Rose's legal,
accounting and professional costs incurred or to be incurred in connection with
the Rose Merger) which shall reflect the exercise of all stock options of Rose
which would be exercisable at the Rose Closing and have an exercise price which
is less than book value, whether or not such options are exercised, divided by
the total number of shares of Rose Common Stock outstanding at the Rose Closing
Date which for purposes of this calculation shall include the number of stock
options included in the calculation above, whether or not such options are
exercised prior to the Rose Closing Date. Furthermore, the Rose Book Value Per
Share shall include the present value (as of the Rose Determination Date) of the
tax benefit of Rose's net operating loss carryforward to the extent that such
net operating loss carryforward will be available to the Bancorp after the Rose
Effective Time. Perry-Smith & Co., LLP , the independent public accountants for
the Bancorp and Rose, will calculate the Rose Book Value Per Share.
The "Bancorp Book Value Per Share" means the sum of the Bancorp's total
shareholders' equity as of the Rose Determination Date, (after expensing the
Bancorp's legal, accounting and professional costs incurred or to be incurred in
connection with the Rose Merger) which shall reflect the exercise of all stock
options of Bancorp which would be exercisable at the Rose Closing and have an
exercise price which is less than book value, whether or not such options are
exercised, divided by the total number of shares of Bancorp Common Stock
outstanding at the Rose Closing Date which for purposes of this calculation
shall include the number of stock options included in the calculation above,
whether or not such options are exercised prior to the Rose Closing Date.
However, the Bancorp Book Value Per Share shall not reflect the prior
consummation of the Lake Merger if the Lake Merger occurs before the Rose
Merger. Perry-Smith & Co., LLP , the independent public accountants for the
Bancorp and Rose, will calculate the Bancorp Book Value Per Share.
For purposes of illustration only, assuming (i) September 30, 1998 is used as
the Rose Determination Date for calculating a pro forma Rose Conversion Rate,
(ii) the Rose Book Value Per Share is $12.54, and (iii) the Bancorp Book Value
Per Share is $10.41, the Rose Conversion Rate would be 1.2048. Accordingly, if
the assumptions used in arriving at this pro forma Rose Conversion Rate were to
remain unchanged until the consummation of the Rose Merger, each share of Rose
Common Stock would be converted into 1.2048 shares of Bancorp Common Stock.
Assuming the holders of all of the shares of Rose Common Stock convert their
shares into Bancorp Common Stock at the Rose Conversion Rate of 1.2048 there
would be approximately 1,428,194 shares of Bancorp Common Stock outstanding
immediately following the consummation of the Rose Merger, comprised of 981,448
outstanding shares of Bancorp Common Stock and approximately 446,746 shares of
Bancorp Common Stock issued as a result of the Rose Conversion Rate. If any of
the assumptions used in arriving at this pro forma Rose Conversion Rate were to
change prior to the consummation of the Rose Merger, the Rose Conversion Rate
would likely be different.
THE ACTUAL ROSE CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT SET FORTH
ABOVE.
No fractional shares of Bancorp Common Stock will be issued in the Rose Merger.
Instead, shareholders of Rose will receive an amount in cash equal to the
product (rounded to the nearest hundredth) obtained by multiplying (a)
57
<PAGE> 72
Bancorp Market Value Per Share by (b) the fraction of a share of Bancorp Common
Stock to which such holder would otherwise be entitled. "Bancorp Market Value
Per Share" means the last trade price of Bancorp Common Stock prior to the Rose
Effective Time.
EXCHANGE PROCEDURE. Each holder of a certificate representing shares of Rose
Common Stock shall surrender such certificate, duly endorsed as the Bancorp may
require, to American Securities Transfer and Trust as the exchange agent (the
"Rose Exchange Agent"). Each holder shall then receive in exchange (i) a
certificate representing the number of whole shares of Bancorp Common Stock to
which the holder shall have become entitled based upon the Rose Conversion Rate
and (ii) a check for any fractional share. Upon surrender for cancellation to
the Rose Exchange Agent of one or more certificates for shares of Rose Common
Stock ("Rose Certificates"), accompanied by the Transmittal Letter which will be
sent to the Rose shareholders, the Rose Exchange Agent shall, promptly after the
Rose Effective Time, deliver to each holder of such surrendered Rose
Certificates new certificates representing the appropriate number of shares of
Bancorp Common Stock ("New Certificates") and checks for payment of fractional
shares.
Until Rose Certificates have been surrendered and exchanged, each outstanding
Rose Certificate shall be deemed for all corporate purposes to represent the
number of shares of Bancorp Common Stock into which the number of shares of Rose
Common Stock shown thereon will be converted. No dividends or other
distributions which are declared on Bancorp Common Stock will be paid to persons
otherwise entitled to receive the same until Rose Certificates have been
surrendered in exchange for New Certificates in the manner herein provided, but
upon such surrender, such dividends or other distributions, from and after the
Rose Effective Time, will be paid to such persons in accordance with the terms
of such Bancorp Common Stock. In no event shall the persons entitled to receive
such dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
No shareholder will be liable for any transfer taxes unless a certificate for
Bancorp Common Stock is to be issued in a name other than the shareholder's. It
shall be a condition of such issuance that the person requesting such issuance
shall properly endorse the Rose Certificates and shall pay to the Bancorp or the
Rose Exchange Agent any transfer taxes owed for that transfer or for any prior
transfer or establish to the satisfaction of the Bancorp or the Rose Exchange
Agent that such taxes have been paid or are not payable.
If any holder of Rose Common Stock is unable to surrender his or her Rose
Certificates because the certificates have been lost or destroyed, the holder
may instead deliver an affidavit and indemnity undertaking in form and substance
and, if required, with surety satisfactory to the Rose Exchange Agent and the
Bancorp.
EXCHANGE OF OUTSTANDING STOCK OPTIONS FOR SHARES OF ROSE COMMON STOCK. All
outstanding rights with respect to Rose Common Stock pursuant to existing stock
options for shares of Rose Common Stock will be converted into and become
outstanding rights with respect to shares of Bancorp Common Stock at the Rose
Conversion Rate with a corresponding adjustment in the option price.
INTERESTS OF CERTAIN PERSONS IN THE ROSE MERGER AND MATERIAL CONTRACTS WITH ROSE
AND ITS AFFILIATES
In considering the recommendations of the Boards of Directors of the Bancorp and
Rose for approval of the Rose Merger, the shareholders of the Bancorp and Rose
should be aware that certain members of the Boards of Directors of the Bancorp
and Rose may have conflicts of interest with respect to the Rose Merger.
Upon consummation of the Rose Merger, four directors of Rose shall be appointed
as directors of the Bancorp to serve until the next annual meeting of
shareholders of the Bancorp and until such successors are elected and qualified.
58
<PAGE> 73
At the Rose Effective Time, there shall be ten members of the Board of Directors
of R1NB; two will be selected by the Bancorp, and eight will be current
directors of R1NB. At the Rose Effective Time, the Board of Directors of WSNB
shall be increased by two persons to be selected by Rose. The Chairman of the
Board of the Bancorp shall be an attendee of the Board of Directors of R1NB and
all committees of the Board of Directors of R1NB. It is presently anticipated
that Kirk Doyle, Howard "Skip" Jahn, Thomas Manz and Richard C. Seeba will be
appointed as directors of the Bancorp, that Stephen F. Caulkins, Mark Davis,
Kirk Doyle, Skip Jahn, Ernest E. Johnson, M.D., Thomas Manz, Randall Scagliotti
and Richard C. Seeba will continue to serve as directors of R1NB, and that Gary
D. Gall and Richard Golemon will be appointed as new directors of R1NB. It is
also currently anticipated that Thomas Manz and Richard C. Seeba will be
selected by Rose to join the Board of Directors of WSNB.
In addition, each director of Rose has entered into a director's agreement with
the Bancorp which provides that the director agrees: (i) to recommend that the
shareholders of Rose approve the Rose Agreement and to advise Rose's
shareholders to reject any subsequent proposal or offer received by Rose
relating to any purchase, sale, acquisition, merger or other form of business
combination involving Rose or any of its assets, equity securities or debt
securities and to proceed with the transactions contemplated by the Rose
Agreement, unless Rose's Board of Directors has been advised by outside legal
counsel that, in the exercise of such director's fiduciary duties, a director of
Rose should not take such action; (ii) not to take any action that will alter or
affect in any way the right to vote the shares of Rose Common Stock, except (x)
with the prior written consent of the Bancorp, (y) to change such right from
that of a shared right of the director to vote the shares of Rose Common Stock
to a sole right of the director to vote the shares of Rose Common Stock or (z)
in connection with a transfer to a revocable intervivos trust under which the
director is a grantor and trustee; and (iii) to vote all shares of Rose Common
Stock as to which such director has voting power in favor of the Rose Merger.
The director's agreements also provide that the directors, other than Messrs.
Richard Seeba and Kenneth Leung, shall not for a period of two years after the
Rose Effective Time or until the director (a) if a director of R1NB and/or the
Bancorp immediately after the Rose Effective Time, is removed or not reelected
to such position or positions or (b) if a director emeritus of R1NB immediately
after the Rose Effective Time, is removed as a director emeritus, which ever
occurs first, directly or indirectly, without the prior written consent of the
Bancorp, own more than 1% of, organize, manage, operate, finance or participate
in the ownership, management, operation or financing of, or be connected as an
officer, director, employee, principal, agent or consultant to any financial
institution whose deposits are insured by the FDIC that has its head offices or
a branch office within 50 miles of the head office of Rose or R1NB. Mr. Kirk
Doyle's agreement provides an exception for Placer Savings Bank. However, Mr.
Doyle has agreed not to solicit any customers of R1NB or the Bancorp for the
benefit of Placer Savings Bank.
Gary D. Gall, who is currently the President and Chief Executive Officer of the
Bancorp and WSNB, and Lesa Fynes, who is currently the Controller of the Bancorp
and Senior Vice President and Chief Financial Officer of WSNB, are expected to
serve in the same positions with the Bancorp and WSNB following the Rose Merger.
Stephanie M. Marsh, who is currently the Senior Vice President and Chief
Administrative Officer of WSNB, and Kirk Dowdell, who is currently the Senior
Vice President and Chief Credit Officer of WSNB, are expected to serve in those
positions with both the Bancorp and WSNB following the Rose Merger. In addition,
Richard C. Seeba, who is currently serving as the President and Chief Executive
Officer of Rose and R1NB, will continue to serve in those capacities with R1NB
and will serve as an Executive Vice President of the Bancorp, and Thomas C.
Warren, who is currently serving as the Senior Vice President and Chief
Financial Officer of Rose and R1NB, will serve as the Senior Vice President and
Chief Financial Officer of the Bancorp and R1NB following the Rose Merger.
Douglas A. Nordell, who is currently the Executive Vice President and Chief
Operating Officer of Rose and R1NB, has accepted the position of President and
Chief Executive Officer of Lake, and is not expected to be employed by R1NB
following the Rose Merger. It is anticipated that most other present officers
and employees of the Bancorp and R1NB will initially continue in the same or
similar capacities with the Bancorp and R1NB at the same or comparable
compensation levels. For information regarding the Bancorp's employee benefit
plans see the descriptions of the
59
<PAGE> 74
Bancorp's employee benefit plans below in "DESCRIPTION OF THE
BANCORP--Management-- Compensation of Executive Officers." For information
regarding R1NB's employee benefit plans see the descriptions of R1NB's employee
benefit plans below in "DESCRIPTION OF ROSE--Management-- Compensation of
Executive Officers."
REGULATORY APPROVAL AND ROSE EFFECTIVE TIME
The Rose Merger was approved by the FRB on September 17, 1998. THE APPROVAL OF
THE ROSE MERGER BY THE FRB IS NOT A RECOMMENDATION OR ENDORSEMENT OF THE ROSE
MERGER BY THE FRB. The consummation of the Rose Merger is anticipated to take
place on a day ("Rose Closing Date") which shall not, however, be later than
thirty (30) days after (i) the receipt of the last required regulatory approval
and expiration of all applicable waiting periods, and (ii) satisfaction of the
conditions precedent to the obligations of each of the Bancorp and Rose or the
written waiver of such conditions by the Bancorp or Rose, as applicable. The
Rose Merger shall become effective at the Rose Effective Time.
It is presently anticipated that the Rose Merger will be consummated during the
fourth quarter of this year.
CONDITIONS TO THE ROSE MERGER
The Rose Agreement provides that the consummation of the Rose Merger is subject
to various conditions which must be satisfied, including the following:
1. The Rose Agreement and the Rose Merger shall have been approved by the
vote of the holders of a majority of the outstanding stock of the
Bancorp and Rose, respectively;
2. All approvals or permits required to be obtained, and all waiting
periods required to expire, for the Rose Merger shall have been obtained
or expired, without the imposition of any materially burdensome
condition on any party to the Rose Merger as determined by the party
affected;
3. There shall not be any action taken, or any law, regulation or order
enacted, enforced or deemed applicable to the Rose Merger, by any
government entity which: (i) makes the consummation of the Rose Merger
illegal; (ii) requires the divestiture by the Bancorp of any material
asset or of a material portion of the business of the Bancorp; or (iii)
imposes any condition upon the Bancorp or its subsidiaries which in the
judgment of the Bancorp would be materially burdensome;
4. The Bancorp's Registration Statement shall have become effective under
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in
effect. No action or proceeding shall have been instituted to restrain
or prohibit the transactions contemplated in the Rose Agreement;
5. The Bancorp and Rose shall have received a determination from
Perry-Smith & Co., LLP that the Rose Merger will qualify for the pooling
of interests accounting method;
6. The representations and warranties of each of the Bancorp and Rose set
forth in the Rose Agreement shall be true in all materials respects as
of the Rose Effective Time; each of the Bancorp and Rose shall have duly
performed and complied in all material respects with all agreements
required by the Rose Agreement, except where the failure to so perform
and comply would not have or would not be reasonably likely to have a
material adverse effect on Rose, R1NB, the Bancorp, WSNB or the Bancorp
as the Surviving Corporation of the Rose Merger; and none of the events
or conditions entitling either party to terminate the Rose Agreement
shall have occurred and be continuing;
60
<PAGE> 75
7. The Bancorp and Rose shall have received certificates of officers of the
other party stating that the representations and warranties as set forth
in the Rose Agreement are true and correct, and opinions of counsel for
the other party;
8. No action, suit or proceeding shall have been instituted or threatened
before any court or governmental body seeking to challenge or restrain
the transactions contemplated by the Rose Agreement which presents a
substantial risk that such transactions will be restrained or that
either the Bancorp or Rose may suffer material damages;
9. The holders of no more than 10% of the outstanding shares of Rose Common
Stock shall have exercised dissenters' rights. Dissenters of the Bancorp
shall be included in such calculation;
10. There shall not have been any change in the consolidated financial
condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of the Bancorp and its
subsidiaries, taken as a whole, from December 31, 1997 to the Rose
Effective Time that results in a material adverse effect as to the
Bancorp and its subsidiaries, taken as a whole;
11. No event or circumstance shall have occurred which has had or could
reasonably be expected to have a material adverse effect on Rose or its
subsidiaries; and
12. Rose shall have received a written opinion from a recognized company
experienced in providing business valuations and fairness opinions,
selected by Rose confirming the fairness of the terms of the Rose Merger
to Rose and its shareholders from a financial standpoint, and such
opinion shall not have been withdrawn prior to the Rose Meeting.
On August 26, 1998, BSG delivered its opinion to Rose's Board of Directors that
the terms of the Rose Merger are fair, from a financial standpoint, to the
shareholders of Rose. In addition, on September 17, 1998, the FRB approved the
Rose Merger subject to approval of the shareholders of the Bancorp and Rose.
WAIVER, AMENDMENT, AND TERMINATION
Any term or provision of the Rose Agreement, other than regulatory approval or
any of the provisions required by law, may be waived in writing at any time by
the party which is, or whose shareholders are, entitled to the benefits thereof.
The Rose Agreement provides that it may be terminated prior to the Rose
Effective Time:
1. By mutual consent of the Boards of Directors of the Bancorp and Rose;
2. By the Bancorp or Rose upon the failure to satisfy any conditions
specified in the Rose Agreement if such failure is not caused by any
action or inaction of the party requesting termination;
3. By the Bancorp or Rose if a Rose Acquisition Event, as defined below,
involving the other party shall have occurred;
4. By either the Bancorp or Rose if there shall have been a material breach
of any of the representations or warranties of the other party, which
breach, in the reasonable opinion of the terminating party, by its
nature cannot be cured or is not cured prior to the Rose Closing and
which breach would, in the reasonable opinion
61
<PAGE> 76
of the terminating party, individually or in the aggregate, have, or be
reasonably likely to have, a material adverse effect on the breaching
party, or upon the consummation of the Rose Merger;
5. By the Bancorp or Rose after the occurrence of a default by the other
party and the continuance of such default for a period of 20 business
days after written notice of such default, if such default, in the
reasonable opinion of the terminating party, cannot be cured prior to
the Rose Closing;
6. By the Bancorp or Rose if the updated schedules to the Rose Agreement
(the "Rose Closing Schedules") prepared and delivered by the other party
disclose the occurrence of an event or the existence of any facts or
circumstances, not previously disclosed, that has had or could
reasonably be expected to have a material adverse effect on the other
party, or on the consummation of the Rose Merger; or
7. By the Bancorp or Rose upon the failure of any of the conditions
specified in the Rose Agreement to have been satisfied prior to December
31, 1998.
A "Rose Acquisition Event" is defined as a public announcement of an intent to
enter into a letter of intent or an agreement with any other entity (other than
Rose or the Bancorp) to effect an acquisition or failure to publicly oppose a
tender offer for the acquisition of either Rose's or the Bancorp's shares or an
exchange offer for the shares of either Rose or the Bancorp for shares of the
offering entity.
LIQUIDATED DAMAGES
If a Rose Acquisition Event occurs involving Rose, then Rose shall pay to the
Bancorp the sum of Five Hundred Thousand Dollars ($500,000) in cash. If a Rose
Acquisition Event occurs involving the Bancorp, then the Bancorp shall pay to
Rose the sum of Five Hundred Thousand Dollars ($500,000) in cash.
If there is a termination of the Rose Agreement by Rose as a result of the
revocation of the Rose Fairness Opinion; or a termination of the Rose Agreement
by the Bancorp because (i) Rose's shareholders do not approve the Rose
Agreement, or (ii) of a breach of Rose's representations or warranties, a
default by Rose, or disclosure in the Rose Closing Schedules of a material
adverse event, then, Rose shall pay to the Bancorp the sum of Two Hundred
Thousand Dollars ($200,000), in cash; provided, however, that if a Rose
Acquisition Event occurs involving Rose within one hundred eighty (180) days
following any termination by the Bancorp as provided in the Rose Agreement, Rose
shall pay to the Bancorp an additional Three Hundred Thousand Dollars ($300,000)
in cash.
If there is a termination of the Rose Agreement by Rose because (i) the
Bancorp's shareholders do not approve the Rose Agreement, or (ii) of a breach of
the Bancorp's representations and warranties, a default by the Bancorp, or
disclosure in Rose Closing Schedules of a material adverse event respecting the
Bancorp, then, the Bancorp shall pay to Rose the sum of Two Hundred Thousand
Dollars ($200,000), in cash; provided, however, that if a Rose Acquisition Event
occurs involving the Bancorp within one hundred eighty (180) days following any
termination by Rose as provided in the Rose Agreement, the Bancorp shall pay to
Rose an additional Three Hundred Thousand Dollars ($300,000) in cash.
OPINION OF ROSE'S FINANCIAL ADVISOR
Rose retained BSG as investment bankers to determine the fairness, from a
financial point of view, to the holders of shares of Rose Common Stock of the
consideration to be received by Rose, in the proposed Rose Merger. Pursuant to
the Rose Agreement and subject to the terms and conditions contained therein,
each holder of shares of Rose Common Stock will receive, in exchange for shares
of Rose Common Stock, shares of Bancorp Common Stock. The transaction is based
on a book value to book value exchange of shares based on the adjusted
62
<PAGE> 77
shareholders' equity of both Rose and the Bancorp subject to certain adjustments
and terms, as described in the Rose Agreement.
BSG has prepared for Rose and for the Rose Board of Directors in connection with
this transaction a fairness opinion and has received a fee of $14,000 for the
fairness opinion. BSG has not previously provided investment banking and
financial advisory services to Rose. BSG has not provided investment banking or
financial advisory services to the Bancorp. BSG is not a market maker in shares
of Rose Common Stock. The Rose Board of Directors selected BSG to prepare a
fairness opinion on the basis of BSG's expertise and experience in the banking
industry. BSG is an independent financial services firm, specializing in the
researching, buying, holding and selling stock of publicly and privately traded
community banks for its portfolio and portfolios of its clients, and as part of
its investment banking activities, is regularly engaged in the valuation of
banks and their securities in connection with mergers and other types of
acquisitions, negotiated underwritings, stock navigation programs, and other
purposes.
No limitations were imposed by Rose on BSG with respect to the investigations
made or procedures followed in rendering its opinion. The full text of BSG's
written opinion to the Board of Directors of Rose, (the "Rose Fairness Opinion")
sets forth the assumptions made, procedures followed, matters considered,
accuracy of data reviewed, and limitations on the scope of the prepared Rose
Fairness Opinion. The Rose Fairness Opinion should be read carefully and in its
entirety in connection with this Joint Proxy Statement/Prospectus. The following
summary of the Rose Fairness Opinion is qualified in its entirety by reference
to the full text of the Rose Fairness Opinion which is attached to this Joint
Proxy Statement/Prospectus as Exhibit V.
In arriving at this opinion, BSG has reviewed and analyzed, among other things,
the following: (i) the Rose Agreement; (ii) certain publicly available financial
and other data with respect to Rose and the Bancorp including consolidated
financial statements for recent years and interim periods to March 31, 1998;
(iii) certain other publicly available financial and other information
concerning Rose and the Bancorp; (iv) publicly available information concerning
other banks and holding companies, the trading markets for their securities and
the nature and terms of certain other merger transactions BSG believed relevant
to its inquiry; and (v) evaluations and analyses prepared and presented to the
Board of Directors of Rose in connection with the Rose Fairness Opinion.
BSG has held discussions with senior management of Rose and of the Bancorp
concerning their past and current operations, financial condition and prospects,
as well as the results of regulatory examinations. BSG has reviewed with senior
management of Rose earnings projections for Rose as a stand-alone entity,
assuming the Rose Merger does not occur, prepared by Rose. BSG has reviewed with
senior management of the Bancorp earnings projections as a stand-alone entity,
assuming the Rose Merger does not occur, prepared by the Bancorp. BSG has also
reviewed with the senior management of both Rose and the Bancorp the projected
operating cost savings reasonably expected by the Bancorp resulting from the
Rose Merger. Certain pro forma financial projections for the combined companies
and for Rose and the Bancorp as stand-alone entities were derived by BSG based
upon the projections and growth assumptions discussed above, as well as BSG's
own assessment of general economic, market and financial conditions. In certain
cases, such combined pro forma financial projections included projected
operating cost savings derived by BSG based upon the projections discussed above
and believed by BSG to be realizable in the Rose Merger.
In conducting the review and in arriving at the Rose Fairness Opinion, BSG
relied upon and assumed the accuracy and completeness of the financial and other
information provided to BSG or publicly available. BSG did not assume any
responsibility for independent verification of the same. BSG relied upon the
management of both Rose and the Bancorp as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefor) provided to them. BSG assumed
that such forecasts, projections and projected operating cost savings reflected
the best currently available estimates and judgements of the applicable
managements. BSG also assumed, without assuming any responsibility for the
independent verification of same, that
63
<PAGE> 78
the aggregate allowances for loan losses for Rose and the Bancorp were adequate
to cover such losses. BSG did not make or obtain any evaluations or appraisals
of the property of Rose or the Bancorp, nor did BSG examine any individual loan
credit files. For purposes of the Rose Fairness Opinion, BSG assumed that the
Rose Merger will have the tax, accounting and legal effects (including, without
limitation, that the Rose Merger will be accounted for as a pooling of
interests) described in the Rose Agreement and assumed the accuracy of the
disclosures set forth in the Rose Agreement. BSG's opinion as expressed in the
Rose Fairness Opinion is limited to the fairness, from a financial point of
view, to the holders of shares of Rose Common Stock of the Rose Conversion Rate
as described in the Rose Agreement and does not address Rose's underlying
business decision to proceed with the Rose Merger.
BSG considered such financial and other factors as it deemed appropriate under
the circumstances, including among others the following: (i) the historical and
current financial positions and results of operations of Rose and the Bancorp,
including interest income, interest expense, net interest income, net interest
margin, provision for loan losses, noninterest income, noninterest expense,
earnings, dividends, internal capital generation, book value, intangible assets,
return on assets, return on shareholders' equity, capitalization, the amount and
type of nonperforming assets, loan losses and the reserve for loan losses, all
as set forth in the financial statements for Rose and for the Bancorp; (ii) the
assets and liabilities for Rose and the Bancorp, including the loan, investment
and mortgage portfolios, deposits, other liabilities, historical and current
liability sources and costs and liquidity; and (iii) the nature and terms of
certain other merger transactions involving banks and bank holding companies.
BSG has also taken into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. BSG's opinion is necessarily based only upon conditions as they exist
and can be evaluated on the date hereof and the information made available to
BSG through the date hereof.
Set forth below is a brief summary of the Rose Fairness Opinion dated July 2,
1998. For purposes of this report, BSG found that Rose had approximately 384,805
outstanding shares of Rose Common Stock (fully diluted) as of the report date.
BSG performed in-depth financial analysis and peer group comparison on the
subject institution. Analysis has been prepared utilizing both "quantitative and
qualitative" factors relating to overall performance benchmarking. Key
indicators have been offered based on accepted industry standards as well as
regulatory indicators of satisfactory bank performance.
Comparison Analysis. The valuation analyzed the contribution of Rose and the
Bancorp to total assets, total loans, total deposits, total equity capital, and
net income of the pro forma combined institution as of March 31, 1998. This
analysis was undertaken without regard to the effect of merger costs or
projected synergies realized by the proposed Rose Merger.
This analysis showed that based on the pro forma financial statements of the
combined company as of March 31, 1998, Rose would contribute approximately 30.6%
of total assets, approximately 32% of total loans, approximately 30.6% of total
deposits, approximately 31.62% of total equity capital, and approximately 15.4%
of net income.
Multiple of Book Value Method. This valuation approach is formulated on the
purchase prices and multiples of book values based on recent transactions for
institutions involved in mergers and acquisitions utilizing both a national and
regional index.
In BSG's opinion, the multiple factor of 1.3 - 1.7 is representative of the
current values of sound and profitable banks referencing similar operating
platforms with a multiple of 1.5 specifically utilized in determining the
valuation multiple of book for Rose. Utilizing the Multiple of Book Value
Method, (based on the March 31, 1998 call report) the acquisition value, as of
the Rose Fairness Opinion report date is as follows:
$3,948,000 (Rose equity) X 1.5 (multiple) = $5,922,000
64
<PAGE> 79
Multiple of Equity Return Method. This is the primary method of determining fair
market value and used extensively in valuation analysis. This valuation
preparation must take into account regional market transactions as well as
validating the forward earnings potential of Rose to demonstrate an ability to
support an institution's current and future earnings capacity calculations.
Return multiples for the industry for profitable and financially sound
institutions is in the range of 14 to 20 times equity return. For the purpose of
this valuation a multiple of 17 times earnings will be utilized based on known
market conditions and institutions performance. Based on the equity return of
Rose utilizing most recent fiscal year-end with comparison to current annualized
estimated equity return calculates a value of $2,924,000.
$172,000 Estimated Equity Return X 17(Multiple) = $2,924,000
Market Value Method. This method of determining the price of an institution's
per share market value is based on existing and previously documented stock
transactions. These transactions provide an indication of an institution's per
share value. In BSG's opinion, despite the fact that the stock is very thinly
traded, a market does exist and is most likely limited by combined local
community influences of low liquidity, ownership levels, and/or low investor
market interest and awareness. Shares of Rose Common Stock are currently trading
at a discount of book value. Based on the determined per share price of $8.00
(the reported transaction price of the most recent trades), the fair market
value of Rose is calculated accordingly:
Per Share Value $8.00 X Total Outstanding Shares 319,972
$2,559,776 = Fair Market Value
Valuation Summary.
Multiple of Book Value Method $ 5,922,000
Multiple of Equity Return Method $ 2,924,000
Market Value Method $ 2,559,776
Average $ 3,801,925
The fair market value of Rose, based on the averaging of total market value
methods of all of the shares would be $3,801,925. Realizing that the current
market value is trading at a 35% discount to book value, primarily due to stock
liquidity issues and performance issues, market value analysis for premium
calculation purposes must be carefully reviewed within the averaging formula. A
market value premium of $3,801,925 is being utilized to reflect the approximate
value of Rose.
The individual cost associated on a per share basis would be $11.91 nondiluted
and $9.88 fully diluted.
In BSG's opinion, based on the information compiled and analyzed within the Rose
Fairness Opinion, the actual valuation on a per share basis, taking into account
financial condition and performance, blockage factors, discount/premium,
liquidity, and number of shares being valued, is $9.88 per share fair market
value for a control price premium on outstanding shares of Rose Common Stock
fully diluted. A premium range of 1.3-1.7 x book value can be utilized in
determining a market value of Rose. The transaction offer as analyzed by BSG of
book to book based on adjusted equity of Rose as identified in the Rose
Agreement is fair to the shareholders of Rose. Rose shareholders will
immediately realize the benefit of a more liquid stock and resultant value.
Although the transaction is identified as book to book, the price per share
after the transaction will reflect the then current market value of shares of
Bancorp Common Stock. Shares of Bancorp Common Stock are currently trading at
2.1 x book. Shares of Rose Common Stock are currently trading at a discount of
book value as described within the Rose Fairness
65
<PAGE> 80
Opinion. Rose's value is further realized in being acquired within a holding
company framework as described within the Rose Fairness Opinion and R1NB being
operated as a wholly-owned subsidiary. The franchise value of Rose is on its
loyal customers and operating "footprint" which can realize continued revenue
generation thereby providing shareholders a higher multiple return. The combined
shareholder base of both Rose and the Bancorp will provide additional liquidity
to Bancorp Common Stock providing a platform of additional growth with the added
prospect of other transactions to be seen as most likely by investors.
In performing its analyses, BSG made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Rose or the Bancorp. The
analyses performed are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of BSG's analysis
as to the fairness of the consideration to the holders of shares of Rose Common
Stock in the Rose Merger. The analyses do not purport to be appraisals or to
reflect the prices at which Rose might actually be sold or the prices at which
any securities may trade at the present time or in the future.
A representative of BSG provided the Rose Fairness Opinion to the Board of
Directors of Rose and provided a verbal summary of the Rose Fairness opinion.
BSG provided the Rose Fairness Opinion dated August 26, 1998 regarding the
fairness, from a financial point of view, of the consideration to be received by
Rose in the proposed Rose Merger, based on the information then available.
Based upon and subject to the foregoing, it is BSG's opinion that, as of the
date hereof, the Rose Conversion Rate as set forth in the Rose Agreement is
fair, from a financial point of view, to the holders of the shares of Rose
Common Stock.
CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES
The following is a summary description of certain material federal and
California income tax consequences of the Rose Merger. This summary is not a
complete description of all tax consequences of the Rose Merger. Each
shareholder's individual circumstances may affect the tax consequences of the
Rose Merger to him or her. In addition, the summary does not address the tax
consequences of the Rose Merger under applicable state or local laws, other than
with respect to California law. CONSEQUENTLY, EACH ROSE SHAREHOLDER IS ADVISED
TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
ROSE MERGER.
An opinion of Perry-Smith & Co., LLP, independent accountants for the Bancorp
and Rose, has been delivered to the Bancorp to the effect that for federal and
related California income tax purposes, under current law, assuming that the
Rose Merger and related transactions will take place as described in the Rose
Agreement, the Rose Merger will constitute a reorganization under Section 368 of
the Code. Assuming the opinion is not withdrawn or changed due to changes in
laws, or otherwise, prior to the date of the Rose Merger, certain material
federal and related California income tax consequences of the Rose Merger, in
the opinion of Perry-Smith & Co., LLP, will be as follows:
(a) No gain or loss will be recognized by Rose or the Bancorp in the
Rose Merger;
(b) The basis and holding periods of the assets of Rose will
carryover to the Bancorp;
(c) No gain or loss will be recognized by the holders of Rose Common
Stock upon their receipt of Bancorp Common Stock upon conversion
of their Rose Common Stock;
66
<PAGE> 81
(d) The receipt of cash in lieu of fractional share interests of
Bancorp Common Stock by holders of Rose Common Stock will result
in gain or loss equal to the difference between such payment and
the tax basis allocated to their fractional share interests.
Whether such gain or loss will constitute capital gain or loss
for a particular shareholder will depend upon whether that
shareholder's Rose Common Stock is held as a capital asset at
the date of the Rose Merger;
(e) The receipt of cash upon exercise of dissenters' rights by
holders of Bancorp Common Stock or Rose Common Stock will result
in gain or loss equal to the difference between such payment and
the tax basis of their shares. Whether such gain or loss shall
constitute capital gain or loss for a particular shareholder
will depend upon: 1) whether that shareholder's Bancorp Common
Stock or Rose Common Stock is held as a capital asset at the
date of the Rose Merger, and 2) whether the requirements of
Section 302(b) of the Code are met with respect to that
shareholder's exchange;
(f) The tax basis of Bancorp Common Stock received by the holders of
Rose Common Stock will be the same as the tax basis of the Rose
Common Stock converted in the Rose Merger; and
(g) The holding period of Bancorp Common Stock in the hands of the
shareholders of Rose will include the period during which the
Rose Common Stock converted in the Rose Merger was held,
provided such Rose Common Stock was held as a capital asset on
the date of the Rose Merger.
In developing its opinion, Perry-Smith & Co., LLP relied upon facts and
representations provided to it by the Bancorp's management and Rose's management
and made no independent determination with respect to them. In addition,
Perry-Smith & Co., LLP's opinion was based upon the analysis of the current
Code, the California and Revenue Taxation Code, the Regulations thereunder,
current case law, and published rulings. The foregoing are subject to change,
and such change may be retroactively effective. If so, Perry-Smith & Co., LLP's
opinion may be affected and may not be relied upon. Perry-Smith & Co., LLP
assumes no responsibility to update its opinion after the date of the Rose
Merger because of such change. Further any variation or differences in the facts
or representations, for any reason, may affect Perry-Smith & Co., LLP's opinion,
perhaps in an adverse manner, and make it inapplicable.
RIGHTS OF DISSENTING SHAREHOLDERS OF ROSE AND THE BANCORP
Shareholders of Rose and the Bancorp who do not vote in favor of the Rose Merger
either by voting against the Rose Merger or by abstaining from voting are
entitled to certain rights under Chapter 13 of the California General
Corporation Law ("Chapter 13"). Chapter 13 is reprinted in Exhibit VI to this
Joint Proxy Statement/Prospectus. Please note that all references in Chapter 13
and in this section to a "shareholder" are to the record holder of dissenting
shares. A person having a beneficial interest in shares of Bancorp Common Stock
or Rose Common Stock held of record in the name of another person, such as a
broker or nominee, and wishing to exercise his or her dissenter's rights should
act promptly to cause the shareholder of record to follow the steps summarized
below properly and in a timely manner to perfect his or her dissenter's rights
with respect to such shares.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by Exhibit VI which is
incorporated herein by reference. This discussion and Exhibit VI should be
reviewed carefully by any shareholders who wish to exercise dissenters' rights
or who wish to preserve the right to do so since failure to comply with the
procedures set forth in Chapter 13 will result in the loss of dissenters'
rights.
If the Rose Merger is consummated, those shareholders of the Bancorp or Rose who
elect to exercise their dissenters' rights and who properly and timely perfect
such rights will be entitled to receive the "fair market value", in cash, of
their shares. Pursuant to Section 1300(a) of the California General Corporation
Law, such "fair market value" would
67
<PAGE> 82
be determined as of June 11, 1998, the day before the first announcement of the
terms of the Rose Merger, excluding any appreciation caused by the Rose Merger.
See "MARKET PRICES."
If the Rose Agreement is approved at the Bancorp Meeting and the Rose Meeting,
the Bancorp and Rose will within 10 days of such approval mail a notice to the
holders of record of shares of Bancorp Common Stock and Rose Common Stock which
were not voted in favor of the Rose Agreement stating that the required
shareholder approval of the Rose Merger was obtained (the "Rose Notice of
Approval"). The Rose Notice of Approval will set forth the price determined by
the Bancorp or Rose, as applicable, to represent the "fair market value" of any
dissenting shares, and will set forth the procedures (which are also described
below) to be followed by dissenting shareholders who wish to pursue further
their statutory rights. The procedures include a timely written demand that must
be made on the Bancorp or Rose, as applicable, in order to perfect the right to
dissent. The Rose Notice of Approval will include a copy of Sections 1300
through 1304 of the California General Corporation Law.
Under Section 1301(a) of the California General Corporation Law, the statement
in the Rose Notice of Approval of the determination of the fair market value of
Bancorp Common Stock or Rose Common Stock, as applicable, will constitute an
offer by the Bancorp or Rose, as applicable, to purchase from its shareholders
any dissenting shares at the price stated, assuming the Rose Merger is
consummated. However, the determination by the Bancorp or Rose, as applicable,
of fair market value is not binding on its shareholders, and if a dissenting
shareholder chooses not to accept that offer, he or she has the right during a
period of six months following the mailing of the Rose Notice of Approval to
commence a lawsuit to have the fair market value, as described in Section
1300(a), determined by a court. The fair market value as determined by the court
in those circumstances could be higher or lower than the amount offered by the
Bancorp or Rose, as applicable, in the Rose Notice of Approval and any such
determination would be binding on both the dissenting shareholder or
shareholders involved in the lawsuit and the Bancorp or Rose, as applicable.
Any holder of record of Bancorp Common Stock or Rose Common Stock, as
applicable, who wishes to exercise dissenters' rights (or to preserve the right
to do so) must make a written demand upon the Bancorp or Rose, as applicable,
that the Bancorp or Rose, as applicable, pay such shareholder in cash the fair
market value of his or her dissenting shares (as defined above).
Such demand by holders of Bancorp Common Stock should be sent to Western Sierra
Bancorp, 4011 Plaza Goldorado Circle, Cameron Park, California 95682, Attention:
President. Such written demand must state the number of shares held of record by
such shareholder and the number of shares which such shareholder demands that
the Bancorp purchase for cash and must also contain a statement of the amount
which such shareholder claims to be the fair market value of the dissenting
shares, as of the day before the announcement of the proposed Rose Merger. That
statement will constitute an offer by such shareholder to sell his or her
dissenting shares to the Bancorp at that price. The certificates for shares of
Bancorp Common Stock must also be included with the written demand.
Such demand by holders of Rose Common Stock should be sent to Roseville 1st
Community Bancorp, 1801 Douglas Boulevard, Roseville, California 95661,
Attention: President. Such written demand must state the number of shares held
of record by such shareholder and the number of shares which such shareholder
demands that Rose purchase for cash and must also contain a statement of the
amount which such shareholder claims to be the fair market value of the
dissenting shares, as of the day before the announcement of the proposed Rose
Merger. That statement will constitute an offer by such shareholder to sell his
or her dissenting shares to Rose at that price. The certificates for shares of
Rose Common Stock must also be included with the written demand.
A proxy card directing a vote against the Rose Merger is not sufficient to meet
the requirements for a written demand. Such written demand and the dissenting
shareholder's share certificate(s) must be received by the Bancorp or Rose, as
applicable, within thirty (30) days after the date on which the Rose Notice of
Approval was mailed to
68
<PAGE> 83
such shareholder. The certificate(s) will be stamped or endorsed with a
statement that the shares are dissenting shares and returned to the dissenting
shareholder.
In addition, such shareholders may not have voted in favor of approval of the
Rose Agreement, either in person or by proxy. A shareholder may vote in favor of
approval of the Rose Agreement as to part of his or her shares without
jeopardizing the dissenting status of those shares not voted in favor of
approval of the Rose Agreement. However, a shareholder should clearly specify
the number of shares not voted in favor of approval of the Rose Agreement.
If the shareholder votes in favor of approval of the Rose Agreement (either in
person or by proxy) or if the Bancorp or Rose, as applicable, does not receive
his or her written demand within thirty (30) days after the Rose Notice of
Approval was mailed to the shareholder (or if the shareholder otherwise fails to
comply in a timely manner with the procedures of Chapter 13 as described herein
or contained in Exhibit VI), such shareholder shall be bound by the terms of the
Rose Agreement and shall lose the right to receive the fair market value of his
or her shares in cash.
Dissenting shares may lose their status as such if any of the following occurs:
the Rose Merger is abandoned; the shares are transferred before being submitted
to the Bancorp or Rose, as applicable, for endorsement; the shareholder
withdraws his or her demand with the consent of the Bancorp or Rose, as
applicable, in the absence of an agreement between the shareholder and the
Bancorp or Rose, as applicable, as to the price of his or her shares; or the
shareholder fails to file suit against the Bancorp or Rose, as applicable, or
otherwise fails to become a party to such suit within six months following the
mailing of the Rose Notice of Approval.
The Bancorp or Rose, as applicable, will pay the fair market value of dissenting
shares at the later of 30 days following an agreement as to the amount to be
paid or within 30 days after all statutory and contractual conditions to the
Rose Merger are satisfied; provided that in the event that such payment cannot
be made due to the provisions set forth in California General Corporation Law,
Section 500 et seq. dealing with restrictions on a corporation's ability to
distribute funds or assets to a shareholder, then those shareholders holding
dissenting shares shall become creditors of the Bancorp or Rose, as applicable,
and their claims will be payable as soon as permissible under such provisions.
The foregoing summarizes certain provisions of Chapter 13 of the California
General Corporation Law, but shareholders of the Bancorp or Rose, as applicable,
considering the exercise of their rights under those sections should read in
full Chapter 13, which is reproduced in Exhibit VI and should consult their own
legal advisors. The receipt of cash payment for dissenting shares will result in
recognition of gain or loss for federal income tax purposes by such dissenting
shareholders. (See "THE ROSE MERGER AND RELATED TRANSACTIONS--Certain Federal
and California Income Tax Consequences," above.)
DESCRIPTION OF THE CAPITAL STOCK OF THE
BANCORP, LAKE AND ROSE
THE BANCORP
The authorized capital stock of the Bancorp consists of 10,000,000 shares of
Bancorp Common Stock, no par value per share and 10,000,000 shares of Bancorp
preferred stock, of which 981,448 shares of Bancorp Common Stock and no shares
of Bancorp preferred stock were outstanding as of October 1, 1998. In addition,
115,543 shares of Bancorp Common Stock were reserved for issuance pursuant to
stock option and other employee stock plans. Each share has the same rights,
privileges and preferences as every other share and would share equally in the
Bancorp's net assets upon liquidation or dissolution. The shares of Bancorp
Common Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to said
69
<PAGE> 84
shares. Each share is entitled to one vote, except in connection with the
election of directors, the Bancorp shareholders may vote their shares
cumulatively. All of the outstanding shares of Bancorp Common Stock are fully
paid and nonassessable and each participates equally in dividends, which are
payable when and as declared by the Bancorp's Board of Directors out of funds
legally available therefor.
The Bancorp's Articles of Incorporation (the "Bancorp Articles") also
incorporate provisions which may have the effect of delaying, deferring or
preventing a change in control of the Bancorp in certain circumstances. These
provisions will be controlling upon consummation of the Lake Merger and/or the
Rose Merger and shareholders of Lake and/or Rose will thereafter be subject to
such provisions. Specifically, the Bancorp Articles provide that the shareholder
vote required to approve a "Business Combination" (as defined) shall be at least
66-2/3% of the Bancorp's outstanding shares of voting stock voting together as a
single class. A "Business Combination" is defined as any (i) merger or
consolidation of the Bancorp or a subsidiary of the Bancorp where the
shareholders of the Bancorp immediately prior to such merger or consolidation
will own immediately after such merger or consolidation (A) no equity securities
of the surviving entity after such merger or consolidation or (B) equity
securities (excluding options, warrants and rights) of the surviving entity
after such merger or consolidation with less than 50% of the voting power of the
surviving entity after such merger or consolidation or (ii) any sale, exchange,
transfer or other disposition of 50% or more of the assets of the Bancorp or
combined assets of the Bancorp and its subsidiaries. The amendment or repeal of
this provision of the Bancorp's Articles requires the affirmative vote of the
holders of 66 2/3% or more of the outstanding shares.
LAKE
The authorized capital stock of Lake consists of 20,000,000 shares of Lake
Common Stock, no par value per share and 10,000,000 shares of Lake preferred
stock, of which 1,298,296 shares of Lake Common Stock and no shares of Lake
preferred stock were outstanding as of October 1, 1998. In addition, 147,850
shares of Lake Common Stock were reserved for issuance pursuant to outstanding
stock options under the Lake 1984 Stock Option Plan. Holders of shares of Lake
Common Stock are entitled to cast one vote for each share held of record on all
matters to be voted on, except that holders are entitled to cumulate their votes
in the election of directors upon compliance with certain conditions. The
holders of Lake Common Stock are entitled to receive such dividends, if any, as
may be declared from time to time by Lake's Board of Directors in its discretion
from funds legally available therefor. Upon liquidation or dissolution of Lake,
the holders of Lake Common Stock are entitled to receive pro rata all assets
remaining available for distribution to shareholders. The Lake Common Stock has
no preemptive or other subscription rights, and there are no conversion rights
or redemption or sinking fund provisions with respect to said shares. All the
outstanding shares of Lake Common Stock are fully paid and nonassessable.
Lake's Articles of Incorporation (the "Lake Articles") also incorporate
provisions, certain of which are described below, which may have the effect of
delaying, deferring or preventing a change in control of Lake in certain
circumstances. Certain of these provisions would effectively become inoperative
upon consummation of the Lake Merger. The following discussion is qualified in
its entirety by the specific provisions of the Lake Articles.
CONSIDERATION OF FACTORS OTHER THAN PRICE. The Lake Articles provide that, when
evaluating any proposed tender or exchange offer for Lake's voting stock or any
proposed transaction with any other person which would constitute a "Business
Combination," the Board of Directors of Lake may consider the best interests of
Lake as a whole, including without limitation: giving due consideration to the
interests of Lake's shareholders; whether the proposed transaction might violate
applicable laws; not only the consideration being offered in the proposed
transaction in relation to the then current market price for Lake's stock, but
also the market price for such stock over a period of years, the estimated price
which might be achieved in a negotiated sale of Lake as a whole or in part or
through liquidation, the premiums over market price for the securities of other
corporations in similar transactions, current
70
<PAGE> 85
political, economic and other factors bearing on securities prices and Lake's
financial condition and future prospects; and the social, economic and legal
effects on the employees, customers, suppliers and other constituents of Lake
and on the communities in which Lake conducts its business.
SHAREHOLDER ACTION BY WRITTEN CONSENT. Under California law, generally, any
action which may be taken at any annual or special meeting of shareholders of a
corporation may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares of the corporation 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. The Lake Articles provide that as a condition to shareholder action by
written consent, the Board of Directors of Lake, by resolution, shall have
previously approved any such action.
ANTI-GREENMAIL PROVISION. The Lake Articles also provide that any direct or
indirect repurchase by Lake of outstanding shares of voting stock of Lake
("Voting Stock") from any person (or group of affiliated persons) known to Lake
to be a beneficial owner of five percent or more of the Voting Stock (an
"Interested Shareholder"), who has acquired beneficial ownership of any Voting
Stock within a period of less than two years immediately prior to the date of
the proposed repurchase (or the date of an agreement in respect thereof) at a
per share price in excess of the Fair Market Value (as defined) at the time of
such repurchase by Lake shall require the approval of a majority of the shares
of Voting Stock, excluding Voting Stock beneficially owned by such Interested
Shareholder, except for (i) a tender or exchange offer by Lake for a class of
Capital Stock (as defined) made available on the same terms to all holders of
such class of Capital Stock, or (ii) purchases made pursuant to an open market
purchase program approved by a majority of Continuing Directors (as defined)
provided that such purchases are effected on the open market and are not the
result of a privately negotiated transaction. Additionally, any amendment or
repeal of this provision, or the adoption of provisions inconsistent with this
provision, must be approved by the affirmative vote of a majority of the shares
of Voting Stock, excluding Voting Stock beneficially owned by any Interested
Shareholder, voting together as a single class.
ROSE
The authorized capital stock of Rose consists of 5,000,000 shares of Rose Common
Stock, no par value per share, of which 370,805 shares of Rose Common Stock were
outstanding as of October 1, 1998. In addition, 26,000 shares of Rose Common
Stock were reserved for issuance pursuant to outstanding stock options under the
Rose 1993 Stock Option Plan. Each share has the same rights, privileges and
preferences as every other share and would share equally in Rose's net assets
upon liquidation or dissolution. The shares of Rose Common Stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to said shares. Each share is
entitled to one vote, except in connection with the election of directors, Rose
shareholders may vote their shares cumulatively. All of the outstanding shares
of Rose Common Stock are fully paid and nonassessable and each participates
equally in dividends, which are payable when and as declared by Rose's Board of
Directors out of funds legally available therefor.
THE BANCORP FOLLOWING THE LAKE MERGER AND THE ROSE MERGER
The Articles of Incorporation and Bylaws of the Bancorp will continue as the
Articles of Incorporation and Bylaws of the Bancorp following the Lake Merger
and the Rose Merger. The authorized capital stock of the Bancorp following the
Lake Merger and the Rose Merger will consist of 10,000,000 shares of Bancorp
Common Stock and 10,000,000 shares of Bancorp preferred stock. The rights,
preferences and privileges of the Bancorp Common Stock following the Lake Merger
and the Rose Merger will be the same as those described above for Bancorp Common
Stock.
71
<PAGE> 86
MARKET PRICES
THE BANCORP
Bancorp Common Stock is not listed on any stock exchange, nor is it listed with
NASDAQ. Bancorp Common Stock is thinly traded, and there is no established
public market for Bancorp Common Stock. Management of the Bancorp is aware that
the San Francisco office of Hoefer & Arnett, Incorporated, Sutro & Co., Dean
Witter, Paine Webber, Prudential, Resource Trust, 1st National Bank, Solomon
Booth, Northern Trust, Philadep, South West, Midwest & Co., Schwab, Edward D.
Jones, Donaldson, Old Discount Brokerage and CEDE handle trades in Bancorp
Common Stock (the "Bancorp Securities Dealers").
The following table sets forth the high and low bid quotations for Bancorp
Common Stock, as reported by the Bancorp Securities Dealers during the first
nine months of 1998 and the calendar quarters for the years 1997 and 1996. These
quotations reflect the price that would be received by the seller, without
retail mark-up, mark-down or commissions and may not have represented actual
transactions:
<TABLE>
<CAPTION>
Bid Prices
-----------------------------
Quarter High Low Volumes
---------------- ---------- ---------- -------
<S> <C> <C> <C>
3rd Quarter 1998 $ 20.25 $ 15.00 35,707
2nd Quarter 1998 $ 21.00 $ 18.50 72,806
1st Quarter 1998 $ 19.50 $ 17.25 46,976
4th Quarter 1997 $ 18.375 $ 14.25 15,074
3rd Quarter 1997 $ 14.50 $ 12.50 31,285
2nd Quarter 1997 $ 12.75 $ 12.75 40,250
1st Quarter 1997 $ 12.875 $ 12.875 500
4th Quarter 1996 No Report No Report 30,600
3rd Quarter 1996 $ 10.00 $ 9.75 20,965
2nd Quarter 1996 $ 11.125 $ 10.625 19,840
1st Quarter 1996 $ 11.00 $ 10.25 15,595
</TABLE>
The last sales price of Bancorp Common Stock on or before May 27, 1998, the day
prior to the date of the first public announcement of the proposed Lake Merger,
was $20.25, which reflects a sale that occurred on May 15, 1998. The last sales
price of Bancorp Common Stock on or before June 11, 1998, the day prior to the
date of the first public announcement of the proposed Rose Merger, was $21.00,
which reflects a sale that occurred on June 8, 1998. The last sales price of
Bancorp Common Stock on or before _________, 1998, the last practicable date
before printing of this Joint Proxy Statement/Prospectus, was $_____, which
reflects a sale that occurred on ______, 1998. The "bid" and "asked" prices of
Bancorp Common Stock on ________, 1998 were $_____ and $_____, respectively. As
of October 1, 1998, the shares of Bancorp Common Stock were held by
approximately 331 record holders.
LAKE
Trading in Lake Common Stock has not been extensive and such trades cannot be
characterized as amounting to an active trading market. Lake Common Stock is not
listed on any exchange, nor is it listed with NASDAQ. Management of Lake is
aware that various brokers facilitate trades in Lake Common Stock. The following
table summarizes those trades in the market of which Lake's management has
knowledge setting forth the approximate
72
<PAGE> 87
high and low sale prices for the periods indicated. These quotations reflect the
price that would be received by the seller, without retail mark-up, mark-down or
commissions and may not have represented actual transactions:
<TABLE>
<CAPTION>
Sales Prices Volumes
---------------------------- -------
Quarter High Low
---------------- ------- --------- -----
<S> <C> <C> <C>
3rd Quarter 1998 $ 11.125 $ 10.25 4,550
2nd Quarter 1998 $ 10.50 $ 7.50 50,033
1st Quarter 1998 $ 7.75 $ 7.00 90,490
4th Quarter 1997 $ 7.00 $ 7.00 N/A
3rd Quarter 1997 $ 7.00 $ 7.00 N/A
2nd Quarter 1997 $ 7.00 $ 7.00 N/A
1st Quarter 1997 $ 7.00 $ 7.00 N/A
4th Quarter 1996 $ 7.50 $ 6.00 100
3rd Quarter 1996 $ 7.50 $ 6.00 600
2nd Quarter 1996 $ 7.50 $ 6.00 29,000
1st Quarter 1996 $ 7.50 $ 6.00 1,000
</TABLE>
The last sales price of Lake Common Stock on or before May 27, 1998, the day
prior to the date of the first public announcement of the proposed Lake Merger,
was $7.75, which reflects a sale that occurred on May 19, 1998. The last sales
price of Lake Common Stock on or before _____, 1998, the last practicable date
before printing of this Joint Proxy Statement/Prospectus, was $____, which
reflects a sale that occurred on _______, 1998. The "bid" and "asked" prices of
the Lake Common Stock on _______, 1998 were $____ and $____ respectively. As of
October 1, 1998, the shares of Lake Common Stock were held by approximately 850
record holders.
ROSE
Trading in Rose Common Stock has been very limited and there is no established
public trading market. Rose Common Stock is not listed on any exchange, nor is
it included in NASDAQ. There have been no trades in Rose Common Stock during
1998 and there was only one trade in 1997 for 241 shares of Rose Common Stock at
a price of $8.00 per share. The last sales price of Rose Common Stock on or
before June 11, 1998, the day prior to the date of the first public announcement
of the proposed Rose Merger, was $8.00, which reflects a sale that occurred on
June 3, 1997. The last sales price of Rose Common Stock on or before _______,
1998, the last practicable date before printing of this Joint Proxy
Statement/Prospectus, was $____, which reflects a sale that occurred on _______,
1998. As of October 1, 1998, the shares of Rose Common Stock were held by
approximately 303 record holders.
DIVIDENDS
THE BANCORP
The Bancorp shareholders are entitled to receive dividends when and as declared
by its board of directors, out of funds legally available therefor, as provided
in the California General Corporation Law. The California General Corporation
Law provides that a corporation may make a distribution to its shareholders if
its retained earnings immediately prior to the dividend payout at least equal
the amount of the proposed distribution. In the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may,
nevertheless, make a distribution if it meets both the "quantitative solvency"
and the "liquidity" tests, as set forth in the California General
73
<PAGE> 88
Corporation Law. In general, the quantitative solvency test requires that the
sum of the assets of the corporation equal at least 1-1/4 times its liabilities.
The liquidity test generally requires that a corporation have current assets at
least equal to current liabilities, or, if the average of the earnings of the
corporation before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of the interest expense of the
corporation for such fiscal years, then current assets must equal at least 1-1/4
times current liabilities.
The Bancorp paid stock dividends of 7% per share on April 17, 1995, 4% per share
on October 20, 1995, 6% per share on April 30, 1997 and 10% per share on October
20, 1997.
The amount and payment of dividends by the Bancorp are set by the Bancorp's
Board of Directors with numerous factors involved including the Bancorp's
earnings, financial condition and the need for capital for expanded growth and
general economic conditions. While it is anticipated that the Bancorp will
continue to declare stock dividends based upon the recommendations of the Board
of Directors of the Bancorp, there can be no assurance that such dividends will
occur. Under both the Lake Agreement and the Rose Agreement, the Bancorp has
agreed that it will not declare or pay any dividend on its shares of Bancorp
Common Stock, other than regular cash dividends consistent with past practices.
This restriction would no longer be applicable in the event the Lake Merger and
the Rose Merger are not approved by the shareholders, and will not restrict the
Bancorp's ability to pay dividends following the Lake Merger and/or the Rose
Merger.
LAKE
The shareholders of Lake are entitled to cash dividends when and as declared by
Lake's Board of Directors out of funds legally available therefor, subject to
the restrictions set forth in the California Financial Code. The California
Financial Code provides that a bank may not make a cash distribution to its
shareholders in an amount which exceeds the lesser of (1) the retained earnings
or (2) the net income of the bank for its last three fiscal years, less the
amount of any distributions made by the bank to its shareholders during such
period; however, a bank may, with the approval of the DFI, make a distribution
to its shareholders in an amount not exceeding the greatest of (i) the retained
earnings of the bank, (ii) the net income of the bank for its last fiscal year,
or (iii) the net income of the bank for its current fiscal year. If the DFI
finds that the shareholders' equity of a bank is not adequate or that the
payment of a dividend would be unsafe or unsound for the bank, the DFI may order
the bank not to pay any dividend to the shareholders.
Lake has paid cash dividends on its shares of Lake Common Stock. On December 18,
1997, the Board of Directors of Lake declared a cash dividend of $0.27 per share
payable February 17, 1998 to shareholders of record as of January 16, 1998. On
November 21, 1996, the Board of Directors of Lake declared a cash dividend of
$0.20 per share payable February 14, 1997 to shareholders of record as of
January 15, 1997, and on November 30, 1995, the Board of Directors of Lake
declared a cash dividend of $0.20 per share payable February 2, 1996 to
shareholders of record as of January 1, 1996. The amount and payment of
dividends by Lake are set by Lake's Board of Directors with numerous factors
involved including Lake's earnings, financial condition, and the need for
capital for expanded growth and general economic conditions. No assurance can be
given that cash or stock dividends will be paid in the future. Under the Lake
Agreement, Lake has agreed that it will not declare or pay any dividend on its
shares of Lake Common Stock, other than regular cash dividends consistent with
past practices. This restriction would no longer be applicable in the event the
Lake Merger is not approved by the shareholders.
ROSE
Rose has never paid any cash or stock dividends and does not intend to do so in
the foreseeable future. Under the Rose Agreement, Rose has agreed that it will
not declare or pay any dividend on its shares of Rose Common Stock, other than
regular cash dividends consistent with past practices. This restriction would no
longer be applicable in the event the Rose Merger is not approved by the
shareholders.
74
<PAGE> 89
THE BANCORP FOLLOWING THE LAKE MERGER AND THE ROSE MERGER
If either or both the Lake Merger and the Rose Merger are consummated, no
assurance can be given that the trading market for the Bancorp Common Stock will
be more active than that which currently exists for Bancorp Common Stock. While
it is anticipated that the Bancorp following the Lake Merger and the Rose Merger
will continue to declare stock dividends based upon the recommendations of the
Board of Directors of the Bancorp, there can be no assurance that such dividends
will occur. The payment of dividends will depend, in any event, upon the
Bancorp's earnings, financial condition, the need for capital for expanded
growth and general economic conditions.
PRO FORMA FINANCIAL STATEMENTS
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED BELOW. THEREFORE, THE
INFORMATION SET FORTH HEREIN SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE
BUSINESS PROSPECTS OF THE BANCORP, LAKE AND ROSE ON AN INDIVIDUAL AND
CONSOLIDATED BASIS.
LAKE MERGER
The merger of Lake and LMC will be accounted for under the pooling of interests
method of accounting. The following sets forth certain pro forma information
including pro forma consolidated condensed balance sheets of the Bancorp
following the Lake Merger as of September 30, 1998 and December 31, 1997 and pro
forma consolidated condensed income statements of the Bancorp following the Lake
Merger for the nine month periods ended September 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995 (collectively referred to herein as
the "Lake Merger Pro Forma Financial Information.")
The following Lake Merger Pro Forma Financial Information and related notes are
based on the historical financial statements of the Bancorp and Lake, giving
effect to the Lake Merger under the pooling of interests method of accounting
and the assumptions and adjustments in the accompanying notes to the Lake Merger
Pro Forma Financial Information. The pro forma consolidated condensed balance
sheets assume the Lake Merger was consummated on September 30, 1998 and December
31, 1997 and the pro forma consolidated condensed income statements assume the
Lake Merger was consummated at the beginning of each period. The Lake Merger Pro
Forma Financial Information further assumes the issuance of approximately
971,125 shares of Bancorp Common Stock in exchange for all of the outstanding
shares of Lake Common Stock at September 30, 1998. Such Lake Merger Pro Forma
Financial Information is not necessarily indicative of the financial position or
results of operations of the Bancorp following the Lake Merger as it may be in
the future or as it might have been had the Lake Merger been effected on the
assumed dates.
The Lake Merger Pro Forma Financial Information should be read in conjunction
with the historical financial statements of the Bancorp and Lake and the notes
related thereto, presented elsewhere in this Joint Proxy Statement/Prospectus.
(See "INDEX TO FINANCIAL STATEMENTS" herein.)
75
<PAGE> 90
LAKE MERGER PRO FORMA FINANCIAL INFORMATION BASED ON POOLING OF INTERESTS METHOD
OF ACCOUNTING
EXISTING AND PRO FORMA CONSOLIDATED CAPITALIZATION
(UNAUDITED)
The following table sets forth the existing capitalization of the Bancorp and
Lake and the pro forma consolidated capitalization of the Bancorp following the
Lake Merger at September 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Surviving
The Bancorp Lake Adjustments(1) Bancorp(1)
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Shareholders' equity:
Common stock $ 7,381 $ 3,473 $ 10,854
Retained earnings 2,744 5,795 8,539
Net unrealized gains on
available-for-sale
securities 268 165 433
----------- ----------- ----------- -----------
Total shareholders'
equity $ 10,393 $ 9,433 $ 19,826
=========== =========== =========== ===========
Authorized shares of
common stock 10,000,000 20,000,000 10,000,000
=========== =========== =========== ===========
Outstanding shares 981,448 1,298,296 1,952,573
=========== =========== =========== ===========
</TABLE>
- -----------------
(1) Assumes that holders of 100% of Lake Common Stock convert their shares
into Bancorp Common Stock and that an aggregate of 971,125 shares of
Bancorp Common Stock are issued in the Lake Merger.
76
<PAGE> 91
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Consolidated
Bancorp Lake Adjustments Balance Sheet
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,941 $ 4,558 $ $ 11,499
Federal funds sold 10,600 3,500 14,100
Loans held for sale 2,786 620 3,406
Interest-bearing deposits in banks 4,554 4,554
Investment securities:
Available-for-sale 30,544 12,041 42,585
Held-to-maturity 2,889 2,889
--------- --------- --------- ---------
Total investments 33,433 12,041 45,474
--------- --------- --------- ---------
Loans and leases:
Commercial 18,708 4,449 23,157
Real estate 46,634 28,980 75,614
Real estate construction 7,686 1,157 8,843
Lease financing 1,442 1,442
Agricultural 18,026 18,026
Consumer 583 2,530 3,113
--------- --------- ---------
Total loans 75,053 55,142 130,195
Deferred fees and costs, net (209) (204) (413)
Allowance for loan and lease losses (1,025) (1,161) (2,186)
--------- --------- --------- ---------
Net loans 73,819 53,777 127,596
--------- --------- --------- ---------
Other real estate 1,553 630 2,183
Bank premises and equipment, net 3,481 2,894 6,375
Accrued interest receivable and other assets 2,668 2,467 5,135
--------- --------- --------- ---------
$ 135,281 $ 85,041 $ $220,322
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 31,552 $ 12,765 $ $ 44,317
Interest-bearing 92,177 62,106 154,283
--------- --------- --------- ---------
Total deposits 123,729 74,871 198,600
Accrued interest payable and other liabilities 1,159 737 1,896
--------- --------- --------- ---------
Total liabilities 124,888 75,608 200,496
--------- --------- --------- ---------
Shareholders' equity:
Common stock 7,381 3,473 10,854
Retained earnings 2,744 5,795 8,539
Unrealized gains on available-for-sale
investment securities, net of taxes 268 165 433
--------- --------- --------- ---------
Total shareholders' equity 10,393 9,433 19,826
--------- --------- --------- ---------
$ 135,281 $ 85,041 $ $ 220,322
========= ========= ========= =========
</TABLE>
77
<PAGE> 92
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Consolidated
Bancorp Lake Adjustments Balance Sheet
--------- --------- ----------- --------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,296 $ 5,236 $ $ 10,532
Federal funds sold 6,550 4,000 10,550
Loans held for sale 1,767 680 2,447
Interest-bearing deposits in banks 4,557 4,557
Investment securities:
Available-for-sale 15,799 11,976 27,775
Held-to-maturity 4,950 4,950
--------- --------- ------- ---------
Total investments 20,749 11,976 32,725
--------- --------- ------- ---------
Loans and leases:
Commercial 14,882 5,045 19,927
Real estate 40,052 32,003 72,055
Real estate construction 13,263 435 13,698
Lease financing 698 698
Agricultural 13,942 13,942
Consumer 615 2,919 3,534
--------- --------- ---------
Total loans 69,510 54,344 123,854
Deferred fees and costs, net (371) (182) (553)
Allowance for loan and lease losses (948) (952) (1,900)
--------- --------- ------- ---------
Net loans 68,191 53,210 121,401
--------- --------- ------- ---------
Other real estate 967 598 1,565
Bank premises and equipment, net 3,027 3,077 6,104
Accrued interest receivable and other assets 2,313 2,186 4,499
--------- --------- ------- ---------
$ 108,860 $ 85,520 $ $ 194,380
========= ========= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 19,215 $ 12,927 $ $ 32,142
Interest-bearing 79,494 63,112 142,606
--------- --------- ------- ---------
Total deposits 98,709 76,039 174,748
Accrued interest payable and other liabilities 1,153 821 1,974
--------- --------- ------- ---------
Total liabilities 99,862 76,860 176,722
--------- --------- ------- ---------
Shareholders' equity:
Common stock 7,001 3,178 10,179
Retained earnings 1,908 5,442 7,350
Unrealized gains on available-for-sale
investment securities, net of taxes 89 40 129
--------- --------- ------- ---------
Total shareholders' equity 8,998 8,660 17,658
--------- --------- ------- ---------
$ 108,860 $ 85,520 $ $ 194,380
========= ========= ======= =========
</TABLE>
78
<PAGE> 93
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Consolidated
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,550 $ 3,935 $ $ 9,485
Interest on deposits in banks 223 223
Interest on investment securities 1,134 497 1,631
Interest on federal funds sold 320 184 504
---------- ---------- ---------- ----------
Total interest income 7,004 4,839 11,843
Interest expense on deposits 2,601 1,916 4,517
---------- ---------- ---------- ----------
Net interest income 4,403 2,923 7,326
Provision for loan and lease losses 250 270 520
---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 4,153 2,653 6,806
---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 534 494 1,028
Gain on sale of loans 1,093 10 1,103
Other 215 215
---------- ---------- ---------- ----------
Total noninterest income 1,842 504 2,346
---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,621 1,416 4,037
Occupancy 324 213 537
Equipment 420 272 692
Other 1,323 756 2,079
---------- ---------- ---------- ----------
Total other expenses 4,688 2,657 7,345
---------- ---------- ---------- ----------
Income before income taxes 1,307 500 1,807
Income taxes 472 147 619
---------- ---------- ---------- ----------
Net income $ 835 $ 353 $ $ 1,188
========== ========== ========== ==========
Basic earnings per share $ 0.86 $ 0.28 $ $ 0.62
========== ========== ========== ==========
Weighted average shares of common stock 970,810 1,265,387 1,917,319(1)
========== ========== ========== ==========
Diluted earnings per share $ 0.80 $ 0.27 $ $ 0.58
========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,038,285 1,329,428 2,032,697(1)
========== ========== ========== ==========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 to the weighted average shares for the Bancorp
before the combination. The Lake Conversion Rate is based on the formula
included at "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998 and the Bancorp Average
Trading Price of $17.00 per share.
79
<PAGE> 94
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1997
-----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Consolidated
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,106 $ 4,146 $ $ 9,252
Interest on deposits in banks 165 165
Interest on investment securities 912 434 1,346
Interest on federal funds sold 150 123 273
---------- ----------- ---------- ----------
Total interest income 6,168 4,868 11,036
Interest expense on deposits 2,217 1,895 4,112
---------- ----------- ---------- ----------
Net interest income 3,951 2,973 6,924
Provision for loan and lease losses 193 270 463
---------- ----------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,758 2,703 6,461
---------- ----------- ---------- ----------
Noninterest income:
Service charges and fees 557 389 946
Gain on sale of loans 562 17 579
Gain (loss) on sale of investment securities 16 (8) 8
Other 208 15 223
---------- ----------- ---------- ----------
Total noninterest income 1,343 413 1,756
---------- ----------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,094 1,267 3,361
Occupancy 296 204 500
Equipment 337 257 594
Other 1,213 680 1,893
---------- ----------- ---------- ----------
Total other expenses 3,940 2,408 6,348
---------- ----------- ---------- ----------
Income before income taxes 1,161 708 1,869
Income taxes 453 258 711
---------- ----------- ---------- ----------
Net income $ 708 $ 450 $ $ 1,158
========== =========== ========== ==========
Basic earnings per share $ 0.73 $ 0.36 $ $ 0.61
========== =========== ========== ==========
Weighted average shares of common stock 965,403 1,240,546 $ 1,893,331(1)
========== =========== ========== ==========
Diluted earnings per share $ 0.70 $ 0.35 $ $ 0.59
========== =========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,009,311 1,276,729 1,964,304(1)
========== =========== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 to the weighted average shares for the Bancorp
before the combination. The Lake Conversion Rate is based on the formula
included at "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998 and the Bancorp Average
Trading Price of $17.00 per share.
80
<PAGE> 95
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 6,978 $ 5,529 $ $ 12,507
Interest on deposits in banks 233 233
Interest on investment securities 1,242 595 1,837
Interest on federal funds sold 210 203 413
--------- --------- --------- ---------
Total interest income 8,430 6,560 14,990
Interest expense on deposits 3,051 2,562 5,613
--------- --------- --------- ---------
Net interest income 5,379 3,998 9,377
Provision for loan and lease losses 243 263 506
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 5,136 3,735 8,871
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 765 442 1,207
Gain on sale of loans 972 49 1,021
Gain (loss) on sale of investment securities 21 (8) 13
Other 279 147 426
--------- --------- --------- ---------
Total noninterest income 2,037 630 2,667
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 2,988 1,617 4,605
Occupancy 400 214 614
Equipment 461 343 804
Other 1,682 1,048 2,730
--------- --------- --------- ---------
Total other expenses 5,531 3,222 8,753
--------- --------- --------- ---------
Income before income taxes 1,642 1,143 2,785
Income taxes 639 377 1,016
--------- --------- --------- ---------
Net income $ 1,003 $ 766 $ $ 1,769
========= ========= ========= =========
Basic earnings per share $ 1.08 $ 0.62 $ $ 0.95
========= ========= ========= =========
Weighted average shares of common stock 932,531 1,240,546 1,860,459(1)
========= ========= ========= =========
Diluted earnings per share $ 1.02 $ 0.59 $ $ 0.90
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 986,706 1,297,954 1,957,576(1)
========= ========= ========= =========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 to the weighted average shares for the Bancorp
before the combination. The Lake Conversion Rate is based on the formula
included at "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998 and the Bancorp Average
Trading Price of $17.00 per share.
81
<PAGE> 96
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-------------------------------------------------------------
Pro Forma
The Bancorp Lake Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,544 $ 5,704 $ $ 11,248
Interest on deposits in banks 198 198
Interest on investment securities 751 777 1,528
Interest on federal funds sold 146 168 314
--------- --------- --------- ---------
Total interest income 6,441 6,847 13,288
Interest expense 2,185 2,845 5,030
--------- --------- --------- ---------
Net interest income 4,256 4,002 8,258
Provision for loan and lease losses 458 477 935
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,798 3,525 7,323
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 688 415 1,103
Gain on sale of loans 684 146 830
Gain (loss) on sale of investment securities 11 20 31
Other 309 97 406
--------- --------- --------- ---------
Total noninterest income 1,692 678 2,370
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 2,355 1,683 4,038
Occupancy 352 255 607
Equipment 399 342 741
Other 1,176 1,244 2,420
--------- --------- --------- ---------
Total other expenses 4,282 3,524 7,806
--------- --------- --------- ---------
Income before income taxes 1,208 679 1,887
Income taxes 470 203 673
--------- --------- --------- ---------
Net income $ 738 $ 476 $ $ 1,214
========= ========= ========= =========
Basic earnings per share $ 0.97 $ 0.38 $ $ 0.72
========= ========= ========= =========
Weighted average shares of common stock 759,017 1,240,491 1,686,904(1)
========= ========= ========= =========
Diluted earnings per share $ 0.94 $ 0.36 $ $ 0.69
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 782,318 1,308,758 1,761,269(1)
========= ========= ========= =========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 to the weighted average shares for the Bancorp
before the combination. The Lake Conversion Rate is based on the formula
included at "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998 and the Bancorp Average
Trading Price of $17.00 per share.
82
<PAGE> 97
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 4,938 $ 5,794 $ $ 10,732
Interest on deposits in banks 160 160
Interest on investment securities 605 819 1,424
Interest on federal funds sold 141 229 370
--------- --------- --------- ---------
Total interest income 5,684 7,002 12,686
Interest expense 1,875 3,056 4,931
--------- --------- --------- ---------
Net interest income 3,809 3,946 7,755
Provision for loan and lease losses 80 210 290
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,729 3,736 7,465
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 690 444 1,134
Gain on sale of loans 427 115 542
(Loss) gain on sale of investment securities (30) 40 10
Other 140 82 222
--------- --------- --------- ---------
Total noninterest income 1,227 681 1,908
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 2,091 1,689 3,780
Occupancy 308 182 490
Equipment 369 237 606
Other 1,160 1,193 2,353
--------- --------- --------- ---------
Total other expenses 3,928 3,301 7,229
--------- --------- --------- ---------
Income before income taxes 1,028 1,116 2,144
Income taxes 377 335 712
--------- --------- --------- ---------
Net income $ 651 $ 781 $ $ 1,432
========= ========= ========= =========
Basic earnings per share $ 0.96 $ 0.63 $ $ 0.89
========= ========= ========= =========
Weighted average shares of common stock 681,030 1,239,791 1,608,394(1)
========= ========= ========= =========
Diluted earnings per share $ 0.94 $ 0.59 $ $ 0.86
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 689,696 1,315,310 1,673,548(1)
========= ========= ========= =========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 to the weighted average shares for the Bancorp
before the combination. The Lake Conversion Rate is based on the formula
included at "THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998 and the Bancorp Average
Trading Price of $17.00 per share.
83
<PAGE> 98
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth selected historical financial information for the
Bancorp and Lake and pro forma consolidated financial information with respect
to the Lake Merger. The table assumes that the Lake Merger was consummated at
the beginning of the periods presented, and that each outstanding share of Lake
Common Stock is converted into .7480 shares of Bancorp Common Stock (see "THE
LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of
Shares and Options").
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- --------------------------
1998 1997 1997 1996 1995
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amounts per common share:
The Bancorp historical
Net income(1)(2) $ .80 $ .70 $ 1.02 $ .94 $ .94
Book value(3) $10.59 $ 9.15 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Lake historical
Net income(1)(2) $ .27 $ .35 $ .59 $ .36 $ .59
Book value(3) $ 7.27 $ 6.98 $ 6.98 $ 6.57 $ 6.50
Dividends declared $ 0 $ 0 $ .27 $ .20 $ .20
Pro forma amounts per
common share of the Bancorp
Net income(1)(4) $ .58 $ .59 $ .90 $ .69 $ .86
Book value(5) $10.15 $ 9.24 $ 9.42 $ 9.20 $ 8.67
Dividends declared(7) $ 0 $ 0 $ .18 $ .14 $ .16
Pro forma amounts per
common share of Lake
Net income(1)(6) $ .43 $ .44 $ .67 $ .52 $ .64
Book value(6) $ 7.60 $ 6.91 $ 7.05 $ 6.88 $ 6.48
Dividends declared(7) $ 0 $ 0 $ .13 $ .10 $ .12
</TABLE>
- --------------------------
(1) All net income per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common
stock and common stock equivalent shares outstanding for each period for
the Bancorp and Lake.
(3) Book value per share is based on the actual number of shares outstanding
at the end of the period.
(4) Pro forma net income per share is determined in the same manner as
footnote (2) above except the Lake common shares are multiplied by the
estimated Lake Conversion Rate of .7480.
(5) Pro forma book value per share is determined in the same manner as
footnote (3) above except the Lake common shares are multiplied by the
estimated Lake Conversion Rate of .7480.
(6) Lake pro forma equivalents are computed by multiplying the pro forma per
share data of the consolidated entity by the estimated Lake Conversion
Rate of .7480.
(7) Pro forma amounts assume that the Bancorp would have declared cash
dividends per share equal to the Lake dollar amount of dividends
declared divided by the pro forma shares outstanding after the
combination.
84
<PAGE> 99
ROSE MERGER
The merger of Rose and the Bancorp will be accounted for under the pooling of
interests method of accounting. The following sets forth certain pro forma
information including pro forma consolidated condensed balance sheets of the
Bancorp following the Rose Merger as of September 30, 1998 and December 31, 1997
and pro forma consolidated condensed income statements of the Bancorp following
the Rose Merger for the nine month periods ended September 30, 1998 and 1997 and
the years ended December 31, 1997, 1996 and 1995 (collectively referred to
herein as the "Rose Merger Pro Forma Financial Information.")
The following Rose Merger Pro Forma Financial Information and related notes are
based on the historical financial statements of the Bancorp and Rose, giving
effect to the Rose Merger under the pooling of interests method of accounting
and the assumptions and adjustments in the accompanying notes to the Rose Merger
Pro Forma Financial Information. The pro forma consolidated condensed balance
sheets assume the Rose Merger was consummated on September 30, 1998 and December
31, 1997 and the pro forma consolidated condensed income statements assume the
Rose Merger was consummated at the beginning of each period. The Rose Merger Pro
Forma Financial Information further assumes the issuance of approximately
446,746 shares of Bancorp Common Stock in exchange for all of the outstanding
shares of Rose Common Stock at September 30, 1998. Such Rose Merger Pro Forma
Financial Information is not necessarily indicative of the financial position or
results of operations of the Bancorp following the Rose Merger as it may be in
the future or as it might have been had the Rose Merger been effected on the
assumed dates.
The Rose Merger Pro Forma Financial Information should be read in conjunction
with the historical financial statements of the Bancorp and Rose and the notes
related thereto, presented elsewhere in this Joint Proxy Statement/Prospectus.
(See "INDEX TO FINANCIAL STATEMENTS" herein.)
85
<PAGE> 100
ROSE MERGER PRO FORMA FINANCIAL INFORMATION BASED ON POOLING OF INTERESTS METHOD
OF ACCOUNTING
EXISTING AND PRO FORMA CONSOLIDATED CAPITALIZATION
(UNAUDITED)
The following table sets forth the existing capitalization of the Bancorp and
Rose and the pro forma consolidated capitalization of the Bancorp following the
Rose Merger at September 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Surviving
The Bancorp Rose Adjustments(1) Bancorp(1)
----------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Common stock $ 7,381 $ 2,511 $ 9,892
Retained earnings 2,744 2,174 4,918
Net unrealized gains
on available-for-sale
securities 268 19 287
---------- --------- ---------- ----------
Total shareholders'
equity $ 10,393 $ 4,704 $ $ 15,097
========== ========= ========== ==========
Authorized shares of
common stock 10,000,000 5,000,000 10,000,000
========== ========= ========== ==========
Outstanding shares 981,448 370,805 1,428,194
========== ========= ========== ==========
</TABLE>
- --------------------------
(1) Assumes that holders of 100% of Rose Common Stock convert their shares
into Bancorp Common Stock and that an aggregate of 446,746 shares of
Bancorp Common Stock are issued in the Rose Merger.
86
<PAGE> 101
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Consolidated
Bancorp Rose Adjustments Balance Sheet
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,941 $ 4,252 $ $ 11,193
Federal funds sold 10,600 10,050 20,650
Loans held for sale 2,786 305 3,091
Investment securities:
Available-for-sale 30,544 4,218 34,762
Held-to-maturity 2,889 2,889
--------- --------- --------- ---------
Total investments 33,433 4,218 37,651
--------- --------- --------- ---------
Loans and leases:
Commercial 18,708 6,694 25,402
Real estate 46,634 15,325 61,959
Real estate construction 7,686 6,965 14,651
Lease financing 1,442 1,442
Consumer 583 2,184 2,767
--------- --------- --------- ---------
Total loans 75,053 31,168 106,221
Deferred fees and costs, net (209) (76) (285)
Allowance for loan and lease losses (1,025) (296) (1,321)
--------- --------- --------- ---------
Net loans 73,819 30,796 104,615
--------- --------- --------- ---------
Other real estate 1,553 1,553
Bank premises and equipment, net 3,481 1,646 5,127
Accrued interest receivable and other assets 2,668 2,104 4,772
--------- --------- --------- ---------
$ 135,281 $ 53,371 $ $ 188,652
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 31,552 $ 10,880 $ $ 42,432
Interest-bearing 92,177 37,596 129,773
--------- --------- --------- ---------
Total deposits 123,729 48,476 172,205
Accrued interest payable and other liabilities 1,159 191 1,350
--------- --------- --------- ---------
Total liabilities 124,888 48,667 173,555
--------- --------- --------- ---------
Shareholders' equity:
Common stock 7,381 2,511 9,892
Retained earnings 2,744 2,174 4,918
Unrealized gains on available-for-sale
investment securities, net of taxes 268 19 287
--------- --------- --------- ---------
Total shareholders' equity 10,393 4,704 15,097
--------- --------- --------- ---------
$ 135,281 $ 53,371 $ $ 188,652
========= ========= ========= =========
</TABLE>
87
<PAGE> 102
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Consolidated
Bancorp Rose Adjustments Balance Sheet
--------- --------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,296 $ 1,830 $ $ 7,126
Federal funds sold 6,550 6,720 13,270
Loans held for sale 1,767 227 1,994
Investment securities:
Available-for-sale 15,799 4,010 19,809
Held-to-maturity 4,950 4,950
--------- --------- ---------- ---------
Total investments 20,749 4,010 24,759
--------- --------- ---------- ---------
Loans and leases:
Commercial 14,882 8,715 23,597
Real estate 40,052 16,279 56,331
Real estate construction 13,263 7,319 20,582
Lease financing 698 698
Consumer 615 2,623 3,238
--------- --------- ---------- ---------
Total loans 69,510 34,936 104,446
Deferred fees and costs, net (371) (87) (458)
Allowance for loan and lease losses (948) (724) (1,672)
--------- --------- ---------- ---------
Net loans 68,191 34,125 102,316
--------- --------- ---------- ---------
Other real estate 967 967
Bank premises and equipment, net 3,027 1,722 4,749
Accrued interest receivable and other assets 2,313 1,954 4,267
--------- --------- ---------- ---------
$ 108,860 $ 50,588 $ $ 159,448
========= ========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 19,215 $ 8,527 $ $ 27,742
Interest-bearing 79,494 37,823 117,317
--------- --------- ---------- ---------
Total deposits 98,709 46,350 145,059
Accrued interest payable and other liabilities 1,153 274 1,427
--------- --------- ---------- ---------
Total liabilities 99,862 46,624 146,486
--------- --------- ---------- ---------
Shareholders' equity:
Common stock 7,001 2,021 9,022
Retained earnings 1,908 1,932 3,840
Unrealized gains on available-for-sale
investment securities, net of taxes 89 11 100
--------- --------- ---------- ---------
Total shareholders' equity 8,998 3,964 12,962
--------- --------- ---------- ---------
$ 108,860 $ 50,588 $ $ 159,448
========= ========= ========== =========
</TABLE>
88
<PAGE> 103
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,550 $ 2,524 $ $ 8,074
Interest on investment securities 1,134 174 1,308
Interest on federal funds sold 320 292 612
--------- ------- ---------- ---------
Total interest income 7,004 2,990 9,994
Interest expense on deposits 2,601 1,303 3,904
--------- ------- ---------- ---------
Net interest income 4,403 1,687 6,090
Provision for loan and lease losses 250 105 355
--------- ------- ---------- ---------
Net interest income after provision
for loan and lease losses 4,153 1,582 5,735
--------- ------- ---------- ---------
Noninterest income:
Service charges and fees 534 51 585
Gain on sale of loans 1,093 187 1,280
Other 215 177 392
--------- ------- ---------- ---------
Total noninterest income 1,842 415 2,257
--------- ------- ---------- ---------
Other expenses:
Salaries and employee benefits 2,621 705 3,326
Occupancy 324 105 429
Equipment 420 98 518
Other 1,323 686 2,009
--------- ------- ---------- ---------
Total other expenses 4,688 1,594 6,282
--------- ------- ---------- ---------
Income before income taxes 1,307 403 1,710
Income taxes 472 161 633
--------- ------- ---------- ---------
Net income $ 835 $ 242 $ $ 1,077
========= ======= ========== =========
Basic earnings per share $ 0.86 $ 0.75 $ $ 0.79
========= ======= ========== =========
Weighted average shares of common stock 970,810 320,158 1,356,536(1)
========= ======= ========== =========
Diluted earnings per share $ 0.80 $ 0.72 $ $ 0.75
========= ======= ========== =========
Weighted average shares of common stock
and common stock equivalents 1,038,285 333,661 1,440,280(1)
========= ======= ========== =========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Rose before the combination multiplied by the Rose
Conversion Rate of 1.2048 to the weighted average shares for the Bancorp
before the combination. The Rose Conversion Rate is based on the formula
included at "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998.
89
<PAGE> 104
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1997
------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Consolidated
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,106 $ 2,432 $ $ 7,538
Interest on investment securities 912 202 1,114
Interest on federal funds sold 150 210 360
---------- -------- ---------- ----------
Total interest income 6,168 2,844 9,012
Interest expense on deposits 2,217 1,198 3,415
---------- -------- ---------- ----------
Net interest income 3,951 1,646 5,597
Provision for loan and lease losses 193 126 319
---------- -------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,758 1,520 5,278
---------- -------- ---------- ----------
Noninterest income:
Service charges and fees 557 41 598
Gain on sale of loans 562 57 619
Gain on sale of investment securities 16 16
Other 208 122 330
---------- -------- ---------- ----------
Total noninterest income 1,343 220 1,563
---------- -------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,094 604 2,698
Occupancy 296 79 375
Equipment 337 69 406
Other 1,213 423 1,636
---------- -------- ---------- ----------
Total other expenses 3,940 1,175 5,115
---------- -------- ---------- ----------
Income before income taxes 1,161 565 1,726
Income taxes 453 226 679
---------- -------- ---------- ----------
Net income $ 708 $ 339 $ $ 1,047
========== ======== ========== ==========
Basic earnings per share $ 0.73 $ 1.06 $ $ 0.78
========== ======== ========== ==========
Weighted average shares of common stock 965,403 319,972 1,350,905(1)
========== ======== ========== ==========
Diluted earnings per share $ 0.70 $ 1.04 $ $ 0.75
========== ======== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,009,311 324,648 1,400,447(1)
========== ======== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Rose before the combination multiplied by the Rose
Conversion Rate of 1.2048 to the weighted average shares for the Bancorp
before the combination. The Rose Conversion Rate is based on the formula
included at "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998.
90
<PAGE> 105
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Consolidated
----------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 6,978 $ 3,287 $ $ 10,265
Interest on investment securities 1,242 266 1,508
Interest on federal funds sold 210 342 552
-------- -------- ---------- ----------
Total interest income 8,430 3,895 12,325
Interest expense on deposits 3,051 1,664 4,715
-------- -------- ---------- ----------
Net interest income 5,379 2,231 7,610
Provision for loan and lease losses 243 564 807
-------- -------- ---------- ----------
Net interest income after provision
for loan and lease losses 5,136 1,667 6,803
-------- -------- ---------- ----------
Noninterest income:
Service charges and fees 765 58 823
Gain on sale of loans 972 99 1,071
Gain on sale of investment securities 21 21
Other 279 184 463
-------- -------- ---------- ----------
Total noninterest income 2,037 341 2,378
-------- -------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,988 818 3,806
Occupancy 400 148 548
Equipment 461 29 490
Other 1,682 698 2,380
-------- -------- ---------- ----------
Total other expenses 5,531 1,693 7,224
-------- -------- ---------- ----------
Income before income taxes 1,642 315 1,957
Income taxes 639 133 772
-------- -------- ---------- ----------
Net income $ 1,003 $ 182 $ $ 1,185
======== ======== ========== ==========
Basic earnings per share $ 1.08 $ 0.57 $ $ .90
======== ======== ========== ==========
Weighted average shares of common stock 932,531 319,972 1,318,033(1)
======== ======== ========== ==========
Diluted earnings per share $ 1.02 $ 0.56 $ $ .86
======== ======== ========== ==========
Weighted average shares of common stock
and common stock equivalents 986,706 324,648 1,377,842(1)
======== ======== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Rose before the combination multiplied by the Rose
Conversion Rate of 1.2048 to the weighted average shares for the Bancorp
before the combination. The Rose Conversion Rate is based on the formula
included at "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998.
91
<PAGE> 106
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Consolidated
----------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,544 $ 2,545 $ $ 8,089
Interest on investment securities 751 232 983
Interest on federal funds sold 146 251 397
-------- -------- ---------- ----------
Total interest income 6,441 3,028 9,469
Interest expense on deposits 2,185 1,331 3,516
-------- -------- ---------- ----------
Net interest income 4,256 1,697 5,953
Provision for loan and lease losses 458 89 547
-------- -------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,798 1,608 5,406
-------- -------- ---------- ----------
Noninterest income:
Service charges and fees 688 33 721
Gain on sale of loans 684 58 742
Gain on sale of investment securities 11 11
Other 309 137 446
-------- -------- ---------- ----------
Total noninterest income 1,692 228 1,920
-------- -------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,355 701 3,056
Occupancy 352 53 405
Equipment 399 97 496
Other 1,176 479 1,655
-------- -------- ---------- ----------
Total other expenses 4,282 1,330 5,612
-------- -------- ---------- ----------
Income before income taxes 1,208 506 1,714
Income taxes 470 204 674
-------- -------- ---------- ----------
Net income $ 738 $ 302 $ $ 1,040
======== ======== ========== ==========
Basic earnings per share $ 0.97 $ 0.94 $ $ 0.91
======== ======== ========== ==========
Weighted average shares of common stock 759,017 319,872 1,144,399(1)
======== ======== ========== ==========
Diluted earnings per share $ 0.94 $ 0.93 $ $ 0.89
======== ======== ========== ==========
Weighted average shares of common stock
and common stock equivalents 782,318 324,622 1,173,423(1)
======== ======== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Rose before the combination multiplied by the Rose
Conversion Rate of 1.2048 to the weighted average shares for the Bancorp
before the combination. The Rose Conversion Rate is based on the formula
included at "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998.
92
<PAGE> 107
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
-----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Consolidated
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 4,938 $ 2,164 $ $ 7,102
Interest on investment securities 605 274 879
Interest on federal funds sold 141 226 367
--------- --------- --------- ---------
Total interest income 5,684 2,664 8,348
Interest expense on deposits 1,875 1,288 3,163
--------- --------- --------- ---------
Net interest income 3,809 1,376 5,185
Provision for loan and lease losses 80 55 135
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,729 1,321 5,050
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 690 21 711
Gain on sale of loans 427 32 459
Gain on sale of investment securities (30) (30)
Other 140 73 213
--------- --------- --------- ---------
Total noninterest income 1,227 126 1,353
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 2,091 578 2,669
Occupancy 308 58 366
Equipment 369 87 456
Other 1,160 422 1,582
--------- --------- --------- ---------
Total other expenses 3,928 1,145 5,073
--------- --------- --------- ---------
Income before income taxes 1,028 302 1,330
Income taxes 377 104 481
--------- --------- --------- ---------
Net income $ 651 $ 198 $ $ 849
========= ========= ========= =========
Basic earnings per share $ 0.96 $ 0.62 $ $ 0.80
========= ========= ========= =========
Weighted average shares of common stock 681,030 319,572 1,066,050(1)
========= ========= ========= =========
Diluted earnings per share $ 0.94 $ 0.61 $ $ 0.79
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 689,696 324,530 1,080,690(1)
========= ========= ========= =========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Rose before the combination multiplied by the Rose
Conversion Rate of 1.2048 to the weighted average shares for the Bancorp
before the combination. The Rose Conversion Rate is based on the formula
included at "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity
and outstanding shares at September 30, 1998.
93
<PAGE> 108
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth selected historical financial information for the
Bancorp and Rose and pro forma consolidated financial information with respect
to the Rose Merger. The table assumes that the Rose Merger was consummated at
the beginning of the periods presented, and that each outstanding share of Rose
Common Stock is converted into 1.2048 shares of Bancorp Common Stock (see "THE
ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion Rate and Exchange of
Shares and Options").
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
----------------- ----------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amounts per common share:
The Bancorp historical
Net income(1)(2) $ .80 $ .70 $ 1.02 $ .94 $ .94
Book value(3) $10.59 $ 9.15 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Rose historical
Net income(1)(2) $ .72 $ 1.04 $ .56 $ .93 $ .61
Book value(3) $12.69 $12.88 $12.39 $11.80 $10.85
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Pro forma amounts per
common share of the
Bancorp
Net income(1)(4) $ .75 $ .75 $ .86 $ .89 $ .79
Book value(5) $10.57 $ 9.60 $ 9.73 $ 9.72 $ 8.77
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Pro forma amounts per
common share of Rose
Net income(1)(6) $ .90 $ .90 $ 1.04 $ 1.07 $ .95
Book value(6) $12.74 $11.57 $11.73 $11.71 $10.57
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
- --------------------------
(1) All net income per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common
stock and common stock equivalent shares outstanding for each period for
the Bancorp and Rose.
(3) Book value per share is based on the actual number of shares outstanding
at the end of the period.
(4) Pro forma net income per share is determined in the same manner as
footnote (2) above except the Rose common shares are multiplied by the
estimated Rose Conversion Rate of 1.2048.
(5) Pro forma book value per share is determined in the same manner as
footnote (3) above except the Rose common shares are multiplied by the
estimated Rose Conversion Rate of 1.2048.
(6) Rose pro forma equivalents are computed by multiplying the pro forma per
share data of the consolidated entity by the estimated Rose Conversion
Rate of 1.2048.
94
<PAGE> 109
THE BANCORP FOLLOWING THE LAKE MERGER AND THE ROSE MERGER
As stated above, both the Lake Merger and the Rose Merger will be accounted for
under the pooling of interests method of accounting. The following sets forth
certain pro forma information including pro forma consolidated condensed balance
sheets of the Bancorp following both the Lake Merger and the Rose Merger as of
September 30, 1998 and December 31, 1997 and pro forma consolidated condensed
income statements of the Bancorp following both the Lake Merger and the Rose
Merger for the nine month periods ended September 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995 (collectively referred to herein as
the "Bancorp Pro Forma Financial Information.")
The following Bancorp Pro Forma Financial Information and related notes are
based on the historical financial statements of the Bancorp, Lake and Rose,
giving effect to both the Lake Merger and the Rose Merger under the pooling of
interests method of accounting and the assumptions and adjustments in the
accompanying notes to the Bancorp Pro Forma Financial Information. The pro forma
consolidated condensed balance sheets assume both the Lake Merger and the Rose
Merger were consummated on September 30, 1998 and December 31, 1997 and the pro
forma consolidated condensed income statements assume the Lake Merger and the
Rose Merger were consummated at the beginning of each period. The Bancorp Pro
Forma Financial Information further assumes the issuance of approximately
1,417,871 shares of Bancorp Common Stock in exchange for all of the outstanding
shares of Lake Common Stock and Rose Common Stock at September 30, 1998. Such
Bancorp Pro Forma Financial Information is not necessarily indicative of the
financial position or results of operations of the Bancorp following both the
Lake Merger and the Rose Merger as it may be in the future or as it might have
been had both the Lake Merger and the Rose Merger been effected on the assumed
dates.
The Bancorp Pro Forma Financial Information should be read in conjunction with
the historical financial statements of the Bancorp, Lake and Rose and the notes
related thereto, presented elsewhere in this Joint Proxy Statement/Prospectus.
(See "INDEX TO FINANCIAL STATEMENTS" herein.)
95
<PAGE> 110
THE BANCORP PRO FORMA FINANCIAL INFORMATION BASED ON POOLING OF INTERESTS METHOD
OF ACCOUNTING
EXISTING AND PRO FORMA CONSOLIDATED CAPITALIZATION
(UNAUDITED)
The following table sets forth the existing capitalization of the Bancorp, Lake
and Rose and the pro forma consolidated capitalization of the Bancorp following
both the Lake Merger and the Rose Merger at September 30, 1998 (dollars in
thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Surviving
The Bancorp Lake Rose Adjustments(1) Corporation(1)
----------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shareholders' equity:
Common stock $ 7,381 $ 3,473 $ 2,511 $ $ 13,365
Retained earnings 2,744 5,795 2,174 10,713
Net unrealized gains on
available-for-sale
securities 268 165 19 452
----------- ----------- ---------- ----------- -----------
Total shareholders'
equity $ 10,393 $ 9,433 $ 4,704 $ $ 24,530
=========== =========== ========== =========== ===========
Authorized shares of
common stock 10,000,000 20,000,000 5,000,000 10,000,000
=========== =========== ========== =========== ===========
Outstanding shares 981,448 1,298,296 370,805 2,399,319
=========== =========== ========== =========== ===========
</TABLE>
(1) Assumes that holders of 100% of both Lake Common Stock and Rose Common
Stock convert their shares into Bancorp Common Stock and that an
aggregate of 1,417,871 shares of Bancorp Common Stock are issued in the
Lake Merger and the Rose Merger.
96
<PAGE> 111
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Pro Forma Consolidated
Bancorp Rose Lake Adjustments Balance Sheet
--------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,941 $ 4,252 $ 4,558 $ $ 15,751
Federal funds sold 10,600 10,050 3,500 24,150
Loans held for sale 2,786 305 620 3,711
Interest-bearing deposits in banks 4,554 4,554
Investment securities:
Available-for-sale 30,544 4,218 12,041 46,803
Held-to-maturity 2,889 2,889
--------- -------- --------- --------- ---------
Total investments 33,433 4,218 12,041 49,692
--------- -------- --------- --------- ---------
Loans and leases:
Commercial 18,708 6,694 4,449 29,851
Real estate 46,634 15,325 28,980 90,939
Real estate construction 7,686 6,965 1,157 15,808
Lease financing 1,442 1,442
Agricultural 18,026 18,026
Consumer 583 2,184 2,530 5,297
--------- -------- --------- --------- ---------
Total loans 75,053 31,168 55,142 161,363
Deferred fees and costs, net (209) (76) (204) (489)
Allowance for loan and lease losses (1,025) (296) (1,161) (2,482)
--------- -------- --------- --------- ---------
Net loans 73,819 30,796 53,777 158,392
--------- -------- --------- --------- ---------
Other real estate 1,553 630 2,183
Bank premises and equipment, net 3,481 1,646 2,894 8,021
Accrued interest receivable and other assets 2,668 2,104 2,467 7,239
--------- -------- --------- --------- ---------
$ 135,281 $ 53,371 $ 85,041 $ $ 273,693
========= ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 31,552 $ 10,880 $ 12,765 $ $ 55,197
Interest-bearing 92,177 37,596 62,106 191,879
--------- -------- --------- --------- ---------
Total deposits 123,729 48,476 74,871 247,076
Accrued interest payable and other liabilities 1,159 191 737 2,087
--------- -------- --------- --------- ---------
Total liabilities 124,888 48,667 75,608 249,163
--------- -------- --------- --------- ---------
Shareholders' equity:
Common stock 7,381 2,511 3,473 13,365
Retained earnings 2,744 2,174 5,795 10,713
Unrealized gains on available-for-sale
investment securities, net of taxes 268 19 165 452
--------- -------- --------- --------- ---------
Total shareholders' equity 10,393 4,704 9,433 24,530
--------- -------- --------- --------- ---------
$ 135,281 $ 53,371 $ 85,041 $ $ 273,693
========= ======== ========= ========= =========
</TABLE>
97
<PAGE> 112
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Pro Forma Consolidated
Bancorp Rose Lake Adjustments Balance Sheet
--------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,296 $ 1,830 $ 5,236 $ $ 12,362
Federal funds sold 6,550 6,720 4,000 17,270
Loans held for sale 1,767 227 680 2,674
Interest-bearing deposits in banks 4,557 4,557
Investment securities:
Available-for-sale 15,799 4,010 11,976 31,785
Held-to-maturity 4,950 4,950
--------- --------- --------- -------- ---------
Total investments 20,749 4,010 11,976 36,735
--------- --------- --------- -------- ---------
Loans and leases:
Commercial 14,882 8,715 5,045 28,642
Real estate 40,052 16,279 32,003 88,334
Real estate construction 13,263 7,319 435 21,017
Lease financing 698 698
Agricultural 13,942 13,942
Consumer 615 2,623 2,919 6,157
--------- --------- --------- -------- ---------
Total loans 69,510 34,936 54,344 158,790
Deferred fees and costs, net (371) (86) (182) (639)
Allowance for loan and lease losses (948) (724) (952) (2,624)
--------- --------- --------- -------- ---------
Net loans 68,191 34,126 53,210 155,527
--------- --------- --------- -------- ---------
Other real estate 967 598 1,565
Bank premises and equipment, net 3,027 1,721 3,077 7,825
Accrued interest receivable and other assets 2,313 1,954 2,186 6,453
--------- --------- --------- -------- ---------
$ 108,860 $ 50,588 $ 85,520 $ $ 244,968
========= ========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 19,215 $ 8,527 $ 12,927 $ $ 40,669
Interest-bearing 79,494 37,823 63,112 180,429
--------- --------- --------- -------- ---------
Total deposits 98,709 46,350 76,039 221,098
Accrued interest payable and other liabilities 1,153 274 821 2,248
--------- --------- --------- -------- ---------
Total liabilities 99,862 46,624 76,860 223,346
--------- --------- --------- -------- ---------
Shareholders' equity:
Common stock 7,001 2,021 3,178 12,200
Retained earnings 1,908 1,932 5,442 9,282
Unrealized gains on available-for-sale
investment securities, net of taxes 89 11 40 140
--------- --------- --------- -------- ---------
Total shareholders' equity 8,998 3,964 8,660 21,622
--------- --------- --------- -------- ---------
$ 108,860 $ 50,588 $ 85,520 $ $ 244,968
========= ========= ========= ======== =========
</TABLE>
98
<PAGE> 113
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
----------------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Consolidated
----------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,550 $ 2,524 $ 3,935 $ $ 12,009
Interest on deposits in banks 223 223
Interest on investment securities 1,134 174 497 1,805
Interest on federal funds sold 320 292 184 796
---------- -------- ---------- ---------- ----------
Total interest income 7,004 2,990 4,839 14,833
Interest expense on deposits 2,601 1,303 1,916 5,820
---------- -------- ---------- ---------- ----------
Net interest income 4,403 1,687 2,923 9,013
Provision for loan and lease losses 250 105 270 625
---------- -------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 4,153 1,582 2,653 8,388
---------- -------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 534 51 494 1,079
Gain on sale of loans 1,093 187 10 1,290
Other 215 177 392
---------- -------- ---------- ---------- ----------
Total noninterest income 1,842 415 504 2,761
---------- -------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,621 705 1,416 4,742
Occupancy 324 105 213 642
Equipment 420 98 272 790
Other 1,323 686 756 2,765
---------- -------- ---------- ---------- ----------
Total other expenses 4,688 1,594 2,657 8,939
---------- -------- ---------- ---------- ----------
Income before income taxes 1,307 403 500 2,210
Income taxes 472 161 147 780
---------- -------- ---------- ---------- ----------
Net income $ 835 $ 242 $ 353 $ $ 1,430
========== ======== ========== ========== ==========
Basic earnings per share $ 0.86 $ 0.75 $ 0.28 $ $ 0.62
========== ======== ========== ========== ==========
Weighted average shares of common stock 970,810 320,158 1,265,387 2,303,046(1)
========== ======== ========== ========== ==========
Diluted earnings per share $ 0.80 $ 0.72 $ 0.27 $ $ 0.59
========== ======== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,038,285 333,661 1,329,428 2,434,692(1)
========== ======== ========== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 and the weighted average shares for Rose before
the combination multiplied by the Rose Conversion Rate of 1.2048 to the
weighted average shares for the Bancorp before the combination at the
beginning of all periods presented. The Lake Conversion Rate and the
Rose Conversion Rate are based on the formulas included at "THE LAKE
MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of
Shares and Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose
Conversion Rate and Exchange of Shares and Options" using the
shareholders' equity and outstanding shares at September 30, 1998 and
the Bancorp Average Trading Price of $17.00 per share.
99
<PAGE> 114
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1997
-------------------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Consolidated
----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,106 $ 2,432 $ 4,146 $ $ 11,684
Interest on deposits in banks 165 165
Interest on investment securities 912 202 434 1,548
Interest on federal funds sold 150 210 123 483
---------- --------- ---------- ---------- ----------
Total interest income 6,168 2,844 4,868 13,880
Interest expense on deposits 2,217 1,198 1,895 5,310
---------- --------- ---------- ---------- ----------
Net interest income 3,951 1,646 2,973 8,570
Provision for loan and lease losses 193 126 270 589
---------- --------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,758 1,520 2,703 7,981
---------- --------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 557 41 389 987
Gain on sale of loans 562 57 17 636
Gain (loss) on sale of investment securities 16 (8) 8
Other 208 122 15 345
---------- --------- ---------- ---------- ----------
Total noninterest income 1,343 220 413 1,976
---------- --------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,094 604 1,267 3,965
Occupancy 296 79 204 579
Equipment 337 69 257 663
Other 1,213 423 680 2,316
---------- --------- ---------- ---------- ----------
Total other expenses 3,940 1,175 2,408 7,523
---------- --------- ---------- ---------- ----------
Income before income taxes 1,161 565 708 2,434
Income taxes 453 226 258 937
---------- --------- ---------- ---------- ----------
Net income $ 708 $ 339 $ 450 $ $ 1,497
========== ========= ========== ========== ==========
Basic earnings per share $ 0.73 $ 1.06 $ 0.36 $ $ 0.66
========== ========= ========== ========== ==========
Weighted average shares of common stock 965,403 319,972 1,240,546 2,278,834(1)
========== ========= ========== ========== ==========
Diluted earnings per share $ 0.70 $ 1.04 $ 0.35 $ $ 0.64
========== ========= ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,009,311 324,648 1,276,729 2,355,440(1)
========== ========= ========== ========== ==========
</TABLE>
- --------------------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 and the weighted average shares for Rose before
the combination multiplied by the Rose Conversion Rate of 1.2048 to the
weighted average shares for the Bancorp before the combination at the
beginning of all periods presented. The Lake Conversion Rate and the
Rose Conversion Rate are based on the formulas included at "THE LAKE
MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of
Shares and Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose
Conversion Rate and Exchange of Shares and Options" using the
shareholders' equity and outstanding shares at September 30, 1998 and
the Bancorp Average Trading Price of $17.00 per share.
100
<PAGE> 115
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Consolidated
----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 6,978 $ 3,287 $ 5,529 $ $ 15,794
Interest on deposits in banks 233 233
Interest on investment securities 1,242 266 595 2,103
Interest on federal funds sold 210 342 203 755
----------- ----------- ---------- ---------- ----------
Total interest income 8,430 3,895 6,560 18,885
Interest expense on deposits 3,051 1,664 2,562 7,277
---------- ---------- ---------- ---------- ----------
Net interest income 5,379 2,231 3,998 11,608
Provision for loan and lease losses 243 564 263 1,070
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 5,136 1,667 3,735 10,538
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 765 58 442 1,265
Gain on sale of loans 972 99 49 1,120
Gain (loss) on sale of investment securities 21 (8) 13
Other 279 184 147 610
---------- ---------- ---------- ---------- ----------
Total noninterest income 2,037 341 630 3,008
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,988 818 1,617 5,423
Occupancy 400 148 214 762
Equipment 461 29 343 833
Other 1,682 698 1,048 3,428
---------- ---------- ---------- ---------- ----------
Total other expenses 5,531 1,693 3,222 10,446
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,642 315 1,143 3,100
Income taxes 639 133 377 1,149
---------- ---------- ---------- ---------- ----------
Net income $ 1,003 $ 182 $ 766 $ $ 1,951
========== ========== ========== ========== ==========
Basic earnings per share $ 1.08 $ 0.57 $ 0.62 $ $ 0.87
========== ========== ========== ========== ==========
Weighted average shares of common stock 932,531 319,972 1,240,546 2,245,962(1)
========== ========== ========== ========== ==========
Diluted earnings per share $ 1.02 $ 0.56 $ 0.59 $ $ 0.83
========== ========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 986,706 324,648 1,297,954 2,348,712(1)
========== ========== ========== ========== ==========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 and the weighted average shares for Rose before
the combination multiplied by the Rose Conversion Rate of 1.2048 to the
weighted average shares for the Bancorp before the combination at the
beginning of all periods presented. The Lake Conversion Rate and the Rose
Conversion Rate are based on the formulas included at "THE LAKE MERGER AND
RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of Shares and
Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity and
outstanding shares at September 30, 1998 and the Bancorp Average Trading
Price of $17.00 per share.
101
<PAGE> 116
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Consolidated
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 5,544 $ 2,545 $ 5,704 $ $ 13,793
Interest on deposits in banks 198 198
Interest on investment securities 751 232 777 1,760
Interest on federal funds sold 146 251 168 865
---------- ---------- ---------- ---------- ----------
Total interest income 6,441 3,028 6,847 16,316
Interest expense on deposits 2,185 1,331 2,845 6,361
---------- ---------- ---------- ---------- ----------
Net interest income 4,256 1,697 4,002 9,955
Provision for loan and lease losses 458 89 477 1,024
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,798 1,608 3,525 8,931
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 688 33 415 1,136
Gain on sale of loans 684 58 146 888
Gain (loss) on sale of investment securities 11 20 31
Other 309 137 97 543
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,692 228 678 2,598
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,355 701 1,683 4,739
Occupancy 352 53 255 660
Equipment 399 97 342 838
Other 1,176 479 1,244 2,899
---------- ---------- ---------- ---------- ----------
Total other expenses 4,282 1,330 3,524 9,136
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,208 506 679 2,393
Income taxes 470 204 203 877
---------- ---------- ---------- ---------- ----------
Net income $ 738 $ 302 $ 476 $ $ 1,516
========== ========== ========== ========== ==========
Basic earnings per share $ 0.97 $ 0.94 $ 0.38 $ $ 0.73
========== ========== ========== ========== ==========
Weighted average shares of common stock 759,017 319,872 1,240,491 2,072,286(1)
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.94 $ 0.93 $ 0.36 $ $ 0.70
========== ========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 782,318 324,622 1,308,758 2,152,374(1)
========== ========== ========== ========== ==========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 and the weighted average shares for Rose before
the combination multiplied by the Rose Conversion Rate of 1.2048 to the
weighted average shares for the Bancorp before the combination at the
beginning of all periods presented. The Lake Conversion Rate and the Rose
Conversion Rate are based on the formulas included at "THE LAKE MERGER AND
RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of Shares and
Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity and
outstanding shares at September 30, 1998 and the Bancorp Average Trading
Price of $17.00 per share.
102
<PAGE> 117
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Consolidated
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 4,938 $ 2,164 $ 5,794 $ $ 12,896
Interest on deposits in banks 160 160
Interest on investment securities 605 274 819 1,698
Interest on federal funds sold 141 226 229 596
---------- ---------- ---------- ---------- ----------
Total interest income 5,684 2,664 7,002 15,350
Interest expense on deposits 1,875 1,288 3,056 6,219
---------- ---------- ---------- ---------- ----------
Net interest income 3,809 1,376 3,946 9,131
Provision for loan and lease losses 80 55 210 345
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 3,729 1,321 3,736 8,786
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 690 21 444 1,155
Gain on sale of loans 427 32 115 574
Gain (loss) on sale of investment securities (30) 40 10
Other 140 73 82 295
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,227 126 681 2,034
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,091 578 1,689 4,358
Occupancy 308 58 182 548
Equipment 369 87 237 693
Other 1,160 422 1,193 2,775
---------- ---------- ---------- ---------- ----------
Total other expenses 3,928 1,145 3,301 8,374
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,028 302 1,116 2,446
Income taxes 377 104 335 816
---------- ---------- ---------- ---------- ----------
Net income $ 651 $ 198 $ 781 $ $ 1,630
========== ========== ========== ========== ==========
Basic earnings per share $ 0.96 $ 0.62 $ 0.63 $ $ 0.82
========== ========== ========== ========== ==========
Weighted average shares of common stock 681,030 319,572 1,239,791 1,993,414(1)
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.94 $ 0.61 $ 0.59 $ $ 0.79
========== ========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 689,696 324,530 1,315,310 2,064,542(1)
========== ========== ========== ========== ==========
</TABLE>
- ----------------
(1) Weighted average shares of common stock and common stock equivalents for
the pro forma consolidated entity was determined by adding the weighted
average shares for Lake before the combination multiplied by the Lake
Conversion Rate of .7480 and the weighted average shares for Rose before
the combination multiplied by the Rose Conversion Rate of 1.2048 to the
weighted average shares for the Bancorp before the combination at the
beginning of all periods presented. The Lake Conversion Rate and the Rose
Conversion Rate are based on the formulas included at "THE LAKE MERGER AND
RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of Shares and
Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Rose Conversion
Rate and Exchange of Shares and Options" using the shareholders' equity and
outstanding shares at September 30, 1998 and the Bancorp Average Trading
Price of $17.00 per share.
103
<PAGE> 118
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth selected historical financial information for the
Bancorp, Lake and Rose and pro forma consolidated financial information with
respect to both the Lake Merger and the Rose Merger. The table assumes that both
the Lake Merger and the Rose Merger were consummated at the beginning of the
periods presented, that each outstanding share of Lake Common Stock is converted
into .7480 shares of Bancorp Common Stock, and that each outstanding share of
Rose Common Stock is converted into 1.2048 shares of Bancorp Common Stock (see
"THE LAKE MERGER AND RELATED TRANSACTIONS--Lake Conversion Rate and Exchange of
Shares and Options" and "THE ROSE MERGER AND RELATED TRANSACTIONS --Rose
Conversion Rate and Exchange of Shares and Options").
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amounts per common share:
The Bancorp historical
Net income(1)(2) $ .80 $ .70 $ 1.02 $ .94 $ .94
Book value(3) $10.59 $ 9.15 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Lake historical
Net income(1)(2) $ .27 $ .35 $ .59 $ .36 $ .59
Book value(3) $ 7.27 $ 6.98 $ 6.98 $ 6.57 $ 6.50
Dividends declared $ 0 $ 0 $ .27 $ .20 $ .20
Rose historical
Net income(1)(2) $ .72 $ 1.04 $ .56 $ .93 $ .61
Book value(3) $12.69 $12.88 $12.39 $11.80 $10.85
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Pro forma amounts per
common share of the Bancorp
Net income(1)(4) $ .59 $ .64 $ .83 $ .70 $ .79
Book value(5) $10.22 $ 9.49 $ 9.57 $ 9.31 $ 8.73
Dividends declared(6) $ 0 $ 0 $ .15 $ .12 $ .13
Pro forma amounts per
common share of Lake
Net income(1)(7) $ .44 $ .48 $ .62 $ .52 $ .59
Book value(7) $ 7.65 $ 7.10 $ 7.16 $ 6.96 $ 6.53
Dividends declared(7) $ 0 $ 0 $ .11 $ .09 $ .10
Pro forma amounts per
common share of Rose
Net income(1)(7) $ .71 $ .77 $ 1.00 $ .84 $ .95
Book value(7) $12.32 $11.43 $11.53 $11.21 $10.52
Dividends declared(7) $ 0 $ 0 $ .18 $ .14 $ .16
</TABLE>
- --------------------------
(1) All net income per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common
stock and common stock equivalent shares outstanding for each period for
each entity.
(Footnotes continued on the following page.)
104
<PAGE> 119
(3) Book value per share is based on the actual number of shares outstanding
at the end of the period.
(4) Pro forma net income per share is determined in the same manner as
footnote (2) above except the Lake common shares are multiplied by the
estimated Lake Conversion Rate of .7480 and the Rose common shares are
multiplied by the estimated Rose Conversion Rate of 1.2048.
(5) Pro forma book value per share is determined in the same manner as
footnote (3) above except the Lake common shares are multiplied by the
estimated Lake Conversion Rate of .7480 and the Rose common shares are
multiplied by the estimated Rose Conversion Rate of 1.2048.
(6) Pro forma amounts assume that the Bancorp would have declared cash
dividends per share equal to the Lake dollar amount of dividends
declared divided by the pro forma shares outstanding after the
combination.
(7) Lake pro forma equivalents are computed by multiplying the pro forma per
share data of the combined entity by the estimated Lake Conversion Rate
of .7480 and Rose pro forma equivalents are computed by multiplying the
pro forma per share data of the combined entity by the estimated Rose
Conversion Rate of 1.2048.
REGULATORY CAPITAL ADEQUACY
The following table sets forth, as of September 30, 1998, the regulatory capital
ratios of the Bancorp, Lake and Rose on a historical basis, the Bancorp on a pro
forma basis assuming consummation of the Lake Merger, the Bancorp on a pro forma
basis assuming consummation of the Rose Merger, the Bancorp on a pro forma basis
assuming consummation of both the Lake Merger and the Rose Merger, and the
minimum regulatory capital ratios.
<TABLE>
<CAPTION>
The
Minimum Bancorp Lake Rose
------- ------- ---- ----
<S> <C> <C> <C> <C>
Leverage ratio 5.0% 8.5% 11.0% 9.3%
Tier 1 risk-based
capital ratio 4.0% 11.2% 13.5% 11.7%
Total risk-based
capital ratio 8.0% 12.4% 14.8% 12.4%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Lake Merger
------- -----------
<S> <C> <C>
Leverage ratio 5.0% 9.5%
Tier 1 risk-based
capital ratio 4.0% 12.2%
Total risk-based
capital ratio 8.0% 13.4%
</TABLE>
105
<PAGE> 120
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Rose Merger
------- -----------
<S> <C> <C>
Leverage ratio 5.0% 8.7%
Tier 1 risk-based
capital ratio 4.0% 11.3%
Total risk-based
capital ratio 8.0% 12.4%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp Following
Both the Lake Merger
Minimum and the Rose Merger
------- -------------------
<S> <C> <C>
Leverage ratio 5.0% 9.5%
Tier 1 risk-based
capital ratio 4.0% 12.1%
Total risk-based
capital ratio 8.0% 13.2%
</TABLE>
106
<PAGE> 121
DESCRIPTION OF THE BANCORP
BUSINESS
GENERAL. The Bancorp was incorporated under the laws of the State of California
on July 11, 1996. The Bancorp was organized pursuant to a plan of reorganization
for the purpose of becoming the parent corporation of WSNB, and on December 31,
1996, the reorganization was effected and shares of Bancorp Common Stock were
issued to the shareholders of WSNB for the common shares held by WSNB's
shareholders. The Bancorp is a registered bank holding company under the Bank
Holding Company Act of 1956. The Bancorp conducts its operations at the head
office of WSNB located at 4011 Plaza Goldorado Circle, Cameron Park, California
95682.
WSNB was organized under national banking laws and commenced operations as a
national bank on January 4, 1984. WSNB is a member of the Federal Reserve System
and its deposits are insured to the maximum amount permitted by law by the FDIC.
WSNB's head office is located at 4011 Plaza Goldorado Circle, Cameron Park,
California and its branch offices are located at 2661 Sanders Drive, Pollock
Pines, 3970 J Missouri Flat Road, Placerville, 1450 Broadway, Placerville, 3919
Park Drive, El Dorado Hills, and 571 5th Street, Lincoln. WSNB does not have any
affiliates or subsidiaries. WSNB also has two loan production offices located at
3161 Cameron Park Drive, Suite 101, Cameron Park, and 1900 Point West Way, Suite
101, Sacramento.
BANKING SERVICES. The Bancorp is a locally owned and operated bank holding
company, and its primary service area is the Northern California communities of
Cameron Park, Pollock Pines, Placerville, El Dorado Hills and Lincoln. The
Bancorp also services the Sacramento community through its loan production
office. The Bancorp's primary business is servicing the banking needs of these
communities and its marketing strategy stresses its local ownership and
commitment to serve the banking needs of individuals living and working in the
Bancorp's primary service areas and local businesses, including retail,
professional and real estate-related activities in those service areas.
The Bancorp offers a broad range of services to individuals and businesses in
its primary service area with an emphasis upon efficiency and personalized
attention. The Bancorp provides a full line of consumer services and also offers
specialized services, such as courier services and appointment banking to small
businesses, middle market companies and professional firms. WSNB offers personal
and business checking and savings accounts (including individual
interest-bearing negotiable orders of withdrawal ("NOW"), money market accounts
and/or accounts combining checking and savings accounts with automatic
transfer), IRA accounts, time certificates of deposit and direct deposit of
social security, pension and payroll checks and computer cash management with
plans to institute PC Banking during 1998. WSNB also makes available commercial,
construction, accounts receivable, inventory, automobile, home improvement, real
estate, commercial real estate, single family mortgage, Small Business
Administration, office equipment, leasehold improvement and installment loans
(as well as overdraft protection lines of credit), issues drafts and standby
letters of credit, sells travelers' checks (issued by an independent entity),
offers ATM's tied in with major statewide and national networks, provides
banking by appointment outside WSNB's normal office hours, extends special
considerations to senior citizens and offers other customary commercial banking
services.
Most of WSNB's deposits are obtained from commercial businesses, professionals
and individuals. At September 30, 1998, WSNB had a total of 6,287 accounts
consisting of demand deposit, NOW and money market accounts with an average
balance of approximately $7,705; 3,003 savings accounts with an average balance
of approximately $2,370; time certificates of $100,000 or more with an average
balance of approximately $253,286; and other time deposits with an average
balance of approximately $23,280. WSNB has not obtained any deposits through
deposit brokers and has no present intention of using brokered deposits. There
is no concentration of deposits or any customer with 5% or more of WSNB's
deposits other than one locally-owned title company which holds 7.2% of WSNB's
deposits and one director of the Bancorp who holds 6.9% of WSNB's deposits.
107
<PAGE> 122
Other special services and products include economy personal and business
checking products, computer cash management products and mortgage products and
services.
EMPLOYEES. At September 30, 1998, the Bancorp and its subsidiaries employed 92
persons on a full-time equivalent basis. The Bancorp believes its employee
relations are excellent.
PROPERTIES. The Bancorp and its subsidiary own the real property located at 4011
Plaza Goldorado Circle, Cameron Park, California. The building situated on the
property consists of 6,842 square feet and houses the executive and head offices
of the Bancorp and WSNB.
The Bancorp and its subsidiary also own the real property located at 3970 J
Missouri Flat Road, Placerville, California. The building situated on the
property consists of approximately 3,707 square feet and houses the West
Placerville branch office of WSNB.
On July 24, 1998, the Bancorp and its subsidiary purchased property in El Dorado
Hills for the purpose of building a stand-alone branch to be completed during
the first quarter of the year 2000. The property is located on El Dorado Hills
Boulevard.
The Bancorp is also in escrow for the purchase of additional property adjacent
to the Bancorp's and WSNB's executive and head offices at 4011 Plaza Goldorado
Circle for the purpose of expanding the Bancorp's administration. The Bancorp's
data processing department will be moved from the existing Placerville branch
located on Broadway which will be downsized at that time, reducing the overhead
fee for the Placerville Broadway branch. The land acquisition will allow for
future growth and expanded parking. It is estimated that the first expansion to
meet the Bancorp's immediate needs will be completed in approximately
twenty-four months. The Bancorp expects escrow to close on the property in the
near future.
The Bancorp and its subsidiary lease the premises of WSNB's Placerville branch
office located at 1450 Broadway, Placerville, California. The lease is presently
for a term expiring June 30, 2002. The office space at this branch consists of
approximately 6,500 square feet.
The Bancorp and its subsidiary lease the premises of WSNB's Pollock Pines branch
office located at 2661 Sanders Drive, Pollock Pines, California. The premises
are leased for a term expiring on July 31, 2000. The office space at this branch
consists of approximately 1,520 square feet.
The Bancorp and its subsidiary lease the premises of WSNB's El Dorado Hills
branch office located at 3919 Park Drive, Suite 110, El Dorado Hills,
California. The premises are leased for a term expiring on July 31, 1999. The
office space of this branch consists of approximately 1,800 square feet.
The Bancorp and its subsidiary lease the premises of WSNB's Lincoln branch
office located at 571 5th Street, Lincoln, California. The premises are leased
for a term expiring on September 30, 2002. The office space of this branch
consists of approximately 5,500 square feet.
The Bancorp and its subsidiary lease the premises of WSNB's Mortgage Division
located at 3161 Cameron Park Drive, Suite 101, Cameron Park, California. The
premises are leased for a term expiring on March 31, 1999. The office space at
this site consists of approximately 1,353 square feet.
The Bancorp and its subsidiary lease the premises of WSNB's Mortgage Division
Branch at 1900 Point West Way, Suite 101, Sacramento, California. The premises
are leased for a term expiring on March 31, 2000. The office space at this site
consists of approximately 896 square feet.
108
<PAGE> 123
LEGAL PROCEEDINGS. From time to time, the Bancorp and/or WSNB is a party to
claims and legal proceedings arising in the ordinary course of business. The
Bancorp's management is not aware of any material pending litigation proceedings
to which either it or WSNB is a party or has recently been a party, which will
have a material adverse effect on the financial condition or results of
operations of the Bancorp and WSNB taken as a whole.
SUPERVISION AND REGULATION. The Bancorp is a bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and is
registered as such with and is subject to the supervision of the FRB. Generally,
a bank holding company is required to obtain the approval of the FRB before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, the bank holding company would own or control more than
5% of the voting shares of such bank. The FRB's approval is also required for
the merger or consolidation of bank holding companies.
The Bancorp is required to file reports with the FRB and provide such additional
information as the FRB may require. The FRB also has the authority to examine
the Bancorp and each of its subsidiaries, as well as any arrangements between
the Bancorp and any of its subsidiaries, with the cost of any such examination
to be borne by the Bancorp.
Banking subsidiaries of bank holding companies are also subject to certain
restrictions imposed by federal law in dealings with their holding companies and
other affiliates. Subject to certain restrictions set forth in the Federal
Reserve Act, a bank can loan or extend credit to an affiliate, purchase or
invest in the securities of an affiliate, purchase assets from an affiliate, or
issue a guarantee, acceptance, or letter of credit on behalf of an affiliate;
provided that the aggregate amount of the above transactions of the bank and its
subsidiaries does not exceed 10 percent of the capital stock and surplus of the
bank on a per affiliate basis or 20 percent of the capital stock and surplus of
the bank on an aggregate affiliate basis. In addition, such transactions must be
on terms and conditions that are consistent with safe and sound banking
practices and, in particular, a bank and its subsidiaries generally may not
purchase from an affiliate a low-quality asset, as that term is defined in the
Federal Reserve Act. Such restrictions also prevent a bank holding company and
its other affiliates from borrowing from a banking subsidiary of the bank
holding company unless the loans are secured by marketable collateral of
designated amounts. Further, the Bancorp and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services.
A bank holding company is prohibited from itself engaging in or acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
company engaged in nonbanking activities. One of the principal exceptions to the
prohibition is for activities found by the FRB by order or regulation to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public which outweigh possible adverse effects.
Federal Reserve Regulation "Y" sets out those activities which are regarded as
closely related to banking or managing or controlling banks, and thus, are
permissible activities that may be engaged in by bank holding companies subject
to approval in individual cases by the FRB. Most of these activities are now
permitted for national banks. There has been litigation challenging the validity
of certain activities authorized by the FRB for bank holding companies, and the
FRB has various regulations in this regard still under consideration. The future
scope of permitted activities is uncertain.
WSNB is subject to primary supervision, examination and regulation by the
Comptroller. The deposits of WSNB are insured by the FDIC to applicable limits.
WSNB is also subject to applicable regulations of the FDIC and the FRB, and in
addition the provisions of California law, insofar as they are not preempted by
federal banking law. As a consequence of the extensive regulation of commercial
banking activities in California and the United States,
109
<PAGE> 124
WSNB's business is particularly susceptible to changes in California and federal
legislation and regulations, which may have the effect of increasing the cost of
doing business, limiting permissible activities or increasing competition.
Various other requirements and restrictions under the laws of the United States
and the State of California affect the operations of WSNB. Federal and
California statutes and regulations relate to many aspects of WSNB's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, branching, capital
requirements and disclosure obligations to depositors and borrowers. The
Comptroller regulates the number and locations of the branch offices of a
national bank, but may only permit a national bank to maintain branches in
locations and under the conditions imposed by state laws upon state banks.
California law presently permits a bank to locate a branch office in any
locality in the state. Additionally, California law exempts banks, including
national banks, from California usury laws.
SUMMARY OF EARNINGS
The following consolidated Summary of Earnings of the Bancorp and subsidiary for
the three years ended December 31, 1997 has been derived from financial
statements audited by Perry-Smith & Co., LLP, independent certified public
accountants, as described in their report included elsewhere in this Joint Proxy
Statement/Prospectus. The amounts shown for the nine months ended September 30,
1998 and 1997 are unaudited. The September 30, 1998 and 1997 amounts reflect, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such periods. These statements should be read in conjunction with the Financial
Statements and the Notes relating thereto which appear elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,(1)
(Dollars in thousands, -------------------------- ------------------------------------
except per share data) 1998 1997 1997 1996 1995
---------- ---------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 7,004 $ 6,168 $ 8,430 $ 6,441 $ 5,684
Interest expense 2,601 2,217 3,051 2,185 1,875
Net interest income 4,403 3,951 5,379 4,256 3,809
Provision for loan and lease losses 250 193 243 458 80
Net interest income after
provision for loan and lease losses 4,153 3,758 5,136 3,798 3,729
Other noninterest income 1,842 1,343 2,037 1,692 1,227
Noninterest expense 4,688 3,940 5,531 4,282 3,928
Earnings before income taxes 1,307 1,161 1,642 1,208 1,028
Provision for income taxes(2) 472 453 639 470 377
Net income 835 708 1,003 738 651
Basic earnings per share $ .86 $ .73 $ 1.08 $ .97 $ .96
Number of shares used in basic
earnings per share calculation(3) 970,810 965,403 932,531 759,017 681,030
Diluted earnings per share $ .80 $ .70 $ 1.02 $ .94 $ .94
Number of shares used in diluted
earnings per share calculation(4) 1,038,285 1,009,311 986,706 782,318 689,696
</TABLE>
- -------------------
(1) See Notes to Financial Statements for a summary of significant accounting
policies and other related data.
(2) See Notes to Financial Statements for an explanation of income taxes.
(3) Basic earnings per share information is based on the weighted average
number of shares of common stock outstanding during each period.
(4) Diluted earnings per share information is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during each period.
110
<PAGE> 125
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
(Unaudited) September 30, December 31,
--------------------- ------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 12.6% 11.6% 12.7% 12.2% 13.8%
Net earnings to
average total assets(1) 1.0% 1.0% 1.0% 1.0% 1.0%
Total interest expense to
total interest income 37.1% 36.0% 36.2% 33.9% 33.0%
Other operating income to
other operating expense 39.3% 34.1% 36.8% 39.5% 31.2%
</TABLE>
- -----------------
(1) Ratios have been annualized for the nine months ended September 30, 1998
and 1997.
THE BANCORP'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is the Bancorp's management's discussion and analysis of the
significant changes in income and expense accounts presented in the Summary of
Earnings for the years ended December 31, 1997, 1996 and 1995 and the nine
months ended September 30, 1998 and 1997.
INTRODUCTION. This discussion is designed to provide a better understanding of
significant trends related to the Bancorp's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. It
should be read in conjunction with the Bancorp's audited financial statements
and unaudited interim financial statements and notes thereto and the other
financial information appearing elsewhere in this Joint Proxy
Statement/Prospectus.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income increased
from $5,684 thousand in 1995 to $6,441 thousand in 1996, and to $8,430 thousand
in 1997, representing a 13.3% increase in 1996 over 1995 and a 30.9% increase in
1997 over 1996. Total interest income increased from $6,168 thousand for the
nine months ended September 30, 1997, to $7,004 thousand for the nine months
ended September 30, 1998, representing a 13.6% increase. The total interest
income increases in the periods discussed were primarily the result of the
growth in the Bancorp's loan and investment portfolios as a result of the
acquisition of the Lincoln branch of Wells Fargo Bank and growth in the
Bancorp's established market areas. Total interest expense increased from $1,875
thousand in 1995 to $2,185 thousand in 1996 and to $3,051 thousand in 1997,
representing a 16.5% increase in 1996 over 1995 and a 39.6% increase in 1997
over 1996. The increase in interest expense in 1997 over 1996 was primarily the
result of the assumption of $6,440 thousand in deposits in connection with the
Bancorp's acquisition of the Lincoln branch of Wells Fargo Bank in February of
1997. Total interest expense increased from $2,217 thousand for the nine months
ended September 30, 1997, to $2,601 thousand for the nine months ended September
30, 1998, representing a 17.3% increase.
The Bancorp's net interest margin (net interest income divided by average
earning assets) was 6.6% in 1995, 6.3% in 1996, and 6.0% in 1997. The net
interest margin for the nine months ended September 30, 1997 was 6.1% and for
the nine months ended September 30, 1998 was 5.6%. The primary reason for the
decrease in the net interest margin for the nine months ended September 30, 1998
from the nine months ended September 30, 1997 was the increased competition for
quality loans and the overall growth and change in mix in the loan and
investment portfolios, which decreased the yield on interest-earning assets. The
overall yield on the investment portfolio decreased from 7.25% in 1996 to 6.73%
in 1997 and to 6.00% for the nine months ended September 30, 1998. During the
same periods, the yield on the loan portfolio increased from 10.18% in 1996 to
10.25% in 1997, but
111
<PAGE> 126
decreased to 10.07% for the nine months ended September 30, 1998. In addition,
while interest rates on deposits decreased, the overall mix of deposits changed
to include a greater percentage of higher yielding time deposits, which
increased the yield on interest-bearing liabilities. The growth in deposits
since 1997 resulted in the increase in interest expense for the nine months
ended September 30, 1998 over the same nine month period in 1997.
The Bancorp's net interest income increased from $3,809 thousand in 1995 to
$4,256 thousand in 1996 and to $5,379 thousand in 1997, representing an 11.7%
increase in 1996 over 1995 and a 26.4% increase in 1997 over 1996. The increases
in the periods discussed were primarily the result of the overall growth of the
Bancorp, with average interest-earning assets increasing 31.6% to $89,708
thousand in 1997 from $68,142 thousand in 1996 and 17.5% from $57,998 thousand
in 1995. During these same periods, the net interest margin decreased to 6.00%
in 1997 from 6.25% in 1996 and 6.57% in 1995. However, the increase in volume
due to the Bancorp's growth outweighed the decrease in the net interest margin
which resulted in the significant growth in net interest income discussed above.
Net interest income increased from $3,951 thousand for the nine months ended
September 30, 1997 to $4,403 thousand for the nine months ended September 30,
1998, representing an 11.4% increase. Average interest-earning assets increased
20.8% to $104,375 thousand for the nine months ended September 30, 1998 from
$86,416 thousand for the comparable period in 1997, with a decrease in the net
interest margin to 5.61% for the nine months ended September 30, 1998 from 6.08%
for the comparable period in 1997. The increase in net interest income for the
nine months ended September 30, 1998 over the nine months ended September 30,
1997 was primarily due to the reasons noted above.
The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:
ANALYSIS OF CHANGES IN NET INTEREST INCOME.
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
----------------------------------------------------------------
1997 Versus 1996 1996 Versus 1995
----------------------------- ------------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 65 $ 2 $ 63 $ 4 $ (14) $ 18
Investment securities 489 32 457 146 65 81
Loans, gross 1,435 38 1,397 607 (266) 873
------ ---- ------ ----- ----- -----
Total interest-
earnings assets 1,989 72 1,917 757 (215) 972
------ ---- ------ ----- ----- -----
NOW, MMDA 27 (10) 37 (14) (15) 1
Savings 1 0 1 (30) (16) (14)
Certificates of deposit 838 31 807 354 (80) 434
------ ---- ------ ----- ----- -----
Total interest-
bearing liabilities 866 21 845 310 (111) 421
------ ---- ------ ----- ----- -----
Net interest income $1,123 $ 51 $1,072 $ 447 $(104) $ 551
====== ==== ====== ===== ===== =====
</TABLE>
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
112
<PAGE> 127
The following is an unaudited summary of changes in earnings of the Bancorp for
the nine months ended September 30, 1998 and 1997 and for the years ended
December 31, 1997 and 1996. In the opinion of the Bancorp's management, the
following summary of changes in earnings reflects all adjustments which the
Bancorp considers necessary for a fair presentation of the results of its
operations for these periods. This summary of changes in earnings should be read
in conjunction with the Financial Statements and Notes relating thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, -------------------------------------------------
(Dollars in thousands) 1998 over 1997 1997 over 1996 1996 over 1995
-------------------- ---------------------- ----------------------
(Unaudited) Amount of % of Amount of % of Amount of % of
Change Change Change Change(1) Change Change(1)
--------- ------ --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 444 8.70% $ 1,434 25.87% $ 606 12.28%
Interest on securities 222 24.31% 490 65.25% 147 24.20%
Interest on federal funds sold 170 113.25% 65 44.72% 4 3.06%
----- ------- -----
Total interest income 836 13.55% 1,989 30.88% 757 13.32%
INTEREST EXPENSE
Interest on deposits 384 17.32% 866 39.63% 310 16.53%
----- ------- -----
Net interest income 452 11.43% 1,123 29.56% 447 11.74%
PROVISION FOR
LOAN LOSSES 57 29.53% (214) (46.72)% 378 472.50%
----- ------- -----
Net interest income after
provision for loan losses 395 10.50% 1,337 35.20% 69 1.85%
NONINTEREST INCOME
Service charges (23) (4.14)% 77 11.19% (2) (.27)%
Other income 522 66.36% 268 26.71% 467 86.86%
----- ------- -----
Total noninterest income 499 37.12% 345 20.39% 465 37.90%
----- ------- -----
OTHER EXPENSES
Salaries and related benefits 527 25.17% 632 26.84% 265 12.68%
Occupancy and
equipment expense 111 17.54% 110 14.67% 73 10.84%
Other 110 9.07% 506 43.03% 16 1.35%
----- ------- -----
Total other expenses 748 18.96% 1,248 29.15% 354 9.01%
----- ------- -----
Income before income taxes 146 12.59% 434 35.93% 180 17.50%
PROVISION FOR
INCOME TAXES 19 4.09% 169 35.96% 93 24.67%
----- ------- -----
NET INCOME $ 127 18.02% $ 265 35.91% $ 87 13.36%
===== ======= =====
</TABLE>
- ----------
(1) Increase or (decrease) over previous year amount.
NONINTEREST INCOME. Noninterest income increased from $1,227 thousand in 1995 to
$1,692 thousand in 1996 and to $2,037 thousand in 1997, representing a 37.9%
increase in 1996 over 1995 and a 20.4% increase in 1997 over 1996. Noninterest
income increased from $1,343 thousand for the nine months ended September 30,
1997 to $1,842 thousand for the nine months ended September 30, 1998,
representing a 37.1% increase. The increases in noninterest income in 1996, 1997
and the first nine months of 1998 were primarily the result of increased funding
and sales of
113
<PAGE> 128
mortgage loans in the mortgage department. The Bancorp expects
mortgage fundings and sales to continue to increase for the remainder of 1998.
OTHER EXPENSES. The continued growth of the Bancorp required additional staff
and overhead expense to support general and administrative services and
increased the cost of occupying the Bancorp's offices. Salaries were also
adjusted to be competitive with the industry and to reward performance. Other
expenses are comprised of salaries and related benefits, occupancy, equipment
and other expenses. Other expenses increased from $3,928 thousand in 1995 to
$4,282 thousand in 1996, and to $5,531 thousand in 1997, representing a 9.0%
increase in 1996 over 1995 and a 29.2% increase in 1997 over 1996. The increase
in total other expenses for the periods compared was due to the continued growth
of the Bancorp, to include the acquisition of the Lincoln branch of Wells Fargo
Bank in February of 1997.
The following table compares the various elements of other expenses as a
percentage of average assets for the years ended December 31, 1997, 1996 and
1995 and the nine months ended September 30, 1998 and 1997. (Dollars in
thousands except percentage amounts.)
<TABLE>
<CAPTION>
Salaries Occupancy Other
Average and Related & Equipment Operating
Period Assets(1) Benefits Expenses Expenses
- ------------------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Nine Months Ended
September 30,(2)
- ------------------
1998 $116,062 3.0% .9% 1.5%
1997 $ 96,917 2.9% .9% 1.7%
Year Ended
December 31,
- ------------------
1997 $ 99,453 3.0% .9% 1.7%
1996 $ 76,156 3.1% 1.0% 1.5%
1995 $ 65,029 3.2% 1.0% 1.8%
</TABLE>
- ----------
(1) Based on the average of daily balances.
(2) Expense ratios are calculated on an annualized basis.
PROVISION FOR LOAN LOSSES. The provision for loan losses corresponds directly to
the level of the allowance that management deems sufficient to offset potential
loan losses. The balance in the loan loss allowance reflects the amount which,
in management's judgement, is adequate to provide for these potential loan
losses after weighing the mix of the loan portfolio, current economic
conditions, past loan experience and such other factors as deserve recognition
in estimating loan losses.
Management allocated $243 thousand as a provision for loan losses in 1997, $458
thousand in 1996 and $80 thousand in 1995. Loans charged off net of recoveries
in 1997 were $2 thousand, in 1996 were $399 thousand and in 1995 were $51
thousand. For the nine months ended September 30, 1998, $250 thousand was
allocated as a provision for loan losses and for the nine months ended September
30, 1997, $193 thousand was allocated as a provision for loan losses. Loans
charged off net of recoveries for the nine months ended September 30, 1998 were
$173 thousand. There were no loans charged-off for the nine months ended
September 30, 1997. The ratio of the allowance for loan losses to total gross
loans was 1.37% in 1997, 1.15% in 1996, and 1.30% in 1995, and for the interim
periods was 1.37% at September 30, 1998 and 1.27% at September 30, 1997.
114
<PAGE> 129
In management's opinion, the balance of the allowance for loan losses at
September 30, 1998 was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
INCOME TAXES. Income taxes were $639 thousand in 1997, $470 thousand in 1996 and
$377 thousand in 1995. The income tax provision for the nine months ended
September 30, 1998 and 1997 was $472 thousand and $453 thousand, respectively.
NET INCOME. The net income and basic earnings per share of the Bancorp were
$1,003 thousand and $1.08 per share in 1997, $738 thousand and $.97 per share in
1996, and $651 thousand and $.96 per share in 1995, respectively. The net income
and basic earnings per share for the nine months ended September 30, 1998 were
$835 thousand and $.86 per share as compared to a net income of $708 thousand
and $.73 per share for the nine months ended September 30, 1997. The increase in
net income for the periods discussed was due to the increase in net interest
income resulting from the growth of the Bancorp and the increased gain on the
sale of mortgage loans.
LIQUIDITY. The Bancorp has an asset and liability management program allowing it
to maintain its interest margins during times of both rising and falling
interest rates and to maintain sufficient liquidity. Liquidity of the Bancorp at
December 31, 1997 was 20.4%, at December 31, 1996 was 10.8%, and at December 31,
1995 was 13.9% based on liquid assets (consisting of cash and due from banks,
investments not pledged, federal funds sold and loans available-for-sale)
divided by total liabilities. The Bancorp's management believes it maintains
adequate liquidity levels.
CAPITAL RESOURCES. The shareholders' equity accounts of the Bancorp increased
from $5,155 thousand at December 31, 1995, to $7,720 thousand at December 31,
1996 and to $8,998 thousand at December 31, 1997. These increases are
attributable to retained earnings and a $2,000 thousand stock offering of the
Bancorp in 1996. The Bancorp is subject to various regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bancorp must meet specific capital guidelines that involve quantitative
measures of the Bancorp's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bancorp's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bancorp to maintain minimum amounts and ratios of total and Tier 1
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of September 30, 1998, that the Bancorp exceeds all capital
adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the FDIC categorized the
Bancorp as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bancorp must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table below. There are no conditions or events since that notification which
management believes have changed the Bancorp's categorization.
115
<PAGE> 130
The Bancorp's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized September 30,
Requirement Requirement 1998
----------- ----------- -------------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 11.2%
Total risk-based to
risk-weighted assets 8% 10% 12.4%
Leverage to total
average assets 4-5% 5% 8.5%
</TABLE>
116
<PAGE> 131
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the unaudited average balances of the Bancorp's assets, liabilities and
shareholders' equity accounts and the percentage distribution of the items,
computed using the daily average balances, for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Months Ended
September 30,
----------------------------------------------------
(Unaudited) 1998 1997
------------------------- ------------------------
Amount Percent(1) Amount Percent(1)
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,957 4.27% $ 4,355 4.49%
Investment securities 23,900 20.59% 16,968 17.51%
Federal funds sold 7,705 6.64% 3,594 3.71%
Loans:
Commercial 16,879 14.54% 14,233 14.69%
Installment 549 0.47% 562 0.58%
Real estate 56,478 48.66% 52,059 53.72%
Ag 147 0.13% 155 0.16%
Less deferred costs (274) (0.24)% (366) (0.38)%
Less allowance for loan and lease losses (955) (0.82)% (790) (0.82)%
--------- --------
Net loans 72,824 62.75% 65,853 67.95%
--------- --------
Bank premises and equipment, net 3,000 2.58% 2,825 2.91%
OREO 1,388 1.20% 1,393 1.44%
Other assets 2,288 1.97% 1,929 1.99%
--------- --------
TOTAL ASSETS $ 116,062 100.00% $ 96,917 100.00%
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 23,578 20.32% $ 17,217 17.76%
NOW and money market 17,766 15.31% 17,610 18.17%
Savings 7,120 6.13% 7,398 7.63%
Time 37,410 32.23% 33,579 34.65%
Time > $100,000 20,373 17.55% 12,596 13.00%
--------- --------
Total deposits 106,247 91.54% 88,400 91.21%
Other liabilities 972 0.84% 669 0.69%
--------- --------
Total liabilities 107,219 92.38% 89,069 91.90%
--------- --------
Shareholders' equity:
Common stock 5,029 4.33% 5,029 5.19%
Retained earnings 3,747 3.23% 2,885 2.98%
Unearned ESOP shares (26) (0.03)%
Unrealized gain (loss) on AFS
investment securities, net 67 0.06% (40) (0.04)%
--------- --------
Total shareholders' equity 8,843 7.62% 7,848 8.10%
--------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 116,062 100.00% $ 96,917 100.00%
========= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,388 4.41% $ 3,810 5.00% $ 3,430 5.27%
Investment securities 17,832 17.93% 11,019 14.47% 9,790 15.05%
Federal funds sold 3,780 3.80% 2,671 3.51% 2,330 3.58%
Loans:
Commercial 14,557 14.64% 13,426 17.63% 16,895 25.98%
Installment 556 0.56% 672 0.88% 467 0.72%
Real estate 53,354 53.64% 40,649 53.38% 28,735 44.19%
Ag
Less deferred costs (371) (0.37)% (295) (0.39)% (219) (0.34)%
Less allowance for loan and lease losses (824) (0.83)% (683) (0.90)% (625) (0.96)%
-------- -------- --------
Net loans 67,272 67.64% 53,769 70.60% 45,253 69.59%
-------- -------- --------
Bank premises and equipment, net 2,820 2.84% 2,871 3.77% 2,513 3.87%
OREO 1,370 1.38% 633 0.83% 454 0.70%
Other assets 1,991 2.00% 1,383 1.82% 1,259 1.94%
-------- -------- --------
TOTAL ASSETS $ 99,453 100.00% $ 76,156 100.00% $ 65,029 100.00%
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 17,823 17.92% $ 13,293 17.45% $ 11,457 17.62%
NOW and money market 18,041 18.14% 15,906 20.88% 15,822 24.33%
Savings 7,361 7.40% 7,294 9.58% 7,975 12.26%
Time 34,417 34.61% 24,752 32.50% 18,656 28.69%
Time > $100,000 13,079 13.15% 7,714 10.13% 5,757 8.85%
-------- -------- --------
Total deposits 90,721 91.22% 68,959 90.54% 59,667 91.75%
Other liabilities 807 0.81% 1,146 1.53% 630 0.97%
-------- -------- --------
Total liabilities 91,528 92.03% 70,105 92.06% 60,297 92.72%
-------- -------- --------
Shareholders' equity:
Common stock 5,029 5.06% 3,604 4.72% 2,745 4.23%
Retained earnings 2,911 2.93% 2,449 3.22% 1,993 3.06%
Unearned ESOP shares (10) (0.01)%
Unrealized gain (loss) on AFS
investment securities, net (15) (0.02%) 8 0.01% (6) (0.01%)
-------- -------- --------
Total shareholders' equity 7,925 7.97% 6,051 7.94% 4,732 7.28%
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 99,453 100.00% $ 76,156 100.00% $ 65,029 100.00%
======== ======== ========
</TABLE>
(1) Percentages of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
117
<PAGE> 132
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of the Bancorp's investment securities as of September
30, 1998, December 31, 1997 and December 31, 1996. (Dollars in thousands)
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- ---------------- ---------------- ----------------- -----------------
September 30, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------ ----- ------ ----- ------ ----- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 0 0% $ 968 7.51% $6,855 6.98% $16,727 7.40% $24,550 7.29%
Municipals 0 0% 429 5.40% 0 0% 8,454 5.00% 8,883 5.00%
---- ------ ------ ------- -------
Total $ 0 0% $1,397 6.86% $6,855 6.98% $25,181 6.60% $33,433 6.68%
==== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- ---------------- ---------------- ----------------- -----------------
December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------ ----- ------ ----- ------ ----- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $997 5.17% $1,227 6.50% $6,378 7.00% $ 9,624 7.30% $18,226 6.90%
Municipals 0 0% 473 5.40% 0 0% 2,050 5.45% 2,523 5.43%
---- ------ ------ ------- -------
Total $997 5.17% $1,700 6.10% $6,378 7.00% $11,674 6.93% $20,749 6.73%
==== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- ---------------- ---------------- ----------------- -----------------
December 31, 1996 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------ ----- ------ ----- ------ ----- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $166 6.50% $2,241 6.25% $2,759 7.55% $ 6,311 7.75% $11,477 7.30%
Municipals 0 0% 258 5.40% 0 0% 0 0% 258 5.40%
---- ------ ------ ------- -------
Total $166 6.50% $2,499 6.15% $2,759 7.55% $ 6,311 7.75% $11,735 7.25%
==== ====== ====== ======= =======
</TABLE>
118
<PAGE> 133
LOAN PORTFOLIO. The Bancorp's largest historical lending categories are real
estate loans, commercial loans and installment loans. These categories accounted
for approximately 78%, 21% and 1%, respectively, of the Bancorp's total loan
portfolio at December 31, 1996, approximately 78%, 21% and 1%, respectively, of
the Bancorp's total loan portfolio at December 31, 1997 and approximately 72%,
27% and 1%, respectively, at September 30, 1998. Loans are carried at face
amount, less payments collected and the allowance for possible loan losses.
Interest on all loans is accrued monthly on a simple interest basis. Typically,
once a loan is placed on nonaccrual status, the Bancorp reverses interest
accrued through the date of transfer. Loans are placed on nonaccrual status when
principal or interest on a loan is past due 90 days or more, unless the loan is
both well-secured and in the process of collection. Interest actually received
for loans on nonaccrual status is recognized as income at the time of receipt.
Problem loans are maintained on accrual status only when management of the
Bancorp is confident of full repayment within a reasonable period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to the Bancorp's published lending rate and vary as the
Bancorp's lending rate varies. At December 31, 1996, approximately 71% of the
Bancorp's loan portfolio was comprised of variable interest rate loans, at
December 31, 1997, approximately 74% of the Bancorp's loan portfolio was
comprised of variable interest rate loans, and at September 30, 1998, variable
rate loans comprised approximately 60% of the Bancorp's loan portfolio.
DISTRIBUTION OF LOANS. The distribution of the Bancorp's total loans by type of
loan as of the dates indicated is shown in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
----------------------- --------------------------------------
Type of Loan 1998 1997 1997 1996 1995
- --------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate $ 54,319 $ 55,031 $ 53,315 $ 47,284 $ 35,281
Commercial 20,151 15,121 15,580 14,040 14,016
Installment 583 585 615 657 849
-------- -------- -------- -------- --------
TOTAL 75,053 70,737 69,510 61,981 50,146
Less:
Deferred loans fees (209) (392) (371) (372) (252)
Allowance for loan losses (1,025) (901) (948) (707) (649)
-------- -------- -------- -------- --------
TOTAL NET LOANS $ 73,819 $ 69,444 $ 68,191 $ 60,902 $ 49,245
======== ======== ======== ======== ========
</TABLE>
COMMERCIAL LOANS. Commercial loans are made for the purpose of providing working
funds, financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from 30 to 360 days,
and "term loans", which are loans with maturities normally ranging from one to
five years. Short term business loans are generally used to finance current
transactions and typically provide for periodic interest payments, with
principal being payable at maturity or periodically. Term loans normally provide
for monthly payments of both principal and interest.
The Bancorp also extends lines of credit to business customers. On business
credit lines, the Bancorp specifies a maximum amount which it stands ready to
lend to the customer during a specified period in return for which the customer
agrees to maintain its primary banking relationship with the Bancorp. The
purpose for which such loans will be used and the security therefor, if any, are
generally determined before the Bancorp's commitment is extended. Normally, the
Bancorp does not make loan commitments in material amounts for periods in excess
of one year.
119
<PAGE> 134
REAL ESTATE LOANS. Real estate loans are primarily made for the purpose of
purchasing, improving or constructing single family residences, and commercial
and industrial properties.
At September 30, 1998, approximately 58% of the Bancorp's real estate
construction loans consisted of loans secured by first trust deeds on the
construction of owner-occupied single family dwellings, and the remaining 42%
consisted of loans secured by first trust deeds on speculative single family
dwellings. Construction loans are generally written with terms of six to twelve
months and usually do not exceed a loan to appraised value ratio of 75 to 80%.
The risk associated with speculative construction lending includes the
borrower's inability to complete and sell the project, the borrower's incorrect
estimate of necessary construction funds and/or time for completion, and
economic changes, including depressed real estate values and increased interest
rates. Management has established underwriting criteria to minimize losses on
speculative construction loans by lending only to experienced developers with
proven track records. To date the Bancorp has not suffered any significant
losses through its speculative real estate construction loans. See also "RISK
FACTORS--Risks Relating to the Bancorp."
INSTALLMENT LOANS. Most installment loans are short-term loans, made for a
period of up to five years. Automobile loans are normally made with up to a
five-year amortization period.
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding of the Bancorp as of
September 30, 1998 and December 31, 1997 which, based on the remaining scheduled
repayments of principal, have the ability to be repriced or are due in less than
one year, in one to five years, or in more than five years. Management has
increased the fixed rate portion of the Bancorp's loan portfolio in 1998 in
order to diversify its loan repricing options as part of its overall
asset/liability management program.
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
September 30, 1998
- ------------------
Fixed rate $11,133 $ 7,894 $10,033 $29,060
Variable 41,955 3,583 455 45,993
------- ------- ------- -------
Total $53,088 $11,477 $10,488 $75,053
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1997
- -----------------
Fixed rate $ 8,579 $ 5,018 $ 4,133 $17,730
Variable 46,219 5,066 495 51,780
------- ------- ------- -------
Total $54,798 $10,084 $ 4,628 $69,510
======= ======= ======= =======
</TABLE>
120
<PAGE> 135
LOAN COMMITMENTS. The following table shows the Bancorp's loan commitments at
the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- ------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Commercial $ 8,608 $11,160 $ 6,827 $ 5,401 $3,287
Real estate 9,696 5,506 8,440 7,690 4,915
------- ------- ------- ------- ------
Total commitments $18,304 $16,666 $15,267 $13,091 $8,202
======= ======= ======= ======= ======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 40% of the commitments at September 30, 1998 will
be exercised during 1998.
SUMMARY OF LOAN LOSSES EXPERIENCE. As a natural corollary to the Bancorp's
lending activities, some loan losses are experienced. The risk of loss varies
with the type of loan being made and the creditworthiness of the borrower over
the term of the loan. To some extent, the degree of perceived risk is taken into
account in establishing the structure of, and interest rates and security for,
specific loans and for various types of loans. The Bancorp attempts to minimize
its credit risk exposure by use of thorough loan application and approval
procedures.
The Bancorp maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Bancorp's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Bancorp's Loan Committee. Loans for which it is probable
that the Bancorp will be unable to collect all amounts due (including principal
and interest) are considered to be impaired. The recorded investment in impaired
loans totaled $736 thousand and $1,487 thousand at September 30, 1998 and
December 31, 1997, respectively. In addition, when principal or interest on a
loan is past due 90 days or more, such loan is placed on nonaccrual status
unless it is both well-secured and in the process of collection. Loans totaling
approximately $736 thousand and $1,487 thousand were on nonaccrual status as of
September 30, 1998 and December 31, 1997, respectively. The Bancorp classifies
certain loans on nonaccrual status as impaired. Accordingly, all loans on
nonaccrual status at September 30, 1998 and December 31, 1997 are included with
the impaired loans disclosed above.
Financial difficulties encountered by certain borrowers may cause the Bancorp to
restructure the terms of their loans to facilitate loan payments. As of December
31, 1997 and 1996, the Bancorp had no troubled debt restructured loans. Interest
foregone on nonaccrual loans during the nine months ended September 30, 1998 and
the years ended December 31, 1997 and 1996 amounted to approximately $37
thousand, $96 thousand and $112 thousand, respectively.
The Bancorp charges off that portion of any loan which management or bank
examiners consider to represent a loss. A loan is generally considered by
management to represent a loss in whole or in part when an exposure beyond any
collateral value is apparent, servicing of the unsecured portion has been
discontinued or collection is not anticipated based on the borrower's financial
condition and general economic conditions in the borrower's industry. The
principal amount of any loan which is declared a loss is charged against the
Bancorp's allowance for loan losses.
121
<PAGE> 136
The following table sets forth the amount of loans on the Bancorp's books which
were 30 to 89 days past due at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, --------------------
(Dollars in thousands) 1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Commercial $ 0 $289 $ 6
Real estate 0 0 158
---- ---- ----
Total $ 0 $289 $164
==== ==== ====
</TABLE>
The following table sets forth the amount of loans on the Bancorp's books which
were on nonaccrual status at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------
(Dollars in thousands) 1998 1997 1996
------------ ------ ------
<S> <C> <C> <C>
Commercial $298 $ 428 $ 500
Real estate 439 1,059 929
---- ------ ------
Total $737 $1,487 $1,429
==== ====== ======
</TABLE>
122
<PAGE> 137
The following table summarizes the Bancorp's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- ------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $ 74,053 $ 67,009 $ 68,096 $ 54,452 $ 45,878
Loans at end of period 75,053 71,322 69,139 61,609 49,894
Loans charged off 187 0 3 403 56
Recoveries of loans
previously charged off 14 0 1 3 5
Net loans charged off 173 0 2 400 51
Allowance for loan
and lease losses 1,025 901 948 707 649
Provisions for loan
and lease losses 250 193 243 458 80
Ratios(1):
Net loan charge-offs to
average loans 0.31% 0.00% 0.00% 0.73% 0.11%
Net loan charge-offs to
loans at end of period 0.31% 0.00% 0.00% 0.65% 0.10%
Allowance for possible loan
losses to average loans 1.38% 1.34% 1.39% 1.30% 1.41%
Allowance for possible loan
losses to loans at end of period 1.37% 1.26% 1.37% 1.15% 1.30%
Net loan charge-offs to
allowance for possible loan losses 22.50% 0.00% 0.21% 56.58% 7.86%
Net loan charge-offs to
provision for possible loan losses 69.20% 0.00% 0.82% 87.34% 63.75%
</TABLE>
- ----------
(1) Annualized for the nine months ended September 30, 1998 and 1997.
The Bancorp's allowance for loan and lease losses is to provide for losses which
can be reasonably anticipated. The allowance for loan and lease losses is
established through charges to operating expenses in the form of provisions for
loan and lease losses. Provisions for loan and lease losses amounted to $243
thousand in 1997, $458 thousand in 1996 and $250 thousand for the first nine
months of 1998. The increased charge-offs and provision in 1996 reflect the
write-down of a loan secured by an apartment building in Southern California
which was acquired by the Bancorp in exchange for a problem loan. Other
increases reflect, in the opinion of management of the Bancorp, the growth of
the loan portfolio. Actual loan and lease losses or recoveries are charged or
credited, respectively, directly to the allowance for loan and lease losses. The
amount of the allowance is determined by management of the Bancorp. Among the
factors considered in determining the allowance for loan and lease losses are
the current financial condition of the Bancorp's borrowers and the value of the
security, if any, for their loans. Estimates of future economic conditions and
their impact on various industries and individual borrowers are also taken into
consideration, as are the Bancorp's historical loan loss experience and reports
of banking regulatory authorities. Because these estimates and evaluations are
primarily judgmental factors, no assurance can be given that the Bancorp
123
<PAGE> 138
may not sustain loan and lease losses substantially higher in relation to the
size of the allowance for loan and lease losses or that subsequent evaluation of
the loan portfolio may not require substantial changes in such allowance.
At December 31, 1997, 1996 and 1995, the allowance was 1.37%, 1.15%, and 1.30%,
of the loans then outstanding, respectively. At September 30, 1998, the
allowance was 1.37% of the loans then outstanding. Although the current level of
the allowance is deemed adequate by management, future provisions will be
subject to continuing reevaluation of risks in the loan portfolio.
Management of the Bancorp reviews with the Bancorp's Board of Directors the
adequacy of the allowance for loan and lease losses on a monthly basis and
adjusts the loan loss provision upward where specific items reflect a need for
such an adjustment. Management of the Bancorp charged off approximately $3
thousand in 1997, $403 thousand in 1996 and approximately $187 thousand in the
first nine months of 1998. Recoveries of loans previously charged off were $1
thousand in 1997, $3 thousand in 1996 and $14 thousand during the first nine
months of 1998. Charge-offs for 1998 are expected to consist mainly of two loans
for which the financial positions of the related borrowers changed
significantly. Management does not believe there has been any significant
deterioration in the Bancorp's loan portfolio. Management also believes that the
Bancorp has adequately reserved for all individual items in its portfolio which
may result in a loss material to the Bancorp. See "DESCRIPTION OF THE
BANCORP--The Bancorp's Management's Discussion and Analysis of Financial
Condition and Results of Operations--Provision for Loan Losses".
INVESTMENT SECURITIES. The Bancorp has invested $33,433 thousand in federal
instruments, securities issued by states and political subdivisions and other
debt securities, which yielded approximately 6.08% per annum during the first
nine months of 1998. The Bancorp's present investment policy is to invest excess
funds in federal funds, U.S. Treasuries, securities issued by the U.S.
Government and securities issued by states and political subdivisions.
INTEREST RATES AND DIFFERENTIALS. Certain information concerning
interest-earning assets and interest-bearing liabilities and yields thereon
(unaudited) is set forth in the following table. Amounts outstanding are daily
average balances:
124
<PAGE> 139
<TABLE>
<CAPTION>
Nine Months Ended
September 30,(1) Year Ended December 31,
(Dollars in thousands) --------------------- ----------------------------------
(Unaudited) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold:
Average outstanding $ 7,705 $ 3,594 $ 3,780 $ 2,671 $ 2,330
Average yield 5.54% 5.56% 5.56% 5.47% 6.05%
Interest income $ 320 $ 150 $ 210 $ 146 $ 141
Investment securities:
Average outstanding $ 23,900 $ 16,968 $ 17,832 $ 11,019 $ 9,790
Average yield 6.33% 7.17% 6.97% 6.82% 6.18%
Interest income $ 1,134 $ 912 $ 1,242 $ 751 $ 605
Loans:
Average outstanding $ 74,053 $ 67,009 $ 68,096 $ 54,452 $ 45,878
Average yield 9.99% 10.16% 10.25% 10.18% 10.76%
Interest income $ 5,550 $ 5,106 $ 6,978 $ 5,544 $ 4,938
Total interest-earning assets:
Average outstanding $105,658 $ 87,371 $ 89,708 $ 68,142 $ 57,998
Average yield 8.84% 9.39% 9.40% 9.45% 9.80%
Interest income $ 7,004 $ 6,168 $ 8,430 $ 6,441 $ 5,684
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $ 17,766 $ 17,610 $ 18,041 $ 15,906 $ 15,822
Average yield 1.61% 1.76% 1.77% 1.84% 1.93%
Interest expense $ 215 $ 232 $ 320 $ 292 $ 306
Savings deposits:
Average outstanding $ 7,120 $ 7,398 $ 7,361 $ 7,294 $ 7,975
Average yield 1.97% 2.07% 2.06% 2.08% 2.28%
Interest expense $ 105 $ 115 $ 152 $ 152 $ 182
Time deposits:
Average outstanding $ 57,783 $ 46,175 $ 47,495 $ 32,466 $ 24,413
Average yield 5.27% 5.40% 5.43% 5.33% 5.66%
Interest expense $ 2,282 $ 1,870 $ 2,579 $ 1,730 $ 1,381
Other borrowings:
Average outstanding $ 0 $ 0 $ 0 $ 0 $ 0
Average yield 0% 0% 0% 0% 0%
Interest expense $ 0 $ 0 $ 2 $ 11 $ 6
Total interest-bearing liabilities:
Average outstanding $ 82,669 $ 71,183 $ 72,897 $ 55,666 $ 48,210
Average yield 4.20% 4.15% 4.18% 3.91% 3.88%
Interest expense $ 2,602 $ 2,217 $ 3,051 $ 2,185 $ 1,875
Net interest income $ 4,402 $ 3,951 $ 5,379 $ 4,256 $ 3,809
Average net yield on
interest-earning assets 5.56% 6.02% 6.00% 6.25% 6.57%
</TABLE>
- ----------
(1) Nine month yields have been annualized.
125
<PAGE> 140
LIQUIDITY MANAGEMENT. To augment short-term liquidity, WSNB has unsecured
short-term borrowing agreements with two of its correspondent banks in the
amounts of $2,000,000 each. WSNB can also borrow up to $900,000 on an overnight
basis from the FRB. In addition, WSNB has the ability to borrow up to $880,000
on a short-term basis from the Federal Home Loan Bank secured by investment
securities with amortized costs totaling $974,379 and estimated market values
totaling $957,930. WSNB can also borrow $6,445,000 from the Federal Home Loan
Bank secured by mortgage loans totaling $10,401,000. There were no outstanding
borrowings at December 31, 1997 or September 30, 1998.
Policies have been developed by the Bancorp's management and approved by the
Bancorp's Board of Directors which establish guidelines for the investments and
liquidity of the Bancorp. These policies include an Investment Policy and an
Asset Liability Policy. The goals of these policies are to provide liquidity to
meet the financial requirements of the Bancorp's customers, maintain adequate
reserves as required by regulatory agencies and maximize earnings of the
Bancorp.
The following table shows the Bancorp's average deposits for each of the periods
indicated below, based upon average daily balances:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------------------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995
(Dollars in ------------------- ------------------- ------------------- ------------------- -----------------
thousands) Average Percent Average Percent Average Percent Average Percent Average Percent
(Unaudited) Balance of Total Balance of Total Balance of Total Balance of Total Balance of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 23,578 22.19% $ 17,217 19.48% $ 17,823 19.65% $ 13,293 19.27% $ 11,457 19.20%
NOW accounts 10,133 9.54% 9,580 10.84% 9,616 10.60% 8,371 12.14% 7,924 13.27%
Savings deposits 7,633 7.18% 8,030 9.08% 7,361 8.11% 7,294 10.58% 7,975 13.37%
Money market
deposits 7,120 6.70% 7,398 8.37% 8,425 9.29% 7,535 10.93% 7,898 13.24%
Time deposits 57,783 54.39% 46,175 52.23% 47,496 52.35% 32,466 47.08% 24,413 40.92%
-------- -------- -------- -------- --------
Total deposits $106,247 100.00% $ 88,400 100.00% $ 90,721 100.00% $ 68,959 100.00% $ 59,667 100.00%
======== ======== ======== ======== ========
</TABLE>
LIABILITY MANAGEMENT. It is management's policy to restrict the maturities of a
majority of its certificates of deposit in denominations of $100,000 or more to
less than one year. The maturities of such time certificates of deposit
("TCD's"), as well as other time deposits, were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------ -------------------------
TCD's Other TCD's Other
(Dollars in thousands) over Time over Time
(Unaudited) $100,000 Deposits $100,000 Deposits
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Less than three months $22,786 $15,375 $ 8,219 $16,056
Over three months
through twelve months 5,822 18,699 6,286 16,664
Over twelve months
through five years 1,144 3,239 1,028 3,677
Over five years 0 62 0 100
------- ------- ------- -------
Total $29,752 $37,375 $15,533 $36,497
======= ======= ======= =======
</TABLE>
126
<PAGE> 141
Time deposits in denominations in excess of $100,000, with maturities of less
than three months, increased by over $14 million at September 30, 1998. A
director of the Bancorp accounted for approximately $8 million of this increase.
This shift in the mix of time deposits to shorter maturities reduced the
effective yield of overall time deposits for the nine months ending September
30, 1998. These additional funds were invested in securities with similar
anticipated maturity dates. It is anticipated that approximately one half of the
approximately $8 million in time deposits discussed above will be withdrawn from
the Bancorp in the second quarter of 1999.
While the deposits of the Bancorp may fluctuate up and down somewhat with local
and national economic conditions, management of the Bancorp does not believe
that such deposits, or the business of the Bancorp in general, are seasonal in
nature. Liability management is monitored by the Bancorp's Board of Directors
which meets monthly.
REGULATORY MATTERS.
Capital Adequacy. The capital adequacy of banking institutions has become
increasingly important in recent years. The deregulation of the banking industry
during the 1980's has resulted in, among other things, a broadening of business
activities beyond that of traditional banking products and services. Because of
this volatility within the banking industry, regulatory agencies have increased
their focus upon ensuring that banking institutions meet certain capital
requirements as a means of protecting depositors and investors against such
volatility.
The Comptroller has adopted regulations requiring insured institutions to
maintain a minimum leverage ratio of Tier 1 capital (the sum of common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries, minus intangible assets, identified
losses and investments in certain subsidiaries) to total assets. Institutions
which have received the highest composite regulatory rating and which are not
experiencing or anticipating significant growth are required to maintain a
minimum leverage capital ratio of 3% Tier 1 capital to total assets. All other
institutions are required to maintain a minimum leverage capital ratio of at
least 100 to 200 basis points above the 3% minimum requirement.
The Comptroller has also adopted a statement of policy, supplementing its
leverage capital ratio requirements, which provided definitions of qualifying
total capital (consisting of Tier 1 capital and supplementary capital, including
the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets)
and sets forth minimum risk-based capital ratios. Insured institutions are
required to maintain a ratio of qualifying total capital to risk-weighted assets
of 8%, at least one-half (4%) of which must be in the form of Tier 1 capital.
The following table sets forth the Bancorp's capital positions at September 30,
1998 and December 31, 1997 under the regulatory guidelines discussed above:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Actual Actual Minimum
Capital Ratios Capital Ratios Capital Ratios
-------------- -------------- --------------
<S> <C> <C> <C>
Total risk-based
capital ratio 12.4% 11.9% 8.0%
Tier 1 capital to
risk-weighted assets 11.2% 10.7% 4.0%
Leverage ratio 8.5% 8.7% 3.0%
</TABLE>
127
<PAGE> 142
As is indicated by the above table, the Bancorp exceeded all applicable
regulatory capital guidelines at September 30, 1998 and December 31, 1997. The
Bancorp's management believes that, under the current regulations, the Bancorp
will continue to meet its minimum capital requirements in the foreseeable
future.
Dividends. WSNB as a national bank is subject to dividend restrictions set forth
by the Comptroller. Under such restrictions, WSNB may not, without the prior
approval of the Comptroller, declare dividends in excess of the sum of the
current year's earnings (as defined) plus the retained earnings (as defined)
from the prior two years, provided that WSNB's surplus fund is a least equal to
its common capital. If the capital surplus falls below the balance of the common
capital account, then further restrictions apply. This is not the case with
WSNB. Year-to-date dividends of $400,000 paid through September 30, 1998, were
well within the approximate maximum allowed under those regulatory guidelines,
without approval of the Comptroller.
Reserve Balances. WSNB is required to maintain average reserve balances with the
FRB. At September 30, 1998 and December 31, 1997, WSNB's qualifying balance with
the FRB was approximately $2,423 thousand and $548 thousand, respectively,
consisting of vault cash and balances.
Year 2000 Compliance. The inability of most computers, software and other
equipment utilizing microprocessors to distinguish the year 1900 from the Year
2000 poses substantial risks to all financial institutions including the
Bancorp. The Year 2000 problem is pervasive and complex. Virtually every
financial institution, service provider and vendor will have its computing
operations affected in some way by the rollover of the two-digit year value to
00 if action is not taken to fix the problem before the Year 2000 arrives.
The Bancorp is currently engaged in a five-phase management program which
includes awareness, assessment, renovation, validation, and implementation. The
Bancorp has identified all major applications and systems that may require
modification to ensure "Year 2000 Compliance." The scope of the project covers
all computer systems including PC and network hardware and software, and
mainframe hardware and software. It also covers all equipment and other systems
utilized in the Bancorp's operations or in the premises from which the Bancorp
operates.
In addition, the Bancorp has communicated with its large borrowers, corporate
customers, and major vendors upon which it relies to determine the extent to
which the Bancorp is vulnerable to those third parties if they fail to resolve
their Year 2000 issues. However, there can be no guarantee that the systems of
other companies on which the Bancorp's systems rely will be converted on time,
or that a failure to convert by another company, or a conversion that is
incompatible with the Bancorp's systems, would not have a material adverse
effect on the Bancorp.
The Bancorp will utilize both internal and external resources to implement its
Year 2000 Project. The Bancorp expects to complete the majority of its efforts
by the end of 1998 leaving adequate time to assess and correct any significant
issues that may materialize. Purchased hardware and software not specifically
related to the Year 2000 Project will be capitalized in accordance with normal
policy. Personnel and all other costs related to the project are being expensed
as incurred. The majority of these costs are expected to be incurred during
1998, and are not expected to have a material impact on the Bancorp's cash
flows, results of operations or financial condition. The Year 2000 team is
analyzing the needs of Rose and Lake Year 2000 compliance and this has been
incorporated into the costs associated with the Lake Merger and the Rose Merger
and the Bancorp's compliance schedule. The Bancorp estimates that the additional
costs associated with Year 2000 compliance will be $264 thousand on a
stand-alone basis, $324 thousand if the Lake Merger is consummated, $272
thousand if the Rose Merger is consummated and $332 thousand if both the Lake
Merger and the Rose Merger are consummated.
128
<PAGE> 143
Quantitative and Qualitative Disclosures About Market Risk. Market risk is the
risk of loss from adverse changes in market prices and rates. The Bancorp's
market risk arises primarily from interest rate risk inherent in its loan and
deposit functions and management actively monitors and manages this interest
rate risk exposure. The Bancorp does not have any market risk sensitive
instruments entered into for trading purposes. Management uses several different
tools to monitor its interest rate risk. One measure of exposure to interest
rate risk is gap analysis. A positive gap for a given period means that the
amount of interest-earning assets maturing or otherwise repricing within such
period is greater than the amount of interest-bearing liabilities maturing or
otherwise repricing within the same period. The Bancorp has a positive gap. In
addition, the Bancorp uses interest rate shock simulations to estimate the
effect of certain hypothetical rate changes. Based upon the Bancorp's shock
simulations, net interest income is expected to rise with increasing rates and
fall with declining rates.
The Bancorp's positive gap is the result of the majority of the Bancorp's
investments having terms greater than five years on the asset side. On the
liability side, the majority of the Bancorp's time deposits have average terms
of approximately six months while savings accounts and other interest-bearing
transaction accounts are recorded for gap analysis in the next day to three
month category because they do not have a contractual maturity date.
Taking into consideration that savings accounts and other interest-bearing
transaction accounts typically do not react immediately to changes in interest
rates, management has taken the following steps to manage its positive gap
position. The Bancorp has added loans tied to indices which change at a slower
rate than prime and more closely match the Bancorp's liabilities. In addition,
the Bancorp holds the majority of its investments in the available-for-sale
category in order to be able to react to changes in interest rates.
The following table sets forth the distribution of repricing opportunities of
the Bancorp's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e. interest rate sensitive assets less interest
rate sensitive liabilities), the cumulative interest rate sensitivity gap and
the cumulative gap as a percentage of total interest-earning assets as of
December 31, 1997. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
the Bancorp.
129
<PAGE> 144
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Over Three
Months Over
Next Day Through One Year
(Dollars in thousands) to Three Twelve Through Over
(Unaudited) Months Months Five Years Five Years Total
-------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 6,550 $ 6,550
Taxable investment securities 606 $ 391 $ 1,227 $16,002 18,226
Nontaxable investment securities 473 2,050 2,523
Loans 37,119 17,679 10,084 4,628 69,510
------- -------- ------- ------- -------
Total interest-earning assets 44,275 18,070 11,784 22,680 96,809
------- -------- ------- ------- -------
Liabilities:
Savings deposits(1) 27,464 27,464
Time deposits 24,275 22,950 4,705 100 52,030
------- -------- ------- ------- -------
Total interest-bearing liabilities 51,739 22,950 4,705 100 79,494
------- -------- ------- ------- -------
Net (interest-bearing liabilities)
interest-earning assets $(7,464) $ (4,880) $ 7,079 $22,580 $17,315
======= ======== ======= ======= =======
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $(7,464) $(12,344) $(5,265) $17,315
======= ======== ======= =======
Cumulative GAP as a percentage of
total interest-earning assets (7.71)% (12.75)% (5.44)% 17.89%
======= ======== ======= =======
</TABLE>
- ------------------
(1) Savings deposits include interest-bearing transaction accounts.
The following table sets forth the distribution of the expected maturities of
the Bancorp's interest-earning assets and interest-bearing liabilities as of
December 31, 1997 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 1998 maturity category.
130
<PAGE> 145
<TABLE>
<CAPTION>
EXPECTED MATURITIES
(Dollars in thousands)
(Unaudited) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
------- ------ ------ ------ ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 6,550 $ 6,550 $ 6,550
Weighted average rate 5.70% 5.70%
Investment securities(1) $ 997 $ 227 $ 574 $ 899 $18,052 $20,749 $20,791
Weighted average rate 5.20% 8.10% 6.30% 6.00% 6.30% 6.25%
Fixed rate loans $ 7,871 $1,564 $ 703 $1,476 $ 905 $ 5,211 $17,730 $16,812
Weighted average rate 9.67% 9.80% 9.80% 9.40% 9.50% 8.27% 9.17%
Variable rate loans(2) $46,219 $2,782 $1,176 $ 561 $ 344 $ 698 $51,780 $51,780
Weighted average rate 9.80% 9.90% 9.95% 9.40% 9.40% 9.85% 9.78%
Total interest-bearing assets $61,637 $4,573 $2,453 $2,037 $2,148 $23,961 $96,809 $95,933
Savings deposits(3) $27,464 $27,464 $27,464
Weighted average rate 1.95% 1.95%
Time deposits $47,225 $2,706 $1,332 $ 259 $ 371 $ 137 $52,030 $52,037
Weighted average rate 5.40% 5.65% 5.80% 6.10% 6.20% 2.00% 5.40%
Total interest-bearing
liabilities $74,689 $2,706 $1,332 $ 259 $ 371 $ 137 $79,494 $79,501
</TABLE>
- ------------
(1) Interest rates on tax exempt obligations have not been tax effected to
include the related tax benefit in calculating the weighted average yield.
(2) Of the total variable rate loans, 90% reprice in one year or less.
(3) Savings deposits include interest-bearing transaction accounts.
131
<PAGE> 146
MANAGEMENT
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth
certain information, as of October 1, 1998, with respect to those persons who
are directors and executive officers of the Bancorp and WSNB:
<TABLE>
<CAPTION>
Year First
Appointed
Director or Principal Occupation
Name and Title Age Officer During the Past Five Years
- --------------------------- --- ----------- --------------------------------------------------------------
<S> <C> <C> <C>
Joseph A. Surra 57 1983 Assistant Superintendent Business and Facilities for Auburn
Chairman of the Board Union School District, President of Gold Country Hardware Inc.
Robert G. Albrecht 80 1983 Owner of Coyote Creek Ranch, Winnemucca, Nevada.
Director
Charles W. Bacchi 55 1993 Partner in Bacchi Ranch, Lotus, California.
Director
Barbara L. Cook 66 1993 Real estate broker and co-owner of Coker & Cook Real Estate.
Director
Kirk Dowdell 35 1997 Senior Vice President and Chief Credit Officer of WSNB.
Senior Vice President
and Chief Credit Officer
William J. Fisher 51 1993 President and broker of Pacific States Development
Director Corporation, real estate development and marketing.
Lesa Fynes 40 1987 Controller of the Bancorp and WSNB.
Controller
Gary D. Gall 47 1993 President and Chief Executive Officer of the Bancorp and
President/CEO, Director WSNB.
Richard L. Golemon 66 1983 Retired.
Director
Stephanie M. Marsh 52 1993 Senior Vice President and Chief Administrative Officer of
Senior Vice WSNB.
President/CAO
Harold S. Prescott, Jr. 66 1983 Owner of Prescott Engineering.
Director
Darol B. Rasmussen 76 1987 Retired dentist.
Director
Osvaldo I. Scariot 71 1983 Retired. Former owner of Eldorado Disposal Service and
Secretary, Director Western Eldorado Recovery System.
</TABLE>
132
<PAGE> 147
THE BANCORP'S BOARD OF DIRECTORS AND COMMITTEES. The Bancorp's Board of
Directors met twelve (12) times in 1997. None of the Bancorp's directors
attended less than 75 percent of all of the Bancorp's Board of Directors'
meetings and committee meetings (of which they were a member) except Barbara
Cook who attended 66 2/3% of the meetings.
The Bancorp has an Audit Committee which met twelve (12) times in 1997. The
Audit Committee consists of Gary Gall, Robert Albrecht, Charles Bacchi, Barbara
Cook and Harold Prescott. The purpose of the Audit Committee is to review all
internal and external examination reports, review internal audit findings and
monitor Year 2000 progress and to select the Bancorp's independent certified
public accountants.
The Bancorp has an Executive Committee which met ten (10) times in 1997. The
Executive Committee consists of Robert Albrecht, Gary Gall, Harold Prescott,
Darol Rasmussen, Osvaldo Scariot and Joseph Surra. The purpose of the Executive
Committee is to (i) set policies, review salary recommendations, grant stock
options and approve other personnel matters which are in excess of management's
authority, (ii) consider mergers and acquisitions, develop marketing programs
and participate in strategic planning, and (iii) evaluate the directors for
various performance rating factors to determine each director's monthly
director's fees and to make recommendations to the Bancorp's Board of Directors
regarding nominees for election of directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
Director Compensation. Directors receive $300 per month for director fees from
the Bancorp and $300 per month from WSNB, except the Chairman of the Bancorp who
receives $1,000 per month as director's fees for the Bancorp and $300 per month
as director's fees for WSNB. No additional fees are paid for the directors'
attendance at committee meetings. The directors have been granted stock options:
Messrs. Albrecht, Golemon, Prescott, Scariot and Surra were granted stock
options in July 1989 to acquire 12,975 shares at $4.82 per share (the options of
Messrs. Prescott and Scariot have been fully exercised), Dr. Rasmussen was
granted a stock option in July 1989 to acquire 5,190 shares at $4.82 per share
(these options of Dr. Rasmussen have been fully exercised), and all of the
directors were also each granted stock options to acquire 4,664 shares in
November 1996 with an option exercise price of $8.58 per share (these options of
Dr. Rasmussen and Ms. Cook were also fully exercised and Mr. Bacchi exercised
700 shares of this option.) The director stock options have a term of 10 years
and are all completely vested. Each of the directors participates in WSNB's
incentive compensation plan and earned under such plan a bonus of $5,359 in 1996
and a bonus of $8,764 in 1997.
Executive Compensation. During 1997, the Bancorp did not pay any cash
compensation to its executive officers and no such cash compensation is expected
to be paid during 1998. However, the persons serving as the executive officers
of the Bancorp received during 1997, and have received in 1998, cash
compensation in their capacities as executive officers of WSNB.
The following table sets forth a summary of the compensation paid during the
Bancorp's past three fiscal years for services rendered in all capacities to
Gary D. Gall, the President and Chief Executive Officer of the Bancorp and WSNB,
and to Stephanie M. Marsh, the Senior Vice President and Chief Administrative
Officer of WSNB, the only executive officers of the Bancorp and/or WSNB whose
annual base compensation and bonus exceeded $100,000 during the Bancorp's 1997
fiscal year.
133
<PAGE> 148
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
------------------- ---------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ---------------------------- ---- ------- ------- --------- ---------- -------- ------- ---------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(3)
Position Year ($) ($) ($) ($) SARs(2) ($) ($)
- ---------------------------- ---- ------- ------- --------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary D. Gall, President, 1997 127,500 109,486 8,497 0 27,500 0 10,773
CEO and Director ---- ------- ------- ------- ---------- -------- ------- -------
of the Bancorp and WSNB 1996 120,000 67,528 8,260 0 11,660 0 7,580
---- ------- ------- ------- ---------- -------- ------- -------
1995 107,200 37,462 4,214 0 1,298 0 4,321
- ---------------------------- ---- ------- ------- ------- ---------- -------- ------- -------
Stephanie M. Marsh 1997 71,070 33,964 3,750 0 3,300 0 7,162
Senior Vice President and ---- ------- ------- ------- ---------- -------- ------- -------
Chief Administrative Officer 1996 68,400 33,764 3,495 0 5,830 0 4,710
of WSNB ---- ------- ------- ------- ---------- -------- ------- -------
1995 68,400 18,656 2,770 0 0 0 3,105
- ---------------------------- ---- ------- ------- ------- ---------- -------- ------- -------
</TABLE>
(1) These amounts represent perquisites consisting of country club fees for all
officers and automobile allowance and family health insurance premiums for
Mr. Gall.
(2) These amounts are adjusted for stock dividends. The Bancorp has no SARs.
(3) This amount represents the Bancorp's contribution for the cost of premiums
for life insurance and 401(k) Plan and ESOP.
134
<PAGE> 149
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants(1)
- -------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ---------------------- ------------ ------------ ---------- -------------
% of Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date
- ---------------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Gary D. Gall 27,500 55.6 $10.91 May 20, 2007
- ---------------------- ------ ---- ------ -------------
Stephanie M. Marsh 3,300 6.7 $11.36 July 16, 2007
- ---------------------- ------ ---- ------ -------------
</TABLE>
(1) The Bancorp has no SARs and the number of options and exercise price is
adjusted for stock dividends.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ---------------------- ------------------ -------------- ---------------- ----------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year End (#) Year End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable(1) Unexercisable(1)
- ---------------------- ------------------ -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gary D. Gall 0 0 11,308/29,150 $104,500/$237,608
- ---------------------- - - ------------- -----------------
Stephanie M. Marsh 0 0 2,992/9,130 $27,846/$53,550
- ---------------------- - - ------------- -----------------
</TABLE>
(1) The Bancorp has no SARs.
135
<PAGE> 150
On December 4, 1997, WSNB entered into an agreement with Mr. Gall to provide him
with severance benefits of up to two year's worth of his regular compensation at
the time of severance of employment in the event of (i) any merger or
consolidation where WSNB is (A) not the surviving or resulting corporation or
(B) the surviving corporation and the shareholders of the Bancorp at the time
immediately prior to such merger will own less than 50% on a direct or indirect
basis of the voting equity interests of the surviving corporation after such
merger, (ii) upon transfer of all or substantially all of the assets of WSNB, or
(iii) a sale of the equity securities of the Bancorp representing more than 50%
of the aggregate voting power of all outstanding equity securities of the
Bancorp to any person or entity, or any group of persons and/or entities acting
in concert (any of these events shall be referred to as an "Acquisition"). The
severance agreement is for a term of 5 years, and in the event of an
Acquisition, if Mr. Gall is not given a new employment agreement that is
satisfactory to him in his sole discretion within 15 days prior to the date of
consummation of the Acquisition, then WSNB shall pay him the severance payment
in a lump sum.
On December 4, 1997, WSNB also entered into an agreement with Ms. Marsh to
provide her with severance benefits of up to two year's worth of her regular
compensation at the time of severance of employment in the event of (i) any
merger or consolidation where WSNB is (A) not the surviving or resulting
corporation or (B) the surviving corporation and the shareholders of the Bancorp
at the time immediately prior to such merger will own less than 50% on a direct
or indirect basis of the voting equity interests of the surviving corporation
after such merger, (ii) upon transfer of all or substantially all of the assets
of WSNB, or (iii) a sale of the equity securities of the Bancorp representing
more than 50% of the aggregate voting power of all outstanding equity securities
of the Bancorp to any person or entity, or any group of persons and/or entities
acting in concert (any of these events shall be referred to as an
"Acquisition"). The severance agreement is for a term of 5 years, and in the
event of an Acquisition, if Ms. Marsh is not retained by the resulting
corporation in a position comparable to that of the highest level senior vice
president or a position acceptable to her for a period of up to two years
because she is terminated by the resulting corporation or constructively
terminated by the resulting corporation then she is to be paid the severance
payment in a lump sum within ten days of such termination.
Mr. Gall also has a salary continuation agreement which provides that WSNB will
pay him $75,000 per year for 15 years following his retirement from WSNB at age
65 or later ("Retirement Age"). In the event of disability while Mr. Gall is
actively employed prior to Retirement Age, he will receive a benefit amount that
is a percentage of the $75,000 per year for 15 years based on the vesting
schedule below beginning at the earlier of the time when he reaches age 65 or
the date on which he is no longer entitled to disability benefits provided by
WSNB. In the event Mr. Gall dies while actively employed by WSNB prior to
Retirement Age, his beneficiary will receive from WSNB a lump sum benefit amount
equal to the present value (using an 8% discount rate) of $75,000 per year for
fifteen years, as if such amount is to be paid starting one month after his
death. In the event of termination with or without cause or voluntary
termination, Mr. Gall shall receive a benefit amount that is a percentage of the
$75,000 per year for 15 years based on the vesting schedule below for 15 years
beginning with the month following the month in which Mr. Gall attains age 65 or
beginning with the month following his death, if earlier. Mr. Gall may also
elect to receive a benefit amount that is a percentage of the $75,000 per year
for 15 years based on the vesting schedule below upon early retirement which is
after at least 15 years of service beginning January 9, 1995. The vesting
schedule is 5% per year of service for the first seventeen years beginning
January 9, 1995, and decreases to an additional 3% per year of service for the
last five years. Payment of salary continuation benefits to Mr. Gall is subject
to his not working as an employee, independent contractor, or consultant of or
for a branch of a financial institution located within a 15 mile radius of any
branch of WSNB.
136
<PAGE> 151
CERTAIN TRANSACTIONS
Some of the directors and executive officers of the Bancorp and their immediate
families, as well as the companies with which they are associated, are customers
of, or have had banking transactions with, the Bancorp in the ordinary course of
the Bancorp's business, and the Bancorp expects to have banking transactions
with such persons in the future. In management's opinion, all loans and
commitments to lend in such transactions were made in compliance with applicable
laws and 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.
137
<PAGE> 152
DESCRIPTION OF LAKE
BUSINESS
GENERAL. Lake was incorporated as a banking corporation under the laws of the
State of California on March 9, 1984. Lake commenced operations as a California
state-chartered bank on November 15, 1984. Lake engages in the general
commercial banking business in Lake County in the State of California from its
headquarters banking office located at 805 Eleventh Street, Lakeport,
California, and its branches located at 1377 S. Main Street, Lakeport,
California and 4280 Main Street, Kelseyville, California. Lake is in the process
of consolidating its Main Street, Lakeport office with Lake's headquarters
office located on Eleventh Street in Lakeport.
Lake is an insured bank under the Federal Deposit Insurance Act and is not a
member of the Federal Reserve System.
BANKING SERVICES. Lake conducts a commercial banking business which includes
accepting demand, savings and time deposits and making commercial, real estate
and installment loans. It also offers installment note collections, issues
cashier's checks, sells traveler's checks and provides safe deposit boxes and
other customary banking services. Lake does not offer trust services or
international banking services and does not plan to do so in the near future.
There have been no significant changes in the kinds of services rendered, the
principal markets for or the methods of distribution of such services during the
last three fiscal years.
Lake's operating policy since its inception has emphasized serving the banking
needs of individuals and the business and professional communities in Lakeport,
California and its surrounding area. At September 30, 1998 the total of Lake's
installment and credit card loans outstanding was $2,529,963, the total of
commercial loans outstanding was $4,449,252, the total of agricultural loans
outstanding was $18,026,210, and the total of real estate loans outstanding was
$30,136,531 ($1,156,812 in construction loans and $28,974,719 in residential and
commercial real estate loans), representing 4.6%, 8.1%, 32.7% and 54.6%,
respectively, of Lake's loan portfolio. Lake accepts real estate, listed and
unlisted securities, savings and time deposits, automobiles, machinery and
equipment as collateral for loans.
The majority of Lake's real estate lending activities are limited to Lake County
commercial and residential properties. Real estate secured loans are generally
written at fixed rates of interest and have maturities ranging from one to seven
years. Variable rate real estate loans may have longer maturities. Lake, from
time to time, makes interim construction loans to well established contractors
and/or developers who have take-out financing. Lake generally does not do
take-out loans or permanent real estate financing. However, permanent financing
may be extended on income property with sufficient cash flow to support debt
payments. Real estate loans are usually extended on properties at 70-80% of the
cost or appraised value of the property, whichever is lower. At September 30,
1998, Lake's real estate loan portfolio consisted of approximately 50%
residential properties and 50% commercial properties.
Real estate values remained relatively stable during the first nine months of
1998 with a slight upturn in market values for residential properties in the
second and third quarter. Commercial property values also remained stable, but
sales activity continued to be weak throughout the year. For the nine month
periods and three years covered by the financial statements set forth herein,
approximately twelve (12) real estate loans in the aggregate amount of
approximately $357,380 have been written down by Lake. Additionally, as of
September 30, 1998, Lake held three (3) properties as other real estate owned
("OREO"), consisting mostly of real property acquired through, or in lieu of,
foreclosure.
Lake's deposits are attracted from individual and commercial customers. A
material portion of Lake's deposits has not been obtained from a single person
or a few persons, the loss of any one or more of which would have a material
138
<PAGE> 153
adverse effect on the business of Lake, nor is a material portion of Lake's
loans concentrated within a single industry or group of related industries.
In order to attract loan and deposit business from individuals and small
businesses, Lake maintains lobby hours from 9:00 A.M. to 4:00 P.M., Monday
through Thursday and from 9:00 A.M. to 6:00 P.M. on Friday. Lake also maintains
drive-up window hours from 7:30 A.M. to 5:30 P.M., Monday through Thursday and
from 7:30 A.M. to 6:00 P.M. on Friday. Two automated teller machines (one
walk-up and one drive-up) operate 24 hours per day, seven days per week, at
Lake's headquarters banking office.
Lake relies substantially on local promotional activity, personal contacts by
its officers, directors and employees, referrals by its shareholders, extended
hours, personalized service and its reputation in the communities it serves to
compete effectively.
EMPLOYEES. At September 30, 1998, Lake employed 44 persons on a full-time basis.
Lake believes its employee relations are excellent.
PROPERTIES. Lake owns its headquarters office located at 805 Eleventh Street,
Lakeport, California. The headquarters office is built on 47,188 square feet of
land.
Lake's Shoreline Center Branch Office is located at 1377 S. Main Street,
Lakeport, CA and was acquired on December 27, 1991. Lake leases the branch
premises, which consists of 2,000 square feet, pursuant to the First Amendment
to Lease entered into as of December 28, 1991 with Shoreline Center, Ltd, a
general partnership, as Landlord. In 1997, the lease was extended for 5 years
commencing January 1, 1997 through December 31, 2002 at a base rental of $0.50 a
square foot, or $1,000 per month. The base rental is subject to adjustment every
2 years in accordance with changes in the Consumer Price Index-All Urban
Consumers, All Items, San Francisco-Oakland-San Jose, California. In no event,
however, shall the adjusted monthly rental be less than the base rent or more
than $1,100. Lake also pays for insurance, its pro rata share of property taxes,
and separately metered utilities. There are no options to extend or renew the
lease. Lake is in the process of consolidating the Shoreline Center Branch
Office with Lake's headquarters office located on Eleventh Street in Lakeport.
Lake's Kelseyville Branch Office is located at 4280 Main Street, Kelseyville, CA
and opened for business on March 11, 1996. Lake leases the premises, which
consists of 2,140 square feet, pursuant to a lease dated December 18, 1995
between Lake as tenant and Dr. Ernest Zinke as Landlord, and is for a term of
four (4) years. Rent is $1,500 per month. At the end of the initial term, Lake
has options to renew for two consecutive four (4) year periods, with terms to be
negotiated at the time of exercise.
Lake owns the modular building which housed its former headquarters banking
office. This building with the addition now consists of approximately 4,027
square feet of interior space. Lake presently has sublet one half of this space
at $1.15 per square foot triple net, for a five year term.
LEGAL PROCEEDINGS. In the normal course of business, Lake is occasionally made a
party to actions seeking to recover damages from Lake. In the opinion of Lake's
management, the ultimate disposition of these matters will not have a material
adverse effect on Lake's financial condition.
SUPERVISION AND REGULATION. As a California state-licensed bank, Lake is subject
to regulation, supervision and periodic examination by the DFI and the FDIC.
Lake is not a member of the Federal Reserve System, but is nevertheless subject
to certain regulations of the FRB. Lake's deposits are insured by the FDIC to
the maximum amount permitted by law, which is currently $100,000 per depositor
in most cases.
139
<PAGE> 154
The regulations of these state and federal bank regulatory agencies govern most
aspects of Lake's business and operations, including but not limited to, the
scope of its business, its investments, its reserves against deposits, the
nature and amount of any collateral for loans, the timing of availability of
deposited funds, the issuance of securities, the payment of dividends, bank
expansion and bank activities, including real estate development and insurance
activities, and the maximum rates of interest allowed on certain deposits. Lake
is also subject to the requirements and restrictions of various consumer laws
and regulations.
SUMMARY OF EARNINGS
The following Summary of Earnings of Lake for the three years ended December 31,
1997 has been derived from financial statements audited by Perry-Smith & Co.,
LLP, independent certified public accountants, as described in their report
included elsewhere in this Joint Proxy Statement/Prospectus. The amounts shown
for the nine months ended September 30, 1998 and 1997 are unaudited. The
September 30, 1998 and 1997 amounts reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. These
statements should be read in conjunction with the Financial Statements and the
Notes relating thereto which appear elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in thousands, September 30, Year Ended December 31,(1)
except per share data) ---------------------------- --------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ---------- ---------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 4,839 $ 4,868 $ 6,560 $ 6,847 $ 7,002
Interest expense 1,916 1,895 2,562 2,845 3,056
Net interest income 2,923 2,973 3,998 4,002 3,946
Provision for loan losses 270 270 263 477 210
Net interest income after
provision for loans losses 2,653 2,703 3,735 3,525 3,736
Other noninterest income 504 413 630 678 681
Noninterest expense 2,657 2,408 3,222 3,524 3,301
Earnings before income taxes 500 708 1,143 679 1,116
Provision for income taxes(2) 147 258 377 203 335
Net income 353 450 766 476 781
Basic earnings per share $ 0.28 $ 0.36 $ 0.62 $ 0.38 $ 0.63
Number of shares used in basic
earnings per share calculation(3) 1,265,387 1,240,546 1,240,546 1,240,491 1,239,791
Diluted earnings per share $ 0.27 $ 0.35 $ 0.59 $ 0.36 $ 0.59
Number of shares used in diluted
earnings per share calculation(4) 1,329,428 1,276,729 1,297,954 1,308,758 1,315,310
</TABLE>
- -------------------
(1) See Notes to Financial Statements for a summary of significant
accounting policies and other related data.
(2) See Notes to Financial Statements for an explanation of income taxes.
(3) Basic earnings per share information is based on the weighted average
number of shares of common stock outstanding during each period.
(4) Diluted earnings per share information is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during each period.
140
<PAGE> 155
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
(Unaudited) September 30, December 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 5.25% 7.18% 9.05% 5.91% 10.08%
Net earnings to
average total assets(1) .56% .74% .93% .55% .97%
Total interest expense to
total interest income 39.59% 38.93% 39.05% 41.55% 43.64%
Other operating income to
other operating expense 18.97% 17.15% 19.55% 19.24% 20.63%
</TABLE>
- ---------------
(1) Ratios have been annualized for the nine months ended September 30, 1998
and 1997.
LAKE'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN THIS "LAKE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THEREFORE, THE INFORMATION SET FORTH HEREIN SHOULD BE CAREFULLY CONSIDERED WHEN
EVALUATING THE BUSINESS PROSPECTS OF LAKE.
The following is Lake's management's discussion and analysis of the significant
changes in income and expense accounts presented in the Summary of Earnings for
the years ended December 31, 1997, 1996 and 1995 and the nine months ended
September 30, 1998 and 1997.
INTRODUCTION. This discussion is designed to provide a better understanding of
significant trends related to Lake's financial condition, results of operations,
liquidity, capital resources and interest rate sensitivity. It should be read in
conjunction with Lake's audited financial statements and unaudited interim
financial statements and notes thereto and the other financial information
appearing elsewhere in this Joint Proxy Statement/Prospectus.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income decreased
from $7,002 thousand in 1995 to $6,847 thousand in 1996, and to $6,560 thousand
in 1997, representing a 2.23% decrease in 1996 from 1995 and a 4.19% decrease in
1997 from 1996. Total interest income decreased from $4,868 thousand for the
nine months ended September 30, 1997, to $4,839 thousand for the nine months
ended September 30, 1998, representing a .60% decrease. The decrease in interest
income from 1995 to 1996 resulted from a decrease in the yield on earning assets
from 9.36% to 9.01%. The decrease from 1996 to 1997 resulted from a decrease in
average interest-earning assets from $76.0 million to $72.5 million. Average
interest-earning assets increased at September 30, 1998 to $74.6 million from
$71.4 million at September 30, 1997. Total interest expense decreased from
$3,056 thousand in 1995 to $2,845 thousand in 1996 and to $2,562 thousand in
1997, representing a 6.90% decrease in 1996 from 1995 and a 9.95% decrease in
1997 from 1996. Total interest expense increased from $1,895 thousand for the
nine months ended September 30, 1997, to $1,916 thousand for the nine months
ended September 30, 1998, representing a 1.12% increase.
141
<PAGE> 156
Lake's net interest margin (net interest income divided by average earning
assets) was 5.27% in 1995, 5.27% in 1996, and 5.52% in 1997. The net interest
margin for the nine months ended September 30, 1997 was 5.56% and for the nine
months ended September 30, 1998 was 5.22%. The primary reason for the decrease
in the net interest margin for the nine months ended September 30, 1998 from the
nine months ended September 30, 1997 was the overall change in mix in
interest-earning assets, with average loans outstanding decreasing by $1,370
thousand and investments, with a lower average yield, increasing by $1,882
thousand. Total interest expense decreased from 1996 to 1997 due primarily to a
$3,332 thousand decrease in higher yielding time deposits during that period.
The growth in deposits since 1997 resulted in the increase in interest expense
for the nine months ended September 30, 1998 over the same nine month period in
1997. Lake's net interest income increased from $3,946 thousand in 1995 to
$4,002 thousand in 1996 and decreased slightly to $3,998 thousand in 1997,
representing a 1.42% increase in 1996 from 1995 and a .10% decrease in 1997 from
1996. Net interest income decreased slightly from $2,973 thousand for the nine
months ended September 30, 1997 to $2,923 thousand for the nine months ended
September 30, 1998, representing a 1.68% decrease.
The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:
ANALYSIS OF CHANGES IN NET INTEREST INCOME.
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
----------------------------------------------------
1997 Versus 1996 1996 Versus 1995
------------------------ ------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CDs in other institutions $ 35 $ 9 $ 26 $ 38 $ (7) $ 45
Federal funds sold 36 10 26 (63) (22) (41)
Investment securities (183) (5) (178) (41) (2) (39)
Loans, gross (175) (50) (125) (90) (157) 67
----- ----- ----- ----- ----- ----
Total interest-
earnings assets (287) (36) (251) (156) (188) 32
----- ----- ----- ----- ----- ----
NOW, MMDA (10) 25 (35) (68) (63) (5)
Savings (8) 9 (17) (86) (82) (4)
Certificates of deposit (265) (63) (202) (58) (34) (24)
----- ----- ----- ----- ----- ----
Total interest-
bearing liabilities (283) (29) (254) (212) (179) (33)
----- ----- ----- ----- ----- ----
Net interest income $ (4) $ (7) $ 3 $ 56 $ (9) $ 65
===== ===== ===== ===== ===== ====
</TABLE>
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
142
<PAGE> 157
The following is an unaudited summary of changes in earnings of Lake for the
nine months ended September 30, 1998 and 1997 and for the years ended December
31, 1997 and 1996. In the opinion of Lake's management, the following summary of
changes in earnings reflects all adjustments which Lake considers necessary for
a fair presentation of the results of its operations for these periods. This
summary of changes in earnings should be read in conjunction with the Financial
Statements and Notes relating thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, -------------------------------------------------------
(Dollars in thousands) 1998 over 1997 1997 over 1996 1996 over 1995
(Unaudited) ------------------------ ------------------------ --------------------------
Amount of % of Amount of % of Amount of % of
Change Change Change Change(1) Change Change(1)
--------- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $(211) (5.09)% $(175) (3.07)% $ (90) (1.55)%
Interest on securities 63 14.52 % (183) (23.52)% (41) (5.01)%
Interest on federal funds sold 61 49.59 % 36 21.43 % (62) (26.96)%
Interest on deposits in
other financial institutions 58 35.15 % 35 17.68 % 38 23.75 %
----- ----- -----
Total interest income (29) (.60)% (287) (4.19)% (155) (2.21)%
INTEREST EXPENSE
Interest on deposits 21 1.11 % (283) (9.95)% (211) (6.90)%
----- ----- -----
Net interest income (50) (1.68)% (4) (.10)% 56 1.42 %
PROVISION FOR LOAN LOSSES 0 0 % (214) (44.86)% 267 127.14 %
----- ----- -----
Net interest income after
provision for loan losses (50) (1.85)% 210 5.96 % (211) (5.65)%
----- ----- -----
NONINTEREST INCOME
Service charges 105 26.99 % 28 6.51 % (30) (6.53)%
Other income (14) (58.33)% (76) (28.79)% 27 11.39 %
----- ----- -----
Total noninterest income 91 22.03 % (48) (7.08)% (3) (.44)%
----- ----- -----
OTHER EXPENSES
Salaries and related benefits 149 11.76% (65) (3.92)% (6) (.36)%
Occupancy and
equipment expense 24 5.21% (40) (6.87)% 177 42.14%
Other 76 11.18% (197) (15.82)% 52 4.36%
----- ----- -----
Total other expenses 249 10.34% (302) (8.57)% 223 6.72%
----- ----- -----
Income before income taxes (208) (29.38)% 464 68.43% (437) (39.16)%
PROVISION FOR INCOME TAXES (111) (43.02)% 174 85.71% (132) (39.40)%
----- ----- -----
NET INCOME $ (97) (21.56)% $ 290 60.92% $(305) 39.05%
===== ===== =====
</TABLE>
- -----------------
(1) Increase or (decrease) over previous year amount.
143
<PAGE> 158
NONINTEREST INCOME. Noninterest income decreased from $681 thousand in 1995 to
$678 thousand in 1996 and to $630 thousand in 1997, representing a .44% decrease
in 1996 from 1995 and a 7.08% decrease in 1997 from 1996. Noninterest income
increased from $413 thousand for the nine months ended September 30, 1997 to
$504 thousand for the nine months ended September 30, 1998, representing a 22.0%
increase. The increase for the first nine months of 1998 over the same period in
1997 was the result of recording the increase in cash surrender value of key
officer life insurance policies.
OTHER EXPENSES. Other expenses are comprised of salaries and related benefits,
occupancy, equipment and other expenses. Other expenses increased from $3,301
thousand in 1995 to $3,524 thousand in 1996, and decreased to $3,222 thousand in
1997, representing a 6.72% increase in 1996 over 1995 and a 8.57% decrease in
1997 from 1996. The increase in other expenses in 1996 over 1995 related
primarily to occupancy and equipment expense with the first full year of
occupancy in Lake's newly constructed main office and the purchase of a new
computer system. The single largest component of other expenses is salary and
employee benefits expense, which was $1,617 thousand, $1,683 thousand and $1,689
thousand in 1997, 1996 and 1995, respectively. The number of full-time
equivalent employees was 46.8, 49.3 and 49.7 at December 31, 1997, 1996 and
1995, respectively. The 3.9% decrease in salary and employee benefits expense
during 1997 was due primarily to an increase in deferred direct loan origination
costs recorded as an offset to salary expense. The .4% decrease is salary and
employee benefits expense during 1996 is due primarily to selected staffing
reductions and decreased overtime expenses. Salary and employee benefit expense
for the nine month periods ended September 30, 1998 and 1997 totaled $1,416
thousand and $1,267 thousand, respectively. The 11.7% increase in the first nine
months of 1998 over the same period in 1997 was due primarily to the severance
package paid to Lake's Chief Financial Officer and adjustments to retirement
accruals for Lake's President who retired on October 31, 1998.
The following table compares the various elements of other expenses as a
percentage of average assets for the years ended December 31, 1997, 1996 and
1995 and the nine months ended September 30, 1998 and 1997. (Dollars in
thousands except percentage amounts.)
<TABLE>
<CAPTION>
Salaries Occupancy Other
Average and Related & Equipment Operating
Period Assets(1) Benefits Expenses Expenses
------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Nine Months Ended
September 30,(2)
- ------------------
1998 $84,081 1.68% .58% .90%
1997 $81,524 1.56% .57% .83%
Year Ended
December 31,
- ------------------
1997 $82,580 1.96% .67% 1.27%
1996 $86,473 1.95% .69% 1.44%
1995 $80,808 2.09% .52% 1.48%
</TABLE>
- ----------
(1) Based on the average of daily balances.
(2) Expense ratios are calculated on an annualized basis.
PROVISION FOR LOAN LOSSES. The provision for loan losses corresponds directly to
the level of the allowance that management deems sufficient to offset potential
loan losses. The balance in the loan loss allowance reflects the amount which,
in management's judgement, is adequate to provide for these potential loan
losses after weighing the
144
<PAGE> 159
mix of the loan portfolio, current economic conditions, past loan experience and
such other factors as deserve recognition in estimating loan losses.
Management allocated $263 thousand as a provision for loan losses in 1997, $477
thousand in 1996 and $210 thousand in 1995. Loans charged off net of recoveries
in 1997 were $218 thousand, $697 thousand in 1996 and $100 thousand in 1995. For
the nine months ended September 30, 1998 and 1997, $270 thousand was allocated
as a provision for loan losses during each period. Loans charged off net of
recoveries for the nine months ended September 30, 1998 were $62 thousand and
for the nine months ended September 30, 1997 were $284 thousand. The ratio of
the allowance for loan losses to total gross loans was 1.75% in 1997, 1.70% in
1996, and 2.08% in 1995, and for the interim periods was 2.11% at September 30,
1998 and 1.63% at September 30, 1997.
In management's opinion, the balance of the allowance for loan losses at
September 30, 1998 was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
INCOME TAXES. Income taxes were $377 thousand in 1997, $203 thousand in 1996 and
$335 thousand in 1995. The income tax provision for the nine months ended
September 30, 1998 and 1997 was $147 thousand and $258 thousand, respectively.
NET INCOME. The net income and basic earnings per share of Lake were $766
thousand and $.62 per share in 1997, $476 thousand and $.38 per share in 1996,
and $781 thousand and $.63 per share in 1995. The income for these periods was
primarily due to net interest income, service charges and fees. The net income
and basic earnings per share for the nine months ended September 30, 1998 were
$353 thousand and $.28 per share as compared to a net income of $450 thousand
and $.36 per share for the nine months ended September 30, 1997.
LIQUIDITY. Lake has an asset and liability management program allowing Lake to
maintain its interest margins during times of both rising and falling interest
rates and to maintain sufficient liquidity. Liquidity of Lake at December 31,
1997 was 33.11%, at December 31, 1996 was 29.94%, and at December 31, 1995 was
35.83% based on liquid assets (consisting of cash and due from banks, deposits
in other financial institutions, investments not pledged, federal funds sold and
loans available-for-sale) divided by total liabilities. Lake's management
believes it maintains adequate liquidity levels.
CAPITAL RESOURCES. The shareholders' equity accounts of Lake increased from
$8,066 thousand at December 31, 1995, to $8,149 thousand at December 31, 1996
and to $8,660 thousand at December 31, 1997. These increases are primarily
attributable to earnings of Lake in 1996 and 1997 adjusted for cash dividends
paid to shareholders. Lake is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Lake must meet
specific capital guidelines that involve quantitative measures of Lake's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Lake's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Lake to maintain minimum amounts and ratios of total and Tier 1 capital
(primarily common stock and retained earnings less goodwill) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
September 30, 1998, that Lake exceeds all capital adequacy requirements to which
it is subject.
145
<PAGE> 160
As of June 30, 1998, the most recent notification from the FDIC categorized Lake
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Lake must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table below. There are no conditions or events since that notification which
management believes have changed Lake's category.
Lake's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized September 30,
Requirement Requirement 1998
----------- ----------- -------------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 14.1%
Total risk-based to
risk-weighted assets 8% 10% 15.4%
Leverage to total
average assets 4-5% 5% 11.0%
</TABLE>
146
<PAGE> 161
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the unaudited average balances of Lake's assets, liabilities and
shareholders' equity accounts and the percentage distribution of the items,
computed using the daily average balances, for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Months Ended
September 30,
(Unaudited) ----------------------------------------------------
1998 1997
------------------------ -----------------------
Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,876 5.80% $ 4,626 5.67%
Deposits in other financial institutions 5,024 5.98% 3,654 4.48%
Investment securities 11,229 13.35% 9,347 11.47%
Federal funds sold 4,510 5.36% 3,044 3.73%
Loans:
Commercial 22,230 26.44% 25,614 31.42%
Installment 5,438 6.47% 6,656 8.16%
Real estate 13,488 16.04% 14,738 18.08%
Agricultural 12,747 15.16% 8,361 10.26%
Less deferred fees (213) (0.25)% (223) (0.27)%
Less allowance for loan losses (1,061) (1.26)% (901) (1.11)%
------- --------
Net loans 52,629 62.60% 54,245 66.54%
------- --------
Bank premises and equipment, net 2,997 3.56% 3,213 3.94%
Other assets 2,816 3.35% 3,395 4.16%
------- --------
TOTAL ASSETS $ 84,081 $ 81,524
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 12,201 14.51% $ 10,716 13.14%
NOW and money market 13,014 15.48% 13,502 16.56%
Savings 12,507 14.87% 13,586 16.67%
Time 31,157 37.06% 29,507 36.19%
Time, $100,000 and over 5,594 6.65% 5,235 6.42%
------- --------
Total deposits 74,473 88.57% 72,546 88.99%
Other liabilities 651 0.77% 616 0.76%
------- --------
Total liabilities 75,124 89.34% 73,162 89.74%
------- --------
Shareholders' equity:
Common stock 3,311 3.94% 3,178 3.90%
Retained earnings 5,605 6.67% 5,267 6.46%
Unrealized gain (loss) on AFS
investment securities 41 0.05% (83) (0.10)%
------- --------
Total shareholders' equity 8,957 10.66% 8,362 10.26%
------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 84,081 $ 81,524
======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Year Ended December 31,
(Unaudited) ----------------------------------------------------------------------------
1997 1996 1995
------------------------ --------------------- -----------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,762 5.77% $ 4,383 5.07% $ 4,285 5.30%
Deposits in other financial institutions 3,870 4.69% 3,432 3.97% 2,644 3.27%
Investment securities 9,700 11.75% 12,658 14.64% 14,218 17.59%
Federal funds sold 3,751 4.54% 3,288 3.80% 4,008 4.96%
Loans:
Commercial 26,333 31.89% 26,024 30.09% 25,157 31.13%
Installment 6,569 7.95% 7,510 8.68% 5,789 7.16%
Real estate 14,396 17.43% 14,727 17.03% 15,848 19.61%
Agricultural 7,873 9.53% 8,347 9.65% 7,147 8.84%
Less deferred fees (214) (0.26)% (309) (0.36)% (395) (0.49)%
Less allowance for loan losses (910) (1.10)% (1,031) (1.19)% (378) (0.47)%
-------- -------- --------
Net loans 54,047 65.45% 55,268 63.91% 53,168 65.80%
-------- -------- --------
Bank premises and equipment, net 3,182 3.85% 3,413 3.95% 3,136 3.88%
Other assets 3,268 3.96% 4,031 4.66% (651) (0.81)%
-------- -------- --------
TOTAL ASSETS $ 82,580 $ 86,473 $ 80,808
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 11,184 13.54% $ 9,883 11.43% $ 8,751 10.83%
NOW and money market 13,585 16.45% 14,889 17.22% 15,046 18.62%
Savings 13,356 16.17% 14,096 16.30% 14,233 17.61%
Time 29,581 35.82% 35,011 40.49% 31,102 38.49%
Time, $100,000 and over 5,793 7.02% 3,695 4.27% 3,154 3.90%
-------- -------- --------
Total deposits 73,499 89.00% 77,574 89.71% 72,286 89.45%
Other liabilities 615 0.74% 833 .96% 773 0.96%
-------- -------- --------
Total liabilities 74,114 89.75% 78,407 90.67% 73,059 90.41%
-------- -------- --------
Shareholders' equity:
Common stock 3,178 3.85% 3,177 3.67% 3,165 3.92%
Retained earnings 5,345 6.47% 4,990 5.77% 4,612 5.71%
Unrealized gain (loss) on AFS
investment securities (57) (0.07)% (101) (0.12)% (28) (0.03)%
-------- -------- --------
Total shareholders' equity 8,466 10.25% 8,066 9.33% 7,749 9.59%
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 82,580 $ 86,473 $ 80,808
======== ======== ========
</TABLE>
- ----------------
(1) Percentages of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
147
<PAGE> 162
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of Lake's investment securities at fair value as of
September 30, 1998, December 31, 1997 and December 31, 1996. (Dollars in
thousands)
<TABLE>
<CAPTION>
(Unaudited)
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- --------------- ---------------- --------------- ---------------
June 30, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 0 0% $4,758 6.01% $1,237 6.21% $ 0 0% $ 5,995 5.96%
Municipals 351 4.98% 1,745 5.33% 1,513 6.09% 103 4.75% 3,712 5.53%
Corporate Notes/Bonds 0 0% 2,334 6.20% 0 0% 0 0% 2,334 6.19%
---- ------ ------ ---- -------
Total $351 $8,837 $2,750 $103 $12,041
==== ====== ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- --------------- ---------------- --------------- ---------------
December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 998 6.06% $1,801 6.11% $4,693 6.67% $ 20 7.45% $ 7,512 6.31%
Municipals 0 0% 1,432 5.54% 1,392 5.93% 399 6.14% 3,223 5.72%
Corporate Notes/Bonds 491 5.77% 750 6.56% 0 0% 0 0% 1,241 6.13%
------ ------ ------ ---- -------
Total $1,489 6.07% $3,983 5.84% $6,085 6.32% $419 6.57% $11,976 6.13%
====== ====== ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
--------------- --------------- ---------------- --------------- ---------------
December 31, 1996 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 0 0% $2,350 5.70% $4,138 6.66% $1,024 7.57% $ 7,512 6.49%
Municipals 0 0% 696 6.37% 1,361 7.21% 503 7.12% 2,560 6.96%
Corporate Notes/Bonds 504 5.52% 500 5.90% 0 0% 0 0% 1,004 5.71%
---- ------ ------ ------ -------
Total $504 5.52% $3,546 5.86% $5,499 6.79% $1,527 7.42% $11,076 6.53%
==== ====== ====== ====== =======
</TABLE>
148
<PAGE> 163
YEAR-END BALANCE. The following table summarizes the year-end amortized cost and
distributions of Lake's investment securities held on December 31, 1997 and
1996. (Dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
U.S. Treasury & Government agencies $ 7,539 $ 7,612
Municipals 3,136 2,522
Corporate Notes/Bonds 1,241 1,004
------- -------
Total $11,916 $11,138
======= =======
</TABLE>
LOAN PORTFOLIO. Lake's largest historical lending categories are real estate
loans, commercial loans, consumer loans and agricultural loans. These categories
accounted for approximately 65.6%, 10.3%, 6.4% and 17.7%, respectively, of
Lake's total loan portfolio at December 31, 1996, approximately 59.7%, 9.3%,
5.4% and 25.6%, respectively, of Lake's total loan portfolio at December 31,
1997 and approximately 54.6%, 8.1%, 4.6% and 32.7%, respectively, at September
30, 1998. Loans are carried at face amount, less payments collected and the
allowance for loan losses. Interest on all loans is accrued daily on a simple
interest basis. Typically, once a loan is placed on nonaccrual status, Lake
reverses interest accrued through the date of transfer. Loans are placed on a
nonaccrual basis when principal or interest on a loan is past due 90 days or
more, unless the loan is both well-secured and in the process of collection.
Interest actually received for loans on nonaccrual status is recognized as
income at the time of receipt. Problem loans are maintained on accrual status
only when management of Lake is confident of full repayment within a reasonable
period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to Lake's published lending rate and vary as Lake's
lending rate varies. At December 31, 1996, approximately 37% of Lake's loan
portfolio was comprised of variable interest rate loans, at December 31, 1997,
approximately 30% of Lake's loan portfolio was comprised of variable interest
rate loans, and at September 30, 1998, variable rate loans comprised
approximately 37% of Lake's loan portfolio.
DISTRIBUTION OF LOANS. The distribution of Lake's total loans by type of loan as
of the dates indicated is shown in the following table:
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands)
September 30, December 31,
------------------- ------------------------------
Type of Loan 1998 1997 1997 1996 1995
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate $ 30,137 $ 32,218 $ 32,437 $ 34,938 $ 34,996
Commercial 4,449 5,557 5,045 5,469 7,995
Consumer 2,530 3,001 2,920 3,436 3,976
Agricultural 18,026 14,059 13,942 9,409 7,363
-------- -------- -------- -------- --------
TOTAL 55,142 54,835 54,344 53,252 54,330
Less:
Deferred loans fees (205) (188) (182) (253) (363)
Allowance for loan
losses (1,160) (893) (952) (908) (1,128)
-------- -------- -------- -------- --------
TOTAL NET LOANS $ 53,777 $ 53,754 $ 53,210 $ 52,091 $ 52,839
======== ======== ======== ======== ========
</TABLE>
149
<PAGE> 164
COMMERCIAL LOANS. Commercial loans are made for the purpose of providing working
funds, financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from 30 to 360 days,
and "term loans", which are loans with maturities normally ranging from one to
five years. Short term business loans are generally used to finance current
transactions and typically provide for periodic interest payments, with
principal being payable at maturity or periodically. Term loans normally provide
for monthly payments of both principal and interest.
Lake also extends lines of credit to business customers. On business credit
lines, Lake specifies a maximum amount which it stands ready to lend to the
customer during a specified period in return for which the customer agrees to
maintain its primary banking relationship with Lake. The purpose for which such
loans will be used and the security therefor, if any, are generally determined
before Lake's commitment is extended. Normally, Lake does not make loan
commitments in material amounts for periods in excess of one year.
REAL ESTATE LOANS. Real estate loans are primarily made for the purpose of
purchasing, improving or constructing single family residences, and commercial
and industrial properties.
All of Lake's real estate construction loans consist of loans secured by first
trust deeds on the construction of owner-occupied single family dwellings.
Construction loans are generally written with terms of six to twelve months and
usually do not exceed a loan to appraised value ratio of 75 to 80%.
CONSUMER LOANS. Most consumer loans are short-term loans, made for a period of
up to five years. Automobile loans are normally made with up to a five-year
amortization period.
AGRICULTURAL LOANS. Agricultural loans are made for the purpose of providing
production loans and for financing the purchase of ag-equipment and ag-real
estate. Such loans are provided to well established ag-borrowers. Such loans
include loans with maturities ranging from 30 to 360 days, and "term" loans,
which are loans with maturities normally ranging from one to twenty years.
Production loans are used to finance current year crop expenses and typically
provide for periodic interest payments, with principal being payable at maturity
or periodically. Term loans normally provide for payments of both principal and
interest. Repayment may be monthly, quarterly, semi-annually or annually.
The outstanding balance of agricultural loans at September 30, 1998 increased
28% over the balance at September 30, 1997. Over the same period, the
outstanding balance of total loans increased 1%. This trend has existed over the
three-year period presented and represents a strategic decision by Lake's
management to increase the mix of agricultural loans in the portfolio. Lake's
management anticipates that this trend will continue into the future.
150
<PAGE> 165
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding as of September 30,
1998 and December 31, 1997 which, based on the remaining scheduled repayments of
principal, have the ability to be repriced or are due in less than one year, in
one to five years, or in more than five years.
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
--------- ----------- ---------- -----
<S> <C> <C> <C> <C>
September 30, 1998
- ------------------
Fixed rate $ 4,472 $17,552 $13,272 $35,296
Variable 17,808 2,658 0 20,466
------- ------- ------- -------
Total $22,280 $20,210 $13,272 $55,762
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
--------- ----------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1997
- -----------------
Fixed rate $ 3,956 $19,541 $14,433 $37,930
Variable 8,670 5,889 1,855 16,414
------- ------- ------- -------
Total $12,626 $25,430 $16,288 $54,344
======= ======= ======= =======
</TABLE>
LOAN COMMITMENTS. The following table shows Lake's loan commitments at the dates
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
------------------ -----------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial $ 1,705 $ 1,468 $ 3,793 $ 3,561 $ 4,303
Real estate 3,631 2,496 3,097 2,325 2,320
Consumer 434 469 402 434 449
Agricultural 5,175 6,432 7,814 4,463 4,933
------- ------- ------- ------- -------
Total commitments $10,945 $10,865 $15,106 $10,783 $12,005
======= ======= ======= ======= =======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 5% of the commitments at September 30, 1998 will
be exercised during 1998. All commercial commitments in the preceding table are
commitments to grant such loans. The commitments related to agricultural loans
are generally drawn down and repaid during the year.
SUMMARY OF LOAN LOSS EXPERIENCE. As a natural corollary to Lake's lending
activities, some loan losses are experienced. The risk of loss varies with the
type of loan being made and the creditworthiness of the borrower over the term
of the loan. To some extent, the degree of perceived risk is taken into account
in establishing the structure of, and interest rates and security for, specific
loans and for various types of loans. Lake attempts to minimize its credit risk
exposure by use of thorough loan application and approval procedures.
151
<PAGE> 166
Lake maintains a program of systematic review of its existing loans. Loans are
graded for their overall quality. Those loans which Lake's management determines
require further monitoring and supervision are segregated and reviewed on a
periodic basis. Significant problem loans are reviewed on a monthly basis by
Lake's Loan Committee. Loans for which it is probable that Lake will be unable
to collect all amounts due (including principal and interest) are considered to
be impaired. The recorded investment in impaired loans totaled $661 thousand and
$1,057 thousand at September 30, 1998 and December 31, 1997. In addition, when
principal or interest on a loan is past due 90 days or more, such loan is placed
on nonaccrual status unless it is both well-secured and in the process of
collection. Loans totaling approximately $1,184 thousand and $1,389 thousand
were on nonaccrual status as of September 30, 1998 and December 31, 1997,
respectively. Lake also classifies certain loans on nonaccrual status as
impaired. Accordingly, certain loans on nonaccrual status at September 30, 1998
and December 31, 1997 are included with the impaired loans disclosed above.
Financial difficulties encountered by certain borrowers may cause Lake to
restructure the terms of their loans to facilitate loan payments. As of December
31, 1997 and 1996, Lake had no troubled debt restructured loans. Interest
foregone on nonaccrual loans and troubled debt restructurings outstanding during
the nine months ended September 30, 1998 and the years ended December 31, 1997
and 1996 amounted to approximately $26 thousand, $76 thousand and $103 thousand,
respectively.
Lake charges off that portion of any loan which management or bank examiners
consider to represent a loss. A loan is generally considered by management to
represent a loss in whole or in part when an exposure beyond any collateral
value is apparent, servicing of the unsecured portion has been discontinued or
collection is not anticipated based on the borrower's financial condition and
general economic conditions in the borrower's industry. The principal amount of
any loan which is declared a loss is charged against Lake's allowance for loan
losses.
The following table sets forth the amount of loans on Lake's books which were 30
to 89 days past due at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------
(Dollars in thousands) 1998 1997 1996
------------ ------- -------
<S> <C> <C> <C>
Commercial $ 18 $ 12 $ 200
Real estate 485 260 1,012
Consumer 39 2 61
------ ------ ------
Total $ 542 $ 274 $1,273
====== ====== ======
</TABLE>
The following table sets forth the amount of loans on Lake's books which were on
nonaccrual status at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
(Dollars in thousands) 1998 1997 1996
------------ ------ ------
<S> <C> <C> <C>
Commercial $ 125 $ 136 $ 29
Real estate 1,059 1,253 1,394
Consumer 0 0 2
------ ------ ------
Total $1,184 $1,389 $1,425
====== ====== ======
</TABLE>
152
<PAGE> 167
The following table summarizes Lake's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
(Unaudited) Nine Months Ended
(Dollars in thousands) September 30, Year Ended December 31,
------------------ -------------------------------
1998 1997 1997 1996 1995
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $ 53,902 $ 55,273 $ 55,171 $ 56,608 $ 53,941
Loans at end of period 55,142 54,835 54,344 53,252 54,330
Loans charged off (85) (315) (257) (739) (147)
Recoveries of loans
previously charged off 23 30 38 42 47
Net loans charged off 62 285 (219) (697) (100)
Allowance for loan losses 1,160 893 952 908 1,128
Provisions for loan losses 270 270 263 477 210
Ratios(1):
Net loan charge-offs to
average loans 0.15% 0.69% 0.40% 1.23% 0.19%
Net loan charge-offs to
loans at end of period 0.15% 0.69% 0.40% 1.31% 0.18%
Allowance for loan
losses to average loans 2.15% 1.62% 1.73% 1.60% 2.09%
Allowance for loan losses
to loans at end of period 2.11% 1.63% 1.75% 1.70% 2.08%
Net loan charge-offs to
allowance for loan losses 7.13% 42.55% 23.00% 76.76% 8.87%
Net loan charge-offs to
provision for loan losses 22.96% 105.56% 83.27% 146.12% 47.62%
</TABLE>
- -------------
(1) Annualized for the nine months ended September 30, 1998 and 1997.
Lake's allowance for loan losses is to provide for loan losses which can be
reasonably anticipated. The allowance for loan losses is established through
charges to operating expenses in the form of provisions for loan losses.
Provisions for possible loan losses amounted to $263 thousand in 1997, $477
thousand in 1996 and $270 thousand for the first nine months of 1998. The
provision increased in 1996, 1997 and the first nine months of 1998 as a result
of identified losses in the loan portfolio totaling $739 thousand, $257 thousand
and $85 thousand, respectively, which were charged-off. Actual loan losses or
recoveries are charged or credited, respectively, directly to the allowance for
loan losses. The amount of the allowance is determined by the management of
Lake. Among the factors considered in determining the allowance for loan losses
are the current financial condition of Lake's borrowers and the value of the
security, if any, for their loans. Estimates of future economic conditions and
their impact on various industries and individual borrowers are also taken into
consideration, as are Lake's historical loan loss experience and reports of
banking regulatory authorities. Because these estimates and evaluations are
primarily judgmental factors, no assurance can be given that Lake may not
sustain loan losses substantially higher in relation to the size of the
allowance for loan losses or that subsequent evaluation of the loan portfolio
may not require substantial changes in such allowance.
153
<PAGE> 168
At December 31, 1997, 1996 and 1995, the allowance was 1.75%, 1.70%, and 2.08%
of the loans then outstanding, respectively. At September 30, 1998, the
allowance was 2.11% of the loans then outstanding. Although the current level of
the allowance is deemed adequate by management, future provisions will be
subject to continuing reevaluation of risks in the loan portfolio.
Management of Lake reviews with the Board of Directors the adequacy of the
allowance for loan losses on a monthly basis and adjusts the loan loss provision
upward where specific items reflect a need for such an adjustment. Management of
Lake charged off approximately $257 thousand in 1997, $739 thousand in 1996 and
approximately $85 thousand in the first nine months of 1998. Recoveries of loans
previously charged off were $38 thousand in 1997, $42 thousand in 1996 and $23
thousand during the first nine months of 1998. Charge-offs decreased in 1998 and
management does not believe there has been any significant deterioration in
Lake's loan portfolio. Management also believes that Lake has adequately
reserved for all individual items in its portfolio which may result in a loss
material to Lake.
INVESTMENT SECURITIES. Lake has invested $20,095 thousand in federal
instruments, securities issued by states and political subdivisions, other debt
securities and bank certificates of deposit, which yielded approximately 5.84%
per annum during the first nine months of 1998. Lake's present investment policy
is to invest excess funds in federal funds, certificates of deposits in
financial institutions, U.S. Treasuries, securities issued by the U.S.
Government and securities issued by states and political subdivisions.
154
<PAGE> 169
INTEREST RATES AND DIFFERENTIALS. Certain information concerning
interest-earning assets and interest-bearing liabilities and yields thereon is
set forth in the following table. Amounts outstanding are daily average
balances:
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in thousands) September 30,(1) Year Ended December 31,
(Unaudited) ---------------------- -----------------------------------------
1998 1997 1997 1996 1995
------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits:
Average outstanding $ 5,024 $ 3,654 $ 3,870 $ 3,432 $ 2,644
Average yield 5.92% 6.02% 6.02% 5.77% 6.05%
Interest income $ 223 $ 165 $ 233 $ 198 $ 160
Federal funds sold:
Average outstanding $ 4,510 $ 3,044 $ 3,751 $ 3,288 $ 4,008
Average yield 5.44% 5.39% 5.42% 5.11% 5.73%
Interest income $ 184 $ 123 $ 203 $ 168 $ 230
Investment securities:
Average outstanding $11,229 $ 9,347 $ 9,700 $12,658 $14,218
Average yield 5.90% 6.19% 6.13% 6.14% 5.76%
Interest income $ 497 $ 434 $ 595 $ 777 $ 819
Loans:
Average outstanding $53,903 $55,273 $55,171 $56,608 $53,941
Average yield 9.73% 10.00% 10.02% 10.08% 10.74%
Interest income $ 3,935 $ 4,146 $ 5,529 $ 5,704 $ 5,793
Total interest-earning assets:
Average outstanding $74,666 $71,318 $72,492 $75,986 $74,811
Average yield 8.64% 9.10% 9.05% 9.01% 9.36%
Interest income $ 4,839 $ 4,868 $ 6,560 $ 6,847 $ 7,002
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $13,014 $13,502 $13,585 $14,889 $15,046
Average yield 2.41% 2.33% 2.34% 2.20% 2.63%
Interest expense $ 235 $ 236 $ 318 $ 328 $ 395
Savings deposits:
Average outstanding $12,507 $13,586 $13,356 $14,096 $14,233
Average yield 2.24% 2.25% 2.25% 2.19% 2.77%
Interest expense $ 210 $ 229 $ 301 $ 309 $ 395
Time deposits:
Average outstanding $36,751 $34,749 $35,374 $38,706 $34,256
Average yield 5.34% 5.49% 5.50% 5.70% 6.61%
Interest expense $ 1,471 $ 1,430 $ 1,943 $ 2,208 $ 2,266
Total interest-bearing
liabilities:
Average outstanding $62,272 $61,837 $62,315 $67,691 $63,535
Average yield 4.10% 4.09% 4.11% 4.20% 4.81%
Interest expense $ 1,916 $ 1,895 $ 2,562 $ 2,845 $ 3,056
Net interest income $ 2,923 $ 2,973 $ 3,998 $ 4,002 $ 3,946
Average net yield of
interest-earning assets 5.22% 5.56% 5.52% 5.27% 5.27%
</TABLE>
- ---------------
(1) Nine month yields have been annualized.
155
<PAGE> 170
LIQUIDITY MANAGEMENT. Lake has a federal funds line of credit with its
correspondent bank, Union Bank of California, of $2,000 thousand. When Lake has
excess funds over its reserve requirements or short-term liquidity needs, Lake
increases/or decreases its securities investments and/or sells federal funds.
Policies have been developed by Lake's management and approved by the Board of
Directors which establish guidelines for the investments and liquidity of Lake.
These policies include an Investment Policy and an Asset/Liability Policy. The
goals of these policies are to provide liquidity to meet the financial
requirements of Lake's customers, maintain adequate reserves as required by
regulatory agencies and maximize earnings of Lake.
The following table shows Lake's average deposits for each of the periods
indicated below, based upon average daily balances:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------------
(Dollars in thousands) 1998 1997
-------------------- ----------------------
(Unaudited) Average Percent Average Percent
Balance of Total Balance of Total
------- -------- ------- --------
<S> <C> <C> <C> <C>
Demand deposits $12,201 16.38% $10,716 14.77%
NOW accounts 8,996 12.08% 9,362 12.90%
Savings deposits 12,507 16.79% 13,586 18.73%
Money market
deposits 4,018 5.40% 4,140 5.71%
Time deposits 36,751 49.35% 34,749 47.89%
------- -------
Total deposits $74,473 $72,553
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
---------------------- ------------------------ ----------------------
(Unaudited) Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $11,184 15.22% $ 9,883 12.74% $ 8,751 12.10%
NOW accounts 9,402 12.79% 10,080 12.99% 9,837 13.61%
Savings deposits 13,356 18.17% 14,096 18.17% 14,233 19.69%
Money market
deposits 4,183 5.69% 4,809 6.20% 5,209 7.21%
Time deposits 35,374 48.13% 38,706 49.90% 34,256 47.39%
------- ------- -------
Total deposits $73,499 $77,574 $72,286
======= ======= =======
</TABLE>
LIABILITY MANAGEMENT. It is management's policy to maintain the maturities of a
majority of its certificates of deposit in denominations of $100,000 or more to
less than one year. The maturities of such time certificates of deposit
("TCD's"), as well as other time deposits, were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ---------------------
TCD's Other TCD's Other
(Dollars in thousands) over Time over Time
(Unaudited) $100,000 Deposits $100,000 Deposits
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Less than three months $ 3,108 $11,078 $ 1,550 $10,030
Over three months
through twelve months 2,033 15,401 3,619 18,488
Over twelve months
through five years 647 4,326 525 3,088
------- ------- ------- -------
Total $ 5,788 $30,805 $ 5,694 $31,606
======= ======= ======= =======
</TABLE>
While the deposits of Lake may fluctuate up and down somewhat with local and
national economic conditions, management of Lake does not believe that such
deposits, or the business of Lake in general, are seasonal in nature. Liability
management is monitored by Lake's Board of Directors which meets monthly.
156
<PAGE> 171
REGULATORY MATTERS.
Capital Adequacy. Lake is subject to the FDIC's regulations governing capital
adequacy for nonmember banks. Additional capital requirements may be imposed on
banks based on market risk.
The FDIC has established capital adequacy regulations for nonmember banks, which
set total capital requirements and define capital in terms of "core capital
elements," or Tier 1 capital and "supplemental capital elements," or Tier 2
capital. At least fifty percent (50%) of the qualifying total capital base
must consist of Tier 1 capital. The maximum amount of Tier 2 capital that may be
recognized for risk-based capital purposes is limited to one-hundred percent
(100%) of Tier 1 capital, net of goodwill.
Nonmember banks are required to maintain a minimum ratio of qualifying total
capital to risk-weighted assets of eight percent (8%), at least one-half of
which must be in the form of Tier 1 capital. Risk-based capital ratios are
calculated with reference to risk-weighted assets, including both on and
off-balance sheet exposures, which are multiplied by certain risk weights
assigned by the FDIC to those assets.
The FDIC has established a minimum leverage ratio of three percent (3%) Tier 1
capital to total assets for nonmember banks that have received the highest
composite regulatory rating and are not anticipating or experiencing any
significant growth. All other institutions are required to maintain a leverage
ratio of at least 100 to 200 basis points above the 3% minimum for a minimum of
four percent (4%) or five percent (5%).
Set forth below are Lake's risk-based and leverage capital ratios as of
September 30, 1998 and December 31, 1997:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------
AMOUNT RISK-BASED RATIO
----------- ----------------
<S> <C> <C>
Tier 1 capital $ 9,256,046 13.5%
Total capital $10,110,225 14.8%
Total capital minimum requirement $ 5,466,744 8.0%
Excess $ 4,643,481
Total risk-weighted assets $68,334,306
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
AMOUNT RISK-BASED RATIO
----------- ----------------
<S> <C> <C>
Tier 1 capital $ 8,561,600 14.5%
Total capital $ 9,300,000 15.8%
Total capital minimum requirement $ 4,708,700 8.0%
Excess $ 4,591,300
Total risk-weighted assets $58,858,900
</TABLE>
157
<PAGE> 172
LEVERAGE RATIO
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------
AMOUNT LEVERAGE RATIO(1)
------ -----------------
<S> <C> <C>
Tier 1 capital $ 9,256,046 11.0%
Minimum leverage ratio $ 3,363,250 4.0%
Excess $ 5,892,796
Average assets $84,081,250(2)
</TABLE>
- -----------------
(1) Tier 1 capital to adjusted total average assets.
(2) As adjusted for intangibles and FAS 115.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
AMOUNT LEVERAGE RATIO(1)
------ -----------------
<S> <C> <C>
Tier 1 capital $ 8,561,600 10.4%
Minimum leverage ratio $ 3,299,300 4.0%
Excess $ 5,262,300
Average assets $82,481,900(2)
</TABLE>
- -------------------
(1) Tier 1 capital to adjusted total average assets.
(2) As adjusted for intangibles and FAS 115.
The risk-based capital ratio discussed above focuses principally on broad
categories of credit risk, and may not take into account many other factors that
can affect a bank's financial condition. These factors include overall interest
rate risk exposure; liquidity, funding and market risks; the quality and level
of earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rule-making proposals and under
FDICIA (as defined below), some of which are discussed herein. In addition to
evaluating capital ratios, an overall assessment of capital adequacy must take
account of each of these other factors including, in particular, the level and
severity of problem and adversely classified assets. For this reason, the final
supervisory judgment on a bank's capital adequacy may differ significantly from
the conclusions that might be drawn solely from the absolute level of the bank's
risk-based capital ratio. In light of the foregoing, the FDIC has stated that
banks generally are expected to operate above the minimum risk-based capital
ratio. Banks contemplating significant expansion plans, as well as those
institutions with high or inordinate levels of risk, should hold capital
commensurate with the level and nature of the risks to which they are exposed.
Recently adopted regulations by the federal banking agencies have revised the
risk-based capital standards to take adequate account of concentrations of
credit and the risks of nontraditional activities. Concentrations of credit
refers to situations where a lender has a relatively large proportion of loans
involving one borrower, industry, location, collateral or loan type.
Nontraditional activities are considered those that have not customarily been
part of the
158
<PAGE> 173
banking business but that start to be conducted as a result of developments in,
for example, technology or financial markets. The regulations require
institutions with high or inordinate levels of risk to operate with higher
minimum capital standards. The federal banking agencies also are authorized to
review an institution's management of concentrations of credit risk for adequacy
and consistency with safety and soundness standards regarding internal controls,
credit underwriting or other operational and managerial areas. In addition, the
agencies have promulgated guidelines for institutions to develop and implement
programs for interest rate risk management, monitoring and oversight.
Further, the banking agencies recently have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that the banking
agencies will consider in evaluating an institution's capital adequacy. Bank
examiners will consider a bank's historical financial performance and its
earnings exposure to interest rate movements as well as qualitative factors such
as the adequacy of a bank's internal interest rate risk management.
Finally, institutions with significant trading activities must measure and hold
capital for exposure to general market risk arising from fluctuations in
interest rates, equity prices, foreign exchange rates and commodity prices and
exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. The federal banking agencies may apply the
market risk regulations on a case by case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and interest
rate risk, the federal banking agencies will evaluate an institution in its
periodic examination on the degree to which changes in interest rates, foreign
exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies will focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
In certain circumstances, the FDIC may determine that the capital ratios for an
FDIC-insured bank must be maintained at levels which are higher than the minimum
levels required by the guidelines or the regulations. A bank which does not
achieve and maintain the required capital levels may be issued a capital
directive by the FDIC to ensure the maintenance of required capital levels.
Dividends. Dividends payable by Lake are restricted under California law to the
lesser of Lake's retained earnings, or Lake's net income for the latest three
fiscal years, less dividends previously declared during that period, or, with
the approval of the DFI, to the greater of the retained earnings of Lake, the
net income of Lake for its last fiscal year or the net income of Lake for its
current fiscal year.
The FDIC has broad authority to prohibit a bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends or other payments by the bank is
considered an unsafe or unsound banking practice and therefore, implement
corrective action to address such a practice.
159
<PAGE> 174
The following table set forth the distribution of repricing opportunities of
Lake's interest-earning assets and interest-bearing liabilities, the interest
rate sensitivity gap (i.e. interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of
December 31, 1997. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are
not necessarily constant. The table should, therefore, be used only as a
guide as to the possible effect changes in interest rates might have on
the net margins of Lake.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Over Six
Months Over
Next Day Through One Year
(Dollars in thousands) to Six Twelve Through Over
(Unaudited) Months Months Five Years Five Years Total
-------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 4,000 $ 4,000
Interest-bearing deposits 2,081 $ 2,377 $ 99 4,557
Investment securities 4,986 821 1,349 $ 4,820 11,976
Loans 15,784 5,105 7,669 25,786 54,344
-------- -------- -------- -------- -------
Total interest-earning assets 26,851 8,303 9,117 30,606 74,877
-------- -------- -------- -------- -------
Liabilities:
Savings deposits(1) 25,811 25,811
Time deposits 24,929 8,757 2,161 1,454 37,301
-------- -------- -------- -------- -------
Total interest-bearing liabilities 50,740 8,757 2,161 1,454 63,112
-------- -------- -------- -------- -------
Net (interest-bearing liabilities)
interest-earning assets $(23,889) $ (454) $ 6,956 $ 29,152 $11,765
======== ======== ======== ======== =======
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $(23,889) $(24,343) $(17,387) $ 11,765
======== ======== ======== ========
Cumulative GAP as a percentage of
total interest-earning assets (31.90)% (32.51)% (23.22)% 15.71%
======== ======== ======== ========
</TABLE>
- --------
(1) Savings deposits include interest-bearing transaction accounts.
The following table sets forth the distribution of the expected maturities of
Lake's interest-earning assets and interest-bearing liabilities as of
December 31, 1997 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 1998 maturity category.
160
<PAGE> 175
The following table set forth the distribution of repricing opportunities of
Lake's interest-earning assets and interest-bearing liabilities, the interest
rate sensitivity gap (i.e. interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of
December 31, 1997. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are
not necessarily constant. The table should, therefore, be used only as a
guide as to the possible effect changes in interest rates might have on
the net margins of Lake.
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Over Six
Months Over
Next Day Through One Year
(Dollars in thousands) to Six Twelve Through Over
(Unaudited) Months Months Five Years Five Years Total
-------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 4,000 $ 4,000
Interest-bearing deposits 2,081 $ 2,377 $ 99 4,557
Investment securities 4,986 821 1,349 $ 4,820 11,976
Loans 15,784 5,105 7,669 25,786 54,344
-------- -------- -------- -------- -------
Total interest-earning assets 26,851 8,303 9,117 30,606 74,877
-------- -------- -------- -------- -------
Liabilities:
Savings deposits(1) 25,811 25,811
Time deposits 24,929 8,757 2,161 1,454 37,301
-------- -------- -------- -------- -------
Total interest-bearing liabilities 50,740 8,757 2,161 1,454 63,112
-------- -------- -------- -------- -------
Net (interest-bearing liabilities)
interest-earning assets $(23,889) $ (454) $ 6,956 $ 29,152 $11,765
======== ======== ======== ======== =======
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $(23,889) $(24,343) $(17,387) $ 11,765
======== ======== ======== ========
Cumulative GAP as a percentage of
total interest-earning assets (31.90)% (32.51)% (23.22)% 15.71%
======== ======== ======== ========
</TABLE>
- --------
(1) Savings deposits include interest-bearing transaction accounts.
The following table sets forth the distribution of the expected maturities of
Lake's interest-earning assets and interest-bearing liabilities as of
December 31, 1997 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 1998 maturity category.
161
<PAGE> 176
EXPECTED MATURITIES
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
------- ------ ------ ------ ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 4,000 $ 4,000 $ 4,000
Weighted average rate 5.41% 5.41%
Interest-bearing deposits in banks $ 4,458 $ 99 $ 4,557 $ 4,557
Weighted average rate 6.12% 6.28% 6.12%
Investment securities(1) $ 1,489 $ 453 $1,789 $ 753 $ 988 $ 6,504 $11,976 $11,976
Weighted average rate 5.26% 5.18% 5.90% 6.26% 5.99% 6.32% 6.13%
Fixed rate loans $ 3,956 $4,758 $6,511 $5,516 $2,756 $14,433 $37,930 $38,693
Weighted average rate 10.28% 9.57% 9.72% 9.54% 9.22% 9.21% 9.37%
Variable rate loans(2) $ 8,670 $1,545 $ 753 $2,246 $1,345 $ 1,855 $16,414 $16,414
Weighted average rate 11.25% 11.00% 10.55% 10.25% 9.85% 9.75% 10.65%
Total interest-bearing assets $22,573 $6,855 $9,053 $8,515 $5,089 $22,792 $74,877 $75,640
Savings deposits(3) $25,811 $25,811 $25,811
Weighted average rate 2.30% 2.30%
Time deposits $33,687 $2,130 $1,484 $37,301 $37,592
Weighted average rate 5.27% 5.31% 5.49% 5.35%
Total interest-bearing liabilities $59,498 $2,130 $1,484 $63,112 $63,403
</TABLE>
- ------------
(1) Interest rates on tax exempt obligations have not been tax effected to
include the related tax benefits in calculating the weighted average yield.
(2) All variable rate loans reprice in one year or less.
(3) Savings deposits include interest-bearing transaction accounts.
162
<PAGE> 177
MANAGEMENT
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth
certain information, as of October 1, 1998, with respect to those persons who
are directors and executive officers of Lake:
<TABLE>
<CAPTION>
Year First
Appointed
Director or Principal Occupation
Name and Title Age Officer During the Past Five Years
- --------------------------------- --- -------------- ----------------------------------------------------------
<S> <C> <C> <C>
Donald L. Browning, M.D. 66 1984 Physician.
Director
F. Ilene Dumont 46 1995 Executive Director of People Services, Inc.
Director
John H. Helms 73 1984 Founder of Helms Petroleum Products Company.
Director
Billie L. Holmes 65 1984 Retired. Former owner and operator of several businesses
Vice Chairperson in Lake County.
of the Board
May G. Noble 78 1984 President of Noble Realty, Inc.
Director
Gary E. Nordine(1) 61 1985 President and Chief Executive Officer of Lake.
President, Chief Executive
Officer and Director
Brandt Peterson 53 1993 Senior Vice President and Senior Loan Officer of Lake.
Senior Vice President and
Senior Loan Officer
Lawrence A. Rogers 64 1984 Owner and operator of vineyards and pear orchards in
Director various regions of Lake County.
Howard (Bud) Van Lente 72 1984 Mayor of the city of Lakeport and two-term member of the
Chairman of the Board Lakeport City Council.
</TABLE>
- ---------------
(1) Mr. Nordine retired as President and Chief Executive Officer and
director of Lake effective October 31, 1998.
LAKE'S BOARD OF DIRECTORS AND COMMITTEES. Lake's Board of Directors met fourteen
(14) times in 1997. All of Lake's directors attended at least 75 percent of all
of Lake's Board of Directors' meetings and committee meetings (of which they
were a member), except Lawrence A. Rogers who attended 62% of such meetings.
Lake's Board of Directors has established the following standing committees,
with membership as noted.
Lake's Audit Committee is composed of Donald L. Browning, M.D. as Chairman, and
John H. Helms, Billie L. Holmes, and Lawrence A. Rogers as members. Lake's Audit
Committee met three (3) times during 1997. The functions of Lake's Audit
Committee are to recommend the appointment of and to oversee a firm of
independent public accountants which audits the books and records of Lake for
the fiscal year for which it is appointed, to
163
<PAGE> 178
approve each professional service rendered by such accountants and to evaluate
the possible effect of each such service on the independence of Lake's
accountants.
Lake's Asset/Liability and Funds Management Committee is composed of F. Ilene
Dumont, John H. Helms, Billie L. Holmes, May G. Noble, Lawrence A. Rogers,
Brandt Peterson and Vice President/Controller Dorey Pendleton as members. Lake's
Asset/Liability and Funds Management Committee met twelve (12) times during
1997. The function of Lake's Asset/Liability and Funds Management Committee is
to review and evaluate Lake's investment portfolio with management of Lake.
Lake's Loan Committee is composed of Billie L. Holmes as Chairperson, and F.
Ilene Dumont, John H. Helms, May G. Noble, Gary E. Nordine, Howard ("Bud")Van
Lente and Brandt Peterson as members. Lake's Loan Committee met eighteen (18)
times during 1997. The function of Lake's Loan Committee is to review loans made
and to assist management in setting loan policies for Lake. Lake's Loan
Committee also reviews and approves loan requests which exceed the discretionary
lending limits of Lake's officers.
Lake does not maintain a nominating committee. The functions of a nominating
committee are performed by the full Board of Directors of Lake.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
Director Compensation. Lake's director each receive $500 for each regular Lake
Board of Directors' meeting attended and Lake's Chairman of the Board receives
$900 for each regular Lake Board of Directors' meeting attended. Lake's
directors do not receive fees for committee meetings attended, except for
members of Lake's Loan Committee. Nonemployee members of Lake's Loan Committee
receive $150 for each regularly-scheduled Lake Loan Committee meeting attended,
and the Chairman of such Lake Loan Committee receives $250 for each
regularly-scheduled Lake Loan Committee meeting attended. During the fiscal year
ended December 31, 1997, the aggregate amount paid to all directors as a group
was $57,500.
Executive Compensation. The following table sets forth a summary of the
compensation paid during each of Lake's last three completed fiscal years for
services rendered in all capacities to Gary E. Nordine, the Chief Executive
Officer of Lake during the last three fiscal years.
164
<PAGE> 179
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary E. Nordine, President, 1997 $ 96,900 $ 0 $ 4,800 0 0 0 $298,557(2)
-------------------------------------------------------------------------------------------------
CEO and Director of Lake 1996 $ 96,900 $ 0 $ 4,800 0 0 0 $291,423
-------------------------------------------------------------------------------------------------
1995 $ 99,300 $ 32,500 $ 4,800 0 0 0 $299,160
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of an annual automobile allowance.
(2) Reflects (for 1997) $292,206 Mr. Nordine would be entitled to receive
(295% of his base salary) if his employment is terminated as a result of a
merger or change in control of Lake. Mr. Nordine may be entitled to other
payments in the event of termination of employment under other
circumstances. Also includes (for 1997) $750 contributed by Lake to Mr.
Nordine's account in Lake's 401(k) Plan, $5,000 in directors' fees paid by
Lake and $601 in term life insurance payments made by Lake on behalf of
Mr. Nordine.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year End (#) Year End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary E. Nordine 0 0 17,850/0 $22,313/$0
</TABLE>
165
<PAGE> 180
On February 1, 1995, the expiration date of Mr. Nordine's five (5) year
employment agreement with Lake was extended to February 1, 1999. On March 29,
1996, Lake entered into a new agreement with Mr. Nordine, effective February 1,
1996, which replaced the prior agreement (the "1996 Agreement"). Subject to
prior termination by either Lake or Mr. Nordine, the 1996 Agreement is for a
term of five (5) years; provided, however, that the original term shall be
automatically extended for one (1) month upon completion of each additional
month of employment, unless Lake gives Mr. Nordine one (1) year's notice of
intent to terminate. As of February 1, 1998, Mr. Nordine's current annual salary
under the 1996 Agreement is $96,900, subject to annual increases within the sole
discretion of Lake's Board of Directors. Lake also may pay an annual
discretionary bonus to Mr. Nordine based upon his efforts and performance. Mr.
Nordine also receives an automobile allowance of $400 per month and he is
reimbursed for all ordinary and necessary expenses incurred in promoting the
business of Lake. Further, Mr. Nordine has health, accident and disability
insurance and a term life insurance policy in the amount of $135,000, with a
portion of the premium being paid by Lake. The portion of the premiums paid by
Lake for such insurance during 1996 was $268. If Mr. Nordine is terminated
without cause during the term of the agreement, he will be entitled to receive
severance pay in an amount equal to six (6) months' salary at his then
prevailing rate. As Mr. Nordine retired effective October 31, 1998, his
employment agreement expired as of that date.
Upon consummation of the Lake Merger, Gary Nordine will receive a severance
payment of $145,000 (net of taxes), with the tax liability being shared equally
by the Bancorp and Lake. In recognition of Mr. Nordine' retirement as of October
31, 1998, the severance payment to Mr. Nordine is not contingent upon his being
employed by Lake as of the Lake Effective Time. Mr. Nordine will continue to
receive his monthly salary, but no other benefits, from November 1 through
November 30, 1998.
Mr. Nordine also has an Executive Retirement Agreement with Lake which provides
that Lake will pay Mr. Nordine $36,000 a year, in monthly payments, for a period
of ten (10) years, commencing in January 1999.
In the event of death prior to retirement, Mr. Nordine's beneficiaries would
receive $106,000 during the first year following death and $53,000 per year in
each of years 2-15 following death. Death benefits in the first year after death
is based upon 100% of Mr. Nordine's 1990 salary. Benefits in years 2-15 are
based upon 50% of such salary.
To fund its obligation under this plan, Lake acquired a life insurance policy
under which Lake is the owner and beneficiary. Mr. Nordine has no claim on the
insurance policy, its cash value or the proceeds thereof. The policy's cash
value is a general, unpledged, unrestricted earning asset of Lake. During the
fiscal year ended December 31, 1997, Lake paid insurance premiums of $50,000.00.
On January 27, 1994, Lake's Board of Directors adopted an incentive compensation
plan pursuant to which a yearly incentive bonus pool would be established based
upon 15% of net income, less 401(k) Plan contributions. Payment of incentive
compensation is predicated upon Lake achieving "Premier Performer" status as
defined by The Findley Reports, and as adjusted from time to time. If "Premier
Performer" status is not achieved in any given year, the participants will not
be eligible for incentive compensation under the plan. However, Lake's Board of
Directors, in its sole discretion, may elect to evaluate any extraordinary
circumstances that may have impacted operating performance and make
corresponding adjustments if deemed appropriate.
Incentive bonus allocations are made at the sole discretion of Lake's Board of
Directors, and can be adjusted from time-to-time as Lake's Board or Directors
deems appropriate to accurately reflect individual performance as supported by
an annual evaluation.
During 1997, no contribution to the incentive bonus pool was made by Lake.
166
<PAGE> 181
CERTAIN TRANSACTIONS
Since January 1, 1997, the largest aggregate amounts of any extensions of credit
to directors, principal officers, principal shareholders and their respective
associates as a group was $447,362.59, which represented approximately 4.74% of
the total equity capital accounts of Lake as of September 30, 1998. Lake has had
and expects to have in the future, banking transactions in the ordinary course
of its business with directors, officers, principal shareholders and their
associates, on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the time for comparable transactions
with others and which do not involve more than the normal risk of collectibility
or present other unfavorable features.
At no time since January 1, 1997 has Lake had outstanding aggregate extensions
of credit to any of its directors, officers, principal security holders or their
respective associates in excess of 10% of the equity accounts of Lake.
There have been no transactions since January 1, 1997, nor are there any
presently proposed transactions, to which Lake was or is to be a party in which
any of Lake's officers and directors had or have a direct or indirect material
interest other than the proposed Lake Merger.
167
<PAGE> 182
DESCRIPTION OF ROSE
BUSINESS
GENERAL. Rose was incorporated under the laws of the State of California on
April 2, 1997. Rose was organized pursuant to a plan of reorganization for the
purpose of becoming the parent corporation of R1NB, and on March 10, 1998, the
reorganization was effected. Shareholders of R1NB became shareholders of Rose as
of this date. The issuance of shares of Rose stock in exchange for R1NB stock
was deferred pending the Rose Merger. Rose is a registered bank holding company
under the Bank Holding Company Act of 1956. Rose conducts its operations at the
head office of R1NB located at 1801 Douglas Boulevard, Roseville, California
95661.
R1NB was founded in 1983 as Countryside Thrift and Loan ("Countryside").
Countryside operated as an industrial loan company until its conversion to a
national bank in 1992. During this time, Countryside primarily originated
consumer and mortgage loans. A change in control occurred in 1990 when
Countryside was recapitalized and FDIC insurance was obtained. On January 22,
1992, Countryside applied for conversion to a national bank through the
Comptroller. After a field examination was conducted by the Comptroller, the
request was approved on April 6, 1992, and Countryside converted to a national
bank on July 1, 1992.
R1NB is a member of the Federal Reserve System and its deposits are insured to
the maximum amount permitted by law by the FDIC. R1NB's head office is located
at 1801 Douglas Boulevard, Roseville, California and its branch office is
located at 6951 Douglas Boulevard, Granite Bay, California. R1NB does not have
any affiliates or subsidiaries.
BANKING SERVICES. Rose is a locally owned and operated bank holding company and
its primary service area is the Northern California communities of Roseville and
Granite Bay as well as close proximity areas of Placer and Sacramento counties.
Rose's primary business is servicing the banking needs of these communities
through R1NB and its marketing strategy stresses community involvement and
commitment to serve the banking needs of consumers living and working in Rose's
primary service areas and local merchants, professionals and real estate related
activities in those service areas.
R1NB offers a broad range of services to individuals and businesses in its
primary service area with an emphasis upon efficiency and personalized customer
service. R1NB provides a full line of consumer services and also offers
specialized services, such as courier services to small businesses, middle
market companies and professional firms. R1NB offers personal and business
checking and savings accounts (including individual interest-bearing negotiable
orders of withdrawal ("NOW"), money market accounts, IRA accounts, time
certificates of deposit and direct deposit of social security, pension and
payroll checks. R1NB also makes available commercial, construction, accounts
receivable, inventory, automobile, home improvement, real estate, commercial
real estate, single family mortgage, office equipment, leasehold improvement and
installment loans (as well as overdraft protection lines of credit), issues
drafts and standby letters of credit, sells traveler's checks (issued by an
independent entity), offers ATM's tied in with major statewide and national
networks, provides telephone banking services and offers other customary
commercial banking services.
Most of R1NB's deposits are obtained from commercial businesses, professionals
and individuals. At September 30, 1998, R1NB had a total of 2,651 accounts,
consisting of demand deposit accounts with an average balance of approximately
$12,128; savings, NOW and money market accounts with an average balance of
approximately $14,549, time certificates of $100,000 or more with an average
balance of approximately $139,545; and other time deposits with an average
balance of approximately $26,175. R1NB does not have any deposits obtained
through deposit brokers at this time and has no intention of using brokered
deposits.
168
<PAGE> 183
Other special services and products include personal and business checking
products and mortgage products and services.
EMPLOYEES. At September 30, 1998 Rose and its subsidiaries employed 25 persons
on a full-time basis. Rose believes its employee relations are excellent.
PROPERTIES. R1NB owns the real property located at 1801 Douglas Boulevard,
Roseville, California. The building situated on the property consists of 7,960
square feet and houses the executive and head offices of Rose and R1NB.
R1NB leases the premises of R1NB's Granite Bay branch office located at 6951
Douglas Boulevard, Granite Bay, California. The lease is presently for a term
expiring July 1, 2000. The office space at this branch consists of approximately
2,800 square feet and is the site of R1NB's computer and back office operations.
R1NB leases warehouse facilities located at 209-A Harding Boulevard, Roseville,
California. The premises are rented on a month-to-month basis. Off-site storage
consists of approximately 800 square feet.
LEGAL PROCEEDINGS. From time to time, Rose and/or R1NB is a party to claims and
legal proceedings arising in the ordinary course of business. Rose's management
is not aware of any material pending litigation proceedings to which either it
or R1NB is a party or has recently been a party to, which will have a material
adverse effect on the financial condition or results of operations of Rose and
R1NB taken as a whole.
SUPERVISION AND REGULATION.
Supervision and Regulation of Bank Holding Companies. Rose is a bank holding
company subject to the BHCA. Rose reports to, registers with, and may be
examined by, the FRB. The FRB also has the authority to examine Rose's
nonbanking subsidiaries. The costs of any examination by the FRB are payable by
Rose.
Rose also is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such Rose and R1NB are subject to examination by,
and may be required to file reports with, the DFI.
The FRB has significant supervisory and regulatory authority over Rose and its
affiliates. The FRB requires Rose to maintain certain levels of capital. See
"DESCRIPTION OF ROSE--Rose's Management's Discussion And Analysis of Financial
Condition And Results Of Operations--Regulatory Matters." The FRB also has the
authority to take enforcement action against any bank holding company that
commits any unsafe or unsound practice, or violates certain laws, regulations or
conditions imposed in writing by the FRB. See "INFORMATION CONCERNING THE
BANCORP, LAKE AND ROSE--Recent Legislation and Other Changes."
Under the BHCA, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, Rose would be required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company; and any company seeking to acquire, merge or
consolidate with Rose also would be required to obtain the approval of the FRB.
Rose is generally prohibited under the BHCA from acquiring ownership or control
of more than 5% of the voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than banking, managing banks, or providing services to affiliates of the holding
company. A bank holding company, with the approval of the FRB, may engage, or
acquire the voting shares of companies engaged, in activities that the FRB has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. A bank holding company must demonstrate that
the benefits to the public of the proposed activity will outweigh the possible
adverse effects associated with such activity.
169
<PAGE> 184
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Banks may also merge
across states lines, therefore creating interstate branches. Furthermore, a bank
is now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "DIVIDENDS" for additional restrictions.
Transactions between Rose and R1NB are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. Rose may only
borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, Rose may not sell a low-quality asset to a depository institution
subsidiary.
The FRB has adopted comprehensive amendments to Regulation Y which became
effective April 21, 1997, and are intended to improve the competitiveness of
bank holding companies by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank holding companies may
engage without prior FRB approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying restrictions imposed
upon bank holding companies and their nonbank subsidiaries. Amended Regulation Y
also provides for a streamlined and expedited review process for bank
acquisition proposals submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements when there has been a
further change in bank control or in bank directors or officers after an earlier
approved change. These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for a bank holding
company to qualify as "well-run," both it and the insured depository
institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most
recent examination or review must have received a composite rating, rating for
management and rating for compliance
170
<PAGE> 185
which were at least satisfactory; (ii) none of the bank holding company's
depository institutions may have received one of the two lowest composite
ratings; and (iii) neither the bank holding company nor any of its depository
institutions during the previous 12 months may have been subject to a formal
enforcement order or action.
Bank Supervision and Regulation. As a national bank, R1NB is regulated,
supervised and regularly examined by the Comptroller. Deposit accounts at R1NB
are insured by Bank Insurance Fund ("BIF"), as administered by the FDIC, to the
maximum amount permitted by law. R1NB is also subject to applicable provisions
of California law, insofar as such provisions are not in conflict with or
preempted by federal banking law. R1NB is a member of the Federal Reserve
System, and is also subject to certain regulations of the FRB dealing primarily
with check clearing activities, establishment of banking reserves,
Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal
Credit Opportunity (Regulation B).
The Comptroller may approve, on a case-by-case basis, the entry of bank
operating subsidiaries into a business incidental to banking, including
activities in which the parent bank is not permitted to engage. A national bank
is permitted to engage in activities approved for a bank holding company through
a bank operating subsidiary, such as acting as an investment or financial
advisor, leasing personal property and providing financial advice to customers.
In general, these activities are permitted only for well-capitalized or
adequately capitalized national banks.
By comparison, California state-chartered banks are regulated by the Department
of Financial Institutions. The Department of Financial Institutions was created
pursuant to AB 3351, effective July 1, 1997, and combined the California State
Banking Department, the California Department of Savings and Loan, and
regulatory oversight over industrial loan companies and credit unions with the
Department of Financial Institutions.
Community Reinvestment Act and Fair Lending Developments. R1NB is subject to
certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act ("CRA") activities.
The CRA generally requires the federal banking agencies to evaluate the record
of a financial institution in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In addition to
substantive penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities.
SUMMARY OF EARNINGS
The following Summary of Earnings of Rose for the three years ended December 31,
1997 has been derived from financial statements audited by Perry-Smith & Co.,
LLP, independent certified public accountants, as described in their report
included elsewhere in this Joint Proxy Statement/Prospectus. The amounts shown
for the nine months ended September 30, 1998 and 1997 are unaudited. The
September 30, 1998 and 1997 amounts reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. These
statements should be read in conjunction with the Financial Statements and the
Notes relating thereto which appear elsewhere herein. Rose acquired 100%
ownership of R1NB on March 10, 1998 and was approved as a bank holding company
on this date. Financial statements for September 30, 1998 represent the
consolidation of Rose and R1NB. Prior period Financial Statements represent
R1NB's financial information.
171
<PAGE> 186
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,(1)
(Dollars in thousands, ---------------------- ------------------------------------
except per share data) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 2,990 $ 2,844 $ 3,894 $ 3,028 $ 2,664
Interest expense 1,303 1,198 1,664 1,331 1,288
Net interest income 1,687 1,646 2,230 1,697 1,376
Provision for loan losses 105 126 564 89 55
Net interest income after
provision for loan losses 1,582 1,520 1,666 1,608 1,321
Other noninterest income 415 220 341 228 126
Noninterest expense 1,594 1,175 1,692 1,330 1,145
Earnings before income taxes 403 565 315 506 302
Provision for income taxes(2) 161 226 133 204 104
Net income 242 339 182 302 198
Basic earnings per share(3) $ .75 $ 1.06 $ .57 $ .94 $ .62
Number of shares used in basic
earnings per share calculation(3) 320,158 319,972 319,972 319,872 319,572
Diluted earnings per share(4) $ .72 $ 1.04 $ .56 $ .93 $ .61
Number of shares used in diluted
earnings per share calculation(4) 333,661 324,648 324,648 324,622 324,530
</TABLE>
- ----------
(1) See Notes to Financial Statements for a summary of significant accounting
policies and other related data.
(2) See Notes to Financial Statements for an explanation of income taxes.
(3) Basic earnings per share information is based on the weighted average
number of shares of common stock outstanding during each period.
(4) Diluted earnings per share information is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during each period.
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
(Unaudited) September 30, December 31,
------------------- --------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 7.97% 11.45% 4.54% 8.23% 5.83%
Net earnings to
average total assets(1) .66% 1.05% .41% .86% .64%
Total interest expense to
total interest income 43.58% 42.12% 42.73% 43.96% 48.35%
Other operating income to
other operating expense 26.04% 18.72% 20.15% 17.14% 11.00%
</TABLE>
- ----------
(1) Ratios have been annualized for the nine months ended September 30, 1998
and 1997.
172
<PAGE> 187
ROSE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in income and expense accounts presented in the Summary of Earnings for the
years ended December 31, 1997, 1996 and 1995 and the nine months ended September
30, 1998 and 1997.
INTRODUCTION. This discussion is designed to provide a better understanding of
significant trends related to Rose's financial condition, results of operations,
liquidity, capital resources and interest rate sensitivity. It should be read in
conjunction with Rose's audited financial statements and unaudited interim
financial statements and notes thereto and the other financial information
appearing elsewhere in this Joint Proxy Statement/Prospectus.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income increased
from $2,664 thousand in 1995 to $3,028 thousand in 1996, and to $3,894 thousand
in 1997, representing a 13.7% increase in 1996 over 1995 and a 28.6% increase in
1997 over 1996. Total interest income increased from $2,844 thousand for the
nine months ended September 30, 1997, to $2,990 thousand for the nine months
ended September 30, 1998, representing a 5.1% increase. The total interest
income increases in the periods discussed were primarily the result of the
growth in Rose's loan and investment portfolios of 21.1%, 22.7% and 1.5% from
1995 to 1996, 1996 to 1997, and September 30, 1997 to September 30, 1998.
Additionally, during 1997 commercial loans, the highest yielding component of
the loan portfolio, increased by 94% to represent 25% of the loan portfolio at
December 31, 1997. Growth in the loan portfolio and related net interest income
slowed in the first nine months of 1998 due to increased competition for quality
loans. Total interest expense increased from $1,288 thousand in 1995 to $1,331
thousand in 1996 and to $1,664 thousand in 1997, representing a 3.4% increase in
1996 over 1995 and a 25.0% increase in 1997 over 1996. Total interest expense
increased from $1,198 thousand for the nine months ended September 30, 1997, to
$1,304 thousand for the nine months ended September 30, 1998, representing an
8.8% increase. Total interest expense increased from 1996 to 1997 due primarily
to a 33.6% growth in deposits and increase in higher yielding time deposits from
50.3% to 54.9% of total interest-bearing deposits during that period. The growth
in deposits since 1997 resulted in the increase in interest expense for the nine
months ended September 30, 1998 over the same nine month period in 1997.
Rose's net interest margin (net interest income divided by average earning
assets) was 4.76% in 1995, 5.26% in 1996, and 5.40% in 1997. The net interest
margin for the nine months ended September 30, 1997 was 5.56% and for the nine
months ended September 30, 1998 was 5.10%. The primary reason for the decrease
in the net interest margin for the nine months ended September 30, 1998 from the
nine months ended September 30, 1997 was the overall change in mix in the loan
portfolio, which decreased the yield on interest-earning assets, as well as the
increases in yields on interest-bearing liabilities. Rose's net interest income
increased from $1,376 thousand in 1995 to $1,697 thousand in 1996 and to $2,231
thousand in 1997, representing a 23.3% increase in 1996 over 1995 and a 31.4%
increase in 1997 over 1996. The increases in the periods discussed were
primarily the result of the overall growth of Rose and the fact that interest
rates for interest-bearing liabilities increased at a slower rate than interest
rates on interest-earning assets. Net interest income increased from $1,646
thousand for the nine months ended September 30, 1997 to $1,686 thousand for the
nine months ended September 30, 1998, representing a 2.5% increase. The increase
in net interest income for the nine months ended September 30, 1998 over the
nine months ended September 30, 1997 was at a reduced growth rate primarily due
to decreasing yields on loans due to market pressures.
173
<PAGE> 188
The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:
ANALYSIS OF CHANGES IN NET INTEREST INCOME.
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
-----------------------------------------------------------------------------
1997 Versus 1996 1996 Versus 1995
---------------------------------- ----------------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CDs in other institutions $ (6) $ 0 $ (6) $ (7) $ 0 $ (7)
Federal funds sold 90 11 79 25 (18) 43
Investment securities 40 (2) 42 (35) 36 (71)
Loans, gross 742 (5) 747 381 (22) 403
------ ---- ------ ------ ---- ------
Total interest-
earnings assets $ 866 $ 4 $ 862 $ 364 $ (4) $ 368
------ ---- ------ ------ ---- ------
NOW, MMDA $ 144 $(11) $ 155 $ 68 $(56) $ 124
Savings 8 0 8 7 0 7
Certificates of deposit 181 8 173 (32) (28) (4)
------ ---- ------ ------ ---- ------
Total interest-
bearing liabilities $ 333 $ (3) $ 336 $ 43 $(84) $ 127
------ ---- ------ ------ ---- ------
Net interest income $ 533 $ 7 $ 526 $ 321 $ 80 $ 241
====== ==== ====== ====== ==== ======
</TABLE>
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
The following is an unaudited summary of changes in earnings of Rose for the
nine months ended September 30, 1998 and 1997 and for the years ended December
31, 1997 and 1996. In the opinion of Rose's management, the following summary of
changes in earnings reflects all adjustments which Rose considers necessary for
a fair presentation of the results of its operations for these periods. This
summary of changes in earnings should be read in conjunction with the Financial
Statements and Notes relating thereto appearing elsewhere herein.
174
<PAGE> 189
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, -------------------------------------------------------
(Dollars in thousands) 1998 over 1997 1997 over 1996 1996 over 1995
---------------------- ------------------------- ------------------------
(Unaudited)
Amount of % of Amount of % of Amount of % of
Change Change Change Change(1) Change Change(1)
--------- ------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 92 3.8% $ 742 29.2% $ 381 17.6%
Interest on securities (28) (13.9)% 40 17.7% (35) (13.4)%
Interest on federal funds sold 82 39.0% 90 35.9% 25 11.1%
Interest on deposits in
other financial institutions 0 0% (6) (100.0)% (7) (54.6)%
------ ------ ------
Total interest income 146 5.1% 866 28.6% 364 13.7%
INTEREST EXPENSE
Interest on deposits 105 8.8% 333 25.0% 43 3.3%
------ ------ ------
Net interest income 41 2.5% 533 31.4% 321 23.3%
PROVISION FOR
LOAN LOSSES (Benefit) (21) (16.7)% 475 533.7% 34 61.8%
------ ------ ------
Net interest income after
provision for loan losses 62 4.1% 58 3.6% 287 21.7%
------ ------ ------
NONINTEREST INCOME
Service charges 10 24.4% 25 75.8% 13 65.0%
Other income 185 103.4% 88 44.7% 89 84.8%
------ ------ ------
Total noninterest income 195 88.6% 113 49.6% 102 81.0%
------ ------ ------
OTHER EXPENSES
Salaries and related benefits 101 16.7% 116 16.6% 124 21.5%
Occupancy and
equipment expense 55 37.2% 27 18.0% 4 2.7%
Other 263 62.2% 219 45.7% 57 13.5%
------ ------ ------
Total other expenses 419 35.7% 362 27.2% 185 16.1%
------ ------ ------
Income before income taxes (162) (28.7)% (191) (37.8)% 204 67.6%
PROVISION FOR
INCOME TAXES (BENEFIT) (65) (28.8)% (71) (34.8)% 100 96.2%
------ ------ ------
NET INCOME $ (97) (28.6)% $ (120) (39.7)% $ 104 52.5%
====== ====== ======
</TABLE>
- ----------
(1) Increase or (decrease) over previous year amount.
NONINTEREST INCOME. Noninterest income increased from $126 thousand in 1995 to
$228 thousand in 1996 and to $341 thousand in 1997, representing a 81.0%
increase in 1996 over 1995 and a 49.3% increase in 1997 over 1996. Noninterest
income increased from $220 thousand for the nine months ended September 30, 1997
to $415 thousand for the nine months ended September 30, 1998, representing an
88.6% increase. The increases in noninterest income in 1996 and 1997 were
primarily the result of service charges and fees related to increased deposits
and new product service fees. The increases for the first nine months of 1998
over the same period in 1997 were the result of increased sales of loans with
gains totaling $130 thousand and earnings related to life insurance policies on
key members of senior management.
OTHER EXPENSES. The continued growth of Rose required additional staff and
overhead expense to support general and administrative services and increased
the cost of occupying Rose's main office and one branch opened in May 1997.
Other expenses are comprised of salaries and related benefits, occupancy,
equipment and other expenses.
175
<PAGE> 190
Other expenses increased from $1,145 thousand in 1995 to $1,330 thousand in
1996, and to $1,693 thousand in 1997, representing a 16.1% increase in 1996 over
1995 and a 27.2% increase in 1997 over 1996. Other expenses increased from
$1,175 thousand for the nine months ended September 30, 1997 to $1,594 thousand
for the nine months ended September 30, 1998 representing a 35.7% increase.
Salaries were also adjusted for 1998 to be competitive with the industry and to
reward performance. The increase in total other expenses for the periods
compared was due to the continued growth of Rose, computer system conversion
expenses in 1997 and the costs of forming a holding company in 1998.
The following table compares the various elements of other expenses as a
percentage of average assets for the years ended December 31, 1997, 1996 and
1995 and the nine months ended September 30, 1998 and 1997. (Dollars in
thousands except percentage amounts.)
<TABLE>
<CAPTION>
Salaries Occupancy Other
Average and Related & Equipment Operating
Period Assets(1) Benefits Expenses Expenses
- ----------------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Nine Months Ended
September 30,(2)
- -----------------
1998 $49,020 2.06% .55% 1.73%
1997 $42,876 1.88% .46% 1.32%
Year Ended
December 31,
- -----------------
1997 $44,625 1.83% .40% 1.56%
1996 $35,188 1.99% .43% 1.36%
1995 $30,914 1.87% .47% 1.36%
</TABLE>
- ----------
(1) Based on the average of daily balances.
(2) Expense ratios are calculated on an annualized basis.
PROVISION FOR LOAN LOSSES. The provision for loan losses corresponds directly to
the level of the allowance that management deems sufficient to offset potential
loan losses. The balance in the loan loss allowance reflects the amount which,
in management's judgement, is adequate to provide for these potential loan
losses after weighing the mix of the loan portfolio, current economic
conditions, past loan experience and such other factors deserving recognition in
estimating loan losses.
Management allocated $564 thousand as a provision for loan losses in 1997, $89
thousand in 1996 and $55 thousand in 1995. Loans charged off net of recoveries
in 1997 were $94 thousand, in 1996 were $21 thousand and in 1995 were $28
thousand. For the nine months ended September 30, 1998, $105 thousand was
allocated as a provision for loan losses and for the nine months ended September
30, 1997, $126 thousand was allocated as a provision for loan losses. Loans
charged off net of recoveries for the nine months ended September 30, 1998 were
$533 thousand and for the nine months ended September 30, 1997 were $89
thousand. During the first nine months of 1998, $481 thousand of the amount
charged off was related to a single commercial loan and $400 thousand was added
to the provision for loan losses in December 1997 to cover this risk. The ratio
of the allowance for loan losses to total gross loans was 2.07% in 1997, .92% in
1996, and .81% in 1995, and for the interim periods was .95% at September 30,
1998 and .90% at September 30, 1997.
In management's opinion, the balance of the allowance for loan losses at
September 30, 1998 was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
176
<PAGE> 191
INCOME TAXES. Income taxes were $133 thousand in 1997, $204 thousand in 1996 and
$104 thousand in 1995. The income tax provision for the nine months ended
September 30, 1998 and 1997 was $161 thousand and $226 thousand, respectively.
NET INCOME. The net income of Rose was $182 thousand or $.57 in basic earnings
per share in 1997, $302 thousand or $.94 in basic earnings per share in 1996,
and $198 thousand or $.62 in basic earnings per share in 1995. The income for
these periods was primarily due to net interest income and service charges and
fees. The net income for the nine months ended September 30, 1998 was $242
thousand or $.75 in basic earnings per share as compared to a net income of $339
thousand or $1.06 in basic earnings per share for the nine months ended
September 30, 1997. The decrease in net income for the first nine months of 1998
from the same period in 1997 was due to higher expenses resulting from staffing
increases, installation of new computer systems and the cost of forming Rose as
a holding company.
LIQUIDITY. Rose has an asset and liability management program allowing Rose to
maintain its interest margins during times of both rising and falling interest
rates and to maintain sufficient liquidity. Liquidity of Rose at December 31,
1997 was 24.21%, at December 31, 1996 was 23.23%, and at December 31, 1995 was
24.79% based on liquid assets (consisting of cash and due from banks, deposits
in other financial institutions, investments not pledged, federal funds sold and
loans available-for-sale) divided by total liabilities. Rose's management
believes it maintains adequate liquidity levels.
CAPITAL RESOURCES. The shareholders' equity accounts of Rose increased from
$3,467 thousand at December 31, 1995, to $3,775 thousand at December 31, 1996
and to $3,964 thousand at December 31, 1997. These increases are attributable to
earnings of Rose in 1996 and 1997. Rose is subject to various regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Rose must meet specific capital guidelines that involve quantitative measures of
Rose's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. Rose's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Rose to maintain minimum amounts and ratios of total and Tier 1 capital
(primarily common stock and retained earnings less goodwill) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
September 30, 1998, that Rose exceeds all capital adequacy requirements to which
it is subject.
As of June 30, 1998, the most recent notification from the FDIC categorized Rose
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized Rose must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table below. There are no conditions or events since that notification which
management believes have changed Rose's category.
177
<PAGE> 192
Rose's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized September 30,
Requirement Requirement 1998
----------- ----------- -------------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 11.65%
Total risk-based to
risk-weighted assets 8% 10% 12.41%
Leverage to total
average assets 4-5% 5% 9.31%
</TABLE>
178
<PAGE> 193
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the unaudited average balances of Rose's assets, liabilities and
shareholders' equity accounts and the percentage distribution of the items,
computed using the daily average balances, for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in thousands) September 30,
(unaudited) ----------------------------------------------------------
1998 1997
------------------------- --------------------------
Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,809 3.7% $ 1,393 3.2%
Deposits in other financial
institutions
Investment securities 3,732 7.6% 4,252 9.9%
Federal funds sold 7,023 14.3% 4,983 11.6%
Loans:
Commercial 7,217 14.7% 4,084 9.5%
Installment 2,483 5.1% 3,105 7.2%
Real estate 23,659 48.3% 23,056 54.0%
Less deferred fees (75) (.2)% (119) (.3)%
Less allowance for
loan losses (496) (1.0)% (208) (.5)%
-------- --------
Net loans 32,768 66.9% 29,918 69.9%
-------- --------
Bank premises and equipment, net 1,700 3.5% 1,579 3.7%
Other assets 1,968 4.0% 751 1.7%
-------- --------
TOTAL ASSETS $ 49,020 100.0% $ 42,876 100.0%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 23,591 48.1% $ 20,780 48.5%
Savings 1,034 2.1% 822 1.9%
Time 14,298 29.2% 11,818 27.6%
Time, $100,000 & over 5,794 11.8% 5,277 12.3%
-------- --------
Total deposits 44,717 91.2% 38,697 90.3%
Other liabilities 254 .5% 231 .5%
-------- --------
Total liabilities 44,971 91.7% 38,928 90.8%
-------- --------
Shareholders' equity:
Common stock(2) 2,024 4.2% 1,600 3.7%
Additional paid-in capital 422 1.0%
Retained earnings 2,018 4.1% 1,929 4.5%
Unrealized gain (loss) on
available-for-sale
investment securities 7 .0% (3) .0%
-------- --------
Total shareholders' equity 4,049 8.3% 3,948 9.2%
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 49,020 100.0% $ 42,876 100.0%
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,464 3.3% $ 1,145 3.2% $ 1,105 3.6%
Deposits in other financial
institutions 99 .3% 207 .7%
Investment securities 4,197 9.4% 3,531 10.0% 4,706 15.2%
Federal funds sold 6,072 13.6% 4,632 13.2% 3,833 12.4%
Loans:
Commercial 4,221 9.5% 3,223 9.2% 1,869 6.0%
Installment 3,017 6.7% 3,316 9.4% 4,099 13.3%
Real estate 23,790 53.3% 17,447 49.6% 14,204 45.9%
Less deferred fees (113) (.3)% (109) (.3)% (94) (.3)%
Less allowance for
loan losses (287) (.6)% (208) (.6)% (168) (.5)%
-------- -------- --------
Net loans 30,628 68.6% 23,669 67.3% 19,910 64.4%
-------- -------- --------
Bank premises and equipment, net 1,605 3.6% 1,467 4.2% 290 .9%
Other assets 659 1.5% 645 1.8% 863 2.8%
-------- -------- --------
TOTAL ASSETS $ 44,625 100.0% $ 35,188 100.0% $ 30,914 100.0%
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 21,581 48.3% $ 15,957 45.3% $ 12,167 39.4%
Savings 838 1.9% 568 1.6% 316 1.0%
Time 12,163 27.3% 11,490 32.7% 11,920 38.6%
Time, $100,000 & over 5,766 12.9% 3,344 9.5% 2,975 9.6%
-------- -------- --------
Total deposits 40,348 90.4% 31,359 89.1% 27,378 88.6%
Other liabilities 269 .6% 158 .5% 142 .5%
-------- -------- --------
Total liabilities 40,617 91.0% 31,517 89.6% 27,520 89.1%
-------- -------- --------
Shareholders' equity:
Common stock(2) 1,600 3.6% 1,600 4.6% 1,598 5.1%
Additional paid-in capital 422 1.0% 422 1.2% 421 1.4%
Retained earnings 1,986 4.4% 1,649 4.6% 1,375 4.4%
Unrealized gain (loss) on
available-for-sale
investment securities 0 .0% 0 .0% 0 .0%
-------- -------- --------
Total shareholders' equity 4,008 9.0% 3,671 10.4% 3,394 10.9%
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 44,625 100.0% $ 35,188 100.0% $ 30,914 100.0%
======== ======== ========
</TABLE>
- ----------
(1) Percentages of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
(2) On March 10, 1998 Rose assumed 100% ownership of R1NB. At that time no par
stock was issued, eliminating additional paid-in-capital.
179
<PAGE> 194
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of Rose's investment securities as of September 30,
1998, December 31, 1997 and December 31, 1996. (Dollars in thousands)
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
---------------- ---------------- ----------------- ---------------- ----------------
September 30, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------ ------ ------ ------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 501 6.25% $2,269 6.15% $ 963 6.31% $ 0 0.00% $3,733 6.24%
Municipal 0 0.00% 0 0.00% 0 0.00% 193 5.02% 193 5.02%
Other 292 4.40% 0 0.00% 0 0.00% 0 0.00% 292 4.40%
------ ------ ------ ------ ------
Total $ 793 5.57% $2,269 6.15% $ 963 6.31% $ 193 5.02% $4,218 6.03%
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
---------------- ---------------- ----------------- ---------------- ----------------
December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ------ ------ ------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $1,001 6.12% $2,754 6.47% $3,755 6.38%
Other 255 4.35% 0 0.00% 255 4.35%
------ ------ ------
Total $1,256 5.76% $2,754 6.47% $4,010 6.25%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years Total
---------------- ---------------- ----------------- ----------------
December 31, 1996 Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 299 6.83% $3,729 6.43% $4,028 6.46%
Other 236 5.61% 0 0.00% 236 5.61%
------ ------ ------
Total $ 535 6.30% $3,729 6.43% $4,264 6.41%
====== ====== ======
</TABLE>
180
<PAGE> 195
LOAN PORTFOLIO. Rose's largest historical lending categories are real estate
loans, commercial loans and consumer loans. These categories accounted for
approximately 76.0%, 16.3%, and 7.7%, respectively, of Rose's total loan
portfolio at December 31, 1996, approximately 67.5%, 25.0%, and 7.5%,
respectively, of Rose's total loan portfolio at December 31, 1997 and
approximately 71.5%, 21.5%, and 7.0%, respectively, at September 30, 1998. Loans
are carried at face amount, less payments collected and the allowance for
possible loan losses. Interest on all loans is accrued monthly on a simple
interest basis. Typically, once a loan is placed on nonaccrual status, Rose
reverses interest accrued through the date of transfer. Loans are placed on a
nonaccrual basis when principal or interest on a loan is past due 90 days or
more, unless the loan is both well-secured and in the process of collection.
Interest actually received for loans on nonaccrual status is recognized as
income at the time of receipt. Problem loans are maintained on accrual status
only when management of Rose is confident of full repayment within a reasonable
period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to Rose's published lending rate, based on the Bank of
America reference rate, and vary as this lending rate varies. At December 31,
1996, approximately 66.6% of Rose's loan portfolio was comprised of variable
interest rate loans, at December 31, 1997, approximately 56.9% of Rose's loan
portfolio was comprised of variable interest rate loans, and at September 30,
1998, variable rate loans comprised approximately 57.3% of Rose's loan
portfolio.
DISTRIBUTION OF LOANS. The distribution of Rose's total loans by type of loan as
of the dates indicated is shown in the following table (dollars in thousands):
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
--------------------- ----------------------------------
Type of Loan 1998 1997 1997 1996 1995
- -------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate $ 22,290 $ 21,966 $ 23,598 $ 20,890 $ 16,848
Commercial 6,694 7,312 8,715 4,472 2,358
Consumer 2,184 2,652 2,623 2,075 3,655
Agricultural 0 0 0 43 65
-------- -------- -------- -------- --------
TOTAL $ 31,168 $ 31,930 $ 34,936 $ 27,480 $ 22,926
Less:
Deferred loans fees (76) (99) (87) (136) (92)
Allowance for loan losses (296) (290) (724) (254) (185)
-------- -------- -------- -------- --------
TOTAL NET LOANS $ 30,796 $ 31,541 $ 34,125 $ 27,090 $ 22,649
======== ======== ======== ======== ========
</TABLE>
COMMERCIAL LOANS. Commercial loans are made for the purpose of providing working
funds, financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from 30 to 360 days,
and "term loans", which are loans with maturities normally ranging from one to
five years. Short term business loans are generally used to finance current
transactions and typically provide for periodic interest payments, with
principal being payable at maturity or periodically. Term loans normally provide
for monthly payments of both principal and interest.
Rose occasionally extends lines of credit to business customers. On business
credit lines, Rose specifies a maximum amount which it stands ready to lend to
the customer during a specified period in return for which the customer agrees
to maintain its primary banking relationship with Rose. The purpose for which
such loans will be used and
181
<PAGE> 196
the security therefore, if any, are generally determined before Rose's
commitment is extended. Normally, Rose does not make loan commitments in
material amounts for periods in excess of one year.
REAL ESTATE LOANS. Real estate loans are primarily made for the purpose of
purchasing, improving or constructing single family residences, and commercial
and industrial properties.
Approximately 66% of Rose's real estate construction loans consist of loans
secured by first trust deeds on the construction of owner-occupied single family
dwellings, and the remaining 34% consist of loans secured by first trust deeds
on speculative single family dwellings. Construction loans are generally written
with terms of six to twelve months and usually do not exceed a loan to appraised
value ratio of 75 to 80%. The risk associated with speculative construction
lending includes the borrower's inability to complete and sell the project, the
borrower's incorrect estimate of necessary construction funds and/or time for
completion, and economic changes, including depressed real estate values and
changes in interest rates. Management has established underwriting criteria to
minimize losses on speculative construction loans by lending only to experienced
developers with proven track records. To date Rose has not suffered any losses
through its speculative real estate construction loans.
CONSUMER LOANS. Most consumer loans are short-term loans, made for a period of
up to five years. Automobile loans are normally made with up to a five-year
amortization period.
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding of Rose as of
September 30, 1998 and December 31, 1997 which, based on the remaining scheduled
repayments of principal, have the ability to be repriced or are due in less than
one year, in one to five years, or in more than five years.
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
-------- ----------- ---------- -------
<S> <C> <C> <C> <C>
September 30, 1998
- ------------------
Fixed rate $ 5,443 $4,421 $4,130 $13,994
Variable 15,664 1,092 418 17,174
------- ------ ------ -------
Total $21,107 $5,513 $4,548 $31,168
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
-------- ----------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1997
- -----------------
Fixed rate $ 5,487 $5,668 $3,896 $15,051
Variable 17,915 1,526 444 19,885
------- ------ ------ -------
Total $23,402 $7,194 $4,340 $34,936
======= ====== ====== =======
</TABLE>
182
<PAGE> 197
LOAN COMMITMENTS. The following table shows Rose's loan commitments at the dates
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
------------------- -------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Commercial $ 1,433 $1,391 $ 1,208 $1,107 $1,058
Real estate 10,256 8,191 9,668 5,207 2,877
Consumer 66 165 165 195 296
------- ------ ------- ------ ------
Total commitments $11,755 $9,747 $10,986 $6,509 $4,231
======= ====== ======= ====== ======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 45% of the commitments at September 30, 1998 will
be exercised during 1998. All commercial commitments in the preceding table are
commitments to grant such loans.
SUMMARY OF LOAN LOSSES EXPERIENCE. As a natural corollary to Rose's lending
activities, some loan losses are experienced. The risk of loss varies with the
type of loan being made and the creditworthiness of the borrower over the term
of the loan. To some extent, the degree of perceived risk is taken into account
in establishing the structure of, interest rates and security for, specific
loans and for various types of loans. Rose attempts to minimize its credit risk
exposure by use of thorough loan application and approval procedures.
Rose maintains a program of systematic review of its existing loans. Loans are
graded for their overall quality. Those loans which Rose's management determines
require further monitoring and supervision are segregated and reviewed on a
periodic basis. Significant problem loans are reviewed on a monthly basis by
Rose's Loan Committee. Loans for which it is probable that Rose will be unable
to collect all amounts due (including principal and interest) are considered to
be impaired. The recorded investment in impaired loans totaled $76 thousand and
$550 thousand at September 30, 1998 and December 31, 1997. In addition, when
principal or interest on a loan is past due 90 days or more, such loan is placed
on nonaccrual status unless it is both well-secured and in the process of
collection. No loans were on nonaccrual status as of September 30, 1998 and
December 31, 1997, respectively.
Financial difficulties encountered by certain borrowers may cause Rose to
restructure the terms of their loans to facilitate loan payments. As of December
31, 1997 and 1996, Rose had no troubled debt restructured loans. Interest
foregone on nonaccrual loans and troubled debt restructurings outstanding during
the nine months ended September 30, 1998 and the years ended December 31, 1997
and 1996 were not significant.
Rose charges off that portion of any loan which management or bank examiners
consider to represent a loss. A loan is generally considered by management to
represent a loss in whole or in part when an exposure beyond any collateral
value is apparent, servicing of the unsecured portion has been discontinued or
collection is not anticipated based on the borrower's financial condition and
general economic conditions in the borrower's industry. The principal amount of
any loan which is declared a loss is charged against Rose's allowance for loan
losses.
183
<PAGE> 198
The following table sets forth the amount of loans on Rose's books which were 30
days or more past due at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------
(Dollars in thousands) 1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Commercial $ 8 $ 31 $ 15
Real estate 90 117 188
Consumer 36 43 17
---- ---- ----
Total $134 $191 $220
==== ==== ====
</TABLE>
The following table sets forth the amount of loans on Rose's books which were on
nonaccrual status at the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------
(Dollars in thousands) 1998 1997 1996
------------- ---- ----
<S> <C> <C> <C>
Commercial $ 0 $ 0 $ 0
Real estate 0 0 190
Consumer 0 0 0
---- ---- ----
Total $ 0 $ 0 $190
==== ==== ====
</TABLE>
184
<PAGE> 199
The following table summarizes Rose's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- ------------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $ 33,359 $ 30,245 $ 31,028 $ 23,986 $ 20,172
Loans at end of period 31,168 31,930 34,936 27,480 23,003
Loans charged off 540 95 101 30 40
Recoveries of loans previously
charged off 7 6 7 9 12
Net loans charged off 533 89 94 21 28
Allowance for loan losses 296 291 724 254 185
Provisions for loan losses 105 126 564 89 55
Ratios:(1)
Net loan charge-offs to
to average loans 2.13% .39% .30% .09% .14%
Net loan charge-offs to
loans at end of period 2.28% .37% .27% .08% .12%
Allowance for loan losses
to average loans .89% .96% 2.33% 1.06% .92%
Allowance for loan losses
to loans at end of period .95% .91% 2.07% .92% .80%
Net loan charge-offs to allowance
for loan losses 240.09% 40.78% 12.98% 8.27% 15.14%
Net loan charge-offs to provision
for loan losses 507.62% 70.63% 16.67% 23.60% 50.91%
</TABLE>
- ----------
(1) Annualized for the nine months ended September 30, 1997. Ratios were not
annualized for the nine months ended September 30, 1998 due to the impact
of a one time charge-off of approximately $481 thousand.
Rose's allowance for loan losses is established to provide for loan losses which
can be reasonably anticipated. The allowance for loan losses is established
through charges to operating expenses in the form of provisions for loan losses.
Provisions for loan losses amounted to $564 thousand in 1997, $89 thousand in
1996 and $105 thousand for the first nine months of 1998. The provisions have
been increasing reflecting, in the opinion of management of Rose, the growth of
the loan portfolio. Actual loan losses or recoveries are charged or credited,
respectively, directly to the allowance for loan losses. The amount of the
allowance is determined by management of Rose. Among the factors considered in
determining the allowance for loan losses are the current financial conditions
of Rose's borrowers and the value of the security, if any, for their loans.
Estimates of future economic conditions and their impact on various industries
and individual borrowers are also taken into consideration, as are Rose's
historical loan loss experience and reports of banking regulatory authorities.
Because these estimates and evaluations are primarily judgmental factors, no
assurance can be given that Rose may not sustain loan losses substantially
higher in relation to the size of the allowance for loan losses or that
subsequent evaluation of the loan portfolio may not require substantial changes
in such allowance.
185
<PAGE> 200
At December 31, 1997, 1996 and 1995, the allowance was 2.07%, .92%, and .80%, of
the loans then outstanding, respectively. At September 30, 1998, the allowance
was .95% of the loans then outstanding. Although the current level of the
allowance is deemed adequate by management, future provisions will be subject to
continuing reevaluation of risks in the loan portfolio.
Management of Rose reviews with the Board of Directors the adequacy of the
allowance for loan losses on a monthly basis and adjusts the loan loss provision
upward where specific items reflect a need for such an adjustment. Management of
Rose charged off $101 thousand in 1997, $30 thousand in 1996 and $540 thousand
in the first nine months of 1998. Recoveries of loans previously charged off
were $7 thousand in 1997, $9 thousand in 1996 and $7 thousand during the first
nine months of 1998. Charge-offs continued to increase in 1998; however,
management does not believe there has been any significant deterioration in
Rose's loan portfolio as the charge-off of $481 thousand involved a single
commercial loan. Management also believes that Rose has adequately reserved for
all individual items in its portfolio which may result in a loss material to
Rose. See "DESCRIPTION OF ROSE - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Provision for Loan Losses".
INVESTMENT SECURITIES. Rose has invested an average of $3,732 thousand in
federal instruments, securities issued by states and political subdivisions,
other debt securities and bank certificates of deposit, which yielded
approximately 6.22% per annum during the first nine months of 1998. Rose's
present investment policy is to invest excess funds in federal funds,
certificates of deposits in financial institutions, U.S. Treasuries, securities
issued by the U.S. Government and securities issued by states and political
subdivisions.
186
<PAGE> 201
INTEREST RATES AND DIFFERENTIALS. Certain information concerning
interest-earning assets and interest-bearing liabilities and yields thereon
(unaudited) is set forth in the following table. Amounts outstanding are daily
average balances:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,(1) Year Ended December 31,
(Dollars in thousands) ------------------------- ------------------------------------------
(Unaudited) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits:
Average outstanding $ 0 $ 0 $ 0 $ 99 $ 207
Average yield 0% 0% 0% 6.06% 6.28%
Interest income $ 0 $ 0 $ 0 $ 6 $ 13
Federal funds sold:
Average outstanding $ 7,023 $ 4,983 $ 6,072 $ 4,632 $ 3,833
Average yield 5.54% 5.62% 5.63% 5.42% 5.90%
Interest income $ 292 $ 210 $ 342 $ 251 $ 226
Investment securities:
Average outstanding $ 3,732 $ 4,252 $ 4,197 $ 3,531 $ 4,706
Average yield 6.22% 6.33% 6.34% 6.40% 5.57%
Interest income $ 174 $ 202 $ 266 $ 226 $ 262
Loans:
Average outstanding $ 33,359 $ 30,245 $ 31,028 $ 23,986 $ 20,172
Average yield(2) 10.09% 10.72% 10.59% 10.61% 10.72%
Interest income $ 2,524 $ 2,432 $ 3,286 $ 2,545 $ 2,163
Total interest-earning assets:
Average outstanding $ 44,114 $ 39,480 $ 41,297 $ 32,248 $ 28,918
Average yield 9.04% 9.60% 9.43% 9.39% 9.21%
Interest income $ 2,990 $ 2,844 $ 3,894 $ 3,028 $ 2,664
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $ 23,591 $ 20,780 $ 16,230 $ 12,270 $ 9,305
Average yield 2.46% 3.00% 3.91% 4.00% 4.55%
Interest expense $ 436 $ 467 $ 635 $ 491 $ 423
Savings deposits:
Average outstanding $ 1,034 $ 822 $ 838 $ 568 $ 316
Average yield 2.97% 3.08% 2.98% 2.99% 3.16%
Interest expense $ 23 $ 19 $ 25 $ 17 $ 10
Time deposits:
Average outstanding $ 20,092 $ 17,095 $ 17,929 $ 14,834 $ 14,895
Average yield 5.60% 5.55% 5.60% 5.55% 5.74%
Interest expense $ 844 $ 712 $ 1,004 $ 823 $ 855
Total interest-bearing liabilities:
Average outstanding $ 44,717 $ 38,697 $ 34,997 $ 27,672 $ 24,516
Average yield 3.89% 4.13% 4.75% 4.81% 5.25%
Interest expense $ 1,303 $ 1,198 $ 1,664 $ 1,331 $ 1,288
Net interest income $ 1,687 $ 1,646 $ 2,230 $ 1,697 $ 1,376
Average net yield on
interest-earning assets(2) 5.10% 5.56% 5.40% 5.26% 4.76%
</TABLE>
- ----------
(1) Nine month yields have been annualized.
(2) Rose has originated a high volume of loans during this period that have
been sold rather than held in the loan portfolio. Since loan sales
premiums are recorded as other income, interest income is less than if the
loans were retained. This lowers the average yield on loans and average
net yield on interest-earning assets.
187
<PAGE> 202
LIQUIDITY MANAGEMENT. Rose has federal funds lines of credit with its
correspondent banks, Pacific Coast Bankers Bank of $1,000 thousand, Compass Bank
of $1,000 thousand and Union Bank of California, of $1,000 thousand. In
addition, Rose has arranged for advances from Federal Home Loan Bank under their
blanket lien on loans program. As of September 30, 1998 Rose's advance maximum
was $3,376 thousand. These lines have never been used. At times when Rose has
excess funds over its reserve requirements or short-term liquidity needs, Rose
increases its securities investments and/or sells federal funds.
Policies have been developed by Rose's management and approved by the Board of
Directors which establish guidelines for the investments and liquidity of Rose.
These policies include an Investment Policy and an Asset Liability Policy. The
goals of these policies are to provide liquidity to meet the financial
requirements of Rose's customers, maintain adequate reserves as required by
regulatory agencies and maximize earnings of Rose.
The following table shows Rose's average deposits (unaudited) for each of the
periods indicated below, based upon average daily balances:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------------------- --------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------------------ ------------------ ------------------- ------------------ ------------------
(Unaudited) Average Percent Average Percent Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 7,943 17.76% $ 4,875 12.60% $ 5,351 13.26% $ 3,687 11.76% $ 2,862 10.45%
NOW and Super
NOW accounts 3,496 7.82% 2,821 7.29% 2,911 7.21% 2,380 7.59% 1,681 6.14%
Savings deposits 1,034 2.31% 822 2.12% 838 2.08% 568 1.81% 316 1.15%
Money market
deposits 12,152 27.18% 13,084 33.81% 13,319 33.01% 9,890 31.54% 7,624 27.85%
Time deposits 20,092 44.93% 17,095 44.18% 17,929 44.44% 14,834 47.30% 14,895 54.41%
------- ------- ------- ------- -------
Total deposits $44,717 100.00% $38,697 100.00% $40,348 100.00% $31,359 100.00% $27,378 100.00%
======= ======= ======= ======= =======
</TABLE>
LIABILITY MANAGEMENT. It is management's policy to maintain the maturities of a
majority of its certificates of deposit in denominations of $100,000 or more to
less than one year. The maturities of such time certificates of deposit
("TCD's"), as well as other time deposits, were as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------- ----------------------
TCD's Other TCD's Other
(Dollars in thousands) over Time over Time
(Unaudited) $100,000 Deposits $100,000 Deposits
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Less than three months $2,024 $ 2,991 $2,902 $ 5,549
Over three months
through twelve months 3,718 8,034 3,002 7,602
Over twelve months
through five years 817 2,349 621 1,085
Over five years 0 1 0 10
------ ------- ------ -------
Total $6,559 $13,375 $6,525 $14,246
====== ======= ====== =======
</TABLE>
While the deposits of Rose may fluctuate up and down somewhat with local and
national economic conditions, management of Rose does not believe that such
deposits, or the business of Rose in general, are seasonal in nature. Liability
management is monitored by Rose's Board of Directors which meets monthly.
188
<PAGE> 203
REGULATORY MATTERS.
Capital Adequacy. The Comptroller and other federal banking agencies have
risk-based capital adequacy guidelines intended to provide a measure of capital
adequacy 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. government
securities, to 100% for assets with relatively higher credit risk, such as
certain loans.
In determining the capital level R1NB is required to maintain, the Comptroller
does not, in all respects, follow generally accepted accounting principles
("GAAP") and has special rules which have the effect of reducing the amount of
capital it will recognize for purposes of determining the capital adequacy of
R1NB.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
possible loan and lease losses, term preferred stock and other types of
preferred stock not qualifying as Tier 1 capital, term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets and
off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
average risk-adjusted assets and off balance sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule lowering the risk-based
capital requirements for certain small business loans and leases sold with
recourse. The final rule on small business loans and leases sold with recourse
essentially makes permanent an interim interagency rule in effect since 1995
that reduced the minimum capital levels that institutions must maintain for
those transactions. Under the final rule, a qualifying institution that sells
small business loans and leases with recourse must hold capital only against the
amount of recourse retained. In general, a qualifying institution is one that is
well-capitalized under the FDIC's prompt corrective action rules. The amount of
recourse that can receive the preferential capital treatment cannot exceed 15%
of the institution's total risk-based capital.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital 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%. It is improbable, however, that an institution with a
3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
189
<PAGE> 204
The following table presents the capital ratios for Rose, compared to the
standards for well-capitalized depository institutions, as of September 30, 1998
(amounts in thousands except percentage amounts).
<TABLE>
<CAPTION>
Rose
--------------------------------------------------------
Actual Well Minimum
----------------------- Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----------- -----------
<S> <C> <C> <C> <C>
Leverage $4,565 9.3% 5.0% 4.0%
Tier 1 Risk-Based $4,565 11.7 6.0 4.0
Total Risk-Based $4,860 12.4 10.0 8.0
</TABLE>
Regulators must take into consideration concentrations of credit risk and risks
from nontraditional activities, as well as an institution's ability to manage
those risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Regulators must also consider interest rate risk (when
the interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy.
Prompt Corrective Action and Other Enforcement Mechanisms. The FDIC Improvement
Act of 1991 ("FDICIA") requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
-----------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
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
190
<PAGE> 205
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards. FDICIA also implemented certain specific
restrictions on transactions and required federal banking regulators to adopt
overall safety and soundness standards for depository institutions related to
internal control, loan underwriting and documentation and asset growth. Among
other things, FDICIA limits the interest rates paid on deposits by
undercapitalized institutions, restricts the use of brokered deposits, limits
the aggregate extensions of credit by a depository institution to an executive
officer, director, principal shareholder or related interest, and reduces
deposit insurance coverage for deposits offered by undercapitalized institutions
for deposits by certain employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
Premiums for Deposit Insurance and Assessments for Examinations. FDICIA
established several mechanisms to increase funds to protect deposits insured by
the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30
billion from the United States Treasury; up to 90% of the fair market value of
assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. FDICIA also provides authority for
special assessments against insured deposits. No assurance can be given at this
time as to what the future level of premiums will be.
Dividends. The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
The payment of dividends by a national bank is further restricted by additional
provisions of federal law, which prohibit a national bank from declaring a
dividend on its shares of common stock unless its surplus fund exceeds the
amount of its common capital (total outstanding common shares times the par
value per share). Additionally, if losses have at any time been sustained equal
to or exceeding a bank's undivided profits then on hand, no dividend
shall be paid. Moreover, even if a bank's surplus exceeded its common capital
and its undivided profits exceed its losses, the approval of the Comptroller is
required for the payment of dividends if the total of all dividends declared
191
<PAGE> 206
by a national bank in any calendar year would exceed the total of its net
profits of that year combined with its retained net profits of the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by R1NB is
governed by R1NB's ability to maintain minimum required capital levels and an
adequate allowance for loan losses. Regulators also have authority to prohibit a
depository institution from engaging in business practices which are considered
to be unsafe or unsound, possibly including payment of dividends or other
payments under certain circumstances even if such payments are not expressly
prohibited by statute.
Reserve Balances. R1NB has not been required to maintain average reserve
balances with the FRB because R1NB has had adequate vault cash to meet the
reserve requirements.
Year 2000 Compliance. The inability of most computers, software and other
equipment utilizing microprocessors to distinguish the year 1900 from the Year
2000 poses substantial risks to all financial institutions including Rose. The
Year 2000 problem is pervasive and complex. Virtually every financial
institution, service provider and vendor will have its computing operations
affected in some way by the rollover of the two-digit year value to 00 if action
is not taken to fix the problem before the Year 2000 arrives.
Rose is currently engaged in a five phase management program which includes
awareness, assessment, renovation, validation and implementation. Rose has
identified all major applications and systems that may require modification to
ensure "Year 2000 Compliance." The scope of the project covers all computer
systems including PC and network hardware and software. It also covers all
equipment and other systems utilized in Rose's operations or in the premises
from which Rose operates.
Plans to test Rose's hardware, software and equipment to ensure Rose's Year 2000
compliance have been developed as well as contingency plans if tests are not
successful. In addition, Rose has communicated with its large borrowers,
corporate customers and major vendors upon which it relies to determine the
extent to which Rose is vulnerable to those third parties if they fail to
resolve their Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which Rose's systems rely will be converted on
time, or that a failure to convert by another company, or a conversion that is
incompatible with Rose's systems, would not have a material adverse effect on
Rose.
Rose will utilize both internal and external resources to implement its Year
2000 Project. Rose expects to complete the majority of its efforts by the end of
1998 leaving adequate time to assess and correct any significant issues that may
materialize. Personnel and all other costs are expensed as incurred. The
majority of these costs are expected to be incurred during 1998, and are not
expected to have a material impact on Rose's cash flows, results of operations
or financial condition.
Quantitative and Qualitative Disclosures About Market Risk. Market risk is the
risk of loss from adverse changes in market prices and rates. Rose's market risk
arises primarily from interest rate risk inherent in its loan and deposit
functions and management actively monitors and manages this interest rate risk
exposure. Rose does not have any market risk sensitive instruments entered into
for trading purposes. Management uses several different tools to monitor its
interest rate risk. One measure of exposure to interest rate risk is gap
analysis. A positive gap for a given period means that the amount of
interest-earning assets maturing or otherwise repricing within such period is
greater than the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Rose has a positive gap. In addition, Rose
uses interest rate shock simulations to estimate the effect of certain
hypothetical rate changes. Based upon Rose's shock simulations, net interest
income is expected to rise with increasing rates and fall with declining rates.
192
<PAGE> 207
Rose's positive gap is the result of 32% of its loans and 75% of its investments
having terms greater than one year on the asset side. On the liability side, the
majority of the Rose's time deposits have average terms of one year or less
while savings accounts and other interest-bearing transaction accounts are
recorded for gap analysis in the next day to three month category because they
do not have a contractual maturity date.
Taking into consideration that savings accounts and other interest-bearing
transaction accounts typically do not react immediately to changes in interest
rates, management has taken the following steps to manage its positive gap
position. Emphasis has been placed on increasing noninterest-bearing deposits
and shorter term construction and floating rate loans. In addition, Rose holds
all of its investments in the available-for-sale category in order to be able to
match its investments with changes which occur in the repricing of its
liabilities.
The following table sets forth the distribution of repricing opportunities of
Rose's interest-earning assets and interest-bearing liabilities, the interest
rate sensitivity gap (i.e. interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of December
31, 1997. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
Rose.
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Over Three
Months Over
Next Day Through One Year
(Dollars in thousands) to Three Twelve Through Over
(Unaudited) Months Months Five Years Five Years Total
-------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 6,720 $ 6,720
Investment securities 521 $ 501 $2,754 $ 234 4,010
Loans 16,524 7,078 7,065 4,269 34,936
-------- -------- ------ ------ -------
Total interest-earning assets 23,765 7,579 9,819 4,503 45,666
-------- -------- ------ ------ -------
Liabilities:
Savings deposits(1) 17,052 17,052
Time deposits 8,606 10,449 1,716 20,771
-------- -------- ------ ------ -------
Total interest-bearing liabilities 25,658 10,449 1,716 0 37,823
-------- -------- ------ ------ -------
Net (interest-bearing liabilities)
interest-earning assets $ (1,893) $ (2,870) $8,103 $4,503 $ 7,843
======== ======== ====== ====== =======
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $ (1,893) $ (4,763) $3,340 $7,843
======== ======== ====== ======
Cumulative GAP as a percentage of
total interest-earning assets (4.15)% (10.43)% 7.31% 17.17%
======== ======== ====== ======
</TABLE>
- ----------
(1) Savings deposits include interest-bearing transaction accounts.
193
<PAGE> 208
The following table sets forth the distribution of the expected maturities of
Rose's interest-earning assets and interest-bearing liabilities as of December
31, 1997 as well as the fair value of these instruments. Expected maturities are
based on contractual agreements. Savings accounts and interest-bearing
transaction accounts, which have no stated maturity, are included in the 1998
maturity category.
<TABLE>
<CAPTION>
EXPECTED MATURITIES
(Dollars in thousands) ----------------------------------------------------------------------------------------
(Unaudited) 1998 1999 2000 2001 2002 Thereafter Total Fair Value
------- ------ ------ ------ ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 6,720 $ 6,720 $ 6,720
Weighted average rate 5.56% 5.56%
Investment securities $ 1,256 $1,000 $1,754 $ 4,010 $ 4,010
Weighted average rate 5.76% 6.28% 6.57% 6.25%
Fixed rate loans $ 5,487 $1,846 $1,231 $1,425 $ 1,166 $ 3,896 $15,051 $15,121
Weighted average rate 8.31% 9.57% 9.55% 9.54% 9.50% 8.77% 8.87%
Variable rate loans(1) $17,915 $ 508 $ 340 $ 373 $ 305 $ 444 $19,885 $19,885
Weighted average rate 9.93% 8.63% 8.58% 9.17% 9.21% 9.24% 9.85%
Total interest-bearing assets $31,378 $3,354 $1,571 $3,552 $ 1,471 $ 4,340 $45,666 $45,736
Savings deposits(2) $17,052 $17,052 $17,052
Weighted average rate 3.85% 3.85%
Time deposits $19,055 $ 904 $ 602 $ 200 $ 10 $20,771 $20,812
Weighted average rate 5.59% 5.84% 5.92% 5.76% 5.12% 5.61%
Total interest-bearing liabilities $36,107 $ 904 $ 602 $ 200 $ 10 $37,823 $37,864
</TABLE>
- ------------
(1) Of the total variable rate loans, 90.1% reprice in one year or less.
(2) Savings deposits include interest-bearing transaction accounts.
194
<PAGE> 209
MANAGEMENT
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth
certain information, as of October 1, 1998, with respect to those persons who
are directors and executive officers of Rose and/or R1NB:
<TABLE>
<CAPTION>
Year First
Appointed
Director or Principal Occupation
Name and Title Age Officer During the Past Five Years
- --------------------------- --- ----------- --------------------------------------------------------
<S> <C> <C> <C>
Patrick I. Abare 76 1992 Bank executive. Retired.
Director
Stephen F. Caulkins 54 1992 Manager and owner of Ad Litho Press.
Director
D. Mark Davis 43 1995 Owner, Sierra View Company, Inc.
Director
Kirk Doyle 44 1994 Owner, Kirk Doyle Realty.
Director
Howard "Skip" Jahn 53 1992 Partner, Jackson-Jahn Commercial Real Estate.
Director
Ernest E. Johnson, M.D. 68 1992 Physician and Surgeon.
Director
Kenneth Leung 60 1998 Chief Executive Officer, Kwong on Bank, Ltd., Hong Kong.
Director
Thomas Manz 49 1992 Real estate developer; Owner of TMJ Enterprises.
Chairman of the Board
James Otto 60 1992 Businessman.
Director
Randall Scagliotti, D.V.M. 52 1992 Veterinarian.
Director
Richard C. Seeba 59 1992 President and Chief Executive Officer of Rose and R1NB.
President/CEO, Director
Douglas A. Nordell(1) 49 1994 Executive Vice President and Chief Operating Officer of Rose and
Executive Vice President R1NB.
Thomas C. Warren 60 1996 Senior Vice President and Chief Financial Officer of Rose and
Senior Vice President R1NB.
</TABLE>
- -----------------
(1) Effective November 1, 1998, Mr. Nordell was granted an unpaid leave of
absence (but remains an employee of Rose) which will expire on the earlier
of (i) the Rose Effective Time and (ii) January 29, 1999. Mr. Nordell is
currently serving as the President and Chief Executive Officer of Lake.
195
<PAGE> 210
ROSE'S BOARD OF DIRECTORS AND COMMITTEES. Rose's Board of Directors met thirteen
(13) times in 1997. All of Rose's directors, except James Otto, attended 75% or
more of Rose's Board of Directors' meetings and committee meetings (of which
they were members).
Rose has an Audit Committee that met two (2) times during 1997. The purpose of
the Audit Committee is to review all internal and external examination reports
and to select Rose's independent certified public accountants. Current members
of the Audit Committee are Messrs. Caulkins and Otto and Dr. Scagliotti.
Rose has an Executive Committee that met three (3) times in 1997. The purpose of
the Executive Committee is to review and recommend policy changes. The current
members of the Executive Committee are Messrs. Abare, Caulkins, Davis, Doyle,
Jahn, Manz and Seeba.
The full Board of Directors of Rose acts as the Nominating Committee that
nominates officers and directors of Rose and R1NB for election.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
Director Compensation. In 1998, nonemployee directors receive director fees of
$300 for each Board of Directors or Board Committee meeting attended. Directors
who are also officers are not compensated for their services as directors. The
directors have been granted stock options: in 1990, Messrs. Abare (2,500
shares), Caulkins (2,500 shares), Johnson (2,500 shares), Manz (500 shares),
Otto (2,500 shares), Scagliotti (2,500 shares) and Seeba (15,833 shares) were
granted at an option price of $7.50 per share; in February 1994, Messrs. Abare,
Caulkins, Jahn and Manz were each granted 4,000 shares at an option price of
$7.50 per share; in February 1994, Messrs. Johnson, Otto, Scagliotti and Seeba
were each granted 3,000 shares at an option price of $7.50 per share; and in
November 1994, Mr. Doyle was granted 4,000 shares at a option price of $ 7.50
per share. These stock options have a term of ten years and are completely
vested at the end of five years. On September 30, 1998, the following directors
exercised options as follows: Messrs. Abare (6,500 shares); Doyle (4,000
shares); Jahn (4,000 shares); Johnson (5,500 shares); Otto (5,500 shares);
Scagliotti (5,500 shares); and Seeba (15,833 shares).
Executive Compensation. During 1997, Rose did not pay any cash compensation to
its executive officers and no such cash compensation is expected to be paid
during 1998. However, the persons serving as the executive officers of Rose
received during 1997, and have received in 1998, cash compensation in their
capacities as executive officers of R1NB.
The following table sets forth a summary of the compensation paid during Rose's
past three fiscal years for services rendered in all capacities to Richard C.
Seeba, the President and Chief Executive Officer of Rose and R1NB, the only
executive officer of Rose and/or R1NB whose annual base compensation and bonus
exceeded $100,000 during Rose's 1997 fiscal year.
196
<PAGE> 211
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------- --------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------------- -------- ----------- --------- ---------- ------------ ---------- --------- ----------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(2)
Position Year ($) ($) ($) ($) SARs ($) ($)
- ----------------------------- -------- ----------- ---------- ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard C. Seeba 1997 $105,000 $0 $11,575 0 0 0 $3,735
President and Chief Executive 1996 $92,000 $22,000 $ 5,005 0 0 0 $3,347
Officer 1995 $92,000 $0 $ 9,355 0 0 0 $2,916
</TABLE>
(1) Includes automobile allowance and family health insurance paid by R1NB.
(2) Includes life insurance premiums paid by R1NB and R1NB's match on the R1NB
401(k) contribution.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ---------------------- ------------------------ ---------------- ---------------- ----------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year End (#) Year End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- --------------------- ----------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Richard C. Seeba 0 N/A 17,633/1,200 $8,816/$600
</TABLE>
197
<PAGE> 212
Mr. Seeba has a salary continuation agreement which provides that R1NB will pay
him $ 65,000 per year for 15 years ("Normal Retirement Benefit") following his
retirement at age 66 or later ("Retirement Age"). In the event of disability
while Mr. Seeba is actively employed prior to Retirement Age, he will receive a
benefit amount that is determined by calculating a fixed annuity, payable in 15
annual installments, crediting interest on the unpaid balance of the accrual
balance at an annual rate of 8.55, compounded monthly. If Mr. Seeba dies while
actively employed by R1NB prior to Retirement Age, his beneficiary will receive
from R1NB the Normal Retirement Benefit in 180 equal installments, commencing
with the month following the date of death. In the event of early termination,
Mr. Seeba will receive a benefit that is a percentage of the $ 65,000 per year
amount for 15 years based on the vesting schedule, provided however, that Mr.
Seeba is not entitled to any benefit if he voluntarily terminates his employment
prior to the end of the second plan year. Benefits are paid in 180 equal
installments payable the first day of each month, commencing with the month
following attaining age 66. In the event of a change of control (other than the
proposed Rose Merger), Mr. Seeba will receive the Normal Retirement Benefit
payable in 180 equal installments payable the first of each month, commencing
the month following the change of control.
CERTAIN TRANSACTIONS
Some of the directors and executive officers of Rose and their immediate
families, as well as the companies with which they are associated, are customers
of, or have had banking transactions with, Rose in the ordinary course of Rose's
business, and Rose expects to have banking transactions with such persons in the
future. In management's opinion, all loans and commitments to lend in such
transactions were made in compliance with applicable laws and 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.
INFORMATION CONCERNING THE BANCORP, LAKE AND ROSE
COMPETITION
The banking business in California generally, and in the market areas served by
the Bancorp, Lake and Rose specifically, is highly competitive with respect to
both loans and deposits. The Bancorp, Lake and Rose all compete for loans and
deposits with other commercial banks, savings and loan associations, finance
companies, money market funds, credit unions and other financial institutions,
including a number that are much larger than any of the Bancorp, Lake or Rose.
As of June 30, 1997 there were 41 banking offices, including 9 offices of three
major chain banks, operating within the Bancorp's primary market areas in El
Dorado and Placer Counties, there were 10 banking offices, including one office
of a major chain bank operating within Lake's primary market area in Lake County
and there were 66 banking offices, including 23 offices of three major chain
banks, operating within Rose's primary market area in Placer County. There has
been increased competition for deposit and loan business over the last several
years as a result of deregulation. Additionally, with the recent enactment of
interstate banking legislation in California, bank holding companies
headquartered outside of California may enter the California market and provide
further competition for the Bancorp, Lake and Rose. See "Effect of Governmental
Policies and Recent Legislation" below. Many of the major commercial banks
operating in the Bancorp's, Lake's and Rose's market areas offer certain
services, such as trust and international banking services, which the Bancorp,
Lake and Rose do not offer directly. Additionally, banks with larger
capitalization have larger lending limits and are thereby able to serve larger
customers.
198
<PAGE> 213
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business which depends on rate differentials. In general, the
difference between the interest rate paid by the Bancorp, Lake and Rose on their
deposits and their other borrowings and the interest rate received by the
Bancorp, Lake and Rose on loans extended to its customers and securities held in
the Bancorp's, Lake's and Rose's portfolio comprise the major portion of the
Bancorp's, Lake's and Rose's earnings. These rates are highly sensitive to many
factors which are beyond the control of the Bancorp, Lake and Rose. Accordingly,
the earnings and growth of the Bancorp, Lake and Rose are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The earnings and growth of the Bancorp, Lake and Rose are also influenced by the
monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the FRB. The FRB implements national monetary
policies (with objectives such as to curb inflation and combat recession) by its
open-market operations in United States Government securities, by adjusting the
required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowing by
depository institutions. The actions of the FRB in these areas influence the
growth of bank loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and impact of any future
change in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. The likelihood of any major change and the impact such
change may have on the Bancorp, Lake and Rose is impossible to predict. Certain
of the potentially significant changes which have been enacted recently and
others which are currently under consideration by Congress or various regulatory
or professional agencies are discussed below.
CURRENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 128, Earnings Per Share, which establishes standards for computing
and presenting earnings per share. Statement No. 128 redefines earnings per
share under generally accepted accounting principles. Under Statement No. 128,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. Statement
No. 128 was effective for the Bancorp, Lake and Rose for their fiscal years
beginning with 1997.
In the first six months of 1997, the FASB also issued Statement No. 129,
Disclosure of Information about Capital Structure; Statement No. 130, Reporting
Comprehensive Income; and Statement No. 131, Reporting Disaggregated Information
about a Business Enterprise. Statement No. 129 was effective for the Bancorp,
Lake and Rose for their fiscal years ended December 31, 1997 but had no material
effect on their financial statements. Statements No. 130 and No. 131 are
effective for the Bancorp, Lake and Rose for their fiscal years beginning with
1998. In addition, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for fiscal years
beginning after June 15, 1999 but may be adopted as of the beginning of any
fiscal quarter that begins after the issuance of the Statement. Management of
each of the Bancorp, Lake and Rose has not yet completed its analysis to
determine the effect implementation of Statements Nos. 130, 131 and 133 will
have on the Bancorp's, Lake's and Rose's financial statements.
199
<PAGE> 214
The FASB issued Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, and Statement No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125
(An Amendment of FASB Statement No. 125), which are applicable for transactions
occurring after December 31, 1996 and certain transactions after December 31,
1997. These Statements do not permit earlier or retroactive application. These
Statements distinguish transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. These Statements also establish
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
These Statements require that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, these Statements require that a liability
be derecognized only if the debtor is relieved of its obligation through payment
to the creditor or by being legally released from being the primary obligor
under the liability either judicially or by the creditor. Management of each of
the Bancorp, Lake and Rose does not believe the application of these Statements
to transactions of the Bancorp, Lake and Rose that have been typical in the past
will materially affect the Bancorp's, Lake's and Rose's financial position and
results of operations.
RECENT LEGISLATION AND OTHER CHANGES
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. The likelihood of any major changes and the impact such
changes might have on the Bancorp, Lake and Rose are impossible to predict.
Certain of the potentially significant changes which have been enacted recently
by Congress and others which are currently under consideration by Congress or
various regulatory or professional agencies are discussed below.
On October 1, 1998, the FDIC adopted two new rules governing minimum capital
levels that FDIC-supervised banks must maintain against the risks to which they
are exposed. The first rule makes risk-based capital standards consistent for
two types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on equity securities to be recognized for risk-based
capital purposes. These rules may be applied by the Bancorp, Lake and Rose on
September 1, 1998.
In August 1997, Governor Wilson of California signed Assembly Bill 1432
("AB1432") which provides for certain changes in the banking laws of California.
Effective January 1, 1998 AB1432 eliminates the provisions regarding impairment
of contributed capital and the assessment of shares when there is an impairment
of capital. AB1432 now allows the DFI to close a bank, if the DFI finds that the
bank's tangible shareholders' equity is less than the greater of 3% of the
bank's total assets or $1 million. AB1432 also moved administration of the Local
Agency Program from the California Department of Financial Institutions to the
California State Treasurer's office.
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act") as
part of the Omnibus Appropriations Bill was enacted on September 30, 1996 and
includes many banking related provisions. The most important banking provision
is the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
1996 Act provides for a one time assessment, payable on November 30, 1996, of
approximately 65 basis points per $100
200
<PAGE> 215
of deposits of SAIF insured deposits including SAIF insured deposits which were
assumed by banks in acquisitions of savings associations. For the years 1997
through 1999 the banking industry will assist in the payment of interest on
Financing Corporation ("FICO") bonds that were issued to help pay for the clean
up of the savings and loan industry. Banks will pay approximately 1.3 cents per
$100 of deposits for this special assessment, and after the Year 2000, banks
will pay approximately 2.4 cents per $100 of deposits until the FICO bonds
mature in 2017. There is a three year moratorium on conversions of SAIF deposits
to Bank Insurance Fund ("BIF") deposits. The 1996 Act also has certain
regulatory relief provisions for the banking industry. Lender liability under
the Superfund is eliminated for lenders who foreclose on property that is
contaminated provided that the lenders were not involved with the management of
the entity that contributed to the contamination. There is a five year sunset
provision for the elimination of civil liability under the Truth in Savings Act.
The FRB and Department of Housing and Urban Development are to develop a single
format for Real Estate Settlement Procedures Act and Truth in Lending Act
("TILA") disclosures. TILA disclosures for adjustable mortgage loans are to be
simplified. Significant revisions are made to the Fair Credit Reporting Act
("FCRA") including requiring that entities which provide information to credit
bureaus conduct an investigation if a consumer claims the information to be in
error. Regulatory agencies may not examine for FCRA compliance unless there is a
consumer complaint investigation that reveals a violation or where the agency
otherwise finds a violation. In the area of the Equal Credit Opportunity Act,
banks that self-test for compliance with fair lending laws will be protected
from the results of the test provided that appropriate corrective action is
taken when violations are found.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conversation and Recovery Act to provide lenders
and fiduciaries with greater protections from environmental liability. In June
1997, the U.S. Environmental Protection Agency ("EPA") issued its official
policy with regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996. California law provides that, subject to numerous
exceptions, a lender acting in the capacity of a lender shall not be liable
under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
In 1997, California adopted the Environmental Responsibility Acceptance Act (the
"Act") (Cal. Civil Code Sections 850-855) to facilitate (i) the notification of
government agencies and potentially responsible parties (e.g., for cleanup) of
the existence of contamination and (ii) the cleanup or other remediation of
contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
On September 28, 1995, Assembly Bill 1482 (known as the Caldera, Weggeland, and
Killea California Interstate Banking and Branching Act of 1995 and referred to
herein as "CIBBA") was enacted which allows for early interstate branching in
California. Under the federally enacted Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), discussed in more detail below,
individual states could "opt-out" of the federal law that would allow banks on
an interstate basis to engage in interstate branching by merging out-of-state
banks with host state banks after June 1, 1997. In addition under IBBEA,
individual states could also "opt-in" and allow out-of-state banks to merge with
host state banks prior to June 1, 1997. The host state is allowed under IBBEA to
impose certain nondiscriminatory conditions on the resulting depository
institution until June 1, 1997. California, in enacting CIBBA, authorizes
out-of-state banks to enter California by the acquisition of or merger with a
California bank that has been in existence for at least five years.
201
<PAGE> 216
Section 3824 of the California Financial Code ("Section 3824") as added by CIBBA
provides for the election of California to "opt-in" under IBBEA allowing
interstate bank merger transactions prior to July 1, 1997 of an out-of-state
bank with a California bank that has been in existence for at least five years.
The early "opt in" has the reciprocal effect of allowing California banks to
merge with out-of-state banks where the states of such out-of-state banks have
also "opted in" under IBBEA. The five year age limitation is not required when
the California bank is in danger of failing or in certain other emergency
situations.
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against interstate
branching through the acquisition of a branch in California without the
acquisition of the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through the
establishment of de novo or new branches by out-of-state banks. Section 3824
provides that California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of IBBEA. CIBBA also amends
the California Financial Code to include agency provisions to allow California
banks to establish affiliated insured depository institution agencies
out-of-state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern the use of
shared ATM's, and amend intrastate branch acquisition and bank merger laws.
Another banking bill enacted in California in 1995 was Senate Bill 855 (known as
the State Bank Parity Act and is referred to herein as the "SBPA"). SBPA went
into effect on January 1, 1996, and its purpose is to allow a California state
bank to be on a level playing field with a national bank by the elimination of
certain disparities and allowing the DFI authority to implement certain changes
in California banking law which are parallel to changes in national banking law
such as closer conformance of California's version of Regulation O to the FRB's
version of Regulation O and certain other changes including allowing the
repurchase of stock with the prior written consent of the DFI.
On September 29, 1994, IBBEA was enacted which has eliminated many of the
current restrictions to interstate banking and branching. IBBEA permits full
nationwide interstate banking to adequately capitalized and adequately managed
bank holding companies beginning September 29, 1995 without regard to whether
such transaction is expressly prohibited under the laws of any state. IBBEA's
branching provisions permit full nationwide interstate bank merger transactions
to adequately capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate bank
mergers and to continue to require that out-of-state banks comply with the
states' rules governing entry.
The states that opt out must enact a law after September 29, 1994 and before
June 1, 1997 that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States which
opt out of allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opt out are not permitted to have
interstate branches. States can also "opt in" which means states can permit
interstate branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide that
transactions, which result in the bank holding company or bank controlling or
holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the thirty percent
provision for such state. In addition, a state may impose a cap of less than
thirty percent of the total amount of deposits held by a bank holding company or
bank provided such cap is not discriminatory to out-of-state bank holding
companies or banks.
202
<PAGE> 217
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "1994 Act") was enacted which covers a wide range
of topics including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act include an
examination schedule that has been eased for the top rated banks and will be
every 18 months for CAMEL 1 banks with less than $250 million in total assets
and CAMEL 2 banks with less than $100 million in total assets (the $100 million
amount was amended to $250 million by the 1996 Act discussed above). The 1994
Act amends Federal Deposit Insurance Corporation Improvement Act of 1991 with
respect to the Section 124, the mandate to the federal banking agencies to issue
safety and soundness regulations, including regulations concerning executive
compensation allowing the federal banking regulatory agencies to issue
guidelines instead of regulations.
Further regulatory relief is provided in the 1994 Act, as each of the federal
regulatory banking agencies, including the National Credit Union Administration
Board, is required to establish an internal regulatory appeals process for
insured depository institutions within 6 months. In addition, the Department of
Justice 30 day waiting period for mergers and acquisitions is reduced by the
1994 Act to 15 days for certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires the Secretary
of the Treasury to allow financial institutions to file such reports
electronically. The 1994 Act also requires the Secretary of the Treasury to
publish written rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual basis.
The procedures for forming a bank holding company have also been simplified. The
formal application process for many holding company formations is now a
simplified 30 day notice procedure. In addition, the Securities Act of 1933 has
been amended by the 1994 Act to further simplify the securities issuance in
connection with a bank holding company formation.
PENDING LEGISLATION AND REGULATIONS
There are pending legislative proposals to reform the Glass-Steagall Act to
allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms. Certain other
pending legislative proposals include bills to let banks pay interest on
business checking accounts, to cap consumer liability for stolen debit cards,
and to give judges the authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
It is impossible to predict what effect the enactment of certain of the
above-mentioned legislation will have on the Bancorp, Lake and Rose and on the
financial institutions industry in general. Moreover, it is likely that other
bills affecting the business of banks may be introduced in the future by the
United States Congress or California legislature.
203
<PAGE> 218
DESCRIPTION OF THE BANCORP FOLLOWING THE
LAKE MERGER AND THE ROSE MERGER
BUSINESS
It is anticipated that following the Lake Merger and the Rose Merger, the
Bancorp will continue to operate the businesses of WSNB, Lake and R1NB in
substantially the same form as such businesses were conducted prior to the Lake
Merger and the Rose Merger. The principal office of the Bancorp will move to
2350 Country Club Drive, Cameron Park, California before year end. The Bancorp
will continue to operate WSNB through WSNB's head office and branch offices,
Lake through Lake's head office and branch offices and R1NB through R1NB's head
office and branch office as three independently operated subsidiary banks.
MANAGEMENT
Pursuant to the Lake Agreement and upon consummation of the Lake Merger, the
Board of Directors of the Bancorp will consist of 13 directors. All of the 10
directors of the Bancorp then in office immediately prior to the consummation of
the Lake Merger shall continue to serve as directors of the Bancorp as the
Surviving Corporation, and in addition, John Helms, Gary E. Nordine and Howard
("Bud") Van Lente, currently directors of Lake, will be added to the Board of
Directors of the Bancorp. For information concerning these persons, see
"DESCRIPTION OF THE BANCORP--Management--Information on Directors and Executive
Officers" and "DESCRIPTION OF LAKE--Management--Information on Directors and
Executive Officers".
Pursuant to the Rose Agreement and upon consummation of the Rose Merger, the
Board of Directors of the Bancorp will consist of 14 directors. All of the 10
directors of the Bancorp then in office immediately prior to the consummation of
the Rose Merger shall continue to serve as directors of the Bancorp as the
Surviving Corporation, and in addition, Kirk Doyle, Howard ("Skip") Jahn, Thomas
Manz and Richard C. Seeba, currently directors of Rose, will be added to the
Board of Directors of the Bancorp. For information concerning these persons, see
"DESCRIPTION OF THE BANCORP--Management--Information on Directors and Executive
Officers" and "DESCRIPTION OF ROSE--Management--Information on Directors and
Executive Officers."
If both the Lake Merger and the Rose Merger are consummated, the Board of
Directors of the Bancorp will consist of 17 directors, 10 directors of the
Bancorp, three directors of Lake and four directors of Rose as set forth above.
It is anticipated that the directors of the Bancorp will receive fees in amounts
which are substantially similar to those presently paid to directors of the
Bancorp. (See "DESCRIPTION OF THE BANCORP--Management--Compensation of
Executive Officers and Directors.")
Gary D. Gall, who is currently the President and Chief Executive Officer of the
Bancorp, and Lesa Fynes, who is currently the Controller of the Bancorp, are
expected to serve in the same positions with the Bancorp following the Lake
Merger and the Rose Merger. In addition, Stephanie M. Marsh, who is currently
the Senior Vice President and Chief Administrative Officer of WSNB, and Kirk
Dowdell, who is currently the Senior Vice President and Chief Credit Officer of
WSNB, are expected to serve in those positions with both the Bancorp and WSNB
following the Lake Merger and the Rose Merger. In addition, Richard C. Seeba,
who is currently serving as the President and Chief Executive Officer of Rose
and R1NB will continue to serve in those capacities with R1NB and will serve as
an Executive Vice President of the Bancorp, and Thomas C. Warren, who is
currently serving as the Senior Vice President and Chief Financial Officer of
Rose and R1NB will serve as the Senior Vice President and Chief Financial
Officer of both the Bancorp and R1NB following the Rose Merger. Gary D. Gall
will serve as President and Chief
204
<PAGE> 219
Executive Officer of WSNB, Douglas A. Nordell will serve as the President and
Chief Executive Officer of Lake, and Richard C. Seeba will serve as the
President and Chief Executive Officer of R1NB. In addition, the Board of
Directors of the Bancorp will appoint from time to time such other officers of
the Bancorp and the subsidiary banks as may be necessary. For further
information concerning Gary D. Gall, Lesa Fynes, Stephanie M. Marsh, Kirk
Dowdell, Richard Seeba, Thomas C. Warren, Douglas A. Nordell and other principal
officers of the Bancorp, Lake and Rose, see "DESCRIPTION OF THE
BANCORP--Management--Information on Directors and Executive Officers,"
"DESCRIPTION OF LAKE--Management--Information on Directors and Executive
Officers" and "DESCRIPTION OF ROSE--Management--Information on Directors and
Executive Officers."
It is anticipated that Gary D. Gall, Douglas A. Nordell and Richard C. Seeba and
the other principal officers of the Bancorp, WSNB, Lake and R1NB will receive
compensation substantially similar to that currently being received by them. For
information concerning compensation currently being paid to principal officers
of the Bancorp, Lake and Rose, see "DESCRIPTION OF THE
BANCORP--Management--Compensation of Executive Officers and Directors,"
"DESCRIPTION OF LAKE--Management--Compensation of Executive Officers and
Directors," and "DESCRIPTION OF ROSE--Management--Compensation of Executive
Officers and Directors," "THE LAKE MERGER AND RELATED TRANSACTIONS--Interests of
Certain Persons in the Lake Merger and Material Contracts with Lake and its
Affiliates" and "THE ROSE MERGER AND RELATED TRANSACTIONS--Interests of Certain
Persons in the Rose Merger and Material Contracts with Rose and its Affiliates"
above.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles of Incorporation and Bylaws of the Bancorp provide for
indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreements. The Bancorp Articles further provide for the elimination of director
liability for monetary damages to the maximum extent allowed by California law.
The indemnification law of the State of California generally allows
indemnification in matters not involving the right of the corporation, to an
agent of the corporation if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation, and
in the case of a criminal matter, had no reasonable cause to believe the conduct
of such person was unlawful. California law, with respect to matters involving
the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there shall be no indemnification for: (i) amounts paid in
settling or otherwise disposing of a pending action without court approval; (ii)
expenses incurred in defending a pending action which is settled or otherwise
disposed of without court approval; (iii) matters in which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which the proceeding is or was pending shall determine that
such person is entitled to be indemnified; or (iv) other matters specified in
the California General Corporation Law.
The Bancorp's Bylaws provide that the Bancorp shall to the maximum extent
permitted by law have the power to indemnify its directors, officers and
employees. The Bancorp's Bylaws also provide that the Bancorp shall have the
power to purchase and maintain insurance covering its directors, officers and
employees against any liability asserted against any of them and incurred by any
of them, whether or not the Bancorp would have the power to indemnify them
against such liability under the provisions of applicable law or the provisions
of the Bancorp's Bylaws. Each of the directors and executive officers of the
Bancorp's subsidiary bank, WSNB has an indemnification agreement with WSNB that
provides that WSNB shall indemnify such person to the full extent authorized by
the applicable provisions of California law, subject to national banking laws,
and further provide advances to pay for any expenses which would be subject to
reimbursement.
205
<PAGE> 220
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Bancorp pursuant to the foregoing, the Bancorp has
been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
INDEPENDENT PUBLIC ACCOUNTANTS
It is anticipated that Perry-Smith & Co., LLP will continue to provide
accounting services to the Bancorp, WSNB, Lake and R1NB, such services to
include audits of year end financial statements and other services as required.
EXPERTS
The financial statements of the Bancorp as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in this
Joint Proxy Statement/Prospectus have been audited by Perry-Smith & Co., LLP,
independent auditors, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Lake as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 included in this Joint
Proxy Statement/Prospectus have been audited by Perry-Smith & Co., LLP,
independent auditors, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Rose as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 included in this Joint
Proxy Statement/Prospectus have been audited by Perry-Smith & Co., LLP,
independent auditors, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
Representatives of Perry-Smith & Co., LLP will be present at the Bancorp
Meeting, and they will be given an opportunity to make a statement if they
desire to do so. They will also be available to respond to appropriate
questions.
Representatives of Perry-Smith & Co., LLP will be present at the Lake Meeting,
and they will be given an opportunity to make a statement if they desire to do
so. They will also be available to respond to appropriate questions.
Representatives of Perry-Smith & Co., LLP will be present at the Rose Meeting,
and they will be given an opportunity to make a statement if they desire to do
so. They will also be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the securities to be issued by the Bancorp in connection with
each of the Lake Merger and the Rose Merger is being passed upon by Gary Steven
Findley & Associates, Anaheim, California.
206
<PAGE> 221
OTHER BUSINESS
The Boards of Directors of the Bancorp, Lake and Rose do not know of any other
matters to be presented at the Bancorp Meeting, the Lake Meeting or the Rose
Meeting, except the proposals concerning the Lake Merger and the Rose Merger set
forth above. If other matters properly come before the Bancorp Meeting, the Lake
Meeting or the Rose Meeting, however, it is the intention of the persons named
in the accompanying Proxy cards to vote said Proxy cards in accordance with
their best judgment and in their sole discretion.
207
<PAGE> 222
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WESTERN SIERRA BANCORP AND SUBSIDIARY
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheet, September 30, 1998 and December 31, 1997........................................ F-1
Consolidated Statement of Income for the Nine Month Periods Ended September 30, 1998 and 1997............... F-2
Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended
September 30, 1998 and the Year Ended December 31, 1997..................................................... F-3
Consolidated Statement of Cash Flows for the Nine Month Periods Ended September 30, 1998 and 1997........... F-4
Notes to Financial Statements .............................................................................. F-6
WESTERN SIERRA BANCORP AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report................................................................................ F-14
Consolidated Balance Sheet, December 31, 1997 and 1996...................................................... F-15
Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995....................... F-16
Consolidated Statement of Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995........................................................ F-18
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995................... F-19
Notes to Consolidated Financial Statements.................................................................. F-23
LAKE COMMUNITY BANK
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Balance Sheet, September 30, 1998 and December 31, 1997..................................................... F-52
Statement of Income for the Nine Months Ended September 30, 1998 and 1997................................... F-53
Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1998 and 1997............................................................... F-54
Statement of Cash Flows for the Nine Months Ended September 30, 1998........................................ F-55
Statement of Cash Flows for the Nine Months Ended September 30, 1997........................................ F-56
Notes to Financial Statements............................................................................... F-57
</TABLE>
208
<PAGE> 223
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LAKE COMMUNITY BANK
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report................................................................................ F-61
Balance Sheet, December 31, 1997 and 1996................................................................... F-62
Statement of Income for the Years Ended December 31, 1997, 1996 and 1995.................................... F-63
Statement of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995............................................................................ F-65
Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995................................ F-66
Notes to Financial Statements............................................................................... F-70
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheet, September 30, 1998 and December 31, 1997........................................ F-87
Consolidated Statement of Income for the Nine Months Ended September 30, 1998 and 1997...................... F-88
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997..................................................... F-90
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1998 and 1997.................. F-91
Notes to Consolidated Financial Statements ................................................................. F-93
</TABLE>
209
<PAGE> 224
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ROSEVILLE 1ST NATIONAL BANK
AUDITED FINANCIAL STATEMENTS
Independent Auditor's Report................................................................................ F-98
Balance Sheet, December 31, 1997 and 1996................................................................... F-99
Statement of Income for the Years Ended December 31, 1997, 1996 and 1995.................................... F-100
Statement of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995...................................................................... F-101
Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995................................ F-102
Notes to Financial Statements............................................................................... F-104
</TABLE>
210
<PAGE> 225
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 6,941,034 $ 5,296,020
Federal funds sold 10,600,000 6,550,000
Loans held for sale 2,785,765 1,766,851
Investment securities (market value of $33,483,300
in 1998 and $20,790,500 in 1997) (Note 2) 33,433,044 20,748,546
Loans and leases, less allowance for loan and
lease losses of $1,024,738 in 1998 and $947,865
in 1997 (Note 3) 73,819,437 68,190,971
Other real estate, net (Note 4) 1,553,336 966,804
Bank premises and equipment, net (Note 5) 3,480,912 3,027,078
Accrued interest receivable and other assets (Note 6) 2,667,767 2,313,511
------------ ------------
$135,281,295 $108,859,781
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 31,552,381 $ 19,214,744
Interest bearing (Note 7) 92,177,085 79,494,454
------------ -------------
Total deposits 123,729,466 98,709,198
Accrued interest payable and other liabilities 1,158,452 1,152,111
------------ -------------
Total liabilities 124,887,918 99,861,309
Stockholders' equity:
Preferred stock - no par value; 10,000,000
shares authorized; none issued -- --
Common stock - no par value; 10,000,000 shares
authorized; issued and outstanding - 981,448
shares in 1998 and 946,021 shares in 1997 7,381,303 7,000,846
Retained earnings 2,743,717 1,908,449
Accumulated other comprehensive income
(Notes 2 and 9) 268,357 89,177
------------ -------------
Total stockholders' equity 10,393,377 8,998,472
------------ -------------
$135,281,295 $ 108,859,781
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE> 226
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $5,550,326 $5,106,293
Interest on investment securities:
Taxable 968,111 869,775
Exempt from Federal income taxes 165,503 42,164
Interest on Federal funds sold 320,201 150,153
---------- ----------
Total interest income 7,004,141 6,168,385
Interest expense on deposits (Note 7) 2,601,564 2,217,426
---------- ----------
Net interest income 4,402,577 3,950,959
Provision for loan and lease losses (Note 3) 250,000 193,000
---------- ----------
Net interest income after provision
for loan and lease losses 4,152,577 3,757,959
---------- ----------
Non-interest income:
Service charges and fees 534,111 557,191
Gain on sale of loans 1,093,463 561,737
Gain on sale of investment securities, net (Note 2) 16,292
Other 214,532 208,214
---------- ----------
Total non-interest income 1,842,106 1,343,434
---------- ----------
Other expenses:
Salaries and employee benefits (Note 3) 2,621,234 2,094,069
Occupancy 323,744 295,763
Equipment 420,245 337,457
Other 1,322,614 1,213,343
---------- ----------
Total other expenses 4,687,837 3,940,632
---------- ----------
Income before income taxes 1,306,846 1,160,761
Income taxes 471,578 453,043
---------- ----------
Net income $ 835,268 $ 707,718
========== ==========
Basic earnings per share (Note 8) $ .86 $ .73
========== ==========
Diluted earnings per share (Note 8) $ .80 $ .70
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 227
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACCUMU-
LATED OTHER
COMMON STOCK COMPRE-
---------------------- RETAINED HENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 796,948 $4,989,275 $ 2,762,300 $ (31,249) $7,720,326
Stock options exercised and related
tax benefit 11,943 118,827 118,827
6% stock dividend 47,927 617,300 (617,300)
10% stock dividend 85,203 1,235,444 (1,235,444)
Fractional shares (4,177) (4,177)
Earned ESOP shares 4,000 40,000 40,000
Net income 1,003,070 1,003,070
Net change in unrealized loss on
available-for-sale investment
securities, net of taxes 120,426 120,426
------- ---------- ----------- -------- ----------
Balance, December 31, 1997 946,021 7,000,846 1,908,449 89,177 8,998,472
Stock options exercised
and related tax benefit 35,427 380,457 380,457
Net income 835,268 835,268
Net change in unrealized gain on
available-for-sale investment sec-
urities, net of taxes (Notes 2 and 9) 179,180 179,180
------- ---------- ----------- -------- -----------
Balance, September 30, 1998 981,448 $7,381,303 $ 2,743,717 $268,357 $10,393,377
======= ========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-3
<PAGE> 228
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 835,268 $ 707,718
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan and lease losses 250,000 193,000
Depreciation and amortization 329,770 288,402
Deferred loan origination costs and fees, net (161,976) 19,643
Amortization of investment security premiums, net 57,047 11,935
Loss on sale of available-for-sale investment
securities (16,292)
Provision for losses on other real estate 75,000 274,972
(Gain) loss on sale of other real estate (19,139) 181
(Increase) decrease in loans held for sale (1,018,914) 165,117
Increase in accrued interest receivable and
other assets (278,798) (255,030)
Increase in accrued interest payable and
other liabilities 6,341 42,048
------------ ------------
Net cash provided by operating activities 74,599 1,431,694
------------ ------------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets
and liabilities of another bank 5,944,700
Proceeds from the sale and call of available-for-sale
investment securities 2,800,000 3,441,511
Proceeds from matured available-for-sale investment
securities 1,000,007
Proceeds from called held-to-maturity investment
securities 2,000,000 1,000,000
Proceeds from matured held-to-maturity investment
securities 25,000 114,380
Purchases of available-for-sale investment securities (20,270,778) (11,615,150)
Purchases of held-to-maturity investment securities (1,695,678)
Principal repayments received from available-for-sale
SBA pools and mortgage-backed securities 1,943,985 677,614
Principal repayments received from held-to-maturity
mortgage-backed securities 36,009 113,493
Net increase in loans and leases (6,474,325) (9,431,133)
Purchases of premises and equipment (783,602) (276,898)
Capitalized additions to other real estate (81,338) (18,232)
Proceeds from the sale of other real estate 196,775 200,343
------------ ------------
Net cash used in investing activities (19,608,267) (11,545,050)
------------ ------------
</TABLE>
(Continued)
F-4
<PAGE> 229
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 9,923,266 $ 4,625,080
Net increase in time deposits 15,097,002 12,407,307
Repayment of ESOP note payable (40,000)
Proceeds from the exercise of stock options 208,414 36,342
Payments for fractional shares (1,741)
------------ -----------
Net cash provided by financing
activities 25,228,682 17,026,988
------------ -----------
Increase in cash and cash equivalents 5,695,014 6,913,632
Cash and cash equivalents at beginning of period 11,846,020 4,547,407
------------ -----------
Cash and cash equivalents at end of period $ 17,541,034 $11,461,039
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 2,747,262 $ 2,117,980
Income taxes $ 445,000 $ 544,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 757,830 $ 709,846
Net change in unrealized gain on available-
for-sale investment securities $ 275,287 $ 148,777
Supplemental schedule related to acquisition:
On February 21, 1997, the Bank acquired
certain assets and liabilities of the
Lincoln branch of Wells Fargo Bank:
Cash $ 5,944,700
Fair value of assets and liabilities
acquired, net 128,824
Premium paid for deposits 366,581
-----------
Deposits assumed $ 6,440,105
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 230
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format and, therefore, do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been
reflected in the financial statements. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the full year. Certain reclassifications
have been made to prior period amounts to present them on a basis
consistent with classifications for the nine months ended September 30,
1998.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at September 30, 1998 and December 31, 1997 consisted of the following:
Available-for-Sale:
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 21,739,880 $ 252,262 $ (58,642) $21,933,500
Obligations of states and
political subdivisions 7,820,876 238,728 (11,204) 8,048,400
Federal Reserve Bank stock 150,900 150,900
Federal Home Loan Bank stock 411,000 411,000
------------ --------- --------- -----------
$ 30,122,656 $ 490,990 $ (69,846) $30,543,800
============ ========= ========= ===========
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $421,144 were recorded net of $152,787 in tax liabilities as a
separate component of stockholders' equity at September 30, 1998. There
were no sales of available-for-sale investment securities for the nine
month period ended September 30, 1998.
F-6
<PAGE> 231
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 13,534,887 $ 126,463 $ (46,350) $13,615,000
Obligations of states and
political subdivisions 1,573,256 66,738 (994) 1,639,000
Federal Reserve Bank stock 150,900 150,900
Federal Home Loan Bank stock 393,600 393,600
------------ --------- --------- -----------
$ 15,652,643 $ 193,201 $ (47,344) $15,798,500
============ ========= ========= ===========
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $145,857 were recorded net of $56,680 in tax liabilities as a
separate component of stockholders' equity at December 31, 1997.
Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the nine month period ended September 30, 1997
totaled $2,186,980 and $16,292, respectively.
Held-to-Maturity:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 2,054,428 $ 31,472 $2,085,900
Obligations of states and
political subdivisions 834,816 18,784 853,600
------------ ---------- ---------- ----------
$ 2,889,244 $ 50,256 $ -- $2,939,500
============ ========== ========== ==========
</TABLE>
F-7
<PAGE> 232
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
Held-to-Maturity: (Continued)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 4,065,583 $ 36,417 $ 4,102,000
Obligations of states and
political subdivisions 884,463 5,537 890,000
----------- --------- ---------- -----------
$ 4,950,046 $ 41,954 $ -- $ 4,992,000
=========== ========= ========== ===========
</TABLE>
There were no sales or transfers of held-to-maturity investment
securities for the nine month periods ended September 30, 1998 and 1997,
respectively.
F-8
<PAGE> 233
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at September 30, 1998 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------ ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
After one year through
five years $ 500,000 $ 500,300
After five years through
ten years 5,002,108 5,125,000 $1,500,000 $1,528,400
After ten years 2,641,110 2,733,400 500,000 500,800
---------- ------------ ---------- ----------
8,143,218 8,358,700 2,000,000 2,029,200
Investment securities
not due at a single
maturity date:
Mortgage-backed
securities 9,539,139 9,500,800 54,428 56,700
SBA loan pools 4,057,523 4,074,000
Municipal bonds 7,820,876 8,048,400 834,816 853,600
Federal Reserve Bank
stock 150,900 150,900
Federal Home Loan
Bank stock 411,000 411,000
----------- ----------- ---------- ----------
$30,122,656 $30,543,800 $2,889,244 $2,939,500
=========== =========== ========== ==========
</TABLE>
Investment securities with amortized costs totaling $7,087,451 and
$8,495,865 and market values totaling $7,261,600 and $8,565,000 were
pledged to secure public deposits, treasury, tax and loan accounts and
the Federal Reserve Bank borrowing line at September 30, 1998 and
December 31, 1997, respectively.
F-9
<PAGE> 234
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. LOANS AND LEASES
Outstanding loans and leases are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
<S> <C> <C>
Commercial $18,708,168 $14,882,162
Real estate-mortgage 46,633,773 40,051,471
Real estate-construction 7,685,776 13,263,326
Lease financing 1,442,542 697,499
Installment 582,953 615,391
----------- -----------
75,053,212 69,509,849
Deferred loan and lease origination
fees and costs, net (209,037) (371,013)
Allowance for loan and lease losses (1,024,738) (947,865)
----------- -----------
$73,819,437 $68,190,971
=========== ===========
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30, Year Ended
----------------------- December 31,
1998 1997 1997
---------- ---------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 947,865 $ 707,066 $ 707,066
Provision charged to operations 250,000 193,000 243,000
Losses charged to allowance (186,813) (3,000)
Recoveries 13,686 600 799
---------- ---------- ---------
$1,024,738 $ 900,666 $ 947,865
========== ========== =========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $736,400 and $1,487,000 at September 30, 1998 and December 31,
1997, respectively. The related allowance for loan losses for these
loans at September 30, 1998 and December 31, 1997 was $344,900 and
$207,500, respectively. The average recorded investment in impaired
loans for the nine month period ended September 30, 1998 and the year
ended December 31, 1997 was $862,400 and $1,100,000, respectively. The
Bank recognized $4,000 and $63,119 in interest income on impaired loans
during the nine month periods ended September 30, 1998 and 1997,
respectively.
At September 30, 1998 and December 31,1997, nonaccrual loans totaled
$736,400 and $1,487,000, respectively. Interest foregone on nonaccrual
loans totaled $37,434 and $46,713 for the nine month periods ended
September 30, 1998 and 1997, respectively.
Salaries and employee benefits totaling $240,540 and $262,015 have been
deferred as loan origination costs during the nine month periods ended
September 30, 1998 and 1997, respectively.
F-10
<PAGE> 235
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. OTHER REAL ESTATE
Other real estate consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Other real estate $ 1,903,308 $ 1,241,776
Valuation allowance (349,972) (274,972)
------------ -----------
$ 1,553,336 $ 966,804
============ ===========
</TABLE>
Changes in the allowance for losses on other real estate were as
follows:
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30, Year Ended
--------------------------- December 31,
1998 1997 1997
----------- ---------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 274,972
Provision charged to
operations 75,000 $ 274,972 $ 274,972
----------- ---------- ---------
Balance, end of period $ 349,972 $ 274,972 $ 274,972
=========== ========== =========
</TABLE>
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land $ 1,175,394 $ 720,640
Building 1,490,089 1,484,566
Furniture, fixtures
and equipment 2,418,090 2,211,896
Leasehold improvements 252,637 245,677
Construction in progress 175,460 80,081
----------- -----------
5,511,670 4,742,860
Less accumulated
depreciation and
amortization (2,030,758) (1,715,782)
----------- -----------
$ 3,480,912 $ 3,027,078
=========== ===========
</TABLE>
Depreciation and amortization included in occupancy and equipment
expense totaled $329,770 and $267,018 for the nine month periods ended
September 30, 1998 and 1997, respectively.
F-11
<PAGE> 236
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
6. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Accrued interest receivable $ 783,877 $ 752,368
Cash surrender value of officer life
insurance policies 362,645 349,722
Deferred tax assets, net 388,207 484,000
Deposit premium, net 308,536 336,031
Other 824,502 391,390
----------- -----------
$ 2,667,767 $ 2,313,511
=========== ===========
</TABLE>
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Savings $ 7,944,270 $ 7,198,335
NOW accounts 10,793,085 9,695,696
Money market 6,312,581 10,570,276
Time, $100,000 or more 29,752,423 15,533,010
Other time 37,374,726 36,497,137
----------- -----------
$92,177,085 $79,494,454
=========== ===========
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Savings $ 104,822 $ 114,531
NOW accounts 75,990 78,847
Money market 138,517 154,469
Time, $100,000 or more 794,153 499,518
Other time 1,488,082 1,370,061
----------- -----------
$ 2,601,564 $ 2,217,426
=========== ===========
</TABLE>
F-12
<PAGE> 237
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
8. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
For the Nine Month Net Shares Per Share
Periods Ended Income Outstanding Amount
-------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
September 30, 1998
------------------
Basic earnings per share $ 835,268 970,810 $ .86
=======
Effect of dilutive stock options 67,475
---------- ---------
Diluted earnings per share $ 835,268 1,038,285 $ .80
========== ========= =======
September 30, 1997
------------------
Basic earnings per share $ 707,718 965,403 $ .73
=======
Effect of dilutive stock options 43,908
---------- ---------
Diluted earnings per share $ 707,718 1,009,311 $ .70
========== ========= =======
</TABLE>
9. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income, which establishes standards for the reporting and
display of comprehensive income and its components in a full set of
financial statements. The Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported. Other comprehensive income, net of
taxes, was comprised of the unrealized gain on available-for sale
investment securities for the nine month periods ended September 30,
1998 and 1997 and totaled $179,180 and $130,745, respectively. Total
comprehensive income, net of taxes, was $1,014,448 and $838,463 for the
nine month periods ended September 30, 1998 and 1997, respectively.
10. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be
adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, Management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings
or the financial position of the Company.
F-13
<PAGE> 238
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Board of Directors
and Stockholders
Western Sierra Bancorp
and Subsidiary
We have audited the accompanying consolidated balance sheet of
Western Sierra Bancorp and subsidiary as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company'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 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Western Sierra Bancorp and subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ PERRY SMITH & CO., LLP
------------------------------------
Certified Public Accountants
Sacramento, California
February 6, 1998
F-14
<PAGE> 239
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,296,020 $ 4,447,407
Federal funds sold 6,550,000 100,000
Loans held for sale 1,766,851 748,617
Investment securities (market value of
$20,790,500 in 1997 and $11,739,100
in 1996) (Note 2) 20,748,546 11,734,630
Loans and leases, less allowance for loan and
lease losses of $947,865 in 1997 and
$707,066 in 1996 (Note 3) 68,190,971 60,901,585
Other real estate (Note 4) 966,804 1,197,304
Bank premises and equipment, net (Note 5) 3,027,078 2,770,761
Accrued interest receivable and other assets
(Note 6) 2,313,511 1,560,222
------------ ------------
$108,859,781 $ 83,460,526
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 19,214,744 $ 15,488,098
Interest bearing (Note 7) 79,494,454 59,439,072
------------ ------------
Total deposits 98,709,198 74,927,170
Accrued interest payable and other liabilities 1,152,111 813,030
------------ ------------
Total liabilities 99,861,309 75,740,200
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 10):
Preferred stock - no par value; 10,000,000 shares
authorized; none issued -- --
Common stock - no par value; 10,000,000 shares
authorized; issued and outstanding - 946,021
shares in 1997 and 796,948 shares in 1996 7,000,846 4,989,275
Retained earnings 1,908,449 2,762,300
Unrealized gain (loss) on available-for-sale
investment securities, net of taxes (Note 2) 89,177 (31,249)
------------ ------------
Total stockholders' equity 8,998,472 7,720,326
------------ ------------
$108,859,781 $ 83,460,526
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 240
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and leases $ 6,977,940 $ 5,543,968 $ 4,937,615
Interest on Federal funds sold 210,669 145,574 141,254
Interest on investment securities:
Taxable 1,171,799 733,987 588,893
Exempt from Federal income taxes 70,041 17,521 16,180
----------- ----------- -----------
Total interest income 8,430,449 6,441,050 5,683,942
----------- ----------- -----------
Interest expense:
Interest on deposits (Note 7) 3,049,511 2,173,525 1,868,796
Interest on short-term borrowings
(Note 8) 1,783 11,453 5,795
----------- ----------- -----------
Total interest expense 3,051,294 2,184,978 1,874,591
----------- ----------- -----------
Net interest income 5,379,155 4,256,072 3,809,351
Provision for loan and lease losses
(Note 3) 243,000 457,500 80,000
----------- ----------- -----------
Net interest income after
provision for loan and
lease losses 5,136,155 3,798,572 3,729,351
----------- ----------- -----------
Non-interest income:
Service charges and fees 764,888 687,896 689,759
Gain on sale of loans 972,425 684,316 426,998
Gain (loss) on sale and call of
investment securities, net
(Note 2) 20,597 11,020 (29,520)
Other income 278,964 308,541 139,755
----------- ----------- -----------
Total non-interest income 2,036,874 1,691,773 1,226,992
----------- ----------- -----------
</TABLE>
(Continued)
F-16
<PAGE> 241
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits
(Notes 3 and 14) $2,987,918 $2,355,582 $2,090,522
Occupancy (Notes 5 and 9) 399,720 351,845 307,998
Equipment 461,138 398,913 369,320
Other expenses (Note 11) 1,682,183 1,176,110 1,160,495
---------- ---------- ----------
Total other expenses 5,530,959 4,282,450 3,928,335
---------- ---------- ----------
Income before income taxes 1,642,070 1,207,895 1,028,008
Income taxes (Note 12) 639,000 470,000 377,000
---------- ---------- ----------
Net income $1,003,070 $ 737,895 $ 651,008
========== ========== ==========
Basic earnings per share (Note 10) $ 1.08 $ .97 $ .96
========== ========== ==========
Diluted earnings per share (Note 10) $ 1.02 $ .94 $ .94
========== ========== ==========
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
F-17
<PAGE> 242
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN
ON AVAILABLE-
COMMON STOCK ADDITIONAL FOR-SALE
---------------------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 517,600 $ 1,294,000 $ 1,307,500 $ 1,751,852 $ (52,919) $ 4,300,433
Stock options exercised 21,400 53,500 71,476 124,976
7% stock dividend 36,274 90,685 126,959 (217,644)
4% stock dividend 22,783 56,958 102,583 (159,541)
Fractional shares (1,270) (1,270)
Net income 651,008 651,008
Net change in unrealized
loss on available-for-sale
investment securities, net
of taxes 80,312 80,312
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 598,057 1,495,143 1,608,518 2,024,405 27,393 5,155,459
Shares exchanged to effect
merger with the Bank 1,608,518 (1,608,518)
Stock issued through stock
offering 200,000 1,904,922 1,904,922
Stock options exercised and
related tax benefit 2,891 20,692 20,692
Unearned ESOP shares
(Note 14) (4,000) (40,000) (40,000)
Net income 737,895 737,895
Net change in unrealized
gain on available-for-sale
investment securities, net
of taxes (58,642) (58,642)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 796,948 4,989,275 2,762,300 (31,249) 7,720,326
Stock options exercised and
related tax benefit 11,943 118,827 118,827
6% stock dividend 47,927 617,300 (617,300)
10% stock dividend 85,203 1,235,444 (1,235,444)
Fractional shares (4,177) (4,177)
Earned ESOP shares
(Note 14) 4,000 40,000 40,000
Net income 1,003,070 1,003,070
Net change in unrealized
loss on available-for-sale
investment securities, net
of taxes (Note 2) 120,426 120,426
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 946,021 $ 7,000,846 $ -- $ 1,908,449 $ 89,177 $ 8,998,472
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 243
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,003,070 $ 737,895 $ 651,008
Adjustments to reconcile net
income to cash provided by
operating activities:
Provision for loan and lease losses 243,000 457,500 80,000
Depreciation and amortization 397,903 318,076 316,604
Deferred loan origination costs and
fees, net (1,636) 120,039 (2,774)
Amortization of investment security
premiums, net 21,063 39,101 57,272
(Gain) loss on sale and call of avail-
able-for-sale investment securities (16,293) (11,020) 29,520
Gain on called held-to-maturity
investment securities (4,304)
Provision for losses on other real
estate 207,651 90,521
Loss (gain) on sale of other real
estate 25,802 (78,450) (8,937)
Increase in loans held for sale (1,018,234) (105,368) (440,099)
Increase in accrued interest
receivable and other assets (230,030) (129,292) (160,865)
Increase (decrease) in accrued
interest payable and other
liabilities 419,081 (55,869) 495,557
Deferred taxes (233,000) (26,000) (53,000)
----------- ----------- -----------
Net cash provided by
operating activities 814,073 1,357,133 964,286
----------- ----------- -----------
</TABLE>
(Continued)
F-19
<PAGE> 244
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Cash acquired in the purchase of
selected assets and liabilities of
another bank $ 5,944,700
Proceeds from the sale and call of
available-for-sale investment
securities 4,422,806 $ 4,624,994 $ 2,625,494
Proceeds from called held-to-
maturity investment securities 1,236,435
Proceeds from matured held-to-
maturity investment securities 114,380 545,000 1,422,675
Purchases of available-for-sale
investment securities (12,615,575) (3,835,745) (6,157,987)
Purchases of held-to-maturity
investment securities (3,371,446) (2,498,017) (620,562)
Principal repayments received from
available-for-sale SBA pools and
mortgage-backed securities 1,226,887 1,184,545 453,149
Principal repayments received from
held-to-maturity mortgage-backed
securities 168,765 131,058 93,089
Net decrease in interest-bearing
deposits in banks 100,000
Net increase in loans and leases (8,298,384) (13,462,483) (8,371,476)
Purchases of premises and equipment (529,120) (109,556) (1,061,457)
Purchase of other real estate (35,000)
Proceeds from the sale of other real
estate 798,955 419,708 98,997
Purchase of life insurance policies (305,000)
------------ ------------ ------------
Net cash used in
investing activities (10,901,597) (13,000,496) (11,758,078)
------------ ------------ ------------
</TABLE>
(Continued)
F-20
<PAGE> 245
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-
bearing and savings deposits $ 4,134,281 $ 2,037,915 $ 800,995
Net increase in time deposits 13,207,642 9,783,403 9,398,324
Net (decrease) increase in short-term
borrowings (2,000,000) 1,350,000
Payments for fractional shares (4,177) (1,270)
Proceeds from the sale of common
stock 1,904,922
Proceeds from issuance of ESOP
note payable 40,000
Repayment of ESOP note payable (40,000)
Proceeds from the exercise of
stock options 88,391 16,272 124,976
------------ ------------ ------------
Net cash provided by financing
activities 17,386,137 11,782,512 11,673,025
------------ ------------ ------------
Increase in cash and cash
equivalents 7,298,613 139,149 879,233
Cash and cash equivalents at
beginning of year 4,547,407 4,408,258 3,529,025
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 11,846,020 $ 4,547,407 $ 4,408,258
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 2,909,016 $ 2,081,127 $ 1,717,971
Income taxes $ 784,000 $ 738,000 $ 201,602
Non-cash investing activities:
Real estate acquired through
foreclosure $ 709,846 $ 1,307,314 $ 35,941
Net change in unrealized gain (loss)
on available-for-sale investment
securities $ 196,634 $ (94,116) $ 130,121
</TABLE>
(Continued)
F-21
<PAGE> 246
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Supplemental schedule related to acquisition:
<TABLE>
<S> <C>
On February 21, 1997, the Bank acquired certain assets and liabilities of the
Lincoln branch of Wells Fargo Bank (Note 16):
Cash $5,944,700
Fair value of assets and liabilities
acquired, net 128,824
Premium paid for deposits 366,581
----------
Deposits assumed $6,440,105
==========
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
F-22
<PAGE> 247
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
Western Sierra Bancorp (the "Company") was incorporated on July 11,
1996, and subsequently obtained approval of the Board of Governors of
the Federal Reserve System to be a bank holding company. On
December 31, 1996, Western Sierra National Bank (the "Bank")
consummated a merger with Western Sierra Bancorp that was effected
through the exchange of one share of the Company's no par value
common stock for each share of the Bank's $2.50 per share par value
common stock. The merger was accounted for in a manner similar to
that of a pooling-of-interests method of accounting.
The accounting and reporting policies of the Company and its
subsidiary conform with generally accepted accounting principles and
prevailing practices within the banking industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1997.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All material
intercompany transactions and accounts have been eliminated in
consolidation.
Investment Securities
---------------------
Investments are classified into the following categories:
- Available-for-sale securities, reported at fair
value, with unrealized gains and losses excluded
from earnings and reported, net of taxes, as a
separate component of stockholders' equity.
- Held-to-maturity securities, which management has
the positive intent and ability to hold, reported
at amortized cost, adjusted for the accretion of
discounts and amortization of premiums.
Management determines the appropriate classification of its
investments at the time of purchase and may only change the
classification in certain limited circumstances. All transfers
between categories are accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums.
In addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
F-23
<PAGE> 248
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases
----------------
Loans and leases are stated at principal balances outstanding, except
for loans transferred from loans held for sale which are carried at
the lower of principal balance or market value at the date of
transfer, adjusted for accretion of discounts. Interest is accrued
daily based upon outstanding loan and lease balances. However, when,
in the opinion of management, loans and leases are considered to be
impaired and the future collectibility of interest and principal is
in serious doubt, loans and leases are placed on nonaccrual status
and the accrual of interest income is suspended. Any interest accrued
but unpaid is charged against income. Payments received are applied
to reduce principal to the extent necessary to ensure collection.
Subsequent payments on these loans and leases, or payments received
on nonaccrual loans and leases for which the ultimate collectibility
of principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's
observable market price or the fair value of collateral if the loan
or lease is collateral dependent. A loan or lease is considered
impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due
(including both principal and interest) in accordance with the
contractual terms of the loan or lease agreement.
Loan and lease origination fees, commitment fees, direct loan and
lease origination costs and purchase premiums and discounts on loans
and leases are deferred and recognized as an adjustment of yield, to
be amortized to interest income over the contractual term of the loan
or lease. The unamortized balance of deferred fees and costs is
reported as a component of net loans and leases.
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can
be expected to occur in the normal course of business. The
determination of the allowance is based on estimates made by
management, to include consideration of the character of the loan and
lease portfolio, specifically identified problem loans and leases,
potential losses inherent in the portfolio taken as a whole and
economic conditions in the Bank's service area. These estimates are
particularly susceptible to changes in the economic environment and
market conditions. The allowance is established through a provision
for loan and lease losses which is charged to expense.
F-24
<PAGE> 249
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Sales and Servicing
------------------------
The Bank adopted Financial Accounting Standards Board Statement No.
125 (SFAS 125), Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities on January 1, 1997. This
Statement superseded SFAS 122, Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65, which was adopted by
the Bank on October 1, 1996. Under SFAS 125, sales of financial
assets are recognized when the transferred assets are put beyond the
reach of the transferor and its creditors, even in bankruptcy or
receivership.
Under SFAS 125, servicing rights acquired through 1) a purchase or 2)
the origination of loans which are sold or securitized with servicing
rights retained are recognized as separate assets or liabilities.
Servicing assets or liabilities are recorded at the difference
between the contractual servicing fees and adequate compensation for
performing the servicing, and are subsequently amortized in
proportion to and over the period of the related net servicing income
or expense. Servicing assets are periodically evaluated for
impairment. Fair values are estimated using discounted cash flows
based on current market interest rates. For purposes of measuring
impairment, servicing assets are stratified based on note rate and
term. The amount of impairment recognized is the amount by which the
servicing assets for a stratum exceed their fair value. Servicing
rights acquired during the year ended December 31, 1997 were not
considered material for disclosure purposes.
The Bank originates loans that are sold to the Federal Home Loan
Mortgage Corporation (FHLMC) and other investors. Loans held for sale
are carried at the lower of cost or market value. Market value is
determined by the specific identification method as of the balance
sheet date or the date which investors have committed to purchase the
loans. At the time the loans are sold, the related right to service
the loans are either retained, with the Bank earning future servicing
income, or released in exchange for a one-time servicing-released
premium. Mortgage loans subsequently transferred to the loan
portfolio are transferred at the lower of cost or market value at the
date of transfer. Any difference between the carrying amount of the
loan and its outstanding principal balance is recognized as an
adjustment to yield by the interest method. The Bank serviced loans
for FHLMC totaling approximately $6,648,000 and $7,869,000 as of
December 31, 1997 and 1996, respectively.
In addition, the guaranteed portion of certain Small Business
Administration (SBA) loans are sold to third parties with the Bank
retaining the unguaranteed portion. The Bank generally receives a
premium in excess of the adjusted carrying value of the loan at the
time of sale. The Bank may be required to refund a portion of this
premium if the borrower defaults or the loan prepays within ninety
days of the settlement date. However, there were no sales of loans
subject to these recourse provisions at December 31, 1997, 1996 or
1995. SBA loans with unpaid balances of $4,181,000 and $2,917,000
were being serviced for others at December 31, 1997 and 1996,
respectively.
F-25
<PAGE> 250
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property,
net of estimated selling costs, is charged against the allowance for
loan and lease losses. A valuation allowance for losses on other real
estate is maintained to provide for temporary declines in value. The
allowance is established through a provision for losses on other real
estate which is included in other expenses. Subsequent gains or
losses on sales or writedowns resulting from permanent impairments
are recorded in other income or expense as incurred.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of Bank premises are
estimated to be thirty years. The useful lives of furniture, fixtures
and equipment are estimated to be one to fifteen years. Leasehold
improvements are amortized over the life of the asset or the term of
the related lease, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
or amortization are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to expense as incurred.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance
sheet, net deferred tax assets are included in accrued interest
receivable and other assets.
Cash Equivalents
----------------
For the purpose of the statement of cash flows, cash and due from
banks and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which established new
standards for computing and presenting earnings per share (EPS). This
Statement was adopted by the Company for financial statements issued
for the year ended December 31, 1997 and requires the restatement of
all prior-period EPS data presented.
F-26
<PAGE> 251
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
------------------
Basic EPS, which excludes dilution, is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period and replaces the
presentation of primary EPS. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock, such as stock options, result in the issuance of common
stock which shares in the earnings of the Company. Diluted EPS is
computed similarly to, and replaces the presentation of, fully
diluted EPS. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS.
Earnings per share is retroactively adjusted for stock dividends for
all periods presented.
Stock-Based Compensation
------------------------
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the exercise
price. However, if the fair value of stock-based compensation
computed under a fair value based method, as prescribed in Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, is material to the financial statements, pro-forma net
income and earnings per share are disclosed as if the fair value
method had been applied.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates.
F-27
<PAGE> 252
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment
securities at December 31, 1997 and 1996 consisted of the following:
Available-for Sale:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 13,534,887 $ 126,463 $ (46,350) $ 13,615,000
Obligations of states
and political sub-
divisions 1,573,256 66,738 (994) 1,639,000
Federal Reserve
Bank stock 150,900 150,900
Federal Home Loan
Bank stock 393,600 393,600
------------ ------------ ------------ ------------
$ 15,652,643 $ 193,201 $ (47,344) $ 15,798,500
============ ============ ============ ============
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $145,857 were recorded net of $56,680 in tax liabilities as
a separate component of stockholders' equity at December 31, 1997.
Proceeds and gross realized gains from the sale and call of
available-for-sale investment securities for the year ended
December 31, 1997 totaled $4,422,806 and $16,293, respectively.
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 8,171,777 $ 12,623 $ (63,400) $ 8,121,000
Federal Reserve
Bank stock 150,900 150,900
Federal Home Loan
Bank stock 370,200 370,200
----------- ----------- ----------- -----------
$ 8,692,877 $ 12,623 $ (63,400) $ 8,642,100
=========== =========== =========== ===========
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $50,777 were recorded net of $19,528 in tax benefits as a
separate component of stockholders' equity at December 31, 1996.
Proceeds and gross realized gains and losses from the sale and call
of available-for-sale investment securities for the year ended
December 31, 1996 totaled $4,624,994, $14,957 and $3,937,
respectively. Proceeds and gross realized gains and losses from the
sale and call of available-for-sale investment securities for the
year ended December 31, 1995 totaled $2,625,494, $1,620 and $31,140,
respectively.
F-28
<PAGE> 253
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Held-to Maturity:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $4,065,583 $ 36,417 $4,102,000
Obligations of states
and political sub-
divisions 884,463 5,537 890,000
---------- ---------- ---------- ----------
$4,950,046 $ 41,954 $ -- $4,992,000
========== ========== ========== ==========
</TABLE>
Proceeds and gross realized gains on called held-to-maturity
investment securities for the year ended December 31, 1997 totaled
$1,236,435 and $4,304, respectively.
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $2,835,010 $ 4,615 $ (625) $2,839,000
Obligations of states
and political sub-
divisions 257,520 480 258,000
---------- ---------- -------- ----------
$3,092,530 $ 5,095 $ (625) $3,097,000
========== ========== ======== ==========
</TABLE>
There were no sales, calls or transfers of held-to-maturity
investment securities for the years ended December 31, 1996 and 1995.
F-29
<PAGE> 254
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment
securities at December 31, 1997 by contractual maturity are shown
below. Expected maturities may differ from contractual maturities
because the issuers of the securities may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-------------------------------- --------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year $ 1,000,088 $ 997,000
After one year
through five years 1,060,000 1,060,000
After five years
through ten years 2,707,296 2,744,000 $ 3,500,152 $ 3,533,000
After ten years 2,314,709 2,426,000 1,175,789 1,182,000
----------- ----------- ----------- -----------
7,082,093 7,227,000 4,675,941 4,715,000
Investment securities not due
at a single maturity date:
Government guar-
anteed mortgage-
backed securities 7,373,324 7,369,000 65,431 68,000
SBA loan pools 652,726 658,000
Municipal bonds 208,674 209,000
Federal Reserve
Bank stock 150,900 150,900
Federal Home
Loan Bank
stock 393,600 393,600
----------- ----------- ----------- -----------
$15,652,643 $15,798,500 $ 4,950,046 $ 4,992,000
=========== =========== =========== ===========
</TABLE>
Investment securities with amortized costs totaling $8,495,865 and
$9,731,880 and market values totaling $8,565,000 and $9,670,000 were
pledged to secure treasury tax and loan accounts and public deposits
at December 31, 1997 and 1996, respectively.
F-30
<PAGE> 255
'
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commercial $ 14,882,162 $ 13,021,706
Real estate - mortgage 40,051,471 33,441,843
Real estate - construction 13,263,326 13,841,966
Lease financing 697,499 1,018,563
Installment 615,391 657,222
------------ ------------
69,509,849 61,981,300
Deferred loan and lease origination
fees and costs, net (371,013) (372,649)
Allowance for loan and lease losses (947,865) (707,066)
------------ ------------
$ 68,190,971 $ 60,901,585
============ ============
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 707,066 $ 648,730 $ 620,018
Provision charged to operations 243,000 457,500 80,000
Losses charged to allowance (3,000) (402,518) (56,238)
Recoveries 799 3,354 4,950
--------- --------- ---------
Balance, end of year $ 947,865 $ 707,066 $ 648,730
========= ========= =========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $1,487,000 and $1,429,000 at December 31, 1997 and 1996,
respectively. The related allowance for loan losses for these loans
at December 31, 1997 and 1996 was $207,500 and $62,900, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 1997, 1996 and 1995 was $1,100,000, $1,192,000 and
$500,000, respectively. The Bank recognized $133,617, $101,841 and
$49,584 in interest income on impaired loans during these same
periods on a cash basis.
At December 31, 1997 and 1996, nonaccrual loans totaled $1,487,000
and $1,429,000, respectively. Interest foregone on nonaccrual loans
totaled $96,000, $112,000 and $82,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Salaries and employee benefits totaling $339,415, $277,458 and
$152,210 have been deferred as loan and lease origination costs
during 1997, 1996 and 1995, respectively.
F-31
<PAGE> 256
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. OTHER REAL ESTATE
Other real estate consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Other real estate $ 1,241,776 $ 1,197,304
Valuation allowance (274,972)
----------- -----------
$ 966,804 $ 1,197,304
=========== ===========
</TABLE>
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 720,640 $ 720,640
Building 1,484,566 1,473,069
Furniture, fixtures and equipment 2,211,896 1,763,363
Leasehold improvements 245,677 225,061
Construction in progress 80,081
----------- -----------
4,742,860 4,182,133
Less accumulated
depreciation and
amortization (1,715,782) (1,411,372)
----------- -----------
$ 3,027,078 $ 2,770,761
=========== ===========
</TABLE>
Depreciation and amortization included in occupancy and equipment
expense totaled $366,803, $317,526 and $301,727 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-32
<PAGE> 257
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Accrued interest receivable $ 752,368 $ 545,613
Cash surrender value of officer life
insurance policies (Note 14) 349,722 332,525
Deferred tax assets, net (Note 12) 484,000 323,000
Deposit premium, net (Note 16) 336,031
Other 391,390 359,084
---------- ----------
$2,313,511 $1,560,222
========== ==========
</TABLE>
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Savings $ 7,198,335 $ 7,011,315
NOW accounts 9,695,696 8,265,995
Money market 10,570,276 7,068,644
Time, $100,000 or more 15,533,010 9,692,733
Other time 36,497,137 27,400,385
----------- -----------
$79,494,454 $59,439,072
=========== ===========
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Savings $ 152,374 $ 151,592 $ 181,749
NOW accounts 105,363 92,685 98,775
Money market 214,956 199,352 207,086
Time, $100,000 or more 764,129 394,904 327,624
Other time 1,812,689 1,334,992 1,053,562
---------- ---------- ----------
$3,049,511 $2,173,525 $1,868,796
========== ========== ==========
</TABLE>
F-33
<PAGE> 258
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has $4,000,000 in unsecured borrowing arrangements with two
of its correspondent banks. At December 31, 1997, the Bank could also
borrow up to $3,986,000 from the Federal Home Loan Bank, secured by
investment securities with amortized costs totaling $1,188,590 and
estimated market values totaling $1,168,000 and mortgage loans with
carrying values totaling approximately $4,512,000. In addition, as of
December 31, 1997, the Bank could borrow up to $721,000 on an
overnight basis from the Federal Reserve Bank, secured by investment
securities with amortized costs totaling $1,000,000 and estimated
market values totaling $1,006,000. There were no short-term
borrowings outstanding at December 31, 1997 and 1996.
9. COMMITMENTS AND CONTINGENCIES
Leases
------
The Bank leases certain of its branch offices under noncancelable
operating leases. Rental payments include minimum rentals, plus
adjustments for changing price indexes. Future minimum lease payments
are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $147,600
1999 138,180
2000 100,600
2001 93,600
2002 50,700
--------
$530,680
========
</TABLE>
Rental expense included in occupancy expense totaled $161,957,
$134,610 and $110,853 for the years ended December 31, 1997, 1996 and
1995, respectively.
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess
of the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of
credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
letters of credit as it does for loans included on the balance sheet.
F-34
<PAGE> 259
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
The following financial instruments represent off-balance-sheet
credit risk:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $15,267,028 $13,091,131
Letters of credit $ 246,288 $ 494,949
</TABLE>
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 some 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. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held
varies, but may include deposits, accounts receivable, inventory,
equipment, income-producing commercial properties and residential
real estate.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance or financial obligation of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers.
Real estate loan commitments represent 57% of total commitments and
are generally secured by property with a loan-to-value ratio not to
exceed 80%. Other loan commitments, predominantly commercial,
represent 41% of total commitments and are generally unsecured. Home
equity line commitments represent the remaining 2% of total
commitments. In addition, the majority of the Bank's loan commitments
have variable interest rates.
Significant Concentrations of Credit Risk
-----------------------------------------
The Bank grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to customers throughout
El Dorado, Placer and Sacramento counties.
Although the Bank has a diversified loan and lease portfolio, a
substantial portion of its portfolio is secured by commercial and
residential real estate. However, personal and business income
represent the primary source of repayment for a majority of these
loans.
F-35
<PAGE> 260
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Contingencies
-------------
The Company and its subsidiary are subject to legal proceedings and
claims which arise in the ordinary course of business. In the opinion
of management, the amount of ultimate liability with respect to such
actions will not materially affect the financial position or results
of operations of the Company or its subsidiary.
10. STOCKHOLDERS' EQUITY
Dividends
---------
Upon declaration by the Board of Directors of the Company, all
stockholders of record will be entitled to receive dividends. Under
applicable Federal laws, the Comptroller of the Currency restricts
the total dividend payment of any national banking association in any
calendar year to the net income of the year, as defined, combined
with the net income for the two preceding years, less distributions
made to stockholders during the same three-year period. At
December 31, 1997, the Bank had $1,778,723 in retained earnings
available for dividend payments to the Company.
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
-------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
December 31, 1997
-----------------
Basic earnings per share $ 1,003,070 932,531 $ 1.08
=====================
Effect of dilutive stock options 54,175
--------------------- ---------------------
Diluted earnings per share $ 1,003,070 986,706 $ 1.02
===================== ===================== =====================
December 31, 1996
-----------------
Basic earnings per share $ 737,895 759,017 $ .97
=====================
Effect of dilutive stock options 23,301
--------------------- ---------------------
Diluted earnings per share $ 737,895 782,318 $ .94
===================== ===================== =====================
</TABLE>
F-36
<PAGE> 261
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Earnings Per Share (Continued)
------------------
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
-------------------------------- -------- ----------- ---------
<S> <C> <C> <C>
December 31, 1995
-----------------
Basic earnings per share $651,008 681,030 $ .96
=====
Effect of dilutive stock options 8,666
-------- -------
Diluted earnings per share $651,008 689,696 $ .94
======== ======= =====
Stock Options
-------------
</TABLE>
In 1997 and 1989, the Board of Directors adopted Stock Option Plans
for which 218,070 shares of common stock were reserved for issuance
to employees and Directors under incentive and nonstatutory
agreements. The plans require that the option price may not be less
than the fair market value of the stock at the date the option is
granted, and that the stock must be paid in full at the time the
option is exercised. The options expire on a date determined by the
Board of Directors, but not later than ten years from the date of
grant. The vesting period is determined by the Board of Directors and
is generally over five years. As a result of the merger between the
Bank and the Company, no additional shares can be granted under the
1989 Plan.
F-37
<PAGE> 262
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Stock Options (Continued)
-------------
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been
recognized for its stock option plan. Had compensation cost for the
plan been determined based on the fair value at grant date for awards
in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would have
been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings - as reported $ 1,003,070 $ 737,895 $ 651,008
Net earnings - proforma $ 956,265 $ 611,262 $ 650,170
Basic earnings per share -
as reported $ 1.08 $ .97 $ .96
Basic earnings per share -
proforma $ 1.03 $ .81 $ .95
Diluted earnings per share -
as reported $ 1.02 $ .94 $ .94
Diluted earnings per share -
proforma $ .97 $ .78 $ .94
</TABLE>
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
Dividend yield (not applicable)
Expected volatility 23.33% to 25.35% 25.55% 1.17%
Risk-free interest rate 5.78% 6.25% 5.35%
Expected option life 10 years 10 years 5 years
</TABLE>
F-38
<PAGE> 263
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Stock Options (Continued)
-------------
A summary of the combined activity within the plans follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 101,283 $ 7.16 41,174 $ 4.83 72,000 $ 4.84
Options granted 45,000 $ 11.14 63,000 $ 8.58 1,000 $ 4.62
Options exercised (11,943) $ 7.22 (2,891) $ 4.82 (21,400) $ 4.82
Options canceled (4,198) $ 8.58 (16,000) $ 4.89
Options resulting
from stock
dividends 20,828 $ 8.03 5,574 $ 4.87
------- ------ ------
Options outstanding,
end of year 150,970 $ 8.43 101,283 $ 7.16 41,174 $ 4.83
======= ======= ======
Options exercisable,
end of year 98,078 $ 7.31 76,283 $ 6.81 41,174 $ 4.83
======= ======= ======
Weighted average
fair value of options
granted during the
year 45,000 $ 6.45 63,000 $ 5.32 1,000 $ 1.39
======= ======= ======
</TABLE>
A summary of options outstanding at December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1997 Life 1997
------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 4.62 1,298 3 years 1,298
$ 4.82 38,374 2 years 38,374
$ 8.58 61,798 9 years 48,506
$ 10.91 27,500 10 years 5,500
$ 11.36 15,400 10 years 3,080
$ 11.59 6,600 10 years 1,320
------- ------
150,970 98,078
======== ======
</TABLE>
F-39
<PAGE> 264
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Regulatory Capital
------------------
The Bank is subject to certain regulatory capital requirements
administered by the Office of the Comptroller of the Currency (OCC).
Failure to meet these minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
The Company is subject to similar capital requirements administered
by the Board of Governors of the Federal Reserve System.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets as set forth below. The average
assets and risk-weighted assets of the Company and the Bank are not
materially different at December 31, 1997. Each of these components
is defined in the regulations. Management believes that the Company
and the Bank meet all their capital adequacy requirements as of
December 31, 1997.
In addition, the most recent notification from the OCC as of
December 31, 1997 categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions
or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
--------------
Western Sierra Bancorp and
Subsidiary $ 8,573,264 8.7% $ 7,751,575 10.2%
Western Sierra National Bank $ 8,223,819 8.3% $ 7,476,315 9.8% $ 5,128,066 7.9%
Minimum requirement for "Well-
Capitalized" institution $ 4,953,300 5.0% $ 3,810,500 5.0% $ 3,252,000 5.0%
Minimum regulatory requirement $ 3,962,700 4.0% $ 3,048,400 4.0% $ 2,601,600 4.0%
</TABLE>
F-40
<PAGE> 265
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio
-------------------------------
Western Sierra Bancorp and
Subsidiary $ 8,573,264 10.7% $ 7,751,575 11.6%
Western Sierra National Bank $ 8,223,819 10.2% $ 7,476,315 11.3% $ 5,128,066 9.3%
Minimum requirement for "Well-
Capitalized" institution $ 4,816,900 6.0% $ 4,024,800 6.0% $ 3,353,500 6.0%
Minimum regulatory requirement $ 3,211,300 4.0% $ 2,683,200 4.0% $ 2,235,600 4.0%
Total Risk-Based Capital Ratio
------------------------------
Western Sierra Bancorp and
Subsidiary $ 9,521,129 11.9% $ 8,458,641 12.6%
Western Sierra National Bank $ 9,171,684 11.4% $ 8,183,381 12.4% $ 5,776,796 10.3%
Minimum requirement for "Well-
Capitalized" institution $ 8,028,200 10.0% $ 6,708,000 10.0% $ 5,589,100 10.0%
Minimum regulatory requirement $ 6,422,600 8.0% $ 5,366,400 8.0% $ 4,471,300 8.0%
</TABLE>
11. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Advertising and promotion $ 86,898 $ 60,324 $ 83,778
Regulatory assessments 46,121 32,069 95,937
Stationery and supplies 116,042 98,022 94,493
Professional fees 144,839 82,994 94,014
Other real estate 341,814 137,840 83,410
Other operating expenses 946,469 764,861 708,863
--------------------- --------------------- ---------------------
$ 1,682,183 $ 1,176,110 $ 1,160,495
===================== ===================== =====================
</TABLE>
F-41
<PAGE> 266
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
1997
----
Current $ 642,000 $ 230,000 $ 872,000
Deferred (178,000) (55,000) (233,000)
--------------------- --------------------- ---------------------
Income tax expense $ 464,000 $ 175,000 $ 639,000
===================== ===================== =====================
1996
----
Current $ 351,000 $ 145,000 $ 496,000
Deferred (19,000) (7,000) (26,000)
--------------------- --------------------- ---------------------
Income tax expense $ 332,000 $ 138,000 $ 470,000
===================== ===================== =====================
1995
----
Current $ 316,000 $ 114,000 $ 430,000
Deferred (46,000) (7,000) ( 53,000)
--------------------- --------------------- ---------------------
Income tax expense $ 270,000 $ 107,000 $ 377,000
===================== ===================== =====================
</TABLE>
F-42
<PAGE> 267
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 342,000 $ 234,000
Excess servicing fees 12,000 13,000
Deferred compensation 58,000 40,000
Future benefit of State tax deduction 76,000 49,000
Other real estate 123,000 37,000
Deposit purchase premium 4,000
Organization costs 15,000
Unrealized loss on available-for-sale
investment securities 20,000
Other 11,000 5,000
--------- ---------
Total deferred tax assets 641,000 398,000
--------- ---------
Deferred tax liabilities:
Bank premises and equipment (38,000) (53,000)
Future liability of State deferred tax
assets (41,000) (22,000)
Federal Home Loan Bank stock
dividends (21,000)
Unrealized gain on available-for-sale
investment securities (57,000)
--------- ---------
Total deferred tax liabilities (157,000) (75,000)
--------- ---------
Net deferred tax assets $ 484,000 $ 323,000
========= =========
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to operating income
before income taxes. The items comprising these differences for the
years ended December 31, 1997, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
Amount Rate % Amount Rate % Amount Rate %
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 558,304 34.0 $ 410,684 34.0 $ 349,523 34.0
State franchise tax, net
of Federal tax effect 112,539 6.9 89,588 7.4 75,852 7.4
Benefit of tax-
exempt income (35,627) (2.2) (29,296) (2.4) (44,423) (4.3)
Other 3,784 .2 (976) (.1) (3,952) (.4)
--------- --------- --------- --------- --------- ---------
Total income
tax expense $ 639,000 38.9 $ 470,000 38.9 $ 377,000 36.7
========= ========= ========= ========= ========= =========
</TABLE>
F-43
<PAGE> 268
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into
transactions with related parties, including Directors. These
transactions are on substantially the same terms and conditions as
those prevailing for comparable transactions with unrelated parties.
The following is a summary of the aggregate activity involving
related party borrowers during 1997:
<TABLE>
<S> <C>
Balance, January 1, 1997 $ 1,083,000
Disbursements 376,000
Amounts repaid (240,000)
-----------
Balance, December 31, 1997 $ 1,219,000
===========
Undisbursed commitments to related
parties, December 31, 1997 $ --
===========
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
-------------------
The Western Sierra Bancorp and Subsidiary 401KSOP is available to
employees meeting certain service requirements. The Company's
contribution to the plan is discretionary and is allocated in the
same ratio as each participant's compensation bears to total
compensation for all participants. Contributions totaled $32,200,
$21,800 and $8,200 in 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan
-----------------------------
The Employee Stock Ownership Plan (ESOP) is designed to invest
primarily in securities of the Bank purchased on the open market.
Contributions to the plan are at the sole discretion of the Board of
Directors and are limited on a participant-by-participant basis to
the lesser of $30,000 or 25% of the participant's compensation for
the plan year. Compensation is defined as all compensation paid
during the plan year which is considered to be W-2 income, to include
amounts deferred under the Company's 401KSOP. Employer contributions
vest at a rate of 20% per year after two years of employment.
Employee contributions are not permitted.
During 1996, the ESOP purchased 6,000 shares of the Company's common
stock. Of these shares, 2,000 shares were purchased with a $20,000
contribution to the ESOP by the Bank which was recognized as
compensation expense. The remaining 4,000 shares were purchased with
the proceeds of a $40,000 loan to the ESOP by a member of the Board
of Directors.
F-44
<PAGE> 269
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. EMPLOYEE BENEFIT PLANS (Continued)
Employee Stock Ownership Plan (Continued)
-----------------------------
As the debt is repaid, shares are released in proportion to the debt
service paid during the year and allocated to active employees. The
debt of the ESOP is recorded as debt of the Company and the shares
are reported as unearned ESOP shares in stockholders' equity. As
shares are committed to be released, the Bank reports compensation
expense equal to the current market price of the shares, and the
shares are recognized as outstanding for earnings per share and
capital ratio computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings and are allocated to the
participants; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest.
During 1997, the loan was repaid and the 4,000 shares were released
and allocated to employees. Compensation expense of $75,000 and
$20,000 and interest expense related to the loan of $2,739 and $1,148
were recognized for the years ended December 31, 1997 and 1996,
respectively.
Allocated and unreleased ESOP shares as of December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Allocated shares 16,064 12,064
Unreleased shares 4,000
Shares resulting from stock
dividends 2,665
------ ------
Total ESOP shares 18,729 16,064
======= =======
Fair value of unreleased shares $ -- $47,000
======= =======
</TABLE>
Salary Continuation Plan
------------------------
In December 1994, the Board of Directors approved a salary
continuation plan for a key executive. Under this plan, the Company
is obligated to provide the executive or his designated beneficiary,
with annual benefits for fifteen years after retirement or death.
These benefits are substantially equivalent to those available under
insurance policies purchased by the Company on the life of the
executive. In addition, the estimated present value of these future
benefits are accrued over the period from the effective date of the
plan until the executive's expected retirement date. The expense
recognized under this plan totaled $11,400 for the years ended
December 31, 1997 and 1996 and $11,700 for the year ended
December 31, 1995.
Under this plan, the Bank invested in single premium life insurance
policies with cash surrender values totaling $349,722 and $332,525 at
December 31, 1997 and 1996, respectively. On the balance sheet, the
cash surrender value of life insurance polices is included in accrued
interest receivable and other assets.
F-45
<PAGE> 270
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for
which it is practicable to estimate fair value. These estimates are
made at a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for
sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition,
the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimates and
have not been considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of
various financial instruments and other 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 fair
values presented.
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
1997 and 1996:
Cash, cash equivalents and short-term borrowings: For cash, cash
------------------------------------------------
equivalents and short-term borrowings, the carrying amount is
estimated to be fair value.
Investment securities: For investment securities, fair values are
---------------------
based on quoted market prices, where available. If quoted market
prices are not available, fair values are estimated using quoted
market prices for similar securities and indications of value
provided by brokers.
Loans and leases: For variable-rate loans and leases that reprice
----------------
frequently with no significant change in credit risk, fair values are
based on carrying values. Fair values of loans held for sale are
estimated using quoted market prices for similar loans. The fair
values for other loans and leases are estimated using discounted cash
flow analyses, using interest rates being offered at each reporting
date for loans and leases with similar terms to borrowers of
comparable creditworthiness. The carrying amount of accrued interest
receivable approximates its fair value.
Cash surrender value of life insurance policies: The fair value of
-----------------------------------------------
life insurance policies are based on cash surrender values at each
reporting date as provided by the insurers.
Deposits: The fair values for demand deposits are, by definition,
--------
equal to the amount payable on demand at the reporting date
represented by their carrying amount. Fair values for fixed-rate
certificates of deposit are estimated using discounted cash flow
analyses using interest rates being offered by the Bank at each
reporting date for certificates with similar remaining maturities.
The carrying amount of accrued interest payable approximates its fair
value.
Commitments to extend credit: Commitments to extend credit are
----------------------------
primarily for variable rate loans. For these commitments, there is no
difference between the commitment amounts and their fair values.
Commitments to fund fixed rate loans and letters of credit are at
rates which approximate fair value at each reporting date.
F-46
<PAGE> 271
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 5,296,020 $ 5,296,020 $ 4,447,407 $ 4,447,407
Federal funds sold 6,550,000 6,550,000 100,000 100,000
Loans held for sale 1,766,851 1,781,000 748,617 771,000
Investment securities 20,748,546 20,790,500 11,734,630 11,739,100
Loans and leases 68,190,971 67,644,000 60,901,585 60,117,000
Accrued interest receivable 752,368 752,368 545,613 545,613
Cash surrender value of life
insurance policies 349,722 349,722 332,525 332,525
------------ ------------ ------------ ------------
$103,654,478 $103,163,610 $ 78,810,377 $ 78,052,645
============ ============ ============ ============
Financial liabilities:
Deposits $ 98,709,198 $ 98,716,000 $ 74,927,170 $ 74,967,000
Accrued interest payable 518,955 518,955 376,677 376,677
------------ ------------ ------------ ------------
$ 99,228,153 $ 99,234,955 $ 75,303,847 $ 75,343,677
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 15,267,028 $ 15,267,028 $ 13,091,131 $ 13,091,131
Letters of credit 246,288 246,288 494,949 494,949
------------ ------------ ------------ ------------
$ 15,513,316 $ 15,513,316 $ 13,586,080 $ 13,586,080
============ ============ ============ ============
</TABLE>
16. BRANCH ACQUISITION
The Bank acquired certain assets and liabilities of the Lincoln
branch of Wells Fargo Bank on February 21, 1997, summarized as
follows:
<TABLE>
<S> <C>
Cash $ 5,944,700
Fair value of assets and liabilities
acquired, net 128,824
Premium paid for deposits 366,581
----------------
Deposits assumed $ 6,440,105
================
</TABLE>
The deposit premium is included on the consolidated balance sheet in
accrued interest receivable and other assets and is being amortized
using the straight-line method over ten years. Amortization expense
totaled $30,550 for the year ended December 31, 1997.
F-47
<PAGE> 272
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 205,792 $ 258,067
Investment in subsidiary 8,649,027 7,445,066
Available-for-sale investment
securities 5,000
Construction in progress 80,081
Other assets 58,572 17,193
---------------- ---------------
$ 8,998,472 $ 7,720,326
================ ===============
STOCKHOLDERS' EQUITY
Common stock $ 7,000,846 $ 4,989,275
Retained earnings 1,908,449 2,762,300
Unrealized gain (loss) on available-for-sale
investment securities, net of taxes 89,177 (31,249)
---------------- ---------------
$ 8,998,472 $ 7,720,326
================ ===============
</TABLE>
F-48
<PAGE> 273
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
PERIOD FROM JULY 11, 1996 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Income:
Dividends declared by subsidiary-
eliminated in consolidation
Interest income $ 1,565 $ 300,000
--------------------- ---------------------
Total interest income 1,565 300,000
--------------------- ---------------------
Expenses:
Interest expense 1,437
Professional fees 13,023 32,026
Director fees 40,800
Other expenses 16,207 8,277
--------------------- ---------------------
Total expenses 70,030 41,740
--------------------- ---------------------
(Loss) income before equity in
undistributed income of subsidiary (68,465) 258,260
Equity in undistributed income of subsidiary 1,043,535 462,635
--------------------- ---------------------
Income before income tax benefit 975,070 720,895
Income tax benefit 28,000 17,000
--------------------- ---------------------
Net income $ 1,003,070 $ 737,895
===================== =====================
</TABLE>
F-49
<PAGE> 274
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
PERIOD FROM JULY 11, 1996 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN
ON AVAILABLE-
COMMON STOCK FOR-SALE
RETAINED INVESTMENT
SHARES AMOUNT EARNINGS SECURITIES TOTAL
--------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Common stock issued 1,000 $ 10,000 $ 10,000
Common stock issued
to effect merger with
the Bank 800,948 5,029,275 $ 2,024,405 $ (31,249) 7,022,431
Repurchase of common
stock (1,000) (10,000) (10,000)
Unearned ESOP shares (4,000) (40,000) (40,000)
Net income 737,895 737,895
--------------- --------------- --------------- -------------- -------------
Balance,
December 31, 1996 796,948 4,989,275 2,762,300 (31,249) 7,720,326
Stock options exercised
and related tax benefit 11,943 118,827 118,827
6% stock dividend 47,927 617,300 (617,300)
10% stock dividend 85,203 1,235,444 (1,235,444)
Fractional shares (4,177) (4,177)
Earned ESOP shares 4,000 40,000 40,000
Net income 1,003,070 1,003,070
Net change in unrealized
loss on available-for-
sale investment secur-
ities, net of taxes 120,426 120,426
--------------- --------------- --------------- -------------- -------------
Balance,
December 31, 1997 946,021 $ 7,000,846 $ 1,908,449 $ 89,177 $ 8,998,472
=============== =============== =============== ============== =============
</TABLE>
F-50
<PAGE> 275
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
PERIOD FROM JULY 11, 1996 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,003,070 $ 737,895
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Undistributed earnings of subsidiary (1,043,535) (462,635)
Increase in other assets (10,943) (17,193)
---------------- ---------------
Net cash (used in) provided by
operating activities (51,408) 258,067
---------------- ---------------
Cash flows from investing activities:
Purchase of available-for-sale investment
security (5,000)
Increase in construction in progress (80,081)
--------------- --------------
Net cash used in investing
activities (85,081)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 10,000
Proceeds from issuance of note payable 120,000
Repurchase of common stock (10,000)
Repayment of note payable (120,000)
Payments for fractional shares (4,177)
Proceeds from exercise of stock options 88,391
---------------- ---------------
Net cash provided by financing
activities 84,214
---------------- ---------------
Net (decrease) increase in cash and cash
equivalents (52,275) 258,067
---------------- ---------------
Cash and cash equivalents at beginning of year 258,067
---------------- ----------------
Cash and cash equivalents at end of year $ 205,792 $ 258,067
================ ===============
Supplemental disclosures of cash flow information:
Non-cash investing activities:
Net change in unrealized gain (loss) on
available-for-sale investment securities $ 196,634 $ (50,777)
Non-cash financing activities:
Issuance of common stock in exchange for
assets and liabilities of the Bank $ 7,022,431
</TABLE>
F-51
<PAGE> 276
LAKE COMMUNITY BANK
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,557,969 $ 5,236,194
Federal funds sold 3,500,000 4,000,000
Loans held for sale 620,376 680,434
Interest-bearing deposits in banks 4,554,000 4,557,000
Available-for-sale investment
securities (Note 3) 12,041,010 11,976,000
Loans, less allowance for loan losses of
$1,160,490 at September 30, 1998 and
$952,335 at December 31, 1997 (Note 4) 53,776,976 53,209,573
Bank premises and equipment, net 2,893,555 3,077,251
Intangible assets, net 12,821 59,162
Other real estate 629,898 597,949
Accrued interest receivable and
other assets 2,454,557 2,126,193
------------- -------------
$ 85,041,162 $ 85,519,756
============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 12,764,797 $ 12,926,652
Interest bearing 62,106,190 63,111,481
------------- -------------
Total deposits 74,870,987 76,038,133
Accrued interest payable and other
liabilities 736,792 821,295
------------- -------------
Total liabilities 75,607,779 76,859,428
------------- -------------
Commitments and contingencies -- --
Stockholders' equity (Note 5):
Common stock, no par value; 20,000,000
shares authorized; 1,298,296 shares
issued and outstanding in 1998 and
1,240,546 shares in 1997, respectively 3,473,433 3,178,121
Retained earnings 5,795,433 5,442,647
Accumulated other comprehensive
income (Notes 2 and 3) 164,517 39,560
------------- -------------
Total stockholders' equity 9,433,383 8,660,328
------------- -------------
$ 85,041,162 $ 82,519,756
============= =============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 277
LAKE COMMUNITY BANK
STATEMENT OF INCOME
(Unaudited)
For the Nine months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,934,633 $ 4,146,272
Interest on federal funds sold 183,486 122,722
Interest on deposits in banks 223,185 165,301
Interest on investment securities:
Taxable 427,550 371,310
Exempt from Federal income taxes 69,848 62,412
------------ ------------
Total interest income 4,838,702 4,868,017
Interest expense on deposits 1,915,990 1,894,688
------------ ------------
Net interest income 2,922,712 2,973,329
Provision for loan losses 270,000 270,000
------------ ------------
Net interest income after
provision for loan losses 2,652,712 2,703,329
------------ ------------
Non-interest income:
Service charges and fees 493,827 388,609
Mortgage packaging fees 3,277 5,299
Gain on sale of other real estate -0- 15,571
Gain on sale of loans 7,249 11,908
Loss on sale of securities -0- <8,315>
------------ ------------
Total non-interest income 504,353 413,072
------------ ------------
Non-interest expense:
Salaries and related benefits 1,415,545 1,267,566
Occupancy expense, net 212,973 203,597
Equipment expense 271,763 256,933
Other 756,532 680,448
------------ ------------
Total non-interest expense 2,656,813 2,408,544
------------ ------------
Income before income taxes 500,252 707,857
Provision for income taxes 147,466 257,795
------------ ------------
Net income $ 352,786 $ 450,062
============ ============
Basic earnings per share (Note 2) $ 0.28 $ 0.36
============ ============
Diluted earnings per share (Note 2) $ 0.27 $ 0.35
============ ============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 278
LAKE COMMUNITY BANK
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
---------------------------- Retained Comprehensive
Shares Amount Earnings Income Total
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Prior Year
- ----------
Balance, December 31,
1996 1,240,546 $ 3,178,121 $ 5,011,324 $ <40,517> $ 8,148,928
Net Income 450,062 450,062
Net change in unrealized
loss on available-
for-sale investment
securities 61,168 61,168
--------- ----------- ----------- --------- -----------
Balance, September 30, 1997 1,240,546 $ 3,178,121 $ 5,461,386 $ 20,651 $ 8,660,158
========= =========== =========== ========= ===========
Current Year
- ------------
Balance, December 31, 1997 1,240,546 $ 3,178,121 $ 5,442,647 $ 39,560 $ 8,660,328
Stock options exercised
and related tax benefit 57,750 295,312 295,312
Net income 352,786 352,786
Net change in unrealized
gain on available-for-
sale investment
securities (Notes 2 and 3) 124,957 124,957
--------- ----------- ----------- ---------- -----------
Balance, September 30, 1998 1,298,296 $ 3,473,433 $ 5,795,433 $ 164,517 $ 9,433,383
========= =========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 279
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1998
<TABLE>
<S> <C> <C>
Net income $ 352,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense $ 253,238
Provision for loan losses 270,000
Provision for losses on other real estate 25,000
Loss on sale of equipment 10,967
Net decrease in loans held for sale 60,058
Increase in deferred loan origination
fees and costs, net 22,197
Increase in accrued interest receivable
and other assets <392,425>
Amortization of intangible assets 46,340
Increase in accrued interest payable
and other liabilities 250,444
-----------
Total adjustments 545,819
-----------
Net cash provided by operating activities 898,605
Cash flows from investing activities:
Net decrease in interest-bearing
deposits in banks 3,000
Purchase of available-for-sale
investment securities <4,466,047>
Proceeds from matured available-for-sale
investment securities 1,500,000
Proceeds from called available-for-sale
investment securities 2,997,789
Repayment of investment security principal 90,350
Net increase in loans <859,599>
Acquisition of other real estate <75,000>
Capitalized costs on former bank premises <5,503>
Purchase of premises and equipment <55,039>
-----------
Net cash used in investing activities <870,049>
Cash flows from financing activities:
Net decrease in short-term
deposit accounts <460,377>
Net decrease in time deposits <706,769>
Proceeds from exercise of stock options 295,312
Payment of cash dividends <334,947>
-----------
Net cash used in financing activities <1,206,781>
-----------
Net decrease in cash and cash equivalents <1,178,225>
Cash and cash equivalents at December 31, 1997 9,236,194
-----------
Cash and cash equivalents at September 30, 1998 $ 8,057,969
===========
</TABLE>
See accompanying notes to financial statements
F-55
<PAGE> 280
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1997
<TABLE>
<S> <C> <C>
Net income $ 450,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense $ 244,635
Provision for loan losses 270,000
Loss on sale of available-for-sale
investment securities 8,315
Gain on sale of other real estate <15,571>
Net increase in loans held for sale <465,530>
Decrease in deferred loan origination
fees and costs, net <65,341>
Decrease in accrued interest receivable
and other assets 43,125
Amortization of intangible assets 47,326
Decrease in accrued interest payable
and other liabilities <7,539>
-----------
Total adjustments 59,420
-----------
Net cash used in operating activities 509,482
Cash flows from investing activities:
Net increase in interest-bearing
deposits in banks <101,000>
Purchase of available-for-sale
investment securities <1,703,906>
Proceeds from matured available-for-sale
investment securities 300,000
Proceeds from the sale and call of
available-for-sale investment securities 2,667,563
Repayment of investment security principal 25,588
Net increase in loans <1,867,001>
Proceeds from sale of other real estate 828,254
Purchase of premises and equipment <13,535>
-----------
Net cash provided by investing activities 135,963
Cash flows from financing activities:
Net decrease in short-term deposit accounts <1,252,256>
Net increase in time deposits 3,529,005
Purchase of premises and equipment <248,109>
-----------
Net cash provided by financing activities 2,028,640
-----------
Net increase in cash and cash equivalents 2,674,085
Cash and cash equivalents at December 31, 1996 7,542,415
-----------
Cash and cash equivalents at September 30, 1997 $10,216,500
===========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 281
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in condensed
format and, therefore, do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been reflected in the financial statements. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year. Certain
reclassifications have been made to prior amounts to present them on a basis
consistent with classifications for the nine months ended September 30, 1998.
2. SUMMARY OF CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
- ------------------
Basic earnings per share are calculated using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
are calculated using the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. The dilutive effect of
stock options outstanding from the application of the treasury stock method has
been considered in the computation of common stock equivalents. A reconciliation
of the numerators and denominators of the basic and diluted earnings per share
computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
For the Nine Month Net Shares Per Share
Periods Ended Income Outstanding Amount
------------------ ------ ----------- ---------
<S> <C> <C> <C>
September 30, 1998
- ------------------
Basic earnings per share $352,786 1,265,386 $ .28
=====
Effect of dilutive stock options 64,041
-------- ---------
Diluted earnings per share $352,786 1,329,427 $ .27
======== ========= =====
September 30, 1997
- ------------------
Basic earnings per share $450,062 1,240,546 $ .36
=====
Effect of dilutive stock options 36,183
-------- ---------
Diluted earnings per share $450,062 1,276,729 $ .35
======== ========= =====
</TABLE>
F-57
<PAGE> 282
2. SUMMARY OF CHANGES IN SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
- --------------------
On January 1, 1998, the Bank adopted SFAS 130, Reporting Comprehensive Income,
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of financial statements. The Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported. Other comprehensive
income, net of taxes, was comprised of the unrealized gain on available-for sale
investment securities for the six month periods ended September 30, 1998 and
1997 and totaled $124,957 and $61,168, respectively. Total comprehensive income,
net of taxes, was $477,743 and $511,230 for the nine month periods ended
September 30, 1998 and September 30, 1997, respectively.
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale investment
securities at September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government corporations
and agencies $ 5,958,495 $ 36,870 $ 5,995,365
Corporate bonds 2,273,569 60,515 2,334,084
Obligations of state and
political subdivisions 3,559,679 151,882 3,711,561
----------- ----------- ----------- -----------
$11,791,743 $ 249,267 $ -- $12,041,010
=========== =========== =========== ===========
</TABLE>
Net unrealized gains on available-for-sale investment securities totaling
$249,267 were recorded net of $84,750 in tax liabilities as a separate component
of stockholders' equity at September 30, 1998. There were no sales of
available-for-sale investment securities for the nine months ended September 30,
1998.
The amortized cost and estimated market value of investment securities at
December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government corporations
and agencies $ 7,539,313 $ 3,728 $ <31,041> $ 7,512,000
Obligations of state and
political subdivisions 3,135,646 87,977 <623> 3,223,000
Corporate bonds 750,238 931 <1,169> 750,000
Banker's Acceptances 490,553 447 -- 491,000
----------- ----------- ----------- -----------
$11,915,750 $ 93,083 $ <32,833> $11,976,000
=========== =========== =========== ===========
</TABLE>
F-58
<PAGE> 283
3. INVESTMENT SECURITIES (Continued)
Net unrealized gains on available-for-sale investment securities totaling
$60,250 were recorded net of $20,690 in tax liabilities as a separate component
of stockholders' equity at December 31, 1997. Proceeds and gross realized gains
and losses from the sale of available-for-sale investment securities for the
nine months ended September 30, 1997 totaled $2,003,719, $597 and $8,912,
respectively.
4. LOANS
Outstanding loans at September 30, 1998 and December 31, 1997 are summarized
below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Commercial $ 4,449,252 $ 5,044,819
Agricultural 18,026,210 13,941,616
Real estate-mortgage 28,979,719 32,002,981
Real estate-construction 1,156,812 434,888
Installment 2,529,963 2,919,897
----------- -----------
55,141,956 54,344,201
Deferred loan fees <204,490> <182,293>
Allowance for loan losses <1,160,490> <952,335>
----------- -----------
$53,776,976 $53,209,573
=========== ===========
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30, Year Ended
----------------------- December 31,
1998 1997 1997
---------- --------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 952,335 $ 907,661 $ 907,661
Provision charged to operations 270,000 270,000 263,000
Losses charged to allowance <84,746> <315,000> <256,712>
Recoveries 22,901 30,000 38,386
---------- --------- ---------
Balance, end of period $1,160,490 $ 892,661 $ 952,335
========== ========= =========
</TABLE>
The recorded investment in loans that were considered to be impaired totaled
$661,500 at September 30, 1998, and $1,057,000 at December 31, 1997. The related
allowance for loan losses on these loans at September 30, 1998 and December 31,
1997 was $121,651 and $161,368, respectively. The average recorded investment in
impaired loans for the quarter ended September 30, 1998 was $874,578, and the
Bank did not recognize any interest income on these loans during that same
period.
Nonaccrual loans totaled $1,184,000 and $1,389,000, respectively, at September
30, 1998 and December 31, 1997. Interest foregone on nonaccrual loans totaled
$25,849, and $31 for the nine months ended September 30, 1998 and 1997,
respectively. There were no loans considered to be nonperforming, defined as
loans ninety days or more past due and still accruing interest, as of September
30, 1998 and December 31, 1997.
F-59
<PAGE> 284
INDEPENDENT AUDITOR'S REPORT
The Stockholders and
Board of Directors
Lake Community Bank
We have audited the accompanying balance sheet of Lake Community Bank
as of December 31, 1997 and 1996 and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 Lake Community Bank
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ PERRY SMITH & CO., LLP
------------------------------------
Certified Public Accountants
Sacramento, California
March 5, 1998
F-61
<PAGE> 285
4. LOANS (Continued)
Salaries and employee benefits totaling $99,230 and $95,937 have been deferred
as loan origination costs during the nine months ended September 30, 1998 and
1997, respectively.
5. STOCKHOLDERS' EQUITY
The Bank maintains total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios required by the Federal Deposit Insurance Corporation to be categorized
as well capitalized.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ---------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Leverage Ratio
--------------
Lake Community Bank $9,256,000 10.9% $8,561,600 10.4%
Minimum requirement for
"Well-Capitalized" institution $4,204,100 5.0% $4,124,100 5.0%
Minimum regulatory requirement $3,363,200 4.0% $3,299,300 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
Lake Community Bank $9,256,000 13.5% $8,561,600 14.5%
Minimum requirement for
"Well-Capitalized" institution $4,100,100 6.0% $3,544,400 6.0%
Minimum regulatory requirement $2,733,400 4.0% $2,362,900 4.0%
Total Risk-Based Capital Ratio
------------------------------
Lake Community Bank $10,110,200 14.8% $9,300,000 15.8%
Minimum requirement for
"Well-Capitalized" institution $6,833,400 10.0% $5,885,900 10.0%
Minimum regulatory requirement $5,466,700 8.0% $4,708,700 8.0%
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. Because of the Bank's minimal use of derivatives,
Management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or the financial position of the Bank.
F-60
<PAGE> 286
LAKE COMMUNITY BANK
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,236,194 $ 5,042,415
Federal funds sold 4,000,000 2,500,000
Loans held for sale 680,434 289,066
Interest-bearing deposits in banks 4,557,000 4,357,000
Available-for-sale investment securities (Note 2) 11,976,000 11,076,000
Loans, less allowance for loan losses of $952,335
in 1997 and $907,661 in 1996 (Note 3) 53,209,573 52,091,091
Bank premises and equipment, net (Note 4) 3,077,251 3,304,030
Other real estate 597,949 1,816,325
Accrued interest receivable and other assets
(Notes 5, 7 and 12) 2,185,355 2,026,230
------------ -----------
$ 85,519,756 $82,502,157
============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 12,926,652 $10,202,155
Interest bearing (Note 6) 63,111,481 63,334,438
------------ -----------
Total deposits 76,038,133 73,536,593
Accrued interest payable and other liabilities 821,295 816,636
------------ -----------
Total liabilities 76,859,428 74,353,229
------------ -----------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 10):
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued -- --
Common stock - no par value; 20,000,000 shares
authorized; 1,240,546 shares issued and
outstanding 3,178,121 3,178,121
Retained earnings 5,442,647 5,011,324
Unrealized gain (loss) on available-for-sale
investment securities, net of taxes (Note 2) 39,560 (40,517)
------------ -----------
Total stockholders' equity 8,660,328 8,148,928
------------ -----------
$ 85,519,756 $82,502,157
============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-62
<PAGE> 287
LAKE COMMUNITY BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 5,528,769 $ 5,704,033 $ 5,794,178
Interest on Federal funds sold 203,474 167,901 229,678
Interest on deposits in banks 232,954 197,906 159,995
Interest on investment securities:
Taxable 510,919 608,705 530,660
Exempt from Federal income
taxes 84,094 168,841 288,114
----------- ----------- -----------
Total interest income 6,560,210 6,847,386 7,002,625
Interest expense on deposits (Note 6) 2,561,713 2,844,956 3,056,182
----------- ----------- -----------
Net interest income 3,998,497 4,002,430 3,946,443
Provision for loan losses (Note 3) 263,000 477,000 210,000
----------- ----------- -----------
Net interest income after
provision for loan losses 3,735,497 3,525,430 3,736,443
----------- ----------- -----------
Non-interest income:
Service charges and fees 442,248 414,689 444,153
Mortgage packaging fees 32,899 54,226 73,954
Gain on sale of loans 15,699 92,121 40,563
(Loss) gain on sale of investment
securities, net (Note 2) (7,998) 19,681 40,206
Other 146,734 97,599 82,342
----------- ----------- -----------
Total non-interest income 629,582 678,316 681,218
----------- ----------- -----------
</TABLE>
(Continued)
F-63
<PAGE> 288
LAKE COMMUNITY BANK
STATEMENT OF INCOME
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits
(Notes 3 and 12) $1,616,974 $1,682,501 $1,688,760
Occupancy 213,457 255,478 182,750
Equipment 343,146 341,735 237,105
Other (Note 11) 1,048,232 1,244,747 1,193,265
---------- ---------- ----------
Total other expenses 3,221,809 3,524,461 3,301,880
---------- ---------- ----------
Income before income
taxes 1,143,270 679,285 1,115,781
Income taxes (Note 7) 377,000 203,000 335,000
---------- ---------- ----------
Net income $ 766,270 $ 476,285 $ 780,781
========== ========== ==========
Basic earnings per share (Note 10) $ .62 $ .38 $ .63
========== ========== ==========
Diluted earnings per share (Note 10) $ .59 $ .36 $ .59
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-64
<PAGE> 289
LAKE COMMUNITY BANK
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN ON
AVAILABLE-
COMMON STOCK FOR-SALE
RETAINED INVESTMENT
SHARES AMOUNT EARNINGS SECURITIES TOTAL
------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 1,238,846 $ 3,168,253 $ 4,250,376 $ (79,202) $ 7,339,427
Cash dividend $.20 per
share (248,009) (248,009)
Stock options exercised
and related tax benefit
(Note 10) 1,200 7,039 7,039
Net income 780,781 780,781
Net change in unrealized
loss on available-for-
sale investment securi-
ties, net of taxes 186,837 186,837
------------- --------------- --------------- --------------- ---------------
Balance,
December 31, 1995 1,240,046 3,175,292 4,783,148 107,635 8,066,075
Cash dividend $.20 per
share (248,109) (248,109)
Stock options exercised
and related tax benefit
(Note 10) 500 2,829 2,829
Net income 476,285 476,285
Net change in unrealized
gain on available-for-
sale investment securi-
ties, net of taxes (148,152) (148,152)
------------- --------------- --------------- --------------- ---------------
Balance,
December 31, 1996 1,240,546 3,178,121 5,011,324 (40,517) 8,148,928
Cash dividend $.27 per
share (334,947) (334,947)
Net income 766,270 766,270
Net change in unrealized
loss on available-for-
sale investment securi-
ties, net of taxes
(Note 2) 80,077 80,077
------------- --------------- --------------- --------------- ---------------
Balance,
December 31, 1997 1,240,546 $ 3,178,121 $ 5,442,647 $ 39,560 $ 8,660,328
============== =============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-65
<PAGE> 290
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 766,270 $ 476,285 $ 780,781
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation, accretion and amortiza-
tion, net 380,500 413,770 300,202
Provision for loan losses 263,000 477,000 210,000
Net loss (gain) on sale of available-for-
sale investment securities 7,998 (19,681) (40,206)
Net (gain) loss on sale of other
real estate (15,910) (12,202) 888
Provision for losses on other
real estate 101,437 129,980 38,459
Net (increase) decrease in loans
held for sale (391,368) 7,103 113,868
Deferred loan origination fees and costs,
net (71,172) (109,109) (39,632)
Increase in accrued interest receivable
and other assets (325,131) (39,236) (54,962)
(Decrease) increase in accrued
interest payable and other liabilities (82,179) (469,141) 552,693
Deferred taxes 62,000 103,000 (39,000)
----------- ----------- -----------
Net cash provided by operating
activities 695,445 957,769 1,823,091
----------- ----------- -----------
</TABLE>
(Continued)
F-66
<PAGE> 291
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Cash acquired in the assumption of
certain liabilities of another bank $ 4,778,000
Proceeds from matured and called
available-for-sale investment securities $ 1,000,000 $ 3,445,000 1,940,000
Proceeds from matured and called held-
to-maturity investment securities 1,000,000
Proceeds from the sale of available-
for-sale investment securities 2,003,719 7,910,477 474,600
Purchases of available-for-sale
investment securities (3,857,150) (5,560,566) (7,000,687)
Proceeds from principal repay-
ments from available-for-sale
mortgage-backed securities 63,123 61,551 3,609
Proceeds from principal repay-
ments from held-to-maturity
mortgage-backed securities 40,709
Net increase in interest-bearing
deposits in banks (200,000) (991,000) (993,000)
Net (increase) decrease in loans (1,050,286) 195,219 (4,596,451)
Proceeds from sale of other real estate 841,170 265,965 37,527
Acquisition of other real estate (143,654) (149,632)
Capitalized additions to other
real estate (63,905)
Additions to premises and equipment (55,673) (183,642) (593,279)
------------------ ------------------ ------------------
Net cash (used in) provided by
investing activities (1,255,097) 4,999,350 (5,122,509)
------------------- ------------------ -------------------
</TABLE>
(Continued)
F-67
<PAGE> 292
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in demand,
interest-bearing and savings
deposits $ (1,273,785) $ 1,620,069 $ (148,904)
Net increase (decrease) in time
deposits 3,775,325 (9,675,837) 8,868,927
Principal repayments on note payable (2,949) (47,959)
Cash dividends paid (248,109) (248,009) (247,769)
Proceeds from exercise of stock
options 2,188 5,719
------------------ ------------------ ------------------
Net cash provided by (used in)
financing activities 2,253,431 (8,304,538) 8,430,014
------------------ ------------------- ------------------
Increase (decrease) in cash and
cash equivalents 1,693,779 (2,347,419) 5,130,596
Cash and cash equivalents at
beginning of year 7,542,415 9,889,834 4,759,238
------------------ ------------------ ------------------
Cash and cash equivalents at
end of year $ 9,236,194 $ 7,542,415 $ 9,889,834
================== ================== ==================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 2,692,072 $ 3,273,028 $ 2,499,932
Income taxes $ 369,000 $ 123,500 $ 326,200
Non-cash investing activities:
Real estate acquired through foreclosure $ 225,618 $ 588,757 $ 407,857
Net change in unrealized gain on
available-for-sale investment securities $ 121,352 $ 224,052 $ 282,584
Non-cash financing activities:
Dividends declared, $.27 per share
in 1997 and $.20 per share in 1996
and 1995 $ 334,947 $ 248,109 $ 248,009
</TABLE>
(Continued)
F-68
<PAGE> 293
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Supplemental schedule concerning acquisition:
On June 22, 1995, the Bank assumed certain liabilities of the Lakeport branch
of U.S. Bank. The following assets and liabilities were recorded in
connection with this transaction (Note 5):
<TABLE>
<S> <C>
Cash $4,778,000
Deposit base intangible 22,000
----------
Deposits and accrued interest liabilities assumed $4,800,000
==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-69
<PAGE> 294
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
The accounting and reporting policies of Lake Community Bank conform
with generally accepted accounting principles and prevailing
practices within the banking industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1997.
Investment Securities
---------------------
Investments are classified into one of the following categories:
- Available-for-sale securities, reported at fair
value, with unrealized gains and losses excluded
from earnings and reported, net of taxes, as a
separate component of stockholders' equity.
- Held-to-maturity securities, which management has
the positive intent and ability to hold, reported
at amortized cost, adjusted for the accretion of
discounts and amortization of premiums.
Management determines the appropriate classification of its
investments at the time of purchase and may only change the
classification in certain limited circumstances. All transfers
between categories are accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums.
In addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
Loans
-----
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower
of principal balance or market value at the date of transfer,
adjusted for accretion of discounts. Interest is accrued daily based
upon outstanding loan balances. However, when, in the opinion of
management, loans are considered to be impaired and the future
collectibility of interest and principal is in serious doubt, loans
are placed on nonaccrual status and the accrual of interest income is
suspended. Any interest accrued but unpaid is charged against income.
Payments received are applied to reduce principal to the extent
necessary to ensure collection. Subsequent payments on these loans,
or payments received on nonaccrual loans for which the ultimate
collectibility of principal is not in doubt, are applied first to
earned but unpaid interest and then to principal.
F-70
<PAGE> 295
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
-----
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
or, as a practical matter, at the loan's observable market price or
the fair value of collateral if the loan is collateral dependent. A
loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all
amounts due (including both principal and interest) in accordance
with the contractual terms of the loan agreement.
Loan origination fees, commitment fees, direct loan origination costs
and purchased premiums and discounts on loans are deferred and
recognized as an adjustment of yield, to be amortized to interest
income over the contractual term of the loan. The unamortized balance
of deferred fees and costs is reported as a component of net loans.
Sales and Servicing of Government Guaranteed Loans
--------------------------------------------------
The Bank adopted Financial Accounting Standards Board Statement No.
125 (SFAS 125), Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, on January 1, 1997. Under
SFAS 125, sales of financial assets are recognized when the
transferred assets are put beyond the reach of the transferor and its
creditors, even in bankruptcy or receivership.
Under SFAS 125, servicing rights acquired through 1) a purchase or 2)
the origination of loans which are sold or securitized with servicing
rights retained are recognized as separate assets or liabilities.
Servicing assets or liabilities are recorded at the difference
between the contractual servicing fees and adequate compensation for
performing the servicing, and are subsequently amortized in
proportion to and over the period of the related net servicing income
or expense. Servicing rights acquired during the year ended
December 31, 1997 were not considered material for disclosure
purposes.
In addition, assets (accounted for as interest-only (IO) strips) are
recorded at the fair value of the difference between note rates and
rates paid to purchasers (the interest spread) and contractual
servicing fees, if applicable. IO strips are carried at fair value
with gains or losses recorded as a component of stockholders' equity,
similar to available-for-sale investment securities.
Included in the portfolio are loans which are 75% to 90% guaranteed
by the Small Business Administration (SBA) and Farmers Home
Administration (FmHA). The guaranteed portion of these loans may be
sold to a third party, with the Bank retaining the unguaranteed
portion. The Bank generally receives a premium in excess of the
adjusted carrying value of the loan at the time of sale. The Bank may
be required to refund a portion of the sales premium if the borrower
defaults or the loan prepays within ninety days of the settlement
date. However, there were no sales of loans subject to these recourse
provisions at December 31, 1997, 1996 and 1995.
F-71
<PAGE> 296
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales and Servicing of Government Guaranteed Loans (Continued)
--------------------------------------------------
The Bank's investment in the loan is allocated between the retained
portion of the loan, the servicing asset, the IO strip, and the sold
portion of the loan based on their relative fair values on the date
the loan is sold. The gain on the sold portion of the loan is
recognized as income at the time of sale. The carrying value of the
retained portion of the loan is discounted based on the estimated
value of a comparable non-guaranteed loan. The servicing asset is
amortized over the estimated life of the related loan. Significant
future prepayments of these loans will result in the recognition of
additional amortization of related servicing assets and an adjustment
to the carrying value of related IO strips.
The Bank serviced loans for others totaling $1,792,500 and $1,575,000
as of December 31, 1997 and 1996, respectively.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained to provide for losses
related to impaired loans and other losses that can be expected to
occur in the normal course of business. The determination of the
allowance is based on estimates made by management, to include
consideration of the character of the loan portfolio, specifically
identified problem loans, potential losses inherent in the portfolio
taken as a whole and economic conditions in the Bank's service area.
These estimates are particularly susceptible to changes in the
economic environment and market conditions. The allowance is
established through a provision for loan losses which is charged to
expense.
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations and former Bank premises. When
property is acquired in settlement of loan obligations, any excess of
the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property
is charged against the allowance for loan losses. A valuation
allowance for losses on other real estate is maintained to provide
for temporary declines in value. The allowance is established through
a provision for losses on other real estate which is included in
other expenses. Subsequent gains or losses on sales or writedowns
resulting from permanent impairments are recorded in other income or
expenses as incurred.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of Bank premises are
estimated to be forty years. The useful lives of furniture, fixtures
and equipment are estimated to be two to ten years. Leasehold
improvements are amortized over the life of the asset or the life of
the related lease, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
or amortization are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to expense as incurred.
F-72
<PAGE> 297
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance
sheet, net deferred tax assets are included in accrued interest
receivable and other assets.
Cash Equivalents
----------------
For the purpose of the statement of cash flows, cash and due from
banks and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which established new
standards for computing and presenting earnings per share (EPS). This
Statement was adopted by the Bank for financial statements issued for
the year ended December 31, 1997 and requires the restatement of all
prior-period EPS data presented.
Basic EPS, which excludes dilution, is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period and replaces the
presentation of primary EPS. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock, such as stock options, result in the issuance of common
stock which shares in the earnings of the Bank. Diluted EPS is
computed similarly to, and replaces the presentation of, fully
diluted EPS. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS.
Stock-Based Compensation
------------------------
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market
price of the Bank's stock at the date of grant over the exercise
price. However, if the fair value of stock-based compensation
computed under a fair value based method, as prescribed in Statement
of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, is material to the financial statements,
pro-forma net income and earnings per share are disclosed as if the
fair value method had been applied.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions 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 these
estimates.
F-73
<PAGE> 298
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment
securities at December 31, 1997 and 1996 consisted of the following:
Available-for-Sale:
------------------
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Government
corporations and
agencies $ 7,539,313 $ 3,728 $ (31,041) $ 7,512,000
Obligations of states
and political sub-
divisions 3,135,646 87,977 (623) 3,223,000
Corporate debt
securities 750,238 931 (1,169) 750,000
Bankers' Accept-
ances 490,553 447 491,000
----------------- ------------------ ------------------ ------------------
$ 11,915,750 $ 93,083 $ (32,833) $ 11,976,000
================= ================== ================== ==================
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $60,250 were recorded net of $20,690 in tax liabilities as a
separate component of stockholders' equity at December 31, 1997.
Proceeds and gross realized gains and losses from the sale of
available-for-sale investment securities for the year ended
December 31, 1997 totaled $2,003,719, $879 and $8,877, respectively.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Government
corporations and
agencies $ 7,611,519 $ 2,924 $ (102,443) $ 7,512,000
Obligations of states
and political sub-
divisions 2,521,747 44,319 (6,066) 2,560,000
Corporate debt
securities 1,003,836 462 (298) 1,004,000
----------------- ------------------ ------------------- -----------------
$ 11,137,102 $ 47,705 $ (108,807) $ 11,076,000
================= ================== =================== ==================
</TABLE>
F-74
<PAGE> 299
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
------------------
Net unrealized losses on available-for-sale investment securities
totaling $61,102 were recorded net of $20,585 in tax benefits as a
separate component of stockholders' equity at December 31, 1996.
Proceeds and gross realized gains and losses from the sale of
available-for-sale investment securities for the year ended
December 31, 1996 totaled $7,910,477, $49,149 and $29,468,
respectively. Proceeds and gross realized gains from the sale of
available-for-sale investment securities for the year ended
December 31, 1995 totaled $474,600 and $40,206, respectively.
The amortized cost and estimated market value of investment
securities at December 31, 1997 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities
because the issuers of the securities may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale
--------------------------------
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Within one year $ 1,490,553 $ 1,489,000
After one year through five years 3,970,902 3,983,000
After five years through ten years 6,080,784 6,085,000
After ten years 373,511 419,000
----------- -----------
$11,915,750 $11,976,000
=========== ===========
</TABLE>
Investment securities with amortized costs totaling $1,000,000 and
estimated market values totaling $992,000 and $980,000 were pledged
to secure treasury tax and loan accounts and public deposits at
December 31, 1997 and 1996, respectively.
3. LOANS
Outstanding loans are summarized below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commercial $ 5,044,819 $ 5,469,173
Agricultural 13,941,616 9,409,531
Real estate - mortgage 32,002,981 33,885,271
Real estate - construction 434,888 1,052,556
Installment 2,919,897 3,435,686
------------ ------------
54,344,201 53,252,217
Deferred loan fees (182,293) (253,465)
Allowance for loan losses (952,335) (907,661)
------------ ------------
$ 53,209,573 $ 52,091,091
============ ============
</TABLE>
F-75
<PAGE> 300
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. LOANS (Continued)
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 907,661 $ 1,127,587 $ 1,017,502
Provision charged to operations 263,000 477,000 210,000
Losses charged to allowance (256,712) (738,522) (147,035)
Recoveries 38,386 41,596 47,120
----------- ----------- -----------
Balance, end of year $ 952,335 $ 907,661 $ 1,127,587
=========== =========== ===========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $1,057,000 and $1,188,000 at December 31, 1997 and 1996,
respectively. The related allowance for loan losses on these loans at
December 31, 1997 and 1996 was $143,400 and $132,400, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 1997, 1996 and 1995 was $1,038,500, $1,345,800 and
$620,500, respectively. The Bank recognized $38,500, $52,700 and
$8,400 in interest income on these loans during that same period, to
include $38,500, $44,800 and $4,700 recognized using a cash-basis
method.
At December 31, 1997 and 1996, nonaccrual loans totaled $1,389,000
and $1,425,000, respectively. Interest foregone on nonaccrual loans
totaled $75,900, $103,300 and $62,700 for the years ended
December 31, 1997, 1996 and 1995, respectively. There were no loans
considered to be nonperforming, defined as loans ninety days or more
past due and still accruing interest, for the years ended
December 31, 1997 and 1996.
Salaries and employee benefits totaling $130,622, $43,101 and $54,988
have been deferred as loan origination costs during the years ended
December 31, 1997, 1996 and 1995, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 278,840 $ 278,840
Bank premises 2,168,640 2,168,640
Furniture, fixtures and equipment 2,008,643 1,952,970
Leasehold improvements 90,974 90,974
----------- -----------
4,547,097 4,491,424
Less accumulated depreciation
and amortization (1,469,846) (1,187,394)
----------- -----------
$ 3,077,251 $ 3,304,030
=========== ===========
</TABLE>
F-76
<PAGE> 301
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. BANK PREMISES AND EQUIPMENT (Continued)
Depreciation included in occupancy and equipment expense totaled
$282,452, $283,044 and $193,573 for the years ended December 31,
1997, 1996 and 1995, respectively.
5. ACQUISITIONS
On June 22, 1995, the Bank assumed certain liabilities of the
Lakeport branch of U.S. Bank. The following assets and liabilities
were recorded in connection with this transaction:
<TABLE>
<S> <C>
Cash $4,778,000
Deposit base intangible 22,000
----------
Deposits and accrued interest
liabilities assumed $4,800,000
==========
</TABLE>
The deposit base intangible and $13,300 in related capitalized legal
expenses are being amortized over fifteen years.
In addition, a deposit base intangible, covenant not to compete,
goodwill and related capitalized legal expenses totaling $509,153
were recorded in December 1991 in connection with the acquisition of
certain assets and liabilities of the Lakeport office of Citizens
Federal Bank. These intangible assets are being amortized over
periods ranging from five to seven years. The covenant not to compete
was fully amortized as of December 31, 1996.
Amortization expense totaled $63,100, $92,277 and $86,210 for the
years ended December 31, 1997, 1996 and 1995, respectively.
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Savings $12,027,671 $14,533,004
Money market 4,143,444 4,885,173
Now accounts 9,640,047 10,391,267
Time, $100,000 or more 5,694,147 3,798,069
Other time 31,606,172 29,726,925
----------- -----------
$63,111,481 $63,334,438
=========== ===========
</TABLE>
F-77
<PAGE> 302
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Savings $ 301,124 $ 309,130 $ 394,745
Money market 142,423 185,976 232,463
Now accounts 175,619 142,234 162,934
Time, $100,000 or more 212,630 162,000 161,700
Other time 1,729,917 2,045,616 2,104,340
---------- ---------- ----------
$2,561,713 $2,844,956 $3,056,182
========== ========== ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
1997
----
Current $ 208,000 $ 107,000 $ 315,000
Deferred 47,000 15,000 62,000
--------- --------- ---------
Income tax expense $ 255,000 $ 122,000 $ 377,000
========= ========= =========
1996
----
Current $ 51,000 $ 49,000 $ 100,000
Deferred 72,000 31,000 103,000
--------- --------- ---------
Income tax expense $ 123,000 $ 80,000 $ 203,000
========= ========= =========
1995
----
Current $ 245,000 $ 129,000 $ 374,000
Deferred (25,000) (14,000) (39,000)
--------- --------- ---------
Income tax expense $ 220,000 $ 115,000 $ 335,000
========= ========= =========
</TABLE>
F-78
<PAGE> 303
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 294,000 $ 277,000
Deferred compensation 86,000 59,000
Future benefit of state tax deduction 34,000 14,000
Future benefit of alternative minimum tax 41,000
Other real estate 17,000 75,000
Unrealized loss on available-for-sale
investment securities 21,000
Other 10,000 3,000
--------- ---------
Total deferred tax assets 441,000 490,000
--------- ---------
Deferred tax liabilities:
Bank premises and equipment (195,000) (150,000)
Unrealized gain on available-for-sale
investment securities (21,000)
Other (12,000) (23,000)
--------- ---------
Total deferred tax liabilities (228,000) (173,000)
--------- ---------
Net deferred tax assets $ 213,000 $ 317,000
========= =========
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rates to operating income
before income taxes. The significant items comprising these
differences for the years ended December 31, 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Amount Rate % Amount Rate % Amount Rate %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 388,712 34.0 $ 230,957 34.0 $ 379,366 34.0
State franchise tax, net
of Federal tax effect 74,484 6.5 45,886 6.8 80,314 7.2
Tax exempt income
from life insurance
policies (38,150) (3.3) (24,720) (3.6) (16,261) (1.5)
Interest on obligations
of states and political
subdivisions (45,781) (4.0) (70,861) (10.4) (92,495) (8.3)
Other (2,265) (.2) 21,738 3.2 (15,924) (1.4)
--------- ---- --------- ---- --------- ----
Total income
tax expense $ 377,000 33.0 $ 203,000 30.0 $ 335,000 30.0
========= ==== ========= ==== ========= ====
</TABLE>
F-79
<PAGE> 304
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENT
The Bank is eligible to borrow up to $2,000,000 on an overnight basis
from its correspondent bank. There were no short-term borrowings
outstanding at December 31, 1997 or 1996.
9. COMMITMENTS AND CONTINGENCIES
Leases
------
The Bank leases land and two branch offices under noncancelable
operating leases. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 68,500
1999 52,000
2000 52,000
2001 18,667
2002 12,000
-------------
$ 203,167
=============
</TABLE>
Rental expense included in occupancy and other expenses totaled
$52,049, $47,740 and $43,924 for the years ended December 31, 1997,
1996 and 1995, respectively.
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess
of the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of
credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet
credit risk:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $15,106,000 $10,783,000
Letters of credit $ 151,000 $ 100,000
</TABLE>
F-80
<PAGE> 305
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
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 some 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. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held
varies, but may include deposits, real estate, accounts receivable
and personal property.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance or financial obligation of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers.
Commercial loan commitments represent approximately 78% of total
commitments and are generally unsecured or secured by collateral
other than real estate. Real estate loan commitments represent 10% of
total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%. Consumer loan commitments
represent the remaining 12% of total commitments and are generally
unsecured. In addition, the majority of the Bank's loan commitments
have variable interest rates.
Significant Concentrations of Credit Risk
-----------------------------------------
The Bank's business activity is primarily with customers located
within Lake County. The Bank's operating policy since its inception
has emphasized serving the banking needs of individuals, business and
professional communities and agribusiness in Lakeport, California and
its surrounding area. The Bank grants real estate, commercial and
installment loans to these customers. Although the Bank has a
diversified loan portfolio, a significant portion of its customers'
ability to repay their loans is dependent upon commercial and
residential real estate development, agribusiness and the resort and
recreational economic sectors.
Correspondent Banking Agreements
--------------------------------
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $4,331,837 at December 31, 1997.
10. STOCKHOLDERS' EQUITY
Dividends
---------
Upon declaration by the Board of Directors, all stockholders of
record will be entitled to receive dividends. The California
Financial Code restricts the total dividend payment of any bank in
any calendar year to the lesser of (1) the bank's retained earnings
or (2) the bank's net income for its last three fiscal years, less
distributions made to stockholders during the same three-year period.
At December 31, 1997, retained earnings of $1,192,271 were free of
such restrictions.
F-81
<PAGE> 306
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
--------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
December 31, 1997
-----------------
Basic earnings per share $ 766,270 1,240,546 $ .62
======
Effect of dilutive stock options 57,408
--------- ----------
Diluted earnings per share $ 766,270 1,297,954 $ .59
========= ========== ======
December 31, 1996
-----------------
Basic earnings per share $ 476,285 1,240,491 $ .38
======
Effect of dilutive stock options 68,267
--------- ----------
Diluted earnings per share $ 476,285 1,308,758 $ .36
========= ========== ======
December 31, 1995
-----------------
Basic earnings per share $ 780,781 1,239,791 $ .63
======
Effect of dilutive stock options 75,519
--------- ----------
Diluted earnings per share $ 780,781 1,315,310 $ .59
========= ========== ======
</TABLE>
Options to purchase 25,350 shares of common stock at a weighted
average price of $9.70 per share were outstanding during 1997, 1996
and 1995 but were not included in the computation of earnings per
share because the exercise price of the options was greater than the
average market price of the common shares during those years.
F-82
<PAGE> 307
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Stock Options
-------------
The Bank's 1984 Stock Option Plan was amended in 1989 to authorize
the grant of options to non-employee directors and again in 1990 to
increase the number of shares reserved under the plan to 340,062
shares of authorized but unissued common stock. Of the shares
reserved, 200,000 shares were available for grant to non-employee
directors. Options were granted to non-employee directors based on
consecutive years of service to a maximum of 20,000 shares each. The
plan requires that the option price may not be less than the fair
market value at the date the option is granted, and that the stock
must be paid in full at the time the option is exercised. The options
expire on dates determined by the Board of Directors, but not later
than ten years from the grant date. Options generally vest ratably
over a four to five year period.
The plan terminated in November 1994 and no additional options will
be granted. However, the vesting schedule and ability to exercise
options currently granted were not effected.
A summary of the activity within the plan follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ------------------------ ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 220,850 $ 5.50 238,900 $ 5.41 240,100 $ 5.41
Options exercised (500) $ 4.38 (1,200) $ 4.77
Options canceled (15,250) $ 4.38 (17,550) $ 4.38
------------- ----------- --------
Options outstanding,
end of year 205,600 $ 5.58 220,850 $ 5.50 238,900 $ 5.41
============= =========== ========
Options exercisable,
end of year 204,975 $ 5.57 215,138 $ 5.39 226,850 $ 5.19
============= =========== ========
</TABLE>
A summary of options outstanding at December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
Range of December 31, Contractual December 31,
Exercise Prices 1997 Life 1997
--------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
$ 4.38 120,000 1 year 120,000
$ 6.25 60,250 2 years 60,250
$ 9.75 22,850 5 years 22,850
$ 9.25 2,500 6 years 1,875
------------------ ------------------
205,600 204,975
================== ==================
</TABLE>
F-83
<PAGE> 308
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Regulatory Capital
------------------
The Bank is subject to certain regulatory capital requirements
administered by the Federal Deposit Insurance Corporation (FDIC).
Failure to meet these minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Each of these components is defined in the
regulations. Management believes that the Bank meets all its capital
adequacy requirements as of December 31, 1997.
In addition, the most recent notification from the FDIC as of
December 31, 1997 and 1996 categorized the Bank as well 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
below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
--------------
Lake Community Bank $8,561,600 10.4% $8,067,300 9.3% $7,743,900 9.3%
Minimum requirement for "Well-
Capitalized" institution $4,124,100 5.0% $4,321,200 5.0% $4,163,000 5.0%
Minimum regulatory requirement $3,299,300 4.0% $3,457,000 4.0% $3,330,400 4.0%
Tier I Risk-Based Capital Ratio
-------------------------------
Lake Community Bank $8,561,600 14.5% $8,067,200 13.3% $7,743,900 12.9%
Minimum requirement for "Well-
Capitalized" institution $3,544,400 6.0% $3,645,700 6.0% $3,601,100 6.0%
Minimum regulatory requirement $2,362,900 4.0% $2,430,500 4.0% $2,400,700 4.0%
Total Risk-Based Capital Ratio
------------------------------
Lake Community Bank $9,300,000 15.8% $8,788,000 14.5% $8,505,000 14.3%
Minimum requirement for "Well-
Capitalized" institution $5,885,900 10.0% $6,061,400 10.0% $5,965,200 10.0%
Minimum regulatory requirement $4,708,700 8.0% $4,849,100 8.0% $4,772,200 8.0%
</TABLE>
F-84
<PAGE> 309
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Regulatory assessments $ 28,950 $ 25,328 $ 102,833
Advertising and promotion 107,420 109,964 98,044
Professional fees and legal expenses 146,420 219,652 144,930
Stationery and supplies 67,771 98,270 88,727
Amortization of intangibles 63,100 92,277 86,210
Other real estate expenses 209,552 222,956 200,859
Other 425,019 476,300 471,662
---------- ---------- ----------
$1,048,232 $1,244,747 $1,193,265
========== ========== ==========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Employee Retirement Plan
------------------------
On December 19, 1991, the Board of Directors adopted a 401(k)
Retirement Plan, effective January 1, 1992. All employees 18 years of
age or older with one year of service and who worked at least 1,000
hours during the year are eligible to participate in the plan.
Eligible employees may elect to make tax deferred contributions of up
to seventeen percent of their annual salary, to the maximum allowed
by law. The Bank may make additional nonelective contributions to the
plan at the discretion of the Board of Directors. Bank contributions
vest after three years of service. Bank contributions to the plan for
the years ended December 31, 1997, 1996 and 1995 totaled $26,290,
$15,298 and $20,048, respectively.
Salary Continuation Plan
------------------------
During 1992, the Board of Directors approved a salary continuation
plan for key executives. Under this plan, the Bank is obligated to
provide the executives, or their designated beneficiaries, with
annual benefits for fifteen years after retirement or death. These
benefits are substantially equivalent to those available under
insurance policies purchased by the Bank on the lives of the
executives. In addition, the estimated present value of these future
benefits are accrued over the period from the effective date of the
plan until each of the executive's expected retirement date. The
expense under this plan for the year ended December 31, 1997, 1996
and 1995 totaled $58,700, $34,400 and $30,100, respectively.
In connection with the plan, the Bank has purchased life insurance
policies with cash surrender values totaling $413,100 and $314,800 at
December 31, 1997 and 1996, respectively.
F-85
<PAGE> 310
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into
transactions with related parties, including directors and executive
officers. These transactions are on substantially the same terms and
conditions as those prevailing for comparable transactions with
unrelated parties.
The following is a summary of the aggregate activity involving
related party borrowers during 1997:
<TABLE>
<S> <C>
Balance, January 1, 1997 $ 609,000
Disbursements 565,000
Amounts repaid (322,000)
---------
Balance, December 31, 1997 $ 852,000
=========
Undisbursed commitments to related
parties, December 31, 1997 $ 576,000
=========
</TABLE>
F-86
<PAGE> 311
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,251,458 $ 1,830,279
Federal funds sold 10,050,000 6,720,000
Loans held for sale 305,252 227,150
Available-for-sale investment securities (Note 3) 4,217,700 4,010,300
Loans and leases, less allowance for loan and
lease losses of $295,468 in 1998 and $723,880
in 1997 (Note 4) 30,796,419 34,125,423
Bank premises and equipment, net 1,645,963 1,720,231
Accrued interest receivable and other assets 2,104,258 1,954,293
----------- -----------
$53,371,050 $50,587,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $10,879,585 $ 8,526,329
Interest bearing (Note 5) 37,596,488 37,823,066
----------- -----------
Total deposits 48,476,073 46,349,395
Accrued interest payable and other liabilities 191,370 273,782
----------- -----------
Total liabilities 48,667,443 46,623,177
----------- -----------
Stockholders' equity:
Common stock - no par value,
5,000,000 shares authorized; issued and
outstanding - 370,805 shares in 1998 and
319,972 shares in 1997 2,511,057 2,021,434
Retained earnings since December 31, 1990
when deficit of $1,729,001 was transferred
to common stock as part of a
quasi-reorganization 2,173,559 1,931,885
Accumulated other comprehensive income
(Notes 3 and 7) 18,991 11,180
----------- -----------
Total stockholders' equity 4,703,607 3,964,499
----------- -----------
$53,371,050 $50,587,676
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 312
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $2,524,043 $2,431,619
Interest on investment securities:
Taxable 174,082 202,408
Interest on Federal funds sold 292,057 209,620
---------- ----------
Total interest income 2,990,182 2,843,647
---------- ----------
Interest expense:
Interest on deposits (Note 5) 1,303,715 1,197,629
---------- ----------
Net interest income 1,686,467 1,646,018
Provision for loan and lease losses
(Note 4) 105,000 126,000
---------- ----------
Net interest income after provision
for loan and lease losses 1,581,467 1,520,018
---------- ----------
Non-interest income:
Service charges and fees 50,446 40,871
Gain on sale of loans 187,384 57,310
Other 177,330 122,191
---------- ----------
Total non-interest income 415,160 220,372
---------- ----------
</TABLE>
(Continued)
F-88
<PAGE> 313
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Other expenses:
Salaries and employee benefits $ 756,659 $ 604,445
Occupancy 104,792 78,754
Equipment 97,872 68,734
Professional fees 186,593 82,932
Other 448,169 340,551
---------- ----------
Total other expenses 1,594,085 1,175,416
---------- ----------
Income before income taxes 402,542 564,974
Income taxes 160,868 226,230
---------- ----------
Net income $ 241,674 $ 338,744
========== ==========
Basic earnings per share $ .75 $1,06
========== ==========
Diluted earnings per share $ .72 $ 1.04
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE> 314
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACCUMU-
LATED OTHER
COMMON STOCK COMPRE-
----------------------- RETAINED HENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 319,972 $2,021,434 $1,750,166 $ 3,439 $3,775,039
Net income 181,719 181,719
Net change in unrealized
gain on available-for-sale
investment securities,
net of taxes 7,741 7,741
------- ---------- ---------- ------- ----------
Balance, December 31, 1997 319,972 2,021,434 1,931,885 11,180 3,964,499
Net Income 241,674 241,674
Stock options exercised and related
tax benefit 50,833 489,623 489,623
Net change in unrealized
gain on available-for-sale
investment securities,
net of taxes (Notes 3 and 7) 7,811 7,811
------- ---------- ---------- ------- ----------
Balance, September 30, 1998 370,805 $2,511,057 $2,173,559 $18,991 $4,703,607
======= ========== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-90
<PAGE> 315
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 241,674 $ 338,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 105,000 126,000
Depreciation and amortization 94,928 54,905
Increase in deferred loan origination fees
and costs, net (10,332) (37,225)
Increase in loans held for sale (78,103) (294,175)
Decrease (increase) in accrued interest
receivable and other assets 48,735 (128,352)
(Decrease) increase in accrued interest payable
and other liabilities (82,624) 79,172
Deferred taxes (89,359) 19,000
----------- -----------
Net cash provided by operating activities 229,919 158,069
----------- -----------
Cash flows from investing activities:
Proceeds from matured held-to-maturity investment
securities 300,000
Proceeds from sale or calls of available-for-sale
investment securities 2,000,000
Proceeds from matured available for sale investment
securities 1,000,000
Purchases of available-for-sale investment securities (3,185,832) (18,000)
Net decrease (increase) in loans and leases 3,229,609 (4,682,455)
Additions to bank premises and equipment (30,387) (347,419)
----------- -----------
Net cash provided by (used in)
investing activities 3,013,390 (4,747,874)
----------- -----------
</TABLE>
(Continued)
F-91
<PAGE> 316
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-bearing
and savings deposits $ 2,813,873 $ 3,896,297
Net (decrease) increase in time deposits (687,251) 4,954,577
Proceeds from exercise of stock options 381,248
------------ ------------
Net cash provided by financing activities 2,507,870 8,850,874
------------ ------------
Increase in cash and cash equivalents 5,751,179 4,261,069
Cash and cash equivalents at beginning of year 8,550,279 5,232,288
------------ ------------
Cash and cash equivalents at end of period $ 14,301,458 $ 9,493,357
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 1,230,364 $ 1,120,786
Income taxes $ 239,636 $ 162,500
Non-cash investing activities:
Real estate acquired through foreclosure $ 117,500
Change in unrealized gain on available-
for-sale investment securities $ 11,841 $ 11,125
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE> 317
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format and, therefore, do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been
reflected in the financial statements. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the full year. Certain reclassifications
have been made to prior period amounts to present them on a basis
consistent with classifications for the nine months ended September 30,
1998.
2. FORMATION OF HOLDING COMPANY
On March 10, 1998, Roseville 1st Community Bancorp assumed 100%
ownership of Roseville 1st National Bank. On the same date, formal
approval as a bank holding company was received from the Federal
Reserve.
3. INVESTMENT SECURITIES
All investment securities were classified as available for sale as of
September 30, 1998 and December 31, 1997.
The amortized cost and estimated market value of investment securities
at September 30, 1998 and December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $3,706,422 $25,678 $3,732,100
Municipal Bonds 190,221 3,079 193,300
Federal Reserve
Bank stock 60,700 60,700
Federal Home Loan
Bank stock 156,600 156,600
Pacific Coast Bankers
Bank stock 75,000 75,000
---------- ------- ---------- ----------
$4,188,943 $28,757 $ -- $4,217,700
========== ======= ========== ==========
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $28,757 were recorded net of $9,766 in tax benefits as a
separate component of stockholders' equity at September 30, 1998. There
were no sales of available-for-sale investment securities for the nine
months ended September 30, 1998.
F-93
<PAGE> 318
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $3,737,984 $16,916 $3,754,900
Federal Reserve
Bank stock 60,700 60,700
Federal Home Loan
Bank stock 119,700 119,700
Pacific Coast Bankers
Bank stock 75,000 75,000
---------- ------- ------- ----------
$3,993,384 $16,916 $ -- $4,010,300
========== ======= ======= ==========
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $16,916 were recorded net of $5,736 in tax liabilities as a
separate component of stockholders' equity. There were no sales of
available-for-sale investment securities for the nine months ended
September 30, 1997.
The amortized cost and estimated market value of available-for-sale
investment securities at September 30, 1998 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities
because the issuers of the securities may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Within one year $ 498,594 $ 500,545
After one year through five years 2,247,828 2,268,500
After five years through ten years 960,000 963,075
After ten years 190,221 193,280
---------- ----------
3,896,643 3,925,400
Investment securities not due at a single
maturity date:
Federal Reserve Bank stock 60,700 60,700
Federal Home Loan Bank stock 156,600 156,600
Pacific Coast Bankers Bank stock 75,000 75,000
---------- ----------
$4,188,943 $4,217,700
========== ==========
</TABLE>
Investment securities with amortized costs totaling $1,496,701 and
$1,490,500 and market values totaling $1,511,875 and $1,500,200 were
pledged to secure deposits at September 30, 1998 and December 31, 1997,
respectively.
F-94
<PAGE> 319
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. LOANS AND LEASES
Outstanding loans and leases are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
<S> <C> <C>
Commercial $ 6,693,625 $ 8,714,911
Real estate-mortgage 4,438,956 5,498,941
Real estate-commercial 10,886,614 10,780,097
Real estate-construction 6,965,446 7,319,151
Installment 2,183,676 2,622,966
----------- -----------
31,168,317 34,936,066
Deferred loan and lease fees, net (76,430) (86,763)
Allowance for loan and lease losses (295,468) (723,880)
----------- -----------
$30,796,419 $34,125,423
=========== ===========
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1998 1997 1997
----------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 723,880 $ 253,560 $ 253,560
Provision charged to operations 105,000 126,000 564,000
Losses charged to allowance (540,228) (95,025) (100,910)
Recoveries 6,816 6,163 7,230
--------- --------- ---------
$ 295,468 $ 290,698 $ 723,880
========= ========= =========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $75,794 and $550,000 at September 30, 1998 and December 31,
1997, respectively. The related allowance for loan losses for these
loans at September 30, 1998 and December 31, 1997 was $25,672 and
$400,000, respectively. The average recorded investment in impaired
loans for the nine month period ended September 30, 1998 and the year
ended December 31, 1997 was $223,359 and $152,547, respectively. The
Bank recognized $7,059 in interest income on impaired loans during the
nine month period ended September 30, 1998. There was one impaired loan
at September 30, 1997 with a balance due of $22,484.
At September 30, 1998 and December 31,1997, there were no nonaccrual
loans. Interest foregone on nonaccrual loans for the nine month periods
ended September 30, 1998 and 1997 was considered insignificant.
Salaries and employee benefits totaling $190,502 and $169,050 have been
deferred as loan origination costs during the nine month periods ended
September 30, 1998 and 1997, respectively.
F-95
<PAGE> 320
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
5. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Savings $ 1,003,678 $ 924,218
NOW accounts 3,859,199 2,814,604
Money market 12,799,713 13,313,222
Time, $100,000 or more 6,558,634 6,525,188
Other time 13,375,264 14,245,834
----------- -----------
$37,596,488 $37,823,066
=========== ===========
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Nine Month Periods Ended
September 30,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Savings $ 23,033 $ 18,477
Now Accounts 45,776 41,823
Money Market 390,863 425,349
Time, $100,000 or more 279,686 218,871
Other time 564,357 493,109
---------- ----------
$1,303,715 $1,197,629
========== ==========
</TABLE>
F-96
<PAGE> 321
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
6. EARNINGS PER SHARE
A reconciliation of the numerator and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number
Net of Shares Per Share
Nine Months Ended Income Outstanding Amount
----------------- -------- ----------- ---------
<S> <C> <C> <C>
September 30, 1998
Basic earnings per share $241,674 320,158 $ .75
=====
Effect of dilutive stock options 13,503
-------- -------
Diluted earnings per share $241,674 333,661 $ .72
======== ======= =====
September 30, 1997
Basic earnings per share $338,744 319,972 $1.06
=====
Effect of dilutive stock options 4,676
-------- -------
Diluted earnings per share $338,744 324,648 $1.04
======== ======= =====
</TABLE>
7. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income, which establishes standards for the reporting and
display of comprehensive income and its components in a full set of
financial statements. The Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported. Other comprehensive income, net of
tax, was comprised of the unrealized gain on available-for-sale
investment securities for the nine month periods ended September 30,
1998 and 1997 and totaled $7,811 and $7,342 respectively. Total
comprehensive income, net of taxes, was $249,485 and $346,086 for the
nine month periods ended September 30, 1998 and 1997, respectively.
8. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be
adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, Management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings
or the financial position of the Company.
F-97
<PAGE> 322
INDEPENDENT AUDITOR'S REPORT
The Stockholders and
Board of Directors
Roseville 1st National Bank
Roseville, California
We have audited the accompanying balance sheet of Roseville 1st
National Bank as of December 31, 1997 and 1996, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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 Roseville 1st
National Bank as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ PERRY-SMITH & CO., LLP
---------------------------------------
Certified Public Accountants
Sacramento, California
March 20, 1998
F-98
<PAGE> 323
ROSEVILLE 1ST NATIONAL BANK
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,830,279 $ 1,792,288
Federal funds sold 6,720,000 3,440,000
Loans held for sale 227,150 110,000
Investment securities (market value of $4,010,300
in 1997 and $4,266,600 in 1996) (Note 2) 4,010,300 4,263,669
Loans, less allowance for loan losses of $723,880
in 1997 and $253,560 in 1996 (Note 3) 34,125,423 27,090,500
Bank premises and equipment, net (Note 4) 1,720,231 1,443,303
Deferred tax assets, net (Note 5) 303,000 230,000
Accrued interest receivable and other assets (Note 11) 1,651,293 338,370
----------- -----------
$50,587,676 $38,708,130
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 8,526,329 $ 4,539,246
Interest bearing (Note 6) 37,823,066 30,147,852
----------- -----------
Total deposits 46,349,395 34,687,098
Accrued interest payable and other liabilities 273,782 245,993
----------- -----------
Total liabilities 46,623,177 34,933,091
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity (Note 8):
Common stock - $5 par value; 5,000,000
shares authorized - 319,972 shares issued
and outstanding 1,599,860 1,599,860
Additional paid-in capital 421,574 421,574
Retained earnings since December 31, 1990 when the deficit of $1,729,001 was
transferred to additional paid-in capital as part of a quasi-
reorganization 1,931,885 1,750,166
Net unrealized gain on available-for-sale
investment securities, net of taxes (Note 2) 11,180 3,439
----------- -----------
Total stockholders' equity 3,964,499 3,775,039
----------- -----------
$50,587,676 $38,708,130
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-99
<PAGE> 324
ROSEVILLE 1ST NATIONAL BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $3,286,609 $2,545,138 $2,163,619
Interest on Federal funds sold 341,603 251,169 225,855
Interest on deposits in banks 5,748 12,653
Interest on taxable investment securities 266,264 226,179 261,936
---------- ---------- ----------
Total interest income 3,894,476 3,028,234 2,664,063
Interest expense on deposits (Note 6) 1,663,920 1,331,181 1,287,862
---------- ---------- ----------
Net interest income 2,230,556 1,697,053 1,376,201
Provision for loan losses (Note 3) 564,000 89,200 55,000
---------- ---------- ----------
Net interest income after provision
for loan losses 1,666,556 1,607,853 1,321,201
---------- ---------- ----------
Non-interest income:
Service charges and fees 58,200 33,061 20,436
Gain on sale of loans 98,761 58,229 32,249
Other income 184,039 137,149 73,429
---------- ---------- ----------
Total non-interest income 341,000 228,439 126,114
---------- ---------- ----------
Other expenses:
Salaries and employee benefits
(Notes 3 and 11) 817,541 701,482 578,111
Occupancy and equipment 176,921 150,110 145,563
Other (Note 9) 698,375 478,894 421,807
---------- ---------- ----------
Total other expenses 1,692,837 1,330,486 1,145,481
---------- ---------- ----------
Income before income taxes 314,719 505,806 301,834
Income taxes (Note 5) 133,000 204,000 104,000
---------- ---------- ----------
Net income $ 181,719 $ 301,806 $ 197,834
========== ========== ==========
Basic earnings per share (Note 8) $ .57 $ .94 $ .62
========== ========== ==========
Diluted earnings per share (Note 8) $ .56 $ .93 $ .61
========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-100
<PAGE> 325
ROSEVILLE 1ST NATIONAL BANK
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
AVAILABLE-
COMMON STOCK ADDITIONAL FOR-SALE
--------------------------- PAID-IN RETAINED INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
----------- ------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 319,572 $ 1,597,860 $ 420,574 $1,250,526 $3,268,960
Net income 197,834 197,834
----------- ------------ ------------ ---------- ------------ ----------
Balance,
December 31, 1995 319,572 1,597,860 420,574 1,448,360 3,466,794
Issuance of common
stock under Stock
Option Plan (Note 8) 400 2,000 1,000 3,000
Net income 301,806 301,806
Unrealized gain on
available-for-sale
investment secur-
ities, net of taxes $ 3,439 3,439
----------- ------------ ------------ ---------- ------------ ----------
Balance,
December 31, 1996 319,972 1,599,860 421,574 1,750,166 3,439 3,775,039
Net income 181,719 181,719
Net change in un-
realized gain on
available-for-sale
investment secur-
ities, net of taxes
(Note 2) 7,741 7,741
----------- ------------ ------------ ---------- ------------ ----------
Balance,
December 31, 1997 319,972 $ 1,599,860 $ 421,574 $1,931,885 $ 11,180 $3,964,499
=========== ============ ============ ========== ============ ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-101
<PAGE> 326
ROSEVILLE 1ST NATIONAL BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 181,719 $ 301,806 $ 197,834
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 564,000 89,200 55,000
Depreciation, accretion and
amortization, net 89,443 86,064 15,475
Loss on sale of other real estate 3,914
(Decrease) increase in deferred
loan origination fees and costs,
net (49,116) 44,036 15,479
(Increase) decrease in loans held
for sale (117,150) 699,475
Increase in accrued interest
receivable and other assets (117,923) (41,710) (150,451)
Gain on sale of equipment (300) (1,810)
Increase in accrued interest payable
and other liabilities 27,789 76,746 45,396
Deferred income taxes (77,000) 111,000 81,000
----------- ----------- -----------
Net cash provided by operating
activities 505,376 1,364,807 259,733
----------- ----------- -----------
Cash flows from investing activities:
Purchase of available-for-sale investment
securities (519,900) (3,807,507)
Purchase of held-to-maturity investment
securities (3,861,063)
Proceeds from sale of available-for-sale
investment securities 37,400
Proceeds from called available-for-sale
investment securities 500,000
Proceeds from called held-to-maturity
investment securities 1,479,464 420,536
Proceeds from matured held-to-maturity
investment securities 300,000 1,250,000 3,300,000
Net decrease in interest-bearing
deposits in banks 199,000
Net increase in loans (7,667,307) (4,498,306) (4,934,096)
Purchase of premises and equipment (381,361) (47,096) (1,408,020)
Proceeds from sale of equipment 300 1,810
Proceeds from sale of other real estate 113,586
Purchase of life insurance policies (1,195,000)
----------- ----------- -----------
Net cash used in investing
activities (8,849,682) (5,385,235) (6,482,643)
----------- ----------- -----------
</TABLE>
(Continued)
F-102
<PAGE> 327
ROSEVILLE 1ST NATIONAL BANK
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-
bearing and savings deposits $ 6,043,449 $ 6,175,971 $ 4,842,832
Net increase in time deposits 5,618,848 242,394 431,517
Proceeds from exercise of stock options 3,000
----------- ----------- -----------
Net cash provided by
financing activities 11,662,297 6,421,365 5,274,349
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 3,317,991 2,400,937 (948,561)
Cash and cash equivalents at
beginning of year 5,232,288 2,831,351 3,779,912
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 8,550,279 $ 5,232,288 $ 2,831,351
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 1,648,035 $ 1,362,926 $ 1,278,679
Income taxes $ 162,500 $ 23,100 $ 800
Non-cash investing activities:
Real estate acquired through
foreclosure $ 188,100
Net change in unrealized gain on
available-for-sale investment
securities $ 11,706 $ 5,210
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-103
<PAGE> 328
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accounting and reporting policies of Roseville 1st National Bank
(the "Bank") conform with generally accepted accounting principles
and prevailing practices within the banking industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1997.
Cash Equivalents
For the purpose of the statement of cash flows, the Bank considers
cash and due from banks and Federal funds sold to be cash
equivalents. Generally, Federal funds are sold for one day periods.
Loan Sales and Servicing
The Bank originates mortgage loans that are either held in the Bank's
loan portfolio or sold in the secondary market. Loans held for sale
are carried at the lower of cost or market value. Market value is
determined by the specific identification method as of the balance
sheet date or the date which the purchasers have committed to
purchase the loans. At the time the loan is sold, the related right
to service the loan is either retained, with the Bank earning future
servicing income, or released in exchange for a one-time
servicing-released premium. Mortgage loans subsequently transferred
to the loan portfolio are transferred at the lower of cost or market
value at the date of transfer. Any difference between the carrying
amount of the loan and its outstanding principal balance is
recognized as an adjustment to yield by the interest method. The Bank
serviced loans for others totaling approximately $4,314,000 and
$4,600,000 as of December 31, 1997 and 1996, respectively.
The Bank adopted Financial Accounting Standards Board Statement No.
125 (SFAS 125), Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities on January 1, 1997. This
Statement superseded SFAS 122, Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65, which was adopted by
the Bank on October 1, 1996. Under SFAS 125, sales of financial
assets are recognized when the transferred assets are put beyond the
reach of the transferor and its creditors, even in bankruptcy or
receivership.
F-104
<PAGE> 329
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Sales and Servicing (Continued)
Under SFAS 125, servicing rights acquired through 1) a purchase or 2)
the origination of loans which are sold or securitized with servicing
rights retained are recognized as separate assets or liabilities.
Servicing assets or liabilities are recorded at the difference
between the contractual servicing fees and adequate compensation for
performing the servicing, and are subsequently amortized in
proportion to and over the period of the related net servicing income
or expense. Servicing assets are periodically evaluated for
impairment. Fair values are estimated using discounted cash flows
based on current market interest rates. For purposes of measuring
impairment, servicing assets are stratified based on note rate and
term. The amount of impairment recognized is the amount by which the
servicing assets for a stratum exceed their fair value. Servicing
rights acquired during the year ended December 31, 1997 were not
considered material for disclosure purposes.
Investment Securities
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair
value, with unrealized gains and losses excluded
from earnings and reported, net of taxes, as a
separate component of stockholders' equity.
o Held-to-maturity securities, which management has
the positive intent and ability to hold, reported
at amortized cost, adjusted for the accretion of
discounts and amortization of premiums.
Management determines the appropriate classification of its
investments at the time of purchase and may only change the
classification in certain limited circumstances. All transfers
between categories are accounted for at fair value.
Gains or losses on the sale of securities are computed using the
specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums.
In addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
F-105
<PAGE> 330
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans are stated at principal balances outstanding, except for loans
held for sale which are carried at the lower of principal balance or
market value at the date of transfer, adjusted for accretion of
discounts. Interest is accrued daily based upon outstanding loan
balances. Discounts on retail contracts are deferred and amortized
into income over their respective lives using a method which
approximates the interest method. However, when, in the opinion of
management, the future collectibility of interest and principal is in
serious doubt, loans and retail contracts are placed on nonaccrual
status and the accrual of interest income is suspended. Any interest
accrued but unpaid is charged against income. Payments received are
applied to reduce principal to the extent necessary to ensure
collection. Subsequent payments on these loans, or payments received
on nonaccrual loans for which the ultimate collectibility of
principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
or, as a practical matter, at the loan's observable market price or
the fair value of collateral if the loan is collateral dependent. A
loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all
amounts due (including both principal and interest) in accordance
with the contractual terms of the loan agreement.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are
deferred and recognized as an adjustment of yield, to be amortized to
interest income over the contractual term of the loan. The
unamortized balance of deferred fees and costs is reported as a
component of net loans.
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses
related to impaired loans and other losses that can be expected to
occur in the normal course of business. The determination of the
allowance is based on estimates made by management, to include
consideration of the character of the loan and contract portfolio,
specifically identified problem loans, potential losses inherent in
the portfolio taken as a whole and economic conditions in the Bank's
service area. These estimates are particularly susceptible to changes
in the economic environment and market conditions. The allowance is
established through a provision for loan losses which is charged to
expense.
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property
is charged against the allowance for loan losses. A valuation
allowance for losses on other real estate is maintained to provide
for temporary declines in value. The allowance is established through
a provision for losses on other real estate which is included in
other expenses. Subsequent gains or losses on sales or writedowns
resulting from permanent impairments are recorded in other income or
expense as incurred.
F-106
<PAGE> 331
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of bank premises are
estimated to be five to forty years. The useful lives of furniture
and equipment are estimated to be five to ten years. Leasehold
improvements are amortized over the life of related lease, or the
life of the asset, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which established new
standards for computing and presenting earnings per share (EPS). This
Statement was adopted by the Bank for financial statements issued for
the year ended December 31, 1997 and requires the restatement of all
prior-period EPS data presented.
Basic EPS, which excludes dilution, is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period and replaces the
presentation of primary EPS. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock, such as stock options, result in the issuance of common
stock which shares in the earnings of the Bank. Diluted EPS is
computed similarly to, and replaces the presentation of, fully
diluted EPS. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions 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 these
estimates.
F-107
<PAGE> 332
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market
price of the Bank's stock at the date of grant over the exercise
price. However, if the fair value of stock-based compensation
computed under a fair value based method, as prescribed in Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, is material to the financial statements, proforma net
income and earnings per share are disclosed as if the fair value
method had been applied. Compensation cost related to options granted
during 1995 were considered by management to be immaterial for
disclosure purposes.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment
securities at December 31, 1997 and 1996 consisted of the following:
Available-for-Sale:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $1,990,170 $ 9,730 $1,999,900
U.S. Government
agencies 1,747,814 7,186 1,755,000
Federal Home Loan
Bank stock 119,700 119,700
Federal Reserve
Bank stock 60,700 60,700
Pacific Coast Bankers'
Bank stock 75,000 75,000
---------- ---------- ---------- ----------
$3,993,384 $ 16,916 $ -- $4,010,300
========== ========== ========== ==========
</TABLE>
F-108
<PAGE> 333
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $1,977,126 $ 10,974 $1,988,100
U.S. Government
agencies 1,746,564 $ (5,764) 1,740,800
Federal Home Loan
Bank stock 99,800 99,800
Federal Reserve
Bank stock 60,700 60,700
Pacific Coast Bankers'
Bank stock 75,000 75,000
---------- ---------- ---------- ----------
$3,959,190 $ 10,974 $ (5,764) $3,964,400
========== ========== ========== ==========
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $16,916 and $5,210 were recorded net of $5,736 and $1,771 in
tax liabilities as a separate component of stockholders' equity at
December 31, 1997 and 1996, respectively. Proceeds from the sale of
available-for-sale investment securities totaled $37,400 for the year
ended December 31, 1996, with no gain or loss recognized. There were
no sales of available-for-sale investment securities in 1997 or 1995.
Held-to-Maturity:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 299,269 $ 2,931 $ -- $ 302,200
=========== =========== =========== =========
</TABLE>
There were no sales or transfers of held-to-maturity investment
securities during the years ended December 31, 1997, 1996 or 1995. At
December 31, 1997, the Bank's portfolio contained no held-to-maturity
investment securities.
F-109
<PAGE> 334
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment
securities at December 31, 1997 by contractual maturity is shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for Sale
----------------------------------
Estimated
Amortized Market
Cost Value
---------- ------------
<S> <C> <C>
Within one year $ 998,784 $ 1,000,500
After one year through five years 2,739,200 2,754,400
---------- ------------
3,737,984 3,754,900
Federal Home Loan Bank stock 119,700 119,700
Federal Reserve Bank stock 60,700 60,700
Pacific Coast Bankers' Bank stock 75,000 75,000
---------- ------------
$3,993,384 $ 4,010,300
========== ============
</TABLE>
Investment securities with amortized costs totaling $1,490,500 and
$1,482,000 and estimated market values totaling $1,500,200 and
$1,491,100 were pledged to secure public deposits at December 31,
1997 and 1996, respectively.
3. LOANS
Outstanding loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Real estate - mortgage $ 5,498,940 $ 3,366,099
Real estate - commercial 10,780,097 6,416,104
Real estate - construction 7,319,152 11,151,425
Commercial 8,714,911 4,471,666
Installment 2,622,966 2,074,645
------------ -----------
34,936,066 27,479,939
Deferred loan origination fees and costs, net (86,763) (135,879)
Allowance for loan losses (723,880) (253,560)
------------ -----------
$ 34,125,423 $ 27,090,500
============ ============
</TABLE>
F-110
<PAGE> 335
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. LOANS (Continued)
Changes in the allowance for loan losses for the years ended December
31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 253,560 $ 185,280 $ 157,997
Provision charged to operations 564,000 89,200 55,000
Losses charged to allowance (100,910) (30,360) (40,252)
Recoveries 7,230 9,440 12,535
---------- --------- ----------
Balance, end of year $ 723,880 $ 253,560 $ 185,280
========== ========= ==========
</TABLE>
The recorded investment in loans that are considered to be impaired
at December 31, 1997 totaled $550,000. The related allowance for loan
losses at December 31, 1997 was $400,000. The Bank had no impaired
loans during the year ended December 31, 1996.
The Bank had no loans on nonaccrual status at December 31, 1997.
Nonaccrual loans totaled $189,727 at December 31, 1996. Interest
foregone on nonaccrual loans for the year ended December 31, 1997 was
not considered to be significant.
Salaries and employee benefits totaling $237,850, $133,286 and
$116,305 have been deferred as loan origination costs during 1997,
1996 and 1995, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 425,000 $ 425,000
Building 903,775 903,775
Furniture and equipment 729,978 491,903
Leasehold improvements 33,128
----------- -----------
2,091,881 1,820,678
Less accumulated depreciation
and amortization (371,650) (377,375)
----------- -----------
$ 1,720,231 $ 1,443,303
=========== ===========
</TABLE>
Depreciation and amortization included in occupancy and equipment
expense totaled $104,433, $95,101 and $65,439 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-111
<PAGE> 336
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INCOME TAXES
As a result of the capital restructuring in 1990, the Bank is limited
in its application of tax benefits arising from net operating losses
which arose prior to its conversion to a National Bank. Consequently,
the maximum future utilization of the Federal net operating loss
carryovers, which arose prior to the capital restructuring, was
limited to approximately $469,000. At December 31, 1997, the
remaining carryovers of $410,000 may be utilized at the rate of
approximately $59,000 per year. If not utilized, the carryovers will
expire in the years 2003 and 2004.
The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
--------- --------- ---------
<S> <C> <C> <C>
1997
Current $ 144,000 $ 66,000 $ 210,000
Deferred (45,000) (32,000) (77,000)
--------- --------- ---------
Income tax expense $ 99,000 $ 34,000 $ 133,000
========= ========= =========
1996
Current $ 25,000 $ 68,000 $ 93,000
Deferred 121,000 (10,000) 111,000
--------- --------- ---------
Income tax expense $ 146,000 $ 58,000 $ 204,000
========= ========= =========
1995
Current $ 23,000 $ 23,000
Deferred $ 69,000 12,000 81,000
--------- --------- ---------
Income tax expense $ 69,000 $ 35,000 $ 104,000
========= ========= =========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryovers $ 140,000 $ 160,000
Allowance for loan and contract losses 299,000 91,000
Future benefit of state tax deductions 1,000 15,000
Other 5,000
-------------- -------------
Total deferred tax assets 440,000 271,000
-------------- -------------
</TABLE>
F-112
<PAGE> 337
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Adjustment for change in tax accounting
method $ (103,000) $ (39,000)
Unrealized gain on available-for-sale
investment securities (6,000) (2,000)
Future liability of state deferred tax asset (15,000)
Other (13,000)
----------- ----------
Total deferred tax liabilities (137,000) (41,000)
---------- ----------
Net deferred tax assets $ 303,000 $ 230,000
========== ==========
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rates to operating income
before income taxes. The items comprising these differences are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Amount Rate % Amount Rate % Amount Rate %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 107,004 34.0 $ 171,974 34.0 $ 102,624 34.0
State franchise tax, net
of Federal tax effect 22,519 7.2 37,984 7.5 22,612 7.5
Change in tax rate used
to measure deferred
tax asset (20,150) (6.7)
Other 3,477 1.1 (5,958) (1.2) (1,086) (.3)
--------- ------ --------- ------ --------- ------
$ 133,000 42.3 $ 204,000 40.3 $ 104,000 34.5
========= ====== ========= ====== ========= ======
</TABLE>
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Money market $ 13,313,222 $ 12,003,808
Savings 924,218 700,643
NOW accounts 2,814,604 2,291,227
Time, $100,000 or more 6,525,188 2,951,634
Other time 14,245,834 12,200,540
------------ ------------
$ 37,823,066 $ 30,147,852
============ ============
</TABLE>
F-113
<PAGE> 338
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Money Market $ 579,200 $ 432,303 $ 381,057
Savings 25,157 17,261 9,531
NOW accounts 55,842 58,911 42,328
Time, $100,000 or more 256,597 135,689 147,597
Other time 747,124 687,017 707,349
------------ ------------ ------------
$ 1,663,920 $ 1,331,181 $ 1,287,862
============ ============ ============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess
of the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of
credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet
credit risk:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commitments to extend credit $ 10,986,300 $ 6,509,100
Letters of credit $ 108,500 $ 93,000
</TABLE>
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 some 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. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held
varies, but may include accounts receivable, inventory, deeds of
trust on commercial and residential real estate and bank accounts.
F-114
<PAGE> 339
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 1997, real estate commitments represent approximately
88% of total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%. Commercial commitments
represent approximately 11% of total commitments and are generally
unsecured. Revolving lines of credit represent the remaining 1% of
total commitments and are generally unsecured. The majority of the
commitments have variable interest rates.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction,
commercial and consumer loans to customers throughout Placer and
Sacramento counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential
real estate. However, business and personal income represent the
primary source of repayment for a majority of these loans.
Leases
The Bank leases certain office premises under a long-term
noncancelable lease. At December 31, 1997, future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $ 42,560
1999 44,240
2000 7,420
----------
$ 94,220
==========
</TABLE>
Rental expense included in occupancy and equipment expense for the
years ended December 31, 1997, 1996 and 1995 totaled $27,711, $20,964
and $50,712, respectively.
Contingencies
The Bank is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of
the Bank.
F-115
<PAGE> 340
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors, all stockholders of
record will be entitled to receive dividends. Under applicable
Federal laws, the Comptroller of the Currency restricts the total
dividend payment of any national banking association in any calendar
year to the net income of the year, as defined, combined with the
retained net income for the two preceding years. At December 31,
1997, retained earnings of $681,359 were free of such restrictions.
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
------------------ ------------ ------------ ------------
<S> <C> <C> <C>
December 31, 1997
Basic earnings per share $ 181,719 319,972 $ .57
============
Effect of dilutive stock options 4,676
------------ ------------
Diluted earnings per share $ 181,719 324,648 $ .56
============ ============ ============
December 31, 1996
Basic earnings per share $ 301,806 319,872 $ .94
============
Effect of dilutive stock options 4,750
------------ ------------
Diluted earnings per share $ 301,806 324,622 $ .93
============ ============ ============
December 31, 1995
Basic earnings per share $ 197,834 319,572 $ .62
============
Effect of dilutive stock options 4,958
------------ ------------
Diluted earnings per share $ 197,834 324,530 $ .61
============ ============ ============
</TABLE>
F-116
<PAGE> 341
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Regulatory Capital
The Bank is subject to certain regulatory capital requirements
administered by the Office of the Comptroller of the Currency (OCC).
Failure to meet these minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Each of these components is defined in the
regulations. Management believes that the Bank meets all its capital
adequacy requirements as of December 31, 1997.
In addition, the most recent notification from the OCC as of December
31, 1997 categorized the Bank as well 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 below.
There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's capital ratios and the respective minimum regulatory
requirements at December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
Roseville 1st National Bank $3,832,319 8.6% $3,635,039 10.3% $3,307,794 11.4%
Minimum requirement for "Well-
Capitalized" institution $2,226,300 5.0% $1,758,100 5.0% $1,449,400 5.0%
Minimum regulatory requirement $1,781,000 4.0% $1,406,500 4.0% $1,159,500 4.0%
Tier I Risk-Based Capital Ratio
Roseville 1st National Bank $3,832,319 9.3% $3,635,039 11.7% $3,307,794 13.4%
Minimum requirement for "Well-
Capitalized" institution $2,485,100 6.0% $1,879,100 6.0% $1,556,900 6.0%
Minimum regulatory requirement $1,656,700 4.0% $1,252,800 4.0% $1,038,000 4.0%
Total Risk-Based Capital Ratio
Roseville 1st National Bank $4,352,588 10.5% $3,888,599 12.5% $3,493,074 14.1%
Minimum requirement for "Well-
Capitalized" institution $4,142,000 10.0% $3,131,900 10.0% $2,594,900 10.0%
Minimum regulatory requirement $3,313,000 8.0% $2,505,500 8.0% $2,075,900 8.0%
</TABLE>
F-117
<PAGE> 342
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. STOCKHOLDERS' EQUITY (Continued)
Stock Options
During 1990, in conjunction with the capital restructuring, 200,000
shares of common stock were reserved for purchase at fair market
value by certain directors. Also in 1990, as part of his employment
agreement, the Bank's President was granted options to purchase
133,333 shares of common stock at fair market value. These shares
were proportionately reduced in 1992 to reflect the one-for-ten
reverse stock split. These options vested immediately and will expire
ten years from the date of grant.
In 1993, the Board of Directors adopted the 1993 Stock Option Plan to
reserve common stock for purchase, at fair market value, by
directors, officers, and certain full-time Bank employees, as
determined by the Board of Directors. The shares vest ratably over
five years and will expire ten years from the date of grant.
The activity within the plan is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 74,833 $ 7.50 76,333 $ 7.50 80,333 $ 7.50
Options granted 2,000 $ 8.00
Options exercised (400) $ 7.50
Options canceled (1,100) $ 7.50 (4,000) $ 7.50
------- ------- -------
Options outstanding,
end of year 76,833 $ 7.51 74,833 $ 7.50 76,333 $ 7.50
======= ======= =======
Options exercisable,
end of year 58,033 $ 7.50 49,633 $ 7.50 42,733 $ 7.50
======= ======= =======
</TABLE>
A summary of options outstanding at December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Exercise Price 1997 Life 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C>
$ 7.50 74,833 5 years 58,033
$ 8.00 2,000 9 years
------------ ------------
76,833 58,033
============ ============
</TABLE>
F-118
<PAGE> 343
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Telephone and utilities $ 68,386 $ 42,414 $ 30,730
Office expenses 92,832 71,343 62,496
Insurance and bonds 32,476 29,679 26,385
Auto, travel and entertainment 59,103 43,219 32,564
Loan expenses 55,754 86,002 73,450
Outside services 153,204 70,964 56,579
Regulatory assessments 25,108 19,498 44,157
Visa merchant expenses 44,534 43,008 18,137
Other operating expenses 166,978 72,767 77,309
------------ ------------ ------------
$ 698,375 $ 478,894 $ 421,807
============ ============ ============
</TABLE>
10. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into
transactions with related parties, including directors and officers.
These transactions include borrowings from the Bank with
substantially the same terms, including rates and collateral, as
loans to unrelated parties. The following is a summary of activity
involving related party borrowers during 1997:
<TABLE>
<S> <C>
Balance, January 1, 1997 $ 1,354,889
Disbursements 715,051
Amounts repaid (497,038)
------------
Balance, December 31, 1997 $ 1,572,902
============
Undisbursed commitments to related
parties, December 31, 1997 $ 8,794
============
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Salary Deferral Plan
The Bank adopted the Roseville 1st National Bank 401(k) Profit
Sharing Plan and Trust effective January 1, 1995. The Plan is
available to all employees. Under the Plan, the Bank will match 50%
of each participant's contribution up to a maximum of 6% of their
annual compensation. Employer contributions vest at a rate of 20% for
each completed year of employment and totaled $19,188, $15,381 and
$16,296 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-119
<PAGE> 344
ROSEVILLE 1ST NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. EMPLOYEE BENEFIT PLANS (Continued)
Salary Continuation Plans
In December 1997, the Board of Directors approved salary continuation
plans for three key executives. Under these plans, the Bank is
obliged to provide the executives, or designated beneficiaries, with
annual benefits for fifteen years after retirement or death. These
benefits are substantially equivalent to those available under seven
insurance policies purchased in December 1997 by the Bank for
$1,195,000 on the lives of the executives. In addition, the estimated
present value of the future benefits will begin accruing in 1998
until the employees' expected retirement dates.
F-120
<PAGE> 345
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
DATED: MAY 27, 1998
BY AND AMONG
WESTERN SIERRA BANCORP
LMC MERGER COMPANY
AND
LAKE COMMUNITY BANK
<PAGE> 346
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is entered into as of May 27, 1998 by and among LAKE COMMUNITY BANK, a
California state-chartered bank ("LCB"), WESTERN SIERRA BANCORP, a California
corporation ("BANCORP"), and LMC MERGER COMPANY, a California corporation
("LMC"), which is a wholly-owned subsidiary of BANCORP.
RECITALS:
WHEREAS, the respective Boards of Directors of LCB and BANCORP have
determined that it is in the best interests of LCB and BANCORP and their
respective shareholders for LCB to be merged with LMC, upon the terms and
subject to the conditions set forth in this Agreement and in accordance with the
California Corporations Code, the California Financial Code and other applicable
laws;
WHEREAS, each of the Boards of Directors of LCB and BANCORP have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, LCB's and BANCORP'S Boards of Directors have resolved to
recommend approval of the merger of LCB and LMC to their respective
shareholders; and
WHEREAS, upon the consummation of the Merger of LCB with LMC, LCB shall
become a wholly-owned subsidiary of BANCORP.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, LCB and BANCORP
hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, either LCB or BANCORP
shall have authorized, recommended, publicly proposed or publicly
announced an intention to authorize, recommend or propose, or
shall have entered or announced an intention to enter into a
letter of intent, an agreement-in-principle or a definitive
agreement with any Person (other than LCB, BANCORP or any of
their respective Subsidiaries) to effect, an Acquisition
Transaction or failed to publicly oppose a Tender Offer or an
Exchange Offer (as defined below). As used herein, the term
"Acquisition Transaction" shall mean (i) a merger, consolidation
or similar transaction involving LCB, BANCORP or any of their
respective Subsidiaries (other than internal mergers,
reorganizations, consolidations or dissolutions involving only
existing Subsidiaries), (ii) the disposition, by sale, lease,
exchange, dissolution or liquidation, or otherwise,
1
<PAGE> 347
of all or substantially all of the assets of LCB or BANCORP or
any asset or assets of LCB or BANCORP the disposition or lease of
which would result in a material change in the business or
business operations of LCB or BANCORP, a transfer of any shares
of stock or other securities of LCB or BANCORP by LCB or BANCORP,
or a material change in the assets, liabilities or results of
operations or the future prospects of LCB or BANCORP, including,
but not limited to a grant of an option entitling any Person to
acquire any shares of stock of LCB or BANCORP or any assets
material to the business of LCB or BANCORP; or (iii) the
issuance, other than pursuant to outstanding stock options, sale
or other disposition by LCB or BANCORP (including, without
limitation, by way of merger, consolidation, share exchange or
any similar transaction) of shares of LCB Common Stock or BANCORP
Common Stock or other Equity Securities, or the grant of any
option, warrant or other right to acquire shares of LCB Common
Stock or BANCORP Common Stock or other Equity Securities,
representing directly, or on an as-exercised, as-exchanged or
as-converted basis (in the case of options, warrants, rights or
exchangeable or convertible Equity Securities), 15% or more of
the voting securities of LCB or BANCORP;
(b) Prior to termination of this Agreement (i) any Person (other than
a person who is a party to a Director Shareholder Agreement)
shall have increased the number of shares of LCB Common Stock or
BANCORP Common Stock over which such person has beneficial
ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) by a number that is greater than 1% of
the then outstanding shares of LCB Common Stock or BANCORP Common
Stock if, after giving effect to such increase, such Person owns,
beneficially, more than 5% of the outstanding shares of LCB
Common Stock or BANCORP Common Stock, or (ii) any "group" (as
such term is defined under the Exchange Act) shall have been
formed which beneficially owns, or has the right to acquire
beneficial ownership of, more than 5% of the then outstanding
shares of LCB Common Stock or BANCORP Common Stock; or
(c) The approval by LCB's or BANCORP'S shareholders, or the
consummation by LCB or BANCORP, of any Acquisition Transaction as
described in Subsection (a) of this Paragraph within a period of
two hundred seventy (270) days following: (i) the termination of
this Agreement by BANCORP pursuant to Sections 8.1.1, 8.1.3,
8.1.5, 8.1.7, 8.1.8, or 8.1.11; or (ii) the termination of this
Agreement by LCB pursuant to Section 8.1.1, 8.1.3, 8.1.4, 8.1.6,
8.1.9, or 8.1.10.
(d) An Acquisition Transaction shall not mean any transaction
identified above with an entity identified in writing by BANCORP
or LCB prior to the date of the Agreement.
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5.
"Affected Party" shall have the meaning given to it in Section 5.7.
"Affiliate" or "affiliate" shall mean, with respect to any other Person,
any Person that, directly or indirectly, controls or is controlled by or
is under common control with such Person.
2
<PAGE> 348
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3.
"BANK" shall mean Western Sierra National Bank.
"BANCORP" shall mean Western Sierra Bancorp.
"BANCORP Average Trading Price" shall mean the average trading price for
BANCORP Common Stock as determined for a thirty calendar day period prior to the
Determination Date. However, if the BANCORP Average Trading Price is above
$20.00 per share, the BANCORP Average Trading Price shall be $20.00 per share.
If the BANCORP Average Trading Price is below $17.00 per share, the BANCORP
Average Trading Price shall be $17.00.
"BANCORP Collateralizing Real Estate" shall have the meaning given to
such term in Section 4.19.1.
"BANCORP Common Stock" shall mean the common stock, no par value per
share, of BANCORP.
"BANCORP Fairness Opinion" shall have the meaning given to such term in
Section 7.2.9.
"BANCORP Filings" shall have the meanings given such term in Section
4.6.1.
"BANCORP Financial Statements" shall mean the financial statements of
BANCORP for the year ended December 31, 1997.
"BANCORP Market Value Per Share" shall mean the last trade of BANCORP
Common Stock prior to the Effective Time.
"BANCORP Material Adverse Event" shall have the meaning given to such
term in Section 8.1.9
"BANCORP Properties" shall have the meaning given to such term in
Section 4.19.1.
"BANCORP Stock Plans" shall have the meaning set forth in Section 4.5.
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law of
the State of California.
"California Financial Code" shall mean the Financial Code of the State
of California.
3
<PAGE> 349
"CDFI" shall mean the California Department of Financial Institutions.
"Classified Assets" shall have the meaning given to such term in Section
6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section 2.1.
"Closing Schedules" shall have the meaning given to such term in Section
5.7.
"Commissioner" shall mean the Commissioner of Financial Institutions of
the State of California.
"Conversion Rate" shall mean the result of a fraction, the numerator of
which is the Per Share Merger Price, and the denominator of which is the BANCORP
Average Trading Price.
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements or
covenants of such party contained in Articles 5 or 6.
"Determination Date" shall mean the last business day of the calendar
month immediately preceding the calendar month in which the Effective Time
occurs.
"Director Shareholder Agreement" shall have the meaning given such term
in Section 7.2.10.
"Dissenting Shares" shall mean shares of LCB Common Stock or BANCORP
Common Stock which come within all of the descriptions set forth in
Subparagraphs (1), (2), (3) and (4) of Paragraph (a) of Section 1300 of the
California Corporations Code.
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Paragraph (a) of
Section 1301 of the California Corporations Code.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any Governmental
Entity pertaining to health or to the environment, including, without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Federal Water
Pollution Control Act Amendments, the Occupational Safety and Health Act of
1970, as amended, the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Hazardous Materials Transportation Act of 1975, as amended, the
Safe Drinking Water Act, as amended, and the Toxic Substances Control Act, as
amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
4
<PAGE> 350
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean Western Sierra National Bank, or such other
Person as BANCORP shall have appointed to perform the duties set forth in
Section 2.8.
"Exchange Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of an exchange offer or the filing by any
Person of a registration statement under the Securities Act with respect to an
exchange offer to purchase any shares of LCB Common Stock such that, upon
consummation of such offer, such Person would own or control 15% or more of the
then outstanding shares of LCB Common Stock.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Entity" shall mean any court, federal, state, local or
foreign government or any administrative agency or commission or other
governmental authority or instrumentality whatsoever.
"Hazardous Substances" shall have the meaning given such term in Section
3.23.4.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning given to such
term in Section 3.7.2.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement; the actual knowledge, after reasonable inquiry, of
any director or executive officer of LCB or BANCORP.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable federal laws of
the United States and laws of any state having jurisdiction over the Merger, to
permit the parties to consummate the Merger.
"LCB" shall mean Lake Community Bank.
"LCB Certificates" shall have the meaning given such term in Section
2.8.1.
"LCB Collateralizing Real Estate" shall have the meaning given to such
term in Section 3.23.1.
"LCB Common Stock" shall mean the common stock, no par value, of LCB.
5
<PAGE> 351
"LCB's Costs Associated With the Transaction" shall mean all legal,
accounting and professional costs incurred or to be incurred by LCB for the
transaction up to the Closing Date (including investment banking fees) which
have not been expensed by LCB by the Determination Date and one-half of the
taxes identified with the termination of the Employment Agreement/Change of
Control Agreement with Gary Nordine.
"LCB Fairness Opinion" shall have the meaning given to such term in
Section 7.3.7.
"LCB Filings" shall have the meaning given such term in Section 3.6.1.
"LCB Financial Statements" shall have the meaning given to such term in
Section 3.7.3.
"LCB Material Adverse Event" shall have the meaning given to such term
in Section 8.1.8.
"LCB Properties" shall have the meaning given to such term in Section
3.23.1.
"LCB State Documents" shall have the meaning given to such term in
Section 3.6.2.
"LCB Stock Options" shall mean any options to purchase any shares of LCB
Common Stock or any other Equity Securities of LCB granted on or prior to the
Effective Time, whether pursuant to the LCB Stock Option Plan or otherwise.
"LCB Stock Option Plan" shall mean LCB's written Stock Option Plan as
described in Schedule 3.5 and 3.24 hereto.
"LMC" shall mean LMC Merger Company.
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or prospects of
a Person and its subsidiaries, if any, taken as a whole (unless specifically
indicated otherwise); or (ii) on the ability of a Person that is a party to this
Agreement to perform its obligations under this Agreement or to consummate the
transactions contemplated by this Agreement.
"Material Adverse Event" shall have the meaning given to such term in
Section 8.1.8.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Agreement" shall have the meaning given to such term in Section
2.1.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OCC" shall mean Office of the Comptroller of the Currency.
"OREO" shall have the meaning given to such term in Section 3.13.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on LCB or BANCORP in accordance with Paragraph
(b) of Section 1301 of the California Corporations Code and has not withdrawn
such demand prior to the Effective Time.
6
<PAGE> 352
"Per Share Merger Price" shall mean the sum of the total shareholders'
equity for LCB as of the Determination Date (after a third party review to
determine the adequacy of LCB's loan loss reserves as provided under Section
7.2.12 and the expensing of LCB's Costs Associated With The Transaction)
multiplied by 1.75 with the total product divided by the total number of shares
of LCB Common Stock outstanding at the Closing Date. The calculation of Per
Share Merger Price shall be performed by Perry-Smith & Co. or such other party
agreed to by BANCORP and LCB.
"Persons" or "persons" shall mean an individual, corporation,
partnership, limited liability company, joint venture, trust or unincorporated
organization, Governmental Entity or any other legal entity whatsoever.
"Registration Statement" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements, and
other documents required to be filed with respect to federal, state, local and
foreign Taxes, and the term "Return" means any one of the foregoing Returns.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"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.
"Superior Proposal" shall have the meaning given to such term in Section
6.2.5.
"Surviving Corporation" shall have the meaning given to such term in
Section 2.1.
"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profits,
customs, duties, or other taxes, together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto, and the term "Tax"
means any one of the foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal Governmental
Entity before the Merger may become
7
<PAGE> 353
effective, including, but not limited to, any filing required to be made with
the California Franchise Tax Board to obtain a Tax Clearance Certificate for the
Merger.
"Tender Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of a tender offer or the filing by any person
of a registration statement under the Securities Act with respect to, a tender
offer to purchase any shares of LCB Common Stock or BANCORP Common Stock such
that, upon consummation of such offer, such person would own or control 15% or
more of the then outstanding voting securities of LCB or BANCORP.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote in the
election of the directors, trustees or Persons performing similar functions of
the Person in question, including, without limitation, nonvoting securities that
are convertible or exchangeable into voting securities, but shall not include
any stock or other interest so entitling the holders thereof to vote only upon
the happening of a contingency (other than a conversion or exchange thereof into
voting securities), whether or not such contingency has occurred.
ARTICLE 2. THE MERGER
Section 2.1 THE MERGER. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, LCB
shall be merged with LMC, with LCB being the Surviving Corporation of the
merger, all pursuant to the Agreement of Merger attached to this Agreement as
Exhibit 2.1 (the "Merger Agreement") and in accordance with the applicable
provisions of the California Financial Code and the California Corporations Code
(the "Merger"). The closing of the Merger (the "Closing") shall take place at a
location and time and Business Day to be designated by BANCORP and reasonably
concurred to by LCB (the "Closing Date") which shall not, however, be later than
thirty (30) days after receipt of the Last Regulatory Approval and expiration of
all applicable waiting periods. The Merger shall be effective when the Merger
Agreement (together with any other documents required by law to effectuate the
Merger) shall have been filed with the Secretary of State of the State of
California. When used in this Agreement, the term "Effective Time" shall mean
the time of filing of the Merger Agreement with the Secretary of State, and
"Surviving Corporation" shall mean LCB.
Section 2.2 EFFECT OF MERGER. By virtue of the Merger and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of LCB and LMC 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 LCB and LMC, including
all debts due to either of them, shall be as effectively the property of the
Surviving Corporation as they were of LCB and LMC immediately prior to the
Effective Time, and the title to any real estate vested by deed or otherwise in
either LCB or LMC 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 LCB and LMC
shall be preserved unimpaired and all debts, liabilities and duties of LCB and
LMC shall be debts, liabilities and duties of the Surviving Corporation and may
be enforced against it to the same extent
8
<PAGE> 354
as if such debts, liabilities and duties had been incurred or contracted by it,
and none of such debts, liabilities or duties shall be expanded, increased,
broadened or enlarged by reason of the Merger.
Section 2.3 ARTICLES OF INCORPORATION. The Articles of Incorporation of
LCB in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until amended and the name of the
Surviving Corporation shall be "Lake Community Bank."
Section 2.4 CONVERSION OF LMC STOCK. The authorized and issued capital
stock of LMC, all of which shall be owned by BANCORP, immediately prior to the
Effective Time, on and after the Effective Time, pursuant to the Merger
Agreement and without any further action on the part of BANCORP or LMC shall be
exchanged on a one-for-one basis for shares of common stock of the Surviving
Corporation.
Section 2.5 CONVERSION OF LCB STOCK OPTIONS. At the Effective Time, all
outstanding rights with respect to LCB Common Stock pursuant to stock options
under the LCB Stock Option Plan shall be converted into and become equivalent
rights with respect to BANCORP Common Stock at the applicable Conversion Rate
with a corresponding adjustment in the option price, and BANCORP shall assume
each LCB Stock Option in accordance with the terms of LCB Stock Option Plans and
the stock option agreement by which it is evidenced.
Section 2.6 CONVERSION OF LCB COMMON STOCK.
2.6.1 Except as provided in Sections 2.6.2 and 2.7, each share of
LCB Common Stock shall be converted at the Effective Time into and become the
right to receive that number of shares of duly authorized, validly issued, fully
paid and nonassessable shares of BANCORP Common Stock equal to the Conversion
Rate, subject to adjustment, if any, as provided in any other section of this
Agreement; provided, however, that the shares held by any shareholder who
properly exercises dissenters' rights provided under the California Corporations
Code, shall not be so converted and in lieu of such conversion shall be treated
in accordance with the provisions of the California Corporations Code.
2.6.2 The Conversion Rate shall be further appropriately adjusted
to reflect any recapitalization, reorganization, reclassification, split-up,
merger, consolidation, exchange, stock or other dividend or distribution, made,
declared or effective with respect to the BANCORP Common Stock between the date
of this Agreement and the Effective Time.
Section 2.7 FRACTIONAL SHARES. No fractional shares of BANCORP Common
Stock shall be issued in the Merger. In lieu thereof, each holder of LCB Common
Stock who would otherwise be entitled to receive a fractional share shall
receive an amount in cash equal to the product (rounded to the nearest
hundredth) obtained by multiplying (a) BANCORP Market Value Per Share by (b) the
fraction of a share of BANCORP Common Stock to which such holder would otherwise
be entitled. No such holder shall be entitled to dividends or other rights in
respect of any such fraction.
Section 2.8 EXCHANGE PROCEDURES. On or as soon as practicable after the
Effective Time, (i) BANCORP will deliver to the Exchange Agent: (i) certificates
representing the number of shares of BANCORP Common Stock issuable in the
Merger; and (ii) cash for the payout of fractional shares.
9
<PAGE> 355
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of LCB Common Stock ("LCB Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall, as promptly as practicable thereafter, deliver to each
holder of such surrendered LCB Certificates, certificates representing the
appropriate number of shares of BANCORP Common Stock ("New Certificates") and/or
checks for payment of cash in lieu of fractional shares, in respect of the LCB
Certificates. In no event shall the holders of LCB Certificates be entitled to
receive interest on cash amounts due them hereunder.
2.8.2 Until an LCB Certificate has been surrendered and exchanged
as herein provided, each share of LCB Common Stock represented by such LCB
Certificate shall represent, on and after the Effective Time, the right to
receive the Conversion Rate into which each such share of LCB Common Stock shown
thereon has been converted as provided by Section 2.6 including the right to
vote such shares of BANCORP Common Stock. No dividends or other distributions
that are declared on any shares of BANCORP Common Stock into which any shares of
LCB Common Stock have been converted at the Effective Time shall be paid to the
holder of such LCB shares until the LCB Certificates evidencing such LCB shares
have been surrendered in exchange for New Certificates in the manner herein
provided, but upon such surrender, such dividends or other distributions, from
and after the Effective Time, will be paid to such holders. In no event shall
the holders entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
2.8.3 No transfer taxes shall be payable by any shareholder in
respect of the issuance of New Certificates, except that if any New Certificate
is to be issued in a name other than that in which the LCB Certificates
surrendered shall have been registered, it shall be a condition of such issuance
that the holder requesting such issuance shall properly endorse the certificate
or certificates and shall pay to BANCORP or the Exchange Agent any transfer
taxes payable by reason thereof, or of any prior transfer of such surrendered
certificate, or establish to the satisfaction of BANCORP or the Exchange Agent
that such taxes have been paid or are not payable.
2.8.4 Any BANCORP Common Stock or cash delivered to the Exchange
Agent and not distributed pursuant to this Section 2.8 at the end of nine months
from the Effective Time, shall be returned to BANCORP, in which event the
Persons entitled thereto shall look only to BANCORP for payment thereof.
2.8.5 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 and 2.8.3 hereof, if any holder of LCB Common Stock shall be
unable to surrender such holder's LCB Certificates because such LCB Certificates
have been lost or destroyed, such holder may deliver in lieu thereof an
affidavit and indemnity bond in form and substance and with surety satisfactory
to the Exchange Agent and BANCORP.
2.8.6 The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of BANCORP Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such shares of BANCORP Common Stock for the account of the Persons entitled
thereto.
2.8.7 After the Effective Time, there shall be no further
registration of transfers of the shares of LCB Common Stock which were
outstanding immediately prior to the Effective Time.
10
<PAGE> 356
If, after the Effective Time, LCB Certificates representing such shares of LCB
Common Stock are presented to BANCORP, they shall be canceled and exchanged for
BANCORP Common Stock as provided in this Article 2.
Section 2.9 BOARD OF DIRECTORS OF LCB AND BANCORP FOLLOWING THE
EFFECTIVE TIME. At the Effective Time three directors of LCB named on Schedule
2.9 shall be appointed as directors of BANCORP to serve until the next annual
meeting of shareholders of BANCORP and until such successors are elected and
qualified. At the Effective Time, the Board of Directors of LCB shall be nine in
number, three of which will be selected by BANCORP, and six of which will be
current directors of LCB. The six existing directors of LCB shall serve as
directors of LCB for at least a two year period after the Effective Time.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF LCB
LCB represents and warrants to BANCORP as follows:
Section 3.1 ORGANIZATION; CORPORATE POWER; ETC. LCB is a California
state-chartered banking institution duly organized, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to own, lease and operate its properties and
assets and to carry on its business substantially as it is being conducted on
the date of this Agreement. LCB has all requisite corporate power and authority
to enter into this Agreement and, subject to obtaining all Requisite Regulatory
Approvals, LCB will have the requisite corporate power and authority to perform
its obligations hereunder with respect to the consummation of the transactions
contemplated hereby. LCB is authorized by the CDFI to conduct a general banking
business. LCB is not a member of the Federal Reserve System. LCB's deposits are
insured by the FDIC in the manner and to the full extent provided by law. LCB
maintains and operates branch offices only in the State of California. Neither
the scope of the business of LCB, or any Subsidiary of LCB, nor the location of
any of their respective properties, requires that LCB or any of its respective
Subsidiaries be licensed or qualified to conduct business in any jurisdiction
other than the State of California, where the failure to be so licensed and
qualified would have a Material Adverse Effect on LCB taken as a whole.
Section 3.2 LICENSES AND PERMITS. Except as disclosed on Schedule 3.2,
LCB and its Subsidiaries have all material licenses, certificates, franchises,
rights and permits that are necessary for the conduct of their respective
businesses, and such licenses are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a Material Adverse Effect on LCB or on the ability of LCB to
consummate the transactions contemplated by this Agreement. The properties,
assets, operations and businesses of LCB and those of its Subsidiaries, are and
have been maintained and conducted, in all material respects, in compliance with
all applicable licenses, certificates, franchises, rights and permits.
Section 3.3 SUBSIDIARIES. Other than as set forth on Schedule 3.3, there
is no corporation, partnership, joint venture or other entity in which LCB owns,
directly or indirectly (except as pledgee pursuant to loans or stock or other
interest held as the result of or in lieu of foreclosure pursuant to pledge or
other security arrangement) any equity or other voting interest or position.
11
<PAGE> 357
Section 3.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
3.4.1 The execution and delivery of this Agreement and the Merger
Agreement by LCB, and the consummation of the transactions contemplated hereby
and thereby, have been duly authorized by all necessary corporate action on the
part of LCB, subject only to the approval of this Agreement, the Merger
Agreement and the Merger by LCB's shareholders. This Agreement has been duly
executed and delivered by LCB and constitutes a legal, valid and binding
obligation of LCB, 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 and by general
equitable principles. The Merger Agreement, upon the receipt of all Requisite
Regulatory Approvals and the due execution and filing of such Merger Agreement
in accordance with the applicable provisions of the California Corporations
Code, will constitute a legal, valid and binding obligation of LCB, 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 and by general equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and 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 or Bylaws of LCB, or except for
the necessity of obtaining Requisite Regulatory Approvals and approval of the
shareholders of LCB, any material mortgage, indenture, lease, agreement or other
material instrument or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to LCB or any of its assets or properties, other than any such conflict,
violation, default or loss which (i) will not have a Material Adverse Effect on
LCB, or on BANCORP following consummation of the Merger; or (ii) will be cured
or waived prior to the Effective Time. 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 or the Merger Agreement by LCB or the performance by LCB of its
obligations hereunder and thereunder, except for (a) filings required in order
to obtain the Requisite Regulatory Approvals; (b) the filing and approval of the
Merger Agreement with the Secretary of the State of California; and (c) Tax
Filings.
Section 3.5 CAPITAL STRUCTURE. The authorized capital stock of LCB
consists of 20,000,000 shares of LCB Common Stock, no par value per share and
10,000,000 shares of LCB preferred stock. On the date of this Agreement,
1,263,296 shares of LCB Common Stock were outstanding, 182,850 shares of LCB
Common Stock were reserved for issuance pursuant to outstanding LCB Stock
Options under the LCB Stock Option Plan, and no shares of LCB preferred stock
were outstanding or reserved for issuance by LCB. All outstanding shares of LCB
Common Stock are validly issued, fully paid and nonassessable and do not possess
any preemptive rights and were not issued in violation of any preemptive rights
or any similar rights of any Person. Except for the LCB Stock Options described
on Schedule 3.5 to this Agreement, LCB does not have outstanding any options,
warrants, calls, rights, commitments, securities or agreements of any character
to which LCB is a party or by which it is bound obligating LCB to issue, deliver
or sell, or cause to be issued, delivered or sold, additional shares of capital
stock of LCB or obligating LCB to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
12
<PAGE> 358
Section 3.6 LCB FILINGS.
3.6.1 Since January 1, 1995, LCB and its Subsidiaries have filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that were required to be filed with (a) the
Federal Reserve Board or any Federal Reserve Bank; (b) the Commissioner; (c) the
FDIC; and (d) any other applicable federal, state or local governmental or
regulatory authority. All such reports, registrations and filings, and all
reports sent to LCB's shareholders during the three-year period ended December
31, 1997 (whether or not filed with any Regulatory Authority), are collectively
referred to as the "LCB Filings. Except to the extent prohibited by law, copies
of the LCB Filings have been made available to BANCORP. As of their respective
filing or mailing dates, each of the past LCB Filings (a) was true and complete
in all material respects (or was amended so as to be so promptly following
discovery of any discrepancy); and (b) complied in all material respects with
all of the statutes, rules and regulations enforced or promulgated by the
governmental or regulatory authority with which it was filed (or was amended so
as to be so promptly following discovery of any such noncompliance) and none
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
LCB Financial Statements, together with the financial statements contained in
the LCB Filings have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the financial position of LCB as of the
dates thereof and the results of its operations, cash flows and changes in
shareholders' equity for the periods then ended.
3.6.2 LCB has filed each report, schedule and amendments to each
of the foregoing since January 1, 1995 that LCB was required to file with the
Commissioner and the FDIC (the "LCB State Documents"), all of which have been
made available to BANCORP. As of their respective dates, the LCB State Documents
complied in all material respects with the applicable requirements of the
California Financial Code and the Federal Deposit Insurance Act, as the case may
be, and the rules and regulations of the Commissioner and the FDIC thereunder
applicable to such LCB State Documents, and none of the LCB State Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
financial statements of LCB included in the LCB Filings comply in all material
respects with applicable regulatory accounting requirements and with the
published rules and regulations of the Commissioner (as applicable) with respect
thereto, and have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by regulations of the
Commissioner) and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the financial
position of LCB as of the dates thereof and the results of its operations and
cash flows or changes in financial position for the periods then ended.
Section 3.7 ACCURACY OF INFORMATION SUPPLIED.
3.7.1 No representation or warranty of LCB contained herein or
any statement, schedule, exhibit or certificate given or to be given by or on
behalf of LCB or any of its Subsidiaries,
13
<PAGE> 359
to BANCORP in connection herewith and none of the information supplied or to be
supplied by LCB or its Subsidiaries to BANCORP hereunder contains or will
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
3.7.2 None of the information supplied or to be supplied by LCB
or relating to LCB which is included or incorporation by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by BANCORP in
connection with the issuance of shares of BANCORP Common Stock in the Merger
(including the Joint Proxy Statement of BANCORP and LCB and the Prospectus of
BANCORP ("Joint Proxy Statement/Prospectus") constituting a part thereof, the
"Registration Statement") will, at the time the Registration Statement becomes
effective under the Securities Act, 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; (ii) the Joint Proxy Statement/ Prospectus and any
amendment or supplement thereto will, at all times from the date of mailing to
shareholders of LCB through the date of the meeting of shareholders of LCB to be
held in connection with the Merger, 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; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
BANCORP Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, 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, in
light of the circumstances under which they were made, not misleading. The Joint
Proxy Statement/Prospectus (except for such portions thereof that relate only to
BANCORP and its Subsidiaries) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
3.7.3 LCB has or will deliver to BANCORP copies of: (a) the
audited balance sheets of LCB and its Subsidiaries as of December 31, 1997, 1996
and 1995 and the related statements of income, changes in shareholders' equity
and cash flows for the years then ended and the related notes to such financial
statements, all as audited by Perry-Smith & Company, independent public
accountants (the "LCB Financial Statements"), and LCB will hereafter until the
Closing Date deliver to BANCORP copies of additional financial statements of LCB
as provided in Sections 5.1.1(iii) and 6.1.11(iii). The LCB Financial Statements
have been prepared (and all of said additional financial statements will be
prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of LCB and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
LCB has delivered to BANCORP copies of all management or other letters delivered
to LCB by its independent accountants in connection with any of the LCB
Financial Statements or by such accountants or any consultant regarding the
internal controls or internal compliance procedures and systems of LCB issued at
any time since January 1, 1995, and
14
<PAGE> 360
will make available for inspection by BANCORP or its representatives, at such
times and places as BANCORP may reasonably request, reports and working papers
produced or developed by such accountants or consultants.
Section 3.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 3.8, to the best of LCB's Knowledge, the respective businesses of LCB
and its Subsidiaries are not being conducted in violation of any law, ordinance
or regulation, except for violations which individually or in the aggregate
would not have a Material Adverse Effect on LCB, or BANCORP at or following the
Effective Time. Except as set forth in Schedule 3.8, no investigation or review
by any Governmental Entity with respect to LCB is pending or, to the Knowledge
of LCB threatened, nor has any Governmental Entity indicated to LCB an intention
to conduct the same.
Section 3.9 LITIGATION. Except as set forth in Schedule 3.9, there is no
suit, action or proceeding or investigation pending, or to the Knowledge of LCB
threatened against or affecting LCB or any of its Subsidiaries which, if
adversely determined, would have a Material Adverse Effect on LCB or its
Subsidiaries; nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against LCB or any of its
Subsidiaries that has, or which, insofar as reasonably can be foreseen, in the
future would have, any such Material Adverse Effect. Schedule 3.9 contains a
true, correct and complete list, including identification of the applicable
insurance policy covering such litigation, if any, subject to reservation of
rights, if any, the applicable deductible and the amount of any reserve
therefor, of all pending litigation in which LCB or any of its Subsidiaries is a
named party, and except as disclosed on Schedule 3.9, all of the litigation
shown on such Schedule is adequately covered by insurance in force, except for
applicable deductibles, or has been adequately reserved for in accordance with
LCB's prior business practices.
Section 3.10 AGREEMENTS WITH BANKING AUTHORITIES. Neither LCB nor any
Subsidiary of LCB is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 3.11 INSURANCE. LCB and its Subsidiaries have in full force and
effect policies of insurance with respect to their assets and businesses against
such casualties and contingencies and in such amounts, types and forms as are
customarily appropriate for their businesses, operations, properties and assets.
Schedule 3.11 contains a list of all policies of insurance and bonds carried and
owned by LCB or any Subsidiary. None of LCB or any of its Subsidiaries is in
default under any such policy of insurance or bond such that it can be canceled
and all material claims thereunder have been filed in timely fashion. LCB and
its Subsidiaries have filed claims with, or given notice of claim to, their
insurers or bonding companies in timely fashion with respect to all material
matters and occurrences for which they believe they have coverage.
Section 3.12 TITLE TO ASSETS OTHER THAN REAL PROPERTY. LCB and its
Subsidiaries have good and marketable title to all their properties and assets
(other than real property which is the subject to Section 3.13), owned or leased
by LCB or any of its Subsidiaries, free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature except as disclosed on
Schedule 3.12 and except for: (a) encumbrances as set forth in the LCB Financial
Statements; (b) liens for current Taxes not yet due which have been fully
reserved for; and (c) encumbrances, if any, that are not substantial in
character, amount or extent and do not detract materially from the value, or
interfere with present use or the sale or other disposition of the property
subject thereto or affected thereby.
15
<PAGE> 361
All such properties and assets are, and require only routine maintenance to keep
them, in good working condition, normal wear and tear excepted.
Section 3.13 REAL PROPERTY. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by LCB or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Each of LCB and its
respective Subsidiaries has good and marketable title to the real properties
that it owns, as described in such Schedule, free and clear of all mortgages,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (a) rights of lessors,
lessees or sublessees in such matters as are reflected in a written lease; (b)
current Taxes (including assessments collected with Taxes) not yet due and
payable; (c) encumbrances, if any, that are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with
present use, or the ability of LCB to dispose, of the property subject thereto
or affected thereby; and (d) other matters as described in Schedule 3.13. LCB
and its Subsidiaries have valid leasehold interests in the leaseholds they
respectively hold, free and clear of all mortgages, liens, security interest,
charges, claims, assessments and encumbrances, except for (a) claims of lessors,
co-lessees or sublessees in such matters as are reflected in a written lease;
(b) title exceptions affecting the fee estate of the lessor under such leases;
and (c) other matters as described in Schedule 3.13. To the best of LCB's
Knowledge, the activities of LCB and its Subsidiaries with respect to all real
property owned or leased by them for use in connection with their operations are
in all material respects permitted and authorized by applicable zoning laws,
ordinances and regulations and all laws and regulations of any Governmental
Entity. Except as set forth in Schedule 3.13, LCB and its Subsidiaries enjoy
quiet possession under all material leases to which they are the lessees and all
of such leases are valid and in full force and effect, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and by general
equitable principles. The buildings and improvements on real properties owned or
leased by LCB or any of its Subsidiaries are in good condition and repair, and
do not require more than normal and routine maintenance, to keep them in such
condition, normal wear and tear excepted.
Section 3.14 TAXES.
3.14.1 FILING OF RETURNS. Except as set forth on Schedule 3.14.1,
LCB and its Subsidiaries have duly prepared and filed federal, state, and local
Returns (for Tax or informational purposes) which were required to be filed by
or in respect of LCB and its Subsidiaries, or any of their properties, income
and/or operations on or prior to the Closing Date. As of the time they were
filed, the foregoing Returns accurately reflected the material facts regarding
the income, business, asset, operations, activities, status, and any other
information required to be shown thereon. No extension of time within which LCB
or any of its Subsidiaries may file any Return is currently in force.
3.14.2 PAYMENT OF TAXES. Except as disclosed on Schedule 3.14.2
with respect to all amounts in respect of Taxes imposed on LCB or any Subsidiary
or for which LCB or any Subsidiary is or could be liable, whether to taxing
authorities (as, for example, under law) or to other Persons (as, for example,
under Tax allocation agreements), with respect to all taxable periods or
portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of LCB or any
Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
16
<PAGE> 362
3.14.3 AUDIT HISTORY. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of LCB
or any Subsidiary currently in progress. Except as disclosed on Schedule 3.14.3,
LCB and its Subsidiaries have not received any written notices within the three
years preceding the Closing Date of any pending or threatened audit, by the
Internal Revenue Service or any state, local or foreign agency, for any Returns
or Tax liability of LCB or any Subsidiary for any period. LCB and its
Subsidiaries currently have no unpaid deficiencies assessed by the Internal
Revenue Service or any state, local or foreign taxing authority arising out of
any examination of any of the Returns of LCB or any Subsidiaries filed for
fiscal years ended on or after December 31, 1993 through the Closing Date, nor
to the Knowledge of LCB is there reason to believe that any material deficiency
will be assessed.
3.14.4 STATUTE OF LIMITATIONS. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of LCB or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of LCB or any
Subsidiaries are currently pending.
3.14.5 WITHHOLDING OBLIGATIONS. LCB and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions, unemployment contributions,
backup withholding and other deductions required to be withheld therefrom by any
Tax law and have paid the same to the proper taxing authorities within the time
required under any applicable Tax law.
3.14.6 TAX LIENS. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by LCB or its Subsidiaries, except for liens for Taxes that are not
yet due and payable.
3.14.7 TAX RESERVES. LCB and its Subsidiaries have made full and
adequate provision and reserve for all federal, state, local or foreign Taxes
for the current period for which Tax and information returns are not yet
required to be filed. The LCB Financial Statements contain fair and sufficient
accruals for the payment of all Taxes for the periods covered by the LCB
Financial Statements and all periods prior thereto.
3.14.8 TAX ELECTIONS. No new elections with respect to Taxes or
any changes in current elections with respect to Taxes affecting the assets
owned by LCB or its Subsidiaries shall be made after the date of this Agreement
without the prior written consent of BANCORP, which shall not be unreasonably
withheld. BANCORP shall be deemed to have consented in writing to any election
LCB or its Subsidiaries shall desire to make if: (i) the electing Person shall
have notified the Chief Executive Officer of BANCORP in writing of its desire to
make such election, including in such notice a reasonably complete summary of
the election it desires to make and the reasons it desires to make such election
at least 20 Business Days prior to the due date (including extensions thereof)
for filing such election; and (ii) BANCORP shall not have responded in writing
to such notice by the fifth Business Day prior to the due date (including
extensions thereof) for filing such election.
3.14.9 IRC SECTION 382 APPLICABILITY. None of LCB or any of its
Subsidiaries, including any party joining in any consolidated return to which
LCB is a member, underwent an
17
<PAGE> 363
"ownership change" as defined in IRC Section 382(g) within the "testing period"
(as defined in IRC Section 382) ending immediately before the Effective Time,
and not taking into account any transactions contemplated by this Agreement.
3.14.10 DISCLOSURE INFORMATION. Within 45 days of the date of
this Agreement, LCB will deliver to BANCORP a schedule setting forth the
following information with respect to LCB and as of the most recent practicable
date (as well as on an estimated pro forma basis as of the Closing giving effect
to the consummation of the transactions contemplated hereby): (a) LCB's basis in
its assets; (b) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to LCB; and (c) the amount of any deferred gain or loss
allocable to LCB and arising out of any deferred intercompany transactions.
Section 3.15 PERFORMANCE OF OBLIGATIONS. LCB and its Subsidiaries have
performed all material obligations required to be performed by them to date and
none of LCB or any of its Subsidiaries is in default under or in breach of any
term or provision of any covenant, contract, lease, indenture or any other
agreement, written or oral, to which any is a party, is subject or is otherwise
bound, and no event has occurred that, with the giving of notice or the passage
of time or both, would constitute such a default or breach, where such default
or breach or failure to perform would have a Material Adverse Effect on LCB or
its Subsidiaries. To LCB's Knowledge, and except as disclosed on Schedule 3.15
or in the portion of Schedule 3.16 that identifies 90-day past due or classified
or nonaccrual loans, no party with whom LCB or any of its Subsidiaries has an
agreement that is of material importance to the businesses of LCB or its
Subsidiaries is in default thereunder.
Section 3.16 LOANS AND INVESTMENTS. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of LCB or their Subsidiaries are, and constitute, in all material
respects, the legal, valid and binding obligations of the parties thereto and
are enforceable against such parties in accordance with their terms, except as
the enforceability thereof may be limited by applicable law and otherwise by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. Except as described on
Schedule 3.16, as of April 30, 1998, no loans or investments held by LCB or any
Subsidiary are: (i) more than ninety days past due with respect to any scheduled
payment of principal or interest, other than loans on a nonaccrual status; (ii)
classified as "loss," "doubtful," "substandard" or "specially mentioned" by LCB
or any banking regulators; or (iii) on a nonaccrual status in accordance with
LCB's loan review procedures. Except as set forth on Schedule 3.16, none of such
assets (other than loans) are subject to any restrictions, contractual,
statutory or other, that would materially impair the ability of the entity
holding such investment to dispose freely of any such assets at any time, except
restrictions on the public distribution or transfer of any such investments
under the Securities Act and the regulations thereunder or state securities laws
and pledges or security interests given in connection with government deposits.
All loans, leases or other extensions of credit outstanding, or commitments to
make any loans, leases or other extensions of credit to any Affiliates of LCB
are disclosed on Schedule 3.16. For outstanding loans or extensions of credit or
commitments to make loans or extensions of credit where the original principal
amounts are in excess of $25,000 and which by their terms are either secured by
collateral or supported by a guaranty or similar obligation, the security
interests have been duly perfected in all material respects and have the
priority they purport to have in all material respects, other than by operation
of law, and, in the case of each guaranty or similar obligation, each has been
duly executed and delivered to LCB or any Subsidiary, and to LCB's Knowledge, is
still in full force and effect.
18
<PAGE> 364
Section 3.17 BROKERS AND FINDERS. Except as set forth on Schedule 3.17,
none of LCB or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. LCB agrees to indemnify and hold
harmless BANCORP and its affiliates, and to defend with counsel selected by
BANCORP and reasonably satisfactory to LCB, from and against any liability, cost
or expense, including attorneys' fees, incurred in connection with a breach of
this Section 3.17.
Section 3.18 MATERIAL CONTRACTS. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which LCB or any Subsidiary
is a party as of the date of this Agreement, except for loans and other
extensions of credit made by LCB in the ordinary course of its business and
those items specifically disclosed in the LCB Financial Statements.
Section 3.19 ABSENCE OF MATERIAL ADVERSE EFFECT. Since January 1, 1998,
the respective businesses of LCB and its Subsidiaries have been conducted only
in the ordinary course, in the same manner as theretofore conducted, and no
event or circumstance has occurred or is expected to occur which has had or
which, with the passage of time or otherwise, could reasonably be expected to
have a Material Adverse Effect on LCB.
Section 3.20 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
3.20, none of LCB or any of its Subsidiaries has any liabilities or obligations,
either accrued, contingent or otherwise, that are material to LCB and its
Subsidiaries and that have not been: (a) reflected or disclosed in the LCB
Financial Statements; or (b) incurred subsequent to December 31, 1997 in the
ordinary course of business. LCB has no Knowledge of any basis for the assertion
against LCB or any of its Subsidiaries, of any liability, obligation or claim
(including without limitation that of any Governmental Entity) that will have or
cause, or could reasonably be expected to have or cause, a Material Adverse
Effect on LCB that is not fully and fairly reflected and disclosed in the LCB
Financial Statements or on Schedule 3.20.
Section 3.21 EMPLOYEES; EMPLOYEE BENEFIT PLANS; ERISA.
3.21.1 All material obligations of LCB or its Subsidiaries for
payment to trusts or other funds or to any Governmental Entity or to any
individual, director, officer, employee or agent (or his or her heirs, legatees
or legal representatives) with respect to unemployment compensation benefits,
profit-sharing, pension or retirement benefits or social security benefits,
whether arising by operation of law, by contract or by past custom, have been
properly accrued for the periods covered thereby on the LCB Financial Statements
and paid when due. All material obligations of LCB or its Subsidiaries, whether
arising by operation of law, by contract or by past custom for vacation or
holiday pay, bonuses and other forms of compensation which are payable to their
respective directors, officers, employees or agents have been properly accrued
on the LCB Financial Statements for the periods covered thereby and paid when
due. Except as set forth on Schedule 3.21.1, there are no unfair labor practice
complaints, strikes, slowdowns, stoppages or other controversies pending or, to
the Knowledge of LCB, attempts to unionize or controversies threatened
19
<PAGE> 365
between LCB or any Subsidiary or Affiliate and or relating to, any of their
employees that are likely to have a Material Adverse Effect on LCB and its
Subsidiaries, taken as a whole. None of LCB or any Subsidiary is a party to any
collective bargaining agreement with respect to any of their employees and,
except as set forth on Schedule 3.21.1, none of LCB or any Subsidiary is a party
to a written employment contract with any of their respective employees and
there are no understandings with respect to the employment of any officer or
employee of LCB or any Subsidiary which are not terminable by LCB or such
Subsidiary without liability on not more than thirty (30) days' notice. Except
as disclosed in the LCB Financial Statements for the periods covered thereby,
all material sums due for employee compensation have been paid and all employer
contributions for employee benefits, including deferred compensation
obligations, and all material benefit obligations under any Employee Plan (as
defined in Section 3.21.3 hereof) or any Benefit Arrangement (as defined in
Section 3.21.4 hereof) have been duly and adequately paid or provided for in
accordance with plan documents. Except as set forth on Schedule 3.21.1, no
director, officer or employee of LCB or any Subsidiary is entitled to receive
any payment of any amount under any existing agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated by
this Agreement or the Merger Agreement. To LCB's Knowledge, it has materially
complied with all applicable federal and state statutes and regulations which
govern workers' compensation, equal employment opportunity and equal pay,
including, but not limited to, all civil rights laws, Presidential Executive
Order 1124, the Fair Labor Standards Act of 1938, as amended, and the Americans
with Disabilities Act.
3.21.2 LCB has delivered as Schedule 3.21.2 a complete list of:
(a) All current employees of LCB or any of its
Subsidiaries together with each employee's tenure with LCB or such Subsidiary,
title or job classification, and the current annual rate of compensation
anticipated to be paid to each such employee; and
(b) All Employee Plans and Benefit Arrangements, including
all plans or practices providing for current compensation or accruals for active
Employees, including, but not limited to, all employee benefit plans, all
pension, profit-sharing, retirement, bonus, stock option, incentive, deferred
compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
3.21.3 Except as disclosed on Schedule 3.21.3, none of LCB or any
of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of LCB or any of its Subsidiaries (any such plan being herein referred to as an
"Employee Plan"). True and complete copies of each such Employee Plan, including
amendments thereto, have been previously delivered to BANCORP, together with (i)
all agreements regarding plan assets with respect to such Employee Plans, (ii) a
true and complete copy of the annual reports for the most recent three years
(Form 5500 Series including, if applicable, Schedules A and B thereto) prepared
in connection with any such Employee Plan, (iii) a true and complete copy of the
actuarial valuation reports for the most recent three years, if any, prepared in
connection with any such Employee Plan covering any active employee of LCB or
its Subsidiaries, (iv) a copy of the most recent summary plan description of
each such Employee Plan, together with any modifications thereto, and (v) a copy
of the most recent favorable determination letter (if applicable) from the
Internal Revenue Service for each Employee Plan. None of the Employee Plans is a
"multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple
employer plan" as
20
<PAGE> 366
covered in Section 412(c) of the IRC, and none of LCB or any of its Subsidiaries
has been obligated to make a contribution to any such multiemployer or multiple
employer plan within the past five years. None of the Employee Plans of LCB or
any of its Subsidiaries is, or for the last five years has been, subject to
Title IV of ERISA. Each Employee Plan which is intended to be qualified under
Section 401(a) of the IRC is so qualified and each trust maintained pursuant
thereto is exempt from income tax under Section 501(a) of the IRC, and none of
LCB or any of its Subsidiaries is aware of any fact which has occurred which
would cause the loss of such qualification or exemption.
3.21.4 Except as disclosed in Schedule 3.21.2, none of LCB or any
of its Subsidiaries maintains (other than base salary and base wages) any form
of current or deferred compensation, bonus, stock option, stock appreciation
right, severance pay, salary continuation, retirement or incentive plan or
arrangement for the benefit of any director, officer or employee, whether active
or retired, of LCB or any of its Subsidiaries or for any class or classes of
such directors, officers or employees. Except as disclosed in Schedule 3.21.2,
none of LCB or any of its Subsidiaries maintains any group or individual health
insurance, welfare or similar plan or arrangement for the benefit of any
director, officer or employee of LCB or any of its Subsidiaries, whether active
or retired, or for any class or classes of such directors, officers or
employees. Any such plan or arrangement described in this Section 3.21.4, copies
of which have been delivered to BANCORP, shall be herein referred to as a
"Benefit Arrangement."
3.21.5 To LCB's Knowledge, all Employee Plans and Benefit
Arrangements are operated in material compliance with the requirements
prescribed by any and all statutes, governmental or court orders, or
governmental rules or regulations currently in effect, including but not limited
to ERISA and the IRC, applicable to such plans or arrangements, and plan
documents relating to any such plans or arrangements, comply with or will be
amended to comply with applicable legal requirements. To LCB's Knowledge, none
of LCB or any of its Subsidiaries, nor any Employee Plan, nor any trusts created
thereunder, nor any trustee, administrator nor any other fiduciary thereof, has
engaged in a "prohibited transaction," as defined in Section 406 of ERISA and
Section 4975 of the IRC, that could subject LCB or any of its Subsidiaries or
BANCORP to liability under Section 409 or 502(i) of ERISA or Section 4975 of the
IRC or that would adversely affect the qualified status of such plans; each
"plan official" within the meaning of Section 412 of ERISA of each Employee Plan
is bonded to the extent required by such Section 412; with respect to each
Employee Plan, to LCB's Knowledge, no employee of LCB or any Subsidiary, nor any
fiduciary of any Employee Plan, has engaged in any breach of fiduciary duty as
defined in Part 4 of Subtitle B of Title I of ERISA which could subject LCB or
any of its Subsidiaries to liability if LCB or any such Subsidiary is obligated
to indemnify such Person against liability. Except as disclosed in Schedule
3.21.5, LCB and its Subsidiaries have not failed to make any material
contribution or pay any amount due and owing as required by law or the terms of
any Employee Plan or Benefit Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee Plan
or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, there is no pending, or to LCB's Knowledge threatened, legal
action, proceeding or investigation against any Employee Plan which could result
in material liability to such Employee Plan, other than routine claims for
benefits, and there is no basis for any such legal action, proceeding or
investigation.
21
<PAGE> 367
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(g)(2)) materially
complies and has materially complied with the requirements of Section 601
through 608 of ERISA or Section 4980B of the IRC governing continuation coverage
requirements for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of LCB or any
of its Subsidiaries maintains any Employee Plan or Benefit Arrangement pursuant
to which any benefit or other payment will be required to be made by LCB or any
of its Subsidiaries or Affiliates or pursuant to which any other benefit will
accrue or vest in any director, officer or employee of LCB or any Subsidiary or
Affiliate thereof, in either case as a result of the consummation of the
transactions contemplated by this Agreement or the Merger Agreement.
Section 3.22 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by LCB or any Subsidiary thereof is presently in effect or
outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 3.23 HAZARDOUS MATERIALS. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
LCB and its Subsidiaries and in compliance with applicable Environmental Laws,
or ordinary rubbish, debris and nonhazardous solid waste stored in garbage cans
or bins for regular disposal off-site, or petroleum contained in and de minimus
quantities discharged from motor vehicles in their ordinary operation on any of
the LCB Properties (as defined below), LCB and its Subsidiaries have not engaged
in the generation, use, manufacture, treatment, transportation, storage (in
tanks or otherwise), or the disposal, of Hazardous Substances other than as
permitted by and only in compliance with applicable law. To LCB's Knowledge, no
Hazardous Substances have been released, emitted or disposed of, or otherwise
deposited, on, in or from any real property which is now or has been previously
owned since January 1, 1994, or which is currently or during the past three
years was leased, by LCB or any of its Subsidiaries, including OREO
(collectively, the "LCB Properties"), or to LCB's Knowledge, on or in any real
property in which LCB or any of its Subsidiaries now holds any security
interest, mortgage or other lien or interest with an underlying obligation in
excess of $25,000 ("LCB Collateralizing Real Estate"), except for (i) matters
disclosed on Schedule 3.23; (ii) ordinary and necessary quantities of cleaning,
pest control and office supplies used and stored in compliance with applicable
Environmental Laws, or ordinary rubbish, debris and nonhazardous solid waste
stored in garbage cans or bins for regular disposal off-site, or petroleum
contained in, and de minimus quantities discharged from, motor vehicles in their
ordinary operation on such LCB Properties; and (iii) such releases, emissions,
disposals or deposits which constituted a violation of an Environmental Law but
did not have a Material Adverse Effect on the LCB Property involved and would
not result in the incurrence or imposition of any liability, expense, penalty or
fine against LCB or any of its Subsidiaries in excess of $25,000 individually or
in the aggregate. To LCB's Knowledge, no activity has been undertaken on any of
the LCB Properties since January l, 1994, and to the Knowledge of LCB no
activities have been or are being undertaken on any of the LCB Collateralizing
Real Estate, that would cause or contribute to:
22
<PAGE> 368
(a) any of the LCB Properties or LCB Collateralizing Real
Estate becoming a treatment, storage or disposal facility within the meaning of
RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. ss.1251 et seq., the Clean Air Act, as
amended, 42 U.S.C. ss.7401 et seq., or any similar federal or state law or local
ordinance; the cumulative effect of which would have a material adverse effect
on the LCB Property or LCB Collateralizing Real Estate involved.
3.23.2 To the Knowledge of LCB, there are not, and never have
been, any underground storage tanks located in or under any of the LCB
Properties or the LCB Collateralizing Real Estate.
3.23.3 None of LCB or any of its Subsidiaries has received any
written notice of, and to the Knowledge of LCB none has received any verbal
notice of, any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for remedial
or responsive actions or for compensation, with respect to any of the LCB
Properties or LCB Collateralizing Real Estate, alleging noncompliance with or
violation of any Environmental Law or seeking relief under any Environmental Law
and none of the LCB Properties or LCB Collateralizing Real Estate is listed on
the United States Environmental Protection Agency's National Priorities List of
Hazardous Waste Sites, or, to the Knowledge of LCB, any other list, schedule,
log, inventory or record of hazardous waste sites maintained by any federal,
state or local agency.
3.23.4 "Hazardous Substances" shall mean any hazardous, toxic or
infectious substance, material, gas or waste which is regulated by any local,
state or federal Governmental Entity, or any of their agencies.
Section 3.24 Stock Options. Schedule 3.24 to this Agreement contains a
description of the LCB Stock Option Plan and list of all LCB Stock Options
outstanding, indicating for each: (a) the grant date; (b) whether vested or
unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of LCB set
forth in this Agreement shall be deemed to be made on and as of the date hereof
and as of the Effective Time.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BANCORP
BANCORP and LMC represent and warrant to LCB that:
Section 4.1 ORGANIZATION; CORPORATE POWER; ETC. BANCORP and LMC are
California corporations duly organized, validly existing and in good standing
under the laws of the State of
23
<PAGE> 369
California and have all requisite corporate power and authority to own, lease
and operate its respective properties and assets and to carry on its respective
business substantially as it is being conducted on the date of this Agreement.
BANCORP is a bank holding company registered under the BHCA. Each of BANCORP's
Subsidiaries has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business substantially as it is being
conducted on the date of this Agreement, except where the failure to have such
power or authority would not have a Material Adverse Effect on BANCORP taken as
a whole or the ability of BANCORP or LMC to consummate the transactions
contemplated by this Agreement. BANCORP has all requisite corporate power and
authority to enter into this Agreement and, subject to obtaining all Requisite
Regulatory Approvals, BANCORP will have the requisite corporate power and
authority to perform its respective obligations hereunder with respect to the
consummation of the transactions contemplated hereby. BANCORP is the sole
shareholder of BANK and LMC. BANK is a national banking association authorized
by the OCC to conduct a general banking business in California. BANK is a member
of the Federal Reserve System. BANK's deposits are insured by the FDIC in the
manner and to the full extent provided by law. Neither the scope of business of
BANCORP or any Subsidiary, including BANK, nor the location of any of their
respective properties, requires that BANCORP or any of its respective
Subsidiaries be licensed to conduct business in any jurisdiction other than
those jurisdictions in which they are licensed or qualified to do business as a
foreign corporation, where the failure to be so licensed or qualified would,
individually or in the aggregate, have a Material Adverse Effect on BANCORP
taken as a whole.
Section 4.2 LICENSES AND PERMITS. Except as disclosed on Schedule 4.2,
BANCORP and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on BANCORP taken as a whole, or
on the ability of BANCORP and/or LMC to consummate the transactions contemplated
by this Agreement. The properties, assets, operations and businesses of BANCORP
and those of its Subsidiaries, including BANK, are and have been maintained and
conducted, in all material respects, in compliance with all applicable licenses,
certificates, franchises, rights and permits.
Section 4.3 SUBSIDIARIES. Other than as set forth on Schedule 4.3, there
is no corporation, partnership, joint venture or other entity in which BANCORP
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 4.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
4.4.1 The execution and delivery of this Agreement and the Merger
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the parts
of BANCORP and LMC, subject only to the approval of this Agreement and the
Merger Agreement by BANCORP's shareholders. This Agreement has been duly
executed and delivered by BANCORP and LMC and constitutes a legal, valid and
binding obligation of BANCORP and LMC, 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 and
by general equitable principles. The Merger Agreement, upon the receipt of all
Requisite Regulatory Approvals and the due execution and filing of such Merger
Agreement in accordance with the applicable provisions of the California
24
<PAGE> 370
Corporations Code, will constitute a legal, valid and binding obligation of LMC
and BANCORP, 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 or by general
equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and 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 or Bylaws of BANCORP and LMC, or except for the necessity of
obtaining the Requisite Regulatory Approvals and the approval of the
shareholders of BANCORP, any material mortgage, indenture, lease, agreement or
other material instrument, or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to BANCORP or LMC or any of their assets or properties or any of their
respective Subsidiaries, other than any such conflict, violation, default or
loss which (i) will not have a Material Adverse Effect on BANCORP and LMC taken
as a whole; or (ii) will be cured or waived prior to the Effective Time. 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 BANCORP and LMC or the
performance by BANCORP and LMC of their obligations hereunder, except for (a)
filings required in order to obtain Requisite Regulatory Approvals; (b) the
filing of the Registration Statement (including the Joint Proxy Statement/
Prospectus constituting a part thereof) with the SEC relating to the Merger and
the declaration of effectiveness of the Registration Statement by the SEC and
any applicable state securities law regulatory authorities; (c) the filing and
approval of the Merger Agreement with the Secretary of the State of California;
(d) any approvals required to be obtained pursuant to the BHCA or the Federal
Deposit Insurance Act or any other required governmental approval for the
execution and delivery of this Agreement by BANCORP and LMC or the consummation
of the Merger; and (e) any consents, authorizations, approvals, filings or
exemptions required to be made or obtained under the securities or "blue sky"
laws of various jurisdictions in connection with the issuance of shares of
BANCORP Common Stock contemplated by this Agreement.
Section 4.5 CAPITAL STRUCTURE OF BANCORP. The authorized capital stock
of BANCORP consists of 10,000,000 shares of BANCORP Common Stock, no par value
per share and 10,000,000 shares of BANCORP preferred stock. On the date of this
Agreement 974,214 shares of BANCORP Common Stock were outstanding, 183,277
shares of BANCORP Common Stock were reserved for issuance pursuant to employee
stock option and other employee stock plans (the "BANCORP Stock Plans"), and no
shares of BANCORP preferred stock were outstanding or were reserved for issuance
by BANCORP. All outstanding shares of BANCORP Common Stock are validly issued,
fully paid and nonassessable and do not possess any preemptive rights and were
not issued in violation of any preemptive rights or any similar rights of any
Person. The issuance of the shares of BANCORP Common Stock proposed to be issued
pursuant to this Agreement at the Effective Time will have been duly authorized
by all requisite corporate action of BANCORP, and such shares, when issued as
contemplated by this Agreement, will constitute duly authorized, validly issued,
fully paid and nonassessable shares of BANCORP Common Stock, and will not have
been issued in violation of any preemptive or similar rights of any Person. As
of the date of this Agreement, and except for this Agreement and the BANCORP
Stock Plans, BANCORP does not have outstanding any options, warrants, calls,
rights, commitments, securities or agreements of any character to which BANCORP
is a party or by which it is bound obligating BANCORP to issue, deliver or sell,
or cause to be
25
<PAGE> 371
issued, delivered or sold, additional shares of capital stock of BANCORP or
obligating BANCORP to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement.
Section 4.6 BANCORP FILINGS.
4.6.1 Since January 1, 1995, BANCORP and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the Federal Reserve Board or any Federal Reserve Bank; (b) the OCC; (c) the
SEC; and (d) any other applicable federal, state or local governmental or
regulatory authority. All such reports, registrations and filings including the
BANCORP Financial Statements are collectively referred to as the "BANCORP
Filings". Except to the extent prohibited by law, copies of the BANCORP Filings
have been made available to LCB. As of their respective filing or mailing dates,
each of the past BANCORP Filings (a) was true and complete in all material
respects (or was amended so as to be so promptly following discovery of any
discrepancy); and (b) complied in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the governmental or
regulatory authority with which it was filed (or was amended so as to be so
promptly following discovery of any such noncompliance) and none contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The BANCORP
Financial Statements, together with the financial statements contained in the
BANCORP Filings, have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
period involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the consolidated financial position of
BANCORP as of the dates thereof and the consolidated results of its operations,
cash flows and changes in shareholders' equity for the period then ended.
4.6.2 BANCORP, or BANK, as the case may be, has filed each
report, schedule, and amendments to each of the foregoing since January 1, 1995
that BANCORP, or BANK, was required to file with the Federal Reserve Bank or the
OCC, all of which have been made available to LCB. The financial statements of
BANCORP included in the BANCORP Filings comply in all material respects with
applicable accounting requirements and have been prepared in accordance with
GAAP, or applicable regulatory accounting principles, applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto, and fairly present (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount) the consolidated financial
position of BANCORP as of the dates thereof and the consolidated results of its
operations and cash flows or changes in financial position for the periods then
ended.
Section 4.7 ACCURACY OF INFORMATION SUPPLIED.
4.7.1 No representation or warranty of BANCORP contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of BANCORP or any of its Subsidiaries, including BANK, to LCB in
connection herewith and none of the information supplied or to be supplied by
BANCORP or any of its Subsidiaries, including BANK, to LCB hereunder contains or
will contain any untrue statement of material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
26
<PAGE> 372
4.7.2 None of the information supplied or to be supplied by
BANCORP or relating to BANCORP and BANK which is included or incorporated by
reference in (i) the Registration Statement on Form S-4 to be filed with the SEC
by BANCORP in connection the issuance of shares of BANCORP Common Stock in the
Merger will, at the time the Registration Statement becomes effective under the
Securities Act, 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; (ii) the Joint Proxy Statement/ Prospectus and any amendment or
supplement thereto will, at all times from the date of mailing to shareholders
of BANCORP through the date of the meeting of shareholders of BANCORP to be held
in connection with the Merger, 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; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
BANCORP Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, 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, in
light of the circumstances under which they were made, not misleading. The
Registration Statement (except for such portions thereof that relate only to LCB
and its Subsidiaries) will comply in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
4.7.3 BANCORP has or will deliver to LCB copies of: (a) the
audited balance sheets of BANCORP and its Subsidiaries as of December 31, 1997,
1996 and 1995 and the related statements of income, changes in shareholders'
equity and cash flows for the years then ended and the related notes to such
financial statements, all as audited by Perry-Smith & Company, independent
public accountants (the "BANCORP Financial Statements"), and BANCORP will
hereafter until the Closing Date deliver to LCB copies of additional financial
statements of BANCORP as provided in Section 5.1.1(iii). The BANCORP Financial
Statements have been prepared (and all of said additional financial statements
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of BANCORP and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
BANCORP has delivered to LCB copies of all management or other letters delivered
to BANCORP by its independent accountants in connection with any of the BANCORP
Financial Statements or by such accountants or any consultant regarding the
internal controls or internal compliance procedures and systems of BANCORP
issued at any time since January 1, 1994, and will make available for inspection
by LCB or its representatives, at such times and places as LCB may reasonably
request, reports and working papers produced or developed by such accountants or
consultants.
Section 4.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 4.8, , to the best of BANCORP's Knowledge, the respective businesses of
BANCORP and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on BANCORP and its
27
<PAGE> 373
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to BANCORP is pending or, to the Knowledge of BANCORP
threatened, nor has any Governmental Entity indicated to BANCORP an intention to
conduct the same, other than those the outcome of which, as far as can be
reasonably foreseen, will not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole.
Section 4.9 LITIGATION. Except as disclosed on Schedule 4.9, there is no
suit, action or proceeding or investigation pending or, to the Knowledge of
BANCORP, threatened against or affecting BANCORP or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against BANCORP or any of its Subsidiaries that has or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect.
Section 4.10 AGREEMENTS WITH BANKING AUTHORITIES. Neither BANCORP nor
any Subsidiary of BANCORP is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 4.11 INSURANCE. BANCORP and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 4.11 contains a list of all policies of insurance and bonds
carried and owned by BANCORP or any Subsidiary. None of BANCORP or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material claims thereunder have been filed in timely
fashion. BANCORP and its Subsidiaries have filed claims with, or given notice of
claim to, their insurers or bonding companies in timely fashion with respect to
all material matters and occurrences for which they believe they have coverage.
Section 4.12 TITLE TO ASSETS OTHER THAN REAL PROPERTY. BANCORP and its
Subsidiaries have good and marketable title to all their properties and assets
(other than real property which is the subject to Section 4.13), owned or leased
by BANCORP or any of its Subsidiaries, free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature except as disclosed on
Schedule 4.12 and except for: (a) encumbrances as set forth in the BANCORP
Financial Statements; (b) liens for current Taxes not yet due which have been
fully reserved for; and (c) encumbrances, if any, that are not substantial in
character, amount or extent and do not detract materially from the value, or
interfere with present use or the sale or other disposition of the property
subject thereto or affected thereby. All such properties and assets are, and
require only routine maintenance to keep them, in good working condition, normal
wear and tear excepted.
Section 4.13 REAL PROPERTY. Schedule 4.13 is an accurate list and
general description of all real property owned or leased by BANCORP or any of
its Subsidiaries, including OREO. Each of BANCORP and its respective
Subsidiaries has good and marketable title to the real properties that it owns,
as described in such Schedule, free and clear of all mortgages, covenants,
conditions, restrictions, easements, liens, security interests, charges, claims,
assessments and encumbrances, except for (a) rights of lessors, lessees or
sublessees in such matters as are reflected in a written lease; (b) current
Taxes (including assessments collected with Taxes) not yet due and payable; (c)
encumbrances, if any, that are not substantial in character, amount or extent
and do not materially
28
<PAGE> 374
detract from the value, or interfere with present use, or the ability of BANCORP
to dispose, of the property subject thereto or affected thereby; and (d) other
matters as described in Schedule 4.13. BANCORP and its Subsidiaries have valid
leasehold interests in the leaseholds they respectively hold, free and clear of
all mortgages, liens, security interest, charges, claims, assessments and
encumbrances, except for (a) claims of lessors, co-lessees or sublessees in such
matters as are reflected in a written lease; (b) title exceptions affecting the
fee estate of the lessor under such leases; and (c) other matters as described
in Schedule 4.13. To the best of BANCORP's Knowledge, the activities of BANCORP
and its Subsidiaries with respect to all real property owned or leased by them
for use in connection with their operations are in all material respects
permitted and authorized by applicable zoning laws, ordinances and regulations
and all laws and regulations of any Governmental Entity. Except as set forth in
Schedule 4.13, BANCORP and its Subsidiaries enjoy quiet possession under all
material leases to which they are the lessees and all of such leases are valid
and in full force and effect, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally and by general equitable principles. The
buildings and improvements on real properties owned or leased by BANCORP or any
of its Subsidiaries are in good condition and repair, and do not require more
than normal and routine maintenance, to keep them in such condition, normal wear
and tear excepted.
Section 4.14 PERFORMANCE OF OBLIGATIONS. BANCORP and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of BANCORP or any of its Subsidiaries is in default under or in breach
of any term or provision of any covenant, contract, lease, indenture or any
other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on BANCORP and its Subsidiaries, taken as a whole. To BANCORP's
Knowledge, and except as disclosed on Schedule 4.14, no party with whom BANCORP
or any of its Subsidiaries has an agreement that is of material importance to
the business of BANCORP and its Subsidiaries, taken as a whole, is in default
thereunder.
Section 4.15 BROKERS AND FINDERS. Except as set forth on Schedule 4.15,
none of BANCORP or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby. BANCORP agrees to indemnify and hold harmless LCB and its affiliates,
and to defend with counsel reasonably satisfactory to LCB's Chief Executive
Officer, from and against any liability, cost or expense, including attorneys'
fees, incurred in connection with a breach of this Section 4.15.
Section 4.16 ABSENCE OF MATERIAL ADVERSE EFFECT. Since January 1, 1998,
the respective businesses of BANCORP and its Subsidiaries have been conducted
only in the ordinary course, in substantially the same manner as theretofore
conducted, and no event or circumstance has occurred or is expected to occur
which has had or which, with the passage of time or otherwise, could reasonably
be expected to have a Material Adverse Effect on BANCORP and its Subsidiaries,
taken as a whole.
Section 4.17 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
4.17, none of BANCORP or any of its Subsidiaries has any liabilities or
obligations, either accrued, contingent or otherwise, that are material to
BANCORP and its Subsidiaries, taken as a whole, and that have not been: (a)
reflected or disclosed in the BANCORP Financial Statements; or (b) incurred
29
<PAGE> 375
subsequent to December 31, 1997 in the ordinary course of business. BANCORP has
no Knowledge of any basis for the assertion against BANCORP or any of its
Subsidiaries, of any liability, obligation or claim (including without
limitation that of any Governmental Entity) that will have or cause, or could
reasonably be expected to have or cause, a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole, that is not fairly reflected in the
BANCORP Financial Statements or on Schedule 4.17.
Section 4.18 TAXES.
4.18.1 FILING OF RETURNS. Except as set forth on Schedule 4.18.1,
BANCORP and its Subsidiaries have duly prepared and filed federal, state, and
local Returns (for Tax or informational purposes) which were required to be
filed by or in respect of BANCORP and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. No extension of time within
which BANCORP or any of its Subsidiaries may file any Return is currently in
force.
4.18.2 PAYMENT OF TAXES. Except as disclosed on Schedule 4.18.2
with respect to all amounts in respect of Taxes imposed on BANCORP or any
Subsidiary or for which BANCORP or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of BANCORP or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
4.18.3 AUDIT HISTORY. Except as disclosed on Schedule 4.18.3,
there is no review or audit by any taxing authority of any Tax liability of
BANCORP or any Subsidiary currently in progress. Except as disclosed on Schedule
4.18.3, BANCORP and its Subsidiaries have not received any written notices
within the three years preceding the Closing Date of any pending or threatened
audit, by the Internal Revenue Service or any state, local or foreign agency,
for any Returns or Tax liability of BANCORP or any Subsidiary for any period.
BANCORP and its Subsidiaries currently have no unpaid deficiencies assessed by
the Internal Revenue Service or any state, local or foreign taxing authority
arising out of any examination of any of the Returns of BANCORP or any
Subsidiaries filed for fiscal years ended on or after December 31, 1993 through
the Closing Date, nor to the Knowledge of BANCORP is there reason to believe
that any material deficiency will be assessed.
4.18.4 STATUTE OF LIMITATIONS. Except as disclosed on Schedule
4.18.4, no agreements are in force or are currently being negotiated by or on
behalf of BANCORP or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of BANCORP or any
Subsidiaries are currently pending.
4.18.5 WITHHOLDING OBLIGATIONS. BANCORP and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions,
30
<PAGE> 376
unemployment contributions, backup withholding and other deductions required to
be withheld therefrom by any Tax law and have paid the same to the proper taxing
authorities within the time required under any applicable Tax law.
4.18.6 TAX LIENS. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by BANCORP or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
4.18.7 TAX RESERVES. BANCORP and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The BANCORP Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
BANCORP Financial Statements and all periods prior thereto.
4.18.8 TAX ELECTIONS. No new elections with respect to Taxes or
any changes in current elections with respect to Taxes affecting the assets
owned by BANCORP or its Subsidiaries shall be made after the date of this
Agreement without the prior written consent of LCB, which shall not be
unreasonably withheld. LCB shall be deemed to have consented in writing to any
election BANCORP or its Subsidiaries shall desire to make if: (i) the electing
Person shall have notified the Chief Executive Officer of LCB in writing of its
desire to make such election, including in such notice a reasonably complete
summary of the election it desires to make and the reasons it desires to make
such election at least 20 Business Days prior to the due date (including
extensions thereof) for filing such election; and (ii) LCB shall not have
responded in writing to such notice by the fifth Business Day prior to the due
date (including extensions thereof) for filing such election.
4.18.9 IRC SECTION 382 APPLICABILITY. None of BANCORP or any of
its Subsidiaries, including any party joining in any consolidated return to
which BANCORP is a member, underwent an "ownership change" as defined in IRC
Section 382(g) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
Section 4.19 HAZARDOUS MATERIALS. Except as set forth on Schedule 4.19:
4.19.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
BANCORP and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in, and de
minimus quantities discharged from, motor vehicles in their ordinary operation
on any of the BANCORP Properties (as defined below), BANCORP and its
Subsidiaries have not engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or the disposal, of Hazardous
Substances other than as permitted by and only in compliance with applicable
law. To BANCORP's Knowledge, no Hazardous Substances have been released, emitted
or disposed of, or otherwise deposited, on, in or from any real property which
is now or has been previously owned since January 1, 1994, or which is currently
or during the past three years was leased, by BANCORP or any of its
Subsidiaries, including OREO (collectively, the "BANCORP Properties"), or to
BANCORP's Knowledge, on or in any real property in which BANCORP or any of its
Subsidiaries now holds any security interest, mortgage or other lien or interest
with an underlying obligation in
31
<PAGE> 377
excess of $25,000 ("BANCORP Collateralizing Real Estate"), except for (i)
matters disclosed on Schedule 4.19; (ii) ordinary and necessary quantities of
cleaning, pest control and office supplies used and stored in compliance with
applicable Environmental Laws, or ordinary rubbish, debris and nonhazardous
solid waste stored in garbage cans or bins for regular disposal off-site, or
petroleum contained in, and de minimus quantities discharged from, motor
vehicles in their ordinary operation on such BANCORP Properties; and (iii) such
releases, emissions, disposals or deposits which constituted a violation of an
Environmental Law but did not have a Material Adverse Effect on the BANCORP
Property involved and would not result in the incurrence or imposition of any
liability, expense, penalty or fine against BANCORP or any of its Subsidiaries
in excess of $25,000 individually or in the aggregate. To BANCORP's Knowledge,
no activity has been undertaken on any of the BANCORP Properties since January
l, 1994, and to the Knowledge of BANCORP no activities have been or are being
undertaken on any of the BANCORP Collateralizing Real Estate, that would cause
or contribute to:
(a) any of the BANCORP Properties or BANCORP
Collateralizing Real Estate becoming a treatment, storage or disposal facility
within the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. ss.1251 et seq., the Clean Air Act, as
amended, 42 U.S.C. ss.7401 et seq., or any similar federal or state law or local
ordinance; the cumulative effect of which would have a material adverse effect
on the BANCORP Property or BANCORP Collateralizing Real Estate involved.
4.19.2 To the Knowledge of BANCORP, there are not, and never have
been, any underground storage tanks located in or under any of the BANCORP
Properties or the BANCORP Collateralizing Real Estate.
4.19.3 None of BANCORP or any of its Subsidiaries has received
any written notice of, and to the Knowledge of BANCORP none has received any
verbal notice of, any pending or threatened claims, investigations,
administrative proceedings, litigation, regulatory hearings or requests or
demands for remedial or responsive actions or for compensation, with respect to
any of the BANCORP Properties or BANCORP Collateralizing Real Estate, alleging
noncompliance with or violation of any Environmental Law or seeking relief under
any Environmental Law and none of the BANCORP Properties or BANCORP
Collateralizing Real Estate is listed on the United States Environmental
Protection Agency's National Priorities List of Hazardous Waste Sites, or, to
the Knowledge of BANCORP, any other list, schedule, log, inventory or record of
hazardous waste sites maintained by any federal, state or local agency.
Section 4.20 EMPLOYEES.
4.20.1 Except as set forth in Schedule 4.20.1, there are no
material controversies pending or threatened between BANCORP or any of its
Subsidiaries and any of their employees.
32
<PAGE> 378
4.20.2 Except as disclosed in the BANCORP Financial Statements at
December 31, 1997, or in Schedule 4.20.2, 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. Neither BANCORP nor
BANK is a party to any collective bargaining agreement with respect to any of
its employees or any labor organization to which its employees or any of them
belong.
4.20.3 To BANCORP's Knowledge, no governmental agency or claimant
or representative of such claimant has alleged a material violation of ERISA by
BANCORP, the liability of which, if adversely determined would result in a
material adverse change in the capital or earnings of BANCORP.
Section 4.21 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by BANCORP or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 4.22 LOANS AND INVESTMENTS. Except as set forth on Schedule
4.22, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of BANCORP or its Subsidiaries are, and constitute, in all material
respects, the legal, valid and binding obligations of the parties thereto and
are enforceable against such parties in accordance with their terms, except as
the enforceability thereof may be limited by applicable law and otherwise by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. For outstanding loans
or extensions of credit or commitments to make loans or extensions of credit
where the original principal amounts are in excess of $25,000 and which by their
terms are either secured by collateral or supported by a guaranty or similar
obligation, the security interests have been duly perfected in all material
respects and have the priority they purport to have in all material respects,
other than by operation of law, and, in the case of each guaranty or similar
obligation, each has been duly executed and delivered to BANCORP or any
Subsidiary, and to BANCORP's Knowledge, is still in full force and effect.
Section 4.23 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS. Each representation, warranty, covenant and agreement of BANCORP
set forth in this Agreement shall be deemed to be made on and as of the date
hereof and as of the Effective Time.
ARTICLE 5. ADDITIONAL AGREEMENTS
Section 5.1 ACCESS TO INFORMATION, DUE DILIGENCE, ETC.
5.1.1 Upon reasonable notice, each party shall permit the other
party and their accountants, counsel and other representatives reasonable access
to their officers, employees, properties, books, contracts, commitments and
records and from the date hereof through the Effective Time, and shall furnish
or provide access to each other as soon as practicable, (i) a copy of each of
LCB's Filings or BANCORP's Filings filed subsequent to the date of this
Agreement promptly after such document has been filed with the appropriate
Governmental Entity, provided, however, that copies of any Returns relating to
Taxes of any of LCB or any of its Subsidiaries shall be furnished to BANCORP at
least 15 Business Days prior to the proposed date of filing thereof and
33
<PAGE> 379
shall not be filed without the prior approval of BANCORP, which approval shall
not be unreasonably withheld or delayed; (ii) unless otherwise prohibited by
law, a copy of each report, schedule and other documents filed or received by it
during such period with any Regulatory Authority or the Internal Revenue
Service, as to documents other than related to employees or customers and other
than those distributed to banks generally; (iii) as promptly as practicable
following the end of each calendar month after the date hereof, a balance sheet
of LCB or BANCORP as of the end of such month; and (iv) all other information
concerning its business, properties, assets, financial condition, results of
operations, liabilities, personnel and otherwise as LCB or BANCORP may
reasonably request.
5.1.2 Until the Effective Time, a representative of BANCORP shall
be entitled and shall be invited to attend meetings of the Board of Directors of
LCB and of the Loan Committee of LCB, and at least five (5) days' prior written
notice of the dates, times and places of such meetings shall be given to BANCORP
except that in the case of special meetings BANCORP shall receive the same
number of days' prior notice as LCB's directors receive for such meetings;
provided, however, that such representative shall excuse himself or herself from
any portion of any such meetings that (i) relate to approval of, or the exercise
of any rights under, this Agreement by LCB, and (ii) involve discussions between
such Board of Directors or such Loan Committee and legal counsel for LCB that
are entitled to be protected from disclosure under an attorney-client privilege
which would be lost due to the presence of such representative of BANCORP.
5.1.3 Until the Effective Time, a representative of LCB shall be
entitled and shall be invited to attend meetings of the Boards of Directors of
BANCORP and BANK and of the Loan Committee of BANK, at least five (5) days'
prior to written notice of the dates, times and places of such meetings shall be
given to LCB except that in the case of special meetings LCB shall receive the
same number of days' prior notice as BANCORP's directors receive for such
meetings; provided, however, that such representative shall excuse himself or
herself from any portion of any such meetings that (i) relate to approval of, or
the exercise of any rights under, this Agreement by BANCORP, and (ii) involve
discussions between such Boards of Directors or such Loan Committees and legal
counsel for BANCORP that are entitled to be protected from disclosure under an
attorney-client privilege which would be lost due to the presence of such
representative of LCB.
5.1.4 BANCORP, LMC and LCB each agrees to keep confidential and
not divulge to any other party or Person (other than to the employees,
attorneys, accountants and consultants of each who have a need to receive such
information and other than as may be required by law) any information received
from the other, unless and until such documents and other information otherwise
becomes publicly available or unless the disclosure of such information is
authorized by each party. In the event of termination of this Agreement for any
reason, the parties shall promptly return, or at the election of the other party
destroy, all nonpublic documents obtained from the other and any copies or notes
of such documents (except as otherwise required by law) and, upon the request of
the other party, confirm such destruction to the other in writing.
Section 5.2 SHAREHOLDER APPROVAL.
5.2.1 LCB and BANCORP each shall promptly call a meeting of its
respective shareholders to be held at the earliest practicable date after the
date on which the initial Registration Statement is filed with the SEC, but in
no event later than September 30, 1998, for the purpose of approving this
Agreement and authorizing the Merger Agreement and the Merger. Each of the
34
<PAGE> 380
respective Boards of Directors will recommend to the respective shareholders,
approval of this Agreement, the Merger Agreement and the Merger; provided,
however, that the LCB Board of Directors or BANCORP's Board of Directors may
withdraw its recommendation if such Board of Directors believes in good faith
(based on a written opinion of a financial advisor that is experienced in
evaluating the fairness of Acquisition Proposals) that a Superior Proposal
(defined below) has been made and shall have determined in good faith, after
consultation with and based on written advice of its outside legal counsel, that
the withdrawal of such recommendation is necessary for such Board of Directors
to comply with its fiduciary duties under applicable law.
5.2.2 If the Merger is approved by vote of the shareholders of
BANCORP and LCB, then, within ten (10) days thereafter BANCORP and LCB shall
send a Dissenting Shareholder Notice to each recordholder of any Dissenting
Shares.
5.2.3 Prior to the Effective Time of the Merger, BANCORP, as the
sole shareholder of LMC, shall take all action necessary for the consummation of
the Merger by LMC.
Section 5.3 TAKING OF NECESSARY ACTION.
5.3.1 Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees, subject to applicable laws and the fiduciary
duties of LCB's, BANCORP's or LMC's Boards of Directors, as advised in writing
by their respective counsel, to use all reasonable efforts promptly to take or
cause to be taken all action and promptly to do or cause to be done all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Merger Agreement, including, without limitation, the delivery of any
certificate or other document reasonably requested by counsel to a party to this
Agreement. Without limiting the foregoing, BANCORP, LMC and LCB will use their
reasonable efforts to obtain all consents of third parties and Government
Entities necessary or, in the reasonable opinion of BANCORP or LCB advisable for
the consummation of the transactions contemplated by this Agreement. Without
limiting the foregoing, BANCORP shall cause LMC to take all actions necessary to
execute and file the Merger Agreement and to effect all transactions
contemplated of LMC by this Agreement and LCB shall take all actions necessary
to effect all transactions contemplated by this Agreement and the Merger
Agreement. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the Merger
Agreement, or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of LCB, the
proper officers or directors of BANCORP, LMC or LCB, as the case may be, shall
take all such necessary action. Notwithstanding the foregoing, nothing in this
Agreement shall be construed to require LCB to take any action (or omit to take
any action) which may affect the Conversion Rate, except as may be specifically
provided for or required by this Agreement.
5.3.2 The obligations of LCB or BANCORP contained in Section
6.2.5 of this Agreement shall continue to be in full force and effect despite
any Default thereof by reason of receipt of a Superior Proposal (defined below)
and any Default thereof by the defaulting party shall entitle either LCB or
BANCORP to such legal or equitable remedies as may be provided in this Agreement
or by law notwithstanding that any action or inaction of the Board of Directors
or officers of the defaulting party which is required to enable such party to
fulfill such obligations may be excused based on the continuing fiduciary
obligations of such party's Board of Directors and officers to its shareholders.
Notwithstanding the foregoing, however, in the event of a termination
35
<PAGE> 381
of this Agreement by BANCORP or LCB and the actual payment of the liquidated
damages to the other party as provided for in Section 8.5 of this Agreement,
neither BANCORP, LCB or their respective directors or officers shall have any
obligations or liabilities of any kind under this Agreement by reason of any
such Default, and BANCORP or LCB shall have no further obligations of any kind
under this Agreement.
5.3.3 LCB shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of LCB (for purposes of
Rule 145 under the Securities Act) to deliver to BANCORP, on the date of this
Agreement, a written agreement in the form attached hereto as Exhibit 5.3 (the
"Affiliate Agreements").
Section 5.4 REGISTRATION STATEMENT AND APPLICATIONS.
5.4.1 BANCORP and LCB will cooperate and jointly prepare and file
as promptly as practicable the Registration Statement, the statements,
applications, correspondence or forms to be filed with appropriate State
securities law regulatory authorities, and the statements, correspondence or
applications to be filed to obtain the Requisite Regulatory Approvals to
consummate the transactions contemplated by this Agreement. Each of BANCORP and
LCB shall use all reasonable efforts to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Joint Proxy Statement/Prospectus to the
shareholders of LCB. Each party will furnish all financial or other information,
including accountant comfort letters relating thereto, certificates, consents
and opinions of counsel concerning it and its Subsidiaries received by such
party.
5.4.2 Each party shall provide to the other at the request of the
other party: (i) immediately prior to the filing thereof, copies of all material
statements, applications, correspondence or forms to be filed with state
securities law regulatory authorities, the SEC and other appropriate regulatory
authorities to obtain the Requisite Regulatory Approvals to consummate the
transactions contemplated by this Agreement; and (ii) promptly after delivery
to, or receipt from, such regulatory authorities all written communications,
letters, reports or other documents relating to the transactions contemplated by
this Agreement.
Section 5.5 EXPENSES.
5.5.1 Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same, including,
without limitation, all costs associated with any resales of BANCORP Common
Stock by Affiliates of LCB; provided, however, that BANCORP will file on a
timely basis at its own expense the reports required by Rule 144(c) of the
Securities Act.
5.5.2 LCB shall use its best efforts to ensure that its
attorneys, accountants, financial advisors, investment bankers and other
consultants engaged by it in connection with the transaction contemplated by
this Agreement submit full and final bills on or before the Determination Date
and that all such expenses are paid or properly accrued prior to the
Determination Date.
36
<PAGE> 382
Section 5.6 NOTIFICATION OF CERTAIN EVENTS.
5.6.1 LCB shall provide to BANCORP, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Sections 6.1 and 6.2, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.2 BANCORP shall provide to LCB, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Section 6.3 and 6.4, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in writing of
any change or event which could reasonably be expected to have a Material
Adverse Effect on the business, properties, assets, financial condition, results
of operations, liabilities or personnel of such party or on its ability to
consummate the transactions contemplated by this Agreement or the Merger
Agreement.
5.6.4 LCB and BANCORP shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statement or Joint Proxy Statement/Prospectus at any time contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statement therein, in light of
the circumstances under which they were made, not misleading or that the
Registration Statement or the Joint Proxy Statement/Prospectus otherwise is
required to be amended and supplemented, which notice shall specify, in
reasonable detail, the circumstances thereof. BANCORP shall promptly amend and
supplement such materials and disseminate the new or modified information so as
to fully comply with the Securities Act. If the amendment or supplement so
required relates to information concerning LCB, the out-of-pocket costs and
expenses of preparing, filing and disseminating such amendment or supplement
shall be borne by LCB.
Section 5.7 CLOSING SCHEDULES. LCB has delivered to BANCORP on or before
the date of this Agreement all of the Schedules to this Agreement which LCB is
required to deliver to BANCORP hereunder (the "LCB Schedules"). BANCORP has
delivered to LCB on or before the date of this Agreement all of the Schedules to
this Agreement which BANCORP is required to deliver to LCB hereunder ( the
"BANCORP Schedules"). Immediately prior to the Closing Date, LCB shall have
prepared updates of the LCB Schedules provided for in this Agreement and shall
deliver to BANCORP revised schedules containing the updated information (or a
certificate signed by LCB's Chief Executive Officer stating that there have been
no changes on the applicable schedules); and BANCORP shall have prepared updates
of the BANCORP Schedules provided for in this Agreement and shall deliver to LCB
revised Schedules containing updated information (or a certificate signed by
BANCORP's Chief Executive Officer stating that there has been no change on the
applicable schedules.) Such updated schedules shall sometimes be referred to
collectively, as the "Closing Schedules." The Closing Schedules shall be dated
as of the day prior to the Closing Date and shall contain information as of the
day prior to the Closing Date or as of such earlier date as is practicable under
the circumstances. In the event the Closing Schedules disclose an event,
occurrence or circumstance that has had or could reasonably be expected to have
a Material Adverse Effect on LCB, on the one hand, or on BANCORP, on the other
hand, or on consummation of the transactions contemplated by this Agreement,
that was not disclosed in the previously delivered Schedules hereto, the party
delivering such Closing Schedules (the "Affected Party") shall so notify
37
<PAGE> 383
the other party in the letter of transmittal for such Closing Schedules, the
Closing Date shall be delayed for seven (7) Business Days and such other party
shall be entitled to terminate this Agreement within five (5) Business Days
after receiving such Closing Schedules that disclose such event, occurrence or
circumstance. In the event of any such termination, the terminating party shall
have no liability for such termination. The Affected Party shall have no
liability to the terminating party in such an event unless (i) as a result of
the existence of such event, occurrence or circumstance so disclosed in the
Closing Schedules any of the representations or warranties of the Affected Party
contained in this Agreement are found to have been untrue in any material
respect as of the date of this Agreement, or (ii) the event, occurrence or
circumstance could have been prevented in the exercise of reasonable diligence
by any officers or directors of the Affected Party, in either of which cases the
Affected Party shall be liable to the terminating party for Liquidated Damages
as provided in Section 8.5 hereof.
Section 5.8 ADDITIONAL ACCRUALS/APPRAISALS. Prior to the Closing Date,
but after the Determination Date, at BANCORP's request, LCB shall, consistent
with GAAP and applicable banking regulations, establish such additional accruals
and reserves immediately prior to the Determination Date as may be necessary to
conform LCB's accounting and credit and OREO loss reserve practices and methods
to those of BANCORP, provided, however, that no accrual or reserve made by LCB
pursuant to this Section 5.8, or any litigation or regulatory proceeding arising
out of any such accrual or reserve, or any other effect on LCB resulting from
LCB's compliance with this Section 5.8, shall constitute or be deemed to be a
breach, violation of or failure to satisfy any representation, warranty,
covenant, condition or other provision of this Agreement or otherwise be
considered in determining whether any such breach, violation or failure to
satisfy shall have occurred. Additionally, no such accrual or reserve made by
LCB pursuant to this Section 5.8 shall be used by the parties in the calculation
of the Per Share Merger Price.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 AFFIRMATIVE CONDUCT OF LCB. During the period from the date
of execution of this Agreement through the Effective Time, LCB shall carry on
its business, and shall cause each of its respective Subsidiaries to carry on
its business, in the ordinary course in substantially the manner in which
heretofore conducted, subject to changes in law applicable to all California
state-chartered banks or all nonmember banks insured by the FDIC and directives
from regulators, and use all commercially reasonable efforts to preserve intact
its business organization, keep available the services of its officers and
employees, (other than terminations in the ordinary course of business) and
preserve its relationships with customers, depositors, suppliers and others
having business dealings with it; and, to these ends, shall fulfill each of the
following:
6.1.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.1.2 Advise BANCORP promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, financial condition,
assets, results of operations, business or prospects or of any matter which
would make the representations and warranties set forth in Article 3 hereof not
true and correct in any material respect as of the effective date of the
Registration Statement and at the Effective Time;
38
<PAGE> 384
6.1.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify BANCORP in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.1.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any material
contract, agreement, understanding, commitment, or offer, whether written or
oral, (collectively referred to as an "Understanding") or materially default in
the performance of any of its obligations under any Understanding where such
default would have a Material Adverse Effect on LCB;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on LCB;
6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.1.8 Maintain its assets and properties in good condition and
repair, normal wear and tear excepted;
6.1.9 Promptly advise BANCORP in writing of any event or any
other transaction within the Knowledge of LCB, whereby any Person or related
group of Persons acquires, after the date of this Agreement, directly or
indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated
by the SEC pursuant to the Exchange Act) or control of 5% or more of the
outstanding shares of LCB Common Stock either prior to or after the record date
fixed for the LCB shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
6.1.10 (a) Maintain a reserve for loan and lease losses ("Loan
Loss Reserve") at a level which is adequate to provide for all known and
reasonably expected losses on loans, leases and other extensions of credit
outstanding and other inherent risks in LCB's portfolio of loans and leases, in
accordance with GAAP and applicable regulatory accounting principles and banking
laws and regulations;
(b) Charge off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by LCB, LCB has
submitted in writing to such regulatory authority the basis upon which it has so
disregarded such classification or direction, and such regulatory authority
retracts its direction requiring such charge-off;
39
<PAGE> 385
6.1.11 Furnish to BANCORP, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of LCB and access to the working papers
related thereto, provided, however, that LCB need not furnish BANCORP any
materials relating to deliberations of LCB's Board of Directors with respect to
its approval of this Agreement, communications of LCB's legal counsel with the
Board of Directors or officers of LCB regarding LCB's rights against or
obligations to BANCORP or its Subsidiaries under this Agreement, or books,
records and documents covered by the attorney-client privilege or which are
attorneys' work product; (ii) copies of all material reports, renewals, filings,
certificates, statements, correspondence and other documents specific to LCB or
filed with or received from any Federal Reserve Bank, the FDIC, the Commissioner
or any Governmental Entity; (iii) monthly unaudited balance sheets, statements
of income and changes in shareholders' equity for LCB and its Subsidiaries and
quarterly unaudited balance sheets, statements of income and changes in
shareholders' equity for LCB, in each case prepared on a basis consistent with
past practice; and (iv) such other reports as BANCORP may reasonably request
(which are otherwise deliverable under this Section 6.1.11) relating to LCB.
Each of the financial statements of LCB delivered pursuant to this Section
6.1.11 shall be accompanied by a certificate of the Chief Financial Officer of
LCB to the effect that such financial statements fairly present the financial
information presented therein of LCB, for the periods covered, subject to
recurring adjustments normal in nature and amount, necessary for a fair
presentation and are prepared on a basis consistent with past practice;
6.1.12 LCB agrees that through the Effective Time, as of their
respect dates, (i) each LCB Filing will be true and complete in all material
respects; and (ii) each LCB Filing 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 LCB Filings that is intended to present the
financial position of LCB during the periods involved to which it relates will
fairly present in all material respects the financial position of LCB and will
be prepared in accordance with GAAP or consistent with applicable regulatory
accounting principles and banking law and banking regulations, except as stated
therein;
6.1.13 Maintain reserves for contingent liabilities in accordance
with GAAP or applicable regulatory accounting principles, and consistent with
past practices;
6.1.14 Promptly notify BANCORP of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against LCB or any of its
assets;
6.1.15 Inform BANCORP of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any unit of LCB as "Specially Mentioned,"
"Renegotiated," "Substandard," "Doubtful," "Loss" or any comparable
classification ("Classified Assets"). LCB will furnish to BANCORP, as soon as
practicable, and in any event within fifteen days after the end of each calendar
month, schedules including the following: (i) Classified Assets by type
(including each credit or other asset in an amount equal to or greater than
$10,000), and its classification category; (ii) nonaccrual credits by type
(including each credit in an amount equal to or greater than $10,000); (iii)
renegotiated loans
40
<PAGE> 386
by type (loans on which interest has been renegotiated to lower than market
rates because of the financial condition of the borrowers); (iv) delinquent
credits by type (including each delinquent credit in an amount equal to or
greater than $10,000), including an aging into 30-89 and 90+ day categories; (v)
loans or leases or other assets charged off, in whole or in part, during the
previous month by type (including each such loan or lease or other asset in an
amount equal to or greater than $10,000); and (vi) OREO or assets owned stating
with respect to each its type;
6.1.16 Furnish to BANCORP, upon BANCORP's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by LCB to any director or
officer (at or above the Vice President level) of LCB or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of LCB,
including, with respect to each such loan or lease, the identity and, to the
best Knowledge of LCB, the relation of the borrower to LCB, the loan or lease
type and the outstanding and undrawn amounts; and (iii) standby letters of
credit, by type, (including each letter of credit in a face amount equal to or
greater than $10,000); and
6.1.17 Make available to BANCORP copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit of
$25,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $10,000 in the case of unsecured loans or unsecured
extensions of credit, which are approved by LCB after the date of this
Agreement, within ten Business Days of preparation of such packages.
Section 6.2 NEGATIVE COVENANTS OF LCB. During the period from the date
of execution of this Agreement through the Effective Time, LCB agrees that
without BANCORP's prior written consent, it shall not:
6.2.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.2.2 Take any action that would or might result in any of the
representations and warranties of LCB set forth in the Agreement becoming untrue
in any material respect or any of the conditions to the Merger set forth in
Article 7 not being satisfied, except to the extent such actions are required to
be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
6.2.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of LCB
or any securities convertible or exercisable into or exchangeable for such
capital stock, or any rights, warrants or options, including options under any
stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of LCB Common Stock pursuant to the
exercise of LCB Stock Options;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
41
<PAGE> 387
6.2.5 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
BANCORP, and its representatives) concerning any such solicited Acquisition
Proposal. LCB shall notify BANCORP immediately if any inquiry regarding an
Acquisition Proposal is received by LCB, including the terms thereof. For
purposes of this Section 6.2.5, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than BANCORP would acquire or
participate in a merger or other business combination or reorganization
involving LCB; (b) proposal by which any Person or group, other than BANCORP,
would acquire the right to vote ten percent (10%) or more of the capital stock
of LCB entitled to vote for the election of directors; (c) acquisition of the
assets of LCB other than in the ordinary course of business; or (d) acquisition
in excess of ten percent (10%) of the outstanding capital stock of LCB, other
than as contemplated by this Agreement. Notwithstanding the foregoing, nothing
contained in this Agreement shall prevent LCB or LCB's Board of Directors from
(i) furnishing nonpublic information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity, or recommending an
unsolicited bona fide written Acquisition Proposal to the shareholders of LCB,
if and only to the extent that (A) the Board of Directors of LCB has determined
and believes in good faith (after consultation with and the concurrence of its
financial advisor) that such Acquisition Proposal would, if consummated, result
in a transaction materially more favorable, from a financial point of view, to
LCB's shareholders than the transaction contemplated by this Agreement (any such
more favorable Acquisition Proposal being referred to in this Agreement as a
"Superior Proposal") and LCB's Board of Directors has determined in good faith,
after consultation with and based on written advice from its outside legal
counsel, that such action is necessary for LCB to comply with its fiduciary
duties to shareholders under applicable law, and (B) prior to furnishing such
nonpublic information to, or entering into discussions or negotiations with,
such person or entity, LCB's Board of Directors has received from such person or
entity an executed confidentiality agreement, with terms no more favorable to
such party than those contained in the Confidentiality Agreement between LCB and
BANCORP, or (ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal, if such Rule is applicable thereto;
6.2.6 Acquire or agree to acquire by merging, consolidating with,
or by purchasing all or a substantial portion of the assets of, or in any other
manner, any business or any Person or otherwise acquire or agree to acquire any
assets which are material to LCB, other than in the ordinary course of business
consistent with prior practice;
6.2.7 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to LCB, except in the ordinary
course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of LCB or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one year)
issued, in its ordinary course of business consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement; (b) commitments to make loans or other
extensions of
42
<PAGE> 388
credit in the ordinary course of business consistent with prior practice; and
(c) loan sales in the ordinary course of business, without any recourse,
provided that no commitment to sell loans shall extend beyond the Effective
Time;
6.2.10 Make or enter into a commitment to make any loan or other
extension of credit to any director, officer or employee of LCB or any of its
Subsidiaries, except in accordance with practice or policy in existence on the
date of this Agreement and in compliance with all applicable laws and all
applicable regulations and directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent with
prior practice or as required by an existing contract, and provided prior
disclosure thereof has been made in Schedule 6.2.11, grant any general or
uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any Person;
6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1997 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.2.14 Make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$10,000 individually or $30,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract or
agreement, enter into any new employment contract or agreement or make any bonus
or any special or extraordinary payments to any Person;
6.2.16 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
BANCORP, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
report or proposed Tax election or change in any method or period of accounting,
to BANCORP for its approval, which it shall not unreasonably withhold or delay;
43
<PAGE> 389
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
6.2.19 Change its fiscal year or methods of accounting in effect
at December 31, 1997, except as required by changes in GAAP or regulatory
accounting principles as concurred to by LCB's independent public accountants;
6.2.20 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization; or
6.2.21 Take or cause to be taken into OREO any property without
(a) an environmental report reporting no adverse environmental condition on such
property, with a copy of such report delivered to BANCORP prior to taking such
property into OREO; and (b) the written consent of BANCORP, which shall not be
unreasonably withheld.
Section 6.3 Conduct of BANCORP. During the period from the date of
execution of this Agreement through the Effective Time, BANCORP agrees (except
to the extent LCB shall otherwise consent in writing) to do the following:
6.3.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise LCB promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 BANCORP agrees that through the Effective Time, as of their
respect dates, (i) each BANCORP Filing will be true and complete in all material
respects; and (ii) each BANCORP Filing 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 BANCORP Filings that is intended to present
the financial position of BANCORP, on a consolidated basis, during the periods
involved to which it relates will fairly present in all material respects the
financial position of BANCORP, on a consolidated basis, and will be prepared in
accordance with GAAP or consistent with applicable regulatory accounting
principles and banking law and regulations, except as stated therein; and
6.3.4 Promptly notify LCB of the filing, or threatened filing, of
any litigation, or the filing or threatened filing of any government or
regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against BANCORP or any of
its assets, which is expected to have a Material Adverse Effect on BANCORP and
its Subsidiaries taken as a whole.
44
<PAGE> 390
Section 6.4 NEGATIVE COVENANTS OF BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, BANCORP agrees
that without LCB's prior written consent, it shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.4.2 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
6.4.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
BANCORP or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of BANCORP Common Stock pursuant to the
exercise of BANCORP Stock Options or pursuant to the proposed acquisition of
another financial entity identified by BANCORP in writing to LCB prior to the
execution of the Agreement;
6.4.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
6.4.5 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to BANCORP, except in the
ordinary course of business consistent with prior practice;
6.4.6 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of BANCORP or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.4.7 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.4.8 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.4.9 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously
45
<PAGE> 391
approved by LCB, in writing, or file or amend any federal, foreign, state or
local Tax Return or report or make any tax election or change any method or
period of accounting unless required by GAAP or applicable law and, then, only
after submitting such Tax return or report or proposed Tax election or change in
any method or period of accounting, to LCB for its approval, which it shall not
unreasonably withhold or delay;
6.4.10 Change its fiscal year or methods of accounting in effect
at December 31, 1997, except as required by changes in GAAP or regulatory
accounting principles as concurred to by BANCORP's independent public
accountants;
6.4.11 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
LCB, and its representatives) concerning any such solicited Acquisition
Proposal. BANCORP shall notify LCB immediately if any inquiry regarding an
Acquisition Proposal is received by BANCORP, including the terms thereof. For
purposes of this Section 6.4.11, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than LCB would acquire or
participate in a merger or other business combination or reorganization
involving BANCORP; (b) proposal by which any Person or group would acquire the
right to vote ten percent (10%) or more of the capital stock of BANCORP entitled
to vote for the election of directors; (c) acquisition of the assets of BANCORP
other than in the ordinary course of business; or (d) acquisition in excess of
ten percent (10%) of the outstanding capital stock of BANCORP, other than as
contemplated by this Agreement. An Acquisition Proposal shall not mean
discussions or negotiations with an entity identified by BANCORP to LCB in
writing prior to the execution of this Agreement. Notwithstanding the foregoing,
nothing contained in this Agreement shall prevent BANCORP or its Board of
Directors from (i) furnishing nonpublic information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity, or
recommending an unsolicited bona fide written Acquisition Proposal to the
shareholders of BANCORP, if and only to the extent that (A) the Board of
Directors of BANCORP has determined and believes in good faith (after
consultation with and the concurrence of its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction materially
more favorable, from a financial point of view, to BANCORP's shareholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Superior
Proposal") and BANCORP's Board of Directors has determined in good faith, after
consultation with and based on written advice from its outside legal counsel,
that such action is necessary for BANCORP to comply with its fiduciary duties to
shareholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such person
or entity, BANCORP's Board of Directors received from such person or entity an
executed confidentiality agreement, with terms no more favorable to such party
than those contained in the Confidentiality Agreement between LCB and BANCORP,
or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to an Acquisition Proposal, if such Rule is applicable thereto;
6.4.12 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority; or
46
<PAGE> 392
6.4.13 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization; or
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 CONDITIONS TO THE PARTIES' OBLIGATIONS. The obligations of
all the parties to this Agreement to effect the Merger shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreement and the Merger shall
have been validly approved by the holders of a majority of the outstanding
shares of LCB Common Stock and BANCORP Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Merger under applicable federal laws of the United States or applicable
laws of any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger Agreement shall have been obtained or expired, as the
case may be (all such permits, approvals and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals"),
without the imposition of any condition which in the reasonable judgment of any
party to be affected by such condition is materially burdensome upon such party
or its respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any Government Entity which: (i) makes the consummation of the Merger
illegal; (ii) requires the divestiture by BANCORP of any material asset or of a
material portion of the business of BANCORP; or (iii) imposes any condition upon
BANCORP or its Subsidiaries (other than general provisions of law applicable to
all banks and bank holding companies) which in the judgment of BANCORP would be
materially burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 BANCORP and LCB shall have received an opinion from
Perry-Smith & Co., dated the Effective Time, subject to assumptions and
exceptions normally included, and in form and substance reasonably satisfactory
to BANCORP and LCB, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the IRC and that BANCORP and LCB will each be a party to that reorganization
within the meaning of Section 368(b) of the IRC;
7.1.6 BANCORP and LCB shall have received from Perry-Smith & Co.,
who are the independent public accountants of BANCORP and LCB, letters, dated at
the effective date of the Registration Statement and at the Effective Time, in
form and substance satisfactory to BANCORP and LCB that the Merger may be
accounted for as a pooling of interests;
47
<PAGE> 393
7.1.7 BANCORP and LCB shall have received opinions of counsel for
the other party in substantially the forms previously agreed to by the parties
as set forth in Exhibits 7.1.7A and 7.1.7B, respectively, dated as of the
Closing Date;
7.1.8 No action, suit or proceeding shall have been instituted or
threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger Agreement
which presents a substantial risk that such transactions will be restrained or
that either party hereto may suffer material damages or other relief as a result
of consummating such transactions; and
7.1.9 The holders of no more than 10% of the outstanding shares
of LCB Common Stock have exercised dissenters' rights. Dissenters of BANCORP
shall be included in such calculation. Dissenters' rights shall be deemed to be
exercised to the extent at the Effective Time the holder of such shares have
complied with the California Corporations Code concerning dissenters' rights.
Section 7.2 CONDITIONS TO BANCORP'S OBLIGATIONS. The obligations of
BANCORP to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by BANCORP) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of LCB contained in Article 3 shall be true in
all material respects as of the Effective Time as though made at the Effective
Time, except to the extent they expressly refer to an earlier time and except
where the failure to be true, individually or in the aggregate, would not have
or would not be reasonably likely to have, a Material Adverse Effect on LCB or
the Surviving Corporation, or upon the consummation of the transactions
contemplated hereby; (b) LCB shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on LCB or the Surviving Corporation, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
BANCORP to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) LCB shall have delivered to BANCORP certificates dated the
date of the Effective Time and signed by the President and Chief Executive
Officer to the effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition of
any material burden or restriction on any of the parties hereto not in existence
on the date hereof, each consent to the consummation of the Merger required to
be obtained from any Person under any agreement, contract or license to which
LCB is a party or by or under which it is bound or licensed, the withholding of
which might have a Material Adverse Effect on LCB, the Surviving Corporation or
BANCORP at or following the Effective Time, or on the transactions contemplated
by this Agreement;
7.2.3 LCB shall have delivered its Closing Schedules to BANCORP
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the LCB Schedules (or in the
LCB Financial Statements) delivered on the date of execution of this Agreement
that has had, would have, or could be reasonably likely to have, a
48
<PAGE> 394
Material Adverse Effect on LCB, the Surviving Corporation or BANCORP at or after
the Effective Time, or on the consummation of the transactions contemplated
hereby;
7.2.4 Between the date of this Agreement and the Effective Time,
no event or circumstance shall have occurred which has had or could reasonably
be expected to have a Material Adverse Effect on LCB, or its Subsidiaries, and
BANCORP shall have received a certificate signed on behalf of LCB by the
President and Chief Executive Officer of LCB to such effect;
7.2.5 Counsel for BANCORP shall have approved, in the exercise of
counsel's reasonable discretion, 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 BANCORP hereunder
or that are reasonably requested by such counsel;
7.2.6 The sale of the BANCORP Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
7.2.7 LCB shall have delivered to BANCORP not later than the date
of this Agreement all of the executed Affiliate Agreements in the form attached
hereto as Exhibit 5.3;
7.2.8 None of LCB or any of its Subsidiaries shall be subject to
any memorandum of understanding, cease and desist order, or other agreement with
any Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect;
7.2.9 The Findley Group shall not have revoked, at any time prior
to the Effective Time, its opinion, rendered to the Board of Directors of
BANCORP on May 27, 1998 (the "BANCORP Fairness Opinion"), to the effect that the
terms of the Merger, from a financial standpoint, are fair to the shareholders
of BANCORP;
7.2.10 All of LCB's director-shareholders shall have delivered to
BANCORP on the date of this Agreement the Director-Shareholder Agreements in the
form attached hereto as Exhibit 7.2.10;
7.2.11 BANCORP shall have received a modified Change In Control
Severance Agreement executed by LCB and Mr. Gary Nordine in a form acceptable to
BANCORP, which agreement shall contain a covenant not to compete in Lake County
for a period of three years and LCB shall have accrued or expensed one-half of
the tax liability identified with payments to Mr. Nordine related to such
agreement; and
7.2.12 Prior to the Determination Date James Updegraf or such
other person agreed to by the parties, shall have completed an outside loan
review of LCB to determine the adequacy of LCB's loan loss reserves. As of the
Determination Date LCB shall have increased the loan loss reserves to the level
required by such outside review.
Section 7.3 CONDITIONS TO LCB'S OBLIGATIONS. The obligations of LCB to
effect the Merger shall be subject to the fulfillment (or waiver, in writing, by
LCB) of the following conditions:
49
<PAGE> 395
7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of BANCORP contained in Article 4 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
BANCORP and BANK, taken as a whole, or upon consummation of the transactions
contemplated hereby; (b) BANCORP shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on BANCORP and BANK, taken as a whole, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
LCB to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) BANCORP shall have delivered to LCB certificates dated the
date of the Effective Time and signed by a duly authorized officer to the effect
set forth in Subsections 7.3.1(a), (b) and (c);
7.3.2 Counsel for LCB shall have approved, in the exercise of
counsel's reasonable discretion, 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 LCB hereunder or
that are reasonably requested by such counsel;
7.3.3 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of BANCORP and its Subsidiaries,
taken as a whole, from December 31, 1997 to the Effective Time that results in a
Material Adverse Effect as to BANCORP and its Subsidiaries, taken as a whole;
7.3.4 BANCORP has taken such action as appropriate to convert LCB
stock options to BANCORP stock options adjusted for the Conversion Rate;
7.3.5 Prior to the Closing Date, BANCORP shall have taken all
corporate action required to effectuate the appointment of the three individuals
named on Schedule 2.9 hereto to its Board of Directors effective immediately
after the Effective Time;
7.3.6 BANCORP shall have delivered its Closing Schedules to LCB
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the BANCORP Schedules (or in
the BANCORP Financial Statements) delivered on the date of execution of this
Agreement that has had, or would have a Material Adverse Effect on BANCORP and
its Subsidiaries, taken as a whole, at or after the Effective Time, or on the
consummation of the transactions contemplated hereby;
7.3.7 The Bank Stock Group shall not have revoked, at any time
prior to the meeting of LCB's shareholders at which the Merger is to be voted
on, its opinion, rendered to the Board of Directors of LCB on May 27, 1998 (the
"LCB Fairness Opinion"), to the effect that the terms of the Merger, from a
financial standpoint, are fair to the shareholders of LCB;
7.3.8 BANCORP shall have provided an agreement to those 10
employees of LCB listed on Schedule 7.3.8 that if such employee is terminated
within a two year period from the
50
<PAGE> 396
Effective Time, such employee shall receive one week of base salary for every
year of employment at LCB up to a maximum of four weeks; and
7.3.9 BANCORP shall have provided assurance to LCB of the
retention of LCB's existing employee benefits at least until December 31, 1999.
ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time;
8.1.1 By mutual consent of the Boards of Directors of BANCORP and
LCB;
8.1.2 By BANCORP or LCB upon the failure to satisfy any
conditions specified in Section 7.1 if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
8.1.3 By BANCORP or LCB if an Acquisition Event involving the
other party shall have occurred;
8.1.4 By LCB if there shall have been a material breach of any of
the representations or warranties of BANCORP set forth in this Agreement, which
breach, in the reasonable opinion of LCB, by its nature cannot be cured or is
not cured prior to the Closing and which breach would, in the reasonable opinion
of LCB, individually or in the aggregate, have, or be reasonably likely to have,
a Material Adverse Effect on BANCORP and its Subsidiaries, taken as a whole, or
upon the consummation of the transactions contemplated hereby;
8.1.5 By BANCORP if there shall have been a material breach of
any of the representations or warranties of LCB set forth in this Agreement,
which breach, in the reasonable opinion of BANCORP, by its nature cannot be
cured or is not cured prior to the Closing and which breach would, in the
reasonable opinion of BANCORP, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on LCB or upon the
consummation of the transactions contemplated hereby;
8.1.6 By LCB after the occurrence of a Default by BANCORP and the
continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of LCB,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.7 By BANCORP after the occurrence of a Default by LCB and the
continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of BANCORP,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.8 By BANCORP if the Closing Schedules delivered by LCB
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the LCB Financial Statements
delivered to BANCORP on or before the date hereof, that has had
51
<PAGE> 397
or could reasonably be expected to have a Material Adverse Effect on LCB, or
after the Effective Time, on BANCORP, or on the consummation of the transactions
contemplated hereby (an "LCB Material Adverse Event");
8.1.9 By LCB if the Closing Schedules delivered by BANCORP
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the BANCORP Financial
Statements delivered to LCB on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole, or on the consummation of the transactions
contemplated hereby (a "BANCORP Material Adverse Event");
8.1.10 By LCB upon the failure of any of the conditions specified
in Section 7.3 to have been satisfied prior to December 31, 1998; or
8.1.11 By BANCORP upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to December 31, 1998.;
Section 8.2 EFFECT OF TERMINATION; SURVIVAL. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.4, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
Section 8.3 AMENDMENT. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of LCB
and BANCORP; provided, however, that after any such approval by such
shareholders, no amendments shall be made which by law require further approval
by such shareholders without such further approval.
Section 8.4 WAIVER. Any term or provision of this Agreement other than
regulatory approval or any other provision required by law, 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 LIQUIDATED DAMAGES; CANCELLATION FEE.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving LCB, then LCB shall pay to BANCORP the sum of Five Hundred Thousand
Dollars ($500,000) in cash; or (ii) an Acquisition Event involving BANCORP, then
BANCORP shall pay to LCB the sum of Five Hundred Thousand Dollars ($500,000) in
cash.
8.5.2 In the event of termination of this Agreement by LCB
pursuant to Section 8.1.10 as a result of the revocation of the LCB Fairness
Opinion; or a termination of this Agreement by BANCORP pursuant to (i) Section
8.1.2 (no approval by LCB shareholders), or (ii) pursuant to Section 8.1.5
(breach of representations or warranties of LCB) or Section 8.1.7 (Default) or
Section 8.1.8 (disclosure in the Closing Schedules of an LCB Material Adverse
Event), where such breach of representation or warranty, Default or LCB Material
Adverse Event shall have been caused in
52
<PAGE> 398
whole or in material part by any action or inaction within the control of LCB or
any of its Subsidiaries, or any of their directors or executive officers (it
being understood that any breach or Default or LCB Material Adverse Event that
occurred after the date of this Agreement and was outside of the control of LCB
and its Subsidiaries, and the directors and executive officers thereof, such as,
by way of example only, the filing of a lawsuit against LCB, shall not come
within this Section 8.5.2), then, LCB shall pay to BANCORP the sum of Two
Hundred Thousand Dollars ($200,000), in cash; provided, however, that if an
Acquisition Agreement occurs involving LCB within one hundred eighty (180) days
following any termination by BANCORP to which this Section 8.5.2 applies, LCB
shall pay to BANCORP an additional Three Hundred Thousand Dollars ($300,000) in
cash.
8.5.3 In the event of the termination of this Agreement by
BANCORP pursuant to Section 8.1.11 as a result of the revocation of the BANCORP
Fairness Opinion; or a termination of this Agreement by LCB pursuant to (i)
Section 8.1.2 (no approval by BANCORP Shareholders), or (ii) 8.1.4 (breach of
representations and warranties of BANCORP) or Section 8.1.6 (Default), or
Section 8.1.9 (disclosure in Closing Schedules of a BANCORP Material Adverse
Event), where such breach of representation or warranty, or such Default or
BANCORP Material Adverse Event shall have been caused in whole or in material
part by any action or inaction within the control of BANCORP or any of its
Subsidiaries, or any of their directors or executive officers (it being
understood that any action or inaction outside of the control of BANCORP, its
Subsidiaries and their directors and executive officers, such as, by way of
example only, the filing of a lawsuit against BANCORP, shall not come within
this Section 8.5.3), then, BANCORP shall pay to LCB the sum of Two Hundred
Thousand Dollars ($200,000), in cash; provided, however, that if an Acquisition
Event occurs involving BANCORP within one hundred eighty (180) days following
any termination by LCB to which this Section 8.5.3 applies, BANCORP shall pay to
LCB an additional Three Hundred Thousand Dollars ($300,000) in cash.
8.5.4 The parties have determined that the occurrence of any of
the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3 would
cause a substantial damage and loss and lost business opportunities to the party
terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.4, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
BANCORP or LCB and for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties hereto, nor any Affiliates of any such
parties, shall have any further obligation or liability of any kind to the other
party, except pursuant to Sections 5.1.4, 5.5 and 9.5.
53
<PAGE> 399
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time or to a
termination of this Agreement.
Section 9.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so delivered, mailed or sent, as the case may be, to the parties
at the following addresses (or any such other address for a party as shall be
specified by like notice):
If to LCB at:
Lake Community Bank
805 11th Street
Lakeport, California 95453
Fax No. (707) 263-4510
Attention: Gary Nordine, President/CEO
with a copy to:
Lillick & Charles LLP
Two Embarcadero, Suite 2600
San Francisco, California 94111
Fax No. (415) 984-8300
Attention: R. Brent Faye, Esq.
If to BANCORP or LMC at:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Fax No. (916) 677-5075
Attention: Gary D. Gall, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
54
<PAGE> 400
Section 9.3 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 9.4 ENTIRE AGREEMENT/NO THIRD PARTY RIGHTS/ASSIGNMENT. 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 expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 NONDISCLOSURE OF AGREEMENT. BANCORP and LCB agree, except as
required by law or the rules of the NASDAQ, so long as this Agreement is in
effect, not to issue any public notice, disclosure or press release with respect
to the transactions contemplated by this Agreement without seeking the consent
of the other party, which consent shall not be unreasonably withheld.
Section 9.6 GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law.
Section 9.7 HEADINGS/TABLE OF CONTENTS. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.8 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Merger Agreement is not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the State of California or any state having jurisdiction, this
being in addition to any remedy to which they are entitled at law or in equity.
Section 9.9 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
55
<PAGE> 401
IN WITNESS WHEREOF, BANCORP, LMC and LCB have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first above written.
WESTERN SIERRA BANCORP LAKE COMMUNITY BANK
By: /s/ GARY D. GALL By: /s/ GARY E. NORDINE
------------------------------ ------------------------------
Name: Gary D. Gall Name: Gary E. Nordine
By: /s/ JOSEPH SURRA By: /s/ HOWARD VAN LENTE
------------------------------ ------------------------------
Name: Joseph Surra Name: Howard Van Lente
LMC MERGER COMPANY
By: /s/ GARY D. GALL
------------------------------
Name: Gary D. Gall
By: /s/ Joseph Surra
------------------------------
Name: Joseph Surra
56
<PAGE> 402
INDEX OF EXHIBITS AND SCHEDULES
PREVIOUSLY DELIVERED BY THE PARTIES
Exhibits
--------
Exhibit 2.1 Form of Merger Agreement
Exhibit 5.3(a) Form of Affiliate Agreements
Exhibit 7.1.7A Form of Opinion of LCB Counsel
Exhibit 7.1.7B Form of Opinion of BANCORP and BANK Counsel
Exhibit 7.2.10 Form of Director-Shareholder Agreements
Schedules
---------
Schedule 2.9 LCB Directors
Schedule 3.2 Licenses and Permits
Schedule 3.3 Subsidiaries
Schedule 3.4 Required Consents and Conflicts
Schedule 3.8 Compliance with Laws
Schedule 3.9 Litigation
Schedule 3.11 Insurance Policies
Schedule 3.12 Title Exceptions
Schedule 3.13 Real Property
Schedule 3.14.1-.4 Tax Matters
Schedule 3.15 Performance of Obligations
Schedule 3.16 Loans and Investments
Schedule 3.17 LCB's Brokers and Finders
Schedule 3.18 Material Contracts
Schedule 3.20 Undisclosed Liabilities
Schedule 3.21.1-.8 Employees; Employee Benefit Plans
Schedule 3.23 Potential Environmental Liabilities
Schedule 3.24 Stock Options
Schedule 4.2 Licenses and Permits
Schedule 4.3 Subsidiaries
Schedule 4.4 Regulatory Concerns and Conflicts
Schedule 4.8 Compliance with Laws
Schedule 4.9 Litigation
Schedule 4.11 Insurance
Schedule 4.12 Title Exceptions
Schedule 4.13 Real Property
Schedule 4.14 Performance of Obligations
Schedule 4.15 BANCORP's Brokers and Finders
Schedule 4.17 Undisclosed Liabilities
Schedule 4.18.1-.4 Tax Matters
Schedule 4.19 Potential Environmental Liabilities
Schedule 4.20.1-.2 Employees
Schedule 4.22 Loans and Investments
Schedule 6.2.11 Salary Increases
Schedule 7.3.8 LCB Employee List
57
<PAGE> 403
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
DATED: JULY 2, 1998
BY AND AMONG
WESTERN SIERRA BANCORP
AND
ROSEVILLE 1ST COMMUNITY BANCORP
<PAGE> 404
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the
"Agreement") is entered into as of July 2, 1998 by and among WESTERN SIERRA
BANCORP, a California corporation ("BANCORP"), and Roseville 1st Community
Bancorp, a California corporation ("ROSE").
RECITALS:
WHEREAS, the respective Boards of Directors of ROSE and BANCORP have
determined that it is in the best interests of ROSE and BANCORP and their
respective shareholders for ROSE to be merged with BANCORP, upon the terms and
subject to the conditions set forth in this Agreement and in accordance with the
California Corporations Code and other applicable laws;
WHEREAS, Roseville 1st National Bank ("R1NB") is a wholly-owned
subsidiary of ROSE and Western Sierra National Bank ("BANK") is a wholly-owned
subsidiary of BANCORP;
WHEREAS, each of the Boards of Directors of ROSE and BANCORP have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, ROSE's and BANCORP's Boards of Directors have resolved to
recommend approval of the merger of ROSE and BANCORP to their respective
shareholders; and
WHEREAS, upon the consummation of the Merger of ROSE with BANCORP, R1NB
shall become a wholly-owned subsidiary of BANCORP.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, ROSE and BANCORP
hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, either ROSE or
BANCORP shall have authorized, recommended, publicly proposed or
publicly announced an intention to authorize, recommend or
propose, or shall have entered or announced an intention to enter
into a letter of intent, an agreement-in-principle or a
definitive agreement with any Person (other than ROSE, BANCORP or
any of their respective Subsidiaries) to effect, an Acquisition
Transaction or failed to publicly oppose a Tender Offer or an
Exchange Offer (as defined below). As used herein, the term
"Acquisition Transaction" shall mean (i) a merger, consolidation
or similar transaction involving ROSE, BANCORP or any of their
respective Subsidiaries (other than internal
1
<PAGE> 405
mergers, reorganizations, consolidations or dissolutions
involving only existing Subsidiaries), (ii) the disposition, by
sale, lease, exchange, dissolution or liquidation, or otherwise,
of all or substantially all of the assets of ROSE or BANCORP or
any asset or assets of ROSE or BANCORP the disposition or lease
of which would result in a material change in the business or
business operations of ROSE or BANCORP, a transfer of any shares
of stock or other securities of ROSE or BANCORP by ROSE or
BANCORP, or a material change in the assets, liabilities or
results of operations or the future prospects of ROSE or BANCORP,
including, but not limited to a grant of an option entitling any
Person to acquire any shares of stock of ROSE or BANCORP or any
assets material to the business of ROSE or BANCORP; or (iii) the
issuance, other than pursuant to outstanding stock options, sale
or other disposition by ROSE or BANCORP (including, without
limitation, by way of merger, consolidation, share exchange or
any similar transaction) of shares of ROSE Common Stock or
BANCORP Common Stock or other Equity Securities, or the grant of
any option, warrant or other right to acquire shares of ROSE
Common Stock or BANCORP Common Stock or other Equity Securities,
representing directly, or on an as-exercised, as-exchanged or
as-converted basis (in the case of options, warrants, rights or
exchangeable or convertible Equity Securities), 15% or more of
the voting securities of ROSE or BANCORP;
(b) Prior to termination of this Agreement (i) any Person (other than
a person who is a party to a Director Shareholder Agreement)
shall have increased the number of shares of ROSE Common Stock or
BANCORP Common Stock over which such person has beneficial
ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) by a number that is greater than 1% of
the then outstanding shares of ROSE Common Stock or BANCORP
Common Stock if, after giving effect to such increase, such
Person owns, beneficially, more than 5% of the outstanding shares
of ROSE Common Stock or BANCORP Common Stock, or (ii) any "group"
(as such term is defined under the Exchange Act) shall have been
formed which beneficially owns, or has the right to acquire
beneficial ownership of, more than 5% of the then outstanding
shares of ROSE Common Stock or BANCORP Common Stock; or
(c) The approval by ROSE's or BANCORP's shareholders, or the
consummation by ROSE or BANCORP, of any Acquisition Transaction
as described in Subsection (a) of this Paragraph.
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5 and 6.4.12.
"Affected Party" shall have the meaning given to it in Section 5.7.
"Affiliate" or "affiliate" shall mean, with respect to any other Person,
any Person that, directly or indirectly, controls or is controlled by or is
under common control with such Person.
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3.
"BANK" shall mean Western Sierra National Bank.
2
<PAGE> 406
"BANCORP" shall mean Western Sierra Bancorp.
"BANCORP Book Value Per Share" shall mean the sum of the Total
Shareholders' Equity for BANCORP as of the Determination Date (after expensing
BANCORP's Costs Associated With the Transaction) which shall reflect the
exercise of all stock options of BANCORP which would be exercisable at the
Closing and have an exercise price which is less than book value, whether or not
such options are exercised, divided by the total number of shares of BANCORP
Common Stock outstanding at the Closing Date which for purposes of this
calculation shall include the number of stock options included in the
calculation above, whether or not such options are exercised prior to the
Closing Date. Furthermore, BANCORP Book Value Per Share shall not reflect the
prior consummation of the acquisition of Lake Community Bank by BANCORP. The
calculation of BANCORP Book Value Per Share shall be performed by Perry-Smith &
Co. or such other party agreed to by BANCORP and ROSE.
"BANCORP Collateralizing Real Estate" shall have the meaning given to
such term in Section 4.19.1.
"BANCORP's Costs Associated With the Transaction" shall mean all legal,
accounting, professional and regulatory filing costs incurred or to be incurred
by BANCORP for the transaction up to the Closing Date which have not been
expensed by BANCORP by the Determination Date.
"BANCORP Common Stock" shall mean the common stock, no par value per
share, of BANCORP.
"BANCORP Documents" shall have the meaning given to such term in Section
4.6.2.
"BANCORP Fairness Opinion" shall have the meaning given to such term in
Section 7.2.9.
"BANCORP Filings" shall have the meanings given such term in Section
4.6.1.
"BANCORP Financial Statements" shall mean the financial statements of
BANCORP for the year ended December 31, 1997.
"BANCORP Market Value Per Share" shall mean the last trade of BANCORP
Common Stock prior to the Effective Time.
"BANCORP Material Adverse Event" shall have the meaning given to such
term in Section 8.1.9
"BANCORP Properties" shall have the meaning given to such term in
Section 4.19.1.
"BANCORP Stock Plans" shall have the meaning set forth in Section 4.5.
"BANCORP Superior Proposal" shall have the meaning set forth in Section
6.4.12.
3
<PAGE> 407
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law of
the State of California.
"Classified Assets" shall have the meaning given to such term in Section
6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section 2.1.
"Closing Schedules" shall have the meaning given to such term in Section
5.7.
"Conversion Rate" shall mean the fraction, the numerator of which is the
ROSE Book Value Per Share, and the denominator of which is the BANCORP Book
Value Per Share.
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements or
covenants of such party contained in Articles 5 or 6.
"Determination Date" shall mean the last business day of the calendar
month immediately preceding the calendar month in which the Effective Time
occurs.
"Director Shareholder Agreement" shall have the meaning given such term
in Section 7.2.10.
"Dissenting Shares" shall mean shares of ROSE Common Stock or BANCORP
Common Stock which come within all of the descriptions set forth in
Subparagraphs (1), (2), (3) and (4) of Paragraph (b) of Section 1300 of the
California Corporations Code.
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Paragraph (a) of
Section 1301 of the California Corporations Code.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any Governmental
Entity pertaining to health or to the environment, including, without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as
4
<PAGE> 408
amended ("CERCLA"), the Federal Water Pollution Control Act Amendments, the
Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), the Hazardous
Materials Transportation Act of 1975, as amended, the Safe Drinking Water Act,
as amended, and the Toxic Substances Control Act, as amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean Western Sierra National Bank, or such other
Person as BANCORP shall have appointed to perform the duties set forth in
Section 2.8.
"Exchange Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of an exchange offer or the filing by any
Person of a registration statement under the Securities Act with respect to an
exchange offer to purchase any shares of ROSE Common Stock or BANCORP Common
Stock such that, upon consummation of such offer, such Person would own or
control 15% or more of the then outstanding shares of ROSE Common Stock or
BANCORP Common Stock.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Entity" shall mean any court, federal, state, local or
foreign government or any administrative agency or commission or other
governmental authority or instrumentality whatsoever.
"Hazardous Substances" shall have the meaning given such term in Section
3.23.4.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning given to such
term in Section 3.7.2.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement; the actual knowledge, after reasonable inquiry, of
any director or executive officer of ROSE or BANCORP.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable federal laws of
the United States and laws of any state having jurisdiction over the Merger, to
permit the parties to consummate the Merger.
5
<PAGE> 409
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or prospects of
a Person and its subsidiaries, if any, taken as a whole (unless specifically
indicated otherwise); or (ii) on the ability of a Person that is a party to this
Agreement to perform its obligations under this Agreement or to consummate the
transactions contemplated by this Agreement.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Agreement" shall have the meaning given to such term in Section
2.1.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OCC" shall mean Office of the Comptroller of the Currency.
"OREO" shall have the meaning given such term in Section 3.13.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on ROSE or BANCORP in accordance with Paragraph
(b) of Section 1301 of the California Corporations Code and has not withdrawn
such demand prior to the Effective Time.
"Persons" or "persons" shall mean an individual, corporation,
partnership, limited liability company, joint venture, trust or unincorporated
organization, Governmental Entity or any other legal entity whatsoever.
"Registration Statement" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements, and
other documents required to be filed with respect to federal, state, local and
foreign Taxes, and the term "Return" means any one of the foregoing Returns.
"ROSE" shall mean Roseville 1st Community Bancorp.
"ROSE Book Value Per Share" shall mean the sum of the Total
Shareholders' Equity for ROSE as of the Determination Date (after expensing
ROSE's Costs Associated With the Transaction) which shall reflect the exercise
of all stock options of ROSE which would be exercisable at the Closing and have
an exercise price which is less than book value, whether or not such options are
exercised, divided by the total number of shares of ROSE Common Stock
outstanding at the Closing Date which for purposes of this calculation shall
include the number of stock options included in the calculation above, whether
or not such options are exercised prior to the Closing Date. Furthermore, ROSE
Book Value Per Share shall include the present value (as of the Determination
Date) of ROSE's net operating loss carryforward
6
<PAGE> 410
to the extent that such net operating loss carryforward will be available to
BANCORP after the Effective Time. The calculation of ROSE Book Value Per Share
shall be performed by Perry-Smith & Co. or such other party agreed to by ROSE
and BANCORP.
"ROSE Certificates" shall have the meaning given such term in Section
2.8.1.
"ROSE Collateralizing Real Estate" shall have the meaning given such
term in Section 3.23.1.
"ROSE Common Stock" shall mean the common stock, no par value, of ROSE.
"ROSE's Costs Associated With the Transaction" shall mean all legal,
accounting and professional costs incurred or to be incurred by ROSE for the
transaction up to the Closing Date which have not been expensed by ROSE by the
Determination Date.
"ROSE Documents" shall have the meaning given to such term in Section
3.6.2.
"ROSE Fairness Opinion" shall have the meaning given to such term in
Section 7.3.7.
"ROSE Filings" shall have the meaning given such term in Section 3.6.1.
"ROSE Financial Statements" shall have the meaning given to such term in
Section 3.7.3.
"ROSE Material Adverse Event" shall have the meaning given such term in
Section 8.1.8.
"ROSE Properties" shall have the meaning given such term in Section
3.23.1.
"ROSE Stock Options" shall mean any options to purchase any shares of
ROSE Common Stock or any other Equity Securities of ROSE granted on or prior to
the Effective Time, whether pursuant to the ROSE Stock Option Plan or otherwise.
"ROSE Stock Option Plan" shall mean ROSE's written Stock Option Plan as
described in Schedule 3.5 and 3.24 hereto.
"ROSE Superior Proposal" shall have the meaning set forth in Section
6.2.5.
"R1NB" shall mean Roseville 1st National Bank.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"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.
7
<PAGE> 411
"Surviving Corporation" shall have the meaning given to such term in
Section 2.1.
"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profits,
customs, duties, or other taxes, together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto, and the term "Tax"
means any one of the foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal Governmental
Entity before the Merger may become effective, including, but not limited to,
any filing required to be made with the California Franchise Tax Board to obtain
a Tax Clearance Certificate for the Merger.
"Tender Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of a tender offer or the filing by any person
of a registration statement under the Securities Act with respect to, a tender
offer to purchase any shares of ROSE Common Stock or BANCORP Common Stock such
that, upon consummation of such offer, such person would own or control 15% or
more of the then outstanding voting securities of ROSE or BANCORP.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote in the
election of the directors, trustees or Persons performing similar functions of
the Person in question, including, without limitation, nonvoting securities that
are convertible or exchangeable into voting securities, but shall not include
any stock or other interest so entitling the holders thereof to vote only upon
the happening of a contingency (other than a conversion or exchange thereof into
voting securities), whether or not such contingency has occurred.
ARTICLE 2. THE MERGER
Section 2.1 THE MERGER. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, ROSE
shall be merged with BANCORP, with BANCORP being the Surviving Corporation of
the merger, all pursuant to the Agreement of Merger attached to this Agreement
as Exhibit 2.1 (the "Merger Agreement") and in accordance with the applicable
provisions of the California Corporations Code (the "Merger"). The closing of
the Merger (the "Closing") shall take place at a location and time and Business
Day to be designated by BANCORP and reasonably concurred to by ROSE (the
"Closing Date") which shall not, however, be later than thirty (30) days after
receipt of the Last Regulatory Approval and expiration of all applicable waiting
periods. The Merger shall be effective when the Merger Agreement (together with
any other documents required by law to effectuate the Merger) shall have been
filed with the Secretary of State of the State of California. When used in this
Agreement, the term "Effective Time" shall mean the time of filing of the Merger
Agreement with the Secretary of State, and "Surviving Corporation" shall mean
BANCORP.
8
<PAGE> 412
Section 2.2 EFFECT OF MERGER. By virtue of the Merger and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of ROSE and BANCORP 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 ROSE and
BANCORP, including all debts due to either of them, shall be as effectively the
property of the Surviving Corporation as they were of ROSE and BANCORP
immediately prior to the Effective Time, and the title to any real estate vested
by deed or otherwise in either ROSE or BANCORP 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 ROSE and BANCORP shall be preserved unimpaired and all debts,
liabilities and duties of ROSE and BANCORP shall be debts, liabilities and
duties of the Surviving Corporation and may be enforced against it to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by it, and none of such debts, liabilities or duties shall be expanded,
increased, broadened or enlarged by reason of the Merger.
Section 2.3 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of BANCORP in effect immediately prior to the Effective
Time shall be the Articles of Incorporation and Bylaws of the Surviving
Corporation until amended and the name of the Surviving Corporation shall be
"Western Sierra Bancorp."
Section 2.4 CONVERSION OF BANCORP STOCK. The authorized and issued
capital stock of BANCORP immediately prior to the Effective Time, on and after
the Effective Time, pursuant to the Merger Agreement and without any further
action on the part of BANCORP shall remain as the common stock of the Surviving
Corporation.
Section 2.5 CONVERSION OF ROSE STOCK OPTIONS. At the Effective Time, all
outstanding rights with respect to ROSE Common Stock pursuant to stock options
under the ROSE Stock Option Plan shall be converted into and become equivalent
rights with respect to BANCORP Common Stock at the applicable Conversion Rate
with a corresponding adjustment in the option price, and BANCORP shall assume
each ROSE Stock Option in accordance with the terms of ROSE Stock Option Plans
and the stock option agreement by which it is evidenced.
Section 2.6 CONVERSION OF ROSE COMMON STOCK. Except as provided in
Section 2.7, each share of ROSE Common Stock shall be converted at the Effective
Time into and become the right to receive that number of shares of duly
authorized, validly issued, fully paid and nonassessable shares of BANCORP
Common Stock equal to the Conversion Rate, subject to adjustment, if any, as
provided in any other section of this Agreement; provided, however, that the
shares held by any shareholder who properly exercises dissenters' rights
provided under the California Corporations Code, shall not be so converted and
in lieu of such conversion shall be treated in accordance with the provisions of
the California Corporations Code.
Section 2.7 FRACTIONAL SHARES. No fractional shares of BANCORP Common
Stock shall be issued in the Merger. In lieu thereof, each holder of ROSE Common
Stock who would otherwise be entitled to receive a fractional share shall
receive an amount in cash equal to the product (rounded to the nearest
hundredth) obtained by multiplying (a) BANCORP Market Value Per Share by (b) the
9
<PAGE> 413
fraction of a share of BANCORP Common Stock to which such holder would otherwise
be entitled. No such holder shall be entitled to dividends or other rights in
respect of any such fraction.
Section 2.8 EXCHANGE PROCEDURES. On or as soon as practicable after the
Effective Time, (i) BANCORP will deliver to the Exchange Agent: (i) certificates
representing the number of shares of BANCORP Common Stock issuable in the
Merger; and (ii) cash for the payout of fractional shares.
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of ROSE Common Stock ("ROSE Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall, as promptly as practicable thereafter, deliver to each
holder of such surrendered ROSE Certificates, certificates representing the
appropriate number of shares of BANCORP Common Stock ("New Certificates") and/or
checks for payment of cash in lieu of fractional shares, in respect of the ROSE
Certificates. In no event shall the holders of ROSE Certificates be entitled to
receive interest on cash amounts due them hereunder.
2.8.2 Until a ROSE Certificate has been surrendered and exchanged
as herein provided, each share of ROSE Common Stock represented by such ROSE
Certificate shall represent, on and after the Effective Time, the right to
receive the Conversion Rate into which each such share of ROSE Common Stock
shown thereon has been converted as provided by Section 2.6, including the right
to vote such shares of BANCORP Common Stock. No dividends or other distributions
that are declared on any shares of BANCORP Common Stock into which any shares of
ROSE Common Stock have been converted at the Effective Time shall be paid to the
holder of such ROSE shares until the ROSE Certificates evidencing such ROSE
shares have been surrendered in exchange for New Certificates in the manner
herein provided, but upon such surrender, such dividends or other distributions,
from and after the Effective Time, will be paid to such holders. In no event
shall the holders entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
2.8.3 No transfer taxes shall be payable by any shareholder in
respect of the issuance of New Certificates, except that if any New Certificate
is to be issued in a name other than that in which the ROSE Certificates
surrendered shall have been registered, it shall be a condition of such issuance
that the holder requesting such issuance shall properly endorse the certificate
or certificates and shall pay to BANCORP or the Exchange Agent any transfer
taxes payable by reason thereof, or of any prior transfer of such surrendered
certificate, or establish to the satisfaction of BANCORP or the Exchange Agent
that such taxes have been paid or are not payable.
2.8.4 Any BANCORP Common Stock or cash delivered to the Exchange
Agent and not distributed pursuant to this Section 2.8 at the end of nine months
from the Effective Time, shall be returned to BANCORP, in which event the
Persons entitled thereto shall look only to BANCORP for payment thereof.
2.8.5 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 and 2.8.3 hereof, if any holder of ROSE Common Stock shall be
unable to surrender such holder's ROSE Certificates because such ROSE
Certificates have been lost or destroyed, such holder may deliver in lieu
thereof an affidavit and indemnity undertaking in form and substance and, if
required, with surety satisfactory to the Exchange Agent and BANCORP.
10
<PAGE> 414
2.8.6 The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of BANCORP Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such shares of BANCORP Common Stock for the account of the Persons entitled
thereto.
2.8.7 After the Effective Time, there shall be no further
registration of transfers of the shares of ROSE Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, ROSE Certificates representing such shares of ROSE Common Stock are
presented to BANCORP, they shall be canceled and exchanged for BANCORP Common
Stock as provided in this Article 2.
Section 2.9 BOARD OF DIRECTORS OF BANCORP, R1NB AND BANK FOLLOWING THE
EFFECTIVE TIME. At the Effective Time four directors of ROSE named on Schedule
2.9 shall be appointed as directors of BANCORP to serve until the next annual
meeting of shareholders of BANCORP and until such successors are elected and
qualified. At the Effective Time, the then existing Board of Directors of R1NB
shall total ten directors with eight existing directors of R1NB and two persons
to be selected by BANCORP. At the Effective Time, the then existing Board of
Directors of BANK shall be increased by two persons to be selected by ROSE. The
Chairman of the Board of BANCORP shall be an attendee of the Board of Directors
of R1NB and all committees of the Board of Directors of R1NB.
Section 2.10 TRUSTEES OF BANCORP'S KSOP FOLLOWING THE EFFECTIVE TIME.
Following the Effective Time, the trustees of BANCORP's KSOP shall be the those
trustees named on Schedule 2.10 as well as the President/Chief Executive Officer
of Lake Community Bank so long as BANCORP consummates the acquisition of Lake
Community Bank.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ROSE
ROSE represents and warrants to BANCORP as follows (it being understood
that all references to ROSE relative to the period on or before March 1, 1998
shall be deemed to refer to R1NB where appropriate in the context):
Section 3.1 ORGANIZATION; CORPORATE POWER; ETC. ROSE is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. ROSE is a
bank holding company registered under the BHCA. Each of ROSE's Subsidiaries has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business substantially as it is being conducted
on the date of this Agreement, except where the failure to have such power or
authority would not have a Material Adverse Effect on ROSE taken as a whole or
the ability of ROSE to consummate the transactions contemplated by this
Agreement. ROSE has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining all requisite Regulatory Approvals,
ROSE will have the requisite corporate power and authority to perform its
respective obligations hereunder with respect to the consummation of the
transactions contemplated hereby. ROSE is the sole shareholder of R1NB. R1NB is
a national banking
11
<PAGE> 415
association authorized by the OCC to conduct a general banking business in
California. R1NB is a member of the Federal Reserve System. R1NB's deposits are
insured by the FDIC in the manner and to the full extent provided by law.
Neither the scope of business or ROSE, or any Subsidiary of ROSE, including
R1NB, nor the location of any of their respective properties, requires that ROSE
or any of its respective Subsidiaries be licensed or qualified to conduct
business in any jurisdiction other than those jurisdictions in which they are
licensed or qualified to do business as a foreign corporation, where the failure
to be so licensed or qualified would, individually or in the aggregate, have a
Material Adverse Effect on ROSE taken as a whole.
Section 3.2 LICENSES AND PERMITS. Except as disclosed on Schedule 3.2,
ROSE and its Subsidiaries have all material licenses, certificates, franchises,
rights and permits that are necessary for the conduct of their respective
businesses, and such licenses are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a Material Adverse Effect on ROSE or on the ability of ROSE to
consummate the transactions contemplated by this Agreement. The properties,
assets, operations and businesses of ROSE, and those of its Subsidiaries,
including R1NB, are and have been maintained and conducted, in all material
respects, in compliance with all applicable licenses, certificates, franchises,
rights and permits.
Section 3.3 SUBSIDIARIES. Other than as set forth on Schedule 3.3, there
is no corporation, partnership, joint venture or other entity in which ROSE
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 3.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
3.4.1 The execution and delivery of this Agreement and the Merger
Agreement by ROSE, and the consummation of the transactions contemplated hereby
and thereby, have been duly authorized by all necessary corporate action on the
part of ROSE, subject only to the approval of this Agreement, the Merger
Agreement and the Merger by ROSE's shareholders. This Agreement has been duly
executed and delivered by ROSE and constitutes a legal, valid and binding
obligation of ROSE, 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 and by general
equitable principles. The Merger Agreement, upon the receipt of all Requisite
Regulatory Approvals and the due execution and filing of such Merger Agreement
in accordance with the applicable provisions of the California Corporations
Code, will constitute a legal, valid and binding obligation of ROSE, 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 and by general equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and 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 or Bylaws of ROSE, or except for
the necessity of obtaining Requisite Regulatory Approvals, and the approval of
the shareholders of ROSE, any material mortgage, indenture, lease, agreement or
other material instrument or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to ROSE or any of its assets or properties, other than any
12
<PAGE> 416
such conflict, violation, default or loss which (i) will not have a Material
Adverse Effect on ROSE, or on BANCORP following consummation of the Merger; or
(ii) will be cured or waived prior to the Effective Time. 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 or the Merger Agreement by ROSE or the performance by
ROSE of its obligations hereunder and thereunder, except for (a) filings
required in order to obtain the Requisite Regulatory Approvals; (b) the filing
and approval of the Merger Agreement with the Secretary of the State of
California; and (c) Tax Filings.
Section 3.5 CAPITAL STRUCTURE. The authorized capital stock of ROSE
consists of 5,000,000 shares of ROSE Common Stock, no par value per share. On
the date of this Agreement, 319,972 shares of ROSE Common Stock were outstanding
and 75,000 shares of ROSE Common Stock were reserved for issuance pursuant to
outstanding ROSE Stock Options under the ROSE Stock Option Plan. All outstanding
shares of ROSE Common Stock are validly issued, fully paid and nonassessable and
do not possess any preemptive rights and were not issued in violation of any
preemptive rights or any similar rights of any Person. Except for the ROSE Stock
Options described on Schedule 3.5 to this Agreement, ROSE does not have
outstanding any options, warrants, calls, rights, commitments, securities or
agreements of any character to which ROSE is a party or by which it is bound
obligating ROSE to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of ROSE or obligating ROSE to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement.
Section 3.6 ROSE FILINGS.
3.6.1 Since January 1, 1995, ROSE and its Subsidiaries have filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that were required to be filed with (a) the
Federal Reserve Board or any Federal Reserve Bank; (b) the OCC; (c) the SEC; and
(d) any other applicable federal, state or local governmental or regulatory
authority. All such reports, registrations and filings, and all reports sent to
ROSE's shareholders during the three-year period ended December 31, 1997
(whether or not filed with any Regulatory Authority), are collectively referred
to as the "ROSE Filings. Except to the extent prohibited by law, copies of the
ROSE Filings have been made available to BANCORP. As of their respective filing
or mailing dates, each of the past ROSE Filings (a) was true and complete in all
material respects (or was amended so as to be so promptly following discovery of
any discrepancy); and (b) complied in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the governmental or
regulatory authority with which it was filed (or was amended so as to be so
promptly following discovery of any such noncompliance) and none contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The ROSE Financial
Statements, together with the financial statements contained in the ROSE
Filings, have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present (subject,
in the case of the unaudited statements, to recurring adjustments normal in
nature and amount) the financial position of ROSE as of the dates thereof and
the results of its operations, cash flows and changes in shareholders' equity
for the periods then ended.
13
<PAGE> 417
3.6.2 ROSE, or R1NB, as the case may be, has filed each report,
schedule and amendments to each of the foregoing since January 1, 1995 that ROSE
or R1NB was required to file with the Federal Reserve Bank, the SEC or the OCC
(the "ROSE Documents"), all of which have been made available to BANCORP. As of
their respective dates, the ROSE Documents complied in all material respects
with the applicable requirements of the BHCA, the Exchange Act and the National
Bank Act, as the case may be, and the rules and regulations of the Federal
Reserve Bank, the SEC and the OCC thereunder applicable to such ROSE Documents,
and none of the ROSE Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of ROSE included in the ROSE
Filings comply in all material respects with applicable regulatory accounting
requirements and with the published rules and regulations of the Federal Reserve
Bank, the SEC or the OCC (as applicable) with respect thereto, and have been
prepared in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by regulations of the Federal Reserve Bank or the OCC)
and fairly present (subject, in the case of the unaudited statements, to
recurring adjustments normal in nature and amount) the financial position of
ROSE as of the dates thereof and the consolidated results of its operations and
cash flows or changes in financial position for the periods then ended.
Section 3.7 ACCURACY OF INFORMATION SUPPLIED.
3.7.1 No representation or warranty of ROSE contained herein or
any statement, schedule, exhibit or certificate given or to be given by or on
behalf of ROSE or any of its Subsidiaries, including R1NB, to BANCORP in
connection herewith and none of the information supplied or to be supplied by
ROSE or its Subsidiaries, including R1NB, to BANCORP hereunder to the best of
ROSE's Knowledge contains or will contain any untrue statement of material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
3.7.2 None of the information supplied or to be supplied by ROSE
or relating to ROSE and approved by ROSE which is included or incorporated by
reference in (i) the Registration Statement on Form S-4 to be filed with the SEC
by BANCORP in connection with the issuance of shares of BANCORP Common Stock in
the Merger (including the Joint Proxy Statement of BANCORP and ROSE and the
Prospectus of BANCORP ("Joint Proxy Statement/Prospectus") constituting a part
thereof, the "Registration Statement") will, at the time the Registration
Statement becomes effective under the Securities Act, 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; (ii) the Joint Proxy
Statement/Prospectus and any amendment or supplement thereto will, at all times
from the date of mailing to shareholders of ROSE through the date of the meeting
of shareholders of ROSE to be held in connection with the Merger, 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; and (iii) the
applications and forms to be filed with securities or "blue sky" authorities,
self regulatory authorities, or any Governmental Entity in connection with the
Merger, the issuance of any shares of BANCORP Common Stock in connection with
the Merger, or any Requisite Regulatory Approvals will, at the time filed or at
the
14
<PAGE> 418
time they become effective, 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, in light of the circumstances under which they were
made, not misleading. The Joint Proxy Statement/Prospectus (except for such
portions thereof that relate only to BANCORP and its Subsidiaries) will comply
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder.
3.7.3 ROSE has delivered or will deliver to BANCORP copies of:
(a) the audited balance sheets of R1NB as of December 31, 1997, 1996 and 1995
and the related statements of income, changes in shareholders' equity and cash
flows for the years then ended and the related notes to such financial
statements, all as audited by Perry-Smith & Company, independent public
accountants (the "ROSE Financial Statements"), and ROSE will hereafter until the
Closing Date deliver to BANCORP copies of additional financial statements of
ROSE and its Subsidiaries as provided in Sections 5.1.1(iii) and 6.1.11(iii).
The ROSE Financial Statements have been prepared (and all of said additional
financial statements will be prepared) in accordance with GAAP, or applicable
regulatory accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) consistently
followed throughout the periods covered by such statements, and present (and,
when prepared, will present) fairly the financial position of ROSE and its
Subsidiaries, including R1NB, as of the respective dates indicated and the
results of operations, cash flows and changes in shareholders' equity at the
respective dates and for the respective periods covered by such financial
statements (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount). In addition, ROSE has delivered or
made available to BANCORP copies of all management or other letters delivered to
ROSE or R1NB by its independent accountants in connection with any of the ROSE
Financial Statements or by such accountants or any consultant regarding the
internal controls or internal compliance procedures and systems of ROSE or R1NB
issued at any time since January 1, 1995, and will make available for inspection
by BANCORP or its representatives, at such times and places as BANCORP may
reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 3.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 3.8, to the best of ROSE's Knowledge the respective businesses of ROSE
and its Subsidiaries are not being conducted in violation of any law, ordinance
or regulation, except for violations which individually or in the aggregate
would not have a Material Adverse Effect on ROSE, or BANCORP at or following the
Effective Time. Except as set forth in Schedule 3.8, to the Knowledge of ROSE no
investigation or review by any Governmental Entity with respect to ROSE or R1NB
is pending or threatened, nor has any Governmental Entity indicated to ROSE or
R1NB an intention to conduct the same.
Section 3.9 LITIGATION. Except as set forth in Schedule 3.9, to the
Knowledge of ROSE there is no suit, action or proceeding or investigation
pending or threatened against or affecting ROSE or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on ROSE or
its Subsidiaries; nor is there any judgment, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against ROSE or any of its
Subsidiaries that has, or which, insofar as reasonably can be foreseen, in the
future would have, any such Material Adverse Effect. Schedule 3.9 contains a
true, correct and complete list, including identification of the applicable
insurance policy covering such litigation, if any, subject to reservation of
rights, if any, the applicable deductible and the amount of any reserve
therefor, of all pending litigation in which ROSE
15
<PAGE> 419
or any of its Subsidiaries is a named party of which ROSE has Knowledge, and
except as disclosed on Schedule 3.9, all of the litigation shown on such
Schedule is adequately covered by insurance in force, except for applicable
deductibles, or has been adequately reserved for in accordance with ROSE's prior
business practices.
Section 3.10 AGREEMENTS WITH BANKING AUTHORITIES. Neither ROSE nor any
Subsidiary of ROSE is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 3.11 INSURANCE. ROSE and its Subsidiaries have in full force and
effect policies of insurance with respect to their assets and businesses against
such casualties and contingencies and in such amounts, types and forms as are
customarily appropriate for their businesses, operations, properties and assets.
Schedule 3.11 contains a list of all policies of insurance and bonds carried and
owned by ROSE or any Subsidiary. None of ROSE or any of its Subsidiaries is in
default under any such policy of insurance or bond such that it can be canceled
and all material current claims outstanding thereunder have been filed in timely
fashion. ROSE and its Subsidiaries have filed claims with, or given notice of
claim to, their insurers or bonding companies in timely fashion with respect to
all material matters and occurrences for which they believe they have coverage.
Section 3.12 TITLE TO ASSETS OTHER THAN REAL PROPERTY. Each of ROSE and
its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 3.13), it owns or leases, free and clear of all
mortgages, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for: (a) rights
of lessors, lessees or sublessees in such matters as are reflected in a written
lease; (b) encumbrances as set forth in the ROSE Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) encumbrances, if any, that are not substantial
in character, amount or extent and do not detract materially from the value, or
interfere with present use, or the ability of ROSE or its Subsidiary to sell or
otherwise dispose of the property subject thereto or affected thereby; and (e)
other matters as described in Schedule 3.12. Materially all such properties and
assets are, and require only routine maintenance to keep them, in good working
condition, normal wear and tear excepted.
Section 3.13 REAL PROPERTY. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by ROSE or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Each of ROSE and its
respective Subsidiaries has good and marketable title to the real properties
that it owns, as described in such Schedule, free and clear of all mortgages,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (a) rights of lessors,
lessees or sublessees in such matters as are reflected in a written lease; (b)
current Taxes (including assessments collected with Taxes) not yet due and
payable; (c) encumbrances, if any, that are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with
present use, or the ability of ROSE to dispose, of ROSE's interest in the
property subject thereto or affected thereby; and (d) other matters as described
in Schedule 3.13. ROSE and its Subsidiaries have valid leasehold interests in
the leaseholds they respectively hold, free and clear of all mortgages, liens,
security interest, charges, claims, assessments and encumbrances, except for (a)
claims of lessors, co-lessees or sublessees in such matters as are reflected in
a written lease; (b) title exceptions affecting the fee estate of the lessor
under such leases; and (c) other matters as described in Schedule 3.13. To the
best of ROSE's Knowledge, the activities
16
<PAGE> 420
of ROSE and its Subsidiaries with respect to all real property owned or leased
by them for use in connection with their operations are in all material respects
permitted and authorized by applicable zoning laws, ordinances and regulations
and all laws and regulations of any Governmental Entity. Except as set forth in
Schedule 3.13, ROSE and its Subsidiaries enjoy quiet possession under all
material leases to which they are the lessees and all of such leases are valid
and in full force and effect, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the rights of creditors generally and by general equitable principles.
Materially all buildings and improvements on real properties owned or leased by
ROSE or any of its Subsidiaries are in good condition and repair, and do not
require more than normal and routine maintenance, to keep them in such
condition, normal wear and tear excepted.
Section 3.14 TAXES.
3.14.1 FILING OF RETURNS. Except as set forth on Schedule 3.14.1,
ROSE and its Subsidiaries have duly prepared and filed or caused to be duly
prepared and filed all federal, state, and local Returns (for Tax or
informational purposes) which were required to be filed by or in respect of ROSE
and its Subsidiaries, or any of their properties, income and/or operations on or
prior to the Closing Date. As of the time they were filed, the foregoing Returns
accurately reflected the material facts regarding the income, business, asset,
operations, activities, status, and any other information required to be shown
thereon. Except as set forth on Schedule 3.14.1, no extension of time within
which ROSE or any of its Subsidiaries may file any Return is currently in force.
3.14.2 PAYMENT OF TAXES. Except as disclosed on Schedule 3.14.2
with respect to all amounts in respect of Taxes imposed on ROSE or any
Subsidiary or for which ROSE or any Subsidiary is or could be liable, whether to
taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of ROSE or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
3.14.3 AUDIT HISTORY. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of ROSE
or any Subsidiary currently in progress of which ROSE has Knowledge. Except as
disclosed on Schedule 3.14.3, ROSE and its Subsidiaries have not received any
written notices within the three years preceding the Closing Date of any pending
or threatened audit, by the Internal Revenue Service or any state, local or
foreign agency, for any Returns or Tax liability of ROSE or any Subsidiary for
any period. ROSE and its Subsidiaries currently have no unpaid deficiencies
assessed by the Internal Revenue Service or any state, local or foreign taxing
authority arising out of any examination of any of the Returns of ROSE or any
Subsidiaries filed for fiscal years ended on or after December 31, 1993 through
the Closing Date, nor to the Knowledge of ROSE is there reason to believe that
any material deficiency will be assessed.
3.14.4 STATUTE OF LIMITATIONS. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of ROSE or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of ROSE or any
Subsidiaries are currently pending.
17
<PAGE> 421
3.14.5 WITHHOLDING OBLIGATIONS. Except as set forth on Schedule
3.14.5, ROSE and its Subsidiaries have withheld from each payment made to any of
their respective officers, directors and employees, the amount of all applicable
Taxes, including, but not limited to, income tax, social security contributions,
unemployment contributions, backup withholding and other deductions required to
be withheld therefrom by any Tax law and have paid the same to the proper taxing
authorities within the time required under any applicable Tax law.
3.14.6 TAX LIENS. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by ROSE or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
3.14.7 TAX RESERVES. ROSE and its Subsidiaries have made full and
adequate provision and reserve for all federal, state, local or foreign Taxes
for the current period for which Tax and information returns are not yet
required to be filed. The ROSE Financial Statements contain fair and sufficient
accruals for the payment of all Taxes for the periods covered by the ROSE
Financial Statements and all periods prior thereto.
3.14.8 IRC SECTION 382 APPLICABILITY. None of ROSE or any of its
Subsidiaries, including any party joining in any consolidated return to which
ROSE is a member, underwent an "ownership change" as defined in IRC Section
382(g) within the "testing period" (as defined in IRC Section 382) ending
immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
3.14.9 DISCLOSURE INFORMATION. Within 45 days of the date of this
Agreement, ROSE will deliver to BANCORP a schedule setting forth the following
information with respect to ROSE and as of the most recent practicable date (as
well as on an estimated pro forma basis as of the Closing giving effect to the
consummation of the transactions contemplated hereby): (a) ROSE's basis in its
assets; (b) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to ROSE; and (c) the amount of any deferred gain or loss
allocable to ROSE and arising out of any deferred intercompany transactions.
Section 3.15 PERFORMANCE OF OBLIGATIONS. ROSE and its Subsidiaries have
performed all material obligations required to be performed by them to date and
none of ROSE or any of its Subsidiaries is in material default under or in
breach of any term or provision of any covenant, contract, lease, indenture or
any other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on ROSE or its Subsidiaries. To ROSE's Knowledge, and except as disclosed
on Schedule 3.15 or in the portion of Schedule 3.16 that identifies 90-day past
due or classified or nonaccrual loans, no party with whom ROSE or any of its
Subsidiaries has an agreement that is of material importance to the businesses
of ROSE or its Subsidiaries is in default thereunder.
Section 3.16 LOANS AND INVESTMENTS. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of ROSE or its Subsidiaries, including R1NB, are,
18
<PAGE> 422
and constitute, in all material respects, the legal, valid and binding
obligations of the parties thereto and are enforceable against such parties in
accordance with their terms, except as the enforceability thereof may be limited
by applicable law and otherwise by bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors generally and by general
equitable principles. Except as described on Schedule 3.16, as of April 30,
1998, no loans or investments held by ROSE or any Subsidiary, including R1NB
are: (i) more than ninety days past due with respect to any scheduled payment of
principal or interest, other than loans on a nonaccrual status; (ii) classified
as "loss," "doubtful," "substandard" or "specially mentioned" by R1NB or any
banking regulators; or (iii) on a nonaccrual status in accordance with R1NB's
loan review procedures. Except as set forth on Schedule 3.16, none of such
assets (other than loans) are subject to any restrictions, contractual,
statutory or other, that would materially impair the ability of the entity
holding such investment to dispose freely of any such assets at any time, except
restrictions on the public distribution or transfer of any such investments
under the Securities Act and the regulations thereunder or state securities laws
and pledges or security interests given in connection with government deposits.
All loans, leases or other extensions of credit outstanding, or commitments to
make any loans, leases or other extensions of credit made by ROSE or R1NB to any
Affiliates of ROSE or R1NB are disclosed on Schedule 3.16. For outstanding loans
or extensions of credit where the original principal amounts are in excess of
$50,000 and which by their terms are either secured by collateral or supported
by a guaranty or similar obligation, the security interests have been duly
perfected in all material respects and have the priority they purport to have in
all material respects, other than by operation of law, and, in the case of each
guaranty or similar obligation, each has been duly executed and delivered to
ROSE or any Subsidiary, including R1NB, and to ROSE's Knowledge, is still in
full force and effect.
Section 3.17 BROKERS AND FINDERS. Except as set forth on Schedule 3.17,
none of ROSE or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. ROSE agrees to indemnify and hold
harmless BANCORP and its affiliates, and to defend with counsel selected by
BANCORP and reasonably satisfactory to ROSE, from and against any liability,
cost or expense, including attorneys' fees, incurred in connection with a breach
of this Section 3.17.
Section 3.18 MATERIAL CONTRACTS. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which ROSE or any Subsidiary
is a party as of the date of this Agreement, except for loans and other
extensions of credit made by ROSE or R1NB in the ordinary course of its business
and those items specifically disclosed in the ROSE Financial Statements.
Section 3.19 ABSENCE OF MATERIAL ADVERSE EFFECT. Since January 1, 1998,
the respective businesses of ROSE and its Subsidiaries, including R1NB, have
been conducted only in the ordinary course, in the same manner as theretofore
conducted, and no event or circumstance has occurred or is expected to occur
which to ROSE's Knowledge has had or which, with the passage of time or
otherwise, could reasonably be expected to have a Material Adverse Effect on
ROSE.
19
<PAGE> 423
Section 3.20 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
3.20, none of ROSE or any of its Subsidiaries to ROSE's Knowledge has any
liabilities or obligations, either accrued, contingent or otherwise, that are
material to ROSE and its Subsidiaries and that have not been: (a) reflected or
disclosed in the ROSE Financial Statements; or (b) incurred subsequent to
December 31, 1997 in the ordinary course of business. ROSE has no Knowledge of
any basis for the assertion against ROSE, or any of its Subsidiaries, of any
liability, obligation or claim (including without limitation that of any
Governmental Entity) that will have or cause, or could reasonably be expected to
have or cause, a Material Adverse Effect on ROSE that is not fully and fairly
reflected and disclosed in the ROSE Financial Statements or on Schedule 3.20.
Section 3.21 EMPLOYEES; EMPLOYEE BENEFIT PLANS; ERISA.
3.21.1 All material obligations of ROSE or its Subsidiaries for
payment to trusts or other funds or to any Governmental Entity or to any
individual, director, officer, employee or agent (or his or her heirs, legatees
or legal representatives) with respect to unemployment compensation benefits,
profit-sharing, pension or retirement benefits or social security benefits,
whether arising by operation of law, by contract or by past custom, have been
properly accrued for the periods covered thereby on the ROSE Financial
Statements and paid when due. All material obligations of ROSE or its
Subsidiaries, whether arising by operation of law, by contract or by past custom
for vacation or holiday pay, bonuses and other forms of compensation which are
payable to their respective directors, officers, employees or agents have been
properly accrued on the ROSE Financial Statements for the periods covered
thereby and paid when due. Except as set forth on Schedule 3.21.1, there are no
unfair labor practice complaints, strikes, slowdowns, stoppages or other
controversies pending or, to the Knowledge of ROSE, attempts to unionize or
controversies threatened between ROSE or any Subsidiary or Affiliate and or
relating to, any of their employees that are likely to have a Material Adverse
Effect on ROSE and its Subsidiaries, taken as a whole. None of ROSE or any
Subsidiary is a party to any collective bargaining agreement with respect to any
of their employees and, except as set forth on Schedule 3.21.1, none of ROSE or
any Subsidiary is a party to a written employment contract with any of their
respective employees and there are no understandings with respect to the
employment of any officer or employee of ROSE or any Subsidiary which are not
terminable by ROSE or such Subsidiary without liability on not more than thirty
(30) days' notice. Except as disclosed in the ROSE Financial Statements for the
periods covered thereby, all material sums due for employee compensation have
been paid and all employer contributions for employee benefits, including
deferred compensation obligations, and all material benefit obligations under
any Employee Plan (as defined in Section 3.21.3 hereof) or any Benefit
Arrangement (as defined in Section 3.21.4 hereof) have been duly and adequately
paid or provided for in accordance with plan documents. Except as set forth on
Schedule 3.21.1, no director, officer or employee of ROSE or any Subsidiary is
entitled to receive any payment of any amount under any existing agreement,
severance plan or other benefit plan as a result of the consummation of any
transaction contemplated by this Agreement or the Merger Agreement. To ROSE's
Knowledge, ROSE and its Subsidiaries have materially complied with all
applicable federal and state statutes and regulations which govern workers'
compensation, equal employment opportunity and equal pay, including, but not
limited to, all civil rights laws, Presidential Executive Order 1124, the Fair
Labor Standards Act of 1938, as amended, and the Americans with Disabilities
Act.
3.21.2 ROSE has delivered as Schedule 3.21.2 a complete list of:
(a) All current employees of ROSE or any of its
Subsidiaries together with each employee's tenure with ROSE or such Subsidiary,
title or job classification, and the current annual rate of compensation
anticipated to be paid to each such employee; and
20
<PAGE> 424
(b) All Employee Plans and Benefit Arrangements, including
all plans or practices providing for current compensation or accruals for active
Employees, including, but not limited to, all employee benefit plans, all
pension, profit-sharing, retirement, bonus, stock option, incentive, deferred
compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
3.21.3 Except as disclosed on Schedule 3.21.3, none of ROSE or
any of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of ROSE or any of its Subsidiaries (any such plan being herein referred to as an
"Employee Plan"). True and complete copies of each such Employee Plan, including
amendments thereto, have been previously delivered or made available to BANCORP,
together with (i) all agreements regarding plan assets with respect to such
Employee Plans, (ii) a true and complete copy of the annual reports for the most
recent three years (Form 5500 Series including, if applicable, Schedules A and B
thereto) prepared in connection with any such Employee Plan, (iii) a true and
complete copy of the actuarial valuation reports for the most recent three
years, if any, prepared in connection with any such Employee Plan covering any
active employee of ROSE or its Subsidiaries, (iv) a copy of the most recent
summary plan description of each such Employee Plan, together with any
modifications thereto, and (v) a copy of the most recent favorable determination
letter (if applicable) from the Internal Revenue Service for each Employee Plan.
None of the Employee Plans is a "multiemployer plan" as defined in Section 3(37)
of ERISA or a "multiple employer plan" as covered in Section 412(c) of the IRC,
and none of ROSE or any of its Subsidiaries has been obligated to make a
contribution to any such multiemployer or multiple employer plan within the past
five years. None of the Employee Plans of ROSE or any of its Subsidiaries is, or
for the last five years has been, subject to Title IV of ERISA. Each Employee
Plan which is intended to be qualified under Section 401(a) of the IRC is so
qualified and each trust maintained pursuant thereto is exempt from income tax
under Section 501(a) of the IRC, and none of ROSE or any of its Subsidiaries is
aware of any fact which has occurred which would cause the loss of such
qualification or exemption.
3.21.4 Except as disclosed in Schedule 3.21.4, none of ROSE or
any of its Subsidiaries maintains (other than base salary and base wages) any
form of current or deferred compensation, bonus, stock option, stock
appreciation right, severance pay, salary continuation, retirement or incentive
plan or arrangement for the benefit of any director, officer or employee,
whether active or retired, of ROSE or any of its Subsidiaries or for any class
or classes of such directors, officers or employees. Except as disclosed in
Schedule 3.21.4, none of ROSE or any of its Subsidiaries maintains any group or
individual health insurance, welfare or similar plan or arrangement for the
benefit of any director, officer or employee of ROSE or any of its Subsidiaries,
whether active or retired, or for any class or classes of such directors,
officers or employees. Any such plan or arrangement described in this Section
3.21.4, copies of which have been delivered or made available to BANCORP, shall
be herein referred to as a "Benefit Arrangement."
3.21.5 All Employee Plans and Benefit Arrangements are operated
in material compliance with the requirements prescribed by any and all statutes,
governmental or court orders, or governmental rules or regulations currently in
effect, including but not limited to ERISA and the IRC, applicable to such plans
or arrangements, and plan documents relating to any such plans or arrangements,
materially comply with or will be amended to materially comply with applicable
legal requirements. None of ROSE or any of its Subsidiaries, nor any Employee
Plan, nor any trusts
21
<PAGE> 425
created thereunder, nor any trustee, administrator nor any other fiduciary
thereof, has engaged in a "prohibited transaction," as defined in Section 406 of
ERISA and Section 4975 of the IRC, that could subject ROSE or any of its
Subsidiaries or BANCORP to liability under Section 409 or 502(i) of ERISA or
Section 4975 of the IRC or that would adversely affect the qualified status of
such plans; each "plan official" within the meaning of Section 412 of ERISA of
each Employee Plan is bonded to the extent required by such Section 412; with
respect to each Employee Plan, to ROSE's Knowledge, no employee of ROSE or any
Subsidiary, nor any fiduciary of any Employee Plan, has engaged in any breach of
fiduciary duty as defined in Part 4 of Subtitle B of Title I of ERISA which
could subject ROSE or any of its Subsidiaries to liability if ROSE or any such
Subsidiary is obligated to indemnify such Person against liability. Except as
disclosed in Schedule 3.21.5, ROSE and its Subsidiaries have not failed to make
any material contribution or pay any amount due and owing as required by law or
the terms of any Employee Plan or Benefit Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee Plan
or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, to ROSE's Knowledge there is no pending or threatened legal
action, proceeding or investigation against any Employee Plan which could result
in material liability to such Employee Plan, other than routine claims for
benefits, and there is no basis for any such legal action, proceeding or
investigation.
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(g)(2)) materially
complies and has materially complied with the requirements of Section 601
through 608 of ERISA or Section 4980B of the IRC governing continuation coverage
requirements for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of ROSE or
any of its Subsidiaries maintains any Employee Plan or Benefit Arrangement
pursuant to which any benefit or other payment will be required to be made by
ROSE or any of its Subsidiaries or Affiliates or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of ROSE or any
Subsidiary or Affiliate thereof, in either case as a result of the consummation
of the transactions contemplated by this Agreement or the Merger Agreement.
Section 3.22 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by ROSE or any Subsidiary thereof is presently in effect or
outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 3.23 HAZARDOUS MATERIALS. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
ROSE and its Subsidiaries and in compliance with applicable Environmental Laws,
or ordinary rubbish, debris and nonhazardous solid waste stored in garbage cans
or bins for regular disposal off-site, or petroleum contained in and de minimus
quantities discharged from motor vehicles in their ordinary operation on any of
the ROSE Properties (as defined below), ROSE and its Subsidiaries have not
engaged in the generation, use, manufacture, treatment,
22
<PAGE> 426
transportation, storage (in tanks or otherwise), or the disposal, of Hazardous
Substances other than as permitted by and only in compliance with applicable
law. To ROSE's Knowledge, no material amount of Hazardous Substances have been
released, emitted or disposed of, or otherwise deposited, on, in or from any
real property which is now or has been previously owned since January 1, 1994,
or which is currently or during the past three years was leased, by ROSE or any
of its Subsidiaries, including OREO (collectively, the "ROSE Properties"), or to
ROSE's Knowledge, on or in any real property in which ROSE or any of its
Subsidiaries now holds any security interest, mortgage or other lien or interest
with an underlying obligation in excess of $25,000 ("ROSE Collateralizing Real
Estate"), except for (i) matters disclosed on Schedule 3.23; (ii) ordinary and
necessary quantities of cleaning, pest control and office supplies used and
stored in compliance with applicable Environmental Laws, or ordinary rubbish,
debris and nonhazardous solid waste stored in garbage cans or bins for regular
disposal off-site, or petroleum contained in, and de minimus quantities
discharged from, motor vehicles in their ordinary operation on such ROSE
Properties; and (iii) such releases, emissions, disposals or deposits which
constituted a violation of an Environmental Law but did not have a Material
Adverse Effect on the ROSE Property involved and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against ROSE
or any of its Subsidiaries in excess of $25,000 individually or in the
aggregate. To ROSE's Knowledge, no activity has been undertaken on any of the
ROSE Properties since January l, 1994, and to the Knowledge of ROSE no
activities have been or are being undertaken on any of the ROSE Collateralizing
Real Estate, that would cause or contribute to:
(a) any of the ROSE Properties or ROSE Collateralizing
Real Estate becoming a treatment, storage or disposal facility within the
meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. ss.1251 et seq., the Clean Air Act, as
amended, 42 U.S.C. ss.7401 et seq., or any similar federal or state law or local
ordinance; the cumulative effect of which would have a material adverse effect
on the ROSE Property or ROSE Collateralizing Real Estate involved.
3.23.2 To the Knowledge of ROSE, there are not, and never have
been, any underground storage tanks located in or under any of the ROSE
Properties or the ROSE Collateralizing Real Estate.
3.23.3 None of ROSE or any of its Subsidiaries has received any
written notice of, and to the Knowledge of ROSE none has received any verbal
notice of, any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for remedial
or responsive actions or for compensation, with respect to any of the ROSE
Properties or ROSE Collateralizing Real Estate, alleging noncompliance with or
violation of any Environmental Law or seeking relief under any Environmental Law
and none of the ROSE Properties or ROSE Collateralizing Real Estate is listed on
the United States Environmental Protection Agency's National Priorities List of
Hazardous Waste Sites, or, to the Knowledge of ROSE, any other list, schedule,
log, inventory or record of hazardous waste sites maintained by any federal,
state or local agency.
23
<PAGE> 427
3.23.4 "Hazardous Substances" shall mean any hazardous, toxic or
infectious substance, material, gas or waste which is regulated by any local,
state or federal Governmental Entity, or any of their agencies.
Section 3.24 STOCK OPTIONS. Schedule 3.24 to this Agreement contains a
description of the ROSE Stock Option Plan and list of all ROSE Stock Options
outstanding, indicating for each: (a) the grant date; (b) whether vested or
unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS. Each representation, warranty, covenant and agreement of ROSE
set forth in this Agreement shall be deemed to be made on and as of the date
hereof and as of the Effective Time.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BANCORP
BANCORP represents and warrants to ROSE that:
Section 4.1 ORGANIZATION; CORPORATE POWER; ETC. BANCORP is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. BANCORP is
a bank holding company registered under the BHCA. Each of BANCORP's Subsidiaries
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business substantially as it is being conducted
on the date of this Agreement, except where the failure to have such power or
authority would not have a Material Adverse Effect on BANCORP taken as a whole
or the ability of BANCORP to consummate the transactions contemplated by this
Agreement. BANCORP has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining all Requisite Regulatory Approvals,
BANCORP will have the requisite corporate power and authority to perform its
respective obligations hereunder with respect to the consummation of the
transactions contemplated hereby. BANCORP is the sole shareholder of BANK. BANK
is a national banking association authorized by the OCC to conduct a general
banking business in California. BANK is a member of the Federal Reserve System.
BANK's deposits are insured by the FDIC in the manner and to the full extent
provided by law. Neither the scope of business of BANCORP or any Subsidiary,
including BANK, nor the location of any of their respective properties, requires
that BANCORP or any of its respective Subsidiaries be licensed to conduct
business in any jurisdiction other than those jurisdictions in which they are
licensed or qualified to do business as a foreign corporation, where the failure
to be so licensed or qualified would, individually or in the aggregate, have a
Material Adverse Effect on BANCORP taken as a whole.
Section 4.2 LICENSES AND PERMITS. Except as disclosed on Schedule 4.2,
BANCORP and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a
24
<PAGE> 428
Material Adverse Effect on BANCORP taken as a whole, or on the ability of
BANCORP to consummate the transactions contemplated by this Agreement. The
properties, assets, operations and businesses of BANCORP and those of its
Subsidiaries, including BANK, are and have been maintained and conducted, in all
material respects, in compliance with all applicable licenses, certificates,
franchises, rights and permits.
Section 4.3 SUBSIDIARIES. Other than as set forth on Schedule 4.3, there
is no corporation, partnership, joint venture or other entity in which BANCORP
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 4.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
4.4.1 The execution and delivery of this Agreement and the Merger
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of BANCORP, subject only to the approval of this Agreement and the Merger
Agreement by BANCORP's shareholders. This Agreement has been duly executed and
delivered by BANCORP and constitutes a legal, valid and binding obligation of
BANCORP, 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 and by general equitable
principles. The Merger Agreement, upon the receipt of all Requisite Regulatory
Approvals and the due execution and filing of such Merger Agreement in
accordance with the applicable provisions of the California Corporations Code,
will constitute a legal, valid and binding obligation of BANCORP, 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 or by general equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and 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 or Bylaws of BANCORP, or except for the necessity of obtaining the
Requisite Regulatory Approvals, and the approval of the shareholders of BANCORP,
any material mortgage, indenture, lease, agreement or other material instrument,
or any permit, concession, grant, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to BANCORP or any of its
assets or properties or any of its Subsidiaries, other than any such conflict,
violation, default or loss which (i) will not have a Material Adverse Effect on
BANCORP taken as a whole; or (ii) will be cured or waived prior to the Effective
Time. 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 BANCORP or the performance
by BANCORP of its obligations hereunder, except for (a) filings required in
order to obtain Requisite Regulatory Approvals; (b) the filing of the
Registration Statement (including the Joint Proxy Statement/Prospectus
constituting a part thereof) with the SEC relating to the Merger and the
declaration of effectiveness of the Registration Statement by the SEC and any
applicable state securities law regulatory authorities; (c) the filing and
approval of the Merger Agreement with the Secretary of the State of California;
(d) any approvals required to be obtained pursuant to the BHCA or the Federal
Deposit Insurance Act or any other required governmental approval for the
execution and delivery of this Agreement by BANCORP or the consummation of the
Merger; and (e) any
25
<PAGE> 429
consents, authorizations, approvals, filings or exemptions required to be made
or obtained under the securities or "blue sky" laws of various jurisdictions in
connection with the issuance of shares of BANCORP Common Stock contemplated by
this Agreement.
Section 4.5 CAPITAL STRUCTURE OF BANCORP. The authorized capital stock
of BANCORP consists of 10,000,000 shares of BANCORP Common Stock, no par value
per share and 10,000,000 shares of BANCORP preferred stock. On the date of this
Agreement 981,448 shares of BANCORP Common Stock were outstanding, 176,043
shares of BANCORP Common Stock were reserved for issuance pursuant to employee
stock option and other employee stock plans (the "BANCORP Stock Plans"), and no
shares of BANCORP preferred stock were outstanding or were reserved for issuance
by BANCORP. All outstanding shares of BANCORP Common Stock are validly issued,
fully paid and nonassessable and do not possess any preemptive rights and were
not issued in violation of any preemptive rights or any similar rights of any
Person. The issuance of the shares of BANCORP Common Stock proposed to be issued
pursuant to this Agreement at the Effective Time will have been duly authorized
by all requisite corporate action of BANCORP, and such shares, when issued as
contemplated by this Agreement, will constitute duly authorized, validly issued,
fully paid and nonassessable shares of BANCORP Common Stock, and will not have
been issued in violation of any preemptive or similar rights of any Person. As
of the date of this Agreement, and except for this Agreement and the BANCORP
Stock Plans, BANCORP does not have outstanding any options, warrants, calls,
rights, commitments, securities or agreements of any character to which BANCORP
is a party or by which it is bound obligating BANCORP to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
BANCORP or obligating BANCORP to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 4.6 BANCORP FILINGS.
4.6.1 Since January 1, 1995, BANCORP and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the Federal Reserve Board or any Federal Reserve Bank; (b) the OCC; (c) the
SEC; and (d) any other applicable federal, state or local governmental or
regulatory authority. All such reports, registrations and filings including the
BANCORP Financial Statements are collectively referred to as the "BANCORP
Filings". Except to the extent prohibited by law, copies of the BANCORP Filings
have been made available to ROSE. As of their respective filing or mailing
dates, each of the past BANCORP Filings (a) was true and complete in all
material respects (or was amended so as to be so promptly following discovery of
any discrepancy); and (b) complied in all material respects with all of the
statutes, rules and regulations enforced or promulgated by the governmental or
regulatory authority with which it was filed (or was amended so as to be so
promptly following discovery of any such noncompliance) and none contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The BANCORP
Financial Statements, together with the financial statements contained in the
BANCORP Filings, have been prepared in accordance with GAAP, or applicable
regulatory accounting principles, applied on a consistent basis during the
period involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the consolidated financial position of
BANCORP as of the dates thereof and the consolidated results of its operations,
cash flows and changes in shareholders' equity for the period then ended.
26
<PAGE> 430
4.6.2 BANCORP, or BANK, as the case may be, has filed each
report, schedule, and amendments to each of the foregoing since January 1, 1995
that BANCORP, or BANK, was required to file with the Federal Reserve Bank or the
OCC (the "BANCORP Documents"), all of which have been made available to ROSE. As
of their respective dates, the BANCORP Documents complied in all material
respects with the applicable requirements of the BHCA and the National Bank Act,
as the case may be, and the rules and regulations of the Federal Reserve Bank
and the OCC thereunder applicable to such BANCORP Documents, and none of the
BANCORP Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of BANCORP included in the BANCORP
Filings comply in all material respects with applicable accounting requirements
and have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto, or in the case of the
unaudited statements, as permitted by regulations of the Federal Reserve Bank or
the OCC), and fairly present (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount) the consolidated financial
position of BANCORP as of the dates thereof and the consolidated results of its
operations and cash flows or changes in financial position for the periods then
ended.
Section 4.7 ACCURACY OF INFORMATION SUPPLIED.
4.7.1 No representation or warranty of BANCORP contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of BANCORP or any of its Subsidiaries, including BANK, to ROSE in
connection herewith and none of the information supplied or to be supplied by
BANCORP or any of its Subsidiaries, including BANK, to ROSE hereunder to the
best of BANCORP's Knowledge contains or will contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
4.7.2 None of the information supplied or to be supplied by
BANCORP or relating to BANCORP and BANK which is included or incorporated by
reference in (i) the Registration Statement on Form S-4 to be filed with the SEC
by BANCORP in connection the issuance of shares of BANCORP Common Stock in the
Merger will, at the time the Registration Statement becomes effective under the
Securities Act, 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; (ii) the Joint Proxy Statement/Prospectus and any amendment or
supplement thereto will, at all times from the date of mailing to shareholders
of BANCORP through the date of the meeting of shareholders of BANCORP to be held
in connection with the Merger, 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; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
BANCORP Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, 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, in
light of the circumstances under which they were made, not misleading. The
Registration Statement (except for
27
<PAGE> 431
such portions thereof that relate only to ROSE and its Subsidiaries) will comply
in all material respects with the applicable provisions of the Securities Act
and the Exchange Act and the rules and regulations thereunder.
4.7.3 BANCORP has delivered or will deliver to ROSE copies of:
(a) the audited balance sheets of BANCORP and its Subsidiaries as of December
31, 1997, 1996 and 1995 and the related statements of income, changes in
shareholders' equity and cash flows for the years then ended and the related
notes to such financial statements, all as audited by Perry-Smith & Company,
independent public accountants (the "BANCORP Financial Statements"), and BANCORP
will hereafter until the Closing Date deliver to ROSE copies of additional
financial statements of BANCORP as provided in Section 5.1.1(iii). The BANCORP
Financial Statements have been prepared (and all of said additional financial
statements will be prepared) in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) consistently followed
throughout the periods covered by such statements, and present (and, when
prepared, will present) fairly the financial position of BANCORP and its
Subsidiaries as of the respective dates and for the respective periods covered
by such financial statements (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount). In addition, BANCORP has
delivered or made available to ROSE copies of all management or other letters
delivered to BANCORP by its independent accountants in connection with any of
the BANCORP Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
BANCORP issued at any time since January 1, 1994, and will make available for
inspection by ROSE or its representatives, at such times and places as ROSE may
reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 4.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 4.8, to the best of BANCORP's Knowledge, the respective businesses of
BANCORP and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to BANCORP is pending or, to the Knowledge of BANCORP,
threatened, nor has any Governmental Entity indicated to BANCORP an intention to
conduct the same, other than those the outcome of which, as far as can be
reasonably foreseen, will not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole.
Section 4.9 LITIGATION. Except as disclosed on Schedule 4.9, there is no
suit, action or proceeding or investigation pending or, to the Knowledge of
BANCORP, threatened against or affecting BANCORP or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against BANCORP or any of its Subsidiaries that has, or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect.
Section 4.10 AGREEMENTS WITH BANKING AUTHORITIES. Neither BANCORP nor
any Subsidiary of BANCORP is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
28
<PAGE> 432
Section 4.11 INSURANCE. BANCORP and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 4.11 contains a list of all policies of insurance and bonds
carried and owned by BANCORP or any Subsidiary. None of BANCORP or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material current claims thereunder have been filed in
timely fashion. BANCORP and its Subsidiaries have filed claims outstanding with,
or given notice of claim to, their insurers or bonding companies in timely
fashion with respect to all material matters and occurrences for which they
believe they have coverage.
Section 4.12 TITLE TO ASSETS OTHER THAN REAL PROPERTY. Each of BANCORP
and its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 4.13), it owns or leases, free and clear of all
mortgages, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for: (a) rights
of lessors, lessees or sublessees in such matters as are reflected in a written
lease; (b) encumbrances as set forth in the BANCORP Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) encumbrances, if any, that are not substantial
in character, amount or extent and do not detract materially from the value, or
interfere with present use, or the ability of BANCORP or its Subsidiary to sell
or otherwise dispose of the property subject thereto or affected thereby; and
(e) other matters as described in Schedule 4.12. Materially all such properties
and assets are, and require only routine maintenance to keep them, in good
working condition, normal wear and tear excepted.
Section 4.13 REAL PROPERTY. Schedule 4.13 is an accurate list and
general description of all real property owned or leased by BANCORP or any of
its Subsidiaries, including OREO. Each of BANCORP and its respective
Subsidiaries has good and marketable title to the real properties that it owns,
as described in such Schedule, free and clear of all mortgages, covenants,
conditions, restrictions, easements, liens, security interests, charges, claims,
assessments and encumbrances, except for (a) rights of lessors, lessees or
sublessees in such matters as are reflected in a written lease; (b) current
Taxes (including assessments collected with Taxes) not yet due and payable; (c)
encumbrances, if any, that are not substantial in character, amount or extent
and do not materially detract from the value, or interfere with present use, or
the ability of BANCORP to dispose, of BANCORP's interest in the property subject
thereto or affected thereby; and (d) other matters as described in Schedule
4.13. BANCORP and its Subsidiaries have valid leasehold interests in the
leaseholds they respectively hold, free and clear of all mortgages, liens,
security interest, charges, claims, assessments and encumbrances, except for (a)
claims of lessors, co-lessees or sublessees in such matters as are reflected in
a written lease; (b) title exceptions affecting the fee estate of the lessor
under such leases; and (c) other matters as described in Schedule 4.13. To the
best of BANCORP's Knowledge, the activities of BANCORP and its Subsidiaries with
respect to all real property owned or leased by them for use in connection with
their operations are in all material respects permitted and authorized by
applicable zoning laws, ordinances and regulations and all laws and regulations
of any Governmental Entity. Except as set forth in Schedule 4.13, BANCORP and
its Subsidiaries enjoy quiet possession under all material leases to which they
are the lessees and all of such leases are valid and in full force and effect,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles. Materially all buildings and improvements on
real properties owned or leased
29
<PAGE> 433
by BANCORP or any of its Subsidiaries are in good condition and repair, and do
not require more than normal and routine maintenance, to keep them in such
condition, normal wear and tear excepted.
Section 4.14 PERFORMANCE OF OBLIGATIONS. BANCORP and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of BANCORP or any of its Subsidiaries is in material default under or
in breach of any term or provision of any covenant, contract, lease, indenture
or any other agreement, written or oral, to which any is a party, is subject or
is otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on BANCORP and its Subsidiaries, taken as a whole. To BANCORP's
Knowledge, and except as disclosed on Schedule 4.14, no party with whom BANCORP
or any of its Subsidiaries has an agreement that is of material importance to
the business of BANCORP and its Subsidiaries, taken as a whole, is in default
thereunder.
Section 4.15 BROKERS AND FINDERS. Except as set forth on Schedule 4.15,
none of BANCORP or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of the Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein and therein, will
result in any liability to any broker or finder. BANCORP agrees to indemnify and
hold harmless ROSE and its affiliates, and to defend with counsel reasonably
satisfactory to ROSE's Chief Executive Officer, from and against any liability,
cost or expense, including attorneys' fees, incurred in connection with a breach
of this Section 4.15.
Section 4.16 ABSENCE OF MATERIAL ADVERSE EFFECT. Since January 1, 1998,
the respective businesses of BANCORP and its Subsidiaries have been conducted
only in the ordinary course, in substantially the same manner as theretofore
conducted, and no event or circumstance has occurred or is expected to occur
which to BANCORP's Knowledge has had or which, with the passage of time or
otherwise, could reasonably be expected to have a Material Adverse Effect on
BANCORP and its Subsidiaries, taken as a whole.
Section 4.17 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
4.17, none of BANCORP or any of its Subsidiaries to BANCORP's Knowledge has any
liabilities or obligations, either accrued, contingent or otherwise, that are
material to BANCORP and its Subsidiaries, taken as a whole, and that have not
been: (a) reflected or disclosed in the BANCORP Financial Statements; or (b)
incurred subsequent to December 31, 1997 in the ordinary course of business.
BANCORP has no Knowledge of any basis for the assertion against BANCORP or any
of its Subsidiaries, of any liability, obligation or claim (including without
limitation that of any Governmental Entity) that will have or cause, or could
reasonably be expected to have or cause, a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole, that is not fairly reflected in the
BANCORP Financial Statements or on Schedule 4.17.
Section 4.18 TAXES.
4.18.1 FILING OF RETURNS. Except as set forth on Schedule 4.18.1,
BANCORP and its Subsidiaries have duly prepared and filed or caused to be duly
prepared and filed all federal, state, and local Returns (for Tax or
informational purposes) which were required to be filed by or in respect of
BANCORP and its Subsidiaries, or any of their properties, income and/or
operations on or prior to
30
<PAGE> 434
the Closing Date. As of the time they were filed, the foregoing Returns
accurately reflected the material facts regarding the income, business, asset,
operations, activities, status, and any other information required to be shown
thereon. Except as set forth on Schedule 4.18.1, no extension of time within
which BANCORP or any of its Subsidiaries may file any Return is currently in
force.
4.18.2 PAYMENT OF TAXES. Except as disclosed on Schedule 4.18.2
with respect to all amounts in respect of Taxes imposed on BANCORP or any
Subsidiary or for which BANCORP or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of BANCORP or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
4.18.3 AUDIT HISTORY. Except as disclosed on Schedule 4.18.3,
there is no review or audit by any taxing authority of any Tax liability of
BANCORP or any Subsidiary currently in progress of which BANCORP has Knowledge.
Except as disclosed on Schedule 4.18.3, BANCORP and its Subsidiaries have not
received any written notices within the three years preceding the Closing Date
of any pending or threatened audit, by the Internal Revenue Service or any
state, local or foreign agency, for any Returns or Tax liability of BANCORP or
any Subsidiary for any period. BANCORP and its Subsidiaries currently have no
unpaid deficiencies assessed by the Internal Revenue Service or any state, local
or foreign taxing authority arising out of any examination of any of the Returns
of BANCORP or any Subsidiaries filed for fiscal years ended on or after December
31, 1993 through the Closing Date, nor to the Knowledge of BANCORP is there
reason to believe that any material deficiency will be assessed.
4.18.4 STATUTE OF LIMITATIONS. Except as disclosed on Schedule
4.18.4, no agreements are in force or are currently being negotiated by or on
behalf of BANCORP or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of BANCORP or any
Subsidiaries are currently pending.
4.18.5 WITHHOLDING OBLIGATIONS. BANCORP and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions, unemployment contributions,
backup withholding and other deductions required to be withheld therefrom by any
Tax law and have paid the same to the proper taxing authorities within the time
required under any applicable Tax law.
4.18.6 TAX LIENS. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by BANCORP or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
4.18.7 TAX RESERVES. BANCORP and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The BANCORP Financial Statements contain
31
<PAGE> 435
fair and sufficient accruals for the payment of all Taxes for the periods
covered by the BANCORP Financial Statements and all periods prior thereto.
4.18.8 IRC SECTION 382 APPLICABILITY. None of BANCORP or any of
its Subsidiaries, including any party joining in any consolidated return to
which BANCORP is a member, underwent an "ownership change" as defined in IRC
Section 382(g) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
Section 4.19 HAZARDOUS MATERIALS. Except as set forth on Schedule 4.19:
4.19.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
BANCORP and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in, and de
minimus quantities discharged from, motor vehicles in their ordinary operation
on any of the BANCORP Properties (as defined below), BANCORP and its
Subsidiaries have not engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or the disposal, of Hazardous
Substances other than as permitted by and only in compliance with applicable
law. To BANCORP's Knowledge, no material amount of Hazardous Substances have
been released, emitted or disposed of, or otherwise deposited, on, in or from
any real property which is now or has been previously owned since January 1,
1994, or which is currently or during the past three years was leased, by
BANCORP or any of its Subsidiaries, including OREO (collectively, the "BANCORP
Properties"), or to BANCORP's Knowledge, on or in any real property in which
BANCORP or any of its Subsidiaries now holds any security interest, mortgage or
other lien or interest with an underlying obligation in excess of $25,000
("BANCORP Collateralizing Real Estate"), except for (i) matters disclosed on
Schedule 4.19; (ii) ordinary and necessary quantities of cleaning, pest control
and office supplies used and stored in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in, and de
minimus quantities discharged from, motor vehicles in their ordinary operation
on such BANCORP Properties; and (iii) such releases, emissions, disposals or
deposits which constituted a violation of an Environmental Law but did not have
a Material Adverse Effect on the BANCORP Property involved and would not result
in the incurrence or imposition of any liability, expense, penalty or fine
against BANCORP or any of its Subsidiaries in excess of $25,000 individually or
in the aggregate. To BANCORP's Knowledge, no activity has been undertaken on any
of the BANCORP Properties since January l, 1994, and to the Knowledge of BANCORP
no activities have been or are being undertaken on any of the BANCORP
Collateralizing Real Estate, that would cause or contribute to:
(a) any of the BANCORP Properties or BANCORP
Collateralizing Real Estate becoming a treatment, storage or disposal facility
within the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous
Substances under circumstances which would violate any Environmental Laws; or
32
<PAGE> 436
(c) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling of
any waters, that would require a permit or any other approval under the Federal
Water Pollution Control Act, 33 U.S.C. ss.1251 et seq., the Clean Air Act, as
amended, 42 U.S.C. ss.7401 et seq., or any similar federal or state law or local
ordinance; the cumulative effect of which would have a material adverse effect
on the BANCORP Property or BANCORP Collateralizing Real Estate involved.
4.19.2 To the Knowledge of BANCORP, there are not, and never have
been, any underground storage tanks located in or under any of the BANCORP
Properties or the BANCORP Collateralizing Real Estate.
4.19.3 None of BANCORP or any of its Subsidiaries has received
any written notice of, and to the Knowledge of BANCORP none has received any
verbal notice of, any pending or threatened claims, investigations,
administrative proceedings, litigation, regulatory hearings or requests or
demands for remedial or responsive actions or for compensation, with respect to
any of the BANCORP Properties or BANCORP Collateralizing Real Estate, alleging
noncompliance with or violation of any Environmental Law or seeking relief under
any Environmental Law and none of the BANCORP Properties or BANCORP
Collateralizing Real Estate is listed on the United States Environmental
Protection Agency's National Priorities List of Hazardous Waste Sites, or, to
the Knowledge of BANCORP, any other list, schedule, log, inventory or record of
hazardous waste sites maintained by any federal, state or local agency.
Section 4.20 EMPLOYEES.
4.20.1 Except as set forth in Schedule 4.20.1, there are no
material controversies pending or threatened between BANCORP or any of its
Subsidiaries and any of their employees.
4.20.2 Except as disclosed in the BANCORP Financial Statements at
December 31, 1997, or in Schedule 4.20.2, 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. Neither BANCORP nor
BANK is a party to any collective bargaining agreement with respect to any of
its employees or any labor organization to which its employees or any of them
belong.
4.20.3 To BANCORP's Knowledge, no governmental agency or claimant
or representative of such claimant has alleged a material violation of ERISA by
BANCORP, the liability of which, if adversely determined would result in a
material adverse change in the capital or earnings of BANCORP.
Section 4.21 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by BANCORP or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 4.22 LOANS AND INVESTMENTS. Except as set forth on Schedule
4.22, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of BANCORP or its Subsidiaries, including BANK, are, and constitute,
in all material respects, the legal, valid and binding obligations of the
parties thereto and are enforceable against such parties in accordance with
their terms, except as the
33
<PAGE> 437
enforceability thereof may be limited by applicable law and otherwise by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. Except as described on
Schedule 4.22, as of April 30, 1998, no loans or investments held by BANCORP or
any Subsidiary, including BANK are: (i) more than ninety days past due with
respect to any scheduled payment of principal or interest, other than loans on a
nonaccrual status; (ii) classified as "loss," "doubtful," "substandard" or
"specially mentioned" by BANK or any banking regulators; or (iii) on a
nonaccrual status in accordance with BANK's loan review procedures. Except as
set forth on Schedule 4.22, none of such assets (other than loans) are subject
to any restrictions, contractual, statutory or other, that would materially
impair the ability of the entity holding such investment to dispose freely of
any such assets at any time, except restrictions on the public distribution or
transfer of any such investments under the Securities Act and the regulations
thereunder or state securities laws and pledges or security interests given in
connection with government deposits. All loans, leases or other extensions of
credit outstanding, or commitments to make any loans, leases or other extensions
of credit made by BANCORP or BANK to any Affiliates of BANCORP or BANK are
disclosed on Schedule 4.22. For outstanding loans or extensions of credit where
the original principal amounts are in excess of $100,000 and which by their
terms are either secured by collateral or supported by a guaranty or similar
obligation, the security interests have been duly perfected in all material
respects and have the priority they purport to have in all material respects,
other than by operation of law, and, in the case of each guaranty or similar
obligation, each has been duly executed and delivered to BANCORP or any
Subsidiary, including BANK, and to BANCORP's Knowledge, is still in full force
and effect.
Section 4.23 MATERIAL CONTRACTS. Schedule 4.23 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which BANCORP or any
Subsidiary is a party as of the date of this Agreement, except for loans and
other extensions of credit made by BANCORP or BANK in the ordinary course of its
business and those items specifically disclosed in the BANCORP Financial
Statements.
Section 4.24 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS. Each representation, warranty, covenant and agreement of BANCORP
set forth in this Agreement shall be deemed to be made on and as of the date
hereof and as of the Effective Time.
ARTICLE 5. ADDITIONAL AGREEMENTS
Section 5.1 ACCESS TO INFORMATION, DUE DILIGENCE, ETC.
5.1.1 Upon reasonable notice, each party shall permit the other
party and its accountants, counsel and other representatives reasonable access
to their officers, employees, properties, books, contracts, commitments and
records and from the date hereof through the Effective Time, and shall furnish
or provide access to each other as soon as practicable, (i) a copy of each of
ROSE's Filings or BANCORP's Filings filed subsequent to the date of this
Agreement promptly after such document has been filed with the appropriate
Governmental Entity, provided, however, that copies of any Returns relating to
Taxes of ROSE or any of its Subsidiaries shall be furnished to BANCORP at least
15 Business Days prior to the proposed date of filing thereof and shall not be
filed without the prior approval of BANCORP, which approval shall not be
unreasonably withheld or delayed; (ii) unless otherwise prohibited by law, a
copy of each report, schedule and other
34
<PAGE> 438
documents filed or received by it during such period with any Regulatory
Authority or the Internal Revenue Service, as to documents other than related to
employees or customers and other than those distributed to banks generally;
(iii) as promptly as practicable following the end of each calendar month after
the date hereof, a balance sheet of ROSE or BANCORP as of the end of such month;
and (iv) all other information concerning its business, properties, assets,
financial condition, results of operations, liabilities, personnel and otherwise
as ROSE or BANCORP may reasonably request.
5.1.2 Until the Effective Time, a representative of BANCORP shall
be entitled and shall be invited to attend meetings of the Board of Directors of
ROSE or R1NB and of the Loan Committee of R1NB, and at least five (5) days'
prior written notice of the dates, times and places of such meetings shall be
given to BANCORP except that in the case of special meetings BANCORP shall
receive the same number of days' prior notice as ROSE's directors receive for
such meetings; provided, however, that such representative shall excuse himself
or herself from any portion of any such meetings that (i) relate to approval of,
or the exercise of any rights under, this Agreement by ROSE, (ii) involve
discussions between such Board of Directors or such Loan Committee and legal
counsel for ROSE that are entitled to be protected from disclosure under an
attorney-client privilege which would be lost due to the presence of such
representative of BANCORP, or (iii) constitute the Executive Session of any
Board of Directors meeting.
5.1.3 Until the Effective Time, a representative of ROSE shall be
entitled and shall be invited to attend meetings of the Boards of Directors of
BANCORP and BANK and of the Loan Committee of BANK, at least five (5) days'
prior to written notice of the dates, times and places of such meetings shall be
given to ROSE except that in the case of special meetings ROSE shall receive the
same number of days' prior notice as BANCORP's directors receive for such
meetings; provided, however, that such representative shall excuse himself or
herself from any portion of any such meetings that (i) relate to approval of, or
the exercise of any rights under, this Agreement by BANCORP, (ii) involve
discussions between such Boards of Directors or such Loan Committees and legal
counsel for BANCORP that are entitled to be protected from disclosure under an
attorney-client privilege which would be lost due to the presence of such
representative of ROSE, or (iii) constitute the Executive Session of any Board
of Directors meeting.
5.1.4 BANCORP and ROSE each agrees to keep confidential and not
divulge to any other party or Person (other than to the employees, attorneys,
accountants and consultants of each who have a need to receive such information
and other than as may be required by law) any information received from the
other, unless and until such documents and other information otherwise becomes
publicly available or unless the disclosure of such information is authorized by
each party. In the event of termination of this Agreement for any reason, the
parties shall promptly return, or at the election of the other party destroy,
all nonpublic documents obtained from the other and any copies or notes of such
documents (except as otherwise required by law) and, upon the request of the
other party, confirm such destruction to the other in writing.
Section 5.2 SHAREHOLDER APPROVAL.
5.2.1 ROSE and BANCORP each shall promptly call a meeting of its
respective shareholders to be held at the earliest practicable date after the
date on which the initial Registration Statement is filed with the SEC, but in
no event later than September 30, 1998, for the purpose of approving this
Agreement and authorizing the Merger Agreement and the Merger. Each of the
35
<PAGE> 439
respective Boards of Directors will recommend to the respective shareholders
approval of this Agreement, the Merger Agreement and the Merger; provided,
however, that ROSE's Board of Directors or BANCORP's Board of Directors may
withdraw its recommendation if such Board of Directors believes in good faith
(based on a written opinion of a financial advisor that is experienced in
evaluating the fairness of Acquisition Proposals) that a ROSE Superior Proposal
or BANCORP Superior Proposal, as applicable (defined below) has been made and
shall have determined in good faith, after consultation with and based on
written advice of its outside legal counsel, that the withdrawal of such
recommendation is necessary for such Board of Directors to comply with its
fiduciary duties under applicable law.
5.2.2 If the Merger is approved by vote of the shareholders of
BANCORP and ROSE, then, within ten (10) days thereafter BANCORP and ROSE shall
send a Dissenting Shareholder Notice to each recordholder of any Dissenting
Shares.
Section 5.3 TAKING OF NECESSARY ACTION.
5.3.1 Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees, subject to applicable laws and the fiduciary
duties of ROSE's or BANCORP's Boards of Directors, as advised in writing by
their respective counsel, to use all reasonable efforts promptly to take or
cause to be taken all action and promptly to do or cause to be done all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Merger Agreement, including, without limitation, the delivery of any
certificate or other document reasonably requested by counsel to a party to this
Agreement. Without limiting the foregoing, BANCORP and ROSE will use their
reasonable efforts to obtain all consents of third parties and Government
Entities necessary or, in the reasonable opinion of BANCORP or ROSE advisable
for the consummation of the transactions contemplated by this Agreement. Without
limiting the foregoing, BANCORP shall take all actions necessary to execute and
file the Merger Agreement and to effect all transactions contemplated by this
Agreement and ROSE shall take all actions necessary to effect all transactions
contemplated by this Agreement and the Merger Agreement. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement, the Merger Agreement, or to vest the
Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of ROSE, the proper officers or directors
of BANCORP or ROSE, as the case may be, shall take all such necessary action.
Notwithstanding the foregoing, nothing in this Agreement shall be construed to
require ROSE to take any action (or omit to take any action) which may affect
the Conversion Rate, except as may be specifically provided for or required by
this Agreement.
5.3.2 The obligations of ROSE or BANCORP contained in Section
6.2.5 of this Agreement shall continue to be in full force and effect despite
any Default thereof by reason of receipt of a ROSE Superior Proposal or BANCORP
Superior Proposal, as applicable (defined below) and any Default thereof by the
defaulting party shall entitle either ROSE or BANCORP to such legal or equitable
remedies as may be provided in this Agreement or by law notwithstanding that any
action or inaction of the Board of Directors or officers of the defaulting party
which is required to enable such party to fulfill such obligations may be
excused based on the continuing fiduciary obligations of such party's Board of
Directors and officers to its shareholders. Notwithstanding the foregoing,
however, in the event of a termination of this Agreement by BANCORP or ROSE and
the actual
36
<PAGE> 440
payment of the liquidated damages to the other party as provided for in Section
8.5 of this Agreement, neither BANCORP, ROSE or their respective directors or
officers shall have any obligations or liabilities of any kind under this
Agreement by reason of any such Default, and BANCORP or ROSE shall have no
further obligations of any kind under this Agreement.
5.3.3 ROSE shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of ROSE (for purposes
of Rule 145 under the Securities Act) to deliver to BANCORP, on the date of this
Agreement, a written agreement in the form attached hereto as Exhibit 5.3 (the
"Affiliate Agreements").
Section 5.4 REGISTRATION STATEMENT AND APPLICATIONS.
5.4.1 BANCORP and ROSE will cooperate and jointly prepare and
file as promptly as practicable the Registration Statement, the statements,
applications, correspondence or forms to be filed with appropriate State
securities law regulatory authorities, and the statements, correspondence or
applications to be filed to obtain the Requisite Regulatory Approvals to
consummate the transactions contemplated by this Agreement. Each of BANCORP and
ROSE shall use all reasonable efforts to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Joint Proxy Statement/Prospectus to the
shareholders of ROSE. Each party will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents and opinions of counsel concerning it and its
Subsidiaries received by such party.
5.4.2 Each party shall provide to the other at the request of the
other party: (i) immediately prior to the filing thereof, copies of all material
statements, applications, correspondence or forms to be filed with state
securities law regulatory authorities, the SEC and other appropriate regulatory
authorities to obtain the Requisite Regulatory Approvals to consummate the
transactions contemplated by this Agreement; provided, however, that no approval
need be obtained from any party to which such materials are provided; and (ii)
promptly after delivery to, or receipt from, such regulatory authorities all
written communications, letters, reports or other documents relating to the
transactions contemplated by this Agreement.
Section 5.5 EXPENSES.
5.5.1 Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same, including,
without limitation, all costs associated with any resales of BANCORP Common
Stock by Affiliates of ROSE; provided, however, that BANCORP will file on a
timely basis at its own expense the reports required by Rule 144(c) of the
Securities Act.
5.5.2 ROSE and BANCORP shall use their best efforts to ensure
that their attorneys, accountants, financial advisors, investment bankers and
other consultants engaged by them in connection with the transaction
contemplated by this Agreement submit full and final bills on or before the
Determination Date and that all such expenses are paid or properly accrued prior
to the Determination Date.
37
<PAGE> 441
Section 5.6 NOTIFICATION OF CERTAIN EVENTS.
5.6.1 ROSE shall provide to BANCORP, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Sections 6.1 and 6.2, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.2 BANCORP shall provide to ROSE, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Section 6.3 and 6.4, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in writing of
any change or event which could reasonably be expected to have a Material
Adverse Effect on the business, properties, assets, financial condition, results
of operations, liabilities or personnel of such party or on its ability to
consummate the transactions contemplated by this Agreement or the Merger
Agreement.
5.6.4 ROSE and BANCORP shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statement or Joint Proxy Statement/Prospectus at any time contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statement therein, in light of
the circumstances under which they were made, not misleading or that the
Registration Statement or the Joint Proxy Statement/Prospectus otherwise is
required to be amended and supplemented, which notice shall specify, in
reasonable detail, the circumstances thereof. BANCORP shall promptly amend and
supplement such materials and disseminate the new or modified information so as
to fully comply with the Securities Act. If the amendment or supplement so
required relates to information concerning ROSE, the out-of-pocket costs and
expenses of preparing, filing and disseminating such amendment or supplement
shall be borne by ROSE.
Section 5.7 CLOSING SCHEDULES. ROSE has delivered to BANCORP on or
before the date of this Agreement all of the Schedules to this Agreement which
ROSE is required to deliver to BANCORP hereunder (the "ROSE Schedules"). BANCORP
has delivered to ROSE on or before the date of this Agreement all of the
Schedules to this Agreement which BANCORP is required to deliver to ROSE
hereunder ( the "BANCORP Schedules"). Immediately prior to the Closing Date,
ROSE shall have prepared updates of the ROSE Schedules provided for in this
Agreement and shall deliver to BANCORP revised schedules containing the updated
information (or a certificate signed by ROSE's Chief Executive Officer stating
that there have been no changes on the applicable schedules); and BANCORP shall
have prepared updates of the BANCORP Schedules provided for in this Agreement
and shall deliver to ROSE revised Schedules containing updated information (or a
certificate signed by BANCORP's Chief Executive Officer stating that there has
been no change on the applicable schedules). Such updated schedules shall
sometimes be referred to collectively, as the "Closing Schedules." The Closing
Schedules shall be dated as of the day prior to the Closing Date and shall
contain information as of the day prior to the Closing Date or as of such
earlier date as is practicable under the circumstances. In the event the Closing
Schedules disclose an event, occurrence or circumstance that has had or could
reasonably be expected to have a Material Adverse Effect on ROSE, on the one
hand, or on BANCORP, on the other hand, or on consummation of the transactions
contemplated by this Agreement, that was not disclosed in the previously
delivered
38
<PAGE> 442
Schedules hereto, the party delivering such Closing Schedules (the "Affected
Party") shall so notify the other party in the letter of transmittal for such
Closing Schedules, the Closing Date shall be delayed for seven (7) Business Days
and such other party shall be entitled to terminate this Agreement within five
(5) Business Days after receiving such Closing Schedules that disclose such
event, occurrence or circumstance. In the event of any such termination, the
terminating party shall have no liability for such termination. The Affected
Party shall have no liability to the terminating party in such an event unless
(i) as a result of the existence of such event, occurrence or circumstance so
disclosed in the Closing Schedules any of the representations or warranties of
the Affected Party contained in this Agreement are found to have been untrue in
any material respect as of the date of this Agreement, or (ii) the event,
occurrence or circumstance could have been prevented in the exercise of
reasonable diligence by any officers or directors of the Affected Party, in
either of which cases the Affected Party shall be liable to the terminating
party for Liquidated Damages as provided in Section 8.5 hereof.
Section 5.8 ADDITIONAL ACCRUALS/APPRAISALS. Prior to the Closing Date,
but after the Determination Date, at BANCORP's request, ROSE and/or R1NB shall,
consistent with GAAP and applicable banking regulations, establish such
additional accruals and reserves immediately prior to the Determination Date as
may be necessary to conform ROSE's or R1NB's accounting and credit and OREO loss
reserve practices and methods to those of BANCORP, provided, however, that no
accrual or reserve made by ROSE or R1NB pursuant to this Section 5.8, or any
litigation or regulatory proceeding arising out of any such accrual or reserve,
or any other effect on ROSE or R1NB resulting from ROSE's or R1NB's compliance
with this Section 5.8, shall constitute or be deemed to be a breach, violation
of or failure to satisfy any representation, warranty, covenant, condition or
other provision of this Agreement or otherwise be considered in determining
whether any such breach, violation or failure to satisfy shall have occurred.
Additionally, no such accrual or reserve made by ROSE or R1NB pursuant to this
Section 5.8 shall be used by the parties in the calculation of the ROSE Book
Value Per Share.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 AFFIRMATIVE CONDUCT OF ROSE. During the period from the date
of execution of this Agreement through the Effective Time, ROSE shall carry on
its business, and shall cause each of its respective Subsidiaries to carry on
its business, in the ordinary course in substantially the manner in which
heretofore conducted, subject to changes in law applicable to all national banks
or all member banks insured by the FDIC and directives from regulators, and use
all commercially reasonable efforts to preserve intact its business
organization, keep available the services of its officers and employees, (other
than terminations in the ordinary course of business) and preserve its
relationships with customers, depositors, suppliers and others having business
dealings with it; and, to these ends, shall fulfill each of the following:
6.1.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.1.2 Advise BANCORP promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, financial condition,
assets, results of operations, business or prospects or of any matter which
would make the representations and warranties set forth
39
<PAGE> 443
in Article 3 hereof not true and correct in any material respect as of the
effective date of the Registration Statement and at the Effective Time;
6.1.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify BANCORP in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.1.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any material
contract, agreement, understanding, commitment, or offer, whether written or
oral, (collectively referred to as an "Understanding") or materially default in
the performance of any of its obligations under any Understanding where such
default would have a Material Adverse Effect on ROSE;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on ROSE;
6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.1.8 Maintain its tangible assets and properties in good
condition and repair, normal wear and tear excepted in accordance with prior
practices;
6.1.9 Promptly advise BANCORP in writing of any event or any
other transaction within the Knowledge of ROSE, whereby any Person or related
group of Persons acquires, after the date of this Agreement, directly or
indirectly, record or beneficial ownership (as defined in Rule 13d-3 promulgated
by the SEC pursuant to the Exchange Act) or control of 5% or more of the
outstanding shares of ROSE Common Stock either prior to or after the record date
fixed for the ROSE shareholders' meeting or any adjourned meeting thereof to
approve the transactions contemplated herein;
6.1.10 (a) Maintain a reserve for loan and lease losses ("Loan
Loss Reserve") at a level which is adequate to provide for all known and
reasonably expected losses on loans, leases and other extensions of credit
outstanding and other inherent risks in ROSE's or R1NB's portfolio of loans and
leases, in accordance with GAAP and applicable regulatory accounting principles
and banking laws and regulations;
(b) Charge off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless
40
<PAGE> 444
such classification or direction has been disregarded in good faith by ROSE or
R1NB, ROSE or R1NB has submitted in writing to such regulatory authority the
basis upon which it has so disregarded such classification or direction, and
such regulatory authority retracts its direction requiring such charge-off;
6.1.11 Furnish to BANCORP, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of ROSE or R1NB and access to the working
papers related thereto, provided, however, that ROSE need not furnish BANCORP
any materials relating to deliberations of ROSE's Board of Directors or R1NB's
Board of Directors with respect to its approval of this Agreement,
communications of ROSE's legal counsel with the Board of Directors or officers
of ROSE regarding ROSE's rights against or obligations to BANCORP or its
Subsidiaries under this Agreement, or books, records and documents covered by
the attorney-client privilege or which are attorneys' work product; (ii) copies
of all material reports, renewals, filings, certificates, statements,
correspondence and other documents specific to ROSE or R1NB or filed with or
received from any Federal Reserve Bank, the SEC, the OCC or any Governmental
Entity; (iii) monthly unaudited balance sheets, statements of income and changes
in shareholders' equity for ROSE and R1NB and quarterly unaudited balance
sheets, statements of income and changes in shareholders' equity for ROSE and
R1NB, in each case prepared on a basis consistent with past practice; and (iv)
such other reports as BANCORP may reasonably request (which are otherwise
deliverable under this Section 6.1.11) relating to ROSE. Each of the financial
statements of ROSE or R1NB delivered pursuant to this Section 6.1.11 shall be
accompanied by a certificate of the Chief Financial Officer of ROSE or R1NB to
the effect that such financial statements fairly present the financial
information presented therein of ROSE or R1NB, for the periods covered, subject
to recurring adjustments normal in nature and amount, necessary for a fair
presentation and are prepared on a basis consistent with past practice;
6.1.12 ROSE agrees that through the Effective Time, as of their
respect dates, (i) each ROSE Filing will be true and complete in all material
respects; and (ii) each ROSE Filing 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 ROSE Filings that is intended to present the
financial position of ROSE during the periods involved to which it relates will
fairly present in all material respects the financial position of ROSE and will
be prepared in accordance with GAAP or consistent with applicable regulatory
accounting principles and banking law and banking regulations, except as stated
therein;
6.1.13 Maintain reserves for contingent liabilities in accordance
with GAAP or applicable regulatory accounting principles and consistent with
past practices;
6.1.14 Promptly notify BANCORP of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against ROSE or any of its
assets;
41
<PAGE> 445
6.1.15 Inform BANCORP of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any unit of R1NB as "Specially
Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or any comparable
classification ("Classified Assets"). ROSE will furnish to BANCORP, as soon as
practicable, and in any event within fifteen days after the end of each calendar
month, schedules including the following: (i) Classified Assets by type
(including each credit or other asset in an amount equal to or greater than
$10,000), and its classification category; (ii) nonaccrual credits by type
(including each credit in an amount equal to or greater than $10,000); (iii)
renegotiated loans by type (loans on which interest has been renegotiated to
lower than market rates because of the financial condition of the borrowers);
(iv) delinquent credits by type (including each delinquent credit in an amount
equal to or greater than $10,000), including an aging into 30-89 and 90+ day
categories; (v) loans or leases or other assets charged off, in whole or in
part, during the previous month by type (including each such loan or lease or
other asset in an amount equal to or greater than $10,000); and (vi) OREO or
assets owned stating with respect to each its type;
6.1.16 Furnish to BANCORP, upon BANCORP's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by ROSE to any director or
officer (at or above the Vice President level) of ROSE or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of ROSE,
including, with respect to each such loan or lease, the identity and, to the
best Knowledge of ROSE, the relation of the borrower to ROSE or R1NB, the loan
or lease type and the outstanding and undrawn amounts; and (iii) standby letters
of credit, by type, (including each letter of credit in a face amount equal to
or greater than $10,000); and
6.1.17 Make available to BANCORP copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit of
$100,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $25,000 in the case of unsecured loans or unsecured
extensions of credit, which are approved by ROSE after the date of this
Agreement, within ten Business Days of preparation of such packages.
Section 6.2 NEGATIVE COVENANTS OF ROSE. During the period from the date
of execution of this Agreement through the Effective Time, ROSE agrees that
without BANCORP's prior written consent, it shall not and its Subsidiaries shall
not:
6.2.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of any of its capital stock; (b) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.2.2 Take any action that would or might result in any of the
representations and warranties of ROSE set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
42
<PAGE> 446
6.2.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of ROSE
or any securities convertible or exercisable into or exchangeable for such
capital stock, or any rights, warrants or options, including options under any
stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of ROSE Common Stock pursuant to the
exercise of ROSE Stock Options;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
6.2.5 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
BANCORP, and its representatives) concerning any such solicited Acquisition
Proposal. ROSE shall notify BANCORP immediately if any inquiry regarding an
Acquisition Proposal is received by ROSE, including the terms thereof. For
purposes of this Section 6.2.5, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than BANCORP would acquire or
participate in a merger or other business combination or reorganization
involving ROSE or any of its Subsidiaries; (b) proposal by which any Person or
group, other than BANCORP, would acquire the right to vote ten percent (10%) or
more of the capital stock of ROSE entitled to vote for the election of
directors; (c) acquisition of the assets of ROSE other than in the ordinary
course of business; or (d) acquisition in excess of ten percent (10%) of the
outstanding capital stock of ROSE, other than as contemplated by this Agreement.
Notwithstanding the foregoing, nothing contained in this Agreement shall prevent
ROSE or ROSE's Board of Directors from (i) furnishing nonpublic information to,
or entering into discussions or negotiations with, any person or entity in
connection with an unsolicited bona fide written Acquisition Proposal by such
person or entity, or recommending an unsolicited bona fide written Acquisition
Proposal to the shareholders of ROSE, if and only to the extent that (A) the
Board of Directors of ROSE has determined and believes in good faith (after
consultation with and the concurrence of its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction materially
more favorable, from a financial point of view, to ROSE's shareholders than the
transaction contemplated by this Agreement (any such more favorable Acquisition
Proposal being referred to in this Agreement as a "ROSE Superior Proposal") and
ROSE's Board of Directors has determined in good faith, after consultation with
and based on written advice from its outside legal counsel, that such action is
necessary for ROSE to comply with its fiduciary duties to shareholders under
applicable law, and (B) prior to furnishing such nonpublic information to, or
entering into discussions or negotiations with, such person or entity, ROSE's
Board of Directors has received from such person or entity an executed
confidentiality agreement, with terms no more favorable to such party than those
contained in the Confidentiality Agreement between ROSE and BANCORP, or (ii)
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal, if such Rule is applicable thereto;
6.2.6 Acquire or agree to acquire by merging, consolidating with,
or by purchasing all or a substantial portion of the assets of, or in any other
manner, any business or any Person or otherwise acquire or agree to acquire any
assets which are material to ROSE, other than in the ordinary course of business
consistent with prior practice;
43
<PAGE> 447
6.2.7 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to ROSE, except in the ordinary
course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of ROSE or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one year)
issued, in its ordinary course of business consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement; (b) commitments to make loans or other
extensions of credit in the ordinary course of business consistent with prior
practice; and (c) loan sales in the ordinary course of business, without any
recourse, provided that no commitment to sell loans shall extend beyond the
Effective Time;
6.2.10 Make or enter into a commitment to make any loan or other
extension of credit to any director, officer or employee of ROSE or any of its
Subsidiaries, except in accordance with practice or policy in existence on the
date of this Agreement and in compliance with all applicable laws and all
applicable regulations and directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent with
prior practice or as required by an existing contract, and provided prior
disclosure thereof has been made in Schedule 6.2.11, grant any general or
uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any Person;
6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1997 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.2.14 Make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$10,000 individually or $30,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract or
agreement, enter into any new employment contract or agreement or make any bonus
or any special or extraordinary payments to any Person;
6.2.16 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of
44
<PAGE> 448
stock or securities, contributions of capital, property transfers, purchases of
any property or assets or otherwise, in any other individual, corporation or
other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
BANCORP, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
report or proposed Tax election or change in any method or period of accounting,
to BANCORP for its approval, which it shall not unreasonably withhold or delay;
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
6.2.19 Change its fiscal year or methods of accounting in effect
at December 31, 1997, except as required by changes in GAAP or regulatory
accounting principles as concurred to by ROSE's independent public accountants;
6.2.20 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization;
6.2.21 Take or cause to be taken into OREO any commercial
property without an environmental report reporting no adverse environmental
condition on such property, with a copy of such report delivered to BANCORP
prior to taking such property into OREO; or
6.2.22 Make any new elections with respect to Taxes or any
changes in current elections with respect to Taxes affecting the assets owned by
ROSE or its Subsidiaries. BANCORP shall be deemed to have consented in writing
to any election ROSE or its Subsidiaries shall desire to make if: (i) the
electing Person shall have notified the Chief Executive Officer of BANCORP in
writing of its desire to make such election, including in such notice a
reasonably complete summary of the election it desires to make and the reasons
it desires to make such election at least 20 Business Days prior to the due date
(including extensions thereof) for filing such election; and (ii) BANCORP shall
not have responded in writing to such notice by the fifth Business Day prior to
the due date (including extensions thereof) for filing such election.
Section 6.3 AFFIRMATIVE CONDUCT OF BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, BANCORP shall
carry on its business, and shall cause each of its respective Subsidiaries to
carry on its business, in the ordinary course in substantially the manner in
which heretofore conducted, subject to changes in law applicable to all national
banks or all member banks insured by the FDIC and directives from regulators
(except to the extent ROSE shall otherwise consent in writing), and use all
commercially reasonable efforts to preserve intact its business organization,
keep available the services of its officers and employees, (other than
terminations in the ordinary course of business) and preserve its relationships
with customers, depositors, suppliers and others having business dealings with
it; and, to these ends, shall fulfill each of the following:
45
<PAGE> 449
6.3.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise ROSE promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.3.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
and notify ROSE in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.3.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any
Understanding or materially default in the performance of any of its obligations
under any Understanding where such default would have a Material Adverse Effect
on BANCORP;
6.3.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on ROSE;
6.3.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.3.8 Maintain its tangible assets and properties in good
condition and repair, normal wear and tear excepted in accordance with prior
practices;
6.3.9 Promptly advise ROSE in writing of any event or any other
transaction within the Knowledge of BANCORP, whereby any Person or related group
of Persons acquires, after the date of this Agreement, directly or indirectly,
record or beneficial ownership (as defined in Rule 13d-3 promulgated by the SEC
pursuant to the Exchange Act) or control of 5% or more of the outstanding shares
of BANCORP Common Stock either prior to or after the record date fixed for the
BANCORP shareholders' meeting or any adjourned meeting thereof to approve the
transactions contemplated herein;
6.3.10 (a) Maintain a Loan Loss Reserve at a level which is
adequate to provide for all known and reasonably expected losses on loans,
leases and other extensions of credit outstanding and other inherent risks in
BANCORP's or BANK's portfolio of loans and leases, in
46
<PAGE> 450
accordance with GAAP and applicable regulatory accounting principles and banking
laws and regulations;
(b) Charge off all loans, receivables and other assets, or
portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by BANCORP or
BANK, BANCORP or BANK has submitted in writing to such regulatory authority the
basis upon which it has so disregarded such classification or direction, and
such regulatory authority retracts its direction requiring such charge-off;
6.3.11 Furnish to ROSE, as soon as practicable, and in any event
within fifteen days after it is prepared: (i) a copy of any report submitted to
the Board of Directors of BANCORP or BANK and access to the working papers
related thereto, provided, however, that BANCORP need not furnish ROSE any
materials relating to deliberations of BANCORP's Board of Directors or BANK's
Board of Directors with respect to its approval of this Agreement,
communications of BANCORP's legal counsel with the Board of Directors or
officers of BANCORP regarding BANCORP's rights against or obligations to ROSE or
its Subsidiaries under this Agreement, or books, records and documents covered
by the attorney-client privilege or which are attorneys' work product; (ii)
copies of all material reports, renewals, filings, certificates, statements,
correspondence and other documents specific to BANCORP or BANK or filed with or
received from any Federal Reserve Bank, the SEC, the OCC or any Governmental
Entity; (iii) monthly unaudited balance sheets, statements of income and changes
in shareholders' equity for BANCORP and BANK and quarterly unaudited balance
sheets, statements of income and changes in shareholders' equity for BANCORP and
BANK, in each case prepared on a basis consistent with past practice; and (iv)
such other reports as ROSE may reasonably request (which are otherwise
deliverable under this Section 6.3.11) relating to BANCORP. Each of the
financial statements of BANCORP or BANK delivered pursuant to this Section
6.3.11 shall be accompanied by a certificate of the Chief Financial Officer of
BANCORP or BANK to the effect that such financial statements fairly present the
financial information presented therein of BANCORP or BANK, for the periods
covered, subject to recurring adjustments normal in nature and amount, necessary
for a fair presentation and are prepared on a basis consistent with past
practice;
6.3.12 BANCORP agrees that through the Effective Time, as of
their respect dates, (i) each BANCORP Filing will be true and complete in all
material respects; and (ii) each BANCORP Filing 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 BANCORP Filings that is intended to present
the financial position of BANCORP, on a consolidated basis, during the periods
involved to which it relates will fairly present in all material respects the
financial position of BANCORP, on a consolidated basis, and will be prepared in
accordance with GAAP or consistent with applicable regulatory accounting
principles and banking law and regulations, except as stated therein;
6.3.13 Maintain reserves for contingent liabilities in accordance
with GAAP or applicable regulatory accounting principles and consistent with
past practices;
47
<PAGE> 451
6.3.14 Promptly notify ROSE of the filing, or threatened filing,
of any litigation, or the filing or threatened filing of any government or
regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against BANCORP or any of
its assets, which is expected to have a Material Adverse Effect on BANCORP and
its Subsidiaries taken as a whole;
6.3.15 Inform ROSE of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any unit of BANK as Classified Assets.
BANCORP will furnish to ROSE, as soon as practicable, and in any event within
fifteen days after the end of each calendar month, schedules including the
following: (i) Classified Assets by type (including each credit or other asset
in an amount equal to or greater than $10,000), and its classification category;
(ii) nonaccrual credits by type (including each credit in an amount equal to or
greater than $10,000); (iii) renegotiated loans by type (loans on which interest
has been renegotiated to lower than market rates because of the financial
condition of the borrowers); (iv) delinquent credits by type (including each
delinquent credit in an amount equal to or greater than $10,000), including an
aging into 30-89 and 90+ day categories; (v) loans or leases or other assets
charged off, in whole or in part, during the previous month by type (including
each such loan or lease or other asset in an amount equal to or greater than
$10,000); and (vi) OREO or assets owned stating with respect to each its type;
and
6.3.16 Furnish to ROSE, upon ROSE's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by BANCORP to any director or
officer (at or above the Vice President level) of BANCORP or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of
BANCORP, including, with respect to each such loan or lease, the identity and,
to the best Knowledge of BANCORP, the relation of the borrower to BANCORP or
BANK, the loan or lease type and the outstanding and undrawn amounts; and (iii)
standby letters of credit, by type, (including each letter of credit in a face
amount equal to or greater than $10,000).
Section 6.4 NEGATIVE COVENANTS OF BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, BANCORP agrees
that without ROSE's prior written consent, it shall not and its Subsidiaries
shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of any of its capital stock; (b) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.4.2 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
48
<PAGE> 452
6.4.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
BANCORP or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of BANCORP Common Stock pursuant to the
exercise of BANCORP Stock Options or pursuant to the proposed acquisition of
another financial entity identified by BANCORP in writing to ROSE prior to the
execution of the Agreement;
6.4.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
6.4.5 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to BANCORP, except in the
ordinary course of business consistent with prior practice;
6.4.6 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of BANCORP or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.4.7 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.4.8 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1997 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.4.9 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.4.10 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by ROSE,
in writing, or file or amend any federal, foreign, state or local Tax Return or
report or make any tax election or change any method or period of accounting
unless required by GAAP or applicable law and, then, only after submitting such
Tax return or report or proposed Tax election or change in any method or period
of accounting, to ROSE for its approval, which it shall not unreasonably
withhold or delay;
6.4.11 Change its fiscal year or methods of accounting in effect
at December 31, 1997, except as required by changes in GAAP or regulatory
accounting principles as concurred to by BANCORP's independent public
accountants;
49
<PAGE> 453
6.4.12 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
ROSE, and its representatives) concerning any such solicited Acquisition
Proposal. BANCORP shall notify ROSE immediately if any inquiry regarding an
Acquisition Proposal is received by BANCORP, including the terms thereof. For
purposes of this Section 6.4.12, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than ROSE would acquire or
participate in a merger or other business combination or reorganization
involving BANCORP; (b) proposal by which any Person or group, other than ROSE,
would acquire the right to vote ten percent (10%) or more of the capital stock
of BANCORP entitled to vote for the election of directors; (c) acquisition of
the assets of BANCORP other than in the ordinary course of business; or (d)
acquisition in excess of ten percent (10%) of the outstanding capital stock of
BANCORP other than as contemplated by this Agreement. Notwithstanding the
foregoing, nothing contained in this Agreement shall prevent BANCORP or its
Board of Directors from (i) furnishing nonpublic information to, or entering
into discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide written Acquisition Proposal by such person or entity,
or recommending an unsolicited bona fide written Acquisition Proposal to the
shareholders of BANCORP, if and only to the extent that (A) the Board of
Directors of BANCORP has determined and believes in good faith (after
consultation with and the concurrence of its financial advisor) that such
Acquisition Proposal would, if consummated, result in a transaction materially
more favorable, from a financial point of view, to BANCORP's shareholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "BANCORP Superior
Proposal") and BANCORP's Board of Directors has determined in good faith, after
consultation with and based on written advice from its outside legal counsel,
that such action is necessary for BANCORP to comply with its fiduciary duties to
shareholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such person
or entity, BANCORP's Board of Directors received from such person or entity an
executed confidentiality agreement, with terms no more favorable to such party
than those contained in the Confidentiality Agreement between ROSE and BANCORP,
or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to an Acquisition Proposal, if such Rule is applicable thereto;
6.4.13 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority;
6.4.14 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization;
6.4.15 Take or cause to be taken into OREO any commercial
property without an environmental report reporting no adverse environmental
condition on such property, with a copy of such report delivered to ROSE prior
to taking such property into OREO; or
6.4.16 Make any new elections with respect to Taxes or any
changes in current elections with respect to Taxes affecting the assets owned by
BANCORP or its Subsidiaries. ROSE
50
<PAGE> 454
shall be deemed to have consented in writing to any election BANCORP or its
Subsidiaries shall desire to make if: (i) the electing Person shall have
notified the Chief Executive Officer of ROSE in writing of its desire to make
such election, including in such notice a reasonably complete summary of the
election it desires to make and the reasons it desires to make such election at
least 20 Business Days prior to the due date (including extensions thereof) for
filing such election; and (ii) ROSE shall not have responded in writing to such
notice by the fifth Business Day prior to the due date (including extensions
thereof) for filing such election.
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 CONDITIONS TO THE PARTIES' OBLIGATIONS. The obligations of
all the parties to this Agreement to effect the Merger shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreement and the Merger shall
have been validly approved by the holders of a majority of the outstanding
shares of ROSE Common Stock and BANCORP Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Merger under applicable federal laws of the United States or applicable
laws of any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger Agreement shall have been obtained or expired, as the
case may be (all such permits, approvals and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals"),
without the imposition of any condition which in the reasonable judgment of any
party to be affected by such condition is materially burdensome upon such party
or its respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any Government Entity which: (i) makes the consummation of the Merger
illegal; (ii) requires the divestiture by BANCORP of any material asset or of a
material portion of the business of BANCORP; or (iii) imposes any condition upon
BANCORP or its Subsidiaries (other than general provisions of law applicable to
all banks and bank holding companies) which in the judgment of BANCORP would be
materially burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 BANCORP and ROSE shall have received an opinion from
Perry-Smith & Co., dated the Effective Time, subject to assumptions and
exceptions normally included, and in form and substance reasonably satisfactory
to BANCORP and ROSE, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the IRC and that BANCORP and ROSE will each be a party to that reorganization
within the meaning of Section 368(b) of the IRC;
51
<PAGE> 455
7.1.6 BANCORP and ROSE shall have received from Perry-Smith &
Co., who are the independent public accountants of BANCORP and ROSE, letters,
dated at the effective date of the Registration Statement and at the Effective
Time, in form and substance satisfactory to BANCORP and ROSE that the Merger may
be accounted for as a pooling of interests;
7.1.7 BANCORP and ROSE shall have received opinions of counsel
for the other party in substantially the forms previously agreed to by the
parties as set forth in Exhibits 7.1.7A and 7.1.7B, respectively, dated as of
the Closing Date;
7.1.8 No action, suit or proceeding shall have been instituted or
threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger Agreement
which presents a substantial risk that such transactions will be restrained or
that either party hereto may suffer material damages or other relief as a result
of consummating such transactions; and
7.1.9 The holders of no more than 10% of the outstanding shares
of ROSE Common Stock have exercised dissenters' rights. Dissenters of BANCORP
shall be included in such calculation. Dissenters' rights shall be deemed to be
exercised to the extent at the Effective Time the holder of such shares have
complied with the California Corporations Code concerning dissenters' rights.
Section 7.2 CONDITIONS TO BANCORP'S OBLIGATIONS. The obligations of
BANCORP to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by BANCORP) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of ROSE contained in Article 3 shall be true in
all material respects as of the Effective Time as though made at the Effective
Time, except to the extent they expressly refer to an earlier time and except
where the failure to be true, individually or in the aggregate, would not have
or would not be reasonably likely to have, a Material Adverse Effect on the
Surviving Corporation or R1NB, or upon the consummation of the transactions
contemplated hereby; (b) ROSE shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on ROSE or R1NB, or upon the consummation of the transactions
contemplated hereby; (c) none of the events or conditions entitling BANCORP to
terminate this Agreement under Article 8 shall have occurred and be continuing;
and (d) ROSE shall have delivered to BANCORP certificates dated the date of the
Effective Time and signed by the President and Chief Executive Officer to the
effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition of
any material burden or restriction on any of the parties hereto not in existence
on the date hereof, each consent to the consummation of the Merger required to
be obtained from any Person under any agreement, contract or license to which
ROSE is a party or by or under which it is bound or licensed, the withholding of
which might have a Material Adverse Effect on ROSE, the Surviving Corporation or
BANCORP at or following the Effective Time, or on the transactions contemplated
by this Agreement;
52
<PAGE> 456
7.2.3 ROSE shall have delivered its Closing Schedules to BANCORP
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the ROSE Schedules (or in the
ROSE Financial Statements) delivered on the date of execution of this Agreement
that has had, would have, or could be reasonably likely to have, a Material
Adverse Effect on ROSE, the Surviving Corporation or BANCORP at or after the
Effective Time, or on the consummation of the transactions contemplated hereby;
7.2.4 Between the date of this Agreement and the Effective Time,
no event or circumstance shall have occurred which has had or could reasonably
be expected to have a Material Adverse Effect on ROSE, or its Subsidiaries, and
BANCORP shall have received a certificate signed on behalf of ROSE by the
President and Chief Executive Officer of ROSE to such effect;
7.2.5 Counsel for BANCORP shall have approved, in the exercise of
counsel's reasonable discretion, 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 BANCORP hereunder
or that are reasonably requested by such counsel;
7.2.6 The sale of the BANCORP Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
7.2.7 ROSE shall have delivered to BANCORP not later than the
date of this Agreement all of the executed Affiliate Agreements in the form
attached hereto as Exhibit 5.3;
7.2.8 None of ROSE or any of its Subsidiaries shall be subject to
any memorandum of understanding, cease and desist order, or other agreement with
any Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect;
7.2.9 All of ROSE's director-shareholders shall have delivered to
BANCORP on the date of this Agreement the Director-Shareholder Agreements in the
form attached hereto as Exhibit 7.2.9.
Section 7.3 CONDITIONS TO ROSE'S OBLIGATIONS. The obligations of ROSE to
effect the Merger shall be subject to the fulfillment (or waiver, in writing, by
ROSE) of the following conditions:
7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of BANCORP contained in Article 4 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
BANCORP and BANK, taken as a whole, or upon consummation of the transactions
contemplated hereby; (b) BANCORP shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have
53
<PAGE> 457
or would not be reasonably likely to have a Material Adverse Effect on BANCORP
and BANK, taken as a whole, or upon the consummation of the transactions
contemplated hereby; (c) none of the events or conditions entitling ROSE to
terminate this Agreement under Article 8 shall have occurred and be continuing;
and (d) BANCORP shall have delivered to ROSE certificates dated the date of the
Effective Time and signed by a duly authorized officer to the effect set forth
in Subsections 7.3.1(a), (b) and (c);
7.3.2 Counsel for ROSE shall have approved, in the exercise of
counsel's reasonable discretion, 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 ROSE hereunder or
that are reasonably requested by such counsel;
7.3.3 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of BANCORP and its Subsidiaries,
taken as a whole, from December 31, 1997 to the Effective Time that results in a
Material Adverse Effect as to BANCORP and its Subsidiaries, taken as a whole;
7.3.4 BANCORP has taken such action as appropriate to convert
ROSE stock options to BANCORP stock options adjusted for the Conversion Rate;
7.3.5 Prior to the Closing Date, BANCORP shall have taken all
corporate action required to effectuate the appointment of the four individuals
named on Schedule 2.9 hereto to its Board of Directors effective immediately
after the Effective Time;
7.3.6 BANCORP shall have delivered its Closing Schedules to ROSE
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the BANCORP Schedules (or in
the BANCORP Financial Statements) delivered on the date of execution of this
Agreement that has had, or would have a Material Adverse Effect on BANCORP and
its Subsidiaries, taken as a whole, at or after the Effective Time, or on the
consummation of the transactions contemplated hereby;
7.3.7 The fairness opinion (the "ROSE Fairness Opinion") to be
commissioned by ROSE's Board of Directors shall provide that the terms of the
Merger, from a financial standpoint, are fair to the shareholders of ROSE, and
shall not have been revoked, at any time prior to the meeting of ROSE's
shareholders at which the Merger is to be voted on;
7.3.8 BANCORP shall have entered into agreements with those
employees of ROSE listed on Schedule 7.3.8 which provide that if such employee
ceases to be employed by BANCORP within a two year period from the Effective
Time, such employee shall not compete with either BANCORP or R1NB. In addition,
such agreements shall provide that in the event employee's employment with
BANCORP ceases due to employee's termination by BANCORP, employee shall receive
a consulting agreement providing for two years base salary for consulting
services for a two year period;
7.3.9 BANCORP shall have appointed Richard Seeba as Executive
Vice President of BANCORP;
54
<PAGE> 458
7.3.10 The sale of the BANCORP Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
and
7.3.11 None of BANCORP or any of its Subsidiaries shall be
subject to any memorandum of understanding, cease and desist order, or other
agreement with any Governmental Entity restricting the conduct of any of their
respective businesses, prospects and operations, so as to have a Material
Adverse Effect.
ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time:
8.1.1 By mutual consent of the Boards of Directors of BANCORP and
ROSE;
8.1.2 By BANCORP or ROSE upon the failure to satisfy any
conditions specified in Section 7.1 if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
8.1.3 By BANCORP or ROSE if an Acquisition Event involving the
other party shall have occurred;
8.1.4 By ROSE if there shall have been a material breach of any
of the representations or warranties of BANCORP set forth in this Agreement,
which breach, in the reasonable opinion of ROSE, by its nature cannot be cured
or is not cured prior to the Closing and which breach would, in the reasonable
opinion of ROSE, individually or in the aggregate, have, or be reasonably likely
to have, a Material Adverse Effect on BANCORP and its Subsidiaries, taken as a
whole, or upon the consummation of the transactions contemplated hereby;
8.1.5 By BANCORP if there shall have been a material breach of
any of the representations or warranties of ROSE set forth in this Agreement,
which breach, in the reasonable opinion of BANCORP, by its nature cannot be
cured or is not cured prior to the Closing and which breach would, in the
reasonable opinion of BANCORP, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on ROSE and its
Subsidiaries, taken as a whole, or upon the consummation of the transactions
contemplated hereby;
8.1.6 By ROSE after the occurrence of a Default by BANCORP and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of ROSE,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.7 By BANCORP after the occurrence of a Default by ROSE and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default,
55
<PAGE> 459
in the reasonable opinion of BANCORP, cannot be cured prior to the Closing or,
even though curable by the Closing, it is not cured prior to the Closing;
8.1.8 By BANCORP if the Closing Schedules delivered by ROSE
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the ROSE Financial Statements
delivered to BANCORP on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on ROSE and its
Subsidiaries, taken as a whole, or after the Effective Time, on BANCORP, or on
the consummation of the transactions contemplated hereby (a "ROSE Material
Adverse Event");
8.1.9 By ROSE if the Closing Schedules delivered by BANCORP
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the BANCORP Financial
Statements delivered to ROSE on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole, or on the consummation of the transactions
contemplated hereby (a "BANCORP Material Adverse Event");
8.1.10 By ROSE upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to December 31, 1998; or
8.1.11 By BANCORP upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to December 31, 1998.
Section 8.2 EFFECT OF TERMINATION; SURVIVAL. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.4, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
Section 8.3 AMENDMENT. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of ROSE
and BANCORP; provided, however, that after any such approval by such
shareholders, no amendments shall be made which by law require further approval
by such shareholders without such further approval.
Section 8.4 WAIVER. Any term or provision of this Agreement, other than
regulatory approval or any of the provisions required by law, 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 LIQUIDATED DAMAGES; CANCELLATION FEE.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving ROSE, then ROSE shall pay to BANCORP the sum of Five Hundred Thousand
Dollars ($500,000) in cash; or (ii) an Acquisition Event involving BANCORP, then
BANCORP shall pay to ROSE the sum of Five Hundred Thousand Dollars ($500,000) in
cash.
56
<PAGE> 460
8.5.2 In the event of termination of this Agreement by ROSE
pursuant to Section 8.1.10 as a result of the revocation of the ROSE Fairness
Opinion; or a termination of this Agreement by BANCORP pursuant to (i) Section
8.1.2 (no approval by ROSE shareholders), or (ii) pursuant to Section 8.1.5
(breach of representations or warranties of ROSE) or Section 8.1.7 (Default) or
Section 8.1.8 (disclosure in the Closing Schedules of a ROSE Material Adverse
Event), where such breach of representation or warranty, Default or ROSE
Material Adverse Event shall have been caused in whole or in material part by
any action or inaction within the control of ROSE or any of its Subsidiaries, or
any of their directors or executive officers (it being understood that any
breach or Default or ROSE Material Adverse Event that occurred after the date of
this Agreement and was outside of the control of ROSE and its Subsidiaries, and
the directors and executive officers thereof, such as, by way of example only,
the filing of a lawsuit against ROSE, shall not come within this Section 8.5.2),
then, ROSE shall pay to BANCORP the sum of Two Hundred Thousand Dollars
($200,000), in cash; provided, however, that if an Acquisition Event occurs
involving ROSE within one hundred eighty (180) days following any termination by
BANCORP to which this Section 8.5.2 applies, ROSE shall pay to BANCORP an
additional Three Hundred Thousand Dollars ($300,000) in cash.
8.5.3 In the event of the termination of this Agreement by
BANCORP pursuant to Section 8.1.11 as a result of the revocation of the BANCORP
Fairness Opinion; or a termination of this Agreement by ROSE pursuant to (i)
Section 8.1.2 (no approval by BANCORP Shareholders), or (ii) 8.1.4 (breach of
representations and warranties of BANCORP) or Section 8.1.6 (Default), or
Section 8.1.9 (disclosure in Closing Schedules of a BANCORP Material Adverse
Event), where such breach of representation or warranty, or such Default or
BANCORP Material Adverse Event shall have been caused in whole or in material
part by any action or inaction within the control of BANCORP or any of its
Subsidiaries, or any of their directors or executive officers (it being
understood that any action or inaction outside of the control of BANCORP, its
Subsidiaries and their directors and executive officers, such as, by way of
example only, the filing of a lawsuit against BANCORP, shall not come within
this Section 8.5.3), then, BANCORP shall pay to ROSE the sum of Two Hundred
Thousand Dollars ($200,000), in cash; provided, however, that if an Acquisition
Event occurs involving BANCORP within one hundred eighty (180) days following
any termination by ROSE to which this Section 8.5.3 applies, BANCORP shall pay
to ROSE an additional Three Hundred Thousand Dollars ($300,000) in cash.
8.5.4 The parties have determined that the occurrence of any of
the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3 would
cause a substantial damage and loss and lost business opportunities to the party
terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.4, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
BANCORP or ROSE and for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties
57
<PAGE> 461
hereto, nor any Affiliates of any such parties, shall have any further
obligation or liability of any kind to the other party, except pursuant to
Sections 5.1.4, 5.5 and 9.5.
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time or to a
termination of this Agreement.
Section 9.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so delivered, mailed or sent, as the case may be, to the parties
at the following addresses (or any such other address for a party as shall be
specified by like notice):
If to ROSE at:
Roseville 1st Community Bancorp
1801 Douglas Boulevard
Roseville, California 95661
Fax No. (916) 773-5500
Attention: Richard Seeba, President/CEO
with a copy to:
Pillsbury, Madison & Sutro, LLP
400 Capitol Mall, 17th Floor
Sacramento, California 95814
Fax No. (916) 441-3583
Attention: Cary C. Boyden, Esq.
If to BANCORP at:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Fax No. (530) 677-5075
Attention: Gary D. Gall, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
58
<PAGE> 462
Section 9.3 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 9.4 ENTIRE AGREEMENT/NO THIRD PARTY RIGHTS/ASSIGNMENT. 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 expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 NONDISCLOSURE OF AGREEMENT. BANCORP and ROSE agree, except
as required by law or the rules of the NASDAQ, so long as this Agreement is in
effect, not to issue any public notice, disclosure or press release with respect
to the transactions contemplated by this Agreement without seeking the consent
of the other party, which consent shall not be unreasonably withheld.
Section 9.6 GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law.
Section 9.7 HEADINGS/TABLE OF CONTENTS. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.8 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Bank Merger Agreement is not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the State of California or any state having jurisdiction, this
being in addition to any remedy to which they are entitled at law or in equity.
Section 9.9 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 9.10 ATTORNEYS' FEES. If any legal action or any arbitration
upon mutual agreement is brought for the enforcement of this Agreement or
because of an alleged dispute, breach or default in connection with this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs and expenses incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
59
<PAGE> 463
IN WITNESS WHEREOF, BANCORP and ROSE have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the date first
above written.
WESTERN SIERRA BANCORP ROSEVILLE 1ST COMMUNITY BANCORP
By: /s/ JOSEPH A. SURRA By: /S/ THOMAS MANZ
---------------------------------- --------------------------------
Name: Joseph A. Surra Name: Thomas Manz
By: /S/ GARY D. GALL By: /S/ RICHARD C. SEEBA
---------------------------------- --------------------------------
Name: Gary D. Gall Name: Richard C. Seeba
60
<PAGE> 464
INDEX OF EXHIBITS AND SCHEDULES
PREVIOUSLY DELIVERED BY THE PARTIES
Exhibits
--------
Exhibit 2.1 Form of Merger Agreement
Exhibit 5.3 Form of Affiliate Agreements
Exhibit 7.1.7A Form of Opinion of ROSE Counsel
Exhibit 7.1.7B Form of Opinion of BANCORP Counsel
Exhibit 7.2.10 Form of Director-Shareholder Agreements
Schedules
---------
Schedule 2.9 ROSE Directors
Schedule 2.10 KSOP Trustees
Schedule 3.2 Licenses and Permits
Schedule 3.3 Subsidiaries
Schedule 3.4 Required Consents and Conflicts
Schedule 3.5 ROSE Stock Options
Schedule 3.8 Compliance with Laws
Schedule 3.9 Litigation
Schedule 3.11 Insurance Policies
Schedule 3.12 Title Exceptions
Schedule 3.13 Real Property
Schedule 3.14 Tax Matters
Schedule 3.15 Performance of Obligations
Schedule 3.16 Loans and Investments
Schedule 3.17 ROSE's Brokers and Finders
Schedule 3.18 Material Contracts
Schedule 3.20 Undisclosed Liabilities
Schedule 3.21 Employees; Employee Benefit Plans; ERISA
Schedule 3.23 Potential Environmental Liabilities
Schedule 3.24 Stock Option Plans
Schedule 4.2 Licenses and Permits
Schedule 4.3 Subsidiaries
Schedule 4.4 Required Consents and Conflicts
Schedule 4.8 Compliance with Laws
Schedule 4.9 Litigation
Schedule 4.11 Insurance Policies
Schedule 4.12 Title Exceptions
Schedule 4.13 Real Property
Schedule 4.14 Performance of Obligations
Schedule 4.15 BANCORP's Brokers and Finders
Schedule 4.17 Undisclosed Liabilities
Schedule 4.18 Tax Matters
Schedule 4.19 Potential Environmental Liabilities
Schedule 4.20 Employees
Schedule 4.22 Loans and Investments
Schedule 4.23 Material Contracts
Schedule 6.2.11 Pay or Benefit Increases
Schedule 7.3.8 ROSE Employee List
61
<PAGE> 465
EXHIBIT III
[THE FINDLEY GROUP LETTERHEAD]
May 27, 1998
Members of the Board of Directors
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial standpoint, to the shareholders of Western Sierra Bancorp, Cameron
Park, California ("Bancorp") of the terms of the proposed merger of LMC Merger
Company, Cameron Park, California ("LMC"), a wholly owned subsidiary of Bancorp
and Lake Community Bank, Lakeport, California ("LCB") whereby LCB shall become a
wholly owned subsidiary of Bancorp as defined in the Agreement and Plan of
Reorganization and Merger (the "Agreement") entered into as of May 27, 1998.
Pursuant to the Agreement and subject to the terms and conditions therein, each
share of LCB Common Stock issued and outstanding at the Effective Time shall, on
and at the Effective Time, pursuant to the Agreement be exchanged for and
converted into the right to receive shares of Bancorp Common Stock equal to the
Conversion Rate. The Conversion Rate is obtained by dividing the Per Share
Merger Price by the Bancorp Average Trading Price. The Per Share Merger Price is
the sum of the total shareholders' equity for LCB as of the Determination Date
(after a third party review to determine the adequacy of LCB's loan loss
reserves and the expensing of LCB's Costs Associated With The Transaction)
multiplied by 1.75 with the total product divided by the total number of shares
of LCB Common Stock outstanding at the Closing Date. Bancorp Average Trading
Price is the average trading price for Bancorp Common Stock as determined for a
thirty calendar day period prior to the Determination Date. However, if the
Bancorp Average Trading Price is above $20.00 per share, the Bancorp Average
Trading Price shall be $20.00 per share. If the Bancorp Average Trading Price is
below $17.00 per share, the Bancorp Average Trading Price shall be $17.00 per
share.
As part of its investment banking business, The Findley Group is continually
engaged in the valuation bank, bank holding company and thrift securities in
connection with mergers and acquisitions nationwide. We have previously provided
investment banking and financial advisory services to Bancorp.
<PAGE> 466
Board of Directors - 2 - May 27, 1998
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) a draft of the Agreement; (ii) Annual Reports to Shareholders
of Bancorp and LCB for the years ended December 31, 1997 and December 31, 1996;
(iii) Quarterly Call Reports for the Quarters ended March 31, 1998 , December
31, 1997, September 30, 1997, June 30, 1997, March 31, 1997 and December 31,
1996 for LCB and Western Sierra National Bank, a wholly owned subsidiary of
Bancorp; (iv) certain other publicly available financial and other information
concerning Bancorp and LCB; and (v) publicly available information concerning
other banks and holding companies, the trading markets for their securities and
the nature and terms of certain other merger transactions we believe relevant to
our inquiry. We have held discussions with senior management of Bancorp
concerning their past and current operations, financial condition and prospects,
as well as the results of regulatory examinations.
We have reviewed with senior management of Bancorp earnings projections for 1998
through 2002 for Bancorp as a stand-alone entity, assuming the Merger does not
occur, prepared by Bancorp. We reviewed earnings projections for 1998 through
2002 for LCB as a stand-alone entity, assuming the Merger does not occur, as
well as projected operating cost savings and earnings enhancement opportunities
expected to be achieved in each such years resulting from the Merger. Certain
pro forma financial projections for the combined entity were derived by us based
partially upon the projections discussed above, as well as our own assessment of
general economic, market and financial conditions. In certain cases, such
combined pro forma financial projections included projected operating cost
savings and earnings enhancement opportunities derived by us partially based
upon the projections discussed above to be realizable in the Merger.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the managements of
Bancorp and LCB as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings and earnings
enhancement opportunities (and the assumptions and bases therefor) provided to
us, and we have assumed that such forecasts, projections and projected operating
cost savings and earnings enhancement opportunities reflect the best currently
available estimates and judgements of the applicable managements. We have also
assumed, without assuming any responsibility for the independent verification of
the same, that the aggregate allowances for loan losses for Bancorp and LCB are
adequate to cover such losses. We have not made or obtained any evaluations or
appraisals of the property of Bancorp or LCB, nor have we examined any
individual loan credit files. For purposes of this opinion, we have assumed that
the Merger will have the tax, accounting and legal effects described in the
Agreement and assumed the accuracy of the disclosures set forth in the
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial standpoint, to the holders of the shares of Bancorp Common Stock of
the terms of the proposed merger of LCB with and into LMC with LCB as the
Surviving Corporation and a wholly owned subsidiary of Bancorp and does not
address Bancorp's underlying business decision to proceed with the Merger.
<PAGE> 467
Board of Directors - 3 - May 27, 1998
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Bancorp and LCB; (ii) the assets and liabilities of Bancorp and LCB, including
the loan and investment portfolios, deposits, other liabilities, historical and
current liability sources and costs and liquidity; and (iii) the nature and
terms of certain other merger transactions involving banks and bank holding
companies. We have also taken into account our assessment of general economic,
market and financial conditions and our experience in other transactions, as
well as our experience in securities valuation and our knowledge of the banking
industry generally. Our opinion is necessarily based upon conditions as they
exist and can be evaluated on the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the proposed merger are fair,
from a financial standpoint, to the holders of the shares of Bancorp Common
Stock.
This opinion may not be used or referred to by Bancorp or quoted or disclosed to
any person in any manner without our prior written consent, with the exception
of submission to the regulatory agencies as part of the applications and
included in the proxy materials provided to shareholders of Bancorp in relation
to approval of the Merger. This opinion is not intended to be and shall not be
deemed to be a recommendation to any shareholder of Bancorp as to how such
shareholder should vote with respect to the Merger.
Respectfully submitted,
THE FINDLEY GROUP
/s/ GARY STEVEN FINDLEY
----------------------------
Gary Steven Findley
Director
<PAGE> 468
EXHIBIT IV
[THE BANC STOCK GROUP, INC. LETTERHEAD]
May 27, 1998
Board of Directors
LAKE COMMUNITY BANK
805 Eleventh St
Lakeport, CA 95453
RE: FAIRNESS OPINION LAKE COMMUNITY BANK/WESTERN SIERRA BANCORP
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of common shares of Lake Community Bank
("LCB") of the consideration to be received by LCB, in the proposed merger (the
"Merger") of LCB with and into Western Sierra Bancorp ("WSB"). Pursuant to the
Agreement and Plan of Merger (the "Agreement") and subject to the terms and
conditions contained therein, each holder of common shares of LCB will receive,
in exchange for common shares of LCB, WSB common shares. The transaction is
based on a share value for LCB of 1.75 X book value of LCB to be exchanged based
on the determined market value per share of WSB common shares for each share of
LCB common stock subject to certain adjustments as described in the Agreement.
We have acted for LCB and for the Board of Directors as financial advisor in
connection with this transaction and have received a fee for our services. We
have previously provided investment banking and financial advisory services to
LCB. We have not provided investment banking or financial advisory services to
WSB. We are not a market maker in LCB's common shares.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (I) the Agreement; (II) certain publicly available financial and
other data with respect to LCB and WSB including consolidated financial
statements and recent years and interim periods to March 31, 1998; (III) certain
other publicly available financial and other information concerning LCB and WSB;
(IV) publicly available information concerning other banks and holding
companies, the trading markets for their securities and the nature and terms of
certain other merger transactions we believed relevant to our inquiry; and (V)
evaluations and analyses prepared and presented to the Board of Directors of LCB
thereof in connection with the Merger. We have held discussions with senior
management of LCB and of WSB concerning their past and current operations,
financial condition and prospects, as well as the results of regulatory
examinations.
We have reviewed with senior management of LCB earnings projections for LCB as a
stand-alone entity, assuming the Merger does not occur, prepared by LCB. We have
reviewed with senior management of WSB earnings projections as a stand-alone
entity, assuming the Merger does not occur, prepared by WSB. We have also
reviewed with the senior management of both LCB and WSB the projected operating
cost savings
<PAGE> 469
Lake Community Bank/Fairness Opinion
May 27, 1998
Page Two
reasonably expected by WSB resulting from the Merger with LCB. Certain pro forma
financial projections for the combined companies and for LCB and WSB as
stand-alone entities were derived by us based upon the projections and growth
assumptions discussed above, as well as our own assessment of general economic,
market and financial conditions. In certain cases, such combined pro forma
financial projections included projected operating cost savings derived by us
based upon the projections discussed above and believed by us to be realizable
in the Merger.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
both LCB and WSB as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts,
projections and projected operating cost savings reflect the best currently
available estimates and judgements of the applicable managements. We have also
assumed, without assuming any responsibility for the independent verification of
same, that the aggregate allowances for loan losses for LCB and WSB are adequate
to cover such losses. We have not made or obtained any evaluations or appraisals
of the property of LCB or WSB, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the Merger will have
the tax, accounting and legal effects (including, without limitation, that the
Merger will be accounted for as a pooling-of-interests) described in the
Agreement and assumed the accuracy of the disclosures set forth in the
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of common shares of LCB of the Exchange
Formula as described in the Merger as set forth in the Agreement and does not
address LCB's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (I)
the historical and current financial positions and results of operations of LCB
and WSB, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
LCB and for WSB; (II) the assets and liabilities for LCB and WSB, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (III) the
nature and terms of certain other merger transactions involving banks and bank
holding companies. We have also taken into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily based
only upon conditions as
<PAGE> 470
Lake Community Bank/Fairness Opinion
May 27, 1998
Page Three
they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of LCB and may not be relied upon by any other person or used for any
other purpose without our prior written consent except a copy of this letter may
be included in LCB's proxy statement with respect to the Merger. This letter
does not constitute a recommendation to the Board of Directors or to any
shareholder of LCB with respect to any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Exchange Formula of the Merger as set
forth in the Agreement is fair, from a financial point of view, to the holders
of the common shares of LCB.
Very truly yours,
THE BANC STOCK GROUP, INC
/s/ EDWARD E. SCHMIDT
- --------------------------
Edward E. Schmidt
Executive Vice President
Encl. Prepared Fairness Opinion Report, Dated May 27, 1998
(provided under separate cover)
<PAGE> 471
EXHIBIT V
[THE BANC STOCK GROUP, INC. LETTERHEAD]
August 26, 1998
Board of Directors
ROSEVILLE 1ST COMMUNITY BANCORP
1801 Douglas Boulevard
Roseville, California 95661
RE: "FAIRNESS OPINION" ROSEVILLE 1ST COMMUNITY BANCORP /WESTERN SIERRA BANCORP
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of common shares of Roseville 1st
Community Bancorp ("ROSE") of the consideration to be received by ROSE, in the
proposed merger (the "Merger") of ROSE with and into Western Sierra Bancorp
("WSB"). Pursuant to the Agreement and Plan of Merger (the "Agreement") and
subject to the terms and conditions contained therein, each holder of common
shares of ROSE will receive, in exchange for common shares of ROSE, WSB common
shares. The transaction is based on a share value for ROSE based on the adjusted
book value of ROSE to be exchanged based on the determined book value per share
of WSB common shares for each share of ROSE common stock subject to certain
adjustments as described in the Agreement.
We have not acted for ROSE or for the Board of Directors as financial advisor in
connection with this transaction. We have not previously provided investment
banking and financial advisory services to ROSE. We have not provided investment
banking or financial advisory services to WSB. We are not a market maker in
ROSE's common shares.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (I) the Agreement; (II) certain publicly available financial and
other data with respect to ROSE and WSB including consolidated financial
statements and recent years and interim periods to March 31, 1998; (III) certain
other publicly available financial and other information concerning ROSE and
WSB; (IV) publicly available information concerning other banks and holding
companies, the trading markets for their securities and the nature and terms of
certain other merger transactions we believed relevant to our inquiry; and (V)
evaluations and analyses prepared and presented to the Board of Directors of
ROSE thereof in connection with the Merger. We have held discussions with senior
management of ROSE and of WSB concerning their past and current operations,
financial condition and prospects, as well as the results of regulatory
examinations.
We have reviewed with senior management of ROSE earnings projections for ROSE as
a stand-alone entity, assuming the Merger does not occur, prepared by ROSE. We
have reviewed with senior management of WSB earnings projections as a
stand-alone entity, assuming the Merger does not occur, prepared by WSB. We have
also reviewed with the senior management of both ROSE and WSB the projected
operating cost savings
<PAGE> 472
Roseville 1st Community Bancorp/Fairness Opinion
August 26, 1998
Page Two
reasonably expected by WSB resulting from the Merger with ROSE. Certain pro
forma financial projections for the combined companies and for ROSE and WSB as
stand-alone entities were derived by us based upon the projections and growth
assumptions discussed above, as well as our own assessment of general economic,
market and financial conditions. In certain cases, such combined pro forma
financial projections included projected operating cost savings derived by us
based upon the projections discussed above and believed by us to be realizable
in the Merger.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
both ROSE and WSB as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts,
projections and projected operating cost savings reflect the best currently
available estimates and judgements of the applicable managements. We have also
assumed, without assuming any responsibility for the independent verification of
same, that the aggregate allowances for loan losses for ROSE and WSB are
adequate to cover such losses. We have not made or obtained any evaluations or
appraisals of the property of ROSE or WSB, nor have we examined any individual
loan credit files. For purposes of this opinion, we have assumed that the Merger
will have the tax, accounting and legal effects (including, without limitation,
that the Merger will be accounted for as a pooling-of-interests) described in
the Agreement and assumed the accuracy of the disclosures set forth in the
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of common shares of ROSE of the Exchange
Formula as described in the Merger as set forth in the Agreement and does not
address ROSE's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (I)
the historical and current financial positions and results of operations of ROSE
and WSB, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
ROSE and for WSB; (II) the assets and liabilities for ROSE and WSB, including
the loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (III) the
nature and terms of certain other merger transactions involving banks and bank
holding companies. We have also taken into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily based
only upon conditions as
<PAGE> 473
Roseville 1st Community Bancorp/Fairness Opinion
August 26, 1998
Page Three
they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of ROSE and may not be relied upon by any other person or used for any
other purpose without our prior written consent except a copy of this letter may
be included in ROSE's proxy statement with respect to the Merger. This letter
does not constitute a recommendation to the Board of Directors or to any
shareholder of ROSE with respect to any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Exchange Formula of the Merger as set
forth in the Agreement is fair, from a financial point of view, to the holders
of the common shares of ROSE.
Very truly yours,
THE BANC STOCK GROUP, INC
/s/ EDWARD E. SCHMIDT
- -------------------------
Edward E. Schmidt
Executive Vice President
Encl. PREPARED FAIRNESS OPINION REPORT, DATED JULY 2, 1998
<PAGE> 474
EXHIBIT VI
CHAPTER 13
DISSENTERS' RIGHTS
Right to require purchase -- "Dissenting shares" and "dissenting shareholder"
defined. Section 1300.
Demand for purchase. Section 1301.
Endorsement of shares. Section 1302.
Agreed price -- Time for payment. Section 1303.
Dissenter's action to enforce payment. Section 1304.
Appraisers' report -- Payment -- Costs. Section 1305.
Dissenting shareholder's status as creditor. Section 1306.
Dividends paid as credit against payment. Section 1307.
Continuing rights and privileges of dissenting shareholders. Section 1308.
Termination of dissenting shareholder status. Section 1309.
Suspension of proceedings for payment pending litigation. Section 1310.
Exempt shares. Section 1311.
Attacking validity of reorganization or merger. Section 1312.
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-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,
1
<PAGE> 475
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. Leg.H.
1975 ch. 682 1976 ch. 641, effective January 1, 1997, 1982 ch. 36, effective
February 17, 1982, 1990 ch. 1018, 1993 ch. 543.
1993 NOTE: Nothing in this act shall be construed to modify or alter the
prohibition contained in Sections 15503 and 15616 of the Corporations Code or
Section 1648 of the Insurance Code, or modify or alter any similar prohibition
relating to the operation of a business in limited partnership form. Stats.
1993 ch. 543 Section 24.
Nothing in this act shall be construed to modify or impair any rights of
limited partners under the Thompson-Killea Limited Partners Protection Act of
1992 (Chapter 1183 of the Statutes of 1992). Stats. 1993 ch. 543 Section 25.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares 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.
2
<PAGE> 476
(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.
Leg.H. 1975 ch. 682, 1976 ch. 641, effective January 1, 1997, 1980 chs. 501,
1155.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates 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. Leg.H. 1975 ch. 682, effective January 1, 1997, 1986 ch.
766.
SECTION 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
3
<PAGE> 477
(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. Leg.H. 1975 ch. 682,
effective January 1, 1997, 1980 ch. 501, 1986 ch. 766.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting 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. Leg.H. 1975
ch. 682, effective January 1, 1997.
SECTION 1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or
4
<PAGE> 478
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). Leg.H. 1975 ch. 682, 1976 ch. 641, effective January 1, 1997,
1997 ch. 235, 1986 ch. 766.
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5. Leg.H. 1975 ch. 682, effective
January 1, 1977.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor. Leg.H. 1975 ch. 682, effective January 1, 1977.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto. Leg.H. 1975 ch. 682, effective January 1, 1977.
5
<PAGE> 479
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares
of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Leg.H. 1975 ch. 682, effective January 1, 1977.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Section 1304 and 1305 shall be suspended until final determination of
such litigation. Leg.H. 1975 ch. 682, effective January 1, 1977.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger. Leg.H. 1975
ch. 682, effective January 1, 1977, 1988 ch. 919.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to
6
<PAGE> 480
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the approved
reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of 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. Leg.H. 1975 ch. 682, 1976 ch.
641, effective January 1, 1977, 1988 ch. 919.
7
<PAGE> 481
PROXY
WESTERN SIERRA BANCORP
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
hereby appoints Robert G. Albrecht, Richard L. Golemon and Joseph A. Surra and
each of them as proxyholders with full power of substitution, to represent, vote
and act with respect to all shares of common stock of Western Sierra Bancorp
(the "Bancorp") which the undersigned would be entitled to vote at the Special
Meeting of Shareholders to be held on ___________, 1998 at ____ p.m., at Western
Sierra National Bank's principal office located at 4011 Plaza Goldorado Circle,
Cameron Park, California or any adjournments thereof, with all the powers the
undersigned would possess if personally present as follows:
1. Approval of the principal terms of the Agreement and Plan of
Reorganization and Merger by and among the Bancorp, LMC Merger Company
and Lake Community Bank ("Lake") dated May 27, 1998 and the
transactions contemplated thereby (the "Lake Agreement") providing for
the merger of Lake with the Bancorp's subsidiary corporation, LMC
Merger Company, and the exchange of shares of Bancorp Common Stock for
shares of Lake Common Stock as further described in the accompanying
Joint Proxy Statement/Prospectus and in the Lake Agreement which is
included as Exhibit I to the Joint Proxy Statement/Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the principal terms of the Agreement and Plan of
Reorganization and Merger by and among the Bancorp and Roseville 1st
Community Bancorp ("Rose") dated July 2, 1998 and the transactions
contemplated thereby (the "Rose Agreement") providing for the merger of
Rose with the Bancorp, and the exchange of shares of Bancorp Common
Stock for shares of Rose Common Stock as further described in the
accompanying Joint Proxy Statement/Prospectus and in the Rose
Agreement which is included as Exhibit II to the Joint Proxy Statement/
Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Transaction of such other business as may properly come before the
meeting and any adjournment or adjournments thereof.
<PAGE> 482
PLEASE SIGN AND DATE BELOW
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSALS. The
Proxy confers authority to vote and shall be voted in accordance with such
recommendation unless a contrary instruction is indicated, in which case, the
shares represented by the Proxy will be voted in accordance with such
instruction. IF NO INSTRUCTION IS SPECIFIED WITH RESPECT TO THE MATTERS TO BE
ACTED UPON, THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT.
(Please date this Proxy and sign your name exactly as it appears on your stock
certificate. Executors, administrators, trustees, etc., should give their full
title. If a corporation, please sign in full corporate name by the president or
other authorized officer. If a partnership, please sign in partnership name by
an authorized person. All joint owners should sign.)
[ ] I DO [ ] I DO NOT EXPECT TO ATTEND THE MEETING.
---------------------------------------
(Number of Shares)
---------------------------------------
(Please Print Your Name)
---------------------------------------
(Please Print Your Name)
---------------------------------------
(Date)
---------------------------------------
(Signature of Shareholder)
---------------------------------------
(Signature of Shareholder)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE BY FILING WITH THE SECRETARY OF THE BANCORP AN INSTRUMENT
REVOKING THIS PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY
ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE> 483
LAKE COMMUNITY BANK
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ____________ __, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Lake Common Stock acknowledges receipt of a copy
of the Notice of Special Meeting of Shareholders of Lake Community Bank, and the
accompanying Joint Proxy Statement/Prospectus dated _______ __, 1998, and
revoking any Proxy heretofore given, hereby constitutes and appoints Howard Van
Lente and Donald L. Browning, M.D., and each of them, with full power of
substitution, as attorneys and proxies to appear and vote all of the shares of
Lake Common Stock of Lake Community Bank, a California banking corporation
("Lake"), standing in the name of the undersigned which the undersigned could
vote if personally present and acting at the Special Meeting of Shareholders of
Lake, to be held at Lake's head office, 805 Eleventh Street, Lakeport,
California, on ___________, ____ __, 1998 at 5:00 p.m. or at any adjournments
thereof, upon the following items as set forth in the Notice of Special Meeting
and Joint Proxy Statement/Prospectus and to vote according to their discretion
on all other matters which may be properly presented for action at the meeting
or any adjournments thereof
1. Adoption and approval of the Agreement and Plan of Reorganization and Merger
dated May 27, 1998 among Lake, Western Sierra Bancorp and LMC Merger Company;
the related Agreement to Merge to be entered into among Lake, Western Sierra
Bancorp, and LMC Merger Company pursuant to which LMC Merger Company will be
merged with and into Lake, resulting in Lake becoming the wholly-owned
subsidiary of Western Sierra Bancorp; and the transactions contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxy holders are authorized to vote upon such
other business as may properly come before the meeting, including, but not
limited to, any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 1. THE PROXY WHEN
PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE
VOTED "FOR" PROPOSAL NO. 1
<TABLE>
<CAPTION>
SHAREHOLDER(S) NO. OF COMMON SHARES
-------------- --------------------
<S> <C>
------------------------------ --------------------
------------------------------ --------------------
</TABLE>
DATE:________________
Please date and sign exactly as your name(s) appears. When signing as attorney,
executor, administrator, trustee, or guardian, please give full title as such.
If more than one trustee, all should sign. All joint owners should sign. WHETHER
OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THIS PROXY AS
PROMPTLY AS POSSIBLE IN THE ENCLOSED POST-PAID ENVELOPE.
I/We do ____ or do not ____ expect to attend this meeting.
THIS PROXY IS SOLICITED BY, AND ON BEHALF OF, THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE.
<PAGE> 484
PROXY
ROSEVILLE 1ST COMMUNITY BANCORP
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
hereby appoints Thomas Manz and Richard C. Seeba and each of them as
proxyholders with full power of substitution, to represent, vote and act with
respect to all shares of common stock of Roseville 1st Community Bancorp
("Rose") which the undersigned would be entitled to vote at the Special Meeting
of Shareholders to be held on ___________, 1998 at ____ p.m., at Roseville 1st
National Bank's principal office located at 1801 Douglas Boulevard, Roseville,
California, or any adjournments thereof, with all the powers the undersigned
would possess if personally present as follows:
1. Approval of the principal terms of the Agreement and Plan of
Reorganization and Merger by and among the Western Sierra Bancorp (the
"Bancorp") and Rose dated July 2, 1998 and the transactions contemplated
thereby (the "Rose Agreement") providing for the merger of Rose with the
Bancorp, and the exchange of shares of Bancorp Common Stock for shares of
Rose Common Stock as further described in the accompanying Joint Proxy
Statement/Prospectus and in the Rose Agreement which is included as
Exhibit II to the Joint Proxy Statement/Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Transaction of such other business as may properly come before the meeting
and any adjournment or adjournments thereof.
<PAGE> 485
PLEASE SIGN AND DATE BELOW
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ROSE AGREEMENT.
The Proxy confers authority to vote and shall be voted in accordance with such
recommendation unless a contrary instruction is indicated, in which case, the
shares represented by the Proxy will be voted in accordance with such
instruction. IF NO INSTRUCTION IS SPECIFIED WITH RESPECT TO THE MATTER TO BE
ACTED UPON, THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT.
(Please date this Proxy and sign your name exactly as it appears on your stock
certificate. Executors, administrators, trustees, etc., should give their full
title. If a corporation, please sign in full corporate name by the president or
other authorized officer. If a partnership, please sign in partnership name by
an authorized person. All joint owners should sign.)
[ ] I DO [ ] I DO NOT EXPECT TO ATTEND THE MEETING.
-----------------------------------------
(Number of Shares)
-----------------------------------------
(Please Print Your Name)
-----------------------------------------
(Please Print Your Name)
-----------------------------------------
(Date)
-----------------------------------------
(Signature of Shareholder)
-----------------------------------------
(Signature of Shareholder)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE BY FILING WITH THE SECRETARY OF ROSE AN INSTRUMENT
REVOKING THIS PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY
ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE> 486
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of Western Sierra Bancorp ("Bancorp")
provide for indemnification of agents including directors, officers and
employees to the maximum extent allowed by California law including the use of
an indemnity agreement. Bancorp's Articles further provide for the elimination
of director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the State of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of such person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there shall be no indemnification for: (i) amounts paid in
settling or otherwise disposing of a pending action without court approval; (ii)
expenses incurred in defending a pending action which is settled or otherwise
disposed of without court approval; (iii) matters in which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which the proceeding is or was pending shall determine that
such person is entitled to be indemnified; or (iv) other matters specified in
the California General Corporation Law.
Bancorp's Bylaws provide that Bancorp shall to the maximum extent permitted by
law have the power to indemnify its directors, officers and employees. Bancorp's
Bylaws also provide that Bancorp shall have the power to purchase and maintain
insurance covering its directors, officers and employees against any liability
asserted against any of them and incurred by any of them, whether or not Bancorp
would have the power to indemnify them against such liability under the
provisions of applicable law or the provisions of Bancorp's Bylaws. Each of the
directors and executive officers of Bancorp's subsidiary, Western Sierra
National Bank, has an indemnification agreement with Western Sierra National
Bank that provides that Western Sierra National Bank shall indemnify such person
to the full extent authorized by the applicable provisions of California law,
subject to national banking law, and further provide advances to pay for any
expenses which would be subject to reimbursement.
ITEM 21. EXHIBITS
<TABLE>
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger by and between the
Bancorp and Lake dated as of May 27, 1998 attached as Exhibit I to the
Joint Proxy Statement/Prospectus contained in Part I of this
Registration Statement.
2.2 Agreement and Plan of Reorganization and Merger by and between the
Bancorp and Rose dated as of July 2, 1998 attached as Exhibit II to the
Joint Proxy Statement/Prospectus contained in Part I of this
Registration Statement.
*3.1 Articles of Incorporation of Registrant.
*3.2 Bylaws as amended of Registrant.
*5.1 Opinion re: legality.
</TABLE>
- ----------
* Filed with the original Registration Statement.
1
<PAGE> 487
ITEM 21. EXHIBITS (CONTINUED)
<TABLE>
<S> <C>
*8.1 Opinion re: tax matters as to the merger of Lake Community Bank with a
subsidiary of Registrant by Perry-Smith & Co., LLP.
*8.2 Opinion re: tax matters as to the merger of Roseville 1st Community
Bancorp with Registrant by Perry-Smith & Co., LLP.
*10.1 Placerville branch lease dated June 23, 1987 as amended.
*10.2 Severance benefits agreement for Gary Gall.
*10.3 Severance benefits agreement for Stephanie Marsh
*10.4 Salary continuation agreement for Gary Gall as amended.
*10.5 Stock option agreement dated April 11, 1995 for Gary Gall.
*10.6 Stock option agreement dated November 14, 1996 for Gary Gall.
*10.7 Stock option agreement dated May 20, 1997 for Gary Gall.
*10.8 Stock option agreement dated November 14, 1996 for Stephanie Marsh.
*10.9 Stock option agreement dated July 15, 1997 for Stephanie Marsh.
*10.10 Western Sierra National Bank 1989 Stock Option Plan and form of
incentive stock option and nonqualified stock option agreement.
*10.11 Western Sierra Bancorp 1997 Stock Option Plan and form of incentive
stock option agreement and nonqualified stock option agreement.
*10.12 Western Sierra National Bank Incentive Compensation Plan for senior
management.
*10.13 Indemnification agreement for Gary Gall.
*10.14 Indemnification agreement for Stephanie Marsh.
*10.15 Indemnification agreement form for directors of Western Sierra National
Bank.
11. Statement re: computation of per share earnings is included in Note 1 to
the financial statements to the Joint Proxy Statement/Prospectus
included in Part I of this Registration Statement.
21. Subsidiaries of the registrant are Western Sierra National Bank, a
national banking association and LMC Merger Company, a California
corporation.
</TABLE>
- ----------
* Filed with the original Registration Statement.
2
<PAGE> 488
ITEM 21. EXHIBITS (CONTINUED)
<TABLE>
<S> <C>
23.1 Consent of Counsel is included with the opinion re: legality as Exhibit
5 to this Registration Statement.
23.2 Consent of Perry-Smith & Co., LLP as accountants for the Registrant.
23.3 Consent of Perry-Smith & Co., LLP as accountants for Lake Community
Bank.
23.4 Consent of Perry-Smith & Co., LLP as accountants for Roseville 1st
Community Bancorp.
*23.5 Consent of The Findley Group as financial advisor to the Registrant.
*23.6 Consent of The Banc Stock Group, Inc. as financial advisor to Lake
Community Bank.
*23.7 Consent of The Banc Stock Group, Inc. as financial advisor to Roseville
1st Community Bancorp.
</TABLE>
- ----------
* Filed with the original Registration Statement.
b) Financial Statement Schedules
None.
c) OPINIONS
Opinion of The Findley Group (included as Exhibit III in the Joint Proxy
Statement/Prospectus in Part I herein).
Opinion of The Banc Stock Group, Inc. as financial advisor to Lake Community
Bank (included as Exhibit IV in the Joint Proxy Statement/Prospectus in Part
I herein)
Opinion of The Banc Stock Group, Inc. as financial advisor to Roseville 1st
Community Bancorp (included as Exhibit V in the Joint Proxy
Statement/Prospectus in Part I herein).
ITEM 28. UNDERTAKINGS
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 of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
3
<PAGE> 489
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) 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.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
4
<PAGE> 490
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Cameron Park, California,
on November 16, 1998.
WESTERN SIERRA BANCORP
/s/ GARY D. GALL
-----------------------------------------
Gary D. Gall, President & CEO
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<S> <C> <C>
/s/ GARY D. GALL , Director, Principal Executive November 16, 1998
- ------------------------------ and Principal Financial Officer
Gary D. Gall
/s/ JOSEPH A. SURRA , Chairman November 16, 1998
- ------------------------------
Joseph A. Surra
/s/ ROBERT G. ALBRECHT , Director November 16, 1998
- ------------------------------
Robert G. Albrecht
/s/ CHARLES W. BACCHI , Director November 16, 1998
- ------------------------------
Charles W. Bacchi
/s/ BARBARA L. COOK , Director November 16, 1998
- ------------------------------
Barbara L. Cook
/s/ WILLIAM J. FISHER , Director November 16, 1998
- ------------------------------
William J. Fisher
</TABLE>
5
<PAGE> 491
<TABLE>
<S> <C> <C>
/s/ RICHARD L. GOLEMON , Director November 16, 1998
- ------------------------------
Richard L. Golemon
/s/ HAROLD S. PRESCOTT, JR. , Director November 16, 1998
- ------------------------------
Harold S. Prescott, Jr.
/s/ DAROL B. RASMUSSEN , Director November 16, 1998
- ------------------------------
Darol B. Rasmussen
/s/ OSVALDO I. SCARIOT , Director November 16, 1998
- ------------------------------
Osvaldo I. Scariot
/s/ LESA FYNES , Principal Accounting Officer November 16, 1998
- ------------------------------
Lesa Fynes
</TABLE>
6
<PAGE> 492
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
23.2 Consent of Perry-Smith & Co., LLP as accountants for the Registrant.
23.3 Consent of Perry-Smith & Co., LLP as accountants for Lake
Community Bank.
23.4 Consent of Perry-Smith & Co., LLP as accountants for Roseville 1st
Community Bancorp.
</TABLE>
7
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form S-4
for Western Sierra Bancorp of our report dated February 6, 1998 relating to the
financial statements of Western Sierra Bancorp and Subsidiary for the years
ended December 31, 1997, 1996 and 1995, and to the reference to our Firm under
the caption "EXPERTS" in the Registration Statement.
/s/ Perry-Smith & Co., LLP
Sacramento, California
November 16, 1998
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form S-4
for Western Sierra Bancorp of our report dated March 5, 1998 relating to the
financial statements of Lake Community Bank for the years ended December 31,
1997, 1996 and 1995, and to the reference to our Firm under the caption
"EXPERTS" in the Registration Statement.
/s/ Perry-Smith & Co., LLP
Sacramento, California
November 16, 1998
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form S-4
for Western Sierra Bancorp of our report dated March 20, 1998 relating to the
financial statements of Roseville 1st National Bank for the years ended December
31, 1997, 1996 and 1995, and to the reference to our Firm under the caption
"EXPERTS" in the Registration Statement.
/s/ Perry-Smith & Co., LLP
Sacramento, California
November 16, 1998
