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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement Under the Securities Act of 1933
WESTERN SIERRA BANCORP
(Exact Name of Registrant as Specified in Its Charter)
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CALIFORNIA 6021 68-0390121
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(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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4011 PLAZA GOLDORADO CIRCLE, CAMERON PARK, CALIFORNIA 95682, (530) 677-5600
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(Address and Telephone Number of Principal Executive Offices)
4011 PLAZA GOLDORADO CIRCLE, CAMERON PARK, CALIFORNIA 95682
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(Address of Principal Place of Business)
GARY D. GALL, PRESIDENT & CEO
4011 PLAZA GOLDORADO CIRCLE, CAMERON PARK, CALIFORNIA 90064 (530) 677-5600
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(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. [ ]
_________________________.
CALCULATION OF REGISTRATION FEE
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Title of each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Price Aggregate Amount of
be Registered Registered(a) Per Unit Offering Price Registration Fee
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Common stock (1) 1,560,000 (2) Not applicable Not applicable (3) $4,221.48 (3)
(No Par Value)
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(1) This Registration Statement relates to shares of Common Stock of the
Registrant issuable to holders of common stock, no par value ("Roseville
Common Stock") of Roseville 1st Community Bancorp ("Roseville"), a
California corporation and to holders of common stock, no par value
("Lake Common Stock") of Lake Community Bank ("Lake"), a California
banking corporation, in the proposed mergers (the "Mergers") of
Roseville into Registrant and Lake with a subsidiary of Registrant.
(2) Based upon the estimated maximum number of shares of Registrant's Common
Stock required to be issued under the agreements providing for the
Mergers. This Registration Statement also includes any additional shares
of Registrant's Common Stock which may be issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
(3) Pursuant to Rule 457(f)(2), the registration fee was computed on the
basis of the sum of the book value of Lake Common Stock at September 30,
1998 ($10,285,546) and the book value of Roseville Common Stock at
September 30, 1998 ($4,899,607).
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.
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WESTERN SIERRA BANCORP
CROSS-REFERENCE SHEET ITEMS IN
FORM S-4 AND PROSPECTUS PURSUANT TO
ITEM 501(b) OF REGULATION S-K
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Item No. Form S-4 Caption Location in Prospectus
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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 COMBINED 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 Lia-
bilities
10. Information with Respect to S-3 Registrants Not Applicable
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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 INFORMATION, THE LAKE
other than S-2 or S-3 Registrants MERGER AND RELATED TRANSACTIONS,
THE ROSE MERGER AND RELATED
TRANSACTIONS, DESCRIPTION OF THE
CAPITAL STOCK OF THE BANCORP,
LAKE AND ROSE, MARKET PRICES,
DIVIDENDS, PRO FORMA COMBINED
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
other than S-3 or S-2 Companies MERGER AND RELATED TRANSACTIONS,
THE ROSE MERGER AND RELATED
TRANSACTIONS, DESCRIPTION OF THE
CAPITAL STOCK OF THE BANCORP,
LAKE AND ROSE, MARKET PRICES,
DIVIDENDS, PRO FORMA COMBINED
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
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JOINT PROXY STATEMENT OF
WESTERN SIERRA BANCORP,
LAKE COMMUNITY BANK
AND
ROSEVILLE 1ST COMMUNITY BANCORP
AND PROSPECTUS OF
WESTERN SIERRA BANCORP
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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 LAKE MERGER HAS BEEN 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
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), THE CALIFORNIA DEPARTMENT OF CORPORATIONS (THE "DOC"),
THE DFI, THE FDIC OR THE FRB NOR HAS THE SEC, THE DOC, THE DFI, THE FDIC OR THE
FRB PASSED UPON THE ACCURACY OR ADEQUACY OR THE FAIRNESS OR MERITS OF THE
INFORMATION CONTAINED IN THE JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Joint Proxy Statement/Prospectus is _________, 1998.
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Information in this Joint Proxy Statement/Prospectus relating to the Bancorp has
been prepared from information which has been furnished by the Bancorp for
inclusion herein. Information which relates to Lake has been prepared from
information furnished by Lake for inclusion herein. Information which relates to
Rose has been prepared from information furnished by Rose for inclusion herein.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. 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
HEREOF.
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" AT PAGE 21 HEREOF.
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 offered 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. Such 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 of such
materials also can 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 in accordance therewith, Lake files reports, proxy
statements and other information with the FDIC. Such 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 and exhibits
thereto. The Registration
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Statement and the exhibits thereto may be inspected and copied, at prescribed
rates, at the public reference facilities maintained by the SEC at the addresses
set forth above.
Statements contained in this Joint Proxy Statement/Prospectus or in any document
incorporated by reference herein relating to the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS INCLUDED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING
WITHOUT LIMITATION STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "CONSIDERS" AND WORDS OF SIMILAR IMPORT, CONSTITUTE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE BANCORP, LAKE OR ROSE TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCES
MARGINS; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, 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; (6) CHANGES IN SECURITIES MARKETS; AND (7)
INCREASED COMPETITION FOR LOANS AND DEPOSITS; AND OTHER FACTORS REFERRED TO
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. GIVEN THESE UNCERTAINTIES,
THE BANCORP, LAKE AND ROSE SHAREHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE BANCORP, LAKE AND ROSE DISCLAIM
ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF
ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN TO
REFLECT FUTURE EVENTS OR DEVELOPMENTS.
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TABLE OF CONTENTS
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SUMMARY INFORMATION...............................................................................1
Corporations Soliciting Proxies....................................................1
Meeting Dates and Locations........................................................1
Purposes of the Meetings...........................................................1
Vote Required - Lake Agreement.....................................................2
Vote Required - Rose Agreement.....................................................2
The Lake Merger....................................................................2
The Rose Merger....................................................................3
Independence of the Lake Merger and the Rose Merger................................3
Terms of the Lake Merger; Conversion of Shares and Options.........................3
Terms of the Rose Merger; Conversion of Shares and Options.........................4
Reasons for the Lake Merger and Managements' Recommendations.......................5
Reasons for the Rose Merger and Managements' Recommendations.......................6
Opinions of Financial Advisors - Lake Merger.......................................6
Opinion of Financial Advisor - Rose Merger.........................................6
Certain Federal and California Income Tax Consequences of the Lake Merger..........6
Certain Federal and California Income Tax Consequences of the Rose Merger..........7
Appraisal Rights - Lake Merger.....................................................7
Appraisal Rights - Rose Merger.....................................................7
Interests of Certain Persons in the Lake Merger
and Material Contracts with Lake and its Affiliates..................7
Interests of Certain Persons in the Rose Merger
and Material Contracts with Rose and its Affiliates..................8
Conditions to the Lake Merger......................................................9
Conditions to the Rose Merger.....................................................10
Lake Effective Time...............................................................10
Rose Effective Time...............................................................10
Accounting Treatment of the Lake Merger...........................................10
Accounting Treatment of the Rose Merger...........................................11
Certain Financial Information.....................................................11
Regulatory Capital Adequacy.......................................................18
Certain Differences in Rights of Shareholders.....................................19
Market Prices of Bancorp Common Stock and Lake Common Stock.......................20
Market Prices of Bancorp Common Stock and Rose Common Stock.......................21
RISK FACTORS ..................................................................................21
Risk Factors Relating to the Lake Merger and the Rose Merger......................21
Risk Factors Relating to the Industry.............................................22
Risks Relating to the Bancorp.....................................................23
INTRODUCTION ..................................................................................24
Matters to be Considered at the Shareholders' Meetings............................24
Record Dates ....................................................................25
Outstanding Securities and Voting Rights..........................................25
Recommendations of the Boards of Directors........................................26
Revocability of Proxies...........................................................26
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TABLE OF CONTENTS
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Cost of Solicitation of Proxies...................................................27
Beneficial Ownership of Principal Shareholders and Management.....................27
THE LAKE MERGER AND RELATED TRANSACTIONS.........................................................32
General ....................................................................32
Background and Reasons for the Lake Merger........................................33
Lake Conversion Rate and Exchange of Shares and Options...........................34
Interests of Certain Persons in the Lake Merger
and Material Contracts with Lake and its Affiliates.................36
Regulatory Approval and Lake Effective Time.......................................37
Conditions to the Lake Merger.....................................................38
Waiver, Amendment, and Termination................................................39
Liquidated Damages................................................................40
Opinions of Financial Advisors....................................................41
Certain Federal and California Income Tax Consequences............................47
Rights of Dissenting Shareholders of Lake and the Bancorp.........................49
THE ROSE MERGER AND RELATED TRANSACTIONS.........................................................51
General ....................................................................51
Background and Reasons for the Rose Merger........................................51
Rose Conversion Rate and Exchange of Shares and Options...........................55
Interests of Certain Persons in the Rose Merger
and Material Contracts with Rose and its Affiliates.................57
Regulatory Approval and Rose Effective Time.......................................58
Conditions to the Rose Merger.....................................................59
Waiver, Amendment, and Termination................................................60
Liquidated Damages................................................................61
Opinion of Rose's Financial Advisor...............................................61
Certain Federal and California Income Tax Consequences............................65
Rights of Dissenting Shareholders of Rose and the Bancorp.........................66
DESCRIPTION OF THE CAPITAL STOCK OF THE
BANCORP, LAKE AND ROSE............................................................68
The Bancorp ....................................................................68
Lake ....................................................................69
Rose ....................................................................70
The Bancorp Following the Lake Merger and the Rose Merger.........................70
MARKET PRICES ..................................................................................71
The Bancorp ....................................................................71
Lake ....................................................................71
Rose ....................................................................72
DIVIDENDS ..................................................................................72
The Bancorp ....................................................................72
Lake ....................................................................73
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Rose ....................................................................73
The Bancorp Following the Lake Merger and the Rose Merger.........................74
PRO FORMA COMBINED FINANCIAL STATEMENTS..........................................................74
Lake Merger ....................................................................74
Rose Merger ....................................................................84
The Bancorp Following the Lake Merger and the Rose Merger.........................94
REGULATORY CAPITAL ADEQUACY.....................................................................104
DESCRIPTION OF THE BANCORP......................................................................106
Business.........................................................................106
Summary of Earnings..............................................................109
The Bancorp's Management's Discussion and Analysis
of Financial Condition And Results of Operations...................110
Management.......................................................................131
Certain Transactions.............................................................136
DESCRIPTION OF LAKE.............................................................................137
Business.........................................................................137
Summary of Earnings..............................................................139
Lake's Management's Discussion and Analysis
of Financial Condition and Results of Operations...................140
Management.......................................................................162
Certain Transactions.............................................................166
DESCRIPTION OF ROSE.............................................................................167
Business.........................................................................167
Summary of Earnings..............................................................170
Rose's Management's Discussion and Analysis
of Financial Condition and Results of Operations...................172
Management.......................................................................193
Certain Transactions.............................................................196
INFORMATION CONCERNING THE BANCORP, LAKE AND ROSE...............................................196
Competition......................................................................196
Effect of Governmental Policies and Recent Legislation...........................197
Current Accounting Developments..................................................197
Recent Legislation and Other Changes.............................................198
Pending Legislation and Regulations..............................................201
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DESCRIPTION OF THE BANCORP FOLLOWING THE
LAKE MERGER AND THE ROSE MERGER..................................................202
Business.........................................................................202
Management.......................................................................202
Limitation of Liability and Indemnification......................................203
Independent Public Accountants...................................................204
EXPERTS.........................................................................................204
LEGAL MATTERS...................................................................................204
OTHER BUSINESS..................................................................................205
INDEX TO FINANCIAL STATEMENTS...................................................................206
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 Bank Stock Group, Inc.
Exhibit V Opinion of The Bank Stock Group, Inc.
Exhibit VI Sections 1300-1304 of the California General Corporation Law
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SUMMARY INFORMATION
The following is a summary of certain information contained in this Joint Proxy
Statement/Prospectus. The summary is provided for your convenience, should not
be considered complete, and is qualified by the detailed discussion contained
elsewhere herein 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 hereto 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 hereto 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 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.
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
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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.
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.
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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 (referred to hereinafter as "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. Pursuant to the Lake Agreement, upon
the consummation of the Lake Merger, each share of Bancorp Common Stock will
remain outstanding. Each outstanding share of Lake Common Stock issued and
outstanding immediately prior to the consummation of the Lake Merger (other than
Lake Perfected Dissenting Shares [as defined below under "SUMMARY
INFORMATION--Appraisal Rights - the Lake Merger"]) shall 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"
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.
The "Per Share Merger Price" shall mean the sum of Lake's total shareholders'
equity as adjusted pursuant to the Lake Agreement as of the last business day of
the calendar month immediately preceding 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 Closing Date. The calculation of the Per Share Merger Price
shall be performed by Perry-Smith & Co., LLP, the independent public accountants
of the Bancorp, Lake and Rose or such other party agreed to by the Bancorp and
Lake. The "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 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. 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, (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
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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.
In lieu thereof, each holder of Lake Common Stock who would otherwise be
entitled to receive a fractional share 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" shall mean 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 Perfected Dissenting
Shares, 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 shall
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 shall 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. Pursuant to the Rose Agreement, upon
the consummation of the Rose Merger, each share of Bancorp Common Stock will
remain outstanding. Each outstanding share of Rose Common Stock issued and
outstanding immediately prior to the consummation of the Rose Merger (other than
Perfected Dissenting Shares [as defined below under "SUMMARY
INFORMATION--Appraisal Rights - the Rose Merger"]) shall 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"
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. The
"Rose Book Value Per Share" shall mean the sum of Rose's total shareholders'
equity as adjusted pursuant to the Rose Agreement as of the last business day of
the calendar month immediately preceding 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 Closing Date as
adjusted pursuant to the Rose Agreement. The calculation of the Rose Book Value
Per Share shall be performed by Perry-Smith & Co., LLP or such other party
agreed to by Rose and the Bancorp. The "Bancorp Book Value Per Share" shall mean
the sum of 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 Closing Date 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.
The calculation of the Bancorp Book Value Per Share shall be performed by
Perry-Smith & Co., LLP or such other party agreed to by the Bancorp and Rose. A
detailed discussion of the calculation of the Rose
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<PAGE> 16
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.
In lieu thereof, each holder of Rose Common Stock who would otherwise be
entitled to receive a fractional share 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" shall mean 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 Perfected
Dissenting Shares 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 shall 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 shall 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.
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<PAGE> 17
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") has 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 such opinion is attached hereto 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") has 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
such opinion is attached hereto 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") has 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 such
opinion is attached hereto 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
An opinion is to be obtained from Perry-Smith & Co., LLP limited to certain
material federal and California state income tax consequences. Such an opinion
is a condition to the consummation of the Lake Merger. The Bancorp and Lake
expect the opinion to state 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.
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<PAGE> 18
CERTAIN FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES OF THE ROSE MERGER
An opinion is to be obtained from Perry-Smith & Co., LLP limited to certain
material federal and California state income tax consequences. Such an opinion
is a condition to the consummation of the Rose Merger. The Bancorp and Rose
expect the opinion to state 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
The holders of Lake Common Stock and Bancorp Common Stock may dissent from the
Lake Merger and demand payment in cash equal to the fair value of their shares
of Lake Common Stock and/or Bancorp Common Stock, provided that such holders
follow certain statutory procedures in the exercise of appraisal rights with
respect to their shares pursuant to the 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
("Perfected Dissenting Shares"), shall 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 shall be
included in such 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
The holders of Rose Common Stock and Bancorp Common Stock may dissent from the
Rose Merger and demand payment in cash equal to the fair value of their shares
of Rose Common Stock and/or Bancorp Common Stock, provided that such holders
follow certain statutory procedures in the exercise of appraisal rights with
respect to their shares pursuant to the 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
("Perfected Dissenting Shares"), shall 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 shall be
included in such 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 then 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
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<PAGE> 19
their successors are elected and qualified. At the Lake Effective Time, the
Board of Directors of Lake shall be nine in number, three of which will be
selected by the Bancorp, and six of which 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
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 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 then 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, 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 the Bancorp. In addition, at the Rose
Effective Time, the then 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
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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."
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 precedent to the obligations of the Bancorp and
Lake to consummate the Lake Merger. Among such conditions are (i) the Lake
Merger shall have been validly approved by the holders of a majority of the
outstanding shares of Lake Common Stock and Bancorp Common Stock entitled to
vote; (ii) all permits, approvals and consents required to be obtained, and all
waiting periods required to expire, prior to the consummation of the Lake Merger
under applicable federal laws of the United States or applicable laws of any
state having jurisdiction over the transactions shall have been obtained or
expired; (iii) there shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the Lake
Merger, by any government entity which in the judgment of the Bancorp would be
materially burdensome; (iv) 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; (v) the Bancorp and Lake shall have received an opinion from
Perry-Smith & Co., LLP, dated the Lake Effective Time, to the effect that the
Lake Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (vi) the Bancorp and Lake
shall have received from Perry-Smith & Co., LLP, letters, dated at the effective
date of the Registration Statement and at the Lake Effective Time, that the Lake
Merger may be accounted for as a pooling of interests; (vii) the Bancorp and
Lake shall have received opinions of counsel for the other party; (viii) no
action, suit or proceeding shall have been instituted or threatened before any
court or governmental body seeking to challenge or restrain the transactions
which presents a substantial risk that such transactions will be restrained or
that either party thereto may suffer material damages or other relief as a
result of consummating such transactions; and (ix) 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. 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")
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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 precedent to the obligations of the Bancorp and
Rose to consummate the Rose Merger. Among such conditions are (i) the Rose
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; (ii) all permits, approvals and consents required to be obtained, and all
waiting periods required to expire, prior to the consummation of the Rose Merger
under applicable federal laws of the United States or applicable laws of any
state having jurisdiction over the transactions shall have been obtained or
expired; (iii) there shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the Rose
Merger, by any government entity which in the judgment of the Bancorp would be
materially burdensome; (iv) 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; (v) the Bancorp and Rose shall have received an opinion from
Perry-Smith & Co., LLP, dated the Rose Effective Time, to the effect 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; (vi) the Bancorp and Rose
shall have received from Perry-Smith & Co., LLP, letters, dated at the effective
date of the Registration Statement and at the Rose Effective Time, that the Rose
Merger may be accounted for as a pooling of interests; (vii) the Bancorp and
Rose shall have received opinions of counsel; (vii) no action, suit or
proceeding shall have been instituted or threatened before any court or
governmental body seeking to challenge or restrain the transactions which
presents a substantial risk that such transactions will be restrained or that
either party thereto may suffer material damages or other relief as a result of
consummating such transactions; and (ix) the holders of no more than 10% of the
outstanding shares of Rose Common Stock have exercised dissenters' rights.
Dissenters of the Bancorp shall be included in such 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.")
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 "THE LAKE MERGER AND RELATED
TRANSACTIONS--Pro Forma Combined Financial Statements.")
10
<PAGE> 22
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 "THE ROSE MERGER AND RELATED
TRANSACTIONS--Pro Forma Combined 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 "THE LAKE MERGER AND
RELATED TRANSACTIONS--Pro Forma Combined Financial Statements" and "THE ROSE
MERGER AND RELATED TRANSACTIONS--Pro Forma Combined 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 thereto included elsewhere
in this Joint Proxy Statement/Prospectus. All dollar amounts are in thousands,
except per share data.
11
<PAGE> 23
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
Six
(Dollars in thousands, Months Ended Year Ended
except per share numbers) June 30, 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 $ 4,457 $ 3,905 $ 8,430 $ 6,441 $ 5,684 $ 4,001 $ 3,374
Interest expense 1,649 1,417 3,051 2,185 1,875 1,028 1,038
Net interest income 2,808 2,488 5,379 4,256 3,809 2,973 2,336
Provision for credit losses 150 118 243 458 80 36 130
Net interest income after
provision for credit losses 2,658 2,370 5,136 3,798 3,729 2,937 2,206
Noninterest income 1,192 847 2,037 1,692 1,227 657 833
Noninterest expense 3,067 2,553 5,531 4,282 3,928 3,223 2,871
Income before income taxes 783 664 1,642 1,208 1,028 371 168
Taxes on income 285 260 639 470 377 134 68
Net income $ 498 $ 404 $ 1,003 $ 738 $ 651 $ 237 $ 100
PER SHARE DATA:
Net income-basic $ 0.52 $ 0.43 $ 1.08 $ 0.97 $ 0.96 $ 0.39 $ 0.16
Net income-diluted $ 0.48 $ 0.42 $ 1.02 $ 0.94 $ 0.94 $ 0.35 $ 0.15
Shares outstanding-
end of period(1) 981,448 933,770 946,021 796,948 598,057 517,600 517,600
Average shares out-
standing-basic(2) 965,403 929,412 932,531 759,017 681,030 612,828 612,828
Average shares out-
standing-diluted(2) 1,037,409 968,330 986,706 782,318 689,696 668,143 668,143
Book value per share(3) $ 10.01 $ 8.55 $ 9.51 $ 9.69 $ 8.62 $ 8.31 $ 7.95
FINANCIAL POSITION
Total assets $ 119,655 $ 99,981 $108,860 $ 83,461 $ 71,050 $ 58,214 $ 50,107
Total net loans and leases 69,100 67,410 68,191 60,902 49,245 41,003 29,026
Total deposits 108,036 91,386 98,709 74,927 63,106 52,907 45,853
Total shareholders' equity $ 9,829 $ 7,984 $ 8,998 $ 7,720 $ 5,155 $ 4,300 $ 4,116
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.91% 0.86% 1.01% 0.97% 1.00% 0.44% 0.20%
Return on average
shareholders' equity 11.39% 10.52% 12.66% 12.20% 13.76% 5.63% 2.46%
Average shareholders'
equity to average assets 8.01% 8.19% 7.97% 7.95% 7.28% 7.77% 8.17%
Net charge-offs to average loans 0.51% 0.00% 0.00% 0.73% 0.11% 0.08% 0.82%
Allowance for credit losses as a
percentage of period-end loans 1.30% 1.22% 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 six months ended June 30, 1998 and 1997.
12
<PAGE> 24
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Six
except per share numbers) Months Ended Year Ended
June 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 $ 3,209 $ 3,170 $ 6,560 $ 6,847 $ 7,002 $ 6,024 $ 6,327
Interest expense 1,278 1,234 2,562 2,845 3,056 2,046 2,458
Net interest income 1,931 1,936 3,998 4,002 3,946 3,978 3,869
Provision for credit losses 180 180 263 477 210 285 420
Net interest income after
provision for credit losses 1,751 1,756 3,735 3,525 3,736 3,693 3,449
Noninterest income 355 271 630 678 681 638 504
Noninterest expense 1,813 1,598 3,222 3,524 3,301 2,980 2,613
Income before income taxes 293 429 1,143 679 1,116 1,351 1,340
Taxes on income 87 146 377 203 335 485 451
Net income $ 206 $ 283 $ 766 $ 476 $ 781 $ 866 $ 889
PER SHARE DATA:
Net income-basic $ 0.16 $ 0.23 $ 0.62 $ 0.38 $ 0.63 $ 0.70 $ 0.73
Net income-diluted $ 0.16 $ 0.22 $ 0.59 $ 0.36 $ 0.59 $ 0.66 $ 0.66
Shares outstanding-
end of period(1) 1,283,296 1,240,546 1,240,546 1,240,546 1,240,046 1,238,846 1,218,746
Average shares
outstanding-basic(2) 1,251,477 1,240,546 1,240,546 1,240,491 1,239,791 1,228,796 1,218,971
Average shares
outstanding-diluted(2) 1,311,645 1,274,696 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) $ 7.09 $ 6.78 $ 6.98 $ 6.57 $ 6.50 $ 5.92 $ 5.49
FINANCIAL POSITION
Total assets $ 85,542 $ 87,981 $ 85,520 $ 82,502 $ 90,947 $ 76,217 $ 79,026
Total net loans and leases 51,116 55,366 53,210 52,091 52,839 48,765 46,245
Total deposits 75,770 79,089 76,039 73,537 81,592 68,094 72,024
Total shareholders' equity $ 9,098 $ 8,415 $ 8,660 $ 8,149 $ 8,066 $ 7,339 $ 6,686
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.49% 0.70% 0.93% 0.55% 0.97% 1.13% 1.15%
Return on average
shareholders' equity 4.67% 6.85% 9.05% 5.91% 10.08% 12.35% 14.24%
Average shareholders'
equity to average assets 10.52% 10.28% 10.25% 9.33% 9.59% 9.13% 8.05%
Net charge-offs to average loans 0.14% 0.69% 0.40% 1.23% 0.19% 0.28% 0.48%
Allowance for credit losses as
a percentage of period-end loans 2.09% 1.59% 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 six months ended June 30, 1998 and 1997.
13
<PAGE> 25
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Six
except per share numbers) Months Ended Year Ended
June 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 $ 1,946 $ 1,805 $ 3,895 $ 3,028 $ 2,664 $ 2,082 $ 1,660
Interest expense 849 742 1,664 1,331 1,288 876 708
Net interest income 1,097 1,063 2,231 1,697 1,376 1,206 952
Provision for credit losses 60 89 564 89 55 50 23
Net interest income after
provision for credit losses 1,037 974 1,667 1,608 1,321 1,156 929
Noninterest income 272 129 341 228 126 200 18
Noninterest expense 1,110 734 1,693 1,330 1,145 971 818
Income before income taxes 199 369 315 506 302 385 129
Taxes on income 79 148 133 204 104 80 54
Net income $ 120 $ 221 $ 182 $ 302 $ 198 $ 305 $ 75
PER SHARE DATA:
Net income-basic $ 0.37 $ 0.69 $ 0.57 $ 0.94 $ 0.62 $ 0.95 $ 0.23
Net income-diluted $ 0.37 $ 0.68 $ 0.56 $ 0.93 $ 0.61 $ 0.95 $ 0.23
Shares outstanding-
end of period(1) 319,972 319,972 319,972 319,972 319,572 319,572 319,572
Average shares
outstanding-basic(2) 319,972 319,972 319,972 319,872 319,572 319,572 319,572
Average shares
outstanding-diluted(2) 324,648 324,648 324,648 324,622 324,530 319,572 319,572
Book value per share(3) $ 12.74 $ 12.48 $ 12.39 $ 11.80 $ 10.85 $ 10.23 $ 9.27
FINANCIAL POSITION
Total assets $ 50,138 $ 47,514 $ 50,588 $ 38,708 $ 31,905 $ 26,387 $ 22,507
Total net loans and leases 31,308 31,663 34,125 27,091 22,725 18,595 17,180
Total deposits 45,977 43,320 46,350 34,687 28,269 22,776 19,318
Total shareholders' equity $ 4,078 $ 3,993 $ 3,964 $ 3,775 $ 3,467 $ 3,269 $ 2,964
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.50% 1.09% 0.41% 0.86% 0.64% 1.17% 0.36%
Return on average
shareholders' equity 5.99% 11.37% 4.54% 8.23% 5.83% 9.79% 2.56%
Average shareholders'
equity to average assets 8.38% 9.56% 8.98% 10.43% 10.98% 11.98% 14.12%
Net charge-offs to average loans 2.85% 0.23% 0.30% 0.09% 0.14% 0.16% 0.08%
Allowance for credit losses as a
percentage of period-end loans 0.94% 0.94% 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 six months ended June 30, 1998 and 1997.
14
<PAGE> 26
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) Six Months Ended Year Ended
June 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 $ 7,666 $ 7,075 $ 14,990 $ 13,288 $ 12,686 $ 10,025 $ 9,701
Interest expense 2,927 2,651 5,613 5,030 4,931 3,074 3,496
Net interest income 4,739 4,424 9,377 8,258 7,755 6,951 6,205
Provision for credit losses 330 298 506 935 290 321 550
Net interest income after
provision for credit losses 4,409 4,126 8,871 7,323 7,465 6,630 5,655
Noninterest income 1,546 1,118 2,667 2,370 1,908 1,295 1,337
Noninterest expense 4,879 4,151 8,753 7,806 7,229 6,203 5,484
Income before income taxes 1,076 1,093 2,785 1,887 2,144 1,722 1,508
Taxes on income 372 406 1,016 673 712 619 519
Net income $ 704 $ 687 $ 1,769 $ 1,214 $ 1,432 $ 1,103 $ 989
PER SHARE DATA:
Net income-basic $ 0.37 $ 0.37 $ 0.95 $ 0.72 $ 0.89 $ 0.72 $ 0.65
Net income-diluted $ 0.35 $ 0.36 $ 0.90 $ 0.69 $ 0.86 $ 0.67 $ 0.59
Shares outstanding-end of period(1) 1,941,353 1,861,698 1,873,949 1,724,876 1,525,611 1,444,257 1,429,222
Average shares outstanding-basic(1) 1,901,508 1,857,340 1,860,459 1,686,904 1,608,394 1,531,967 1,524,618
Average shares outstanding-diluted(1) 2,018,519 1,921,803 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) $ 9.75 $ 8.81 $ 9.42 $ 9.20 $ 8.67 $ 8.06 $ 7.56
Book value per share equivalent-Lake(3) $ 7.29 $ 6.59 $ 7.05 $ 6.88 $ 6.48 $ 6.03 $ 5.65
FINANCIAL POSITION
Total assets $ 205,197 $ 187,962 $ 194,380 $ 165,963 $ 161,997 $ 134,431 $ 129,133
Total net loans and leases 120,216 122,772 121,401 112,993 102,084 89,768 75,271
Total deposits 183,806 170,475 174,748 148,464 144,698 121,001 117,877
Total shareholders' equity $ 18,927 $ 16,399 $ 17,658 $ 15,869 $ 13,221 $ 11,639 $ 10,802
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.73% 0.79% .97% .75% .98% .84% .78%
Return on average shareholders' equity 8.01% 8.62% 10.79% 8.60% 11.47% 9.82% 9.60%
Average shareholders'
equity to average assets 9.10% 9.15% 9.00% 8.68% 8.56% 8.57% 8.09%
Net charge-offs to average loans 0.35% 0.32% 0.18% 0.99% 0.15% 0.20% 0.61%
Allowance for credit losses as a
percentage of period-end loans 1.64% 1.38% 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 six months ended June 30, 1998 and 1997.
15
<PAGE> 27
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
THE BANCORP AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Six Months Ended Year Ended
except per share numbers) June 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 $ 6,403 $ 5,710 $ 12,325 $ 9,469 $ 8,348 $ 6,083 $ 5,034
Interest expense 2,498 2,159 4,715 3,516 3,163 1,904 1,746
Net interest income 3,905 3,551 7,610 5,953 5,185 4,179 3,288
Provision for credit losses 210 207 807 547 135 86 153
Net interest income after
provision for credit losses 3,695 3,344 6,803 5,406 5,050 4,093 3,135
Noninterest income 1,464 976 2,378 1,920 1,353 857 851
Noninterest expense 4,177 3,287 7,224 5,612 5,073 4,194 3,689
Income before income taxes 982 1,033 1,957 1,714 1,330 756 297
Taxes on income 364 408 772 674 481 214 122
Net income $ 618 $ 625 $ 1,185 $ 1,040 $ 849 $ 542 $ 175
PER SHARE DATA:
Net income-basic $ 0.46 $ 0.48 $ 0.90 $ 0.91 $ 0.80 $ 0.54 $ 0.18
Net income-diluted $ 0.43 $ 0.46 $ 0.86 $ 0.89 $ 0.79 $ 0.51 $ 0.17
Shares outstanding-end of period(1) 1,366,950 1,319,272 1,331,523 1,182,450 983,077 902,620 902,620
Average shares outstanding-basic(1) 1,350,905 1,314,914 1,318,033 1,144,399 1,066,050 997,848 997,848
Average shares outstanding-diluted(1) 1,428,545 1,359,466 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) $ 10.17 $ 9.08 $ 9.73 $ 9.72 $ 8.77 $ 8.39 $ 7.84
Book value per share equivalent-Rose(3) $ 12.26 $ 10.94 $ 11.73 $ 11.71 $ 10.57 $ 10.10 $ 9.45
FINANCIAL POSITION
Total assets $ 169,793 $ 147,495 $ 159,448 $ 122,169 $ 102,955 $ 84,601 $ 72,614
Total net loans and leases 100,408 99,069 102,316 87,993 71,970 59,598 46,206
Total deposits 154,012 134,706 145,058 109,614 91,375 75,683 65,171
Total shareholders' equity $ 13,907 $ 11,977 $ 12,962 $ 11,495 $ 8,622 $ 7,569 $ 7,080
SELECTED FINANCIAL RATIOS(4):
Return on average assets 0.79% 0.93% 0.82% 0.93% 0.88% 0.68% 0.25%
Return on average shareholders' equity 9.69% 10.81% 9.93% 10.70% 10.45% 7.40% 2.50%
Average shareholders'
equity to average assets 8.12% 8.61% 8.28% 8.73% 8.47% 9.14% 9.92%
Net charge-offs to average loans 1.26% 0.08% 0.10% 0.54% 0.12% 0.10% 0.57%
Allowance for credit losses as a
percentage of period-end loans 1.19% 1.12% 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 six months ended June 30, 1998 and 1997.
16
<PAGE> 28
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
THE BANCORP, LAKE AND ROSE
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, Six Months Ended Year Ended
except per share numbers) June 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 $ 9,612 $ 8,880 $ 18,885 $ 16,316 $ 15,350 $ 12,107 $ 11,361
Interest expense 3,776 3,393 7,277 6,361 6,219 3,950 4,204
Net interest income 5,836 5,487 11,608 9,955 9,131 8,157 7,157
Provision for credit losses 390 387 1,070 1,024 345 371 573
Net interest income after
provision for credit losses 5,446 5,100 10,538 8,931 8,786 7,786 6,584
Noninterest income 1,818 1,247 3,008 2,598 2,034 1,495 1,355
Noninterest expense 5,989 4,885 10,446 9,136 8,374 7,174 6,302
Income before income taxes 1,275 1,462 3,100 2,393 2,446 2,107 1,637
Taxes on income 451 554 1,149 877 816 699 573
Net income $ 824 $ 908 $ 1,951 $ 1,516 $ 1,630 $ 1,408 $ 1,064
PER SHARE DATA:
Net income-basic $ 0.36 $ 0.40 $ 0.87 $ 0.73 $ 0.82 $ 0.73 $ 0.56
Net income-diluted $ 0.34 $ 0.39 $ 0.83 $ 0.70 $ 0.79 $ 0.69 $ 0.52
Shares outstanding-end of period(1) 2,326,856 2,247,201 2,259,452 2,110,379 1,910,632 1,829,277 1,814,242
Average shares outstanding-basic(1) 2,287,010 2,242,843 2,245,962 2,072,286 1,993,414 1,916,988 1,909,639
Average shares outstanding-diluted(1) 2,409,655 2,312,939 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) $ 9.89 $ 9.07 $ 9.57 $ 9.31 $ 8.73 $ 8.15 $ 7.59
Book value per share equivalent-Lake(4) $ 7.40 $ 6.79 $ 7.16 $ 6.96 $ 6.53 $ 6.10 $ 5.68
Book value per share equivalent-Rose(5) $ 11.92 $ 10.93 $ 11.53 $ 11.21 $ 10.52 $ 9.82 $ 9.14
FINANCIAL POSITION
Total assets $ 255,335 $ 235,476 $ 244,968 $ 204,671 $ 193,902 $ 160,818 $ 151,640
Total net loans and leases 151,524 154,435 155,527 140,084 124,809 108,363 92,451
Total deposits 229,783 213,795 221,098 183,151 172,967 143,777 137,195
Total shareholders' equity $ 23,005 $ 20,392 $ 21,622 $ 19,644 $ 16,688 $ 14,908 $ 13,766
SELECTED FINANCIAL RATIOS(6):
Return on average assets 0.68% 0.85% 0.86% 0.77% 0.92% 0.90% 0.72%
Return on average shareholders' equity 7.64% 9.16% 9.56% 8.52% 10.27% 9.81% 8.04%
Average shareholders'
equity to average assets 8.96% 9.23% 9.00% 8.99% 8.98% 9.13% 8.94%
Net charge-offs to average loans 0.88% 0.31% 0.20% 0.83% 0.15% 0.19% 0.53%
Allowance for credit losses as a
percentage of period-end loans 1.50% 1.29% 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.)
17
<PAGE> 29
(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 six months ended June 30, 1998 and 1997.
REGULATORY CAPITAL ADEQUACY
The following table sets forth, as of June 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% 8.7% 10.8% 8.5%
Tier 1 risk-based
capital ratio 4.0% 11.4% 14.1% 10.6%
Total risk-based
capital ratio 8.0% 12.5% 15.4% 11.3%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Lake Merger
------- -------------
<S> <C> <C>
Leverage ratio 5.0% 9.6%
Tier 1 risk-based
capital ratio 4.0% 12.6%
Total risk-based
capital ratio 8.0% 13.7%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Rose Merger
------- -------------
<S> <C> <C>
Leverage ratio 5.0% 8.6%
Tier 1 risk-based
capital ratio 4.0% 11.1%
Total risk-based
capital ratio 8.0% 12.1%
</TABLE>
18
<PAGE> 30
<TABLE>
<CAPTION>
The Bancorp Following
Both the Lake Merger
Minimum and the Rose Merger
------- ---------------------
<S> <C> <C>
Leverage ratio 5.0% 9.4%
Tier 1 risk-based
capital ratio 4.0% 12.2%
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") incorporate provisions,
certain of which are described below, 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 Articles requires the affirmative vote
of the holders of 66-2/3% or more of the outstanding shares.
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") 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.
19
<PAGE> 31
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 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
delaying, deferring or 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:
20
<PAGE> 32
<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 can be 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 can be no assurance that the Bancorp will be able
to fully realize any revenue enhancement or cost savings as a result of the Lake
Merger and/or the Rose Merger. There can be 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
21
<PAGE> 33
customers. The existing loan portfolios of Lake, R1NB and WSNB differ to some
extent in the types of borrowers, industries and credits represented. In
addition, there are differences in the documentation, classifications, credit
ratings and management of the portfolios. As a result, the Bancorp has
established a centralized loan administration and policy to 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 can be 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 adversely affected 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 Lake Merger and/or the Rose Merger anticipated benefits
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 no assurance can be given 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. The
Sacramento loan production office has allowed the Bancorp to expand into new
business markets.
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 cause the Bancorp's, Lake's or Rose's results to differ
materially. Further, federal monetary policy, particularly as
22
<PAGE> 34
implemented through the Federal Reserve System, significantly affects credit
conditions for financial institutions, primarily through open market operations
in United States government securities, the discount rate for bank borrowings
and bank reserve requirements. Any material change in these conditions would be
likely to have a material impact on 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 June 30, 1998, approximately 77% 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 or wastes, contaminants or pollutants 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 can be no assurance that the cost of such removal
would not substantially exceed the value of affected properties or the loans
secured by the 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 either prior to or
following any such removal.
23
<PAGE> 35
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 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 will be the
surviving corporation of the Lake Merger and a wholly-owned subsidiary of the
Bancorp as
24
<PAGE> 36
more particularly described herein. 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, R1NB, will be a wholly-owned subsidiary of the Bancorp
as more particularly described herein. 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
25
<PAGE> 37
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.
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
26
<PAGE> 38
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 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>
- -------------------
(Footnotes on the following page.)
27
<PAGE> 39
(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.
(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
Officers as a Group (12 in all) 389,032(12) 37.3
</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.
(Footnotes continued on the following page.)
28
<PAGE> 40
(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.
(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 officers and by all directors and executive officers as a group.
29
<PAGE> 41
<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.)
30
<PAGE> 42
(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)
Officers as a Group (13 in all) 202,319(6) 54.6%
</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.
31
<PAGE> 43
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
Perfected Dissenting Shares as defined below in "THE LAKE MERGER AND RELATED
TRANSACTIONS--Rights of Dissenting Lake Shareholders") shall be converted at the
Lake 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 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.
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<PAGE> 44
A copy of the Lake Agreement is attached hereto as Exhibit I and incorporated
herein by this reference. SUMMARIES OF CERTAIN PROVISIONS OF THE LAKE 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 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 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
33
<PAGE> 45
through acquisition by another financial institution is most economically
advantageous to 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 foregoing 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. Pursuant to the Lake Agreement, upon the consummation of
the Lake Merger, each share of Bancorp Common Stock will remain outstanding.
Each outstanding share of Lake Common Stock issued and outstanding immediately
prior to the consummation of the Lake Merger (other than Perfected Dissenting
Shares) 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" shall mean the result of 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"
shall mean the sum of Lake's total shareholders' equity as adjusted pursuant to
the Lake Agreement as of the last business day of the calendar month immediately
preceding 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 Closing Date. The
calculation of the Per Share Lake Merger Price shall be performed by Perry-Smith
& Co., LLP, the independent public accountants for the Bancorp and Lake or such
other party agreed to by the Bancorp and Lake. The "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 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.
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, (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
34
<PAGE> 46
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 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 the 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 Lake Per Share 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.
In lieu thereof, each holder of Lake Common Stock who would otherwise be
entitled to receive a fractional share 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" shall mean the last trade of Bancorp Common Stock prior to the Lake
Effective Time.
EXCHANGE PROCEDURE. Each holder of a certificate or certificates representing
shares of Lake Common Stock issued and outstanding immediately prior to the Lake
Effective Time shall surrender such certificate or certificates, duly endorsed
as the Bancorp may require, to American Securities Transfer and Trust as the
exchange agent (the "Lake Exchange Agent"), and shall receive in exchange
therefor (i) a certificate or certificates representing the number of whole
shares of Bancorp Common Stock which the holder of Lake Common Stock theretofore
represented by the certificate or certificates so surrendered shall have become
entitled to receive as aforesaid and (ii) a check representing any cash to be
paid for fractional shares. Upon surrender for cancellation to the Lake Exchange
Agent of one or more certificates for shares of Lake Common Stock ("Lake
Certificates"), accompanied by a duly executed Transmittal Letter in proper
form, 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 cash in lieu of fractional interests to
be issued in respect of Lake Certificates.
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<PAGE> 47
Until Lake Certificates have been surrendered and exchanged as herein provided
for New Certificates, 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 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 transfer taxes shall be payable by any shareholder in respect of the issuance
of certificates for Bancorp Common Stock, except that, if any certificate for
Bancorp Common Stock is to be issued in a name other than that in which Lake
Certificates surrendered shall have been registered, 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 payable by reason thereof or of any prior transfer of such
surrendered Lake Certificate 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 shall be unable to surrender his or her Lake
Certificates because such 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 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 shall 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.
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, the Board of Directors of Lake shall be nine in
number, three of which will be selected by the Bancorp, and six of which 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 the transactions
contemplated thereby; (ii) 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
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<PAGE> 48
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; (iii) 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 (iv) to vote all shares of Lake Common Stock as to which such director has
voting power in favor of the Lake Merger.
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 (an "FDIC-Insured Institution") 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 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
37
<PAGE> 49
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 precedent to the consummation of the Lake Merger,
including the following:
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, prior to the consummation of the Lake Merger
shall have been obtained or expired, as the case may be, 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, its respective affiliates or Lake as the Surviving
Corporation of the Lake Merger;
3. There shall not be any action taken, or any statute, rule, regulation or
order enacted, entered, 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 an opinion from Perry-Smith &
Co., LLP to the effect that the Lake Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that the Bancorp and Lake will each be a party to
that reorganization within the meaning of Section 368(b) of the Code;
6. 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;
7. 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 and
covenants 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;
8. 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;
38
<PAGE> 50
9. 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;
10. 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;
11. 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;
12. No event or circumstance shall have occurred which has had or could
reasonably be expected to have a material adverse effect on Lake; and
13. 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
39
<PAGE> 51
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.
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
In the event of the occurrence of a Lake Acquisition Event involving Lake, then
Lake shall pay to the Bancorp the sum of Five Hundred Thousand Dollars
($500,000) in cash. In the event of a Lake Acquisition Event involving the
Bancorp, then the Bancorp shall pay to Lake the sum of Five Hundred Thousand
Dollars ($500,000) in cash.
In the event of 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.
In the event of the 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.
40
<PAGE> 52
OPINIONS OF FINANCIAL ADVISORS
OPINION OF THE BANCORP'S FINANCIAL ADVISOR.
General. Pursuant to oral discussions in early March 1998 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 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 hereto 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.
41
<PAGE> 53
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.
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.
42
<PAGE> 54
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 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,
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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.
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.
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<PAGE> 56
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 hereto 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, 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
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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.
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
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<PAGE> 58
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.
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 such shareholder. In addition, the summary does not address the
tax consequences of the Lake Merger under applicable state or local
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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.
Consummation of the Lake Merger is conditioned upon there being delivered an
opinion of Perry-Smith & Co., LLP, independent accountants for the Bancorp and
Lake, 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;
(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 will rely upon facts and
representations provided to it by the Bancorp's management and Lake's management
and make no independent determination with respect to them. In addition,
Perry-Smith & Co., LLP's opinion will be 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 will
assume 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.
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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 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, including a discussion of the time in which written
demand 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).
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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
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.)
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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 Perfected Dissenting Shares
as defined below in "THE ROSE MERGER AND RELATED TRANSACTIONS--Rights of
Dissenting Shareholders of the Bancorp and Rose") 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 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 hereto 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
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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.
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
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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 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,
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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.
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
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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.
ROSE CONVERSION RATE AND EXCHANGE OF SHARES AND OPTIONS
ROSE CONVERSION RATE. Pursuant to the Rose Agreement, upon the consummation of
the Rose Merger, each share of Bancorp Common Stock will remain outstanding.
Each outstanding share of Rose Common Stock issued and outstanding immediately
prior to the consummation of the Rose Merger (other than Perfected Dissenting
Shares) 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" shall mean the result of 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" shall mean the sum of Rose's total shareholders'
equity as of the last business day of the calendar month immediately preceding
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. The
calculation of the Rose Book Value Per Share shall be performed by Perry-Smith &
Co., LLP or such other party agreed to by Rose and the Bancorp.
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The "Bancorp Book Value Per Share" shall mean 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.
Furthermore, the Bancorp Book Value Per Share shall not reflect the prior
consummation of the acquisition of Lake by the Bancorp. The calculation of the
Bancorp Book Value Per Share shall be performed by Perry-Smith & Co., LLP or
such other party agreed to by Bancorp and Rose.
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.
In lieu thereof, each holder of Rose Common Stock who would otherwise be
entitled to receive a fractional share 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" shall mean the last trade price of Bancorp Common Stock prior to the
Rose Effective Time.
EXCHANGE PROCEDURE. Each holder of a certificate or certificates representing
shares of Rose Common Stock issued and outstanding immediately prior to the Rose
Effective Time shall surrender such certificate or certificates, duly endorsed
as the Bancorp may require, to American Securities Transfer and Trust as the
exchange agent (the "Rose Exchange Agent"), and shall receive in exchange
therefor (i) a certificate or certificates representing the number of whole
shares of Bancorp Common Stock to which the holder of Rose Common Stock
theretofore represented by the certificate or certificates so surrendered shall
have become entitled to receive as aforesaid and (ii) a check representing any
cash to be paid for fractional shares. Upon surrender for cancellation to the
Rose Exchange Agent of one or more certificates for shares of Rose Common Stock
("Rose Certificates"), accompanied by a duly executed Transmittal Letter in
proper form, 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 cash in lieu of fractional
interests to be issued in respect of Rose Certificates.
Until Rose Certificates have been surrendered and exchanged as herein provided
for New Certificates, each outstanding Rose Certificate shall be deemed for all
corporate purposes to represent the number of shares of Bancorp
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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 transfer taxes shall be payable by any shareholder in respect of the issuance
of certificates for Bancorp Common Stock, except that, if any certificate for
Bancorp Common Stock is to be issued in a name other than that in which Rose
Certificates surrendered shall have been registered, 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 payable by reason thereof or of any prior transfer of such
surrendered Rose Certificate 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 shall be unable to surrender his or her Rose
Certificates because such 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 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 shall 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.
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.
At the Rose 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 the Bancorp. At the Rose Effective Time, the then existing 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 the transactions
contemplated thereby 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
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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 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
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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 precedent, 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, prior to the consummation of the Rose Merger
shall have been obtained or expired, as the case may be, 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, its respective affiliates or the Bancorp as the Surviving
Corporation of the Rose Merger;
3. There shall not be any action taken, or any statute, rule, regulation or
order enacted, entered, 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 an opinion from Perry-Smith &
Co., LLP to the effect 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 that the Bancorp and Rose will each be a party to
that reorganization within the meaning of Section 368(b) of the Code;
6. 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;
7. 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 and
covenants 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;
8. 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;
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9. 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;
10. 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;
11. 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;
12. 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
13. 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 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;
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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
In the event of the occurrence of a Rose Acquisition Event involving Rose, then
Rose shall pay to the Bancorp the sum of Five Hundred Thousand Dollars
($500,000) in cash. In the event of a Rose Acquisition Event involving the
Bancorp, then the Bancorp shall pay to Rose the sum of Five Hundred Thousand
Dollars ($500,000) in cash.
In the event of 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.
In the event of the 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
shareholders' equity of both Rose and the Bancorp subject to certain adjustments
and terms, as described in the Rose Agreement.
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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 hereto 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 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
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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
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
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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
= Fair Market Value $2,559,776
<TABLE>
<CAPTION>
Valuation Summary.
- ------------------
<S> <C>
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
</TABLE>
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 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
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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 such shareholder. 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.
Consummation of the Rose Merger is conditioned upon there being delivered an
opinion of Perry-Smith & Co., LLP, independent accountants for the Bancorp and
Rose, 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;
(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
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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 will rely upon facts and
representations provided to it by the Bancorp's management and Rose's management
and make no independent determination with respect to them. In addition,
Perry-Smith & Co., LLP's opinion will be 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 will
assume 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 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."
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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, including a discussion of the time in which written
demand 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 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.
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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
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
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<PAGE> 80
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 political, economic and other
factors bearing on securities prices and Lake's financial condition and future
prospects;
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<PAGE> 81
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.
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<PAGE> 82
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
half 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 Volumes
-------------------------- -------
Quarter High Low
------- ----------- -----------
<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
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<PAGE> 83
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
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<PAGE> 84
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.
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<PAGE> 85
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 COMBINED 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 June 30, 1998 and December 31, 1997 and pro
forma consolidated condensed income statements of the Bancorp following the Lake
Merger for the six month periods ended June 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 June 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
959,905 shares of Bancorp Common Stock in exchange for all of the outstanding
shares of Lake Common Stock at June 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.)
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<PAGE> 86
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 June 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Surviving
The Bancorp Lake Adjustments(1) Bancorp(1)
----------- ----------- -------------- -----------
<S> <C> <C> <C>
Shareholders' equity:
Common stock $ 7,381 $ 3,408 $ 10,789
Retained earnings 2,407 5,648 8,055
Net unrealized gains on
available-for-sale
securities 41 42 83
----------- ----------- ----------- -----------
Total shareholders'
equity $ 9,829 $ 9,098 $ 18,927
=========== =========== =========== ===========
Authorized shares of
common stock 10,000,000 20,000,000 10,000,000
=========== =========== =========== ===========
Outstanding shares 981,448 1,283,296 1,941,353
=========== =========== =========== ===========
</TABLE>
- -----------
(1) Assumes that holders of 100% of Lake Common Stock convert their shares
into Bancorp Common Stock and that an aggregate of 959,905 shares of
Bancorp Common Stock are issued in the Lake Merger.
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<PAGE> 87
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) The Consolidated
Bancorp Lake Adjustments Balance Sheet
--------- --------- ----------- --------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,166 $ 5,842 $ $ 12,008
Federal funds sold 9,900 5,500 15,400
Loans held for sale 2,771 639 3,410
Interest-bearing deposits in banks 5,148 5,148
Investment securities:
Available-for-sale 20,951 11,390 32,341
Held-to-maturity 3,446 3,446
--------- --------- ------- ---------
Total investments 24,397 11,390 35,787
--------- --------- ------- ---------
Loans and leases:
Commercial 15,263 4,412 19,675
Real estate 43,611 30,099 73,710
Real estate construction 9,329 379 9,708
Lease financing 1,425 1,425
Agricultural 14,854 14,854
Consumer 630 2,680 3,310
--------- --------- ---------
Total loans 70,258 52,424 122,682
Deferred fees and costs, net (245) (213) (458)
Allowance for loan and lease losses (913) (1,095) (2,008)
--------- --------- ------- ---------
Net loans 69,100 51,116 120,216
--------- --------- ------- ---------
Other real estate 1,584 557 2,141
Bank premises and equipment, net 3,072 2,968 6,040
Accrued interest receivable and other assets 2,665 2,382 5,047
--------- --------- ------- ---------
$ 119,655 $ 85,542 $ $ 205,197
========= ========= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 30,010 $ 13,628 $ $ 43,638
Interest-bearing 78,026 62,142 140,168
--------- --------- ------- ---------
Total deposits 108,036 75,770 183,806
Short-term borrowings 750 750
Accrued interest payable and other liabilities 1,040 674 1,714
--------- --------- ------- ---------
Total liabilities 109,826 76,444 186,270
--------- --------- ------- ---------
Shareholders' equity:
Common stock 7,381 3,408 10,789
Retained earnings 2,407 5,648 8,055
Unrealized gains on available-for-sale
investment securities, net of taxes 41 42 83
--------- --------- ------- ---------
Total shareholders' equity 9,829 9,098 18,927
--------- --------- ------- ---------
$ 119,655 $ 85,542 $ $ 205,197
========= ========= ======= =========
</TABLE>
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<PAGE> 88
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>
77
<PAGE> 89
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
----------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Combined
----------- --------- ----------- ---------
<S> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 3,629 $ 2,607 $ $ 6,236
Interest on deposits in banks 149 149
Interest on investment securities 713 323 1,036
Interest on federal funds sold 115 130 245
--------- --------- --------- ---------
Total interest income 4,457 3,209 7,666
Interest expense on deposits 1,649 1,278 2,927
--------- --------- --------- ---------
Net interest income 2,808 1,931 4,739
Provision for loan and lease losses 150 180 330
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 2,658 1,751 4,409
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 362 353 715
Gain on sale of loans 680 2 682
Other 150 150
--------- --------- --------- ---------
Total noninterest income 1,192 355 1,547
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 1,751 999 2,750
Occupancy 213 140 353
Equipment 271 181 452
Other 832 493 1,325
--------- --------- --------- ---------
Total other expenses 3,067 1,813 4,880
--------- --------- --------- ---------
Income before income taxes 783 293 1,076
Income taxes 285 87 372
--------- --------- --------- ---------
Net income $ 498 $ 206 $ $ 704
========= ========= ========= =========
Basic earnings per share $ 0.52 $ 0.16 $ $ 0.37
========= ========= ========= =========
Weighted average shares of common stock 965,403 1,251,477 1,901,508(1)
========= ========= ========= =========
Diluted earnings per share $ 0.48 $ 0.16 $ $ 0.35
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 1,037,409 1,311,645 2,018,519(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.
78
<PAGE> 90
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
----------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Combined
----------- --------- ----------- ---------
<S> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 3,254 $ 2,709 $ $ 5,963
Interest on deposits in banks 108 108
Interest on investment securities 558 292 850
Interest on federal funds sold 93 61 154
--------- --------- --------- ---------
Total interest income 3,905 3,170 7,075
Interest expense on deposits 1,417 1,234 2,651
--------- --------- --------- ---------
Net interest income 2,488 1,936 4,424
Provision for loan and lease losses 118 180 298
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 2,370 1,756 4,126
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 366 268 634
Gain on sale of loans 336 3 339
Gain (loss) on sale of investment securities 11 (8) 3
Other 134 8 142
--------- --------- --------- ---------
Total noninterest income 847 271 1,118
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 1,383 840 2,223
Occupancy 189 133 322
Equipment 216 172 388
Other 765 453 1,218
--------- --------- --------- ---------
Total other expenses 2,553 1,598 4,151
--------- --------- --------- ---------
Income before income taxes 664 429 1,093
Income taxes 260 146 406
--------- --------- --------- ---------
Net income $ 404 $ 283 $ $ 687
========= ========= ========= =========
Basic earnings per share $ 0.43 $ 0.22 $ $ 0.37
========= ========= ========= =========
Weighted average shares of common stock 929,412 1,240,546 1,857,340(1)
========= ========= ========= =========
Diluted earnings per share $ 0.42 $ 0.22 $ $ 0.36
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 968,330 1,274,696 1,921,803(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> 91
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Combined
----------- --------- ----------- ---------
<S> <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.
80
<PAGE> 92
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-----------------------------------------------------------
Pro Forma
The Bancorp Lake Adjustments Combined
----------- --------- ----------- ---------
<S> <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.
81
<PAGE> 93
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
----------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Lake Adjustments Combined
----------- --------- ----------- ---------
<S> <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.
82
<PAGE> 94
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>
Six Months Ended Year Ended
June 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) $ .48 $ .42 $ 1.02 $ .94 $ .94
Book value(3) $ 10.01 $ 8.55 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Lake historical
Net income(1)(2) $ .16 $ .22 $ .59 $ .36 $ .59
Book value(3) $ 7.09 $ 6.78 $ 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) $ .35 $ .36 $ .90 $ .69 $ .86
Book value(5) $ 9.75 $ 8.81 $ 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) $ .26 $ .27 $ .67 $ .52 $ .64
Book value(6) $ 7.29 $ 6.59 $ 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.
83
<PAGE> 95
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 June 30, 1998 and December 31, 1997 and
pro forma consolidated condensed income statements of the Bancorp following the
Rose Merger for the six month periods ended June 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 June 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
385,502 shares of Bancorp Common Stock in exchange for all of the outstanding
shares of Rose Common Stock at June 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.)
84
<PAGE> 96
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 June 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 $ 2,021 $ 9,402
Retained earnings 2,407 2,052 4,459
Net unrealized gains on
available-for-sale
securities 41 5 46
----------- ----------- ----------- -----------
Total shareholders'
equity $ 9,829 $ 4,078 $ $ 13,907
=========== =========== =========== ===========
Authorized shares of
common stock 10,000,000 5,000,000 10,000,000
=========== =========== =========== ===========
Outstanding shares 981,448 319,972 1,366,950
=========== =========== =========== ===========
</TABLE>
- -----------------
(1) Assumes that holders of 100% of Rose Common Stock convert their shares
into Bancorp Common Stock and that an aggregate of 385,502 shares of
Bancorp Common Stock are issued in the Rose Merger.
85
<PAGE> 97
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 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 $ 6,166 $ 1,734 $ $ 7,900
Federal funds sold 9,900 8,980 18,880
Loans held for sale 2,771 1,487 4,258
Investment securities:
Available-for-sale 20,951 3,003 23,954
Held-to-maturity 3,446 3,446
----------- ----------- ----------- -----------
Total investments 24,397 3,003 27,400
----------- ----------- ----------- -----------
Loans and leases:
Commercial 15,263 7,107 22,370
Real estate 43,611 15,057 58,668
Real estate construction 9,329 7,160 16,489
Lease financing 1,425 1,425
Consumer 630 2,358 2,988
----------- ----------- ----------- -----------
Total loans 70,258 31,682 101,940
Deferred fees and costs, net (245) (76) (321)
Allowance for loan and lease losses (913) (298) (1,211)
----------- ----------- ----------- -----------
Net loans 69,100 31,308 100,408
----------- ----------- ----------- -----------
Other real estate 1,584 1,584
Bank premises and equipment, net 3,072 1,685 4,757
Accrued interest receivable and other assets 2,665 1,941 4,606
----------- ----------- ----------- -----------
$ 119,655 $ 50,138 $ $ 169,793
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 30,010 $ 9,013 $ $ 39,023
Interest-bearing 78,026 36,964 114,990
----------- ----------- ----------- -----------
Total deposits 108,036 45,977 154,013
Short-term borrowings 750 750
Accrued interest payable and other liabilities 1,040 83 1,123
----------- ----------- ----------- -----------
Total liabilities 109,826 46,060 155,886
----------- ----------- ----------- -----------
Shareholders' equity:
Common stock 7,381 2,021 9,402
Retained earnings 2,407 2,052 4,459
Unrealized gains on available-for-sale
investment securities, net of taxes 41 5 46
----------- ----------- ----------- -----------
Total shareholders' equity 9,829 4,078 13,907
----------- ----------- ----------- -----------
$ 119,655 $ 50,138 $ $ 169,793
=========== =========== =========== ===========
</TABLE>
86
<PAGE> 98
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>
87
<PAGE> 99
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
----------------------------------------------------- ---------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Combined
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 3,629 $ 1,687 $ $ 5,316
Interest on investment securities 713 114 827
Interest on federal funds sold 115 145 260
--------- --------- --------- ---------
Total interest income 4,457 1,946 6,403
Interest expense on deposits 1,649 849 2,498
--------- --------- --------- ---------
Net interest income 2,808 1,097 3,905
Provision for loan and lease losses 150 60 210
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 2,658 1,037 3,695
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 362 32 394
Gain on sale of loans 680 129 809
Other 150 111 261
--------- --------- --------- ---------
Total noninterest income 1,192 272 1,464
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 1,751 519 2,270
Occupancy 213 70 283
Equipment 271 63 334
Other 832 458 1,290
--------- --------- --------- ---------
Total other expenses 3,067 1,110 4,177
--------- --------- --------- ---------
Income before income taxes 783 199 982
Income taxes 285 79 364
--------- --------- --------- ---------
Net income $ 498 $ 120 $ $ 618
========= ========= ========= =========
Basic earnings per share $ 0.52 $ 0.37 $ $ 0.46
========= ========= ========= =========
Weighted average shares of common stock 965,403 319,972 1,350,905(1)
========= ========= ========= =========
Diluted earnings per share $ 0.48 $ 0.37 $ $ 0.43
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 1,037,409 324,648 1,428,545(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.
88
<PAGE> 100
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
---------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Combined
----------- --------- ----------- ---------
Interest income
<S> <C> <C> <C> <C>
Interest and fees on loans and leases $ 3,254 $ 1,565 $ $ 4,819
Interest on investment securities 558 136 694
Interest on federal funds sold 93 104 197
--------- --------- --------- ---------
Total interest income 3,905 1,805 5,710
Interest expense on deposits 1,417 742 2,159
--------- --------- --------- ---------
Net interest income 2,488 1,063 3,551
Provision for loan and lease losses 118 89 207
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 2,370 974 3,344
--------- --------- --------- ---------
Noninterest income:
Service charges and fees 366 25 391
Gain on sale of loans 336 19 355
Gain on sale of investment securities 11 11
Other 134 85 219
--------- --------- --------- ---------
Total noninterest income 847 129 976
--------- --------- --------- ---------
Other expenses:
Salaries and employee benefits 1,383 374 1,757
Occupancy 189 58 247
Equipment 216 30 246
Other 765 272 1,037
--------- --------- --------- ---------
Total other expenses 2,553 734 3,287
--------- --------- --------- ---------
Income before income taxes 664 369 1,033
Income taxes 260 148 408
--------- --------- --------- ---------
Net income $ 404 $ 221 $ $ 625
========= ========= ========= =========
Basic earnings per share $ 0.43 $ 0.69 $ $ 0.48
========= ========= ========= =========
Weighted average shares of common stock 929,412 319,972 1,314,914(1)
========= ========= ========= =========
Diluted earnings per share $ 0.42 $ 0.68 $ $ 0.46
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents 968,330 324,648 1,359,466(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> 101
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Combined
----------- --------- ----------- ---------
<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.
90
<PAGE> 102
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
----------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Combined
<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.
91
<PAGE> 103
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
---------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Adjustments Combined
----------- --------- ----------- --------
<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.
92
<PAGE> 104
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>
Six Months Ended Year Ended
June 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) $ .48 $ .42 $ 1.02 $ .94 $ .94
Book value(3) $ 10.01 $ 8.55 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Rose historical
Net income(1)(2) $ .37 $ .68 $ .56 $ .93 $ .61
Book value(3) $ 12.74 $ 12.48 $ 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) $ .43 $ .46 $ .86 $ .89 $ .79
Book value(5) $ 10.17 $ 9.08 $ 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) $ .52 $ .55 $ 1.04 $ 1.07 $ .95
Book value(6) $ 12.26 $ 10.94 $ 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.
93
<PAGE> 105
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
June 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 six month periods ended June 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 June 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 1,345,407
shares of Bancorp Common Stock in exchange for all of the outstanding shares of
Lake Common Stock and Rose Common Stock at June 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.)
94
<PAGE> 106
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 June 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 $ 3,408 $ 2,021 $ 12,810
Retained earnings 2,407 5,648 2,052 10,107
Net unrealized gains on
available-for-sale
securities 41 42 5 88
----------- ----------- ----------- ------ -----------
Total shareholders'
equity $ 9,829 $ 9,098 $ 4,078 $ 23,005
=========== =========== =========== ====== ===========
Authorized shares of
common stock 10,000,000 20,000,000 5,000,000 10,000,000
=========== =========== =========== ====== ===========
Outstanding shares 981,448 1,283,296 319,972 2,326,855
=========== =========== =========== ====== ===========
</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 1,345,407 shares of Bancorp Common Stock are issued in the
Lake Merger and the Rose Merger.
95
<PAGE> 107
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 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 $ 6,166 $ 1,734 $ 5,842 $ $ 13,742
Federal funds sold 9,900 8,980 5,500 24,380
Loans held for sale 2,771 1,487 639 4,897
Interest-bearing deposits in banks 5,148 5,148
Investment securities:
Available-for-sale 20,951 3,003 11,390 35,344
Held-to-maturity 3,446 3,446
--------- --------- --------- -------- ---------
Total investments 24,397 3,003 11,390 38,790
--------- --------- --------- -------- ---------
Loans and leases:
Commercial 15,263 7,107 4,412 26,782
Real estate 43,611 15,057 30,099 88,767
Real estate construction 9,329 7,160 379 16,868
Lease financing 1,425 1,425
Agricultural 14,854 14,854
Consumer 630 2,358 2,680 5,668
--------- --------- --------- -------- ---------
Total loans 70,258 31,682 52,424 154,364
Deferred fees and costs, net (245) (76) (213) (534)
Allowance for loan and lease losses (913) (298) (1,095) (2,306)
--------- --------- --------- -------- ---------
Net loans 69,100 31,308 51,116 151,524
--------- --------- --------- -------- ---------
Other real estate 1,584 557 2,141
Bank premises and equipment, net 3,072 1,685 2,968 7,725
Accrued interest receivable and other assets 2,665 1,941 2,382 6,988
--------- --------- --------- -------- ---------
$ 119,655 $ 50,138 $ 85,542 $ $ 255,335
========= ========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 30,010 $ 9,013 $ 13,628 $ $ 52,651
Interest-bearing 78,026 36,964 62,142 177,132
--------- --------- --------- -------- ---------
Total deposits 108,036 45,977 75,770 229,783
Short-term borrowings 750 750
Accrued interest payable and other liabilities 1,040 83 674 1,797
--------- --------- --------- -------- ---------
Total liabilities 109,826 46,060 76,444 232,330
--------- --------- --------- -------- ---------
Shareholders' equity:
Common stock 7,381 2,021 3,408 12,810
Retained earnings 2,407 2,052 5,648 10,107
Unrealized gains on available-for-sale
investment securities, net of taxes 41 5 42 88
--------- --------- --------- -------- ---------
Total shareholders' equity 9,829 4,078 9,098 23,005
--------- --------- --------- -------- ---------
$ 119,655 $ 50,138 $ 85,542 $ $ 255,335
========= ========= ========= ======== =========
</TABLE>
96
<PAGE> 108
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>
97
<PAGE> 109
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
---------------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Combined
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 3,629 $ 1,687 $ 2,607 $ $ 7,923
Interest on deposits in banks 149 149
Interest on investment securities 713 114 323 1,150
Interest on federal funds sold 115 145 130 390
---------- ---------- ---------- ---------- ----------
Total interest income 4,457 1,946 3,209 9,612
Interest expense on deposits 1,649 849 1,278 3,776
---------- ---------- ---------- ---------- ----------
Net interest income 2,808 1,097 1,931 5,836
Provision for loan and lease losses 150 60 180 390
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 2,658 1,037 1,751 5,446
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 362 32 352 746
Gain on sale of loans 680 129 2 811
Other 150 111 261
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,192 272 354 1,818
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,751 519 998 3,268
Occupancy 213 70 140 423
Equipment 271 63 181 515
Other 832 458 493 1,783
---------- ---------- ---------- ---------- ----------
Total other expenses 3,067 1,110 1,812 5,989
---------- ---------- ---------- ---------- ----------
Income before income taxes 783 199 293 1,275
Income taxes 285 79 87 451
---------- ---------- ---------- ---------- ----------
Net income $ 498 $ 120 $ 206 $ $ 824
========== ========== ========== ========== ==========
Basic earnings per share $ 0.52 $ 0.37 $ 0.16 $ $ 0.36
========== ========== ========== ========== ==========
Weighted average shares of common stock 965,403 319,972 1,251,477 2,287,010(1)
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.48 $ 0.37 $ 0.16 $ $ 0.34
========== ========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 1,037,409 324,648 1,311,645 2,409,655(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.
98
<PAGE> 110
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
---------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Combined
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 3,254 $ 1,565 $ 2,709 $ $ 7,528
Interest on deposits in banks 108 108
Interest on investment securities 558 136 292 986
Interest on federal funds sold 93 104 61 258
---------- ---------- ---------- ---------- ----------
Total interest income 3,905 1,805 3,170 8,880
Interest expense on deposits 1,417 742 1,234 3,393
---------- ---------- ---------- ---------- ----------
Net interest income 2,488 1,063 1,936 5,487
Provision for loan and lease losses 118 89 180 387
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses 2,370 974 1,756 5,100
---------- ---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees 366 25 268 659
Gain on sale of loans 336 19 3 358
Gain (loss) on sale of investment securities 11 (8) 3
Other 134 85 8 227
---------- ---------- ---------- ---------- ----------
Total noninterest income 847 129 271 1,247
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,383 374 840 2,597
Occupancy 189 58 133 380
Equipment 216 30 172 418
Other 765 272 453 1,490
---------- ---------- ---------- ---------- ----------
Total other expenses 2,553 734 1,598 4,885
---------- ---------- ---------- ---------- ----------
Income before income taxes 664 369 429 1,462
Income taxes 260 148 146 554
---------- ---------- ---------- ---------- ----------
Net income $ 404 $ 221 $ 283 $ $ 908
========== ========== ========== ========== ==========
Basic earnings per share $ 0.43 $ 0.69 $ 0.23 $ $ 0.40
========== ========== ========== ========== ==========
Weighted average shares of common stock 929,412 319,972 1,240,546 2,242,843(1)
========== ========== ========== ========== ==========
Diluted earnings per share $ 0.42 $ 0.68 $ 0.22 $ $ 0.39
========== ========== ========== ========== ==========
Weighted average shares of common stock
and common stock equivalents 968,330 324,648 1,274,696 2,312,939(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> 111
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Combined
----------- ---------- ---------- ----------- ----------
<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.
100
<PAGE> 112
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Combined
---------- ---------- ---------- ---------- ----------
<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.
101
<PAGE> 113
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
-----------------------------------------------------------------
(Dollars in thousands) Pro Forma
The Bancorp Rose Lake Adjustments Combined
---------- ---------- ---------- ---------- ----------
<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.
102
<PAGE> 114
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>
Six Months Ended Year Ended
June 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) $ .48 $ .42 $ 1.02 $ .94 $ .94
Book value(3) $10.01 $ 8.55 $ 9.51 $ 9.69 $ 8.62
Dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Lake historical
Net income(1)(2) $ .16 $ .22 $ .59 $ .36 $ .59
Book value(3) $ 7.09 $ 6.78 $ 6.98 $ 6.57 $ 6.50
Dividends declared $ 0 $ 0 $ .27 $ .20 $ .20
Rose historical
Net income(1)(2) $ .37 $ .68 $ .56 $ .93 $ .61
Book value(3) $12.74 $12.48 $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) $ .34 $ .39 $ .83 $ .70 $ .79
Book value(5) $ 9.89 $ 9.07 $ 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) $ .25 $ .29 $ .62 $ .52 $ .59
Book value(7) $ 7.40 $ 6.79 $ 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) $ .41 $ .47 $ 1.00 $ .84 $ .95
Book value(7) $11.92 $10.93 $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.)
103
<PAGE> 115
(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 June 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% 8.7% 10.8% 8.5%
Tier 1 risk-based
capital ratio 4.0% 11.4% 14.1% 10.6%
Total risk-based
capital ratio 8.0% 12.5% 15.4% 11.3%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Lake Merger
------- --------------
<S> <C> <C>
Leverage ratio 5.0% 9.6%
Tier 1 risk-based
capital ratio 4.0% 12.6%
Total risk-based
capital ratio 8.0% 13.7%
</TABLE>
104
<PAGE> 116
<TABLE>
<CAPTION>
The Bancorp
Following the
Minimum Rose Merger
------- -----------
<S> <C> <C>
Leverage ratio 5.0% 8.6%
Tier 1 risk-based
capital ratio 4.0% 11.1%
Total risk-based
capital ratio 8.0% 12.1%
</TABLE>
<TABLE>
<CAPTION>
The Bancorp Following
Both the Lake Merger
Minimum and the Rose Merger
------- -------------------
<S> <C> <C>
Leverage ratio 5.0% 9.4%
Tier 1 risk-based
capital ratio 4.0% 12.2%
Total risk-based
capital ratio 8.0% 13.2%
</TABLE>
105
<PAGE> 117
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 a loan production office located at
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 June 30, 1998, WSNB had a total of 6,132 accounts consisting
of demand deposit, NOW and money market accounts with an average balance of
approximately $15,744; 2,985 savings accounts with an average balance of
approximately $1,686; time certificates of $100,000 or more with an average
balance of approximately $248,256; and other time deposits with an average
balance of approximately $23,432. 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 5.8% of WSNB's
deposits.
106
<PAGE> 118
Other special services and products include economy personal and business
checking products, computer cash management products and mortgage products and
services.
EMPLOYEES. At June 30, 1998, the Bancorp and its subsidiaries employed 89
persons on a full-time 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.
107
<PAGE> 119
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,
108
<PAGE> 120
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 six months ended June 30, 1998
and 1997 are unaudited. The June 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>
(Dollars in thousands, Six Months
except per share data) Ended June 30, Year Ended December 31,(1)
------------------------ ------------------------------------
1998 1997 1997 1996 1995
---------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 4,457 $ 3,905 $ 8,430 $ 6,441 $ 5,684
Interest expense 1,649 1,417 3,051 2,185 1,875
Net interest income 2,808 2,488 5,379 4,256 3,809
Provision for loan and lease losses 150 118 243 458 80
Net interest income after
provision for loan and lease losses 2,658 2,370 5,136 3,798 3,729
Other noninterest income 1,192 847 2,037 1,692 1,227
Noninterest expense 3,067 2,553 5,531 4,282 3,928
Earnings before income taxes 783 664 1,642 1,208 1,028
Provision for income taxes(2) 285 260 639 470 377
Net income 498 404 1,003 738 651
Basic earnings per share $ .52 $ .43 $ 1.08 $ .97 $ .96
Number of shares used in basic
earnings per share calculation(3) 965,403 929,412 932,531 759,017 681,030
Diluted earnings per share $ .48 $ .42 $ 1.02 $ .94 $ .94
Number of shares used in diluted
earnings per share calculation(4) 1,037,409 968,330 986,706 782,318 689,696
</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.
109
<PAGE> 121
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
(Unaudited) June 30, December 31,
---------------- ---------------------------
1998 1997 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 11.4% 10.5% 12.7% 12.2% 13.8%
Net earnings to
average total assets(1) .9% .9% 1.0% 1.0% 1.0%
Total interest expense to
total interest income 37.0% 36.3% 36.2% 33.9% 33.0%
Other operating income to
other operating expense 38.9% 33.2% 36.8% 39.5% 31.2%
</TABLE>
- -----------------
(1) Ratios have been annualized for the six months ended June 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 six months
ended June 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 $3,905 thousand for the six
months ended June 30, 1997, to $4,457 thousand for the six months ended June 30,
1998, representing a 14.1% 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
$1,417 thousand for the six months ended June 30, 1997, to $1,649 thousand for
the six months ended June 30, 1998, representing a 16.4% 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 six months ended June 30, 1997 was 5.9% and for the six
months ended June 30, 1998 was 5.7%. The primary reason for the decrease in the
net interest margin for the six months ended June 30, 1998 from the six months
ended June 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 6.50%
for the six months ended June 30, 1998. During the same periods, the yield on
the loan portfolio increased from 10.18% in 1996 to 10.25% in 1997, but
decreased to 10.02% for the six months ended June 30, 1998. In addition, while
interest rates on deposits decreased, the overall mix of deposits changed to
include a greater
110
<PAGE> 122
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 six months ended June 30, 1998 over the
same six 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 $2,488 thousand for the six months ended June
30, 1997 to $2,808 thousand for the six months ended June 30, 1998, representing
a 12.9% increase. Average interest-earning assets increased 17.4% to $99,008
thousand for the six months ended June 30, 1998 from $84,294 thousand for the
comparable period in 1997, with a decrease in the net interest margin to 5.67%
for the six months ended June 30, 1998 from 5.90% for the comparable period in
1997. The increase in net interest income for the six months ended June 30, 1998
over the six months ended June 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.
111
<PAGE> 123
The following is an unaudited summary of changes in earnings of the Bancorp for
the six months ended June 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>
Six Months Ended Year Ended December 31,
June 30, --------------------------------------------------------
1998 over 1997 1997 over 1996 1996 over 1995
(Dollars in thousands) ------------------------ ------------------------- --------------------------
(Unaudited) Amount of % of Amount of % of Amount of % of
Change Change Change Change(1) Change Change(1)
--------- ------ --------- --------- --------- ---------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Interest and fees on loans $ 375 11.54% $1,434 25.87% $ 606 12.28%
Interest on securities 155 27.74% 490 65.25% 147 24.20%
Interest on federal funds sold 22 23.27% 65 44.72% 4 3.06%
------ ------ ------
Total interest income 552 14.13% 1,989 30.88% 757 13.32%
INTEREST EXPENSE
Interest on deposits 232 16.37% 866 39.63% 310 16.53%
------ ------ ------
Net interest income 320 12.86% 1,123 29.56% 447 11.74%
PROVISION FOR
LOAN LOSSES 32 27.12% (214) (46.72)% 378 472.50%
------ ------ ------
Net interest income after
provision for loan losses 288 12.15% 1,337 35.20% 69 1.85%
------ ------ ------
NONINTEREST INCOME
Service charges (4) (1.11)% 77 11.19% (2) (.27)%
Other income 349 72.46% 268 26.71% 467 86.86%
------ ------ ------
Total noninterest income 345 40.73% 345 20.39% 465 37.90%
------ ------ ------
OTHER EXPENSES
Salaries and related benefits 368 26.60% 632 26.84% 265 12.68%
Occupancy and
equipment expense 79 19.51% 110 14.67% 73 10.84%
Other 67 8.80% 506 43.03% 16 1.35%
------ ------ ------
Total other expenses 514 20.14% 1,248 29.15% 354 9.01%
------ ------ ------
Income before income taxes 119 17.92% 434 35.93% 180 17.50%
PROVISION FOR
INCOME TAXES (25) 9.64% (169) 35.96% (93) 24.67%
------ ------ ------
NET INCOME $ 94 23.27% $ 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 $847 thousand for the six months ended June 30, 1997 to
$1,192 thousand for the six months ended June 30, 1998, representing a 40.7%
increase. The increases in noninterest income in 1996, 1997 and the first six
months of 1998 were primarily the result of increased funding and sales of
mortgage loans in
112
<PAGE> 124
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 six months ended June 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
- ---------------- --------- ----------- ----------- ---------
Six Months Ended
June 30,(2)
- ----------------
<S> <C> <C> <C> <C>
1998 $109,218 3.2% .9% 1.5%
1997 $ 93,760 2.9% .9% 1.6%
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
- ----------------
<S> <C> <C> <C> <C>
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 six months ended June 30, 1998, $150 thousand was allocated as
a provision for loan losses and for the six months ended June 30, 1997, $118
thousand was allocated as a provision for loan losses. Loans charged off net of
recoveries for the six months ended June 30, 1998 were $185 thousand. There were
no loans charged-off for the six months ended June 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 1.30% at June 30, 1998 and
1.22% at June 30, 1997.
113
<PAGE> 125
In management's opinion, the balance of the allowance for loan losses at June
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 six months ended June
30, 1998 and 1997 was $285 thousand and $260 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 six months ended June 30, 1998 were $498
thousand and $.52 per share as compared to a net income of $404 thousand and
$.43 per share for the six months ended June 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 June 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.
114
<PAGE> 126
The Bancorp's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized June 30,
Requirement Requirement 1998
----------- ----------- --------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 11.4%
Total risk-based to
risk-weighted assets 8% 10% 12.5%
Leverage to total
average assets 4-5% 5% 8.7%
</TABLE>
115
<PAGE> 127
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>
Six Months Ended June 30,
(Dollars in thousands) ---------------------------------------------------------
(Unaudited) 1998 1997
-------------------------- ------------------------
Amount Percent(1) Amount Percent(1)
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,681 4.29% $ 4,237 4.52%
Investment securities 22,452 20.56% 15,707 16.75%
Federal funds sold 4,128 3.78% 3,376 3.60%
Loans:
Commercial 15,918 14.58% 13,602 14.51%
Installment 544 0.50% 573 0.61%
Real estate 56,257 51.51% 51,398 54.82%
Less deferred costs (291) (0.27)% (362) (0.39)%
Less allowance for loan
and lease losses (948) (0.87)% (761) (0.81)%
-------- -------
Net loans 71,480 65.45% 64,450 68.74%
-------- -------
Bank premises and equipment, net 2,901 2.66% 2,822 3.01%
OREO 1,313 1.20% 1,291 1.38%
Other assets 2,263 2.07% 1,877 2.00%
-------- -------
TOTAL ASSETS $109,218 100.00% $93,760 100.00%
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 20,791 19.04% $16,347 17.42%
NOW and money market 17,704 16.21% 17,191 18.34%
Savings 6,976 6.39% 7,338 7.83%
Time 37,299 34.15% 32,718 34.90%
Time > $100,000 16,799 15.38% 11,872 12.66%
-------- -------
Total deposits 99,569 91.17% 85,466 91.15%
Other liabilities 902 0.82% 614 0.66%
-------- -------
Total liabilities 100,471 91.99% 86,080 91.81%
-------- -------
Shareholders' equity:
Common stock 5,029 4.60% 5,029 5.36%
Retained earnings 3,652 3.35% 2,753 2.94%
Unearned ESOP shares (40) (0.04)%
Unrealized gain (loss) on AFS
investment securities, net 66 0.06% (62) (0.07)%
-------- -------
Total shareholders' equity 8,747 8.01% 7,680 8.19%
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $109,218 100.00% $93,760 100.00%
======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) ---------------------------------------------------------------------------------------
(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 $ 4,388 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%
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.
116
<PAGE> 128
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of the Bancorp's investment securities as of June 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
---------------- ----------------- ----------------- ------------------ ------------------
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 $999 5.17% $ 675 6.63% $5,862 7.00% $12,322 7.40% $19,858 6.85%
Municipals 0 0% 471 5.30% 0 0% 4,068 5.30% 4,539 5.30%
---- ------ ------ ------- -------
Total $999 5.17% $1,146 6.00% $5,862 7.00% $16,390 6.80% $24,397 6.50%
==== ====== ====== ======= =======
</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>
117
<PAGE> 129
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 77%,
22% and 1%, respectively, at June 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 statue 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 June 30, 1998, variable rate
loans comprised approximately 68% 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)
June 30, December 31,
----------------------- ---------------------------------------
Type of Loan 1998 1997 1997 1996 1995
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate $52,940 $53,058 $53,315 $47,284 $35,281
Commercial 16,688 15,023 15,580 14,040 14,016
Installment 630 542 615 657 849
------- ------- ------- ------- -------
TOTAL 70,258 68,623 69,510 61,981 50,146
Less:
Deferred loans fees (245) (388) (371) (372) (252)
Allowance for loan losses (913) (825) (948) (707) (649)
------- ------- ------- ------- -------
TOTAL NET LOANS $69,100 $67,410 $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.
118
<PAGE> 130
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 June 30, 1998, approximately 72% 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 28% 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
June 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
-------- ---------- ----------- -------
June 30, 1998
- -------------
<S> <C> <C> <C> <C>
Fixed rate $ 7,880 $ 7,502 $7,263 $22,645
Variable 43,436 3,708 469 47,613
------- ------- ------ -------
Total $51,316 $11,210 $7,732 $70,258
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Less than One Year to After
thousands) One Year Five Years Five Years Total
-------- ---------- ----------- -------
December 31, 1997
- -----------------
<S> <C> <C> <C> <C>
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>
119
<PAGE> 131
LOAN COMMITMENTS. The following table shows the Bancorp's loan commitments at
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------- ------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Commercial $ 7,065 $ 5,485 $ 6,827 $ 5,401 $3,287
Real estate 7,221 8,185 8,440 7,690 4,915
------- ------- ------- ------- ------
Total commitments $14,286 $13,670 $15,267 $13,091 $8,202
======= ======= ======= ======= ======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 60% of the commitments at June 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 $632 thousand and $1,487 thousand at June 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
$632 thousand and $1,487 thousand were on nonaccrual status as of June 30, 1998
and December 31, 1997, respectively. The Bancorp classifies certain loans on
nonaccrual status as impaired. Accordingly, all loans on nonaccrual status at
June 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 six months ended June 30, 1998 and the
years ended December 31, 1997 and 1996 amounted to approximately $32 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.
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<PAGE> 132
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,
June 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,
June 30, ------------------
(Dollars in thousands) 1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Commercial $310 $ 428 $ 500
Real estate 322 1,059 929
---- ------ ------
Total $632 $1,487 $1,429
==== ====== ======
</TABLE>
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<PAGE> 133
The following table summarizes the Bancorp's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------- -------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
BALANCES
<S> <C> <C> <C> <C> <C>
Loans:
Average loans $72,428 $65,211 $68,096 $54,452 $45,878
Loans at end of period 70,013 68,235 69,139 61,609 49,894
Loans charged off 187 0 3 403 56
Recoveries of loans
previously charged off 2 0 1 3 5
Net loans charged off 185 0 2 400 51
Allowance for loan
and lease losses 913 825 948 707 649
Provisions for loan
and lease losses 150 118 243 458 80
Ratios(1):
Net loan charge-offs to
average loans 0.51% 0.00% 0.00% 0.73% 0.11%
Net loan charge-offs to
loans at end of period 0.53% 0.00% 0.00% 0.65% 0.10%
Allowance for possible loan
losses to average loans 1.26% 1.27% 1.39% 1.30% 1.41%
Allowance for possible loan
losses to loans at end of period 1.30% 1.22% 1.37% 1.15% 1.30%
Net loan charge-offs to
allowance for possible loan losses 40.53% 0.00% 0.21% 56.58% 7.86%
Net loan charge-offs to
provision for possible loan losses 123.33% 0.00% 0.82% 87.34% 63.75%
</TABLE>
- ------------------
(1) Annualized for the six months ended June 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 $150 thousand for the first six
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
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<PAGE> 134
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 June 30, 1998, the allowance was
1.30% 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 six months of 1998. Recoveries of loans previously charged off were $1
thousand in 1997, $3 thousand in 1996 and $2 thousand during the first six
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 $24,397 thousand in federal
instruments, securities issued by states and political subdivisions and other
debt securities, which yielded approximately 6.35% per annum during the first
six 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:
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<PAGE> 135
<TABLE>
<CAPTION>
Six Months Ended
(Dollars in thousands) June 30,(1) Year Ended December 31,
--------------------- -----------------------------------
(Unaudited) 1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold:
Average outstanding $ 4,128 $ 3,376 $ 3,780 $ 2,671 $ 2,330
Average yield 5.57% 5.51% 5.56% 5.47% 6.05%
Interest income $ 115 $ 93 $ 210 $ 146 $ 141
Investment securities:
Average outstanding $22,452 $15,707 $17,832 $11,019 $ 9,790
Average yield 6.35% 7.11% 6.97% 6.82% 6.18%
Interest income $ 713 $ 558 $ 1,242 $ 751 $ 605
Loans:
Average outstanding $72,428 $65,211 $68,096 $54,452 $45,878
Average yield 10.02% 9.98% 10.25% 10.18% 10.76%
Interest income $ 3,629 $ 3,254 $ 6,978 $ 5,544 $ 4,938
Total interest-earning assets:
Average outstanding $99,008 $84,294 $89,708 $68,142 $57,998
Average yield 9.00% 9.27% 9.40% 9.45% 9.80%
Interest income $ 4,457 $ 3,905 $ 8,430 $ 6,441 $ 5,684
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $17,704 $17,191 $18,041 $15,906 $15,822
Average yield 1.63% 1.75% 1.77% 1.84% 1.93%
Interest expense $ 144 $ 150 $ 320 $ 292 $ 306
Savings deposits:
Average outstanding $ 6,976 $ 7,338 $ 7,361 $ 7,294 $ 7,975
Average yield 1.95% 2.04% 2.06% 2.08% 2.28%
Interest expense $ 68 $ 75 $ 152 $ 152 $ 182
Time deposits:
Average outstanding $54,085 $44,570 $47,495 $32,466 $24,413
Average yield 5.31% 5.35% 5.43% 5.33% 5.66%
Interest expense $ 1,437 $ 1,192 $ 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 $78,765 $69,099 $72,897 $55,666 $48,210
Average yield 4.19% 4.10% 4.18% 3.91% 3.88%
Interest expense $ 1,649 $ 1,417 $ 3,051 $ 2,185 $ 1,875
Net interest income $ 2,808 $ 2,488 $ 5,379 $ 4,256 $ 3,809
Average net yield on
interest-earning assets 5.67% 5.90% 6.00% 6.25% 6.57%
</TABLE>
- ------------------
(1) Six month yields have been annualized.
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<PAGE> 136
LIQUIDITY MANAGEMENT. To augment short-term liquidity, WSNB has unsecured
short-term borrowing agreements with two of its correspondence 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 $980,000
on a short-term basis from the Federal Home Loan Bank secured by investment
securities with amortized costs totaling $1,061,798 and estimated market values
totaling $1,053,700. WSNB can also borrow $5,560,000 from the Federal Home Loan
Bank secured by mortgage loans totaling $8,973,000. At June 30, 1998, WSNB had
outstanding overnight borrowings of $750,000 from the FRB at an interest rate of
5% due to the timing of an outgoing wire transfer. There were no outstanding
borrowings at December 31, 1997 or June 30, 1997.
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>
Six Months Ended Year Ended
June 30, 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 $20,791 20.88% $16,347 19.13% $17,823 19.65% $13,293 19.27% $11,457 19.20%
NOW accounts 9,871 9.91% 9,470 11.08% 9,616 10.60% 8,371 12.14% 7,924 13.27%
Savings deposits 6,976 7.01% 7,338 8.59% 7,361 8.11% 7,294 10.58% 7,975 13.37%
Money market
deposits 7,833 7.87% 7,721 9.03% 8,425 9.29% 7,535 10.93% 7,898 13.24%
Time deposits 54,098 54.33% 44,590 52.17% 47,496 52.35% 32,466 47.08% 24,413 40.92%
------- ------- ------- ------- -------
Total deposits $99,569 100.00% $85,466 100.00% $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>
June 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 $12,150 $20,243 $ 8,219 $16,056
Over three months
through twelve months 3,959 13,247 6,286 16,664
Over twelve months
through five years 1,246 3,495 1,028 3,677
Over five years 0 109 0 100
------- ------- ------- -------
Total $17,355 $37,094 $15,533 $36,497
======= ======= ======= =======
</TABLE>
125
<PAGE> 137
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 June 30, 1998
and December 31, 1997 under the regulatory guidelines discussed above:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Actual Capital Ratios Actual Capital Ratios Minimum Capital Ratios
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Total risk-based
capital ratio 12.5% 11.9% 8.0%
Tier 1 capital to
risk-weighted assets 11.4% 10.7% 4.0%
Leverage ratio 8.7% 8.7% 3.0%
</TABLE>
As is indicated by the above table, the Bancorp exceeded all applicable
regulatory capital guidelines at June 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
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<PAGE> 138
common capital account, then further restrictions apply. This is not the case
with WSNB. Year-to-date dividends of $300,000 paid through June 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 June 30, 1998 and December 31, 1997, WSNB's qualifying balance with the
FRB was approximately $786 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 and mainframe 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.
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
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<PAGE> 139
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.
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<PAGE> 140
<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.
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<PAGE> 141
<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.
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<PAGE> 142
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>
131
<PAGE> 143
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 $100,000 during the Bancorp's 1997
fiscal year.
132
<PAGE> 144
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
------------------- ---------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ---------------------------- ---- ------- ------- --------- ---------- -------- ------- ---------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(3)
Position Year ($) ($) ($) ($) SARs(2) ($) ($)
- ---------------------------- ---- ------- ------- --------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary D. Gall, President, 1997 127,500 109,486 8,497 0 27,500 0 10,773
CEO and Director ---- ------- ------- ------- ---------- -------- ------- -------
of the Bancorp and WSNB 1996 120,000 67,528 8,260 0 11,660 0 7,580
---- ------- ------- ------- ---------- -------- ------- -------
1995 107,200 37,462 4,214 0 1,298 0 4,321
- ---------------------------- ---- ------- ------- ------- ---------- -------- ------- -------
Stephanie M. Marsh 1997 71,070 33,964 3,750 0 3,300 0 7,162
Senior Vice President and ---- ------- ------- ------- ---------- -------- ------- -------
Chief Administrative Officer 1996 68,400 33,764 3,495 0 5,830 0 4,710
of WSNB ---- ------- ------- ------- ---------- -------- ------- -------
1995 68,400 18,656 2,770 0 0 0 3,105
- ---------------------------- ---- ------- ------- ------- ---------- -------- ------- -------
</TABLE>
(1) These amounts represent perquisites consisting of country club fees for all
officers and automobile allowance and family health insurance premiums for
Mr. Gall.
(2) These amounts are adjusted for stock dividends. The Bancorp has no SARs.
(3) This amount represents the Bancorp's contribution for the cost of premiums
for life insurance and 401(k) Plan and ESOP.
133
<PAGE> 145
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants(1)
- -------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ---------------------- ------------ ------------ ---------- -------------
% of Total
Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/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.
134
<PAGE> 146
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.
135
<PAGE> 147
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.
136
<PAGE> 148
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 June 30, 1998 the total of Lake's
installment and credit card loans outstanding was $2,680,221, the total of
commercial loans outstanding was $4,412,167, the total of agricultural loans
outstanding was $14,853,973, and the total of real estate loans outstanding was
$30,478,124 ($380,000 in construction loans and $30,098,124 in residential and
commercial real estate loans), representing 5.2%, 8.4%, 28.3% and 58.1%,
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 June 30, 1998,
Lake's real estate loan portfolio consisted of approximately 31% residential
properties and 26% commercial properties.
Real estate values remained relatively stable during the first half of 1998 with
a slight upturn in market values for residential properties in the second
quarter. Commercial property values also remained stable, but sales activity
continued to be weak throughout the year. For the six 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 June 30, 1998, Lake held two (2)
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
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.
137
<PAGE> 149
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 June 30, 1998, Lake employed 42 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.
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,
138
<PAGE> 150
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 six months ended June 30, 1998 and 1997 are unaudited. The June 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>
Six Months
Ended June 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 $ 3,209 $ 3,170 $ 6,560 $ 6,847 $ 7,002
Interest expense 1,278 1,234 2,562 2,845 3,056
Net interest income 1,931 1,936 3,998 4,002 3,946
Provision for loan losses 180 180 263 477 210
Net interest income after
provision for loans losses 1,751 1,756 3,735 3,525 3,736
Other noninterest income 355 271 630 678 681
Noninterest expense 1,813 1,598 3,222 3,524 3,301
Earnings before income taxes 293 429 1,143 679 1,116
Provision for income taxes(2) 87 146 377 203 335
Net income 206 283 766 476 781
Basic earnings per share $0.16 $0.23 $0.62 $0.38 $0.63
Number of shares used in basic
earnings per share calculation(3) 1,251,477 1,240,546 1,240,546 1,240,491 1,239,791
Diluted earnings per share $.16 $.22 $.59 $.36 $.59
Number of shares used in diluted
earnings per share calculation(4) 1,311,645 1,274,696 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.
139
<PAGE> 151
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
(Unaudited) June 30, December 31,
----------------- ----------------------------
1998 1997 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 4.67% 6.85% 9.05% 5.91% 10.08%
Net earnings to
average total assets(1) .49% .70% .93% .55% .97%
Total interest expense to
total interest income 39.83% 38.92% 39.05% 41.55% 43.64%
Other operating income to
other operating expense 19.59% 16.96% 19.55% 19.24% 20.63%
</TABLE>
- -----------------
(1) Ratios have been annualized for the six months ended June 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 six months ended June
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 increased from $3,170 thousand for the six
months ended June 30, 1997, to $3,209 thousand for the six months ended June 30,
1998, representing a 1.20% increase. 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 June 30, 1998 to $74.4 million from $70.2
million at June 30, 1997, resulting in an increase in interest income. 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 $1,234 thousand for the six months ended June 30, 1997, to $1,278 thousand
for the six months ended June 30, 1998, representing a 3.65% increase.
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<PAGE> 152
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 six months ended June 30, 1997 was 5.52% and for the six months
ended June 30, 1998 was 5.19%. The primary reason for the decrease in the net
interest margin for the six months ended June 30, 1998 from the six months ended
June 30, 1997 was the overall change in mix in interest-earning assets, with
average loans outstanding decreasing by $1,101 thousand and investments, with a
lower average yield, increasing by $5,309 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 six months ended June
30, 1998 over the same six 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 $1,936 thousand for the six months ended June 30, 1997 to $1,931
thousand for the six months ended June 30, 1998, representing a .26% 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.
141
<PAGE> 153
The following is an unaudited summary of changes in earnings of Lake for the six
months ended June 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>
Six Months Ended Year Ended December 31,
June 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 $(102) (3.77%) $(175) (3.07%) $ (90) (1.55%)
Interest on securities 31 10.59% (183) (23.52%) (41) (5.01%)
Interest on federal funds sold 68 110.76% 36 21.43% (62) (26.96%)
Interest on deposits in
other financial institutions 42 38.57% 35 17.68% 38 23.75%
----- ----- -----
Total interest income 39 1.22% (287) (4.19%) (155) (2.21%)
INTEREST EXPENSE
Interest on deposits 44 3.58% (283) (9.95%) (211) (6.90%)
----- ----- -----
Net interest income (5) (.28%) (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 (5) (.31%) 210 5.96% (211) (5.65%)
----- ----- -----
NONINTEREST INCOME
Service charges 84 31.26% 28 6.51% (30) (6.53%)
Other income 0 (76) (28.79%) 27 11.39%
----- ----- -----
Total noninterest income 84 31.00% (48) (7.08%) (3) (.44%)
----- ----- -----
OTHER EXPENSES
Salaries and related benefits 159 18.93% (65) (3.92%) (6) (.36%)
Occupancy and
equipment expense 17 5.34% (40) (6.87%) 177 42.14%
Other 39 8.67% (197) (15.82%) 52 4.36%
----- ----- -----
Total other expenses 215 13.42% (302) (8.57%) 223 6.72%
----- ----- -----
Income before income taxes (136) (31.71%) 464 68.43% (437) (39.16%)
PROVISION FOR
INCOME TAXES (58) (40.06%) 174 85.71% (132) (39.40%)
----- ----- -----
NET INCOME $ (78) (27.41%) $ 290 60.92% $(305) 39.05%
===== ===== =====
</TABLE>
- -----------------
(1) Increase or (decrease) over previous year amount.
142
<PAGE> 154
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 over 1995 and a 7.08% decrease in 1997 over 1996. Noninterest income
increased from $271 thousand for the six months ended June 30, 1997 to $355
thousand for the six months ended June 30, 1998, representing a 31.0% increase.
The increase for the first six 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 over 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 six month periods ended June 30, 1998 and 1997 totaled $999 thousand and
$840 thousand, respectively. The 18.9% increase in the first six months of 1998
over the same period in 1997 was due primarily to the severance package paid to
the Chief Financial Officer and adjustments to retirement accruals for the
President who will be retiring at the end of 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 six months ended June 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>
Six Months Ended
June 30,(2)
- ----------------
1998 $83,883 2.38% .77% 1.17%
1997 $80,450 2.09% .76% 1.13%
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
143
<PAGE> 155
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 six months ended June 30, 1998 and 1997, $180 thousand was allocated as a
provision for loan losses during each period. Loans charged off net of
recoveries for the six months ended June 30, 1998 were $37 thousand and for the
six months ended June 30, 1997 were $190 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 2.09% at June 30, 1998 and 1.59% at
June 30, 1997.
In management's opinion, the balance of the allowance for loan losses at June
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 six months ended June
30, 1998 and 1997 was $87 thousand and $146 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 six months ended June 30, 1998 were $206
thousand and $.16 per share as compared to a net income of $283 thousand and
$.23 per share for the six months ended June 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 June
30, 1998, that Lake exceeds all capital adequacy requirements to which it is
subject.
144
<PAGE> 156
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 June 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% 10.8%
</TABLE>
145
<PAGE> 157
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) Six Months Ended
June 30,
-------------------------------------------------
(Unaudited) 1998 1997
---------------------- ---------------------
Amount Percent(1) Amount Percent(1)
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,921 5.87% $ 4,536 5.62%
Deposits in other financial institutions 5,062 6.03% 3,684 4.56%
Investment securities 10,918 13.02% 9,434 11.86%
Federal funds sold 4,810 5.73% 2,363 2.93%
Loans:
Commercial 22,654 27.01% 19,407 24.02%
Installment 5,767 6.88% 6,667 8.63%
Real estate 13,591 16.20% 14,955 18.51%
Agricultural 11,604 13.83% 13,688 16.94%
Less deferred fees (215) (0.26%) (236) (0.29%)
Less allowance for loan losses (1,023) (.12%) (913) (1.13%)
------- -------
Net loans 52,378 62.44% 53,568 66.69%
------- -------
Bank premises and equipment, net 3,026 3.61% 3,239 4.01%
Other assets 2,768 3.30% 3,626 4.51%
------- -------
TOTAL ASSETS $83,883 $80,450
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $11,978 14.28% $10,273 12.77%
NOW and money market 12,946 15.43% 13,611 16.92%
Savings 12,463 14.86% 13,848 17.21%
Time 31,822 37.94% 29,440 36.60%
Time, $100,000 and over 5,201 5.94% 4,335 5.39%
------- -------
Total Deposits 74,410 84.67% 71,507 88.47%
Other liabilities 649 0.77% 675 0.84%
------- -------
Total liabilities 75,059 89.48% 72,182 89.72%
------- -------
Shareholders' equity:
Common Stock 3,241 3.86% 3,178 3.95%
Retained earnings 5,542 6.61% 5,187 6.45%
Unrealized gain (loss) on AFS
investment securities 41 0.05% (97) (0.12%)
------- -------
Total shareholders' equity 8,824 10.52% 8,268 11.74%
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $83,883 $80,450
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) ------------------------------------------------------------------------
(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) (.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.
146
<PAGE> 158
Investment Portfolio. The following table summarizes the amounts, terms,
distributions and yields of Lake's investment securities at fair value as of
June 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 $500 6.25% $3,748 6.01% $1,232 6.23% $ 0 0% $ 5,480 6.11%
Municipals 450 5.10% 1,359 5.50% 1,481 5.31% 352 6.01% 3,642 5.61%
Corporate Notes/Bonds 0 0% 1,764 6.21% 504 6.20% 0 0% 2,268 6.20%
---- ------ ------ ---- -------
Total $950 5.70% $6,871 5.96% $3,217 5.80% $352 6.01% $11,390 5.97%
==== ====== ====== ==== =======
</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>
147
<PAGE> 159
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
Municipal 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 58.2%, 8.4%, 5.1% and 28.3%, respectively, at June 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 June 30, 1998, variable rate loans comprised approximately
33% 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) June 30, December 31,
----------------- ---------------------------
Type of Loan 1998 1997 1997 1996 1995
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate $30,478 $34,213 $32,437 $34,938 $34,996
Commercial 4,412 5,665 5,045 5,469 7,995
Consumer 2,680 3,278 2,920 3,436 3,976
Agricultural 14,854 13,317 13,942 9,409 7,363
------- ------- ------- ------- -------
TOTAL 52,424 56,473 54,344 53,252 54,330
Less:
Deferred loans fees (213) (209) (182) (253) (363)
Allowance for loan losses (1,095) (898) (952) (908) (1,128)
------- ------- ------- ------- -------
TOTAL NET LOANS $51,116 $55,366 $53,210 $52,091 $52,839
======= ======= ======= ======= =======
</TABLE>
148
<PAGE> 160
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.
149
<PAGE> 161
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding as of June 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>
June 30, 1998
Fixed rate $ 3,858 $15,769 $15,245 $34,872
Variable 15,225 2,327 0 17,552
------- ------- ------- -------
Total $19,083 $18,096 $15,245 $52,424
======= ======= ======= =======
</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>
June 30, December 31,
------------------ ------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
- ---------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Commercial $ 1,729 $ 3,980 $ 3,793 $ 3,561 $ 4,303
Real estate 4,245 2,722 3,097 2,325 2,320
Consumer 413 442 402 434 449
Agricultural 6,514 3,547 7,814 4,463 4,933
------- ------- ------- ------- --------
Total commitments $12,901 $10,691 $15,106 $10,783 $12,005
======= ======= ======= ======= ========
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 31% of the commitments at June 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.
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<PAGE> 162
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 $993 thousand and
$1,057 thousand at June 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 $1,297 thousand and $1,389 thousand
were on nonaccrual status as of June 30, 1998 and December 31, 1997,
respectively. Lake also classifies certain loans on nonaccrual status as
impaired. Accordingly, certain loans on nonaccrual status at June 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 six months ended June 30, 1998 and the years ended December 31, 1997 and
1996 amounted to approximately $43 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,
June 30, -------------------
(Dollars in thousands) 1998 1997 1996
------- ---- ------
<S> <C> <C> <C>
Commercial $ 190 $ 12 $ 200
Real estate 550 260 1,012
Consumer 56 2 61
------ ---- ------
Total $ 796 $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,
June 30, --------------------
(Dollars in thousands) 1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Commercial $ 127 $ 136 $ 29
Real estate 1,168 1,253 1,394
Consumer 2 0 2
------ ------ ------
Total $1,297 $1,389 $1,425
====== ====== ======
</TABLE>
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<PAGE> 163
The following table summarizes Lake's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended
(Unaudited) June 30, Year Ended December 31,
-------------------- --------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $53,616 $54,717 $55,171 $56,608 $53,941
Loans at end of period 52,424 56,473 54,344 53,252 54,330
Loans charged off (54) (212) (257) (739) (147)
Recoveries of loans
previously charged off 17 22 38 42 47
Net loans charged off (37) (190) (219) (697) (100)
Allowance for loan losses 1,095 898 952 908 1,128
Provisions for loan losses 180 180 263 477 210
Ratios(1):
Net loan charge-offs to
average loans 0.14% 0.69% 0.40% 1.23% 0.19%
Net loan charge-offs to
loans at end of period 0.14% 0.67% 0.40% 1.31% 0.18%
Allowance for loan
losses to average loans 2.04% 1.64% 1.73% 1.60% 2.09%
Allowance for loan losses
to loans at end of period 2.09% 1.59% 1.75% 1.70% 2.08%
Net loan charge-offs to
allowance for loan losses 6.76% 42.32% 23.00% 76.76% 8.87%
Net loan charge-offs to
provision for loan losses 41.11% 211.11% 83.27% 146.12% 47.62%
</TABLE>
- ------------------
(1) Annualized for the six months ended June 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 $180 thousand for the first six months of 1998. The
provision increased in 1996, 1997 and the first six months of 1998 as a result
of identified losses in the loan portfolio totaling $739 thousand, $257 thousand
and $54 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.
At December 31, 1997, 1996 and 1995, the allowance was 1.75%, 1.70%, and 2.08%
of the loans then outstanding, respectively. At June 30, 1998, the allowance was
2.09% of the loans then outstanding. Although the current level
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<PAGE> 164
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 $54 thousand in the first six months of 1998. Recoveries of loans
previously charged off were $38 thousand in 1997, $42 thousand in 1996 and $17
thousand during the first six 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 $22,038 thousand in Federal
instruments, securities issued by states and political subdivisions, other debt
securities and bank certificates of deposit, which yielded approximately 5.82%
per annum during the first six 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.
153
<PAGE> 165
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>
Six Months Ended
June 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 $ 5,062 $ 3,684 $ 3,870 $ 3,432 $ 2,644
Average yield 5.98% 5.97% 6.02% 5.77% 6.05%
Interest income $ 150 $ 108 $ 233 $ 198 $ 160
Federal funds sold:
Average outstanding $ 4,810 $ 2,363 $ 3,751 $ 3,288 $ 4,008
Average yield 5.45% 5.23% 5.42% 5.11% 5.73%
Interest income $ 130 $ 61 $ 203 $ 168 $ 230
Investment securities:
Average outstanding $10,918 $ 9,434 $ 9,700 $12,658 $14,218
Average yield 5.98% 6.28% 6.13% 6.14% 5.76%
Interest income $ 323 $ 292 $ 595 $ 777 $ 819
Loans:
Average outstanding $53,616 $54,717 $55,171 $56,608 $53,941
Average yield 9.81% 9.90% 10.02% 10.08% 10.74%
Interest income $ 2,606 $ 2,709 $ 5,529 $ 5,704 $ 5,793
Total interest-earning assets:
Average outstanding $74,406 $70,198 $72,492 $75,986 $74,811
Average yield 8.63% 9.03% 9.05% 9.01% 9.36%
Interest income $ 3,209 $ 3,170 $ 6,560 $ 6,847 $ 7,002
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $12,946 $13,611 $13,585 $14,889 $15,046
Average yield 2.36% 2.34% 2.34% 2.20% 2.63%
Interest expense $ 153 $ 157 $ 318 $ 328 $ 395
Savings deposits:
Average outstanding $12,463 $13,848 $13,356 $14,096 $14,233
Average yield 2.23% 2.27% 2.25% 2.19% 2.77%
Interest expense $ 139 $ 155 $ 301 $ 309 $ 395
Time deposits:
Average outstanding $37,023 $33,775 $35,374 $38,706 $34,256
Average yield 5.33% 5.54% 5.50% 5.70% 6.61%
Interest expense $ 987 $ 922 $ 1,943 $ 2,208 $ 2,266
Total interest-bearing
liabilities:
Average outstanding $62,432 $61,234 $62,315 $67,691 $63,535
Average yield 4.10% 4.03% 4.11% 4.20% 4.81%
Interest expense $ 1,278 $ 1,234 $ 2,562 $ 2,845 $ 3,056
Net interest income $ 1,931 $ 1,936 $ 3,998 $ 4,002 $ 3,946
Average net yield of
interest-earning assets 5.19% 5.52% 5.52% 5.27% 5.27%
</TABLE>
(1) Six month yields have been annualized.
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<PAGE> 166
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>
Six Months Ended Year Ended
June 30, 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 $11,978 16.10% $10,273 14.37% $11,184 15.22% $ 9,883 12.74% $ 8,751 12.10%
NOW accounts 8,922 11.99% 9,511 13.30% 9,402 12.79% 10,080 12.99% 9,837 13.61%
Savings deposits 12,463 16.75% 13,848 19.37% 13,356 18.17% 14,096 18.17% 14,233 19.69%
Money market deposits 4,024 5.41% 4,100 5.73% 4,183 5.69% 4,809 6.20% 5,209 7.21%
Time deposit 37,023 49.75% 33,775 47.23% 35,374 48.13% 38,706 49.90% 34,256 47.39%
------- ------- ------- ------- -------
Total deposits $74,410 $71,507 $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>
June 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 $1,808 $12,218 $1,550 $10,030
Over three months
through twelve months 2,544 15,726 3,619 18,488
Over twelve months
through five years 742 3,454 525 3,088
------ ------- ------ -------
Total $5,094 $31,398 $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.
155
<PAGE> 167
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(1) and "supplemental capital elements," or Tier 2
capital(2). 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 June 30,
1998 and December 31, 1997:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
AMOUNT RISK-BASED RATIO
----------- ----------------
<S> <C> <C>
Tier 1 capital $ 9,028,400 14.1%
Total capital $ 9,830,000 15.4%
Total capital minimum requirement $ 5,129,900 8.0%
Excess $ 4,700,100
Total risk-weighted assets $64,124,330
</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>
156
<PAGE> 168
LEVERAGE RATIO
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
AMOUNT LEVERAGE RATIO(1)
-------------- -----------------
<S> <C> <C>
Tier 1 capital $ 9,028,400 10.8%
Minimum leverage ratio $ 3,355,300 4.0%
Excess $ 5,673,100
Average assets $83,813,000(2)
</TABLE>
- ----------------
(1) Tier 1 capital to adjusted total average assets.
(2) As adjusted for intangibles and FAS 115.
<TABLE>
<CAPTION>
DECEMBER 30, 1998
-----------------
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
157
<PAGE> 169
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.
158
<PAGE> 170
In addition to the regulations concerning minimum uniform capital adequacy
requirements discussed above, the FDIC has established guidelines regarding the
maintenance of an adequate allowance for loan and lease losses. Therefore, the
future payment of cash dividends by Lake will generally depend, in addition to
regulatory constraints, upon Lake's earnings during any fiscal period, the
assessment of Lake's Board of Directors of the capital requirements of the
institution and other factors, including the maintenance of an adequate
allowance for loan and lease losses.
Reserve Balances. Lake maintains average reserve balances with the FRB. At June
30, 1998 and December 31, 1997, Lake's qualifying balance with the FRB was
approximately $490,000 and $640,000, respectively, consisting of vault cash and
balances.
Year 2000 Compliance. The millennium change is just around the corner and with
it comes uncertainty about the accuracy of automated systems. The seeds of the
Year 2000 ("Y2K") problem were planted decades ago when programmers instituted
the practice of representing dates as two digits instead of four. As a result,
at the end of 1999 most computer systems will process as if the date moved to
the year 1900 rather than 2000. Lake is taking steps to efficiently evaluate the
amount of risk related to the Y2K problem and effectively execute the necessary
changes required to meet the new millennium. Lake's Y2K project is part of
Lake's Strategic Plan and has been addressed within the budget process. In
addition, a Y2K Committee has been established and policy and procedure
guidelines have been developed to insure that the computer systems that Lake
relies upon, and those of Lake's vendors and associated businesses, are reviewed
and tested to meet all Y2K requirements. Additionally, Lake has informed its
customers of the Y2K concerns in Lake's quarterly newsletter and has also made
available in Lake's lobby two publications, "Testing Personal Computers for Year
2000 Compatibility," issued by the FRB, and "Customer Communications: Year 2000
Awareness," published by the California Bankers' Association. Based upon
information to date, Lake's management believes that the estimated cost of
compliance will not be material.
Quantitative and Qualitative Disclosures About Market Risk. Market risk is the
risk of loss from adverse changes in market prices and rates. Lake'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. Lake 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. Lake has a positive gap. In addition, Lake
uses interest rate shock simulations to estimate the effect of certain
hypothetical rate changes. Based upon Lake's shock simulations, net interest
income is expected to rise with increasing rates and fall with declining rates.
Lake's positive gap is the result of a significant portion of Lake's loans
having terms greater than five years on the asset side. On the liability side,
the majority of the Lake'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 six 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. Lake has reduced interest rates on time deposits and focused on
increasing noninterest-bearing deposits and floating rate loans. In addition,
Lake holds all of its investments in the available-for-sale category in order to
maintain flexibility in matching its investments with repricing changes which
occur in its liabilities.
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<PAGE> 171
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.
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<PAGE> 172
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.
161
<PAGE> 173
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
162
<PAGE> 174
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 $57,500.
Executive Compensation. The following table sets forth a summary of the
compensation paid during each of Lake's last three completed fiscal years for
services rendered in all capacities to Gary E. Nordine, the Chief Executive
Officer of Lake during the last three fiscal years.
163
<PAGE> 175
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
<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>
164
<PAGE> 176
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 the 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.
165
<PAGE> 177
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 $598,820, which represented approximately 6.59% of the
total equity capital accounts of Lake as of June 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.
166
<PAGE> 178
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 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.
Rose offers a broad range of services to individuals and businesses in its
primary service area with an emphasis upon efficiency and personalized customer
service. Rose 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 June 30, 1998, R1NB had a total of 2,650 accounts,
consisting of demand deposit accounts with an average balance of approximately
$9,820; savings, NOW and money market accounts with an average balance of
approximately $14,245, time certificates of $100,000 or more with an average
balance of approximately $133,230; and other time deposits with an average
balance of approximately $25,950. R1NB does not have any deposits obtained
through deposit brokers at this time and has no intention of using brokered
deposits.
167
<PAGE> 179
Other special services and products include personal and business checking
products and mortgage products and services.
EMPLOYEES. At June 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.
168
<PAGE> 180
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
169
<PAGE> 181
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 six months ended June 30, 1998 and 1997 are unaudited. The June 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 June 30, 1998 represent the consolidation of Rose and
R1NB. Prior period Financial Statements represent R1NB's financial information.
170
<PAGE> 182
<TABLE>
<CAPTION>
Six Months
Ended June 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 $ 1,946 $ 1,805 $ 3,894 $ 3,028 $ 2,664
Interest expense 849 742 1,664 1,331 1,288
Net interest income 1,097 1,063 2,230 1,697 1,376
Provision for loan losses 60 89 564 89 55
Net interest income after
provision for loan losses 1,037 974 1,666 1,608 1,321
Other noninterest income 272 129 341 228 126
Noninterest expense 1,110 734 1,692 1,330 1,145
Earnings before income taxes 199 369 315 506 302
Provision for income taxes(2) 79 148 133 204 104
Net income 120 221 182 302 198
Basic earnings per share(3) $ .37 $ .69 $ .57 $ .94 $ .62
Number of shares used in basic
earnings per share calculation(3) 319,972 319,972 319,972 319,872 319,572
Diluted earnings per share(4) $ .37 $ .68 $ .56 $ .93 $ .61
Number of shares used in diluted
earnings per share calculation(4) 324,648 324,648 324,648 324,622 324,530
</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>
Six Months Ended Year Ended
June 30, December 31,
----------------------- --------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings to average
shareholders' equity(1) 5.99% 11.37% 4.54% 8.23% 5.83%
Net earnings to
average total assets(1) .50% 1.09% .41% .86% .64%
Total interest expense to
total interest income 43.63% 41.11% 42.73% 43.96% 48.35%
Other operating income to
other operating expense 24.50% 17.57% 20.15% 17.14% 11.00%
</TABLE>
- ----------
(1) Ratios have been annualized for the six months ended June 30, 1998 and
1997.
171
<PAGE> 183
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 six months ended June 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 $2,664,063 in 1995 to $3,028,234 in 1996, and to $3,894,476 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 $1,805,241 for the six months
ended June 30, 1997, to $1,945,646 for the six months ended June 30, 1998,
representing a 7.8% 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 4.6% from 1995 to 1996, 1996 to 1997, and June
30, 1997 to June 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 six months of 1998 due to
increased competition for quality loans. Total interest expense increased from
$1,287,862 in 1995 to $1,331,181 in 1996 and to $1,663,920 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 $742,041 for the six months ended June 30, 1997,
to $848,698 for the six months ended June 30, 1998, representing a 14.5%
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 six
months ended June 30, 1998 over the same six 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 six months ended June 30, 1997 was 5.67% and for the six months
ended June 30, 1998 was 5.10%. The primary reason for the decrease in the net
interest margin for the six months ended June 30, 1998 from the six months ended
June 30, 1997 was the overall change in mix in the loan portfolio, which
decreased the yield on interest-earning assets more than the increases in yields
on interest-bearing liabilities. Rose's net interest income increased from
$1,376,201 in 1995 to $1,697,053 in 1996 and to $2,230,556 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 $1,063,200 for the six months ended June 30, 1997
to $1,096,948 for the six months ended June 30, 1998, representing a 3.2%
increase. The increase in net interest income for the six months ended June 30,
1998 over the six months ended June 30, 1997 was at a reduced growth rate
primarily due to decreasing yields on loans due to market pressures.
172
<PAGE> 184
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.
(Dollars in thousands)
<TABLE>
<CAPTION>
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 six
months ended June 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.
173
<PAGE> 185
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 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)
--------- ------ --------- --------- --------- ---------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Interest and fees on loans $ 122 7.8% $ 742 29.2% $ 381 17.6%
Interest on securities (22) (16.2%) 40 17.7% (35) (13.4%)
Interest on federal funds sold 41 39.4% 90 35.9% 25 11.1%
Interest on deposits in
other financial institutions 0 (6) (100.0)% (7) (54.6%)
------ ------ ------
Total interest income 141 7.8% 866 28.6% 364 13.7%
INTEREST EXPENSE
Interest on deposits 107 14.4% 333 25.0% 43 3.3%
------ ------ ------
Net interest income 34 3.2% 533 31.4% 321 23.3%
PROVISION FOR
LOAN LOSSES (Benefit) (29) (32.6%) 475 533.7% 34 61.8%
------ ------ ------
Net interest income after
provision for loan losses 63 6.5% 58 3.6% 287 21.7%
------ ------ ------
NONINTEREST INCOME
Service charges 7 29.0% 25 75.8% 13 65.0%
Other income 136 130.7% 88 44.7% 89 84.8%
------ ------ ------
Total noninterest income 143 110.9% 113 49.6% 102 81.0%
------ ------ ------
OTHER EXPENSES
Salaries and related benefits 145 38.8% 116 16.6% 124 21.5%
Occupancy and
equipment expense 45 51.1% 27 18.0% 4 2.7%
Other 186 68.4% 219 45.7% 57 13.5%
------ ------ ------
Total other expenses 376 51.2% 362 27.2% 185 16.1%
------ ------ ------
Income before income taxes (170) (46.1%) (191) (37.8%) 204 67.6%
PROVISION FOR
INCOME TAXES (BENEFIT) (69) (46.6%) (71) (34.8%) 100 96.2%
------ ------ ------
NET INCOME $ (101) (45.9%) $ (120) (39.7%) $ 104 52.5%
====== ====== ======
</TABLE>
- ----------
(1) Increase or (decrease) over previous year amount.
NONINTEREST INCOME. Noninterest income increased from $126,114 in 1995 to
$228,439 in 1996 and to $341,000 in 1997, representing a 81.0% increase in 1996
over 1995 and a 49.3% increase in 1997 over 1996. Noninterest income increased
from $129,061 for the six months ended June 30, 1997 to $272,326 for the six
months ended June 30, 1998, representing a 110.9% 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 six months of 1998 over the same period in 1997 were the
result of increased sales of loans with gains totaling $128,608 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. Other expenses increased from $1,145,481 in 1995
to $1,330,486 in 1996, and to $1,692,837 in 1997, representing
174
<PAGE> 186
a 16.1% increase in 1996 over 1995 and a 27.2% increase in 1997 over 1996. Other
expenses increased from $733,930 for the six months ended June 30, 1997 to
$1,110,122 for the six months ended June 30, 1998 representing a 51.2% 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 six months ended June 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>
Six Months Ended
June 30,(2)
- ----------------
1998 $ 47,782 2.17% .56% 1.92%
1997 $ 40,640 1.84% .43% 1.34%
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 $564,000 as a provision for loan losses in 1997, $89,200 in
1996 and $55,000 in 1995. Loans charged off net of recoveries in 1997 were
$93,680, in 1996 were $20,920 and in 1995 were $27,717. For the six months ended
June 30, 1998, $60,000 was allocated as a provision for loan losses and for the
six months ended June 30, 1997, $89,000 was allocated as a provision for loan
losses. Loans charged off net of recoveries for the six months ended June 30,
1998 were $486,220 and for the six months ended June 30, 1997 were $39,585.
During the first six months of 1998, $453,000 of the amount charged off was
related to a single commercial loan and $400,000 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 .94% at June 30, 1998 and .94% at June 30,
1997.
In management's opinion, the balance of the allowance for loan losses at June
30, 1998 was sufficient to sustain any foreseeable losses in the loan portfolio
at that time.
INCOME TAXES. Income taxes were $133,000 in 1997, $204,000 in 1996 and $104,000
in 1995. The income tax provision for the six months ended June 30, 1998 and
1997 was $79,535 and $148,100, respectively.
175
<PAGE> 187
NET INCOME. The net income of Rose was $181,719 or $.57 in basic earnings per
share in 1997, $301,806 or $.94 in basic earnings per share in 1996, and
$197,834 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 six months ended June 30, 1998 was $119,617 or $.37 in
basic earnings per share as compared to a net income of $221,321 or $.69 in
basic earnings per share for the six months ended June 30, 1997. The decrease in
net income for the first six 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 Rose.
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
$3,466,794 at December 31, 1995, to $3,775,039 at December 31, 1996 and to
$3,964,499 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 June
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.
Rose's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized June 30,
Requirement Requirement 1998
----------- ----------- ---------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 10.6%
Total risk-based to
risk-weighted assets 8% 10% 11.3%
Leverage to total
average assets 4-5% 5% 8.5%
</TABLE>
176
<PAGE> 188
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>
(Dollars in thousands) Six Months Ended June 30,
(Unaudited) -----------------------------------------------------
1998 1997
------------------------ -------------------------
Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,726 3.6% $ 1,308 3.2%
Deposits in other financial institutions
Investment securities 3,628 7.6% 4,260 10.5%
Federal funds sold 5,266 11.0% 3,762 9.3%
Loans:
Commercial 7,281 15.2% 4,003 9.9%
Installment 2,571 5.4% 3,092 7.6%
Real estate 24,295 50.9% 22,396 55.1%
Less deferred fees (76) (.2%) (127) (.3%)
Less allowance for
loan losses (597) (1.3%) (268) (.7%)
-------- --------
Net loans 33,474 70.2% 29,096 71.6%
-------- --------
Bank premises and equipment, net 1,717 3.6% 1,506 3.7%
Other assets 1,971 4.1% 708 1.7%
-------- --------
TOTAL ASSETS $ 47,782 100.0% $ 40,640 100.0%
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 22,405 46.9% $ 19,973 49.1%
Savings 1,018 2.1% 792 2.0%
Time 13,092 27.4% 11,172 27.5%
Time, $100,000 & over 6,976 14.6% 4,593 11.3%
-------- --------
Total Deposits 43,491 91.0% 36,530 89.9%
Other liabilities 285 .6% 224 .6%
-------- --------
Total liabilities 43,776 91.6% 36,754 90.5%
-------- --------
Shareholders' equity:
Common Stock(2) 2,022 4.3% 1,600 3.9%
Additional paid-in capital 422 1.0%
Retained earnings 1,975 4.1% 1,870 4.6%
Unrealized gain(loss) on
available-for-sale
investment securities 9 .0% (6) .0%
-------- --------
Total shareholders' equity 4,006 8.4% 3,886 9.5%
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 47,782 100.0% $ 40,640 100.0%
======== ========
</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 $ 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 1.4%
Additional paid-in capital 422 1.0% 422 1.2% 421
Retained earnings 1,986 4.4% 1,649 4.6% 1,375 4.4%
Unrealized gain (loss) on
available-for-sale
investment securities 9 .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.
177
<PAGE> 189
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of Rose's investment securities as of June 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 Total
------------------ ------------------ ------------------ ------------------
June 30, 1998 Amount Yield Amount Yield Amount Yield Amount Yield
- ------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $ 999 6.22% $1,254 6.39% $ 460 6.41% $2,713 6.33%
Other 290 4.33% 0 0.00% 0 0.00% 290 4.33%
------ ------ ------ ------
Total $1,289 5.80% $1,254 6.39% $ 460 6.41% $3,003 6.22%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years Total
------------------ ------------------ ------------------ ------------------
December 31, 1997 Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <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>
178
<PAGE> 190
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 70.1%, 22.4%, and 7.5%, respectively, at June 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 June 30, 1998,
variable rate loans comprised approximately 53.2% 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)
June 30, December 31,
----------------------- --------------------------------------
Type of Loan 1998 1997 1997 1996 1995
- -------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate $ 22,217 $ 24,858 $ 23,598 $ 20,890 $ 16,848
Commercial 7,107 4,189 8,715 4,515 2,423
Consumer 2,358 3,028 2,623 2,075 3,732
-------- -------- -------- -------- --------
TOTAL $ 31,682 $ 32,075 $ 34,936 $ 27,480 $ 23,003
Less:
Deferred loans fees (76) (109) (87) (136) (92)
Allowance for loan losses (298) (303) (724) (254) (185)
-------- -------- -------- -------- --------
TOTAL NET LOANS $ 31,308 $ 31,663 $ 34,125 $ 27,090 $ 22,745
======== ======== ======== ======== ========
</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 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.
179
<PAGE> 191
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 76% 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 24% 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 June
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>
June 30, 1998
- -------------
Fixed rate $ 7,554 $4,650 $2,637 $14,841
Variable 15,277 1,145 419 16,841
------- ------ ------ -------
Total $22,831 $5,795 $3,056 $31,682
======= ====== ====== =======
</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>
180
<PAGE> 192
LOAN COMMITMENTS. The following table shows Rose's loan commitments at the dates
indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------- -------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Commercial $1,267 $1,024 $ 1,208 $1,107 $1,058
Real estate 8,022 7,394 9,668 5,207 2,877
Consumer 26 16 110 195 296
------ ------ ------- ------ ------
Total commitments $9,315 $8,434 $10,986 $6,509 $4,231
====== ====== ======= ====== ======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 90% of the commitments at June 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 $117,576 and
$550,000 at June 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 June 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 six months ended June 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.
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<PAGE> 193
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,
June 30, -----------------------
(Dollars in thousands) 1998 1997 1996
------- ---- ----
<S> <C> <C> <C>
Commercial $ 9 $ 31 $ 15
Real estate 102 117 188
Consumer 30 43 17
---- ---- ----
Total $141 $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,
June 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>
182
<PAGE> 194
The following table summarizes Rose's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- --------------------------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $ 34,147 $ 29,491 $ 31,028 $ 23,986 $ 20,172
Loans at end of period 31,682 32,075 34,936 27,480 23,003
Loans charged off 492 44 101 30 40
Recoveries of loans previously
charged off 6 4 7 9 12
Net loans charged off 486 40 94 21 28
Allowance for loan losses 298 303 724 254 185
Provisions for loan losses 60 89 564 89 55
Ratios:(1)
Net loan charge-offs to
to average loans 1.42% .28% .30% .09% .14%
Net loan charge-offs to
loans at end of period 1.53% .24% .27% .08% .12%
Allowance for loan losses
to average loans .87% 1.03% 2.33% 1.06% .92%
Allowance for loan losses
to loans at end of period .94% .94% 2.07% .92% .80%
Net loan charge-offs to allowance
for loan losses 163.09% 26.40% 12.98% 8.27% 15.14%
Net loan charge-offs to provision
for loan losses 810.00% 44.94% 16.67% 23.60% 50.91%
</TABLE>
- ----------
(1) Annualized for the six months ended June 30, 1997. Ratios were not
annualized for the six months ended June 30, 1998 due to the impact of a
one time charge-off of approximately $400,000.
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 $564,000 in 1997, $89,200 in 1996 and
$60,000 for the first six 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.
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<PAGE> 195
At December 31, 1997, 1996 and 1995, the allowance was 2.07%, .92%, and .80%, of
the loans then outstanding, respectively. At June 30, 1998, the allowance was
.94% 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 $100,910 in 1997, $30,360 in 1996 and $491,556 in the first six
months of 1998. Recoveries of loans previously charged off were $7,230 in 1997,
$9,440 in 1996 and $5,336 during the first six 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
$453,000 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 $3,357,908 in Federal
instruments, securities issued by states and political subdivisions, other debt
securities and bank certificates of deposit, which yielded approximately 6.42%
per annum during the first six 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.
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<PAGE> 196
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>
Six Months Ended
June 30,(1) Year Ended December 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
(Unaudited)
<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 $ 5,266 $ 3,762 $ 6,072 $ 4,632 $ 3,833
Average yield 5.51% 5.53% 5.63% 5.42% 5.90%
Interest income $ 145 $ 104 $ 342 $ 251 $ 226
Investment securities:
Average outstanding $ 3,628 $ 4,260 $ 4,197 $ 3,531 $ 4,706
Average yield 6.28% 6.38% 6.34% 6.40% 5.57%
Interest income $ 114 $ 136 $ 266 $ 226 $ 262
Loans:
Average outstanding $ 34,147 $ 29,491 $ 31,028 $ 23,986 $ 20,172
Average yield(2) 9.87% 10.61% 10.59% 10.61% 10.72%
Interest income $ 1,686 $ 1,565 $ 3,286 $ 2,545 $ 2,163
Total interest-earning assets:
Average outstanding $ 43,041 $ 37,513 $ 41,297 $ 32,248 $ 28,918
Average yield 9.04% 9.62% 9.43% 9.39% 9.21%
Interest income $ 1,946 $ 1,805 $ 3,894 $ 3,028 $ 2,664
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $ 15,024 $ 15,367 $ 16,230 $ 12,270 $ 9,305
Average yield 3.65% 3.90% 3.91% 4.00% 4.55%
Interest expense $ 274 $ 300 $ 635 $ 491 $ 423
Savings deposits:
Average outstanding $ 1,018 $ 792 $ 838 $ 568 $ 316
Average yield 2.95% 3.03% 2.98% 2.99% 3.16%
Interest expense $ 15 $ 12 $ 25 $ 17 $ 10
Time deposits:
Average outstanding $ 20,068 $ 15,765 $ 17,929 $ 14,834 $ 14,895
Average yield 5.57% 5.46% 5.60% 5.55% 5.74%
Interest expense $ 559 $ 430 $ 1,004 $ 823 $ 855
Total interest-bearing liabilities:
Average outstanding $ 36,110 $ 31,924 $ 34,997 $ 27,672 $ 24,516
Average yield 4.70% 4.65% 4.75% 4.81% 5.25%
Interest expense $ 849 $ 742 $ 1,664 $ 1,331 $ 1,288
Net interest income $ 1,097 $ 1,063 $ 2,230 $ 1,697 $ 1,376
Average net yield on
interest-earning assets(2) 5.10% 5.67% 5.40% 5.26% 4.76%
</TABLE>
- ----------
(1) Six 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.
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<PAGE> 197
LIQUIDITY MANAGEMENT. Rose has federal funds lines of credit with its
correspondent banks, Pacific Coast Bankers Bank of $1,000,000, Compass Bank of
$1,000,000 and Union Bank of California, of $1,000,000. In addition, Rose has
arranged for advances from Federal Home Loan Bank under their blanket lien on
loans program. As of March 31, 1998 Rose's advance maximum was $3,349,500. 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>
Six Months Ended June 30, Year Ended December 31,
---------------------------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
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
------- -------- ------- -------- ------- -------- ------- -------- ------- -------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 7,382 16.97% $ 4,606 12.61% $ 5,351 13.26% $ 3,687 11.76% $ 2,862 10.45%
NOW and Super
NOW accounts 3,465 7.97% 2,761 7.56% 2,911 7.21% 2,380 7.59% 1,681 6.14%
Savings deposits 1,018 2.34% 792 2.17% 838 2.08% 568 1.81% 316 1.15%
Money market
deposits 11,558 26.58% 12,606 34.51% 13,319 33.01% 9,890 31.54% 7,624 27.85%
Time deposits 20,068 46.14% 15,765 43.15% 17,929 44.44% 14,834 47.30% 14,895 54.41%
------- ------- ------- ------- -------
Total deposits $43,491 100.00% $36,530 100.00% $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>
June 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 $2,404 $ 4,108 $2,902 $ 5,549
Over three months
through twelve months 3,014 7,828 3,002 7,602
Over twelve months
through five years 711 1,661 621 1,085
Over five years 0 0 0 10
------ ------- ------ -------
Total $6,129 $13,597 $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.
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<PAGE> 198
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.
187
<PAGE> 199
The following table presents the capital ratios for Rose, compared to the
standards for well-capitalized depository institutions, as of June 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 $3,953 8.5% 5.0% 4.0%
Tier 1 Risk-Based $3,953 10.6 6.0 4.0
Total Risk-Based $4,251 11.3 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>
<CAPTION>
"Well capitalized" "Adequately capitalized"
------------------------------------------ ------------------------------------------
<S> <C>
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
</TABLE>
<TABLE>
<CAPTION>
"Undercapitalized" "Significantly undercapitalized"
------------------------------------------ ------------------------------------------
<S> <C>
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%.
</TABLE>
<TABLE>
<CAPTION>
"Critically undercapitalized"
------------------------------------------
<S> <C>
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 "under-capitalized" 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
188
<PAGE> 200
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
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<PAGE> 201
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.
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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>
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.
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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.
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<PAGE> 204
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
Executive Vice President and 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.
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<PAGE> 205
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 $100,000 during Rose's 1997 fiscal year.
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<PAGE> 206
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------- --------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------------- -------- ----------- --------- ---------- ------------ ---------- --------- ----------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(2)
Position Year ($) ($) ($) ($) SARs ($) ($)
- ----------------------------- -------- ----------- ---------- ---------- ------------ ---------- --------- ---------
<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>
195
<PAGE> 207
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, 1998 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.
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<PAGE> 208
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.
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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
198
<PAGE> 210
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.
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<PAGE> 211
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.
200
<PAGE> 212
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.
201
<PAGE> 213
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
202
<PAGE> 214
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.
203
<PAGE> 215
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.
204
<PAGE> 216
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
those 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.
205
<PAGE> 217
INDEX TO FINANCIAL STATEMENTS
206
<PAGE> 218
INDEX TO FINANCIAL STATEMENTS
207
<PAGE> 219
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,166,249 $ 5,296,020
Federal funds sold 9,900,000 6,550,000
Loans held for sale 2,770,714 1,766,851
Investment securities (market value of $24,427,400
in 1998 and $20,790,500 in 1997) (Note 1) 24,396,586 20,748,546
Loans and leases, less allowance for loan and
lease losses of $912,969 in 1998 and $947,865
in 1997 (Note 2) 69,099,879 68,190,971
Other real estate, net (Note 3) 1,584,336 966,804
Bank premises and equipment, net (Note 4) 3,072,390 3,027,078
Accrued interest receivable and other assets (Note 5) 2,664,939 2,313,511
------------ ------------
$119,655,093 $108,859,781
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 30,010,195 $ 19,214,744
Interest bearing (Note 6) 78,026,059 79,494,454
------------ ------------
Total deposits 108,036,254 98,709,198
Short-term borrowings 750,000
Accrued interest payable and other liabilities 1,039,611 1,152,111
------------ ------------
Total liabilities 109,825,865 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 2,406,569 1,908,449
Unrealized gain on available-for-sale investment
securities, net of taxes (Note 1) 41,356 89,177
------------ ------------
Total stockholders' equity 9,829,228 8,998,472
------------ ------------
$119,655,093 $108,859,781
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE> 220
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $3,628,894 $3,253,567
Interest on investment securities:
Taxable 618,355 541,570
Exempt from Federal income taxes 95,012 16,879
Interest on Federal funds sold 114,401 92,805
---------- ----------
Total interest income 4,456,662 3,904,821
Interest expense on deposits (Note 6) 1,648,779 1,417,285
---------- ----------
Net interest income 2,807,883 2,487,536
Provision for loan and lease losses (Note 2) 150,000 118,000
---------- ----------
Net interest income after provision
for loan and lease losses 2,657,883 2,369,536
---------- ----------
Non-interest income:
Service charges and fees 361,931 365,992
Gain on sale of loans 680,012 336,603
Gain on sale of investment securities, net (Note 1) 11,038
Other 150,297 133,806
---------- ----------
Total non-interest income 1,192,240 847,439
---------- ----------
Other expenses:
Salaries and employee benefits (Note 2) 1,750,758 1,382,916
Occupancy 212,800 189,228
Equipment 271,365 215,910
Other 832,287 764,973
---------- ----------
Total other expenses 3,067,210 2,553,027
---------- ----------
Income before income taxes 782,913 663,948
Income taxes 284,793 259,758
---------- ----------
Net income $ 498,120 $ 404,190
========== ==========
Basic earnings per share (Note 7) $ .52 $ .43
========== ==========
Diluted earnings per share (Note 7) $ .48 $ .42
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 221
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTH PERIOD ENDED JUNE 30, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
<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, 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 498,120 498,120
Net change in unrealized gain on
available-for-sale investment
securities, net of taxes (Note 1) (47,821) (47,821)
-------------- -------------- -------------- ------------- --------------
Balance, June 30, 1998 981,448 $ 7,381,303 $ 2,406,569 $ 41,356 $ 9,829,228
============== ============== ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 222
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 498,120 $ 404,190
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Provision for loan and lease losses 150,000 118,000
Depreciation and amortization 233,037 186,789
Deferred loan origination costs and fees, net (125,487) 15,639
Amortization of investment security premiums, net 29,138 6,857
Gain on sale of available-for-sale investment
securities (11,038)
Provision for losses on other real estate 76,000
Gain on sale of other real estate (19,139)
Increase in loans held for sale (1,003,863) (66,102)
Increase in accrued interest receivable and other assets (165,277) (220,959)
Decrease in accrued interest payable and other
liabilities (112,500) (86,267)
----------- -----------
Net cash (used in) provided by operating activities (515,971) 423,109
----------- -----------
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 1,000,000 1,401,985
Proceeds from called held-to-maturity investment securities 1,500,000
Proceeds from matured held-to-maturity investment securities 114,380
Purchases of available-for-sale investment securities (7,504,659) (9,690,367)
Purchases of held-to-maturity investment securities (1,195,523)
Principal repayments received from available-for-sale SBA
pools and mortgage-backed securities 1,242,652 373,030
Principal repayments received from held-to-maturity mortgage-
backed securities 4,569 53,913
Net increase in loans and leases (1,691,252) (6,076,124)
Purchases of premises and equipment (260,017) (199,800)
Capitalized additions to other real estate (37,338)
Proceeds from the sale of other real estate 196,775
----------- -----------
Net cash used in investing activities (5,549,270) (9,273,806)
----------- -----------
</TABLE>
(Continued)
F-4
<PAGE> 223
WESTERN SIERRA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
FOR THE SIX MONTH PERIODS ENDED JUNE 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 $ 6,907,989 $ 2,030,435
Net increase in time deposits 2,419,067 7,825,010
Net increase in short-term borrowings 750,000
Repayment of ESOP note payable (40,000)
Proceeds from the exercise of stock options 208,414 649
Payments for fractional shares (1,741)
------------ ------------
Net cash provided by financing activities 10,285,470 9,814,353
------------ ------------
Increase in cash and cash equivalents 4,220,229 963,656
Cash and cash equivalents at beginning of period 11,846,020 4,547,407
------------ ------------
Cash and cash equivalents at end of period $ 16,066,249 $ 5,511,063
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 1,653,971 $ 1,331,868
Income taxes $ 342,000 $ 336,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 757,830 $ 265,613
Net change in unrealized gain (loss) on available-for-sale
investment securities $ (80,385) $ 55,320
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> 224
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment
securities at June 30, 1998 and December 31, 1997 consisted of the
following:
Available-for-Sale:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 16,710,710 $ 101,839 $ (71,549) $ 16,741,000
Obligations of states
and political sub-
divisions 3,618,718 55,949 (20,767) 3,653,900
Federal Reserve
Bank stock 150,900 150,900
Federal Home Loan
Bank stock 405,100 405,100
------------------ ------------------ ------------------ -------------------
$ 20,885,428 $ 157,788 $ (92,316) $ 20,950,900
================== ================== ================== ===================
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $65,472 were recorded net of $24,116 in tax liabilities as a
separate component of stockholders' equity at June 30, 1998. There
were no sales of available-for-sale investment securities for the six
month period ended June 30, 1998.
<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 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>
F-6
<PAGE> 225
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
1. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
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 six month period ended June 30,
1997 totaled $1,401,985 and $11,038, respectively.
Held-to-Maturity:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 2,561,006 $ 21,494 $ 2,582,500
Obligations of states
and political sub-
divisions 884,680 9,320 894,000
---------------- ------------------ -------------------- ---------------------
$ 3,445,686 $ 30,814 $ -- $ 3,476,500
================ ================== ==================== =====================
</TABLE>
<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 sub-
divisions 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 six month periods ended June 30, 1998 and 1997,
respectively.
F-7
<PAGE> 226
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
1. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment
securities at June 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>
Within one year $ 1,000,019 $ 999,000
After one year
through five years 500,000 500,700
After five years
through ten years 3,802,171 3,836,500 $ 2,000,128 $ 2,017,100
After ten years 3,636,042 3,676,700 500,000 502,300
---------------- ---------------- ---------------- -----------------
8,938,232 9,012,900 2,500,128 2,519,400
Investment securities
not due at a single
maturity date:
Mortgage-backed
securities 7,168,099 7,119,200 60,878 63,100
SBA loan pools 604,379 608,900
Municipal bonds 3,618,718 3,653,900 884,680 894,000
Federal Reserve
Bank stock 150,900 150,900
Federal Home
Loan Bank
stock 405,100 405,100
---------------- ---------------- ---------------- -----------------
$ 20,885,428 $ 20,950,900 $ 3,445,686 $ 3,476,500
================ ================ ================ =================
</TABLE>
Investment securities with amortized costs totaling $6,710,184 and
$8,495,865 and market values totaling $6,751,300 and $8,565,000 were
pledged to secure public deposits, treasury, tax and loan accounts
and the Federal Reserve Bank borrowing line at June 30, 1998 and
December 31, 1997, respectively.
F-8
<PAGE> 227
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. LOANS AND LEASES
Outstanding loans and leases are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Commercial $ 15,263,127 $ 14,882,162
Real estate-mortgage 43,611,375 40,051,471
Real estate-construction 9,328,958 13,263,326
Lease financing 1,424,898 697,499
Installment 630,016 615,391
------------ ------------
70,258,374 69,509,849
Deferred loan and lease origination
fees and costs, net (245,526) (371,013)
Allowance for loan and lease losses (912,969) (947,865)
------------ ------------
$ 69,099,879 $ 68,190,971
============ ============
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Six Month Periods Ended Year ended
June 30, December 31,
----------------------------- ------------
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 947,865 $ 707,066 $ 707,066
Provision charged to operations 150,000 118,000 243,000
Losses charged to allowance (186,813) (3,000)
Recoveries 1,917 250 799
--------- --------- ---------
$ 912,969 $ 825,316 $ 947,865
========= ========= =========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $631,600 and $1,487,000 at June 30, 1998 and December 31,
1997, respectively. The related allowance for loan losses for these
loans at June 30, 1998 and December 31, 1997 was $154,800 and
$207,500, respectively. The average recorded investment in impaired
loans for the six month period ended June 30, 1998 and the year ended
December 31, 1997 was $317,700 and $1,100,000, respectively. The Bank
recognized $4,000 and $42,686 in interest income on impaired loans
during the six month periods ended June 30, 1998 and 1997,
respectively.
At June 30, 1998 and December 31,1997, nonaccrual loans totaled
$631,600 and $1,487,000, respectively. Interest foregone on
nonaccrual loans totaled $31,704 and $61,777 for the six month
periods ended June 30, 1998 and 1997, respectively.
Salaries and employee benefits totaling $151,600 and $133,190 have
been deferred as loan and lease origination costs during the six
month periods ended June 30, 1998 and 1997, respectively.
F-9
<PAGE> 228
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. OTHER REAL ESTATE
Other real estate consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Other real estate $ 1,859,308 $ 1,241,776
Valuation allowance (274,972) (274,972)
----------- -----------
$ 1,584,336 $ 966,804
=========== ===========
</TABLE>
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Land $ 720,640 $ 720,640
Building 1,490,088 1,484,566
Furniture, fixtures and equipment 2,363,712 2,211,896
Leasehold improvements 248,937 245,677
Construction in progress 179,500 80,081
----------- -----------
5,002,877 4,742,860
Less accumulated depreciation and
amortization (1,930,487) (1,715,782)
----------- -----------
$ 3,072,390 $ 3,027,078
=========== ===========
</TABLE>
Depreciation and amortization included in occupancy and equipment
expense totaled $214,705 and $174,569 for the six month periods ended
June 30, 1998 and 1997, respectively.
F-10
<PAGE> 229
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
5. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Accrued interest receivable $ 754,177 $ 752,368
Cash surrender value of officer life insurance
policies 358,338 349,722
Deferred tax assets, net 517,000 484,000
Deposit premium, net 317,701 336,031
Other 717,723 391,390
---------- ------------
$2,664,939 $ 2,313,511
========== ============
</TABLE>
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Savings $ 7,122,891 $ 7,198,335
NOW accounts 10,082,064 9,695,696
Money market 6,371,890 10,570,276
Time, $100,000 or more 17,355,092 15,533,010
Other time 37,094,122 36,497,137
----------- -----------
$78,026,059 $79,494,454
=========== ===========
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Six Month Periods Ended
June 30,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Savings $ 67,939 $ 75,491
NOW accounts 48,981 52,010
Money market 94,593 97,897
Time, $100,000 or more 447,118 307,608
Other time 990,148 884,279
---------- ----------
$1,648,779 $1,417,285
========== ==========
</TABLE>
F-11
<PAGE> 230
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
7. 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 Six Month Net Shares Per Share
Periods Ended Income Outstanding Amount
--------------------------------- ---------- ----------- ---------
<S> <C> <C> <C>
June 30, 1998
-------------
Basic earnings per share $ 498,120 965,403 $ .52
======
Effect of dilutive stock options 72,006
---------- ---------
Diluted earnings per share $ 498,120 1,037,409 $ .48
========== ========= ======
June 30, 1997
-------------
Basic earnings per share $ 404,190 929,412 $ .43
======
Effect of dilutive stock options 38,918
---------- ---------
Diluted earnings per share $ 404,190 968,330 $ .42
========== ========= ======
</TABLE>
8. 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
(loss) income, net of taxes, was comprised of the unrealized (loss)
gain on available-for sale investment securities for the six month
periods ended June 30, 1998 and 1997 and totaled $(47,821) and
$34,249, respectively. Total comprehensive income, net of taxes, was
$450,299 and $438,439 for the six month periods ended June 30, 1998
and 1997, respectively.
F-12
<PAGE> 231
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-13
<PAGE> 232
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-14
<PAGE> 233
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-15
<PAGE> 234
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-16
<PAGE> 235
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-17
<PAGE> 236
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-18
<PAGE> 237
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-19
<PAGE> 238
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-20
<PAGE> 239
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-21
<PAGE> 240
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-22
<PAGE> 241
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-23
<PAGE> 242
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-24
<PAGE> 243
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-25
<PAGE> 244
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-26
<PAGE> 245
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-27
<PAGE> 246
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-28
<PAGE> 247
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-29
<PAGE> 248
'
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-30
<PAGE> 249
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-31
<PAGE> 250
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-32
<PAGE> 251
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-33
<PAGE> 252
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-34
<PAGE> 253
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-35
<PAGE> 254
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-36
<PAGE> 255
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-37
<PAGE> 256
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-38
<PAGE> 257
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-39
<PAGE> 258
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-40
<PAGE> 259
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-41
<PAGE> 260
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-42
<PAGE> 261
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-43
<PAGE> 262
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-44
<PAGE> 263
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-45
<PAGE> 264
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-46
<PAGE> 265
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-47
<PAGE> 266
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-48
<PAGE> 267
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-49
<PAGE> 268
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-50
<PAGE> 269
LAKE COMMUNITY BANK
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,841,751 $ 5,236,194
Federal funds sold 5,500,000 4,000,000
Loans held for sale 639,194 680,434
Interest-bearing deposits in banks 5,148,000 4,557,000
Available-for-sale investment
securities (Note 2) 11,389,816 11,976,000
Loans, less allowance for loan losses of
$1,095,287 at June 30, 1998 and
$952,335 at December 31, 1997 (Note 3) 51,116,155 53,209,573
Bank premises and equipment, net 2,967,639 3,077,251
Intangible assets, net 27,612 59,162
Other real estate 557,308 597,949
Accrued interest receivable and
other assets 2,354,198 2,126,193
------------- -------------
$ 85,541,673 $ 85,519,756
============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 13,628,242 $ 12,926,652
Interest bearing 62,141,697 63,111,481
------------- -------------
Total deposits 75,769,939 76,038,133
Accrued interest payable and other
liabilities 674,150 821,295
------------- -------------
Total liabilities 76,444,089 76,859,428
------------- -------------
Commitments and contingencies -- --
Stockholders' equity (Note 4):
Common stock, no par value; 20,000,000
shares authorized; 1,283,296 shares
issued and outstanding in 1998 and
1,240,546 in 1997, respectively 3,407,808 3,178,121
Retained earnings 5,648,251 5,442,647
Unrealized gain on available-for-sale
securities, net of taxes (Note 2) 41,525 39,560
------------- -------------
Total stockholders' equity 9,097,584 8,660,328
------------- -------------
$ 85,541,673 $ 82,519,756
============= =============
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 270
LAKE COMMUNITY BANK
STATEMENT OF INCOME
(Unaudited)
For the Six months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,606,824 $ 2,708,824
Interest on federal funds sold 129,594 61,490
Interest on deposits in banks 149,527 107,911
Interest on investment securities:
Taxable 276,734 250,630
Exempt from Federal income taxes 46,515 41,654
------------ ------------
Total interest income 3,209,194 3,170,509
------------ ------------
Interest expense:
Interest on deposits 1,278,500 1,234,361
------------ ------------
Total interest expense 1,278,500 1,234,361
------------ ------------
Net interest income 1,930,694 1,936,148
Provision for loan losses 180,000 180,000
------------ ------------
Net interest income after
provision for loan losses 1,750,694 1,756,148
------------ ------------
Non-interest income:
Service charges and fees 352,409 268,485
Mortgage packaging fees 2,296 2,723
Gain on sale of other real estate -0- 7,832
Loss on sale of
investment securities -0- <8,279>
------------ ------------
Total non-interest income 354,705 270,761
------------ ------------
Non-interest expense:
Salaries and related benefits 998,532 839,623
Net occupancy expense 139,976 133,313
Equipment expense 181,260 171,646
Other 492,697 453,396
------------ ------------
Total non-interest expense 1,812,465 1,597,978
------------ ------------
Income before income taxes 292,934 428,931
Provision for income taxes 87,330 145,700
------------ ------------
Net income $ 205,604 $ 283,231
============ ============
Basic earnings per share (Note 1) $ 0.16 $ 0.23
============ ============
Diluted earnings per share (Note 1) $ 0.16 $ 0.22
============ ============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 271
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 1998
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 205,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense $ 165,859
Provision for loan losses 180,000
Provision for losses on other real estate 25,000
Loss on sale of equipment 10,968
Net decrease in loans held for sale 41,240
Increase in deferred loan origination
fees and costs, net 30,750
Increase in accrued interest receivable
and other assets <228,704>
Amortization of intangible assets 31,548
Increase in accrued interest payable
and other liabilities 187,802
-----------
Total adjustments 444,463
-----------
Net cash provided by operating activities 650,067
Cash flows from investing activities:
Net increase in interest-bearing
deposits in banks <591,000>
Purchase of available-for-sale
investment securities <3,968,817>
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 60,282
Net decrease in loans 1,882,668
Purchase of premises and equipment <51,978>
-----------
Net cash provided by investing activities 1,828,944
Cash flows from financing activities:
Net increase in short-term
deposit accounts 540,287
Net decrease in time deposits <808,481>
Proceeds from exercise of stock options 229,687
Payment of cash dividends <334,947>
-----------
Net cash used in financing activities <373,454>
-----------
Net increase in cash and cash equivalents 2,105,557
Cash and cash equivalents at December 31, 1997 9,236,194
-----------
Cash and cash equivalents at June 30, 1998 $11,341,751
===========
</TABLE>
See accompanying notes to financial statements
F-53
<PAGE> 272
LAKE COMMUNITY BANK
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 1997
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 283,231
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense $ 163,627
Provision for loan losses 180,000
Loss on sale of available-for-sale
investment securities 8,279
Decrease in deferred loan origination
fees and costs, net <44,856>
Net increase in loans held for sale <716,751>
Amortization of intangible assets 31,550
Gain on sale of other real estate <7,832>
Increase in accrued interest receivable
and other assets <62,541>
Decrease in accrued interest payable
and other liabilities <92,505>
Deferred tax benefit 30,011
-----------
Total adjustments <511,018>
-----------
Net cash used in operating activities <227,787>
Cash flows from investing activities:
Net decrease in interest-bearing
deposits in banks 1,482,000
Purchase of available-for-sale
investment securities <953,906>
Proceeds from matured available-for-sale
investment securities 300,000
Proceeds from sale of available-for-sale
investment securities 2,667,563
Repayment of investment security principal 12,687
Net increase in loans <3,410,063>
Proceeds from sale of other real estate 783,254
Purchase of premises and equipment <5,848>
-----------
Net cash provided by investing activities 875,687
Cash flows from financing activities:
Net increase in short-term deposit accounts 3,446,981
Net increase in time deposits 2,105,759
Payment of cash dividends <248,109>
-----------
Net cash provided by financing activities 5,304,631
-----------
Net increase in cash and cash equivalents 5,952,531
Cash and cash equivalents at December 31, 1996 7,542,415
-----------
Cash and cash equivalents at June 30, 1997 $13,494,946
===========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 273
LAKE COMMUNITY BANK
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Unrealized
---------------------------- <Loss> Gain
on Available-
For-Sale
Retained Investment
Shares Amount Earnings Securities 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 283,231 283,231
Net change in unrealized
loss on available-
for-sale investment
securities <16,934> <16,934>
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 1,240,546 $ 3,178,121 $ 5,294,555 $<57,451> $ 8,415,225
=========== =========== =========== =========== ===========
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 42,750 229,687 229,687
Net income 205,604 205,604
Net change in unrealized
gain on available-for-
sale investment
securities (Note 2) 1,965 1,965
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 1,283,296 $ 3,407,808 $ 5,648,251 $ 41,525 $ 9,097,584
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 274
LAKE COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
1. 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 earning 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. The number
of shares used in the computation of basic and diluted earnings per share is as
follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Weighted average number
of shares outstanding
during period: 1,251,477 1,240,546
Common stock equivalents: 60,168 34,150
--------- ---------
1,311,645 1,274,696
========= =========
</TABLE>
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 (loss), net of taxes, was comprised of the unrealized gain
(loss) on available-for sale investment securities for the six month periods
ended June 30, 1998 and 1997 and totaled $1,965 and $<16,934>, respectively.
Total comprehensive income, net of taxes, was $207,569 and $266,297 for the six
month periods ended June 30, 1998 and June 30, 1997, respectively.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at June 30, 1998 consisted of the following:
Available-for-Sale:
- ------------------
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government corporations
and agencies $ 5,490,689 $ 4,898 $ <15,639> $ 5,479,948
Corporate bonds 2,275,325 10,250 <17,294> 2,268,281
Obligations of state and
political subdivisions 3,560,887 84,243 <3,543> 3,641,587
----------- ----------- ----------- -----------
$11,326,901 $ 99,391 $ <36,476> $11,389,816
=========== =========== =========== ===========
</TABLE>
F-56
<PAGE> 275
2. INVESTMENT SECURITIES (Continued)
Net unrealized gains on available-for-sale investment securities
totaling $62,915 were recorded net of $21,390 in tax liabilities as a separate
component of stockholders' equity at June 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 debt securities 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>
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.
3. LOANS
Outstanding loans at June 30, 1998 and December 31, 1997 are summarized
below:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Commercial $ 4,412,167 $ 5,044,819
Agricultural 14,853,973 13,941,616
Real estate-mortgage 30,098,608 32,002,981
Real estate-construction 379,516 434,888
Installment 2,680,221 2,919,897
----------- -----------
52,424,485 54,344,201
Deferred loan fees <213,043> <182,293>
Allowance for loan losses <1,095,287> <952,335>
----------- -----------
$51,116,155 $53,209,573
=========== ===========
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Balance, December 31, 1997 $ 952,335
Provision charged to operations 180,000
Losses charged to allowance <54,173>
Recoveries 17,125
----------
Balance, June 30, 1998 $1,095,287
==========
</TABLE>
F-57
<PAGE> 276
3. LOANS (Continued)
The recorded investment in loans that were considered to be impaired
totaled $993,000 at June 30, 1998, and $1,057,000 at December 31, 1997. The
related allowance for loan losses on these loans at June 30, 1998 and
December 31, 1997 was $154,800 and $143,400, respectively. The average
recorded investment in impaired loans for the quarter ended June 30, 1998
was $1,000,300. The Bank recognized no interest income on these
loans during that same period.
Nonaccrual loans totaled $1,297,000 and $1,389,000, respectively, at
June 30, 1998 and December 31, 1997. Interest foregone on nonaccrual loans
totaled $43,000 for the six months ended June 30, 1998. There were no loans
considered to be nonperforming, defined as loans ninety days or more past
due and still accruing interest, as of June 30, 1998 and December 31, 1997.
Salaries and employee benefits totaling $73,235 and $55,666 have been
deferred as loan origination costs during the six months ended June 30,
1998 and 1997, respectively.
4. STOCKHOLDERS' EQUITY
The Bank maintains total risk-based, Tier I risk-based and Tier I
leverage ratios required by the Federal Deposit Insurance Corporation to be
categorized as well capitalized.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------- ---------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Leverage Ratio
--------------
Lake Community Bank $9,028,400 10.8% $8,561,600 10.4%
Minimum requirement for
"Well-Capitalized" institution $4,194,100 5.0% $4,124,100 5.0%
Minimum regulatory requirement $3,355,300 4.0% $3,299,300 4.0%
Tier I Risk-Based Capital Ratio
-------------------------------
Lake Community Bank $9,028,400 14.1% $8,561,600 14.5%
Minimum requirement for
"Well-Capitalized" institution $3,847,500 6.0% $3,544,400 6.0%
Minimum regulatory requirement $2,565,000 4.0% $2,362,900 4.0%
Total Risk-Based Capital Ratio
------------------------------
Lake Community Bank $9,830,000 15.4% $9,300,000 15.8%
Minimum requirement for
"Well-Capitalized" institution $6,412,400 10.0% $5,885,900 10.0%
Minimum regulatory requirement $5,129,900 8.0% $4,708,700 8.0%
</TABLE>
F-58
<PAGE> 277
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-59
<PAGE> 278
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-60
<PAGE> 279
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-61
<PAGE> 280
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-62
<PAGE> 281
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-63
<PAGE> 282
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-64
<PAGE> 283
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-65
<PAGE> 284
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-66
<PAGE> 285
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-67
<PAGE> 286
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-68
<PAGE> 287
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-69
<PAGE> 288
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-70
<PAGE> 289
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-71
<PAGE> 290
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-72
<PAGE> 291
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-73
<PAGE> 292
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-74
<PAGE> 293
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-75
<PAGE> 294
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-76
<PAGE> 295
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-77
<PAGE> 296
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-78
<PAGE> 297
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-79
<PAGE> 298
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-80
<PAGE> 299
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-81
<PAGE> 300
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-82
<PAGE> 301
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-83
<PAGE> 302
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-84
<PAGE> 303
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,733,835 $ 1,830,279
Federal funds sold 8,980,000 6,720,000
Loans held for sale 1,486,850 227,150
Available-for-sale investment securities (Note 2) 3,003,000 4,010,300
Loans, less allowance for loan losses
of $297,660 in 1998 and $723,880 in 1997
(Note 3) 31,308,280 34,125,423
Bank premises and equipment, net 1,684,725 1,720,231
Accrued interest receivable and other assets 1,941,493 1,954,293
------------ ------------
$ 50,138,183 $ 50,587,676
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 9,012,864 $ 8,526,329
Interest bearing (Note 4) 36,963,595 37,823,066
------------ ------------
Total deposits 45,976,459 46,349,395
Accrued interest payable and other liabilities 83,491 273,782
------------ ------------
Total liabilities 46,059,950 46,623,177
------------ ------------
Stockholders' equity:
Common stock - no par value,
5,000,000 shares authorized; issued and
outstanding - 319,972 shares 2,021,434 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 2,051,502 1,931,885
Unrealized gain on available-for-sale
investment securities, net of taxes (Note 2) 5,297 11,180
------------ ------------
Total stockholders' equity 4,078,233 3,964,499
------------ ------------
$ 50,138,183 $ 50,587,676
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-85
<PAGE> 304
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $ 1,686,608 $ 1,565,361
Interest on investment securities 113,718 135,656
Interest on Federal funds sold 145,320 104,224
------------ ------------
Total interest income 1,945,646 1,805,241
Interest expense on deposits (Note 4) 848,698 742,041
------------ ------------
Net interest income 1,096,948 1,063,200
Provision for loan losses (Note 3) 60,000 89,000
------------ ------------
Net interest income after provision for
loan losses 1,036,948 974,200
------------ ------------
Non-interest income:
Service charges and fees 32,255 24,639
Gain on sale of loans 128,608 19,590
Other 111,463 84,832
------------ ------------
Total non-interest income 272,326 129,061
------------ ------------
Other expenses:
Salaries and employee benefits (Note 3) 519,329 374,386
Occupancy 69,435 57,684
Equipment 63,348 30,036
Other 458,010 271,824
------------ ------------
Total other expenses 1,110,122 733,930
------------ ------------
Income before income taxes 199,152 369,331
Income taxes 79,535 148,100
------------ ------------
Net income $ 119,617 $ 221,231
============ ============
Basic earnings per share (Note 5) $ .37 $ .69
============ ============
Diluted earnings per share (Note 5) $ .37 $ .68
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-86
<PAGE> 305
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTH PERIOD ENDED JUNE 30, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN
ON AVAILABLE-
COMMON STOCK FOR-SALE
----------------------- RETAINED INVESTMENT
SHARES AMOUNT EARNINGS SECURITIES 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 119,617 119,617
Net change in unrealized gain on
available-for-sale investment
securities, net of taxes (Note 2) (5,883) (5,883)
------- ------------ ------------ -------- ------------
Balance, June 30, 1998 319,972 $ 2,021,434 $ 2,051,502 $ 5,297 $ 4,078,233
======= ============ ============ ======== ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-87
<PAGE> 306
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 119,617 $ 221,231
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 60,000 89,000
Depreciation and amortization 59,121 34,511
Deferred loan origination fees and costs, net (11,013) (27,090)
(Increase) decrease in loans held for sale (1,259,700) 110,000
Decrease (increase) in accrued interest receivable
and other assets 1,523 (43,287)
Decrease in accrued interest payable and
other liabilities (190,291) (44,715)
Deferred taxes 19,000 19,000
------------ ------------
Net cash (used in) provided by
operating activities (1,201,743) 358,650
------------ ------------
Cash flows from investing activities:
Proceeds from sale or calls of available-for-sale
investment securities 1,500,000
Proceeds from matured available-for-sale investment
securities 500,000
Purchases of available-for-sale investment securities (994,800) (16,300)
Net decrease (increase) in loans 2,763,422 (4,822,428)
Additions to bank premises and equipment (30,387) (208,136)
------------ ------------
Net cash provided by (used in)
investing activities 3,738,235 (5,046,864)
------------ ------------
</TABLE>
(Continued)
F-88
<PAGE> 307
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
SIX MONTH PERIODS ENDED JUNE 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 $ 672,712 $ 4,334,757
Net (decrease) increase in time deposits (1,045,648) 4,298,212
------------ ------------
Net cash (used in) provided by
financing activities (372,936) 8,632,969
------------ ------------
Increase in cash and cash equivalents 2,163,556 3,944,755
Cash and cash equivalents at beginning of year 8,550,279 5,232,288
------------ ------------
Cash and cash equivalents at end of period $ 10,713,835 $ 9,177,043
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest expense $ 898,555 $ 765,904
Income taxes $ 239,636 $ 105,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 188,100
Change in unrealized gain on available-for-sale
investment securities $ (8,872) $ (5,005)
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-89
<PAGE> 308
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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.
2. INVESTMENT SECURITIES
All investment securities were classified as available for sale as of
June 30, 1998 and December 31, 1997.
The amortized cost and estimated market value of investment securities
at June 30, 1998 and December 31, 1997 consisted of the following:
Available-for-Sale:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 2,704,756 $ 8,044 $ 2,712,800
Federal Reserve
Bank stock 60,700 60,700
Federal Home Loan
Bank stock 154,500 154,500
Pacific Coast Bankers
Bank stock 75,000 75,000
------------ ------------ ------------ ------------
$ 2,994,956 $ 8,044 $ -- $ 3,003,000
============ ============ ============ ============
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $8,044 were recorded net of $2,747 in tax liabilities as a
separate component of stockholders' equity at June 30, 1998. There were
no sales of available-for-sale investment securities for the six months
ended June 30, 1998.
<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 $ 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>
F-90
<PAGE> 309
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
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 at December 31, 1997. There
were no sales of available-for-sale investment securities for the six
months ended June 30, 1997.
The amortized cost and estimated market value of investment securities
at June 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
------------------------------
Estimated
Amortized Market
Cost Value
------------ ------------
<S> <C> <C>
Within one year $ 996,567 $ 998,700
After one year through five years 1,248,189 1,254,400
After five years through ten years 460,000 459,700
------------ ------------
2,704,756 2,712,800
Investment securities not due at a single maturity date:
Federal Reserve Bank stock 60,700 60,700
Federal Home Loan Bank stock 154,500 154,500
Pacific Coast Bankers Bank stock 75,000 75,000
------------ ------------
$ 2,994,956 $ 3,003,000
============ ============
</TABLE>
Investment securities with amortized costs totaling $1,494,900 and
$1,490,500 and market values totaling $1,501,700 and $1,500,200 were
pledged to secure deposits at June 30, 1998 and December 31, 1997,
respectively.
F-91
<PAGE> 310
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. LOANS
Outstanding loans are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Commercial $ 7,106,896 $ 8,714,911
Real estate-mortgage 5,099,347 5,498,940
Real estate-commercial 9,957,131 10,780,097
Real estate-construction 7,160,309 7,319,152
Installment 2,358,007 2,622,966
------------ ------------
31,681,690 34,936,066
Deferred loan fees and costs, net (75,750) (86,763)
Allowance for loan losses (297,660) (723,880)
------------ ------------
$ 31,308,280 $ 34,125,423
============ ============
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Six Month Periods Ended
June 30, Year ended
------------------------------ December 31,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 723,880 $ 253,560 $ 253,560
Provision charged to operations 60,000 89,000 564,000
Losses charged to allowance (491,556) (44,035) (100,910)
Recoveries 5,336 4,450 7,230
------------ ------------ ------------
$ 297,660 $ 302,975 $ 723,880
============ ============ ============
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $117,576 and $550,000 at June 30, 1998 and December 31, 1997,
respectively. The related allowance for loan losses for these loans at
June 30, 1998 and December 31, 1997 was $46,785 and $400,000,
respectively. The average recorded investment in impaired loans for the
six month period ended June 30, 1998 and the year ended December 31,
1997 was $290,407 and $152,547, respectively. The Bank recognized
$5,707 in interest income on impaired loans during the six month period
ended June 30, 1998. There were no impaired loans at June 30, 1997.
At June 30, 1998 and December 31,1997, there were no nonaccrual loans.
Interest foregone on nonaccrual loans for the six month periods ended
June 30, 1998 and 1997 was considered insignificant.
Salaries and employee benefits totaling $101,573 and $116,158 have been
deferred as loan origination costs during the six month periods ended
June 30, 1998 and 1997, respectively.
F-92
<PAGE> 311
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Savings $ 1,035,968 $ 924,218
NOW accounts 3,502,938 2,814,604
Money market 12,699,315 13,313,222
Time, $100,000 or more 6,128,530 6,525,188
Other time 13,596,844 14,245,834
------------ ------------
$ 36,963,595 $ 37,823,066
============ ============
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Six Month Periods Ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Savings $ 15,003 $ 11,801
NOW accounts 30,160 28,841
Money market 244,397 271,784
Time, $100,000 or more 189,464 95,995
Other time 369,674 333,620
------------ ------------
$ 848,698 $ 742,041
============ ============
</TABLE>
F-93
<PAGE> 312
ROSEVILLE 1ST COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
5. 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 Six Month Periods Ended Income Outstanding Amount
------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
June 30, 1998
-------------
Basic earnings per share $ 119,617 319,972 $ .37
============
Effect of dilutive stock options 4,676
------------ ------------
Diluted earnings per share $ 119,617 324,648 $ .37
============ ============ ============
June 30, 1997
-------------
Basic earnings per share $ 221,231 319,972 $ .69
============
Effect of dilutive stock options 4,676
------------ ------------
Diluted earnings per share $ 221,231 324,648 $ .68
============ ============ ============
</TABLE>
6. 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 (loss) income,
net of tax, was comprised of the unrealized (loss) gain on
available-for-sale investment securities for the six month periods
ended June 30, 1998 and 1997 and totaled $(5,883) and $(3,439),
respectively. Total comprehensive income, net of taxes, was $113,734
and $217,792 for the six month periods ended June 30, 1998 and 1997,
respectively.
F-94
<PAGE> 313
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-95
<PAGE> 314
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-96
<PAGE> 315
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-97
<PAGE> 316
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-98
<PAGE> 317
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-99
<PAGE> 318
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-100
<PAGE> 319
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-101
<PAGE> 320
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-102
<PAGE> 321
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-103
<PAGE> 322
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-104
<PAGE> 323
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-105
<PAGE> 324
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-106
<PAGE> 325
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-107
<PAGE> 326
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-108
<PAGE> 327
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-109
<PAGE> 328
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-110
<PAGE> 329
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-111
<PAGE> 330
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-112
<PAGE> 331
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-113
<PAGE> 332
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-114
<PAGE> 333
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-115
<PAGE> 334
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-116
<PAGE> 335
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-117
<PAGE> 336
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> 337
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> 338
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> 339
"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> 340
"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.
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"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.
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"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.
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"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
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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
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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.
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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.
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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.
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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.
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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,
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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
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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.
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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.
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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
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"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.
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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
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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
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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.
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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:
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(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
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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
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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
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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.
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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
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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
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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
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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,
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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
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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.
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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
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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
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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
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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.
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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
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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;
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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;
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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
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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;
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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
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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;
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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.
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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
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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
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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;
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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
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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:
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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
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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
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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
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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.
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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.
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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.
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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
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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
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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> 395
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
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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.
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"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.
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"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
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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.
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"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
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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.
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"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.
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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
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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,
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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.
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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
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(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
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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,
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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.
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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
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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
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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.
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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
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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.
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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
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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
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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
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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
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(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
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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
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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
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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
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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.
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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
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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
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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
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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;
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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;
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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;
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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
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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:
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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
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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;
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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;
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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;
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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
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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;
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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;
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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
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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;
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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,
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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.
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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
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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.
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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> 454
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> 455
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> 456
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> 457
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> 458
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> 459
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> 460
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> 461
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> 462
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> 463
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> 464
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> 465
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> 466
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> 467
(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> 468
(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> 469
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> 470
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> 471
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> 472
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 has an indemnification agreement
with Bancorp that provides that Bancorp shall indemnify such person to the full
extent authorized by the applicable provisions of California 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.
8.1 Opinion re: tax matters as to the merger of Lake Community Bank with a
subsidiary of Registrant by Perry- Smith & Co.
8.2 Opinion re: tax matters as to the merger of Roseville 1st Community
Bancorp with Registrant by Perry-Smith & Co.
</TABLE>
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<PAGE> 473
ITEM 21. EXHIBITS (CONTINUED)
<TABLE>
<S> <C>
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 prospectus included in Part I of this
registration statement.
21. Sole Subsidiary of the registrant is Western Sierra National Bank, a
national banking association.
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
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>
II-2
<PAGE> 474
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 Edward Schmidt as financial advisor to Lake Community Bank
(included as Exhibit IV in the Joint Proxy Statement/Prospectus in Part
I herein)
Opinion of Edward Schmidt as financial advisor to Roseville 1st 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;
(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.
II-3
<PAGE> 475
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.
II-4
<PAGE> 476
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 2, 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 2, 1998
- ---------------------------------- and Principal Financial Officer
Gary D. Gall
/s/ JOSEPH A. SURRA Chairman November 2, 1998
- ----------------------------------
Joseph A. Surra
/s/ ROBERT G. ALBRECHT Director November 2, 1998
- ----------------------------------
Robert G. Albrecht
/s/ CHARLES W. BACCHI Director November 2, 1998
- ----------------------------------
Charles W. Bacchi
/s/ BARBARA L. COOK Director November 2, 1998
- ----------------------------------
Barbara L. Cook
/s/ WILLIAM J. FISHER Director November 2, 1998
- ----------------------------------
William J. Fisher
</TABLE>
II-5
<PAGE> 477
<TABLE>
<S> <C> <C>
/s/ RICHARD L. GOLEMON Director November 2, 1998
- ----------------------------------
Richard L. Golemon
/s/ HAROLD S. PRESCOTT, JR. Director November 2, 1998
- ----------------------------------
Harold S. Prescott, Jr.
/s/ DAROL B. RASMUSSEN Director November 2, 1998
- ----------------------------------
Darol B. Rasmussen
/s/ OSVALDO I. SCARIOT Director November 2, 1998
- ----------------------------------
Osvaldo I. Scariot
/s/ LESA FYNES Principal Accounting Officer November 2, 1998
- ----------------------------------
Lesa Fynes
</TABLE>
II-6
<PAGE> 478
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Articles of Incorporation of Registrant.
3.2 Bylaws of Registrant.
5.1 Opinion re: legality.
8.1 Opinion re: tax matters as to the merger of Lake Community
Bank with a subsidiary of Registrant by Perry-Smith & Co.
8.2 Opinion re: tax matters as to the merger of Roseville 1st
Community Bancorp with Registrant by Perry-Smith & Co.
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.
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 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>
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
WESTERN SIERRA BANCORP
ONE: NAME
The name of the corporation is:
Western Sierra Bancorp
TWO: PURPOSE
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE: AUTHORIZED STOCK
This corporation is authorized to issue two classes of shares designated
respectively "Common Stock" and "Preferred Stock" and referred to either as
Common Stock or Common shares and Preferred Stock or Preferred shares,
respectively. The number of shares of Common Stock is Ten Million (10,000,000),
and the number of shares of Preferred Stock is Ten Million (10,000,000).
FOUR: RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
The Preferred shares may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares of
any series of Preferred shares and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred shares, and within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
<PAGE> 2
FIVE: SHAREHOLDER VOTE NECESSARY
FOR CERTAIN BUSINESS COMBINATIONS
The stockholder vote required to approve a Business Combination (as
hereinafter defined) shall be at least 66-2/3% of the corporation'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 corporation or
a subsidiary of the corporation where the shareholders of the corporation
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 corporation or combined assets of the
corporation and its subsidiaries. The corporation shall not be a party to any
Business Combination without the shareholder approval specified herein.
Notwithstanding any other provisions of these Articles of Incorporation
or the Bylaws (and notwithstanding the fact that a lesser percentage may be
specified by law, these Articles of Incorporation or the Bylaws) the affirmative
vote of the holders of 66-2/3% or more of the outstanding shares of voting stock
shall be required to amend or repeal or adopt any provision inconsistent with
this Article Five or any provision in this Article Five.
SIX: DIRECTOR LIABILITY
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
SEVEN: INDEMNIFICATION
The corporation is authorized to indemnify its agents (as defined from
time to time in Section 317 of the California Corporations Code) to the fullest
extent permissible under California law. Any amendment, repeal or modification
of the provisions of this Article shall not adversely affect any right or
protection of an agent of the corporation existing at the time of such
amendment, repeal or modification.
EIGHT: AGENT FOR SERVICE OF PROCESS
The name and address in this State of this corporation's initial agent
for service of process is:
Gary Steven Findley
1470 North Hundley Street
Anaheim, California 92806
2
<PAGE> 3
IN WITNESS WHEREOF, for the purpose of forming this corporation under
the laws of the State of California, the undersigned, constituting the
incorporator of this corporation, has executed these Articles of Incorporation.
Dated: July 10, 1996
/s/ Gary Findley
----------------------------------------
Gary Steven Findley
I hereby declare that I am the person who executed the foregoing
Articles of Incorporation, which execution is my act and deed.
/s/ Gary Findley
----------------------------------------
Gary Steven Findley
3
<PAGE> 1
EXHIBIT 3.2
BYLAWS
AS AMENDED OF
WESTERN SIERRA BANCORP
ARTICLE I
OFFICES
SECTION 1.1. PRINCIPAL OFFICE. The principal executive office of the corporation
is hereby located at such place as the board of directors (the "board") shall
determine. The board is hereby granted full power and authority to change said
principal executive office from one location to another.
SECTION 1.2. OTHER OFFICES. Other business offices may, at any time, be
established by the board at such other places as it deems appropriate.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 2.1. PLACE OF MEETINGS. Meetings of shareholders may be held at such
place within or outside the state of California designated by the board. In the
absence of any such designation, shareholders' meetings shall be held at the
principal executive office of the corporation.
SECTION 2.2. ANNUAL MEETING. The annual meeting of shareholders shall be held
for the election of directors on a date and at a time designated by the board.
The date so designated shall be within fifteen (15) months after the last annual
meeting. At such meeting, directors shall be elected, and any other proper
business within the power of the shareholders may be transacted.
SECTION 2.3. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time by the board, the chairperson of the board, the president, or
by the holders of shares entitled to cast not less than ten percent (10%) of the
votes at such meeting. If a special meeting is called by any person or persons
other than the board, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or by registered mail to the chairperson of
the board, the president, any vice president or the secretary of the
corporation. The officer receiving the request shall cause notice to be promptly
given to the shareholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than 35 nor
more than 60 days after receipt of the request. If the notice is not given
within 20 days after receipt of the request, the person or persons requesting
the meeting may give the notice. Nothing in this paragraph shall be construed as
limiting, fixing or affecting the time when a meeting of shareholders called by
action of the board may be held.
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SECTION 2.4. NOTICE OF MEETINGS. Written notice, in accordance with Section 2.5
of this Article II, of each annual or special meeting of shareholders shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall state the place,
date and hour of the meeting and (a) in the case of a special meeting, the
general nature of the business to be transacted, and no other business may be
transacted, or (b) in the case of the annual meeting, those matters which the
board, at the time of the mailing of the notice, intends to present for action
by the shareholders, but, subject to the provisions of applicable law, any
proper matter may be presented at the meeting for such action. The notice of any
meeting at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by the board for election.
If action is proposed to be taken at any meeting for approval of (a) a contract
or transaction in which a director has a direct or indirect financial interest,
pursuant to Section 310 of the California Corporations Code, as amended (the
"Code"), (b) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (c) a reorganization of the corporation, pursuant to Section
1201 of the Code, (d) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (e) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall also state the general nature of that
proposal.
SECTION 2.5. MANNER OF GIVING NOTICE. Notice of a shareholders' meeting shall be
given either personally or by first-class mail or telegraphic or other written
communication, charges prepaid, addressed to the shareholder at the address of
that shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address
appears on the corporation's books or is given, notice shall be deemed to have
been given if sent to that shareholder by first-class mail or telegraphic or
other written communication to the corporation's principal executive office or
if published at least once in a newspaper of general circulation in the county
in which the principal executive office is located. Notice shall be deemed to
have been given at the time when delivered personally or deposited in the mail
or sent by telegram or other means of written communication. An affidavit of
mailing or other means of giving any notice in accordance with the above
provisions, executed by the secretary, assistant secretary or any transfer
agent, shall be prima facie evidence of the giving of the notice.
If any notice addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at such address, all
future notices shall be deemed to have been duly given without further mailing
if the same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice to all other shareholders.
SECTION 2.6. QUORUM. A majority of the shares entitled to vote, represented in
person or by proxy, shall constitute a quorum at any meeting of shareholders.
The shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
SECTION 2.7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of a majority of the shares represented either in person or by proxy at the
meeting, but in the absence of a quorum (except as provided in Section 2.6 of
this Article II) no other business may be transacted at such meeting.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is
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taken. However, when any shareholders' meeting is adjourned for more than 45
days from the date set for the original meeting, or, if after adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting
shall be given to each shareholder of record entitled to vote at the meeting. At
any adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
SECTION 2.8. VOTING. The shareholders entitled to notice of any meeting or to
vote at any such meeting shall be only persons in whose name shares stand on the
stock records of the corporation on the record date determined in accordance
with Section 2.9 of this Article II.
Voting of shares of the corporation shall in all cases be subject to the
provisions of Sections 700 through 711, inclusive, of the Code.
The shareholders' vote may be by voice or ballot; provided, however, that any
election for directors must be by ballot if demanded by any shareholder before
the voting has begun. On any matter other than election of directors, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal (other than
the election of directors), but, if the shareholder fails to specify the number
of shares which the shareholder is voting affirmatively, it will be conclusively
presumed that the shareholder's approving vote is with respect to all shares
that the shareholder is entitled to vote. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on any matter (other than the election of directors) shall be
the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the articles of incorporation.
Subject to the following sentence and the provisions of Section 708 of the Code,
every shareholder entitled to vote at any election of directors may cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
shareholder's shares are entitled, or distribute the shareholder's votes on the
same principle among as many candidates as the shareholder thinks fit. No
shareholder shall be entitled to cumulate votes for any candidate or candidates
pursuant to the preceding sentence unless such candidate's or candidates' names
have been placed in nomination prior to the voting and the shareholder has given
notice at the meeting and prior to the voting of the shareholder's intention to
cumulate the shareholder's votes. If any one shareholder has given such notice,
all shareholders may cumulate their votes for candidates in nomination.
In any election of directors, the candidates receiving the highest number of
affirmative votes of the shares entitled to be voted for them, up to the number
of directors to be elected, shall be elected. Votes against the director and
votes withheld shall have no legal effect.
SECTION 2.9. RECORD DATE. The board may fix, in advance, a record date for the
determination of the shareholders entitled to notice of any meeting or to vote
or to receive payment of any dividend or other distribution, or allotment of any
rights, or to exercise any rights in respect of any other lawful action. The
record date so fixed shall be not more than 60 days nor less than 10 days prior
to the date of the meeting nor more than 60 days prior to any other action. When
a record date is so fixed, only shareholders of record on that date are entitled
to notice of and to vote at the meeting or to receive the dividend,
distribution, or allotment of rights, or to exercise rights, as the case may be,
notwithstanding any transfer of shares on the books of the corporation after the
record date. A record date for a meeting of shareholders shall apply to any
adjournment of the meeting unless the board fixes a new record date for the
adjourned meeting. The board shall fix a new record date if the meeting is
adjourned for more than 45 days.
If no record date is fixed by the board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice of the meeting is given or, if notice is waived, the close of business on
the business day next preceding the day
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on which the meeting is held. The record date for determining shareholders for
any purpose other than as set forth in this Section 2.9 or Section 2.11 of this
Article II shall be at the close of business on the day on which the board
adopts the resolution relating thereto, or the sixtieth day prior to the date of
such other action, whichever is later.
SECTION 2.10. CONSENT OF ABSENTEES. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, who was not present in person or
by proxy, signs a written waiver of notice, or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance of a person at a meeting shall constitute a
waiver of notice of and presence at such meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required by the Code to be included in the notice but
not so included, if such objection is expressly made at the meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of shareholders need be specified in any written waiver of notice, consent to
the holding of the meeting or approval of the minutes of the meeting, except
that if action is taken or proposed to be taken for approval of any of those
matters specified in the second paragraph of Section 2.4 of this Article II, the
waiver of notice, consent or approval shall state the general nature of the
proposal.
SECTION 2.11. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Subject to Section
603 of the Code, any action which may be taken at any annual or special meeting
of shareholders may be taken without a meeting and without prior notice if a
consent in writing, setting forth the action so taken, is signed by the holders
of the outstanding shares, or their proxies, 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. All
such consents shall be filed with the secretary of the corporation and shall be
maintained in the corporate records; provided, however, that (1) unless the
consents of all shareholders entitled to vote have been solicited in writing,
notice of any shareholder approval without a meeting by less than unanimous
consent shall be given, as provided by Section 603(b) of the Code, and (2) in
the case of election of directors, such a consent shall be effective only if
signed by the holders of all outstanding shares entitled to vote for the
election of directors; provided, however, that subject to applicable law, a
director may be elected at any time to fill a vacancy on the board that has not
been filled by the directors, by the written consent of the holders of a
majority of the outstanding shares entitled to vote for the election of
directors. Any written consent may be revoked by a writing received by the
secretary of the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the secretary.
Unless a record date for voting purposes be fixed as provided in Section 2.9 of
this Article II, the record date for determining shareholders entitled to give
consent pursuant to this Section 2.11, when no prior action by the board has
been taken, shall be the day on which the first written consent is given.
SECTION 2.12. PROXIES. Every person entitled to vote shares or execute written
consents has the right to do so either in person or by one or more persons
authorized by a written proxy executed and dated by such shareholder and filed
with the secretary of the corporation prior to the convening of any meeting of
the shareholders at which any such proxy is to be used or prior to the use of
such written consent. A validly executed proxy which does not state that it is
irrevocable continues in full force and effect unless: (1) revoked by the person
executing it prior to the vote pursuant thereto, by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy executed
by the person executing the prior proxy and presented to the meeting, or as to
any meeting of shareholders, by attendance at such meeting and voting in person
by the person executing the proxy; or (2) written notice of the death or
incapacity of the maker of the proxy is received by the corporation before the
vote pursuant thereto is counted; provided, however, that no proxy shall be
valid after the expiration of 11 months from the date of its execution unless
otherwise provided in the proxy.
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SECTION 2.13. INSPECTORS OF ELECTION. In advance of any meeting of shareholders,
the board may appoint any persons other than nominees for office as inspectors
of election to act at such meeting and any adjournment thereof. If no inspectors
of election are so appointed, or if any persons so appointed fail to appear or
refuse to act, the chairperson of any such meeting may, and on the request of
any shareholder or shareholder's proxy shall, appoint inspectors of election at
the meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting on the request of one or more shareholders
or proxies, the holders of a majority of shares or their proxies present shall
determine whether one (1) or three (3) inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b) of the
Code and shall include: determining the number of shares outstanding and the
voting power of each; determining the shares represented at the meeting;
determining the existence of a quorum; determining the authenticity, validity
and the effect of proxies; receiving votes, ballots or consents; hearing and
determining all challenges and questions in any way arising in connection with
the right to vote; counting and tabulating all votes or consents; determining
when the polls shall close; determining the result; and doing such acts as may
be proper to conduct the election or vote with fairness to all shareholders. If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all.
SECTION 2.14. CONDUCT OF MEETINGS. The president shall preside at all meetings
of the shareholders and shall conduct each such meeting in a businesslike and
fair manner, but shall not be obligated to follow any technical, formal or
parliamentary rules or principles of procedure. The presiding officer's rulings
on procedural matters shall be conclusive and binding on all shareholders,
unless at the time of ruling a request for a vote is made to the shareholders
entitled to vote and represented in person or by proxy at the meeting, in which
case the decision of a majority of such shares shall be conclusive and binding
on all shareholders. Without limiting the generality of the foregoing, the
presiding officer shall have all the powers usually vested in the presiding
officer of a meeting of shareholders.
ARTICLE III
DIRECTORS
SECTION 3.1. POWERS. Subject to the provisions of the Code and any limitations
in the articles of incorporation and these bylaws relating to actions required
to be approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the board. The board may delegate the
management of the day-to-day operations of the business of the corporation to a
management company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the board. Without prejudice to such general powers,
but subject to the same limitations, it is hereby expressly declared that the
board shall have the following powers in addition to the other powers enumerated
in these bylaws:
(a) to select and remove all the other officers, agents and employees of the
corporation, prescribe any qualifications, powers and duties for them
that are consistent with law, the articles of incorporation or these
bylaws, fix their compensation, and require from them security for
faithful service;
(b) to conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor not
inconsistent with law, the articles of incorporation or these bylaws, as
they may deem best;
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(c) to adopt, make and use a corporate seal, to prescribe the forms of
certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best;
(d) to authorize the issuance of shares of stock of the corporation from
time to time, upon such terms and for such consideration as may be
lawful;
(e) to borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory and capital notes, bonds, debentures, deeds
of trust, mortgages, pledges, hypothecations or other evidences of debt
and securities therefor and any agreements pertaining thereto;
(f) to prescribe the manner in which and the person or persons by whom any
or all of the checks, drafts, notes, contracts and other corporate
instruments shall be executed;
(g) to appoint and designate, by resolution adopted by a majority of the
authorized number of directors, one or more committees, each consisting
of two or more directors, including the appointment of alternate members
of any committee who may replace any absent member at any meeting of the
committee; and
(h) generally, to do and perform every act or thing whatever that may
pertain to or be authorized by the board of directors of a corporation
incorporated under the laws of this state.
SECTION 3.2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall not be less than eight (8) nor more than
fifteen (15) until changed by an amendment of the articles of incorporation or
by a bylaw amending this Section 3.2 duly adopted by the vote or written consent
of holders of a majority of the outstanding shares entitled to vote. The exact
number of directors shall be fixed from time to time, within the range specified
in the articles of incorporation or in this Section 3.2: (i) by a resolution
duly adopted by the board; (ii) by a bylaw or amendment thereof duly adopted by
the vote of a majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present, or by the written consent of the holders
of a majority of the outstanding shares entitled to vote; or (iii) by approval
of the shareholders (as defined in Section 153 of the Code.
Mandatory retirement age of qualified directors is seventy-five (75). The board
may override the mandatory retirement with a two-thirds (2/3) majority vote of
the Board of Directors to extend the term for one year. The vote will be done by
secret ballot.
SECTION 3.3. NOMINATIONS OF DIRECTORS. Nominations for election of members of
the board may be made by the board or by any holder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Notice of intention to make any nominations (other than for persons named in the
notice of the meeting called for the election of directors) shall be made in
writing and shall be delivered or mailed to the president of the corporation by
the later of: (i) the close of business twenty-one (21) days prior to any
meeting of shareholders called for the election of directors; or (ii) ten (10)
days after the date of mailing of notice of the meeting to shareholders. Such
notification shall contain the following information to the extent known to the
notifying shareholder: (a) the name and address of each proposed nominee; (b)
the principal occupation of each proposed nominee; (c) the number of shares of
capital stock of the corporation owned by each proposed nominee; (d) the name
and residence address of the notifying shareholder; (e) the number of shares of
capital stock of the corporation owned by the notifying shareholder; (f) the
number of shares of capital stock of any bank, bank holding company, savings and
loan association or other depository institution owned beneficially by the
nominee or by the notifying shareholder and the identities and locations of any
such institutions; and (g) whether the proposed nominee has ever been convicted
of or pleaded nolo contendere to any criminal offense involving dishonesty or
breach of trust, filed a petition in bankruptcy or been adjudged bankrupt. The
notification shall be signed by the nominating shareholder and by each
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nominee, and shall be accompanied by a written consent to be named as a nominee
for election as a director from each proposed nominee. Nominations not made in
accordance with these procedures shall be disregarded by the chairperson of the
meeting, and upon his or her instructions, the inspectors of election shall
disregard all votes cast for each such nominee. The foregoing requirements do
not apply to the nomination of a person to replace a proposed nominee who has
become unable to serve as a director between the last day for giving notice in
accordance with this paragraph and the date of election of directors if the
procedure called for in this paragraph was followed with respect to the
nomination of the proposed nominee.
A copy of the preceding paragraph shall be set forth in the notice to
shareholders of any meeting at which directors are to be elected.
SECTION 3.4. ELECTION AND TERM OF OFFICE. The directors shall be elected at each
annual meeting of shareholders, but if any annual meeting is not held or the
directors are not elected thereat, the directors may be elected at any special
meeting of shareholders held for that purpose. Each director shall hold office
until the next annual meeting and until a successor has been elected and
qualified.
SECTION 3.5. VACANCIES. Vacancies on the board, except for a vacancy created by
the removal of a director, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and each
director so elected shall hold office until the next annual meeting and until
such director's successor has been elected and qualified. A vacancy on the board
created by the removal of a director may only be filled by the vote of a
majority of the shares entitled to vote represented at a duly held meeting at
which a quorum is present, or by the written consent of the holders of all of
the outstanding shares.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent other than to fill a vacancy created by removal requires the consent of
a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the chairperson
of the board, the president, secretary, or the board, unless the notice
specifies a later time for the effectiveness of such resignation. If the board
accepts the resignation of a director tendered to take effect at a future time,
the board or the shareholders shall have power to elect a successor to take
office when the resignation is to become effective.
A vacancy or vacancies on the board shall be deemed to exist in case of the
death, resignation or removal of any director, or if the authorized number of
directors is increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are elected, to elect
the full authorized number of directors to be voted for at that meeting.
The board may declare vacant the office of a director who has been declared of
unsound mind by an order of court or convicted of a felony.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term of office.
SECTION 3.6. PLACE OF MEETINGS. Regular or special meetings of the board shall
be held at any place within or outside the state of California which has been
designated in the notice of meeting or if there is no notice, at the principal
executive office of the corporation, or at a place designated by resolution of
the board or by the written consent of the board. Any regular or special meeting
is valid wherever held if held upon written consent of all members of the board
given either before or after the meeting and filed with the secretary of the
corporation.
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SECTION 3.7. REGULAR MEETINGS. Immediately following each annual meeting of
shareholders, the board shall hold a regular meeting for the purpose of
organization, any desired election of officers and the transaction of other
business. Notice of this meeting shall not be required.
Other regular meetings of the board shall be held without notice on the third
Tuesday of each month at the hour of 4:00 p.m., or at such different date and
time as the board may from time to time fix by resolution; provided, however,
should said day fall upon a legal holiday observed by the corporation at its
principal executive office, then said meeting shall be held at the same time and
place on the next succeeding full business day of the corporation. Call and
notice of all regular meetings of the board are hereby dispensed with.
SECTION 3.8. SPECIAL MEETINGS. Special meetings of the board for any purpose or
purposes may be called at any time by the chairperson of the board, the
president, any vice president, the secretary or by any two directors.
Special meetings of the board shall be held upon four days' written notice by
mail or 48 hours' notice delivered personally or by telephone, telegraph, telex
or other similar means of communication. Any such notice shall be addressed or
delivered to each director at the director's address as shown upon the records
of the corporation or as given to the corporation by the director for purposes
of notice or, if such address is not shown on such records or is not readily
ascertainable, at the place in which the meetings of the directors are regularly
held. Such notice may, but need not, specify the purpose of the meeting, or the
place if the meeting is to be held at the principal executive office of the
corporation.
Notice by mail shall be deemed to have been given at the time a written notice
is deposited in the United States mails, postage prepaid. Any other written
notice shall be deemed to have been given at the time it is personally delivered
to the recipient or is delivered to a common carrier for transmission, or
actually transmitted by the person giving the notice by electronic means or by
facsimile transmission, to the recipient. Oral notice shall be deemed to have
been given at the time it is communicated, in person or by telephone or
wireless, to the recipient or to a person at the office of the recipient whom
the person giving the notice has reason to believe will promptly communicate it
to the recipient.
SECTION 3.9. QUORUM. A majority of the authorized number of directors
constitutes a quorum of the board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the board, unless a greater number be
required by the articles of incorporation and subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest) and Section
317(e) of the Code (as to indemnification of directors). A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, if any action taken is approved by at least a
majority of the required quorum for such meeting.
SECTION 3.10. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the
board may participate in a meeting through use of a conference telephone or
similar communications equipment, so long as the requirements of Section
307(a)(6) of the Code are met. Participation in a meeting pursuant to this
Section 3.10 constitutes presence in person at such meeting.
SECTION 3.11. WAIVER OF NOTICE. Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes of the meeting, whether before or after the meeting, or
who attends the meeting without protesting, before the meeting or at its
commencement, the lack of notice to such director. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
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SECTION 3.12. ADJOURNMENT. A majority of the directors present, whether or not a
quorum is present, may adjourn any directors' meeting to another time and place.
Notice of the time and place of holding an adjourned meeting need not be given,
unless the meeting is adjourned for more than twenty-four hours, in which case
notice of the time and place shall be given before the time of the adjourned
meeting to the directors who were not present at the time of the adjournment.
SECTION 3.13. ACTION WITHOUT MEETING. Any action required or permitted to be
taken by the board may be taken without a meeting if all members of the board
shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the board. Such action by written consent shall have the same effect as a
unanimous vote of the board.
SECTION 3.14. FEES AND COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by the board. This Section 3.14
shall not be construed to preclude any director from serving the corporation in
any other capacity as an officer, agent, employee or otherwise, and receiving
compensation for those services.
SECTION 3.15. RIGHTS OF INSPECTION. Every director of the corporation shall have
the absolute right at any reasonable time to inspect and copy all books, records
and documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney, and the
right of inspection includes the right to copy and make extracts.
SECTION 3.16. REMOVAL OF DIRECTOR WITHOUT CAUSE. Any or all of the directors of
the corporation may be removed without cause if the removal is approved by the
outstanding shares, subject to the following:
(a) Except if the corporation has a classified board, no director may be
removed (unless the entire board is removed) when the votes cast against
removal, or not consenting in writing to the removal, would be
sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast (or, if the action is
taken by written consent, all shares entitled to vote were voted) and
the entire number of directors authorized at the time of the director's
most recent election were then being elected.
(b) When by the provisions of the articles the holders of the shares of any
class or series, voting as a class or series, are entitled to elect one
or more directors, any director so elected may be removed only by the
applicable vote of the holders of the shares of that class or series.
(c) When the corporation has a classified board, a director may not be
removed if the votes cast against removal of the director, or not
consenting in writing to the removal, would be sufficient to elect the
director if voted cumulatively (without regard to whether shares may
otherwise be voted cumulatively) at an election at which the same total
number of votes were cast (or, if the action is taken by written
consent, all shares entitled to vote were voted) and either the number
of directors elected at the most recent annual meeting of shareholders,
or if greater, the number of directors for whom removal is being sought,
were then being elected.
SECTION 3.17. REMOVAL OF DIRECTORS BY SHAREHOLDER'S SUIT. The superior court of
the proper county may, at the suit of the shareholders holding at least 10
percent of the number of outstanding shares of any class, remove from office any
director in case of fraudulent or dishonest acts or gross abuse of authority or
discretion with reference to the corporation and may bar from reelection any
director so removed for a period prescribed by the court. The corporation shall
be made a party to such action.
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SECTION 3.18. MANDATORY RETIREMENT OF DIRECTORS. Mandatory retirement age of
qualified directors is seventy-five (75). The board may override the mandatory
retirement with a two-thirds (2/3) majority vote to the Board of Directors to
extend the term for one year. The vote will be done by secret ballot.
ARTICLE IV
OFFICERS
SECTION 4.1. OFFICERS. The officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board, a chairperson of the board, a vice chairperson of the
board, one or more vice presidents, one or more assistant secretaries, one or
more assistant financial officers and such other officers as may be elected or
appointed in accordance with the provisions of Section 4.3 of this Article IV.
One person may hold two or more offices, except those of president and
secretary.
SECTION 4.2. APPOINTMENT. The officers of the corporation, except such officers
as may be appointed in accordance with the provisions of Section 4.3 or Section
4.5 of this Article IV, shall be chosen by, and shall serve at the pleasure of,
the board, and shall hold their respective offices until their resignation,
removal or other disqualification from service, or until their respective
successors shall be appointed, subject to the rights, if any, of an officer
under any contract of employment.
SECTION 4.3. SUBORDINATE OFFICERS. The board may appoint, or may empower the
president to appoint, such other officers as the business of the corporation may
require, each to hold office for such period, have such authority and perform
such duties as are provided in these bylaws or as the board may from time to
time determine.
SECTION 4.4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of an
officer under any contract of employment, any officer may be removed, either
with or without cause, by the board at any time, or, except in the case of an
officer chosen by the board, by any officer upon whom such power of removal may
be conferred by the board.
Any officer may resign at any time by giving written notice to the corporation
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 4.5. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointment to such office.
SECTION 4.6. CHAIRPERSON. The chairperson of the board, if there shall be such
an officer, shall, if present, preside at all meetings of the board and exercise
and perform such other powers and duties as may be assigned from time to time by
the board.
SECTION 4.7. VICE CHAIRPERSON. The vice chairperson of the board, if there shall
be such an officer, shall, in the absence of the chairperson of the board,
preside at all meetings of the board and exercise and perform such other powers
and duties as may be assigned from time to time by the board.
SECTION 4.8. PRESIDENT. Subject to such powers, if any, as may be given by the
board to the chairperson of the board, if there shall be such an officer, the
president is the general manager and chief executive officer of the corporation
and has, subject to the control of the board, general supervision, direction and
control of the business
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and affairs of the corporation. The president shall preside at all meetings of
the shareholders and in the absence of both the chairperson of the board and the
vice chairperson, or if there be none, at all meetings of the board. The
president has the general powers and duties of management usually vested in the
office of president and chief executive officer of a corporation and such other
powers and duties as may be prescribed by the board.
SECTION 4.9. VICE PRESIDENT. In the absence or disability of the president, the
vice presidents in order of their rank as fixed by the board or, if not ranked,
the vice president designated by the board, shall perform all the duties of the
president and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the president. The vice presidents shall have such
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the bylaws, the board, the president or the
chairperson of the board.
SECTION 4.10. SECRETARY. The secretary shall keep or cause to be kept, at the
principal executive office or such other place as the board may order, a book of
minutes of all meetings of shareholders, the board and its committees, with the
time and place of holding, whether regular or special, and, if special, how
authorized, the notice or waivers of notice thereof given, the names of those
present at the board and committee meetings, the number of shares present or
represented at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, a copy of the bylaws of the
corporation at the principal executive office or business office in accordance
with Section 213 of the Code. The secretary shall keep, or cause to be kept, at
the principal executive office or at the office of the corporation's transfer
agent or registrar, if one is appointed, a record of its shareholders, or a
duplicate record of its shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each.
The secretary shall give, or cause to be given, notice of all the meetings of
the shareholders, of the board and of any committees thereof required by these
bylaws or by law to be given, shall keep the seal of the corporation in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the board.
SECTION 4.11. ASSISTANT SECRETARY. The assistant secretary or the assistant
secretaries, in the order of their seniority, shall, in the absence or
disability of the secretary, or in the event of such officer's refusal to act,
perform the duties and exercise the powers of the secretary and shall have such
additional powers and discharge such duties as may be assigned from time to time
by the president or by the board.
SECTION 4.12. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of the properties and financial and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares, and shall
send or cause to be sent to the shareholders of the corporation such financial
statements and reports that by law or these bylaws are required to be sent to
them. The books of account shall at all times be open to inspection by any
director of the corporation.
The chief financial officer shall deposit all monies and other valuables in the
name and to the credit of the corporation with such depositories as may be
designated by the board. The chief financial officer shall disburse the funds of
the corporation as may be ordered by the board, shall render to the president
and directors, whenever they request it, an account of all transactions engaged
in as chief financial officer and of the financial condition of the corporation,
and shall have such other powers and perform such other duties as may be
prescribed by the board.
SECTION 4.13. ASSISTANT FINANCIAL OFFICER. The assistant financial officer or
the assistant financial officers, in the order of their seniority, shall, in the
absence or disability of the chief financial officer, or in the event of such
officer's refusal to act, perform the duties and exercise the powers of the
chief financial officer, and shall have such additional powers and discharge
such duties as may be assigned from time to time by the president or by the
board.
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SECTION 4.14. SALARIES. The salaries of the officers shall be fixed from time to
time by the board and no officer shall be prevented from receiving such salary
by reason of the fact that such officer is also a director of the corporation.
SECTION 4.15. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more offices,
except those of president and secretary, may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity.
SECTION 4.16. INABILITY TO ACT. In the case of absence or inability to act of
any officer of the corporation and of any person herein authorized to act in his
or her place, the board may from time to time delegate the powers or duties of
such officer to any other officer, or any director or other person whom it may
select.
ARTICLE V
INDEMNIFICATION
SECTION 5.1. DEFINITIONS. For use in this Article V, certain terms are defined
as follows:
(a) "Agent": A director, officer, employee or agent of the corporation or a
person who is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, or other enterprise
(including service with respect to employee benefit plans and service on
creditors' committees with respect to any proceeding under the
Bankruptcy Code, assignment for the benefit of creditors or other
liquidation of assets of a debtor of the corporation), or a person who
was a director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of the predecessor corporation.
(b) "Loss": All expenses, liabilities, and losses including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties, amounts paid or to
be paid in settlement, any interest, assessments, or other charges
imposed thereon, and any federal, state, local, or foreign taxes imposed
on any Agent as a result of the actual or deemed receipt of any payments
under this Article.
(c) "Proceeding": Any threatened, pending or completed action, suit or
proceeding including any and all appeals, whether civil, criminal,
administrative or investigative.
SECTION 5.2. RIGHT TO INDEMNIFICATION. Each person who was or is a party or is
threatened to be made a party to or is involved (as a party, witness or
otherwise) in any Proceeding, by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was an Agent, is entitled
to indemnification. Agent shall be indemnified and held harmless by the
corporation to the fullest extent authorized by law. The right to
indemnification conferred in this Article V shall be a contract right. It is the
corporation's intention that these bylaws provide indemnification in excess of
that expressly permitted by Section 317 of the Code, as authorized by the
corporation's articles of incorporation.
SECTION 5.3. AUTHORITY TO ADVANCE EXPENSES. The right to indemnification
provided in Section 5.2 of these bylaws shall include the right to be paid, in
advance of a Proceeding's final disposition, expenses incurred in defending that
Proceeding, provided, however, that if required by the California General
Corporation Law, as amended, the payment of expenses in advance of the final
disposition of the Proceeding shall be made only upon delivery to the
corporation of an undertaking by or on behalf of the Agent to repay such amount
if it shall ultimately be determined that he or
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she is not entitled to be indemnified by the corporation as authorized under
this Article V or otherwise. The Agent's obligation to reimburse the corporation
for advances shall be unsecured and no interest shall be charged thereon.
SECTION 5.4. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 5.2 or
5.3 of these bylaws is not paid in full by the corporation within thirty (30)
days after a written claim has been received by the corporation, the claimant
may at any time there-after bring suit against the corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expenses (including attorneys' fees) of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending a
Proceeding in advance of its final disposition) that the claimant has not met
the standards of conduct that make it permissible under the California General
Corporation Law for the corporation to indemnify the claimant for the amount
claimed. The burden of proving such a defense shall be on the corporation.
Neither the failure of the corporation (including its board of directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that the indemnification of the
claimant is proper under the circumstances because he or she has met the
applicable standard of conduct set forth in the California General Corporation
Law, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its shareholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not already met the applicable standard
of conduct.
SECTION 5.5. PROVISIONS NONEXCLUSIVE. The rights conferred on any person by this
Article V shall not be exclusive of any other rights that such person may have
or hereafter acquire under any statute, provision of the articles of
incorporation, agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. To the extent that any provision of the
articles of incorporation, agreement, or vote of the shareholders or
disinterested directors is inconsistent with these bylaws, the provision,
agreement, or vote shall take precedence.
SECTION 5.6. AUTHORITY TO INSURE. The corporation may purchase and maintain
insurance to protect itself and any Agent against any Loss asserted against or
incurred by such person, whether or not the corporation would have the power to
indemnify the Agent against such Loss under applicable law or the provisions of
this Article V. If the corporation owns all or a portion of the shares of the
company issuing the insurance policy, the company and/or the policy must meet
one of the two sets of conditions set forth in Section 317 of the Code.
SECTION 5.7. SURVIVAL OF RIGHTS. The rights provided by this Article V shall
continue as to a person who has ceased to be an Agent and shall inure to the
benefit of the heirs, executors, and administrators of such person.
SECTION 5.8. SETTLEMENT OF CLAIMS. The corporation shall not be liable to
indemnify any Agent under this Article V: (a) for any amounts paid in settlement
of any action or claim effected without the corporation's written consent, which
consent shall not be unreasonably withheld; or (b) for any judicial award, if
the corporation was not given a reasonable and timely opportunity, at its
expense, to participate in the defense of such action.
SECTION 5.9. EFFECT OF AMENDMENT. Any amendment, repeal or modification of this
Article V shall not adversely affect any right or protection of any Agent
existing at the time of such amendment, repeal or modification.
SECTION 5.10. SUBROGATION. Upon payment under this Article V, the corporation
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Agent, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the corporation effectively to bring suit
to enforce such rights.
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SECTION 5.11. NO DUPLICATION OF PAYMENTS. The corporation shall not be liable
under this Article V to make any payment in connection with any claim made
against the Agent to the extent the Agent has otherwise actually received
payment (under any insurance policy, agreement, vote or otherwise) of the
amounts otherwise indemnifiable hereunder.
ARTICLE VI
OTHER PROVISIONS
SECTION 6.1. INSPECTION OF CORPORATE RECORDS.
(a) A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent (1%) of the outstanding
voting shares and have filed a Schedule 14B with the United States
Securities and Exchange Commission relating to the election of directors
of the corporation shall have an absolute right to do either or both of
the following:
(i) inspect and copy the record of shareholders' names and addresses
and shareholdings during usual business hours upon five business
days' prior written demand upon the corporation; or
(ii) obtain from the transfer agent, if any, for the corporation, upon
written demand and upon the tender of its usual charges for such
a list (the amount of which charges shall be stated to the
shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for
the election of directors and their shareholdings, as of the most
recent record date for which it has been compiled, or as of a
date specified by the shareholder subsequent to the date of
demand. The corporation shall have a responsibility to cause the
transfer agent to comply with this Section 6.1;
(b) The record of shareholders shall also be open to inspection and copying
by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for
a purpose reasonably related to such holder's interest as a shareholder
or holder of a voting trust certificate. A written demand for such
inspection shall be accompanied by a statement in reasonable detail of
the purpose of the inspection.
(c) The accounting books and records and minutes of proceedings of the
shareholders and the board and committees of the board shall be open to
inspection upon written demand on the corporation by any shareholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's
interest as a shareholder or as a holder of such voting trust
certificate. The right of inspection created by this Section 6.1(c)
shall extend to the records of each subsidiary of the corporation. A
written demand for such inspection shall be accompanied by a statement
in reasonable detail of the purpose of the inspection.
(d) Any inspection and copying under this Section 6.1 may be made in person
or by agent or attorney.
SECTION 6.2. INSPECTION OF BYLAWS. The corporation shall keep at its principal
executive office in California the original or a copy of these bylaws as amended
to date, which shall be open to inspection by shareholders at all reasonable
times during office hours.
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SECTION 6.3. EXECUTION OF DOCUMENTS, CONTRACTS. Subject to the provisions of
applicable law, any note, mortgage, evidence of indebtedness, contract, share
certificate, initial transaction statement or written statement, conveyance or
other instrument in writing and any assignment or endorsement thereof executed
or entered into between the corporation and any other person, when signed by the
chairperson of the board, the president or any vice president and the secretary,
any assistant secretary, the chief financial officer or any assistant financial
officer of the corporation, or when stamped with a facsimile signature of such
appropriate officers in the case of share certificates, shall be valid and
binding upon the corporation in the absence of actual knowledge on the part of
the other person that the signing officers did not have authority to execute the
same. Any such instruments may be signed by any other person or persons and in
such manner as from time to time shall be determined by the board, and unless so
authorized by the board, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or amount.
SECTION 6.4. CERTIFICATES OF STOCK. Every holder of shares of the corporation
shall be entitled to have a certificate signed in the name of the corporation by
the chairperson or the vice chairperson of the board or the president or a vice
president and by the secretary or an assistant secretary or the chief financial
officer or an assistant financial officer, certifying the number of shares and
the class or series of shares owned by the shareholder. The signatures on the
certificates may be facsimile signatures. If any officer, transfer agent or
registrar who has signed a certificate or whose facsimile signature has been
placed upon the certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
Except as provided in this Section 6.4, no new certificate for shares shall be
issued in lieu of an old certificate unless the latter is surrendered and
canceled at the same time. The board may, however, in case any certificate for
shares is alleged to have been lost, stolen or destroyed, authorize the issuance
of a new certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Prior to the due presentment for registration of transfer in the stock transfer
book of the corporation, the registered owner shall be treated as the person
exclusively entitled to vote, to receive notifications and otherwise to exercise
all the rights and powers of an owner, except as expressly provided otherwise by
the laws of the state of California.
SECTION 6.5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The president or
any other officer or officers authorized by the board or the president are each
authorized to vote, represent and exercise on behalf of the corporation all
rights incident to any and all shares or other securities of any other
corporation or corporations standing in the name of the corporation. The
authority herein granted may be exercised either by any such officer in person
or by any other person authorized to do so by proxy or power of attorney duly
executed by said officer.
SECTION 6.6. SEAL. The corporate seal of the corporation shall consist of two
concentric circles, between which shall be the name of the corporation, and in
the center shall be inscribed the word "Incorporated" and the date of its
incorporation.
SECTION 6.7. FISCAL YEAR. The fiscal year of the corporation shall begin on the
first day of January and end on the 31st day of December of each year.
SECTION 6.8. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the Code and the California General Corporation Law shall govern
the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the
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plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
SECTION 6.9. BYLAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF
LAW. Any article, section, subsection, subdivision, sentence, clause or phrase
of these bylaws which, upon being construed in the manner provided in this
Section 6.9, shall be contrary to or inconsistent with any applicable provision
of the Code or other applicable laws of the state of California or of the United
States shall not apply so long as said provisions of law shall remain in effect,
but such result shall not affect the validity or applicability of any other
portions of these bylaws, it being hereby declared that these bylaws would have
been adopted and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, irrespective of the fact that any one or more
articles, sections, subsections, subdivisions, sentences, clauses or phrases is
or are illegal.
ARTICLE VII
AMENDMENTS
SECTION 7.1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these
bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the articles of incorporation of the corporation set forth the number of
authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment of the articles of incorporation and provided
also that a bylaw reducing the fixed number or the minimum number of directors
to a number less than five cannot be adopted if the votes cast against adoption
at a meeting, or the shares not consenting in the case of action by written
consent, are equal to more than 16 2/3 percent of the outstanding shares
entitled to vote.
SECTION 7.2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders
as provided in Section 7.1 of this Article VII, bylaws, other than a bylaw
specifying or changing a fixed number of directors or the maximum or minimum
number or changing from a fixed to a variable board or vice versa, may be
adopted, amended or repealed by the board.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting secretary of Western Sierra
Bancorp, a California corporation; and
2. That the foregoing Bylaws, comprising 16 pages, constitute the Bylaws of
Western Sierra Bancorp as duly adopted by action of the board of
directors of Western Sierra Bancorp duly taken on, August 20, 1996.
/s/ Osvaldo I. Scariot
----------------------------------------
Osvaldo I. Scariot, Secretary
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EXHIBIT 5.1
[GARY STEVEN FINDLEY & ASSOCIATES LETTERHEAD]
November 2, 1998
Western Sierra Bancorp
4011 Goldorado Plaza Circle
Cameron Park, California 95682
RE: Registration Statement on Form S-4
Gentlemen:
At your request, we have examined the form of Registration Statement to be filed
with the Securities and Exchange Commission in connection with the registration
under the Securities Act of 1933, as amended, for the offer and sale of up to
1,560,000 shares of your common stock, no par value (the "Common Stock"). We
are familiar with the actions taken or to be taken in connection with the
authorization, issuance and sale of the Common Stock.
It is our opinion that, subject to said proceedings being duly taken and
completed as now contemplated before the issuance of the Common Stock, said
Common Stock, will, upon the issuance and sale thereof be legally and validly
issued and fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement.
Respectfully submitted,
GARY STEVEN FINDLEY & ASSOCIATES
By: /s/ Gary Steven Findley
-----------------------------
Gary Steven Findley
Attorney at Law
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EXHIBIT 8.1
Opinion re: tax matters as to the merger of Lake Community Bank with
a subsidiary of Registrant by Perry-Smith & Co.
PERRY SMITH & CO.
CERTIFIED PUBLIC ACCOUNTANTS
October 26, 1998
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Dear Sirs:
Tax Opinion for the Registration Statement on Form S-4
Regarding the Merger with Lake Community Bank
As requested, we have prepared this opinion letter for Western Sierra
Bancorp, a California corporation ("BANCORP"), in connection with the proposed
merger of LMC Merger Company, a California corporation ("LMC"), with and into
Lake Community Bank, a California state-chartered bank ("LCB"), pursuant to the
terms of the Agreement and Plan of Reorganization and Merger dated as of May 27,
1998 ("Agreement") by and among BANCORP, LMC and LCB, each as described in the
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission ("Registration Statement").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction the
Agreement, the Registration Statement and such other documents as we have deemed
necessary or appropriate in order to enable us to render the opinions below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. The opinion is subject to the receipt by us prior to
the Effective Date of certain written representations and covenants of BANCORP
and LCB.
Based upon and subject to the foregoing, the discussion contained in the
prospectus included as part of the Registration Statement ("Prospectus") under
the caption "Certain Federal and California Income Tax Consequences," expresses
our opinion as to the material Federal and California income tax consequences
applicable to holders of LCB Stock. You should be aware, however, that the
discussion under the caption "Certain Federal and California Income Tax
Consequences" in the Prospectus represents our conclusions as to the application
of existing law to the instant transactions. There can be no assurance that
contrary positions may not be taken by the tax authorities.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the references to
Perry-Smith & Co., LLP under the heading "Certain Federal and California Income
Tax Consequences" in the Registration Statement and the Prospectus.
Very truly yours,
/s/ Perry-Smith & Co., LLP
Perry-Smith & Co., LLP
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EXHIBIT 8.2
Opinion re: tax matters as to the merger of Roseville 1st Bancorp
with Registrant by Perry-Smith & Co.
PERRY SMITH & CO.
CERTIFIED PUBLIC ACCOUNTANTS
October 26, 1998
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Dear Sirs:
Tax Opinion for the Registration Statement on Form S-4
Regarding the Merger with Roseville 1st Community Bancorp
As requested, we have prepared this opinion letter in connection with
the proposed merger of Roseville 1st Community Bancorp, a California corporation
("ROSE"), with and into Western Sierra Bancorp, a California corporation
("BANCORP"), pursuant to the terms of the Agreement and Plan of Reorganization
and Merger dated as of July 2, 1998 ("Agreement") by and among ROSE and BANCORP,
each as described in the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission ("Registration Statement").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction the
Agreement, the Registration Statement and such other documents as we have deemed
necessary or appropriate in order to enable us to render the opinions below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. The opinion is subject to the receipt by us prior to
the Effective Date of certain written representations and covenants of BANCORP
and ROSE.
Based upon and subject to the foregoing, the discussion contained in the
prospectus included as part of the Registration Statement ("Prospectus") under
the caption "Certain Federal and California Income Tax Consequences," expresses
our opinion as to the material Federal and California income tax consequences
applicable to holders of ROSE Stock. You should be aware, however, that the
discussion under the caption "Certain Federal and California Income Tax
Consequences" in the Prospectus represents our conclusions as to the application
of existing law to the instant transactions. There can be no assurance that
contrary positions may not be taken by the tax authorities.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the references to
Perry-Smith & Co., LLP under the heading "Certain Federal and California Income
Tax Consequences" in the Registration Statement and the Prospectus.
Very truly yours,
/s/ Perry-Smith & Co., LLP
Perry-Smith & Co., LLP
20
<PAGE> 1
EXHIBIT 10.1
Placerville branch lease dated June 23, 1987 as amended.
21
<PAGE> 2
AMENDMENT TO THE LEASE RENEWAL AGREEMENT
dated August 27, 1996 extending the term of the Lease Agreement
dated June 23, 1987 by and between:
Western Sierra National Bank, Tenant and;
Mr. Leo J. Albusche, the then Landlord (Lessor)
Note: Any reference to the 'Lease Agreement' in the following paragraphs is to
that certain Lease Agreement dated June 23, 1987; by and between Leo J.
Albusche, "Landlord" and Western Sierra National Bank, "Tenant".
The Carriage Trader Shopping Center, a portion of which are the premises leased
by Tenant at 1450 Broadway, Placerville, CA 95667; were bought by Shashank and
Sheela Kapre on July 22, 1997 from Leo J. Albusche. Tenant and the current
Landlord hereby agree that;
1. Tenant, Western Sierra National Bank shall not relocate or 'downsize' to
2,000-3,000 sq. ft. at the current location or at a smaller facility within
the Carriage Trade Shopping Center before July 31, 1999. Any such move at a
later date shall still be only upon a minimum one year's written notice.
The current Landlord, Shashank Kapre, agrees to a total monthly rent of
$5,000.00, inclusive of all the 'Miscellaneous Costs (per clause 46 of the
Lease Agreement), tax increases (per clause 45 of the Lease Agreement
taking into account the recent Sale/Purchase of the Shopping Center) and
Cost of Living Increases (per clause 4B of the Lease Agreement: "Increases
in Minimum Rent) to date. The new monthly rent shall be effective August 1,
1997 and Tenant shall reimburse Landlord for the August and September 1997
rent shortage in the amount of $890.90 payable with the October 1997 rent.
2. All other Terms and Conditions of the Lease Agreement shall remain the
same; particularly the provisions for the future annual Increase in Minimum
rent (clause 4B) and any utility charges (Tenant's share of water charges
per clause 19) shall apply. The total monthly rent payment shall be subject
to future Cost of Living increases.
3. Should the Tenant choose to relocate to a smaller space within the Shopping
Center or 'downsize' at the current location, the cost of such a move and
that of all related Tenant Improvements or Modifications shall be at
Tenant's sole expense. However, if it is mutually acceptable for the Tenant
to occupy a smaller portion of the premises at the current location, Tenant
shall, at its sole expense, reconstruct/remodel the premises for its own
use at the western end. The necessary 'alterations' shall be made according
to the provisions of clause 9.A of the Lease Agreement. In either case,
should Tenant 'downsize to 2,500 sq. ft. or less, the new lease rate for
the smaller space shall be three per cent (3%) higher on a per sq. ft.
basis compared to the then applicable lease rate under the Lease Agreement.
/s/ STEPHANIE MARSH /s/ SHASHANK KAPRE
- ------------------------------ -----------------------------
Western Sierra National Bank, Tenant Shashank Kapre, Landlord
SVP/CAO
- ------------------------------
Title
Date: 9-24-97 Date: 9/24/1997
--------- -----------
<PAGE> 3
LEASE RENEWAL AGREEMENT
Whereas Western Sierra National Bank and Leo J. Albusche entered into a Lease
Agreement June 23, 1987 covering premises at 1450 Broadway, Placerville,
California and extended that agreement by memorandum December 27, 1991.
This extended lease term will expire June 30, 1997 and the undersigned parties
herewith agree to extend the lease for an additional five years under the same
terms and conditions as the Lease Renewal Agreement of 1991 with the following
modification:
At any time after June 30, 1998, upon one year written notice, Western
Sierra National Bank may terminate their lease of 6,500 square feet of
building space in the Carriage Trade Shopping Center in exchange for a
smaller facility in that center of 2,000 to 3,000 square feet in size.
Monthly rental would be reduced proportionately and occupancy would
continue through the balance of the extended term until June 30, 2002.
Agreed this 27th day of August, 1996
/s/ [SIG] /s/ LEO J. ALBUSCHE
- ------------------------------------ ----------------------------------------
Western Sierra National Bank Leo J. Albusche, Lessor
Pres/CEO
- ------------------------------------
Title
<PAGE> 4
LEASE
1. PARTIES. This Lease is made this 23rd day of June, 1987, by and
between LEO J. ALBUSCHE (herein called "Landlord") and Western Sierra National
Bank (herein called "Tenant" whether one or more.
2. PREMISES. Landlord does hereby lease to Tenant and Tenant hereby
leases from Landlord that certain space (herein called "Premises") located in
the County of El Dorado, State of California, and described as follows: A
retail store building of 6,500 square feet (gross) being a portion of the
premises formerly leased to Rasco Stores, Inc., now divided and known as 1450
Broadway, Placerville.
This lease is subject to the terms, covenants and conditions herein
set forth and the Tenant covenants as a material part of the consideration for
this Lease to keep and perform each and all of said terms, covenants and
conditions by it to be kept and performed.
3. USE. Tenant shall use the Premises for a bank and shall not use or
permit the Premises to be used for any other purpose.
4. RENT.
4.A. MINIMUM RENT. Tenant agrees to pay to Landlord as Minimum Rent,
without notice or demand, the rent of $195,000.00 in installments as follows:
Fifty four equal payments of $3,611.11 each to be paid the first day of each
month commencing January 1, 1988.
The rental shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America and at such place as Landlord may
from time to time designate in writing.
4.B. INCREASES IN MINIMUM RENT. In addition to the minimum rental,
upon the first anniversary of said Lease the rental payments shall be increased
in direct proportion to any increase in the cost of living over the previous
year based on figures released by the U.S. Department of Labor for the San
Francisco (Northern California) region. Example: If the cost of living shall
increase 10% over the first year of this Lease, the monthly rental payments
shall be increased 10% upon the Lease anniversary and thereafter. Should
similar increases occur in subsequent years, each successive anniversary the
rental shall be increased additionally by such amounts proportionate to the rise
in living costs over the previous year. In the event that the cost of living
shall decrease, then rental shall be reduced on the same basis as above except
that in no event shall the monthly payments be reduced below the monthly
payments set forth in the rental paragraph above. If Landlord waives these
rental increases for any year(s) and elects to charge the increases for
subsequent years, the cost of living increase shall be determined by comparing
the then current cost of living index with the index that was in effect on the
date the lease term commenced.
5. TERM. The Lease shall be for a term of five years commencing on July
1, 1987, and ending on June 30, 1992.
6. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease,
Tenant has deposited with Landlord a sum equivalent to the first month's rent.
Said sum shall be held by Landlord as security for the faithful performance by
Tenant of all the terms, covenants, and conditions of this Lease to be kept and
performed by Tenant during the term hereof. If Tenant defaults with respect to
any provision of this Lease, including, but not limited to the provi-
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<PAGE> 5
sions relating to the payment of rent, Landlord may (but shall not be required
to) use, apply or retain all or any part of this security deposit for the
payment of any rent or any other sum in default, or for the payment of any
amount which Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of said
deposit is so used or applied, Tenant shall, within five (5) days after written
demand therefor, deposit cash with Landlord in an amount sufficient to restore
the security deposit to its original amount and Tenant's failure to do so shall
be a default under this Lease. Landlord shall not be required to keep this
security deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit. In the event of termination of Landlord's
interest in this Lease, Landlord shall transfer said deposit to Landlord's
successor in interest.
7. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver
possession of the said Premises to Tenant at the commencement of said term, as
hereinbefore specified, this Lease shall not be void or voidable, nor shall
Landlord be liable to Tenant for any loss or damage resulting therefrom; but in
that event there shall be a proportionate deduction of rent covering the period
between the commencement of the said term and the time when Landlord can deliver
possession.
8. USES PROHIBITED. Tenant shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose or purposes other than the purpose or
purposes for which the said Premises are hereby leased; and no use shall be made
or permitted to be made of the said Premises, nor acts done, which will increase
the existing rate of insurance upon the building in which said Premises may be
located, or cause a cancellation of any insurance policy covering said building,
or any part thereof, nor shall Tenant sell, or permit to be kept, used, or sold,
in or about said Premises, any article which may be prohibited by the standard
form of fire insurance policies. Tenant shall, at his sole cost and expense,
comply with any and all requirements, pertaining to said Premises, of any
insurance organization or company, necessary for the maintenance of reasonable
fire and public liability insurance, covering said building and appurtenances.
9. ALTERATIONS AND ADDITIONS; LANDLORD'S LIEN.
9.A. Tenant shall not make or allow to be made any alterations,
additions or improvements to or of the Premises or any part thereof without
first obtaining the written consent of Landlord and any alterations, additions,
or improvements to or of said Premises, including, but not limited to, wall
covering, paneling and built-in cabinet work, but excepting movable furniture
and trade fixtures, shall at once become a part of the realty and belong to the
Landlord and shall be surrendered with the Premises. In the event Landlord
consents to the making of any alterations, additions or improvements to the
Premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and
expense. Upon expiration or sooner termination of the term hereof, Tenant shall,
upon written demand by Landlord, given at least thirty (30) days prior to the
end of the term, at Tenant's sole cost and expense, forthwith and with all due
diligence, remove and alterations, additions, or improvements made by Tenant,
designated by Landlord to be removed, and Tenant shall, forthwith and with all
due diligence, at is sole cost and expense, repair any damage to the Premises
caused by such removal. For any period during which Tenant fails to so remove
and repair, rent shall continue to accrue and Landlord may, but shall not be
obligated to, remove Tenant's property, repair any damage, and collect from
Tenant the costs thereof as well as rent.
9.B. Notwithstanding the provisions of Article 10.A. in the event
Tenant shall "default" as defined in Article 22 below, Landlord shall have a
lien upon all of Tenant's movable furniture, trade fixtures and improvements to
the Premises which lien shall constitute Landlord a secured creditor with all
rights and remedies provided by the California Commercial Code.
10. ASSIGNMENT AND SUBLETTING.
10.A. Tenant shall not either voluntarily, or by operation of law,
assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any
interest therein, and shall not sublet the Premises or any part thereof, or any
right or privilege appurtenant thereto, or allow any other person (the
employees, agents, servants and invitees of Tenant excepted) to occupy or use
the said Premises, or any portion thereof, without first obtaining the written
con-
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<PAGE> 6
sent of Landlord, which consent shall not be unreasonably withheld. A consent
to one assignment, subletting, occupation or use by any other person shall not
be deemed to be a consent to any subsequent assignment, subletting, occupation
or use by another person. Consent to any such assignment or subletting shall in
no way relieve Tenant of any liability under this Lease. Any such assignment or
subletting without such consent shall be void, and shall, at the option of the
Landlord, constitute a default under the terms of this lease.
10.B. In determining whether Landlord acts "reasonable" in giving or
withholding his consent pursuant to Article 10.A., the following criteria shall
be applied: (i) the creditworthiness and financial standing of the proposed
sublessees, assignee, etc.; and (ii) the consistency of the sublessee's,
assignees's, etc. proposed use with the use specified in this Lease, it being
of paramount interest to Landlord that the tenant mix and integrity of the
shopping center be preserved. These criteria shall not be exclusive of others
that Landlord may additionally apply.
11. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any
time during the term; and if Tenant shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Tenant left on the Premises shall be deemed to be
abandoned, at the option of Landlord, except such property as may be mortgaged
to Landlord.
12. REPAIRS. Tenant shall, at his sole cost, keep and maintain the
Premises and appurtenances, including glazing and sidewalks, in good and
sanitary order, condition and repair, hereby waiving all right to make repairs
at the expense of the Landlord as provided in Section 1942 of the Civil Code of
the State of California, and all rights provided for by Section 1941 of said
Civil Code. By entry hereunder, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and agrees on the last day of the
term, or sooner termination of this Lease, to surrender to Landlord the
Premises with the appurtenances in the same condition as when received,
reasonable use and wear thereof excepted.
13. FREE FROM LIENS. Tenant shall keep the Premises and the property in
which the Premises are situated, free from any liens arising out of any work
performed, materials furnished, or obligations incurred by Tenant.
14. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at his sole
cost and expense, comply with all of the requirements of all Municipal, State
and Federal authorities now in force, or which may hereafter be in force,
pertaining to the Premises, and shall faithfully observe in the use of the
Premises all Municipal ordinances and State and Federal statutes now in force
or which may hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated
any such ordinance or statute in the use of the Premises, shall be conclusive
of the fact as between Landlord and Tenant.
15. INDEMNIFICATION OF LANDLORD. Tenant, as a material part of the
consideration to be rendered to Landlord, hereby waives all claims against
Landlord for damages to goods, wares and merchandise, in, upon or about said
Premises and for injuries to persons in or about said Premises, from any cause
arising at any time, and Tenant will hold Landlord exempt and harmless from any
damage or injury to any person, or to the goods, wares and merchandise of any
person, arising from the use of the Premises by Tenant, or from the failure of
Tenant to keep the Premises in good condition and repair, as herein provided.
16. SIGNS. Tenant shall not have the right to place, construct, or
maintain on the glass panes or supports of the show windows of the Premises,
the doors, or the exterior walls or roof of the building in which the Premises
are located or any interior portions of the Premises that may be visible from
the exterior of the Premises, any signs, advertisements, names, insignia,
trademarks, descriptive material, or any other similar item without Landlord's
written consent. Landlord at Tenant's cost can remove any item placed,
constructed, or maintained that does not comply with the provisions of this
paragraph.
17. DISPLAYS. The Tenant may not display or sell merchandise outside the
defined exterior walls and permanent doorways of the Premises. Tenant further
agrees not to install any exterior lighting, amplifiers or similar devices for
use in or about the Premises any advertising medium which may be heard or seen
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<PAGE> 7
outside the Premises, such as flashing lights, searchlights, loudspeakers,
phonographs or radio broadcasts.
18. AUCTIONS. Tenant shall not conduct or permit to be conducted any
sale by auction in, upon or from the Premises whether said auction be
voluntary, involuntary, pursuant to any assignment for the payment of creditors
or pursuant to any bankruptcy or other insolvency proceeding.
19. UTILITIES. Tenant shall pay for all water, gas, heat, power,
telephone service and all other services supplied to the Premises.
20. ENTRY TO LANDLORD. Tenant shall permit Landlord and his agents to
enter into and upon said Premises at all reasonable times for the purpose of
inspecting the same, or for the purpose of maintaining the building in which
said Premises are situated, or for the purpose of making repairs, alterations or
additions to any other portion of said building, including the erection and
maintenance of such scaffolding, canopies, fences and props as may be required,
or for the purpose of posting notices of non-liability for alterations,
additions or repairs or for the purpose of placing upon the property in which
the said Premises are located any usual or ordinary "for sale" signs, without
any rebate of rent and without any liability to Tenant for any loss of
occupation or quiet enjoyment of the Premises thereby occasioned; and shall
permit Landlord, at any time within thirty (30) days prior to the expiration of
this Lease, to place upon the Premises any usual or ordinary "to let" or "to
lease" signs. No rights of Landlord under this paragraph shall create a duty for
Landlord to repair or maintain the Premises.
21. DESTRUCTION OF PREMISES. In the event of a partial destruction of
the said Premises during the said term, from any cause, Landlord shall
forthwith repair the same, provided such repairs can be made within sixty (60)
days under the laws and regulations of State, Federal, County or Municipal
authorities, but such partial destruction shall in no wise annul or void this
Lease, except that Tenant shall be entitled to a proportionate deduction of
rent while such repairs are being made, such proportionate deduction to be
based upon the extent to which the making of such repairs shall interfere with
the business carried on by Tenant in the said Premises. If such repairs cannot
be made in sixty (60) days, Landlord may, at his option, make same within a
reasonable time, this Lease continuing in full force and effect and the rent to
be proportionately rebated as aforesaid in this paragraph provided. In the
event that Landlord does not so elect to make such repairs which cannot be
made in sixty (60) days, or such repairs cannot be made under such laws and
regulations, this Lease may be terminated at the option of either party. In
respect to any partial destruction which Landlord is obligated to repair or may
elect to repair under the terms of this paragraph, the provisions of Section
1932, Subdivision 2 and Section 1933, Subdivision 4, of the Civil Code of the
State of California are waived by Tenant. In the event that the building in
which the demised Premises may be situated be destroyed to the extent of not
less than 33 1/3% of the replacement cost thereof, Landlord may elect to
terminate this Lease, whether the demised Premises be injured or not. A total
destruction of the building in which the said Premises may be situated shall
terminate this Lease. In the event of any dispute between Landlord and Tenant
relative to the provisions of this paragraph, they shall each select an
arbitrator, the two arbitrators so selected shall select a third arbitrator and
the three arbitrators so selected shall hear and determine the controversy and
their decision thereon shall be final and binding on both Landlord and Tenant,
who shall bear the cost of such arbitration equally between them.
22. TENANT'S DEFAULT. The occurrence of any one or more of the
following events shall constitute a default and breach of this Lease by Tenant:
22.A. The vacating or abandonment of the Premises by Tenant.
22.B. The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof by Landlord to Tenant.
22.C. The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by the Tenant, other than described in Article 22.B. above, where such failure
shall continue for a period of thirty (30) days after written notice thereof by
Landlord to Tenant.
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<PAGE> 8
22.D. The making by tenant of any general assignment or general
arrangement for the benefit of creditors or the filing by or against Tenant of
a petition to have Tenant adjudged a bankrupt, or a petition or reorganization
or arrangement under any law relating to bankruptcy; or the appointment of a
trustee or a receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease.
23. REMEDIES IN DEFAULT. In the event of any such default or breach by
Tenant, Landlord may at any time thereafter, in his sole discretion, with or
without notice or demand and without limiting Landlord in the exercise of a
right or remedy which Landlord may have by reason of such default or breach;
23.A. Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises; reasonable attorney's
fees; the worth at the time of award by the Court having jurisdiction thereof
of the amount by which the unpaid rent and other charges and Adjustments called
for herein for the balance of the term after the time of such award exceeds the
amount of such loss for the same period that Tenant proves could be reasonably
avoided; and that portion of any leasing commission paid by Landlord and
applicable to the unexpired term of this Lease. Unpaid installments of rent
or other sums shall bear interest from the date due at the maximum legal rate;
or
23.B. Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent
and any other charges and Adjustments as may become due hereunder; or
23.C. Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the State in which the Premises are
located.
24. SURRENDER OF LEASE. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Landlord, terminate all or any existing subleases or
subtenancies, or may, at the option of Landlord, operate as an assignment to
him of any or all subleases or subtenancies.
25. EMINENT DOMAIN. If more than twenty-five (25%) percent of the
Premises shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain, either party hereto shall have the right, at
its option, within sixty (60) days after said taking, to terminate this Lease,
upon thirty (30) days written notice. If either less or more than 25% of the
Premises are taken (and neither party elects to terminate as herein provided),
the Minimum Rent thereafter to be paid shall be equitably reduced. If any part
of the Shopping Center other than the Premises may be so taken or appropriated,
Landlord shall within sixty (60) days of said taking have the right at its
option to terminate this Lease upon written notice to Tenant. In the event of
any taking or appropriation whatsoever, Landlord shall be entitled to any and
all awards and/or settlements which may be given and Tenant shall have no claim
against Landlord for the value of any unexpired term of this Lease.
26. HOURS OF BUSINESS. Tenant shall continuously during the entire term
hereof conduct and carry on Tenant's business in the Premises and shall keep
the Premises open for business and cause Tenant's business to be conducted
therein during the usual business hours of each and every business day as is
customary for businesses of like character in the area in which the Premises
are located to be open for business. Tenant shall keep the Premises adequately
stocked with merchandise, and with sufficient sales personnel to care for the
patronage, and to conduct said business in accordance with sound business
practice.
27. MERCHANT'S ASSOCIATION. A Shopping Center Merchant's Association
shall be formed if more than 50% of the shopping center tenants, who each lease
less than 10,000 square feet of space, elect to form the Association. Voting
shall be on the basis of each tenant having one vote. If the Association is
formed, Tenant agrees to become a member, to participate in, and to remain in
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<PAGE> 9
good standing and abide by the regulations of the Association, except that
Tenant shall not be required to pay annual dues exceeding $300.00 in order to
comply with the requirements of this Lease.
28. LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant
to Landlord of rent or other sums due thereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Landlord by terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) days after it is
due, then Tenant shall pay to Landlord a late charge equal to $25.00 for each
delinquent installment, plus any attorney's fees incurred by Landlord by reason
of Tenant's failure to pay rent and/or other charges when due hereunder. The
parties hereby agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of the late payment by
Tenant. Acceptance of such late charges by the Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount,
nor prevent Landlord from exercising any of the other rights and remedies
granted hereunder.
29. WAIVER. The waiver by Landlord of any breach of any term, covenent or
condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition therein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
30. HOLDING OVER. Any holding over after the expiration of the said term,
with the consent of Landlord, shall be construed to be a tenancy from month to
month, at a rental to be agreed upon by the parties, and shall otherwise be on
the terms and conditions herein specified.
31. SALE OF PREMISES BY LANDLORD. In the event of any sale of the
Premises by Landlord, Landlord shall be and is hereby entirely freed and
relieved of all liability under any and all of its covenants and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission occurring after the consummation of such sale; and the purchaser, at
such sale or any subsequent sale of the Premises shall be deemed, without any
further agreement between the parties or their successors in interest or between
the parties and any such purchaser, to have assumed and agreed to carry out any
and all of the covenants and obligations of the Landlord under this Lease.
32. TENANT'S STATEMENT. Tenant shall at any time and from time to time,
upon not less than three days prior written notice from Landlord, execute,
acknowledge and deliver to Landlord a statement in writing (a) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease as so modified
is in full force and effect), and the date to which the rental and other
charges are paid in advance, if any, and (b) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of the Landlord
hereunder, or specifying such defaults if any are claimed, and (c) setting
forth the date of commencement of rents and expiration of the term hereof. Any
such statement may be relied upon by the prospective purchaser or encumbrancer
of all or any portion of the real property of which the Premises are a part.
33. NOTICES. All notices to be given to Tenant may be given in writing
personally or by depositing the same in the United States mail, postage
prepaid, and addressed to Tenant at the said Premises, whether or not Tenant
has departed from, abandoned or vacated the Premises.
34. ATTORNEYS' FEES. In the event of any action or proceeding brought by
either party against the other under this Lease the prevailing party shall be
entitled to recover for the fees of its attorneys in such action or proceeding,
including costs of appeal, if any, in such amount as the court may adjudge
reasonable as attorneys' fees. In addition, should it be necessary for Landlord
to employ legal counsel to enforce any of the provisions herein contained,
Tenant agrees to pay all attorneys' fees and court costs reasonably incurred.
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<PAGE> 10
35. SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
36. TIME. Time is of the essence of this Lease.
37. PRIOR AGREEMENTS. This Lease contains all of the agreements of the
parties hereto with respect to any matter covered or mentioned in this Lease,
and no prior agreements or understandings pertaining to any such matters shall
be effective for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing and signed by the parties hereto or
their respective successors in interest. This Lease shall not be effective or
binding on any party until fully executed by both parties hereto.
38. INABILITY TO PERFORM. This Lease and the obligations of the Tenant
hereunder shall not be affected or impaired because the Landlord is unable to
fulfill any of its obligations hereunder or is delayed in doing so, if such
inability or delay is caused by reason of strike, labor troubles, acts of God,
or any other cause beyond the reasonable control of the Landlord.
39. PARTIAL INVALIDITY. Any provision of this Lease which shall prove to
be invalid, void, or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision shall remain in full force and
effect.
40. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, whenever possible, be cumulative with all other remedies
at law or in equity.
41. CHOICE OF LAW. This Lease shall be governed by the laws of the State
of California.
42. RENEWAL OPTION. Tenant is herewith given an option to renew this Lease
for one additional 5 yr. term ___ under the same general terms and conditions
provided that Tenant gives Landlord written notice of his intent to renew prior
to January 1, 1992.
43. EMPLOYEE PARKING. Tenant and Tenant's employees shall park in such
parking spaces as Landlord shall from time to time designate.
44. LIGHTING. Tenant agrees to keep window lights and any exterior lights
illuminated during such hours as the shopping center Association or Landlord
shall from time to time designate.
45. REAL PROPERTY TAXES. In the event of any increase in taxes or
governmental impositions levied against the real property of which the demised
Premises are a part, the rental shall be increased to cover Tenant's share of
such increase based on his proportionate occupancy of the total square footage
of the building. Example: If Tenant occupies a one thousand square foot portion
of a two thousand square foot building and taxes assessed to this building go
up $120.00 July first of next year, then Tenant's monthly rental payments shall
be increased at the time by five dollars each month to cover his proportionate
share (1/2 or $60.00 per year) and this same procedure shall occur under any
tax increase.
46. MISCELLANEOUS COSTS. The parking lots shall be maintained at all times
by Landlord who shall also maintain the landscaping and see that the sidewalks
and common areas of the shopping center are kept neat and orderly. Tenant shall
pay to Landlord a proportionate share of said maintenance costs as well as the
shopping center's costs of public liability and fire insurance for the center
areas. Tenant's share shall be determined by dividing the aforementioned costs
by Tenant's percentile space occupancy of the center. Example: If Tenant
occupies ten percent of the gross leaseable area of the shopping center and the
costs are $1,000.00 during the first year of his occupancy, within thirty days
after billing by Landlord he shall pay ten percent of said cost or $100.00. In
no event shall the cost to Tenant in the first two years of this Lease exceed
$3,900.00 yr. Common area charges may be billed at any time convenient to
Landlord and shall be paid to Landlord by Tenant within thirty days of such
billing. Tenant is responsible for one parking lot light and will maintain same
per lease paragraph 44.
-7-
<PAGE> 11
47. Landlord shall maintain roof and structural elements of premises'
exterior walls.
IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the
day and year first above written.
"LANDLORD" "TENANT"
/s/ [SIG] Western Sierra National Bank
- ---------------------------- ----------------------------
By /s/ DUVAL E. PHILLIPS
--------------------------
-8-
<PAGE> 1
EXHIBIT 10.2
Severance benefits agreement for Gary Gall.
AGREEMENT
This Agreement ("Agreement") is made and entered into as of the 4th day of
December, 1997 between Western Sierra National Bank ("Bank"), and Gary D. Gall
(hereinafter referred to as "Executive").
WITNESSETH:
WHEREAS, Bank desires to provide Executive with severance compensation in the
event there is a change in control of Bank, and Executive desires severance
compensation in the event there is a change in control of Bank.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
conditions herein contained, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. SEVERANCE PAYMENT
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of Bank. Notwithstanding the foregoing, in the event proceedings for
liquidation of Bank are commenced by regulatory authorities, this Agreement and
all rights and benefits hereunder shall terminate.
In the event of (i) any merger or consolidation where Bank is (A) not the
surviving or resulting corporation or (B) the surviving corporation and the
shareholders of Western Sierra Bancorp (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 Bank, or (iii) a sale
of the equity securities of 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"), this Agreement shall
continue and be in full force and effect. In the event of an Acquisition, if
Executive is not given a new employment agreement that is satisfactory to
Executive in Executive's sole discretion within 15 days prior to the date of
consummation of the Acquisition, then the Bank shall pay Executive a lump sum
amount in cash equal to the product of the number of months provided in the
table below that corresponds to amount of Employer's total assets as of the
month-end immediately prior to the
22
<PAGE> 2
consummation of the Acquisition times the Executive's monthly base salary at the
time immediately prior to the time of consummation of the Acquisition.
<TABLE>
<CAPTION>
Total Assets of Employer Number of
in Millions of Dollars Months
------------------------ ---------
<S> <C>
150 or less 12
150+ to 200 16
200+ to 250 20
250 or more 24
</TABLE>
Such lump sum payment shall be paid within fifteen (15) days of the date
Executive's determination that new employment agreement is not satisfactory to
Executive or just prior to the time of consummation of the Acquisition if no new
employment agreement was offered by the resulting corporation at least 15 days
prior to time of consummation of the Acquisition. The lump sum payment shall be
considered to be in full and complete satisfaction of any and all rights which
Executive may enjoy other than (i) rights under the Executive's salary
continuation agreement and (ii) rights, if any, to exercise any of the stock
options vested prior to such termination.
2. TERM OF AGREEMENT
This Agreement shall be for a term of five (5) years from the date first above
stated ("Termination Date"). Such Termination Date may be amended or extended by
written agreement of the parties. This Agreement shall apply to any Acquisition
that is (i) consummated prior to the Termination Date provided that Executive is
employed by Bank at the date of public announcement of the Acquisition or (ii)
consummated at any time within one (1) year after the Termination Date, in the
event Executive's employment is terminated without cause by Bank prior to the
Termination Date and such termination is within twelve (12) months prior to the
date of consummation of an Acquisition that was announced within six (6) months
before or after the date of Executive's termination of employment with Bank.
3. APPLICABLE LAW
This Agreement is made and entered into in the State of California and the laws
of the State of California shall govern the validity and interpretation hereof,
and the performance of the parties hereto and their respective duties and
obligations hereunder, except to the extent that the provisions of federal law
are mandatorily applicable.
23
<PAGE> 3
4. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties and it supersedes
any and all other agreements, either oral or in writing, between Executive and
Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, but only by an agreement in writing signed by Bank
and Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
WESTERN SIERRA NATIONAL BANK
By: /s/Joseph A. Surra
-----------------------------------
Joseph A. Surra, Chairman of the Board
EXECUTIVE
/s/ Gary D. Gall
-----------------------------------
Gary D. Gall, President and CEO
24
<PAGE> 1
EXHIBIT 10.3
Severance benefits agreement for Stephanie Marsh
SEVERANCE COMPENSATION AGREEMENT
This Agreement ("Agreement") is made and entered into as of the 4th day of
December, 1997 between Western Sierra National Bank ("Bank"), and Stephanie M.
Marsh (hereinafter referred to as "Executive").
WITNESSETH:
WHEREAS, Bank desires to provide Executive with severance compensation in the
event there is a change in control of Bank, and Executive desires severance
compensation in the event there is a change in control of Bank.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
conditions herein contained, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. SEVERANCE PAYMENT
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of Bank. Notwithstanding the foregoing, in the event proceedings for
liquidation of Bank are commenced by regulatory authorities, this Agreement and
all rights and benefits hereunder shall terminate.
In the event of (i) any merger or consolidation where Bank is (A) not the
surviving or resulting corporation or (B) the surviving corporation and the
shareholders of Western Sierra Bancorp (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 Bank, or (iii) a sale
of the equity securities of 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"), this Agreement shall
continue and be in full force and effect. In the event of an Acquisition, if (i)
Executive is not retained by the resulting corporation for the period of time
equal to the number of months provided in the table below that corresponds to
amount of Employer's total assets as of the month-end immediately prior to the
consummation of the Acquisition from the time of consummation of the Acquisition
in a position comparable to that of the highest level senior vice president of
the resulting corporation or a position accepted by Executive or (ii) the
resulting corporation reduces Executive's base salary from
25
<PAGE> 2
Executive's base salary at the time immediately prior to the Acquisition at any
time within the period of time equal to the number of months provided in the
table below that corresponds to amount of Employer's total assets as of the
month-end immediately prior to the consummation of the Acquisition after the
time of consummation of the Acquisition, then the resulting corporation shall
pay Executive a lump sum amount in cash equal to the product of the number of
months provided in the table below that corresponds to amount of Employer's
total assets as of the month-end immediately prior to the consummation of the
Acquisition times the Executive's monthly base salary at the time immediately
prior to the time of consummation of the Acquisition.
<TABLE>
<CAPTION>
Total Assets of Employer Number of
in Millions of Dollars Months
------------------------ ---------
<S> <C>
150 or less 12
150+ to 200 16
200+ to 250 20
250 or more 24
</TABLE>
Such lump sum payment shall be paid within ten (10) days of the date Executive's
employment is terminated by the resulting corporation or Executive leaves
voluntarily because of (i) a change in Executive's position with the resulting
corporation such that Executive is no longer in a position comparable to that of
the highest level senior vice president of the resulting corporation or a
position accepted by Executive or (ii) a reduction in Executive's base salary at
the closest time prior to the Acquisition. The lump sum payment shall be
considered to be in full and complete satisfaction of any and all rights which
Executive may enjoy other than (i) rights under the Executive's salary
continuation agreement and (ii) rights, if any, to exercise any of the stock
options vested prior to such termination.
2. TERM OF AGREEMENT
This Agreement shall be for a term of five (5) years from the date first above
stated ("Termination Date"). Such Termination Date may be amended or extended by
written agreement of the parties. This Agreement shall apply to any Acquisition
that is (i) consummated prior to the Termination Date provided that Executive is
employed by Bank at the date of public announcement of the Acquisition or (ii)
consummated at any time within one (1) year after the Termination Date, in the
event Executive's employment is terminated without cause by Bank prior to the
Termination Date and such termination is within twelve (12) months prior to the
date of consummation of an Acquisition that
26
<PAGE> 3
was announced within six (6) months before or after the date of Executive's
termination of employment with Bank.
3. APPLICABLE LAW
This Agreement is made and entered into in the State of California and the laws
of the State of California shall govern the validity and interpretation hereof,
and the performance of the parties hereto and their respective duties and
obligations hereunder, except to the extent that the provisions of federal law
are mandatorily applicable.
4. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties and it supersedes
any and all other agreements, either oral or in writing, between Executive and
Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, but only by an agreement in writing signed by Bank
and Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
WESTERN SIERRA NATIONAL BANK
By: /s/Joseph A. Surra
----------------------------------------------------
Joseph A. Surra, Chairman of the Board
EXECUTIVE
/s/ Stephanie M. Marsh
----------------------------------------------------
Stephanie M. Marsh, SVP/Chief Administrative Officer
27
<PAGE> 1
EXHIBIT 10.4
AMENDMENT
EXECUTIVE SALARY CONTINUATION PLAN
GARY D. GALL
DATED JANUARY 9,1995
Page 6-Paragraph 7 (Verbiage in italics is an addition to paragraph seven (7)
PAYMENT OF BENEFITS SUBJECT TO EXECUTIVE NOT COMPETING WITH THE BANK.
Notwithstanding anything to the contrary, the benefits payable to Executive
pursuant to this Agreement are conditioned upon the Executive 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 Employer,
for a period of three years after Executive terminates employment with Employer.
Parties understand that should headquarters be re-located this clause can be
re-negotiated. In the event executive breaches such condition, Employer shall
immediately terminate any and all remaining payments for benefits due to
Executive or Executive's beneficiaries pursuant to this Agreement, and the Bank
shall have no liability to Executive or Executive's beneficiaries for any
benefits or payments pursuant to this Agreement, EXCEPT IN THE EVENT OF AN
ACQUISITION WHERE WESTERN SIERRA BANK IS NOT THE SURVIVING INSTITUTION, IN WHICH
CASE PARAGRAPH (7) DOES NOT APPLY.
IN WITNESS WHEREOF, the Employer and the Executive have executed this amendment
on the date below in the City of Cameron Park, California.
THE EMPLOYER: THE EXECUTIVE:
WESTERN SIERRA NATIONAL BANK
A CALIFORNIA CORPORATION
By: /s/ JOSEPH A. SURRA By: /s/ GARY D. GALL
--------------------------------- --------------------------------
Joseph A. Surra Gary D. Gall
Chairman of the Board President/CEO
Date: NOVEMBER 18, 1997 Date: NOVEMBER 18, 1997
------------------------------ --------------------------------
10
<PAGE> 2
EXECUTIVE SALARY CONTINUATION AGREEMENT
This agreement is made and entered into this 9th day of January, 1995, by and
between Western Sierra National Bank, a corporation organized under the laws of
the State of California (the "Employer"), and Gary D. Gall, an individual
residing in the State of California (hereinafter referred to as the
"Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer and is serving as its
President and Chief Executive Officer;
WHEREAS, the Executive's experience and knowledge of the affairs of the Employer
and the banking industry are extensive and valuable;
WHEREAS, it is deemed to be in the best interest of the Employer to provide the
Executive with certain salary continuation benefits, on the terms and conditions
set forth herein, in order to reasonably induce the Executive to remain in the
Employer's employment; and
WHEREAS, the Executive and the Employer wish to specify in writing the terms and
conditions upon which this additional compensatory incentive will be provided to
the Executive, or to the Executive's spouse or the Executive's designated
beneficiaries, as the case may be;
NOW, THEREFORE, in consideration of the services to be performed in the future,
as well as the mutual promises and covenants contained herein, the Executive and
the Employer agree as follows:
AGREEMENT
1. TERMS AND DEFINITIONS.
1.1. ADMINISTRATOR. The Employer shall be the "Administrator" and, solely
for the purpose of ERISA, the " fiduciary" of this Agreement where a
fiduciary is required by ERISA.
1.2. ANNUAL BENEFIT. The term "Annual Benefit" shall mean an annual sum
of $75,000 multiplied by the applicable Percentage (defined below)
and then reduced to the extent required: (i) under the other
provisions of this Agreement; (ii) by reason of the lawful order of
any regulatory agency or body having jurisdiction over the Employer;
and (iii) in order for the Employer to properly comply with any and
all applicable state and federal laws, including but not limited to,
income, employment and disability income tax laws (e.g., FICA, FUTA,
SDI).
<PAGE> 3
1.3. APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean
that percentage listed on Schedule "A" attached hereto which is
adjacent to the number of complete years (with a "year" being the
performance or personal services for or on behalf of the Employer as
an employee for a period of 365 days) which have elapsed starting
from the Effective Date of this Agreement and ending on the date the
Executive's employment is terminated for purposes of this Agreement.
In the event that Executive's employment with Employer is terminated
other than by reason of death, disability, Retirement or voluntary
termination on the part of the Executive, Executive shall be deemed
for purposes of determining the number of complete years to have
completed a year of service in its entirety for any partial year of
service after the last anniversary date of the Effective Date during
which the Executive's employment is terminated, provided that in no
event shall Executive be deemed to have completed a year of service
for any partial year if the partial year occurs prior to the first
anniversary date of this Agreement.
1.4. BENEFICIARY. The term "beneficiary or "designated beneficiary" shall
mean the person or persons whom the Executive shall designate in a
valid Beneficiary Designation, a copy of which is attached hereto as
Exhibit "B", to receive the benefits provided hereunder. A
Beneficiary Designation shall be valid only if it is in the form
attached hereto and made a part hereof and is received by the
Administrator prior to the Executive's death.
1.5. THE CODE. The Code shall mean the Internal Revenue Code of 1986, as
amended ("the Code").
1.6. DISABILITY/DISABLED. The term "Disability or "Disabled" shall have
the same meaning given such term in the principal disability
insurance policy covering the Executive, which is incorporated
herein by reference. In the event the Executive is not covered by a
disability policy containing a definition of "Disability" or
"Disabled", the these terms shall mean an illness or incapacity
which having continued for a period of one hundred eighty (180)
consecutive days, prevents the Executive from adequately performing
the Executive's regular employment duties. The determination of
whether the Executive is Disabled shall be made by an independent
physician selected by mutual agreement of the parties.
1.7. EARLY RETIREMENT DATE. The term "Early Retirement Date" shall mean
the Retirement (as defined below) of the Executive on a date which
occurs after the date upon which the Executive has, measured in the
aggregate and from the date of this Agreement to the
2
<PAGE> 4
date of the Executive's Retirement, been employed by the Employer
for no less than fifteen (15) years.
1.8. EFFECTIVE DATE. The term "Effective Date" shall mean the date upon
which this Agreement was entered into by the parties, as first
written above.
1.9. ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
1.10. PLAN YEAR. The term "Plan Year" shall mean the Employer's calendar
year.
1.11. RETIREMENT. The term "Retirement", "Retires" or "Retire" shall refer
to the date which the Executive acknowledges in writing to Employer
to be the last day he will provide any significant personal
services, whether as an employee or independent consultant, or
contractor to Employer or to, for, or on behalf of, any other
business entity banking or other financial services of any kind. For
purposes of this Agreement, the phrase "significant personal
service" shall mean more than ten (10) hours of personal services
rendered to one or more individuals or entities in any thirty (30)
day period.
1.12. SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person,
if any who shall be legally married to the Executive on the date of
the Executive's death.
2. SCOPE, PURPOSE AND EFFECT.
2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to
provide the Executive with an additional incentive to remain in the
employ of the Employer, this Agreement shall not be deemed to
constitute a contract of employment between the Executive and the
Employer nor shall any provision of this Agreement restrict or
expand the right of the Employer to terminate the Executive's
employment. This Agreement shall have no impact or effect upon any
separate written Employment Agreement which the Executive may have
with the Employer, it being the parties' intention and agreement
that unless this Agreement is specifically referenced in said
Employment Agreement (or any modification thereto) , this Agreement
(and Employer's obligations hereunder) shall stand separate and
apart and shall have no effect upon, nor be affected by, the terms
and provisions of said Employment Agreement.
2.2. FRINGE BENEFIT. The benefits provided by this Agreement are granted
by the Employer as a fringe benefit to the Executive and are not a
part of any salary reduction plan or any arrangement deferring a
bonus or a salary increase. The Executive has no
3
<PAGE> 5
option to take any current payments or bonus in lieu of the benefits
provided by this Agreement.
3. PAYMENTS UPON OR AFTER RETIREMENT.
3.1. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the
continuous employment of the employer until attaining sixty-five
(65) years of age, the Executive shall be entitled to be paid the
Annual Benefit, as defined above, for a period of fifteen (15)
years, in One Hundred Eighty (180) equal monthly installments, with
each installment to be paid on the first day of each month,
beginning with the month following the month in which the Executive
Retires or upon such later date as may be mutually agreed upon by
the Executive and the Employer in advance of said Retirement date.
At the Employer's sole and absolute discretion, the Employer may
increase the Annual Benefit as and when the Employer determines the
same to appropriate in order to reflect a substantial change in the
cost of living. Notwithstanding anything contained herein to the
contrary, the Employer shall have no obligation hereunder to make
such cost-of-living adjustment.
3.2. PAYMENTS IN THE EVENT OF DEATH AFTER RETIREMENT. The Employer agrees
that if the Executive Retires, but shall die before receiving all of
the One Hundred Eighty (180) monthly payments described in paragraph
3.1 above, the Employer will make a lump sum payment equal to
aggregate sum of the then present value of each of the remaining
monthly payments to Executive's designated beneficiary within 60
days of the Executive's death. The discount rate used to determine
the present value of each remaining monthly payment shall be equal
to eight percent (8%) . If a valid Beneficiary Designation is not in
place, then the lump sum amount due to the Executive under this
paragraph shall be paid to the Executive's Surviving Spouse. If
Executive leaves no Surviving Spouse, the lump sum amount due to
Executive under this paragraph shall be paid to the duly qualified
personal representative, executor, or administrator of the
Executives estate.
4. PAYMENTS IN THE EVENT OF DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT.
4.1. PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. In the event the
Executive should die while actively employed by the Employer at any
time after the Effective Date of this Agreement, but prior to
attaining fifty-eight (58) years of age, or if Executive chooses to
work after attaining fifty-eight (58) years of age, but dies before
Retirement, the Employer agrees to pay to Executive's designated
4
<PAGE> 6
beneficiary within 60 days of Executive's death a lump sum payment
equal to the aggregate sum of) the then present value of the Annual
Benefit it were it to be paid in 180 monthly payments with the first
payment beginning 30 days after Executive's death. The discount rate
used to determine the then present value of each monthly payment
shall be equal to eight percent (8%). The Applicable Percentage for
purposes of computing the Annual Benefit shall be determined by the
number of years of service including years of service with Employer
prior to execution of this Agreement, at the time of Executive's
death, as set forth on Schedule "A". If a valid Beneficiary
Designation is not in place, then the lump sum amount due to the
Executive under this paragraph shall be paid to Executive's
Surviving Spouse. If Executive leaves no Surviving Spouse, the lump
sum amount due to Executive under this paragraph shall be paid to
the duly qualified personal representative, executor or
administrator for the Executives estate.
4.2. PAYMENTS IN THE EVENT OF DISABILITY PRIOR TO RETIREMENT. In the
event the Executive becomes Disabled while actively employed by the
Employer at any time after the date of this Agreement but prior to
Retirement, the Executive shall: (i) continue to be treated during
such period of Disability as being gainfully employed by the
Employer but shall not add applicable years of service for the
purpose of determining the Annual Benefit; and (ii) be entitled to
be paid the Annual Benefit, as set forth on Schedule "A", for
fifteen (15) years, as determined by the applicable years of
service at the time of disability, as defined above, in One Hundred
Eighty (180) equal monthly installments, with each installment to be
paid on the first day of each month, beginning with the month
following the earlier of (1) the month in which the Executive
attains sixty-five (65) years of age; or (2) the date upon which the
Executive is no longer entitled to receive Disability benefits under
the Executive's principal Disability insurance policy and does not,
at such time, return to and thereafter fulfill the responsibilities
associated with the employment position held with the Employer prior
to becoming Disabled by reason of such Disability continuing.
Notwithstanding the forgoing, in the event Executive should die
while actively or gainfully employed by the Employer at any time
after the Effective Date of this Agreement and prior to Retirement,
the payments provided in Paragraph 4.1 shall be paid in lieu of the
payments provided in this Paragraph 4.2, provided that Executive or
his legal representative shall have not elected to take the benefits
provided by Paragraph 5, and payments provided for in this Paragraph
4.2 have not commenced.
5
<PAGE> 7
5. PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED OTHER THAN DEATH,
DISABILITY OR RETIREMENT. As indicated in Paragraph 2 above, the Employer
reserves the right to terminate the Executive's employment, with or
without cause but subject to any written employment agreement which may
then exist, at any time prior to the Executive's Retirement. In the event
that the employment of the Executive shall be terminated, for any reason
including voluntary termination by the Executive, termination with or
without cause by the Employer, but other than by reason of Disability
except as provided in Paragraph 4.2, death or Retirement, the Executive or
his legal representative shall be entitled to be paid the Annual Benefit
for a period of fifteen (15) years, as determined by the applicable years
of service at the time of the Executive's termination of employment with
the Employer, in One Hundred Eighty (180) equal monthly installments,
with each beginning with the month following the month in which the
Executive attains sixty-five (65) years of age, or, if earlier, beginning
with the month following the Executive's death.
6. PAYMENTS IN THE EVENT THE EXECUTIVE ELECTS EARLY RETIREMENT. The Executive
shall have the right to elect to receive the Annual benefit prior to
attaining sixty-five (65) years of age if he chooses to Retire on a date
which constitutes an Early Retirement Date as defined in subparagraph 1.7
above. In the event the Executive elects to Retire on a date which
constitutes an Early Retirement Date, the Executive shall be entitled to
be paid the Annual Benefit for a period of fifteen (15)years, as set forth
on Schedule "A" and determined by the applicable years of service at the
time of early retirement, as defined above, in One Hundred Eighty (180)
equal monthly installments, with each installment to be paid on the first
day of each month, beginning with the month following the month in which
the Early Retirement Date occurs.
7. PAYMENT OF BENEFITS SUBJECT TO EXECUTIVE NOT COMPETING WITH THE BANK.
Notwithstanding anything to the contrary, the benefits payable to
Executive pursuant to this Agreement are conditioned upon the Executive
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 Employer, excluding the City of Sacramento for a period of
three years after Executive terminates employment with Employer. Parties
understand that should headquarters be re-located this clause can be
re-negotiated. In the event Executive breaches such condition, Employer
shall immediately terminate any and all remaining payments for benefits
due to Executive or Executive's beneficiaries pursuant to this Agreement,
and the Bank shall have no liability to Executive or Executive's
beneficiaries for any benefits or payments pursuant to this Agreement.
8. NO OWNERSHIP RIGHTS TO EMPLOYER'S ASSETS. The Employer reserves the right
to determine, in its sole and absolute discretion, whether, to what extent
and by what method, if any, to provide for the payment of the amounts
which may be payable to the Executive, the Executive's spouse or the
Executive's beneficiaries under the terms of this Agreement
6
<PAGE> 8
("Benefits"). The rights of the Executive or any beneficiary of the
Executive under this Agreement shall be solely those of an unsecured
creditor of the Employer.
In the event that the Employer, in its sole and absolute discretion,
elects to acquire an insurance policy, an annuity or any other asset to
recoup the costs or any portion thereof of the Benefits, then such
insurance policy, annuity or other asset shall not be deemed to be held
under any trust for the benefit of the Executive or his or her
beneficiaries or to be security for the performance of the obligations of
the Employer under this Agreement, but shall be, and remain, a general
unpledged, unrestricted asset of the Employer. The Executive and his or
her beneficiaries shall have no rights whatsoever with respect to, or any
claim against, any such insurance policy, annuity or other asset. In
connection with Employer electing to acquire any such insurance policy or
annuity, the Executive agrees to cooperate to facilitate such acquisition,
and pursuant thereto shall execute such documents and undergo such medical
examinations or tests as Employer may reasonably request.
9. CLAIMS PROCEDURE. The Employer shall, but only to the extent necessary to
comply with ERISA, be designated as the named fiduciary under this
Agreement and shall have authority to control and manage the operation and
administration of this Agreement. Consistent therewith, the Employer shall
make all determinations as to the rights to the benefits under this
Agreement. Any decision by the Employer denying a claim by the Executive,
the Executive's spouse, or the Executive's beneficiary for benefits under
this Agreement shall be stated in writing and delivered or mailed, via
registered or certified mail, to the Executive, the Executive's spouse, or
the Executive's beneficiary, as the case may be. Such decision shall set
forth the specific reasons for the denial of a claim. In addition, the
Employer shall provide the Executive, the Executive's spouse, or the
Executive's beneficiary with a reasonable opportunity for a full and fair
review of the decision denying such claim.
10. STATUS OF AN UNSECURED GENERAL CREDITOR. Notwithstanding anything
contained herein to the contrary: (i) neither the Executive, the
Executive's spouse and the Executive's beneficiary shall have any legal or
equitable rights, interests or claims in or to any specific property or
assets of the Employer; (ii) none of the Employer's assets shall be held
in or under any trust for the benefit or the Executive, the Executive's
spouse, or the Executive's beneficiary or held in any way as security for
the fulfillment of the obligations of the Employer under this Agreement;
(iii) all of the Employer's assets shall be and remain the general
unpledged and unrestricted assets of the Employer; (iv) the Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future; and (v) the Executive,
the Executive's spouse and the Executive's beneficiary shall be unsecured
general creditors
7
<PAGE> 9
with respect to any benefits which may be payable under the terms of this
Agreement.
11. COVENANT NOT TO INTERFERE. The Executive agrees not to take any action
which prevents the Employer from collecting the proceeds of any life
insurance policy which the Employer may happen to own at the time of the
Executive's death and of which the Employer is designated beneficiary.
12. MISCELLANEOUS.
12.1. OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL. The Executive
acknowledges that he has been afforded the opportunity to consult
with independent counsel of his choosing regarding both the benefits
granted to him under the terms of this Agreement and the terms and
conditions which may affect the Executive's right to these benefits.
The Executive further acknowledges that he has read, understands and
consents to all of the terms and conditions of this Agreement, and
that he enters into this Agreement with a full understanding of its
terms and conditions.
12.2. ARBITRATION OF DISPUTES. All Claims, disputes and other matters in
question arising out of or relating to this Agreement or the breach
or interpretation thereof, other than those matters which are to be
determined by the Employer in its sole and absolute discretion,
shall be resolved by binding arbitration before a representative
member, selected by the mutual agreement of the parties, of the
Judicial Arbitration and Mediation Services, Inc. ("JAMS"),
presently located at 111 Pine Street, Suite 710, in San Francisco,
California. In the event JAMS is unable or unwilling to conduct the
arbitration provided for under the terms of this Paragraph, or has
discontinued its business, the parties agree that a representative
member, selected by the mutual agreement of the parties, of the
American Arbitration Association ("AAA"), presently located at 417
Montgomery Street, in San Francisco, California, shall conduct the
binding arbitration referred to in this Paragraph. Notice of the
demand for arbitration shall be filed with the other party to this
Agreement and with JAMS (or AAA, if necessary). In no event shall
the demand for arbitration be made after the date when institution
of legal or equitable proceedings based on such claim, dispute, or
other matter in question would be barred by the applicable statute
of limitations. The arbitration shall be subject to such rules of
procedure used or established by JAMS, or if there are none, the
rules of procedures used or established by AAA. Any award rendered
by JAMS or AAA shall be final and binding upon the parties, and as
applicable, their respective heirs, beneficiaries, legal
representatives, agents, successors and assigns, and may be
8
<PAGE> 10
entered in any court having jurisdiction thereof. The obligation of
the parties to arbitrate pursuant to this clause shall be
specifically enforceable in accordance with, and shall be conducted
consistently with, the provisions of Title 9 of Part 3 of the
California Code of Civil Procedure. Any arbitration hereunder shall
be conducted in California, unless otherwise agreed by the parties.
12.3. ATTORNEYS' FEES. In the event of any arbitration or litigation
concerning any controversy, claim or dispute between the parties
hereto, arising out of or relating to this Agreement or the breach
hereof, or the interpretation hereof, the prevailing party shall be
entitled to recover from the losing party reasonable expenses,
attorneys' fees and costs collection of any judgement or award
rendered therein. The "prevailing party" means the party determined
by the arbitrator(s) or court, as the case may be, to have most
nearly prevailed, even if such party did not prevail in all matters,
not necessarily the one in whose favor a judgement is rendered.
12.4. NOTICE. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly
given, if by personal delivery, upon the date received by the party
or its authorized representative; if by facsimile, upon transmission
of a telephone number previously provided by the party to whom the
facsimile is transmitted as reflected in the records of the party
transmitting the facsimile and upon reasonable confirmation of such
transmission; and if by mail on the third day after mailing via U.S.
first class mail, registered or certified, postage prepaid and
return receipt requested, and addresses to the party at the address
given below for the receipt of notices, or such changed address as
may be requested in writing by a party.
If to the Employer:
Western Sierra National Bank
4011 Plaza Goldorado Circle
Cameron Park, California 95682
If to the Executive:
Gary D. Gall
2520 Greens Landing Ct.
Cameron Park, CA 95682
12.5. ASSIGNMENT. Neither the Executive, the Executive's spouse, nor any
other beneficiary under this Agreement shall have any power or right
to transfer, assign,
9
<PAGE> 11
hypothecate, modify or otherwise encumber any part or all of the
amounts payable hereunder, nor, prior to payment in accordance with
the terms of this Agreement, shall any portion of such amounts be:
(i) subject to seizure by any creditor of any such beneficiary, be
proceeding at law or in equity, for the payment of any debt,
judgements, alimony or separate maintenance obligations which may be
owned by the Executive, the Executive's spouse, or any designated
beneficiary; or (ii) transferable by operation of law in the event
of bankruptcy, insolvency or otherwise. Any such attempted
assignment or transfer shall thereupon have no further liability
hereunder.
12.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be
binding upon and inure to the benefit of the Executive and the
Employer and, as applicable, their respective heirs, beneficiaries,
legal representatives, agents, successors and assigns. Accordingly,
the Employer shall not merge or consolidate into or with another
corporation, or reorganize or sell substantially all of its assets
to another corporation, firm, or person, unless and until such
succeeding or continuing corporation, firm or person agrees to
assume and discharge the obligations of the Employer under this
Agreement. Upon the occurrence of such event, the term "Employer" as
used in this Agreement shall be deemed to refer to such surviving or
successor firm, person, entity or corporation.
12.7 NONWAIVER. The failure of either party to enforce at any time or for
any period of time any one or more of the terms or conditions of
this Agreement shall not be a waiver of such term(s) or condition(s)
or of that party's right thereafter to enforce each and every term
and condition of this Agreement.
12.8 PARTIAL INVALIDITY. If any term, provision, covenant or condition of
this Agreement is determined by an arbitrator or a court, as the
case may be, to be invalid, void, or unenforceable, such
determination shall not render any other term, provision, covenant
or condition invalid, void, or unenforceable, and the Agreement
shall remain in full force and effect notwithstanding such partial
invalidity.
12.9. ENTIRE AMOUNT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with
respect to the subject matter of this Agreement and contains all of
the covenants and agreements between the parties with respect
thereto. Each party to this Agreement acknowledges that no other
representations, inducements, promises, or arrangements, oral or
otherwise, have been made by any
10
<PAGE> 12
party, or anyone acting on behalf of any party, which are not set
forth herein, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding on
either party.
12.10. MODIFICATIONS. Any modification of this Agreement shall be
effective only if it is in writing and signed by each party or
such party's authorized representative.
12.11. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
are included solely for the convenience of the parties and shall
not affect or be used in connection with the interpretation of
this Agreement.
12.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction
will be applied against any person.
12.13. GOVERNING LAW. The laws of the State of California, other than
those laws denominated choice of law rules, and, where applicable,
the rules and regulations of: (i) the California Superintendent of
Banks; (ii) the Board of Governors of the Federal Reserve System;
(iii) the Federal Deposit Insurance Corporation; or (iv) any other
regulatory agency or governmental authority having jurisdiction
over the Employer, shall govern the validity, interpretation,
construction and effect of this Agreement.
IN WITNESS WHEREOF, the Employer and the Executive have executed this Agreement
on the date first above-written in the City of Cameron Park, California.
THE EMPLOYER: THE EXECUTIVE:
WESTERN SIERRA NATIONAL BANK
a California Corporation
By: /s/ JOSEPH A. SURRA By: /s/ GARY D. GALL
-------------------------------- ----------------------------------
Joseph A. Surra Gary D. Gall
Chairman of Board President/CEO
11
<PAGE> 13
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
YEARS WHICH HAVE ELAPSED APPLICABLE PERCENTAGE
- ------------------------ ---------------------
<S> <C>
1 ...................................................... 5.00%
2 ...................................................... 10.00%
3 ...................................................... 15.00%
4 ...................................................... 20.00%
5 ...................................................... 25.00%
6 ...................................................... 30.00%
7 ...................................................... 35.00%
8 ...................................................... 40.00%
9 ...................................................... 45.00%
10 ...................................................... 50.00%
11 ...................................................... 55.00%
12 ...................................................... 60.00%
13 ...................................................... 65.00%
14 ...................................................... 70.00%
15 ...................................................... 75.00%
16 ...................................................... 80.00%
17 ...................................................... 85.00%
18 ...................................................... 88.00%
19 ...................................................... 91.00%
20 ...................................................... 94.00%
21 ...................................................... 97.00%
22 ...................................................... 100.00%
</TABLE>
12
<PAGE> 14
SCHEDULE B
BENEFICIARY DESIGNATION
TO: ADMINISTRATOR OF THE Gary D. Gall
EXECUTIVE SALARY CONTINUATION AGREEMENT
Pursuant to the provisions of my Executive Salary Continuation Agreement with
Gary D. Gall permitting the designation of a beneficiary or beneficiaries by a
participant, I hereby designate the following persons and entities as primary
and secondary beneficiaries of any benefit under said Agreement payable by
reason of my death:
PRIMARY BENEFICIARY:
Nancy C. Gall 2520 Greens Landing Ct. Cameron PK. Ca Spouse
- ------------- -------------------------------------- ------------
Name Address Relationship
SECONDARY (CONTINGENT) BENEFICIARY:
14180 E Hywy 120 Sid Gall Trustee under
Sid Gall Ripon, CA. 95366 Will Dated 6/24/94
- ------------ ---------------- ----------------------
Name Address Relationship
THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED.
ALL PRIOR DESIGNATION ... BENEFICIARIES AND SECONDARY BENEFICIARIES ...
The Administrator shall pay all sums payable under the Agreement by reason of my
death to the Primary Beneficiary, if he or she survives me, and if no Primary
Beneficiary shall survive me then to the Secondary Beneficiary, and if no named
beneficiary survives me, the Administrator shall pay all amounts in accordance
with the terms of my Executive Salary Continuation Agreement. In the event that
a named beneficiary survives me and dies prior to receiving the entire benefit
payable under said Agreement then and in that event, the remaining unpaid
benefit payable according to the terms of my Executive Salary Continuation
Agreement shall be payable to the personal representatives of the estate of said
beneficiary who survived me but died prior to receiving the total benefit
provided by my Executive Salary Continuation Agreement.
THE EXECUTIVE:
Date: 1/9, 1995 /s/ GARY D. GALL
----------------------------------------
Gary D. Gall, President/CEO
13
<PAGE> 15
CONSENT OF THE EXECUTIVE'S SPOUSE
TO THE ABOVE BENEFICIARY DESIGNATION:
I, Nancy C. Gall , being the spouse of Gary D. Gall, after being afforded the
opportunity to consult with independent counsel of my choosing, do hereby
acknowledge that I have read, agree and consent to the foregoing Beneficiary
Designation which relates to the Executive Salary Continuation Agreement entered
into by my spouse on January 9, 1995. I understand that the above Beneficiary
Designation may affect certain rights which I may have in the benefits provided
for under the terms of the Executive Salary Continuation Agreement and in which
I may have marital property Interest.
Dated: February 28, 1995 /s/ NANCY C. GALL
-----------------------------------
Nancy C. Gall, Spouse
14
<PAGE> 1
EXHIBIT 10.5
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF THE BANK'S
STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS: THE BANKS 1989 STOCK OPTION PLAN
SHALL HAVE FIRST BEEN APPROVED BY THE SHAREHOLDERS OF THE BANK HOLDING NOT LESS
THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK.
WESTERN SIERRA NATIONAL BANK
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated the 11th day of April, 1995, by and between
Western Sierra National Bank, a California corporation (the "Bank"), and
("Optionee).
WHEREAS, pursuant to the 1989 Stock Option Plan of the Bank (the
"Plan"). The Board of Directors of the Bank (or the Stock Option Committee, if
authorized by the Board of Directors) has authorized granting to Optionee a
stock Option to purchase all or any part of one thousand (1,000) authorized but
unissued shares of the Bank's common stock for cash at the price of Six Dollars
($6.00) per share, such Option to be for the term and upon the terms and
conditions hereinafter stated;
NOW THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Board of Directors
(or the Stock Option Committee) and pursuant to authorizations granted by all
appropriate regulatory and governmental agencies, the Bank hereby grants to
Optionee the Option to purchase, upon and subject to the terms and conditions of
the Plan, which is incorporated in full herein by this reference, all or any
part of one thousand (1,000) shares of the Bank's Common Stock (hereinafter
called "stock") at the price of Six Dollars ($6.00) per share, which price is
not less than one hundred percent (100%) of the fair market value of the stock
as of the date of action of the Board of Directors (or the Stock Option
Committee) granting this Option.
2. Exercisability. This Option shall be exercisable as to the granted
shares in whole or in part immediately. This Option shall remain exercisable as
to all of such shares until May 10, 2005 (but not after the expiration of ten
(10) years from the date this Option is granted) unless this Option has expired
or terminated earlier in accordance with the provisions hereof. Shares as to
which this Option becomes exercisable pursuant to the foregoing provision may be
purchased at any time prior to expiration of this Option.
3 . Exercise of Option. This Option may be exercised by written notice
delivered to the Bank stating the number of shares with respect to which this
Option is being exercised, together with cash in the
1
<PAGE> 2
amount of the purchase price of such shares. Not less than ten (10) shares may
be purchased at any one time unless the number purchased is the total number
which may be purchased under this Option and in no event may the Option be
exercised with respect to fractional shares. Upon exercise, Optionee shall make
appropriate arrangements and shall be responsible for the withholding of any
federal and state taxes then due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5
hereof, if Optionee shall cease to be employed by the Bank or a subsidiary
corporation for any reason other than Optionee's death or disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), this Option shall expire three (3) months thereafter. During the three
month period this Option shall be exercisable only as to those installments, if
any, which had accrued as of the date when Optionee ceased to be employed by the
Bank or the subsidiary corporation.
5. Termination of Employment for Cause. If Optionee's employment by the
Bank or a subsidiary corporation is terminated for cause, this Option shall
expire immediately, unless reinstated by the Board of Directors within thirty
(30) days of such termination by giving written notice of such reinstatement to
Optionee at his last known address. In the event of such reinstatement, Optionee
may exercise this Option only to such extent, for such time, and upon such terms
and conditions as if Optionee had ceased to be employed by the Bank or a
subsidiary corporation upon the date of such termination for a reason other than
cause or death. Termination for cause shall include termination for malfeasance
or gross misfeasance in the performance of duties or conviction of illegal
activity in connection therewith or any conduct detrimental to the interests of
the Bank or a subsidiary corporation and, in any event, the determination of the
Board of Directors with respect thereto shall be final and conclusive.
6. Nontransferability, Disability or Death of Optionee. This Option
shall not be transferable except by Will or by the laws of descent and
distribution and shall be exercisable during Optionee's lifetime only by
Optionee. If Optionee dies while employed by the Bank or a subsidiary
corporation, or during the three-month period referred to in Paragraph 4 hereof,
this Option shall expire one (1) year after the date of Optionee's death or on
the day specified in Paragraph 2 hereof, whichever is earlier. After Optionee's
death but before such expiration, the persons to whom Optionee's rights under
this Option shall have passed by Will or by the applicable laws of descent and
distribution or the executor or administrator of Optionee's estate shall have
the right to exercise this Option as to those shares for which installments had
accrued under Paragraph 2 hereof as of the date on which Optionee ceased to be
employed by the Bank or a subsidiary corporation.
If Optionee shall terminate employment because of disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), Optionee may exercise this Option to the
2
<PAGE> 3
extent he or she is entitled to do so at the date of termination, at any time
within 12 months of the date of termination, but in no event later than
expiration date in paragraph 2.
7. Employment. This Agreement shall not obligate the Bank or a
subsidiary corporation to employ Optionee for any period, nor shall it interfere
in any way with the right of the Bank or a subsidiary corporation to reduce
Optionee's compensation.
8. Privileges of Stock Ownership. Optionee shall have no rights as a
stockholder with respect to the Bank's stock subject to this Option until the
date of issuance of stock certificates to Optionee. Except as provided in
Section 13 of the Plan, no adjustment will be made for dividends or other rights
for which the record date is prior to the date such stock certificates are
issued.
9. Modification and Termination by Board of Directors. The rights of
Optionee are subject to modification and termination upon the occurrence of
certain events as provided in Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this Option, will notify the Bank not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of
this option shall be issued and delivered unless and until all applicable
requirements of federal law and of the Securities and Exchange Commission
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bank of
the same class are then listed shall have been complied with. Upon exercise of
any portion of this option, the person entitled to execute the same shall
execute the letter attached hereto as Exhibit "A". The Bank may require a letter
from counsel acceptable to the Bank that all federal and state securities laws
have been complied with, prior to the issuance of any shares under this option.
In addition, if the Optionee is an "affiliate" for purposes of the Securities
Act of 1933, there may be additional restrictions on the resale of stock, and
Optionee therefore agrees to ascertain what those restrictions are and to abide
by the restrictions and other applicable federal and state securities laws.
Furthermore, the Bank may, if it deems appropriate, issue stop transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bank deems appropriate.
12. Notices. Any notice to the Bank provided for in this Agreement shall
be addressed to it in care of its President or Chief Financial Officer at its
main office and any notice to Optionee shall be addressed to Optionee's address
on file with the Bank or a subsidiary corporation, or to such other address
3
<PAGE> 4
as either may designate to the other in writing. Any notice shall be deemed to
be duly given if and when enclosed in a properly sealed envelope and addressed
as stated above and deposited, postage prepaid, with the United States Postal
Service. In lieu of giving notice by mail as aforesaid, any written notice under
this Agreement may be given to Optionee in person, and to the Bank by personal
delivery to its President or Chief Financial Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE WESTERN SIERRA NATIONAL BANK
By /s/ GARY D. GALL By /s/ O. I. SCARIOT
------------------------------- -----------------------------------
GARY D. GALL O. I. SCARIOT, CORPORATE SECRETARY
By /s/ JOSEPH SURRA
-----------------------------------
JOSEPH SURRA, CHAIRMAN
DATE MAY 18, 1995
-----------------------------------
4
<PAGE> 1
EXHIBIT 10.6
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF THE BANK'S
STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS: THE BANKS 1989 STOCK OPTION PLAN
SHALL HAVE FIRST BEEN APPROVED BY THE SHAREHOLDERS OF THE BANK HOLDING NOT LESS
THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK.
WESTERN SIERRA NATIONAL BANK
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated the 14th day of November, 1996, by and between
Western Sierra National Bank, a California corporation (the "Bank"), and Gary D.
Gall ("Optionee");
WHEREAS, pursuant to the 1989 Stock Option Plan of the Bank (the
"Plan"), the Board of Directors of the Bank (or the Stock Option Committee, if
authorized by the Board of Directors) has authorized granting to Optionee a
stock Option to purchase all or any part of ten thousand (10,000) authorized
but unissued shares of the Bank's common stock for cash at the price of ten
Dollars ($10.00) per share, such Option to be for the term and upon the terms
and conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Board of Directors
(or the Stock Option Committee) and pursuant to authorizations granted by all
appropriate regulatory and governmental agencies, the Bank hereby grants to
Optionee the Option to purchase, upon and subject to the terms and conditions of
the Plan, which is incorporated in full herein by this reference, all or any
part of ten thousand (10,000) shares of the Bank's Common Stock (hereinafter
called "stock") at the price of ten Dollars ($10.00) per share, which price is
not less than one hundred percent
1
<PAGE> 2
(100%) of the fair market value of the stock as of the date of action of the
Board of Directors (or the Stock Option Committee) granting this Option.
2. Exercisability. This Option shall be exercisable. vested @ 20% per
year over five years. This Option shall remain exercisable as to all of such
shares until, (but not after the expiration of ten (10) years from the date this
Option is granted) unless this Option has expired or terminated earlier in
accordance with the provisions hereof. Shares as to which this Option becomes
exercisable pursuant to the foregoing provision may be purchased at any time
prior to expiration of this Option.
3. Exercise of Option. This Option may be exercised by written notice
delivered to the Bank stating the number of shares with respect to which this
Option is being exercised, together with cash in the amount of the purchase
price of such shares. Not less than ten (10) shares may be purchased at any one
time unless the number purchased is the total number which may be purchased
under this Option and in no event may the Option be exercised with respect to
fractional shares. Upon exercise, Optionee shall make appropriate arrangements
and shall be responsible for the withholding of any federal and state taxes then
due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5
hereof, if Optionee shall cease to be employed by the Bank or a subsidiary
corporation for any reason other than Optionee's death or disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), this Option shall expire three (3) months thereafter. During the three
month period this Option shall be exercisable only as to those installments, if
any, which had accrued as of the date when Optionee ceased to be employed by the
Bank or the subsidiary corporation.
2
<PAGE> 3
5. Termination of Employment for Cause. If Optionee's employment by the
Bank or a subsidiary corporation is terminated for cause, this Option shall
expire immediately, unless reinstated by the Board of Directors within thirty
(30) days of such termination by giving written notice of such reinstatement to
Optionee at his last known address. In the event of such reinstatement, Optionee
may exercise this Option only to such extent, for such time, and upon such terms
and conditions as if Optionee had ceased to be employed by the Bank or
subsidiary corporation upon the date of such termination for a reason other than
cause or death. Termination for cause shall include termination for malfeasance
or gross misfeasance in the performance of duties or conviction of illegal
activity in connection therewith or any conduct detrimental to the interests of
the Bank or a subsidiary corporation and, in any event, the determination of the
Board of Directors with respect thereto shall be final and conclusive.
6. Nontransferability, Disability or Death of Optionee. This Option
shall not be transferable except by Will or by the laws of descent and
distribution and shall be exercisable during Optionee's lifetime only by
Optionee. If Optionee dies while employed by the Bank or a subsidiary
corporation, or during the three-month period referred to in Paragraph 4 hereof,
this Option shall expire one (1) year after the date of Optionee's death or on
the day specified in Paragraph 2 hereof, whichever is earlier. After Optionee's
death but before such expiration, the persons to whom Optionee's rights under
this Option shall have Passed by Will or by the applicable laws of descent and
distribution or the executor or administrator of Optionee's estate shall have
the right to exercise this Option as to those shares for which installments had
accrued under Paragraph 2 hereof as of the date on which Optionee ceased to be
employed by the Bank or a subsidiary corporation.
If Optionee shall terminate employment because of disability (as defined
in Section 105(d)(4)
3
<PAGE> 4
of the Internal Revenue Code of 1986, as amended from time to time), Optionee
may exercise this Option to the extent he or she is entitled to do so at the
date of termination, at any time within 12 months of the date of termination,
but in no event later than expiration date in paragraph 2.
7. Employment. This Agreement shall not obligate the Bank or a
subsidiary corporation to employ Optionee for any period, nor shall it interfere
in any way with the right of the Bank or a subsidiary corporation to reduce
Optionee's compensation.
8. Privileges of Stock Ownership. Optionee shall have no rights as a
stockholder with respect to the Bank's stock subject to this Option until the
date of issuance of stock certificates to Optionee. Except as provided in
Section 13 of the Plan, no adjustment will be made for dividends or other rights
for which the record date is prior to the date such stock certificates are
issued.
9. Modification and Termination by Board of Directors. The rights of
Optionee are subject to modification and termination upon the occurrence of
certain events as provided in Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this Option, will notify the Bank not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of
this option shall be issued and delivered unless and until all applicable
requirements of federal law and of the Securities and Exchange Commission
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bank of
the Same class are then listed shall have been complied with. Upon exercise of
any portion of this option, the person entitled to execute the Same shall
execute the letter attached hereto as Exhibit "A". The Bank may
4
<PAGE> 5
require a letter from counsel acceptable to the Bank that all federal and state
securities laws have been complied with, prior to the issuance of any shares
under this option. In addition, if the Optionee is an "affiliate" for purposes
of the Securities Act of 1933, there may be additional restrictions on the
resale of stock, and Optionee therefore agrees to ascertain what those
restrictions are and to abide by the restrictions and other applicable federal
and state securities laws.
Furthermore, the Bank may, if it deems appropriate, issue stop transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bank deems appropriate.
12. Notices. Any notice to the Bank provided for in this Agreement shall
be addressed to it in care of its President or Chief Administrative Officer at
its main office and any notice to Optionee shall be addressed to Optionee's
address on file with the Bank or a subsidiary corporation, or to such other
address as either may designate to the other in writing. Any notice shall be
deemed to be duly given if and when enclosed in a properly sealed envelope and
addressed as stated above and deposited, postage prepaid, with the United States
Postal Service. In lieu of giving notice by mail as aforesaid, any written
notice under this Agreement may be given to Optionee in person, and to the Bank
by personal delivery to its President or Chief Administrative Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE WESTERN SIERRA NATIONAL BANK
By /s/ GARY D. GALL By /s/ O. I. SCARIOT
----------------------------- ----------------------------------
By /s/ JOSEPH SURRA
----------------------------------
5
<PAGE> 1
EXHIBIT 10.7
DATE OF GRANT: May 20, 1997
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the
"Company") and Gary D. Gall ("Optionee"), as of May 20, 1997
In consideration of the mutual covenants contained herein and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner and
subject to the conditions hereinafter provided, the right, privilege and option
to purchase (the "Option") an aggregate of Twenty-five Thousand (25,000) shares
of the Company's Common Stock, (the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set forth
herein, the term of this Option shall be Ten (10) years from the date of grant
(the "Expiration Date"). Any portion of this Option not exercised prior to the
Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING DATE
---------------- ------------
<S> <C>
5,000 Immediately
5,000 5-20-98
5,000 5-20-99
5,000 5-20-00
5,000 5-20-01
</TABLE>
1
<PAGE> 2
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined in the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this
Option may be purchased during the term of this Option, but not as to less than
100 shares (unless the remaining shares then constituting the Vested Portion of
this Option is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be
exercised from time to time, in whole or in part, by presentation of a Request
to Exercise Form, substantially in the form attached hereto, to the Company at
its principal office, which Form must be duly executed by Optionee and
accompanied by payment, in cash, to the Company, in the aggregate amount of the
Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by
the payment specified, the Optionee shall be deemed to be the record owner of
the Shares purchased, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing the Shares
purchased under this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price") payable
upon exercise of this Option shall be $12.00 per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceases to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), or dies while employed by the Company, or
while acting as an officer or director of the Company (or, if the Optionee dies
within the period that the Option remains exercisable after termination of
employment or affiliation), Options then held (to the extent then exercisable)
may be exercised by the Optionee, the Optionee's personal representative, or by
the person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after the
disability or death (but in no event after the expiration date of the Option).
2
<PAGE> 3
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option shall
not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and land of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a sale
of substantially all of the assets of the Company (as determined in the sole
discretion of the Administrator), and if the Optionee does not exercise the
entire Option within 90 days of such event, the Administrator and Optionee may
agree to (i) cancel each outstanding Option upon payment in cash to the Optionee
of the amount by which any cash and the fair market value of any other property
which the Optionee would have received as consideration for the shares of Stock
covered by the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of the
number and kind of securities with respect to which, outstanding Options may be
exercised, and the exercise price at which outstanding Options may be exercised.
The Administrator shall determine, in its sole and absolute discretion, when the
Company shall be deemed to survive for purposes of this Plan.
3
<PAGE> 4
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of the
expiration of this Option or the exercise and purchase of the total number of
Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder
with respect to any Shares covered by this Option unless the Optionee shall have
exercised this Option, and then only with respect to the Shares underlying the
portion of the Option exercised. The Optionee shall have no right to vote any
Shares, or to receive distributions of dividends or any assets or proceeds from
the sale of Company assets upon liquidation until Optionee has effectively
exercised this Option and fully paid for such Shares. Subject to Section 6, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date title to the Shares has been acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this Option
shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits otherwise,
the Optionee shall pay the Company in cash all local, state, and federal
withholding taxes applicable, in the
4
<PAGE> 5
Administrator's absolute discretion, to the grant or exercise of this Option, or
the transfer or other disposition of Shares acquired upon exercise of this
Option. Any such payment must be made promptly when the amount of such
obligation becomes determinable. The Administrator may, in lieu of such cash
payment, withhold that number of Shares sufficient to satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or relating
to this Option which cannot be amicably settled including, but not limited to,
the suspension or termination of Optionee's right in accordance with Section 11
above, shall be settled by arbitration. Said arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association at a time and place within the above-referenced location as selected
by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written
notice to the other, either party hereto may formally initiate arbitration under
this Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
15.2. HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall
be binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right
of either party to seek to obtain injunctive relief or other provisional
remedies against threatened or actual conduct that will cause loss or damages
under the usual equity rules including the applicable rules for obtaining
preliminary injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the
arbitrator, shall initially be borne equally by the parties; provided, the
prevailing party shall be entitled to recover such costs, in addition to
attorneys' fees and other costs, in accordance with Section 18 of this
Agreement.
5
<PAGE> 6
16. NOTICES. All notices to be given by either party to the other shall be in
writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; provided, however, that notices of change of address or telex
or facsimile number shall be effective only upon actual receipt by the other
party. Notices shall be delivered at the following addresses, unless changed as
provided for herein.
To the Optionee:
Gary D. Gall
2520 Greens Landing Court
Cameron Park, CA 95682
To the Company:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
P.O. Box 1460
Cameron Park, CA 95682
Facsimile: (916) 677-5075
6
<PAGE> 7
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective heirs, executors, and successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive stock
options under the Internal Revenue Code, Internal Revenue Service Rules, and
Treasury Regulations governing incentive stock options, the Optionee must meet
certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. Counterparts. This Option may be executed in one or more counterparts, each
of which when taken together shall constitute one and the same instrument.
7
<PAGE> 8
IN WITNESS WHEREOF, this Option Agreement has been executed as of the
20TH day of MAY, 1997, at Cameron Park, California.
THE COMPANY: WESTERN SIERRA BANCORP
By: /s/ JOSEPH SURRA
----------------------------------
OPTIONEE: /s/ GARY D. GALL
---------------------------------------
---------------------------------------
8
<PAGE> 9
REQUEST TO EXERCISE FORM
Dated: ____________________
The undersigned hereby irrevocably elects to exercise all or part, as
specified below, of the Vested Portion of the option ("Option") granted to him
pursuant to a certain stock option agreement ("Agreement") effective
______________, between the undersigned and Western Sierra Bancorp (the
"Company") to purchase an aggregate of __________________ (__________) shares of
the Company's Common Stock, par value $____ (the "Shares").
The undersigned hereby tenders cash in the amount of $__________ per
Share multiplied by _____________________ (__________), the number of Shares he
is purchasing at this time, for a total of $_________ which constitutes full
payment of the total Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:____________________________________
(Please typewrite or print in
block letters)
Address: ______________________________
______________________________
Signature: ______________________________
Accepted by Western Sierra Bancorp:
By: ________________________________
________________________________
Name
________________________________
Title
9
<PAGE> 1
EXHIBIT 10.8
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF THE BANK'S
STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS: THE BANKS 1989 STOCK OPTION PLAN
SHALL HAVE FIRST BEEN APPROVED BY THE SHAREHOLDERS OF THE BANK HOLDING NOT LESS
THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK.
WESTERN SIERRA NATIONAL BANK
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated the 14th day of November 1996, by and between
Western Sierra National Bank, a California corporation (the "Bank"), and
Stephanie Marsh ("Optionee");
WHEREAS, pursuant to the 1989 Stock Option Plan of the Bank (the
"Plan"), the Board of Directors of the Bank (or the Stock Option Committee, if
authorized by the Board of Directors) has authorized granting to Optionee a
stock Option to purchase all or any part of five thousand (5,000) authorized but
unissued shares of the Bank's common stock for cash at the price of ten Dollars
($10.00) per share, such Option to be for the term and upon the terms and
conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Board of Directors
(or the Stock Option Committee) and pursuant to authorizations granted by all
appropriate regulatory and governmental agencies, the Bank hereby grants to
Optionee the Option to purchase, upon and subject to the terms and conditions of
the Plan, which is incorporated in full herein by this reference, all or any
part of five thousand (5,000) shares of the Bank's Common Stock (hereinafter
called "stock") at the price of ten Dollars ($10.00 ) per share, which price is
not less than one hundred percent
1
<PAGE> 2
(100%) of the fair market value of the stock as of the date of action of the
Board of Directors (or the Stock Option Committee) granting this Option.
2. Exercisability. This Option shall be exercisable vested @ 20% per
year over five years. This Option shall remain exercisable as to all of such
shares until, (but not after the expiration of ten (10) years from the date this
Option is granted) unless this Option has expired or terminated earlier in
accordance with the provisions hereof. Shares as to which this Option becomes
exercisable pursuant to the foregoing provision may be purchased at any time
prior to expiration of this Option.
3. Exercise of Option. This Option may be exercised by written notice
delivered to the Bank stating the number of shares with respect to which this
Option is being exercised, together with cash in the amount of the purchase
price of such shares. Not less than ten (10) shares may be purchased at any one
time unless the number purchased is the total number which may be purchased
under this Option and in no event may the Option be exercised with respect to
fractional shares. Upon exercise, Optionee shall make appropriate arrangements
and shall be responsible for the withholding of any federal and state taxes then
due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5
hereof, if Optionee shall cease to be employed by the Bank or a subsidiary
corporation for any reason other than Optionee's death or disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), this Option shall expire three (3) months thereafter. During the three
month period this Option shall be exercisable only as to those installments, if
any, which had accrued as of the date when Optionee ceased to be employed by the
Bank or the subsidiary corporation.
2
<PAGE> 3
5. Termination of Employment for Cause. If Optionee's employment by the
Bank or a subsidiary corporation is terminated for cause, this Option shall
expire immediately, unless reinstated by the Board of Directors within thirty
(30) days of such termination by giving written notice of such reinstatement to
Optionee at his last known address. In the event of such reinstatement Optionee
may exercise this Option only to such extent, for such time, and upon such terms
and conditions as if Optionee had ceased to be employed by the Bank or
subsidiary corporation upon the date of such termination for a reason other than
cause or death. Termination for cause shall include termination for malfeasance
or gross misfeasance in the performance of duties or conviction of illegal
activity in connection therewith or any conduct detrimental to the interests of
the Bank or a subsidiary corporation and, in any event, the determination of the
Board of Directors with respect thereto shall be final and conclusive.
6. Nontransferability; Disability or Death of Optionee. This Option
shall not be transferable except by Will or by the laws of descent and
distribution and shall be exercisable during Optionee's lifetime only by
Optionee. If Optionee dies while employed by the Bank or a subsidiary
corporation, or during the three-month period referred to in Paragraph 4 hereof,
this Option shall expire one (1) year after the date of Optionee's death or on
the day specified in Paragraph 2 hereof, whichever is earlier. After Optionee's
death but before such expiration, the persons to whom Optionee's rights under
this Option shall have Passed by Will or by the applicable laws of descent and
distribution or the executor or administrator of Optionee's estate shall have
the right to exercise this Option as to those shares for which installments had
accrued under Paragraph 2 hereof as of the date on which Optionee ceased to be
employed by the Bank or a subsidiary corporation.
If Optionee shall terminate employment because of disability (as
defined in Section 105(d)(4)
3
<PAGE> 4
of the Internal Revenue Code of 1986, as amended from time to time), Optionee
may exercise this Option to the extent he or she is entitled to do so at the
date of termination, at any time within 12 months of the date of termination,
but in no event later than expiration date in paragraph 2.
7. Employment. This Agreement shall not obligate the Bank or a
subsidiary corporation to employ Optionee for any period, nor shall it interfere
in any way with the right of the Bank or a subsidiary corporation to reduce
Optionee's compensation.
8. Privileges of Stock Ownership. Optionee shall have no rights as a
stockholder with respect to the Bank's stock subject to this Option until the
date of issuance of stock certificates to Optionee. Except as provided in
Section 13 of the Plan, no adjustment will be made for dividends or other rights
for which the record date is prior to the date such stock certificates are
issued.
9. Modification and Termination by Board of Directors. The rights of
Optionee are subject to modification and termination upon the occurrence of
certain events as provided in Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this Option, will notify the Bank not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of
this option shall be issued and delivered unless and until all applicable
requirements of federal law and of the Securities and Exchange Commission
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bank of
the Same class are then listed shall have been compiled with. Upon exercise of
any portion of this option, the person entitled to execute the Same shall
execute the letter attached hereto as Exhibit "A". The Bank may
4
<PAGE> 5
require a letter from counsel acceptable to the Bank that all federal and state
securities laws have been complied with, prior to the issuance of any shares
under this option. In addition, if the Optionee is an "affiliate" for purposes
of the Securities Act of 1933, there may be additional restrictions on the
resale of stock, and Optionee therefore agrees to ascertain what those
restrictions are and to abide by the restrictions and other applicable federal
and state securities laws.
Furthermore, the Bank may, if it deems appropriate, issue stop transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bank deems appropriate.
12. Notices. Any notice to the Bank provided for in this Agreement shall
be addressed to it in care of its President or Chief Administrative Officer at
its main office and any notice to Optionee shall be addressed to Optionee's
address on file with the Bank or a subsidiary corporation, or to such other
address as either may designate to the other in writing. Any notice shall be
deemed to be duly given if and when enclosed in a properly sealed envelope and
addressed as stated above and deposited, postage prepaid, with the United States
Postal Service. In lieu of giving notice by mail as aforesaid, any written
notice under this Agreement may be given to Optionee in person, and to the Bank
by personal delivery to its President or Chief Administrative Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE WESTERN SIERRA NATIONAL BANK
By /s/ STEPHANIE MARSH By /s/ O.I. SCARIOT
----------------------------------- ---------------------------------
By /s/ JOSEPH SURRA
---------------------------------
5
<PAGE> 1
EXHIBIT 10.9
DATE OF GRANT: July 15, 1997
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the
"Company") and Stephanie Marsh ("Optionee"), as of July 15, 1997.
In consideration of the mutual covenants contained herein and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner
and subject to the conditions hereinafter provided, the right, privilege and
option to purchase (the "Option") an aggregate of three thousand ( 3,000)
shares of the Company's Common Stock,(the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set
forth herein, the term of this Option shall be ten ( 10 ) years from the date of
grant (the "Expiration Date"). Any portion of this Option not exercised prior to
the Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING DATE
<S> <C>
600 IMMEDIATELY
----------------- ------------
600 7-15-98
----------------- ------------
600 7-15-99
----------------- ------------
600 7-15-00
----------------- ------------
600 7-15-01
----------------- ------------
</TABLE>
1
<PAGE> 2
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined in the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this
Option may be purchased during the term of this Option, but not as to less than
100 shares (unless the remaining shares then constituting the Vested Portion of
this Option is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be
exercised from time to time, in whole or in part, by presentation of a Request
to Exercise Form, substantially in the form attached hereto, to the Company at
its principal office, which Form must be duly executed by Optionee and
accompanied by payment, in cash, to the Company, in the aggregate amount of the
Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by
the payment specified, the Optionee shall be deemed to be the record owner of
the Shares purchased, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing the Shares
purchased under this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price")
payable upon exercise of this Option shall be $12.50 per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason
other than permanent and total disability (as defined below) or death an
Optionee ceases to be employed by or to be a director of the Company Options
held at the date of such termination (to the extent then exercisable) may be
exercised, in whole or in part, at any time within three (3) months after the
date of such termination or such lesser period specified in the Option Agreement
(but in no event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes
permanently and totally disabled (within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended), or dies while employed by the
Company, or while acting as an officer or director of the Company (or, if the
Optionee dies within the period that the Option remains exercisable after
termination of employment or affiliation), Options then held (to the extent then
exercisable) may be exercised by the Optionee, the Optionee's personal
representative, or by the person to whom the Option is transferred by will or
the laws of descent and distribution, in whole or in part, at any time within
one (1) year after the disability or death (but in no event after the expiration
date of the Option).
2
<PAGE> 3
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option
shall not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving, corporation, or a sale
of substantially all of the assets of the Company (as determined in the sole
discretion of the Administrator), and if the Optionee does not exercise the
entire Option within 90 days of such event, the Administrator and Optionee may
agree to (i) cancel each outstanding Option upon payment in cash to the Optionee
of the amount by which any cash and the fair market value of any other property
which the Optionee would have received as consideration for the shares of Stock
covered by the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger,
consolidation, combination, or reorganization in which the Company is the
surviving corporation, the Administrator shall determine the appropriate
adjustment of the number and kind of securities with respect to which
outstanding Options may be exercised, and the exercise price at which
outstanding Options may be exercised. The Administrator shall determine, in its
sole and absolute discretion, when the Company shall be deemed to survive for
purposes of this Plan.
3
<PAGE> 4
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of
the expiration of this Option or the exercise and purchase of the total number
of Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by this Option unless the
Optionee shall have exercised this Option, and then only with respect to the
Shares underlying the portion of the Option exercised. The Optionee shall have
no right to vote any Shares, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
Optionee has effectively exercised this Option and fully paid for such Shares.
Subject to Section 6, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date title to the Shares has been
acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this
Option shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits
otherwise, the Optionee shall pay the Company in cash all local, state, and
federal withholding taxes applicable, in the
4
<PAGE> 5
Administrator's absolute discretion, to the grant or exercise of this Option, or
the transfer or other disposition of Shares acquired upon exercise of this
Option. Any such payment must be made promptly when the amount of such
obligation becomes determinable. The Administrator may, in lieu of such cash
payment, withhold that number of Shares sufficient to satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or
relating to this Option which cannot be amicably settled including, but not
limited to, the Suspension or termination of Optionee's right in accordance with
Section 11 above, shall be settled by arbitration. Said arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association at a time and place within the above-referenced location
as selected by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written
notice to the other, either party hereto may formally initiate arbitration under
this Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
5
<PAGE> 6
15.2. HEARING AND DETERMINATION DATES. The hearing before the
arbitrator shall occur within thirty (30) days from the date the matter is
submitted to arbitration. Further, a determination by the arbitrator shall be
made within forty-five (45) days from the date the matter is submitted to
arbitration. Thereafter, the arbitrator shall have fifteen (15) days to provide
the parties with his or her decision in writing. However, any failure to meet
the deadlines in this section will not affect the validity of any decision or
award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall
be binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right
of either party to seek to obtain injunctive relief or other provisional
remedies against threatened or actual conduct that will cause loss or damages
under the usual equity rules including the applicable rules for obtaining
preliminary injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the
arbitrator, shall initially be borne equally by the parties; provided, the
prevailing party shall be entitled to recover such costs, in addition to
attorneys' fees and other costs, in accordance with Section 18 of this
Agreement.
16. NOTICES. All notices to be given by either party to the other shall be
in writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; provided, however, that notices of change of address or telex
or facsimile number shall be effective only upon actual receipt by the other
party. Notices shall be delivered at the following addresses, unless changed as
provided for herein.
To the Optionee
Stephanie Marsh
---------------------------------
3349 Hacienda Rd.
---------------------------------
Cameron Park, CA 95682
---------------------------------
To the Company:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
P.O. Box 1460
Cameron Park, CA 95682
Facsimile: (916) 677-5075
6
<PAGE> 7
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, executors, and
successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive
stock options under the Internal Revenue Code, Internal Revenue Service Rules,
and Treasury Regulations governing incentive stock options, the Optionee must
meet certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts,
each of which when taken together shall constitute one and the same instrument.
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<PAGE> 8
IN WITNESS WHEREOF, this Option Agreement has been executed as of the
15th day of July, 1997, at Cameron Park, California.
THE COMPANY: WESTERN SIERRA BANCORP
By: /s/ GARY D. GALL
-----------------------------
Pres/CEO
OPTIONEE: /s/ STEPHANIE MARSH
--------------------------------
--------------------------------
8
<PAGE> 9
REQUEST TO EXERCISE FORM
Dated:___________
The undersigned hereby irrevocably elects to exercise all or part, as
specified below, of the Vested Portion of the option ("Option") granted to him
pursuant to a certain stock option agreement ("Agreement") effective
________________________, between the undersigned and Western Sierra Bancorp
(the "Company") to purchase an aggregate of ________________________ (________)
shares of the Company's Common Stock, par value $_________ (the "Shares").
The undersigned hereby tenders cash in the amount of $__________ per
Share multiplied by _______________________ (___________) the number of Shares
he is purchasing at this time, for a total of which constitutes full payment of
the total Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:______________________________________
(Please typewrite or print in block letters)
Address: ______________________________
______________________________
Signature: ______________________________
Accepted by Western Sierra Bancorp:
By: ______________________________
______________________________
Name
______________________________
Title
9
<PAGE> 1
EXHIBIT 10.10
WESTERN SIERRA NATIONAL BANK
1989 STOCK OPTION PLAN
1. Purpose
The purpose of the 1989 Stock Option Plan is to strengthen Western Sierra
National Bank (the "Bank") and those corporations which are or hereafter become
subsidiary corporations of the Bank by providing an additional means of
attracting and retaining competent managerial personnel and by providing to
participating officers and management level employees added incentive for high
level of performance and for unusual efforts to increase the earnings of the
Bank and any subsidiary corporations. The Plan seeks to accomplish these
purposes and achieve these results by providing a means whereby such officers
and management level employees may purchase shares of the common stock of the
Bank pursuant to options granted in accordance with this Plan.
Options granted pursuant to this Plan are intended to be "Incentive Stock
Options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), or "non-qualified" stock
options, as shall be determined and designated upon the grant of each option
hereunder.
2. Administration
This Plan shall be administered by a committee (the "Stock Option
Committee") consisting of certain members of the Board of Directors who from
time to time shall be selected by the Board. Any action of the Stock Option
Committee with respect to the administration of the Plan shall be taken pursuant
to a majority vote, or to the unanimous written consent, of its members. If no
Stock Option Committee is selected, the Board of Directors as a whole shall act
as such
<PAGE> 2
Committee. Vacancies occurring in the membership of the Committee shall be
filled by appointment by the Board of Directors.
Subject to the express provisions of the Plan, the Stock Option Committee
shall have the authority to construe and interpret the Plan, and to define the
terms used therein, to prescribe, and amend, and rescind rules and regulations
relating to administration of the Plan, to determine the duration and purposes
of leaves of employment for purposes of the Plan, and to make all other
determinations necessary or advisable for administration of the Plan.
Determinations of the Stock Option Committee on matters referred to in this
section shall be final and conclusive.
3. Incentive Stock Options
(a) Incentive Stock Options granted under this Plan are intended to be
qualified under Section 422A of the Internal Revenue Code, as amended from time
to time (the "Code"). Each Stock Option Agreement shall contain such terms and
provisions as the Stock Option Committee may determine to be necessary in order
to qualify such option as an incentive stock option within the meaning of
Section 422A of the Code.
(b) Participation. Full-time salaried officers and management level
employees of the Bank or of subsidiary corporations (as that term is defined in
Section 425 of the Code), shall be eligible for selection to participate in the
incentive stock option portion of the Plan. No director of the Bank who is not
also a full-time salaried officer or employee of the Bank or a subsidiary
corporation, may be granted an incentive stock option hereunder. Subject to the
express provisions of the Plan, the Stock Option Committee shall select from the
eligible class of employees and make recommendations to the Board of Directors
2
<PAGE> 3
concerning the individuals to whom incentive stock options shall be granted, the
terms and provisions of the respective incentive stock option agreements (which
need not be identical), the times at which such incentive stock options shall be
granted, and the number of shares subject to each incentive option. An
individual who has been granted an incentive stock option hereunder may, if he
or she is otherwise eligible, be granted additional incentive stock options if
the Board of Directors shall so determine.
(c) The Board of Directors shall determine the individuals who shall
receive incentive stock options and the terms and provisions of the incentive
stock options, and shall grant such incentive stock options to such individuals.
Notwithstanding the above, however, the Board of Directors may delegate to the
Stock Option Committee the power to determine the individuals who shall receive
options, the terms and provisions of such incentive stock incentive stock
options to such individuals.
(d) Except in compliance with Section (f) below, the Board of Directors
(or Stock Option Committee, if any) shall not grant a stock option to purchase
shares of the Bank's common stock to any individual who is an employee at the
time of the grant and owns stock possessing more than 10% of the total combined
voting power or value of all classes of stock of the Bank or its parent or
subsidiary corporation.
(e) Annual Limit on Incentive Stock Options. The aggregate fair market
value (determined as of the time the incentive stock option is granted) of stock
with respect to which incentive stock options are exercisable for the first time
by an employee during any Calendar year (under any other incentive stock option
plan of the Bank and its subsidiary corporations, if any) shall not exceed
$100,000, plus any greater amount as may be permitted under subsequent
amendments to the Internal Revenue Code of 1986.
3
<PAGE> 4
(f) Option Price. The purchase price of stock subject to each incentive
stock option shall be determined by the Board of Directors (or the Stock Option
Committee if authorized), but shall not be less than one hundred percent (100%)
of the fair market value of such stock at the time such option is granted,
except for officers and key employees who at the time of the grant own more than
10 percent of the total combined voting power Of all classes of stock of the
Bank or its parent or subsidiary corporation (as defined in Section 422A of the
Code), in which case the purchase price of the stock shall not be less than 110
percent of the fair market value of such stock at the time such option is
granted. The fair market value of such stock shall be determined in accordance
with any reasonable valuation method, including the valuation methods described
in Treasury Regulation Section 20.2031-2. The purchase price of any shares
purchased shall be paid in full in cash at the time of each said purchase.
4. Non-Qualified Stock Options
(a) All options granted (1) which are in excess of the fair market value
limitations set forth in Section 3(e) hereof; or (2) which are designated at the
time of the grant as "non-qualified" shall be deemed "non-qualified."
Non-qualified options granted hereunder shall be so designated in the Stock
Option Agreement entered into between the Bank and the Participant.
(b) Participation. Directors, full-time salaried officers, and management
level employees of the Bank or of a subsidiary corporation [as that term is
defined in Section 425 of the Internal Revenue Code of 1986, as from time to
time amended (the "Code")], shall be eligible for selection to participate in
the non-qualified stock option portion of the Plan. Subject to the express
provisions of the Plan, the Stock Option Committee shall select from the
eligible class of individuals to whom non-qualified stock options shall be
granted, the terms and
4
<PAGE> 5
provisions of the respective non-qualified stock option agreements (which need
not be identical), the times at which such non-qualified stock options shall be
granted, and the number of shares subject to each non-qualified stock option. An
individual who has been granted a non-qualified stock option may, if he or she
is otherwise eligible, be granted additional non-qualified stock options if the
Board of Directors shall so determine.
(c) The Board of Directors shall determine the individuals who shall
receive non-qualified stock options and the terms and provisions of the
non-qualified stock options, and shall grant such non-qualified stock options to
such individuals. Notwithstanding the above, however, the Board of Directors may
delegate to the Stock Option Committee the power to determine the individuals
who shall receive non-qualified stock options, the terms and provisions of such
non-qualified stock options, and to grant non-qualified stock options to such
individuals.
(d) Notwithstanding anything to the contrary contained herein, the Board
of Directors (or Stock Option Committee, if any) shall not grant a stock option
to purchase shares of the Bank's common stock to any individual who is an
employee at the time of the grant and owns stock possessing more than 10% of the
total combined voting power or value of all classes of stock of the Bank or its
parent or subsidiary corporation
(e) Option Price. The purchase price of stock subject to each
non-qualified stock option shall be determined by the Board of Directors (or the
Stock Option Committee, if authorized), but shall not be less than one hundred
percent (100%) of the fair market value of such stock at the time such option is
granted. The fair market Value of such stock shall be determined in accordance
with any reasonable valuation method, including the valuation methods described
in Treasury Regulation 20.2031-2. The purchase price of any shares purchased
shall be paid in full in cash at the time of each purchase.
5
<PAGE> 6
(f) Stock Option Grants. No grant of options to any director shall be
valid unless the grant has been ratified by a majority of all the shares
represented and voting at a meeting of shareholders. Each director of the Bank
named below may be granted non-qualified options to purchase the listed amount
of the Bank's common stock, conditional upon ratification by a majority of the
outstanding common stock of the Bank represented and voting at a meeting of
shareholders. A maximum of 44,000 shares, in the aggregate, may be subject to
options granted to directors under this Plan. The options granted to directors
shall vest and become exercisable as to the total number of the stock option
granted to such optionee immediately after the grant. Options to directors shall
be for a term of ten years. The following is a list of names of directors of the
Bank, along with the amount of shares, which may be granted non-qualified stock
options under this Plan:
<TABLE>
<CAPTION>
Director Amount
-------- ------
<S> <C>
R. G. Albrecht 5,000
Richard L. Golemon 5,000
Duval E. Phillips 5,000
Harold S. Prescott, Jr. 5,000
Dr. Darol Rasmussen 2,000
Osvaldo I. Scariot 5,000
Richard L. V. Smith 2,000
Joseph A. Surra 5,000
John Teresi 5,000
Melvin S. Vukovich 5,000
------
Total 44,000
</TABLE>
5. Stock Subject to the Plan
Subject to adjustments as provided in Section 12, hereof, the stock to be
offered under the Plan shall be shares of the Bank's authorized but unissued
common stock (hereinafter called "stock") and the aggregate amount of stock to
be delivered upon exercise of all options granted under this Plan shall not
exceed 63,580 shares, which amount, when combined with stock subject to other
plans of
6
<PAGE> 7
the Bank, shall not exceed 30 percent of the total of the then outstanding
shares of the Bank, including shares which have been previously allocated for
issuance under other stock option plans. If any option shall be cancelled,
surrendered or expire for any reason without having been exercised in full, the
unpurchased shares subject thereto shall again be available for purposes of this
Plan.
6. Continuation of Employment
Nothing contained in the Plan (or in any option agreement) shall obligate
the Bank or any subsidiary corporation to employ any option holder ("Optionee")
for any period or interfere in any way with the right of the Bank or a
subsidiary corporation to reduce the Optionee's compensation.
7. Exercise of Options
No option shall be exercisable until all necessary regulatory and
shareholder approvals are obtained. Except as otherwise provided in this
section, each option shall be exercisable in such installments, which need not
be equal, and upon such contingencies as the Board of Directors (or the Stock
Option Committee, if authorized) shall determine; provided, however, that if an
Optionee shall not in any given installment period purchase all of the shares
which the Optionee is entitled to purchase in such installment period, the
Optionee's right to purchase any shares not purchased in such installment period
shall continue until expiration or termination of such option. Fractional share
interests shall be disregarded, except that they may be accumulated. Not less
than ten (10) shares may be purchased under the option. Options may be exercised
by written notice delivered to the Bank stating the number of shares with
respect to which the option is being exercised, together with the full purchase
price for such shares. Payment of the option price in full, for the number of
shares to be delivered,
7
<PAGE> 8
must be made in cash. If the option is being exercised by any person other than
the Optionee, said notice shall be accompanied by proof, satisfactory to counsel
for the Bank, of the right of such person to exercise the option. Optionees will
have no rights as stockholders with respect to stock of the Bank subject to
their Stock Option Agreements until the date of issuance of stock certificates
to them.
8. Nontransferability of Options
Each option shall, by its terms, be nontransferable by the Optionee other
than by Will or the laws of descent and distribution, and shall be exercisable
during his or her lifetime only by the Optionee.
9. Cessation of Employment or Directorship
Except as provided in Section 10 and 20 hereof, if an Optionee ceases to
be a director of the Bank or an employee of the Bank or a subsidiary corporation
for any reason other than his disability (as defined in Section 105(d)(4) of the
Code) or death, the Optionee's option shall expire not later than three (3)
months thereafter. During the period after cessation of directorship or
employment, such option shall be exercisable only as to those installments, if
any, which have accrued and/or vested as of the date on which the Optionee
ceased to be a director or employed by the Bank or a subsidiary corporation.
10. Termination of Employment for Cause
If the Stock Option Agreement so provides and if an Optionee's employment
by the Bank or a subsidiary corporation is terminated for cause, the Optionee's
option shall expire immediately, provided, however, the Board of Directors may,
in its sole discretion, with thirty (30) days of such termination, reinstate the
option by giving written notice of such reinstatement to the Optionee at the
8
<PAGE> 9
Optionee's last known address. In the event of reinstatement, the Optionee may
exercise the option only to such extent, for such time, and upon such terms and
conditions as if he had ceased to be employed by the Bank or a subsidiary
corporation upon the date of such termination for a reason other than cause or
death. Termination for cause shall include termination for malfeasance or gross
misfeasance in the performance of duties or conviction of illegal activity in
connection therewith or any conduct detrimental to the interests of the Bank or
a subsidiary corporation, and, in any event, the determination of the Board of
Directors with respect thereto shall be final and conclusive.
11. Disability or Death of Optionee
If any Optionee dies while a director or being employed by the Bank or a
subsidiary corporation, or during the three month period referred to in Section
9, the option shall expire one (1) year after the date of such death or on the
day specified in Section 20 hereof, whichever is earlier. After such death but
before such expiration, the persons to whom the Optionee's rights under the
option shall have passed by Will or by the applicable laws of descent and
distribution or the executor or administrator of Optionee's estate shall have
the right to exercise such option to the extent that installments, if any, had
accrued and/or vested as of the date on which the Optionee ceased to be employed
by the Bank or a subsidiary corporation.
If the Optionee shall terminate his or her directorship or employment
because of disability (as defined in Section 105(d)(4) of the Internal Revenue
Code of 1986, as amended from time to time), the Optionee may exercise this
option to the extent he or she is entitled to do so at the date of termination,
at any time within 12 months of the date of termination, but in no event later
than the expiration date in the Option Agreement.
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<PAGE> 10
12. Adjustment Upon Changes in Capitalization
If the outstanding shares of the stock of the Bank are increased,
decreased, or changed into, or exchanged for a different number or kind of
shares or securities of the Bank through reorganization, merger,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation, or other-wise, without consideration to the Bank, an appropriate
and proportionate adjustment shall be made in the number and kind of shares as
to which options may be granted. A corresponding adjustment changing the number
or kind of shares and the exercise price per share allocated to unexercised
options, or portions thereof, which shall have been granted prior to any such
change shall likewise be made. Any such adjustment, however, in an outstanding
option shall be Made without change in corresponding adjustment in the price for
each share subject to the option. Any adjustment under the Section shall be made
by the Board of Directors, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final and conclusive. No fractional
shares of stock shall be issued or made available under the Plan on account Of
any such adjustment, and fractional share-interests shall be disregarded, except
that they may be accumulated.
13. Terminating Events
A Terminating Event shall be defined as any one of the following events;
(i) dissolution or liquidation of the Bank, (ii) a reorganization, merger or
consolidation of the Bank with one or more corporation, the result of which the
Bank is not the surviving corporation or the Bank becomes a subsidiary of
another corporation (which shall be deemed to have occurred if another
corporation shall own directly or indirectly, over 50% of the aggregate voting
power of all outstanding equity securities of the Bank), (iii) a sale of
substantially all the assets of the Bank to another corporation, or (iv) a sale
of the equity securities
10
<PAGE> 11
of the Bank representing more than 50% of the aggregate voting power of all
outstanding equity securities of the Bank to any person or entity, or any group
of persons and/or entities acting in concert. Upon a Terminating Event all
outstanding options granted pursuant to this Plan shall completely vest and
become immediately exercisable as to all shares granted pursuant to the option
immediately prior to such Terminating Event, and upon such Terminating Event all
outstanding options and the Plan shall terminate; provided, however, upon such
Terminating Event all outstanding options not exercised by the time of the
Terminating Event shall not terminate if there is a successor corporation which
assumes the outstanding options or substitutes for such options.
14. Amendment and Termination
The Board of Directors of the Bank may at any time suspend, amend, or
terminate the Plan and may, with the consent of the Optionee, make such
modification of the terms and conditions of the option as it shall deem
advisable; provided that, except as permitted under the provisions of Sections
7, 12 and 13 hereof, no amendment or modification which would:
(a) increase the maximum number of shares which may be purchased pursuant
to options granted under the Plan either in the aggregate or by an
individual;
(b) change the minimum option price;
(c) increase the maximum term of options provided for herein;
(d) permit options to be granted to anyone other than a director,
full-time salaried officer or management level employee of the Bank
or a subsidiary corporation; or
(e) otherwise materially modify the Plan within the meaning of certain
SEC Rules and Regulations.
may be adopted without the Bank having first obtained any necessary regulatory
approvals and any shareholder approvals required by law.
11
<PAGE> 12
No option may be granted during any suspension or after termination of the
Plan. Amendment, suspension, or termination of the Plan shall not (except as
otherwise provided in Section 12 hereof), without the consent of the Optionee,
alter or impair any rights or obligation under any option theretofore granted.
15. Time of Granting Options
The time an option is granted, sometimes referred to as the date of grant,
shall be the day of the action of the Board of Directors (or action of the Stock
Option Committee, if authorized) described in Sections 3(c) and 4(c) hereof;
provided, however, that if appropriate resolutions of the Board of Directors (or
the Stock Option Committee, if authorized) indicate that an option is granted as
of and on some future date, the time such option is granted shall be such future
date. If action by the Board of Directors (or the Stock Option Committee, if
authorized) is taken by unanimous written consent of its members, the action of
the Board of Directors (or the Stock Option Committee) shall be deemed to be at
the time the last Board (or Stock Option Committee) member signs the consent.
16. Privileges of Stock Ownership; Securities Law Compliance; Notice of Sale
No Optionee shall be entitled to the privileges of stock ownership as to
any shares of stock not actually issued. No shares shall be purchased upon the
exercise Of any option unless and until all then applicable requirements of any
regulatory agencies having jurisdiction and all applicable requirements of any
exchanges upon which stock of the Bank may be listed, shall have been fully
complied with. The Optionee shall give the Bank notice of any sale or
disposition of any such shares not more than five (5) days after such sale or
disposition.
12
<PAGE> 13
17. Effective Date of the Plan
The Plan shall be deemed adopted as of April 17, 1989, and shall be
effective immediately subject to approval by the holders of a majority of the
Bank's outstanding stock, as required in Section 422A of the Code or the
regulations promulgated thereunder and the California Corporations Code.
18. Termination
Unless previously terminated by the Board of Directors, the Plan shall
terminate at the close of business on a date ten (10) years from the earlier of
the date of approval by the Bank's outstanding shares or the date of adoption of
this Plan. No options shall be granted under the Plan thereafter, but such
termination shall not affect any option theretofore granted.
19. Option Agreement
Each option shall be evidenced by a written Stock Option Agreement
executed by the Bank and the Optionee and shall contain each of the provisions
and agreements herein specifically required to be contained therein, and such
other terms and conditions as are deemed desirable and are not inconsistent with
the Plan. Each Incentive Stock Option Agreement shall contain such terms and
provisions as the Stock Option Committee may determine to be necessary in order
to qualify such option as any incentive stock option within the meaning of
Section 422A of the Code.
20. Option Period
Each option and all rights or obligations thereunder shall expire on such
date as the Board of Directors (or the Stock Option Committee, if authorized)
may determine, but not later than ten (10) years from the date such option is
granted, and shall be subject to earlier termination as provided elsewhere in
the Plan.
13
<PAGE> 14
21. Exculpation and Indemnification
To the extent permitted by applicable law in effect from time to time, no
member of the Board of Directors or Stock Option Committee shall be liable for
any action or omission of any other member of the Board of Directors or Stock
Option Committee nor for any act or omission on the member's own part, except
the member's own willful misconduct or gross negligence. The Board of Directors
of the Bank and its subsidiary corporations shall pay expenses incurred by, and
satisfy a judgment or fine rendered or levied against, a present or former
director or member of the Stock Option Committee in any action brought by a
third party against such person (whether or not the Bank is joined as a party
defendant) to impose a liability or penalty on such person while a director or
member of the Stock Option Committee arising with respect to the Plan or
administration thereof or out of membership on the Stock Option Committee or of
the Bank, or all or any combination of the preceding; provided, the Board of
Directors determines in good faith that such director or member was acting in
good faith, within what such director or member reasonably believed to be the
scope of his or her employment or authority, and for a purpose which he or she
reasonably believed to be in the best interests of the Bank or its shareholders.
Payments authorized hereunder include amounts paid and expenses incurred in
settling any such action or threatened action. This Section does not apply to
any action instituted or maintained in the right of the Bank by a shareholder or
holder of a voting trust certificate representing shares of the Bank or any
subsidiary corporation thereof. The provisions of this Section shall apply to
the estate, executor, administrator, heirs, legatees or devisees of a director
or member of the Stock Option Committee, and the term "person" as used in this
Section shall include the estate, executor, administrator, heirs, legatees or
devisees of such person.
14
<PAGE> 15
22. Agreement and Representations of Optionee
Unless the shares of stock covered by this Plan have been registered with
the Securities and Exchange Commission, each Optionee shall, by accepting an
option, represent and agree, for himself and his transferees by Will or the laws
of descent and distribution, that all stock will be acquired for investment and
not for sale or distribution. Upon exercise of any portion of an option, the
person entitled to exercise the same shall, upon request of the Bank, furnish
evidence satisfactory to the Bank (including a written and signed
representation) to the effect that the stock is being acquired in good faith for
investment and not for resale or distribution. Furthermore, the Bank, at its
sole discretion, may take all reasonable steps, including affixing the following
legend (and/or such other legend or legends as counsel shall require) on
certificates embodying the shares:
The shares represented by this certificate have not been registered under
the Securities Act of 1933 and may not be sold, pledged, hypothecated of
otherwise transferred or offered for sale in the absence of an effective
registration statement with respect to them under the Act or a written
opinion of counsel for the Optionee which opinion shall be acceptable to
counsel for the Bank that registration is not required.
to assure itself against any sale or distribution by the Optionee which does not
comply with this Plan or any Federal or state securities laws.
The Bank agrees to remove any legend affixed to the certificates embodying
the shares pursuant to this section when all of the restrictions on the transfer
of the shares, whether imposed by this Plan or Federal or state law, have
terminated.
WESTERN SIERRA NATIONAL BANK
By /s/ O. I. SCARIOT
------------------------------------
By /s/ R. G. ALBRECHT
------------------------------------
By /s/ DUVAL E. PHILLIPS
------------------------------------
15
<PAGE> 16
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF THE BANK'S
STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS: THE BANK'S 1989 STOCK OPTION PLAN
SHALL HAVE FIRST BEEN APPROVED BY THE SHAREHOLDERS OF THE BANK HOLDING NOT LESS
THAN A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK.
WESTERN SIERRA NATIONAL BANK
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT, dated the _________ day of _____________ 1989, by and
between Western Sierra National Bank, a California corporation (the "Bank"), and
_____________ ("Optionee") ;
WHEREAS, pursuant to the 1989 Stock Option Plan of the Bank (the "Plan"),
the Board of Directors of the Bank (or the Stock Option Committee, if authorized
by the Board of Directors) has authorized granting to Optionee a stock Option to
purchase all or any part of __________ (____) authorized but unissued shares of
the Bank's common stock for cash at the price of ____ Dollars ($__.__) per
share, such Option to be for the term and upon the terms and conditions
hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Board of Directors (or
the Stock Option Committee) and pursuant to authorizations granted by all
appropriate regulatory and governmental agencies, the Bank hereby grants to
Optionee the Option to purchase, upon and subject to the terms and conditions of
the Plan, which is incorporated in full herein by this reference, all or any
part of __________ (____) shares of the Bank's Common Stock (hereinafter called
"stock") at the price of _____ Dollars ($__.___) per share, which price is not
less than one hundred percent (100%) of the fair market value of the stock as of
the date of action of the Board of Directors (or the Stock Option Committee)
granting this Option.
<PAGE> 17
2. Exercisability. This Option shall be exercisable as to _______________
_______________________________________________________________________________
_______________________________________________________________________________.
This Option shall remain exercisable as to all of such shares until _________,
_______, (but not after the expiration of ten (10) years from the date this
Option is granted) unless this Option has expired or terminated earlier in
accordance with the provisions hereof. Shares as to which this Option becomes
exercisable pursuant to the foregoing provision may be purchased at any time
prior to expiration of this Option.
3. Exercise of Option. This Option may be exercised by written
notice delivered to the Bank stating the number of shares with respect to which
this Option is being exercised, together with cash in the amount of the purchase
price of such shares. Not less than ten (10) shares may be purchased at any one
time unless the number purchased is the total number which may be purchased
under this Option and in no event may the Option be exercised with respect to
fractional shares. Upon exercise, Optionee shall make appropriate arrangements
and shall be responsible for the withholding of any federal and state taxes then
due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5
hereof, if Optionee shall cease to be employed by the Bank or a subsidiary
corporation for any reason other than Optionee's death or disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), this Option shall expire three (3) months thereafter. During the
three-month period this Option shall be exercisable only as to those
installments, if any, which had accrued as of the date when Optionee ceased to
be employed by the Bank or the subsidiary corporation.
5. Termination of Employment for Cause. If Optionee's employment by the
Bank or a subsidiary corporation is terminated for cause, this Option shall
2
<PAGE> 18
expire immediately, unless reinstated by the Board of Directors within thirty
(30) days of such termination by giving written notice of such reinstatement to
Optionee at his last known address. In the event of such reinstatement, Optionee
may exercise this Option only to such extent, for such time, and upon such terms
and conditions as if Optionee had ceased to be employed by the Bank or a
subsidiary corporation upon the date of such termination for a reason other than
cause or death. Termination for cause shall include termination for malfeasance
or gross misfeasance in the performance of duties or conviction of illegal
activity in connection therewith or any conduct detrimental to the interests of
the Bank or a subsidiary corporation and, in any event, the determination of the
Board of Directors with respect thereto shall be final and conclusive.
6. Nontransferability; Disability or Death of Optionee. This Option shall
not be transferable except by Will or by the laws of descent and distribution
and shall be exercisable during Optionee's lifetime only by Optionee. If
Optionee dies while employed by the Bank or a subsidiary corporation, or during
the three-month period referred to in Paragraph 4 hereof, this Option shall
expire one (1) year after the date of Optionee's death or on the day specified
in Paragraph 2 hereof, whichever is earlier. After Optionee's death but before
such expiration, the persons to whom Optionee's rights under this Option shall
have passed by Will or by the applicable laws of descent and distribution or the
executor or administrator of Optionee's estate shall have the right to exercise
this Option as to those shares for which installments had accrued under
Paragraph 2 hereof as of the date on which Optionee ceased to be employed by the
Bank or a subsidiary corporation.
If Optionee shall terminate employment because of disability (as defined
in Section 105(d)(4) of the Internal Revenue Code of 1986, as amended from time
to time), Optionee may exercise this Option to the extent he or she is entitled
to do
3
<PAGE> 19
so at the date of termination, at any time within 12 months of the date of
termination, but in no event later than expiration date in paragraph 2.
7. Employment. This Agreement shall not obligate the Bank or a subsidiary
corporation to employ Optionee for any period, nor shall it interfere in any way
with the right of the Bank or a subsidiary corporation to reduce Optionee's
compensation.
8. Privileges of Stock Ownership. Optionee shall have no rights as a
stockholder with respect to the Bank's stock subject to this Option until the
date of issuance of stock certificates to Optionee. Except as provided in
Section 13 of the Plan, no adjustment will be made for dividends or other rights
for which the record date is prior to the date such stock certificates are
issued.
9. Modification and Termination by Board of Directors. The rights of
Optionee are subject to modification and termination upon the occurrence of
certain events as provided in Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this Option, will notify the Bank not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of
this option shall be issued and delivered unless and until all applicable
requirements of federal law and of the Securities and Exchange Commission
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bank of
the same class are then listed shall have been complied with. Upon exercise of
any portion of this option, the person entitled to execute the same shall
execute the letter attached hereto as Exhibit "A". The Bank may require a letter
from counsel acceptable to the Bank that all federal and state securities laws
have
4
<PAGE> 20
been complied with, prior to the issuance of any shares under this option. In
addition, if the Optionee is an "affiliate" for purposes of the Securities Act
of 1933, there may be additional restrictions on the resale of stock, and
Optionee therefore agrees to ascertain what those restrictions are and to abide
by the restrictions and other applicable federal and state securities laws.
Furthermore, the Bank may, if it deems appropriate, issue stop transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bank deems appropriate.
12. Notices. Any notice to the Bank provided for in this Agreement shall
be addressed to it in care of its President or Chief Financial Officer at its
main office and any notice to Optionee shall be addressed to Optionee's address
on file with the Bank or a subsidiary corporation, or to such other address as
either may designate to the other in writing. Any notice shall be deemed to be
duly given if and when enclosed in a properly sealed envelope and addressed as
stated above and deposited, postage prepaid, with the United States Postal
Service. In lieu of giving notice by mail as aforesaid, any written notice under
this Agreement may be given to Optionee in person, and to the Bank by personal
delivery to its President or Chief Financial Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE WESTERN SIERRA NATIONAL BANK
By By
-------------------------------- -------------------------------------
By
-------------------------------------
5
<PAGE> 21
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF THE BANK'S
STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS: THE BANK'S 1989 STOCK OPTION PLAN
SHALL HAVE FIRST BEEN APPROVED BY SHAREHOLDERS OF THE BANK HOLDING NOT LESS THAN
A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK.
WESTERN SIERRA NATIONAL BANK
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated the ________ day of ________________, 1989, by and
between Western Sierra National Bank, a California corporation (the "Bank"), and
____________________________________________, ("Optionee");
WHEREAS, pursuant to the 1989 Stock Option Plan of the Bank (the "Plan"),
the Board of Directors of the Bank (or the Stock Option Committee, if authorized
by the Board of Directors) has authorized granting to Optionee a stock option to
purchase all or any part of ___________________ (___________) authorized but
unissued shares of the Bank's common stock for cash at the price of
______________________ Dollars ($_____) per share, such option to be for the
term and upon the terms and conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Board of Directors (or
the Stock Option Committee) and pursuant to authorizations granted by all
appropriate regulatory and governmental agencies, the Bank hereby grants to
Optionee the option to purchase, upon and subject to the terms and conditions of
the Plan, which is incorporated in full herein by this reference, all or any
part of _____ ___________________ (______) shares of the Bank's Common Stock
(hereinafter called "stock") at the price of _____________ Dollars ($______) per
share, which price is not less than one hundred percent (100%) of the fair
market value of the stock as of the date of action of the Board of Directors (or
the Stock Option Committee) granting this option.
<PAGE> 22
2. Exercisability. This option shall be exercisable as to ________________
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________. This option
shall remain exercisable as to all of such shares until 19_ (but not after the
expiration of ten (10) years from the date this option is granted) unless this
option has expired earlier in accordance with the provisions hereof. Shares as
to which this option becomes exercisable pursuant to the foregoing provision may
be purchased at any time prior to expiration of this option.
3. Exercise of Option. This option may be exercised by written notice
delivered to the Bank stating the number of shares with respect to which this
option is being exercised, together with cash in the amount of the purchase
price of such shares. Not less than ten (10) shares may be purchased at any one
time unless the number purchased is the total number which may be purchased
under this option and in no event may the option be exercised with respect to
fractional shares. Upon exercise, Optionee shall make appropriate arrangements
and shall be responsible for the withholding of any federal and state taxes then
due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5
hereof, if Optionee shall cease to be employed by or a director of the Bank or a
subsidiary corporation for any reason other than Optionee's death or disability,
this option shall expire three (3) months thereafter. During the three-month
period this option shall be exercisable only as to those installments, if any,
which had accrued as of the date when the Optionee ceased to be employed by or a
director of the Bank or the subsidiary corporation.
5. Termination of Employment for Cause. If Optionee's employment by the
Bank or a subsidiary corporation is terminated for cause, this option shall
expire immediately, unless reinstated by the Board of Directors within thirty
(30)
2
<PAGE> 23
days of such termination by giving written notice of such reinstatement to
Optionee at his last known address. In the event of such reinstatement, Optionee
may exercise this option only to such extent, for such time, and upon such terms
and conditions as if Optionee had ceased to be employed by the Bank or a
subsidiary corporation upon the date of such termination for a reason other than
cause or death. Termination for cause shall include termination for malfeasance
or gross misfeasance in the performance of duties or conviction of illegal
activity in connection therewith or any conduct detrimental to the interests of
the Bank or a subsidiary corporation and, in any event, the determination of the
Board of Directors with respect thereto shall be final and conclusive.
6. Nontransferability; Death or Disability of Optionee. This option shall
not be transferable except by Will or by the laws of descent and distribution
and shall be exercisable during Optionee's lifetime only by Optionee. If
Optionee dies while employed by or while being a director of the Bank or a
subsidiary corporation, or during the three-month period referred to in
Paragraph 4 hereof, this option shall expire one (1) year after the date of
Optionee's death or on the day specified in Paragraph 2 hereof, whichever is
earlier. After Optionee's death but before such expiration, the persons to whom
Optionee's rights under this option shall have passed by Will or by the
applicable laws of descent and distribution or the executor or administrator of
Optionee's estate shall have the right to exercise this option as to those
shares for which installments had accrued under Paragraph 2 hereof as of the
date on which Optionee ceased to be employed by or director of the Bank or a
subsidiary corporation.
If the Optionee terminates his employment or directorship because of a
disability, the Optionee may exercise this option to the extent he is entitled
to do so at the date of termination at any time within 12 months of the date of
3
<PAGE> 24
termination, or before the expiration date specified in Paragraph 2 hereof,
whichever is earlier.
7. Employment. This Agreement shall not obligate the Bank or a subsidiary
corporation to employ Optionee for any period, nor shall it interfere in any way
with the right of the Bank or a subsidiary corporation to reduce Optionee's
compensation.
8. Privileges of Stock Ownership. Optionee shall have no rights as a
stockholder with respect to the Bank's stock subject to this option until the
date of issuance of stock certificates to Optionee. Except as provided in the
Plan, no adjustment will be made for dividends or other rights for which the
record date is prior to the date such stock certificates are issued.
9. Modification and Termination by Board of Directors. The rights of
Optionee are subject to modification and termination upon the occurrence of
certain events as provided in Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this option, will notify the Bank not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of
this option shall be issued and delivered unless and until all applicable
requirements of federal law and of the Securities and Exchange Commission
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bank of
the same class are then listed shall have been complied with. Upon exercise of
any portion of this Option, the person entitled to execute the same shall
execute the letter attached hereto as Exhibit "A". The Bank may require a letter
from counsel acceptable to the Bank that all federal securities laws have been
complied
4
<PAGE> 25
with, prior to the issuance of any shares under this option. In addition, if the
Optionee is an "affiliate" for purposes of the Securities Act of 1933, there may
be additional restrictions on the resale of stock, and Optionee therefore agrees
to ascertain what those restrictions are and to abide by those restrictions and
other applicable federal and state securities laws.
Furthermore, the Bank may, if it deems appropriate, issue stock transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bank deems appropriate.
12. Notices. Any notice to the Bank provided for in this Agreement shall
be addressed to it in care of its President or Chief Financial Officer at its
main office and any notice to Optionee shall be addressed to Optionee's address
on file with the Bank or a subsidiary corporation, or to such other address as
either may designate to the other in writing. Any notice shall be deemed to be
duly given if and when enclosed in a properly sealed envelope and addressed as
stated above and deposited, postage prepaid, with the United States Postal
Service. In lieu of giving notice by mail as aforesaid, any written notice under
this Agreement may be given to Optionee in person, and to the Bank by personal
delivery to its President or Chief Financial Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE WESTERN SIERRA NATIONAL BANK
By By
-------------------------------- -------------------------------------
By
-------------------------------------
5
<PAGE> 1
EXHIBIT 10.11
WESTERN SIERRA BANCORP
1997 STOCK OPTION PLAN
1. Purpose; Definitions.
(a) Purpose. The purpose of the Plan is to attract, retain, and
motivate officers, employees, and directors of Western Sierra Bancorp (the
"Company") by giving them the opportunity to acquire Stock ownership in the
Company.
(b) Definitions. For purposes of the Plan, the following terms
have the following meanings:
(i) "Administrator" means the Executive Committee referred to in
Section 4 in its capacity as administrator of the Plan, or the Board in the
event that it abolishes the Executive Committee and revests in the Board the
administration of the Plan.
(ii) "Board" means the Board of Directors of the Company.
(iii) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(iv) "Company" means Western Sierra Bancorp, a bank holding
company, and its subsidiaries.
(v) "Director" means a member of the Board.
(vi) "Effective Date" has the meaning set forth in Section 2.
(vii) "Eligible Person" means, in the case of the grant of an
Incentive Stock Option, all [management-level] employees of the company, and in
the case of a Non-qualified Stock Option, any director (including a director who
is also a member of the Executive Committee), officer, or employee of the
Company.
(viii) "Fair Market Value" means the value established by the
Administrator for the purpose of granting options under the Plan.
(ix) "Grant Date" means the date of grant of any option.
(x) "Incentive Stock Option" means an option within the meaning
of Section 422 of the Code, the award of which contains such provisions as are
necessary to comply with that section.
(xi) "Non-qualified Stock Option" means an option which is
designated a Non-qualified Stock Option.
(xii) "Option" shall mean an option to purchase Common Stock
under this Plan. An Option shall be designated by the
1
<PAGE> 2
Administrator as either an Incentive Stock Option or a Non-qualified Stock
Option.
(xiii) "Option Agreement" means the written option agreement with
respect to an Option.
(xiv) "Optionee" means the holder of an option.
(xv) "Plan" means this Western Sierra Bancorp 1997 Stock Option Plan, as
amended from time to time.
(xvi) "Stock" means the Common Stock, no par value, of the Company, and
any successor entity.
(xvii) "Tax Date" means the date defined in Section 7.
(xviii)"Vesting Date" means the date on which an Option becomes wholly
or partially exercisable, as determined by the Administrator in its sole
discretion.
2. Effective Date; Term of Plan. The Effective Date of this Plan shall
be upon approval of this Plan by the Company's Board. This Plan, but not options
already granted, shall terminate automatically ten (10) years after its adoption
by the Board, unless terminated earlier by the Board under Section 13. No
Options shall be granted after termination of this Plan but all Options granted
prior to termination shall remain in effect in accordance with their terms.
3. Number and Source of Shares of Stock Subject to the Plan. Subject to
the provisions of Section 8, the total number of shares of Stock with respect to
which Options may be granted under this Plan is 100,000 shares of Stock. The
shares of Stock covered by any canceled, expired, or terminated Option or the
unexercised portion thereof shall become available again for grant under this
Plan. The shares of Stock to be issued hereunder upon exercise of an option may
consist of authorized and unissued shares or treasury shares.
4. Administration of the Plan. This Plan shall be administered by a
committee of the Board to which administration of this Plan is delegated by the
Board (the "Executive Committee"). The "Administrator" shall mean the "Executive
Committee" referred to in this Section 4 in its capacity as administrator of the
Plan in accordance with this Section 4. The Administrator may delegate
nondiscretionary administrative duties to such employees of the Company as it
deems proper.
Subject to the express provisions of this Plan, the Administrator shall
have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Optionees under this
Plan, to further define the
2
<PAGE> 3
terms used in this Plan, to prescribe, amend, and rescind rules and regulations
relating to the administration of this Plan, to determine the duration and
purposes of leaves of absence which may be granted to Optionees without
constituting a termination of their employment for purposes of this Plan, and to
make all other determinations necessary or advisable for the administration of
this Plan.
Any decision or action of the Administrator in connection with this Plan
or Options granted or shares of Stock purchased under this Plan shall be final
and binding. The Administrator shall not be liable for any decision, action, or
omission respecting this Plan, or any Options granted or shares of Stock sold
under this Plan. The Board at any time may abolish or replace the Executive
Committee and revest in the Board the administration of the Plan.
To the extent permitted by applicable law in effect from time to time,
no member of the Executive Committee or the Board of Directors shall be liable
for any action or omission of any other member of the Executive Committee or the
Board of Directors nor for any act or omission on the member's own part,
excepting only the member's own willful misconduct or gross negligence, arising
out of or related to the Plan. The Company shall pay expenses incurred by, and
satisfy a judgment or fine rendered or levied against, a present or former
director or member of the Executive Committee or Board in any action against
such person (whether or not the Company is joined as a party defendant) to
impose liability or a penalty on such person for an act alleged to have been
committed by such person while a director or member of the Executive Committee
or Board arising with respect to the Plan or administration thereof or out of
membership on the Executive Committee or Board or by the Company, or all or any
combination of the preceding; provided, the director or Executive Committee
member was acting in good faith, within what such director or Executive
Committee member reasonably believed to have been within the scope of his or her
employment or authority and for a purpose which he or she reasonably believed to
be in the best interests of the Company or its shareholders. Payments authorized
hereunder include amounts paid and expenses incurred in settling any such action
or threatened action. The provisions of this section shall apply to the estate,
executor, administrator, heirs, legatees, or devisees of a director or Executive
Committee member, and the term "person" as used in this section shall include
the estate, executor, administrator, heirs, legatees, or devisees of such
person.
5. Grant of Options; Terms and Conditions of Grant.
(a) Grant of Options. One or more Options may be granted to any
Eligible Person. Subject to the express provisions of the Plan, the
Administrator shall determine from the Eligible Persons those individuals to
whom options under the Plan may be granted. Each Option so granted shall be
designated by the
3
<PAGE> 4
Administrator as either a Non-qualified Stock Option or an Incentive Stock
Option.
Subject to the express provisions of this Plan, the Administrator shall
specify the Grant Date, the number of shares of Stock covered by the Option, the
exercise price, vesting requirements, if any, and the terms and conditions for
exercise of the Options. Further, the Options may be granted pursuant to an
employee contract. If the Administrator fails to specify the Grant Date, the
Grant Date shall be the date of the action taken by the Administrator to grant
the Option. As soon as practicable after the Grant Date, the Company will
provide the Optionee with a written Option Agreement, in the form approved by
the Administrator, which sets out the Grant Date, the number of shares of Stock
covered by the Option, the exercise price, and the terms and conditions for
exercise of the Option.
The Administrator may, in its absolute discretion, grant Options under
this Plan to an Eligible Person at any time and from time to time before the
expiration of ten (10) years from the Effective Date.
(b) General Terms and Conditions. Except as otherwise provided
herein, the Options shall be subject to the following terms and conditions and
such other terms and conditions not inconsistent with this Plan as the
Administrator may impose:
(i) Exercise of Option. In order to exercise all or any portion of any
Option granted under this Plan, an Optionee must remain as an officer, employee,
or director of the Company, until the Vesting Date. The Option shall be
exercisable on or after each Vesting Date in accordance with the terms set forth
in the Option Agreement.
(ii) Option Term. Each Option and all rights or obligations thereunder
shall expire on such date as shall be determined by the Administrator, up to but
not later than ten years after the grant of the Option (five years in the case
of an Incentive Stock Option when the Optionee owns more than 10% of the total
combined voting power of all classes of stock of the Company) , and shall be
subject to earlier termination as hereinafter provided.
(iii) Exercise Price. The Exercise Price of any Option shall be
determined by the Administrator, but, in the case of Incentive Stock Options,
shall not be less than 100% (110% in the case of an Optionee who owns more than
10% of the total combined voting power of all classes of stock of the Company)
of the Fair Market Value of the Stock on the date the Incentive Stock Option is
granted and 100% of the Fair Market Value of the Stock on the date the
Non-qualified Stock Option is granted.
4
<PAGE> 5
(iv) Method of Exercise. To the extent the right to purchase shares of
Stock has accrued, Options may be exercised, in whole or in part, from time to
time in accordance with their terms by written notice from the Optionee to the
Company stating the number of shares of Stock with respect to which the Option
is being exercised and accompanied by payment in full of the exercise price.
Payment may be made in cash, certified check or, at the absolute discretion of
the Administrator, by non-certified check.
(v) Restrictions on Stock; Option Agreement. At the time it grants
Options under this Plan, the Company may retain, for itself or others, rights to
repurchase the shares of Stock acquired under the Option or impose other
restrictions on such shares. The terms and conditions of any such rights or
other restrictions shall be set forth in the Option Agreement evidencing the
Option. No Option shall be exercisable until after execution of the Option
Agreement by the Company and the Optionee.
(vi) Non-assignability of Option Rights. No Option shall be transferable
other than by will or by the laws of descent and distribution. During the
lifetime of an Optionee, only the Optionee may exercise an option.
(vii) Exercise After Certain Events.
(1) Termination as an employee or director. If for any reason
other than permanent and total disability or death (as defined below) an
Optionee ceases to be employed by or to be a director of the Company, Options
held at the date of such termination (to the extent then exercisable) may be
exercised, in whole or in part, at any time within three months after the date
of such termination or such lesser period specified in the Option Agreement (but
in no event after the earlier of (i) the expiration date of the Option as set
forth in the Option Agreement, and (ii) ten years from the Grant Date).
If an Optionee granted an Incentive Stock Option terminates employment
but continues as a consultant, advisor, or in a similar capacity to the Company,
the Optionee need not exercise the Option within three months of termination of
employment but shall be entitled to exercise within three months of termination
of services to the Company (one year in the event of permanent disability or
death). However, if Optionee does not exercise within three months of
termination of employment, the Option will not qualify as an Incentive Stock
Option.
(2) Permanent Disability and Death. If an Optionee becomes
permanently and totally disabled (within the meaning of Section 221(e)(3) of
the Code) , or dies while employed by the Company, or while acting as an officer
or director of the Company (or if the Optionee dies within the period that the
option remains exercisable after termination of employment or affiliation),
5
<PAGE> 6
Options then held (to the extent then exercisable) may be exercised by the
Optionee, the Optionee's, personal representative, or by the person to whom the
Option is transferred by will or the laws of descent and distribution, in whole
or in part, at any time within one year after the disability or death or any
lesser period specified in the Option Agreement (but in no event after the
earlier of (i) the expiration date of the Option as set forth in the Option
Agreement, and (ii) ten years from the Grant Date).
(viii) Compliance with Securities Laws. The Company shall not be
obligated to issue any shares of Stock upon exercise of an Option unless such
shares are at that time effectively registered or exempt from registration under
the federal securities laws and the offer and sale of the shares of Stock are
otherwise in compliance with all applicable securities laws. Upon exercising all
or any portion of an Option, an Optionee may be required to furnish
representations or undertakings deemed appropriate by the Company to enable the
offer and sale of the shares of Stock or subsequent transfers of any interest in
such shares to comply with applicable securities laws. Evidences of ownership of
shares of Stock acquired upon exercise of Options shall bear any legend required
by, or useful for purposes of compliance with, applicable securities laws, this
Plan, or the Option Agreement evidencing the option.
6. Limitations on Grant of Incentive Stock Options.
(a) The aggregate Fair Market Value (determined as of the Grant
Date) of the Stock for which Incentive Stock Options may first become
exercisable by any Optionee during any calendar year under this Plan, together
with that of Stock subject to Incentive Stock Options first exercisable (other
than as a result of acceleration pursuant to Section 9(a)) by such Optionee
under any other plan of the Company or any Subsidiary, shall not exceed
$100,000.
(b) There shall be imposed in the Option Agreement relating to
Incentive Stock Options such terms and conditions as are required in order that
the Option be an "incentive stock option" as that term is defined in Section 422
of the Code.
(c) No Incentive Stock Option may be granted to any person who,
at the time the Incentive Stock Option is granted, owns shares of outstanding
Stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company, unless the exercise price of such option is at least
110% of the Fair Market Value of the Stock (determined as of the Grant Date)
subject to the Option and such Option by its terms is not exercisable after the
expiration of five years from the Grant Date.
(d) No Incentive Stock Option may be granted to any person who is
not an employee of the company.
6
<PAGE> 7
7. Payment of Taxes. Upon the disposition by an Optionee or other
person of shares of an Option prior to satisfaction of the holding period
requirements of Section 422 of the Code, or upon the exercise of a Non-qualified
Stock Option, the Company shall have the right to require such Optionee or such
other person to pay by cash, or check payable to the Company, the amount of any
taxes which the Company may be required to withhold with respect to such
transactions. Any such payment must be made promptly when the amount of such
obligation becomes determinable (the "Tax Date"). The Administrator may, in
lieu of such cash payment, withhold that number of Shares sufficient to satisfy
such withholding.
8. Adjustment for Changes in Capitalization. The existence of
outstanding options shall not affect the Company's right to effect adjustments,
recapitalizations, reorganizations, or other changes in its or any other
corporation's capital structure or business, any merger or consolidation, any
issuance of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock, the dissolution or liquidation of the Company's or any
other corporation's assets or business or any other corporate act whether
similar to the events described above or otherwise. Subject to Section 9, if the
outstanding shares of the Stock are increased or decreased in number or changed
into or exchanged for a different number or kind of securities of the Company or
any other corporation by reason of a recapitalization, reclassification, stock
split, combination of shares, stock dividend, or other event, an appropriate
adjustment of the number and kind of securities with respect to which Options
may be granted under this Plan, the number and kind of securities as to which
outstanding Options may be exercised, and the exercise price at which
outstanding Options may be exercised will be made.
9. Dissolution, Liquidation, Merger.
(a) Company Not The Survivor. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a sale
of substantially all of the assets of the Company, any outstanding Option shall
become fully vested immediately upon the Company's public announcement of any
one of the foregoing. The Board of Directors shall determine, in its sole and
absolute discretion, when the Company shall be deemed to survive for purposes of
this paragraph. If the Optionee does not exercise the entire Option within
ninety (90) days, the Administrator and Optionee may agree, with respect to the
unexercised portion of the Option:
(1) to cancel the Option upon payment to the Optionee in an
amount equal to the difference between the closing price of the stock underlying
the Option quoted the day before such liquidation, dissolution, merger,
consolidation, combination, reorganization and the exercise price of the Option;
or
7
<PAGE> 8
(2) to assign the Option and all rights and obligations under it
to the successor entity, with all such rights and obligations being assumed by
the successor entity.
(b) Company is the Survivor. In the event of a merger,
consolidation, combination, or reorganization in which the Company is the
surviving corporation, the Board of Directors shall determine the appropriate
adjustment of the number and kind of securities with respect to which
outstanding Options may be exercised, and the exercise price at which
outstanding options may be exercised. The Board of Directors shall determine, in
its sole and absolute discretion, when the Company shall be deemed to survive
for purposes of this Plan.
10. Change of Control. If there is a "change of control" in the Company,
all outstanding Options shall fully vest immediately upon the Company's public
announcement of such a change. A "change of control" shall mean an event
involving one transaction or a related series of transactions, in which (i) the
Company issues securities equal to 25% or more of the Company's issued and
outstanding voting securities, determined as a single class, to any individual,
firm, partnership, limited liability company, or other entity, including a
"group" within the meaning of SEC Exchange Act ("Rule 13d-3"); (ii) subsequent
to the date of the issuance of an Option, any individual, firm, partnership,
limited liability company, or entity, including a "group" within the meaning of
Rule 13d-3 acquires beneficial ownership within the meaning of Rule 13d-3 equal
to 25% or more of the Company's issued and outstanding voting stock; (iii) the
Company issues voting securities equal to 25% or more of the issued and
outstanding voting stock of the Company in connection with a merger,
consolidation or other business combination; (iv) the Company is acquired in a
merger or other business combination transaction in which the Company is not the
surviving company; or (v) all or substantially all of the Company's assets are
sold or transferred. See Section 9 with respect to Options vesting upon the
occurrence of either of the events described in (iv) or (v) of this Section 10
and the result upon the non-exercise of the Options.
11. Suspension and Termination. In the event the Board or the
Administrator reasonably believes an Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option granted hereunder pending final determination by the Board or the
Administrator. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty or deliberate disregard of
the Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
8
<PAGE> 9
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf. The
determination of the Board or the Administrator shall be final and conclusive.
12. No Rights as Shareholder or to Continued Employment. An Optionee
shall have no rights as a shareholder with respect to any shares of Stock
covered by an Option. An Optionee shall have no right to vote any shares of
Stock, or to receive distributions of dividends or any assets or proceeds from
the sale of Company assets upon liquidation until such Optionee has effectively
exercised the Option and fully paid for such shares of Stock. Subject to
Sections 8 and 9, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date title to the shares of Stock has been
acquired by the Optionee. The grant of an Option shall in no way be construed so
as to confer, on any Optionee the rights to continued employment by the Company.
13. Termination; Amendment. The Board may amend, suspend or terminate
this Plan at any time and for any reason, but no amendment, suspension or
termination shall be made which would impair the right of any person under any
outstanding Options without such person's consent not unreasonably withheld.
Further, any amendment which materially increases the benefits accruing to
participants under this Plan, shall be subject to the approval of the Company's
shareholders.
14. Governing Law. This Plan and the rights of all persons under this
Plan shall be construed in accordance with and under applicable provisions of
the laws of the State of California.
Adopted by the Board on 5-20-1997.
----------------------
[SIG]
-------------------------------
Secretary
9
<PAGE> 10
DATE OF GRANT:__________
WESTERN SIERRA BANCORP
NONQUALIFIED STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp, a
California corporation (the "Company") and _____________ ("Optionee"), as of
_________________.
In consideration of the mutual covenants contained herein and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner
and subject to the conditions hereinafter provided, the right, privilege and
option to purchase (the "Option") an aggregate of _____________(____) shares of
the Company's Common Stock, (the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set
forth herein, the term of this Option shall be _____________(____) years from
the date of grant (the "Expiration Date"). Any portion of this Option not
exercised prior to the Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as follows:
NUMBER OF SHARES VESTING DATE
------------------- ---------------------
------------------- ---------------------
------------------- ---------------------
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option
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<PAGE> 11
vested on such date ("Vested Portion"). In the event of a "Change in Control" as
defined in the Plan, all outstanding Options shall fully vest immediately upon
the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this
Option may be purchased during the term of this Option, but not as to less than
100 shares (unless the remaining shares then constituting the Vested Portion
of this Option is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be
exercised from time to time, in whole or in part, by presentation of a Request
to Exercise Form, substantially in the form attached hereto, to the Company at
its principal office, which Form must be duly executed by Optionee and
accompanied by payment, in cash, to the Company, in the aggregate amount of the
Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by
the payment specified, the Optionee shall be deemed to be the record owner of
the Shares purchased, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing the Shares
purchased under this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price") payable
upon exercise of this Option shall be $_______ per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceases to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), or dies while employed by the Company, or
while acting as an officer or director of the Company (or, if the Optionee dies
within the period that the Option remains exercisable after termination of
employment or affiliation), Options then held (to the extent then exercisable)
may be exercised by the Optionee, the Optionee's personal representative, or by
the person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after the
disability or death (but in no event after the expiration date of the Option).
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<PAGE> 12
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option
shall not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a sale
of substantially all of the assets of the Company (as determined in the sole
discretion of the Administrator), and if the Optionee does not exercise the
entire Option within 90 days of such event, the Administrator and Optionee may
agree to (i) cancel each outstanding Option upon payment in cash to the Optionee
of the amount by which any cash and the fair market value of any other property
which the Optionee would have received as consideration for the shares of Stock
covered by the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option or (ii) assign the Option and all rights and obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of the
number and kind of securities with respect to which outstanding Options may be
exercised, and the exercise price at which outstanding Options may be exercised.
The Administrator shall determine, in its sole and absolute discretion, when the
Company shall be deemed to survive for purposes of this Plan.
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of
the expiration of this
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<PAGE> 13
Option or the exercise and purchase of the total number of Shares represented by
this Option, there shall be reserved for issuance and delivery upon exercise of
this Option such number of the Company's authorized and unissued Shares as shall
be necessary to satisfy the terms and conditions of this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by this Option unless the
Optionee shall have exercised this Option, and then only with respect to the
Shares underlying the portion of the Option exercised. The Optionee shall have
no right to vote any Shares, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
Optionee has effectively exercised this Option and fully paid for such Shares.
Subject to Section 6, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date title to the Shares has been
acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this
Option shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits
otherwise, the Optionee shall pay the Company in cash all local, state and
federal withholding taxes applicable, in the Administrator's absolute
discretion, to the grant or exercise of this Option, or the transfer or other
-4-
<PAGE> 14
disposition of Shares acquired upon exercise of this Option. Any such payment
must be made promptly when the amount of such obligation becomes determinable.
The Administrator may, in lieu of such cash payment, withhold that number of
Shares sufficient to satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or
relating to this Option which cannot be amicably settled including, but not
limited to, the suspension or termination of Optionee's right in accordance with
Section 11 above, shall be settled by arbitration. Said arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association at a time and place within the above-referenced location
as selected by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written
notice to the other, either party hereto may formally initiate arbitration under
this Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
15.2. HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration. Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall
be binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right
of either party to seek to obtain injunctive relief or other provisional
remedies against threatened or actual conduct that will cause loss or damages
under the usual equity rules including the applicable rules for obtaining
preliminary injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the
arbitrator, shall initially be borne equally by the parties; provided, the
prevailing party shall be entitled to recover such costs, in addition to
attorneys' fees and other costs, in accordance with Section 18 of this
Agreement.
16. NOTICES. All notices to be given by either party to the other shall be
in writing and may be
-5-
<PAGE> 15
transmitted by personal delivery, facsimile transmission, overnight courier or
mail, registered or certified, postage paid with return receipt requested;
provided, however, that notices of change of address or telex or facsimile
number shall be effective only upon actual receipt by the other party. Notices
shall be delivered at the following addresses, unless changed as provided for
herein.
To the Optionee:
-------------------------------
-------------------------------
-------------------------------
To the Company:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
P.O. Box 1460
Cameron Park, California 95682
Facsimile: (916) 677-5075
-6-
<PAGE> 16
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgement, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, executors, and
successors.
20. TAX EFFECT. The federal tax consequences of stock options are complex
and subject to change. Each person should consult with his or her tax advisor
before exercising any Option or disposing of any Shares acquired upon the
exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts.
each of which when taken together shall constitute one and the same instrument.
-7-
<PAGE> 17
IN WITNESS WHEREOF, this Option Agreement has been executed as of the
________ day of _________________, ______, at Cameron Park, California.
THE COMPANY: WESTERN SIERRA BANCORP
By:
-----------------------------
OPTIONEE: -------------------------------
-------------------------------
-8-
<PAGE> 18
REQUEST TO EXERCISE FORM
Dated:___________
The undersigned hereby irrevocably elects to exercise all or part, as
specified below, of the Vested Portion of the option ("Option") granted to him
pursuant to a certain stock option agreement ("Agreement") effective __________,
between the undersigned and Western Sierra Bancorp (the "Company" to purchase an
aggregate of _____________ (_______) shares of the Company's Common Stock, par
value $________ (the "Shares").
The undersigned hereby tenders cash in the amount of $_____ per Share
multiplied by _____________ (_______) the number of Shares he is purchasing at
this time, for a total of $_______, which constitutes full payment of the total
Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:____________________________________________
(Please typewrite or print in block letters)
Address: ________________________________________
____________________________________________
Signature: ____________________________________________
Accepted by Western Sierra Bancorp:
By: ____________________________________________
____________________________________________
Name
____________________________________________
Title
-9-
<PAGE> 19
DATE OF GRANT:________
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the
"Company") and _________________ ("Optionee"), as of _______________,____.
In consideration of the mutual covenants contained herein and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner
and subject to the conditions hereinafter provided, the right, privilege and
option to purchase (the "Option") an aggregate of __________ (_____) shares of
the Company's Common Stock, (the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set
forth herein, the term of this Option shall be __________ (_____) years from the
date of grant (the "Expiration Date"). Any portion of this Option not exercised
prior to the Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as follows:
NUMBER OF SHARES VESTING DATE
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
--------------------- ---------------------
1
<PAGE> 20
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this
Option may be purchased during the term of this option, but not as to less than
100 shares (unless the remaining shares then constituting the Vested Portion of
this Option is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be
exercised from time to time, in whole or in part. by presentation of a Request
to Exercise Form, substantially in the form attached hereto, to the Company at
its principal office, which Form must be duly executed by Optionee and
accompanied by payment, in cash, to the Company, in the aggregate amount of the
Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by
the payment specified, the Optionee shall be deemed to be the record owner of
the Shares purchased, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing the Shares
purchased under this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price") payable
upon exercise of this Option shall be $_______________ per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceases to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), or dies while employed by the Company, or
while acting as an officer or director of the Company (or, if the Optionee dies
within the period that the Option remains exercisable after termination of
employment or affiliation), Options then held (to the extent then exercisable)
may be exercised by the Optionee, the Optionee's personal representative, or by
the person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after the
disability or death (but in no event after the expiration date of the
2
<PAGE> 21
Option).
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option
shall not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a sale
of substantially all of the assets of the Company (as determined in the sole
discretion of the Administrator), and if the Optionee does not exercise the
entire Option within 90 days of such event, the Administrator and Optionee may
agree to (i) cancel each outstanding Option upon payment in cash to the Optionee
of the amount by which any cash and the fair market value of any other property
which the Optionee would have received as consideration for the shares of Stock
covered by the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of
the number and kind of securities with respect to which outstanding Options may
be exercised, and the exercise price at which outstanding Options may be
exercised. The Administrator shall determine, in its sole and absolute
discretion, when the Company shall be deemed to survive for purposes of this
Plan.
3
<PAGE> 22
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of
the expiration of this Option or the exercise and purchase of the total number
of Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by this Option unless the
Optionee shall have exercised this Option, and then only with respect to the
Shares underlying the portion of the Option exercised. The Optionee shall have
no right to vote any Shares, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
Optionee has effectively exercised this Option and fully paid for such Shares.
Subject to Section 6, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date title to the Shares has been
acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this
Option shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits
otherwise. the Optionee shall pay the Company in cash all local, state, and
federal withholding taxes applicable, in the
4
<PAGE> 23
Administrator's absolute discretion, to the grant or exercise of this Option, or
the transfer or other disposition of Shares acquired upon exercise of this
Option. Any such payment must be made promptly when the amount of such
obligation becomes determinable. The Administrator may, in lieu of such cash
payment, withhold that number of Shares sufficient to satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or
relating to this Option which cannot be amicably settled including, but not
limited to, the suspension or termination of Optionee's right in accordance with
Section II above, shall be settled by arbitration. Said arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association at a time and place within the above-referenced location
as selected by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written
notice to the other, either party hereto may formally initiate arbitration under
this Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
5
<PAGE> 24
15.2. HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration. Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall
be binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right
of either party to seek to obtain injunctive relief or other provisional
remedies against threatened or actual conduct that will cause loss or damages
under the usual equity rules including the applicable rules for obtaining
preliminary injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the
arbitrator, shall initially be borne equally by the parties; provided, the
prevailing party shall be entitled to recover such costs, in addition to
attorneys' fees and other costs, in accordance with Section 18 of this
Agreement.
16. NOTICES. All notices to be given by either party to the other shall be
in writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; provided, however, that notices of change of address or telex
or facsimile number shall be effective only upon actual receipt by the other
party. Notices shall be delivered at the following addresses, unless changed as
provided for herein.
To the Optionee:
---------------------
---------------------
---------------------
To the Company:
Western Sierra Bancorp
4011 Plaza Goldorado Circle
P.O. Box 1460
Cameron Park, CA 95682
Facsimile: (916) 677-5075
6
<PAGE> 25
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, executors, and
successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive
stock options under the Internal Revenue Code, Internal Revenue Service Rules,
and Treasury Regulations governing incentive stock options, the Optionee must
meet certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts,
each of which when taken together shall constitute one and the same instrument.
7
<PAGE> 26
IN WITNESS WHEREOF, this Option Agreement has been executed as of the
_________________ day of _________________, ______, at Cameron Park,
California.
THE COMPANY: WESTERN SIERRA BANCORP
By:__________________________
OPTIONEE: _____________________________
_____________________________
8
<PAGE> 27
REQUEST TO EXERCISE FORM
Dated:___________________
The undersigned hereby irrevocably elects to exercise all or part, as
specified below, of the Vested Portion of the option ("Option") granted to him
pursuant to a certain stock option agreement ("Agreement") effective
_______________________, between the undersigned and Western Sierra Bancorp (the
"Company") to purchase an aggregate of ________________ (______) shares of the
Company's Common Stock, par value $____ (the "Shares").
The undersigned hereby tenders cash in the amount of $____ per Share
multiplied by ________________ (______) the number of Shares he is purchasing at
this time, for a total of $___, which constitutes full payment of the total
Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:______________________________________________
(Please typewrite or print in block letters)
Address: ____________________________________
____________________________________
Signature: ____________________________________
Accepted by Western Sierra Bancorp:
By: ____________________________________
____________________________________
Name
____________________________________
Title
9
<PAGE> 1
EXHIBIT 10.12
WESTERN SIERRA NATIONAL BANK
INCENTIVE COMPENSATION PLAN
SENIOR MANAGEMENT
I Purpose
Western Sierra National Bank ("Bank") is desirous of establishing an
incentive compensation program to reward senior management for productivity
and high performance. The program is also a tool to assure that Bank meet
ROE and ROA goals for the subject year and for future years.
II Who is Eligible?
The program is available to no more than five members of Senior Management.
The composition of the Senior Management grouping shall be determined by
the President, subject to ratification by the Board of Directors.
III How Does the Plan Work?
The program is an incentive compensation program that shares rewards
between the shareholders and plan participants. Plan participants would not
be rewarded with additional compensation unless Bank achieves a minimum
level of performance. Under the program, no incentive compensation would be
provided until Bank achieved eight percent (8%) net shareholder return on
beginning equity for each year the program is in effect. The amounts shall
be adjusted as net shareholder's return increases. For net shareholder
return in excess of eight percent (8%) of beginning equity, such excess
amount would be divided as follows
<TABLE>
<S> <C>
Net Shareholder Return 8% to 10%
Shareholders 72.5%
Senior Management 20.0%
Directors 7.5%
Net Shareholder Return 10% to 12%
Shareholder 60.0%
Senior Management 30.0%
Directors 10.0%
Net Shareholders Return 12% to 15%
Shareholders 52.5%
Senior Management 35.0%
Directors 12.5%
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Net Shareholder Return 15%+
Shareholders 45.0%
Senior Management 40.0%
Directors 15.0%
</TABLE>
For purposes of calculating additional compensation, the following definitions
apply:
Beginning equity: Shareholders equity, contingency and capital reserves,
and loan loss reserves as December 31 of the year prior to the performance
year in question.
Equity return: Determined by adding net addition to beginning equity, plus
cash dividends, minus additional capital stock sold or converted. In
calculating the incentives for the above mentioned plan, when determining
the return on equity ratio, any unrealized gains or losses on the Bank's
available for sale investment portfolio will be excluded. Likewise, so will
any other adjustments to capital which are not directly related to the
Bank's profitability for that year. Examples would be new shares issued,
ESOP loan adjustments, and premiums paid for the acquisition of branches.
The calculation of additional compensation will be based upon audited financial
statements and shall be performed by the certified public accountants for Bank.
Additional Criteria
In addition to Bank, achieving net shareholder return of eight percent (8%) on
beginning equity for the incentive compensation program to become effective, the
following additional criteria must be met for any additional compensation to be
paid to plan participants:
Loan Quality: Loan quality for Bank must remain satisfactory with loan
delinquency on an average basis for the entire year to be less than 2.5
percent of average gross loans.
Loan Losses: Loan Losses for Bank for the subject year shall not exceed
.80 percent of beginning gross loans for that year.
Net Income: Net income before loan loss reserves and taxes as a percentage
of average assets shall be in excess of 1.25 percent.
Regulatory Examination: Bank shall receive a CAMEL rating from the Office
of the Comptroller of the Currency ("OCC") of a "1" or "2" for the
condition of the entire Bank.
2
<PAGE> 3
Payout
To assure the continued performance of Bank, a portion of the payout shall be
deferred. The payment of the additional compensation to plan participants is as
follows:
Senior Management
* 66 percent payment within five days of receipt of audited financial
statements.
* 34 percent payment within five days of receipt of audited financial
statements for following year.
Payout Conditions
The payout for the deferred portions in the second year is subject to the
following conditions:
* Criteria to receive final 34 percent is:
Net Income - Net income before loan loss reserves and taxes as a
percentage of average assets shall be in excess of 1.25 percent.
Regulatory Examination - Bank shall receive a CAMEL rating from the
OCC of a "1" or "2" for the condition of the entire Bank.
Bank shall accrue for the additional compensation on a monthly basis.
Failure to achieve these criteria will return the deferred portions of the
additional compensation to Bank.
The payout of the deferred portion to individual plan participants in the
Senior Management grouping is conditioned upon the continued employment with
Bank. If an individual plan participant in the Senior Management grouping is
terminated for cause or resigns voluntarily from Bank, such individual plan
participant shall lose all interest in the deferred portion of the additional
compensation. If such individual plan participant in the Senior Management
grouping is terminated without cause, such individual plan participant shall be
entitled to the deferred portion of the additional compensation subject to the
attainment of the additional criteria and payout conditions previously
described. However, in the event of the sale, merger or conversion of Bank
(defined in Severance Agreement dated December 4, 1997, Article 1, Paragraph 2,
A & B) where Bank is not the surviving entity, the deferred portions as well as
the YTD accrued balance shall be paid immediately upon the occurrence of such
event.
3
<PAGE> 4
Participant's Distribution
The distribution of the additional compensation within Senior Management
grouping is subject to review by the Board of Directors of Bank.
It is recommended that the distribution to the Senior Management grouping be
broken down as follows:
<TABLE>
<CAPTION>
Percentage
----------
<S> <C>
President 38%
Senior Vice President 19%
Senior Vice President 19%
Senior Vice President 19%
Vice President/Controller 5%
Total 100%
</TABLE>
Illustrations
Utilizing December 31, 1993 Equity Capital (with Loan Loss Reserves) for Bank
of $5,000,000, an illustration of the program is as follows:
<TABLE>
<S> <C>
Beginning equity $5,000,000
Base shareholder return
(8% of Beginning Equity) $ 400,000
Net Shareholder Return $ 600,000
for 1994 (estate)
</TABLE>
If Bank achieved a net shareholder return for 1994 of $600,000, the Senior
Management and Board of Directors groupings would be entitled to the following
amounts:
<TABLE>
<S> <C>
Shareholders $ 532,500
Senior Management $ 50,000
Directors $ 17,500
</TABLE>
Under the deferred payout the Senior Management grouping would be entitled to
$33,000 and the outside Directors would equally share $11,550 within five days
of receipt of the 1994 audited financial statements.
4
<PAGE> 1
EXHIBIT 10.13
WESTERN SIERRA NATIONAL BANK
INDEMNIFICATION AGREEMENT
This Agreement is made as of the 16TH day of MAY, 1994 by and between Western
Sierra National Bank, a national association ("Bank"), and GARY D. GALL ("the
Indemnitee"), a director (or officer) of Bank.
RECITALS
A. Bank and the Indemnitee recognize that statutes, regulations,
court opinions and Bank's Articles of Association and Bylaws are uncertain in
providing Bank's directors and officers with adequate protection from
liabilities to which they may become personally exposed as a result of
performing their duties in good faith for Bank;
B. Bank and the Indemnitee are aware of the large number of
lawsuits filed against corporate directors and officers;
C. Bank and the Indemnitee recognize that the cost of defending
against such lawsuits, may be beyond the financial resources of most directors
and officers of Bank;
D. Bank and the Indemnitee recognize that the potential risks and
liabilities of being a director or officer pose a significant deterrent and
increased reluctance on the part of experienced and capable individuals to serve
as a director or officer of Bank;
E. Bank has investigated the availability and sufficiency of
liability insurance to its directors and officers with adequate protection
against potential liabilities and has concluded that such insurance provides
both inadequate and unacceptable protection to its directors and officers, and
thus, it would be in the best interests of Bank and its shareholders to contract
with the Indemnitee, to indemnify him to the fullest extent permitted by law
against personal liability for actions taken in the good faith performance of
his duties to Bank;
F. The Office of the Comptroller of the Currency (the "OCC")
interpretive ruling 12 CRF 7.5217 states that, with regard to indemnification of
directors, officers and employees, a national bank may amend its Articles of
Association to substantially reflect the general standards of law of the state
in which it is headquartered.
<PAGE> 2
G. Section 317 of the General Corporation Law of the state of
California ("Section 317") sets forth certain provisions relating to the
mandatory and permissive indemnification of directors and officers (among
others) of a California corporation by such corporation.
H. In order to induce and encourage experienced and capable persons
such as the Indemnitee to continue to serve as a director or officer of Bank,
the Board of Directors of Bank has determined, after due consideration and
investigation of the terms and provisions of this Agreement and the various
other options available to Bank and the Indemnitee in lieu hereof, that the
following Agreement is not only reasonable and prudent but necessary to promote
and ensure the best interests of Bank and its shareholders;
I. Bank desires to have the Indemnitee continue to serve as a
director or officer of Bank free from undue concern for unpredictable,
inappropriate or unreasonable legal risks and personal liabilities by reason of
his acting in good faith in the performance to his duty to Bank; and the
Indemnitee desires to continue to serve as a director or officer of Bank;
provided, and on the express condition, that the Indemnitee is furnished with
the indemnity set forth hereinafter.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below and based on the premises set forth above, Bank and the
Indemnitee do hereby agree as follows:
1. Agreement to Serve. The Indemnitee will serve or continue to
serve as a director or officer of Bank to the best of his abilities at the will
of Bank for so long as the Indemnitee is duly elected or appointed or until such
time as the Indemnitee tenders his resignation in writing.
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened,
pending or completed action, suit or proceeding, whether brought in the right of
Bank or otherwise and whether of a civil, criminal, administrative or
investigative nature, including, but not limited to, actions, suits or
proceedings brought under and/or predicated upon the Securities Act of 1933, as
amended, and/or the Securities Exchange Act of 1934, as amended, and/or their
respective state counterparts and/or any rule or regulation promulgated
thereunder, in which the Indemnitee may be or may have been involved as a party
or otherwise, by reason of the fact that the Indemnitee is or was a director or
officer
<PAGE> 3
of Bank, by reason of any action taken by him or of any inaction on his part
while acting as such director or officer or by reason of the fact that he is or
was serving at the request of Bank as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
whether or not he is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
Notwithstanding anything to the contrary above, the term
Proceeding does not include any administrative proceeding or action instituted
by an appropriate bank regulatory agency which proceeding or action results in a
final order assessing civil money penalties or requiring affirmative action by
the Indemnitee in the form of payments to Bank.
(b) The term "Expenses" includes, without limitation
thereto, expenses of investigations, of judicial or administrative proceedings
or appeals, attorneys' fees and disbursements and any expenses of establishing a
right indemnification under Paragraph 7 of this Agreement, but shall not include
the amount of judgments, fines or penalties actually levied against the
Indemnitee.
Notwithstanding anything to the contrary above, the term
Expenses does not include expenses incurred by the Indemnitee or payments to
Bank required of the Indemnitee as a result of an administrative action or
proceeding by an appropriate bank regulatory agency.
3. Indemnity in Third Party Proceedings. Bank shall indemnify the
Indemnitee in accordance with the provisions of this section if the Indemnitee
is a party to or threatened to be made a party to or otherwise involved in any
Proceeding (other than a Proceeding by or in the right of Bank to procure a
judgment in its favor), by reason of the fact that the Indemnitee is or was a
director or officer of Bank or is or was serving at the request of Bank as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all Expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred by the Indemnitee
in connection 'with such Proceeding, provided it is determined pursuant to
Paragraph 7 of this Agreement or by the court before which such action was
brought or by the shareholders of Bank in the manner prescribed by Section 317,
that the Indemnitee acted in good faith and in a manner which he reasonably
believed to be in the best interests of Bank and, in the case of a criminal
proceeding, in addition, had no reasonable cause to believe that his conduct was
unlawful. The termination of any such Proceeding by judgment. order of court,
settlemen, conviction, or upon a plea of nolo contendere, or its equivalent,
shall not, of itself, create a presumption that the Indemnitee
<PAGE> 4
did not act in good faith and in a manner which he reasonably believed to be in
the best interest of Bank, and with respect to any criminal proceeding, that
such person had reasonable cause to believe that his conduct was unlawful.
4. Indemnity in Proceedings by or in the Right of Bank. Bank shall
indemnify the Indemnitee in accordance with the provisions of this section if
the Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding by or in the right of Bank to procure a judgment in
its favor by reason of the fact that the Indemnitee is or was a director of
Bank or is or was serving at the request of Bank as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against all Expenses actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of such Proceeding,
provided it is determined pursuant to Paragraph 7 of this Agreement or by the
court before which such action was brought or by the shareholders of Bank in the
manner prescribed by Section 317, that the Indemnitee acted in good faith and in
a manner which he reasonably believed to be in the best interests of Bank and
its shareholders (for a Proceeding by or in the right of Bank) and with such
care, including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances. Notwithstanding the foregoing,
no indemnification shall be made under this Paragraph 4:
(a) in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to bank, unless and only to the
extent that the court in which such Proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, the
Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as
such court shall determine;
(b) of amounts paid in settling or otherwise disposing of
such Proceeding, other than a Threatened action, suit or proceeding, without
court approval;
(c) of Expenses incurred in defending such Proceeding, other
than a threatened action, suit or proceeding, which is settled or otherwise
disposed of without court approval, or,
(d) in respect of any act, omission, or transaction set
forth in Section 204(a)(10)(A)(i)-(vii) of the California Corporations Code.
5. Indemnification of Expenses of Successful Party. Notwithstanding
any other provision of this Agreement, to the extent that the Indemnitee has
been successful on the merits in defense of any Proceeding or in the defense of
any claim, issue or matter therein, the Indemnitee shall be indemnified against
<PAGE> 5
all Expenses actually and reasonably incurred in connection therewith.
6. Advances of Expenses. The Expenses incurred by the Indemnitee
pursuant to Paragraphs 3 and 4 in defending any Proceeding shall be paid by Bank
in advance of the final disposition of such Proceeding at the written request of
the Indemnitee, if the Indemnitee shall provide an undertaking in the form
attached hereto as Exhibit "A" to Bank to repay such amount unless it is
ultimately determined that the Indemnitee is entitled to the payment of
expenses. The written request to Bank shall include a description of the nature
of the Proceeding and be accompanied by copies of any documents filed with a
court relating to the Proceeding.
Notwithstanding the foregoing or any other provision of this
Agreement, no advance shall be made by Bank if a determination is reasonably and
promptly made by the Board of Directors by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel, that, based upon the facts known to the board or counsel at the time
such determination is made, (a) the Indemnitee acted in bad faith or
deliberately breached his duty to Bank or its stockholders, and (b) as a result
of such actions by the Indemnitee, it is more likely than not that it will
ultimately be determined that the Indemnitee is not entitled to indemnification
under the terms of this Agreement.
7. Rights of the Indemnitee to Indemnification Upon Application;
Procedure Upon Application. To the extent a quorum of the Board of Directors of
Bank consisting of directors who were or are not parties to a Proceeding is
obtainable, the Board of Directors shall determine within 45 days after receipt
of the written request of the Indemnitee for indemnification whether the
Indemnitee has met the relevant standards for indemnification set forth in
Paragraphs 3 and 4 and, if it determines that such standards have been met, it
shall provide indemnification to the Indemnitee.
Notwithstanding the foregoing, the Indemnitee may request independent
counsel or may bring suit in the court in which such Proceeding is or was
pending to determine whether the Indemnitee is entitled to indemnification as
provided by this Agreement. The Indemnitee's expenses incurred in connection
with successfully establishing his right to indemnification, in whole or part,
shall also be indemnified by Bank.
8. Partial Indemnification. the Indemnitee is entitled under any
provision of this Agreement to indemnification by Bank for some or a portion of
the Expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by
<PAGE> 6
him in the investigation, defense, appeal or settlement of any Proceeding but
not, however, for the total amount thereof, Bank shall nevertheless indemnify
the Indemnitee for the portion of such Expenses, judgments, fines settlements or
other amounts to which the Indemnitee is entitled.
9. Directors' and Officers' Liability Insurance. The obtaining of
directors' and officers' liability insurance ("D&O Coverage") at the expense of
and by Bank shall in no way limit or diminish the obligation of Bank to
indemnify the Indemnitee as provided in this Agreement, provided, however, that
any amounts actually recovered by the Indemnitee from the insurer providing D&O
Coverage shall be applied in reduction of amounts otherwise owing by Bank by
reason of it's indemnification under this Agreement and if Bank pays any
amounts to the Indemnitee pursuant to this Agreement, bank shall be subrogated
to the Indemnitee's rights and claims against the insurer providing D&O
Coverage and the Indemnitee shall execute such documents as Bank shall deem
necessary to reflect such subrogation.
Notwithstanding anything to the contrary in this Agreement, the D&O
Coverage obtained by Bank shall explicitly exclude insurance coverage for a
formal order assessing civil money penalties against the Indemnitee.
10. Settlement of Claims.
(a) If Bank has not obtained D&O Coverage, the Indemnitee
shall not settle any Proceeding for which he intends to seek indemnification
hereunder without first attempting to obtain the approval of Bank. If the
Indemnitee seeks such approval and such approval is not granted by Bank, the
Indemnitee shall be free to settle the Proceeding and pursue any procedures to
establish his right to indemnification as provided under this Agreement. If the
Indemnitee seeks such approval and such approval is not granted, but Bank agrees
to indemnify the Indemnitee against any Expenses, judgments, fines, settlements,
or other amounts actually and reasonably incurred by the Indemnitee in
connection with such Proceeding, the Indemnitee shall not settle such
Proceeding. If, however, under such circumstances the Indemnitee does settle
such Proceeding, the Indemnitee shall forfeit his rights to indemnification
under this Agreement.
(b) if Bank has obtained D&O Coverage, the Indemnitee shall
not settle any Proceeding for which he intends to seek indemnification without
first attempting to obtain any approval required with respect to such settlement
by the insurance carrier of any applicable D&O Coverage. If the Indemnitee seeks
such approval and such approval is not granted by the insurance carrier of any
applicable D&O Coverage, the Indemnitee shall not settle such Proceeding without
then attempting to obtain the
<PAGE> 7
approval of Bank. In the event the Indemnitee seeks such approval from Bank,
Bank and the Indemnitee shall have the same rights and obligations as set forth
in Paragraph 10(a). If the Indemnitee seeks such approval from Bank and such
approval is granted, Bank shall be subrogated to the Indemnitee's rights and
claims against the insurance carrier of any applicable D&O coverage and the
Indemnitee shall execute such documents as Bank shall deem necessary to effect
such subrogation.
11. Mutual Acknowledgment. acknowledge that in certain instances,
Federal law, the OCC or applicable public policy may prohibit Bank from
indemnifying its directors and officers under this Agreement or otherwise. For
examples Bank and the Indemnitee acknowledge that the Securities and Exchange
Commission (the "SEC") has taken the position that indemnification is not
permissible for liabilities arising under certain federal securities laws, and
federal legislation prohibits indemnification for certain ERISA violations. The
Indemnitee understands and acknowledges that Bank has undertaken or may be
required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of
Bank's right under public Policy to indemnify the Indemnitee.
Further, the Indemnitee understands that in accordance with its
supervisory responsibilities, the OCC may, in its discretion, review the
possible threat to Bank's safety and soundness posed by this Agreement. Based on
this review, the OCC may direct a modification of this Agreement through
appropriate administrative action.
12. Successors and Assigns. This Agreement shall be binding upon
Bank and its successors and assigns and shall inure to the benefit of the
Indemnitee and the Indemnitee's spouse, heirs, executors and administrators.
13. Savings Clause. If this Agreement or any portion thereof be
invalidated on any ground by any court of competent jurisdiction, then Bank
shall nevertheless indemnify the Indemnitee as to Expenses, judgments, fines,
settlements or other amounts with respect to any Proceeding to the fullest
extent permitted by any applicable portion of this Agreement that to shall not
have been invalidated or by any other applicable law.
14. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California and national banking law.
15. Notices. The Indemnitee shall, as a condition precedent to his
right to be indemnified under this Agreement, give to Bank notice in writing as
soon as practicable of any claim made against him for which indemnification will
or could be sought
<PAGE> 8
under this Agreement. Notice to Bank shall be directed to Western Sierra
National Bank, 3368 Coach Lane, Cameron Park, California 95682, Attention: Duval
Phillips, President (or such other address as Bank shall designate in writing to
the Indemnitee).
16. Modification and Amendment. No amendment, modification,
termination or cancellation of this Agreement shall be effected unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year set forth above.
WESTERN SIERRA NATIONAL BANK
By: /s/ GARY D. GALL By: /s/ STEPHANIE MARSH
------------------------------ ------------------------------
Indemnitee /s/ Osvaldo I. Scariot, Secretary
<PAGE> 9
WESTERN SIERRA NATIONAL BANK
UNDERTAKING
TO: President
Western Sierra National Bank
4011 Plaza Goldorado Circle
Cameron Park, California 95682
I, GARY D. GALL a director(officer) of Western Sierra National Bank, a national
association, pursuant to national banking laws, Section 317(f) of the California
Corporations Code and the terms of my Indemnification Agreement with Western
Sierra National Bank agree to repay Western Sierra National Bank for all
expenses advanced on my behalf in defense of any proceeding or in defense of any
claim, issue or matter therein, prior to the disposition of such proceeding,
unless it shall be determined ultimately that I am entitled to indemnification
under national banking laws, Section 317 of the California Corporations Code or
Western Sierra National Bank's Articles of Association, Bylaws, or my
Indemnification Agreement.
Date: MAY 16, 1994
----------
INDEMNITEE
[SIG]
---------------------------------
<PAGE> 1
EXHIBIT 10.14
WESTERN SIERRA NATIONAL BANK
INDEMNIFICATION AGREEMENT
This Agreement is made as of the 11TH day of May, 1994 by and between Western
Sierra National Bank, a national association ("Bank"), and STEPHANIE MARSH
("the Indemnitee"), a director (or officer) of Bank.
RECITALS
A. Bank and the Indemnitee recognize that statutes, regulations, court
opinions and Bank's Articles of Association and Bylaws are uncertain in
providing Bank's directors and officers with adequate protection from
liabilities to which they may become personally exposed as a result of
performing their duties in good faith for Bank;
B. Bank and the Indemnitee are aware of the large number of lawsuits
filed against corporate directors and officers;
C. Bank and the Indemnitee recognize that the cost of defending against
such lawsuits, may be beyond the financial resources of most directors and
officers of Bank;
D. Bank and the Indemnitee recognize that the potential risks and
liabilities of being a director or officer pose a significant deterrent and
increased reluctance on the part of experienced and capable individuals to
serve as a director or officer of Bank;
E. Bank has investigated the availability and sufficiency of liability
insurance to its directors and officers with adequate protection against
potential liabilities and has concluded that such insurance provides both
inadequate and unacceptable protection to its directors and officers, and thus,
it would be in the best interests of Bank and its shareholders to contract with
the Indemnitee, to indemnify him to the fullest extent permitted by law against
personal liability for actions taken in the good faith performance of his
duties to Bank;
F. The Office of the Comptroller of the Currency (the "OCC")
interpretive ruling 12 CRF 7.5217 states that, with regard to indemnification
of directors, officers and employees, a national bank may amend its Articles of
Association to substantially reflect the general standards of law of the state
in which it is headquartered.
<PAGE> 2
G. Section 317 of the General Corporation Law of the state of California
("Section 317") sets forth certain provisions relating to the mandatory and
permissive indemnification of directors and officers (among others) of a
California corporation by such corporation.
H. In order to induce and encourage experienced and capable persons such as
the Indemnitee to continue to serve as a director or officer of Bank, the Board
of Directors of Bank has determined, after due consideration and investigation
of the terms and provisions of this Agreement and the various other options
available to Bank and the Indemnitee in lieu hereof, that the following
Agreement is not only reasonable and prudent but necessary to promote and ensure
the best interests of Bank and its shareholders;
I. Bank desires to have the Indemnitee continue to serve as a director or
officer of Bank free from undue concern for unpredictable, inappropriate or
unreasonable legal risks and personal liabilities by reason of his acting in
good faith in the performance to his duty to Bank; and the Indemnitee desires to
continue to serve as director or officer of Bank; provided, and on the express
condition, that the Indemnitee is furnished with the indemnity set forth
hereinafter.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below and based on the premises set forth above, Bank and the Indemnitee
do hereby agree as follows:
1. Agreement to Serve. The Indemnitee will serve or continue to serve as a
director or officer of Bank to the best of his abilities at the will of Bank for
so long as the Indemnitee is duly elected or appointed or until such time as the
Indemnitee tenders his resignation in writing.
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought in the right of Bank or
otherwise and whether of a civil, criminal, administrative or investigative
nature, including, but not limited to, actions, suits or proceedings brought
under and/or predicated upon the Securities Act of 1933, as amended, and/or the
Securities Exchange Act of 1934, as amended, and/or their respective state
counterparts and/or any rule or regulation promulgated thereunder, in which the
Indemnitee may be or may have been involved as a party or otherwise, by reason
of the fact that the Indemnitee is or was a director or officer
<PAGE> 3
of Bank, by reason of any action taken by him or of any inaction on his part
while acting as such director or officer or by reason of the fact that he is or
was serving at the request of Bank as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
whether or not he is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
Notwithstanding anything to the contrary above, the term Proceeding
does not include any administrative proceeding or action instituted by an
appropriate bank regulatory agency which proceeding or action results in a
final order assessing civil money penalties or requiring affirmative action by
the Indemnitee in the form of payments to Bank.
(b) The term "Expenses" includes, without limitation thereto,
expenses of investigations, of judicial or administrative proceedings or
appeals, attorneys' fees and disbursements and any expenses of establishing a
right to indemnification under Paragraph 7 of this Agreement, but shall not
include the amount of judgments, fines or penalties actually levied against the
Indemnitee.
Notwithstanding anything to the contrary above, the term Expenses
does not include expenses incurred by the Indemnitee or payments to Bank
required of the Indemnitee as a result of an administrative action or
proceeding by an appropriate bank regulatory agency.
3. Indemnity in Third Party Proceedings. Bank shall indemnify the
Indemnitee in accordance with the provisions of this section if the Indemnitee
is a party to or threatened to be made a party to or otherwise involved in any
Proceeding (other than a Proceeding by or in the right of Bank to procure a
judgment in its favor), by reason of the fact that the Indemnitee is or was a
director or officer of Bank or is or was serving at the request of Bank as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise, against all Expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred by the
Indemnitee in connection with such Proceeding, provided it is determined
pursuant to Paragraph 7 of this Agreement or by the court before which such
action was brought or by the shareholders of Bank in the manner prescribed by
Section 317, that the Indemnitee acted in good faith and in a manner which he
reasonably believed to be in the best interests of Bank and, in the case of a
criminal proceeding, in addition, had no reasonable cause to believe that his
conduct was unlawful. The termination of any such Proceeding by judgment,
order of court, settlement, conviction, or upon a plea of nolo contendere, or
its equivalent, shall not, of itself, create a presumption that the Indemnitee
<PAGE> 4
did not act in good faith and in a manner which he reasonably believed to be in
the best interest of Bank, and with respect to any criminal proceeding, that
such person had reasonable cause to believe that his conduct was unlawful.
4. Indemnity in Proceedings by or in the Right of Bank. Bank shall
indemnify the Indemnitee in accordance with the provisions of this section if
the Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding by or in the right of Bank to procure a judgment in
its favor by reason of the fact that the Indemnitee is or was a director of Bank
or is or was serving at the request of Bank as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against all Expenses actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of such Proceeding,
provided it is determined pursuant to Paragraph 7 of this Agreement or by the
court before which such action was brought or by the shareholders of Bank in the
manner prescribed by Section 317, that the Indemnitee acted in good faith and in
a manner which he reasonably believed to be in the best interests of Bank and
its shareholders (for a Proceeding by or in the right of Bank) and with such
care, including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances. Notwithstanding the foregoing,
no indemnification shall be made under this Paragraph 4:
(a) in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to bank, unless and only to the
extent that the court in which such Proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, the
Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as
such court shall determine;
(b) of amounts paid in settling or otherwise disposing of such
Proceeding, other than a threatened action, suit or proceeding, without court
approval;
(c) of Expenses incurred in defending such Proceeding, other than a
threatened action, suit or proceeding, which is settled or otherwise disposed of
without court approval; or,
(d) in respect of any act, omission, or transaction set forth in
Section 204(a)(10)(A)(i)-(vii) of the California Corporations Code.
5. Indemnification of Expenses of Successful Party. Notwithstanding any
other provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits in defense of any Proceeding or in the defense of any
claim, issue or matter therein, the Indemnitee shall be indemnified against
<PAGE> 5
all Expenses actually and reasonably incurred in connection therewith.
6. Advances of Expenses. The Expenses incurred by the Indemnitee
pursuant to Paragraphs 3 and 4 in defending any Proceeding shall be paid by
Bank in advance of the final disposition of such Proceeding at the written
request of the Indemnitee, if the Indemnitee shall provide an undertaking in
the form attached hereto as Exhibit "A" to Bank to repay such amount unless it
is ultimately determined that the Indemnitee is entitled to the payment of
expenses. The written request to Bank shall include a description of the nature
of the Proceeding and be accompanied by copies of any documents filed with a
court relating to the Proceeding.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by Bank if a determination if reasonably and promptly
made by the Board of Directors by a majority vote of a quorum of disinterested
directors, or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs) by independent legal counsel,
that, based upon the facts known to the Board or counsel at the time such
determination is made, (a) the Indemnitee acted in bad faith or deliberately
breached his duty to Bank or its stockholders, and (b) as a result of such
actions by the Indemnitee, it is more likely than not that it will ultimately
be determined that the Indemnitee is not entitled to indemnification under the
terms of this Agreement.
7. Rights of the Indemnitee to Indemnification Upon Application;
Procedure Upon Application. To the extent a quorum of the Board of Directors of
Bank consisting of directors who were or are not parties to a Proceeding is
obtainable, the Board of Directors shall determine within 45 days after receipt
of the written request of the Indemnitee for indemnification whether the
Indemnitee has met the relevant standards for indemnification set forth in
Paragraphs 3 and 4 and, if it determines that such standards have been met, it
shall provide indemnification to the Indemnitee.
Notwithstanding the foregoing, the Indemnitee may request independent
counsel or may bring suit in the court in which such Proceeding is or was
pending to determine whether the Indemnitee is entitled to indemnification as
provided by this Agreement. The Indemnitee's expenses incurred in connection
with successfully establishing his right to indemnification, in whole or part,
shall also be indemnified by Bank.
8. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by Bank for some or a portion of
the Expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by
<PAGE> 6
him in the investigation, defense, appeal or settlement of any Proceeding but
not, however, for the total amount thereof, Bank shall nevertheless indemnify
the Indemnitee for the portion of such Expenses, judgements, fines settlements
or other amounts to which the Indemnitee is entitled.
9. Directors' and Officers' Liability Insurance. The obtaining of
directors' and officers' liability insurance ("D&O Coverage") at the expense of
and by Bank shall in no way limit or diminish the obligation of Bank to
indemnify the Indemnitee as provided in this Agreement; provided, however, that
any amounts actually recovered by the Indemnitee from the insurer providing D&O
Coverage shall be applied in reduction of amounts otherwise owing by Bank
reason of it's indemnification under this Agreement and if Bank pays any
amounts to the Indemnitee pursuant to this Agreement, bank shall be subrogated
to the Indemnitee's rights and claims against the insurer providing D&O
Coverage and the Indemnitee shall execute such documents as Bank shall deem
necessary to reflect such subrogation.
Notwithstanding anything to the contrary in this Agreement, the D&O
Coverage obtained by Bank shall explicitly exclude insurance coverage for a
formal order assessing civil money penalties against the Indemnitee.
10. Settlement of Claims.
(a) If Bank has not obtained D&O Coverage, the Indemnitee shall not
settle any Proceeding for which he intends to seek indemnification hereunder
without first attempting to obtain the approval of Bank. If the Indemnitee
seeks such approval and such approval is not granted by Bank, the Indemnitee
shall be free to settle the Proceeding and pursue any procedures to establish
his right to indemnification as provided under this Agreement. If the
Indemnitee seeks such approval and such approval is not granted, but Bank
agrees to indemnify the Indemnitee against any Expenses, judgments, fines,
settlements, or other amounts actually and reasonably incurred by the
Indemnitee in connection with such Proceeding, the Indemnitee shall not settle
such Proceeding. If, however, under such circumstances the Indemnitee does
settle such Proceeding, the Indemnitee shall forfeit his rights to
indemnification under this Agreement.
(b) If Bank has obtained D&O Coverage, the Indemnitee shall not settle
any Proceeding for which he intends to seek indemnification without first
attempting to obtain any approval required with respect to such settlement by
the insurance carrier of any applicable D&O Coverage. If the Indemnitee seeks
such approval and such approval is not granted by the insurance carrier of any
applicable D&O Coverage, the Indemnitee shall not settle such Proceeding
without then attempting to obtain the
<PAGE> 7
approval of Bank. In the event the Indemnitee seeks such approval from Bank,
Bank and the Indemnitee shall have the same rights and obligations as set forth
in Paragraph 10(a). If the Indemnitee seeks such approval from Bank and such
approval is granted, Bank shall be subrogated to the Indemnitee's rights and
claims against the insurance carrier of any applicable D&O coverage and the
Indemnitee shall execute such documents as Bank shall deem necessary to effect
such subrogation.
11. Mutual Acknowledgment. Both Bank and the Indemnitee acknowledge that
in certain instances, Federal law, the OCC or applicable public policy may
prohibit Bank from indemnifying its directors and officers under this Agreement
or otherwise. For example, Bank and the Indemnitee acknowledge that the
Securities and Exchange Commission (the "SEC") has taken the position that
indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. The Indemnitee understands and acknowledges that
Bank has undertaken or may be required in the future to undertake with the SEC
to submit the question of indemnification to a court in certain circumstances
for a determination of Bank's right under public policy to indemnify the
Indemnitee.
Further, the Indemnitee understands that in accordance with its
supervisory responsibilities, the OCC may, in its discretion, review the
possible threat to Bank's safety and soundness posed by this Agreement. Based on
this review, the OCC may direct a modification of this Agreement through
appropriate administrative action.
12. Successors and Assigns. This Agreement shall be binding upon Bank
and its successors and assigns and shall inure to the benefit of the Indemnitee
and the Indemnitee's spouse, heirs, executors and administrators.
13. Savings Clause. If this Agreement or any portion thereof be
invalidated on any ground by any court or competent jurisdiction, then Bank
shall nevertheless indemnify the Indemnitee as to Expenses, judgments, fines,
settlements or other amounts with respect to any Proceeding to the fullest
extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or by any other applicable law.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California and national banking law.
15. Notices. The Indemnitee shall, as a condition precedent to his right
to be indemnified under this Agreement, give to Bank notice in writing as soon
as practicable of any claim made against him for which indemnification will or
could be sought
<PAGE> 8
under this Agreement. Notice to Bank shall be directed to Western Sierra
National Bank, 3368 Coach Lane, Cameron Park, California 95682, Attention:
Duval Phillips, President (or such other address as Bank shall designate in
writing to the Indemnitee).
16. Modification and Amendment. No amendment, modification, termination
or cancellation of this Agreement shall be effected unless in writing signed by
both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year set forth above.
WESTERN SIERRA NATIONAL BANK
By: /s/ STEPHANIE MARSH By: /s/ GARY D. GALL
---------------------- -------------------------
Indemnitee President/CEO
<PAGE> 9
WESTERN SIERRA NATIONAL BANK
UNDERTAKING
TO: President
Western Sierra National Bank
4011 Plaza Goldorado Circle
Cameron Park, California 95682
I, STEPHANIE MARSH, a director (officer) of Western Sierra National Bank, a
national association, pursuant to national banking laws, Section 317(f) of the
California Corporations Code and the terms of my Indemnification Agreement with
Western Sierra National Bank agree to repay Western Sierra National Bank for all
expenses advanced on my behalf in defense of any proceeding or in defense of any
claim, issue or matter therein, prior to the disposition of such proceeding,
unless it shall be determined ultimately that I am entitled to indemnification
under national banking laws, Section 317 of the California Corporations Code or
Western Sierra National Bank's Articles of Association, Bylaws, or my
Indemnification Agreement.
Date: MAY 11, 1994
INDEMNITEE
/s/ STEPHANIE M. MARSH
----------------------
<PAGE> 1
EXHIBIT 10.15
WESTERN SIERRA NATIONAL BANK
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement is made as of the ___ day of ___________, 19 __ by and between
Western Sierra National Bank, a national association ("Bank"), and ___________
("the Indemnitee"), a director (or officer) of Bank.
RECITALS
--------
A. Bank and the Indemnitee recognize that statutes, regulations, court
opinions and Bank's Articles of Association and Bylaws are uncertain in
providing Bank's directors and officers with adequate protection from
liabilities to which they may become personally exposed as a result of
performing their duties in good faith for Bank;
B. Bank and the Indemnitee are aware of the large number of lawsuits filed
against corporate directors and officers;
C. Bank and the Indemnitee recognize that the cost of defending against
such lawsuits, may be beyond the financial resources of most directors and
officers of Bank;
D. Bank and the Indemnitee recognize that the potential risks and
liabilities of being a director or officer pose a significant deterrent and
increased reluctance on the part of experienced and capable individuals to
serve as a director or officer of Bank;
E. Bank has investigated the availability and sufficiency of liability
insurance to its directors and officers with adequate protection against
potential liabilities and has concluded that such insurance provides both
inadequate and unacceptable protection to its directors and officers, and thus,
it would be in the best interests of Bank and its shareholders to contract with
the Indemnitee, to indemnify him to the fullest extent permitted by law against
personal liability for actions taken in the good faith performance of his
duties to Bank;
F. The Office of the Comptroller of the Currency (the "OCC") interpretive
ruling 12 CRF 7.5217 states that, with regard to indemnification of directors,
officers and employees, a national bank may amend its Articles of Association
to substantially reflect the general standards of law of the state in which it
is headquartered.
<PAGE> 2
G. Section 317 of the General Corporation Law of the state of California
("Section 317") sets forth certain provisions relating to the mandatory and
permissive indemnification of directors and officers (among others) of a
California corporation by such corporation.
H. In order to induce and encourage experienced and capable persons such
as the Indemnitee to continue to serve as a director or officer of Bank, the
Board of Directors of Bank has determined, after due consideration and
investigation of the terms and provisions of this Agreement and the various
other options available to Bank and the Indemnitee in lieu hereof, that the
following Agreement is not only reasonable and prudent but necessary to promote
and ensure the best interests of Bank and its shareholders;
I. Bank desires to have the Indemnitee continue to serve as a director or
officer of Bank free from undue concern for unpredictable, inappropriate or
unreasonable legal risks and personal liabilities by reason of his acting in
good faith in the performance to his duty to Bank; and the Indemnitee desires
to continue to serve as a director or officer of Bank; provided, and on the
express condition, that the Indemnitee is furnished with the indemnity set
forth hereinafter.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below and based on the premises set forth above, Bank and the
Indemnitee do hereby agree as follows:
1. AGREEMENT TO SERVE. The Indemnitee will serve or continue to serve as a
director or officer of Bank to the best of his abilities at the will of Bank
for so long as the Indemnitee is duly elected or appointed or until such time
as the Indemnitee tenders his resignation in writing.
2. DEFINITIONS. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought in the right of Bank or
otherwise and whether of a civil, criminal, administrative or investigative
nature, including, but not limited to, actions, suits or proceedings brought
under and/or predicated upon the Securities Act of 1933, as amended, and/or the
Securities Exchange Act of 1934, as amended, and/or their respective state
counterparts and/or any rule or regulation promulgated thereunder, in which the
Indemnitee may be or may have been involved as a party or otherwise, by reason
of the fact that the Indemnitee is or was a director or officer
2
<PAGE> 3
of Bank, by reason of any action taken by him or of any inaction on his part
while acting as such director or officer or by reason of the fact that he is or
was serving at the request of Bank as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
whether or not he is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
Notwithstanding anything to the contrary above, the term Proceeding does
not include any administrative proceeding or action instituted by an
appropriate bank regulatory agency which proceeding or action results in a
final order assessing civil money penalties or requiring affirmative action by
the Indemnitee in the form of payments to Bank.
(b) The term "Expenses" includes, without limitation thereto, expenses of
investigations, of judicial or administrative proceedings or appeals,
attorneys' fees and disbursements and any expenses of establishing a right to
indemnification under Paragraph 7 of this Agreement, but shall not include the
amount of judgments, fines or penalties actually levied against the Indemnitee.
Notwithstanding anything to the contrary above, the term Expenses does not
include expenses incurred by the Indemnitee or payments to Bank required of the
Indemnitee as a result of an administrative action or proceeding by an
appropriate bank regulatory agency.
3. INDEMNITY IN THIRD PARTY PROCEEDINGS. Bank shall indemnify the
Indemnitee in accordance with the provisions of this section if the Indemnitee
is a party to or threatened to be made a party to or otherwise involved in any
Proceeding (other than a Proceeding by or in the right of Bank to procure a
judgment in its favor), by reason of the fact that the Indemnitee is or was a
director or officer of Bank or is or was serving at the request of Bank as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise, against all Expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred by the
Indemnitee in connection with such Proceeding, provided it is determined
pursuant to Paragraph 7 of this Agreement or by the court before which such
action was brought or by the shareholders of Bank in the manner prescribed by
Section 317, that the Indemnitee acted in good faith and in a manner which he
reasonably believed to be in the best interests of Bank and, in the case of a
criminal proceeding, in addition, had no reasonable cause to believe that his
conduct was unlawful. The termination of any such Proceeding by judgment, order
of court, settlement, conviction, or upon a plea of nolo contendere, or its
equivalent, shall not, of itself, create a presumption that the Indemnitee
3
<PAGE> 4
did not act in good faith and in a manner which he reasonably believed to be in
the best interest of Bank, and with respect to any criminal proceeding, that
such person had reasonable cause to believe that his conduct was unlawful.
4. INDEMNITY IN PROCEEDINGS BY OR IN THE RIGHT OF BANK. Bank shall
indemnify the Indemnitee in accordance with the provisions of this section if
the Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding by or in the right of Bank to procure a judgment in
its favor by reason of the fact that the Indemnitee is or was a director of
Bank or is or was serving at the request of Bank as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against all Expenses actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of such Proceeding,
provided it is determined pursuant to Paragraph 7 of this Agreement or by the
court before which such action was brought or by the shareholders of Bank in
the manner prescribed by Section 317, that the Indemnitee acted in good faith
and in a manner which he reasonably believed to be in the best interests of
Bank and its shareholders (for a Proceeding by or in the right of Bank) and
with such care, including reasonable inquiry, as an ordinarily prudent person
in a like position would use under similar circumstances. Notwithstanding the
foregoing, no indemnification shall be made under this Paragraph 4:
(a) in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to bank, unless and only to
the extent that the court in which such Proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the case,
the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses
as such court shall determine;
(b) of amounts paid in settling or otherwise disposing of such
Proceeding, other than a threatened action, suit or proceeding, without court
approval;
(c) of Expenses incurred in defending such Proceeding, other than a
threatened action, suit or proceeding, which is settled or otherwise disposed
of without court approval; or,
(d) in respect of any act, omission, or transaction set forth in
Section 204(a)(10)(A)(i)-(vii) of the California Corporations Code.
5. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any
other provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits in defense of any Proceeding or in the defense of any
claim, issue or matter therein, the Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred in connection therewith.
4
<PAGE> 5
6. ADVANCES OF EXPENSES. The Expenses incurred by the Indemnitee pursuant
to Paragraphs 3 and 4 in defending any Proceeding shall be paid by Bank in
advance of the final disposition of such Proceeding at the written request of
the Indemnitee, if the Indemnitee shall provide an undertaking in the form
attached hereto as Exhibit "A" to Bank to repay such amount unless it is
ultimately determined that the Indemnitee is entitled to the payment of
expenses. The written request to Bank shall include a description of the nature
of the Proceeding and be accompanied by copies of any documents filed with a
court relating to the Proceeding.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by Bank if a determination is reasonably and promptly
made by the Board of Directors by a majority vote of a quorum of disinterested
directors, or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs) by independent legal counsel,
that, based upon the facts known to the Board or counsel at the time such
determination is made, (a) the Indemnitee acted in bad faith or deliberately
breached his duty to Bank or its stockholders, and (b) as a result of such
actions by the Indemnitee, it is more likely than not that it will ultimately
be determined that the Indemnitee is not entitled to indemnification under the
terms of this Agreement.
7. RIGHTS OF THE INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE
UPON APPLICATION. To the extent a quorum of the Board of Directors of Bank
consisting of directors who were or are not parties to a Proceeding is
obtainable, the Board of Directors shall determine within 45 days after receipt
of the written request of the Indemnitee for indemnification whether the
Indemnitee has met the relevant standards for indemnification set forth in
Paragraphs 3 and 4 and, if it determines that such standards have been met, it
shall provide indemnification to the Indemnitee.
Notwithstanding the foregoing, the Indemnitee may request independent
counsel or may bring suit in the court in which such Proceeding is or was
pending to determine whether the Indemnitee is entitled to indemnification as
provided by this Agreement. The Indemnitee's expenses incurred in connection
with successfully establishing his right to indemnification, in whole or part,
shall also be indemnified by Bank.
8. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to Indemnification by Bank for some or a portion of
the Expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by
5
<PAGE> 6
him in the investigation, defense, appeal or settlement of any Proceeding but
not, however, for the total amount thereof, Bank shall nevertheless indemnify
the Indemnitee for the portion of such Expenses, judgments, fines, settlements
or other amounts to which the Indemnitee is entitled.
9. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The obtaining of
directors' and officers' liability insurance ("D&O Coverage") at the expense of
and by Bank shall in no way limit or diminish the obligation of Bank to
indemnify the Indemnitee as provided in this Agreement; provided, however, that
any amounts actually recovered by the Indemnitee from the insurer providing
D&O Coverage shall be applied in reduction of amounts otherwise owing by Bank
by reason of its indemnification under this Agreement and if Bank pays any
amounts to the Indemnitee pursuant to this Agreement, Bank shall be subrogated
to the Indemnitee's rights and claims against the insurer providing
D&O Coverage and the Indemnitee shall execute such documents as Bank shall deem
necessary to reflect such subrogation.
Notwithstanding anything to the contrary in this Agreement, the
D&O Coverage obtained by Bank shall explicitly exclude insurance coverage for a
formal order assessing civil money penalties against the Indemnitee.
10. SETTLEMENT OF CLAIMS.
(a) If Bank has not obtained D&O Coverage, the Indemnitee shall not
settle any Proceeding for which he intends to seek indemnification hereunder
without first attempting to obtain the approval of Bank. If the Indemnitee
seeks such approval and such approval is not granted by Bank, the Indemnitee
shall be free to settle the Proceeding and pursue any procedures to establish
his right to indemnification as provided under this Agreement. If the
Indemnitee seeks such approval and such approval is not granted, but Bank
agrees to indemnify the Indemnitee against any Expenses, judgments, fines,
settlements, or other amounts actually and reasonably incurred by the
Indemnitee in connection with such Proceeding, the Indemnitee shall not settle
such Proceeding. If, however, under such circumstances the Indemnitee does
settle such Proceeding, the Indemnitee shall forfeit his rights to
indemnification under this Agreement.
(b) If Bank has obtained D&O Coverage, the Indemnitee shall not
settle any Proceeding for which he intends to seek indemnification without
first attempting to obtain any approval required with respect to such
settlement by the insurance carrier of any applicable D&O Coverage. If the
Indemnitee seeks such approval and such approval is not granted by the
insurance carrier of any applicable D&O Coverage, the Indemnitee shall not
settle such Proceeding without then attempting to obtain the
6
<PAGE> 7
approval of Bank. In the event the Indemnitee seeks such approval from Bank,
Bank and the Indemnitee shall have the same rights and obligations as set forth
in Paragraph 10(a). If the Indemnitee seeks such approval from Bank and such
approval is granted, Bank shall be subrogated to the Indemnitee's rights and
claims against the insurance carrier of any applicable D&O Coverage and the
Indemnitee shall execute such documents as Bank shall deem necessary to effect
such subrogation.
11. MUTUAL ACKNOWLEDGMENT. Both Bank and the Indemnitee acknowledge that
in certain instances, Federal law, the OCC or applicable public policy may
prohibit Bank from indemnifying its directors and officers under this Agreement
or otherwise. For example, Bank and the Indemnitee acknowledge that the
Securities and Exchange Commission (the "SEC") has taken the position that
indemnification is not permissible for liabilities arising under certain
federal securities laws, and federal legislation prohibits indemnification for
certain ERISA violations. The Indemnitee understands and acknowledges that Bank
has undertaken or may be required in the future to undertake with the SEC to
submit the question of indemnification to a court in certain circumstances for
a determination of Bank's right under public policy to indemnify the Indemnitee.
Further, the Indemnitee understands that in accordance with its
supervisory responsibilities, the OCC may, in its discretion, review the
possible threat to Bank's safety and soundness posed by this Agreement. Based
on this review, the OCC may direct a modification of this Agreement through
appropriate administrative action.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon Bank and
its successors and assigns and shall inure to the benefit of the Indemnitee and
the Indemnitee's spouse, heirs, executors and administrators.
13. SAVINGS CLAUSE. If this Agreement or any portion thereof be
invalidated on any ground by any court or competent jurisdiction, then Bank
shall nevertheless indemnify the Indemnitee as to Expenses, judgments, fines,
settlements or other amounts with respect to any Proceeding to the fullest
extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or by any other applicable law.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California and national banking law.
15. NOTICES. The Indemnitee shall, as a condition precedent to his right
to be indemnified under this Agreement, give to Bank notice in writing as soon
as practicable of any claim made against him for which indemnification will or
could be sought
7
<PAGE> 8
under this Agreement. Notice to Bank shall be directed to Western Sierra
National Bank, 3368 Coach Lane, Cameron Park, California 95682, Attention:
Duval Phillips, President (or such other address as Bank shall designate in
writing to the Indemnitee).
16. MODIFICATION AND AMENDMENT. No amendment, modification, termination or
cancellation of this Agreement shall be effected unless in writing signed by
both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year set forth above.
WESTERN SIERRA NATIONAL BANK
By: By:
----------------------------------- --------------------------------
Indemnitee
8
<PAGE> 9
WESTERN SIERRA NATIONAL BANK
UNDERTAKING
TO: President
Western Sierra National Bank
4011 Plaza Goldorado Circle
Cameron Park, California 95682
I, _____________________, a director (officer) of Western Sierra National Bank,
a national association, pursuant to national banking laws, Section 317(f) of
the California Corporations Code and the terms of my Indemnification Agreement
with Western Sierra National Bank agree to repay Western Sierra National Bank
for all expenses advanced on my behalf in defense of any proceeding or in
defense of any claim, issue or matter therein, prior to the disposition of such
proceeding, unless it shall be determined ultimately that I am entitled to
indemnification under national banking laws, Section 317 of the California
Corporations Code or Western Sierra National Bank's Articles of Association,
Bylaws, or my Indemnification Agreement.
Date: , 19
-------------- --
INDEMNITEE
-----------------------------------
<PAGE> 1
EXHIBIT 23.2
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 2, 1998
<PAGE> 1
EXHIBIT 23.3
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 2, 1998
<PAGE> 1
EXHIBIT 23.4
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 2, 1998
<PAGE> 1
EXHIBIT 23.5
[THE FINDLEY GROUP LETTERHEAD]
November 2, 1998
Western Sierra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, California 95682
Gentlemen:
We hereby consent to the inclusion of the Fairness Opinion of The Findley Group
in the Form S-4 Registration Statement of Western Sierra Bancorp in connection
with the acquisition of Lake Community Bank. We also consent to the references
made in such Form S-4 Registration Statement to The Findley Group.
\ Sincerely,
THE FINDLEY GROUP
By: /s/ GARY FINDLEY
-----------------------------
Gary Steven Findley, Director
<PAGE> 1
EXHIBIT 23.6
[THE BANC STOCK GROUP, INC. LETTERHEAD]
November 2, 1998
Western Seirra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, CA 95682
Re: Western Sierra Bancorp-Registration Statement on Form S-4
The Banc Stock Group, Inc. hereby consents to the inclusion of its name and the
description of its activities and responsibilities as investment advisor to Lake
Community Bank ("Lake") and to the inclusion of its May 27, 1998 fairness
opinion to Lake as an exhibit in the above referenced document as stated in the
draft dated November 2, 1998.
Sincerely,
THE BANC STOCK GROUP, INC.
/s/ EDWARD E. SCHMIDT
- --------------------------------
Edward E. Schmidt
Executive Vice President
<PAGE> 1
EXHIBIT 23.7
[THE BANC STOCK GROUP, INC. LETTERHEAD]
November 2, 1998
Western Seirra Bancorp
4011 Plaza Goldorado Circle
Cameron Park, CA 95682
Re: Western Sierra Bancorp-Registration Statement on Form S-4
The Banc Stock Group, Inc. hereby consents to the inclusion of its name and the
description of its activities and responsibilities to Roseville 1st Community
Bancorp ("Rose") and to the inclusion of its July 2, 1998 fairness opinion to
Rose as an exhibit in the above referenced document as stated in the draft dated
November 2, 1998.
Sincerely,
THE BANC STOCK GROUP, INC.
/s/ EDWARD E. SCHMIDT
- ------------------------------
Edward E. Schmidt
Executive Vice President
