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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 30, 1999
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(Date of earliest event reported)
Farmers & Merchants Bancorp
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
94-3327828
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(Commission File Number) (IRS Employer Identification No.)
121 West Pine Street, Lodi, California 95240-2184
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(Address of principal executive offices) (Zip Code)
(209) 334-1101
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
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Reorganization
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On February 22, 1999, Farmers & Merchants Bank of Central California, a
California state-chartered bank (the "Bank"), announced its intention to
reorganize into a bank holding company form. Farmers & Merchants Bancorp, a
Delaware corporation ("Bancorp") was incorporated on February 22, 1999.
On March 10, 1999, the Bank, Bancorp and F&M Merger Co., a wholly-owned
subsidiary of Bancorp ("Merger Co."), entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), whereby Merger Co. would be
merged with and into the Bank, with the Bank being the surviving corporation,
the Bank would become a wholly-owned subsidiary of Bancorp, and shareholders of
the Bank would receive one share of Bancorp common stock in exchange for each
share of Bank common stock (the "Reorganization"). On April 13, 1999, the
California Department of Corporations issued a permit with respect to the
issuance of Bancorp common stock in the Reorganization, in connection with a
fairness hearing held on April 6, 1999 pursuant to Section 25142 of the
California Corporate Securities Law of 1968.
At the Bank's Annual Meeting of Shareholders held on April 19, 1999, the
Reorganization was approved by the affirmative vote of a majority of the
outstanding shares of the Bank's common stock. A copy of the Proxy Statement/
Offering Circular as distributed to the Bank's shareholders in connection with
the Annual Meeting is filed herewith as Exhibit 99.6.
On April 30, 1999, the Reorganization Agreement was filed with the
Secretary of State of the State of California, and consummation of the
Reorganization occurred effective as of the close of business on April 30, 1999.
As a result of the consummation of the Reorganization, the Bank has become a
wholly-owned subsidiary of Bancorp, and the one-for-one share exchange referred
to above has been completed.
Attached as Exhibit 99.1, and incorporated herein by this reference, is a
copy of a press release dated April 30, 1999 with respect to the consummation of
the Reorganization.
Description of Common Stock
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The description of Bancorp's authorized common stock is incorporated herein
by reference to the section entitled "Proposal 3 - Organization of a Bank
Holding Company -- Comparative Description of Common Stock" in the Proxy
Statement/ Offering Circular dated March 12, 1999, filed herewith as Exhibit
99.6.
Description of Preferred Stock
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The description of Bancorp's authorized preferred stock is incorporated
herein by reference to the sections entitled "Proposal 3 - Organization of a
Bank Holding Company -- Anti-Takeover Measures -- Preferred Stock" and "Proposal
3 - Organization of a Bank Holding Company --Comparative Description of Common
Stock -- Authorized Capital" in the Proxy Statement/ Offering Circular dated
March 12, 1999, filed herewith as Exhibit 99.6. As of the date of this report,
no shares of preferred stock are outstanding.
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Item 7. Financial Statements and Exhibits.
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(a) Financial statements of businesses acquired:
See the Bank's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (and Amendment No. 1 thereto) and Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, filed with
Federal Reserve Board pursuant to Section 12(i) of the Securities
Exchange Act of 1934, as amended, and filed herewith as Exhibits
99.2, 99.3 and 99.4 respectively.
(b) Pro forma financial information:
Not applicable.
(c) Exhibits:
3(i) Amended and Restated Certificate of Incorporation of Farmers &
Merchants Bancorp.
3(ii) By-Laws of Farmers & Merchants Bancorp.
10.1 Employment Agreement, dated July 8, 1997, between Farmers &
Merchants Bank of Central California and Kent A. Steinwert.
10.2 Employment Agreement, dated December 1, 1998, between Farmers &
Merchants Bank of Central California and Richard S. Erichson.
10.3 Deferred Bonus Plan of Farmers & Merchants Bank of Central
California adopted as of March 2, 1999.
10.4 Amended and Restated Deferred Bonus Plan of Farmers & Merchant
Bank of Central California, executed May 11, 1999.
21 Subsidiaries of Farmers & Merchants Bancorp.
99.1 Press Release dated April 30, 1999.
99.2 Annual Report on Form 10-K for the fiscal year ended December
31, 1998 of Farmers & Merchants Bank of Central California, as
filed with the Federal Reserve Board.
99.3 Amendment No. 1 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 of Farmers & Merchants Bank of
Central California, as filed with the Federal Reserve Board.
99.4 Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 of Farmers & Merchants Bank of Central California, as filed
with the Federal Reserve Board.
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99.5 Current Report on Form 8-K dated April 30, 1999, of Farmers &
Merchants Bank of Central California, as filed with the Federal
Reserve Board on May 14, 1999.
99.6 Proxy Statement/ Offering Circular of Farmers & Merchants Bank
of Central California and Farmers & Merchants Bancorp,
respectively, dated March 12, 1999.
99.7 Permit and Certificate of Issuance of Permit dated April 13,
1999, of the California Department of Corporations approving the
Reorganization.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANCORP
By /s/ Kent A. Steinwert
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Kent A. Steinwert
President and Chief Executive Officer
Date: May 15, 1999.
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EXHIBIT INDEX
Exhibit No. Description
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3(i) Amended and Restated Certificate of Incorporation of Farmers &
Merchants Bancorp.
3(ii) By-Laws of Farmers & Merchants Bancorp.
10.1 Employment Agreement, dated July 8, 1997, between Farmers &
Merchants Bank of Central California and Kent A. Steinwert.
10.2 Employment Agreement, dated December 1, 1998, between Farmers &
Merchants Bank of Central California and Richard S. Erichson.
10.3 Deferred Bonus Plan of Farmers & Merchants Bank of Central
California, adopted as of March 2, 1999.
10.4 Amended and Restated Deferred Bonus Plan of Farmers & Merchants
Bank of Central CAlifornia executed May 11, 1999.
21 Subsidiaries of Farmers & Merchants Bancorp.
99.1 Press Release dated April 30, 1999.
99.2 Annual Report on Form 10-K for the fiscal year ended December 31,
1998 of Farmers & Merchants Bank of Central California, as filed
with the Federal Reserve Board.
99.3 Amendment No. 1 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 of Farmers & Merchants Bank of Central
California, as filed with the Federal Reserve Board.
99.4 Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
of Farmers & Merchants Bank of Central California, as filed with
the Federal Reserve Board.
99.5 Current Report on Form 8-K dated April 30, 1999, of Farmers &
Merchants Bank of Central California, as filed with the Federal
Reserve Board on May 14, 1999.
99.6 Proxy Statement/ Offering Circular of Farmers & Merchants Bank of
Central California and Farmers & Merchants Bancorp, respectively,
dated March 12, 1999.
99.7 Permit and Certificate of Issuance of Permit dated April 13, 1999,
of the California Department of Corporations approving the
Reorganization.
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Exhibit 3(i)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
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OF
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FARMERS & MERCHANTS BANCORP
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Farmers & Merchants Bancorp, a corporation organized and existing under the
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laws of the State of Delaware, hereby certifies as follows:
FIRST. The name of the corporation is Farmers & Merchants Bancorp.
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SECOND. The date of filing of its original Certificate of Incorporation
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with the Secretary of State of Delaware was February 22, 1999.
THIRD. That said corporation has not received any payment for any of its
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stock.
FOURTH. The Certificate of Incorporation of said corporation shall be
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amended and restated to read in full as follows:
ARTICLE I.
The name of the corporation is Farmers & Merchants Bancorp (the
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"Corporation").
ARTICLE II.
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, Delaware 19801. The name of the Corporation's registered
agent at such address is The Corporation Trust Corporation.
ARTICLE III.
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV.
The Corporation is to have perpetual existence.
ARTICLE V.
The name and mailing address of the incorporator is:
Ole R. Mettler
121 West Pine Street
Lodi, CA 95240
ARTICLE VI.
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is three million (3,000,000). This
Corporation is authorized to issue two classes of shares to be designated
respectively Common Stock ("Common Stock") and Preferred Stock ("Preferred
Stock"). The total
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number of shares of Common Stock this Corporation shall have authority to issue
is two million (2,000,000). The total number of shares of Preferred Stock this
Corporation shall have authority to issue is one million (1,000,000). The
Common Stock shall have a par value of $0.01 per share and the Preferred Stock
shall have no stated par value.
The designations, preferences, qualifications, privileges, limitations and
restrictions of the classes of stock of the Corporation and the express grant of
authority to the Board of Directors to fix by resolution the designations,
preferences, qualifications, privileges, limitations, and restrictions relating
to the classes of stock of the Corporation which are not fixed by this Amended
and Restated Certificate of Incorporation, are as follows:
Section 1. Common Stock.
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(a) Voting. Except as provided in this Amended and Restated Certificate of
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Incorporation, and subject to the rights of holders of any series of Preferred
Stock then outstanding or any other securities of the Corporation, the holders
of the Common Stock shall exclusively possess all voting power. Each holder of
shares of Common Stock shall be entitled to one vote for each share held by such
holders.
(b) Dividends. Whenever there shall have been paid, or declared and set
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aside for payment, to the holders of the outstanding shares of any class of
stock having preference over the Common Stock as to the payment of dividends,
the full amount of dividends and sinking fund or retirement fund or other
retirement payments, if any, to which such holders are respectively entitled in
preference to the Common Stock, then dividends may be paid on the Common Stock,
and on any class or series of stock entitled to participate therewith as to
dividends, out of any assets legally available for the payment of dividends, but
only when as declared by the Board of Directors of the Corporation.
(c) Liquidation. In the event of any liquidation, dissolution or winding
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up of the Corporation, after there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding shares of any class having
preference over the Common Stock in any event, the full preferential amounts to
which they are respectively entitled, the holders of the Common Stock and of any
class or series of stock entitled to participate therewith, in whole or in part,
as to distribution of assets shall be entitled, after payment or provision for
payment of all debts and liabilities of the Corporation, to receive the
remaining assets of the Corporation available for distribution, in cash or in
kind.
Each share of Common Stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of Common Stock of the Corporation.
Section 2. Preferred Stock.
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The Board of Directors is authorized, by resolution or resolutions from
time to time adopted, to provide for the issuance of Preferred Stock in one or
more series and to fix and state the powers, designations, preferences, and
relative, participating, optional, or other special rights of the shares of such
series, and the qualifications, limitations, or restrictions thereof, including,
but not limited to determination of any of the following:
(a) the distinctive serial designation, the number of shares constituting
such series and the stated value thereof if different from the par value
thereof;
(b) the dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date or dates, the payment date or dates for dividends, and the participating or
other special rights, if any, with respect to dividends;
(c) the voting powers, full or limited, if any, of the shares of such
series;
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(d) whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such shares
may be redeemed;
(e) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation;
(f) whether the shares of such series shall be entitled to the benefits of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such funds;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange;
(h) the subscription or purchase price and form of consideration for which
the shares of such series shall be issued;
(i) whether the shares of such series which are redeemed or converted shall
have the status of authorized but unissued shares of Preferred Stock and whether
such shares may be reissued as shares of the same or any other series of
Preferred Stock;
(j) the ranking (be it pari passu, junior or senior) of each class or
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series vis-a-vis any other class or series of any class of Preferred Stock as to
the payment of dividends, the distribution of assets and all other matters; and
(k) any other powers, preferences and relative, participating, optional and
other special rights, and any qualifications, limitations and restrictions
thereof, insofar as they are not inconsistent with the provisions of this
Amended and Restated Certificate of Incorporation, to the full extent permitted
in accordance with the laws of the State of Delaware.
Each share of each series of Preferred Stock shall have the same relative
powers, preferences and rights as, and shall be identical in all respects with,
all the other shares of the Corporation of the same series.
ARTICLE VII.
The holders of Preferred Stock shall not be held individually responsible
as such holders for any debts, contracts or engagements of the Corporation, and
the Preferred Stock shall not be liable for assessment to restore impairments in
the capital of the Corporation.
ARTICLE VIII.
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures, or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates of indebtedness, debentures, or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the Board of Directors of the Corporation to
such persons, firms, corporations, or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
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ARTICLE IX.
The Corporation may from time to time, pursuant to authorization by the
Board of Directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
Board of Directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law or regulation.
ARTICLE X.
Special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by a majority of the Board of Directors or by
the holders of at least a majority of the then outstanding shares of capital
stock of the Corporation entitled to vote thereat. Special meetings may not be
called by any other person or persons. Each special meeting shall be held at
such date and time as is requested by the person or persons calling the meeting,
within the limits fixed by the By-laws and by law.
ARTICLE XI.
Any action required to be taken at any annual or special meeting of
stockholders of this Corporation, or any action which may be taken at any annual
or special meeting of stockholders, 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 stock 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,
provided that the Board of Directors of this Corporation, by resolution, shall
have previously approved any such action.
ARTICLE XII.
Except as required by applicable law, there shall be no cumulative voting
by stockholders of any class or series in the election of directors of the
Corporation.
ARTICLE XIII.
Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the stockholders
of the Corporation shall be given in the manner provided in the By-laws of the
Corporation.
ARTICLE XIV.
Section 1. In addition to any affirmative vote required by law or this
Amended and Restated Certificate of Incorporation, and except as otherwise
expressly provided in Section 2 of this Article XIV, any "Business Combination"
(as hereinafter defined), which shall be consummated at a time when there shall
exist an "Interested Stockholder" (as hereinafter defined), shall require the
affirmative vote of the holders of at least 66-2/3% of the then outstanding
shares of capital stock of this Corporation entitled to vote, voting together as
a single class. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required or that a lesser percentage may be specified
by law or otherwise.
In addition to the higher vote requirement, except as otherwise expressly
provided in Section 2 of this Article XIV, prior to effecting any such Business
Combination all of the following conditions shall have been met:
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A. The aggregate amount of the cash and the "Fair Market Value" (as
hereinafter defined) as of the date of the consummation of the Business
Combination of consideration other than cash to be received per share by holders
of the Common Stock in such Business Combination shall be at least equal to the
higher of the following:
(1) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of the Common Stock acquired by
it (a) within the two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the "Announcement
Date") or (b) in the transaction in which it became an Interested
Stockholder, if within two years of the Announcement Date, whichever is
higher; and
(2) the Fair Market Value per share of the Common Stock on the
Announcement Date or on the date on which the Interested Stockholder became
an Interested Stockholder the ("Determination Date"), if within two years
of the Announcement Date, whichever is higher.
B. The aggregate amount of the cash and the Fair Market Value as of the
date of the consummation of the Business Combination of consideration other than
cash to be received per share by holders of shares of any other class of
outstanding stock of this Corporation shall be at least equal to the highest of
the following:
(1) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of such class of stock acquired
by it (a) within the two-year period immediately prior to the Announcement
Date or (b) in the transaction in which it became an Interested
Stockholder, if within two years of the Announcement Date, whichever is
higher;
(2) (if applicable) the highest preferential amount per share to which
the holders of shares of such class of stock are entitled in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(3) the Fair Market Value per share of such class of stock on the
Announcement Date or on the Determination Date, if within two years of the
Announcement Date, whichever is higher.
C. The consideration to be received by holders of a particular class of
outstanding stock of this Corporation (including Common Stock) shall be in cash
or in the same form as the Interested Stockholder has previously paid for shares
of such class of stock. If the Interested Stockholder has paid for shares of
any class of stock with varying forms of consideration, the form of
consideration for such class of stock shall be either cash or the form used to
acquire the largest number of shares of such class of stock previously acquired
by it. The price determined in accordance with subparagraphs A and B of this
Section 1 shall be subject to appropriate adjustment in the event of any stock
dividend, stock split, combination of shares or similar event.
D. After such stockholder has become an Interested Stockholder and prior
to the consummation of such Business Combination and except to the extent that
the Corporation may be prohibited by law from making a distribution to
stockholders: (1) except as approved by 66-2/3% of the "Disinterested
Directors" (as hereinafter defined), there shall have been no failure to declare
and pay at the regular date therefor any dividends (whether or not cumulative)
on the outstanding Preferred Stock of this Corporation; (2) there shall have
been (a) no reduction in the annual rate of dividends paid on the Common Stock
of this Corporation (except an necessary to reflect any subdivision of the
Common Stock), except as approved by 66-2/3% of the Disinterested Directors, and
(b) an increase in such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number or outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by 66-2/3% of the Disinterested Directors;
and (3) such Interested
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Stockholder shall have not become the beneficial owner of any additional shares
of stock of this Corporation except as part of the transaction which results in
such stockholder becoming an Interested Stockholder within the two year period
prior to such consummation.
E. After such stockholder has become an Interested Stockholder, such
Interested Stockholder shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by this Corporation or any "Subsidiary" (as hereinafter
defined), whether in anticipation of or in connection with such Business
Combination or otherwise.
F. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to all holders of the
stock of this Corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
Section 2. The provisions of Section 1 of this Article XIV shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of this Amended and Restated Certificate of Incorporation, if the
Business Combination shall have been approved by 66-2/3% of the Disinterested
Directors; or, if either
A. there is pending any proceeding or other action by the Federal Deposit
Insurance Corporation pursuant to (S) 1818(a) or (S) 1823(c) of Title 12 of the
United States Code in connection with any of the banking subsidiaries of the
Corporation; or
B. there is outstanding any order of the Commissioner of Financial
Institutions of the State of California pursuant to California Financial Code
(S) 662, (S)(S) 3100-3132 or (S)(S) 3180-3187 against any banking subsidiary of
the Corporation
or any other provision of similar purpose as hereinafter adopted and as the same
may be amended at a future time.
Section 3. For the purposes of this Article XIV the following definitions
apply:
A. A "person" means any individual, firm, corporation or other entity.
B. "Interested Stockholder" means any person (other than this Corporation
or any Subsidiary) who or which:
(1) is the beneficial owner, directly or indirectly, of more than 20%
of the issued and outstanding stock of this Corporation; or
(2) is an "Affiliate" of this Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 20% or more of the issued and
outstanding stock of this Corporation; or
(3) is an assignee of or has otherwise succeeded to any shares of
stock of this Corporation which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
C. A person shall be a "beneficial owner" of stock of this Corporation:
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(1) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(2) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(3) which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of stock of this Corporation.
D. "Business Combination" shall include:
(1) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation (whether
or not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; or
(2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate of any Interested Stockholder of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value of ten percent (10%) or more of the total value of the assets
of the Corporation reflected in the most recent balance sheet of the
Corporation; or
(3) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value of 20% of stockholders' equity or more; or
(4) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate of any Interested Stockholder; except that
this provision shall not limit the right of the stockholders to elect
voluntarily to wind up or dissolve the Corporation by the vote of
stockholders holding shares of stock representing more than fifty percent
(50%) of the stock then entitled to vote in the election of directors; or
(5) any reclassification of the Corporation's securities (including
any reverse stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise involving
any Interested Stockholder) which has the effect, directly or indirectly,
of increasing the proportionate beneficial ownership of any Interested
Stockholder or any Affiliate of any Interested Stockholder in the
outstanding shares of any class of equity or convertible securities of the
Corporation or any Subsidiary.
E. "Affiliate," and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on February 15, 1999.
F. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the interested Stockholder became an
Interested Stockholder, and any successor of a Disinterested Director who is
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unaffiliated with the Interested Stockholder and is recommended to succeed a
Disinterested Director by a majority of Disinterested Directors then on the
Board of Directors.
G. "Fair Market Value" means as to the stock of this Corporation the fair
market value on the date in question of a share of such stock as determined by
the Board of Directors in good faith; and in the case of property other than
cash or stock, the fair market value of such property on the date in question as
determined by the Board of Directors in good faith.
H. "Subsidiary" means any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by this Corporation; provided,
however, that for purposes of the definition of Interested Stockholder, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned directly or indirectly by this Corporation.
In the event of any Business Combination in which this Corporation
survives, the phrase "other consideration to be received" as used in Section 1
of this Article XIV shall include the shares of stock of this Corporation
retained by the holders of such shares.
Section 4. A majority of the directors shall have the power and duty to
determine for the purposes of this Article XIV, on the basis of information
known to them after reasonable inquiry, (A) whether a person is an Interested
Stockholder, (B) the number of shares of stock of this Corporation beneficially
owned by any person, (C) whether a person is an Affiliate or Associate of
another, or (D) whether the assets which are the subject of any Business
Combination constitute substantially all assets of this Corporation. A majority
of the directors shall have the further power to interpret all of the terms and
provisions of this Article XIV.
Section 5. Nothing contained in this Article XIV shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
Section 6. Notwithstanding any other provisions of this Amended and
Restated Certificate of Incorporation or the By-laws (and notwithstanding the
fact that a lesser percentage may be specified by law, this Amended and Restated
Certificate of Incorporation or the By-laws) the affirmative vote of the holders
of 66-2/3% or more of the outstanding stock of this Corporation shall be
required to amend, repeal or adopt any provisions inconsistent with this Article
XIV.
ARTICLE XV.
The Board of Directors, when evaluating any offer of another party to (a)
make a tender or exchange offer for any Equity Security (as defined hereinafter)
of the Corporation, (b) merge or consolidate the Corporation with another
corporation, or (c) purchase, lease, or otherwise acquire all or substantially
all of the property of the Corporation, shall in connection with the exercise of
its judgment in determining what is in the best interests of the Corporation and
its stockholders consider all of the following factors and any other factors it
deems relevant: (i) the social and economic effects on the employees,
stockholders, customers, suppliers, and other constituents of the Corporation
and its subsidiaries and on the communities in which the Corporation or its
subsidiaries operate or are located, including, without limitation, the
availability of credit and other banking services to the communities served by
the Corporation; (ii) whether the proposed transaction might violate federal or
state laws; and (iii) not only the consideration being offered in the proposed
transaction in relation to the then current market price for or book value of
the outstanding capital stock of the Corporation, but also to the market price
for or book value of the capital stock of the Corporation over a period of years
and the Corporation's future value as an independent entity. "Equity Security"
shall have the meaning ascribed to such term in Section 3(a)(11) of the
Securities Exchange Act of 1934, as in effect on February 15, 1999.
ARTICLE XVI.
Directors of the Corporation shall have no liability to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XVI shall not eliminate liability of
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<PAGE>
a director for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not made in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which a director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after the effective date of this Amended and
Restated Certificate of Incorporation to further eliminate or limit the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE XVII.
In accordance with Section 203(b)(3) of the Delaware General Corporation
Law, the Corporation expressly elects not to be governed by Section 203 of the
Delaware General Corporation Law.
FIFTH. This Amended and Restated Certificate of Incorporation was duly
-----
adopted by the sole incorporator of the Corporation in accordance with the
provisions of Section 241 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by Ole R. Mettler, its sole
incorporator, this 9th day of March, 1999.
By /s/ Ole R. Mettler
------------------
Ole R. Mettler
Incorporator
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<PAGE>
EXHIBIT 3(ii)
B Y - L A W S
OF
FARMERS & MERCHANTS BANCORP
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
ARTICLE I OFFICES.................................................. 1
1.1 REGISTERED OFFICE........................................ 1
1.2 PRINCIPAL EXECUTIVE OFFICE............................... 1
1.3 OTHER OFFICES............................................ 1
ARTICLE II MEETINGS OF STOCKHOLDERS................................. 1
2.1 PLACE OF MEETINGS........................................ 1
2.2 ANNUAL MEETING........................................... 1
2.3 SPECIAL MEETING.......................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETING.......................... 1
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............. 2
2.6 AGENDAS FOR ANNUAL MEETINGS OF STOCKHOLDERS.............. 2
2.7 QUORUM................................................... 3
2.8 ADJOURNED MEETING; NOTICE................................ 3
2.9 VOTING................................................... 3
2.10 WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS....... 4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.. 4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE, VOTING, AND GIVING
CONSENTS................................................. 4
2.13 PROXIES.................................................. 5
2.14 INSPECTORS OF ELECTION................................... 5
2.15 CONDUCT OF MEETINGS...................................... 6
ARTICLE III BOARD OF DIRECTORS....................................... 6
3.1 POWERS................................................... 6
3.2 NUMBER AND QUALIFICATION OF DIRECTORS.................... 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................. 6
3.4 NOMINATIONS FOR DIRECTORS................................ 6
3.5 VACANCIES................................................ 7
3.6 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.............. 8
3.7 ANNUAL MEETING........................................... 8
3.8 OTHER REGULAR MEETINGS................................... 8
3.9 SPECIAL MEETINGS......................................... 8
3.10 ACTION ON NON AGENDA ITEMS............................... 8
3.11 QUORUM................................................... 9
3.12 WAIVER OF NOTICE......................................... 9
3.13 ADJOURNMENT.............................................. 9
3.14 NOTICE OF ADJOURNMENT.................................... 9
3.15 ACTION WITHOUT MEETING................................... 9
3.16 FEES AND COMPENSATION OF DIRECTORS....................... 9
3.17 HONORARY DIRECTORS....................................... 9
3.18 ADDITIONAL DIRECTOR QUALIFICATIONS....................... 9
ARTICLE IV COMMITTEES............................................... 10
4.1 COMMITTEES OF DIRECTORS.................................. 10
4.2 MEETINGS AND ACTION OF COMMITTEES........................ 10
ARTICLE V OFFICERS................................................. 11
5.1 OFFICERS................................................. 11
5.2 DUTIES................................................... 11
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<PAGE>
5.3 ELECTION OF OFFICERS..................................... 11
5.4 SUBORDINATE OFFICERS..................................... 11
5.5 REMOVAL AND RESIGNATION OF OFFICERS...................... 11
5.6 VACANCIES IN OFFICES..................................... 11
5.7 CHAIRMAN OF THE BOARD.................................... 11
5.8 VICE CHAIRMAN............................................ 11
5.9 PRESIDENT................................................ 11
5.10 EXECUTIVE VICE PRESIDENT................................. 12
5.11 CHIEF FINANCIAL OFFICER.................................. 12
5.12 SENIOR CREDIT OFFICER.................................... 12
5.13 SECRETARY................................................ 12
ARTICLE VI RECORDS AND REPORTS...................................... 13
6.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER............. 13
6.2 MAINTENANCE AND INSPECTION OF BY-LAWS.................... 13
6.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATION RECORDS.. 13
6.4 INSPECTION BY DIRECTORS.................................. 13
ARTICLE VII GENERAL CORPORATE MATTERS................................ 14
7.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.... 14
7.2 CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS................. 14
7.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED........ 14
7.4 CERTIFICATE FOR SHARES................................... 14
7.5 LOST CERTIFICATES........................................ 14
7.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........... 14
ARTICLE VIII DIVIDENDS............................................... 15
ARTICLE IX FISCAL YEAR.............................................. 15
ARTICLE X CORPORATE SEAL........................................... 15
ARTICLE XI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER CORPORATE AGENTS................................... 15
11.1 RIGHT TO INDEMNIFICATION................................. 15
11.2 RIGHT OF CLAIMANT TO BRING SUIT.......................... 16
11.3 NONEXCLUSIVITY OF RIGHTS................................. 16
11.4 INSURANCE................................................ 16
ARTICLE XII AMENDMENTS............................................... 16
12.1 AMENDMENT BY STOCKHOLDERS................................ 16
12.2 AMENDMENT BY DIRECTORS................................... 17
12.3 CONSTRUCTION AND DEFINITION.............................. 17
</TABLE>
-ii-
<PAGE>
B Y - L A W S
-------------
OF
--
Farmers & Merchants Bancorp
---------------------------
(a Delaware corporation)
ARTICLE I
OFFICES
Section 1.1 REGISTERED OFFICE. The registered office of Farmers &
Merchants Bancorp ("the Corporation"), within the State of Delaware is located
at 1209 Orange Street in the City of Wilmington, County of New Castle, in the
State of Delaware and Corporation Trust Company is the registered agent.
Section 1.2 PRINCIPAL EXECUTIVE OFFICE. The principal executive office of
the Corporation shall be located at such place within or outside of the State of
Delaware as the Board of Directors of the Corporation ("Board of Directors")
from time to time shall designate.
Section 1.3 OTHER OFFICES. The Corporation may also have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at
any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the Corporation.
Section 2.2 ANNUAL MEETING. The annual meeting of the stockholders of
this Corporation for the election of directors and the transaction of any and
all other business shall be held on the third Monday of April of each year, if
not a legal holiday and if a legal holiday then on the day following, beginning
at 4 o'clock in the afternoon of said day except as otherwise specified by the
Board of Directors.
Section 2.3 SPECIAL MEETING. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time by a majority
of the Board of Directors or by the holders of at least a majority of the then
outstanding shares of capital stock of the Corporation entitled to vote thereat.
Special meetings may not be called by any other person or persons. Each special
meeting shall be held at such date and time as is requested by the person or
persons calling the meeting, within the limits fixed by the By-laws and by law.
Section 2.4 NOTICE OF STOCKHOLDERS' MEETING. All notices of meetings of
stockholders shall be sent or otherwise given in accordance with Section 2.5 of
these By-Laws not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the Board of Directors, at the time of giving the notice, intends
to present for action by the stockholders. The notice of any meeting at which
directors are to be
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<PAGE>
elected shall include the name of any nominee or nominees whom, at the time of
the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 144 of the Delaware General Corporation Law (the
"DGCL"), (ii) an amendment of the Certificate of Incorporation, pursuant to
Section 242 of the DGCL, (iii) a reorganization of the Corporation, pursuant to
Subchapter XI of the DGCL, or (iv) a voluntary dissolution of the Corporation,
pursuant to Section 275 of the DGCL of that Code, the notice shall also state
the general nature of that proposal.
Section 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of stockholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
stockholder at the address of that stockholder appearing on the books of the
Corporation or given by the stockholder 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 stockholder 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 where that 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.
If any notice addressed to a stockholder at the address of that stockholder
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 stockholder at that address, all
future notices or reports shall be deemed to have been duly given without
further mailing if these shall be available to the stockholder on written demand
of the stockholder at the principal executive office of the Corporation for a
period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting shall be executed by the Secretary or any transfer agent
of the Corporation giving the notice, and shall be filed and maintained in the
minute book of the Corporation.
Section 2.6 AGENDAS FOR ANNUAL MEETINGS OF STOCKHOLDERS. At any annual
meeting of stockholders only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by, or at the direction of, the Board of Directors,
(ii) otherwise properly brought before the meeting by, or at the direction of,
the Chairman of the meeting, or (iii) otherwise properly brought before the
meeting by a stockholder entitled to vote at such meeting. For business to be
properly brought before a meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation and
must have been a stockholder of record at the time such notice is given. To be
timely, a stockholder's notice shall be delivered to or mailed (by United States
registered mail, return receipt requested) and received at the principal
executive offices of the Corporation not less than seventy (70) days nor more
than ninety (90) days prior to the first anniversary date of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than twenty (20) days, or delayed by more
than seventy (70) days, from such anniversary date, notice by the stockholder to
be timely must be so delivered or mailed (by U.S. registered mail, return
receipt requested) and received not earlier than the ninetieth (90th) day prior
to such annual meeting and not later than the close of business on the later of
the seventieth (70th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice to the Secretary shall set forth (i) as
to each matter the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, and (ii) as to the
stockholder giving the notice (a) the name and record address of the
stockholder, (b) the class and the number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder, (c) any material
interest of the stockholder in such business and (d) whether the stockholder
intends or is part of a group which intends to solicit proxies from other
stockholders in support of
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<PAGE>
such proposal and if part of a group, the names and addresses of such group
members. No business shall be conducted at an annual meeting of stockholders
unless proposed in accordance with the procedures set forth herein. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting in
accordance with the foregoing procedure and such business shall not be
transacted. To the extent this Section 2.6 shall be deemed by the Board of
Directors or the Securities and Exchange Commission or any applicable bank
regulatory authority, or finally adjudged by a court of competent jurisdiction,
to be inconsistent with the right of stockholders to request inclusion of a
proposal in the Corporation's proxy statement pursuant to Rule 14a-8 promulgated
under the Securities Exchange Act of 1934, as amended, such rule shall prevail.
Section 2.7 QUORUM. The presence in person or by proxy of the holders of
a majority of the shares entitled to vote at any meeting of stockholders shall
constitute a quorum for the transaction of business. The stockholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
stockholders 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 2.8 ADJOURNED MEETING; NOTICE. Any stockholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the chairman of the meeting or by the vote of the majority of the shares
represented at that meeting, either in person or by proxy, but in the absence of
a quorum, no other business may be transacted at that meeting, except as
provided in Section 2.7 of these By-Laws.
When any meeting of stockholders, 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 a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than thirty (30) days from the date set for the original
meeting, in which case the Board of Directors shall set a new record date.
Notice of any such adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these By-Laws. At any adjourned meeting
the Corporation may transact any business which might have been transacted at
the original meeting.
Section 2.9 VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.12 these By-Laws, subject to the provision of Sections 217 and 218 of the DGCL
(relating to voting shares held by a fiduciary or in joint ownership or subject
to voting trusts). In the discretion of the chairman of the meeting, the
stockholders' vote as to any matter may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
stockholder before the voting has begun. On any matter other than elections of
directors, any stockholder may vote part of the shares in favor of the proposal
and refrain from voting the remaining shares or vote them against the proposal,
but, if the stockholder fails to specify the number of shares which the
stockholder is voting affirmatively, it will be conclusively presumed that the
stockholder's approving vote is with respect to all shares that the stockholder
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
stockholders, unless the vote of a greater number or voting by classes is
required by the DGCL or by the Certificate of Incorporation.
At a stockholders' meeting at which directors are to be elected, no
stockholder shall be entitled to cumulate votes (i.e., cast for any one or more
----
candidates a number of votes greater than the number of stockholder's shares)
unless cumulative voting shall be required under Section 2115 of the California
Corporations Code and unless the candidates' names have been placed in
nomination prior to commencement of the voting in accordance with Section 3.4 of
these By-Laws and a stockholder has given notice to the secretary of the
Corporation at least two (2) days prior to the date of the meeting of the
stockholder's intention to cumulate votes. If any stockholder has given such a
notice, then every stockholder entitled to vote may cumulate votes for
candidates in nomination and give one candidate a number of votes equal to the
number of
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<PAGE>
directors to be elected multiplied by the number of votes to which that
stockholder's shares are entitled, or distribute the stockholder's votes on the
same principle among any or all of the candidates, as the stockholder thinks
fit. The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
Section 2.10 WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS. The
transactions of any meeting of stockholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though taken at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or any approval of
the minutes. The waiver of notice or consent need not specify either the
business to be transacted or the purpose of any annual or special meeting of
stockholders, 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 these By-Laws, the waiver of notice or consent shall state the general
nature of the proposal. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action required to be taken at any annual or special meeting of stockholders of
this Corporation, or any action which may be taken at any annual or special
meeting of stockholders, 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 outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on such action were present and voted,
provided that the Board of Directors, by resolution, shall have previously
approved any such action. In the case of election of directors, a consent
otherwise conforming to the requirements of the preceding sentence shall be
effective only if signed by the holders of all outstanding shares entitled to
vote for the election of directors; provided, however, that a director may be
elected at any time to fill a vacancy on the Board of Directors 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. All
such consents shall be filed with the Secretary of the Corporation and shall be
maintained in the corporate records. Any stockholder giving a written consent,
or the stockholder's proxy holders, or a transferee of the shares or a personal
representative of the stockholder or their respective proxy holders, may revoke
the consent by a writing received by the Secretary of the Corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the Secretary.
If the consents of all stockholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
stockholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the stockholders without a meeting.
This notice shall be given in the manner specified in Section 2.5 of these By-
Laws. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 144 of
the DGCL, (ii) indemnification of agents of the Corporation, pursuant to Section
145 of the DGCL of that Code, and (iii) a reorganization of the Corporation,
pursuant to Subchapter XI of the DGCL of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 2.12 RECORD DATE FOR STOCKHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the stockholders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any
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<PAGE>
such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only stockholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
the record date, except as otherwise provided in the DGCL.
If the Board of Directors does not so fix a record date:
1. The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
2. The record date for determining stockholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the Board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the Board has been taken, shall be at the
close of business on the day on which the Board adopts the resolution relating
to that action, or the sixtieth (60th) day before the date of such other action,
whichever is later.
Section 2.13 PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Corporation. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the stockholder or the
stockholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the Corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the Corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Section 212 of the DGCL.
Section 2.14 INSPECTORS OF ELECTION. Before any meeting of stockholders,
the Board of Directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the Chairman of the meeting may, and on
the request of any stockholder or a stockholder'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 stockholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may, and upon
the request of any stockholder or a stockholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
1. determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
2. receive votes, ballots, or consents;
3. hear and determine all challenges and questions in any way arising in
connection with the right to vote;
4. count and tabulate all votes or consents;
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<PAGE>
5. determine the result; and
6. do any other acts that may be proper to conduct the election or vote
with fairness to all stockholders.
Section 2.15 CONDUCT OF MEETINGS. The date and time of the opening and
the closing of the polls for each matter upon which the stockholders will vote
at a meeting shall be announced at the meeting by the person presiding over the
meeting. The Board of Directors may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board of Directors, the Chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
Chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the Chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting, (ii) rules and procedures for maintaining order at the meeting and the
safety of those present, (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the Chairman of the meeting
shall determine, (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof (v) limitations on the time allotted to questions
or comments by participants, and (v) determine when the polls shall close as to
any matter to be addressed at the meeting. Unless and to the extent determined
by the Board of Directors or the Chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 POWERS. Subject to the provisions of the DGCL and any
limitations in the Certificate of Incorporation and these By-Laws relating to
action required to be approved by the stockholders 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 of Directors.
Section 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall not be less than nine (9) nor greater than fifteen (15) and
the exact number shall be eleven (11) until changed, within the limits specified
above, by a resolution amending such exact number, duly adopted by the Board of
Directors. The minimum and maximum number of directors may be changed by a duly
adopted amendment to the Certificate of Incorporation or by an amendment to this
By-Law adopted by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote.
Section 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the stockholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 3.4 NOMINATIONS FOR DIRECTORS. Nominations for election to the
Board of Directors may be made by the Board of Directors or by any holder of any
outstanding class of capital stock of the Corporation entitled to vote for the
election of directors. Nominations, other than those made by the Board of
Directors, shall be made by notification in writing delivered or mailed to the
President of the Corporation not less than thirty (30) days or more than sixty
(60) days prior to any meeting of stockholders called for election of directors,
provided, however, that if less than twenty-one (21) days' notice of the meeting
is given to stockholders, such nomination shall be mailed or delivered to the
President of the Corporation not later than the close of business on the seventh
(7th) day following the day on which the notice of meeting was mailed. Such
notification shall contain the following information as to each proposed nominee
and as to each person, acting
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alone or in conjunction with one or more other persons, in making such
nomination or in organizing, directing or financing such nomination or
solicitation of proxies to vote for the nominee: (a) the name, age, residence
address and business address of each proposed nominee and each such person and
the date as of which such nominee commenced residency at such residence address;
(b) the principal occupation or employment, the name, type of business and
address of the Corporation or other organization in which such employment is
carried on of each proposed nominee and of each such person; (c) if the proposed
nominee is an attorney, a statement as to whether or not either he or she or any
firm with whom he or she has a relationship as partner, associate, of counsel,
employee, or otherwise, acts as legal counsel for any banking Corporation,
affiliate or subsidiary thereof, or bank holding company, industrial loan
company, savings bank or association or finance company; (d) a statement as to
each proposed nominee and a statement as to each such person stating whether the
nominee or person concerned has been a participant in any proxy contest within
the past ten years, and, if so, the statement shall indicate the principals
involved, the subject matter of the contest, the outcome thereof, and the
relationship of the nominee or person to the principals; (e) the amount of stock
of the Corporation owned beneficially, directly or indirectly, by each proposed
nominee or by members of his or her family residing with him or her and the
names of the registered owners thereof; (f) the amount of stock of the
Corporation owned of record but not beneficially by each proposed nominee or by
members of his or her family residing with him or her and by each such person or
by members of his or her family residing with him or her and the names of the
beneficial owners thereof; (g) if any shares specified in (e) or (f) above were
acquired in the last two (2) years, a statement of the dates of acquisition and
amounts acquired on each date; (h) a statement showing the extent of any
borrowings to purchase shares of the Corporation specified in (e) or (f) above
acquired within the preceding two years, and if funds were borrowed otherwise
than pursuant to a margin account or bank loan in the regular course of business
of a bank, the material provisions of such borrowings and the names of the
lenders; (i) the details of any contract, arrangement or understanding relating
to the securities of the Corporation, to which each proposed nominee or to which
each such person is a party, such as joint venture or option arrangements, puts
or calls, guaranties against loss, or guaranties of profit or arrangements as to
the division of losses or profits or with respect to the giving or withholding
of proxies, and the name or names of the persons with whom such contracts,
arrangements or understandings exist; (j) the details of any contract,
arrangement, or understanding to which each proposed nominee or to which such
person is a party with any other banking corporation, affiliate or subsidiary
thereof, other than a subsidiary of the Corporation, or bank holding company,
industrial loan company, savings bank or association or finance company, or with
any officer, director, employee, agent, nominee, attorney, or other
representative thereof; (k) a description of any arrangement or understanding of
each proposed nominee and of each such person with any person regarding future
employment or with respect to any future transaction to which the Corporation
will or may be a party; (l) a statement as to each proposed nominee and a
statement as to each such person as to whether or not the nominee or person
concerned will bear any part of the expense incurred in any proxy solicitation,
and, if so, the amount thereof; (m) a statement as to each proposed nominee and
a statement as to each such person describing any conviction for a felony that
occurred during the preceding ten years involving the unlawful possession,
conversion or appropriation of money or other property, or the payment of taxes;
(n) the total number of shares that will be voted for each proposed nominee; (o)
the amount of stock, if any, owned, directly or indirectly, by each proposed
nominee or by members of his family residing with him or her, in any banking
corporation, affiliate or subsidiary thereof, or bank holding company,
industrial loan company, savings bank or association or finance company, other
than the Corporation; and (p) the identity of any other banking corporation,
affiliate or subsidiary thereof, other than a subsidiary of the Corporation, or
bank holding company or industrial loan company, savings bank or association or
finance company as to which such nominee or any other such person serves as a
director, officer, employee, agent, consultant, advisor, nominee or attorney
together with a description of such relationship. The chairman of the meeting
may, in his or her discretion, determine and declare to the meeting that a
nomination not made in accordance with the foregoing procedure shall be
disregarded.
Section 3.5 VACANCIES. Vacancies in the Board of Directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the stockholders or by court order
may be filled only 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 holders of a majority of the outstanding shares entitled to
vote.
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Each director so elected shall hold office until the next annual meeting of the
stockholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in the event of the death, resignation, or removal of any director, or if the
Board of Directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of directors is increased, or if the stockholders
fail, at any meeting of stockholders at which any director or directors are
elected, to elect the number of directors to be voted for at that meeting.
The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective on giving written notice to the Chairman
of the Board, the President, the Secretary, or the Board of Directors, unless
the notice specifies a later time for that resignation to become effective. If
the resignation of a director is effective at a future time, the Board of
Directors may elect a successor to take office when the resignation becomes
effective.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of offices expires.
Section 3.6 PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings
of the Board of Directors may be held at any place within or without the State
of Delaware that has been designated from time to time by resolution of the
Board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the Corporation. Special meetings of the
Board shall be held at any place within or outside the State of Delaware that
has been designated in the notice of the meeting or, if not stated in the notice
or there is no notice, at the principal executive office of the Corporation.
Any meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in
person at the meeting.
Section 3.7 ANNUAL MEETING. Following each annual meeting of
stockholders, the Board of Directors shall meet for the purpose of organization,
any desired election of officers, and the transaction of other business. Notice
of this meeting shall not be required.
Section 3.8 OTHER REGULAR MEETINGS. Other regular meetings of the Board
of Directors shall be held without call at such time as shall from time to time
be fixed by the Board of Directors. Such regular meetings may be held without
notice.
Section 3.9 SPECIAL MEETINGS. Special meetings of the Board of Directors
for any purpose or purposes may be called at any time by the Chairman the Board
or the President of the Corporation.
Special meetings of the Board shall be held upon four (4) days' notice by
first-class mail or twenty-four (24) hours' notice delivered personally or by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, telegraph, facsimile, electronic
mail or other electronic means. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office or home of the director who the person giving the oral notice reasonably
believes will promptly communicate it to the director. A notice need not
specify the purpose of any special meeting of the Board nor the place if the
meeting is to be held at the principal executive office of the Corporation.
Section 3.10 ACTION ON NON AGENDA ITEMS. No action may be taken at any
annual, regular or special meeting of the Board of Directors with respect to any
matter that was not previously included on the agenda or in the notice for such
meeting delivered or announced to the directors prior to the meeting if more
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than one-fourth (1/4) of the directors present at such meeting are opposed to
taking action at such meeting with respect to such matter.
Section 3.11 QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 3.13 of these By-laws. Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Directors, subject to
the provisions of Section 144 of the DGCL (as to approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 141(c) of the DGCL (as to appointment of committees), and
Section 145 of the DGCL (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 that meeting.
Section 3.12 WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting before or at its commencement the lack of
notice to that director.
Section 3.13 ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 3.14 NOTICE OF ADJOURNMENT. 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, in the manner specified
in Section 3.9 of these By-Laws, to the directors who were not present at the
time of the adjournment.
Section 3.15 ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the Board of Directors may be taken without a meeting, if all
members of the Board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and
effect as a unanimous vote of the Board of Directors. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors.
Section 3.16 FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors.
Section 3.17 HONORARY DIRECTORS. The Board of Directors may elect a
director emeritus as an honorary director of the Corporation.
Section 3.18 ADDITIONAL DIRECTOR QUALIFICATIONS. No person shall be a
member of the Board of Directors (a) who has not been a resident for a period of
at least two years immediately prior to his or her election of a county in which
a subsidiary of the Corporation maintains a banking office unless the election
of such person shall be approved by the affirmative vote of at least two-thirds
(2/3) of the members of the Board of Directors of this Corporation then in
office, or (b) who owns, together with his or her family residing with him or
her, directly or indirectly, more than one percent of the outstanding shares of
any other banking corporation, affiliate or subsidiary thereof, or bank holding
company or industrial loan company, savings bank or association or finance
company unless the election of such person shall be approved by the affirmative
vote of at least two-thirds (2/3) of the Board of Directors then in office, or
(c) who is a director, officer, employee, agent, nominee, or attorney of any
other banking corporation, affiliate, or subsidiary thereof, or bank holding
company or industrial loan company, savings bank or association or finance
company, other
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than a subsidiary of the Corporation, unless the election of such person shall
be approved by the affirmative vote of at least two-thirds (2/3) of the members
of the Board of Directors then in office, or (d) who has or is the nominee of
anyone who has any contract, arrangement or understanding with any other banking
corporation, or affiliate or subsidiary thereof, or bank holding company or
industrial loan company, savings bank or association or finance company or with
any officer, director, employee, agent, nominee, attorney or other
representative thereof that he or she will reveal or in any way utilize
information obtained as a director of this Corporation or that he or she will,
directly or indirectly, attempt to effect or encourage any action of this
Corporation.
ARTICLE IV
COMMITTEES
Section 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors to
serve at the pleasure of the Board. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided
in the resolution of the Board, shall have all the authority of the Board,
except with respect to:
(a) the approval of any action which, under the DGCL, also requires
stockholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the Board of the Directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the Board or
on any committee;
(d) the amendment or repeal of By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the stockholders of the Corporation, except at a rate
or in a periodic amount or within a price range determined by the Board of
Directors; or
(g) the appointment of any other committees of the Board of Directors or
the members of these committees.
Section 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Sections 3.6 (place of meetings), 3.8 (regular meetings), 3.9
(special meetings and notice), 3.11 (quorum), 3.12 (waiver of notice), 3.13
(adjournment), 3.14 (notice of adjournment), 3.15 (action without meeting), and
Section 3.16 (on compensation) of these By-Laws with such changes in the context
of those By-Laws as are necessary to substitute the committee and its members
for the Board of Directors and its members, except that the time of regular
meetings of committees may be determined either by resolution of the Board of
Directors or by resolution of the committee, special meetings of committees may
also be called by resolution of the Board of Directors and notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these By-laws.
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ARTICLE V
OFFICERS
Section 5.1 OFFICERS. The officers of the Corporation shall be a
President, a Chief Financial Officer, a Senior Credit Officer and a Secretary,
and may also include, at the discretion of the Board of Directors, a Chairman of
the Board, a Vice-Chairman and one or more Executive Vice Presidents. Any
number of offices may be held by the same person.
Section 5.2 DUTIES. All officers, as between themselves and the
Corporation, shall have such authority and perform such duties in the management
of the Corporation as may be provided in these By-Laws, or, to the extent not so
provided, as may be provided by resolution of the Board of Directors.
Section 5.3 ELECTION OF OFFICERS. The officers of the Corporation, except
such officers as may be appointed in accordance with the provisions of Section
5.4 or Section 5.7 of these By-Laws, shall be chosen by the Board of Directors,
and each shall serve at the pleasure of the Board, subject to the rights, if
any, of an officer under any contract of employment.
Section 5.4 SUBORDINATE OFFICERS. The Board of Directors may appoint, and
may empower the President to appoint, such other officers as the business of the
Corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the By-Laws or as the
Board of Directors may from time to time determine.
Section 5.5 REMOVAL AND RESIGNATION OF OFFICERS. 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 of Directors, at any regular
or special meeting of the Board, or, except in case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
Section 5.6 VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these By-Laws for regular appointments to that
office.
Section 5.7 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the By-
Laws. If there is no President or if the Board of Directors so specifies, the
Chairman of the Board shall in addition be the Chief Executive Officer of the
Corporation and shall have the powers and duties prescribed in Section 5.9 of
these By-Laws.
Section 5.8 VICE CHAIRMAN. In the absence or disability of the Chairman,
the Vice Chairman, if any, shall perform all the duties of the Chairman. The
Vice Chairman shall have such other powers and duties as may be prescribed by
the Board of Directors or these By-Laws.
Section 5.9 PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the Chief Executive Officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers of
the Corporation. He shall preside at all
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meetings of the stockholders and, in the absence of the Chairman of the Board
and Vice Chairman, or if there be none, at all meetings of the Board of
Directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the Board of Directors or these By-
Laws.
Section 5.10 EXECUTIVE VICE PRESIDENT. In the absence or disability of
the President, the Executive Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors or, if not ranked, an Executive Vice President
designated by the Board of Directors, shall perform all the duties of the
President, and when so acting shall have all the powers of, and be subject to
all the restrictions upon, the President. The Executive Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors or the By-Laws, and
the President, or the Chairman of the Board.
Section 5.11 CHIEF FINANCIAL OFFICER. The Chief Financial Officer and
Secretary shall keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of accounts of the properties and business
transactions of the Corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and shares.
The books of account shall at all reasonable times be open to inspection by any
director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the Corporation with such depositaries as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of his
transactions as 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 of Directors, these By-Laws, the President, or
the Chairman of the Board.
Section 5.12 SENIOR CREDIT OFFICER. The Senior Credit Officer of the
Corporation shall be generally responsible for the credit policies of the
Corporation and each subsidiary thereof, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors, these
By-Laws, the President, or the Chairman of the Board.
Section 5.13 SECRETARY. The Secretary shall keep or cause to be kept, at
the principal executive office or such other places as the Board of Directors
may direct, a book of minutes of all meetings and actions of directors,
committees of directors, and stockholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice given,
the names of those present at directors' meetings or committee meetings, the
number of shares present or represented at stockholders' meetings, and the
proceedings. The Secretary need not keep minutes of all advisory committee
meetings.
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, as
determined by resolution of the Board of Directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required by the By-Laws or by law
to be given, and he shall keep the seal of the Corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these By-Laws, and the President,
or the Chairman of the Board.
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ARTICLE VI
RECORDS AND REPORTS
Section 6.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Directors, a record of its stockholders, giving the names and
addresses of all stockholders and the number and class of shares held by each
stockholder.
A complete list of the stockholders entitled to vote at each meeting of
stockholders, arranged in alphabetical order and showing the address of each
such stockholder and the number of shares of stock registered in the name of
each such stockholder, shall be open to the examination of any stockholder, for
any purpose germane to such meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of such meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting and during the whole time thereof, and may be inspected by any
stockholder who is present. The record of stockholders shall also be open to
inspection on the written demand of any stockholder or holder of a voting trust
certificate, at any time during usual business hours, for a purpose reasonably
related to the holder's interest as a stockholder or as the holder of a voting
trust certificate. Any inspection and copying under this Section 6.1 may be
made in person or by an agent or attorney of the stockholder or holder of a
voting trust certificate making the demand.
Section 6.2 MAINTENANCE AND INSPECTION OF BY-LAWS. The Corporation shall
keep at its principal executive office, or if its principal executive office is
not in the State of Delaware, at its principal business office in the State of
California, the original or a copy of the By-Laws as amended to date, which
shall be open to inspection by the stockholders at all reasonable times during
office hours. If the principal executive office of the Corporation is outside
the State of Delaware and the Corporation has no principal business office in
the State of California, the Secretary shall, upon the written request of any
stockholder, furnish to that stockholder a copy of the By-Laws as amended to
date.
Section 6.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATION RECORDS. The
accounting books and records and minutes of proceedings of the stockholders and
the Board of Directors and any committee or committees of the Board of Directors
shall be kept at such place or places designated by the Board of Directors, or,
in the absence of such designation, at the principal executive office of the
Corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any stockholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to the holder's interests as a
stockholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and make extracts. These rights of inspection shall extend to the records
of each subsidiary corporation of the Corporation. No such right of inspection
shall extend to any confidential information relating to the customers of any
banking subsidiary of the Corporation, or other information which the
Corporation may not disclose under applicable laws.
Section 6.4 INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the Corporation and each
of its subsidiary Corporations. This inspection by a director may be made in
person or by an agent or attorney, and the right of inspection includes the
right to copy and make extracts of documents.
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ARTICLE VII
GENERAL CORPORATE MATTERS
Section 7.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
stockholders by written consent without a meeting), the Board of Directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
before any such action, and in that case only stockholders of record on the date
so fixed are entitled to receive the dividend, distribution, or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after the record date so
fixed, except as otherwise provided in the DGCL.
If the Board of Directors does not so fix a record date, the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 7.2 CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, draft,
or other evidences of indebtedness, issued in the name of or payable to the
Corporation, shall be signed or endorsed by such person or persons and in such
manner as, from time to time, shall be determined by resolution of the Board of
Directors.
Section 7.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board
of Directors, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, 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 for any amount.
Section 7.4 CERTIFICATE FOR SHARES. A certificate or certificates for
shares of the capital stock of the Corporation shall be issued to each
stockholder when any of these shares are fully paid. All certificates shall be
signed in the name of the Corporation by the Chairman of the Board or Vice
Chairman of the Board or the President or Executive Vice President, if any, and
by the Chief Financial Officer or the Secretary, certifying the number of shares
and the class or series of shares owned by the stockholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent or
registrar before that certificate is issued, it may be issued by the Corporation
with the same effect as if that person were an officer, transfer agent or
registrar at the date of issue.
Section 7.5 LOST CERTIFICATES. Except as provided in this Section 7.5, no
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Corporation and cancelled at the same time.
The Board of Directors may, in case any share certificate or certificate for any
other security is lost, stolen or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the Board may require,
including provision for indemnification of the Corporation secured by a bond or
other adequate security sufficient to protect the Corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
Section 7.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman
of the board, the President, or any Executive Vice President, if any, or any
other person authorized by resolution of the Board of Directors or by any of the
foregoing designated officers, is authorized to vote on behalf of the
Corporation any and all shares of any other Corporation or Corporations, foreign
or domestic, standing in the name of the Corporation. The authority granted to
these officers to vote or represent on behalf of the
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<PAGE>
Corporation any and all shares held by the Corporation in any other corporation
or corporations may be exercised by any of these officers in person or by any
person authorized to do so by a proxy duly executed by these officers.
ARTICLE VIII
DIVIDENDS
Subject to any agreement to which the Corporation is a party or by which it
is bound, the Board of Directors may declare to be payable, in cash, in other
property or in stock of the Corporation of any class or series, such dividends
in respect of outstanding stock of the Corporation of any class or series as the
Board of Directors may at any time deem to be advisable. Before declaring any
such dividend, the Board of Directors may cause to be set aside any funds or
other property or assets of the Corporation legally available for the payment of
dividends.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, unless
determined otherwise by resolution of the Board of Directors.
ARTICLE X
CORPORATE SEAL
The Corporate Seal, if there shall be one, shall be in such form and shall
bear such words and figures as shall be approved from time to time by the Board
of Directors.
ARTICLE XI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER CORPORATE AGENTS
Section 11.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "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 a director or executive
officer of the Corporation, is or was serving at the request of the Corporation
as a director, officer, employee or agent of another Corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, or was a director or executive officer of a
foreign or domestic Corporation which was a predecessor of the Corporation or of
another enterprise at the request of such predecessor Corporation, whether the
basis of such proceeding is alleged action in an official capacity as a director
or executive officer or in any other capacity while serving as a director or
executive officer shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the DGCL, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorney's fees, judgments, fines,
ERISA excise taxes of penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director
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<PAGE>
or executive officer and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
Section 11.2 of these By-Laws, the Corporation shall indemnify and such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section 11.1 shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that if the DGCL requires the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay, all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section 11.1 or otherwise. The Corporation may by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers. This Article XI shall create a right of indemnification for each such
indemnifiable party whether or not the proceeding to which the indemnification
relates arose in whole or in part prior to adoption of this Article XI (or the
adoption of the comparable provisions of the By-Laws of the Corporation's
predecessor Corporation).
Section 11.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section
11.1 of these By-Laws 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 thereafter 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 expense 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 any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the DGCL for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper to the circumstances
because he or she has met the applicable standard of conduct set forth in the
DGCL nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard or conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 11.3 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article XI shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 11.4 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
ARTICLE XII
AMENDMENTS
Section 12.1 AMENDMENT BY STOCKHOLDERS. New By-Laws may be adopted or
these By-Laws 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 Certificate of Incorporation of the Corporation shall set
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forth the number of authorized directors of the Corporation, the authorized
number of directors may be changed only an amendment of the Certificate of
Incorporation.
Section 12.2 AMENDMENT BY DIRECTORS. Subject to the rights of the
stockholders as provided in Section 12.1 of these By-Laws, By-Laws or amendments
to existing By-Laws, other than a By-Law or an amendment of a By-Law changing
the authorized number of directors, may be adopted, amended or repealed by the
Board of Directors by and through the vote of two-thirds of all directors.
Section 12.3 CONSTRUCTION AND DEFINITION. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
DGCL shall govern the construction of these By-Laws. Without limiting the
generality of this provision, the singular number include the plural, the plural
number includes the singular, and the term "person" includes both a corporation
and a natural person.
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Exhibit 10.1
EMPLOYMENT AGREEMENT
PART I
PARTIES TO AGREEMENT
--------------------
Section 1.01 - Parties: This Employment Agreement is entered into this 8 day of
- - ----------------------
July, 1997, between Farmers & Merchants Bank of Central California, (hereinafter
referred to as "Employer") and Kent A. Steinwert (hereinafter referred to as
"Employee").
PART II
EMPLOYMENT
----------
Section. 2.01 - Employment: Employer hereby employs Employee and Employee
- - --------------------------
hereby accepts employment with Employer in accordance with the terms and
conditions set forth herein.
Section 2.02 - Term of Employment: This Employment Agreement shall be in full
- - ---------------------------------
force and effect for a period of 36 months, commencing on the date that Employee
starts his employment with Employer. At the end of said term, this Agreement
shall renew automatically for additional one year term(s), unless either party
furnishes written notice of his or its intention not to renew by no later than
sixty (60) days prior to the anniversary of the Effective Date of this
Agreement.
Section 2.03 - Regulatory Approval: The parties acknowledge that Employee's
- - ----------------------------------
employment with Bank is subject to review and approval of governmental
regulatory authorities. The parties shall agree to take all steps necessary to
cooperate fully with said regulators in order to expedite the approval process.
Employee's contract under this Agreement is subject to, and shall not commence
until, said regulatory approvals have been obtained.
PART III
DUTIES OF EMPLOYEE
------------------
Section 3.01 - General Duties: During the term of this Agreement, Employee
- - -----------------------------
shall hold the position of President and Chief Executive Officer of the Bank and
shall report to and be responsible to the Bank's Board of Directors and Chairman
(Board). Employee shall have supervision and control over, and responsibility
for, the general management and operation of the Bank, and shall have such other
powers and duties as may from time to time be prescribed by the Board, provided
that such duties are consistent with the Employee's duties as President and
Chief Executive Officer. Throughout his employment with the Bank, Employee
shall provide his full working time and attention to the performance of his
duties under this Agreement.
Section 3.02 - Conscientious Performance of Duties: Employee shall devote his
- - --------------------------------------------------
full productive time, energies, and abilities to the proper and efficient
management of the Employer's business. Without the prior written authorization
of the Employer's Chairman and Board, Employee shall not, directly or
indirectly, during the term of this Agreement, engage in any business,
professional or commercial activity competitive with or adverse to the
Employer's business or welfare whether alone, or as owner, shareholder or
partner, or as an officer, director, employee, advisor or consultant.
-1-
<PAGE>
PART IV
COMPENSATION
------------
Section 4.01 - Salary: Employee shall be paid a base salary of $200,000. This
- - ---------------------
base salary shall be paid to Employee in such intervals and at times as others
salaried executives of Employer are presently paid.
Section 4.02 - Bonus Payment: For the remaining calendar year of 1997, Employer
- - ----------------------------
will provide Employee with a bonus of $50,000, which shall be due and payable on
or about January 30, 1998. On or about January 30, 1999 Employer shall award
Employee a discretionary performance bonus of not less than $50,000. The amount
of performance bonus shall be determined by Employer's Board of Directors upon
consideration of Employee's job performance and the Bank's financial results for
calendar year 1998.
Section 4.03 - Long-Term Incentive Plan: The Bank has a Stock Appreciation
- - ---------------------------------------
Rights Plan which will be offered to Employee. The terms of this stock option
plan will be detailed in an addendum attached to this Agreement.
Section 4.04 - Relocation Allowance: In order to assist Employee in relocating
- - -----------------------------------
from his home in Southern California to Lodi, California, Employer will provide
Employee with the following:
1. Employer will reimburse Employee for all reasonable expenses
associated with Employee selling his home in Southern California,
including real estate commissions, and any additional reasonable
expenses associated with purchasing a home in Lodi, California,
including up to 3 house hunting trips to Lodi;
2. Employer will reimburse Employee for the reasonable cost of moving
from Southern California and reimburse Employee for any costs incurred
for the temporary storage of his household goods for a maximum of six
(6) months;
3. Employer will provide Employee with a temporary housing allowance of
up to $3000 per month. This temporary housing allowance will cease
when Employee sells his home in Southern California or within six (6)
months after starting employment with Employer, whichever comes first;
4. Employer will reimburse Employee for any income tax Employee incurs as
a result of the reimbursements provided in subsections 1, 2 and 3
above;
5. Reimbursements outlined in section 1, 2 and 3 above will be provided
to Employee assuming Employee provides Employer with invoices and
itemized statements supporting any request for reimbursement.
Section 4.05 - Deductions from Compensation: Employer shall deduct from any
- - -------------------------------------------
compensation payable to Employee the sums which it is required by law to deduct,
including but not limited to federal and state withholding taxes, social
security taxes and state disability taxes.
PART V
BENEFITS
--------
Section 5.01 - Benefits: Employee shall be eligible to participate in whatever
- - -----------------------
medical, dental, pension, sick leave, 401k, profit-sharing plan, disability
insurance or other plans of general application to Employer's senior
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<PAGE>
level employees, as may be in effect from time to time, in accordance with the
rules established from time to time for individual participation in any such
plans.
Section 5.02 - Vacation: Employee shall accrue four (4) weeks vacation per
- - -----------------------
year. For 1997, Employee's vacation shall be prorated from Employee's start
date through December 31, 1997. Employee's maximum accrued vacation cannot
exceed four (4) weeks without Board of Directors' approval
Section 5.03 - Company Car: Employer shall provide Employee with a Buick Park
- - --------------------------
Avenue automobile or equal, for business and incidental personal use as per Bank
policy.
Section 5.04 - Membership Fees: Employer shall reimburse Employee for all
- - ------------------------------
appropriate and reasonable expenses incurred in performing his duties, including
providing membership in local service and civic clubs and/or organizations as
the Bank deems appropriate and necessary for enhancement of its presence within
the local business community. In order to be eligible for reimbursement of
these expenses, Employee will provide Employer with receipts and documented
evidence as is required by Federal and State laws and regulations. In addition
to the above, Employee will be entitled to join the Woodbridge Golf and Country
Club at Employee's own expense. However, Employer will reimburse Employee for
the monthly dues, assessments, business meals and customer entertainment
expenses associated with this membership.
PART VI
EXPENSES
--------
Section 6.01 - Travel and Entertainment Expenses: During the term of Employee's
- - ------------------------------------------------
employment, Employer shall reimburse Employee for reasonable out of pocket
expenses incurred in connection with Employer's business, including travel
expenses, food and lodging while away from his home, subject to such policies as
Employer may from time to time establish for its employees. Employee shall keep
records of his travel and entertainments expenses in a form suitable to the
Internal Revenue Service and the Franchise Tax Board to qualify this
reimbursement as a federal and state income tax deduction for Employer.
PART VII
TERMINATION OF EMPLOYMENT
-------------------------
Section 7.01 - Termination at Option of Employer: Notwithstanding any other
- - ------------------------------------------------
section of this Agreement, Employer may terminate this Agreement at any time and
without cause by giving Employee thirty (30) days written notice of Employer's
intent to terminate this Agreement. In the event Employee's employment is
terminated pursuant to Section 7.01 of this Agreement, Employee shall be paid
all accrued salary, vacation and reimbursable expenses for which expense reports
have been provided to Employer in accordance with Employer's policies and this
Agreement. In addition to the foregoing amounts, if Employee is terminated
pursuant to this section of the Agreement, he will be entitled to receipt of
additional severance payments as follows:
1. Employee shall be entitled to receive up to twenty-four (24) monthly
payments, each in the amount equal to one twelfth (1/12) of Employee's
annual base salary, less any withholding required by law. Any
payments due and owing to Employee under this Section will commence on
the 15/th/ day of the first month following Employee's termination and
shall continue until all payments due and owing Employee are made or
until employee obtains other comparable employment, whichever comes
first.
2. For purposes of implementing subparagraph 1 of Section 7.01, Employee
agrees to furnish Employer with prompt written notice describing any
subsequent employment he secures
-3-
<PAGE>
(including his compensation for such employment) following any
termination under this section.
3. For purposes of subparagraph 1 of Section 7.01, the term "comparable
employment" shall mean any employment in which Employee's compensation
(measured by any cash or non-cash payments or benefits) is comparable
to his compensation under this Agreement. Any compensation comparison
undertaken for the purposes of this Agreement shall be done without
regard to any vested or unvested stock appreciation rights of
Employee.
4. In addition so any severance payments due and owing under Section
7.01, Employer may, in its sole discretion, provide Employee with a
performance bonus prorated for the number of months between the
termination date and the end of Employer's last fiscal year.
Section 7.02 - Termination by Employer for Cause: If, at any time during
- - ------------------------------------------------
Employee's employment, Employer finds that Employee is guilty of theft,
malfeasance or gross negligence, Employer may at its option terminate this
Agreement by giving written notification of such termination to Employee. In
the event Employee is terminated pursuant to this Section, Employee shall be
entitled only to the compensation earned by him prior to the date of
termination, computed up to and including the date of termination, and shall be
entitled to no further compensation or severance payment of any nature.
Section 7.03 - Termination at Option of Employee: This Agreement may be
- - ------------------------------------------------
terminated by Employee in his sole discretion by giving thirty (30) days written
notice of termination to Employer. In the event Employee terminates his
employment pursuant to this Section, Employee shall be entitled to the base
compensation earned by him computed up to and including the effective date of
his termination and he shall be entitled to no further compensation, or
severance payments of any nature; provided, however, Employee continues
productive employment until such date; and further provided that Employer may,
at its option, at any time after Employee gives written notice of resignation as
herein provided, pay Employee pro rata compensation as described above up
through and including the effective date of termination set forth in Employee's
resignation notice, and thereupon immediately release and terminate Employee.
Section 7.04 - Continuation of Medical Benefits: In the event Employee's
- - -----------------------------------------------
employment is terminated, Employee shall be afforded the right to continue his
medical benefits as and to the extent provided in the Consolidated Omnibus
Budget Reconciliation Act ("COBRA").
Section 7.05 - Termination of Employee due to Sale of Bank: In the event the
- - ----------------------------------------------------------
Bank is sold during the term of this Agreement, and in the event Employee is not
retained by the purchaser in the same or similar position as described in
Section 3.01 of this Agreement, Employer will provide Employee with a $400,000
severance package, in addition to any vested awards under the Stock Appreciation
Rights Plan.
Section 7.06 - Exclusive Agreement: The agreement of Employer and Employee
- - ----------------------------------
respecting the extent of the parties' duties, obligations and liabilities in the
event of termination of employment as set forth in Part VII herein is intended
to be exclusive and in lieu of any other interests, rights or remedies to which
Employer or Employee may otherwise be entitled either at law, in equity, or
under this Agreement. Employer and Employee expressly waive any and all such
other rights and remedies.
PART VIII
COVENANTS
---------
Section 8.01 - Business and Trade Secrets: Employee specifically agrees that he
- - -----------------------------------------
will not at any time, whether during the period of Employee's employment by
Employer or at any time thereafter, in any fashion, form or manner, unless
specifically consented to in writing by Employer, either directly or indirectly
use or divulge, disclose or communicate to any person, firm or corporation, in
any manner whatsoever, any confidential
-4-
<PAGE>
information and trade secrets of any kind, nature or description concerning any
matters affecting or relating to the business of Employer, including without
limiting the generality of the foregoing, the names, contact persons, business
habits or practices, and standards of the Employer, or confidential business or
financial information, including the Employer's financial and planning data,
compilations of business and financial data, records, reports, customer lists,
(including contacts), customers' profitability, studies, manuals, memoranda,
notebooks, files, documents, correspondence, and other confidential business or
financial information of, about, or concerning the business of the Employer, its
manner of operation, or other confidential data of any kind, nature or
description, the parties hereto stipulating that as between them, the same are
important, material and confidential business and trade secrets and affect the
successful conduct of the Employer's business and its goodwill, and that any
breach in whole or in part of the term of Part VIII of this Agreement is a
material breach of this Agreement.
Section 8.02 - Employer's Property: All files, records, compilations, reports,
- - ----------------------------------
studies, manuals, memoranda, notebooks, documents, correspondence, and other
confidential information or records and similar items relating to the business
of the Employer, whether prepared by Employee or otherwise coming into his
possession, are, and shall remain, the exclusive property of the Employer, and
shall be promptly delivered to the Employer in the event of Employee's
termination.
Section 8.03 - Separate Covenants: The covenants of Part VIII of this Agreement
- - ---------------------------------
shall be construed as separate covenants covering their particular subject
matter. In the event that any covenant shall be found to be judicially
unenforceable, said covenant shall not affect the enforceability or validity of
any other part of this Agreement.
Section 8.04 - Continuing Obligation: Employee's obligations set forth in Part
- - ------------------------------------
VIII of this Agreement shall expressly continue in effect beyond Employee's
employment period in accordance with their terms, and such obligations shall be
binding on Employee's assigns, executors, administrators and other legal
representatives.
Section 8.05 - Enforcement: Employer and Employee acknowledge that Employee is
- - --------------------------
hereunder employed in a sensitive business position where Employee will have
access to business and trade secrets as described in Part VIII hereof, and will
be rendering personal services of a special, unique, unusual and extraordinary
character. In recognition of these facts, Employee agrees that the breach by
him of the covenants of this Agreement could not reasonably or adequately be
compensated in damages in an action at law and that Employer by reason thereof
shall be entitled to preliminary injunctive relief in a court of competent
jurisdiction which relief shall include but shall not be limited to restraining
Employee from rendering any service or taking any action that would breach such
covenants pending a determination of the parties' rights and obligations in
resolution/arbitration in accordance with Part IX hereof.
PART IX
GENERAL AND ARBITRATION PROVISIONS
----------------------------------
Section 9.01 - Notices: Any notice to be given to Employer under the terms of
- - ----------------------
this Agreement shall be addressed to Employer at the address of its principal
place of business, and any notice to be given to Employee shall be addressed to
him at his mailing address as either party may hereafter designate in writing to
the other. Any such notice shall be deemed to have been duly given when
enclosed in a properly sealed and addressed envelope, registered or certified,
and deposited (postage or registry or certification fee prepaid), in a post
office or branch post office regularly maintained by the United States
government.
Section 9.02 - Arbitration: Excepting the preliminary relief described in Part
- - --------------------------
VIII of this Agreement which is expressly excluded herefrom, any and all
controversies between Employer and Employer's agents or employees acting within
the scope of their employment or alleged to be acting within the scope of their
employment, and Employee arising out of Employee's employment and relations with
Employer, whether arising during the term of Employee's employment, or as a
result of or after the termination thereof, whether sounding in tort, contract
-5-
<PAGE>
or otherwise, or involving the construction or application of any of the terms,
provisions or conditions of this Agreement, if not earlier resolved, shall be
submitted for resolution to Employer's Board by Employee and, if not
satisfactorily resolved thereby, by final and binding arbitration in accordance
herewith. The parties further agree that any claim based in whole or in part on
any statute or law of the United States or the State of California shall
similarly be submitted to such resolution procedures and, where not
satisfactorily resolved, to arbitration as provided herein to the fullest extent
permitted by law. Arbitration proceedings hereunder shall, to the extent not
inconsistent with the specific provisions herein, comply with and be governed by
the provisions of the United States' Arbitration Act. Employer and Employee
shall request from the American Arbitration Association a list of eleven (11)
arbitrators and shall, by alternately striking the names therefrom, select an
arbitrator who shall hear and determine the controversy or dispute. Such
arbitrator's decision shall be final and conclusive upon the parties. In the
event Employer and Employee are unable to agree upon a mutually acceptable
arbitrator, each party shall appoint one impartial person and the two impartial
persons so chosen shall select a third impartial person as arbitrator whose
decision shall be final and conclusive upon the parties. EMPLOYER AND EMPLOYEE
HEREBY EXPRESSLY WAIVES THEIR ENTITLEMENT, IF ANY, TO HAVE CONTROVERSIES BETWEEN
THEM DECIDED BY A COURT OR A JURY. The arbitrator shall have full authority to
decide any matters in controversy or dispute between the parties. All
arbitration proceedings herein shall be pursued privately and neither Employer
nor Employee shall publicize the fact of, or the decision of any such
arbitration except as the same may be required by law, or for the purpose of
pursuing the right of review as set forth in the United States Arbitration Act.
The cost of any arbitration proceedings hereunder, including the arbitrator's
fees, shall be borne equally by the parties. Each party, however, shall bear
its own costs for the preparation and presentation of its contentions
notwithstanding and irrespective of any other provision or rule of law
pertaining to the matter to be arbitrated.
Section 9.03 - Time Limitation for Actions: The parties hereto agree that any
- - ------------------------------------------
and all procedures relating to controversies between them as described in
Section 9.02 above shall be commenced within ninety (90) days from the date of
the event giving rise to the claim by giving notice pursuant to Section 9.01
above. Within thirty (30) days of giving notice of an alleged dispute, Employee
shall reduce his allegation to writing for submission to and review by the
Employer's Chairman and/or Board. The Chairman and/or Board shall have fifteen
(15) business days to reach a decision. Employee may request arbitration within
thirty (30) days from receipt of the decision. Failure to comply with any of
the time periods set out above in this section will constitute a bar to any and
all claims and such claims shall be deemed waived and released in their
entirely.
Section 9.04 - Entire Agreement: This Agreement supersedes any and all other
- - -------------------------------
agreements or understandings, whether oral, implied, or in writing, between the
parties hereto with respect to the subject matter hereof and contains all of the
covenants and agreements between the parties with respect to such matters in
their entirety. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally 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. Any modification(s) to this
Agreement will be effective only if it is in writing and signed by the parties
hereto.
Section 9.05 - Partial Invalidity: If any provision in this Agreement is held
- - ---------------------------------
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.
Section 9.06 - Continuing Obligations: Whether or not Employee's employment
- - -------------------------------------
relationship with Employer is terminated, neither Employer or Employee shall be
relieved of the continuing obligations of the covenants contained in this
Agreement.
Section 9.07 - Employee's Representation: Employee represents and warrants that
- - ----------------------------------------
he is free to enter into this Agreement and to perform each of the terms and
covenants in it. Employee represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Agreement, and
-6-
<PAGE>
that his execution and performance of this Agreement is not a violation or
breach of any other agreement between Employee and any other person or entity.
* * * *
The effective date of employment under this Agreement is August 18, 1997.
Dated: July 16, 1997 Dated: June 30, 1997
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
/s/ Kent A. Steinwert /s/ Ole R. Mettler
______________________________ ______________________________
Ole R. Mettler
Kent A. Steinwert Chairman of the Board
-7-
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of December
1, 1998 by and between FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA, a
California banking corporation (the "Bank"), and RICHARD S. ERICHSON
("Executive").
RECITAL:
The parties desire to set forth the terms of Executive's employment with
the Bank.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. The Bank hereby employs Executive and Executive hereby
----------
accepts employment during the Term of Employment upon the terms and conditions
herein set forth.
2. Term of Employment. The "Term of Employment" is the period beginning
------------------
on December 1, 1998 (the "Commencement Date") and ending on November 30, 2001.
The Term of Employment may terminate earlier as provided in this Agreement.
3. Duties. Executive is employed as Executive Vice President and Senior
------
Credit Officer of the Bank under the direction of the Bank's Board of Directors
and Chief Executive Officer ("CEO") and shall perform and discharge well and
faithfully the duties that may be assigned to him from time to time by the Board
of Directors or the CEO in connection with the conduct of the Bank's business.
Nothing herein shall preclude the Board of Directors or CEO from changing
Executive's title or duties.
4. Extent of Services. Executive shall devote his entire business time,
------------------
attention and energies to the business of the Bank during the term of
Executive's employment with the Bank. The foregoing however, shall not preclude
Executive from engaging in appropriate civic, charitable, or religious
activities or from devoting a reasonable amount of time to private investments
or from serving on boards of directors of other entities, as long as such
activities and services do not interfere or conflict with his responsibilities
to the Bank.
5. Compensation.
------------
(a) Salary. During the Term of Employment, the Bank shall pay Executive a
------
monthly salary of $12,500, payable in accordance with the Bank's standard
payroll policies in effect from time to time. In addition, Executive shall
receive $40,000 on December 31, 1998 to compensate Executive for his forfeiture
of his 1998 bonus with his current employer. Executive's salary may be adjusted
annually, on the anniversary of this Agreement, to reflect such changes as the
Board of Directors determines appropriate, based on Executive's performance for
the most recent performance period.
(b) Incentive Programs. During the Term of Employment, Executive shall be
------------------
entitled to participate in any annual and long-term incentive programs adopted
by the Bank and which cover employees in positions comparable to that of
Executive. In addition, Executive shall receive 1,000 stock appreciation rights
("SAR") on January 15, 1999 in accordance with the Bank's SAR program and
related agreements.
(c) Expenses. Executive shall be entitled to prompt reimbursement of all
--------
reasonable business expenses incurred by him in the performance of his duties
during the Term of Employment, subject to the presenting of appropriate vouchers
and receipts in accordance with the Bank's policies.
-1-
<PAGE>
(d) Moving, Interim Housing and Related Costs. Executive shall be entitled
-----------------------------------------
to prompt reimbursement of the reasonable transportation, food and lodging costs
for Executive and his wife incurred in up to three trips to the Lodi area to
such replacement housing, subject to the receipt of appropriate receipts as
required by the Bank. Executive shall also be entitled to prompt reimbursement
of all reasonable expenses for moving Executive's furniture, furnishings and
personal items from Chino Hills to the Lodi area and for up to four month's
storage of certain of such goods not to exceed in the aggregate $18,000 and
subject to the presentment of appropriate receipts or contracts as required by
the Bank. Bank shall reimburse Executive for the rental of interim housing in
the Lodi area to the extent reasonably required by Executive for up to a four-
month period between December 1, 1998 and ending June 30, 1999 and for a monthly
rental not to exceed $1,500 and shall also reimburse Executive for any loan fees
Executive is required to pay in connection with the financing of Executive's new
residence, not to exceed one and one/half percent of the loan amount. These
latter two benefits are also subject to the Bank's receipt of appropriate
receipts or contracts as required by the Bank.
6. Employee Benefits. During the Term of Employment, Executive shall be
-----------------
entitled to participate in employee benefit plans or programs of the Bank, if
any, to the extent that his position, tenure, salary, age, health, and other
qualifications make him eligible to participate, subject to the rules and
regulations applicable thereto.
7. Termination. Notwithstanding the provisions of Section 2 hereof, the
-----------
Term of Employment and Executive's employment hereunder may be terminated
without any breach of this Agreement under the following circumstances:
(a) Death. The Term of Employment shall terminate upon Executive's death.
-----
(b) Disability. The Term of Employment shall terminate upon the Bank
----------
giving Executive written notice that the Bank has elected to terminate his
employment on account of Disability, provided that such notice cannot be given
before the end of the Disability period specified in Section 9(d) hereof.
(c) Voluntary Termination. Executive may terminate his employment with the
---------------------
Bank at any time with three (3) months' written notice to the Bank. The Term of
Employment shall end on the earlier of the last day of the notice period or the
last day on which Executive performs services for the Bank.
(d) Termination for Good Cause. Executive may terminate his employment
--------------------------
with the Bank for Good Cause by giving the Bank thirty (30) days' notice of its
breach, the reasons why the breach constitutes good cause and of his intent to
terminate on such basis. If the Bank cures its breach within the thirty (30)
day period, Executive may rescind his notice of intent to terminate, or
terminate his employment under paragraph (c) with his notice of breach hereunder
satisfying the notice requirement provided for under paragraph (c). If the Bank
fails to cure its breach within the thirty (30) day period or Executive decides
to terminate his employment as provided in the final clause of the preceding
sentence, the Term of Employment shall end on the earlier of the last day of the
notice period or the last day on which Executive performs services for the Bank.
(e) Involuntary Termination. Executive's employment is at will. The Bank
-----------------------
reserves the right to terminate Executive's employment at anytime whatsoever
with or without cause with thirty (30) days' written notice to Executive. The
Term of Employment shall terminate on the last day of the notice period, but the
Bank may require Executive to cease performing services at any time once the
notice is given.
(f) Involuntary Termination for Cause. The Bank reserves the right to
---------------------------------
terminate Executive's employment for Cause. The Bank shall give Executive
written notice of the termination and the reasons therefor. The Term of
Employment shall terminate immediately upon receipt of the notice.
8. Benefits on Termination of Employment. If Executive's employment is
-------------------------------------
terminated during the Term of Employment, the Executive shall be entitled to
receive benefits as follows:
-2-
<PAGE>
(a) Death; Voluntary Termination; Involuntary Termination for Cause. If
---------------------------------------------------------------
employment is terminated under Section 7(a), (c), or (f) hereof, Executive shall
receive salary through the date the Term of Employment ends, any incentive
payment earned but not yet paid, and reimbursement of expenses incurred under
Section 5(c) and (d) hereof but not yet reimbursed. All other employee benefits
and compensation shall cease on the last day on which Executive performs
services as an employee, except to the extent that continued coverage is
required by law.
(b) Change of Control. If Executive's employment is terminated under the
-----------------
provisions of Section 7(d) or (e) hereof within two years following a Change of
Control, Bank shall pay Executive any incentive payment earned but not yet paid,
any expenses incurred under Section 5(c) or (d) hereof but not yet reimbursed
and liquidated damages equal to the remaining salary and annual incentive award
he would have received under this Agreement had he continued employment to the
end of the Term of Employment as in effect immediately prior to his termination,
not to exceed twelve (12) months salary. The liquidated damages payment to
which Executive is entitled pursuant to this paragraph (b) shall be paid in a
single installment within thirty (30) days of his termination or at Bank's
option, on a deferred basis. Executive shall be obligated, however, to disclose
to the Bank his earned income (within the meaning of Internal Revenue Code
Section 911(d)(2)(A)) during the salary period covered and to remit to the Bank
such earned income up to the amount of Executive's liquidated damages paid
pursuant to this paragraph. Bank shall have the right to request Executive to
produce reasonable evidence substantiating the amount (including zero) of
Executive's earned income during the remainder of the Term of Employment (as
described above). If Executive remits the full amount of liquidated damages,
his obligation to disclose his earned income shall end. All other employee
benefits and compensation, except as provided by applicable law, shall cease on
the last day on which Executive performs services as an employee.
(c) Disability; Involuntary Termination without Cause; Termination for Good
-----------------------------------------------------------------------
Cause. If Executive's employment is terminated under the provisions of Sections
- - -----
7(b) or 7(d) hereof or under the provision of Section 7(e) hereof without cause
Executive shall receive:
(i) the lesser of twelve (12) months of salary under Section 5(a)
hereof computed with reference to the annual salary in effect immediately
preceding the date of termination or salary at such rate for the remainder of
the Term of Employment;
(ii) any incentive payment earned or vested but not yet paid; and
(iii) reimbursement of expenses incurred under Section 5(c) and (d)
hereof but not yet reimbursed.
All other employee benefits and compensation, including any incentive benefits
for the year in which the Term of Employment ends, shall cease on the last day
on which Executive performs services as an employee except to the extent that
continued coverage is required by law.
9. Definition of Terms. The following terms used in this Agreement when
-------------------
capitalized have the following meanings:
(a) "Board of Directors" means the Bank's board of directors.
------------------
(b) "Cause" means that Executive has committed act(s) of dishonesty, theft,
-----
embezzlement, fraud, misrepresentation, or other act(s) of moral turpitude
against the Bank, its subsidiaries or affiliates, its shareholders, or its
employees or which adversely impact the interests of the Bank.
(c) "Change of Control" means a change of control of the Bank of a nature
-----------------
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether
or not the Bank is then subject to such reporting requirement; provided,
however, that without limitation, such a Change of Control shall be deemed to
have occurred if:
-3-
<PAGE>
(i) any person or group (as such terms are used in connection with
Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 and 13d-5 under the Act), directly or indirectly, of
securities of the Bank representing 30% or more of the combined voting power of
the Bank's then outstanding securities; or
(ii) the Bank is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members of
the Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter.
Notwithstanding the foregoing provisions of this paragraph (c), a "Change of
Control" will not be deemed to have occurred solely because of the acquisition
of securities of the Bank (or any reporting requirement under the Act relating
thereto) by an employee benefit plan maintained by the Bank for its employees.
(d) "Disability" means that Executive has been unable to perform the
----------
essential functions of his job under this Agreement, with or without reasonable
accommodation, for a period of six (6) consecutive months as the result of his
incapacity due to physical or mental illness.
(e) "Good Cause" means a material reduction in Executive's compensation
----------
under Section 5 hereof , benefits under Section 6 hereof or in Executive's title
or responsibilities.
10. Non-Competition Clause. In addition to his obligations as an
----------------------
executive and whether or not he remains an executive of the Bank, Executive
agrees that during the period commencing with on December 1, 1998 and ending
upon termination of employment with the Bank, however caused, he will not,
without the prior written consent of the Bank, engage, directly or indirectly,
in any business that competes with the Bank for customers or prospective
customers of the Bank located in any county of the State of California where the
Bank has an office or serves customers.
11. Locations of Performance. Executive's services shall be performed
------------------------
primarily in the vicinity of Lodi, California. The parties acknowledge,
however, that Executive may be required to travel in connection with the
performance of his duties hereunder.
12. Proprietary Information.
-----------------------
(a) Executive agrees to comply fully with the Bank's policies relating to
non-disclosure of the Bank's trade secrets and proprietary information and
processes. including information regarding the Bank's customers and prospective
customers. Without limiting the generality of the foregoing, Executive will
not, during the term of his employment by the Bank, disclose any such secrets,
information, or processes to any person, firm, corporation, association, or
other entity for any reason or purpose whatsoever, nor shall Executive make use
of any such property for his own purposes or for the benefit of any person,
firm, corporation, or other entity (except the Bank) under any circumstances
during or after the term of his employment, provided that after the term of his
employment, this provision shall not apply to secrets, information, and
processes that are then in the public domain (provided that Executive was not
responsible, directly or indirectly, for such secrets, information, or processes
entering the public domain without the Bank's consent).
(b) Executive hereby sells, transfers, and assigns to the Bank all of the
entire right, title, and interest of Executive in and to all inventions, ideas,
disclosures, and improvements, whether patented or unpatented, and copyrightable
material, to the extent made or conceived by Executive, solely or jointly,
during the term of this Agreement, except to the extent prohibited by Section
2870 of the California Labor Code, a copy of which is attached hereto as Exhibit
A. Executive shall communicate promptly and disclose to the Bank, in such form
as the Bank requests, all information, details, and data pertaining to the
aforementioned inventions, ideas, disclosures, and improvements: and, whether
during the term hereof or thereafter, Executive shall execute and deliver to the
Bank such formal transfers and assignments and such other papers and documents
as may be required of Executive to permit the Bank to file and prosecute any
patent applications
-4-
<PAGE>
relating to such inventions, ideas, disclosures, and improvements and, as to
copyrightable material, to obtain copyright thereon.
(c) Trade secrets, proprietary information, and processes shall not be
deemed to include information which is:
(i) known to Executive at the time of the disclosure;
(ii) publicly known (or becomes publicly known) without the fault or
negligence of Executive;
(iii) received from a third party without restriction and without
breach of this Agreement;
(iv) approved for release by written authorization of the Bank; or
(v) required to be disclosed by law; provided, however, that in the
event of a proposed disclosure pursuant to this subsection 13(c)(v), the
recipient shall give the Bank prior written notice before such disclosure is
made.
13. Assignment. This Agreement may not be assigned by any party hereto;
----------
provided that the Bank may assign this Agreement, in connection with a merger or
consolidation involving the Bank or a sale of substantially all of its assets,
to the surviving corporation or purchaser as the case may be, so long as such
assignee assumes the Bank's obligations hereunder.
14. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and sent by registered mail to
Executive at his residence maintained on the Bank's records, or to the Bank at
its executive offices, or such other addresses as either party shall notify the
other in accordance with the above procedure.
15. Force Majeure. Neither party shall be liable to the other for any
-------------
delay or failure to perform hereunder, which delay or failure is due to causes
beyond the control of said party, including, but not limited to: acts of God;
acts of the public enemy; acts of the United States of America, or any State,
territory, or political subdivision thereto or of the District of Columbia;
fires; floods; epidemics; quarantine restrictions; strikes: or freight
embargoes. Notwithstanding, the foregoing provisions of this Section 15, in
every case the delay or failure to perform must be beyond the control and
without the fault or negligence of the party claiming excusable delay.
16. Integration. This Agreement and any attachments, schedules, and
-----------
exhibits hereto represent the entire agreement and understanding between the
parties as to the subject matter hereof and supersede all prior or
contemporaneous agreements whether written or oral, including the earlier
version of this Agreement forwarded to Executive on November 20, 1998 by the
Bank's counsel. No waiver, alteration, or modification of any of the provisions
of this Agreement shall be binding unless in writing and signed by duly
authorized representatives of the parties hereto.
17. Waiver. Failure or delay on the part of either party hereto to
------
enforce any right, power, or privilege hereunder shall not be deemed to
constitute a waiver thereof. Additionally, a waiver by either party of a breach
of any promise hereof by the other parry shall not operate as or be construed to
constitute a waiver of any subsequent waiver by such other party.
18. Savings Clause. If any term, covenant, or condition of this Agreement
--------------
or the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term, covenant, or condition to persons or circumstances other than those
as to which it is held invalid or unenforceable, shall not be affected thereby
and each term, covenant, or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
-5-
<PAGE>
19. Authority to Contract. The Bank warrants and represents that it has
---------------------
full authority to enter into this Agreement and to consummate the transactions
contemplated hereby and that this Agreement is not in conflict with any other
agreement to which the Bank is a party or by which it may be bound. The Bank
further warrants and represents that the individuals executing this Agreement on
behalf of the Bank have the full power and authority to bind the Bank to the
terms hereof and have been authorized to do so in accordance with the Bank's
corporate organization.
20. Dispute Resolution.
------------------
(a) Any controversy or claim between Bank and Executive arising from or
relating to this Agreement or any agreement or instrument delivered under or in
connection with this Agreement, including any alleged dispute, breach, default,
or misrepresentation in connection with any of the provisions of this Agreement,
shall, at the option of Executive or Bank, be submitted to arbitration, using
either the American Arbitration Association ("AAA") or Judicial Arbitration and
Mediation Services, Inc. ("JAMS") in accordance with the rules of either JAMS or
AAA (at the option the party initiating the arbitration) and Title 9 of the U.S.
Code. All statutes of limitations or any waivers contained herein which would
otherwise be applicable shall apply to any arbitration proceeding under this
paragraph (a). The parties agree that related arbitration proceedings may be
consolidated. The arbitrator shall prepare written reasons for the award.
Judgment upon the award rendered may be entered in any court having
jurisdiction.
(b) No provision of, or the exercise of any rights under, Section 20(a)
hereof shall limit the right of any party to exercise self help remedies or to
obtain provisional or ancillary remedies, such as injunctive relief from a court
having jurisdiction before, during or after the pendency of any arbitration.
The institution and maintenance of an action for judicial relief or pursuit of
provisional or ancillary remedies or exercise of self help remedies shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration.
21. Recovery of Arbitration Costs. If any arbitration, legal action or
-----------------------------
other proceeding is brought for the enforcement of this Agreement or any
agreement or instrument delivered under or in connection with this Agreement, or
because of an alleged dispute, breach, default, or misrepresentation in
connection with any of the provisions of this Agreement, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled.
22. Remedies. In the event of a breach by Executive of Sections 10 or 12
--------
of this Agreement, in addition to other remedies provided by applicable law, the
Bank will be entitled to issuance of a temporary restraining order or
preliminary injunction enforcing its rights under such Sections.
23. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
24. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day herein first above written.
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
/s/ Kent A. Steinwert
________________________________________________
Kent A. Steinwert, President and Chief Executive
Officer
EXECUTIVE
/s/ Richard S. Erichson
________________________________________________
Richard S. Erichson
Exhibit A - California Labor Code Section 2870
-7-
<PAGE>
EXHIBIT A
---------
CALIFORNIA LABOR CODE SECTION 2870
Section 2870. Application of provision providing that employee shall assign or
offer to assign rights in invention to employer
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either;
(i) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(ii) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an
employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
-8-
<PAGE>
Exhibit 10.3
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
DEFERRED BONUS PLAN
(Adopted as of March 2, 1999)
1. Purpose of the Plan. The purpose of the Farmers & Merchants Bank of
Central California Deferred Bonus Plan is to provide a long-term incentive
compensation opportunity for selected key employees of the Bank based primarily
on the long-term profitability of the Bank.
2. Definitions. As used in this Plan, the following terms shall have the
meanings indicated below:
"Bank" shall mean Farmers & Merchants Bank of Central California and
----
any of its subsidiaries.
"Board of Directors" shall mean the Board of Directors of the Bank.
------------------
"Bonus Factor" shall mean, in respect of any Participant, the
------------
numerical factor determined by the Committee for purposes of such
Participant's participation in the Plan.
"Cause" shall mean any of (i) the Participant's misappropriation of
-----
funds, other dishonesty or willful misconduct or conviction of a felony or
other crime involving moral turpitude, (ii) the Participant's habitual
insobriety or other substance abuse and (iii) any action on the part of the
Participant involving deliberate malfeasance or gross negligence in the
performance of his or her employment duties and responsibilities.
"Change in Control" shall be deemed to occur if (i) a person, other
-----------------
than the Holding Company, acting alone or acting in concert with one or
more other persons acquires shares or combined voting power or control
equal to fifty percent (50%) or more of the issued and outstanding common
stock of the Bank or (ii) the Bank is a party to a consummated merger,
consolidation, sale of assets or other reorganization, as a consequence of
which the members of the Board of Directors in office immediately prior to
such transaction or event shall constitute less than a majority of the
Board of Directors thereafter.
"Committee" shall mean the Personnel Committee of the Board of
---------
Directors or such other committee that the Board of Directors may designate
from time to time.
"Cumulative Profit" shall mean, in respect of any Participant, the
-----------------
consolidated net income (on a book basis after provision for income taxes)
of the Bank and all of its subsidiaries for each consecutive quarter
comprising the Participation Period of such Participant.
"Deferred Bonus" shall mean, in respect of any Participant, the amount
--------------
equal to the sum of (i) the product of the Participant's Bonus Factor times
the Cumulative Profit during Participant's Participation Period plus (ii)
accrued interest on such product as it changes from time to time to be
determined as of the last day of each quarter during the Participation
Period at the annual rate equal to the Bank's Base Commercial Loan Rate as
of that date, less three (3.0) percentage points, with such interest to be
compounded quarterly plus (iii) in the event there is a Change in Control,
the difference by which (A) the product of the Market Value of the
outstanding common stock of the Bank times the total number of such shares
outstanding at the time the Change in Control is consummated times the
Participant's Bonus Factor, exceeds (B) the product of the per share book
value of such common stock times the total number of such shares
outstanding, both as of the date the Change in Control is consummated,
times the Participant's Bonus Factor.
<PAGE>
"Holding Company" shall mean Farmers & Merchants Bancorp.
---------------
"Market Value" means the per share price or equivalent value paid by
------------
the acquiror for such common stock if clause (i) of the definition of
Change in Control applies or the agreed upon acquisition price for such
common stock if clause (ii) of the definition of Change in Control applies.
"Participant" means an employee of the Bank who is selected for
-----------
participation in the Plan based on the recommendation of the Committee and
the approval of the Board of Directors.
"Participation Period" shall mean, in respect of any Participant,
---------------------
the period beginning on the first day of the quarter in which he or she is
selected to become a Participant and ending on the earlier of (i) the last
day of the quarter in which his or her employment with the Bank terminates
(irrespective of the reason or basis for such termination) or (ii) the date
on which a Change in Control is effected or consummated, whichever is
earlier.
"Plan" shall mean the Farmers & Merchants Bank of Central California
----
Deferred Bonus Plan as set forth in this document, as the same may be
amended or supplemented from time to time.
3. Deferred Bonus. A Participant shall be entitled to the Deferred Bonus
applicable to him or her, subject to the terms and conditions of this Agreement,
including the vesting rules set forth in Section 4, the forfeiture rules set
---------
forth in Section 5 and the payment rules set forth in Section 6.
--------- ---------
4. Vesting. A Participant's entitlement to his or her Deferred Bonus shall
vest based on the Participant's years of service with the Bank as measured
beginning with the quarter in which he or she is selected to become a
Participant as set forth in the vesting schedule below, provided that in the
event of a Change of Control or the termination of the Participant's employment
at the Bank due to his or her death or disability, his or her Deferred Bonus
shall become 100% vested upon such Change in Control or termination. (A
Participant will be considered disabled if he or she is eligible to receive
disability benefits under the terms of the Bank's long-term disability plan
offered to all employees or the Participant has been unable to perform the
essential functions of his or her job for a period of at least six months as the
result of his or her incapacity due to physical or mental illness.)
Notwithstanding the vesting schedule set forth below, the Board of Directors
may, in its sole discretion, reduce or waive the vesting requirement as to any
Participant.
Percent of
----------
Post-selection Years of Service Deferred Bonus Vested
------------------------------- ---------------------
Less than 2 years 0%
2 years to less than 3 years 25%
3 years to less than 4 years 50%
4 years to less than 5 years 75%
5 years or more 100%
5. Forfeiture. Notwithstanding any other provision of this Plan, in the event
of the Participant's termination of employment with the Bank for Cause, all
entitlement and other rights of Participant to a Deferred Bonus, whether or not
vested, shall thereupon be cancelled, terminated and forfeited in their
entirety.
6. Payment. Payment of a Participant's Deferred Bonus shall be made in cash,
in substantially equal monthly installments of principal beginning within one
year and extending no longer than five (5) years, after the end of the
Participation Period for such Participant. Interest on the unpaid balance of
principal of the Deferred Bonus shall accrue interest beginning on the first day
after the end of the Participation Period until such principal is paid in full
at the annual rate equal to Bank's Base Commercial Loan Rate, as such Base
Commercial Loan Rate changes from time to time, less three (3.0) percentage
points, and shall be compounded quarterly and paid with each installment of
principal. In the event of the Participant's death after payment has begun but
prior to completion of payment of the remaining balance of the Deferred Bonus,
the unpaid balance
-2-
<PAGE>
shall be paid to the Participant's heirs, devisees or designated beneficiaries
according to the same schedule and in the same manner as had been previously
paid to the Participant. At any point during the payment period, the Committee
may, in its sole discretion, elect to accelerate payment of the unpaid balance
of the Deferred Bonus and accrued interest thereon without penalty.
7. Nontransferability. A Deferred Bonus and interest thereon granted under
the Plan may not be transferred, assigned, pledged or hypothecated in any
manner, by operation of law or otherwise, other than by will or by the laws of
descent and distribution and shall not be subject to execution, attachment or
similar process.
8. Withholding. The Bank shall have the right to withhold any taxes required
by law from all amounts paid to any Participant pursuant to the Plan.
9. Unfunded and Unsecured Obligation of Bank. The Bank is not required to
earmark or otherwise set aside any funds or other assets or in any way secure
payment of its obligations under the Plan. Any asset which may be set aside by
the Bank for accounting purposes is not to be treated as held in trust for any
Participant or for his or her account. Each Participant shall have only the
rights of a general, unsecured creditor of the Bank with respect to any of his
or her rights under the Plan.
10. Powers and Duties of Committee. Except as otherwise determined by the
Board of Directors, the Committee shall administer the Plan in accordance with
its terms and shall have all the powers necessary to carry out such terms. The
Committee shall act by a majority of its members at the time in office, and such
action may be taken by a vote at a meeting or by unanimous consent in writing
without a meeting. The Chairman, or any member of the Committee designated by
the Chairman, shall execute any certificate, instrument or other written
direction on behalf of the Committee and shall direct the payment of benefits
under the Plan. All interpretations of the Plan, and questions concerning its
administration and application, shall be determined by the Committee or, at the
option of the Board of Directors, by the Board of Directors, and such
determination shall be binding on all Participants.
11. Records and Reports. The Committee shall cause to be maintained records
which shall contain all relevant data pertaining to each Participant, and his or
her rights under the Plan.
12. Claims Procedure. Any claim pertaining to a Participant's benefits under
the Plan shall be filed with the Chairman of the Committee. Written notice of
the disposition of a claim shall be furnished the Participant within 30 days
after the application therefor is filed. In the event the claim is denied, the
specific reasons for such denial shall be set forth, pertinent provisions of the
Plan shall be cited and, where appropriate, an explanation as to how the
Participant can perfect his or her claim will be provided.
13. No Employment or Stockholder's Right. Neither the Plan nor a Participant's
participation therein shall constitute evidence of or create (i) any commitment,
agreement or understanding, whether express or implied, that the Bank will
continue to employ such Participant for any period of time, in any position or
at any rate of regular compensation or (ii) any rights, interests or privileges
of a stockholder of the Bank.
14. Multiple Participations. An employee of the Bank may be selected for more
than one participation in the Plan. In such event, each participation of such
employee shall be separate and independent of any prior or subsequent
participation granted to such employee under the Plan.
15. Amendment and Termination; Acquisition by Holding Company. The Board of
Directors shall have the right, at any time, by an affirmative vote of a
majority thereof, to amend, supplement or terminate, in whole or in part, the
Plan, subject to any then vested rights of the Participants. Any amendment to
the Plan shall be in writing. In the event fifty percent (50%) or more of the
issued and outstanding common stock of the Bank is acquired by the Holding
Company, this Plan shall thereupon be superseded by that certain Farmers &
Merchants Bank of Central California Amended and Restated Deferred Bonus Plan in
the form of Exhibit A hereto and made a part hereof.
---------
-3-
<PAGE>
16. Construction. All legal issues pertaining to the Plan shall be determined
in accordance with the laws of the State of California except as preempted by
Federal law.
17. Entire Agreement. This Plan document represents the entire agreement by
the Bank to provide benefits through the Plan, and supersedes any and all prior
agreements and understandings with respect to the subject matter hereof. This
Plan may not be altered or amended except as provided in Section 15.
----------
18. Headings. The headings are for reference only. In the event of a conflict
between a heading and the content of a Section, the content of the Section shall
control.
IN WITNESS WHEREOF, BANK has caused this plan to be duly executed, under
seal, this 2nd day of March, 1999.
ATTEST: FARMERS & MERCHANTS BANK OF CENTRAL
CALIFORNIA
/s/ John R. Olson By /s/ Ole Mettler
- - -------------------------------------- ------------------------------------
Secretary Chairman of the Board
(Corporate Seal)
-4-
<PAGE>
EXHIBIT A
---------
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
AMENDED AND RESTATED DEFERRED BONUS PLAN
1. Purpose of the Plan. The purpose of the Farmers & Merchants Bank of
Central California Amended and Restated Deferred Bonus Plan is to provide a
long-term incentive compensation opportunity for selected key employees of the
Bank based primarily on the long-term profitability of the Holding Company. As
provided by Section 17, this Plan amends and supersedes the Farmers & Merchants
Bank of Central California Deferred Bonus Plan adopted as of March 2, 1999.
2. Definitions. As used in this Plan, the following terms shall have the
meanings indicated below:
"Bank" shall mean Farmers & Merchants Bank of Central California and
----
any of its subsidiaries.
"Bonus Factor" shall mean, in respect of any Participant, the
------------
numerical factor determined by the Committee for purposes of such
Participant's participation in the Plan.
"Cause" shall mean any of (i) the Participant's misappropriation of
-----
funds, other dishonesty or willful misconduct or conviction of a felony or
other crime involving moral turpitude, (ii) the Participant's habitual
insobriety or other substance abuse and (iii) any action on the part of the
Participant involving deliberate malfeasance or gross negligence in the
performance of his or her employment duties and responsibilities.
"Change in Control" shall be deemed to occur if (i) a person acting
-----------------
alone or two or more persons acting in concert acquires shares or combined
voting power or control equal to fifty percent (50%) or more of the issued
and outstanding common stock of the Bank or the Holding Company or (ii) the
Bank or the Holding Company is a party to a consummated merger,
consolidation, sale of assets or other reorganization, as a consequence of
which the members of either the Board of Directors of the Bank or the
Holding Company in office immediately prior to such transaction or event
shall constitute less than a majority of such board thereafter.
"Committee" shall mean the Personnel Committee of the Board of
---------
Directors of the Bank or such other committee that the Board of Directors
of the Bank may designate from time to time.
"Cumulative Profit" shall mean, in respect of any Participant, the
-----------------
consolidated net income (on a book basis after provision for income taxes)
of the Holding Company and all of its subsidiaries, including the Bank and
its subsidiaries, for each consecutive quarter comprising the Participation
Period of such Participant.
"Deferred Bonus" shall mean, in respect of any Participant, the amount
--------------
equal to the sum of (i) the product of the Participant's Bonus Factor times
the Cumulative Profit during Participant's Participation Period plus (ii)
accrued interest on such product as it changes from time to time to be
determined as of the last day of each quarter during the Participation
Period at the annual rate equal to the Bank's Base Commercial Loan Rate as
of that date, less three (3.0) percentage points, with such interest to be
compounded quarterly plus (iii) in the event there is a Change in Control,
the difference by which (A) the product of the Market Value of the
outstanding common stock of the Bank or the Holding Company (whichever is
the subject of the Change in Control) times the total number of such shares
outstanding at the time the Change in Control is consummated times the
Participant's Bonus Factor, exceeds (B) the product of the per share book
value of such common stock times the total
<PAGE>
number of such shares outstanding, both as of the date the Change in
Control is consummated, times the Participant's Bonus Factor.
"Holding Company" shall mean Farmers & Merchants Bancorp.
---------------
"Market Value" means the per share price or equivalent value paid by
------------
the acquiror for such common stock if clause (i) of the definition of
Change in Control applies or the agreed upon acquisition price for such
common stock if clause (ii) of the definition of Change in Control applies.
"Participant" means an employee of the Bank who is selected for
-----------
participation in the Plan based on the recommendation of the Committee and
the approval of the Board of Directors of the Bank.
"Participation Period" shall mean, in respect of any Participant,
---------------------
the period beginning on the first day of the quarter in which he or she is
selected to become a Participant and ending on the earlier of (i) the last
day of the quarter in which his or her employment with the Bank terminates
(irrespective of the reason or basis for such termination) or (ii) the date
on which a Change in Control is effected or consummated, whichever is
earlier.
"Plan" shall mean the Farmers & Merchants Bank of Central California
----
Amended and Restated Deferred Bonus Plan as set forth in this document, as
the same may be amended or supplemented from time to time.
3. Deferred Bonus. A Participant shall be entitled to the Deferred Bonus
applicable to him or her, subject to the terms and conditions of this Agreement,
including the vesting rules set forth in Section 4, the forfeiture rules set
---------
forth in Section 5 and the payment rules set forth in Section 6.
--------- ---------
4. Vesting. A Participant's entitlement to his or her Deferred Bonus shall
vest based on the Participant's years of service with the Bank as measured
beginning with the quarter in which he or she is selected to become a
Participant as set forth in the vesting schedule below, provided that in the
event of a Change in Control or the termination of the Participant's employment
at the Bank due to his or her death or disability, his or her Deferred Bonus
shall become 100% vested upon such Change in Control or termination. (A
Participant will be considered disabled if he or she is eligible to receive
benefits under the terms of the Bank's long-term disability plan offered to all
employees or the Participant has been unable to perform the essential functions
of his or her job for a period of at least six months as the result of his or
her incapacity due to physical or mental illness.) Notwithstanding the vesting
schedule set forth below, the Board of Directors may, in its sole discretion,
reduce or waive the vesting requirement as to any Participant.
Percent of
----------
Post-selection Years of Service Deferred Bonus Vested
------------------------------- ---------------------
Less than 2 years 0%
2 years to less than 3 years 25%
3 years to less than 4 years 50%
4 years to less than 5 years 75%
5 years or more 100%
5. Forfeiture. Notwithstanding any other provision of this Plan, in the event
of the Participant's termination of employment with the Bank for Cause, all
entitlement and other rights of Participant to a Deferred Bonus, whether or not
vested, shall thereupon be cancelled, terminated and forfeited in their
entirety.
6. Payment. Payment of a Participant's Deferred Bonus shall be made in cash,
in substantially equal monthly installments of principal beginning within one
year and extending no longer than five (5) years, after
-2-
<PAGE>
the end of the Participation Period for such Participant. Interest on the
unpaid balance of principal of the Deferred Bonus shall accrue interest
beginning on the first day after the end of the Participation Period until such
principal is paid in full at the annual rate equal to Bank's Base Commercial
Loan Rate, as such Base Commercial Loan Rate changes from time to time, less
three (3.0) percentage points, and shall be compounded quarterly and paid with
each installment of principal. In the event of the Participant's death after
payment has begun but prior to completion of payment of the remaining balance of
the Deferred Bonus, the unpaid balance shall be paid to the Participant's heirs,
devisees or designated beneficiaries according to the same schedule and in the
same manner as had been previously paid to the Participant. At any point during
the payment period, the Committee may, in its sole discretion, elect to
accelerate payment of the unpaid balance of the Deferred Bonus and accrued
interest thereon without penalty.
7. Nontransferability. A Deferred Bonus and interest thereon granted under
the Plan may not be transferred, assigned, pledged or hypothecated in any
manner, by operation of law or otherwise, other than by will or by the laws of
descent and distribution and shall not be subject to execution, attachment or
similar process.
8. Withholding. The Bank shall have the right to withhold any taxes required
by law from all amounts paid to any Participant pursuant to the Plan.
9. Unfunded and Unsecured Obligation of Bank. The Bank is not required to
earmark or otherwise set aside any funds or other assets or in any way secure
payment of its obligations under the Plan. Any asset which may be set aside by
the Bank for accounting purposes is not to be treated as held in trust for any
Participant or for his or her account. Each Participant shall have only the
rights of a general, unsecured creditor of the Bank with respect to any of his
or her rights under the Plan.
10. Powers and Duties of Committee. Except as otherwise determined by the
Board of Directors of the Bank, the Committee shall administer the Plan in
accordance with its terms and shall have all the powers necessary to carry out
such terms. The Committee shall act by a majority of its members at the time in
office, and such action may be taken by a vote at a meeting or by unanimous
consent in writing without a meeting. The Chairman, or any member of the
Committee designated by the Chairman, shall execute any certificate, instrument
or other written direction on behalf of the Committee and shall direct the
payment of benefits under the Plan. All interpretations of the Plan, and
questions concerning its administration and application, shall be determined by
the Committee or, at the option of the Board of Directors of the Bank, by the
Board of Directors of the Bank, and such determination shall be binding on all
Participants.
11. Records and Reports. The Committee shall cause to be maintained records
which shall contain all relevant data pertaining to each Participant, and his or
her rights under the Plan.
12. Claims Procedure. Any claim pertaining to a Participant's benefits under
the Plan shall be filed with the Chairman of the Committee. Written notice of
the disposition of a claim shall be furnished the Participant within 30 days
after the application therefor is filed. In the event the claim is denied, the
specific reasons for such denial shall be set forth, pertinent provisions of the
Plan shall be cited and, where appropriate, an explanation as to how the
Participant can perfect his or her claim will be provided.
13. No Employment or Stockholder's Right. Neither the Plan nor a Participant's
participation therein shall constitute evidence of or create (i) any commitment,
agreement or understanding, whether express or implied, that the Bank will
continue to employ such Participant for any period of time, in any position or
at any rate of regular compensation or (ii) any rights, interests or privileges
of a stockholder of the Bank or the Holding Company.
14. Multiple Participations. An employee of the Bank may be selected for more
than one participation in the Plan. In such event, each participation of such
employee shall be separate and independent of any prior or subsequent
participation granted to such employee under the Plan.
-3-
<PAGE>
15. Amendment and Termination. The Board of Directors of the Bank shall have
the right, at any time, by an affirmative vote of a majority thereof, to amend,
supplement or terminate, in whole or in part, the Plan, subject to any then
vested rights of the Participants. Any amendment to the Plan shall be in
writing.
16. Construction. All legal issues pertaining to the Plan shall be determined
in accordance with the laws of the State of California except as preempted by
Federal law.
17. Entire Agreement; Amends and Supersedes Original Plan. This Plan document
represents the entire agreement by the Bank to provide benefits through the
Plan, and supersedes any and all prior agreements and understandings with
respect to the subject matter hereof. Without limiting the generality of the
foregoing, this Plan shall become effective the date on which the Holding
Company acquires fifty percent (50%) or more of the issued and outstanding
common stock of the Bank and shall thereupon amend and supersede that certain
Farmers & Merchants Bank of Central California Deferred Bonus Plan approved and
adopted as of March 2, 1999 by the Board of Directors of the Bank (the "Original
Plan"). Any Participant who was participating under the Original Plan shall
have an appropriate credit for his or her Deferred Bonus thereunder applied to
his or her Deferred Bonus hereunder. This Plan may not be altered or amended
except as provided in Section 15.
----------
18. Headings. The headings are for reference only. In the event of a conflict
between a heading and the content of a Section, the content of the Section shall
control.
IN WITNESS WHEREOF, BANK has caused this plan to be duly executed, under
seal, this ______ day of _______________, 1999.
ATTEST: FARMERS & MERCHANTS BANK OF CENTRAL
CALIFORNIA
By
- - -------------------------------------- ------------------------------
Secretary Chairman of the Board
(Corporate Seal)
-4-
<PAGE>
EXHIBIT 10.4
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
AMENDED AND RESTATED DEFERRED BONUS PLAN
1. Purpose of the Plan. The purpose of the Farmers & Merchants Bank of
Central California Amended and Restated Deferred Bonus Plan is to provide a
long-term incentive compensation opportunity for selected key employees of the
Bank based primarily on the long-term profitability of the Holding Company. As
provided by Section 17, this Plan amends and supersedes the Farmers & Merchants
Bank of Central California Deferred Bonus Plan adopted as of March 2, 1999.
2. Definitions. As used in this Plan, the following terms shall have the
meanings indicated below:
"Bank" shall mean Farmers & Merchants Bank of Central California and
----
any of its subsidiaries.
"Bonus Factor" shall mean, in respect of any Participant, the
------------
numerical factor determined by the Committee for purposes of such
Participant's participation in the Plan.
"Cause" shall mean any of (i) the Participant's misappropriation of
-----
funds, other dishonesty or willful misconduct or conviction of a felony or
other crime involving moral turpitude, (ii) the Participant's habitual
insobriety or other substance abuse and (iii) any action on the part of the
Participant involving deliberate malfeasance or gross negligence in the
performance of his or her employment duties and responsibilities.
"Change in Control" shall be deemed to occur if (i) a person acting
-----------------
alone or two or more persons acting in concert acquires shares or combined
voting power or control equal to fifty percent (50%) or more of the issued
and outstanding common stock of the Bank or the Holding Company or (ii) the
Bank or the Holding Company is a party to a consummated merger,
consolidation, sale of assets or other reorganization, as a consequence of
which the members of either the Board of Directors of the Bank or the
Holding Company in office immediately prior to such transaction or event
shall constitute less than a majority of such board thereafter.
"Committee" shall mean the Personnel Committee of the Board of
---------
Directors of the Bank or such other committee that the Board of Directors
of the Bank may designate from time to time.
"Cumulative Profit" shall mean, in respect of any Participant, the
-----------------
consolidated net income (on a book basis after provision for income taxes)
of the Holding Company and all of its subsidiaries, including the Bank and
its subsidiaries, for each consecutive quarter comprising the Participation
Period of such Participant.
"Deferred Bonus" shall mean, in respect of any Participant, the amount
--------------
equal to the sum of (i) the product of the Participant's Bonus Factor times
the Cumulative Profit during Participant's Participation Period plus (ii)
accrued interest on such product as it changes from time to time to be
determined as of the last day of each quarter during the Participation
Period at the annual rate equal to the Bank's Base Commercial Loan Rate as
of that date, less three (3.0) percentage points, with such interest to be
compounded quarterly plus (iii) in the event there is a Change in Control,
the difference by which (A) the product of the Market Value of the
outstanding common stock of the Bank or the Holding Company (whichever is
the subject of the Change in Control) times the total number of such shares
outstanding at the time the Change in Control is consummated times the
Participant's Bonus Factor, exceeds (B) the product of the per share book
value of such common stock times the total number of such shares
outstanding, both as of the date the Change in Control is consummated,
times the Participant's Bonus Factor.
"Holding Company" shall mean Farmers & Merchants Bancorp.
---------------
-1-
<PAGE>
"Market Value" means the per share price or equivalent value paid by
------------
the acquiror for such common stock if clause (i) of the definition of
Change in Control applies or the agreed upon acquisition price for such
common stock if clause (ii) of the definition of Change in Control applies.
"Participant" means an employee of the Bank who is selected for
-----------
participation in the Plan based on the recommendation of the Committee and
the approval of the Board of Directors of the Bank.
"Participation Period" shall mean, in respect of any Participant, the
--------------------
period beginning on the first day of the quarter in which he or she is
selected to become a Participant and ending on the earlier of (i) the last
day of the quarter in which his or her employment with the Bank terminates
(irrespective of the reason or basis for such termination) or (ii) the date
on which a Change in Control is effected or consummated, whichever is
earlier.
"Plan" shall mean the Farmers & Merchants Bank of Central California
----
Amended and Restated Deferred Bonus Plan as set forth in this document, as
the same may be amended or supplemented from time to time.
3. Deferred Bonus. A Participant shall be entitled to the Deferred Bonus
applicable to him or her, subject to the terms and conditions of this Agreement,
including the vesting rules set forth in Section 4, the forfeiture rules set
---------
forth in Section 5 and the payment rules set forth in Section 6.
--------- ---------
4. Vesting. A Participant's entitlement to his or her Deferred Bonus shall
vest based on the Participant's years of service with the Bank as measured
beginning with the quarter in which he or she is selected to become a
Participant as set forth in the vesting schedule below, provided that in the
event of a Change in Control or the termination of the Participant's employment
at the Bank due to his or her death or disability, his or her Deferred Bonus
shall become 100% vested upon such Change in Control or termination. (A
Participant will be considered disabled if he or she is eligible to receive
benefits under the terms of the Bank's long-term disability plan offered to all
employees or the Participant has been unable to perform the essential functions
of his or her job for a period of at least six months as the result of his or
her incapacity due to physical or mental illness.) Notwithstanding the vesting
schedule set forth below, the Board of Directors may, in its sole discretion,
reduce or waive the vesting requirement as to any Participant.
Percent of
----------
Post-selection Years of Service Deferred Bonus Vested
------------------------------- ---------------------
Less than 2 years 0%
2 years to less than 3 years 25%
3 years to less than 4 years 50%
4 years to less than 5 years 75%
5 years or more 100%
5. Forfeiture. Notwithstanding any other provision of this Plan, in the event
of the Participant's termination of employment with the Bank for Cause, all
entitlement and other rights of Participant to a Deferred Bonus, whether or not
vested, shall thereupon be cancelled, terminated and forfeited in their
entirety.
6. Payment. Payment of a Participant's Deferred Bonus shall be made in cash,
in substantially equal monthly installments of principal beginning within one
year and extending no longer than five (5) years, after the end of the
Participation Period for such Participant. Interest on the unpaid balance of
principal of the Deferred Bonus shall accrue interest beginning on the first day
after the end of the Participation Period until such principal is paid in full
at the annual rate equal to Bank's Base Commercial Loan Rate, as such Base
Commercial Loan Rate changes from time to time, less three (3.0) percentage
points, and shall be compounded quarterly and paid with each installment of
principal. In the event of the Participant's death after payment has begun but
prior to completion of payment of the remaining balance of the Deferred Bonus,
the unpaid balance shall be paid to the Participant's heirs, devisees or
designated beneficiaries according to the same schedule and in the same manner
as had been previously paid to the Participant. At any point during the payment
period, the Committee may, in its sole discretion, elect to accelerate payment
of the unpaid balance of the Deferred Bonus and accrued interest thereon without
penalty.
-2-
<PAGE>
7. Nontransferability. A Deferred Bonus and interest thereon granted under
the Plan may not be transferred, assigned, pledged or hypothecated in any
manner, by operation of law or otherwise, other than by will or by the laws of
descent and distribution and shall not be subject to execution, attachment or
similar process.
8. Withholding. The Bank shall have the right to withhold any taxes required
by law from all amounts paid to any Participant pursuant to the Plan.
9. Unfunded and Unsecured Obligation of Bank. The Bank is not required to
earmark or otherwise set aside any funds or other assets or in any way secure
payment of its obligations under the Plan. Any asset which may be set aside by
the Bank for accounting purposes is not to be treated as held in trust for any
Participant or for his or her account. Each Participant shall have only the
rights of a general, unsecured creditor of the Bank with respect to any of his
or her rights under the Plan.
10. Powers and Duties of Committee. Except as otherwise determined by the
Board of Directors of the Bank, the Committee shall administer the Plan in
accordance with its terms and shall have all the powers necessary to carry out
such terms. The Committee shall act by a majority of its members at the time in
office, and such action may be taken by a vote at a meeting or by unanimous
consent in writing without a meeting. The Chairman, or any member of the
Committee designated by the Chairman, shall execute any certificate, instrument
or other written direction on behalf of the Committee and shall direct the
payment of benefits under the Plan. All interpretations of the Plan, and
questions concerning its administration and application, shall be determined by
the Committee or, at the option of the Board of Directors of the Bank, by the
Board of Directors of the Bank, and such determination shall be binding on all
Participants.
11. Records and Reports. The Committee shall cause to be maintained records
which shall contain all relevant data pertaining to each Participant, and his or
her rights under the Plan.
12. Claims Procedure. Any claim pertaining to a Participant's benefits under
the Plan shall be filed with the Chairman of the Committee. Written notice of
the disposition of a claim shall be furnished the Participant within 30 days
after the application therefor is filed. In the event the claim is denied, the
specific reasons for such denial shall be set forth, pertinent provisions of the
Plan shall be cited and, where appropriate, an explanation as to how the
Participant can perfect his or her claim will be provided.
13. No Employment or Stockholder's Right. Neither the Plan nor a Participant's
participation therein shall constitute evidence of or create (i) any commitment,
agreement or understanding, whether express or implied, that the Bank will
continue to employ such Participant for any period of time, in any position or
at any rate of regular compensation or (ii) any rights, interests or privileges
of a stockholder of the Bank or the Holding Company.
14. Multiple Participations. An employee of the Bank may be selected for more
than one participation in the Plan. In such event, each participation of such
employee shall be separate and independent of any prior or subsequent
participation granted to such employee under the Plan.
15. Amendment and Termination. The Board of Directors of the Bank shall have
the right, at any time, by an affirmative vote of a majority thereof, to amend,
supplement or terminate, in whole or in part, the Plan, subject to any then
vested rights of the Participants. Any amendment to the Plan shall be in
writing.
16. Construction. All legal issues pertaining to the Plan shall be determined
in accordance with the laws of the State of California except as preempted by
Federal law.
17. Entire Agreement; Amends and Supersedes Original Plan. This Plan document
represents the entire agreement by the Bank to provide benefits through the
Plan, and supersedes any and all prior agreements and understandings with
respect to the subject matter hereof. Without limiting the generality of the
foregoing, this Plan shall become effective the date on which the Holding
Company acquires fifty percent (50%) or more of the issued and outstanding
common stock of the Bank and shall thereupon amend and supersede that certain
Farmers & Merchants Bank of Central California Deferred Bonus Plan approved and
adopted as of March 2, 1999 by the Board of Directors of the Bank (the "Original
Plan"). Any Participant who was participating under the Original Plan shall
have an appropriate credit for his or her Deferred Bonus thereunder applied to
his or her Deferred Bonus hereunder. This Plan may not be altered or amended
except as provided in Section 15.
----------
-3-
<PAGE>
18. Headings. The headings are for reference only. In the event of a conflict
between a heading and the content of a Section, the content of the Section shall
control.
IN WITNESS WHEREOF, BANK has caused this plan to be duly executed, under
seal, this 11th day of May, 1999.
ATTEST: FARMERS & MERCHANTS BANK OF CENTRAL
CALIFORNIA
By
- - ------------------------------------ ---------------------------------
Secretary Chairman of the Board
(Corporate Seal)
-4-
<PAGE>
Exhibit 21
SUBSIDIARIES OF FARMERS & MERCHANTS BANCORP
Farmers & Merchants Bank of Central California
<PAGE>
Exhibit 99.1
[LETTERHEAD OF FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA]
APRIL 30, 1999
FOR IMMEDIATE RELEASE ...
Kent A. Steinwert, President and Chief Executive Officer of Farmers &
Merchants Bank, recently announced the results of the Shareholders' Meeting of
April 19, 1999.
The shareholders overwhelmingly approved the formation of a Bank holding
company, which will be named Farmers & Merchants Bancorp. The shareholders of
Farmers & Merchants Bank of Central California will soon become shareholders in
Farmers & Merchants Bancorp. Shares of common stock in Farmers & Merchants Bank
of Central California will be exchanged on a one for one ratio into Farmers &
Merchants Bancorp.
"This reorganization modernizes our corporate structure," said Steinwert.
"It will allow us to offer other competitive financial services to our
customers, enhance our abilities to expand the Bank, as well as open other
business opportunities not available under the current Bank structure. We are
continuing to identify ways to lower our customers' cost of doing business and
to provide more valuable products and services. We are confident that this new
structure will help us do this, as well as enhance our ongoing efforts to
improve the overall quality of life in the communities we serve."
Headquartered in Lodi, the 83-year old Bank's 18 offices proudly serving
nine central valley communities, in Sacramento, Elk Grove, Walnut Grove, Galt,
Lodi, Linden, Modesto, Turlock and Hilmar.
Contact: Joyce Hartwick-Edwards
209 367-2478
<PAGE>
EXHIBIT 99.2
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
(Exact name of registrant as specified in its charter)
California 94-0467440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 12, 1999: $94,827,750.
The number of shares of Common Stock outstanding as of March 12, 1999:
632,185
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders'
Portions of Proxy Statement for Annual Meeting of Shareholders'
<PAGE>
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
----
<S> <C> <C>
Item 1. Business 3
- General 3
- Selected Financial Data 7
- Annual Report to Shareholders' 19
Item 2. Properties 47
Item 3. Legal Proceedings 47
Item 4. Submission of Matters to a Vote of Security Holders 47
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Matters 48
Item 6. Selected Financial Data 48
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 48
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 49
PART III
Item 10. Directors and Executive Officers of the Bank 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial
Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
Item 14. Exhibits, Financial Statement Schedules and
Reports on Forms 8-k 49
Signatures 51
</TABLE>
2
<PAGE>
Introduction
This annual report contains various forward-looking statements, usually
containing the words "estimate," "project," "expect," "objective," "goal," or
similar expressions and includes assumptions concerning the Bank's operations,
future results, and prospects. These forward-looking statements are based upon
current expectations and are subject to risk and uncertainties. In connection
with the "safe-harbor" provisions of the private Securities Litigation Reform
Act of 1995, the company provides the following cautionary statement identifying
important factors which could cause the actual results of events to differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state banking regulations;
(v) the year 2000, and; (vi) other external developments which could materially
impact the Bank's operational and financial performance. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Bank undertakes no obligation to update any forward-
looking statements to reflect events or circumstances arising after the date on
which they are made.
PART I
Item 1. Business
General
Farmers & Merchants Bank of Central California (the Bank) is a State Chartered
corporation organized in 1916 to conduct the business of banking. The Bank's
deposit accounts are insured under the Federal Deposit Insurance Act up to
applicable limits. The Bank is a member of the Federal Reserve System. At
December 31, 1998, the Bank had $758 million in total assets, $627 million in
total deposits and $329 million in gross loans.
Service Area
The Bank services the northern Central Valley with 18 banking offices. The area
includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches
in Sacramento, Elk Grove, Galt, Lodi, Walnut Grove, Linden, Modesto, Turlock and
Hilmar.
Through its network of banking offices, the Bank emphasizes personalized service
along with a full range of banking services to businesses and individuals
located in the service areas of its offices. Although the Bank focuses on
marketing of its services to small and medium sized businesses, a full range of
retail banking services are made available to the local consumer market.
The Bank offers a wide range of deposit instruments. These include checking,
savings, money market, time certificates of deposit, individual retirement
accounts and online banking services for both business and personal accounts.
The Bank also serves as a federal tax depository for its business customers.
The Bank also provides a full complement of lending products, including
commercial, real estate construction, agribusiness, installment, credit card and
real estate loans. Commercial products include lines of credit and other
working capital financing and letters of credit. Financing products for
individuals include automobile financing, lines of credit, residential real
estate, home improvement and home equity lines of credit.
The Bank also offers a wide range of specialized services designed for the needs
of its commercial accounts. These services include a credit card program for
merchants, collection services, payroll services, electronic funds transfers by
way of domestic and international wire and automated clearinghouse, and on line
account access. The Bank also makes available investment products to customers,
including mutual funds and annuities. These investment products are offered
through a third party with investment advisors
In addition, the Bank has investments in two wholly owned subsidiaries; Farmers
& Merchants Investment Corporation and Farmers/Merchants Corp. Both Companies
were organized during 1986.
3
<PAGE>
Farmers & Merchants Investment Corporation is currently dormant and
Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the
Bank.
Employees
At December 31, 1998 the Bank employed 353 persons. Full time equivalent
employees were 336. The Bank believes that its employee relations are
satisfactory.
Competition
The banking and financial services industry in California generally, and in the
Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial service providers. The Bank competes with other
major commercial banks, diversified financial institutions, savings banks,
credit unions, savings and loan associations, money market and other mutual
funds, mortgage companies, and a variety of other nonbank financial services and
advisory companies.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader range of financial
services than the Bank. In order to compete with other financial service
providers, the Bank relies upon personal contact by its officers, directors,
employees, and shareholders, along with various promotional activities and
specialized services. In those instances where the Bank is unable to
accommodate a customer's needs, the Bank may arrange for those services to be
provided by its correspondents.
Government Policies
The Bank is influenced by prevailing economic conditions and governmental
policies influence the Bank. The actions and policy directives of the Federal
Reserve Board determine to a significant degree the cost and the availability of
funds obtained from money market sources for lending and investing. Federal
Reserve Board policies and regulations also influence, directly and indirectly,
the rates of interest paid by commercial banks on their time and savings
deposits through its open market operations in U.S. Government securities and
adjustments to the discount rates applicable to borrowings by depository
institutions and others. The nature and impact of future changes in such
policies on the Bank of future changes in economic conditions and monetary and
fiscal policies are not predictable.
In recent years significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress, the
state legislature and before the various bank regulatory agencies. These
proposals may increase or decrease the cost of doing business, modify
permissible activities, or enhance the competitive position of other financial
service providers. The likelihood and timing of any such proposals or bills and
the impact they might have on the Bank and its subsidiaries cannot be determined
at this time.
Supervision and Regulation
The Bank is a State chartered bank and a member of the Federal Reserve System.
Accordingly, its operations are subject to extensive regulation and examination
by the California Department of Financial Institutions and the Board of
Governors of the Federal Reserve System. As a Fed member, the Bank is required
to file with the Board an annual report in compliance with SEC reporting
requirements and such other information as the Board may require.
The Bank, as a member of the Federal Reserve System, is restricted from engaging
in activities not authorized or in accordance with its original charter as a
State Bank.
In recent years significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress, the
state legislature and before the various bank regulatory agencies. The
likelihood and timing of any such proposals or bills and the impact they might
have on the Bank and its subsidiaries cannot be determined at this time.
4
<PAGE>
Capital
The Federal Reserve Board and the FDIC have established risk-based minimum
capital guidelines with respect to the maintenance of appropriate levels of
capital by United States Banking organizations. These guidelines are intended
to provide a measure of capital that reflects the degree of risk associated with
a banking organization's operations for both transactions reported on the
balance sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total capital
to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-
adjusted assets of 4%. In addition to the risked-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above minimum guidelines and
ratios.
As of December 31, 1998 Farmers & Merchants Bank of Central California's risk-
based capital ratios were as follows:
<TABLE>
<CAPTION>
Actual Required
<S> <C> <C>
Tier 1 Ratio 19.54% 4.0%
Total Capital Ratio 20.80% 8.0%
Leverage Ratio (1) 10.35% 4.0%
</TABLE>
(1) Excludes unrealized gain on securities avaliable-for-sale
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to
meet the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan. At December 31, 1998, the Bank exceeded all of the required
ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration (i) concentrations of credit risk; (ii) 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); and
(iii) risks from noon-traditional activities, as well as a institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. That evaluation will be made as a part of the institution's regular
safety and soundness examination. In addition, the banking agencies have
amended their regulatory capital incorporate a measure for market risk. In
accordance with the amended guidelines, the Bank and any bank with significant
trading activity must incorporate a measure for market risk in their regulatory
capital calculations.
5
<PAGE>
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the supervising agencies for unsafe or unsound practices in conducting their
businesses for violations of law, rule, regulation or any condition imposed in
writing by the agency or any written agreement with the agency. Enforcement
actions vary commensurate with the severity of the violation.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, and insured depository institution
should: (i) conduct periodic asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and establish reserves that
are sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These guidelines
also set forth standards for evaluating and monitoring earnings and for ensuring
that earnings are sufficient for the maintenance of adequate capital and
reserves.
Premiums for Deposit Insurance
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF") , as
administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operation, or has violated any applicable law, regulation, rule, order,
or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which as of
December 31, 1998, ranged from 0 to 27 basis points per $100 of insured deposits
with a $2,000 minimum, based on the risk of a particular institution poses to
its deposit insurance fund. The risk classification is based on an
institution's capital group and supervisory subgroup assignment. An
institution's risk category is based upon whether the institution is well
capitalized, adequately capitalized, or less than adequately capitalized. Each
insured depository institution is also assigned to one of the following
"supervisory subgroups." Subgroup A, B or C. Subgroup A institutions are
Financially sound institutions with few minor weaknesses; Subgroup B
institutions are institutions that demonstrate weaknesses which, if not
corrected, could result in significant deterioration; and Subgroup C
institutions are institutions for which there is a substantial probability that
the FDIC will suffer a loss in connection with the institution unless effective
action is taken to correct the areas of weakness. Insured institutions are not
allowed to disclose their risk assessment classification and no assurance can be
given as to what the future level of premiums will be.
The Community Reinvestment Act ("CRA")
CRA requires each bank to identify the communities served by the bank's offices
and to identify the types of credit the bank is prepared to extend within such
communities including low and moderated income neighborhoods. It also requires
the bank's regulators to assess the bank's performance in meeting the credit
needs of its community and to take such assessment into consideration in
reviewing application for mergers, acquisitions and other transactions, such as
the Branch Acquisition. An unsatisfactory rating may be the basis for denying
such an application. The Bank completed a CRA
6
<PAGE>
examination during 1998, and received a satisfactory rating in complying with
its CRA obligations.
Year 2000 Compliance
The Bank has initiated a Bank-wide program (Y2K) to prepare its computer
systems, applications and infrastructure for properly processing the dates after
December 31, 1999. Based on the Federal Financial Institutions Examination
Council guidelines, the Bank's Y2K program consists of the following phases:
1. Awareness Phase - A strategic approach was developed to address the Year
2000 problem.
2. Assessment Phase - Detailed plans and target dates were developed.
3. Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
4. Validation Phase - This phase includes testing and conversion of system
applications.
5. Implementation Phase - This phase includes certification of Y2K compliance
and employee training and acceptance.
Phases one through four have been completed. The Bank is currently in the
implementation phase, which is expected to be completed during the first quarter
of 1999.
In addition, an assessment of the Y2K readiness of external entities with which
the Bank conducts its operations is ongoing. The Bank is continuing to
communicate with all of its significant obligors, counterparts, other credit
clients and vendors to determine the likely extent to which the Bank may be
affected by third parties' Y2K plans and target dates. In this regard, the Bank
is developing contingency plans in the event that external parties fail to
achieve their Y2K plans and target dates.
The Bank estimates the total cost of the Y2K project to be approximately
$1,571,000, of which $1,203,000 has been incurred through 1998 and the remaining
368,000 to be incurred during the first quarter of 1999. The costs of the Y2K
program and the date on which the Bank plans to be Y2K compliant are based on
management's best current estimates, which were derived utilizing numerous
assumptions of future events including the availability of certain resources,
third party vendors and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ from those
plans.
Selected Financial Data
The tables on the following pages set forth certain statistical information for
Farmers & Merchants Bank of Central California on a consolidated basis. Averages
are computed on a daily average basis. This information should be read in
conjunction with "Management's Discussion and Analysis" at Item 7, in the Bank's
Annual Report to Shareholders' incorporated herein by reference, and with the
Bank's Consolidated Financial Statements and the Notes thereto included in Item
14, in the company's 1998 Annual Report to Shareholders incorporated herein by
reference.
7
<PAGE>
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
(in thousands)
Twelve Months Ended December
1998
Assets Balance Interest Rate
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 17,665 $ 943 5.34%
Investment Securities Available for Sale
U.S. Treasuries 12,024 721 6.00%
U.S. Agencies 228,086 14,498 6.36%
Municipals 11,304 726 6.42%
Other 3,708 241 6.50%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 255,122 16,186 6.34%
- - -------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 2,015 120 5.96%
U.S. Agencies 19,216 1,080 5.62%
Municipals 60,600 4,793 7.91%
Other 1,146 135 11.78%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity 82,977 6,128 7.39%
- - -------------------------------------------------------------------------------------------------
Loans
Real Estate 186,840 18,896 10.11%
Commercial 91,983 9,042 9.83%
Installment 12,807 1,358 10.60%
Credit Card 2,865 400 13.96%
Municipal 127 11 8.66%
- - -------------------------------------------------------------------------------------------------
Total Loans 294,622 29,707 10.08%
- - -------------------------------------------------------------------------------------------------
Total Earning Assets 650,386 $52,964 8.14%
====================
Unrealized Gain/(Loss) on Securities Available for Sale 401
Reserve for Loan Losses (7,889)
Cash and Due From Banks 22,739
All Other Assets 24,304
- - ---------------------------------------------------------------------------
Total Assets $689,941
===========================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 56,242 $ 768 1.37%
Savings 177,301 4,025 2.27%
Time Deposits Over $100,000 62,129 3,193 5.14%
Time Deposits Under $100,000 153,109 7,794 5.09%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 448,781 15,780 3.52%
Other Borrowed Funds 29,899 1,648 5.51%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 478,680 $17,428 3.64%
====================
Demand Deposits 126,470
All Other Liabilities 5,453
- - ---------------------------------------------------------------------------
Total Liabilities 610,603
Shareholders' Equity 79,338
- - ---------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $689,941
===========================================================================
Net Interest Margin 5.46%
=================================================================================================
</TABLE>
Notes: The factor used to adjust interest revenue on tax-exempt municipal
securities and loans to a taxable equivalent basis for the year ended December
31, 1998, was 1.52. Loan Fees are included in interest income for loans.
Unearned discount is included for rate calculation purposes. Nonaccrual loans
and lease financing receivables have been included in the average balances.
Yields on securities available-for-sale are based on historical cost.
8
<PAGE>
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended December
1997
Assets Balance Interest Rate
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 13,002 $ 724 5.57%
Investment Securities Available for Sale
U.S. Treasuries 14,476 890 6.15%
U.S. Agencies 180,202 11,244 6.24%
Municipals 6,841 512 7.48%
Other 5,132 280 5.46%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 206,651 12,926 6.25%
- - -------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 3,587 229 6.38%
U.S. Agencies 36,941 2,132 5.77%
Municipals 66,954 5,460 8.16%
Other 1,446 135 9.34%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity 108,928 7,956 7.30%
- - -------------------------------------------------------------------------------------------------
Loans
Real Estate 168,949 16,976 10.05%
Commercial 79,457 7,784 9.80%
Installment 10,756 1,104 10.26%
Credit Card 2,959 409 13.82%
Municipal 396 30 7.58%
- - -------------------------------------------------------------------------------------------------
Total Loans 262,517 26,303 10.02%
- - -------------------------------------------------------------------------------------------------
Total Earning Assets 591,098 $47,909 8.11%
============ ========
Unrealized Gain/(Loss) on Securities Available for Sale (4)
Reserve for Loan Losses (7,631)
Cash and Due From Banks 23,706
All Other Assets 27,431
- - --------------------------------------------------------------------------
Total Assets $634,600
==========================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 51,896 $ 840 1.62%
Savings 181,917 4,703 2.59%
Time Deposits Over $100,000 63,765 3,347 5.25%
Time Deposits Under $100,000 145,972 7,432 5.09%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 443,550 16,322 3.68%
Other Borrowed Funds 1,784 100 5.61%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 445,334 $16,422 3.69%
====================
Demand Deposits 112,439
All Other Liabilities 3,007
- - --------------------------------------------------------------------------
Total Liabilities 560,780
Shareholders' Equity 73,820
- - ---------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $634,600
==========================================================================
Net Interest Margin 5.33%
=================================================================================================
</TABLE>
Notes: The factor used to adjust interest revenue on tax-exempt municipal
securities and loans to a taxable equivalent basis for the year ended December
31, 1997, was 1.53. Loan Fees are included in interest income for loans.
Unearned discount is included for rate calculation purposes. Nonaccrual loans
and lease financing receivables have been included in the average balances.
Yields on securities available-for-sale are based on historical cost.
9
<PAGE>
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended December
1996
Assets Balance Interest Rate
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 11,940 $ 647 5.42%
Investment Securities Available for Sale
U.S. Treasuries 9,642 584 6.06%
U.S. Agencies 130,924 7,965 6.08%
Municipals 12,238 975 7.97%
Other 4,186 253 6.04%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 156,990 9,777 6.23%
- - -------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 8,724 513 5.88%
U.S. Agencies 51,807 3,077 5.94%
Municipals 65,301 5,506 8.43%
Other 1,624 151 9.30%
- - -------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity 127,456 9,247 7.26%
- - -------------------------------------------------------------------------------------------------
Loans
Real Estate 167,945 17,602 10.48%
Commercial 83,342 8,399 10.08%
Installment 10,143 1,031 10.16%
Credit Card 3,110 439 14.12%
Municipal 939 103 10.92%
- - -------------------------------------------------------------------------------------------------
Total Loans 265,479 27,574 10.39%
- - -------------------------------------------------------------------------------------------------
Total Earning Assets 561,865 $47,246 8.41%
=====================
Unrealized Gain/(Loss) on Securities Available for Sale (104)
Reserve for Loan Losses (7,204)
Cash and Due From Banks 24,225
All Other Assets 24,934
- - ---------------------------------------------------------------------------
Total Assets $603,716
===========================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 47,739 $ 788 1.65%
Savings 180,444 4,649 2.58%
Time Deposits Over $100,000 48,441 2,532 5.23%
Time Deposits Under $100,000 147,815 7,481 5.06%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 424,439 15,450 3.64%
Other Borrowed Funds 1,798 107 5.95%
- - -------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 426,237 $15,557 3.65%
=====================
Demand Deposits 101,778
All Other Liabilities 4,119
- - ---------------------------------------------------------------------------
Total Liabilities 532,134
Shareholders' Equity 71,582
- - ---------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $603,716
===========================================================================
Net Interest Margin 5.64%
=================================================================================================
</TABLE>
Notes: The factor used to adjust interest revenue on tax-exempt municipal
securities and loans to a taxable equivalent basis for the year ended December
31, 1996, was 1.53. Loan Fees are included in interest income for loans.
Unearned discount is included for rate calculation purposes. Nonaccrual loans
and lease financing receivables have been included in the average balances.
Yields on securities available-for-sale are based on historical cost
10
<PAGE>
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
1998 versus 1997
Amount of Increase
(Decrease) Due to Change in:
Average Average Net
Interest Earning Assets Balance Rate Change
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 250 $ (31) $ 219
Investment Securities Available for Sale
U.S. Treasuries (148) (21) (169)
U.S. Agencies 3,041 213 3,254
Municipals 295 (81) 214
Other (87) 48 (39)
- - ------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 3,101 159 3,260
- - ------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries (94) (14) (109)
U.S. Agencies (998) (55) (1,052)
Municipals (506) (161) (667)
Other (31) 31 0
- - ------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (1,630) (199) (1,828)
- - ------------------------------------------------------------------------------------------------
Loans:
Real Estate 1,809 112 1,920
Commercial 1,231 27 1,258
Installment 217 38 254
Credit Card (13) 4 (9)
Other (22) 3 (19)
- - ------------------------------------------------------------------------------------------------
Total Loans 3,221 183 3,404
- - ------------------------------------------------------------------------------------------------
Total Earning Assets 4,942 112 5,055
- - ------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 66 (138) (72)
Savings (116) (561) (678)
Time Deposits Over $100,000 (85) (69) (154)
Time Deposits Under $100,000 363 (1) 362
- - ------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 229 (770) (542)
Other Borrowed Funds 1,550 (2) 1,548
- - ------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,778 (771) 1,006
- - ------------------------------------------------------------------------------------------------
Total Change $ 3,164 $ 884 $ 4,049
================================================================================================
</TABLE>
"Notes: Rate/volume variance is allocated based on the percentage
relationship of changes in volume and changes in rate to the total
"net change." Changes in accounting principle during 1994 require
securities to be segregated between Available-for-Sale and
Held-to-Maturity."
11
<PAGE>
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
1997 versus 1996
Amount of Increase
(Decrease) Due to Change in:
Average Average Net
Interest Earning Assets Balance Rate Change
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 59 $ 19 $ 77
Investment Securities Available for Sale
U.S. Treasuries 298 8 306
U.S. Agencies 3,068 211 3,279
Municipals (405) (58) (463)
Other 53 (26) 27
- - ----------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 3,014 136 3,149
- - ----------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries (325) 41 (284)
U.S. Agencies (860) (85) (945)
Municipals 123 (169) (46)
Other (17) 1 (16)
- - ----------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (1,078)" (212) (1,291)
- - ----------------------------------------------------------------------------------------------
Loans:
Real Estate 104 (730) (626)
Commercial (385) (231) (615)
Installment 63 10 73
Credit Card (21) (9) (30)
Other (47) (25) (73)
- - ----------------------------------------------------------------------------------------------
Total Loans (286) (985) (1,271)
- - ----------------------------------------------------------------------------------------------
Total Earning Assets 1,709 (1,043) 663
- - ----------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 68 (15) 52
Savings 38 16 54
" Time Deposits Over $100,000" 804 11 815
" Time Deposits Under $100,000" (93) 45 (49)
- - ----------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 816 56 872
Other Borrowed Funds (1) (6) (7)
- - ----------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 815 50 865
- - ----------------------------------------------------------------------------------------------
Total Change $ 893 $(1,093) $ (202)
==============================================================================================
</TABLE>
"Notes: Rate/volume variance is allocated based on the percentage relationship
of changes in volume and changes in rate to the total ""net change."" Changes in
accounting principle during 1994 require securities to be segregated between
Available-for-Sale and Held-to-Maturity."
12
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio
The following table summarizes the balances and distributions of the
investment securities held on the dates indicated.
Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
-------------------------------------------------------------------------
December 31: (in thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 9,099 $ 2,006 $ 18,292 $ 2,022 $ 10,142 $ 6,016
U. S. Agency 12,138 1,990 39,053 33,158 61,631 42,124
Municipal 24,047 55,088 1,013 62,478 11,245 67,109
Mortgage-Backed Securities 257,644 0 185,698 - 113,324 -
Other 9,377 1,068 3,140 1,271 1,773 1,517
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Book Value $312,305 $60,152 $247,196 $98,929 $198,115 $116,766
====================================================================================================================================
Fair Value $312,305 $62,149 $247,196 $100,658 $198,115 $118,124
====================================================================================================================================
</TABLE>
Analysis of Investment Securities Available for Sale
The following table is a summary of the relative maturities and yields of
Farmers & Merchants Bank of Central California's investment securities Available
for Sale as of December 31, 1998. Yields on Municipal securities have been
calculated on a fully taxable equivalent basis using the Federal tax rate of
34%.
<TABLE>
<CAPTION>
Investment Securities Available for Sale Fair Average
December 31, 1998 (in thousands) Value Yield
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury
One year or less 7,044 5.98%
After one year through five years 2,055 6.16%
After five years through ten years - -
After ten years - -
- - --------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Securities 9,099 6.02%
- - --------------------------------------------------------------------------------------------------------------------------
U.S. Agency
One year or less - -
After one year through five years 7,115 6.42%
After five years through ten years 5,023 6.26%
After ten years - -
- - --------------------------------------------------------------------------------------------------------------------------
Total U.S. Agency Securities 12,138 6.35%
- - --------------------------------------------------------------------------------------------------------------------------
Municipal
One year or less - -
After one year through five years 9,030 6.27%
After five years through ten years 10,942 6.66%
After ten years 4,075 6.69%
- - --------------------------------------------------------------------------------------------------------------------------
Total Municipal Securities 24,047 6.52%
- - --------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
One year or less 40,657 6.43%
After one year through five years 185,262 6.19%
After five years through ten years 23,007 6.29%
After ten years 8,718 5.97%
- - --------------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 257,644 6.23%
- - --------------------------------------------------------------------------------------------------------------------------
Other
One year or less 9,377 5.94%
After one year through five years - -
After five years through ten years - -
After ten years - -
- - --------------------------------------------------------------------------------------------------------------------------
Total Other Securities 9,377 5.94%
- - --------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $312,305 6.24%
==========================================================================================================================
</TABLE>
Note: The average yield for floating rate securities is calculated using the
current stated yield.
13
<PAGE>
Analysis of Investment Securities Held to Maturity
The following table is a summary of the relative maturities and yields of
Farmers & Merchants Bank of Central California's investment securities Held to
Maturity as of December 31, 1998. Yields on Municipal securities have been
calculated on a fully taxable equivalent basis using the Federal tax rate of
34%.
<TABLE>
<CAPTION>
Investment Securities Held to Maturity Book Average
December 31, 1998 (in thousands) Value Yield
- - ------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury
One year or less 2,006 5.93%
After one year through five years - -
After five years through ten years - -
After ten years - -
- - ------------------------------------------------------------------------------------
Total U.S. Treasury Securities 2,006 5.93%
- - ------------------------------------------------------------------------------------
U.S. Agency
One year or less - -
After one year through five years 1,990 5.95%
After five years through ten years - -
After ten years - -
- - ------------------------------------------------------------------------------------
Total U.S. Agency Securities 1,990 5.95%
- - ------------------------------------------------------------------------------------
Municipal
One year or less 6,254 8.94%
After one year through five years 27,893 7.90%
After five years through ten years 18,760 7.46%
After ten years 2,181 7.20%
- - ------------------------------------------------------------------------------------
Total Municipal Securities 55,088 7.84%
- - ------------------------------------------------------------------------------------
Other
One year or less - -
After one year through five years - -
After five years through ten years - -
After ten years 1,068 9.48%
- - ------------------------------------------------------------------------------------
Total Other Securities 1,068 9.48%
- - ------------------------------------------------------------------------------------
Total Investment Securities $60,152 7.74%
========================================= ======= ======= ======= ========= =======
</TABLE>
14
<PAGE>
Loan Data
(in thousands)
The following table shows the Bank's loan composition by type of loan.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate $180,468 $150,804 $141,408 $141,574 $132,743
Real Estate Construction 26,529 25,796 24,972 27,928 25,422
Commercial 105,403 79,977 84,073 75,136 51,118
Installment 14,035 12,322 9,690 10,905 10,501
Credit Card 2,989 2,873 3,276 3,212 3,087
Other 64 128 152 175 242
- - --------------------------------------------------------------------------------------------------------
Total Loans 329,488 271,900 263,571 258,930 223,113
Less:
Unearned Income 310 294 284 441 384
Reserve for Possible Loan Losses 8,589 7,188 10,031 7,089 7,582
- - --------------------------------------------------------------------------------------------------------
Loans, Net $320,589 $264,418 $253,256 $251,400 $215,147
=============================================== ========== ========== =========== ========== ==========
There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans
in the above table.
Non-Performing Loans
(in thousands)
December 31,
1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------
Nonaccrual Loans
Real Estate $3,997 $4,911 $5,881 $8,441 $5,016
Commercial 595 580 1,055 4,711 1,215
Installment 9 7 18 106 193
Credit Card 0 0 0 0 0
Other 0 0 0 0 0
- - --------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 4,601 5,498 6,954 13,258 6,424
- - --------------------------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Real Estate 0 0 357 0 0
Commercial 0 0 0 0 0
Installment 0 0 1 5 36
Credit Card 23 6 31 33 45
Other 0 0 0 0 0
- - --------------------------------------------------------------------------------------------------------
Total Accruing Loans Past Due 90 Days or More 23 6 389 38 81
- - --------------------------------------------------------------------------------------------------------
Total Non-Performing Loans $4,624 $5,504 $7,343 $13,296 $6,505
=============================================== ========== ========== =========== ========== ==========
Other Real Estate Owned $636 $2,231 $2,805 $2,584 $2,476
Non-Performing Loans as a Percent of Total Loans 1.40% 2.02% 2.79% 5.13% 2.92%
================================================ ========== ========== =========== ========== ==========
Allowance for Possible Loan Losses
as a Percent of Total Loans 2.61% 2.64% 3.81% 2.74% 3.40%
=============================================== ========== ========== =========== ========== ==========
</TABLE>
The Bank's policy is to place loans (Excluding Credit Card Loans) on nonaccrual
status when the principal or interest is past due for ninety days or more unless
it is both well secured and in the process of collection. Any interest accrued,
but unpaid, is reversed against current income. Thereafter interest is
recognized as income only as it is collected in cash. The gross interest income
that would have been recorded if the loans had been current for the year ending
December 31, 1998 was $681,473. For a discussion of impaired loan policy see
Note 4. in the Bank's 1998 Annual Report.
15
<PAGE>
Maturities and Rate Sensitivity of Loans
(in thousands)
The following table shows the maturity distribution and interest
rate sensitivity of loans of the Bank on December 31, 1998
<TABLE>
<CAPTION>
Over One
Year to Over
One Year Five Five
or Less Years Years Total Percent
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate $ 42,808 $ 47,362 $116,827 $206,997 66.26%
Commercial 72,606 23,211 9,586 105,403 33.74%
- - -------------------------------------------------------------------------------------------------
Total $115,414 $ 70,573 $126,413 $312,400 100.00%
=================================================================================================
Rate Sensitivity:
Predetermined Rate $ 15,133 $ 46,736 $ 109,158 $171,027 54.75%
Floating Rate 100,281 23,837 17,255 141,373 45.25%
- - -------------------------------------------------------------------------------------------------
Total $115,414 $ 70,573 $ 126,413 $312,400 100.00%
================================================================================================
Percent 36.94% 22.59% 40.47% 100.00%
=======================================================================================
</TABLE>
The "One Year Or Less" column includes Demand loans, Overdrafts and Past Due
Loans. Farmers & Merchants Bank does not have an automatic rollover policy for
maturing loans.
Commitments and Lines of Credit
It is not the policy of the Bank to issue formal commitments or lines of credit
except to a limited number of well-established and financially responsible local
commercial and agricultural enterprises. Such commitments can be either secured
or unsecured and are typically in the form of revolving lines of credit for
seasonal working capital needs. Occasionally, such commitments are in the form
of letters of credit to facilitate the customer's particular business
transaction. Commitment fees are generally not charged except where letters of
credit are involved. Commitments and lines of credit typically mature within one
year.
16
<PAGE>
Provision and Reserve for Possible Loan Losses
(in thousands)
The following table summarizes the loan loss experience of
Farmers & Merchants Bank of Central California for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 7,188 $ 10,031 $ 7,089 $ 7,582 $ 6,813
Provision Charged to Expense 1,400 5,450 4,000 1,000 600
Charge Offs:
Real Estate 194 892 803 1,723 8
Commercial 91 7,672 226 286 433
Installment 73 78 99 141 87
Credit Card 73 94 93 60 34
Other 0 0 0 0 0
- - ------------------------------------------------------------------------------------------------------------------
Total Charge Offs $ 431 $ 8,736 $ 1,221 $ 2,210 $ 562
- - ------------------------------------------------------------------------------------------------------------------
Recoveries:
Real Estate 1 208 56 531 359
Commercial 388 201 58 116 307
Installment 36 26 40 65 55
Credit Card 7 8 9 5 10
Other 0 0 0 0 0
- - ------------------------------------------------------------------------------------------------------------------
Total Recoveries 432 443 163 717 731
- - ------------------------------------------------------------------------------------------------------------------
Net Recoveries (Charge-Offs) 1 (8,293) (1,058) (1,493) 169
- - ------------------------------------------------------------------------------------------------------------------
Balance at End of Year* $ 8,589 $ 7,188 $ 10,031 $ 7,089 $ 7,582
==================================================================================================================
Ratios:
Consolidated Reserve for Possible Loan Losses to:
Loans at Year End 2.61% 2.64% 3.81% 2.74% 3.40%
Average Loans 2.92% 2.74% 3.78% 2.90% 3.43%
Consolidated Net Charge-Offs to:
Loans at Year End 0.00% 3.05% 0.40% 0.58% -0.08%
Average Loans 0.00% 3.16% 0.40% 0.61% N/M
</TABLE>
For a description of the Bank's policy regarding the Reserve for Possible Loan
Losses, see Note 1. in the Notes to the Consolidated Financial Statements of the
1998 Annual Report.
Allocation of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
(in thousands) Amount of Allowance Allocation at December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Real Estate $ 3,107 $ 3,020 $ 3,658 $ 4,150 $ 1,049
Real Estate Construction 456 516 646 820 200
Commercial 2,530 1,927 5,598 1,221 904
Installment 229 82 55 51 27
Other 673 62 67 54 35
Unallocated 1,594 1,581 7 793 5,367
- - ------------------------------------------------------------------------------------------------------------------
Total $ 8,589 $ 7,188 $ 10,031 $ 7,089 $ 7,582
==================================================================================================================
<CAPTION>
Percent of Loans in Each Category
to Total Loans at December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate 54.8% 55.5% 53.7% 54.7% 59.5%
Real Estate Construction 8.1% 9.5% 9.5% 10.8% 11.4%
Commercial 32.0% 29.4% 31.9% 29.0% 22.9%
Installment 4.3% 4.5% 3.7% 4.2% 4.7%
Other 0.9% 1.1% 1.3% 1.3% 1.5%
- - ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==================================================================================================================
</TABLE>
17
<PAGE>
Analysis of Certificates of Deposit
(In thousands)
The following table sets forth, by time remaining to maturity, the Bank's time
deposits in amounts of $100,000 or more for the periods indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Time Deposits of $100,000 or More
Three Months or Less $32,146 $39,563
Over Three Months Through Six Months 17,516 15,905
Over Six Months Through Twelve Months 11,009 10,699
Over Twelve Months 1,700 770
- - ----------------------------------------------------------------------------------------------------------------
Total Time Deposits of $100,000 or More $62,371 $66,937
=================================================================================================================
Refer to the Year-To-Date Average Balances and Rate Schedules for information on separate deposit categories.
Return on Equity and Assets
Refer to the Five Year Financial Summary of Operations located on page 39 of the Bank's Annual
Report for the year ending December 31, 1998.
Short-Term Borrowings
Refer to Note 9. of the Bank's Annual Report for the year ending December 31, 1998.
</TABLE>
18
<PAGE>
- - -------------------------------------------------------------------------------
Farmers & Merchants Bank
of Central California
1998
Annual
Report
- - -------------------------------------------------------------------------------
19
<PAGE>
For over 82 years, Farmers & Merchants Bank of Central California has reached
out to the citizens of California's Great Central Valley to satisfy their
financial needs. Founded and still headquartered in Lodi, California, the Bank
has expanded over the years and currently maintains 18 locations serving 9
Central Valley communities. Farmers & Merchants Bank has been steadfast in its
longstanding and proven strategy of delivering consummate customer service while
maintaining a high level of community involvement. These time tested traditions
were continued in 1998 as the Bank provided a higher level of community
financial support than ever before and expanded its already vast array of
products and services available to help customers achieve their financial goals.
We are pleased to report that during 1998, Farmers & Merchants Bank achieved
record financial performance as net income after tax of $8,060,000 exceeded the
prior year by 101%. A 21% increase in total loans outstanding accompanied by 8%
growth of total deposits produced a 14% jump in net interest income before
provision for loan losses. Also contributing to the strong results was a 14%
increase in non-interest income.
Return on shareholders equity and total shareholder return also improved this
past year. Capital management will continue to be the Board and management's
top priority in the future. The Stock Repurchase Program, which the
shareholders approved last year, is being utilized. In addition, management
will continue to focus on achieving revenue growth by leveraging the Bank's
existing infrastructure base. Even though loan portfolio quality strengthened
throughout 1998, management elected to increase the reserve for possible loan
losses as a safety measure designed to cushion the Bank from the potential
impact of future economic fluctuations.
Throughout 1998, management focused on enhancing and streamlining the Bank's
processes and systems applications. The backroom processing and servicing of
loans was centralized which improved turnaround time and enabled the Bank to
handle greater loan volume. A state of the art personal computer network was
installed throughout the Bank to reduce paperwork and improve internal
communications. The Bank's main computer system is also being updated with
advanced technology designed to speed up internal operations and support future
growth. The various computer programs being used by the Bank's tellers, new
accounts representatives and loan officers are also being modernized.
The 1998 capital projects were undertaken to improve customer service and
achieve "Year 2000" systems compliance. Our team of data processing experts has
made considerable progress in addressing potential problems that could develop
from the century date change. A phase II examination of the Bank's progress in
solving the "Year 2000" issues was recently conducted by an independent third
party. The examination team was complimentary of our progress and indicated we
are ahead of other peer banks. Management is committed and confident that
Farmers & Merchants Bank's computer systems will be fully "Year 2000" compliant
well before the end of 1999.
In the future, Farmers & Merchants Bank will continue to differentiate itself
through customer convenience and the delivery of products and services in a
friendly and personal manner. We are also committed to augmenting the level of
volunteer and financial assistance donated to community support organizations.
Reinvesting in the communities we serve in order to improve the quality of life,
is a way of life at Farmers & Merchants Bank.
We appreciate the Board of Director's assistance and guidance throughout this
past year. We are also grateful for the extraordinary effort put forth by the
Bank's employees. The Bank's strong performance in 1998 would not have been
possible without their dedication, hard work, and exceptional accomplishments.
Special thanks are also extended to all of our customers. We immensely value
your business and feel privileged to be able to serve you.
As the new millenium draws near, we remain optimistic about Farmers & Merchants
Bank's future and its ability to successfully meet the many challenges ahead.
The support provided by our shareholders over the years has been a major source
of strength for the Bank. Your continued confidence and satisfaction with your
investment in Farmers & Merchants Bank remains of the utmost importance to us.
Please remember that you can personally enhance the value of your investment by
recommending Farmers & Merchants Bank to your friends, associates and new
acquaintances.
Sincerely,
/s/ Kent A. Steinwert /s/ Ole R. Mettler
Kent A. Steinwert Ole R. Mettler
President & Chief Executive Officer Chairman of the Board
20
<PAGE>
Report of Management
The management of Farmers & Merchants Bank of Central California (the Bank) and
its subsidiaries has the responsibility for the preparation, integrity and
reliability of the consolidated financial statements and related financial
information contained in this annual report. The financial statements were
prepared in accordance with generally accepted accounting principles and
prevailing practices of the banking industry. Where amounts must be based on
estimates and judgments, they represent the best estimates and judgments of
management.
Management has established and is responsible for maintaining an adequate
internal control structure designed to provide reasonable, but not absolute,
assurance as to the integrity and reliability of the financial statements,
safeguarding of assets against loss from unauthorized use or disposition and the
prevention and detection of fraudulent financial reporting. The internal
control structure includes: an effective financial accounting environment; a
comprehensive internal audit function; an independent audit committee of the
Board of Directors; and extensive financial and operating policies and
procedures. Management also recognizes its responsibility for fostering a
strong ethical climate which is supported by a code of conduct, appropriate
levels of management authority and responsibility, an effective corporate
organizational structure and appropriate selection and training of personnel.
The Board of Directors, primarily through its audit committee, oversees the
adequacy of the Bank's internal control structure. The audit committee, whose
members are neither officers nor employees of the Bank, meets periodically with
management, internal auditors and internal credit examiners to review the
functioning of each and to ensure that each is properly discharging its
responsibilities. In addition, Arthur Andersen LLP, independent auditors, are
engaged to audit the Bank's financial statements.
Arthur Andersen LLP, obtains and maintains an understanding of the Bank's
accounting and financial controls and conducts its audit in accordance with
generally accepted auditing standards which includes such audit procedures as it
considers necessary to express the opinion in the report that follows.
Management recognizes that there are inherent limitations in the effectiveness
of any internal control structure. However, management has assessed and
believes that, as of December 31, 1998, the Bank's internal control structure,
as described above, provides reasonable assurance as to the integrity and
reliability of the financial statements and related financial information.
Management also is responsible for compliance with federal and state laws and
regulations concerning loans to insiders and dividend restrictions designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, Management believes
that the Bank complied with the designated laws and regulations relating to
safety and soundness for the year ended December 31, 1998.
/s/ Kent A. Steinwert /s/ John R. Olson
Kent A. Steinwert John R. Olson
President & Executive Vice President &
Chief Executive Officer Chief Financial Officer
21
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Farmers & Merchants Bank of Central California:
We have audited the accompanying consolidated balance sheets of FARMERS &
MERCHANTS BANK OF CENTRAL CALIFORNIA (a California chartered state bank) AND
SUBSIDIARIES as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmers & Merchants Bank of
Central California and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Sacramento, California
January 29, 1999
22
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
- - -------------------------------------------------------------------------- -------------------------------------
(in thousands)
Year Ended December 31,
1998 1997 1996
- - -------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans $29,706 $26,304 $27,574
Interest on Federal Funds Sold and Securities Purchased
Under Agreements to Resell 943 724 647
Interest on Investment Securities:
U.S. Treasury Securities 841 1,119 1,097
Securities of U.S. Government Agencies and Corporations 15,579 13,375 11,042
Obligations of States and Political Subdivisions 3,749 4,038 4,296
Other 376 415 404
- - -------------------------------------------------------------------------- -------------------------------------
Total Interest Income 51,194 45,975 45,060
- - -------------------------------------------------------------------------- -------------------------------------
Interest Expense
Interest on Deposits 15,780 16,322 15,450
Interest on Borrowed Funds 1,648 100 107
- - -------------------------------------------------------------------------- -------------------------------------
Total Interest Expense 17,428 16,422 15,557
- - -------------------------------------------------------------------------- -------------------------------------
Net Interest Income 33,766 29,553 29,503
Provision for Possible Loan Losses 1,400 5,450 4,000
- - -------------------------------------------------------------------------- -------------------------------------
Net Interest Income After Provision for Possible Loan Losses 32,366 24,103 25,503
- - -------------------------------------------------------------------------- -------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 2,842 2,693 2,680
Net Gain on Sale of Investment Securities 333 202 9
Other 2,644 2,217 2,468
- - -------------------------------------------------------------------------- -------------------------------------
Total Non-Interest Income 5,819 5,112 5,157
- - -------------------------------------------------------------------------- -------------------------------------
Non-Interest Expense
Salaries and Employee Benefits 14,493 12,816 12,690
Occupancy Expense 1,787 1,842 1,825
Equipment Expense 2,103 1,956 1,725
Other 7,712 7,563 5,773
- - -------------------------------------------------------------------------- -------------------------------------
Total Non-Interest Expense 26,095 24,177 22,013
- - -------------------------------------------------------------------------- -------------------------------------
Income Before Income Taxes 12,090 5,038 8,647
Provision for Income Taxes 4,030 1,027 1,566
- - -------------------------------------------------------------------------- -------------------------------------
Net Income $ 8,060 $ 4,011 $ 7,081
========================================================================== =========== ============= ==========
Earnings Per Share $ 12.72 $ 6.33 $ 11.17
========================================================================== =========== ============= ==========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- - ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
December 31,
Assets 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks $ 27,572 $ 27,010
Federal Funds Sold and Securities Purchased Under Agreements to Resell 12,140 1,000
Investment Securities:
Available-for-Sale 312,305 247,196
Held-to-Maturity 60,152 98,929
- - ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 372,457 346,125
- - ---------------------------------------------------------------------------------------------------------------------------
Loans 329,178 271,606
Less: Reserve for Possible Loan Losses 8,589 7,188
- - ---------------------------------------------------------------------------------------------------------------------------
Loans, Net 320,589 264,418
- - ---------------------------------------------------------------------------------------------------------------------------
Bank Premises and Equipment, Net 11,714 11,609
Interest Receivable and Other Assets 14,327 13,154
- - ---------------------------------------------------------------------------------------------------------------------------
Total Assets $758,799 $663,316
===========================================================================================================================
Liabilities
Deposits:
Demand $156,586 $128,620
Interest-Bearing Transaction Accounts 75,575 67,923
Savings 166,495 172,593
Time 228,731 212,897
- - ---------------------------------------------------------------------------------------------------------------------------
Total Deposits 627,387 582,033
- - ---------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased 2,000 -
Federal Home Loan Bank Advances 41,093 -
Interest Payable and Other Liabilities 8,914 6,460
- - ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 679,394 588,493
- - ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred Stock: Par Value $100, 1,000,000 Shares Authorized,
None Issued or Outstanding - -
Common Stock: Stated Value $5, 1,000,000 Shares Authorized, 632,185
and 633,705 Issued and Outstanding at December 31, 1998 and 1997, Respectively 3,161 3,020
Additional Paid-In Capital 40,421 36,392
Retained Earnings 34,991 34,465
Accumulated Other Comprehensive Income 832 946
- - ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 79,405 74,823
- - ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $758,799 $663,316
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
24
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,744 $29,343 $36,397 $ (142) $68,342
- - -------------------------------------------------------------------------------------------------------------------------------
Net Income - - 7,081 - 7,081
Cash Dividends Declared on
Common Stock at $4.27 Per
Share - - (2,706) - (2,706)
5% Stock Dividend 134 3,370 (3,504) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (62) - (62)
Change in Net Unrealized Loss on
Securities Available for Sale - - - 62 62
- - -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $2,878 $32,713 $37,206 $ (80) $72,717
- - -------------------------------------------------------------------------------------------------------------------------------
Net Income - - 4,011 - 4,011
Cash Dividends Declared on
Common Stock at $4.53 Per
Share - - (2,869) - (2,869)
5% Stock Dividend 142 3,679 (3,821) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (62) - (62)
Change in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - 1,026 1,026
- - -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $3,020 $36,392 $34,465 $ 946 $74,823
- - -------------------------------------------------------------------------------------------------------------------------------
Net Income - - 8,060 - 8,060
Cash Dividends Declared on
Common Stock at $4.85 Per
Share - - (3,070) - (3,070)
5% Stock Dividend 149 4,250 (4,399) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (65) - (65)
Redemption of Stock (8) (221) (229)
Change in Net Unrealized Gain on
Securities Available for Sale - - - (114) (114)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $3,161 $40,421 $34,991 $ 832 $79,405
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
25
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
(in thousands)
Year Ended December 31,
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 8,060 $ 4,011 $ 7,081
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Possible Loan Losses 1,400 5,450 4,000
Depreciation and Amortization 1,637 1,571 1,437
Provision for Deferred Income Taxes (542) 1,146 (2,019)
Net Amotization (Accretion) of Investment Security Premium & Discounts 221 449 306
Net (Gain) on Sale of Investment Securities (333) (202) (9)
Net (Increase) Decrease in Interest Receivable and Other Assets (552) 23 2
Net Increase (Decrease) in Interest Payable and Other Liabilities 2,454 989 (1,225)
Net Cash Provided by Operating Activities 12,345 13,437 9,573
- - --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Trading Securities:
Purchased (30,345) - -
Sold or Matured 30,454 - -
Securities Available-for-Sale:
Purchased (171,197) (159,351) (107,976)
Sold or Matured 105,926 111,788 54,341
Securities Held-to-Maturity:
Purchased (4,070) (3,518) (22,936)
Matured 42,819 21,336 48,911
Net Increase in Loans (58,003) (17,056) (6,019)
Principal Collected on Loans Previously Charged Off 432 444 163
Net Additions to Premises and Equipment (1,742) (1,475) (2,011)
Net Cash Used for Investing Activities (85,726) (47,832) (35,527)
- - --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net Increase in Demand, Interest-Bearing Transaction,
and Savings Accounts 29,520 15,587 18,848
Net Increase in Time Deposits 15,834 11,829 10,332
Net Increase in Federal Funds Purchased 2,000 - -
Net Increase in Federal Home Loan Bank Advances 41,093 - -
Stock Redemption (229) - -
Cash Dividends (3,135) (2,932) (2,767)
Net Cash Provided by Financing Activities 85,083 24,484 26,413
- - --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 11,702 (9,911) 459
Cash and Cash Equivalents at Beginning of Year 28,010 37,921 37,462
Cash and Cash Equivalents at End of Year $ 39,712 $ 28,010 $ 37,921
==========================================================================================================================
Supplementary Data
Cash Payments made for Income Taxes $ 5,436 $ 800 $ 3,570
Interest Paid $ 17,685 $ 16,335 $ 15,536
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
26
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Comprehensive Income
===================================================================================================================
(in thousands)
Year Ended December 31,
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $8,060 $4,011 $7,081
Other Comprehensive Income -
Unrealized Gains on Securities:
Unrealized holding gains arising during the period, net
of income tax effects of $12, $795 and $48 for the
years ended December 31, 1998, 1997 and 1996,
respectively 18 1,135 67
Less: reclassification adjustment for gains
included in net income, net of related income tax effects
of $92, $76 and $4 for the years ended December 31,
1998, 1997 and 1996, respectively (132) (109) (5)
- - ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (114) 1,026 62
- - ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $7,946 $5,037 $7,143
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Farmers & Merchants Bank of Central California is a provider of a wide range of
financial services in the Central Valley of California. The consolidated
financial statements of Farmers & Merchants Bank of Central California and
subsidiaries (the Bank) are prepared in conformity with generally accepted
accounting principles and prevailing practices within the banking industry. In
preparing the financial statements, management is required to make estimates and
assumptions that affect reported amounts. These estimates are based on
information available as of the date of the financial statements. Therefore,
actual results could differ from those estimates. The following is a summary of
the significant accounting and reporting policies used in preparing the
consolidated financial statements.
Basis of Presentation
The accompanying financial statements include the accounts of the Bank and the
Bank's wholly owned subsidiaries, Farmers & Merchants Investment Corporation and
Farmers/Merchants Corp. Significant intercompany transactions have been
eliminated in consolidation. Farmers & Merchants Investment Corporation has
been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of
trust originated by the Bank.
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current presentation. These reclassifications have no
effect on previously reported income.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Bank has defined
cash and cash equivalents as those amounts included in the balance sheet
captions Cash and Due from Banks and Federal Funds Sold and Securities Purchased
Under Agreements to Resell. Generally, these transactions are for one-day
periods. For these instruments, the carrying amount is a reasonable estimate of
fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity
if it is management's intent and the Bank has the ability to hold the securities
until maturity. These securities are carried at cost, adjusted for amortization
of premium and accretion of discount using a methodology which approximates a
level yield of interest over the estimated remaining period until maturity.
Losses, reflecting a decline in value judged by the Bank to be other than
temporary, are recognized in the period in which they become known.
Securities are classified as available-for-sale if it is management's intent, at
the time of purchase, to hold the securities for an indefinite period of time
and/or to use the securities as part of the Bank's asset/liability management
strategy. Securities classified as available-for-sale include securities which
may be sold to effectively manage interest rate risk exposure, prepayment risk,
satisfy liquidity demands and other factors. These securities are reported at
fair value with aggregate, unrealized gains or losses excluded from income and
included as a separate component of shareholders' equity, net of related income
taxes. Fair values are based on quoted market prices or broker/dealer price
quotations on a specific identification basis. Gains or losses on the sale of
these securities are computed using the specific identification method.
Unrealized losses on these securities, reflecting a decline in value judged by
the Bank to be other than temporary, are recognized in the period in which they
become known.
Trading securities are acquired for short-term appreciation and are recorded in
a trading portfolio and are carried at fair value, with unrealized gains and
losses recorded in non-interest income.
Loans
Loans are reported at the principal amount outstanding net of unearned discounts
and deferred loan fees. Interest income on loans is accrued daily on the
outstanding balances using the simple interest method. Loan origination fees
are deferred and recognized over the contractual life of the loan as an
adjustment to the yield. Loans are placed on a non-accrual status when the
collectibility of principal or interest is in doubt or when they become past due
for 90 days or more unless they are both well-secured and in the process of
collection. For this purpose a loan is considered well-secured if it is
collateralized by property having a net realizable value in excess of the amount
of the loan or is guaranteed by a financially capable party. When a loan is
placed on non-accrual status, the accrued and unpaid interest receivable is
reversed and charged against current income, thereafter, interest income is
recognized only as it is collected in cash. Loans placed on a non-accrual
status are returned to accrual status when the loans are current as to principal
and interest and
28
<PAGE>
future payments are expected to be made in accordance with the contractual terms
of the loan.
A loan is impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is impaired, the recorded
amount of the loan in the Consolidated Balance Sheets is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or on the observable or estimated market price of the loan or the fair
value of the collateral if the loan is collateral dependent. Impaired loans are
placed on a non-accrual status with income reported accordingly. Cash payments
are first applied as a reduction of the principal balance until collectibility
of the remaining principal and interest can be reasonably assured.
Reserve for Possible Loan Losses
As a financial institution which assumes lending and credit risks as a principal
element in its business, the Bank anticipates that credit losses will be
experienced in the normal course of business. Accordingly, the reserve for
possible loan losses is maintained at a level considered adequate by management
to provide for losses that can be reasonably anticipated. The reserve is
increased by provisions charged to operating expense and reduced by net charge-
offs. Management reviews the credit quality of the loan portfolio on a
quarterly basis and considers problem loans, delinquencies, internal credit
review reports, current economic conditions, loan loss experience and other
factors in determining the adequacy of the reserve balance. The reserve is
based on estimates, and ultimate losses may vary from current estimates. The
estimates are reviewed periodically and, as adjustments become necessary, are
reported in earnings in the periods in which they become known. Management has
allocated specific reserves to various loan categories. Nevertheless, the
reserve is general in nature and is available for the loan portfolio as a whole.
Bank Premises and Equipment
Bank premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight line method over the estimated useful lives of the assets.
Estimated useful lives of buildings range from 30 to 40 years, and for furniture
and equipment from 3 to 8 years. Leasehold improvements are amortized over the
lesser of the terms of the respective leases, or their useful lives, which are
generally 5 to 10 years. Remodeling and capital improvements are capitalized
while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate owned, which is included in other assets, is comprised of
properties acquired through foreclosures in satisfaction of indebtedness. These
properties are carried at the lower of the recorded loan balance or their
estimated net realizable value based on current appraisals. Initial losses on
properties acquired through full or partial satisfaction of debt are treated as
credit losses and charged to the Reserve for Possible Loan Losses at the time of
acquisition. Subsequent declines in value from the recorded amounts, routine
holding costs, and gains or losses upon disposition, if any, are included in
non-interest income or expense as incurred.
Income Taxes
As required, the Bank uses the liability method of accounting for income taxes.
This method results in the recognition of deferred tax assets and liabilities
that are reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The
deferred provision for income taxes is the result of the net change in the
deferred tax asset and deferred tax liability balances during the year. This
amount combined with the current taxes payable or refundable results in the
income tax expense for the current year.
Earnings Per Share
Earnings per share amounts are computed by dividing net income by the weighted
average number of shares outstanding at the end of the year. Prior years have
been restated for the 5% stock dividend paid in each of the years presented.
Comprehensive Income
On January 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards, Reporting Comprehensive Income. This statement establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. Other comprehensive income refers to revenues, expenses,
gains and losses that generally accepted accounting principles recognize as
changes in value to an enterprise but are excluded from net income. For the
Bank, comprehensive income includes net income (loss) and changes in fair value
of its available-for-sale investment securities.
29
<PAGE>
2. Securities Purchased Under Agreements to Resell
The Bank enters into purchases and sales of securities under agreements to
resell substantially identical securities. These types of security transactions
are generally for one day periods and are primarily whole loan securities rated
AA or better. During 1998, the underlying securities purchased under resale
agreements were delivered into the Bank's account at a third-party custodian
that recognizes the Bank's rights and interest in these securities.
3. Investment Securities
The amortized cost, fair values and unrealized gains and losses of the
securities available-for-sale are as follows: (in thousands)
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair/Book
December 31, 1998 Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 9,030 $ 69 $ $ 9,099
-
Securities of U.S. Government Agencies and Corporations 11,974 164 - 12,138
Obligations of States and Political Subdivisions 23,823 298 74 24,047
Mortgage-Backed Securities 256,685 1,442 483 257,644
Other 9,377 - - 9,377
- - -------------------------------------------------------------------------------------------------------------------
Total $310,889 $1,973 $557 $312,305
===================================================================================================================
December 31, 1997
- - -------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 18,177 $ 115 $ - $ 18,292
Securities of U.S. Government Agencies and Corporations 38,821 260 28 39,053
Obligations of States and Political Subdivisions 999 14 - 1,013
Mortgage-Backed Securities 184,451 1,373 126 185,698
Other 3,140 - - 3,140
- - -------------------------------------------------------------------------------------------------------------------
Total $245,588 $1,762 $154 $247,196
===================================================================================================================
</TABLE>
The book values, estimated fair values, and unrealized gains and losses of
investments classified as held-to-maturity are as follows: (in thousands)
<TABLE>
<CAPTION>
Gross Unrealized
Book ----------------- Fair
December 31, 1998 Value Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 2,006 $ 11 $ - $ 2,017
Securities of U.S. Government Agencies and Corporations 1,990 41 - 2,031
Obligations of States and Political Subdivisions 55,088 1,845 - 56,933
Other 1,068 100 - 1,168
- - -------------------------------------------------------------------------------------------------------------------
Total $ 60,152 $1,997 $ - $ 62,149
===================================================================================================================
December 31, 1997
- - -------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 2,022 $ 7 $ - $ 2,029
Securities of U.S. Government Agencies and Corporations 33,158 25 90 33,093
Obligations of States and Political Subdivisions 62,478 1,652 10 64,120
Other 1,271 145 - 1,416
- - -------------------------------------------------------------------------------------------------------------------
Total $ 98,929 $1,829 $ 100 $100,658
===================================================================================================================
</TABLE>
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
30
<PAGE>
The remaining principal maturities of debt securities as of December 31, 1998
and 1997 are shown below. Expected maturities may differ from contractual
maturities as borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
After 1 After 5 Total
Securities Available-for-Sale Within but but Over Fair
December 31, 1998 (in thousands) 1 Year Within 5 Within 10 10 years Value
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 7,044 $ 2 ,055 $ - $ - $ 9,099
Securities of U.S. Government
Agencies and Corporations - 7,115 5,023 - 12,138
Obligations of States and Political Subdivisions - 9,030 10,942 4,075 24,047
Mortgage-Backed Securities 40,657 185,262 23,007 8,718 257,644
Other 9,377 - - - 9,377
- - -------------------------------------------------------------------------------------------------------------------------
Total $ 57,078 $ 203,462 $ 38,972 $ 12,793 $ 312,305
=========================================================================================================================
1997 Totals $ 10,425 $ 198,291 $ 19,774 $ 18,706 $ 247,196
=========================================================================================================================
After 1 After 5 Total
Securities Available-for-Sale Within but but Over Fair
December 31, 1998 (in thousands) 1 Year Within 5 Within 10 10 years Value
- - -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 2,006 $ - $ - $ - $ 2,006
Securities of U.S. Government
Agencies and Corporations - 1,990 - - 1,990
Obligations of States and Political Subdivisions 6,254 27,893 18,760 2,181 55,088
Other - - - 1,068 1,068
- - -------------------------------------------------------------------------------------------------------------------------
Total $ 8,260 $ 29,883 $ 18,760 $ 3,249 $ 60,152
=========================================================================================================================
1997 Totals $ 26,360 $ 49,619 $ 19,835 $ 3,115 $ 98,929
=========================================================================================================================
</TABLE>
As of December 31, 1998, securities carried at $80,368,000 were pledged to
secure public and other deposits as required by law.
4. Loans and Reserve for Possible Loan Losses
Loans as of December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate $180,468 $150,804
Real Estate Construction 26,529 25,796
Commercial 105,403 79,977
Consumer 17,088 15,323
- - ---------------------------------------------------------------------------------------------------------------------------------
329,488 271,900
Less Unearned Income on Loans (310) (294)
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Loans $329,178 $271,606
=================================================================================================================================
Non-Accrual Loans $ 4,601 $ 5,498
=================================================================================================================================
</TABLE>
31
<PAGE>
The estimated fair value of the Bank'snet loan portfolio was $333,951,000
and $271,989,000 for the years ended December 31, 1998 and 1997,
respectively. The fair value of the loan portfolio is estimated by discounting
the future estimated cash flows using the Bank's current rates at which similar
loans would be made to borrowers with similar credit ratings for the same
remaining maturities.
Changes in the reserve for possible loan losses consisted of the following:
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $7,188 $ 10,031 $ 7,089
Provision Charged to Operating Expense 1,400 5,450 4,000
Recoveries of Loans Previously Charged Off 432 444 163
Loans Charged Off (431) (8,737) (1,221)
- - ------------------------------------------------------------------------------------------------------
Balance, December 31 $8,589 $ 7,188 $10,031
======================================================================================================
</TABLE>
A loan is impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is impaired, the recorded
amount of the loan in the Consolidated Balance Sheets is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or on the observable or estimated market price of the loan or the fair
value of the collateral if the loan is collateral dependent. All impaired loans
have been assigned a related allowance for credit losses. As of December 31, the
total recorded investment in impaired loans was $1,571,000 and $1,726,000, and
the related allowance for credit losses was $328,000 and $125,000 for the years
ended 1998 and 1997, respectively. For income reporting purposes, impaired loans
are placed on a non-accrual status and are more fully discussed in Note 1. Cash
payments are first applied as a reduction of the loan's principal balance until
collectibility of the remaining principal and interest can be reasonably
assured. Thereafter, interest income is recognized as it is collected in cash.
The average balance of impaired loans was $1.5 million and $5.2 million for the
years ended 1998 and 1997, respectively. There was no interest income reported
on impaired loans in 1998 and 1997. Accrued interest reversed from income on
loans placed on nonaccrual status was $681,000 and $813,000 as of December 31,
1998 and 1997, respectively.
5. Bank Premises and Equipment
Bank premises and equipment as of December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- - ---------------------------------------------------------------------------
<S> <C> <C>
Land and Buildings $13,067 $12,669
Furniture, Fixtures and Equipment 14,204 12,941
Leaseheld Improvements 839 836
- - ---------------------------------------------------------------------------
28,110 26,446
Less Accumulated Depreciation and Amortization 16,396 14,837
- - ---------------------------------------------------------------------------
Total $11,714 $11,609
============================================================================
</TABLE>
Depreciation and amortization on premises and equipment included in occupancy
and equipment expense amounted to $1,637,000, $1,571,000 and $1,437,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Total rental expense
for banking premises was $228,000, $221,000 and $194,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Rental income was $68,000,
$87,000 and $59,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
32
<PAGE>
6. Other Real Estate
Other real estate, included in Interest Receivable and Other Assets, totaled
$636,000 and $2,231,000 at December 31, 1998 and 1997, respectively. Other real
estate includes property no longer utilized for business operations and property
acquired through foreclosure proceedings. These properties are carried at the
lower of cost or estimated net realizable value determined at the date acquired.
Losses arising from the acquisition of these properties are charged against the
reserve for possible loan losses. Subsequent declines in value, routine holding
costs and net gains or losses on disposition are included in other operating
expense as incurred.
7. Deposits
Deposits of $100,000 or more and their related interest expense were as
follows:
<TABLE>
<CAPTION>
(in thousands)
December 31,
1998 1997 1996
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance $62,371 $66,937 $54,420
============================================================================
Interest Expense for the Year Ended $ 3,193 $ 3,347 $ 2,532
============================================================================
</TABLE>
The fair values of the Bank's deposit liabilities were $628,572,000 and
$582,169,000 for the years ended December 31, 1998 and 1997, respectively. The
fair value of demand deposits, interest bearing transaction accounts and savings
accounts is the amount payable on demand as of December 31. The fair value of
fixed-maturity certificates of deposit is estimated by discounting expected
future cash flows utilizing interest rates currently being offered for deposits
of similar remaining maturities.
8. Income Taxes
Current and deferred income tax expense (benefit) provided for the years ended
December 31, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
- - -------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 3,220 $ (237) $ 2,279
State 1,352 118 1,306
- - -------------------------------------------------------
Total Current 4,572 (119) 3,585
=======================================================
Deferred
Federal (502) 717 (1,693)
State (40) 429 (326)
- - -------------------------------------------------------
Total Deferred (542) 1,146 (2,019)
=======================================================
Total $ 4,030 $ 1,027 $ 1,566
=======================================================
</TABLE>
33
<PAGE>
The deferred income tax liabilities (benefits) are the result of certain items
being accounted for in different time periods for financial reporting purposes
than for income tax purposes. The principal items affecting deferred taxes are
as follows:
<TABLE>
<CAPTION>
(in thousands)
Deferred Income Tax Provision 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Writedown of Other Real Estate $ 187 $ (179) $ (174)
Loan Loss Provision (600) 1,368 (1,219)
Securities Accretion 78 (179) 58
Depreciation 50 59 39
Pension Plan Expense 81 63 60
Vacation Expense (18) 3 (19)
Interest on Non-Accrual Loans 288 (168) 62
Other Temporary Differences, Net (608) 179 (826)
- - ----------------------------------------------------------------------------------------------------------
Total $ (542) $ 1,146 $(2,019)
=========================================================================================================
</TABLE>
The total provision for income taxes differs from the federal statutory rate as
follows: (in thousands)
<TABLE>
<CAPTION> 1998 1997 1996
Amount Rate Amount Rate Amount Rate
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax Provision at Federal Statutory Rate $ 4,111 34.0 % $ 1,713 34.0 % $ 2,940 34.0 %
Interest on Obligations of States
and Political Subdivisions
Exempt from Federal Taxation (1,001) (8.3)% (1,099) (21.8)% (1,278) (14.8)%
State and Local Income Taxes,
Net of Federal Income Tax Benefit 866 7.2 % 361 7.2 % 646 7.5 %
Other, Net 54 0.4 % 52 1.0 % (742) (8.6)%
- - ------------------------------------------------------------------------------------------------------------------------
Total $ 4,030 33.3 % $ 1,027 20.4 % $ 1,566 18.1 %
========================================================================================================================
</TABLE>
The components of the net deferred tax assets as of December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Reserve for Possible Loan Losses $ 3,266 $ 2,711
Accrued Liabilities 830 609
Deferred Compensation 532 480
Other Real Estate 369 542
State Franchise Tax 446 40
Interest on Non-Accrual Loans 312 576
Other - 25
- - -------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets 5,755 4,983
========================================================================================================================
Deferred Tax Liabilities
Depreciation (620) (573)
Unrealized Gain on Securities Available-for-Sale (584) (661)
Securities Accretion (267) (195)
Other (170) (59)
- - -------------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities (1,641) (1,488)
=========================================================================================================================
Net Deferred Tax Assets $ 4,114 $ 3,495
=========================================================================================================================
</TABLE>
The net deferred tax assets are reported in Interest Receivable and Other Assets
on the Bank's Consolidated Balance Sheets. Prior year totals have been restated
to conform with the tax return as filed.
34
<PAGE>
9. Short Term Borrowings
As of December 31, 1998 and 1997, the Bank had unused lines of credit available
for short term liquidity purposes of $136 million and $130 million respectively.
Federal Funds purchased and advances from the Federal Reserve Bank are generally
issued on an overnight basis.
10. Federal Home Loan Bank Advances
The Bank's Advances from the Federal Home Loan Bank of San Francisco consist of
the following as of December 31,
<TABLE>
<CAPTION>
1998 (in thousands)
- - --------------------------------------------------------------------
<S> <C>
5.35% note payable due February 2, 2008 with $25,000
Interest due quarterly, callable February 2, 2003 and
quarterly thereafter
5.38% note payable due August 12, 2008 with 15,000
Interest due quarterly, callable August 12, 2003 and
quarterly thereafter
5.60% amortizing note, interest an principal 1,093
payable monthly with final maturity of September 25, 2018.
- - --------------------------------------------------------------------
$41,093
====================================================================
</TABLE>
In accordance with the Collateral Pledge and Security Agreement, advances are
secured by all Federal Home Loan Bank stock held by the Bank and by agency and
mortgage-backed securities with carrying values of $47,538,000 and approximate
market values of $48,403,000.
The fair value of advances from the Federal Home Loan Bank was $41,088,000 at
December 31, 1998.
11. Shareholders' Equity
Beginning in 1975 and continuing through 1998, the Bank has issued an annual 5%
stock dividend. Earnings per share amounts have been restated for each year
presented to reflect the stock dividend.
Under regulations controlling California state chartered banks, the Bank is, to
some extent, limited in the amount of dividends that can be paid to shareholders
without prior approval of the State Department of Financial Institutions.
These regulations require approval if total dividends declared by a state
chartered bank in any calendar year exceed the bank's net profits for that year
combined with its retained net profits for the preceding two calendar years. As
of December 31, 1998, the Bank could declare dividends of $10,317,000 without
approval of the California State Banking Department. These regulations apply to
all California state chartered banks.
The Accumulated Other Comprehensive Income is the result of the accounting
standard, Reporting Comprehensive Income. This accounting principle requires
securities classified as available-for-sale be reported at their fair values.
Unrealized gains and losses are reported on a net-of-tax basis as a component of
Shareholders' Equity.
The Bank is subject to various regulatory capital requirements administered by
the Federal Reserve Bank of San Francisco and the Federal Deposit Insurance
Corporation. These guidelines are designed to make capital requirements more
sensitive to differences in risk related assets among banking organizations, to
take into account off-balance sheet exposures and aid in making the definition
of banking capital uniform. Bank assets and off-balance sheet items are
categorized by risk. The results of these regulations are that assets with a
higher degree of risk require a larger amount of capital; assets, such as cash,
with a low degree of risk have little or no capital requirements. Failure to
meet these minimum capital requirements can initiate certain disciplinary
actions by regulators. As of December 31, 1998 and 1997, the Bank meets all
capital adequacy requirements to which it is subject. The following table
illustrates the relationship between the regulatory capital requirements and the
Bank's capital position.
<TABLE>
<CAPTION>
Regulatory
Capital Adequacy
(in thousands) Bank Capital Requirements
December 31, 1998 Amount Ratio Amount Ratio
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets $84,106 20.80% $32,344 8.0%
Tier I Capital to Risk Weighted Assets $79,009 19.54% $16,172 4.0%
Tier I Capital to Average Assets $79,009 11.45% $27,598 4.0%
December 31, 1997
- - -------------------------------------------------------------------------------
Total Capital to Risk Weighted Assets $78,587 20.99% $29,946 8.0%
Tier I Capital to Risk Weighted Assets $73,877 19.74% $14,973 4.0%
Tier I Capital to Average Assets $73,877 11.23% $26,923 4.0%
</TABLE>
35
<PAGE>
12. Employee Benefit Plans
The Bank sponsors a defined benefit pension plan covering all employees of
Farmers & Merchants Bank of Central California who have completed one year of
service and attained age 21.
The Plan provides benefits, up to a maximum stated in the plan, based on each
covered employee's years of service and highest five-year average compensation
earned while a participant in the plan.
Since January 1, 1989, plan benefits are fully vested after five years of plan
service.
The Bank's funding policy is to contribute annually an amount that is not less
than the ERISA minimum funding requirement and not in excess of the maximum tax-
deductible contribution as developed in accordance with the aggregate cost
method.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
The following schedule states the change in benefit obligations for the years
ended December 31, 1998 and 1997:
(in thousands)
- - ------------------------------------------------------------------------------
<S> <C> <C>
Benefit Obligation at Beginning of Year $4,320 $ 4,776
Service Cost 441 402
Interest Cost 331 318
Benefits Paid (762) (1,341)
Actuarial Loss 679 165
- - --------------------------------------------------------------------------
Total Benefit Obligation at End of Year $5,009 $ 4,320
==========================================================================
The Change in Plan Assets are as follows: 1998 1997
- - --------------------------------------------------------------------------
Fair Value of Plan Assets at Beginning of Year $4,520 $ 4,813
Employer Contribution 612 604
Benefits Paid (762) (1,341)
Actual Return on Plan Assets 589 444
- - --------------------------------------------------------------------------
Total Fair Value of Plan Assets at End of Year $4,959 $ 4,520
==========================================================================
</TABLE>
The following table sets forth the Plan's funded status along with amounts
recognized and not recognized in the Bank's Consolidated Balance Sheets for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- - --------------------------------------------------------------------------
<S> <C> <C>
Benefit Obligation $5,009 $4,320
Fair Value of Plan Assets 4,959 4,520
- - --------------------------------------------------------------------------
Funded Status (50) 200
Unrecognized Net (Asset) at Transition (142) (170)
Unrecognized Prior Service Cost (77) (84)
Unrecognized Net Loss 684 287
- - --------------------------------------------------------------------------
Net Amounts Recognized $ 415 $ 233
==========================================================================
Amounts Recognized:
Prepaid Benefit Cost $ 415 $ 233
Accrued Benefit Liability - -
Intangible Asset - -
- - --------------------------------------------------------------------------
Net Amounts Recognized $ 415 $ 233
==========================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
The components of the net periodic benefit costs are as follows:
(in thousands) 1998 1997 1996
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 441 $ 402 $ 393
Interest Cost 331 318 304
Expected Return on Plan Assets (355) (265) (254)
Amortization of
Unrecognized Net Asset at Transition (28) (28) (28)
Unrecognized Prior Service Cost (7) (7) (7)
Unrecognized Net Loss 49 31 23
- - ----------------------------------------------------------------------
Total Net Periodic Benefit Cost $ 431 $ 451 $ 431
======================================================================
Assumptions Used in the Accounting were:
Discount Rate (Settlement Rate) 6.50% 7.00% 7.00%
Rate of Increase in Salary Levels 5.00% 5.00% 5.00%
Expected Return on Assets 9.00% 8.00% 6.00%
======================================================================
</TABLE>
Substantially all full-time employees of the Bank with one or more years of
service also participate in a defined contribution profit sharing plan.
Contributions to this plan are made at the discretion of the Board of Directors
and the Board can terminate the plan at any time. The Bank contributed $465,000
for year ending December 31, 1998 and $420,000 for each of the years ended
December 31, 1997 and 1996. The Employees are permitted, within limitations
imposed by tax law, to make pretax contributions to the 401(k) feature of the
Plan. The Bank does not match employee contributions within the 401(k) feature
of the Plan.
The Bank sponsors a Stock Appreciation Rights plan for certain employees.
Phantom shares are granted and benefits accumulate based on the change in book
value from the date of grant adjusted for stock dividends and stock repurchase
transactions. The Bank contributed $54,000 and $20,000 for the years ended
December 31, 1998 and 1997, respectively.
13. Commitments and Contingencies
In the normal course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These instruments
include commitments to extend credit, letters of credit and financial guarantees
that are not reflected in the Consolidated Balance Sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party with regards to standby letters of credit, undisbursed loan commitments
and financial guarantees is represented by the contractual notional amount of
those instruments. 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. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for recorded balance sheet items. The Bank
may or may not require collateral or other security to support financial
instruments with credit risk. Evaluations of each customer's creditworthiness
are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee performance of or payment for a customer to a third party. The Bank
had standby letters of credit outstanding of $6,019,000 at December 31, 1998 and
$4,570,000 at December 31, 1997. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition contained
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Undisbursed loan
commitments totaled $123,598,000 and $101,268,000 as of December 31, 1998 and
1997, respectively. Since many of these commitments are expected to expire
without fully being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank does not anticipate any loss as a
result of these transactions.
The Bank is obligated under a number of noncancellable operating leases for
premises and equipment used for banking purposes. Minimum future rental
commitments under noncancellable operating leases as of December 31, 1998 were
$191,000, $109,000, and $43,000 for the years ended
37
<PAGE>
December 31, 1999 through 2001, respectively; and none thereafter.
In the ordinary course of business, the Bank becomes involved in litigation
arising out of its normal business activities. Management, after consultation
with legal counsel, is of the opinion that the ultimate liability, if any,
resulting from the disposition of such claims would not be material in relation
to the financial position of the Bank.
The Bank may be required to maintain average reserves on deposit with the
Federal Reserve Bank primarily based on deposits outstanding. There were no
reserve requirements during 1998 or at December 31, 1998 and 1997. Average
required reserves during 1997 were $2.2 million.
14. Transactions with Related Parties
The Bank, in the ordinary course of business, has had, and expects to have in
the future, deposit and loan transactions with Directors, executive officers and
their affiliated companies. These transactions were on substantially the same
terms, including interest rates, as those prevailing at the time for comparable
transactions with unaffiliated parties and do not involve more than normal
credit risk or other unfavorable features.
Loan transactions with Directors, executive officers and their affiliated
companies during the year ended December 31, 1998, were as follows:
(in thousands)
- - --------------------------------------------
Loan Balances December 31, 1997 $ 2,272
Disbursements During 1998 2,314
Loan Reductions During 1998 (1,894)
- - --------------------------------------------
Loan Balances December 31, 1998 $ 2,692
============================================
38
<PAGE>
<TABLE>
<CAPTION>
Five Year Financial Summary of Operations
(in thousands, except per share data)
1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 51,194 $ 45,975 $ 45,060 $ 42,381 $ 39,520
Total Interest Expense 17,428 16,422 15,557 15,238 12,809
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 33,766 29,553 29,503 27,143 26,711
Provision for Loan Losses 1,400 5,450 4,000 1,000 600
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Interest income After
Provision for Possible Loan Losses 32,366 24,103 25,503 26,143 26,111
Total Non-Interest Income 5,819 5,112 5,157 4,687 4,038
Total Non-Interest Expense 26,095 24,177 22,013 20,764 20,704
- - -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 12,090 5,038 8,647 10,066 9,445
Provision for Income Taxes 4,030 1,027 1,566 3,033 2,631
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,060 $ 4,011 $ 7,081 $ 7,033 $ 6,814
===================================================================================================================================
Balance Sheet Data
Investment Securities $374,170 $346,125 $314,881 $287,413 $311,967
Loans, Net 329,178 271,606 263,287 258,489 222,729
Allowance for Loan Losses 8,589 7,188 10,031 7,089 7,582
Deposits 627,387 582,033 554,617 525,437 515,181
Federal Home Loan Bank Advances 41,093 - - - -
Shareholders Equity 79,405 74,823 72,717 68,342 60,473
Selected Ratios
Return on Average Assets 1.17% .63% 1.17% 1.22% 1.18%
Return on Average Equity 10.16% 5.43% 9.89% 10.69% 11.34%
Dividend Payout Ratio 38.91% 73.10% 39.08% 36.30% 35.35%
Average Loan to Average Deposits 48.93% 47.07% 50.28% 48.20% 43.02%
Average Equity to Average Assets Ratio 11.33% 11.65% 11.91% 11.63% 10.77%
Per Share Data (1)
Net Income $ 12.72 $ 6.33 $ 11.17 $11.10 $ 10.75
Cash Dividends $ 4.85 $ 4.53 $ 4.27 $ 3.94 $ 3.71
</TABLE>
(1) Based on a total of 633,499 weighted average number of shares outstanding.
Prior years have been adjusted for 5% stock dividends issued in each of the
above years.
39
<PAGE>
Quarterly Financial Data
(in thousands, except for per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Total
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income $12,325 $12,946 $13,010 $12,913 $51,194
Total Interest Expense 4,141 4,229 4,405 4,653 17,428
- - -----------------------------------------------------------------------------------------
Net Interest Income 8,184 8,717 8,605 8,260 33,766
Provision for Loan Losses 300 300 300 500 1,400
- - -----------------------------------------------------------------------------------------
Net Interest Income After
Provision for Possible Loan Losses 7,884 8,417 8,305 7,760 32,366
Total Non-Interest Income 1,409 1,446 1,367 1,597 5,819
Total Non-Interest Expense 6,103 6,491 6,448 7,053 26,095
- - -----------------------------------------------------------------------------------------
Income Before Income Taxes 3,190 3,372 3,224 2,304 12,090
Provision for Income Taxes 1,114 1,155 1,096 665 4,030
- - -----------------------------------------------------------------------------------------
Net Income $ 2,076 $ 2,217 $ 2,128 $1,639 $ 8,060
=========================================================================================
Earnings Per Share $ 3.28 $ 3.50 $ 3.36 $ 2.58 $ 12.72
========================================================================================
1997
- - -----------------------------------------------------------------------------------------
Total Interest Income $10,653 $11,428 $11,827 $12,067 $45,975
Total Interest Expense 3,966 4,080 4,114 4,262 16,422
- - -----------------------------------------------------------------------------------------
Net Interest Income 6,687 7,348 7,713 7,805 29,553
Provision for Loan Losses 1,350 3,100 300 700 5,450
- - -----------------------------------------------------------------------------------------
Net Interest Income After
Provision for Possible Loan Losses 5,337 4,248 7,413 7,105 24,103
Total Non-Interest Income 1,079 1,326 1,473 1,234 5,112
Total Non-Interest Expense 5,584 5,757 5,958 6,878 24,177
- - -----------------------------------------------------------------------------------------
Income Before Income Taxes 832 (183) 2,928 1,461 5,038
Provision for Income Taxes 62 (357) 967 355 1,027
- - -----------------------------------------------------------------------------------------
Net Income $ 770 $ 174 $ 1,961 $ 1,106 $ 4,011
=========================================================================================
Earnings Per Share $ 1.22 $ 0.27 $ 3.09 $ 1.75 $ 6.33
=========================================================================================
</TABLE>
Farmers & Merchants Bank of Central California stock is not traded on any
exchange. The shares are primarily held by local residents and are not actively
traded. Dividends declared semiannually during the past three years were for
the following amounts: June 1998, 1997 and 1996, $1.65, $1.53 and $1.45 per
share, respectively, and for December 1998, 1997, and 1996, $3.20, $3.00 and
$2.82 per share, respectively. Based on information from shareholders and from
Bank stock transfer records, the prices paid in 1998, 1997 and 1996 ranged from
$132.00 to $150.00 per share.
40
<PAGE>
Management's Discussion and Analysis
Forward - Looking Statements
This annual report contains various forward-looking statements, usually
containing the words "estimate," "project," "expect," "objective," "goal," or
similar expressions and includes assumptions concerning the Bank's operations,
future results, and prospects. These forward-looking statements are based upon
current expectations and are subject to risk and uncertainties. In connection
with the "safe-harbor" provisions of the private Securities Litigation Reform
Act of 1995, the company provides the following cautionary statement identifying
important factors which could cause the actual results of events to differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state banking regulations;
(v) the year 2000, and; (vi) other external developments which could materially
impact the Bank's operational and financial performance. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Bank undertakes no obligation to update any forward-
looking statements to reflect events or circumstances arising after the date on
which they are made.
Introduction
The following discussion and analysis is intended to provide a better
understanding of the Bank's performance during 1998 and the material changes in
financial condition, operating income and expense of the Bank and its
subsidiaries as shown in the accompanying financial statements. This section
should be read in conjunction with the consolidated financial statements and the
notes thereto, along with other financial information included in this report.
Per share amounts for 1997 and 1996 have been restated for the 5% stock dividend
declared during 1998.
Overview
At the completion of our 82nd year, management is pleased to present the highest
reported income in the Bank's history. As of December 31, 1998, Farmers &
Merchants Bank reported net income of $8,060,000, earnings per share of $12.72,
return on average assets of 1.17% and return on average equity of 10.16%. For
the year 1997, net income totaled $4,011,000, earnings per share was $6.33 for
the year, return on average assets was 0.63%, and the return on average
shareholders' equity totaled 5.43%. As for 1996, net income was $7,081,000,
earnings per share was $11.17, while return on average assets was 1.17% and the
return on average shareholders' equity was 9.89%.
The Bank's improved financial performance in 1998 was due to a combination of
increased revenue generated from its core business, improvement in the credit
quality of the loan portfolio and effective capital management strategies.
The decline in net income during 1997 was the result of one of the Bank's larger
borrowers filing for reorganization under Chapter 11 of the U.S. bankruptcy code
in the first quarter of 1997. During 1997, the loan was charged off and the
reserve for possible loan losses was replenished through current provisions.
Although the loan was completely charged off, the potential for partial or full
recovery exists. Any recoveries, if any, will be recorded when collected in
cash.
The following is a summary of the financial accomplishments achieved during
1998:
. Net interest income increased 14.3% to $33,766,000 from $29,553,000 reported
during 1997.
. The provision for possible loan losses was reduced to $1,400,000 from
$5,450,000 in 1997.
. Non-interest income increased 13.8% to $5,819,000 during 1998, up from the
$5,112,000 reported in 1997.
. Non-interest expense increased $1,918,000 or 7.9% during 1998 compared to an
increase of 9.8% in 1997.
. Total assets increased 14.4% to $758,799,000.
. Total loans increased 21.2% to $329,178,00.
. Total investment securities increased to $372,457,000 from $346,125,000 in
1997.
. Total Shareholders' Equity increased $4,582,000 to $79,405,000.
41
<PAGE>
Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
interest earned on earning assets exceeds the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on tax-
exempt investments and municipal loans is adjusted to an amount comparable to
interest subject to normal income taxes. This adjustment is referred to as
"taxable equivalent" and is noted wherever applicable. Interest income and
expense are affected by changes in the volume and mix of average interest
earning assets and average interest bearing liabilities, as well as fluctuations
in interest rates. Therefore, increases or decreases in net interest income are
analyzed as changes in volume, changes in rate and changes in the mix of assets
and liabilities.
Net interest income grew 14.3% to $33.8 million during 1998. During 1997, net
interest income was $29.6 million representing an increase of 0.2% over 1996.
On a fully taxable equivalent basis, net interest income increased 12.9% and
totaled $35.5 million during 1998, compared to $31.5 million for 1997. During
1996, on a taxable equivalent basis, net interest income decreased 0.6% during
1997 from that of 1996 or $202 thousand. Net interest income on a taxable
equivalent basis, expressed as a percentage of average total earning assets, is
referred to as the net interest margin, which represents the average net
effective yield on earning assets. For 1998, the net interest margin was 5.46%
compared to 5.33% in 1997
The predominant reasons for the growth in net interest income during 1998 was
the increase in average earning assets as well as the change in the mix of asset
totals and deposit balances. During 1998, average earning assets increased
$59.7 million while average interest bearing liabilities increased $33.3
million.
Loans, the Bank's highest earning asset, increased $57.6 million as of December
31, 1998 compared to 1997. On an average balance basis, loans increased by
$32.1 million during the year which contributed to the corresponding increase in
interest and fees on loans of $3.4 million. The yield on the loan portfolio was
10.1% in 1998 compared to 10.0% in 1997.
The investment portfolio represents the largest component of the Bank's earning
assets. The Bank's investment policy is conservative. The Bank primarily
invests in mortgage-backed securities, U.S. Treasuries, U.S. Government
Agencies, and high-grade municipals. Since the risk factor for these types of
investments is significantly lower than that of loans, the yield earned on
investments is substantially less than that of loans.
Average investment securities increased $22.9 million during 1998. This
resulted in interest income on investment securities to grow by $1.4 million.
The average yield, on a taxable equivalent basis, in the investment portfolio
was 6.59% in 1998 and 6.62% in 1997. The tax equivalent yield in 1996 was 6.7%.
The yield decreased slightly during 1998 due to declining interest rates.
Securities maturing during the year were reinvested in securities with yields
slightly below those of the maturing yields. Net interest income on a taxable
equivalent basis is higher than net interest income on the Consolidated
Statements of Income because it reflects adjustments that relate to income on
certain securities that are exempt from federal income taxes.
Interest expense increased as a result of an increase in average deposits and a
change in the mix of deposits. Total deposits increased 7.8% while interest
expense increased 6.1%. As interest rates declined during the year, borrowers
moved to time deposits, locking in rates in a declining interest rate
environment. Average interest cost on interest-bearing deposits was 3.6% in
1998, with interest expense totaling $17.4 million. In 1997, interest expense
was $16.4 million and the average interest cost on interest-bearing deposits was
3.7%.
The Bank's earning assets and rate sensitive liabilities are subject to
repricing at different times, which exposes the Bank to income fluctuations when
interest rates change. In order to minimize income fluctuations, the Bank
attempts to match asset and liability maturities. However, some maturity
mismatch is inherent in the asset and liability mix.
Provision and Reserve for Possible Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, the Bank anticipates that credit losses will be
experienced in the normal course of business. The provision for loan losses
creates a reserve to absorb potential future losses. The reserve for loan
losses is maintained at a level considered by management to be adequate to
provide for risks inherent in the loan portfolio. In determining the adequacy
of the reserve for possible loan losses, management takes into consideration
examinations of bank supervisory authorities, results of internal credit
reviews, financial condition of borrowers, loan concentrations, prior loan loss
42
<PAGE>
experience, and general economic conditions. The reserve is based on estimates
and ultimate future losses may vary from the current estimates. Management
reviews these estimates periodically and, when adjustments are necessary, they
are reported in the period in which they become known.
The Provision for Possible Loan Losses totaled $1.4 million in 1998, compared to
$5.4 million in 1997. The decrease in the provision was the result of
management's evaluation of the credit quality of the loan portfolio, the
prevailing economic climate, and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes and current loan losses. After
reviewing all factors, management concluded that a decrease in the provision for
loan losses was appropriate.
As of December 31, 1998, the reserve for loan losses was $8.6 million, which
represented 2.6% of the total loan balance. In 1997, the reserve for loan
losses was $7.2 million or 2.6% of the total loan balance.
Non-Interest Income
Non-interest income increased 13.8% in 1998 to $5.8 million. In 1997 non-
interest income was $5.1 million. In 1996, the Bank recorded $5.2 million of
non-interest income. Other non-interest income increased 19.3% or $427 thousand
which resulted from non-recurring events during 1998.
Non-Interest Expense
Non-interest expense totaled $26.1 million during 1998, an increase of $1.9
million or 7.9% over that reported in 1997. The increase in 1997 over 1996 was
9.8% with total non-interest expense reported at $24.2 million. The increase in
1996 was 6.0%.
Salaries and employee benefits, the largest component of non-interest expense,
increased $1.7 million in 1998, representing an increase of 13.1% over that of
1997. During 1997 the increase was $126 thousand or 1.0% over 1996. The
increase was primarily the net result of merit increases to Bank employees,
additional staffing requirements and an increase in accrued performance bonuses.
At the end of 1998, the Bank had 335.7 full time equivalent employees compared
to 335.4 at the end of 1997.
Occupancy expense declined 3.0% during 1998. Equipment expense increased $147
thousand or 7.5% and reached $2.1 million during 1998. These equipment
expenditures were for productivity enhancing computer equipment and in
preparation for being year 2000 compliant. During 1997, equipment expense
increased 13.4% or $231 thousand over the previous year.
Other operating expense increased $149 thousand or 1.9% in 1998 compared to
1997. This increase was due principally to an increase in outside professional
fees relating to the year 2000 and holding costs related to other real estate.
In 1997, other operating expense totaled $7.6 million, a 31.0% increase over
1996.
Income Taxes
The provision for income taxes increased 292.4% during 1998 as a result of
improved earnings. In 1997 the provision decreased 34.4% due to the reduction
of pretax earnings and from the reversal of previously anticipated tax
liabilities that are no longer expected.
The Tax Reform Act of 1986 (TRA) has caused the Bank's current taxes payable to
approximate or exceed the current provision for taxes on the income statement.
Two provisions have had a significant effect on the Bank's current income tax
liability; the restrictions on the deductibility of loan losses and the
mandatory use of accrual accounting for taxes rather than the cash basis method
of accounting.
Balance Sheet Analysis
Investment Securities
The Financial Accounting Standards Board statement, Accounting for Certain
Investments in Debt and Equity Securities, requires the Bank to classify its
investments as held-to-maturity, trading or available- for-sale. As of December
31, the Bank classified securities as either held-to-maturity or available-for-
sale. Trading securities are securities acquired for short-term appreciation
and are carried at fair value, with unrealized gains and losses recorded in non-
interest income. As of December 31, there were no securities in the trading
portfolio.
Securities are classified as held-to-maturity and accounted for at amortized
cost when the Bank has the positive intent and ability to hold the securities to
maturity.
Securities for which the Bank does not have the intent to hold to maturity are
classified as available-for-sale. This portion of the investment portfolio
provides the Bank with liquidity that may be required to meet the needs of Bank
borrowers and satisfy depositor's withdrawals.
The investment portfolio provides the Bank with an income alternative to loans.
The Bank's total investment portfolio represented 49% of the Bank's
43
<PAGE>
total assets during 1998 and 52% of the Bank's total assets during 1997. Not
included in the investment portfolio are overnight investments in Federal Funds
Sold. In 1998, average Federal Funds Sold on a year to date basis was $17.7
million compared to $13.0 million in 1997.
The Bank's investment portfolio at the end of 1998 increased $26.3 million or
7.6% from 1997. On an average balance basis, the Bank decreased its investment
in Obligations of States and Political Subdivisions (municipals) by $1.9
million. The Bank generally replaces maturities of municipal securities, to the
point of a maximum tax benefit, with "qualified issues." Qualified issues are
municipal obligations that are considered "small issues" and meet Internal
Revenue Service requirements. By meeting these requirements, the interest
earned from qualified issues is exempt from federal income taxes.
Note 3 in the Notes to Consolidated Financial Statements shows the
classifications of the Bank's investment portfolio, the market value of the
Bank's investment portfolio and the maturity distribution.
Loans
The Bank's written lending policies, along with applicable laws and regulations
governing the extension of credit, require risk analysis as well as ongoing
portfolio and credit management through loan product diversification, lending
limits, ongoing credit reviews and approval policies prior to funding of any
loan. The Bank manages and controls credit risk through diversification, dollar
limits on loans to one borrower by primarily restricting loans made to its
principal market area. Loans that are performing but have shown some signs of
weakness are subjected to more stringent reporting and oversight. Fixed rate
real estate loans are comprised primarily of loans with maturities of less than
five years. Long-term residential loans are originated by the Bank and sold in
the secondary market.
As of December 31, 1998, loans increased $57.6 million, a 21.2% increase over
that of 1997. On an average balance basis the Bank's loan portfolio increased
$32.1 million over the average balance in 1997. The increase in the average
balance was the result of a successful calling program implemented during 1998.
In 1997, average balances decreased from the prior year due to loans being
charged to the reserve during the second quarter of 1997.
Non-Performing Loans
The Bank's policy is to place loans on non-accrual status when, for any reason,
principal or interest is past due for ninety days or more unless it is both well
secured and in the process of collection. Any interest accrued, but unpaid, is
reversed against current income. Thereafter, interest is recognized as income
only as it is collected in cash.
As a result of events beyond the Bank's control, problem loans can and do occur.
As of December 31, 1998, non-accrual loans were $4.6 million compared to $5.5
million at the end of 1997. Reducing problem loans continues to be a
significant Bank objective. The Bank reported $636 thousand in foreclosed loans
as other real estate in 1998, compared to the $2.2 million reported in 1997.
Accrued interest reversed from income on loans placed on a non-accrual status
totaled $681 thousand at December 31, 1998.
Deposits
At December 31, 1998, deposits totaled $627.4 million. This represents an
increase of $45.3 million or 7.8% from the deposit totals of $582.0 million in
1997. The majority of the increase was focused in demand and time deposits,
which increased $28.0 million and $15.8 million, respectively. The change in
the mix of deposits occurs as interest rates change. The expectations our
customers have of future interest rates, dictates their maturity and account
selections. As rates declined during 1998, some customers locked in rates in
anticipation of further declines while other customers placed their funds in
demand accounts because they anticipated rates would rise and were unwilling to
commit their deposits to long term investments at the current rates.
The most volatile deposits in any financial institution are certificates of
deposit over $100,000. The Bank has not found its certificates of deposit over
$100,000 to be as volatile as some other financial institutions as it does not
solicit these types of deposits from brokers nor does it offer interest rate
premiums. It has been the Bank's experience that large depositors have placed
their funds with the Bank due to its strong reputation for safety, security and
liquidity.
Capital
Much attention has been directed at the capital adequacy of the financial
institution industry. The Bank relies on capital generated through the
retention of earnings to satisfy its capital requirements. The Bank engages in
an ongoing assessment of its capital needs in order to support business growth
and to
44
<PAGE>
insure depositor protection. Shareholders' Equity totaled $79.4 million at
December 31, 1998 and $74.8 million at the end of 1997, which represents an
increase of $4.6 million or 6.1%.
The Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation have adopted risk-based capital guidelines. The
guidelines are designed to make capital requirements more sensitive to
differences in risk related assets among banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of bank
capital uniform. Bank assets and off-balance sheet items are categorized by
risk. The results of these regulations are that assets with a higher degree of
risk require a larger amount of capital; assets, such as cash, with a low degree
of risk have little or no capital requirements. Under the guidelines the Bank
is currently required to maintain regulatory risk based capital equal to at
least 8.0%.
As of December 31, 1998, the Bank's risk based capital was 20.8%, well within
regulatory risk based capital guidelines.
Liquidity
Liquidity is the Bank's ability to maintain a cash flow adequate to fund
operations, handle fluctuations in deposit levels, respond to the credit needs
of borrowers and to take advantage of investment opportunities as they arise.
The principal sources of liquidity include interest and principal payments on
loans and investments, proceeds from the maturity or sale of investments, and
growth in deposits. The Bank maintains overnight investments in Federal Funds
as a cushion for temporary liquidity needs. During 1998, Federal Funds averaged
$17.7 million. In addition, the Bank maintains Federal Fund credit lines of
$136 million with major correspondent banks subject to the customary terms and
conditions for such arrangements.
At December 31, 1998, the Bank had available liquid assets, which included cash
and unpledged investment securities of approximately $352.0 million, which
represents 46.4% of total assets.
Asset / Liability Management - Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Bank's earnings and economic value and is referred
to as interest rate risk. Farmers & Merchants Bank's primary objective in
managing interest rate risk is to minimize the potential for significant loss as
a result of changes in interest rates.
The Bank measures interest rate risk in terms of potential impact on both its
economic value and earnings. The methods for governing the amount of interest
rate risk include: analysis of asset and liability mismatches (GAP analysis),
the utilization of a simulation model and limits on maturities of investment,
loan and deposit products to relatively short periods which reduces the market
volatility of those instruments.
The gap analysis measures, at specific time intervals, the divergences between
earning assets and interest bearing liabilities for which repricing
opportunities will occur. A positive difference, or gap, indicates that earning
assets will reprice faster than interest bearing liabilities. This will
generally produce a greater net interest margin during periods of rising
interest rates, and a lower net interest margin during periods of declining
interest rates. Conversely, a negative gap will generally produce a lower net
interest margin during periods of rising interest rates and a greater net
interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with
the rates charges on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning assets
or interest bearing liabilities.
The Bank also utilizes the results of a dynamic simulation model to quantify the
estimated exposure of net interest income to sustained interest rate changes.
The sensitivity of the Company's net interest income is measured over a rolling
one-year horizon.
The simulation model estimates the impact of changing interest rates on the
interest income from all interest earning assets and the interest expense paid
on all interest bearing liabilities reflected on the Bank's balance sheet. This
sensitivity analysis is compared to policy limits which specify a maximum
tolerance level for net interest income exposure over a one-year horizon
assuming no balance sheet growth, given both a 200 basis point upward and
downward shift in interest rates. A parallel and pro rata shift in rates over a
12-month period is assumed. Results that
45
<PAGE>
exceed policy limits, if any, are analyzed for risk tolerance and reported to
the Board with appropriate recommendations.
The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Bank's net interest
income. These estimates are based upon a number of assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, pricing strategies on loans and deposits,
replacement of asset and liability cashflows, and other assumptions. While the
assumptions used are based on current economic and local market conditions,
there is no assurance as to the predictive nature of these conditions including
how customer preferences or competitor influences might change.
Year 2000 Compliance
The Bank has initiated a Bank-wide program (Y2K) to prepare its computer
systems, applications and infrastructure for properly processing the dates after
December 31, 1999. Based on the Federal Financial Institutions Examination
Council guidelines, the Bank's Y2K program consists of the following phases:
1. Awareness Phase - A strategic approach was developed to address the Year 2000
problem.
2. Assessment Phase - Detailed plans and target dates were developed.
3. Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
4. Validation Phase - This phase includes testing and conversion of system
applications.
5. Implementation Phase - This phase includes certification of Y2K compliance
and employee training and acceptance.
Phases one through four have been completed. The Bank is currently in the
implementation phase, which is expected to be completed during the first quarter
of 1999.
In addition, an assessment of the Y2K readiness of external entities with which
the Bank conducts its operations is ongoing. The Bank is continuing to
communicate with all of its significant obligors, counterparties, other credit
clients and vendors to determine the likely extent to which the Bank may be
affected by third parties' Y2K plans and target dates. In this regard, the Bank
is developing contingency plans in the event that external parties fail to
achieve their Y2K plans and target dates.
The Bank estimates the total cost of the Y2K project to be approximately
$1,571,000, of which $1,203,000 has been incurred through 1998 and the remaining
$368,000 to be incurred during the first quarter of 1999. The costs of the Y2K
program and the date on which the Bank plans to be Y2K compliant are based on
management's best current estimates, which were derived utilizing numerous
assumptions of future events including the availability of certain resources,
third party vendors and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ from those
plans.
46
<PAGE>
Item 2. Properties
Farmers & Merchants Bank of Central California along with its two subsidiaries
are headquartered in Lodi California. Executive offices are located at 111 W.
Pine Street.
Banking services are provided in eighteen locations in the Bank's service area.
Of the eighteen locations, fourteen are owned and four are leased. The
expiration of the leases occurs between the years 1999 and 2001.
Item 3. Legal Proceedings
In the ordinary course of business, the Bank becomes involved in litigation
arising out of its normal business activities. Management, after consultation
with legal council, is of the opinion that the ultimate liability, if any,
resulting from the disposition of such claims would not be material in relation
to the financial position of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of 1998.
Item 4(A). Executive Officers of the Registrant
As of February 3, 1999, the principal officers of the Bank are:
<TABLE>
<CAPTION>
Year of Principal Occupation During
Name Birth Past Five Years
---- ----- ---------------
<S> <C> <C>
Kent A. Steinwert 1952 President and
Chief Executive Officer,since 8/18/1997
Elected to Board of Directors, 10/27/1998
Former Bank of America Southern California
Regional Sales and Marketing Manager
Richard S. Erichson 1947 Executive Vice President,
Senior Credit Officer, Since 12/14 1998
Former Bank of America
Vice President, Senior Commercial Banker
Portfolio Manager
Donald H. Fraser 1936 Executive Vice President,
Chief Operating Officer, Since 4/20/1996
John R. Olson 1952 Executive Vice President & CFO,
Secretary & Treasurer, Since 4/20/1996
Douglas E. Eddy 1948 Senior Vice President, Branch Admin. / Sales
Management, Since 2/1/1999
</TABLE>
47
<PAGE>
Item 4(A). Executive Officers of the Registrant (Cont'd)
<TABLE>
<CAPTION>
Year of Principal Occupation During
Name Birth Past Five Years
---- ----- ---------------
<S> <C> <C>
Lamoin V. Schulz 1946 Senior Vice President,
Director of Personnel, Since 4/20/1998
</TABLE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Matters
The common stock of Farmers & Merchants Bank is not widely held nor is it
actively traded. Consequently, it is not listed on any stock exchange or sold in
the over-the-counter market.
The following table summarizes the actual high and low selling prices for the
Bank's common stock since the first quarter of 1997.
<TABLE>
<CAPTION>
Calendar Quarter High Low
---------------- ------- -------
<S> <C> <C> <C>
1998 Fourth quarter $150.00 $150.00
Third quarter 150.00 150.00
Second quarter 160.00 145.00
First quarter 145.00 135.00
1997 Fourth quarter $145.00 $135.00
Third quarter 135.00 135.00
Second quarter 135.00 135.00
First quarter 140.00 135.00
</TABLE>
Beginning in 1975 and continuing through 1998, the Bank has paid a 5% stock
dividend annually.
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1998, which
appears in the Five-Year Financial Summary on page 39 of the Bank's Annual
Report, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The management's discussion and analysis section, which begins on page 41 of the
Bank's Annual Report, is incorporated herein by reference.
48
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements, which appear on pages 23 to 38 of the Bank's Annual
Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Bank
The information required by item 401 of Regulation S-K for this Item 10 with
respect to the Directors is contained in the Bank's 1999 Proxy Statement and is
incorporated herein by reference. For information concerning the executive
officers of the Bank, see Item 4(A), "Executive Officers of the Registrant"
above.
Item 11. Executive Compensation
The information required by this section is contained in the Bank's 1999 Proxy
Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this section is contained in the Bank's 1999 Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this section is contained in the Bank's 1999 Proxy
Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements, the related Notes to Consolidated
financial Statements, together with the Report of Independent Public
Accountants, Arthur Andersen LLP, dated February 6, 1999, appear in the
Bank's Annual Report to Shareholders' and are incorporated herein by
reference. See page 19.
(a) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
49
<PAGE>
(a) Exhibits
Item Description
---- -----------
3(a) Articles of incorporation as amended. By-laws as amended.
11.1 Statement re: computation of per share earnings.
Earnings per share amounts are computed by dividing net income by
the weighted average number of shares outstanding at the end of
the year. Prior years have been restated for the 5% stock
dividend paid in each of the years presented.
22.1 Subsidiaries of the registrant:
Farmers & Merchants Investment Corporation and Farmers/Merchants
Corp. are subsidiaries of Farmers & Merchants Bank of Central
California. Both subsidiaries are incorporated in California and do
business under the names listed.
(b) Reports on form 8-K filed during the last quarter of 1998.
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Farmers & Merchants Bank
of Central California
(Registrant)
By /s/ John R. Olson
-------------------------
John R. Olson
Secretary & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 23, 1999.
/s/ Kent A. Steinwert
- - ------------------------------ President and
Kent A. Steinwert Chief Executive Officer
/s/ Richard S. Erichson
- - ----------------------------- Executive Vice President
Richard S. Erichson Senior Credit Officer
/s/ Donald H. Fraser
- - ----------------------------- Executive Vice President
Donald H. Fraser Chief Operations Officer
/s/ John R. Olson
- - ----------------------------- Executive Vice President
John R. Olson & Chief Financial Officer
Principal Accounting Officer
/s/ Ole R. Mettler /s/ George D. Schiedeman
- - ----------------------------- -----------------------------
Ole R. Mettler, Chairman George D. Schiedeman, Director
/s/ Stewart Adams /s/ Hugh Steacy
- - ----------------------------- -----------------------------
Stewart Adams, Jr., Director Hugh Steacy, Director
/s/ Ralph Burlington /s/ Robert F. Hunnell
- - ----------------------------- -----------------------------
Ralph Burlington, Director Robert F. Hunnell, Director
/s/ Calvin Suess /s/ James E. Podesta
- - ----------------------------- -----------------------------
Calvin Suess, Director James E. Podesta, Director
/s/ Carl Wishek, Jr. /s/ Harry C. Schumacher
- - ----------------------------- -----------------------------
Carl Wishek, Jr., Director Harry C. Schumacher, Director
51
<PAGE>
EXHIBIT 99.3
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
(Exact name of registrant as specified in its charter)
California 94-0467440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par
Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 12, 1999: $94,827,750.
The number of shares of Common Stock outstanding as of March 12, 1999:
632,185
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders'
Portions of Proxy Statement for Annual Meeting of Shareholders'
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Farmers & Merchants Bank
of Central California
(Registrant)
By /s/ John R. Olson
---------------------
John R. Olson
Treasurer
<PAGE>
Exhibit 99.4
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
For the Quarter Ended March 31, 1999 Commission File Number: ___________
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
(Exact name of registrant as specified in its charter)
California 94-0467440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock
Stated value $5.00, authorized 1,000,000 shares; issued and outstanding 632,185
as of 5/11/99.
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
FORM 10-Q
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page
--------------------- ----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999
December 31, 1998 and March 31, 1998. 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998. 4
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998. 5
Statement of Changes in Shareholders' Equity as of
March 31, 1999 and December 31, 1998 6
Consolidated Statement of Cash Flows for the Months
Ended March 31, 1999 and 1998. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 9
PART II. - OTHER INFORMATION 20
-----------------
SIGNATURES 21
- - ----------
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
Assets 1999 1998 1998
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents
Cash and Due From $ 23,670,640 $ 27,571,594 $ 22,889,719
Federal Funds Sold 19,400,000 12,140,000 10,700,000
- - -----------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 43,070,640 39,711,594 33,589,719
Trading Securities - - 10,032,813
Investment Securities:
U.S. Treasury 26,316,635 11,105,061 15,204,838
U.S. Agencies 14,246,158 14,127,893 60,112,442
Municipals 76,767,108 79,134,370 65,236,144
Mortgage Backed Securities 248,602,241 257,644,180 200,367,869
Other 4,488,170 10,445,442 4,375,024
- - -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 370,420,312 372,456,946 345,296,317
- - -----------------------------------------------------------------------------------------------------------------------------
Loans 327,178,833 329,470,707 269,382,685
Less: Unearned Income (315,131) (293,048) (301,273)
Less: Reserve for Possible Loan Losses (8,585,677) (8,588,695) (7,430,091)
- - -----------------------------------------------------------------------------------------------------------------------------
Loans, Net 318,278,025 320,588,964 261,651,322
- - -----------------------------------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 11,632,505 11,714,052 11,523,758
Interest Receivable and Other Assets 12,658,388 14,327,047 12,825,016
- - -----------------------------------------------------------------------------------------------------------------------------
Total Assets $756,059,869 $758,798,603 $674,918,945
=============================================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $135,414,396 $156,585,748 $120,234,711
Interest Bearing Transaction 59,363,410 75,575,233 55,314,107
Savings 191,618,181 166,494,923 181,807,096
Time Deposits Over $100,000 64,677,659 62,371,134 62,099,522
Time Deposits Under $100,000 176,114,027 166,359,770 148,315,438
- - -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 627,187,672 627,386,808 567,770,874
- - -----------------------------------------------------------------------------------------------------------------------------
Fed Funds Purchased/Borrowings 41,085,952 43,093,031 25,000,000
Other Liabilities 6,393,663 8,913,465 5,155,238
- - -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 674,667,287 679,393,304 597,926,112
- - -----------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock 3,160,925 3,160,925 3,019,925
Additional Paid In Capital 40,421,324 40,421,324 36,391,764
Retained Earnings 37,303,172 34,990,563 36,540,409
Accumulated Other Comprehensive Income 507,162 832,487 1,040,735
- - -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 81,392,583 79,405,299 76,992,833
- - -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $756,059,870 $758,798,603 $674,918,945
=============================================================================================================================
</TABLE>
3
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Consolidated Statements of Income
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31, Increase/
1999 1998 (Decrease)
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest & Fees on Loans $7,420,023 $6,815,535 $604,488
Federal Funds Sold 237,422 212,113 25,309
Trading Securities 0 0 0
Securities:
U.S. Treasury 292,078 281,586 10,492
U.S. Agencies 188,779 1,027,873 (839,094)
Municipals 955,230 849,692 105,538
Mortgage Backed Securities 3,688,556 3,067,018 621,538
Other 85,314 70,670 14,644
- - ---------------------------------------------------------------------------------------------------------------
Total Interest Income 12,867,402 12,324,487 542,915
- - ---------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 170,089 188,823 (18,734)
Savings 1,006,551 1,011,493 (4,942)
Time Deposits Over $100,000 748,170 819,371 (71,201)
Time Deposits Under $100,000 2,623,783 2,120,970 502,813
- - ---------------------------------------------------------------------------------------------------------------
Total Interest Expense 4,548,593 4,140,658 407,935
- - ---------------------------------------------------------------------------------------------------------------
Net Interest Income 8,318,809 8,183,829 134,980
Provision for Loan Losses 300,000 300,000 0
- - ---------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 8,018,809 7,883,829 134,980
- - ---------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 954,835 824,319 130,517
Net Gain on Sale of Investment Securities 90,135 102,597 (12,462)
Other 502,327 482,149 20,178
- - ---------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 1,547,297 1,409,065 138,232
- - ---------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 3,586,484 3,368,423 218,062
Occupancy 912,900 991,040 (78,140)
Other Operating 1,540,961 1,743,568 (202,607)
- - ---------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 6,040,345 6,103,030 (62,685)
- - ---------------------------------------------------------------------------------------------------------------
Net Income Before Taxes 3,525,761 3,189,864 335,897
Provision for Taxes 1,213,153 1,114,192 98,961
- - ---------------------------------------------------------------------------------------------------------------
Net Income $2,312,608 $2,075,671 $236,937
===============================================================================================================
Earning Per Share
Basic Earnings Per Common Share $3.66 $3.28
================================================================================================
Diluted Earnings Per Common Share $3.66 $3.28
================================================================================================
</TABLE>
4
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
(in thousands)
March 31, March 31,
1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
Net Income $2,313 $2,076
Other Comprehensive Income -
Unrealized Gains on Securities: ($325) $ 55
- - -----------------------------------------------------------------------------
Total Other Comprehensive Income (325) 55
- - -----------------------------------------------------------------------------
Comprehensive Income $1,988 $2,131
============================================================================
</TABLE>
5
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
(in thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 3,020 36,392 34,465 946 74,823
=====================================================================================================
Net Income - - 2,076 - 2,076
Cash Dividends Declared on -
Common Stock - - - - -
5% Stock Dividend - - - - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - - - -
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - 94 94
Balance, March 31, 1998 $3,020 $ 36,392 $ 36,541 $ 1,040 $ 76,993
====================================================================================================
Balance, December 31, 1998 $3,161 $ 40,421 $ 34,991 $ 832 $ 79,405
====================================================================================================
Net Income - - 2,313 - 2,313
Cash Dividends Declared on -
Common Stock - - - - -
5% Stock Dividend - - - - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - - - -
Redemption of Stock - - - - -
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - (325) (325)
Balance, March 31, 1999 $3,161 $ 40,421 $ 37,304 $ 507 $ 81,393
====================================================================================================
</TABLE>
6
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------
(in thousands) March 31, March 31,
1999 1998
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net Income $ 2,313 $ 2,076
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 300 300
Depreciation and Amortization 434 403
Provision for Deferred Income Taxes (135) (51)
Accretion of Investment Security Discounts 256 (133)
Net (Gain) Loss on Sale of Investment Securities (90) (12)
Net Change in Operating Assets & Liabilities:
Decrease in Trading Account Assets 0 9
(Increase) Decrease in Interest Receivable and Other Assets 2,032 318
(Decrease) in Interest Payable and Other Liabilities (2,520) (1,305)
- - -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,590 1,605
Investing Activities:
Trading Securities:
Purchased (15,490) (10,033)
Sold or Matured 15,478 0
Securities Available-for-Sale:
Purchased (48,826) (29,817)
Sold or Matured 47,598 25,831
Securities Held-to-Maturity:
Purchased (209) (3,061)
Matured 2,765 8,158
Net Loans Originated or Acquired 2,000 2,440
Principal Collected on Loans Charged Off 11 26
Net Additions to Premises and Equipment (352) (307)
- - -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 2,975 (6,763)
Financing Activities:
Net (Decrease) in Demand, Interest-Bearing Transaction,
and Savings Accounts (12,260) (11,781)
Increase (Decrease) in Time Deposits 12,061 (2,481)
Federal Funds Purchased/Borrowings (2,007) 25,000
Cash Dividends 0 0
- - -------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (2,206) 10,738
Increase (Decrease) in Cash and Cash Equivalents 3,359 5,580
Cash and Cash Equivalents at Beginning of Year 39,712 28,010
- - -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of March 31, 1999 and March 31, 1998 $43,071 $33,590
=======================================================================================================
Non-Cash Activities Not Included Above:
Gross Unrealized Gain (Loss) on Securities Available-for-Sale $ (553) $ 152
Net Unrealized Gain (Loss) on Securities Available-for-Sale (325) 89
Net (Increase) Decrease in Deferred Tax Asset on Securities Available-for-Sal 228 (62)
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
A summary of the Corporations significant accounting policies is set forth in
Note 1 to the Consolidated Financial Statements in the Corporation's Annual
Report on Form 10-K for 1998.
2. Reclassifications
Certain reclassifications have been made in the 1998 financial information to
conform to the presentation used in 1999.
3. Interim Statements
The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ended March 31, 1999, are
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
4. Earnings per Share
The actual number of shares outstanding at March 31, 1999, were 632,185. Basic
and diluted earnings per share are calculated on the basis of the weighted
average number of shares outstanding during the period. All per share
information in the financial statements and in Management's Discussion and
Analysis has been restated to give retroactive effect to the 5% stock dividend.
8
<PAGE>
ITEM 2.
Management's Discussion and Analysis
Forward-Looking Statements
This annual report contains various forward-looking statements, usually
containing the words "estimate," "project," "expect," "objective," "goal," or
similar expressions and includes assumptions concerning the Bank's operations,
future results, and prospects. These forward-looking statements are based upon
current expectations and are subject to risk and uncertainties. In connection
with the "safe-harbor" provisions of the private Securities Litigation Reform
Act of 1995, the company provides the following cautionary statement identifying
important factors which could cause the actual results of events to differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state banking regulations;
(v) the year 2000, and; (vi) other external developments which could materially
impact the Bank's operational and financial performance. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Bank undertakes no obligation to update any
forward-looking statements to reflect events or circumstances arising after the
date on which they are made.
Introduction
This section is intended to provide a better understanding of certain material
changes in financial condition, operating income and expense of the Bank and its
subsidiaries as shown in the consolidated financial statements for the three
months ended March 31, 1999. For a more complete understanding of Farmers and
Merchants Bank of Central California and its operations, reference should be
made to the financial statements included in this report and in the Company's
1998 Annual Report on 10-K.
Results of Operations
Net income for the first three months ending March 31, 1999 was $2.3 million.
This is an 11.4% increase over the results achieved during the first three
months of 1998. Earnings per share for the three-month period increased to
$3.66 from $3.28 for the first quarter of 1998. The annualized return on
average assets was 1.24% for both periods. The annualized return on average
equity was 11.5% for the three months ending March 31 1999, compared to 10.7%
for the same period in 1998. The components of the more significant changes are
discussed below.
Net Interest Income
For the three months ended March 31, 1999, net interest income was $8.3 million.
This represented an increase of $135 thousand or 1.6% over net interest income
for the three months ended March 31, 1998. Although net interest income
increased, the net interest
9
<PAGE>
margin decreased to 5.0% for the three months ended March 31, 1999, compared to
5.5% for the three months ended March 31 1998.
The increase in net interest income for the most recent three-month period was
the result of an increase in average earning assets. Earning assets averaged
$707.5 million for the first three months of 1999. This represented an increase
of $76.7 million or 12.2%, compared to average earning assets of $630.8 million
for the first three months of 1998. The decrease in the net interest margin for
the three months ended March 31, 1999 compared to the first three months of 1998
was the result of a lower yield on average earning assets.
The Bank reported total interest income on a tax equivalent basis of $13.3
million for the three months ended March 31, 1999. This represented an increase
of $592 thousand or 4.6%, over total interest income of $12.7 million for the
three months ended March 31, 1998. The increase was the result of an increase
in average earning assets along with a change in the mix of earning assets. The
taxable equivalent yield on average total earning assets decreased to 7.6% for
the three months ended March 31, 1999, from a yield of 8.2% for the three months
ended March 31, 1998.
The decrease in the yield on average earning assets resulted from a decline in
interest rates from the previous year along with increased price competition for
loans. The yield on average loans decreased to 9.3% for the three months ended
March 31, 1999, from a yield of 10.3% for the first three months of 1998. The
100 basis point decrease in average loan yields primarily reflected the overall
decline in market interest rates from the previous year. Loans typically
generate higher yields than investments. Accordingly, the higher the loan
portfolio is as a percentage of earning assets, the higher will be the yield on
earning assets. For the three months ended March 31, 1999, loans represented
43.3% of average earning assets, compared to 40.0% for the three months ended
March 31, 1998.
The increase in total interest income was partially offset by in increase in
interest expense for the three months ended March 31, 1999 when compared to the
same period for 1998. Interest expense totaled $4.5 million for the three
months ended March 31, 1999 compared to $4.1 million for the three months ended
March 31, 1998. This represented an increase of $408 thousand or 9.8%.
The increase reflected an increase in the average volume of interest bearing
liabilities. Average interest-bearing liabilities were $522.1 million for the
first three months of 1999. This represented an increase of $55.3 million, or
11.8% over the average interest bearing liabilities of $466.8 million for the
first three months of 1998.
The cost of interest bearing liabilities decreased to 3.53% for the first three
months of 1999, compared to the cost of 3.60% for the first three months of
1998. The decrease is primarily the result of a decrease in market rates from
that of the previous year.
The schedules on pages 17 and 18 show the average balances of assets,
liabilities and shareholders' equity and the related interest income, expense,
and rates for the three month periods ended March 31, 1999 and 1998. Rates for
municipal securities are shown on a taxable equivalent basis.
10
<PAGE>
During periods of changing interest rates, the ability to reprice interest
earning assets and interest bearing liabilities can influence net interest
income, net interest margin, and consequently, the Bank's earnings. Interest
rate risk is managed by attempting to control the spread between rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
within the constraints imposed by market competition in the Bank's service area.
Short term repricing risk is minimized by controlling the level of floating rate
loans and maintaining a downward sloping ladder of bond payments and maturities.
Basis risk is managed by the timing and magnitude of changes to interest bearing
deposit rates. Yield curve risk is reduced by keeping the duration of the loan
and bond portfolios relatively short.
Both the net interest spread and the net interest margin are largely affected by
the Banks ability to reprice assets and liabilities as interest rates change.
The Bank's management utilizes the results of a dynamic simulation model to
quantify the estimated exposure of net interest income to sustained changes in
interest rates. The sensitivity of the Bank's net interest income is measured
over a rolling 12-month horizon. The simulation model estimates the impact of
changing interest rates on the net interest income from all interest earning
assets and interest expense paid on all interest bearing liabilities reflected
on the Bank's balance sheet. The sensitivity analysis is compared to policy
limits, which specify a maximum tolerance level for net interest income exposure
over a one-year time horizon assuming no balance sheet growth, given both a 200
basis point upward and downward shift in interest rates. A parallel and pro
rata shift in interest rates over a 12-month period is assumed. The following
reflects the Bank's net interest income sensitivity over a one-year horizon as
of March 31, 1999.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 Basis Points +4.86%
-200 Basis Points -7.98%
The table indicates that net interest income would increase by approximately
4.86% aver a 12 month period if there was an immediate sustained parallel upward
shift in interest rates. Net interest income would decrease approximately 4.98%
over a 12-month period if there were an immediate sustained parallel 200 basis
point downward shift in interest rates.
Provision and Reserve for Possible Loan Losses
The provision for loan losses creates a reserve to absorb potential future
losses. The reserve for loan losses is maintained at a level considered by
management to be adequate to provide for risks inherent in the loan portfolio.
In determining the adequacy of the reserve for possible loan losses, management
takes into consideration examinations of bank supervisory authorities, results
of internal credit reviews, financial condition of borrowers, loan
concentrations, prior loan loss experience, and general economic conditions.
The reserve is based on estimates and ultimate future losses may vary from the
current estimates. These estimates are reviewed periodically and when
adjustments are necessary they are reported in the period in which they become
known.
The provision in 1999 is consistent with the provision charged to expense in
1998. As of March 31, 1999, the reserve for possible
11
<PAGE>
loan losses was $8.6 million, which represents 2.6% of the total loan balances.
For the period ended March 31, 1998 the reserve balance was $7.4 million and
2.7% of total loans.
Nonperforming assets, which includes nonaccrual loans, loans past due 90 days or
more and still accruing, restructured loans, and other real estate owned,
totaled $6.2 million at March 31, 1999, an increase of $70 thousand from March
31, 1998.
Although management believes that nonperforming assets are generally secured and
that potential losses are adequately covered in the allowance at March 31, 1999,
there can be no assurance that a general deterioration of economic conditions
which adversely affect the Company's service areas or other circumstances will
not be reflected in increased provisions or credit losses in the future.
Reserve for Possible Loan Losses
<TABLE>
<S> <C>
Balance, December 31, 1997 7,188
Provision Charged to Expense 300
Recoveries of Loans Previously
Charged Off 27
Loans Charged Off (85)
- - -------------------------------------------------------
Balance, March 31, 1998 $7,430
=======================================================
Balance, December 31, 1998 8,589
Provision Charged to Expense 300
Recoveries of Loans Previously
Charged Off 11
Loans Charged Off (314)
- - -------------------------------------------------------
Balance, March 31, 1999 $8,586
=======================================================
</TABLE>
Non-Interest Income
Non-interest income includes revenues earned from sources other than interest
income. These sources include: service charges and fees on deposit accounts,
fee income from the alternative investment products, other fee oriented products
and services, gain or (loss) on sale of securities or other real estate owned.
Non-interest income increased 9.8% for the three months ending March 31, 1999,
compared to the same period of 1998. This increase was due to gains on sales of
securities and also due to an increase in service charges on deposit accounts.
Non-Interest Expense
Non-interest expense declined 1.0% to $6.0 million for the first three months of
1999. This is the net result of an increase in salary and benefit costs of 6.4%
relating to additional staffing and merit increases for employees, a decrease in
occupancy costs of 7.8% and a decrease in other operating costs of 11.6%.
Balance Sheet Analysis
The Bank reported total assets of $756.1 million at March 31, 1999. This
represented an increase of $81.1 million, or 12.0% over total assets of $674.9
million at March 31, 1998. Gross Loans totaled $327.2 million at March 31,
1999. This represented an increase of $57.8 million, or 21.5% over gross loans
at March 31, 1998. Total deposits increased $59.4 million, or 10.5% from March
31, 1998.
Investment Securities
The investment portfolio provides the Bank with additional liquidity that may be
required to meet the needs of Bank borrowers and satisfy deposit account
12
<PAGE>
withdrawals. As of March 31, 1999 the investment portfolio represented 49% of
the Bank's total assets. Total investment securities increased $25.1 million
from a year ago and now total $370.4 million.
At March 31, 1999, the Bank's net unrealized gain on securities available-for-
sale totaled $861.8 thousand. Note 3 of the Notes to the Consolidated Financial
Statements in the Bank's 1998 Annual Report on form 10-K discusses its current
accounting policy as it pertains to recognition of market values for investment
securities held as available-for-sale.
The Bank has been able to maintain its investment in Obligations of States and
Political Subdivisions (municipals) despite the restrictions of the Tax Reform
Act of 1986. The Bank replaces maturities of municipal securities only with
"qualified issues". Qualified issues are municipal obligations that are
considered "small issues" and meet Internal Revenue Service requirements. By
meeting these requirements, the interest earned from qualified issues is exempt
from Federal Income Taxes.
Loans
The Bank's loan portfolio for the three months ending March 31, 1999 increased
$57.8 million compared to March 31, 1998. Additionally, on an average balance
basis loans have increased $55.0 million or 20.5%. The table below sets forth
the distribution of the loan portfolio by type as of the dates indicated.
(Dollar amounts in thousands)
<TABLE>
<S> <C> <C>
3/31/99 3/31/98
Real Estate Const. 31,016 22,701
Other Real Estate 178,613 154,248
Commercial 99,619 77,156
Consumer 17,931 15,277
Gross Loans 327,179 269,382
Less:
Unearned Income 315 301
Reserve for LL 8,586 7,430
Net Loans 318,278 261,651
</TABLE>
Non-Performing Assets
The Bank's policy is to place loans on non-accrual status when principal or
interest is past due for ninety days or more unless it is both well secured and
in the process of collection. Any interest accrued, but unpaid, is reversed
against current income. Thereafter, interest is recognized as income only as it
is collected in cash.
Although management believes that nonperforming assets are generally well
secured and that potential losses are reflected in the allowance for credit
losses, there can be no assurance that a general deterioration of economic
conditions or collateral values would not result in future credit losses.
Non-Performing Assets
<TABLE>
<CAPTION>
Mar. Dec. Mar.
1999 1998 1998
- - ---------------------------------------------------------
<S> <C> <C> <C>
Nonperforming
Loans $5,554 $4,624 $4,704
OREO 599 636 1,379
Total 6,153 5,260 6,083
=========================================================
% of Total
- - ---------------------------------------------------------
Loans 1.9% 1.6% 2.3%
</TABLE>
Deposits
At March 31, 1999, deposits totaled $627.2 million. This represents an increase
of 10.5% or $59.4 million from total deposits of $567.8 million at March 31,
1998. The
13
<PAGE>
greatest area of growth was in Time Deposits under $100,000, which increased
$27.8 million or 18.7% from a year ago. This increase is due to new customer
relationships.
Demand deposits totaled $135.4 million at March 31, 1999, representing a
decrease of $21.2 million or 13.5% since December 31, 1998. The decrease in
demand deposits from the year-end total reflects normal seasonal fluctuations
relating to agricultural and other depositors. Demand deposits compared to one
year ago have increased $15.2 million or 12.6% from the March 31, 1998 total of
$120.2 million. This increase is due to new customer relationships.
Other borrowed funds totaled $41.1 million at March 31, 1999. This represented
an increase of $16.1 million, or 64.3% over other borrowed funds of $25.0
million at March 31, 1998. The increase in other borrowed funds from a year ago
was the result of an increase in secured loans from the Federal Home Loan Bank.
The funds were used to purchase investment securities at a positive net interest
spread as well as match fund term real estate loans.
Liquidity
Liquidity is the Bank's ability to maintain a cash flow adequate to fund
operations, handle fluctuations in deposit levels, respond to the credit needs
of borrowers and to take advantage of investment opportunities as they arise.
The principal sources of liquidity include interest and principal payments on
loans and investments, proceeds from the maturity or sale of investments, and
growth in deposits. The Bank maintains overnight investments in Federal Funds
as a cushion for temporary liquidity needs. During the first quarter of 1999,
Federal Funds averaged $19.6 million. In addition, the Bank maintains Federal
Fund credit lines of $136 million with major correspondent banks subject to the
customary terms and conditions for such arrangements.
At March 31, 1999, the Bank had available liquid assets, which included cash and
unpledged investment securities of approximately $355.9 million, which
represents 47.1% of total assets.
Capital
Much attention has been directed at the capital adequacy of the financial
institution industry. The Bank relies on capital generated through the
retention of earnings to satisfy its capital requirements. The Bank engages in
an ongoing assessment of its capital needs in order to support business growth
and to insure depositor protection. Shareholders' Equity totaled $81.4 million
at March 31, 1999 and $77.0 million as of March 31, 1998, which represents an
increase of $4.4 million or 5.7%.
The Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation have adopted risk-based capital guidelines. The
guidelines are designed to make capital requirements more sensitive to
differences in risk related assets among banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of bank
capital uniform. Bank assets and off-balance sheet items are categorized by
risk. The results of these regulations are that assets with a higher degree of
risk require a larger amount of capital; assets, such as cash, with a low degree
of risk have little or no capital requirements. Under the guidelines the Bank
is currently required to maintain
14
<PAGE>
regulatory risk based capital equal to at least 8.0%.
The table below presents the Bank's risk-based and leverage capital ratios as of
March 31, 1999, and March 31, 1998.
<TABLE>
<CAPTION>
Required
Minimum March March
Capital Ratios Ratios 1999 1998
- - -------------------------------------------------------------
Risk-based Capital Ratios:
<S> <C> <C> <C>
Tier 1 4.00% 20.27% 20.02%
Total 8.00% 21.53% 21.28%
Leverage Ratio 4.00% 10.90% 11.41%
</TABLE>
Year 2000 Compliance Issues
The Bank has initiated a Bank-wide program (Y2K) to prepare its computer
systems, applications and infrastructure for properly processing the dates after
December 31, 1999. Based on the Federal Financial Institutions Examination
Council guidelines, the Bank's Y2K program consists of the following phases:
1. Awareness Phase - A strategic approach was developed to address the Year
2000 problem.
2. Assessment Phase - Detailed plans and target dates were developed.
3. Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
4. Validation Phase - This phase includes testing and conversion of system
applications.
5. Implementation Phase - This phase includes certification of Y2K compliance
and employee training and acceptance.
Phases one through four have been completed. The Bank is currently in the
implementation phase, which was completed during the first quarter of 1999.
In addition, an assessment of the Y2K readiness of external entities with which
the Bank conducts its operations is ongoing. The Bank is continuing to
communicate with all of its significant obligors, counterparts, other credit
clients and vendors to determine the likely extent to which the Bank may be
affected by third parties' Y2K plans and target dates. In this regard, the Bank
is developing contingency plans in the event that external parties fail to
achieve their Y2K plans and target dates.
The Bank estimates the total cost of the Y2K project to be approximately
$1,878,000, of which $1,446,000 has been incurred through March 31, 1999 and the
remaining $432,000 to be incurred during the remainder of 1999. The costs of
the Y2K program and the date on which the Bank plans to be Y2K compliant are
based on management's best current estimates, which were derived utilizing
numerous assumptions of future events including the availability of certain
resources, third party vendors and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could differ
from those plans.
Subsequent Events
On April 19, 1999, the shareholders approved the formation of a Bank holding
company, which will be named Farmers & Merchants Bancorp. The shareholders of
15
<PAGE>
Farmers & Merchants Bank of Central California will become shareholders in
Farmers & Merchants Bancorp. Shares of common stock in Farmers & Merchants Bank
of Central California will be exchanged on a one for one ratio into Farmers &
Merchants Bancorp.
This new corporate structure will give the Bank greater financial and corporate
flexibility to make acquisitions. In addition, the new structure will allow the
Bank to participate in activities through the Holding Company, which are not
permissible for the Bank to engage in directly. The Holding Company will be
permitted to engage in non-bank activities, such as selling insurance and
securities, and providing financial and investment services. After the
reorganization, the nature of the business conducted by the Bank will not
change.
Average Balance Sheets
The tables on the following pages reflect the Bank's average balance sheets and
volume and rate analysis for the three-month periods ending March 31, 1999 and
1998. The average yields on earning assets and average rates paid on interest-
bearing liabilities have been computed on an annualized basis for purposes of
comparability with full year data. Average balance amounts for assets and
liabilities are the computed average of daily balances.
16
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Year-to-Date Average Balances and Interest Rates
(Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999
Assets Balance Interest Rate
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 19,598,556 $ 237,422 4.91%
Investment Securities:
U.S. Treasury 21,251,328 292,078 5.57%
U.S. Agencies 13,716,643 188,779 5.58%
Municipals 77,296,763 1,405,780 7.38%
Mortgage Backed Securities 246,647,541 3,688,562 6.06%
Other 5,978,840 85,309 5.79%
- - ----------------------------------------------------------------------------------------------------------------
Total Investment Securities 364,891,115 5,660,508 6.29%
- - ----------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 205,544,022 4,698,289 9.27%
Commercial 100,488,130 2,293,086 9.25%
Installment 14,053,087 342,294 9.88%
Credit Card 2,798,294 83,191 12.06%
Municipal 178,389 3,163 7.19%
- - ----------------------------------------------------------------------------------------------------------------
Total Loans 323,061,922 7,420,023 9.31%
- - ----------------------------------------------------------------------------------------------------------------
Total Earning Assets 707,551,593 $ 13,317,953 7.63%
===============================
Reserve for Loan Losses (8,755,575)
Cash and Due From Banks 22,362,672
All Other Assets 25,337,985
- - --------------------------------------------------------------------------------
Total Assets $746,496,675
================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction $ 59,720,746 $ 170,089 1.16%
Savings 183325826 1006550 2.23%
Time Deposits Over $100,000 63695033 748170 4.76%
Time Deposits Under $100,000 172575188 2050992 4.82%
- - ----------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 479316793 3975801 3.36%
Other Borrowed Funds 42795289 572792 5.43%
- - ----------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 522,112,082 $ 4,548,593 3.53%
===============================
Demand Deposits 137,807,361
All Other Liabilities 5,869,743
- - --------------------------------------------------------------------------------
Total Liabilities 665,789,186
Shareholders' Equity 80,707,489
- - --------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $746,496,675
================================================================================
Net Interest Margin 5.03%
================================================================================================================
</TABLE>
17
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Year-to-Date Average Balances and Interest Rates
(Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998
Assets Balance Interest Rate
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 15,078,500 $ 212,113 5.71%
Investment Securities:
U.S. Treasury 19,200,996 281,586 5.95%
U.S. Agencies 68,507,950 1,027,873 6.08%
Municipals 62,587,970 1,251,336 8.11%
Mortgage Backed Securities 193,022,096 3,067,018 6.44%
Other 4,402,290 70,670 6.51%
- - --------------------------------------------------------------------------------------------------------------
Total Investment Securities 347,721,302 5,698,483 6.65%
- - --------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 175,556,840 4,445,716 10.27%
Commercial 77,570,776 1,977,736 10.34%
Installment 11,872,551 299,998 10.25%
Credit Card 2,908,394 89,496 12.48%
Municipal 123,955 2,589 8.47%
- - --------------------------------------------------------------------------------------------------------------
Total Loans 268,032,516 6,815,535 10.31%
- - --------------------------------------------------------------------------------------------------------------
Total Earning Assets 630,832,318 $ 12,726,131 8.18%
=============================
Reserve for Loan Losses (7,200,502)
Cash and Due From Banks 21,582,395
All Other Assets 24,397,798
- - --------------------------------------------------------------------------------
Total Assets $669,612,009
================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction $ 55,822,318 $ 188,823 1.37%
Savings 183,888,781 1,011,493 2.23%
Time Deposits Over $100,000 64,478,273 819,371 5.15%
Time Deposits Under $100,000 147,030,948 1,885,457 5.20%
- - --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 451,220,320 3,905,144 3.51%
Other Borrowed Funds 15,586,548 235,514 6.13%
- - --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 466,806,868 $ 4,140,658 3.60%
=============================
Demand Deposits 120,183,188
All Other Liabilities 4,841,266
- - --------------------------------------------------------------------------------
Total Liabilities 591,831,322
Shareholders' Equity 77,780,687
- - --------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $669,612,009
================================================================================
Net Interest Margin 5.52%
==============================================================================================================
</TABLE>
18
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Volume and Rate Analysis of Net Interest Revenue
<TABLE>
<CAPTION>
(Rates on a Taxable Equivalent Basis) March 31, 1999 vs March 31, 1998
Amount of Increase
(Decrease) Due to Change in:
--------------------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 180,548 $ (155,240) $ 25,309
Investment Securities:
U.S. Treasury 96,936 (86,445) 10,492
U.S. Agencies (760,453) (78,641) (839,094)
Municipals 773,944 (619,499) 154,445
Mortgage Backed Securities 1,720,591 (1,099,048) 621,544
Other 59,798 (45,158) 14,639
- - ----------------------------------------------------------------------------------------------------------------------
Total Investment Securities 1,890,816 (1,928,790) (37,974)
- - ----------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 2,397,167 (2,144,594) 252,573
Commercial 1,475,162 (1,159,813) 315,350
Installment 108,688 (66,391) 42,296
Credit Card (3,327) (2,978) (6,305)
Municipal 2,788 (2,213) 574
- - ----------------------------------------------------------------------------------------------------------------------
Total Loans 3,980,478 (3,375,989) 604,488
- - ----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 6,051,843 (5,460,019) 591,822
- - ----------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 68,434 (87,169) (18,734)
Savings (3,093) (1,850) (4,943)
Time Deposits Over $100,000 (9,849) (61,352) (71,201)
Time Deposits Under $100,000 904,201 (738,667) 165,535
- - ----------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 959,694 (889,038) 70,657
Other Borrowed Funds 521,331 (184,054) 337,278
- - ----------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,481,025 (1,073,092) 407,935
- - ----------------------------------------------------------------------------------------------------------------------
Total Change $ 4,570,818 $ (4,386,927) $ 183,887
======================================================================================================================
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
- - ---------------------------
ITEM 1. Legal Proceedings
- - -------------------------
None
ITEM 2. Changes in Securities
- - -----------------------------
None
ITEM 3. Defaults Upon Senior Securities
- - ---------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
- - -----------------------------------------------------------
None
ITEM 5. Other Information
- - -------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
- - ----------------------------------------
None
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
/s/ Kent A. Steinwert
Date: May 14, 1999 --------------------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ John R. Olson
Date: May 14, 1999 ---------------------------------------
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
21
<PAGE>
EXHIBIT 99.5
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Washington, D.C. 20551
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 30, 1999
--------------
(Date of earliest event reported)
Farmers & Merchants Bank of Central California
----------------------------------------------
(Exact name of registrant as specified in its charter)
California
----------
(State or other jurisdiction of incorporation)
94-0467440
----------
(IRS Employer Identification No.)
121 West Pine Street, Lodi, California 95240-2184
-------------------------------------------------
(Address of principal executive offices)(Zip Code)
(209) 334-1101
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
------------------------------------
On February 22, 1999, Farmers & Merchants Bank of Central California, a
California state-chartered bank, announced its intention to reorganize into a
bank holding company form. Farmers & Merchants Bancorp, a Delaware corporation
("Bancorp") was incorporated on February 22, 1999.
On March 10, 1999, the Bank, Bancorp and F&M Merger Co., a California
corporation and a wholly-owned subsidiary of Bancorp ("Merger Co."), entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
whereby Merger Co. would be merged with and into the Bank, with the Bank being
the surviving corporation, the Bank would become a wholly-owned subsidiary of
Bancorp, and shareholders of the Bank would receive one share of Bancorp common
stock in exchange for each share of Bank common stock (the "Reorganization").
On April 13, 1999, the California Department of Corporations issued a permit
with respect to the issuance of Bancorp common stock in the Reorganization, in
connection with a fairness hearing held on April 6, 1999 pursuant to Section
25142 of the California Corporate Securities Law of 1968.
At the Bank's Annual Meeting of Shareholders held on April 19, 1999, the
Reorganization was approved by the affirmative vote of a majority of the
outstanding shares of the Bank's common stock.
On April 30, 1999, the Reorganization Agreement was filed with the
Secretary of State of the State of California, and consummation of the
Reorganization occurred effective as of the close of business on April 30, 1999.
As a result of the consummation of the Reorganization, the Bank has become a
wholly-owned subsidiary of Bancorp, and the one-for-one share exchange referred
to above has been completed.
Attached as Exhibit 99.1, and incorporated herein by this reference, is a
copy of a press release dated April 30, 1999 with respect to the consummation of
the Reorganization.
Item 7. Financial Statements and Exhibits.
---------------------------------
(a) Financial statements of businesses acquired:
None.
(b) Pro forma financial information:
None.
(c) Exhibits:
99.1 Press Release dated April 30, 1999.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANK OF CENTRAL
CALIFORNIA
By
/s/ Kent A. Steinwert
------------------------------------
Kent A. Steinwert
President and Chief Executive Officer
Date: May 14, 1999.
-3-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
99.1 Press Release dated April 30, 1999.
-4-
<PAGE>
Exhibit 99.1
[LETTERHEAD OF FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA]
APRIL 30, 1999
FOR IMMEDIATE RELEASE ...
Kent A. Steinwert, President and Chief Executive Officer of Farmers &
Merchants Bank, recently announced the results of the Shareholders' Meeting of
April 19, 1999.
The shareholders overwhelmingly approved the formation of a Bank holding
company, which will be named Farmers & Merchants Bancorp. The shareholders of
Farmers & Merchants Bank of Central California will soon become shareholders in
Farmers & Merchants Bancorp. Shares of common stock in Farmers & Merchants Bank
of Central California will be exchanged on a one for one ratio into Farmers &
Merchants Bancorp.
"This reorganization modernizes our corporate structure," said Steinwert.
"It will allow us to offer other competitive financial services to our
customers, enhance our abilities to expand the Bank, as well as open other
business opportunities not available under the current Bank structure. We are
continuing to identify ways to lower our customers' cost of doing business and
to provide more valuable products and services. We are confident that this new
structure will help us do this, as well as enhance our ongoing efforts to
improve the overall quality of life in the communities we serve."
Headquartered in Lodi, the 83-year old Bank's 18 offices proudly serving
nine central valley communities, in Sacramento, Elk Grove, Walnut Grove, Galt,
Lodi, Linden, Modesto, Turlock and Hilmar.
Contact: Joyce Hartwick-Edwards
209 367-2478
-5-
<PAGE>
Exhibit 99.6
121 West Pine Street, Lodi, California 95240-2184
BANK HOLDING COMPANY PROPOSED--YOUR VOTE IS IMPORTANT
March 12, 1999
Dear Stockholder:
The annual meeting of stockholders of Farmers & Merchants Bank of Central
California will be held this year at 121 West Pine Street, Lodi, California,
on Monday, April 19, 1999, at 4:00 p.m. We look forward to your attendance.
The following Proxy Statement/Offering Circular outlines the business to be
conducted at the meeting, which, in addition to the election of directors and
the ratification of Arthur Andersen LLP as the Bank's independent auditors,
includes a proposal to create a "bank holding company" and a proposal to renew
the supermajority vote provisions in Article VIII of the Bank's Articles of
Incorporation. YOUR BOARD OF DIRECTORS HAS APPROVED THESE PROPOSALS AND WE
URGE YOU TO VOTE FOR THEM.
The full description of the proposals, the reasons for them and their
possible effects are outlined at length in the Proxy Statement/Offering
Circular. We urge you to read it carefully so that you may vote your
interests.
The Board of Directors of Farmers & Merchants Bank of Central California has
unanimously voted in favor of creating a "bank holding company" to be called
Farmers & Merchants Bancorp. Under this proposal, you would exchange your Bank
shares for shares in the Holding Company. Thus, instead of owning the Bank
directly, you would own shares in the Holding Company which would own the
entire economic interest in the Bank. If the reorganization is completed, for
each share of Bank common stock that you own, you will receive one share of
the Holding Company common stock. No surrender of your Bank share certificates
will be required.
The reorganization will also be the subject of a fairness hearing conducted
by the Commissioner of the California Department of Corporations to be held at
11:00 a.m. on April 6, 1999 in the Hearing Room of the Department of
Corporations of the State of California at 1390 Market Street, Suite 810, San
Francisco, California, as described in the accompanying Proxy
Statement/Offering Circular. The Notice of the fairness hearing is included
along with the enclosed Notice of annual meeting of stockholders and Proxy
Statement/Offering Circular. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES.
This new corporate structure will give the Bank greater financial and
corporate flexibility to make acquisitions. In addition, the new structure
will allow the Bank to participate in activities through the Holding Company,
which are not permissible for the Bank to engage in directly. The Holding
Company will be permitted to engage in non-bank activities, such as selling
insurance and securities, and providing financial and investment services.
After the reorganization, the nature of the business conducted by the Bank
will not change.
The proposal to create a holding company cannot be completed unless holders
of a majority of the outstanding shares vote for it.
Whether or not you plan to attend the meeting, please take the time to
complete and mail your proxy to us. If you do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the proposals. If you
fail to return your proxy, you will in effect vote against the proposals.
<PAGE>
WE STRONGLY SUPPORT THE ORGANIZATION OF A BANK HOLDING COMPANY AND
ENTHUSIASTICALLY RECOMMEND THAT YOU VOTE IN FAVOR OF IT.
Thank you for your continued support.
Sincerely,
Ole R. Mettler Kent A. Steinwert
Chairman of the Board President and Chief Executive
Officer
THE SECURITIES TO BE ISSUED IN THE REORGANIZATION HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER CERTAIN STATE
SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS UNDER SUCH LAWS. NEITHER THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE CALIFORNIA DEPARTMENT OF
FINANCIAL INSTITUTIONS, NOR ANY STATE SECURITIES AUTHORITIES, OTHER THAN THE
CALIFORNIA DEPARTMENT OF CORPORATIONS, HAVE APPROVED OR DISAPPROVED OF THE
ISSUANCE OF THE SECURITIES TO BE ISSUED IN THE REORGANIZATION, NOR HAVE SUCH
AGENCIES PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROXY STATEMENT/OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES TO BE ISSUED IN THE REORGANIZATION ARE NOT DEPOSITS OR
ACCOUNTS, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT
RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES.
2
<PAGE>
121 West Pine Street, Lodi, California 95240-2184
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 19, 1999
To the Stockholder Addressed:
The Annual Meeting of Stockholders of Farmers & Merchants Bank of Central
California will be held at its Main Office, 121 West Pine Street, Lodi,
California, on Monday, April 19, 1999, at 4:00 p.m. to:
1. Elect the following eleven (11) Directors to serve until the next annual
meeting of Stockholders and until their successors are elected and
qualified:
Stewart C. Adams, Jr. Harry C. Schumacher
Ralph Burlington Hugh Steacy
Robert F. Hunnell Kent A. Steinwert
Ole R. Mettler Calvin (Kelly) Suess
James E. Podesta Carl A. Wishek, Jr.
George Scheideman
2. Ratify the appointment of Arthur Andersen LLP by the Board of Directors,
to act as independent auditors of the Bank for the year ending December
31, 1999.
3. Consider and vote upon a proposal to organize a bank holding company for
the Bank in a transaction in which the existing stockholders of the Bank
would become the stockholders of the Holding Company.
4. Consider and vote upon a proposal to renew the supermajority vote
provisions in Article VIII of the Bank's Articles of Incorporation.
5. Act upon such other matters as may properly come before such meeting or
any adjournment or postponement thereof.
Stockholders of record at the close of business March 1, 1999, are entitled
to notice of and to vote at the Annual Meeting or any postponement or
adjournment thereof.
You are strongly encouraged to attend the Annual Meeting and also to
complete, sign, date and return as promptly as possible, the proxy submitted
herewith in the return envelope provided for your use whether or not you plan
to attend the meeting in person. The giving of such proxy will not affect your
right to revoke such proxy or to vote in person, should you later decide to
attend the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
John R. Olson
Executive Vice President
Secretary & Treasurer
Dated: March 12, 1999
YOUR VOTE IS IMPORTANT
YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY SO THAT
YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES.
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
121 West Pine Street, Lodi, California 95240-2184
PROXY STATEMENT
FARMERS & MERCHANTS BANCORP
OFFERING CIRCULAR
This Proxy Statement/Offering Circular is furnished to the stockholders of
Farmers & Merchants Bank of Central California (the "Bank") in connection with
the solicitation of proxies to be used in voting at the Annual Meeting of
stockholders of the Bank to be held on April 19, 1999, 121 West Pine Street,
Lodi, California at 4:00 p.m., and at any adjournment or postponement thereof
(the "Meeting").
This Proxy Statement/Offering Circular outlines the business to be conducted
at the Annual Meeting, which, in addition to the election of directors and the
ratification of Arthur Andersen LLP as the Bank's independent auditors,
includes a proposal to create a "bank holding company" named Farmers &
Merchants Bancorp (the "Holding Company"), a Delaware corporation and a
proposal to renew the supermajority vote provisions of Article VIII of the
Bank's Articles of Incorporation. Under the bank holding company proposal,
each stockholder of Common Stock of the Bank would receive for each share of
stock in the Bank one share of Common Stock in the Holding Company (the
"Reorganization"). It will not be necessary for stockholders to surrender
their Bank share certificates as such certificates, until exchanged, will
represent shares of the Holding Company. The full description of the
proposals, the reasons for them and their possible effects are outlined at
length in this Proxy Statement/Offering Circular.
This Proxy Statement also constitutes an offering circular of the Holding
Company with respect to up to 632,185 shares of common stock, $.01 par value
per share, of the Holding Company, and the solicitation of stockholders of the
Bank to ratify and approve the Reorganization constitutes an offering by the
Holding Company of the shares of its Common Stock to be issued in connection
with the Reorganization. This transaction is exempt from the registration
requirements under the Securities Act of 1933, as amended (the "Securities
Act"), by reason of Section 3(a)(10) thereof.
No person has been authorized to give any information or to make any
representations not contained in this Proxy Statement/Offering Circular, and,
if given or made, such information or representations should not be relied
upon as having been authorized. This Proxy Statement/Offering Circular does
not constitute an offer to sell, or the solicitation of a proxy, to or from
any person in any jurisdiction where it is unlawful to make such offer or
solicitation of a proxy. Neither the delivery of this Proxy Statement/Offering
Circular nor any distribution of the securities made under this Proxy
Statement/Offering Circular shall, under any circumstances, create an
implication that there has been no change in the affairs of the Bank or the
Holding Company since the date of this Proxy Statement/Offering Circular.
---------------
THE SECURITIES TO BE ISSUED IN THE REORGANIZATION HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER CERTAIN STATE
SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS UNDER SUCH LAWS. NEITHER THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE CALIFORNIA DEPARTMENT OF
FINANCIAL INSTITUTIONS, NOR ANY STATE SECURITIES AUTHORITIES, OTHER THAN THE
CALIFORNIA DEPARTMENT OF CORPORATIONS, HAVE APPROVED OR DISAPPROVED OF THE
ISSUANCE OF THE SECURITIES TO BE ISSUED IN THE REORGANIZATION, NOR HAVE SUCH
AGENCIES PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROXY STATEMENT/OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES TO BE ISSUED IN THE REORGANIZATION ARE NOT DEPOSITS OR
ACCOUNTS, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT
RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES.
---------------
The date of this Offering Circular is March 12, 1999.
This Proxy Statement/Offering Circular and the enclosed Proxy are being
mailed to the Bank's stockholders on or about March 12, 1999.
<PAGE>
FARMERS & MERCHANTS BANK
OF CENTRAL CALIFORNIA
Proxy Statement/Offering Circular
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INTRODUCTION.............................................................. 3
Voting Rights and Vote Required......................................... 3
Voting of Proxies; Quorum............................................... 4
Revocability of Proxy................................................... 4
PROPOSAL 1 NOMINATION AND ELECTION OF DIRECTORS OF THE BANK.............. 4
Nominees................................................................ 5
Executive Officers...................................................... 6
Security Ownership of Certain Beneficial Owners and Management.......... 6
Committees of the Board of Directors of the Bank........................ 7
Board of Directors Meetings............................................. 8
Remuneration and other Transactions with Management and Others.......... 9
Certain Relationships and Related Transactions.......................... 11
Stock Performance Graph................................................. 11
PROPOSAL 2 RATIFICATION OF AUDITORS...................................... 11
PROPOSAL 3 ORGANIZATION OF A BANK HOLDING COMPANY........................ 11
SUMMARY................................................................... 11
Bank Holding Company.................................................... 11
Stockholder Approval.................................................... 12
What Should Stockholders Do?............................................ 12
Directors Approval...................................................... 12
Dissenters Appraisal Rights............................................. 12
The Companies........................................................... 12
The One-For-One Exchange Ratio and Market Value......................... 13
Per Share Summary of the Bank and Pro Forma per Share Summary of the
Holding Company........................................................ 13
Management.............................................................. 14
Board of Directors...................................................... 14
Differences Between Holding Company Stock and Bank Stock................ 14
Anti-Takeover Provisions................................................ 14
Certain Federal Income and California Tax Consequences.................. 16
Dividends............................................................... 16
RISK FACTORS.............................................................. 16
The Holding Company's Financial Condition............................... 16
Banking Institutions.................................................... 16
Anti-Takeover Provisions................................................ 17
BANK HOLDING COMPANY REORGANIZATION....................................... 17
Reasons For the Proposal................................................ 17
Description of the Reorganization....................................... 17
Conversion of Shares and Exchange of Stock Certificates................. 18
Affiliate Restrictions.................................................. 18
Conditions of Consummation.............................................. 18
Other Considerations.................................................... 19
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Expenses................................................................. 19
Certain Federal Income and California Tax Consequences................... 19
Appraisal Rights of Dissenting Stockholders.............................. 20
Accounting Treatment..................................................... 21
ANTI-TAKEOVER MEASURES..................................................... 22
The Purpose of the Anti-Takeover Provisions.............................. 22
Summary of Fair Price and Supermajority Vote Provisions.................. 22
Consideration of Nonmonetary Factors..................................... 24
Limitation on Action of Stockholders by Written Consent.................. 25
Special Meetings of Stockholders......................................... 25
Director Qualification and Nomination Procedures......................... 25
Preferred Stock.......................................................... 26
Cumulative Voting........................................................ 26
Additional Considerations................................................ 27
MARKET PRICES OF STOCK..................................................... 28
The Holding Company...................................................... 28
The Bank................................................................. 28
QUASI-CALIFORNIA CORPORATION STATUS........................................ 28
DIVIDENDS.................................................................. 29
The Holding Company...................................................... 29
The Bank................................................................. 29
CAPITALIZATION............................................................. 30
FINANCIAL STATEMENTS....................................................... 30
HISTORY AND BUSINESS OF THE HOLDING COMPANY................................ 31
General.................................................................. 31
Employees................................................................ 31
Board of Directors....................................................... 31
Remuneration of Directors and Officers................................... 31
Indemnification.......................................................... 32
HISTORY AND BUSINESS OF THE BANK........................................... 32
General.................................................................. 32
Competition.............................................................. 33
Employees................................................................ 33
Property................................................................. 33
Year 2000 Issue.......................................................... 33
Litigation............................................................... 34
Board of Directors and Officers.......................................... 34
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS........................... 34
Executive Officers' and Directors' Compensation.......................... 34
Committees and Meetings of the Board of Directors........................ 34
CERTAIN TRANSACTIONS....................................................... 35
SUPERVISION AND REGULATION................................................. 35
Holding Company Regulation............................................... 35
Capital.................................................................. 35
Additional Regulation.................................................... 36
Dividend Regulation...................................................... 36
Government Policies and Legislation...................................... 37
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
COMPARATIVE DESCRIPTION OF COMMON STOCK................................... 37
General................................................................. 37
Change in Number of Directors........................................... 37
Removal of Directors.................................................... 38
Filling Vacancies on the Board of Directors............................. 38
Amendment of the Certificate of Incorporation........................... 39
Amendment of the By-Laws................................................ 39
Authorized Capital...................................................... 39
Voting Rights........................................................... 40
Liquidation Rights...................................................... 40
Preemptive Rights....................................................... 40
Cumulative Voting....................................................... 40
Action by Written Consent of Stockholders............................... 41
Special Meetings of Stockholders........................................ 41
Indemnification......................................................... 41
Dividend Rights......................................................... 41
Stockholder Vote for Mergers and Other Reorganizations.................. 42
Inspection of Stockholder Lists......................................... 42
State Anti-Takeover Statute............................................. 42
Anti-takeover Provisions................................................ 43
REPORTS................................................................... 43
LEGAL OPINION............................................................. 44
PROPOSAL 4 RENEWAL OF SUPERMAJORITY VOTE PROVISIONS IN ARTICLE VIII OF
THE ARTICLES OF INCORPORATION................................. 44
Background.............................................................. 44
General Description..................................................... 44
"Supermajority Voting and Fair Price" Provision--Reason for Initial
Amendment and Renewal.................................................. 45
Important Considerations................................................ 46
Required Approval; Recommendation of Management......................... 46
Effect of Reorganization on Implementation of Proposal 4................ 47
STOCKHOLDER PROPOSALS..................................................... 47
OTHER MATTERS............................................................. 47
</TABLE>
<TABLE>
<C> <S>
ANNEX I AGREEMENT AND PLAN OF REORGANIZATION
ANNEX II CALIFORNIA GENERAL CORPORATION LAW CHAPTER 13--DISSENTERS' RIGHTS
ANNEX III AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF FARMERS &
MERCHANTS BANCORP
</TABLE>
-iii-
<PAGE>
AVAILABLE INFORMATION
The Bank is subject to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith, files
reports, proxy statements and other information with the Board of Governors of
the Federal Reserve (the "Federal Reserve Board"). Such reports, proxy
statements and other information can be inspected and copies obtained from the
Federal Reserve Board at the Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, N.W., Washington, D.C. 20551, or by calling the Federal Reserve Board
public reference facilities at (202) 452-3244.
The following documents which were previously filed or which will be filed
with the Federal Reserve Board pursuant to the Exchange Act and are
incorporated herein by reference:
The Bank's Annual Report on Form 10-K for the year ended December 31, 1998
(to be filed); the Bank's Annual Report on Form 10-K for the year ended
December 31, 1997; and the Bank's Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1998; all other reports
filed with the Federal Reserve Board under the Exchange Act after the date
of this Proxy Statement/Offering Circular.
The Holding Company is a newly formed corporation organized at the direction
of the Bank's Board of Directors for the purpose of acquiring voting control
of the Bank and thereby becoming a bank holding company. For further
information with respect to the Reorganization, reference is made to the
Reorganization Agreement which is incorporated by reference herein and
attached as Annex I. As a newly formed corporation, the Holding Company has
not been subject to the requirements of the Exchange Act, and there is
currently no public market for its common stock. However, pursuant to the
Reorganization, the Bank's reporting obligations to the Federal Reserve Board
will cease, and the Holding Company will assume reporting responsibilities
with the Securities and Exchange Commission under the Exchange Act, which are
similar to the responsibilities previously performed by the Bank with respect
to the Federal Reserve Board.
The Holding Company has filed with the Commissioner of the California
Department of Corporations an application (together with any exhibits,
amendments or supplements thereto, the "Application") for a fairness hearing
pursuant to Section 21542 of the California Corporations Code and for a permit
to authorize the issuance of the shares of the Common Stock of the Holding
Company to be issued by it in connection with the Reorganization described in
this Proxy Statement/Offering Circular. This Proxy Statement/Offering Circular
constitutes part of the Application covering the shares to be offered pursuant
to the Reorganization by the Holding Company. This Proxy Statement/Offering
Circular does not contain all the information set forth in the Application and
the exhibits thereto, certain portions of which have been omitted pursuant to
the rules and regulations of the California Department of Corporations. The
additional information may be obtained from the Division of Securities
Regulation of the California Department of Corporations, 1390 Market Street,
Suite 810, San Francisco, California 94102-5303. Statements contained in this
Proxy Statement/Offering Circular as to the contents of any contract or
document referred to herein 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 Application, each such statement being qualified in all
respects by such reference.
This Proxy Statement/Offering Circular incorporates documents by reference,
certain of which are attached to this Proxy Statement/Offering Circular. The
Holding Company documents not attached (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference) are available
to any person, including any beneficial owner to whom this Proxy
Statement/Offering Circular is delivered, without charge, upon request to: Mr.
John R. Olson, Secretary, Farmers & Merchants Bancorp, P.O. Box 3000, Lodi,
California 95241-1902, (209) 367-2411. The Bank documents not attached (other
than exhibits to such documents, unless such documents are specifically
incorporated by reference) are available to any person, including any
beneficial owner to whom this Proxy Statement/Offering Circular is delivered,
without charge, upon request to John R. Olson, Secretary, Farmers & Merchants
Bank of Central California, P.O. Box 3000, Lodi, California 95241-1902, (209)
367-2411. In order to ensure timely delivery of the documents, any requests to
either the Holding Company or the Bank should be made by April 12, 1999.
1
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Offering
Circular in connection with the solicitation of proxies or the offering of the
securities made hereby and, if given or made, such information or
representation must not be relied upon as having been authorized by the Bank,
the Holding Company or any other person. This Proxy Statement/Offering
Circular does not constitute any offer to sell, or a solicitation of any offer
to buy, any securities, or the solicitation of a proxy, in any jurisdiction to
or from any person to or from whom it is not lawful to make any such offer or
solicitation in such jurisdiction.
Neither the delivery of this Proxy Statement/Offering Circular nor any
distribution of securities made hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of the Bank
or the Holding Company since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
This Proxy Statement/Offering Circular contains various forward-looking
statements, usually containing the words "estimate," "project," "expect,"
"objective," "goal," or similar expressions and includes assumptions
concerning the Bank's operations, future results and prospects. These forward-
looking statements are based upon current expectations and are subject to risk
and uncertainties. In connection with the "safe-harbor" provisions of the
private Securities Litigation Reform Act of 1995, the Bank and the Holding
Company provide the following cautionary statement identifying important
factors which could cause the actual results of events to differ materially
from those set forth in or implied by the forward-looking statements and
related assumptions.
Such factors include the following: (i) changes in regional and national
economic conditions; (ii) significant changes in interest rates and prepayment
speeds; (iii) credit risks of commercial, real estate, consumer, and other
lending activities; (iv) changes in federal and state banking regulations; (v)
the impacts of the year 2000 issue; and (vi) other external developments which
could materially impact the Bank's operational and financial performance.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Bank undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
2
<PAGE>
INTRODUCTION
This Proxy Statement is furnished to the stockholders of Farmers & Merchants
Bank of Central California (the "Bank") in connection with the solicitation of
proxies to be used in voting at the Annual Meeting of stockholders to be held
on April 19, 1999, 121 West Pine Street, Lodi, California at 4:00 p.m., and at
any adjournment or postponement thereof (the "Meeting"). All expenses
incidental to the preparation and mailing, or otherwise making available to
all stockholders of the notice, Proxy Statement and formal Proxy are to be
paid by the Bank.
The enclosed Proxy is solicited by the Board of Directors of the Bank. This
Proxy Statement and the enclosed Proxy are being mailed to the Bank's
stockholders on or about March 12, 1999.
This Proxy Statement/Offering Circular outlines the business to be conducted
at the Annual Meeting, which, in addition to the election of directors and the
ratification of Arthur Andersen LLP as the Bank's independent auditors,
includes a proposal to create a "bank holding company" named Farmers &
Merchants Bancorp (the "Holding Company"), a Delaware corporation and a
proposal to renew the supermajority vote provisions of Article VIII of the
Bank's Articles of Incorporation. Under the bank holding company proposal,
each stockholder of Common Stock of the Bank would receive for each share of
Bank common stock, one share of Common Stock in the Holding Company (the
"Reorganization"). The full description of the proposals, the reasons for them
and their possible effects are outlined at length in this Proxy
Statement/Offering Circular.
Voting Rights and Vote Required
Only stockholders of record at the close of business on March 1, 1999 (the
"Record Date"), will be entitled to vote in person or by proxy. On that date,
there were 632,185 shares of Common Stock outstanding and entitled to vote.
Stockholders of Common Stock of the Bank are entitled to one vote for each
share held, except that in the election of Directors, under California law,
and the By-Laws of the Bank, each stockholder may be eligible to exercise
cumulative voting rights and may be entitled to as many votes as shall equal
the number of shares of Common Stock held by such stockholder multiplied by
the number of Directors to be elected, and such stockholder may cast all of
such votes for a single nominee or may distribute them among two or more
nominees. No stockholder, however, shall be entitled to cumulate votes (in
other words, cast for any candidate a number of votes greater than the number
of shares of Common Stock held by such stockholder multiplied by the number of
Directors to be elected) unless the name(s) of the candidate(s) has (have)
been placed in nomination prior to the voting in accordance with Article III,
Section 3A of the Bank's By-Laws (which requires that nominations made other
than by the Board of Directors be made at least 30 and not more than 60 days
before the meeting) and a stockholder has given at least two days written
notice to the Bank of an intention to cumulate votes prior to the voting. If
any stockholder has given such notice, all stockholders may cumulate their
votes for candidates in nomination, in which event votes represented by
Proxies delivered pursuant to this Proxy Statement/Offering Circular may be
cumulated, in the discretion of the proxy holders, in accordance with the
recommendation of the Board of Directors. Discretionary authority to cumulate
votes in such event is, therefore, solicited in this Proxy Statement/Offering
Circular.
In the election of directors, the 11 nominees receiving the highest number
of votes will be elected. Approval of the selection of the independent
auditors will require the affirmative vote of a majority of the shares
represented and voting at the Meeting. Approval of proposal 3 will require the
affirmative vote of a majority of the outstanding shares. Approval of proposal
4 will require the affirmative vote of 66 2/3% of the outstanding shares.
Abstentions will not count as votes in favor of the election of directors or
any of the other proposals.
3
<PAGE>
Voting of Proxies; Quorum
The shares represented by all properly executed proxies received in time for
the Meeting will be voted in accordance with the stockholders' choices
specified therein; provided, however, that where no choices have been
specified, the shares will be voted "FOR" the election of the 11 nominees for
Director recommended by the Board of Directors, "FOR" the ratification of the
appointment of Arthur Andersen LLP as independent auditors, and "FOR"
proposals 3 and 4; and, at the proxy holder's discretion, on such other
matters, if any, which may properly come before the Meeting (including any
proposal to adjourn the Meeting). A majority of the shares entitled to vote,
represented either in person or by a properly executed Proxy, will constitute
a quorum at the Meeting. Abstentions and broker "non-votes" are each included
in the determination of the number of shares present and voting for purposes
of determining the presence of a quorum. A broker "non-vote" occurs when a
nominee holding shares for a beneficial owner does not have discretionary
voting power with respect to that item and has not received instructions from
the beneficial owner. Abstentions will be included in tabulations of the votes
cast on proposals presented to the stockholders and therefore will have the
effect of a negative vote. Broker "non-votes" will not be counted for purposes
of determining the number of votes cast for a proposal.
Revocability of Proxy
A Stockholder using the enclosed proxy may revoke the authority conferred by
the proxy at any time before it is exercised by delivering written notice of
revocation to the Secretary of the Corporation or a duly executed proxy
bearing a later date, or by appearing and voting by ballot in person at the
meeting. In the event that signed proxies are returned without voting
instructions, proxies will be voted in favor of the actions to be voted upon.
PROPOSAL 1
NOMINATION AND ELECTION OF DIRECTORS OF THE BANK
At the Annual Meeting it will be proposed to elect eleven (11) Directors of
the Bank, each to hold office until the next Annual Meeting and until
successors shall be elected and qualified. It is the intention of the proxy
holders named in the enclosed Proxy to vote such Proxies (except those
containing contrary instructions) for the 11 nominees named below.
Article III, Section 3A of the By-Laws of the Bank provides a procedure for
nomination for election of members of the Board of Directors: director
nominations, other than those made by the Board of Directors, shall be made by
notification in writing delivered or mailed to the President of the Bank not
less than 30 days or more than 60 days prior to any meeting of stockholders
called for election of directors. The provision also requires that the notice
contain detailed information necessary to determine if the nominee is
qualified under Article III, Section 16 of the By-Laws. Nominations not made
in accordance with the procedure set forth in Section 3A of the Bank's By-Laws
may, in the discretion of the Chairman of the Meeting, be disregarded, and,
upon his instruction, the inspectors of election shall disregard all votes
cast for such nominee(s). A copy of Sections 3A and 16 of the Bank's By-Laws
may be obtained by sending a written request to Mr. John R. Olson, Secretary,
Farmers & Merchants Bank of Central California, P.O. Box 3000, Lodi,
California, 95241-1902.
The Board does not anticipate that any of the nominees will be unable to
serve as a director of the Bank, but if that should occur before the Meeting,
the proxy holders, in their discretion, upon the recommendation of the Bank's
Board of Directors, reserve the right to substitute as nominee and vote for
another person of their choice in the place and stead of any nominee unable so
to serve. The proxy holders reserve the right to cumulate votes for the
election of directors and cast all of such votes for any one or more of the
nominees, to the exclusion of the others, and in such order of preference as
the proxy holders may determine in their discretion, based upon the
recommendation of the Board of Directors.
4
<PAGE>
Nominees
The following table sets forth each of the nominees for election as a
Director, their age, their principal occupation for the past five years and
the period during which they have served as Director of the Bank.
<TABLE>
<CAPTION>
Principal Occupation Director of
Name Age During Past Five Years Bank Since
---- --- ---------------------- -----------
<S> <C> <C> <C>
Stewart C. Adams, Jr. .. 61 Attorney 1997
Ralph Burlington........ 75 Retired, Former Co-Owner San Joaquin 1968
Sulphur Co.
Robert F. Hunnell....... 78 Retired, Former Owner, Hunnells 1970
Pharmacy
Ole R. Mettler.......... 81 Chairman of the Board and Retired Bank 1973
President
James E. Podesta........ 78 Orchardist 1980
George Scheideman....... 79 Retired, Former Produce Buyer 1973
Harry C. Schumacher..... 78 Retired Bank President 1997
Hugh Steacy............. 88 Retired, Former President, Henderson 1964
Bros. Co., Inc. (plumbing, contracting
and hardware)
Kent A. Steinwert....... 46 President and Chief Executive Officer 1998
(since August 1997; prior thereto, a
senior officer with Bank of America
National Trust and Savings Association)
Calvin (Kelly) Suess.... 63 President, Lodi Nut Company, Inc. 1990
Carl A. Wishek, Jr. .... 60 Assistant Vice President of the Bank 1988
</TABLE>
None of the directors of the Bank were selected pursuant to arrangements or
understandings other than with the directors and stockholders of the Bank
acting within their capacity as such. There are no family relationships
between any of the directors, and none of the directors serve as a director of
any company which has a class of securities registered under, or subject to
periodic reporting requirements of, the Securities Exchange Act of 1934, as
amended, or any company registered as an investment company under the
Investment Company Act of 1940.
5
<PAGE>
Executive Officers
Set forth below is certain information regarding the executive officers of
the Bank, with the exception of Messrs. Mettler and Steinwert whose
information is set forth above under "--Nominees":
<TABLE>
<CAPTION>
Name and Position(s) Age Principal Occupation During the Past Five Years
- - -------------------- --- -----------------------------------------------
<S> <C> <C>
John R. Primasing......... 69 Retired since December 31, 1998; prior thereto,
Executive Vice President Executive Vice President and Chief Credit
and Chief Credit Officer Officer of the Bank (May 1993 to December 1998).
(Retired Dec. 31, 1998)
Mr. Richard S. Erichson... 51 Executive Vice President and Senior Credit
Executive Vice President Officer of the Bank since December 1998; prior
and Senior Credit Officer thereto, Senior Vice President/Senior Commercial
(Beginning Dec. 14, 1998) Banking Manager, Bank of America National Trust
and Savings Association.
Donald H. Fraser.......... 62 Executive Vice President and Chief Operating
Executive Vice President Officer of the Bank since April 1996; prior
and thereto, Senior Vice President and Chief
Chief Operating Officer Operating Officer of the Bank (May 1993 to May
1996).
John R. Olson............. 46 Executive Vice President and Chief Financial
Executive Vice President Officer of the Bank since April 1996; prior
and Chief Financial thereto, Senior Vice President and Chief
Officer, and Financial Officer of the Bank (May 1993 to May
Secretary/Treasurer 1996).
</TABLE>
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Bank, as of the Record Date, no person or entity was
the beneficial owner of more than five percent (5%) of the outstanding shares
of the Bank's Common Stock except as provided below and in the following
tables. For the purpose of this disclosure and the disclosure of ownership
shares by management, shares are considered to be "beneficially" owned if the
person has or shares the power to vote or direct the voting of the shares, the
power to dispose of or direct the disposition of the shares, or the right to
acquire beneficial ownership (as so defined) within 60 days of March 1, 1999.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership(1) of Class
-------------- ------------------- ----------------------- --------
<C> <S> <C> <C>
Common Stock Sheila M. Wishek(2)........... 50,147 7.93%
1704 Vallejo
San Francisco, CA 94123
Common Stock C.A. Wishek, Jr. ............. 43,622 6.90%
P.O. Box 906
Lodi, CA 95241
Common Stock Bruce Mettler................. 31,724 5.02%
17901 N. Cherry Road
Lodi, CA 95240
</TABLE>
- - --------
(1) Shares are beneficially owned, directly and indirectly, together with
spouses, and, unless otherwise indicated, holders share voting power with
their spouses.
(2) Includes 7,117 shares of Common Stock (representing 1.13% of the
outstanding Common Stock) for which Ms. Wishek holds a Power of Attorney.
6
<PAGE>
The following table shows the number of common shares and the percentage of
the common shares beneficially owned (as defined above) by each of the current
directors, by each of the nominees for election to the office of director, by
the Chief Executive Officer and the four other most highly compensated
executive officers (whose annual compensation exceeded $100,000) and by all
directors and executive officers/1/ of the Corporation as a group as of March
1, 1999.
<TABLE>
<CAPTION>
Number of Shares
Of Common
Beneficially Percent
Name and Address of Beneficial Owner(1) Owned (2) of Class
- - --------------------------------------- ---------------- --------
<S> <C> <C>
Stewart C. Adams, Jr................................ 597 *
Ralph Burlington.................................... 1,856 *
Donald H. Fraser.................................... 600 *
Robert F. Hunnell................................... 1,260 *
Ole R. Mettler...................................... 18,892 2.99%
John R. Olson....................................... 440 *
James R. Podesta.................................... 753 *
John R. Primasing(3)................................ 1,009 *
George Scheideman................................... 2,304 *
Harry C. Schumacher................................. 3,873 *
Hugh Steacy......................................... 1,928 *
Kent A. Steinwert................................... 3,150 *
Calvin (Kelly) Suess................................ 488 *
Carl A. Wishek, Jr.................................. 43,622 6.90%
All directors and executive officers as a group (15
persons)........................................... 80,786 12.78%
</TABLE>
- - --------
* Indicates less than 1%.
(1) Unless otherwise indicated, the business address for each of the persons
listed in the table is 121 West Pine Street, Lodi, California, 95240-2184.
(2) Shares are beneficially owned, directly and indirectly, together with
spouses, and, unless otherwise indicated, holders share voting power with
their spouses.
(3) Mr. Primasing retired effective December 31, 1998.
Committees of the Board of Directors of the Bank
The Bank does not have a Nominating Committee.
Audit Committee
The Audit Committee examines the affairs of the Bank, reviews reports of
examinations made by regulatory agencies and reviews the examinations by
internal auditors of Bank operations, loans and credits. The Committee met 11
times in 1998 and is comprised of the following members: Messrs. Hunnell
(Chairperson), Burlington, and Scheideman.
Personnel Committee
The Personnel Committee reviews and establishes the general employment and
compensation practices and policies of the Bank and approves procedures for
the administration thereof. The Board of Directors of the Bank, operating
through its Personnel Committee, establishes annual executive compensation for
the Chief Executive ("CEO") and the other executive officers based on
performance and regulatory publications that indicate compensation paid by
other banks of similar size. This annual evaluation process establishes a
competitive base
- - --------
/1/ The term "Executive Officer" means the Chairman, the President and Chief
Executive Officer, the Executive Vice President/Chief Credit Officer, the
Executive Vice President/Chief Financial Officer and the Executive Vice
President/Chief Operating Officer.
7
<PAGE>
salary for each executive and offers incentive compensation which can provide
additional compensation if established performance measures are achieved. This
additional compensation is in the form of Stock Appreciation Rights and an
annual cash bonus. In addition the CEO is a participant in the Stock
Appreciation Rights Plan. Under this plan the CEO does not have any rights to
stock ownership. However, increases in the value of "Phantom Shares" are
granted based on the increase, if any, in book value of the stock.
As described in the Summary Compensation Table, each named executive
receives a monthly base salary, and is eligible to receive an annual cash
bonus. Bank performance measures are established each year based on the Bank's
profit objectives. The extent to which these objectives are achieved
determines if and what size the annual cash bonus and merit increases will be.
In evaluating the CEO's annual salary, the Personnel Committee uses a
subjective evaluation as a basis for its decisions and considers: the Bank's
net income, comparative executive compensation levels of peer group banks,
safety and soundness criteria, and current economic conditions. The
performance measures used in determining the CEO's annual cash bonus is based
on the same income objectives as all bank employees.
The Committee met 8 times in 1998 and is comprised of the following members:
Messrs. Steacy (Chairperson), Schumacher and Adams.
Expense Committee
The Expense Committee reviews and examines all Bank expenses on a monthly
basis comparing the results with the annual budget, and the previous month and
prior year, and propose recommendations for management on controllable
expenses. The Committee met 12 times in 1998 and is comprised of the following
members: Messrs. Podesta (Chairperson), Suess and Wishek.
CRA Committee (Community Reinvestment Act)
The CRA Committee reviews the Bank's efforts and responsibilities in
accordance with the Community Reinvestment Act. The Committee makes
recommendations to the Board of Directors to assure the Bank is meeting the
credit needs of all segments of the communities it serves. The Committee met
12 times in 1998 and is comprised of the following members: Messrs. Suess
(Chairperson), Podesta and Wishek.
Year 2000 Committee
The Year 2000 Committee addresses the issues of: (a) computer system
readiness, (b) continued vendor product and service support, (c) evaluation of
credit risk of major Bank borrowers and (d) investment and Asset/Liability.
The committee will meet monthly to review and monitor the Bank's progress on
this important compliance issue. The committee met 27 times in 1998. The
committee is chaired by Mr. Ralph Burlington with officers of the Bank.
Board of Directors Meetings
During the calendar year ending December 31, 1998, 53 meetings of the Board
of Directors were held. Each incumbent attended more than 75% of the meetings
of the Board of Directors and Committees on which they served, with the
exception of the Year 2000 Committee.
8
<PAGE>
Remuneration and other Transactions with Management and Others
The following table sets forth the aggregate remuneration for the services
in all capacities paid by the Bank during 1996, 1997 and 1998 to the Chief
Executive Officer and each of the four highest paid Executive Officers of the
Bank whose total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Profit Stock
Sharing Appreciation
Name Title Year Salary Bonus Plan Rights Plan
- - ---- ----- ---- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ole R. Mettler.......... Chairman of the Board and 1998 $ 99,406 $ -- $ 6,721 --
former President of the 1997 113,047 -- 7,383 --
Bank
(Retired as President in 1996 113,057 11,000 8,335 --
1994)
Kent A. Steinwert....... President and Chief 1998 $201,405 $50,000 $12,267 200
Executive Officer 1997 75,000 -- -- 4,000
(Effective Aug. 18, 1997)
J.R. Primasing.......... Executive Vice President 1998 $165,439 $ -- $12,267 --
and
Chief Credit Officer 1997 160,144 9,000 10,772 --
(Retired Dec. 31, 1998) 1996 157,523 18,331 10,687 --
D.H. Fraser............. Executive Vice President 1998 $135,575 $ -- $ 9,885 --
and
Chief Operating Officer 1997 127,385 8,000 9,402 --
1996 117,060 13,442 8,919 --
J.R. Olson.............. Executive Vice President 1998 $137,083 $ -- $10,032 --
and
Chief Financial Officer, 1997 128,758 8,000 9,526 --
and
Secretary/Treasurer 1996 116,944 13,450 8,909 --
</TABLE>
The following table describes stock appreciation rights ("SARs") that were
granted pursuant to the Bank's SAR Plan to the Bank's Chief Executive Officer
in the fiscal year ended December 31, 1998. No SARs were granted to any other
executive officer during the fiscal year ended December 31, 1998.
SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
Number Percent
of Securities of Total Grant
Underlying Options Granted Date
Options to All Employees Exercise Expiration Present
Name Granted in Fiscal Year Price Date Value
---- ------------- ---------------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Kent A. Steinwert... 200 100% N/A N/A N/A
</TABLE>
- - --------
(1) The related SAR Plan of the Bank has provided for cash payments to a
participant based on the increase in the value of the Bank's common stock
and the issuance of stock dividends following the original grant of SARs.
SARs cannot be exercised unless they are vested and either the
participant's employment with the Bank has terminated or there has been a
sale of the Bank. Subject to certain qualifications, the value of each SAR
is (i) the difference between the book value of a share of the Bank's
common stock when the SAR is granted and the book value of a share of such
stock when the participant's employment terminates or (ii) if there has
been a sale of the Bank (as defined in the Plan), the difference between
the book value of a share of the Bank's common stock when the SAR is
granted and the weighted average sales price of a share of the Bank's
common stock transferred as part of such sale of the Bank. On March 2,
1999 the Board of Directors of the Bank terminated the SAR Plan.
9
<PAGE>
Deferred Bonus Plan
On March 2, 1999 the Board of Directors terminated the SAR Plan and replaced
it with the new Deferred Bonus Plan. Participants under the Deferred Bonus
Plan are entitled to receive cash payments based on the long-term cumulative
profitability of the Bank and its subsidiaries and a bonus factor determined
for each participant. Deferred bonuses become payable to eligible participants
after either the participant has become vested and his or her employment at
the Bank terminates or there has been a "Change in Control" as defined in the
Plan. Appreciated value earned under the terminated SAR Plan has been
transferred to the new Deferred Bonus Plan.
Profit Sharing Plan
Benefits pursuant to the Profit Sharing Plan vest 0% during the first three
years of participation 20% per year thereafter, and after seven years such
benefits are fully vested.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
The Bank entered into an employment agreement on July 8, 1997 with Kent A.
Steinwert as its President and Chief Executive Officer. The agreement, which
expires on August 18, 2000, provides for a minimum base salary of $200,000
annually, a minimum bonus in 1998 in the amount of $50,000, use of a Bank-
owned automobile and certain insurance benefits. Under certain circumstances
in the event of termination of employment, Mr. Steinwert will be entitled to
receive severance compensation set forth in the agreement.
The Bank entered into an employment agreement on December 1, 1998 with
Richard S. Erichson as its Executive Vice President and Senior Credit Officer.
The agreement, which expires on November 30, 2001, provides for a minimum base
salary of $150,000, a bonus of $40,000 in 1998 as compensation for forfeiture
of a 1998 bonus with Mr. Erichson's previous employer, and annual salary
increases at the discretion of the Board of Directors based upon a review of
his performance during the previous year. Under certain circumstances in the
event of termination of employment, particularly in connection with a change
of control of the Bank, Mr. Erichson will be entitled to receive severance
compensation set forth in the agreement.
The Bank has not entered into any other employment agreements.
Defined Benefit Pension Plan
The amount of accrued contribution to the Bank's Defined Benefit Pension
Plan cannot readily be separately calculated at this time by the plan
actuaries. The Bank's contribution requirement to the plan in 1998 was
$612,626 as determined by the actuaries. The maximum annual retirement
benefits, which any of the above named individuals would be entitled to
receive, as Officers of the Bank, assuming that all applicable conditions of
the plan are met, is $18,000 annually. Mr. Mettler elected to withdraw his
respective vested interest the year he reached normal retirement age 65 and is
no longer a participant in the Defined Benefit Pension Plan. Current rules
permit the inclusion of a pension plan table demonstrating benefits payable
upon retirement. Since the maximum compensation payable to any employee,
including Executive Officers is $18,000 per year, a pension table has been
excluded.
Compensation of Directors
A Director who is not a Bank employee receives a monthly fee and a fee for
each Board or Committee meeting attended. The monthly fee is $272.07 for each
Director, the Board Meeting fee is $400.00, and the Committee Meeting fee is
$175.00. Directors may elect to defer receipt of some or all Directors' fees.
Directors who are not active officers in the Bank do not participate in
either the Defined Benefit Pension Plan or the Profit Sharing Plan.
Directors are permitted to participate in the Bank's group insurance along
with salaried employees. This plan is funded 70% by the Bank and 30% by the
Directors who are employees and 100% by Directors who are not employees.
10
<PAGE>
The Bank plans to continue the payment of such fees for regular meetings of
the Board and of the Committees of the Board. No other arrangements exist for
compensation of the Bank's directors.
Certain Relationships and Related Transactions
The Bank has had and expects to have in the future, loan transactions with
many of its officers and Directors and their related interests on the same
terms (including interest rates and collateral) as those prevailing for
comparable transactions with others. Such loan transactions are subject to the
limitations and requirements of Regulation O of the Federal Reserve Board and
other applicable law. In management's opinion, all loans and commitments to
lend included in said transactions were made in compliance with applicable
laws on substantially the same terms, including interest rates and collateral,
as those prevailing for comparable contemporaneous transactions with other
persons of similar creditworthiness, and did not involve more than a normal
risk of collectibility or present other unfavorable features. The aggregate
amount of all such loans made during 1998 amounted to $2,314,000, including
renewals of previous loans. The balance of these loans and loans made in prior
years outstanding at December 31, 1998 amounted to $2,692,000.
Stock Performance Graph
Current rules permit the inclusion of graphs designed to show stock
performance in relation to peer issuers. Federal Reserve Board rules permit
banks to omit this graph when comparative data is not obtainable. Since data
on institutions considered "peers" is not readily available, the
aforementioned graph has been excluded. The Bank's return on equity over the
last five years is set forth in the Annual Report.
PROPOSAL 2
RATIFICATION OF AUDITORS
At the Annual Meeting a vote will be taken on a proposal to ratify the
appointment of Arthur Andersen LLP, by the Board of Directors, to act as
independent auditors of the Bank for the year ending December 31, 1999. Arthur
Andersen LLP are independent accountants and auditors who have audited the
Bank annually since 1985. Representatives of Arthur Andersen LLP are not
expected to be present at the Stockholders meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITS RATIFICATION OF ARTHUR
ANDERSEN LLP AS THE BANK'S AUDITORS.
PROPOSAL 3
ORGANIZATION OF A BANK HOLDING COMPANY
SUMMARY
This Summary contains a brief description of the proposed Reorganization.
This Summary is not a complete statement of all the information contained in
this Proxy Statement/Offering Circular. We recommend that you read all of it
carefully.
Bank Holding Company
You are being asked to vote on a proposal to organize a bank holding company
named Farmers & Merchants Bancorp (the "Holding Company"), a Delaware
corporation, which will own the Bank. The new corporate structure of the Bank
will permit the Holding Company and the Bank greater financial and corporate
flexibility in such areas as acquisitions and debt financing. In addition, it
will allow us to:
. Offer new services.
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. Enjoy access to new markets.
. Participate in activities which are not permissible for the Bank to
engage in directly.
In order to effect the Reorganization into a bank holding company, the
Holding Company has formed F&M Merger Co. ("Merger Co."), a subsidiary
corporation into which the Bank will be merged. Merger Co. has been organized
solely for the purpose of the Reorganization; it has conducted and will
conduct no business prior to the merger; upon the merger, it will disappear
into the Bank which will be the resultant company in the merger. The use of a
"merger subsidiary" such as Merger Co. in a "reverse triangular" merger to
accomplish the Reorganization is a common approach for corporate
reorganizations such as the Reorganization.
Immediately prior to the Reorganization, the Holding Company will own all of
the stock of Merger Co. Following the Reorganization, the Holding Company will
own all of the outstanding shares of common stock of the Bank and Merger Co.
as so merged, and the Bank will continue to do business under the name of
Farmers & Merchants Bank of Central California.
After the Reorganization, the shares of Merger Co. will no longer be
outstanding. The capital stock of the Resulting Bank will be the same as the
capital structure of the Bank immediately prior to the Reorganization. All
stockholders of the Bank, except those stockholders who properly exercise
dissenters' rights, will become stockholders of the Holding Company.
Stockholder Approval
The Reorganization must be approved by the holders of at least a majority of
the outstanding shares of common stock of the Bank. As of March 1, 1999, the
record date, there were 632,185 shares of common stock outstanding and
entitled to vote. Therefore, the affirmative vote of at least 316,093 shares
is required to approve the Reorganization.
What Should Stockholders Do?
If you want to vote in favor of the Reorganization, mail your signed proxy
card in the enclosed envelope as soon as possible so that your shares can be
voted at the stockholder's meeting.
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS VOTING IN FAVOR OF
THE REORGANIZATION.
A failure to send in your proxy or an abstention from voting will have the
same effect as a negative vote because the proposal requires the approval of a
majority of the outstanding shares.
Directors Approval
The Board of Directors of the Bank has unanimously approved the
Reorganization.
Dissenters Appraisal Rights
Stockholders who cast their votes against the Reorganization (or who abstain
or fail to vote) will be entitled to receive the value in cash of the Bank
common stock held by them if they follow the procedures set forth in Chapter
13 of the California General Corporation Law. Stockholders will waive this
right if they fail to follow the procedures set forth in Chapter 13 of the
California General Corporation Law, a copy of which is in Annex II of this
Proxy Statement/Offering Circular. If the holders of more than 10% of the
outstanding shares demand appraisal of their shares, then the Board of
Directors may terminate the Reorganization.
The Companies
The three companies participating in the Reorganization are the Holding
Company, the Bank and Merger Co.
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The Holding Company
The Holding Company is a Delaware business corporation that was formed by
the Bank on February 22, 1999. The Holding Company has not engaged in any
business since its incorporation. After the Reorganization, the Holding
Company will become a registered bank holding company, whose principal asset
will be its stockholdings in the Resulting Bank.
The Bank
The Bank is a California state-chartered bank. The Bank engages in the
commercial banking business in the Sacramento, San Joaquin, Stanislaus and
Merced Counties of California.
Merger Co.
Merger Co. is a newly-formed California corporation organized solely for the
purpose of this transaction. Merger Co. will not conduct any business prior to
the Reorganization. The Holding Company owns all of the capital stock of
Merger Co. The separate existence of Merger Co. will cease after the
Reorganization.
The One-For-One Exchange Ratio and Market Value
If the proposed Reorganization is approved, stockholders of the Bank will
receive for each of their Bank shares, stock in the Holding Company on a one-
for-one basis. No surrender of Bank share certificates will be required as
such certificates will represent shares of the Holding Company's common stock
until surrendered for exchange.
Shares of the Holding Company have not been publicly traded, as it is a new
company. It has not engaged in any prior business activity. Thus, there is no
published information as to the market price of Holding Company stock.
The stock of the Bank is not listed for quotation on any exchange, although
quotations for the stock appear in the Electronic Bulletin Board of the
National Association of Securities Dealers Automated Quotation System. After
the Reorganization, it is expected that the Holding Company stock will be
listed for quotation on the Electronic Bulletin Board of the National
Association of Securities Dealers Automated Quotation System. After the
Reorganization, no market will exist for Resulting Bank stock because the
Holding Company will be the Resulting Bank's only stockholder.
Per Share Summary of the Bank and Pro Forma per Share Summary of the Holding
Company
Presented below is certain per share financial information of the Bank.
Certain pro forma per share information is provided for the Holding Company,
assuming there are no dissenters to the transaction.
PER SHARE DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
The Bank
Net earnings(1)....................... $ 12.72 $ 6.33 $ 11.17 $ 11.10 $10.75
Cash dividends declared............... $ 4.85 $ 4.53 $ 4.27 $ 3.94 $ 3.71
Book value (at period end)............ $125.27 $118.07 $114.75 $107.85 $95.43
Pro Forma--The Holding Company
Net earnings(1)....................... $ 12.72 $ 6.33 $ 11.17 $ 11.10 $10.75
Cash dividends declared............... $ 4.85 $ 4.53 $ 4.27 $ 3.94 $ 3.71
Book value (at period end)............ $125.27 $118.07 $114.75 $107.85 $95.43
</TABLE>
- - --------
(1) Earnings per share are based on the weighted average shares outstanding
during the reporting period. Prior years' earnings per share have been
restated for the 5% stock dividend in each of such years.
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Management
The directors and officers of the Bank will continue to be directors and
officers of the Resulting Bank following the Reorganization. After the
Reorganization, the present directors of the Holding Company will continue to
be directors of the Holding Company. Thereafter, the stockholders of the
Holding Company will elect the directors of the Holding Company from time to
time.
Board of Directors
The Holding Company's Amended and Restated Certificate of Incorporation
("Certificate of Incorporation") provides that the Board of Directors shall
consist of not less than 9 nor more than 15 members, the exact number of which
may be fixed from time to time. The initial number of directors has been fixed
at 11, which is the same as the number of directors of the Bank.
Differences Between Holding Company Stock and Bank Stock
Stockholders of the Holding Company will have rights comparable to those
rights which they now possess as stockholders of the Bank, except as described
hereinafter.
The stockholders of the Bank currently have the right to cumulate their
shares in the election of directors. After the Reorganization, stockholders of
the Holding Company, as provided by Delaware law, will not have the right
under Delaware law or the Holding Company's Certificate of Incorporation or
By-Laws to vote cumulatively in the elections of directors. However, even
though the Holding Company is a Delaware corporation, pursuant to Section 2115
of the California General Corporation Law ("CGCL"), Section 708, subdivisions
(a), (b) and (c) of the CGCL, concerning a stockholder's right to cumulate
votes at any election of directors, likely will apply to the Holding Company
due to its presence in California and likely will require the Holding Company
to permit cumulative voting, at least initially. For an explanation of the
applicability of Section 2115 of the CGCL, see "Quasi-California Corporation
Status" below. Cumulative voting means that a stockholder may cast the number
of shares he or she owns times the number of directors to be elected in favor
of one nominee or allocate such votes among the nominees as he determines.
Stockholders will be affected by certain differences between Delaware law
governing corporations and federal law governing banks. The differing
provisions of the Certificate of Incorporation and By-Laws of the Holding
Company and the Articles of Incorporation and By-Laws of the Bank will also
affect stockholders. For a more complete discussion regarding these matters,
see "Anti-Takeover Measures" and "Comparative Description of Common Stock"
below.
Article V of the Bank's Articles of Incorporation provides that common stock
offered for cash must first be offered for subscription to the outstanding
stockholders of the Bank on a pro rata basis. This preemptive rights provision
will not be carried over into the Holding Company's Certificate of
Incorporation. The Bank's Articles of Incorporation provide for the issuance
of up to 1,000,000 shares of Common Stock. The Holding Company's Certificate
of Incorporation will authorize the Holding Company to issue up to 2,000,000
shares of Common Stock. Because stockholders of the Holding Company do not
have preemptive rights, such stockholders' ownership may be diluted without
prior notice.
There are also differences as to the availability of funds for the payment
of dividends by a California state-chartered bank and a Delaware corporation.
(See "Dividends" below).
Anti-Takeover Provisions
The Holding Company's Certificate Incorporation and By-Laws include
provisions which may be described as "anti-takeover provisions" because they
have an anti-takeover effect and could discourage takeover attempts which have
not been approved by the Board of Directors. Such provisions generally are a
continuation of the similar provisions in the Bank's Articles of Incorporation
and By-Laws.
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<PAGE>
The Bank's Articles of Incorporation and the Holding Company's Certificate
of Incorporation both contain "fair price and supermajority vote" provisions.
If the Reorganization is approved, such provisions will require the
affirmative vote of the holders of at least 66 2/3% of the shares of the
Holding Company to approve certain business combinations, unless the
transaction is approved by the Directors. Under the provisions in the Bank's
Articles of Incorporation, shares held by an "Interested Stockholder" (defined
as the holder of 20% or more of the outstanding shares) may not be counted
towards the required 66 2/3% vote. This restriction will not be carried over
to the Holding Company's Certificate of Incorporation. Certain other
conditions must also be met which result in a "fair price" being paid to all
stockholders. We believe that these provisions in the Holding Company's
Certificate of Incorporation (which are similar to those in the Bank's
Articles of Incorporation) will aid in assuring that stockholders are treated
fairly in any offer for their shares.
The Bank's Articles of Incorporation and the Holding Company's Certificate
of Incorporation both provide for 1,000,000 shares of authorized Preferred
Stock, which the Board of Directors is able to issue without stockholder
approval and set the voting rights, preferences and other terms thereof. The
Bank has no shares of Preferred Stock outstanding. There is no present plan or
proposal to issue any Preferred Stock outstanding.
The Holding Company's Certificate of Incorporation and the Bank's Articles
of Incorporation both require the Board of Directors, when evaluating a
transaction involving a business combination between the Bank and another
party, or that might result in a change of control of the Bank to consider
certain factors in evaluating the proposal. These factors include the social
and economic effects such transaction may have on the Bank's employees,
stockholders, customers and suppliers and the communities in which the Bank
operates or is located, whether the transaction might violate applicable law
and the long-term value of the Bank as an independent entity.
Both the Holding Company's Certificate of Incorporation and the Bank's
Articles of Incorporation permit action by written consent of the stockholders
in lieu of a meeting only if the Board of Directors previously approves such
action.
Under the Holding Company's Certificate of Incorporation, special meetings
of the stockholders of the Holding Company may be called only by a majority of
the Board of Directors or by the holders of a majority of the outstanding
shares entitled to vote. Under the Bank's By-Laws, special meetings of the
stockholders may be called by the Chairman of the Board, or by the President,
or by stockholders holding shares representing at least 10% of the voting
power.
The Bank's By-Laws provide that no person shall be a member of the Board of
Directors unless such person meets certain qualification requirements. The
Holding Company's By-Laws will contain comparable qualification requirements.
The Bank's By-Laws provide that director nominations, other than those made
by the Board of Directors, shall be made by notification in writing delivered
or mailed to the President of the Bank not less than 30 days or more than 60
days prior to any meeting of stockholders called for election of directors.
The provision also requires detailed information about the nominee, including
information necessary to determine if the nominee is qualified under the By-
Laws. The Holding Company's By-Laws provide for comparable notification
procedures.
We believe that it is appropriate to maintain such anti-takeover provisions
during the conversion to a holding company form of ownership. The continued
inclusion of such provisions is not in response to any attempted takeover of
the Bank. The Bank has not been the target of an attempted takeover in the
past.
The presence of these anti-takeover provisions may have the effect of
discouraging outside offers for the shares of the Holding Company. These
provisions may also give management more control than it would otherwise have
over the acceptance or rejection of such offers. Such provisions may protect
the incumbent Board of Directors and management by discouraging takeover
attempts which are not supported by the Board, but which may be supported by
the majority of stockholders.
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<PAGE>
Certain Federal Income and California Tax Consequences
It will be a condition to the completion of the Reorganization that legal
counsel, Pillsbury Madison & Sutro LLP, San Francisco, opine that no gain or
loss will be recognized for federal income tax or California bank and
corporation tax or personal income tax purposes by the Bank, the Holding
Company or the Bank's stockholders as a result of the Reorganization, except
for those stockholders who perfect their dissenters' rights and receive cash
for their shares. See "Bank Holding Company Reorganization--Certain Federal
Income and California Tax Consequences." Such counsel has advised the Bank and
the Holding Company that it fully expects to be able to deliver that opinion.
Each stockholder should rely upon his or her own tax advisor with respect to
the federal, state, local and foreign tax consequences of the Reorganization.
Dividends
In the opinion of the Bank's management, for the foreseeable future, there
is no reason to expect that a decrease in the Holding Company's dividend rate
relative to that of the Bank will occur, although no assurance can be given as
to the occurrence of events in the future which may adversely impact the
financial condition of the Bank or the Holding Company and their respective
ability to pay dividends.
RISK FACTORS
The purpose of the proposal is to give the Bank greater financial and
corporate flexibility in such areas as acquisitions, non-banking activities
and debt or other financings, and to permit it to participate in non-bank
activities, which are not permissible for the Bank to engage in directly. The
nature of the business conducted by the Bank will not change.
Certain risks associated with the combined business of the Holding Company
and the Bank as a result of the Reorganization of the Bank's corporate
structure, are presented below.
The Holding Company's Financial Condition
The proposed Reorganization calls for you to receive Holding Company stock
in exchange for your Bank stock. The Holding Company has no history of
financial performance because it is a newly-formed Delaware corporation. The
Holding Company's financial condition following the Reorganization will depend
on the operation and profitability of the Bank. The Holding Company's
profitability may be affected by other factors such as:
. businesses started or acquired by the Holding Company other than the
Bank; and
. laws and regulations applicable to the Holding Company.
Although the Holding Company intends to operate the Bank in substantially
the same manner that it has been operated to date, changes to the operations
of the Bank and new businesses may affect the financial performance and
condition of the Holding Company as a whole and the return to stockholders of
the Holding Company.
Banking Institutions
The financial services industry and banking in particular has undergone a
complex deregulation process. The interest rate limitations on what banks may
pay to depositors have been phased out. Interstate banking laws which allow
financial institutions to cross state lines have been enacted nationally.
Competition to provide traditional banking services has increased among banks
and other companies. The Holding Company and the Bank will continue to be
affected by these changes in the future. The conduct of the Bank's business as
a subsidiary of the Holding Company may increase its ability to compete in
this newly deregulated environment, but there can be no assurance that this
will be the case.
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<PAGE>
Anti-Takeover Provisions
The Holding Company's Certificate of Incorporation and By-Laws contain
provisions intended to prevent hostile takeovers. The anti-takeover provisions
include: supermajority vote and fair price provisions; "blank check" preferred
stock; a provision requiring the consideration of nonmonetary factors (such as
social effects) in certain merger or other transactions; provisions requiring
that stockholders give advance notice with respect to nomination of candidates
for election as directors and certain proposals they may wish to present for a
stockholder vote; a provision requiring that special meetings of stockholders
be called only by a majority of the Board of Directors; requirements as to
qualifications of directors; a provision allowing action by written consent of
stockholders only if the Board of Directors approves of such action; and other
items. These provisions and additional provisions of Delaware law may:
. discourage outside offers for the shares of the Holding Company;
. give management more control over the acceptance or rejection of business
combination offers; and
. protect incumbent Directors by discouraging takeover attempts which are
not supported by the Board.
BANK HOLDING COMPANY REORGANIZATION
THE BOARD OF DIRECTORS OF THE BANK HAS UNANIMOUSLY APPROVED A PLAN OF
REORGANIZATION UNDER WHICH THE BUSINESS OF THE BANK WOULD BE CONDUCTED AS A
WHOLLY-OWNED SUBSIDIARY OF THE HOLDING COMPANY AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE REORGANIZATION.
Reasons For the Proposal
A bank holding company form of organization will increase the corporate and
financial flexibility of the businesses operated by the Bank through the
combined business of the Bank and the Holding Company. Examples are:
. increased structural alternatives for acquisitions;
. the ability to augment Bank capital by means of Holding Company debt or
other securities; and
. the ability to engage in certain non-banking activities.
A bank holding company can engage directly or through non-banking
subsidiaries in certain non-bank-related activities in which the Bank cannot
presently engage. The Reorganization would broaden the scope of services which
could be offered to the public. The Holding Company has not made any
determination as to which of these types of activities it may engage in after
consummation of the proposed transaction. The Holding Company could also
acquire control of one of more other banking organizations which it could
operate as separate subsidiaries of the Holding Company, although no
determination has been made that the Holding Company will do so.
Description of the Reorganization
The Holding Company will subscribe for and will hold all of the 100
authorized shares of common stock of the Merger Co., which has been formed
solely for the purpose of this transaction. Merger Co. will merge with and
into the Bank under the name and charter of the Bank, pursuant to the terms of
the Agreement and Plan of Reorganization. (See Annex I of this Proxy
Statement/Offering Circular.) Upon consummation of the transaction, the Bank
will be a wholly-owned subsidiary.
After the Reorganization, the business of the Bank will be conducted by the
Resulting Bank under the name "Farmers & Merchants Bank of Central
California." All of the outstanding shares of stock of the Resulting Bank will
be owned by the Holding Company. The Resulting Bank will have the same
directors, officers, interests and properties as those of the Bank immediately
prior to the Reorganization. The Resulting Bank will continue to be
17
<PAGE>
subject to regulation by the Board of Governors of the Federal Reserve System,
and as a subsidiary of the Holding Company, will be subject to regulation by
the Board of Governors of the Federal Reserve System.
Conversion of Shares and Exchange of Stock Certificates
Upon consummation of the Reorganization, each outstanding share of the Bank
stock will be converted into one share of the Holding Company stock. Each
holder of Bank stock certificates upon surrender of such certificates for
cancellation will be entitled to receive certificates representing the same
number of shares of Holding Company Common Stock. Until so surrendered, Bank
stock certificates will be deemed for all purposes to evidence the same number
of shares of the Holding Company stock.
Stock certificates representing shares of the Holding Company's common stock
will be generally available to be distributed to stockholders of the Bank by
approximately July 1, 1999. The distribution of stock certificates to you will
be dependent upon the date of receipt of your Bank stock certificate for
exchange (which you will not be required to do). Stockholders of the Bank will
continue to be entitled to sell or transfer their Bank stock through the date
of consummation of the transaction. Further, you may sell Holding Company
stock after the effective date of the Reorganization but before receipt of
certificates representing Holding Company stock. Completion of such sales will
only require presentation of your Bank stock certificate by the transferee.
Affiliate Restrictions
The shares of Holding Company stock will be exempt from registration under
the Securities Act of 1933, by reason of Section 3(a)(10) thereof. In
accordance with the provisions of such section, the Holding Company has filed
its Application for a fairness hearing before the Commissioner of the
California Department of Corporations. However, the resale of such shares by
the directors, principal officers and principal stockholders may be restricted
by the 1933 Act and by SEC rules if such directors, principal officers and
principal stockholders are deemed to be "affiliates" as that term is defined
by the 1933 Act and SEC rules.
Persons considered to be in control of an issuer are considered as
"affiliates" and may include officers, directors and stockholders who own a
significant percentage of the outstanding stock. Holding Company stock
received after the transaction by "affiliates" the Holding Company will be
"control stock," which can be sold only if they are registered or transferred
in a transaction exempt from registration under the 1933 Act, such as pursuant
to SEC Rules 144 and 145, or pursuant to a private placement. SEC Rules 144
and 145 generally require that before an affiliate can sell control stock:
. there must be on file with the SEC public information filed by the
issuer;
. the affiliate must sell his stock in a unsolicited broker's transaction
or directly to a market maker; and
. during any three-month period, the amount of the securities that can be
sold other than in non-public transactions is limited to the greater of
1% of the outstanding stock of the issuer or the average weekly trading
volume during the last four calendar weeks.
It is advisable for those stockholders who may become "affiliates" of the
Holding Company to confer with their legal counsel prior to the sale of any
Holding Company stock.
Conditions of Consummation
California law provides that a bank reorganization requires the approval of
a reorganization agreement by the Boards of Directors and by stockholders
holding a majority of the outstanding common stock of each of the subject bank
and the corporation merging with such bank.
The obligation of the Bank and the Holding Company to consummate the
Reorganization is conditioned further upon the following:
. the absence of any action, suit, proceeding or claim, made or threatened,
related to the proposed Reorganization;
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<PAGE>
. any development which makes consummation of the Reorganization
inadvisable in the opinion of either Board of Directors;
. the receipt of a favorable opinion of legal counsel with respect to the
tax consequences of the Reorganization;
. the receipt of all necessary regulatory approvals;
. not more than 10% of the Bank's outstanding shares will constitute
Dissenting Shares, as defined in Section 1300 of the California General
Corporation Law (the "CGCL"); and
. the performance of all covenants and agreements.
Other Considerations
The Holding Company is a business corporation formed under Delaware law. It
will have greater flexibility than the Bank in certain corporate procedures,
such as:
. the incurrence of debt for leveraged growth;
. the redemption of stock; and
. the operation of related financially-oriented businesses.
The Holding Company will be a registered bank holding company and subject to
the Federal Bank Holding Company Act of 1956.
Expenses
The Reorganization will cost about $80,000. The expenses are related to:
. legal fees;
. accounting fees;
. application fees;
. printing costs; and
. other expenses.
Certain Federal Income and California Tax Consequences
Neither the Bank nor the Holding Company is required to complete the
Reorganization, and their respective Boards of Directors do not intend to
complete the Reorganization, unless both the Bank and the Holding Company
receive an opinion (the "Tax Opinion") of legal counsel, Pillsbury Madison &
Sutro LLP, to the effect that the Reorganization will constitute a
"reorganization" within the meaning of section 368(a)(1) of the Internal
Revenue Code and that, accordingly, for federal income tax and California bank
and corporation tax and personal income tax purposes:
. no gain or loss will be recognized by the Holding Company, the Bank or
Merger Co. as a result of the Reorganization,
. no gain or loss will be recognized by Bank stockholders upon conversion
of their Bank stock into Holding Company stock, except for those
stockholders who dissent and perfect their appraisal rights,
. a Bank stockholder's tax basis for the Holding Company stock will be the
same as the tax basis of the Bank stock surrendered by the stockholder
and
. a Bank stockholder's holding period for the Holding Company stock will
include the holding period of the Bank stock surrendered by the
stockholder, provided that the Bank stock is held as a capital asset on
the date of consummation of the Reorganization.
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<PAGE>
Although not covered by the Tax Opinion, stockholders who dissent from the
transaction and receive cash in exchange for their Bank shares will be treated
as having had those shares redeemed by the Bank. Whether that redemption will
result in the recognition of taxable gain or loss in an amount equal to the
difference between the tax basis in the shares treated as redeemed and the
amount of cash received or in the receipt of ordinary dividend income may
depend upon application of complex constructive ownership and other rules of
the Internal Revenue Code. Stockholders considering dissenting from the
Reorganization should consult their tax advisors as to the tax consequences of
the resulting receipt of cash in light of their particular circumstances.
An opinion of counsel represents only such counsel's best legal judgment and
is not binding on the Internal Revenue Service, the California Franchise Tax
Board or the courts. The Tax Opinion will rely on certain representations of
the Bank's and the Holding Company's management which are customary in
transactions comparable to the Reorganization. In addition, the Tax Opinion
will be based upon laws, judicial decisions and administrative regulations,
rulings and practice, and other applicable authority, all as in effect on the
date of the Reorganization and all of which could be subject to change, either
on a prospective or retroactive basis. New developments in any such
administrative matters or court decisions, legislative changes, or the
inaccuracy or incompleteness of any of the representations of management could
have an adverse effect on the legal or tax consequences described in the Tax
Opinion and counsel has not undertaken to accept any responsibility for
updating or revising the Tax Opinion in consequence of any such new
developments or changes. Finally, the Tax Opinion deals only with the federal
income tax and California bank and corporation tax and personal income tax
consequences of the Reorganization.
ACCORDINGLY, STOCKHOLDERS ARE STRONGLY URGED TO CONSULT WITH AND MUST RELY
UPON THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE REORGANIZATION IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
Appraisal Rights of Dissenting Stockholders
If the Reorganization Agreement is approved by the required vote of the
Bank's stockholders and is not abandoned or terminated, any holder of the
Bank's Common Stock may, by complying with Sections 1300 through 1312 of the
CGCL, be entitled to dissenters' rights as described therein. The record
holders of the shares of the Bank's Common Stock which dissent from the Merger
(the "Dissenting Shares") are referred to herein as "Bank Dissenting
Stockholders." It will be a condition to the completion of the Reorganization
that there not be Bank Dissenting Stockholders who hold more than 10% of the
Bank's outstanding shares.
The following discussion is not a complete statement of the CGCL relating to
dissenters' rights, and is qualified in its entirety by reference to Sections
1300 through 1312 of the CGCL attached to this Proxy Statement/Offering
Circular as Annex II and incorporated herein by reference. This discussion and
Sections 1300 through 1312 of the CGCL should be reviewed carefully by any
holder who wishes to exercise statutory dissenters' rights or wishes to
preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights.
Shares of the Bank's Common Stock must satisfy each of the following
requirements to qualify as Dissenting Shares under the CGCL: (i) the shares
must have been outstanding on the record date for the determination of the
holders of the Bank's Common Stock entitled to vote on the Reorganization (and
therefore options to purchase the Bank's Common Stock exercised after the
record date may not constitute Dissenting Shares); (ii) the shares must not
have been voted in favor of the Reorganization; (iii) the holder of such
shares must make a written demand that the Bank repurchase the shares at fair
market value and such demand must be received by the Bank within 30 days after
notice of approval of the Reorganization by the outstanding shares is mailed
to the holder; and (iv) the holder of such shares must submit certificates for
endorsement (as described below). A vote by proxy or in person against the
Reorganization does not in and of itself constitute a demand for appraisal
under the CGCL.
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Pursuant to Sections 1300 through 1312 of the CGCL, holders of Dissenting
Shares may require the Bank to repurchase their Dissenting Shares at a price
equal to the fair market value of such shares determined as of the day before
the first announcement of the terms of the Reorganization, excluding any
appreciation or depreciation in consequence of the proposed Reorganization,
but adjusted for any stock split, reverse stock split or stock dividend which
becomes effective thereafter.
Within 10 days following approval of the Reorganization by the Bank's
stockholders, the Bank is required to mail to each person who did not vote in
favor of the Reorganization a notice of the approval of the Reorganization, a
statement of the price determined by the Bank to represent the fair market
value of Dissenting Shares (which shall constitute an offer by the Bank to
purchase such Dissenting Shares at such stated price), and a description of
the procedures for such holders to exercise their rights as Bank Dissenting
Stockholders.
Within 30 days after the date on which the notice of the approval of the
Reorganization was mailed, a holder of the Bank's Common Stock who wishes to
be paid the full cash value of his Dissenting Shares must submit to the Bank
(i) a written demand for the purchase of the dissenting shares, as described
below, and (ii) certificates representing any Dissenting Shares which the Bank
Dissenting Stockholder demands that the Bank purchase, so that such Dissenting
Shares may either be stamped or endorsed with the statement that the shares
are Dissenting Shares or exchanged for certificates of appropriate
denomination so stamped or endorsed.
The demand of a Bank Dissenting Stockholder is required by law to contain a
statement concerning the number of Dissenting Shares held of record by such
Bank Dissenting Stockholder which the Bank Dissenting Stockholder demands that
the Bank purchase, and a statement of what such Bank Dissenting Stockholder
claims to be the fair market value of the Dissenting Shares as of the day
before the announcement of the proposed Reorganization. The statement of fair
market value in such demand by the Bank Dissenting Stockholder constitutes an
offer by the Bank Dissenting Stockholder to sell the Dissenting Shares at such
price.
If the Bank and a Bank Dissenting Stockholder agree upon the price to be
paid for the Dissenting Shares, upon the Bank Dissenting Stockholder's
surrender of the certificates representing the Dissenting Shares, such price
is required by law to be paid to the Bank Dissenting Stockholder within the
later of 30 days after such agreement or 30 days after any statutory or
contractual conditions to the consummation of the Reorganization are satisfied
or waived, and in the case of certificated securities, subject to surrender of
the certificates for the payment.
If the Bank and a Bank Dissenting Stockholder disagree as to the price for
such Dissenting Shares or disagree as to whether such Dissenting Shares are
entitled to be classified as Dissenting Shares, such holder has the right to
bring an action in California Superior Court to resolve such dispute within
six (6) months after the date on which notice of approval of the
Reorganization is mailed. In such action, the court will determine whether the
shares of the Bank's Common Stock held by such stockholder are Dissenting
Shares, the fair market value of such shares of the Bank's Common Stock, or
both. The CGCL provides, among other things, that a Bank Dissenting
Stockholder may not withdraw the demand for payment of the fair market value
of Dissenting Shares unless the Bank consents to such request for withdrawal.
Accounting Treatment
The merger of Bank and Merger Co. will be accounted for in a method similar
to a pooling of interests.
21
<PAGE>
ANTI-TAKEOVER MEASURES
The Purpose of the Anti-Takeover Provisions
The Bank's Articles of Incorporation and By-Laws have contained certain
provisions which might be regarded as so-called "anti-takeover" provisions.
The Certificate of Incorporation and By-Laws of the Holding Company will
continue these provisions. Such provisions may be described as "anti-takeover
provisions" because they have an anti-takeover effect and may discourage
takeover attempts which have not been approved by the Board of Directors. We
included these provisions because they are in the Bank's existing Articles of
Incorporation and because certain tactics have become relatively common in
corporate takeover practice, including:
. an accumulation of a substantial block of stock as a prelude to an
attempted takeover or proxy fight, or a partial tender offer; or
. followed by a second step business combination involving less favorable
considerations than were offered in the partial tender offer.
Your Board of Directors believes such tactics can be highly disruptive and
can result in dissimilar and unfair treatment of stockholders. We are not
aware of any current efforts to obtain control of the Bank or to effect
substantial accumulations of its stock.
The following discussion is a general summary of the material provisions of
the Holding Company's Certificate of Incorporation and By-Laws and certain
other regulatory provisions, which may be deemed to have an "anti-takeover"
effect. The following description of certain of these provisions is
necessarily general and, with respect to provisions contained in the Holding
Company's Certificate of Incorporation and By-Laws, reference should be made
to the document in question. A copy of the Holding Company's Certificate of
Incorporation is attached hereto as Annex III, and a copy of the By-Laws has
been filed with the Application submitted to the Department of Corporations
and may be obtained by sending a written request to Mr. John R. Olson,
Secretary, Farmers & Merchants Bank of Central California, P.O. Box 3000,
Lodi, California 95241-1902.
Summary of Fair Price and Supermajority Vote Provisions
Article XIV of the Holding Company's Certificate of Incorporation contains a
"Supermajority Voting and Fair Price" provision, both to encourage potential
acquirers to negotiate with the Holding Company and to protect stockholders
from being unfairly treated in mergers or other business combinations with
persons who own a substantial amount of the Holding Company's stock. The
Supermajority Voting and Fair Price provision applies to mergers and certain
other types of business combinations with persons holding 20% or more of the
shares held by voting stock of the Holding Company (an "Interested
Stockholder"). In general, the Supermajority Voting and Fair Price provision
requires, in a merger or certain other business combinations, first that 66
2/3% of the outstanding shares, including those held by the Interested
Stockholder, must be voted for the business combination, second that all
stockholders who are independent of the Interested Stockholder receive at
least a specified amount for his or her shares acquired during the preceding
two years and third that certain other requirements are met. The specifics of
these requirements are more fully discussed below.
The Supermajority Voting and Fair Price provisions are designed to encourage
potential acquirors to negotiate at arm's length with the Board of Directors.
In the absence of such negotiations, these provisions seek to ensure that any
multi-step attempt to take over the Holding Company will be made on terms
offering similar treatment to all stockholders. In the past, there have been
takeovers of publicly held companies accomplished by the purchase of blocks of
stock in open market purchases or otherwise at a price above prevailing market
prices, followed by a second step, merger or other transaction in which the
shares acquired are paid less than the value paid in the first step.
The Bank has a large number of long-term stockholders who each hold a
relatively small number of Bank shares. We believe that sophisticated
arbitrageurs and other market professionals are generally in a better position
22
<PAGE>
to take advantage of the more lucrative first step transaction, while long-
term stockholders will often, as a practical matter, be compelled to accept
the less favorable consideration payable in the second step business
combination.
The potential for future use of the two-step acquisition have convinced us
that these provisions are desirable in order to preserve for the stockholders
the benefits which will accrue to the Holding Company and its subsidiary, the
Resulting Bank, including its increased ability to compete in the
significantly deregulated banking industry.
This Supermajority Voting and Fair Price provision will not apply to an
otherwise covered business combination in certain circumstances. First, if the
business combination is approved by 66 2/3% of the "Disinterested Directors"
of the Holding Company, the Supermajority Voting and Fair Price rules do not
apply. For purposes of the Supermajority Voting and Fair Price provision, a
Disinterested Director is defined as a member of the Board of Directors who is
not affiliated with the Interested Stockholder, and who was a member of the
Board of Directors prior to the time the Interested Stockholder became an
Interested Stockholder. Second, the same is true if any banking subsidiary of
the Holding Company has received a notice of termination of insurance from the
Federal Deposit Insurance Corporation or an order to correct a capital
impairment from the Commissioner of the California Department of Financial
Institutions, possession of any banking subsidiary of the Holding Company has
been taken by the Commissioner, a conservator has been appointed for any
banking subsidiary of the Holding Company or the Holding Company or, a similar
proceeding has been commenced following a substantial deterioration in the
Holding Company's condition. Where the Supermajority Voting and Fair Price
provisions do not apply, a simple majority of the outstanding shares is
required to approve the business combination.
Where the Supermajority Voting and Fair Price rules apply, the requirements
in addition to the 66 2/3% approval of the outstanding shares include: (a) the
consideration to be received in the business combination is in cash or in the
same form as the Interested Stockholder has paid for the largest number of
shares acquired by such Interested Stockholder; (b) the per share
consideration to be received by holders of outstanding stock in the business
combination (other than the Interested Stockholder) is at least equal to the
highest of (i) the highest per share price paid by such Interested Stockholder
in acquiring the Holding Company's stock of the same class in the two years
prior to the announcement of the business combination, or in the transaction
in which it became an Interested Stockholder, if within two years of the date
of first public announcement of the proposal, (ii) the fair market value per
share on the announcement date or on the date on which the Interested
Stockholder became an Interested Stockholder if within two years of the first
public announcement of the proposal, or (iii) as to shares other than common
stock, the highest preference per share to which the holder of such shares is
entitled upon a liquidation of the Holding Company; and (c) after becoming an
Interested Stockholder and prior to the consummation of such business
combination (i) such Interested Stockholder must not have become the
beneficial owner of any additional shares of the voting stock of the Holding
Company, except as part of the transaction which results in such stockholder
becoming an Interested Stockholder, within the two year period prior to
consummation of the business combination, (ii) such Interested Stockholder
must not have received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances, guarantees, pledges
or other financial assistance or tax credits provided by the Holding Company
or any subsidiary of the Holding Company, and (iii) except as approved by a 66
2/3% majority of the Directors who are Disinterested Directors, there shall
have been (A) no failure to declare and pay at the regular date therefore any
full dividends on any preferred stock or (B) no reduction in the annual rate
of dividends paid on Common Stock, and there shall have been (C) an increase
in the annual rate of dividends necessary to reflect certain reclassification
and recapitalization.
The Holding Company's Certificate of Incorporation provides that the
Supermajority Voting and Fair Price provisions cannot be amended or repealed
unless such a change is approved by not less than 66 2/3% of the total voting
power of the outstanding shares of the Holding Company.
The Supermajority Voting and Fair Price provision will not prevent a merger
or similar transaction following a tender offer in which all stockholders
receive substantially the same price for their shares and which
23
<PAGE>
66 2/3% of the shares have been voted for the merger or which 66 2/3% of the
Disinterested Directors have approved and which the holders of a majority of
the outstanding shares approve. Except for the restrictions on the specified
business combinations, the Supermajority Voting and Fair Price provision will
not prevent a holder of a controlling interest from exercising control over
the Holding Company or prevent such a holder from increasing his or her share
ownership. The existence of the Supermajority Voting and Fair Price provision
may, however, tend to encourage persons seeking control of the Holding Company
to negotiate terms of a proposed merger or similar transactions with the
Holding Company's Board of Directors.
The Board of Directors recognizes that not all two-tiered tender offers or
other two-step transactions are intended to pressure stockholders into hasty
decisions or to discriminate among stockholders. However, taking all factors
into consideration, the Board believes that it is appropriate to take action
to reduce the possibility to two-tiered transactions which are unfair.
While the Board believes the Supermajority Voting and Fair Price provision
is in the best interest of the Holding Company's stockholders, there are
several possible negative considerations. The effect of the Supermajority
Voting and Fair Price provision may be to deter a future takeover attempt
which the Board has not approved, but which a majority of the stockholders may
deem to be in their best interests or in which stockholders may receive a
premium for their shares over the then market value. The adoption of the
Supermajority Voting and Fair Price provision also may make it more difficult
to obtain stockholder approval of transactions covered by the provision, such
as mergers or other corporate combinations with persons who are Interested
Stockholders, even if approved by the Directors and favored by a majority of
the stockholders.
Applicability of DGCL Section 203. Because the Supermajority Voting and Fair
Price provisions which are already contained in the Bank's Articles of
Incorporation generally have been carried through to the Holding Company's
Certificate of Incorporation, the Holding Company has "opted out" of Section
203 of the DGCL through Article XVII of its Certificate of Incorporation.
Under Delaware law, if the Holding Company did not opt out of Section 203 or
qualify under one of the available exemptions provided in DGCL Section 203,
such Section would otherwise prohibit the Holding Company from engaging in any
business combination with any interested stockholder for a period of three
years following the time that such stockholder became an interested
stockholder unless certain requirements are met.
Two-Year Renewal for Quasi-California Corporation. If the Holding Company is
deemed to be a quasi-California corporation under Section 2115 of the CGCL,
the renewal provisions of Section 710 of the CGCL will apply, and every two
years the supermajority provisions of Article XIV of the Holding Company's
Certificate of Incorporation will have to be renewed by an affirmative vote of
66 2/3% of the outstanding shares in order to remain effective. In the absence
of a Supermajority Voting and Fair Price provision, under California law the
vote of a majority of the voting power of the outstanding stock of the Holding
Company would be sufficient to approve the transactions otherwise covered by
the Supermajority Voting and Fair Price provision, such as a merger,
consolidation or sale of substantially all of the Holding Company's assets.
For further discussion of the applicability of Section 2115 of the CGCL, see
"Quasi-California Corporation Status" below.
Consideration of Nonmonetary Factors
At the annual meeting of the Bank's stockholders in 1998, the stockholders
approved an amendment to the Articles of Incorporation of the Bank requiring
the Board of Directors, when evaluating a merger proposal, to consider the
social and economic effects of the transaction on employees, stockholders,
customers and suppliers in the communities in which the Bank operates, in
addition to monetary factors. Article XV of the Holding Company's Certificate
of Incorporation contains a substantially similar provision requiring the
Board of Directors to consider such factors when evaluating a possible
business combination.
The Boards of Directors of the Holding Company and the Bank believe that the
inclusion of such provisions in the Holding Company's Certificate of
Incorporation is appropriate in light of the importance of the Bank to the
communities which it serves.
24
<PAGE>
In some circumstances, the nonmonetary factors provision could influence the
Board of Directors to oppose a tender offer or other attempted acquisition of
control of the Holding Company that some stockholders might find financially
attractive. This provision may also have the effect of making Board approval
of an acquisition more difficult to secure and, consequently may have the
effect of delaying or discouraging a proposed takeover. In some cases,
opposition to such a proposal might have the effect of maintaining the tenure
of incumbent management.
Another effect of Article XV may be to dissuade stockholders who might be
displeased with the Board of Directors' response to a tender offer from
engaging the Holding Company in costly and time consuming litigation. Such
litigation might involve an allegation by a stockholder that the Board of
Directors breached an obligation to the stockholders by not limiting its
evaluation of a tender offer solely to the value of the tender offer
consideration in relation to the then market price of the Holding Company's
stock.
Limitation on Action of Stockholders by Written Consent
At the Bank's annual meeting of stockholders in 1998, the stockholders
approved an amendment to the Bank's Articles of Incorporation which permits
stockholders to take action by written consent in lieu of a meeting of
stockholders only if the Board of Directors previously approves the action.
The Certificate of Incorporation of the Holding Company contains a similar
provision with respect to action by the Holding Company's stockholders.
The Board of Directors of the Holding Company believes that this provision
is important to assure that all stockholders entitled to vote on proposed
corporate action have the opportunity to participate in determining if such
action is appropriate through the normal meeting process, except in cases
where the Board of Directors has approved. The Board of Directors also
believes that it is in inappropriate for stockholders to take corporate action
without notice to all other stockholders, even if a majority of the
stockholders favors such action. It is felt that the orderly process which is
normally used when actions are proposed at stockholder meetings is preferable
to the consent procedure, unless the Board of Directors has approved such
action. In this way, all stockholders are given an opportunity to consider
proposals and, if appropriate, to inform other stockholders of their views.
Additionally, management is provided with an opportunity to review and respond
to proposed actions, as appropriate.
This provision may be viewed as having the effect of discouraging an attempt
by another person or entity to gain control of the Holding Company or take
action which might facilitate gaining control of the Holding Company, after
the acquisition of a substantial percentage of the shares of the Holding
Company's outstanding stock. The effect of the Article would be to encourage
any person intending such a takeover to negotiate with the Board of Directors,
rather than to take unilateral action without notice to the Board of Directors
or other stockholders. The Board of Directors of the Holding Company believes
that such an orderly procedure is in the best interests of the stockholders.
However, the Article could limit stockholders' participation in certain types
of transactions that might be proposed, whether or not such transactions were
favored by a majority of the stockholders, and could enhance the ability of
officers and directors to retain their positions by precluding changes in
control through the written consent procedure.
Special Meetings of Stockholders
The Holding Company's Certificate of Incorporation provides that special
meetings of the stockholders of the Holding Company may be called only by a
majority of the Board of Directors or by the holders of a majority of the
outstanding shares entitled to vote. Under the Bank's By-Laws, special
meetings of the stockholders may be called by the Chairman, or by the
President, or by stockholders holding shares representing at least 10% of the
voting power.
Director Qualification and Nomination Procedures
The Holding Company's By-Laws provide that no person shall be a member of
the Board of Directors unless such person has been for at least two years a
resident in a county in which a banking subsidiary of the
25
<PAGE>
Holding Company maintains a banking office except when the election of such
person is approved by the affirmative vote of at least two-thirds of the
members of the Board of Directors of the Holding Company then in office. In
addition, such person must not be, among other things, the holder of more than
1% of the outstanding shares of any other banking corporation, affiliate or
subsidiary thereof, or bank holding company, or industrial loan company,
savings bank or association or finance company, or a director, officer,
employee, agent nominee or attorney of any such entity.
The Holding Company's By-Laws provide that director nominations, other than
those made by the Board of Directors, shall be made by notification in writing
delivered or mailed to the President of the Holding Company not less than 30
days or more than 60 days prior to any meeting of stockholders called for
election of directors. The provision also requires that the notice contain
detailed information about the nominee, including information necessary to
determine if the nominee is qualified under the By-Laws.
Preferred Stock
The Holding Company's Certificate of Incorporation authorizes the issuance
of 2,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
The Board of Directors has sole authority to issue and to determine the terms
of any one or more series of Preferred Stock, including voting rights,
conversion rate and liquidation preferences. As a result of the ability to fix
voting rights for a series of Preferred Stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred
Stock to persons friendly to management in order to attempt to block a post-
tender offer merger or other transaction by which a third party seeks control,
and thereby assist management to retain its position. The Holding Company's
Board of Directors currently has no plans for the issuance of Preferred Stock.
Cumulative Voting
Cumulative voting means that a stockholder may cast the number of shares he
owns times the number of directors to be elected in favor of one nominee or
allocate such votes among the nominees as he determines. Stockholders of the
Holding Company will continue to have the right to vote cumulatively in the
elections of directors for the foreseeable future, despite the fact that the
Holding Company's Certificate of Incorporation provides that there will not be
cumulative voting. Under Delaware law, cumulative voting is available only if
the corporation's certificate of incorporation provides for cumulative voting.
However, even though the Holding Company is a Delaware corporation, pursuant
to Section 2115 of the CGCL, Section 708, subdivisions (a), (b) and (c) of the
CGCL, concerning a stockholder's right to cumulate votes at any election of
directors, is expected to apply to the Holding Company due to its presence in
California and to thereby require the Holding Company to permit cumulative
voting. Until and unless the Holding Company's stock becomes designated as
qualified for trading on the Nasdaq National Market System and the Holding
Company has at least 800 stockholders as of the record date of its most recent
annual meeting of stockholders, Section 2115 (and thereby Section 708) of the
CGCL will continue to apply and cumulative voting will continue to be
required. For an explanation of the applicability of Section 2115 of the CGCL,
see "Quasi-California Corporation Status" below.
The Board of Directors of the Holding Company has provided in the
Certificate of Incorporation that there should not be cumulative voting
because the Holding Company is expected to still have cumulative voting as a
quasi-California corporation and because it believes that the eventual
elimination of cumulative voting at some point in the future would be
advantageous to the Holding Company and its stockholders because each director
of a publicly held corporation has a duty to represent the interests of all
stockholders rather than any specific stockholder or group of stockholders.
The presence on the Board of Directors of one or more directors representing
the interests of a minority stockholder or group of stockholders could disrupt
the management of the Holding Company and prevent it from operating in the
most effective manner. Furthermore, the election of directors who view
themselves as representing a particular minority constituency could introduce
an element of discord on the Board of Directors, impair the ability of the
directors to work effectively and discourage qualified independent individuals
from serving as directors. Providing for majority rule voting in the election
of directors by eliminating cumulative voting would help ensure that each
director acts in the best interests of all stockholders.
26
<PAGE>
If, at some point in the future, the Holding Company is not deemed to be a
quasi-California corporation and cumulative voting is no longer required, such
elimination may render more difficult any attempt by a holder or group of
holders of a significant number of voting shares, but less than a majority, to
change or influence the management or policies of the Holding Company. In
addition, under certain circumstances, the elimination of cumulative voting,
along with other measures that may be viewed as having an anti-takeover
effect, such as discouraging the accumulation of large minority stockholders
(as a prelude to an unfriendly acquisition or business combination proposal or
otherwise) by persons who would not make that acquisition without being
assured of representation on the Board of Directors.
The Board of Directors and management have no intention in the foreseeable
future to qualify the Holding Company's stock for listing on the Nasdaq
National Market System nor to take any action which would otherwise result in
the Holding Company no longer being deemed a quasi-California corporation.
Therefore, cumulative voting is expected to remain in effect in the
foreseeable future.
Additional Considerations
Federal law requires prior approval by the Board of Governors of the Federal
Reserve System before any company acquires control of a bank holding company.
In addition, pursuant to the California Financial Code, no person or entity
may directly or indirectly, acquire a controlling interest in a California
state-chartered bank without the prior written approval of the California
Department of Financial Institutions. Independent of any provision of the
Holding Company's Certificate of Incorporation or By-Laws, the requirement for
such regulatory approval may delay efforts to obtain control over the Holding
Company.
The Holding Company has 2,000,000 shares of authorized common stock of
which, after consummation of the proposed Reorganization, there will be
632,185 shares issued and outstanding. Therefore the Holding Company will have
1,367,815 shares of its authorized common stock available for future issuance
by the Board of Directors for any proper corporate purpose. These shares could
be issued into "friendly" hands by the Board of Directors in the event of an
attempt to gain control of the Holding Company. Because the Holding Company's
authorized but unissued shares could be issued and used in this manner, they
represent another potential anti-takeover device.
The Holding Company's Certificate of Incorporation and By-Laws currently
contain no other provisions that were intended to be or could fairly be
considered as anti-takeover in nature or effect. The Board of Directors has no
present intention to amend the Certificate of Incorporation to add any further
anti-takeover provisions.
27
<PAGE>
MARKET PRICES OF STOCK
The Holding Company
Farmers & Merchants Bancorp was incorporated in Delaware on February 22,
1999. No shares of the Holding Company have been issued since the date of its
incorporation to the present time. Therefore, no market exists at this time
for the Holding Company's stock. Bank stockholders will exchange their Bank
stock for Holding Company stock. It is expected that shares of the Holding
Company will be listed for quotation on the Electronic Bulletin Board.
The Bank
The Bank had approximately 1,095 stockholders of record as of March 1, 1999.
The Bank's stock is not traded on any exchange. The Shares are primarily held
by local residents and are not actively traded.
The following sets forth the high and low selling prices of the Bank's
common stock for the quarters indicated based on the limited transactions of
which management is aware. The Bank is not aware of the prices paid for all
stock trades in the Bank's common stock. The high and low selling prices
provided below are based only upon the terms of sales reported to the Bank as
transfer agent.
TRADING PRICES
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1998
Fourth Quarter............................................ $150.00 $150.00
Third Quarter............................................. $150.00 $150.00
Second Quarter............................................ $160.00 $145.00
First Quarter............................................. $145.00 $135.00
1997
Fourth Quarter............................................ $145.00 $135.00
Third Quarter............................................. $135.00 $135.00
Second Quarter............................................ $135.00 $135.00
First Quarter............................................. $140.00 $135.00
1996
Fourth Quarter............................................ $135.00 $130.00
Third Quarter............................................. $130.00 $130.00
Second Quarter............................................ $135.00 $130.00
First Quarter............................................. $135.00 $132.00
</TABLE>
QUASI-CALIFORNIA CORPORATION STATUS
Pursuant to Section 2115 of the CGCL, under certain circumstances, certain
provisions of the CGCL may be applied to foreign corporations qualified to do
business in California notwithstanding the law of the jurisdiction where the
corporation is incorporated. Such a corporation is referred to as a "quasi-
California" corporation. The Holding Company has qualified to do business in
the State of California. Section 2115 is applicable to foreign corporations
which have more than half of their stockholders of record residing in
California and more than half of their business deriving from California.
Initially, the Holding Company's sole business will be managing its investment
in its wholly-owned subsidiary, the Bank, which has substantially all of its
property, employees, and operations in California. However, under subdivision
(c) of Section 2115, if the Holding Company's stock were to become designated
as qualified for trading on the Nasdaq National Market System and there are at
least 800 stockholders as of the record date of its most recent annual meeting
of stockholders, then Section 2115 of the CGCL would no longer be applicable.
The Board of Directors of the Holding Company has no plans to cause the
shares of the common stock of the Holding Company to be listed on the Nasdaq
National Market System.
28
<PAGE>
To the extent that section 2115 of the CGCL continues to apply to the
Holding Company, the various provisions of California law specified in section
2115 will continue to apply to the Holding Company even though it is
incorporated in Delaware. These provisions of California law include the
requirement for an annual election of all directors (no classified or
"staggered" board of directors is permissible), the removal of directors
without cause, the directors' standard of care, indemnification of directors,
officers and others, the right of stockholders to cumulate votes in the
election of directors, the requirement that any supermajority vote
requirements in the Certificate of Incorporation or By-Laws be reaffirmed by
the holders of the outstanding shares every two years, and various provisions
relating to mergers and acquisitions of the Holding Company (including
dissenters' rights) and rights of inspection of corporate records and the list
of stockholders.
DIVIDENDS
The Holding Company
Since the date of its incorporation, the Holding Company has paid no
dividends. After consummation of the Reorganization, the amount and timing of
future dividends will be determined by its Board of Directors and will
substantially depend upon the earnings and financial condition of its
principal subsidiary, the Bank. The ability of the Holding Company to obtain
funds for the payment of dividends and for other cash requirements is largely
dependent on the amount of dividends which may be declared by its subsidiary,
the Bank.
Because the Bank is a state-chartered bank, its ability to pay dividends or
make distributions to its stockholders is subject to restrictions set forth in
the California Financial Code. The California Financial Code restricts the
amount available for cash dividends by state-chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years
(less any distributions to stockholders made during such period). In the event
the Bank has no available funds for dividends as described above, then any
dividends contemplated would require approval from the Commissioner of the
Department of Financial Institutions.
It is expected that the Holding Company will continue to be a quasi-
California corporation as defined pursuant to Section 2115 of the CGCL. Under
the CGCL, the rules for dividends are as follows: (i) the retained earnings of
the corporation immediately prior to the distribution exceeds the amount of
the distribution; (ii) the assets of the corporation exceed 1 1/4 times its
liabilities; or (iii) the current assets of the corporation exceed its current
liabilities, but if the average pre-tax net earnings of the corporation before
interest expense for the two years preceding the distribution was less than
the average interest expense of the corporation for those years, the current
assets of the corporation must exceed 1 1/4 times its current liabilities.
Management currently expects that the Holding Company will remain as a quasi-
California corporation. If at some point in the future the Holding Company
ceases to be a quasi-California corporation, it would become subject to the
provisions of the Delaware General Corporation Law with respect to dividends,
which are technically different. However, Management believes that there would
be no material effect to stockholders in such case.
Management believes that, for the foreseeable future, the ability of the
Holding Company to pay cash dividends will effectively remain the same as the
Bank because dividends from the Bank will continue to be the principal source
of funds for dividends from the Holding Company, although no assurance can be
given as to the occurrence of events in the future which may adversely impact
the financial condition of the Bank or the Holding Company and their
respective ability to pay dividends.
The Bank
The Bank declared semi-annual cash dividends of $1.65, $1.53 and $1.45 per
share for June 1998, 1997 and 1996, respectively, and of $3.20, $3.00 and
$2.82 per share for December 1998, 1997 and 1996, respectively. The Bank has
paid 5% stock dividends to stockholders in each year since 1975. Such amounts
of cash dividends have been adjusted for the effect of such stock dividends.
The Holding Company anticipates continuing to pay dividends in the future.
In the opinion of the Bank's management, for the foreseeable future, there is
no reason to expect a decrease in the Holding Company's dividend rate relative
to the Bank's dividend rates, although no assurance can be given as to the
occurrence of events in the future which may adversely affect the rate of
dividends by the Bank or the Holding Company.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Bank as of December
31, 1998 and the pro forma capitalization of the Holding Company as of
December 31, 1998, assuming that the Reorganization had been consummated at
such date, no stockholder of the Bank had exercised dissenters' rights, and
the Holding Company had redeemed and canceled the shares of Merger Co. issued
to the Holding Company.
<TABLE>
<CAPTION>
Bank Merger Co. Adjustments Holding Company
(Actual) (Actual)(1) (Pro Forma) (Pro Forma)
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Preferred Stock........... $ -- $ -- $ -- $ --
Common Stock.............. 3,161,000 100 (100) 6,322
Additional Paid-in
Capital.................. 40,421,000 43,575,678
Accumulated Other
Comprehensive Income..... 832,000 832,000
Retained Earnings......... 34,991,000 34,991,000
----------- ----- ----- -----------
Total Stockholders'
Equity................. $79,405,000 $ 100 $(100) $79,405,000
=========== ===== ===== ===========
</TABLE>
- - --------
(1) Represents the capitalization of Merger Co. of $100.
FINANCIAL STATEMENTS
The Bank's audited Balance Sheets as of December 31, 1998 and 1997, the
related audited Statements of Earnings, Changes in Stockholders' Equity and
Cash Flows for each of the three years ended December 31, 1998 are included in
the Bank's Annual Report, a copy of which is being sent concurrently with this
Proxy Statement/Offering Circular. Financial statements of the Bank are not
included herein as they are not deemed material to the exercise of prudent
judgment by stockholders with respect to the matters to be acted upon at the
Meeting. If any stockholder so desires, he may obtain an additional copy of
such financial statements upon written request to Mr. John R. Olson,
Secretary, Farmers & Merchants Bank, P.O. Box 3000, Lodi, California 95240-
2184.
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 50, Financial Statement Requirements in Filings Involving the
Formation of a Bank Holding Company, the Bank's audited consolidated balance
sheets as of December 31, 1998 and 1997 and related audited consolidated
statements of income, stockholders' equity and cash flows for each of the
three years ended December 31, 1998, prepared in conformity with generally
accepted accounting principles, and report of independent public accountants,
are included as part of the Bank's 1998 Annual Report to Stockholders, a copy
of which is being concurrently furnished to stockholders. Additional copies of
the Bank's 1998 Annual Report to Stockholders are available to each person to
whom this Proxy Statement/Offering Circular has been delivered, upon written
request of any such person, directed to John R. Olson, Secretary, Farmers &
Merchants Bank of Central California, P.O. Box 3000, Lodi, California 95240-
2184, (209) 367-2411.
No historical financial information is available for the Holding Company
since it is a newly formed Delaware corporation.
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<PAGE>
HISTORY AND BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was incorporated under the laws of the State of Delaware
on February 22, 1999, for the purpose of becoming the holding company of the
Bank. Immediately prior to consummation of the Reorganization, the Holding
Company will own all of the stock of Merger Co. Thereafter, Merger Co. will
merge with the Bank. Stockholders of the Bank will become stockholders of the
Holding Company, subject to their dissenters' rights. The Holding Company will
become the sole stockholder of the Resulting Bank. The Resulting Bank will
carry on the business of the Bank under the name "Farmers & Merchants Bank of
Central California." The executive offices of the Holding Company are located
at 121 West Pine Street, Lodi, California 95240-2184. A copy of the Holding
Company's Certificate of Incorporation is attached hereto as Annex III.
Employees
The Holding Company has no employees other than its officers, each of whom
is also an employee and officer of the Bank and who serve in their capacity as
officers of the Holding Company without additional compensation. Upon
consummation of the Reorganization, the Holding Company, whose sole business
function will be to hold 100% of the Bank stock, does not anticipate any
immediate change in the number of or status of its employee officers. The
status of the Bank's employees is not expected to be affected by the
Reorganization.
Board of Directors
The Directors of the Holding Company are Stewart C. Adams, Jr., Ralph
Burlington, Robert F. Hunnell, Ole R. Mettler, James R. Podesta, George
Scheideman, Harry C. Schumacher, Hugh Steacy, Kent A. Steinwert, Calvin
(Kelly) Suess and Carl A. Wishek, Jr., each of whom also serve as Directors of
the Bank. Directors of the Holding Company are elected to one-year terms.
Under the provisions of the Holding Company's By-Laws, the number of
authorized directors may not be less than 9 nor more than 15 with the exact
number to be determined by resolution adopted from time to time by the Board
of Directors. Upon consummation of the Reorganization, the Directors of the
Holding Company will own the following percentages of Holding Company stock:
<TABLE>
<CAPTION>
Percentage of
Directors Common Stock
- - --------- -------------
<S> <C>
Stewart C. Adams, Jr.............................................. *
Ralph Burlington.................................................. *
Robert F. Hunnell................................................. *
Ole R. Mettler.................................................... 2.99%
James R. Podesta.................................................. *
George Scheideman................................................. *
Harry C. Schumacher............................................... *
Hugh Steacy....................................................... *
Kent A. Steinwert................................................. *
Calvin (Kelly) Suess.............................................. *
Carl A. Wishek, Jr................................................ 6.90%
All directors as a group (11 persons)............................. 12.45%
</TABLE>
- - --------
* Indicates less than 1%.
Remuneration of Directors and Officers
The Holding Company has paid no remuneration to its officers and directors
since its incorporation. It is not anticipated that the Holding Company's
officers and directors will initially be paid any additional compensation by
the Holding Company other than that currently paid to them by the Bank.
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<PAGE>
Indemnification
The Holding Company's Certificate of Incorporation and By-Laws provide for
indemnification of officers, directors, employees and agents to the fullest
extent permitted by Delaware law.
Delaware law generally provides for the payment of expenses, including
attorney's fees, judgments, fines and amounts paid in settlement reasonably
incurred by the indemnitee provided such person acted in good faith and in a
manner he or she reasonably believed not to be opposed to the best interests
of the corporation. However, in derivative suits, if the suit is lost, no
indemnification is permitted if the prospective indemnitee is found to be
liable for misconduct in the performance of his or her duty to the
corporation. No indemnification may be provided in any action or suit in which
the only liability asserted against a director is pursuant to a statutory
provision outlawing loans, dividends, and distribution of assets under certain
circumstances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Holding Company pursuant to provisions in the Holding Company's Certificate of
Incorporation and By-Laws, the Holding Company has been informed that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act of 1933, and is therefore unenforceable.
The Reorganization of the Bank into a subsidiary of the Holding Company is
not expected to have any effect on the ability of the Bank or the Holding
Company to obtain officers and directors indemnification insurance, or the
rates at which such insurance is available. The provisions regarding
indemnification may not be applicable under certain federal banking laws and
regulations.
HISTORY AND BUSINESS OF THE BANK
General
The Bank is a California state-chartered corporation organized in 1916 to
conduct the business of banking. The Bank's deposits are insured under the
Federal Deposit Insurance Act up to applicable limits. The Bank is a member of
the Federal Reserve System. At December 31, 1998, the Bank had $758 million in
total assets, $627 million in total deposits and $329 million in gross loans.
Service Area
The Bank services the northern Central Valley of California with 18 banking
offices. The area includes Sacramento, San Joaquin, Stanislaus and Merced
Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Walnut Grove,
Linden, Modesto, Turlock and Hilmar.
Through its network of banking offices, the Bank emphasizes personalized
service along with a full range of banking services to businesses and
individuals located in the service areas of its offices. Although the Bank
focuses on marketing of its services to small and medium sized businesses, a
full range of retail banking services are made available to the local consumer
market.
The Bank offers a wide range of deposit instruments. These include checking,
savings, money market, time certificates of deposit, individual retirement
accounts and online banking services for both business and personal accounts.
The Bank also serves as a federal tax depository for its business customers.
The Bank also provides a full complement of lending products, including
commercial, real estate construction, agribusiness, installment, credit card
and real estate loans. Commercial products include lines of credit and other
working capital financing and letters of credit. Financing products for
individuals include automobile financing, lines of credit, residential real
estate, home improvement and home equity lines of credit.
The Bank also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include a credit card program
for merchants, collection services, payroll services, electronic funds
32
<PAGE>
transfers by way of domestic and international wire and automated
clearinghouse, and on line account access. The Bank also makes available
investment products to customers, including mutual funds and annuities. These
investment products are offered through a third party with investment
advisors.
In addition, the Bank has investments in two wholly owned subsidiaries:
Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Both
companies were organized during 1986. Farmers & Merchants Corporation is
currently dormant and Farmers/Merchants Corp. acts as trustee on deeds of
trust originated by the Bank.
Competition
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. The Bank competes with
other major commercial banks, diversified financial institutions, savings
banks, credit unions, savings and loan associations, money market and other
mutual funds, mortgage companies and a variety of other nonbank financial
services and advisory companies.
Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader
range of financial services than the Bank. In order to compete with other
financial service providers, the Bank relies upon personal contact by its
officers, directors, employees and stockholders, along with various
promotional activities and specialized services. In those instances where the
Bank is unable to accommodate a customer's needs, the Bank may arrange for
those services to be provided by its correspondents.
Employees
As of December 31, 1998, the Bank had approximately 336 full-time equivalent
employees. The Bank provides several benefits for its full-time employees,
including health and life insurance, workers' compensation, social security,
paid vacations, bank services and a retirement plan. The Bank believes that
its employee relations are satisfactory.
Property
The Bank operates 18 offices, in the Sacramento, San Joaquin, Stanislaus and
Merced Counties of California. The Bank owns 17 of these offices, three of
which are on ground leases. The Bank's other facility is leased.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Bank's programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If not addressed, this could
result in a variety of system and operating problems.
Based on the Federal Financial Institutions Examination Council guidelines,
the Bank is addressing its Y2K issues using a five phase program:
(1) Awareness Phase--A strategic approach was developed to address the
Year 2000 problem.
(2) Assessment Phase--Detailed plans and target dates were developed.
(3) Renovation Phase--This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
33
<PAGE>
(4) Validation Phase--This phase includes testing and conversion of
system applications.
(5) Implementation Phase--This phase includes certification of Y2K
compliance and employee training and acceptance.
Phases one through four have been relatively completed. The Bank is
currently in the implementation phase, which is expected to be completed
during the second quarter of 1999.
In addition, an assessment of the Y2K readiness of external entities with
which the Bank conducts its operations is ongoing. The Bank is continuing to
communicate with all of its significant obligors, counterparties, other credit
clients and vendors to determine the likely extent to which the Bank may be
affected by third parties' Y2K plans and target dates. In this regard, the
Bank is developing contingency plans in the event that external parties fail
to achieve their Y2K plans and target dates.
The Bank estimates the total cost of the Y2K project to be approximately
$1,571,000, of which $1,203,000 has been incurred through 1998 and the
remaining $368,000 to be incurred during the first quarter of 1999. The costs
of the Y2K program and the date on which the Bank plans to be Y2K compliant
are based on management's best current estimates, which were derived utilizing
numerous assumptions of future events including the availability of certain
resources, third party vendors and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could
differ from those plans.
Litigation
There is currently no pending litigation to which the Holding Company, the
Bank or Merger Co. is a party and which is expected to have a material adverse
impact upon the financial condition or results of operations of the Holding
Company, the Bank or Merger Co. Further, there is no material legal proceeding
in which any director, executive officer, principal stockholder, or affiliate
of the Holding Company, the Bank or Merger Co. or any associate of any such
director, executive officer, or principal stockholder is a party and has a
material interest adverse to the Holding Company, the Bank or Merger Co.
Board of Directors and Officers
The Bank's Board of Directors is presently composed of 11 members, each of
whom stand for election each year. For additional information concerning
directors and executive officers, see "Election of Directors" above.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Officers' and Directors' Compensation
Information concerning the annual and long-term compensation for executive
officers and directors is set forth above under "Election of Directors--
Remuneration and other Transactions with Management and Others."
Committees and Meetings of the Board of Directors
Information concerning the committees and the meetings of the Board of
Directors during 1998 is set forth above under "Election of Directors--
Committees of the Board of Directors of the Bank" and "Election of Directors--
Board of Directors Meetings."
34
<PAGE>
CERTAIN TRANSACTIONS
Some of the directors and executive officers of the Bank and the companies
with which they are associated are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Bank's business. The
Bank expects to have banking transactions with such persons and companies in
the future. In management's opinion, all loans and commitments to lend
included in said transactions were made in compliance with applicable laws on
substantially the same terms, including interest rates and collateral, as
those prevailing for comparable contemporaneous transactions with other
persons of similar creditworthiness, and did not involve more than a normal
risk of collectibility or present other unfavorable features. The aggregate
amount of all such loans made during 1998 amounted to $2,314,000, including
renewals of previous loans. The balance of these loans and loans made in prior
years outstanding at December 31, 1998 amounted to $2,692,000.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting the
Holding Company and the Bank. This summary is qualified in its entirety by
such statutes and regulations.
Holding Company Regulation
The Holding Company will be a registered bank holding company under the Bank
Holding Company Act of 1956 (the "Banking Act") as amended, and as such will
be subject to regulation by the Federal Reserve Board. A bank holding company
is required to file with the Federal Reserve Board annual reports and other
information regarding its business operations and those of its subsidiaries. A
bank holding company and its subsidiary banks are also subject to examination
by the Federal Reserve Board.
The Banking Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any
voting shares of any bank or bank holding company, if, after such acquisition,
it would own or control, directly or indirectly, more than 5% of the voting
shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies engaged in
banking-related activities, the Federal Reserve Board considers whether the
performance of any such activity by a subsidiary of the holding company
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as overconcentration of resources, decrease of
competition, conflicts of interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
Capital
The Federal Reserve Board and Federal Deposit Insurance Corporation require
banks and holding companies to maintain minimum capital ratios.
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
adopted substantially similar risk-based capital guidelines. These ratios
involve a mathematical process of assigning various risk weights to different
classes of assets, then evaluating the sum of the risk-weighted balance sheet
structure against the capital base of the Bank and the Holding Company. The
rules set the minimum guidelines for the ratio of Total Capital to risk-
weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at 8% and the ratio of Tier 1 Capital to risk-
weighted assets (including certain off-balance sheet activities) at 4%. To be
well capitalized, the minimum ratio for Total Capital is 10% and the minimum
ratio for Tier 1 Capital is 6%. At least half of the total capital is to be
composed of common equity, retained earnings, and a limited amount of
perpetual preferred stock less certain goodwill items ("Tier 1 Capital"). The
remainder may
35
<PAGE>
consist of a limited amount of subordinated debt, other preferred stock, or a
limited amount of loan loss reserves. At December 31, 1998, on a pro forma
basis as if the transaction had been consummated on such date, the Holding
Company's consolidated risk-adjusted Tier 1 Capital and Total Capital, as
defined by the regulatory agencies based on the fully phased in 1992
guidelines, were 19.54% and 20.80% of risk-weighted assets, respectively, well
above the minimum and well-capitalized standards mandated by the regulatory
agencies.
In addition, the federal banking regulatory agencies have adopted leverage
capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
3% Tier 1 Capital (as defined for purposes of the risk-based capital
guidelines) to total assets. However, most banking organizations are expected
to maintain capital ratios well in excess of the minimum levels and generally
must keep such Tier 1 ratio at or above 5%. To be well capitalized, the
minimum Tier 1 ratio must be 6%. As of December 31, 1998, on a pro forma basis
as if the transaction had been consummated on such date, the Holding Company's
leverage ratio was 10.35%, well above the regulatory minimum and well-
capitalized standards.
Regulatory authorities may increase such minimum requirements for all banks
and bank holding companies or for specified banks or bank holding companies.
Increases in the minimum required ratios could adversely affect the Resulting
Bank and the Holding Company, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any Reorganization or Reorganization,
issuance or retirement by the Bank of its own securities, limitations upon the
payment of dividends and other aspects of banking operations. In addition, the
activities and operations of the Bank are subject to a number of additional
detailed, complex and sometimes overlapping laws and regulations. These
include:
. state usury and consumer credit laws;
. laws relating to fiduciaries;
. the Federal Truth-in-Lending Act and Regulation Z;
. the Federal Equal Credit Opportunity Act and Regulation B;
. the Fair Credit Reporting Act;
. the Truth in Savings Act;
. the Community Reinvestment Act;
. anti-redlining legislation; and
. antitrust laws.
Dividend Regulation
The ability of the Holding Company to obtain funds for the payment of
dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary, the Resulting Bank. The
Resulting Bank will be subject to various statutory and regulatory
restrictions on its ability to pay dividends to the Holding Company. Under
such restrictions, the amount available for payment of dividends to the
Holding Company by the Resulting Bank totaled $10,317,000 at December 31,
1998. See "Dividends." In addition, the California Department of Financial
Institutions and the Federal Reserve Board have the authority to prohibit the
Bank from paying dividends, depending upon the Bank's financial condition, if
such payment is deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC or
36
<PAGE>
the Commissioner could assert that the payment of dividends or other payments
might, under some circumstances, be such an unsafe or unsound practice.
Further, the FDIC and the Federal Reserve Board have established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines and the restrictions that are or may be imposed
under the prompt corrective action provisions of federal law could limit the
amount of dividends which the Bank or the Holding Company may pay.
Government Policies and Legislation
The policies of regulatory authorities, including the Federal Reserve Board,
Federal Deposit Insurance Corporation and the Depository Institutions
Deregulation Committee, have had a significant effect on the operating results
of commercial banks in the past and are expected to do so in the future. An
important function of the Federal Reserve System is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on member bank borrowings, and
changes in reserve requirements against member bank deposits. Policies of
these agencies may be influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any
additional legislation will be adopted or as to the effect such legislation
would have on the business of the Resulting Bank or the Holding Company. In
addition to the relaxation or elimination of geographic restrictions on banks
and bank holding companies, a number of regulatory and legislative initiatives
have the potential for eliminating many of the product line barriers presently
separating the services offered by commercial banks from those offered by non-
banking institutions.
COMPARATIVE DESCRIPTION OF COMMON STOCK
General
The Holding Company is a Delaware corporation and, accordingly, is governed
by the Delaware General Corporation Law ("DGCL") and its Delaware Certificate
of Incorporation and By-Laws. The Bank is a California corporation and,
accordingly, has been and will be, through the Effective Date of the Merger,
governed by the California General Corporation Law ("CGCL") and by its
California Articles of Incorporation and By-Laws. The holders of Bank Common
Stock will, upon the exchange of their shares of Bank Common Stock for shares
of Holding Company Common Stock pursuant to the Merger, become stockholders of
the Holding Company, and their rights as such will be governed by the DGCL and
the Holding Company's Certificate of Incorporation and By-Laws.
The following is a general comparison of material differences between the
rights of the stockholders of the Bank under the Bank's Articles of
Incorporation, the Bank's By-Laws and the CGCL, on the one hand, and the
rights of Holding Company stockholders (the holders of the Holding Company
Common Stock after the Merger) under the Holding Company's Certificate of
Incorporation, the Holding Company's By-Laws and the DGCL, on the other. This
discussion is only a summary of certain provisions and does not purport to be
a complete description of such similarities and differences, and is qualified
in its entirety by reference to the DGCL, the CGCL, the California Financial
Code, the common law thereunder, and the full text of the Holding Company's
Certificate of Incorporation, the Holding Company's By-Laws, the Bank's
Articles of Incorporation and the Bank's By-Laws.
Change in Number of Directors
The Bank's By-Laws provide for 11 directors, and any change in the number of
directors must be made by an amendment to the Articles of Incorporation or the
By-Laws, and requires the approval of the holders of a majority of the
outstanding shares.
37
<PAGE>
Under the DGCL, the number of directors are fixed by, or in the manner
provided in, the by-laws, unless the certificate of incorporation fixes the
number of directors, in which case a change in the number of directors may be
made only by amendment to the certificate. The Holding Company's By-Laws
provide for a range of not less than 9 or more 15 directors; the exact number
of the first Board of Directors is set at 11, which exact number may be
amended by resolution of the Board of Directors. The Holding Company's By-Laws
provide that any change in the minimum or maximum number of directors must be
made by an amendment to the Certificate of Incorporation or the By-Laws, and
requires the approval of the holders of a majority of the outstanding shares.
Removal of Directors
Under the CGCL, a director of Bank may be removed without cause by a
majority of the outstanding shares entitled to vote, provided that the shares
voted against such removal would not be sufficient to elect the director under
California's cumulative voting rules. The CGCL also allows removal of a
director for cause by the Superior Court in a suit by stockholders holding at
least ten percent (10%) of the outstanding shares of any class.
Under the DGCL, any or all directors of Holding Company may be removed, with
or without cause, by the holders of a majority of the shares entitled to vote
at an election of directors. In the case of a corporation whose board of
directors is classified, stockholders may remove directors only for cause, and
in the case of a corporation having cumulative voting, if less than the entire
board is to be removed, no director may be removed without cause if the votes
cast against his or her removal would be sufficient to elect him or her if
then cumulatively voted at an election of the entire board of directors. The
Holding Company's Certificate of Incorporation does not provide for a
classified board or for cumulative voting, but stockholders will continue to
have the right to vote cumulatively so long as the Holding Company is deemed
to be a quasi-California corporation. See "Quasi-California Corporation
Status."
Filling Vacancies on the Board of Directors
Except for a vacancy created by the removal of a director which may only be
filled by approval of the stockholders, the Bank's By-Laws provide that
vacancies on the board of directors may be filled by a majority of the
remaining directors although less than a quorum, or by a sole remaining
director. Each director so elected shall hold office until his or her
successor is elected at an annual or special stockholders' meeting. The Bank's
stockholders may elect a director at any time to fill any vacancy 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. In addition, the CGCL provides that if,
after the filling of any vacancy by the directors, the directors then in
office who have been elected by the stockholders shall constitute less than a
majority of the directors then in office (a) any holder or holders of an
aggregate of five percent (5%) or more of the total number of shares at the
time outstanding having the right to vote for such directors may call a
special meeting of stockholders, or (b) the California Superior Court of the
proper county shall, upon application of such stockholder or stockholders,
summarily order a special meeting of stockholders to be held to elect the
entire Board of Directors.
The Holding Company's By-Laws provide that a vacancy on the Board of
Directors, including a vacancy created by an increase in the number of
directors, may be filled by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director. The directors so chosen
shall hold office until the next annual election and until their successors
are duly elected and shall qualify or until their earlier resignations or
removals. Under the DGCL, however, if at the time of filling any vacancy or
newly created directorship the directors then in office constitute less than a
majority of the entire Board of Directors as constituted immediately prior to
any such increase, the Delaware Court of Chancery may, under certain
circumstances, order an election to be held to fill any such vacancies or
newly created directorships or to replace the directors chosen by the
directors then in office. Additionally, when a director has been removed from
office with or without cause by the stockholders, the stockholders have the
right to fill such vacancy by the affirmative vote of at least a majority of
the voting power of the then outstanding stock. If the stockholders fail to
fill such vacancy, the Board may then do so as set forth above.
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<PAGE>
Amendment of the Certificate of Incorporation
Under the CGCL, the Bank's Articles of Incorporation may be amended if such
amendment is approved by the Board of Directors and by a majority of the
outstanding shares of the Bank, with the exception of Article VIII which
requires approval of 66 2/3% of the outstanding stock and a majority of the
Disinterested Stockholders.
Under the DGCL, the Holding Company's Certificate of Incorporation may be
amended if such amendment is approved by the Board of Directors and by a
majority of the stockholders, with the exception of Article XIV which requires
approval of 66 2/3% of the outstanding stock. In addition, if the Holding
Company were to have more than one class of stock outstanding, amendments that
would adversely affect the rights of any class would require the vote of a
majority of the shares of that class.
Amendment of the By-Laws
Under the CGCL, By-Laws may be adopted, amended or repealed either by the
vote of a majority of the outstanding shares entitled to vote thereon or
(subject to any restrictions in the Articles of Incorporation or By-Laws) by
the approval of the Board of Directors, except that amendments to the By-Laws
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 only be
adopted by approval of the outstanding shares. The Bank By-Laws provide that,
subject to the right of stockholders to adopt, amend or repeal the By-Laws,
By-Laws other than a By-Law fixing or changing the authorized number of
directors may be adopted, amended or repealed by the Board of Directors.
Under the DGCL, the power to adopt, amend or repeal By-Laws is vested in the
stockholders unless the Certificate of Incorporation confers the power to
adopt, amend or repeal By-Laws upon the directors as well. The Holding
Company's Certificate of Incorporation does not confer such powers on the
Board of Directors of the Holding Company. The Holding Company's By-Laws
provide that, subject to the right of stockholders to adopt, amend or repeal
the By-Laws, By-Laws other than a By-Law fixing or changing the authorized
number of directors may be adopted, amended or repealed by the Board of
Directors.
Authorized Capital
The authorized capital stock of the Holding Company consists of 2,000,000
shares of common stock, with $.01 par value per share, and 1,000,000 shares of
preferred stock, no par value per share. The authorized capital stock of the
Bank consists of 1,000,000 shares of common stock, no stated par value per
share, 632,185 of which were outstanding as of March 1, 1999, and 1,000,000
shares of preferred stock, no stated par value per share, of which no shares
were outstanding as of March 1, 1999 or the date of this Proxy Statement.
Assuming the consummation of the holding company Reorganization and no
dissenters to the transaction, the Holding Company will issue 632,185 shares
of its common stock to existing stockholders of the Bank on the basis of one
share of Holding Company common stock for each share of common stock of the
Bank. The Holding Company will have a capital structure of 2,000,000
authorized shares of $.01 par value common stock of which 632,185 shares would
be outstanding and 1,000,000 shares of preferred stock, no par value per
share, of which no shares would be outstanding. It will not be necessary for
stockholders to surrender their Bank share certificates as such certificates,
until exchanged, will represent shares of the Holding Company.
The balance of the Holding Company's authorized capital stock will be
available to be issued when and as the Board of Directors of the Holding
Company determines it advisable to do so. Such shares of capital stock could
be issued for the purpose of raising additional capital, in connection with
acquisitions of other businesses, or for other appropriate purposes. The Board
of Directors of the Holding Company has the authority to issue shares of
Common Stock or Preferred Stock to the extent of the number of authorized
unissued shares without obtaining the approval of existing holders of Common
Stock. The Board of Directors of the Holding Company also has the authority,
without further action of the existing holders of Common Stock, to fix the
rights, preferences, privileges and restrictions on any Preferred Stock
issued, including dividend rights, conversion
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rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of any such series.
The issuance of additional shares of Holding Company Common Stock or
Preferred Stock could adversely affect the voting power of holders of Common
Stock. The issuance of shares of Preferred Stock could adversely affect the
likelihood that holders of Common Stock will receive dividend payments and
payments upon liquidation. There are no present plans, understandings,
arrangements or agreements to issue any additional shares of Holding Company
Common Stock or Preferred Stock.
Voting Rights
Each share of common stock of the Holding Company and the Bank entitles the
holder thereof to one vote on all matters, except in the election of
directors. Stockholders of the Bank have, and stockholders of the Holding
Company will have, cumulative voting rights. (See "Comparative Description of
Common Stock--Cumulative Voting.") A special meeting of stockholders of the
Bank may be called by the Board of Directors, the Chairman, the President or
stockholders of the Bank who own not less than 10% of the voting power of the
Bank. Under the Holding Company's Certificate of Incorporation, special
meetings of the stockholders of the Holding Company may be called only by a
majority of the Board of Directors or the holders of a majority of the shares
entitled to vote.
Nominations for election to the Board of Directors, made other than by the
Board of Directors, must be made in accordance with the procedures set forth
in the Holding Company's By-Laws, which are the same as the procedures set
forth in Article III, Section 3A of the Bank's By-Laws. In addition, directors
must satisfy certain qualifications set forth in the Holding Company's By-
Laws, which are essentially the same as the qualifications set forth in
Article III, Section 16 of the Bank's By-Laws. See "Anti-Takeover Measures--
Director Qualification and Nomination Procedures."
Liquidation Rights
In the event of liquidation, holders of common stock of the Holding Company
and the Bank are entitled to similar rights as to assets distributable to
stockholders on a pro rata basis.
Preemptive Rights
Holders of common stock of the Holding Company will not have the preemptive
right to subscribe for or to purchase any additional securities which may be
issued by the Holding Company. Pursuant to Article V of the Bank's Articles of
Incorporation, holders of common stock of the Bank have preemptive rights to
subscribe for or to purchase additional securities issued by the Bank for cash
to persons who are not then stockholders of the Bank.
Cumulative Voting
Each share of common stock of the Bank entitles the holder thereof to one
vote on all matters except for the election of directors where stockholders
are entitled to vote cumulatively if a stockholder gives notice of an
intention to cumulate votes prior to the voting. The stockholders of the
Holding Company will have a right to one vote per share on all matters and, as
authorized by Delaware law, will not have the right to cumulate their shares
in the elections of directors. A stockholder voting cumulatively may cast
votes equal to the number of shares he owns times the number of Directors to
be elected in favor of one nominee or allocate such votes among the nominees
as he determines. However, even though the Holding Company is a Delaware
corporation, pursuant to Section 2115 of the CGCL, Section 708, subdivisions
(a), (b) and (c) of the CGCL, concerning a stockholder's right to cumulate
votes at any election of directors, is expected to apply to the Holding
Company due to its presence in California and is expected to require the
Holding Company to permit cumulative voting. However, according to subdivision
(c) of Section 2115, once the Holding Company's stock becomes designated as
qualified for trading on the Nasdaq National Market System and the Holding
Company has at least 800 stockholders as of
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the record date of its most recent annual meeting of stockholders, then
Section 2115 (and thereby Section 708) of the CGCL will no longer be
applicable. The Board of Directors of the Holding Company has no plans to
cause the common stock of the Holding Company to be traded on the Nasdaq
National Market System. For further explanation of the applicability of CGCL
Section 2115, see "Quasi-California Corporation Status" above.
Action by Written Consent of Stockholders
Both the Holding Company's Certificate of Incorporation and the Bank's
Articles of Incorporation require that the Board of Directors first approve by
resolution any action proposed to be taken by written consent of the
stockholders in lieu of a meeting of the stockholders.
Special Meetings of Stockholders
Under the Holding Company's Certificate of Incorporation special meetings of
the stockholders of the Holding Company may be called only by a majority of
the Board of Directors or by the holders of a majority of the shares entitled
to vote. Under the Bank's By-Laws, special meetings of the stockholders may be
called by the Chairman of the Board, or by the President, or by stockholders
holding shares representing at least 10% of the voting power.
Indemnification
The Holding Company's Certificate of Incorporation and By-Laws provide for
indemnification of officers, directors, employees and agents to the fullest
extent permitted by Delaware law. The Articles of Incorporation of the Bank
provide for the elimination of liability of directors for monetary damages to
the fullest extent permissible under California law and provide further for
indemnification (by By-Law, agreement or otherwise) of agents to the fullest
extent permissible under California law.
Delaware law generally provides for the payment of expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement reasonably
incurred by the indemnitees provided such person acted in good faith and in a
manner he or she reasonably believed not to be opposed to the best interests
of the corporation and with respect to any criminal action or proceeding if he
or she had no reasonable cause to believe his or her conduct was unlawful.
However, in derivative suits, if the suit is lost, no indemnification is
permitted in respect of any claim as to which the prospective indemnitee is
adjudged to be liable for misconduct in the performance of his or her duty to
the corporation and then only if, and only to the extent that, a court of
competent jurisdiction determines the prospective indemnitee is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper.
Finally, no indemnification may be provided in any action or suit in which the
only liability asserted against a director is pursuant to a statutory
provision outlawing loans, dividends, and distribution of assets under certain
circumstances.
The provisions regarding indemnification may not be applicable under certain
federal banking and securities laws and regulations.
Dividend Rights
Dividends may be paid on common stock of the Holding Company as are declared
by the Board of Directors out of funds legally available therefor. As a quasi-
California corporation, the Holding Company is required to comply with
California law with respect to, among other things, distributions to
stockholders. Management currently expects that the Holding Company will
remain as a quasi-California corporation. If at some point in the future the
Holding Company ceases to be a quasi-California corporation, it would be
subject to the provisions of the Delaware General Corporation Law with respect
to dividends, which are technically different. However, Management believes
that there would be no material effect to stockholders in such case. See
"Dividends" and "Quasi-California Corporation Status."
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Dividends may be paid on common stock of the Bank as are declared by the
Board of Directors out of funds legally available therefor. Dividends paid by
the Bank on its common stock must be declared out of the lesser of retained
earnings or the Bank's net income for its last three fiscal years (less any
distributions made to stockholders during such period). In the event a bank
has no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such
bank's last preceding fiscal year only after obtaining the prior approval of
the Commissioner of the Department of Financial Institutions. The Commissioner
of the Department of Financial Institutions may order the bank to refrain from
making a proposed distribution if the making of the distribution by the bank
would be unsafe or unsound.
Stockholder Vote for Mergers and Other Reorganizations
Generally, the CGCL requires a stockholder vote for mergers and other
reorganizations in more situations than does Delaware law. For example, the
DGCL generally provides for a vote by the stockholders of each constituent
corporation to a merger and by stockholders of a corporation selling all or
substantially all of its assets, whereas, in addition to the foregoing,
California provides for a stockholder vote (a) of an acquiring corporation in
either a share-for-share exchange or a sale-of-assets reorganization, and (b)
of a parent corporation (even though it is not a "constituent corporation")
whose equity securities are being issued in connection with a corporate
reorganization. With certain exceptions, the CGCL also requires a class vote
when a stockholder vote is required in connection with these transactions. In
contrast, the DGCL generally does not require class voting, except where the
transaction involves an amendment to the Certificate of Incorporation that
adversely affects a class of shares.
The DGCL does not require a stockholder vote of the surviving constituent
corporation in a merger if (a) the merger agreement does not amend the
existing Certificate of Incorporation, (b) each outstanding share of the
surviving corporation before the merger is unchanged after the merger, and (c)
the merger involves the issuance of no more than 20% of the shares of the
surviving corporation outstanding immediately prior to such issuance.
California law contains a similar exception to its voting requirements for
reorganizations where stockholder control is not diluted by more than one-
sixth as a result of the reorganization.
Inspection of Stockholder Lists
The CGCL provides a right of inspection of a corporation's stockholder list
to any stockholder holding five percent (5%) or more of a corporation's voting
shares or any stockholder holding one percent (1%) or more of a corporation's
shares who has filed a Schedule 14A with the Commission (Schedule 14A is filed
in connection with certain proxy contests relating to the election of
directors). In addition, the CGCL provides a right of inspection of
stockholder lists by any stockholder for a purpose reasonably related to such
holder's interest as a stockholder. The DGCL does not provide any similar
absolute right of inspection, but does permit any stockholder of record to
inspect the stockholder list for any purpose reasonably related to such
person's interest as a stockholder and, for a ten-day period preceding a
stockholders' meeting, for any purpose germane to the meeting.
State Anti-Takeover Statute
Under the CGCL, if a party that makes a tender offer or proposes to acquire
a corporation by a reorganization or certain sales of assets is controlled by
such corporation or an officer or director of such corporation, or if a
director or executive officer of such corporation has a material financial
interest in such party (each an "Interested Party Proposal"), (i) an
affirmative opinion in writing as to the fairness of the consideration to the
stockholders of such corporation must be delivered to stockholders of such
corporation and (ii) such stockholders must be (a) informed of certain later
tender offers or written proposals for a reorganization or sale of assets made
by other persons and (b) afforded a reasonable opportunity to withdraw any
vote, consent or proxy previously given or shares previously tendered in
connection with the Interested Party Proposal.
Section 203 of the DGCL would prevent an "Interested Stockholder" (defined
as a person beneficially owning 15% or more of a corporation's voting stock)
from engaging in a "Business Combination" (defined
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generally to include mergers, sales and leases of assets, issuances of
securities and similar transactions) with a corporation for three years
following the date such person became an Interested Stockholder unless certain
criteria are met. Section 203(b) allows a corporation to "opt out" of Section
203 in its certificate of incorporation, which the Holding Company has done
because of the "Anti-Takeover and Fair Price" provisions which are contained
in the Certificate of Incorporation and are substantially similar to Article
VIII of the Bank's Articles of Incorporation.
Anti-takeover Provisions
A vote of the holders of at least a majority of the outstanding shares of
common stock of the Bank is required to effectuate a voluntary liquidation of
the Bank, reorganization of the Bank, merger or reorganization of the Bank
with another bank, or the increase or decrease of the Bank's authorized or
outstanding capital stock, except as provided in Article VIII of the Bank's
Articles of Incorporation. Similarly, a majority vote of the outstanding stock
is required for such transactions of the Holding Company, unless a higher or
lower voting requirement is established in the Holding Company's Certificate
of Incorporation.
Pursuant to the Articles of Incorporation of the Bank, a majority vote of
the issued and outstanding shares is sufficient to amend the Articles of the
Incorporation of the Bank, other than Article VIII. In accordance with Article
VIII of the Articles of Incorporation of the Bank a "Business Combination"
(which includes any merger, consolidation, sale, lease or other disposition of
greater than 10% of the assets of the Bank; issuance or sale of any securities
of the Bank; and adoption of a plan of liquidation) requires the approval of
66 2/3% of the outstanding shares of common stock held by the Disinterested
Stockholders and the satisfaction of certain other conditions, including a
"Fair Price," unless such Business Combination has been approved by 66 2/3% of
the "Disinterested Directors." In addition, an amendment of Article VIII of
the Bank's Articles of Incorporation must be approved by the affirmative vote
of 66 2/3% of the outstanding shares of common stock, and if there is an
Interested Stockholder, by a majority of the Disinterested Stockholders.
Article XIV of the Holding Company's Certificate of Incorporation contains
essentially the same provisions as Article VIII of the Bank's Articles of
Incorporation and is therefore subject to the same restrictions except that
the stockholder vote requirement is only 66 2/3% of the outstanding shares
(including any shares held by an "Interested Stockholder"). Because the
executive officers and directors of the Holding Company will own approximately
12.52% of the shares of the Holding Company (assuming consummation of the
proposed Reorganization and assuming there are no dissenting stockholders to
the transaction), a Business Combination with an Interested Stockholder may be
difficult to approve without the consent of the Disinterested Directors and
Management.
In addition, the Holding Company's Certificate of Incorporation requires the
Board of Directors, when evaluating a merger proposal, to consider the social
and economic effects of the transaction on employees, stockholders, customers
and suppliers in the communities in which the Bank operates, in addition to
monetary factors. This provision is substantially similar to an article added
by amendment to the Bank's Articles of Incorporation pursuant to the
stockholder approval of such amendment at the annual meeting of the Bank's
stockholders in 1998.
REPORTS
The Bank currently files periodic reports with the Board of Governors of the
Federal Reserve System pursuant to the Securities Exchange Act of 1934, as
amended, as a "reporting company." Subsequent to the consummation of the
transaction, the Holding Company as "successor" to the Bank will file similar
reports with the SEC. The Holding Company will deliver to the stockholders of
the Holding Company an annual report containing audited financial information
as required under the Exchange Act. While the Holding Company will file
quarterly reports with the SEC, copies of which may be obtained from the SEC,
the Holding Company is not obligated and does not currently intend to provide
copies of such quarterly reports to stockholders.
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LEGAL OPINION
Legal matters in connection with the issuance of common stock of the Holding
Company in the Reorganization will be passed upon by counsel, Pillsbury
Madison & Sutro LLP, San Francisco, California.
PROPOSAL 4
RENEWAL OF SUPERMAJORITY VOTE PROVISIONS
IN ARTICLE VIII OF THE ARTICLES OF INCORPORATION
Background
At the Annual Meeting of Stockholders of the Bank held on April 17, 1989,
83.3% of the outstanding shares were voted to approve an amendment and
restatement of the Bank's Articles of Incorporation. Subsequently, on May 30,
1989, with the approval of the Superintendent of Banks endorsed thereon, the
California Secretary of State filed the Certificate of Restated Articles of
Incorporation. The Amended and Restated Articles of Incorporation were
effective as of May 30, 1989.
Among the provisions adopted by the stockholders were provisions to Article
VIII of the Articles of Incorporation requiring a "supermajority" vote of 66
2/3% to approve specified business combinations. Effective January 1, 1989,
Section 710 of the CGCL was amended to provide that such supermajority vote
requirements need to be reaffirmed or "renewed" by the stockholders every two
years or will cease to be effective.
The Board of Directors recommends that Article VIII of the Articles of
Incorporation be renewed. Article VIII added a "Supermajority Voting and Fair
Price" provision, both to encourage potential acquirers to negotiate with the
Bank and to protect stockholders from being unfairly treated in mergers or
other business combinations with persons who own a substantial amount of the
Bank's stock. The Supermajority Voting and Fair Price provision applies to
mergers and certain other types of business combinations with persons holding
20% or more of the voting stock of the Bank (an "Interested Stockholder"). In
general, the Supermajority Voting and Fair Price provision requires, in a
merger or certain other business combinations, first that 66 2/3% of the
stockholders who are independent of the Interested Stockholder approve the
business combination, second that all stockholders who are independent of the
Interested Stockholder receive at least a specified amount for his or her
shares acquired during the preceding two years and third that certain other
requirements are met. The specifics of these requirements are more fully
discussed on the following pages.
This Supermajority Voting and Fair Price provision will not apply to an
otherwise covered business combination in certain circumstances. First, if the
business combination is approved by 66 2/3% of the "Disinterested Directors"
the Supermajority Voting and Fair Price rules do not apply. For purposes of
the Supermajority Voting and Fair Price provision, a Disinterested Director is
defined as a member of the Board of Directors who is not affiliated with the
Interested Stockholder, and who was a member of the Board of Directors prior
to the time the Interested Stockholder became an Interested Stockholder.
Second, the same is true if the Bank has received a notice of termination of
insurance from the Federal Deposit Insurance Corporation or an order to
correct a capital impairment from the Commissioner of the California
Department of Financial Institutions, possession of the Bank has been taken by
the Commissioner, a conservator has been appointed for the Bank or, a similar
proceeding has been commenced following a substantial deterioration in the
Bank's condition. Where the Supermajority Voting and Fair Price provisions do
not apply, a simple majority of the outstanding shares is required to approve
the business combination.
General Description
Where the Supermajority Voting and Fair Price rules apply, the requirements
in addition to the 66 2/3% approval of shares held by other than the
Interested Stockholder include: (a) the consideration to be received in the
business combination is in cash or in the same form as the Interested
Stockholder has paid for the largest number of shares acquired by such
Interested Stockholder; (b) the per share consideration to be received by
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holders of outstanding stock in the business combination (other than the
Interested Stockholder) is at least equal to the highest of (i) the highest
per share price paid by such Interested Stockholder in acquiring the Bank's
stock of the same class in the two years prior to the announcement of the
business combination, or in the transaction in which it became an Interested
Stockholder, if within two years of the date of first public announcement of
the proposal, (ii) the fair market value per share on the announcement date or
on the date on which the Interested Stockholder became an Interested
Stockholder if within two years of the first public announcement of the
proposal, or (iii) as to shares other than common stock, the highest
preference per share to which the holder of such shares is entitled upon a
liquidation of the Bank; and (c) after becoming an Interested Stockholder and
prior to the consummation of such business combination (i) such Interested
Stockholder, must not have become the beneficial owner of any additional
shares of the voting stock of the Bank, except as part of the transaction
which results in such stockholder becoming an Interested Stockholder, within
the two year period prior to consummation of the business combination, (ii)
such Interested Stockholder must not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or tax credits provided by
the Bank, and (iii) except as approved by a 66 2/3% majority of the Directors
who are Disinterested Directors, there shall have been (A) no failure to
declare and pay at the regular date therefore any full dividends on any
preferred stock or (B) no reduction in the annual rate of dividends paid on
Common Stock, and there shall have been (C) an increase in the annual rate of
dividends necessary to reflect certain reclassification and recapitalization.
The Bank's Articles of Incorporation provide that the Supermajority Voting
and Fair Price provisions cannot be amended or repealed unless such a change
is approved by not less than 66 2/3% of the total voting power of the
outstanding shares of the Bank, and if there is an Interested Stockholder, the
approval by not less than the majority of the outstanding shares excluding
shares held by the Interested Stockholder.
"Supermajority Voting and Fair Price" Provision--Reason for Initial Amendment
and Renewal
In recent years there have been a number of instances where a tender offeror
has made a two-tiered acquisition, involving a tender offer for cash at a high
price for a part of a target bank's shares, followed by a merger in which
securities are issued for the remainder of the target bank's shares. The
securities issued in the second step have sometimes had a value substantially
below the cash paid in the initial tender offer. Tender offers have sometimes
been structured as two-tiered transactions with an expressly lower value at
the second step for the purpose of pressuring stockholders to tender their
shares in the initial tender offer. This structure takes advantage of
stockholders' fear that they will suffer a disadvantage if the tender offer is
successful and they are only able to participate in the lower-valued second
tier transaction. This is unfair to the stockholders both in terms of forcing
them to make hasty decisions and in terms of the basic unfairness of treating
similarly situated stockholders differently. Tender offers have also been made
for a part of the outstanding stock of a bank, followed at some later time by
a merger offer where substantial changes in bank philosophy, dividend policy
and other actions have occurred in the intervening period which have
diminished the market value for the shares in the hands of the public.
The Supermajority Voting and Fair Price provision will protect the Bank's
stockholders in the context of a two-tiered transaction where a tender offer
for a portion of the stock is followed by a second transaction by requiring
independent stockholder approval and by requiring that the value given in the
second transaction is at least equal to that given in the first transaction.
Because of the Supermajority Voting and Fair Price provision, stockholders
cannot be coerced into accepting the first part of a two-step transaction by
the fear of being treated unfairly in the second part of the transaction.
The Supermajority Voting and Fair Price provision is not, however, designed
to otherwise prevent or discourage tender offers or other proposals for
business combinations. The Supermajority Voting and Fair Price provision will
not prevent a merger or similar transaction following a tender offer in which
all stockholders receive substantially the same price for their shares and
which 66 2/3% of the stockholders have approved or
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which 66 2/3% of the Disinterested Directors have approved and which a
majority of the stockholders approve. Except for the restrictions on the
specified business combinations, the Supermajority Voting and Fair Price
provision will not prevent a holder of a controlling interest from exercising
control over the Bank or prevent such a holder from increasing his or her
share ownership. The existence of the Supermajority Voting and Fair Price
provision may, however, tend to encourage persons seeking control of the Bank
to negotiate terms of a proposed merger or similar transactions with the
Bank's Board of Directors.
The Board of Directors recognizes that not all two-tiered tender offers or
other two-step transactions are intended to pressure stockholders into hasty
decisions or to discriminate among stockholders. However, taking all factors
into consideration, the Board believes that it is appropriate to take action
to reduce the possibility to two-tiered transactions which are unfair.
Important Considerations
While the Board believes the Supermajority Voting and Fair Price provision
is in the best interest of the Bank's stockholders, there are several possible
negative considerations which stockholders should note. The effect of the
Supermajority Voting and Fair Price provision may be to deter a future
takeover attempt which the Board has not approved, but which a majority of the
stockholders may deem to be in their best interests or in which stockholders
may receive a premium for their shares over the then market value. The
adoption of the Supermajority Voting and Fair Price provision also may make it
more difficult to obtain stockholder approval of transactions covered by the
provision, such as mergers or other corporate combinations with persons who
are Interested Stockholders, even if approved by the Directors and favored by
a majority of the stockholders.
For example, a transaction which does not meet the minimum price requirement
but which is favored by the Board and a majority of stockholders could still
fail to be approved if there are no Directors who are "Disinterested
Directors" and if the requirement for approval by 66 2/3% of the total voting
power was not met. Currently all of the Directors of the Bank are
"Disinterested Directors". It is conceivable that the Directors could waive
the Supermajority Voting and Fair Price provisions where the Directors could
benefit disproportionately compared to the majority of other stockholders. For
example a Disinterested Director, including those that are also employees of
the Bank, could benefit by means of employment contracts in the event of a
business combination. The Supermajority Voting and Fair Price provision can be
amended only by the affirmative vote of the holders of 66 2/3% of the Bank's
outstanding stock, and if there is an Interested Stockholder, the affirmative
vote of the holders of a majority of the shares not held by the Interested
Stockholder. Thus, the Bank may be unable to eliminate the provision even
though the elimination is approved by a majority of the Directors and
stockholders.
In the absence of a Supermajority Voting and Fair Price provision, under
California law the vote of a majority of the voting power of the outstanding
stock of the Bank would be sufficient to approve the transactions otherwise
covered by the Supermajority Voting and Fair Price provision, such as a
merger, consolidation or sale of substantially all of the Bank's assets.
Required Approval; Recommendation of Management
Pursuant to Section 710 of the CGCL, the renewal of the supermajority vote
provisions of Article VIII of the Articles of Incorporation requires an
affirmative vote of 66 2/3% of the outstanding shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL TO RENEW THE
SUPERMAJORITY VOTE PROVISIONS OF ARTICLE VIII OF THE BANK'S ARTICLES OF
INCORPORATION.
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Effect of Reorganization on Implementation of Proposal 4
In the event that the Reorganization is approved by the vote of the holders
of a majority of the Bank's outstanding shares, then the renewal of the
supermajority vote provisions of Article VIII of the Bank's Articles of
Incorporation will not be effected because of the supermajority vote
provisions of Article XIV of the Holding Company's Certificate of
Incorporation. However, because there can be no assurance that the
Reorganization will be approved, the Board of Directors recommends a vote FOR
this proposal so that the supermajority vote provisions of Article VIII of the
Bank's Articles of Incorporation will remain in effect.
STOCKHOLDER PROPOSALS
Under the present rules of the Regulatory Authorities, the deadline for
Stockholders to submit proposals to the Bank to be considered for inclusion in
the Proxy Statement/Offering Circular for the 2000 Annual Meeting of
Stockholders is November 13, 1999.
OTHER MATTERS
The management of the Bank is not aware of any other matters to be presented
for consideration at the Meeting or any adjournments or postponements thereof.
If any other matters should properly come before the Meeting, it is intended
that the persons named in the enclosed Proxy will vote the shares represented
thereby in accordance with their best business judgment, pursuant to the
discretionary authority granted therein.
For a matter to be properly brought before the Annual Meeting by a
stockholder, Section 5A of the Bank's By-Laws provides that the stockholder
must deliver or mail a written notice to the Secretary of the Bank which must
be received not less than 70 days nor more than 90 days prior to the first
anniversary date of the preceding year's annual meeting. Section 5A also
provides that the notice must set forth as to each matter that the stockholder
proposes to bring before the Annual Meeting a brief description of the
business desired to be brought before the Annual Meeting and the reasons for
conducting such business at the Annual meeting, the name and record address of
the stockholder proposing such business, the number of shares that are owned
by the stockholder, any material interest of the stockholder in such business
and whether the stockholder intends or is part of a group which intends to
solicit proxies from other stockholders in support of such proposal and, if
part of a group, the names and addresses of such group members. If the facts
warrant, the Chairman of the Annual Meeting shall determine and declare to the
Annual Meeting that business was not properly brought before the Annual
Meeting in accordance with the procedure set forth in Section 5A, and such
business shall not be transacted.
Upon the written request of any Stockholder, the Management will provide
without charge, a copy of the Bank's Annual Report on Form 10-K. All requests
should be addressed to Mr. John R. Olson, Executive Vice President, Secretary
and Treasurer, Farmers & Merchants Bank of Central California, P.O. Box 3000,
Lodi, California 95241-1902.
By Order of the Board of Directors
/s/ John R. Olson
John R. Olson
Executive Vice President
Secretary and Treasurer
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ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Reorganization Agreement")
is entered into as of the 10th day of March, 1999, by and among Farmers &
Merchants Bank of Central California (the "Bank"), F&M Merger Co. ("Merger
Co."), and Farmers & Merchants Bancorp (the "Holding Company").
RECITALS AND UNDERTAKINGS
A. The Bank is a California state-chartered bank with its principal office
in the City of Lodi, State of California. Merger Co. is a corporation duly
organized and existing under the laws of the State of California. The Holding
Company is a corporation duly organized and existing under the laws of the
State of Delaware with its principal offices in the City of Lodi, State of
California.
B. As of the date hereof, the Bank has 1,000,000 shares of common stock no
stated par value authorized, 1,000,000 shares of preferred stock no stated par
value authorized, 632,185 shares of common stock issued and outstanding, and
no shares of preferred stock issued and outstanding.
C. As of the date hereof, Merger Co. has 100 shares of common stock $.01 par
value authorized. Immediately prior to the Effective Time (as such term is
defined below), 100 shares of such common stock will be issued and
outstanding, all of which shares will be owned by the Holding Company.
D. As of the date hereof, the Holding Company has 2,000,000 shares of common
stock $.01 par value authorized and 1,000,000 shares of preferred stock no par
value authorized. Immediately prior to the Effective Time, no shares of the
Holding Company's common stock will be issued and outstanding.
E. The Boards of Directors of the Bank, the Holding Company and Merger Co.,
respectively, have unanimously approved this Reorganization Agreement and
authorized its execution.
F. The Holding Company, as sole stockholder of Merger Co., has approved this
Reorganization Agreement and authorized its execution.
AGREEMENT
Section 1. General
1.1 The Merger. On the Effective Time, Merger Co. shall be merged with and
into the Bank, with the Bank being the surviving corporation. The Bank shall
thereafter be a subsidiary of the Holding Company, and its name shall continue
to be "Farmers & Merchants Bank of Central California."
1.2 Effective Time. The merger described herein shall become effective at
the close of business on the day upon which an executed counterpart of this
Reorganization Agreement shall have been filed with the Secretary of State of
the State of California in accordance with Section 1103 of the California
General Corporation Law and with the Secretary of State of the State of
Delaware in accordance with Section 252 of the Delaware General Corporation
Law (the "Effective Time").
1.3 Articles of Incorporation and By-Laws. At the Effective Time, the
Articles of Incorporation of the Bank, as in effect immediately prior to the
Effective Time, shall remain the Articles of Incorporation of the Bank until
amended; the By-Laws of the Bank, as in effect immediately prior to the
Effective Time, shall remain the By-Laws of the Bank until amended; the
certificate of authority of the Bank issued by the Commissioner of the
Department of Financial Institutions of the State of California shall remain
the certificate of authority of the Bank, and the Bank's deposit insurance
coverage by the Federal Deposit Insurance Corporation shall remain the deposit
insurance of the Bank.
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1.4 Directors and Officers. At the Effective Time, the directors and
officers of the Bank immediately prior to the Effective Time shall remain the
directors and officers of the Bank. The directors of the Bank shall serve
until the next annual meeting of stockholders of the Bank or until such time
as their successors are elected and have been qualified.
1.5 Effect of the Merger.
(a) Assets and Rights. At the Effective Time and thereafter, all rights,
privileges, franchises and property of Merger Co. and all debts and
liabilities due or to become due to Merger Co. including choses in action and
every interest or asset of conceivable value or benefit, shall be deemed fully
and finally and without any right of reversion vested in the Bank without
further act or deed; and the Bank shall have and hold the same in its own
right as fully as the same was possessed and held by Merger Co.
(b) Liabilities. At the Effective Time and thereafter, all debts,
liabilities and obligations due or to become due of, and all claims and
demands for any cause existing against, Merger Co. shall be and become the
debts, liabilities or obligations of, or the claims or demands against, the
Bank in the same manner as if the Bank had itself incurred or become liable
for them.
(c) Creditors' Rights and Liens. At the Effective Time and thereafter, all
rights or creditors of Merger Co. and all liens upon the property of Merger
Co. shall be preserved unimpaired, and shall be limited to the property
affected by such liens immediately prior to the Effective Time.
(d) Pending Actions. At the Effective Time and thereafter, any action or
proceeding pending by or against Merger Co. shall not be deemed to have abated
or been discontinued, but may be pursued to judgment with full right to appeal
or review. Any such action or proceeding may be pursued as if the merger
described herein had not occurred, or with the Bank substituted in place of
Merger Co. as the case may be.
1.6 Further Assurances. Merger Co. agrees that at any time, or from time to
time, as and when requested by the Bank, or by its successors or assigns, it
will execute and deliver, or cause to be executed and delivered, in its name
by its last acting officers, or by the corresponding officers of the Bank, all
such conveyances, assignments, transfers, deeds and other instruments, and
will take or cause to be taken such further or other action as the Bank, or
its successors or assigns, may deem necessary or desirable in order to carry
out the vesting, perfecting, confirming, assignment, devolution or other
transfer of the interests, property, privileges, powers, immunities,
franchises and other rights transferred to the Bank in this Section 1, or
otherwise to carry out the intent and purposes of this Reorganization
Agreement.
Section 2. Stock
2.1 Stock of Merger Co. At the Effective Time, each share of common stock of
Merger Co. issued and outstanding immediately prior to the Effective date
shall, by virtue of the merger described herein, be deemed to be exchanged for
and converted into one share of fully paid and nonassessable common stock of
the Bank.
2.2 Stock of the Bank. At the Effective Time, each share of common stock of
the Bank issued and outstanding immediately prior to the Effective Time shall,
by virtue of the merger described herein, be deemed to be exchanged for and
converted into one share of fully paid and nonassessable common stock of the
Holding Company, in accordance with the provisions of Paragraph 2.3 hereto.
2.3 Exchange of Stock by the Bank Stockholders. At the Effective Time or as
soon as practical thereafter, the following actions shall be taken to
effectuate the exchange and conversion specified in Paragraph 2.3 hereof:
(a) The stockholders of the Bank of record immediately prior to the
Effective Time shall be allocated and entitled to receive for each share of
common stock of the Bank then held by them respectively one share of common
stock of the Holding Company.
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(b) Subject to the provisions of Paragraph 2.3(c) hereof, the Holding
Company shall issue to the stockholders of the Bank the shares of common stock
of the Holding Company which said stockholders are entitled to receive.
(c) Thereafter, outstanding certificates representing shares of common stock
of the Bank (except certificates issued to the Holding Company in connection
with the merger described herein) shall represent shares of the common stock
of the Holding Company, and such certificates may, but need not, be exchanged
by the holders thereof for new certificates for the appropriate number of
shares of the Holding Company.
Section 3. Approvals
3.1 Stockholder Approval. This Reorganization Agreement shall be submitted
to the stockholders of the Bank for ratification and confirmation to the
extent required by, and in accordance with, applicable provisions of law.
3.2 Regulatory Approvals. Each of the parties hereto shall proceed
expeditiously and cooperate fully in procuring all other consents and
approvals, and in satisfying all other requirements, prescribed by law or
otherwise, necessary or desirable for the merger described herein to be
consummated, including without limitation the consents and approvals referred
to in Paragraph 4.1(b), 4.1(e) and 4.1(f) hereof.
Section 4. Conditions Precedent, Termination and Payment of Expenses.
4.1 Conditions Precedent to the Merger. Consummation of the merger described
herein is conditioned upon the following:
(a) Ratification and confirmation of this Reorganization Agreement by the
stockholders of the Bank in accordance with applicable provisions of law;
(b) Procuring all other consents and approvals and satisfying all other
requirements, prescribed by law or otherwise, which are necessary for the
merger described herein to be consummated, including without limitation: (i)
approval from the Federal Deposit Insurance Corporation, the Commissioner of
the Department of Financial Institutions of the State of California, and the
Board of Governors of the Federal Reserve System; and (ii) approval of the
California Commissioner of Corporations under the California Corporate
Securities Law of 1968, and securities administrators of other applicable
jurisdictions, with respect to the securities of the Holding Company issuable
upon consummation of the merger;
(c) Receipt and continued effectiveness at the Effective Time (unless waived
by each of the parties hereto) of an opinion of counsel and/or accountants
with respect to the tax consequences to the parties and their stockholders of
the merger described herein;
(d) Not more than 10% of the Bank's outstanding shares will constitute
Dissenting Shares, as defined in Section 1300 of the California General
Corporation Law (unless such condition is waived by each of the parties);
(e) Procuring all consents or approvals, governmental or otherwise, which in
the opinion of counsel for the Bank are or may be necessary to permit or to
enable the Bank to conduct, upon and after the merger described herein, all or
any part of the businesses and other activities that the Bank engages in
immediately prior to such merger, in the same manner and to the same extent
that the Bank engaged in such businesses and other activities immediately
prior to such merger; and
(f) Performance by each of the parties hereto of all obligations under this
Reorganization Agreement which are to be performed prior to the consummation
of the merger described herein.
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4.2 Termination of the Merger. In the event that any condition specified in
Paragraph 4.1 hereof cannot be fulfilled, or prior to the Effective Time the
Board of Directors of any of the parties hereto reaches any of the following
determinations:
(a) The number of shares of common stock of the Bank voting against the
merger described herein makes consummation of such merger inadvisable; or
(b) Any action, suit, proceeding or claim relating to the merger described
herein, whether initiated or threatened, makes consummation of such merger
inadvisable; or
(c) Consummation of the merger described herein is inadvisable for any other
reason;
then this Reorganization Agreement shall terminate. Upon termination, this
Reorganization Agreement shall be void and of no further effect, and there
shall be no liability by reason of this Reorganization Agreement or the
termination hereof on the part of any of the parties hereto or their
respective directors, officers, employees, agents or stockholders.
4.3 Expenses of the Merger. All expenses incurred by the Bank, Merger Co.
and the Holding Company in connection with the merger described herein,
including without limitation filing fees, printing costs, mailing costs,
accountant's fees and legal fees, shall be borne by the Bank.
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IN WITNESS WHEREOF, the parties hereto have caused this Reorganization
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
The Bank: Farmers & Merchants Bank of Central
California
/s/ Ole R. Mettler
By __________________________________
Name Ole R. Mettler
Its Chairman of the Board
/s/ Kent A. Steinwert
By __________________________________
Name Kent A. Steinwert
Its President and Chief
Executive Officer
Merger Subsidiary: F&M Merger Co.
/s/ Ole R. Mettler
By __________________________________
Name Ole R. Mettler
Its Director
/s/ Kent A. Steinwert
By __________________________________
Name Kent A. Steinwert
Its President
Holding Company: Farmers & Merchants Bancorp
/s/ Ole R. Mettler
By __________________________________
Name Ole R. Mettler
Its Chairman of the Board
/s/ Kent A. Steinwert
By __________________________________
Name Kent A. Steinwert
Its President and Chief
Executive Officer
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ANNEX II
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300.REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S) 1301.NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND FOR
PURCHASE; TIME; CONTENTS
(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
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statement of price constitutes an offer by the corporation to purchase at the
price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause [(A)] or [(B)] 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.
(S) 1302.SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
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.
(S) 1303.PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after 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.
(S) 1304.ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; REORGANIZATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval
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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.
(S) 1305.REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT; JUDGMENT;
PAYMENT; APPEAL; 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
reasona- ble, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S) 1306.PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
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.
(S) 1307.DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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(S) 1308.RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309.TERMINATION OF DISSENTING SHARE AND 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.
(S) 1310.SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 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.
(S) 1312.RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
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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.
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ANNEX III
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FARMERS & MERCHANTS BANCORP
Farmers & Merchants Bancorp, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
FIRST. The name of the corporation is Farmers & Merchants Bancorp.
SECOND. The date of filing of its original Certificate of Incorporation with
the Secretary of State of Delaware was February 22, 1999.
THIRD. That said corporation has not received any payment for any of its
stock.
FOURTH. The Certificate of Incorporation of said corporation shall be
amended and restated to read in full as follows:
ARTICLE 1
The name of the corporation is Farmers & Merchants Bancorp (the
"Corporation").
ARTICLE 2
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, Delaware 19801. The name of the Corporation's registered
agent at such address is The Corporation Trust Corporation.
ARTICLE 3
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE 4
The Corporation is to have perpetual existence.
ARTICLE 5
The name and mailing address of the incorporator is:
Ole R. Mettler
121 West Pine Street
Lodi, CA 95240
ARTICLE 6
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is three million (3,000,000). This
Corporation is authorized to issue two classes of shares to be designated
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respectively Common Stock ("Common Stock") and Preferred Stock ("Preferred
Stock"). The total number of shares of Common Stock this Corporation shall
have authority to issue is two million (2,000,000). The total number of shares
of Preferred Stock this Corporation shall have authority to issue is one
million (1,000,000). The Common Stock shall have a par value of $0.01 per
share and the Preferred Stock shall have no stated par value.
The designations, preferences, qualifications, privileges, limitations and
restrictions of the classes of stock of the Corporation and the express grant
of authority to the Board of Directors to fix by resolution the designations,
preferences, qualifications, privileges, limitations, and restrictions
relating to the classes of stock of the Corporation which are not fixed by
this Amended and Restated Certificate of Incorporation, are as follows:
Section 6.1 Common Stock.
(a) Voting. Except as provided in this Amended and Restated Certificate of
Incorporation, and subject to the rights of holders of any series of Preferred
Stock then outstanding or any other securities of the Corporation, the holders
of the Common Stock shall exclusively possess all voting power. Each holder of
shares of Common Stock shall be entitled to one vote for each share held by
such holders.
(b) Dividends. Whenever there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding shares of any class of
stock having preference over the Common Stock as to the payment of dividends,
the full amount of dividends and sinking fund or retirement fund or other
retirement payments, if any, to which such holders are respectively entitled
in preference to the Common Stock, then dividends may be paid on the Common
Stock, and on any class or series of stock entitled to participate therewith
as to dividends, out of any assets legally available for the payment of
dividends, but only when as declared by the Board of Directors of the
Corporation.
(c) Liquidation. In the event of any liquidation, dissolution or winding up
of the Corporation, after there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding shares of any class
having preference over the Common Stock in any event, the full preferential
amounts to which they are respectively entitled, the holders of the Common
Stock and of any class or series of stock entitled to participate therewith,
in whole or in part, as to distribution of assets shall be entitled, after
payment or provision for payment of all debts and liabilities of the
Corporation, to receive the remaining assets of the Corporation available for
distribution, in cash or in kind.
Each share of Common Stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other
shares of Common Stock of the Corporation.
Section 6.2 Preferred Stock.
The Board of Directors is authorized, by resolution or resolutions from time
to time adopted, to provide for the issuance of Preferred Stock in one or more
series and to fix and state the powers, designations, preferences, and
relative, participating, optional, or other special rights of the shares of
such series, and the qualifications, limitations, or restrictions thereof,
including, but not limited to determination of any of the following:
(a) the distinctive serial designation, the number of shares constituting
such series and the stated value thereof if different from the par value
thereof;
(b) the dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date or dates, the payment date or dates for dividends, and the participating
or other special rights, if any, with respect to dividends;
(c) the voting powers, full or limited, if any, of the shares of such
series;
(d) whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such shares
may be redeemed;
III-2
<PAGE>
(e) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or winding up of
the Corporation;
(f) whether the shares of such series shall be entitled to the benefits of a
sinking or retirement fund to be applied to the purchase or redemption of such
shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be
redeemed or purchased through the application of such funds;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
(h) the subscription or purchase price and form of consideration for which
the shares of such series shall be issued;
(i) whether the shares of such series which are redeemed or converted shall
have the status of authorized but unissued shares of Preferred Stock and
whether such shares may be reissued as shares of the same or any other series
of Preferred Stock;
(j) the ranking (be it pari passu, junior or senior) of each class or series
vis-a-vis any other class or series of any class of Preferred Stock as to the
payment of dividends, the distribution of assets and all other matters; and
(k) any other powers, preferences and relative, participating, optional and
other special rights, and any qualifications, limitations and restrictions
thereof, insofar as they are not inconsistent with the provisions of this
Amended and Restated Certificate of Incorporation, to the full extent
permitted in accordance with the laws of the State of Delaware.
Each share of each series of Preferred Stock shall have the same relative
powers, preferences and rights as, and shall be identical in all respects
with, all the other shares of the Corporation of the same series.
ARTICLE 7
The holders of Preferred Stock shall not be held individually responsible as
such holders for any debts, contracts or engagements of the Corporation, and
the Preferred Stock shall not be liable for assessment to restore impairments
in the capital of the Corporation.
ARTICLE 8
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive
right to purchase or subscribe for any unissued stock of any class or series,
or any unissued bonds, certificates of indebtedness, debentures, or other
securities convertible into or exchangeable for stock of any class or series
or carrying any right to purchase stock of any class or series; but any such
unissued stock, bonds, certificates of indebtedness, debentures, or other
securities convertible into or exchangeable for stock or carrying any right to
purchase stock may be issued pursuant to resolution of the Board of Directors
of the Corporation to such persons, firms, corporations, or associations,
whether or not holders thereof, and upon such terms as may be deemed advisable
by the Board of Directors in the exercise of its sole discretion.
III-3
<PAGE>
ARTICLE 9
The Corporation may from time to time, pursuant to authorization by the
Board of Directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities
of the Corporation in such manner, upon such terms, and in such amounts as the
Board of Directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or
acquisition in question or as are imposed by law or regulation.
ARTICLE 10
Special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by a majority of the Board of Directors or
by the holders of at least a majority of the then outstanding shares of
capital stock of the Corporation entitled to vote thereat. Special meetings
may not be called by any other person or persons. Each special meeting shall
be held at such date and time as is requested by the person or persons calling
the meeting, within the limits fixed by the By-laws and by law.
ARTICLE 11
Any action required to be taken at any annual or special meeting of
stockholders of this Corporation, or any action which may be taken at any
annual or special meeting of stockholders, 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 stock 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, provided that the Board of Directors of this Corporation,
by resolution, shall have previously approved any such action.
ARTICLE 12
Except as required by applicable law, there shall be no cumulative voting by
stockholders of any class or series in the election of directors of the
Corporation.
ARTICLE 13
Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
By-laws of the Corporation.
ARTICLE 14
Section 14.1 In addition to any affirmative vote required by law or this
Amended and Restated Certificate of Incorporation, and except as otherwise
expressly provided in Section 2 of this Article XIV, any "Business
Combination" (as hereinafter defined), which shall be consummated at a time
when there shall exist an "Interested Stockholder" (as hereinafter defined),
shall require the affirmative vote of the holders of at least 66 2/3% of the
then outstanding shares of capital stock of this Corporation entitled to vote,
voting together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required or that a lesser
percentage may be specified by law or otherwise.
III-4
<PAGE>
In addition to the higher vote requirement, except as otherwise expressly
provided in Section 2 of this Article XIV, prior to effecting any such
Business Combination all of the following conditions shall have been met:
a. The aggregate amount of the cash and the "Fair Market Value" (as
hereinafter defined) as of the date of the consummation of the Business
Combination of consideration other than cash to be received per share by
holders of the Common Stock in such Business Combination shall be at least
equal to the higher of the following:
i. (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of the Common Stock acquired by it
(a) within the two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the "Announcement
Date") or (b) in the transaction in which it became an Interested
Stockholder, if within two years of the Announcement Date, whichever is
higher; and
ii. the Fair Market Value per share of the Common Stock on the
Announcement Date or on the date on which the Interested Stockholder became
an Interested Stockholder the ("Determination Date"), if within two years
of the Announcement Date, whichever is higher.
b. The aggregate amount of the cash and the Fair Market Value as of the date
of the consummation of the Business Combination of consideration other than
cash to be received per share by holders of shares of any other class of
outstanding stock of this Corporation shall be at least equal to the highest
of the following:
i. (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of such class of stock acquired by it
(a) within the two-year period immediately prior to the Announcement Date
or (b) in the transaction in which it became an Interested Stockholder, if
within two years of the Announcement Date, whichever is higher;
ii. (if applicable) the highest preferential amount per share to which
the holders of shares of such class of stock are entitled in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
iii. the Fair Market Value per share of such class of stock on the
Announcement Date or on the Determination Date, if within two years of the
Announcement Date, whichever is higher.
c. The consideration to be received by holders of a particular class of
outstanding stock of this Corporation (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has previously paid for
shares of such class of stock. If the Interested Stockholder has paid for
shares of any class of stock with varying forms of consideration, the form of
consideration for such class of stock shall be either cash or the form used to
acquire the largest number of shares of such class of stock previously
acquired by it. The price determined in accordance with subparagraphs A and B
of this Section 1 shall be subject to appropriate adjustment in the event of
any stock dividend, stock split, combination of shares or similar event.
d. After such stockholder has become an Interested Stockholder and prior to
the consummation of such Business Combination and except to the extent that
the Corporation may be prohibited by law from making a distribution to
stockholders: (1) except as approved by 66-2/3% of the "Disinterested
Directors" (as hereinafter defined), there shall have been no failure to
declare and pay at the regular date therefor any dividends (whether or not
cumulative) on the outstanding Preferred Stock of this Corporation; (2) there
shall have been (a) no reduction in the annual rate of dividends paid on the
Common Stock of this Corporation (except an necessary to reflect any
subdivision of the Common Stock), except as approved by 66-2/3% of the
Disinterested Directors, and (b) an increase in such annual rate of dividends
as necessary to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar transaction which has
the effect of reducing the number or outstanding shares of the Common Stock,
unless the failure so to increase such annual rate is approved by 66-2/3% of
the Disinterested Directors; and (3) such Interested Stockholder shall have
not become the beneficial owner of any additional shares of stock of this
Corporation except as part of the transaction which results in such
stockholder becoming an Interested Stockholder within the two year period
prior to such consummation.
III-5
<PAGE>
e. After such stockholder has become an Interested Stockholder, such
Interested Stockholder shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by this Corporation or any "Subsidiary" (as
hereinafter defined), whether in anticipation of or in connection with such
Business Combination or otherwise.
f. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to all holders of
the stock of this Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or information statement
is required to be mailed pursuant to such Act or subsequent provisions).
Section 14.2 The provisions of Section 1 of this Article XIV shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by law and
any other provision of this Amended and Restated Certificate of Incorporation,
if the Business Combination shall have been approved by 66 2/3% of the
Disinterested Directors; or, if either
a. there is pending any proceeding or other action by the Federal Deposit
Insurance Corporation pursuant to (S) 1818(a) or (S) 1823(c) of Title 12 of
the United States Code in connection with any of the banking subsidiaries of
the Corporation; or
b. there is outstanding any order of the Commissioner of Financial
Institutions of the State of California pursuant to California Financial Code
(S) 662, (S)(S) 3100-3132 or (S)(S) 3180-3187 against any banking subsidiary
of the Corporation
or any other provision of similar purpose as hereinafter adopted and as the
same may be amended at a future time.
Section 14.3 For the purposes of this Article XIV the following definitions
apply:
a. A "person" means any individual, firm, corporation or other entity.
b. "Interested Stockholder" means any person (other than this Corporation or
any Subsidiary) who or which:
i. is the beneficial owner, directly or indirectly, of more than 20% of
the issued and outstanding stock of this Corporation; or
ii. is an "Affiliate" of this Corporation and at any time within the two-
year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 20% or more of the issued and outstanding
stock of this Corporation; or
iii. is an assignee of or has otherwise succeeded to any shares of stock
of this Corporation which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
c. A person shall be a "beneficial owner" of stock of this Corporation:
i. which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
ii. which such person or any of its Affiliates or Associates has (a) the
right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
iii. which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of stock of this Corporation.
III-6
<PAGE>
d. "Business Combination" shall include:
i. any merger or consolidation of the Corporation or any Subsidiary with
(i) any Interested Stockholder or (ii) any other corporation (whether or
not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; or
ii. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate of any Interested Stockholder of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value of ten percent (10%) or more of the total value of the assets
of the Corporation reflected in the most recent balance sheet of the
Corporation; or
iii. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value of 20% of stockholders' equity or more; or
iv. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or any Affiliate of any Interested Stockholder; except that
this provision shall not limit the right of the stockholders to elect
voluntarily to wind up or dissolve the Corporation by the vote of
stockholders holding shares of stock representing more than fifty percent
(50%) of the stock then entitled to vote in the election of directors; or
v. any reclassification of the Corporation's securities (including any
reverse stock split), or recapitalization of the Corporation, or any merger
or consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving any
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate beneficial ownership of any Interested
Stockholder or any Affiliate of any Interested Stockholder in the
outstanding shares of any class of equity or convertible securities of the
Corporation or any Subsidiary.
e. "Affiliate," and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on February 15, 1999.
f. "Disinterested Director" means any member of the Board of Directors who
is unaffiliated with the Interested Stockholder and was a member of the Board
of Directors prior to the time that the interested Stockholder became an
Interested Stockholder, and any successor of a Disinterested Director who is
unaffiliated with the Interested Stockholder and is recommended to succeed a
Disinterested Director by a majority of Disinterested Directors then on the
Board of Directors.
g. "Fair Market Value" means as to the stock of this Corporation the fair
market value on the date in question of a share of such stock as determined by
the Board of Directors in good faith; and in the case of property other than
cash or stock, the fair market value of such property on the date in question
as determined by the Board of Directors in good faith.
h. "Subsidiary" means any corporation of which a majority of any class of
equity security is owned, directly or indirectly, by this Corporation;
provided, however, that for purposes of the definition of Interested
Stockholder, the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned directly or indirectly by
this Corporation.
In the event of any Business Combination in which this Corporation survives,
the phrase "other consideration to be received" as used in Section 1 of this
Article XIV shall include the shares of stock of this Corporation retained by
the holders of such shares.
Section 14.4 A majority of the directors shall have the power and duty to
determine for the purposes of this Article XIV, on the basis of information
known to them after reasonable inquiry, (A) whether a person is an Interested
Stockholder, (B) the number of shares of stock of this Corporation
beneficially owned by any person,
III-7
<PAGE>
(C) whether a person is an Affiliate or Associate of another, or (D) whether
the assets which are the subject of any Business Combination constitute
substantially all assets of this Corporation. A majority of the directors
shall have the further power to interpret all of the terms and provisions of
this Article XIV.
Section 14.5 Nothing contained in this Article XIV shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
Section 14.6 Notwithstanding any other provisions of this Amended and
Restated Certificate of Incorporation or the By-laws (and notwithstanding the
fact that a lesser percentage may be specified by law, this Amended and
Restated Certificate of Incorporation or the By-laws) the affirmative vote of
the holders of 66 2/3% or more of the outstanding stock of this Corporation
shall be required to amend, repeal or adopt any provisions inconsistent with
this Article XIV.
ARTICLE 15
The Board of Directors, when evaluating any offer of another party to (a)
make a tender or exchange offer for any Equity Security (as defined
hereinafter) of the Corporation, (b) merge or consolidate the Corporation with
another corporation, or (c) purchase, lease, or otherwise acquire all or
substantially all of the property of the Corporation, shall in connection with
the exercise of its judgment in determining what is in the best interests of
the Corporation and its stockholders consider all of the following factors and
any other factors it deems relevant: (i) the social and economic effects on
the employees, stockholders, customers, suppliers, and other constituents of
the Corporation and its subsidiaries and on the communities in which the
Corporation or its subsidiaries operate or are located, including, without
limitation, the availability of credit and other banking services to the
communities served by the Corporation; (ii) whether the proposed transaction
might violate federal or state laws; and (iii) not only the consideration
being offered in the proposed transaction in relation to the then current
market price for or book value of the outstanding capital stock of the
Corporation, but also to the market price for or book value of the capital
stock of the Corporation over a period of years and the Corporation's future
value as an independent entity. "Equity Security" shall have the meaning
ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of
1934, as in effect on February 15, 1999.
ARTICLE 16
Directors of the Corporation shall have no liability to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XVI shall not eliminate liability of a
director for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not made in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derived an improper personal benefit. If the
Delaware General Corporation Law is amended after the effective date of this
Amended and Restated Certificate of Incorporation to further eliminate or
limit the personal liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent permitted
by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
III-8
<PAGE>
ARTICLE 17
In accordance with Section 203(b)(3) of the Delaware General Corporation
Law, the Corporation expressly elects not to be governed by Section 203 of the
Delaware General Corporation Law.
FIFTH. This Amended and Restated Certificate of Incorporation was duly
adopted by the sole incorporator of the Corporation in accordance with the
provisions of Section 241 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by Ole R. Mettler, its sole
incorporator, this 9th day of March, 1999.
/s/ Ole R. Mettler
By __________________________________
Ole R. Mettler
Incorporator
III-9
<PAGE>
STATE OF CALIFORNIA
DEPARTMENT OF CORPORATIONS
In the matter of the_____________________________) NOTICE OF HEARING
Application of___________________________________) PURSUANT TO
FARMERS & MERCHANTS BANCORP,_____________________) SECTION 25142
a Delaware corporation___________________________) OF THE CALIFORNIA
_________________________________________________) CORPORATIONS CODE
For the Qualification by Permit of_______________)
its Securities Under Section 25121_______________) File No. 506-1632
of the Corporate Securities Law of 1968._________)
To: Stockholders of Farmers & Merchants Bank of Central California
NOTICE OF FAIRNESS HEARING
NOTICE IS HEREBY GIVEN that a hearing for a permit authorizing the issuance
of securities by Farmers & Merchants Bancorp, a Delaware corporation (the
"Holding Company"), pursuant to an Application for Qualification of Securities
under section 25121 of the California Corporate Securities Law of 1968 filed
February 22, 1999, will take place on April 1, 1999 at 11:00 a.m. in the
Hearing Room of the Department of Corporations of the State of California at
1390 Market Street, Suite 810, San Francisco, California 94102-5303. Said
hearing will be held before Mr. William Kenefick, Acting Commissioner of
Corporations of the State of California, or any such Assistant Commissioner or
Corporations Counsel as may be designated, pursuant to the authority of
section 25142 of the California Corporations Code and will be in accordance
with the provisions of Title 10, California Administrative Code, sections
250.17 through 250.25.
FACTS GIVING RISE TO THE HEARING
Farmers & Merchants Bank of Central California (the "Bank"), a California
state-chartered bank, proposes to reorganize into a bank holding company form
and become a wholly-owned subsidiary of the Holding Company
("Reorganization"), pursuant to an Agreement and Plan of Reorganization among
the Holding Company, the Bank and F&M Merger Corp. dated as of March 10, 1999
(the "Reorganization Agreement"). Stockholders of the Bank would receive
shares of common stock of the Holding Company in exchange for their shares of
the common stock of the Bank. It will not be necessary for stockholders to
surrender their Bank share certificates as such certificates, until exchanged,
will represent shares of the Holding Company. It is proposed that this
offering of common stock of the Holding Company in exchange for the common
stock of the Bank will not be registered under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption from registration set
forth in section 3(a)(10) of the Act. Accordingly, the Holding Company has
requested a permit from the California Commissioner of Corporations following
a public hearing (which hearing is the subject of this Notice), conducted
pursuant to section 25142 of the California Corporate Securities Laws of 1968.
For further information concerning the Exchange, reference is made to the
Application for Qualification of Securities of the Holding Company and
exhibits filed therewith at the San Francisco office of the Department of
Corporations on February 22, 1999, File No. 506-1632 (the "Application"). The
Proxy Statement/Offering Circular (attached to the Application as Exhibit F)
contains a detailed explanation of the terms of the proposed Exchange, as well
as financial statements of the Holding Company and the Bank.
<PAGE>
THE HEARING
Any interested person may be present at the hearing and may, but need not,
be represented by counsel. Such person will be given an opportunity to be
heard. Any interested person will be entitled to the issuance of subpoenas to
compel the attendance of witnesses and the production of books, documents, and
other items by applying to the Department of Corporations, 1390 Market Street,
Suite 810, San Francisco, CA 94102-5303, Attn: Roger Borgen, Esq., Senior
Corporations Counsel, if reasonably, properly and timely requested. If you are
interested in said matter and decide to do so, you may appear in favor of, or
in opposition to, the granting of such Permit. If you are unable to attend,
correspondence regarding this hearing may be directed to the Department of
Corporations, 1390 Market Street, Suite 810, San Francisco, CA, 94102-5303,
Attn: Roger Borgen, Esq., Senior Corporations Counsel.
The hearing will be based upon the Application and all papers and documents
filed in connection therewith. The hearing will be for the purpose of enabling
the Commissioner of Corporations to determine the fairness of the terms and
conditions of the Exchange. Section 25142 of the California Corporations Code
authorizes the Commissioner of Corporations to hold such a meeting when
securities will be issued in exchange for other outstanding securities, to
approve the terms and conditions of such issuance and exchange, and to
determine whether such terms and conditions are fair, just and equitable.
APPROVAL OF THE EXCHANGE BY THE COMMISSIONER OF CORPORATIONS WILL NOT
SIGNIFY AN ENDORSEMENT OR RECOMMENDATION BY THE COMMISSIONER OF CORPORATIONS.
The stockholders of the Bank will have the opportunity to vote to accept or
reject the Reorganization at the annual meeting of stockholders to be held by
the Bank on April 19, 1999.
Dated: San Francisco, California.
WILLIAM KENEFICK
Acting Commissioner of Corporations
By: /s/ Roger Borgen
-----------------------------------
Roger Borgen, Esq.
Senior Corporations Counsel
<PAGE>
Proxy
121 West Pine Street, Lodi, California 95240-2184
- - -------------------------------------------------------------------------------
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoint(s) Ole R. Mettler, Ralph Burlington, and Kent
A. Steinwert, and any of them, each with full power of substitution as Proxy
of the undersigned, to attend the Annual Meeting of the Stockholders of
Farmers & Merchants Bank of Central California to be held at Lodi, California,
at 4:00 p.m., on April 19, 1999 and any adjournment thereof, and to vote the
number of shares the undersigned would be entitled to vote if personally
present as indicated below:
THE BOARD OF DIRECTORS RECOMMENDS A "FOR" VOTE ON EACH OF ITEMS 1 THROUGH 4,
BELOW.
1. ELECTION OF DIRECTORS OF BANK
[_FOR]all nominees [_]WITHHOLD AUTHORITY
listed below. to vote for ALL
(except as indicated nominees listed below.
to the contrary
below)
Stewart C. Adams, Jr., Ralph Burlington, Robert F. Hunnell, Ole R. Mettler,
James E. Podesta, Harry C. Schumacher,
George Scheideman, Hugh Steacy, Kent A. Steinwert, Calvin (Kelly) Suess, Carl
A. Wishek, Jr.
(INSTRUCTION: To withhold authority to vote for any individual nominee, cross
out that nominee's name listed above.)
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP as the
independent public accountants of the Bank.
[_] FOR[_] AGAINST[_] ABSTAIN
3. BANK HOLDING COMPANY REORGANIZATION
[_] FOR[_] AGAINST[_] ABSTAIN
4. PROPOSAL TO RENEW SUPERMAJORITY VOTE PROVISIONS OF ARTICLE VIII OF THE
BANK'S ARTICLES OF INCORPORATION
[_] FOR[_] AGAINST[_] ABSTAIN
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy when properly executed will be voted in the manner directed by the
undersigned stockholder. If no direction is made, this proxy will be voted for
some or all of the nominees listed under Item 1, in the manner described in
the Proxy Statement dated March 12, 1999, and in favor of Items 2, 3 and 4.
This proxy confers on the proxyholders the power of cumulative voting as
described in such Proxy Statement.
Please sign exactly as name appears
herein. When shares are held by joint
tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
---------------------------------------
Signature
---------------------------------------
Signature
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE.
Date ___________________________ , 1999
<PAGE>
Exhibit 99.7
STATE OF CALIFORNIA
BUSINESS, TRANSPORTATION AND HOUSING AGENCY
DEPARTMENT OF CORPORATIONS
File No. 506-1632
PERMIT
THIS PERMIT IS PERMISSIVE ONLY
AND DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE SECURITIES PERMITTED TO BE ISSUE
Issuer: Farmers & Merchants Bancorp
is hereby qualified to offer, sell and issue the securities described in its
application filed February 22, 1999, and any amendments and supplements thereto
to the date hereof, to the persons described in said application, for the
considerations, uses and purposes, and in the manner set forth in said
application. This qualification is effective for 12 months from the date
hereof.
Dated: San Francisco, California
WILLIAM KENEFICK
Acting Commissioner of Corporations
April 13, 1999 By /s/ Roger Borgen
-----------------------------------
Roger Borgen
Senior Corporations Counsel
<PAGE>
STATE OF CALIFORNIA
BUSINESS, TRANSPORTATION AND HOUSING AGENCY
DEPARTMENT OF CORPORATIONS
File No. 506-1632
Applicant: Farmers & Merchants Bancorp
CERTIFICATE OF ISSUANCE OF PERMIT
I, WILLIAM KENEFICK, Acting Commissioner of Corporations, hereby
certify:
1. By application filed February 22, 1999 applicant seeks
qualification for the offer and sale of securities under section 25121 of the
Corporate Securities Law of 1968, as amended.
2. The terms and conditions of the proposed offer and sale of
securities are described in that application and the Notice of Hearing executed
March 11, 1999.
3. At applicant's request and upon due notice to all persons to
whom it is proposed to issue such securities, a hearing was held April 6, 1999,
before the Department of Corporations, upon the fairness of the terms and
conditions of such offer and sale of securities. All proposed issues had the
right to appear.
4. The terms and conditions are fair and are approved.
Qualification by permit for the offer and sale of such securities is effective
the date hereof.
Dated: San Francisco, California
WILLIAM KENEFICK
Acting Commissioner of Corporations
April 13, 1999 By /s/ Roger Borgen
----------------------------------
Roger Borgen
Senior Corporations Counsel
