<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO.: 333-94353
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6712 95-2568550
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
CITY NATIONAL CENTER
400 NORTH ROXBURY DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 888-6266
(Address including zip code, and telephone number, including area code,
of registrant's principal executive office)
BARBARA S. POLSKY
EXECUTIVE VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
CITY NATIONAL CORPORATION
CITY NATIONAL CENTER
400 NORTH ROXBURY DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 888-6266
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
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WILLIAM T. QUICKSILVER, ESQ. JAMES E. TOPINKA, ESQ.
MANATT, PHELPS & PHILLIPS LLP PRESTON GATES & ELLIS, LLP
11355 WEST OLYMPIC BOULEVARD ONE MARITIME PLAZA, SUITE 2400
LOS ANGELES, CALIFORNIA 90064 SAN FRANCISCO, CA 94111
TELEPHONE: (310) 312-4000 TELEPHONE: (415) 733-8319
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CITY NATIONAL CORPORATION HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL CITY
NATIONAL CORPORATION SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE PACIFIC BANK, NATIONAL ASSOCIATION
Dear Shareholder:
The Boards of Directors of The Pacific Bank, National Association and City
National Corporation have unanimously approved an agreement to merge Pacific
Bank with and into City National Bank, a wholly-owned subsidiary of City
National Corporation.
If we complete the merger, you will receive cash, City National Corporation
common stock or a combination of the two, at your election, subject to proration
under certain circumstances, in exchange for your shares of Pacific Bank common
stock.
This document gives you detailed information about the merger and includes a
copy of the merger agreement. You should read it carefully. This document also
constitutes the prospectus of City National for the shares of its common stock
to be issued in the merger.
We are enthusiastic about the merger and the strength and capabilities we
expect from the combined company. I urge you to join our directors in voting in
favor of the merger.
/s/ Michael Tun Zan
Michael Tun Zan
PRESIDENT AND CHIEF EXECUTIVE OFFICER
The Pacific Bank, National Association
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SECURITIES OFFERED THROUGH THIS DOCUMENT ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JANUARY 26, 2000 AND IT IS
FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT JANUARY 27, 2000.
<PAGE>
THE PACIFIC BANK, N.A.
351 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 576-2700
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 29, 2000 AT 9:00 A.M.
PLACE: 351 CALIFORNIA STREET, THE PACIFIC BANK BUILDING, 4TH FLOOR CONFERENCE
ROOM.
------------------------
PURPOSES:
- To approve the merger agreement that provides for the acquisition of The
Pacific Bank by City National Corporation by means of a merger of The
Pacific Bank with and into City National Bank, a wholly owned subsidiary
of City National Corporation.
- To conduct other business if properly raised.
Only shareholders of Pacific Bank as of the close of business on
January 10, 2000, may vote at the Pacific Bank special shareholders' meeting.
By Order of the Board of Directors
/s/ Carol A. Petricka
Carol A. Petricka
CORPORATE SECRETARY
San Francisco, California
January 26, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL SHAREHOLDERS' MEETING IN
PERSON, WE URGE YOU TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE
MANNER PROVIDED IN THE ACCOMPANYING DOCUMENT.
<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS.......................... 4
SUMMARY..................................................... 5
General..................................................... 5
The Companies............................................... 5
Special Shareholders' Meeting of Pacific Bank............... 6
Record Date; Voting Power................................... 6
Vote Required............................................... 6
Share Ownership of Pacific Bank Management.................. 6
Recommendation of Pacific Bank Board of Directors........... 6
Opinion of Keefe, Bruyette & Woods, Inc., Financial Advisors
to Pacific Bank........................................... 6
Terms of the Merger Agreement............................... 6
Stock Option Agreement...................................... 8
Interests of Certain Directors and Executive Officers of
Pacific Bank in the Merger................................ 9
Directors of City National and City National Bank Following
the Merger................................................ 9
Material Federal Income Tax Consequences.................... 9
Accounting Treatment........................................ 10
Resales of City National Common Stock....................... 10
Regulatory Approvals........................................ 10
Pacific Bank Dissenters' Rights............................. 10
Differences in the Rights of Shareholders................... 10
MARKET PRICE AND DIVIDEND INFORMATION....................... 11
Comparative Market Price Information........................ 11
Historical Market Prices and Dividend Information........... 11
RECENT DEVELOPMENTS......................................... 13
SELECTED CONSOLIDATED FINANCIAL DATA........................ 14
City National Historical Consolidated Financial Data........ 15
Pacific Bank Historical Consolidated Financial Data......... 16
Selected Unaudited Pro Forma Combined Financial Data........ 17
Comparative Per Share Data.................................. 18
RISK FACTORS................................................ 19
A WARNING ABOUT FORWARD-LOOKING INFORMATION................. 20
SPECIAL SHAREHOLDERS' MEETING OF PACIFIC BANK............... 21
General..................................................... 21
Record Date; Voting Power................................... 21
Vote Required............................................... 21
Share Ownership of Pacific Bank Management.................. 21
Recommendation of the Pacific Bank Board of Directors....... 22
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i
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<S> <C>
Solicitation and Revocation of Proxies...................... 22
Other Matters............................................... 22
THE MERGER.................................................. 23
General..................................................... 23
Background of and Reasons for the Merger.................... 23
Opinion of Pacific Bank's Financial Advisor................. 26
Interests of Certain Directors and Executive Officers of
Pacific Bank in the Merger................................ 31
Consideration to be Received in the Merger.................. 32
Election and Proration Procedures........................... 34
Material Federal Income Tax Consequences.................... 37
Accounting Treatment of the Merger.......................... 41
THE MERGER AGREEMENT........................................ 42
Conditions to the Merger.................................... 42
Nonsolicitation............................................. 44
Fees and Expenses........................................... 44
Treatment of Options........................................ 44
Termination................................................. 44
Covenants; Conduct of Business Prior to Completion of the
Merger.................................................... 45
Amendment and Waiver........................................ 49
Shareholder Agreements with Directors of Pacific Bank....... 50
Resales of City National Common Stock by Pacific Bank
Shareholders.............................................. 50
Stock Option Agreement...................................... 50
New York Stock Exchange Listing............................. 53
Regulatory Approvals for the Merger......................... 53
DISSENTING SHAREHOLDERS' RIGHTS............................. 54
General..................................................... 54
Who May Exercise Appraisal Rights........................... 54
Electing Appraisal Rights................................... 54
Determining Value of Dissenting Shareholders' Shares........ 55
DESCRIPTION OF CAPITAL STOCK OF CITY NATIONAL AND PACIFIC
BANK...................................................... 56
City National............................................... 56
Pacific Bank................................................ 59
COMPARISON OF RIGHTS OF HOLDERS OF PACIFIC BANK COMMON STOCK
AND CITY NATIONAL COMMON STOCK............................ 59
EXPERTS..................................................... 64
LEGAL MATTERS............................................... 64
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 65
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 69
</TABLE>
ii
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION......................... 71
</TABLE>
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<S> <C>
ANNEXES
ANNEX A AGREEMENT AND PLAN OF REORGANIZATION
ANNEX B STOCK OPTION AGREEMENT
ANNEX C OPINION OF KEEFE, BRUYETTE & WOODS, INC.
ANNEX D SECTION 215a OF THE NATIONAL BANK ACT
ANNEX E ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 1998 FOR
PACIFIC BANK
ANNEX F QUARTERLY REPORT ON FORM 10-Q/A FOR THE QUARTER ENDED SEPTEMBER 30,
1999 FOR PACIFIC BANK.
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For each share of Pacific Bank you own before the merger, you will have
the right to elect, on a share-by-share basis, to receive:
- $29.00 in cash; or
- shares of City National Corporation common stock based on a
fluctuating exchange ratio as follows: (1) if the final City
National stock price is between $28.05 and $37.95, the
exchange ratio will equal $29.00 divided by the final City
National stock price; (2) if the final City National stock
price is more than $37.95 but less than or equal to $41.25,
the exchange ratio will be .7642; (3) if the final City
National stock price is more than $41.25, the exchange ratio
will be $31.52 divided by the final City National stock
price; and (4) if the final City National stock price is
less than $28.05, the exchange ratio will be 1.0339.
</TABLE>
Final City National stock price means the average of the daily closing
prices of a share of City National common stock on the New York Stock Exchange
for the 20 consecutive trading days ending on the third trading day immediately
before the completion of the merger.
The table below illustrates how changes in the final City National stock
price will change the exchange ratio for each share of Pacific Bank common stock
if you were to elect to receive City National common stock:
<TABLE>
<CAPTION>
ASSUMED FINAL
CITY NATIONAL EXCHANGE
STOCK PRICE RATIO
- -------------------- --------
<S> <C>
$48.00 0.6567
$41.25 0.7642
$37.95 0.7642
$33.00 0.8788
$30.50 0.9508
$28.05 1.0339
$27.00 1.0339
</TABLE>
The merger agreement provides that City National common stock must represent
at least 47% and no more than 52.5% of the total merger consideration. If
Pacific Bank shareholders elect to receive City National common stock
representing less than 47% or more than 52.5% of the total merger consideration,
your election may be subject to proration as described on pages 35 to 37. As a
result of the proration, you may not receive the exact form of merger
consideration that you elect.
The following chart illustrates the approximate value of what a holder of
100 shares of Pacific Bank common stock will receive in the merger, assuming
varying final City National stock prices and different percentages of cash and
City National common stock. You should bear in mind that the value of City
National common stock is subject to fluctuation and, therefore, the value of a
share of City National common stock as of the date of the consummation of the
merger and after the merger will
1
<PAGE>
differ from the value of such stock based on the final City National stock
price. This chart uses hypothetical final City National stock prices.
IF YOU HOLD 100 SHARES OF PACIFIC BANK COMMON STOCK AND
THE FINAL CITY NATIONAL STOCK PRICE IS:
<TABLE>
<CAPTION>
$27 $33 $48
-------- -------- --------
<S> <C> <C> <C>
and you receive:
100% cash....................................... $2,900 $2,900 $2,900
75% cash/25% City National common stock......... 2,873 2,900 2,963
50% cash/50% City National common stock......... 2,846 2,900 3,026
25% cash/75% City National common stock......... 2,819 2,900 3,089
100% City National common stock................. 2,792 2,900 3,152
</TABLE>
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<S> <C>
Q: HOW DO I LEARN MORE ABOUT CITY NATIONAL COMMON STOCK?
A: Please see page 11 and pages 56 through 59 of this proxy
statement/prospectus for information regarding market price,
dividends and other features of City National common stock.
Q: HOW DO I ELECT THE FORM OF PAYMENT THAT I PREFER?
A: Forms of election are being sent contemporaneously to you in
separate mailings. If you wish to make an election, you
should complete this form and send it in the envelope
provided with the form of election to Continental Stock
Transfer & Trust Company which is the exchange agent. For
you to make an effective election, your properly executed
election form must be received by the exchange agent before
the election deadline on February 23, 2000. You must include
your Pacific Bank stock certificates with your election
form. Please read the instructions to the election form for
information on completing the form. These instructions will
also inform you what to do if your stock certificates have
been lost, stolen or destroyed.
DO NOT SEND YOUR PACIFIC BANK STOCK CERTIFICATES IN THE
ENVELOPE PROVIDED FOR USE IN RETURNING YOUR PROXY CARD. THE
STOCK CERTIFICATES SHOULD ONLY BE FORWARDED TO THE EXCHANGE
AGENT WITH THE LETTER OF TRANSMITTAL AND ELECTION FORM.
Copies of this proxy statement/prospectus and the election
form will be provided to all persons who become Pacific Bank
shareholders after the record date and prior to the election
deadline to permit them to make an election.
Q: WHAT HAPPENS IF I DON'T MAKE AN ELECTION FOR CASH OR SHARES?
A: If you fail to make an election prior to the election
deadline, other than because you are exercising your
dissenters' rights, you will be deemed to have elected to
receive either City National common stock or cash in the
merger. The actual merger consideration that will be paid to
you will depend upon how many shareholders request shares of
City National common stock versus how many request cash. See
pages 34 to 37.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: Your tax consequences will depend upon whether you receive
City National common stock, cash, or a combination of City
National common stock and cash, in the merger, and may also
depend upon your basis in your Pacific Bank common stock.
You should not recognize any gain or loss for U.S. federal
income tax purposes to the extent that you receive City
National common stock in the merger.
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2
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<S> <C>
If you receive both City National common stock and cash in
the merger, you should recognize gain equal to the lesser of
the amount of gain realized and the amount of cash received.
If you receive only cash, you generally will recognize gain
and, depending upon your particular circumstances, likely
will be permitted to recognize loss, equal to the difference
between the amount of cash received and your basis in your
Pacific Bank common stock.
The material U.S. federal income tax consequences of the
merger are described in more detail on pages 37 to 41. The
tax consequences of the merger to you will depend upon the
facts of your own situation. Please consult your own tax
advisor for a full understanding of the tax consequences to
you of the consideration you receive in exchange for your
Pacific Bank common stock.
Q: WHAT WILL I GET IF I DISSENT?
A: If you vote against the merger or give written notice at or
prior to the Pacific Bank special shareholders' meeting that
you dissent from the merger and follow the specific steps to
perfect your dissenters' rights, you will have the right to
seek appraisal of your shares and receive a cash amount as
determined in accordance with provisions of the National
Bank Act, which are attached as Annex D.
Q: HOW DO I VOTE?
A: Just indicate on your proxy card how you want to vote, and
sign and mail your proxy card in the enclosed envelope as
soon as possible so that your shares will be represented at
the special shareholders' meeting. As an alternative, you
may vote by telephone following the instructions on the
proxy card.
If you sign and send in your proxy and do not indicate how
you want to vote, your proxy will be voted in favor of the
merger agreement. If you do not sign and send in your proxy
or you abstain, it will have the effect of a vote against
the merger agreement for purposes of determining the number
of votes in favor of the merger agreement.
You may attend the special shareholders' meeting and vote
your shares in person, rather than voting by proxy. In
addition, you may withdraw your proxy up to and including
the day of the meeting by following the directions on
page 22 and either change your vote or attend the meeting
and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
A: No. Your broker will vote your shares of Pacific Bank common
stock only if you provide instructions on how to vote. You
should instruct your broker how to vote your shares,
following the directions your broker provides. If you do not
provide instructions to your broker, your broker will not be
able to vote your shares and this will have the effect of
voting against the merger agreement for purposes of
determining the number of votes in favor of the merger
agreement.
Q: HOW DO THE DIRECTORS PLAN TO VOTE?
A: All of your directors have committed that they will vote
their shares in favor of the merger agreement. Pacific Bank
directors collectively hold as of the record date for the
special shareholders' meeting 53,300 shares or approximately
1.06% of the outstanding Pacific Bank common stock.
Q: WHAT RISKS SHOULD I CONSIDER BEFORE I VOTE ON THE MERGER?
A: You should review "Risk Factors" on pages 19 and 20.
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3
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<S> <C>
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: City National and Pacific Bank are working to complete the
merger on or before the end of the first quarter of 2000.
Pacific Bank must first obtain the approval of the
shareholders of Pacific Bank at the special shareholders'
meeting and City National and Pacific Bank must satisfy
other conditions. Neither City National nor Pacific Bank can
assure you as to when or if all the conditions to the merger
will be met, and it is possible the merger will not be
completed.
</TABLE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
John P. Halicky, Chief Financial Officer
The Pacific Bank
351 California Street
San Francisco, California 94104
Telephone: (415) 576-2700
Please see "WHERE CAN I FIND MORE INFORMATION" on page 71 where you can find
more information about City National and Pacific Bank.
4
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents referred to, including the merger agreement attached as
Annex A. See "Where You Can Find More Information" (page 71).
GENERAL
This proxy statement/prospectus relates to a proposed merger of Pacific Bank
into City National Bank, a wholly-owned subsidiary of City National. The merger
will combine Pacific Bank with City National Bank and will create opportunities
for the combined company to apply their similar relationship banking philosophy
to realize enhanced revenues through asset growth and geographical
diversification.
THE COMPANIES
CITY NATIONAL CORPORATION
City National Center
400 North Roxbury Drive
Beverly Hills, California 90210
(310) 888-6000
City National Corporation is a bank holding company operating City National
Bank, which currently has 46 banking offices. City National Bank is City
National's principal asset. At September 30, 1999, City National had
$6.9 billion in total assets, $5.3 billion in total deposits, $5.2 billion in
total loans and shareholders' equity of $560 million.
Through City National Bank, City National serves clients throughout Los
Angeles County, Ventura County, San Diego, Riverside County, San Bernardino and
Orange County.
City National's principal customer base comprises small-to middle-market
companies with annual sales revenue of up to $250 million, entrepreneurs,
professionals, and affluent individuals. City National typically serves
customers seeking relationship banking, which it seeks to provide through a high
level of personal service, tailored products, and private banking teams. City
National Bank offers commercial and personal loans of all types, deposit, cash
management, international banking, other products and services, personal and
employee benefit trust and estate services and deals in money market and other
investments for its own account and for customers.
THE PACIFIC BANK
351 California Street
San Francisco, California 94104
(415) 576-2700
Pacific Bank is a national bank which currently has 11 branches. Pacific
Bank has two wholly-owned subsidiaries, TPB Holdings, Inc. and PB Capital
Management and Insurance Services. At September 30, 1999, Pacific Bank had
$732 million in total assets, $640 million in total deposits, $502 million in
total loans and shareholders' equity of $73 million.
Pacific Bank serves primarily clients located throughout San Francisco, San
Mateo and Los Angeles Counties. Pacific Bank provides full banking services to
middle market businesses, professional service organizations and individuals, as
well as international banking services worldwide, including import/export
financing. In addition, Pacific Bank provides private banking, asset management
and trust services.
5
<PAGE>
SPECIAL SHAREHOLDERS' MEETING OF PACIFIC BANK (PAGE 21)
The Pacific Bank special shareholders' meeting will be held at 351
California Street, The Pacific Bank Building, 4th Floor Conference Room, at
9:00 a.m., local time, on February 29, 2000. At the meeting, you will vote on a
proposal to approve the merger agreement.
RECORD DATE; VOTING POWER (PAGE 21)
You are entitled to vote at the Pacific Bank special shareholders' meeting
if you owned shares of Pacific Bank on the record date of January 10, 2000. As
of that date, there were 5,008,948 shares of Pacific Bank common stock issued
and outstanding held by approximately 232 holders of record. You will be
entitled to one vote per share on any matter that may properly come before the
meeting.
VOTE REQUIRED (PAGE 21)
Approval of the merger agreement requires the affirmative vote of two-thirds
of the outstanding shares of Pacific Bank common stock.
SHARE OWNERSHIP OF PACIFIC BANK MANAGEMENT (PAGE 21)
On the record date, the executive officers and directors of Pacific Bank,
including their affiliates, had voting power with respect to an aggregate of
53,300 shares of Pacific Bank common stock, or approximately 1.06% of the shares
of the common stock then outstanding.
Each director of Pacific Bank executed a shareholders' agreement which
commits each director to vote his or her shares in favor of the merger agreement
and grants to City National the director's proxy for his or her shares. City
National and Pacific Bank expect that the executive officers of Pacific Bank
will vote the shares of Pacific Bank common stock owned by them in favor of the
merger agreement.
RECOMMENDATION OF PACIFIC BANK BOARD OF DIRECTORS (PAGE 22)
Pacific Bank's Board of Directors has unanimously approved the merger
agreement, and recommends a vote FOR approval of the merger agreement. You
should refer to the reasons that the Pacific Bank Board of Directors considered
in determining whether to approve and adopt the merger agreement on pages 23
through 26.
OPINION OF KEEFE, BRUYETTE & WOODS, INC. FINANCIAL ADVISORS TO PACIFIC BANK
(PAGE 26)
Keefe, Bruyette & Woods, Inc., financial advisor to Pacific Bank, rendered
an oral opinion on September 21, 1999, to the Pacific Bank Board that as of that
date the merger consideration was fair to the Pacific Bank shareholders from a
financial point of view. Keefe, Bruyette subsequently confirmed its
September 21, 1999 opinion by delivery to the Pacific Bank Board of a written
opinion dated January 26, 2000. A copy of the fairness opinion, setting forth
the information reviewed, assumptions made and matters considered by Keefe,
Bruyette, is attached to this document as Annex C. You should read the fairness
opinion in its entirety.
TERMS OF THE MERGER AGREEMENT (PAGE 42)
THE MERGER AGREEMENT IS ATTACHED TO THIS DOCUMENT AS ANNEX A. CITY NATIONAL
AND PACIFIC BANK ENCOURAGE YOU TO READ THE MERGER AGREEMENT IN ITS ENTIRETY. IT
IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER. CITY NATIONAL AND PACIFIC BANK
ALSO ENCOURAGE YOU TO READ THE RISK FACTORS BEGINNING ON PAGE 19.
GENERAL. The merger agreement provides that Pacific Bank will merge with
and into City National Bank, with City National Bank as the surviving
institution.
6
<PAGE>
MERGER CONSIDERATION. You will have the right to elect, on a share-by-share
basis, to receive either $29.00 in cash or shares of City National common stock
based on a fluctuating exchange ratio. If the final City National stock price is
between $28.05 and $37.95, the exchange ratio will equal $29.00 divided by the
final City National stock price. If the final City National stock price is more
than $37.95 but less than or equal to $41.25, the exchange ratio will be .7642.
If the final City National stock price is more than $41.25, the exchange ratio
will be $31.52 divided by the final City National stock price. If the final City
National stock price is less than $28.05, the exchange ratio will be 1.0339.
For purposes of calculating the exchange ratio, the final City National
stock price will be the average of the daily closing prices of a share of City
National common stock on the New York Stock Exchange for the 20 consecutive
trading days ending on the third trading day immediately before completion of
the merger.
ELECTION PROCEDURE; EXCHANGE OF CERTIFICATES. Forms of election are being
sent contemporaneously to you in separate mailings. You may make an election by
delivering the appropriate form of election to Continental Stock Transfer &
Trust Company, which is the exchange agent. For your election to be effective,
you must properly complete and return a form of election to the exchange agent
by no later than 5:00 p.m., Eastern Time, on February 23, 2000 and accompanied
by the Pacific Bank stock certificates as to which the election is being made or
an appropriate guarantee of delivery of such certificates. If you do not submit
a form of election to the exchange agent prior to the election deadline, or if
you submit and then revoke your form of election and do not re-submit a form of
election and other required documents that are timely received by the exchange
agent, or if you submit a form of election without your common stock
certificates or a guarantee of delivery, you will be deemed not to have made an
election. In such event, you may receive City National common stock or cash
depending on the election of the other shareholders. Your elections will be
subject to proration as described on pages 35 to 37. As a result of the
proration, you may not receive the exact form of merger consideration that you
elect.
COMPLETION OF THE MERGER. The merger will become effective when City
National Bank and Pacific Bank file an agreement of merger between them with the
Office of the Comptroller of the Currency.
CONDITIONS TO THE MERGER. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
- Pacific Bank shareholders approve the merger agreement;
- City National and City National Bank receive all approvals or consents
required by law from any applicable governmental agency and all applicable
waiting periods under all laws expire;
- the Securities and Exchange Commission declares effective the registration
statement covering the issuance of City National shares and the
registration statement is not the subject of any stop order or proceeding
seeking a stop order;
- the New York Stock Exchange lists the City National common stock issuable
to you in connection with the merger; and
- Manatt, Phelps & Phillips, LLP delivers a legal opinion to City National
and Pacific Bank that the merger will qualify as a tax-free reorganization
under Section 368 of the Internal Revenue Code.
Unless prohibited by law, either City National or Pacific Bank could elect
to waive a condition that has not been satisfied and complete the merger anyway.
7
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FEES AND EXPENSES.
City National and Pacific Bank will each pay its own expenses in connection
with the merger, except for the following:
- City National will pay all fees due the Securities and Exchange Commission
in connection with the merger, and
- City National will pay all costs associated with the printing and mailing
of this document, unless the merger does not occur, in which case both
parties will split these costs.
TERMINATION. Either Pacific Bank or City National may call off the merger
under certain circumstances, including if:
- the Boards of Pacific Bank and City National both consent in writing;
- the merger is not completed before July 1, 2000, unless the merger was not
completed because the party seeking to terminate breached a covenant or
obligation of the merger agreement;
- City National and Pacific Bank are not able to obtain required
governmental approvals;
- Pacific Bank shareholders do not approve the merger agreement;
- the other party materially breaches, and does not cure within 30 days, any
of the representations or warranties or any covenant or agreement it has
made under the merger agreement and the breach has a material adverse
effect on the non-breaching party or materially compromises the ability to
close the merger;
- any condition to such party's obligations under the merger agreement has
not been met or waived; or
- by Pacific Bank, if the average closing sales price of City National
common stock prior to the merger is below $24.75 and the decline in the
closing sales price is not proportionate to the decline, if any, in the
Nasdaq Bank Index.
In addition, City National may call off the merger if the Pacific Bank Board
of Directors facilitates, recommends or endorses or participates in discussions
and negotiations with any third party relating to a merger or other form of
corporate reorganization, and either
- continues discussions with the third party for more than 15 business days
after receiving its competing proposal, or
- has not rejected a publicly disclosed takeover proposal within 15 business
days of when the proposal was made.
STOCK OPTION AGREEMENT (PAGE 50)
Pacific Bank has signed a stock option agreement granting City National an
option to purchase up to 995,900 shares of Pacific Bank common stock, (but not
more than an amount equal to 19.9 percent of the shares of Pacific Bank common
stock outstanding on the date of exercise). The option is exercisable for $19.00
per share, subject to adjustment in certain circumstances. City National can
exercise the option if, among other things:
- the Board of Directors of Pacific Bank has approved a merger or other type
of corporate reorganization with a third party, or a tender offer or
exchange offer to purchase Pacific Bank common stock;
- Pacific Bank has entered into an agreement with a third party to effect a
merger or other type of corporate reorganization; or
8
<PAGE>
- any person has acquired more than 15% of the outstanding shares of Pacific
Bank common stock.
The purpose of the option agreement is to increase the likelihood that City
National and Pacific Bank will complete the merger and to protect City National
if a third party tries to prevent the acquisition. The right to purchase common
stock of Pacific Bank is subject to compliance with applicable law, including
receipt of any necessary approvals under the Bank Holding Company Act. The
option agreement may also discourage offers by third parties to acquire Pacific
Bank.
INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF PACIFIC BANK IN THE
MERGER (PAGE 31)
When you consider the recommendation of the Pacific Bank Board, you should
be aware that a number of directors and executive officers of Pacific Bank have
interests in the merger as employees and/or directors that are different from,
and may conflict with, your interests. The Pacific Bank Board recognized these
interests and determined that they did not affect the benefits to you of the
merger.
Under employment agreements, Michael Tun Zan, John P. Halicky, C. Edward
Holden, Stephen Reiden and David Wong, executive officers of Pacific Bank, have
the right to receive payments upon termination of employment within a specified
time after a change of control of Pacific Bank occurs. The proposed merger would
be considered a change of control. In addition, a Pacific Bank retirement plan
provides for payments to Messrs. Tun Zan and Halicky based on their respective
accrued retirement benefits upon a change of control. In addition, the merger
agreement requires that Mr. Tun Zan enter into an employment agreement with City
National to serve as Senior Banking Executive, Northern California for two years
following completion of the merger without affecting his right to receive change
of control payments under his Pacific Bank employment agreement and retirement
plan.
Finally, pursuant to the merger agreement, all directors and executive
officers of Pacific Bank will receive a cash payment from City National in an
amount equal to the difference between $29.00 and the exercise price for each
option they hold under the Pacific Bank 1993 and 1998 Stock Option Plans.
DIRECTORS OF CITY NATIONAL AND CITY NATIONAL BANK FOLLOWING THE MERGER
(PAGE 23)
Upon completion of the merger, the current directors of City National will
remain directors of City National and the current directors of City National
Bank will remain directors of City National Bank.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 37)
The U.S. federal income tax consequences of the merger to you will depend
upon the form of consideration you receive in the merger.
If you receive solely City National common stock and cash in lieu of a
fractional share in exchange for your Pacific Bank common stock, then you should
not recognize any gain or loss, except possibly with respect to the fractional
share. If you receive solely cash, then you will generally recognize gain and
likely will be permitted to recognize loss equal to the difference between the
amount of cash you receive and your basis in your Pacific Bank common stock. The
tax treatment of any gain will depend upon your individual circumstances.
If you receive a combination of City National common stock and cash other
than cash in lieu of a fractional share in exchange for your Pacific Bank common
stock, then you should generally recognize gain in an amount equal to the lesser
of the total amount of cash received or the amount of gain realized on the
exchange, but you are not permitted to recognize a loss. Any gain recognized may
be treated as a dividend or capital gain, depending on your particular
circumstances.
9
<PAGE>
ACCOUNTING TREATMENT (PAGE 41)
City National expects the merger to be accounted for under the purchase
method of accounting.
RESALES OF CITY NATIONAL COMMON STOCK (PAGE 50)
Shares of City National common stock which you receive in the merger will be
freely transferable, unless you are an affiliate of Pacific Bank. Affiliates
generally include directors, certain executive officers and holders of 10% or
more of Pacific Bank common stock, under applicable federal securities laws.
Each person that Pacific Bank identifies as an affiliate is required to provide
City National a written agreement that such person will not dispose of any
shares of City National common stock they receive in the merger, except in
compliance with the applicable federal securities laws.
REGULATORY APPROVALS (PAGE 53)
City National and City National Bank must make certain filings with or
obtain approvals from certain regulatory authorities to effect the merger. This
includes the approval of the Comptroller of the Currency. In addition, City
National must list the common stock offered to you with the New York Stock
Exchange.
City National Bank filed the application with the Comptroller of the
Currency on November 2, 1999. The Comptroller of the Currency approved the
application on December 29, 1999, subject to the Pacific Bank shareholders
approving the merger agreement.
PACIFIC BANK DISSENTERS' RIGHTS (PAGE 54)
In the event that you do not wish to accept the merger consideration for
your shares of Pacific Bank common stock pursuant to the merger agreement, you
have the right to dissent from the merger and seek an appraisal of your shares
in accordance with the provisions of the National Bank Act.
DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS (PAGE 59)
Your rights as a Pacific Bank shareholder are currently governed by the
National Bank Act and Pacific Bank's articles of association and bylaws. If you
receive City National common stock, you will become a stockholder of City
National and your rights will be governed by Delaware law and the City National
certificate of incorporation and bylaws.
10
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
COMPARATIVE MARKET PRICE INFORMATION
The following table presents trading information for City National common
stock on the New York Stock Exchange and Pacific Bank common stock on the Nasdaq
National Market System on September 20, 1999 and January 19, 2000.
September 20, 1999 was the last day prior to the announcement of the signing of
the merger agreement. January 19, 2000 was the last practicable trading day for
which information was available prior to the date of this document.
<TABLE>
<CAPTION>
CITY NATIONAL PACIFIC BANK
COMMON STOCK COMMON STOCK
------------------------------ ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
September 20, 1999.......................... $32.94 $32.06 $32.13 $21.13 $20.25 $20.88
January 19, 2000............................ $33.94 $33.06 $33.31 $27.88 $27.69 $27.88
</TABLE>
You should obtain current market quotations for City National common stock
and Pacific Bank common stock. The market price of City National common stock
will probably fluctuate between the date of this document and the date on which
the merger is completed and after the merger. Because the market price of City
National common stock is subject to fluctuation, the value of the shares of City
National common stock that you may receive in the merger may increase or
decrease prior to and after the merger.
HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION
CITY NATIONAL. City National common stock is listed on the New York Stock
Exchange under the symbol "CYN." The following table sets forth for the calendar
quarter indicated the high and low sales prices per share of City National
common stock as reported on the New York Stock Exchange, and the dividends per
share of City National common stock.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------- -------- -------- ---------
<S> <C> <C> <C>
1998:
First quarter...................................... $39.31 $32.13 $0.14
Second quarter..................................... $40.44 $34.69 $0.14
Third quarter...................................... $39.19 $27.88 $0.14
Fourth quarter..................................... $41.63 $26.56 $0.14
1999:
First quarter...................................... $41.56 $30.31 $.165
Second quarter..................................... $40.88 $29.63 $.165
Third quarter...................................... $38.81 $30.38 $.165
Fourth quarter..................................... $41.44 $30.31 $.165
2000:
First quarter (through January 19, 2000)........... $34.00 $29.88 $ --
</TABLE>
11
<PAGE>
PACIFIC BANK. Pacific Bank common stock is traded on the Nasdaq National
Market System under the symbol "PBSF." On the record date, there were
approximately 232 holders of record of Pacific Bank common stock. The following
table sets forth for the calendar quarter indicated the high and low closing
prices per share of Pacific Bank common stock as reported on the Nasdaq National
Market System, and the dividends per share of Pacific Bank common stock.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------- -------- -------- ---------
<S> <C> <C> <C>
1998:
First quarter...................................... $26.63 $21.63 $0.07
Second quarter..................................... $31.50 $26.00 $0.07
Third quarter...................................... $28.00 $18.38 $0.08
Fourth quarter..................................... $24.38 $17.25 $0.08
1999:
First quarter...................................... $22.00 $19.00 $0.08
Second quarter..................................... $21.00 $18.88 $0.08
Third quarter...................................... $25.25 $18.00 $0.08
Fourth quarter..................................... $28.13 $24.88 $ --
2000:
First quarter (through January 19, 2000)........... $27.88 $26.63 $ --
</TABLE>
12
<PAGE>
RECENT DEVELOPMENTS
CITY NATIONAL
On January 13, 2000, City National announced its financial results for the
quarter and year ended December 31, 1999. Net income totaled $108.1 million in
1999, a 12% increase from net income of $96.2 million in 1998. Net income per
diluted common share rose 15% to $2.30 per share, compared with $2.00 per share
in 1998. City National also reported net income of $27.9 million for the fourth
quarter of 1999, an increase of 13% over net income of $24.7 million for the
fourth quarter of 1998. Net income per diluted common share increased by 15% to
$0.60 per share from $0.52 per share in the fourth quarter of 1998. See the
Form 8-K, filed on January 26, 2000, of City National incorporated by reference
in this proxy statement/prospectus and referred to under "Where You Can Find
More Information" on page 71.
PACIFIC BANK
Pacific Bank restated its 1998 earnings to reflect that previously reported
trust fee income was overstated and that certain operational losses in the Trust
Division had occurred. As a result, net income for the nine months ended
September 30, 1999 was reduced by $67,000 and net income for 1998 was reduced by
$430,000, or $.07 per diluted share. A portion of the operational losses may
result in claims against former employees for alleged misconduct and a claim
under Pacific Bank's fidelity bond coverage. The overstatement of trust fee
income and operational losses did not impact any customer accounts.
To reflect these matters, Pacific Bank has restated its 1998 audited
financial statements, and its quarterly unaudited financial statements for the
quarters ended March 31, June 30 and September 30, 1999. As a result, on
January 10, 2000, Pacific Bank filed with the Comptroller of the Currency an
amended Form 10-K/A for the year ended December 31, 1998 and amended
Form 10-Q/As for each of the 1999 quarters. 1998 trust fee income has been
reduced by $570,000 for the overstatement of income and non-interest expense was
increased $166,000 for the operational losses. Net income for 1998 was reduced
by $430,000 from $3,274,000 to $2,844,000. Diluted earnings per share was
revised from $.57 per share to $.50 per share.
Pacific Bank's 1999 third quarter 10-Q included a $456,000 write-off of
trust fee receivables. The first three quarters of 1999 were restated to reflect
this write-off as a reduction of trust fee income in each quarter to maintain
comparability with the restated 1998 quarters. In the restatement, Pacific Bank
has recorded an additional pre-tax charge to earnings of $114,000, or $67,000
after tax, for operational losses for the nine months ended September 30, 1999,
which have been reflected in the appropriate 1999 quarters. An additional
$98,000, or $57,000 after tax, will be recorded in the fourth quarter of 1999
for operational losses.
Pacific Bank was notified on December 2, 1999 that the $9,400,000 claim of
the State of California in the American Star Insurance Company liquidation was
denied by the State of Wisconsin Circuit Court. On December 22, 1999, the
decision was appealed by the State of California, and no assurances can be given
as to the outcome of the appeal or the amount or timing of the receipt of the
net assets remaining after all other claims have been settled upon ultimate
resolution of the liquidation proceedings. See "The Merger--Background of and
Reasons for the Merger" on pages 23 to 26 and "Notes to Unaudited Pro Forma
Condensed Combined Financial Statements--Balance Sheet" on page 69 regarding the
estimated fair value for American Star.
Pacific Bank anticipates an increase in its unfunded Supplemental Executive
Retirement Plan expense of approximately $200,000 net of tax in the fourth
quarter of 1999 due to the disability of its chief credit officer in July 1999.
Also during the fourth quarter, Pacific Bank approved a plan to close its Hong
Kong branch in 2000. Severance costs of $100,000 net of tax will be charged to
earnings in the fourth quarter of 1999 as a result of the branch closure.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
City National and Pacific Bank are providing the following information to
aid you in your analysis of the financial aspects of the merger. The following
tables show financial results actually achieved by each of City National and
Pacific Bank. The tables also show results as if the companies had been combined
for the periods presented after giving effect to the purchase accounting and
other merger-related adjustments described in the respective Notes to Unaudited
Pro Forma Condensed Combined Financial Statements on page 69. When you read this
information, you should also read the information under the heading "Unaudited
Pro Forma Condensed Combined Financial Information" on page 65.
City National's annual historical figures for 1994 to 1998 are derived from
financial statements audited by KPMG LLP, independent auditors of City National.
The information at or for the nine-month periods ended September 30, 1999 and
1998 is unaudited and was derived from City National's unaudited consolidated
quarterly financial statements. However, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation at such dates and for such periods have been made. The results
of operations for the nine-month period ended September 30, 1999 are not
necessarily indicative of results that may be expected for the full fiscal year.
Pacific Bank's annual historical financial data were derived from the full
financial statements as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, which were audited by Deloitte &
Touche LLP, independent auditors of Pacific Bank. The information at or for the
nine-month periods ended September 30, 1999 and 1998 is unaudited and was
derived from Pacific Bank's unaudited consolidated quarterly financial
statements. However, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation at such
dates and for such periods have been made. The results of operations for the
nine-month period ended September 30, 1999 are not necessarily indicative of
results that may be expected for the full fiscal year.
The historical information presented below should be read together with the
consolidated financial statements and related notes of City National,
incorporated in this document by reference, and of Pacific Bank, attached to
this document. To find this information, see "Where You Can Find More
Information" (page 71). Information on net loan charge-off amounts, return on
average shareholders' equity, return on average assets, net interest spread, net
interest income to average assets and net interest margin for September 30, 1999
and September 30, 1998 has been annualized.
City National expects to incur restructuring and merger-related expenses as
a result of combining the companies. City National also anticipates that the
merger will provide the combined company with financial benefits and the
opportunity to earn additional revenue. However, none of these anticipated
expenses or benefits has been factored into the pro forma combined income
statement information. For that reason, the pro forma combined information,
while helpful in illustrating the financial attributes of the combined company
under one set of assumptions, does not attempt to predict or suggest future
results.
14
<PAGE>
CITY NATIONAL HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA 1999 1998 1998 1997 1996 1995 1994
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income..................... $ 341,011 $ 314,317 $ 423,949 $ 357,996 $ 282,123 $ 217,594 $ 181,825
Interest expense.................... 105,917 95,540 130,278 104,328 82,389 55,331 38,414
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income................. 235,094 218,777 293,671 253,668 199,734 162,263 143,411
Provision for credit losses......... -- -- -- -- -- -- 7,535
Noninterest income.................. 63,997 50,509 67,684 53,418 43,995 34,566 32,797
Noninterest expense................. 175,104 158,198 211,331 181,757 144,595 118,076 115,999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes................. 123,987 111,088 150,024 125,329 99,134 78,753 52,674
Income taxes........................ 43,797 39,594 53,796 45,196 32,571 29,961 15,511
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 80,190 $ 71,494 $ 96,228 $ 80,133 $ 66,563 $ 48,792 $ 37,163
========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA:
Income per share, basic............. $ 1.75 $ 1.54 $ 2.08 $ 1.74 $ 1.52 $ 1.08 $ 0.83
Net income per share, diluted....... 1.70 1.48 2.00 1.68 1.47 1.06 0.81
Cash dividends declared............. 0.50 0.42 0.56 0.44 0.36 0.26 0.05
Book value per share................ 12.34 11.78 12.21 11.03 9.13 8.19 7.32
Shares used to compute income per share,
basic............................. 45,767 46,504 46,357 46,018 43,888 45,198 44,725
Shares used to compute income per share,
diluted........................... 47,049 48,352 48,141 47,809 45,146 45,886 45,626
BALANCE SHEET DATA--AT PERIOD END:
Assets.............................. $6,935,616 $5,907,308 $6,427,781 $5,252,032 $4,216,496 $4,157,551 $3,012,775
Loans............................... 5,171,924 4,343,796 4,530,427 3,825,224 2,839,435 2,346,611 1,643,918
Securities.......................... 1,060,431 927,162 1,012,526 833,122 811,092 975,407 749,435
Interest-earning assets............. 6,347,437 5,442,013 5,982,968 4,838,926 3,844,834 3,784,245 2,716,524
Deposits............................ 5,310,737 4,448,672 4,887,402 4,228,348 3,386,523 3,248,035 2,417,762
Shareholders' equity................ 560,388 541,633 561,803 508,670 400,747 366,957 330,721
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets.............................. $6,271,829 $5,503,032 $5,633,829 $4,703,886 $3,821,314 $2,849,807 $2,831,471
Loans............................... 4,661,160 4,142,792 4,213,853 3,387,784 2,539,323 1,758,671 1,537,997
Securities.......................... 1,038,691 811,616 842,346 829,557 839,564 705,122 854,823
Interest-earning assets............. 5,802,437 5,057,299 5,187,897 4,290,453 3,505,422 2,624,436 2,594,241
Deposits............................ 4,574,421 4,192,500 4,267,602 3,614,068 2,871,870 2,062,412 2,241,175
Shareholders' equity................ 561,784 535,211 538,426 472,843 373,491 350,551 313,196
ASSET QUALITY:
Nonaccrual loans.................... $ 19,316 $ 32,506 $ 23,138 $ 27,566 $ 41,543 $ 48,124 $ $58,801
ORE................................. 2,134 2,148 3,480 2,126 15,116 7,439 4,726
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total nonaccrual loans and ORE.... $ 21,450 $ 34,654 $ 26,618 $ 29,692 $ 56,659 $ 55,563 $ 63,527
========== ========== ========== ========== ========== ========== ==========
PERFORMANCE RATIOS:
Return on average assets............ 1.71% 1.74% 1.71% 1.70% 1.74% 1.71% 1.31%
Return on average shareholders'
equity............................ 19.08 17.86 17.87 16.95 17.82 13.92 11.87
Net interest spread................. 4.16 4.38 4.27 4.64 4.47 4.84 4.60
Net interest margin................. 5.58 5.99 5.86 6.13 5.87 6.26 5.57
Average shareholders' equity to average
assets............................ 8.96 9.73 9.56 10.05 9.77 12.30 11.06
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans..... 0.37% 0.75% 0.51% 0.72% 1.46% 2.05% 3.58%
Nonaccrual loans and ORE to total loans
and ORE........................... 0.41 0.80 0.59 0.78 1.98 2.36 3.85
Allowance for credit losses to total
loans............................. 2.69 3.12 2.99 3.60 4.58 5.60 6.41
Allowance for credit losses to
nonaccrual loans.................. 719.69 416.80 584.92 499.75 313.14 273.28 179.15
Net (charge offs) recoveries to average
loans............................. -- 0.12 (0.12) 0.02 (0.06) 0.40 (0.83)
</TABLE>
15
<PAGE>
PACIFIC BANK HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA 1999 1998 1998 1997 1996 1995 1994
- ------------------------------------------ -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income.................................. $ 40,439 $ 38,531 $ 52,448 $ 45,036 $ 38,795 $ 29,681 $ 24,419
Interest expense................................. 13,481 13,899 18,453 15,827 12,623 10,373 8,014
-------- -------- -------- -------- -------- -------- --------
Net interest income.............................. 26,958 24,632 33,995 29,209 26,172 19,308 16,405
Provision (reversal of provisions) for credit
losses......................................... 2,308 -- 6,000 (1,500) (4,500) (5,500) (20,000)
Noninterest income............................... 6,188 6,398 8,667 7,855 5,410 4,436 4,623
Noninterest expense.............................. 24,266 22,163 31,700 25,905 23,756 20,519 25,220
-------- -------- -------- -------- -------- -------- --------
Income before taxes.............................. 6,572 8,867 4,962 12,659 12,326 8,725 15,808
Income taxes (benefit)........................... 2,272 3,774 2,118 5,409 5,197 (4,600) 53
-------- -------- -------- -------- -------- -------- --------
Net income..................................... $ 4,300 $ 5,093 $ 2,844 $ 7,250 $ 7,129 $ 13,325 $ 15,755
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Net income per share, basic...................... $ 0.85 $ 0.94 $ 0.52 $ 1.36 $ 1.31 $ 2.42 $ 2.86
Net income per share, diluted.................... 0.82 0.89 0.50 1.28 1.25 2.35 2.86
Cash dividends declared.......................... 0.24 0.22 0.30 0.14 -- -- --
Book value per share............................. 14.61 15.31 14.67 14.86 13.84 12.55 9.16
Shares used to compute income per share, basic... 5,077 5,441 5,463 5,332 5,449 5,502 5,500
Shares used to compute income per share,
diluted........................................ 5,221 5,737 5,720 5,677 5,724 5,681 5,500
BALANCE SHEET DATA--AT PERIOD END:
Assets........................................... $731,603 $693,006 $712,520 $603,364 $476,673 $398,718 $351,091
Loans............................................ 502,359 471,332 484,474 397,058 331,623 220,599 212,611
Securities....................................... 141,581 105,090 125,861 88,109 106,575 137,175 96,639
Deposits......................................... 639,539 590,558 611,875 506,681 392,537 319,582 292,843
Shareholders' equity............................. 73,149 84,628 79,860 80,027 72,783 69,145 50,369
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets........................................... $710,493 $624,854 $645,828 $538,654 $456,974 $359,429 $362,412
Loans............................................ 497,964 435,147 449,397 359,116 285,258 205,323 214,837
Securities....................................... 128,859 87,727 95,985 93,489 126,580 122,168 104,150
Interest-earning assets.......................... 651,660 573,612 591,041 498,576 422,292 347,923 357,887
Deposits......................................... 617,009 525,120 544,728 448,940 372,507 294,864 313,993
Shareholders' equity............................. 74,888 82,653 83,451 76,584 71,282 56,184 38,051
ASSET QUALITY:
Nonaccrual loans................................. $ 2,482 $ 1,270 $ 2,563 $ 1,375 $ 1,564 $ 6,867 $ 11,387
Loans 90 days past due and still accruing
interest....................................... -- -- -- -- 50 1,356 40
-------- -------- -------- -------- -------- -------- --------
Total nonperforming loans........................ 2,482 1,270 2,563 1,375 1,614 8,223 11,427
ORE.............................................. -- 681 382 -- 175 387 1,505
-------- -------- -------- -------- -------- -------- --------
Total nonperforming assets..................... $ 2,482 $ 1,951 $ 2,945 $ 1,375 $ 1,789 $ 8,610 $ 12,932
======== ======== ======== ======== ======== ======== ========
PERFORMANCE RATIOS:
Return on average assets......................... 0.81% 1.09% 0.44% 1.35% 1.56% 3.71% 4.35%
Return on average shareholders' equity........... 7.68 8.24 3.41 9.47 10.00 23.72 41.40
Net interest income to average assets............ 5.07 5.27 5.26 5.42 5.73 5.37 4.53
Net interest margin--tax equivalent basis........ 5.56 5.75 5.76 5.86 6.20 5.55 4.58
Average shareholders' equity to average assets... 10.54 13.23 12.92 14.22 15.60 15.63 10.50
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans.................. 0.49% 0.27% 0.53% 0.35% 0.47% 3.11% 5.36%
Nonperforming assets to total loans and ORE...... 0.49 0.41 0.61 0.35 0.54 3.90 6.04
Reserves for credit losses to total loans........ 2.00 2.41 2.55 2.73 3.26 4.71 7.38
Reserves for credit losses to nonaccrual loans... 404.71 896.06 481.27 787.13 670.01 126.47 137.28
Net charge offs (recoveries) to average loans.... 1.23 0.04 1.16 (0.42) (1.46) (0.10) (0.53)
</TABLE>
16
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1999(1)
----------------
(IN THOUSANDS)
<S> <C>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
Total assets.............................................. $7,666,136
Subordinated and Long-term debt........................... 303,405
Total shareholders' equity................................ 632,454
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999(1) 1998(1)
----------------- ------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
PRO FORMA CONDENSED COMBINED STATEMENTS OF
INCOME:
Net interest income after provision for
credit losses.............................. $265,022 $328,063
Net income................................... 74,184 85,202
Net income per common share:
Basic...................................... 1.54 1.74
Diluted.................................... 1.50 1.68
</TABLE>
- ------------------------
(1) See "Unaudited Pro Forma Condensed Combined Financial Information" for a
description of the assumptions and adjustments used in preparing the
unaudited pro forma combined financial data.
17
<PAGE>
COMPARATIVE PER SHARE DATA
The table below shows the earnings, book value and dividends per share for
City National and Pacific Bank both on an historical and a pro forma basis. The
City National pro forma data was derived by combining historical consolidated
financial information of City National and Pacific Bank using the purchase
method of accounting for business combinations, all on the basis described under
"Unaudited Pro Forma Condensed Combined Financial Data" on page 65. The Pacific
Bank equivalent pro forma data was derived by multiplying the City National pro
forma data by the number of shares of City National common stock City National
will issue for each share of Pacific Bank common stock, assuming a final City
National stock price of $29.00 and total merger consideration being comprised of
50% cash and 50% City National common stock.
You should read the respective audited and unaudited historical consolidated
financial statements and related notes of City National incorporated by
reference into this proxy statement/prospectus and of Pacific Bank attached to
this document. See "Where You Can Find More Information" on page 71.
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
CITY NATIONAL HISTORICAL
Earnings per share:
Basic.................................... $1.75 $2.08
Diluted.................................. 1.70 2.00
Book value per share....................... 12.34 12.21
Dividends per share........................ 0.495 0.56
PACIFIC BANK HISTORICAL
Earnings per share:
Basic.................................... 0.85 0.52
Diluted.................................. 0.82 0.50
Book value per share....................... 14.61 14.67
Dividends per share........................ 0.24 0.30
CITY NATIONAL'S UNAUDITED PRO FORMA(1)
Earnings per share:
Basic.................................... 1.54 1.74
Diluted.................................. 1.50 1.68
Book value per share....................... 13.20 --
Dividends per share(2)..................... 0.495 0.56
PACIFIC BANK EQUIVALENT PRO FORMA(1)
Earnings per share:
Basic.................................... 1.54 1.74
Diluted.................................. 1.50 1.68
Book value per share....................... 13.20 --
</TABLE>
- ------------------------
(1) Represents the pro forma combined information of City National and Pacific
Bank multiplied by an exchange ratio of one share of City National Stock for
50% of the shares of Pacific Bank common stock for the respective time
period at a final City National stock price of $29.00.
(2) Represents the historical dividends paid by City National.
18
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS DOCUMENT, YOU SHOULD
CONSIDER THE MATTERS DESCRIBED BELOW CAREFULLY IN DETERMINING WHETHER TO APPROVE
THE MERGER AGREEMENT. WHERE "WE" AND "OUR" IS USED IN THIS SECTION, IT IS MEANT
TO REFER TO BOTH CITY NATIONAL AND CITY NATIONAL BANK BEFORE THE MERGER AND TO
CITY NATIONAL AND CITY NATIONAL BANK FOLLOWING ITS PROPOSED ACQUISITION OF
PACIFIC BANK.
THE MERGER CONSIDERATION THAT IS PAID IN CITY NATIONAL COMMON STOCK
FLUCTUATES BASED ON THE FINAL CITY NATIONAL STOCK PRICE. If you receive City
National common stock in the merger, the exchange ratio is based on City
National's common stock average price per share for the 20 consecutive trading
days prior to the three trading days before the day the merger is consummated.
If the final City National stock price is between $28.05 and $37.95, the
exchange ratio will equal $29.00 divided by the final City National stock price.
If the final City National stock price is more than $37.95 but less than or
equal to $41.25, the exchange ratio will be .7642. If the final City National
stock price is more than $41.25, the exchange ratio will be $31.52 divided by
the final City National stock price. If the final City National stock price is
less than $28.05, the exchange ratio will be 1.0339.
You will not know the value of the City National common stock you are
receiving in the merger until the date we consummate the merger.
The market prices of Pacific Bank common stock and City National common
stock before the merger takes place may vary from their prices at the date of
this document and at the date of the special shareholders' meeting. Those
variations in the market prices of City National common stock and Pacific Bank
common stock may result from changes in the business, operations or prospects of
City National or the combined company, market assessments of the likelihood that
the merger will be consummated and the timing of the merger, regulatory
considerations, general market and economic conditions and other factors. We
urge you to obtain current market quotations for City National common stock and
Pacific Bank common stock.
THERE ARE UNCERTAINTIES IN INTEGRATING OUR BUSINESS OPERATIONS AND REALIZING
ENHANCED EARNINGS. If we are unable to integrate our businesses successfully,
this could hurt our business. The merger involves the integration of companies
that have previously operated independently. Successful integration of Pacific
Bank's consolidated operations will depend primarily on City National's ability
to maintain as well as expand Pacific Bank's business in San Francisco and the
surrounding communities. No assurance can be given that City National and
Pacific Bank will be able to integrate their operations without encountering
difficulties including, without limitation, the loss of key employees and
customers, the disruption of their respective ongoing businesses or possible
inconsistencies in standards, controls, procedures and policies.
AN ECONOMIC SLOWDOWN IN CALIFORNIA COULD HURT OUR BUSINESS. Prior to the
merger, City National has focused its business in Southern California in Los
Angeles, Orange, Ventura, San Diego, San Bernardino and Riverside counties.
After the merger, our operations will include San Francisco and San Mateo
Counties. An economic slowdown in California could have the following
consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Demand for our products and services may decline; and
- Collateral for loans made by us, especially real estate, may decline in
value, in turn reducing customers' borrowing power, and reducing the value
of assets and collateral associated with our existing loans.
19
<PAGE>
CHANGES IN INTEREST RATES AFFECT OUR PROFITABILITY. Changes in prevailing
rates may hurt our business. We derive our income mainly from the difference or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. In general, the wider the spread, the more we
earn. When market rates of interest change, the interest we receive on our
assets and the interest we pay on our liabilities will fluctuate. This can cause
decreases in our spread and can affect our income. In addition, interest rates
affect how much money we can lend. For example, when interest rates rise, loan
originations tend to decrease.
WE HAVE YEAR 2000 RISKS BECAUSE OF OUR DEPENDENCE AND OUR VENDORS' AND
CUSTOMERS' DEPENDENCE ON TECHNOLOGY. If we, our vendors, customers or other
third parties with whom we do business suffer a computer or systems failure, it
could hurt our business. After completion of the merger, we will rely on the
data processing systems, hardware and software of City National Bank and its
data processing vendor to conduct our operations. Each of City National Bank and
Pacific Bank took steps to make its own information systems Year 2000 compliant
by the third quarter of 1999. Each also developed contingency plans to reduce
the impact of any failures which may occur. However, each also relies heavily on
the information systems of vendors, customers and other third parties. Even
though we have received assurances from the third parties that they are Year
2000 compliant, changing conditions could make their assurances uncertain. Also,
our contingency and remediation efforts may not succeed. As of January 26, 2000,
neither City National Bank nor Pacific Bank had experienced any problems
relating to Year 2000 computer issues. However, it is possible that problems
relating to Year 2000 issues could arise at a later date.
WE FACE STRONG COMPETITION FROM FINANCIAL SERVICE COMPANIES AND OTHER
COMPANIES THAT OFFER BANKING SERVICES WHICH CAN HURT OUR BUSINESS. After the
merger, we will conduct our banking operations primarily in Los Angeles, Orange,
Ventura, San Diego, Riverside, San Bernardino, San Francisco and San Mateo
counties. Increased competition in our market may result in reduced loans and
deposits. Ultimately, we may not be able to compete successfully against current
and future competitors. Many competitors offer the banking services that we
offer in our service area. These competitors include national banks, regional
banks and other community banks. We also face competition from many other types
of financial institutions, including, without limitation, savings and loans,
finance companies, brokerage firms, insurance companies, credit unions, mortgage
banks and other financial intermediaries.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
City National and Pacific Bank have each made forward-looking statements in
this document, and in certain documents referred to in this document, that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of each respective company's management, and on information
currently available to that management. Forward-looking statements include the
information concerning possible or assumed future results of operations of City
National and/or Pacific Bank set forth under "Questions and Answers About the
Merger," "Summary," "Recent Developments," "The Merger--Background of and
Reasons for the Merger," and "Unaudited Pro Forma Condensed Combined Financial
Statements," and statements preceded by, followed by or that include the words
"will," "believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions.
Management of City National and Pacific Bank believe these forward-looking
statements are reasonable; however, you should not place undue reliance on such
forward-looking statements, which are based on current expectations. Actual
results may differ materially from those currently expected or anticipated.
20
<PAGE>
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of City National following completion of the merger may differ materially from
those expressed in these forward-looking statements. Many of the factors
described under "Risk Factors" that will determine these results and values are
beyond City National's and Pacific Bank's ability to control or predict. For
those statements, City National and Pacific Bank claim the protection of the
safe harbor contained in the Private Securities Litigation Reform Act of 1995
for their respective forward-looking statements.
SPECIAL SHAREHOLDERS' MEETING OF PACIFIC BANK
GENERAL
Pacific Bank will hold its special shareholders' meeting on February 29,
2000 at 9:00 a.m., local time, at 351 California Street, The Pacific Bank
Building, 4th Floor Conference Room. At the special shareholders' meeting, you
will vote upon a proposal to approve the merger agreement. You may also vote
upon a proposal to adjourn or postpone the Pacific Bank special shareholders'
meeting for the purpose of, among other things, allowing additional time for the
solicitation of proxies to approve the merger agreement.
RECORD DATE; VOTING POWER
If you were a holder of record of Pacific Bank common stock at the close of
business on January 10, 2000, you may vote at the meeting. As of January 10,
2000, there were 5,008,948 issued and outstanding shares of Pacific Bank common
stock held by approximately 232 holders of record. You have one vote per share
on any matter that may properly come before the special shareholders' meeting.
Brokers who hold shares of Pacific Bank common stock as nominees will not have
discretionary authority to vote these shares without instructions from the
beneficial owners. Any shares of Pacific Bank common stock for which a broker
has submitted an executed proxy but for which the beneficial owner has not given
instructions on voting to the broker are referred to as "broker non-votes."
VOTE REQUIRED
The presence in person or by proxy of the holders of a majority of the
shares of Pacific Bank common stock outstanding on the record date will
constitute a quorum for the transaction of business at the special shareholders'
meeting. Pacific Bank will count abstentions and broker non-votes for purposes
of establishing the presence of a quorum at the special shareholders' meeting.
The approval of the proposal to approve the merger agreement requires the
affirmative vote of two-thirds of the shares of Pacific Bank common stock
outstanding on the record date. Because broker non-votes and abstentions are not
affirmative votes, they will have the effect of a vote against the proposal to
approve the merger agreement.
SHARE OWNERSHIP OF PACIFIC BANK MANAGEMENT
On the record date, the executive officers and directors of Pacific Bank,
including their affiliates, had voting power with respect to an aggregate of
53,300 shares of Pacific Bank common stock or approximately 1.06% of the shares
of Pacific Bank common stock then outstanding. The directors are contractually
obligated to vote and we expect that the executive officers will vote all of
their shares in favor of the proposal to approve the merger agreement. On the
record date, the directors and executive officers of City National did not
beneficially own any shares of Pacific Bank common stock.
21
<PAGE>
RECOMMENDATION OF THE PACIFIC BANK BOARD OF DIRECTORS
The Pacific Bank Board has unanimously approved and adopted the merger
agreement and the transactions contemplated thereby. The Pacific Bank Board
believes that the merger is fair to and in your best interests as the Pacific
Bank shareholders. It unanimously recommends that you vote FOR approval of the
merger agreement and the transactions contemplated thereby.
SOLICITATION AND REVOCATION OF PROXIES
Pacific Bank has enclosed a form of proxy with this document. Shares
represented by a proxy will be voted at the special shareholders' meeting as
specified in the proxy. Proxies that are properly signed and dated but which do
not have voting instructions will be voted by the proxy holders FOR the merger
agreement and in the discretion of the proxy holder as to any other matter which
may properly come before the special shareholders' meeting.
PACIFIC BANK IS ASKING YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING PROXY CARD AND RETURNING IT PROMPTLY TO CHASEMELLON SHAREHOLDERS'
SERVICES LLC IN THE ENCLOSED POSTAGE-PAID ENVELOPE. AS AN ALTERNATIVE, YOU MAY
VOTE BY TELEPHONE FOLLOWING THE INSTRUCTIONS ON THE PROXY CARD. DO NOT SEND
STOCK CERTIFICATES WITH YOUR DATED PROXY CARDS.
If you deliver a properly executed proxy, you may revoke such proxy at any
time before it is exercised. You may revoke your proxy by
- filing with Pacific Bank's Secretary prior to the special shareholders'
meeting, at Pacific Bank's principal executive offices, either a written
revocation of such proxy or a duly executed proxy bearing a later date or
- attending the special shareholders' meeting and voting in person. Your
presence at the special shareholders' meeting will not revoke your proxy
unless you vote in person.
Pacific Bank will bear the cost of solicitation of proxies. City National
will bear the cost of printing and mailing this document. In addition to
solicitation by mail, your directors, officers and employees may solicit proxies
from shareholders by telephone, in person or through other means. These persons
will not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation. Pacific Bank will also make arrangements with brokerage firms,
fiduciaries and other custodians who hold shares of record to forward
solicitation materials to the beneficial owner of these shares. Pacific Bank
will reimburse these brokerage firms, fiduciaries and other custodians for their
reasonable out-of-pocket expenses in connection with this solicitation.
OTHER MATTERS
Pacific Bank is unaware of any matter to be presented at the special
shareholders' meeting other than the proposal to approve the merger agreement.
If other matters are properly presented at the special shareholders' meeting,
the persons named in the proxy will have authority to vote all properly executed
proxies in accordance with their judgment on any such matter, including, without
limitation, any proposal to adjourn or postpone the special shareholders'
meeting. Proxies that have been designated to vote against approval of the
merger agreement will not be voted in favor of any proposal to adjourn or
postpone the special shareholders' meeting for the purpose of soliciting
additional proxies to approve the merger agreement.
22
<PAGE>
THE MERGER
THE DETAILED TERMS OF THE MERGER ARE CONTAINED IN THE MERGER AGREEMENT
ATTACHED AS ANNEX A TO THIS DOCUMENT. THE FOLLOWING DISCUSSION AND THE
DISCUSSION UNDER "THE MERGER AGREEMENT" DESCRIBE THE MORE IMPORTANT ASPECTS OF
THE MERGER AND MATERIAL TERMS OF THE MERGER AGREEMENT. THESE DESCRIPTIONS ARE
QUALIFIED BY REFERENCE TO THE MERGER AGREEMENT, WHICH IS ATTACHED AS ANNEX A.
CITY NATIONAL AND PACIFIC BANK ENCOURAGE YOU TO READ THE MERGER AGREEMENT
CAREFULLY.
GENERAL
The merger agreement provides that, after approval by the Pacific Bank
shareholders and the satisfaction or waiver of the other conditions to the
merger, Pacific Bank will merge with and into City National Bank as a wholly
owned subsidiary of City National. The certificate of incorporation and bylaws
of City National and the articles of association and bylaws of City National
Bank, as in effect immediately prior to the merger, will be the certificate of
incorporation and bylaws and the articles of association and bylaws of City
National and City National Bank, respectively, after the merger. The directors
and officers of City National immediately prior to the merger will be the
directors and officers of City National after the merger until they resign or
until their respective successors are duly elected and qualified.
The closing of the merger will occur on the first Friday, or such other day
mutually agreed to by City National and Pacific Bank, following the satisfaction
or waiver of all conditions to the merger agreement and after all regulatory
approvals have been obtained.
BACKGROUND OF AND REASONS FOR THE MERGER
Headquartered in San Francisco, California, Pacific Bank opened for business
in 1983. Pacific Bank conducts its domestic commercial banking business through
its branches in San Francisco, San Mateo and Los Angeles Counties and its
international/trade finance business through branches in San Francisco, Los
Angeles, Grand Cayman, British West Indies and Hong Kong. Through its
acquisition of Burlingame Bancorp in 1996, Pacific Bank expanded its presence in
San Mateo County. Pacific Bank expanded to five branches in Los Angeles through
its acquisition of Sterling West Bancorp in 1998.
In April 1998, Pacific Bank retained Keefe Bruyette & Woods to provide
advice on strategic alternatives, including the possible sale of the bank. At
that time, Pacific Bank had a controlling shareholder who owned more than
one-third of Pacific Bank's outstanding common stock. Under the National Bank
Act, the acquisition of another bank by Pacific Bank or sale of Pacific Bank by
merger requires approval of two-thirds of the outstanding common stock of
Pacific Bank. Because the controlling shareholder owned over one-third of
Pacific Bank's outstanding common stock, such transactions required her
approval.
Pacific Bank received offers to buy Pacific Bank during 1997 and the first
half of 1998. The offers which Pacific Bank received varied in the form and
amount of consideration offered, including all cash and all stock. The
controlling shareholder indicated that if Pacific Bank were to be sold, the form
of consideration must be cash or a combination of cash and stock acceptable to
her. The controlling shareholder considered offers which Pacific Bank had
received unacceptable. Pacific Bank's Board of Directors concluded, for a number
of reasons, that a public offering of the controlling shareholder's shares would
give Pacific Bank and its shareholders the greatest range of potential strategic
alternatives available. In June 1998, the controlling shareholder sold all her
shares in Pacific Bank to the public.
After the public offering by the controlling shareholder, the Pacific Bank
Board of Directors continued to explore available strategic alternatives,
including the potential sale of Pacific Bank or the expansion of Pacific Bank
through additional strategic acquisitions. In July 1998, Pacific Bank received
several written indications of interest to acquire it. With the assistance of
its financial advisor, Keefe,
23
<PAGE>
Bruyette, the Pacific Bank Board of Directors determined that one of the written
proposals was inadequate. The Pacific Bank Board concluded that management
should further explore the other two proposals, learn more about the offerors
because they offered stock and determine whether a higher price could be
obtained. Through August and September 1998, Pacific Bank management had various
meetings and communications with the two offerors regarding price and the terms
of their offers. At Pacific Bank's regular Board meeting on August 20, 1998, the
Pacific Bank Board determined that the price and terms of one offer did not
provide meaningful increased value to Pacific Bank shareholders and decided to
reject the offer.
Pacific Bank continued discussions with the other offeror regarding price
and terms through November 1998. Discussions ultimately ceased due to the
general decline in the market prices of bank stocks. At its regular meeting on
November 19, 1998, the Pacific Bank Board agreed to follow its three year
strategic plan since it did not anticipate any other acquisition proposals.
From November 1998 to August 1999, Pacific Bank focused on its three year
strategic plan. The strategic plan included the following components:
- gaining shareholder approval to use excess capital to repurchase Pacific
Bank common stock through a new $12 million share repurchase plan,
- focusing on internally generated growth and integration of recent
acquisitions,
- considering potential investments in other operating subsidiaries,
including an asset management firm,
- implementing a restructuring plan which includes consolidation of branches
and reduction of staff,
- reorganizing the Pacific Bank Board, including the appointment of two new
directors and a new Chairman, to replace the designees of the controlling
shareholder who resigned, and
- hiring a new senior lending executive.
In August 1999, Pacific Bank received three unsolicited written expressions
of interest. Two expressions of interest were from financial institutions,
including City National, and the third was from an investment partnership. The
Pacific Bank Board met with Keefe, Bruyette on September 7, 1999 to evaluate
these proposals in detail.
As part of the Pacific Bank Board's review of the offers, it considered the
fair value of Pacific Bank's interests in American Star. The Wisconsin
Commissioner of Insurance declared American Star insolvent in 1992 and placed it
in liquidation. Prior to the liquidation proceedings, Pacific Bank had
foreclosed on a $4.3 million loan and received as a result of such foreclosure a
surplus note in the original principal amount of about $5.5 million (with
interest accruing at prime plus one percent) and all of American Star's
outstanding stock. Pacific Bank's surplus note and equity interests are
classified, respectively, as Class 10 and 11 claims in the Wisconsin liquidation
proceeding. Classes 10 and 11 are the two lowest priority classes of claims.
Pacific Bank's claim on the surplus note as a Class 10 creditor totaled
$8.0 million including principal and accrued interest at December 31, 1998 and
ranked behind all other allowed claims in the liquidation.
In the first quarter of 1998, the State of California filed a claim under
Proposition 103 totaling $9.4 million. The liquidator reported total assets for
American Star at December 31, 1998 of approximately $43,291,000 with a capital
surplus of approximately $6,848,000. Claims against the assets totaled
approximately $36,443,000 at December 31, 1998 including the State of
California's claim and Pacific Bank's Class 10 note claim. As the sole Class 11
claimant by virtue of its ownership of American Star's stock, Pacific Bank would
be entitled to receive any net assets remaining after all other claims have been
settled. Although the Liquidator has authority under the Wisconsin statutory
24
<PAGE>
provisions governing the liquidation to make interim distributions, claims
typically are paid by class in their order of priority. Consequently, it is
unlikely that payment to Pacific Bank on account of its Class 11 equity claim
will occur prior to the ultimate resolution of the liquidation proceeding which
could take several more years. Any payments received by Pacific Bank would be
recognized as income in the period received. See "Recent Developments."
The Pacific Bank Board reviewed various outcomes of the liquidation of
American Star, including outcomes in which competing claims were allowed and
disallowed, additional claims were filed and the time frames during which
distributions would be made. The analysis considered by the Pacific Bank Board
presented the after tax value of such outcomes, the value per share and also the
net present value at various discount rates.
The Pacific Bank Board was concerned about the investment partnership's
ability to produce the merger consideration offered since it conditioned its
offer on raising the funds necessary to acquire Pacific Bank. The Pacific Bank
Board instructed its financial advisors to advise the investment partnership of
Pacific Bank's lack of interest.
The offer from the financial institution other than City National was all
stock, excluded any value for American Star, was subject to completion of due
diligence and would expire at 5 p.m. on September 15, 1999. The financial
institution was not established in the commercial banking area and wanted to
acquire Pacific Bank to expand into this area. Representatives of First Security
Van Kasper presented an analysis of this offer to the Pacific Bank Board. The
Pacific Bank Board considered the significant cost reductions the proposed
acquirer would have to make for the transaction to be accretive to shareholders
and the challenges it faced in order to establish itself in commercial banking.
The Pacific Bank Board decided to reject this offer because the overall value
City National offered was greater and their offer had fewer contingencies.
Representatives of Keefe, Bruyette provided the Pacific Bank Board with an
analysis of the offer from City National. City National's expression of interest
indicated a purchase price of $28.75 per share based on a value of $27.60 per
share for the banking business and $1.15 per share for the contingent proceeds
from American Star. The consideration offered was 50% cash and 50% City National
common stock. The Pacific Bank Board believed that a higher price should be
negotiated in light of cost savings they believed City National could achieve
and the potential upside of the outcome of the American Star liquidation. The
Pacific Bank Board authorized management to proceed with negotiating a
definitive agreement with City National if the offer was increased to $29.00 per
share, including American Star.
Between September 7, 1999 and September 14, 1999, discussions between
Pacific Bank and City National continued and the parties reached a preliminary
agreement regarding basic terms. During the same period, the parties conducted
due diligence reviews of each other. Representatives of Pacific Bank and City
National negotiated the terms of the merger agreement, the stock option
agreement and the shareholder agreements. See "The Merger Agreement" for a
summary of the terms of these agreements on pages 42 to 53.
On September 14, 1999, Pacific Bank received an all stock offer from another
financial institution which specified that any income from a resolution of the
American Star matter would be split evenly between Pacific Bank and the
financial institution. The Pacific Bank Board met on September 16, 1999 to
discuss the new offer and the offer from City National. Representatives of
Keefe, Bruyette presented an analysis to the Pacific Bank Board comparing the
proposed transactions with City National and with the other institution. The
Pacific Bank Board discussed the two offers and agreed that City National was
the best strategic partner available because of the similarity of its business
with Pacific Bank's and the strength of City National's business in the Los
Angeles area. The Pacific Bank Board decided that City National's offer was also
more desirable because the combination of its stock and cash provided Pacific
Bank shareholders more liquidity than the other financial institution's offer.
In addition, a
25
<PAGE>
transaction with City National offered more certainty because it had completed
due diligence and confirmed its increased price of $29.00 per share, including
American Star. As a result, the Pacific Bank Board agreed to move forward with
the City National offer and rejected the other offer.
At a special meeting of the Pacific Bank Board on September 21, 1999,
management, together with representatives of Keefe, Bruyette and legal counsel
of Pacific Bank, reviewed with the Pacific Bank Board the terms and conditions
of the proposed transaction, including the consideration and proposed terms of
the merger agreement, the stock option agreement and the shareholder agreements.
Keefe, Bruyette delivered a detailed financial review of the proposed
transaction, including the material financial analyses employed by Keefe,
Bruyette in connection with rendering its fairness opinion. See "The
Merger--Opinion of Pacific Bank's Financial Advisor" on pages 26 to 30. During
that meeting Keefe, Bruyette rendered to the Pacific Bank Board an oral fairness
opinion to the effect that the financial terms of the merger with City National
were fair from a financial point of view to the shareholders of Pacific Bank.
Following such discussions and questions by the Pacific Bank Board to
management and its financial and legal advisors, the Pacific Bank Board
considered the proposal from City National and concluded that the merger was
advisable and in the best interests of its shareholders. The Pacific Bank Board
unanimously approved the terms of City National's proposal and the merger
pursuant to the merger agreement. Pacific Bank and City National signed the
merger agreement and the stock option agreement on September 21, 1999.
In reaching its conclusion to approve the merger, the Pacific Bank Board of
Directors considered numerous factors, reviewed information regarding City
National and received reports and presentations from its officers, financial
advisors and legal counsel. The Pacific Bank Board considered numerous factors,
including, among others:
- the alternatives to an acquisition of Pacific Bank, including the
advisability of continuing to operate Pacific Bank as an independent
entity;
- the value of and form of consideration offered by City National, compared
with prices paid in comparable acquisitions of other banks and bank
holding companies, and compared with the prices offered to Pacific Bank by
other interested financial institutions;
- the results of operations and prospects of Pacific Bank and City National;
- the opinion of Keefe, Bruyette that the purchase price to be paid to
Pacific Bank shareholders is fair from a financial point of view;
- the premium represented by the consideration offered to Pacific Bank
shareholders relative to the book value of Pacific Bank common stock and
the range of its trading prices in the recent past; and
- the value of City National stock as an investment, including the fact that
it may offer Pacific Bank shareholders the opportunity to participate in
the future performance of a larger financial institution than Pacific
Bank.
Pacific Bank's Board of Directors did not assign any specific or relative
weight to these factors.
OPINION OF PACIFIC BANK'S FINANCIAL ADVISOR
Pacific Bank engaged Keefe, Bruyette to act as its exclusive financial
advisor in connection with the merger. Keefe, Bruyette agreed to assist Pacific
Bank in analyzing, structuring, negotiating and effecting a transaction with
City National. Pacific Bank selected Keefe, Bruyette because Keefe, Bruyette is
a nationally recognized investment-banking firm with substantial experience in
transactions similar to the merger and is familiar with Pacific Bank, and its
business. As part of its investment
26
<PAGE>
banking business, Keefe, Bruyette is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions.
As part of its engagement, representatives of Keefe, Bruyette attended the
meeting of the Pacific Bank Board held on September 21, 1999 at which the
Pacific Bank Board considered and approved the merger agreement. At the
September 21, 1999 meeting, Keefe, Bruyette rendered an oral opinion
(subsequently confirmed in writing) that, as of that date, the merger
consideration was fair to Pacific Bank and its shareholders from a financial
point of view. That opinion was reconfirmed in writing as of the date of this
document.
The full text of Keefe, Bruyette's updated written opinion is attached as
Annex C to this document and is incorporated herein by reference. You are urged
to read the opinion in its entirety for a description of the procedures
followed, assumptions made, matters considered, and qualifications and
limitations on the review undertaken by Keefe, Bruyette.
Keefe, Bruyette's opinion is directed to the Pacific Bank Board and
addresses only the merger consideration. It does not address the underlying
business decision to proceed with merger and does not constitute a
recommendation to you as to how you should vote at the Pacific Bank special
shareholders' meeting with respect to the merger or any matter related thereto.
In rendering its opinion, Keefe, Bruyette:
- reviewed, among other things,
- the merger agreement;
- Annual Reports to Stockholders and Annual Reports on Form 10-K of City
National;
- Annual Reports to Shareholders and Annual Reports on Form 10-K and
10-K/A of Pacific Bank;
- Quarterly Reports on Form 10-Q of City National;
- Quarterly Reports on Form 10-Q and 10-Q/A of Pacific Bank; and
- certain internal financial analyses and forecasts for Pacific Bank and
City National prepared by management;
- held discussions with members of senior management of City National and
Pacific Bank regarding
- past and current business operations;
- regulatory relationships;
- financial condition; and
- future prospects of the respective companies;
- compared certain financial and stock market information for City National
and Pacific Bank with similar information for certain other companies with
publicly traded securities;
- reviewed the financial terms of certain recent business combinations in
the banking industry; and
- performed other studies and analysesthat it considered appropriate.
The projections furnished to Keefe, Bruyette and used by it in certain of
its analyses were prepared by the senior management of Pacific Bank. Pacific
Bank does not publicly disclose internal management projections of the type
provided to Keefe, Bruyette in connection with its review of the merger. As a
result, such projections were not prepared with a view towards public
disclosure. The projections were based on numerous variables and assumptions
which are inherently uncertain,
27
<PAGE>
including factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in the
projections.
The following is a summary of the material analyses that Keefe, Bruyette
presented to the Pacific Bank Board on September 21, 1999 in connection with its
September 21, 1999 opinion:
TRANSACTION SUMMARY. Keefe, Bruyette calculated the merger consideration to
be paid pursuant to the exchange ratio as a multiple of Pacific Bank's book
value, 1998 actual (excluding non-recurring charges and gains) and 1999
estimated earnings. This computation assumed the estimates of Pacific Bank's
earnings per share of $1.47 in 1998 (excluding non-recurring charges and gains)
and $1.60 in 1999, and an exchange ratio of .449 City National share and $14.50
in cash for each Pacific Bank share. Based on those assumptions, this analysis
indicated that Pacific Bank shareholders would receive a combination of shares
of City National common stock and cash worth $29.00 for each share of Pacific
Bank common stock held, and that this amount would represent a multiple of 2.05
times book value per share, and 19.73 times 1998 earnings per share (excluding
non-recurring charges and gains).
DISCOUNTED CASH FLOW ANALYSIS. Keefe, Bruyette estimated the present value
of future cash flows that would accrue to a holder of a share of Pacific Bank
common stock assuming that the shareholder held the stock for five years and
then sold it. The analysis was based on earnings forecasts prepared by
management on a stand-alone, independent basis for 1999 and annual net income
growth rates from 6.0% to 14.0% for the years 2000 through 2003. A 21.0%
dividend payout ratio was assumed for Pacific Bank through the year 2003.
Pacific Bank's value in the event of a sale was determined by using terminal
price/earnings multiples from 17.0 times to 22.0 times. The terminal value and
the dividends received were discounted at a rate of 12.0%. This rate was
selected because, in Keefe, Bruyette's experience, it represents the
risk-adjusted rates of return that investors in securities such as the Pacific
Bank common stock would require. On the basis of these assumptions, Keefe,
Bruyette calculated a range of present values ranging from $23.42 to $36.92.
These values were compared to the $29.00 offer from City National.
Keefe, Bruyette stated that the discounted cash flow present value analysis
is a widely used valuation methodology but noted that it relies on numerous
assumptions, including asset and earnings growth rates, terminal values and
discount rates. The analysis did not purport to be indicative of the actual
values or expected values of Pacific Bank common stock.
SELECTED TRANSACTION ANALYSIS. Keefe, Bruyette reviewed certain financial
data related to comparable bank transactions which were nationwide bank purchase
accounting transactions from August 26, 1998 to September 21, 1999 with
transaction values between $75 million and $500 million.
Keefe, Bruyette compared multiples of price to various factors for the City
National/Pacific Bank merger to the same average multiples for this comparable
group's mergers at the time those mergers were announced. The results were as
follows:
MULTIPLE OF PRICE TO FACTOR
<TABLE>
<CAPTION>
FACTOR CONSIDERED COMPARABLE GROUP AVERAGE CITY NATIONAL/PACIFIC BANK MERGER
- ----------------- ------------------------ ---------------------------------
<S> <C> <C>
Recurring Trailing 12 Months Earnings...... 19.5x 19.7x
Book Value................................. 2.3x 2.1x
Tangible Book Value........................ 2.5x 2.3x
</TABLE>
Keefe, Bruyette then compared multiples of price to various factors for the
City National/Pacific Bank merger to the same average multiples for comparable
California bank transactions from January 1, 1998 to September 21, 1999 with
transaction values between $75 million and $500 million.
28
<PAGE>
Additionally, Keefe, Bruyette calculated the averages for only the purchase
accounting transactions in the comparable California bank transactions. The
results were as follows:
MULTIPLE OF PRICE TO FACTOR
<TABLE>
<CAPTION>
COMPARABLE PURCHASE CITY NATIONAL/PACIFIC BANK
FACTOR CONSIDERED COMPARABLE GROUP AVERAGE ACCOUNTING AVERAGE MERGER
- ----------------- ------------------------ ------------------- --------------------------
<S> <C> <C> <C>
Recurring Trailing 12 Months
Earnings..................... 21.2x 20.0x 19.7x
Stated Book Value.............. 2.6x 2.4x 2.1x
Estimated Tangible Book
Value........................ 2.8x 2.5x 2.3x
</TABLE>
No company or transaction used as a comparison in the above analysis is
identical to City National, Pacific Bank or the merger. Accordingly, an analysis
of these results is not mathematical. Rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading value of
the companies to which they are being compared.
SELECTED PEER GROUP ANALYSIS. Keefe, Bruyette compared the financial
performance and market performance of City National to those of a group of
comparable holding companies. The comparisons were based on:
- various financial measures
- earnings performance,
- operating efficiency,
- capital adequacy and
- asset quality and
- various measures of market performance,
- including market/book values,
- price to earnings and
- dividend yields.
To perform this analysis, Keefe, Bruyette used the financial information as
of and for the quarter ended June 30, 1999 and market price information as of
September 20, 1999. The companies in the peer group were selected California
regional banks that had total assets from $1.7 billion to $6.6 billion.
Keefe, Bruyette's analysis showed the following concerning City National's
financial performance:
<TABLE>
<CAPTION>
PERFORMANCE MEASURE CITY NATIONAL PEER GROUP AVERAGES
- ------------------- ------------- -------------------
<S> <C> <C>
Return on Equity, annualized................................ 19.28% 16.90%
Return on Assets, annualized................................ 1.64% 1.19%
Net Interest Margin, annualized............................. 5.42% 4.38%
Efficiency Ratio, annualized................................ 56.3% 53.04%
Tangible Equity / Assets.................................... 7.89% 6.27%
Non-Performing Assets to Total Loans and Other Real Estate
Owned..................................................... .63% 1.62%
Loan Loss Reserve to Average Nonperforming Loans............ 467% 263%
</TABLE>
29
<PAGE>
Keefe, Bruyette's analysis showed the following concerning City National's
market performance:
<TABLE>
<CAPTION>
PERFORMANCE MEASURE CITY NATIONAL PEER GROUP AVERAGES
- ------------------- ------------- -------------------
<S> <C> <C>
Price to Earnings Multiple, based on 1999 estimated
earnings.................................................. 14.49x 12.98x
Price to Earnings Multiple, based on 2000 estimated
earnings.................................................. 13.03x 11.31x
Price to Book Multiples..................................... 2.64x 2.19x
Price to Tangible Book Multiples............................ 3.01x 2.30x
Dividend Yield.............................................. 2.04% 1.13%
</TABLE>
For purposes of the above calculations, all earnings estimates are based
upon the Institutional Brokers Estimate System estimates for City National.
OTHER ANALYSES. Keefe, Bruyette reviewed the relative financial and market
performance of Pacific Bank and City National to a variety of relevant industry
peer groups and indices. Keefe, Bruyette also reviewed earnings estimates,
balance sheet composition, historical stock performance and other financial data
for City National.
In connection with its opinion dated as of the date of this document, Keefe,
Bruyette performed procedures to update, as necessary, certain of the analyses
described above. Keefe, Bruyette reviewed the assumptions on which the analyses
described above were based and the factors considered in connection therewith.
Keefe, Bruyette did not perform any analyses in addition to those described
above in updating its September 21, 1999 opinion.
Keefe, Bruyette has not independently verified the information described
above and for purposes of this opinion has assumed the accuracy, completeness
and fairness thereof. With respect to information relating to the prospectus of
Pacific Bank and City National, Keefe, Bruyette has assumed that such
information reflects the best currently available estimates and judgments of the
managements of Pacific Bank and City National, respectively, as to the likely
future financial performance of Pacific Bank and City National. Keefe, Bruyette
also assumed, without independent verification, that the aggregate allowances
for loan losses for City National and Pacific Bank are adequate to cover those
losses. Keefe, Bruyette did not make or obtain any evaluations or appraisals of
the property of City National or Pacific Bank, and Keefe, Bruyette did not
examine any individual credit files.
The Pacific Bank Board has retained Keefe, Bruyette as an independent
contractor to act as financial adviser to Pacific Bank regarding the merger. As
part of its investment banking business, Keefe, Bruyette is continually engaged
in the valuation of banking businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. As specialists in the
securities of banking companies, Keefe, Bruyette has experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
its business as a broker-dealer, Keefe, Bruyette may, from time to time,
purchase securities from, and sell securities to, Pacific Bank and City
National. As a market maker in securities Keefe, Bruyette may from time to time
have a long or short position in, and buy or sell, debt or equity securities of
Pacific Bank and City National for Keefe, Bruyette's own account and for the
accounts of its customers.
Pacific Bank and Keefe, Bruyette have entered into an agreement relating to
the services to be provided by Keefe, Bruyette in connection with the merger.
Pacific Bank has agreed to pay Keefe, Bruyette, at the time of closing, a cash
fee of approximately $1.2 million. Pursuant to the Keefe, Bruyette engagement
agreement, Pacific Bank also agreed to reimburse Keefe, Bruyette for reasonable
out-of-pocket expenses and disbursements incurred in connection with its
retention and to indemnify against certain liabilities, including liabilities
under the federal securities laws.
30
<PAGE>
INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF PACIFIC BANK IN THE
MERGER
When considering the recommendations of the Pacific Bank Board of Directors,
you should be aware that some of the employees of Pacific Bank and members of
the Pacific Bank Board of Directors and management have interests that may be
different from, or may be in conflict with, your interests. The Pacific Bank
Board of Directors was aware of these interests when they approved the merger
and the merger agreement. Except as described below, to the knowledge of Pacific
Bank, the executive officers and directors of Pacific Bank do not have any
material interest in the merger apart from their interests as shareholders.
Under the agreements or the plan discussed below, certain executive officers
have the right to receive payments if a change of control of Pacific Bank
occurs. The proposed merger would be considered a change of control.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. On July 18, 1996, effective
July 1, 1996, the Board of Directors of Pacific Bank adopted a Supplemental
Executive Retirement Plan, or the SERP, to cover any employee of Pacific Bank
who is a member of the management committee and is designated as a participant
of the SERP by the Board of Directors. The SERP provides each participant a
benefit in the form of an annuity payable monthly over a 15-year period
commencing at age 65. A participant may request in writing not later than
60 days prior to termination of his employment that the benefits under the SERP
be paid in another form such as in a lump sum or a joint and survivor annuity
for the joint life of the participant and his spouse. The Pacific Bank Board of
Directors determines whether such alternative form of benefit will be paid.
The SERP also provides that upon the termination of a participant's
employment during the 18-month period following a change in control, unless such
termination is by the employer for cause, reason of death, disability or
retirement, or by the participant without good reason, the participant will
receive a lump sum amount in cash equal to the present value of the retirement
benefit calculated as provided in the SERP, but assuming 3 additional years of
service at the date of termination. Under the SERP, such lump sum payment will
be made to the participant no later than 30 days following the date of
termination.
The estimated credited years of service, including the above-referenced
additional three years, for Mr. Tun Zan is 20 years and for Mr. Halicky is
11 years. The participant's benefit is calculated at 4% of compensation for the
average of the highest three out of five final full years for the first
10 years of service, plus 7% of such compensation thereafter. The maximum annual
benefit payable to Mr. Tun Zan is 50% of the average of the final full three
years of compensation at age 65, not to exceed an annual benefit of $200,000.
The maximum annual benefit payable to Mr. Halicky is 60% of the average of the
final three full years of compensation at age 65, not to exceed an annual
benefit of $237,000. Under his proposed employment agreement with City National,
Mr. Tun Zan will receive his change in control payment under the SERP in a form
to be mutually agreed upon. Assuming the merger closes in the first quarter of
2000, Mr. Tun Zan would be entitled to receive $1,337,000 under the SERP. In the
event that Mr. Halicky is terminated within 18 months after the merger and
assuming the merger closes in the first quarter of 2000, Mr. Halicky will
receive a lump sum payment of approximately $370,000.
EXECUTIVE EMPLOYMENT CONTRACTS. Mr. Tun Zan has an employment agreement
with Pacific Bank with a five year term from November 5, 1996, through
November 5, 2001. The contract is for his employment as President and Chief
Executive Officer, and his current annual base salary is $315,000. Mr. Tun Zan's
annual base salary is subject to review and adjustment at his annual performance
review. The agreement provides that in the event of change in control of Pacific
Bank, either Mr. Tun Zan or any successor to Pacific Bank has six months to
terminate the agreement. If the agreement is so terminated, then Mr. Tun Zan
will receive, among other things, three times annual base salary as adjusted
plus 100% of target bonus. The target bonus for Mr. Tun Zan is 30% of his
current annual base salary.
31
<PAGE>
Mr. Halicky has an employment agreement with Pacific Bank for a three year
term from November 5, 1996, through November 5, 1999. On December 17, 1998, the
Pacific Bank Board of Directors approved an amendment to the employment
agreement with Mr. Halicky. The amendment extended the term of Mr. Halicky's
employment agreement to December 17, 2001. Mr. Halicky's contract is for his
employment as Executive Vice President and Chief Financial Officer, and his
current annual base salary is $184,855. Mr. C. Edward Holden, Executive Vice
President and Senior Lending Officer, entered into an employment agreement with
Pacific Bank on April 16, 1999. Mr. Holden's agreement establishes his current
annual base salary at $200,000. In addition, each agreement provides that in the
event of change in control of Pacific Bank, Messrs. Halicky and Holden or any
successor to Pacific Bank has six months within which to terminate the
agreement. In the event of a change of control, severance benefits for
Messrs. Halicky and Holden will be three times current salary plus 100% of
target bonus. The target bonus for Messrs. Halicky and Holden is 30% of current
annual base salary.
Stephen M. Rieden and David Wong entered into employment agreements with
Pacific Bank with a two year term from December 17, 1998. Their agreements are
for employment as Senior Vice President and their current annual base salaries
are $180,000 and $150,000, respectively. Messrs. Rieden's and Wong's annual base
salaries are subject to performance bonuses to be determined by the Pacific Bank
Board of Directors at the conclusion of Messrs. Rieden's and Wong's annual
performance reviews. Severance during an 18 month period following a change of
control will result in payment of an amount equal to one times current base
salary, plus 100% of target bonus. The target bonuses for Messrs. Reiden and
Wong are 30% of their respective current annual base salaries.
MR. TUN ZAN'S EMPLOYMENT AGREEMENT WITH CITY NATIONAL. It is a condition to
the merger that Mr. Tun Zan sign an employment agreement with City National. The
proposed employment agreement provides that Mr. Tun Zan would serve as Senior
Banking Executive, Northern California of City National Bank for two years
following completion of the merger. Mr. Tun Zan will receive a salary of
$175,000 and a sum of up to 42% of his salary depending on Mr. Tun Zan's and
City National Bank's performances. He will also be granted options to purchase
5,000 shares of City National common stock at fair market value at the date of
grant. Mr. Tun Zan will also be entitled to change of control payments under his
Pacific Bank employment agreement and the SERP.
ACCELERATION OF VESTING OF OPTIONS. When the merger occurs, all stock
options held by Pacific Bank directors and executive officers and granted under
Pacific Bank's 1993 and 1998 stock option plans will become fully vested and
exercisable. Under the merger agreement, holders of outstanding options will
receive a payment in cash equal to the difference between $29.00 and the
exercise price of the option multiplied by the number of shares of Pacific Bank
common stock which could be purchased on exercise of the option. Because the
options will become fully vested, directors and executive officers of Pacific
Bank with options will receive payment for all the shares underlying their
options.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the completion of the merger, each issued and outstanding share of
Pacific Bank common stock, other than shares held by dissenters or City
National, will convert, at the election of each holder but subject to proration,
into either cash or shares of City National common stock.
For each share of Pacific Bank you own before the merger, you will have the
right to elect, on a share-by-share basis, to receive:
- $29.00 in cash; or
- shares of City National common stock based on a floating exchange ratio as
follows: (1) if the final City National stock price is between $28.05 and
$37.95, the exchange ratio will equal $29.00 divided by the final City
National stock price; (2) if the final City National stock price is more
than $37.95 but less than or equal to $41.25, the exchange ratio will be
.7642; (3) if the final City
32
<PAGE>
National stock price is more than $41.25, the exchange ratio will be
$31.52 divided by the final City National stock price; and (4) if the
final City National stock price is less than $28.05, the exchange ratio
will be 1.0339.
Final City National stock price means the average of the daily closing
prices of a share of City National common stock on the New York Stock Exchange
for the 20 consecutive trading days ending on the third trading day immediately
before the completion of the merger.
The table below illustrates how changes in the final City National stock
price will change the exchange ratio for each share of Pacific Bank common stock
if you were to elect to receive City National common stock:
<TABLE>
<CAPTION>
ASSUMED FINAL
CITY NATIONAL EXCHANGE
STOCK PRICE RATIO
- ------------- --------
<S> <C>
$48.00 0.6567
$41.25 0.7642
$37.95 0.7642
$33.00 0.8788
$30.50 0.9508
$28.05 1.0339
$27.00 1.0339
</TABLE>
The following chart illustrates the approximate value of what a holder of
100 shares of Pacific Bank common stock will receive in the merger, assuming
varying final City National stock prices and different percentages of cash and
City National common stock. You should bear in mind that the value of City
National common stock is subject to fluctuation and therefore the value of a
share of City National common stock as of the date of the consummation of the
merger and after the merger will differ from the value of such stock based on
the final City National stock price. This chart uses hypothetical final City
National stock prices.
IF YOU HOLD 100 SHARES OF PACIFIC BANK COMMON STOCK AND
THE FINAL CITY NATIONAL STOCK PRICE IS:
<TABLE>
<CAPTION>
$27 $33 $48
-------- -------- --------
<S> <C> <C> <C>
and you receive:
100% cash............................................... $2,900 $2,900 $2,900
75% cash/25% City National common stock................. 2,873 2,900 2,963
50% cash/50% City National common stock................. 2,846 2,900 3.026
25% cash/75% City National common stock................. 2,819 2,900 3,089
100% City National common stock......................... 2,792 2,900 3,152
</TABLE>
No fractional shares will be issued in the merger. Instead, you will receive
for any fractional shares cash in an amount equal to the fractional share of
City National common stock multiplied by the final City National stock price.
If City National changes the number of outstanding City National common
stock before the merger through any stock dividend, stock split or combination,
then the exchange ratio will be appropriately adjusted.
You may obtain current market quotations for the City National common stock
and the Pacific Bank common stock. The market price of the City National common
stock will probably fluctuate between the date of this document and the date of
the consummation of the merger and after the
33
<PAGE>
merger. Therefore, the value of the shares of City National common stock that
you may receive in the merger may increase or decrease prior to and after the
merger.
ELECTION AND PRORATION PROCEDURES
MAKING THE ELECTION. City National has selected Continental Stock
Transfer & Trust Company, which is the current transfer agent for City National,
to serve as the exchange agent for purposes of effecting the election,
allocation, and proration procedures. An election form is being sent to you
contemporaneously in a separate mailing. If you do not exercise dissenters'
rights, you must use the election form to make the election to receive stock,
cash, or a combination of stock and cash with respect to your shares of Pacific
Bank common stock. Shares of Pacific Bank will be undesignated shares if you
either:
- do not submit a properly completed election form in a timely fashion, or
- revoke your election form prior to the deadline for submitting the
election form.
The deadline for you to submit your election forms to the exchange agent is
February 23, 2000.
All elections will be required to be made on an election form. To make an
effective election with respect to shares of Pacific Bank common stock, you must
deliver the following items to the exchange agent prior to the election
deadline:
- a properly completed letter of transmittal and election form,
- either (a) your certificates for shares of Pacific Bank common stock or an
appropriate guarantee of delivery, or (b) information regarding delivery
by book entry transfer of the shares on a timely basis, and
- any other required documents described in the election form.
You may change your election by submitting to the exchange agent a properly
completed and signed revised letter of transmittal and election form and all
required additional documents. To be effective, however, the exchange agent must
receive these revised documents prior to the election deadline. If some but not
all the revised documents are received by the election deadline, the shares will
be considered undesignated shares.
You may revoke your prior valid election by written notice received by the
exchange agent prior to the election deadline. You may also revoke a prior valid
election by submitting a written withdrawal of your share certificates or of the
notice of guaranteed delivery of your share certificates previously deposited
with the exchange agent. Again, this written withdrawal must be received by the
exchange agent before the election deadline.
DO NOT RETURN YOUR CERTIFICATES REPRESENTING SHARES OF PACIFIC BANK COMMON
STOCK WITH THE ENCLOSED PROXY. THE STOCK CERTIFICATES SHOULD ONLY BE FORWARDED
TO THE EXCHANGE AGENT WITH THE LETTER OF TRANSMITTAL AND ELECTION FORM.
If you have a preference as to the form of consideration to be received for
your shares of Pacific Bank common stock, you should make an election. Shares as
to which an election is made will be given priority in allocating the merger
consideration over shares to which an election is not received. None of City
National, the Board of Directors of City National, Pacific Bank, or the Board of
Directors of Pacific Bank makes any recommendation as to whether you should
elect to receive cash, stock, or a combination of stock and cash. You must make
your own decision with respect to that election.
Following the completion of the merger and upon surrender of all of the
certificates representing shares of Pacific Bank common stock registered in your
name, or a satisfactory indemnity if any of such certificates are lost, stolen
or destroyed, together with a properly completed letter of transmittal,
Continental Stock Transfer & Trust Company will mail to you the cash and/or City
National common stock to which you are entitled, less the amount of any required
withholding taxes. You will not receive interest on any cash.
34
<PAGE>
Declaration of dividends by City National after the completion of the merger
will include dividends on all City National common stock issued in the merger,
but no dividend or other distribution payable to the holders of record of City
National common stock at or as of any time after the completion of the merger
will be paid to holders of Pacific Bank common stock who receive City National
common stock in the merger until they physically surrender all certificates as
described above. After the completion of the merger, the stock transfer books of
Pacific Bank will close and there will be no transfers on the transfer books of
Pacific Bank.
ALLOCATION AND PRORATION PROCEDURES. The merger agreement requires that
City National common stock must represent at least 47% and no more than 52.5% of
the total merger consideration paid by City National to Pacific Bank
shareholders. THEREFORE, IT IS POSSIBLE THAT YOU WILL NOT RECEIVE THE EXACT FORM
OF MERGER CONSIDERATION YOU ELECTED TO RECEIVE.
If stock elections received represent at least the minimum stock amount of
47% and no more than maximum stock amount of 52.5% of the total merger
consideration, then:
- shares for which a stock election has been made will be converted into
stock; and
- shares for which a cash election has been made or undesignated shares will
be converted into cash.
If stock elections received represent more than the maximum stock amount of
52.5% of the total merger consideration, the merger consideration will be
allocated as follows:
- shares for which a cash election has been made or undesignated shares will
be converted into cash;
- shares for which a stock election has been made will be converted into
City National common stock and cash as follows:
- the number of shares of City National common stock that will be
received will be the product of
- the shares of City National common stock which would have been
received based on the stock election, and
- the stock proration factor, the numerator of which is the total
number of shares of City National common stock required to be
issued to equal the maximum stock amount, and the denominator of
which is the aggregate number of shares of City National common
stock which would be issued based on all stock elections made; and
- the amount of cash that will be received will be the product of
- the number of shares of Pacific Bank common stock covered by the
stock elections, times $29.00, and
- 1 minus the stock proration factor.
If stock elections received represent less than the minimum stock amount of
47% of the total merger consideration, the merger consideration will be
allocated as follows:
- shares for which a stock election has been made will be converted into
City National common stock;
- undesignated shares will be allocated stock at random to satisfy the
minimum stock amount until the minimum is reached, and all other
undesignated shares will receive cash; and
35
<PAGE>
- if, after all undesignated shares have been allocated City National common
stock, the minimum stock amount has still not been satisfied, shares for
which a cash election has been made will be converted into City National
common stock and cash as follows:
- the number of shares of City National common stock that will be
received will be the product of
- the total number of shares of Pacific Bank common stock covered by
the cash election, times the exchange ratio, and
- the cash proration factor, the numerator of which is the difference
between (a) the number of shares of City National common stock
required to be issued to equal the minimum stock amount and,
(b) the number of shares of City National common stock which would
be issued to satisfy the stock elections received and the
undesignated shares randomly selected, and the denominator of which
is the total number of shares of Pacific Bank common stock covered
by cash elections; and
- the amount of cash that will be received will be equal to the product
of
- the number of shares of Pacific Bank covered by the cash elections,
times $29.00, and
- 1 minus the cash proration factor.
The following are three examples of the proration of the merger
consideration received by a Pacific Bank shareholder who owns 100 shares of
Pacific Bank common stock and makes an election to have 50 shares converted into
cash and 50 shares converted into City National common stock. The examples
assume:
1. there are 5 million shares of Pacific Bank common stock outstanding;
2. the final City National stock price and the price of City National
common stock at the closing is $29.00 per share; and
3. there are no dissenting or undesignated shares.
PRORATION IF STOCK ELECTIONS RECEIVED FOR 50% OF THE TOTAL MERGER CONSIDERATION.
<TABLE>
<S> <C> <C>
1. The stock proration factor.................................. NA
2. Number of shares of City National common stock received..... 50
3. Amount of cash received on cash election.................... $1,450
4. Fractional shares for which cash will be paid............... NA
</TABLE>
PRORATION IF STOCK ELECTIONS RECEIVED FOR 60% OF THE TOTAL MERGER CONSIDERATION
<TABLE>
<S> <C> <C>
1. The stock proration factor.................................. .875
2. Number of shares of City National common stock received..... 43
3. Amount of cash received on stock election shares............ $181.25
4. Amount of cash received on cash election.................... $ 1,450
5. Fractional shares for which cash will be paid............... .75
</TABLE>
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PRORATION IF STOCK ELECTIONS RECEIVED FOR 40% OF THE TOTAL MERGER CONSIDERATION
<TABLE>
<S> <C> <C>
1. The cash proration factor................................... .1167
Number of shares of City National common stock received on
2. stock election shares..................................... 50
Number of shares of City National common stock received on
3. cash election shares...................................... 5
4. Amount of cash received on cash election shares............. $1,280.78
5. Fractional shares for which cash will be paid............... .835
</TABLE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERALLY. The following discussion addresses the material federal income
tax considerations of the merger that are generally applicable to you as Pacific
Bank shareholders. The following discussion does not deal with all federal
income tax considerations that may be relevant to certain Pacific Bank
shareholders in light of their particular circumstances, such as shareholders:
who are dealers in securities; who are insurance companies, or tax-exempt
organizations; who are subject to alternative minimum tax; who hold their shares
as part of a hedge, straddle, or other risk reduction transaction; who are
foreign persons; who dissent from the merger; or who acquired their Pacific Bank
common stock through stock options or otherwise as compensation. In addition, it
does not address the tax consequences of the merger under foreign, state, or
local tax laws or the tax consequences of transactions completed before or after
the merger, such as the exercise of options or rights to purchase Pacific Bank
common stock in anticipation of the merger.
You are urged to consult your own tax advisors regarding the tax
consequences to you of the merger based on your own circumstances, including the
applicable federal, state, local, and foreign tax consequences to you of the
merger.
The following discussion is based on the Internal Revenue Code, applicable
Treasury Regulations, judicial decisions, and administrative rulings and
practice, all as of the date of this proxy statement/ prospectus, all of which
are subject to change. Any such change could be applied to transactions that
were completed before the change, and could affect the accuracy of the
statements and conclusions in this discussion and the tax consequences of the
merger to City National, Pacific Bank and you.
Neither City National nor Pacific Bank has requested or will request a
ruling from the Internal Revenue Service with regard to any of the tax
consequences of the merger. Manatt, Phelps & Phillips, LLP, special counsel to
City National, will render its opinion to City National and Pacific Bank at the
closing of the merger, that:
- the merger constitutes a tax-deferred "reorganization" within the meaning
of Section 368(a)(1)(A) by way of Section 368(a)(2)(D) of the Internal
Revenue Code;
- the merger will not result in the recognition of gain or loss for federal
income tax purposes to City National, City National Bank or Pacific Bank;
and
- the issuance of City National common stock in the merger will not result
in the recognition of gain or loss by the Pacific Bank shareholders who
receive such stock in the merger.
As a condition to the closing of the merger, counsel must render opinions to
the effect of the points listed above. The opinions that are to be rendered on
or before the closing of the merger will be based upon the assumption that the
merger will take place in the manner described in the merger agreement. The
opinions of counsel will also assume the truth and accuracy of certain factual
representations that have been made by City National and Pacific Bank and which
are customarily given in transactions of this kind.
CONSEQUENCES TO PACIFIC BANK SHAREHOLDERS. The tax consequences of the
merger to you will depend upon the form of consideration you receive. Based on
the assumption that the merger will
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constitute a reorganization, and subject to the limitations and qualifications
referred to in this discussion, the following U.S. federal income tax
consequences will result from the merger:
- If you exchange your shares of Pacific Bank common stock solely for City
National common stock (and cash in lieu of a fractional share), you should
not recognize any gain or loss, except with respect to the fractional
share.
- If you exchange your shares of Pacific Bank common stock solely for cash,
you will generally recognize gain (and, as is more fully described below,
likely will be permitted to recognize loss) equal to the difference
between the amount of cash received and your basis in your Pacific Bank
common stock.
- If you exchange your shares of Pacific Bank common stock for City National
common stock and cash (other than cash in lieu of a fractional share), you
will generally recognize gain in an amount equal to the lesser of:
- the difference between (1) the fair market value of all City National
common stock and cash received in the exchange and (2) your basis in
the Pacific Bank common stock; and
- the amount of cash received in the exchange.
If you exchange your shares of Pacific Bank common stock for a combination
of City National common stock and cash, you will not be permitted to
recognize a loss in the exchange.
- The total initial tax basis of the City National common stock received by
you in the merger will be equal to the total tax basis of the Pacific Bank
common stock exchanged for the City National common stock, decreased by
the amount of cash (other than cash in lieu of a fractional share)
received in the exchange (if any), and increased by the amount of gain
recognized in the exchange (if any).
- If you receive cash in lieu of a fractional share of City National common
stock, you will generally recognize gain or loss in an amount equal to the
difference between (1) the amount of cash received in lieu of a fractional
share and (2) your basis allocated to the fractional share, determined in
the manner described in the immediately preceding point.
- The holding period of the City National common stock you receive in the
merger will include the period for which you held your Pacific Bank common
stock, provided that you held your Pacific Bank common stock as a capital
asset at the time of the merger.
SHAREHOLDER RECEIVING CITY NATIONAL COMMON STOCK AND CASH--CHARACTER OF
GAIN. The gain recognized by you if you receive a combination of City National
common stock and cash in the merger may be characterized as either capital gain
or ordinary income, depending upon your particular situation. In determining the
character of the gain recognized by you if you receive both City National common
stock and cash, the Internal Revenue Service will (1) treat you as having
exchanged your Pacific Bank common stock solely for City National common stock
and then (2) treat you as having sold back a portion of that stock to City
National in exchange for cash. The exchange of stock for cash in this fashion is
known as a "redemption." Gain recognized by you in a redemption will be treated
as a capital gain if, after giving effect to the constructive ownership rules of
the Internal Revenue Code, either:
- your receipt of cash is "substantially disproportionate" to your equity
interest in Pacific Bank; or
- the redemption is "not essentially equivalent to a dividend."
In addition, to receive capital gain treatment, you must have held your
Pacific Bank common stock as a capital asset immediately before the merger. This
capital gain would be treated as long-term
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<PAGE>
capital gain if your holding period for the Pacific Bank common stock was more
than one year at the effective time of the merger.
Both of the two alternative tests given above are designed to determine
whether a shareholder experiences a significant decrease in corporate voting
power as a result of a partial redemption of his or her share holdings. In
making this determination, the constructive ownership rules of the Internal
Revenue Code must be taken into account. Under these rules, a former Pacific
Bank shareholder is treated as owning, in addition to the City National common
stock he or she receives, or is treated as having received, in the merger, those
shares of City National common stock that are held or controlled by certain
related individuals or entities. Specifically:
- An individual shareholder is treated as owning the shares owned, directly
or indirectly, by his or her spouse, children, grandchildren, and parents.
- A shareholder who is a partner in a partnership, a shareholder of an S
corporation, or a beneficiary of an estate or trust, is treated as owning
those shares owned, directly or indirectly, by the relevant entity, in
proportion to his or her interest in the relevant entity.
- A shareholder who is considered the "owner" of any portion of a so-called
"grantor trust" is treated as owning those shares owned, directly or
indirectly, by that portion of the trust.
- A shareholder who owns, directly or indirectly, 50% or more of the value
of the stock of a corporation is treated as owning those shares owned,
directly or indirectly, by the corporation, in proportion to his or her
ownership of the corporation.
- A shareholder that is a partnership or an S corporation is treated as
owning those shares owned, directly or indirectly, by its owners.
- A shareholder that is an estate is treated as owning those shares owned,
directly or indirectly, by its beneficiaries.
- A shareholder that is a trust is generally treated as owning those shares
owned, directly or indirectly, by its beneficiaries, other than any
beneficiary whose interest in the trust is (1) contingent and (2) worth no
more than 5% of the value of the trust property, computed actuarially.
- A shareholder that is a corporation, other than an S corporation, is
treated as owning those shares owned, directly or indirectly, by its
shareholders who own, directly or indirectly, 50% or more of the value of
the stock of the corporation.
- A person who has an option to acquire City National common stock (or any
option to acquire such an option) is treated as owning that stock.
Once a shareholder computes the total number of shares that he or she is
treated as owning, after giving effect to the constructive ownership rules, the
shareholder must determine whether the deemed redemption satisfies the
requirements of either the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test.
To qualify as "substantially disproportionate" with respect to a particular
shareholder, a redemption must meet three requirements, in each case taking into
account the constructive ownership rules described above. The three requirements
are that, immediately after the redemption:
- the shareholder must own less than 50% of the total voting power of the
outstanding Pacific Bank common stock;
- the shareholder must own less than 80% of the percentage of voting power
of the Pacific Bank common stock he or she owned or was treated as owning
before the redemption; and
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<PAGE>
- the shareholder must own less than 80% of the percentage of Pacific Bank
common stock measured by fair market value he or she owned or was treated
as owning before the redemption.
If a shareholder fails any part of this test, the redemption may still
qualify as "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" of the shareholder's proportionate interest in Pacific
Bank. This is a highly subjective standard. Accordingly, neither City National
nor Pacific Bank can provide any substantial assurance that a particular
redemption will qualify as a meaningful reduction. However, based on a published
ruling of the Internal Revenue Service, a shareholder with a relatively minimal
interest in Pacific Bank and no ability to exercise any substantial measure of
control over Pacific Bank's corporate affairs should be treated as having
experienced a meaningful reduction of his proportionate interest in Pacific Bank
as a result of the deemed redemption.
If the deemed redemption of City National common stock in exchange for cash
fails to satisfy either the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test with respect to a particular Pacific
Bank shareholder, then the gain recognized by that shareholder will be
characterized as a distribution with respect to the stock. Such a distribution
will be treated as a dividend to the extent of the shareholder's allocable share
of Pacific Bank's accumulated earnings and profits. A dividend payment received
by a shareholder is generally treated as ordinary income for federal income tax
purposes. If the amount of the distribution exceeds the shareholder's allocable
share of Pacific Bank's accumulated earnings and profits, then the excess will
be treated as a capital gain. A corporate shareholder that receives a dividend
may be eligible to claim a dividends-received deduction, and may be subject to
the "extraordinary dividend" provisions of the Internal Revenue Code.
SHAREHOLDER RECEIVING SOLELY CASH-CHARACTER OF GAIN AND RECOGNITION OF
LOSS. The character of income, gain, or loss if any, recognized by you if you
receive solely cash in exchange for your Pacific Bank common stock is determined
under an analysis similar to that described above, except that the Internal
Revenue Service may treat your common stock as having been redeemed by Pacific
Bank immediately before the merger, rather than as having been exchanged for
City National common stock and then redeemed by City National immediately after
the merger. In either case, if the deemed redemption satisfies either the
"substantially disproportionate" test or the "not essentially equivalent to a
dividend" test with respect to you, or if the deemed redemption results in a
complete termination of your interest in the relevant entity, after giving
effect to the constructive ownership rules, then any gain recognized by you will
be treated as a capital gain (provided that you held your Pacific Bank common
stock as a capital asset immediately before the merger), and you will be
permitted to recognize loss.
If the deemed redemption fails all three of these tests with respect to you,
then you would not be permitted to recognize loss, and the full amount of cash
received by you could be characterized as a distribution with respect to stock,
and thus be treated as a dividend to the extent of your allocable share of
Pacific Bank's current and accumulated earnings and profits. Pacific Bank
shareholders receiving solely cash in the merger are especially urged to consult
their own tax advisors with regard to their individual tax consequences.
WITHHOLDING. Payments in respect of Pacific Bank common stock or a
fractional share of City National common stock may be subject to information
reporting to the Internal Revenue Service and to a 31% backup withholding tax.
Backup withholding will not apply to a payment made to you if you complete and
sign the substitute Form W-9 that is included as part of the transmittal letter,
or you otherwise prove to City National and its exchange agent that you are
exempt from backup withholding.
REPORTING AND RECORDKEEPING. If you exchange shares of Pacific Bank common
stock in the merger for City National common stock, or for a combination of City
National common stock and cash, you are required to retain records of the
transaction, and to attach to your federal income tax return for the year of the
merger a statement setting forth all relevant facts with respect to the
nonrecognition of
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<PAGE>
gain or loss upon the exchange. At a minimum, the statement must include
(1) your tax basis in the Pacific Bank common stock surrendered and (2) the
amount of cash (if any) and the fair market value, as of the effective date of
the merger, of the City National common stock received in exchange therefor.
FEDERAL INCOME TAX TREATMENT OF DISSENTERS. If you effectively dissent from
the merger and receive cash for your shares, you will recognize a gain (or loss)
for federal income tax purposes equal to the amount by which the cash received
for those shares exceeds, or is less than your tax basis for the shares. The
amount of that gain (or loss), if any, will be treated as ordinary income (or
loss) or long-term or short-term capital gain (or loss) depending on the length
of time you held the shares, whether you held the shares as a capital asset, and
whether you actually own City National common stock or are deemed to own shares
of Pacific Bank common stock or City National common stock pursuant to the
constructive ownership rules discussed above. In certain circumstances, you can
be deemed for tax purposes to own shares that are actually owned by a
non-dissenter that is related to you, or to own shares of City National common
stock, with the possible result that the cash received upon the exercise of your
rights could be treated as a dividend received pursuant to a corporate
distribution rather than as an amount received pursuant to a sale or exchange of
Pacific Bank common stock.
CAVEAT. Opinions of counsel are not binding on the Internal Revenue Service
or the courts. If the Internal Revenue Service were to assert successfully that
the merger is not a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, then each of you would be required to recognize gain or
loss equal to the difference between (1) the fair market of all City National
common stock and cash received in the exchange and (2) your tax basis in the
Pacific Bank common stock surrendered therefor. In such an event, your total
initial tax basis in the City National common stock received would be equal to
its fair market value, and your holding period for the City National common
stock would begin the day after the merger. The gain or loss would be a
long-term capital gain or loss if your holding period for the Pacific Bank
common stock was more than one year and the Pacific Bank common stock was a
capital asset in your hands.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OF ALL
POTENTIAL TAX CONSEQUENCES OF THE MERGER THAT MAY BE RELEVANT TO A PARTICULAR
PACIFIC BANK SHAREHOLDER. YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND OTHER TAX LAWS.
ACCOUNTING TREATMENT OF THE MERGER
The merger is expected to be accounted for under the purchase method of
accounting for reporting purposes under generally accepted accounting
principles. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based upon their estimated
fair values as of the consummation of the merger. Deferred tax assets and
liabilities will be adjusted for the difference between the tax basis of the
assets and liabilities and their estimated values. The excess, if any, of the
total acquisition cost over the sum of the assigned fair values of the tangible
and identifiable intangible assets acquired less liabilities assumed will be
recorded as goodwill.
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<PAGE>
THE MERGER AGREEMENT
CONDITIONS TO THE MERGER
The obligation of City National and Pacific Bank to consummate the merger is
subject to the fulfillment of many conditions, including the following:
- the Pacific Bank shareholders approve the merger;
- the Board of Directors of City National and Pacific Bank approve the
merger;
- City National and City National Bank receive all approvals or consents
required by law from any applicable governmental agency and all applicable
waiting periods under all laws expire;
- there is no statute, rule, regulation, injunction or decree enacted which
prohibits, materially restricts or makes illegal the merger;
- the Securities and Exchange Commission declares effective the registration
statement covering the issuance of the City National shares and the
registration statement is not the subject of any stop order or proceeding
seeking a stop order;
- receipt of all necessary state securities permits and other state
authorizations;
- the New York Stock Exchange lists the City National common stock issuable
to the Pacific Bank shareholders in connection with the merger; and
- Manatt, Phelps & Phillips, LLP delivers a legal opinion to City National
and Pacific Bank stating that the merger will qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code.
The obligation of City National and City National Bank to consummate the
merger is also subject to the fulfillment of other conditions, including the
following:
- no event has occurred between September 21, 1999 and the completion of the
merger which could have a material adverse effect on Pacific Bank;
- the representations and warranties of Pacific Bank contained in the merger
agreement are true in all material respects;
- receipt of a certificate signed by the chief executive officer and chief
financial officer of Pacific Bank acknowledging that Pacific Bank has
performed, in all material respects, all the covenants and agreements
contained in the merger agreement;
- receipt of an updated disclosure schedule no later than 72 hours before
completion of the merger;
- receipt of an opinion from Preston Gates & Ellis, LLP, counsel to Pacific
Bank, indicating that Pacific Bank properly executed the merger agreement
and the merger agreement will legally bind Pacific Bank in accordance with
its terms;
- receipt of an opinion from Foley & Lardner, special counsel to Pacific
Bank in the American Star liquidation proceeding, containing the following
representations:
- Pacific Bank indirectly owns all of the capital stock of American Star
through its subsidiary, TPB Holdings, Inc;
- Pacific Bank owns a surplus note of American Star in the principal
amount of $5,500,000 free and clear of any encumbrances;
- Pacific Bank has filed and perfected all claims to the American Star
capital stock and the surplus note in accordance with applicable law;
and
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<PAGE>
- upon liquidation of American Star, Pacific will receive any assets of
American Star in excess of its liabilities;
- receipt of a summary of all estimated fees and expenses for Pacific Bank's
attorneys, accountants, investment bankers and other advisors two days
before completion of the merger. Before completion of the merger, Pacific
Bank also must:
- obtain all final bills for fees and expenses from the same attorneys,
accountants, investments bankers and other advisors;
- deliver a final calculation of all their fees and expenses to City
National;
- deliver a copy of the bills to City National; and
- accrue and pay all such bills after City National has reviewed the bills
and final expense calculation;
- at least four business days before completion of the merger, the receipt
of:
- Pacific Bank's consolidated balance sheet for the last day of the month
ended prior to the merger; and
- Pacific Bank's consolidated income statement for the period from
July 1, 1999 through the last day of the month ended prior to the
merger;
- an employment agreement executed by Michael Tun Zan is in effect;
- receipt by Pacific Bank of necessary third-party consents with respect to
material agreements;
- Pacific Bank has completed all steps required for it to redeem the rights
issued under the rights agreement between Pacific Bank and ChaseMellon
Shareholders' Services, LLC;
- the status or resolution of any claim or proceeding pending against
Pacific Bank is satisfactory to City National in the exercise of its
reasonable judgment;
- no litigation or proceeding by any governmental agency seeking to prevent
the merger is pending against Pacific Bank; and
- total deposits of Pacific Bank on the last day of the month prior to the
completion of the merger are not less than 90% of the average total
deposits for the six month period ending on the last day of the same month
of the prior year.
In addition, the obligation of Pacific Bank to consummate the merger also is
subject to the fulfillment or waiver by Pacific Bank, prior to the completion of
the merger, of the following conditions:
- the representations and warranties and covenants of City National
contained in the merger agreement are true in all material respects;
- the receipt of certificates signed by the chief financial officer or other
authorized senior officer of City National acknowledging that City
National has performed, in all material respects, all the covenants and
agreements contained in the merger agreement;
- no litigation or proceeding by any governmental agency seeking to prevent
the merger is pending against City National or City National Bank;
- the receipt of an opinion from the general counsel to City National
indicating:
- City National and City National Bank properly executed the merger
agreement and the merger agreement will legally bind City National and
City National Bank in accordance with its terms; and
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<PAGE>
- the shares of City National stock to be issued in connection with the
merger have been properly authorized, validly issued, and are fully paid
and non-assessable;
- receipt of an updated fairness opinion from Keefe, Bruyette, dated no more
five days before the mailing date of the proxy materials to the
shareholders; and
- no event has occurred between September 21, 1999 and the completion of the
merger which could have a material adverse effect on City National.
If these and other conditions are not satisfied or waived, City National or
Pacific Bank may terminate the agreement.
NONSOLICITATION
Under the terms of the merger agreement, Pacific Bank has agreed not to
solicit, initiate or encourage any takeover proposals or other forms of business
combination with a third party. In addition, Pacific Bank has agreed not to
negotiate, furnish information or otherwise cooperate in any way in connection
with any competing takeover proposals by third parties, unless:
- Pacific Bank's Board of Directors determines, after receiving and
considering the written advice of counsel, that it has a fiduciary duty to
examine the competing proposal, and
- Pacific Bank notifies City National of the terms of a competing proposal
at least 48 hours in advance of responding to the third party.
FEES AND EXPENSES
City National and Pacific Bank will each pay its own expenses in connection
with the merger, except for the following:
- City National will pay all fees due the Securities and Exchange Commission
in connection with the merger, and
- City National will pay all costs associated with the printing and mailing
of this document unless the merger does not occur, in which case both
parties will split these costs.
TREATMENT OF OPTIONS
Before completion of the merger, Pacific Bank will pay each option holder an
amount equal to the difference between the aggregate exercise price and $29
times the number of shares subject to such options. The vesting schedules for
such options will be accelerated immediately prior to the merger as permitted by
Pacific Bank's stock option plans. As a result, option holders are entitled to
receive the payment discussed above for all the shares under his or her option.
Any options to purchase Pacific Bank shares will terminate with completion of
the merger.
TERMINATION
The merger agreement may be terminated at any time before the completion of
the merger:
- by mutual consent of City National and Pacific Bank in writing;
- by either Pacific Bank or City National if:
- Pacific Bank shareholders do not approve the merger agreement;
- a material breach by the other party is not cured within 30 days after
written notice is given to the non-breaching party;
- any governmental authority denies any required approval, consent or
waiver;
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- any governmental authority or court issues a final, non-appealable order
enjoining the merger;
- the merger is not completed by July 1, 2000, unless the merger was not
completed because the party seeking to terminate breached a covenant or
obligation of the merger agreement; or
- any condition to such party's obligations under the merger agreement has
not been met or waived;
- by City National if:
- the Pacific Bank Board of Directors has withdrawn its approval of the
merger agreement or changed its recommendation as to the merger
agreement; or
- Pacific Bank exercised its rights under Section 4.2(x) of the merger
agreement in entertaining a competing takeover proposal and either:
- continues discussions with a third party for more than 15 business
days after receiving a competing proposal; or
- has not rejected a publicly disclosed takeover proposal within 15
business days of when the proposal was made; and
- by Pacific Bank, if the average closing sales price of City National
common stock prior to the merger is below $24.75 and the decline in the
closing sales price is not proportionate to the decline, if any, in the
Nasdaq Bank Index.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO COMPLETION OF THE MERGER
The merger agreement provides that, during the period from September 21,
1999 to the completion of the merger, Pacific Bank will conduct its business
only in the normal and customary manner and in accordance with sound banking
practices. During the same period, Pacific Bank will not, without the prior
written consent of City National, which consent may not be unreasonably
withheld, take any of the following actions, among others:
- issue any securities except pursuant to the exercise of options
outstanding as of the date of the merger agreement;
- declare or pay any dividend or make any distribution on any of its stock,
other than a quarterly regular dividend so long as Pacific Bank
shareholders do not receive two dividends, or fail to receive one
dividend, for any calendar quarter on Pacific Bank stock and the City
National common stock any shareholder receives in the merger;
- purchase or redeem any shares of its stock;
- sell, transfer, mortgage, encumber or otherwise dispose of any assets with
a book value of $500,000 or more, or release any claims, except in the
ordinary course of business consistent with past practice;
- make any investment by purchase of stock or securities, contributions to
capital or purchase of property or fixed assets in excess of $50,000,
except for purchasing U.S. Treasury or U.S. government agency securities
maturing in three years or less;
- purchase any securities other than U.S. Treasury or U.S. government agency
securities maturing in three years or less;
- enter into or renew any material contract expiring after December 31,
1999;
- terminate or modify any material agreements, except for:
- deposit agreements, or
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- agreements entered into in the ordinary course of business involving
payments under $150,000 per annum and terminable in 90 days or less;
- alter its method of establishing interest rates for deposits;
- grant any increase in salary, incentive compensation, bonuses or fringe
benefits;
- voluntarily accelerate the vesting of any employee benefits, except for
options granted pursuant to the stock option plans;
- adopt or amend any employment agreement or other employment benefit plan
or arrangement except amendments as are required by law;
- settle any claim involving any material liability for monetary damages or
enter into any settlement agreement containing material obligations;
- hire additional vice presidents or above or any other employee (except
that employees below vice president may be hired to fill vacancies in
existing positions);
- enter into any new employment arrangements with new or existing employees
which are anything other than at-will employment;
- sell any securities other than securities held as foreclosed collateral;
- sell any small business administration loans in excess of $2,500,000 per
quarter, prorated for partial quarters;
- engage in speculative trading activities with respect to any securities;
- amend its articles of association or bylaws;
- materially change its tax or accounting policies and procedures or any
method or period of accounting unless required by generally accepted
accounting principles or by law or regulation;
- introduce any new services or products or change its services or products;
- institute any new advertising campaign;
- open, apply to open or close any branch or facility;
- grant any extension of credit to any of Pacific Bank's executive officers
and directors and related interests other than renewals of existing
credits consistent with normal policies and applicable law;
- make, acquire or reacquire a participation in a loan or sell any loan,
without regard to the term, that is not in compliance with normal credit
underwriting policies and procedures as in effect on June 30, 1999;
- renew, extend the maturity of, or alter any material terms of any loan for
a period greater than six months;
- reduce any material accrual or reserve or change the methodology by which
accrual and reserve accounts have been handled in the past, unless
required to do so by generally accepted accounting principles or
applicable law;
- file a 1999 or 2000 income tax return on Form 1120;
- take any action that is reasonably likely to adversely affect Pacific
Bank's ability to perform its covenants or agreements under the merger
agreement;
- consummate a foreclosure proceeding with respect to non-residential land
or properties, unless a Phase I environmental report has been obtained and
City National consents in writing;
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- sell any charged-off loan or settle any loan with a balance of $150,000 or
more for less than 50% of the amount of the total obligation;
- take any action that would prevent the transaction contemplated by the
merger agreement from qualifying as a tax free reorganization;
- compromise, settle or adjust any assertion or claim of a deficiency in
taxes, extend the statute of limitations with any tax authority or file
any pleading in court on any tax litigation or any appeal from an asserted
deficiency;
- amend any federal, foreign, state or local tax return, or make any tax
election;
- change any method or period of tax accounting unless and until required to
do so by an appropriate tax authority;
- release any claim or take any action that will affect the value or rights
with respect to the capital stock or surplus note of American Star; and
- incur or expend non-interest expenses in any month which materially exceed
amounts incurred in any month of the six-month period ended June 30, 1999.
The merger agreement also provides that, during the period from
September 21, 1999 to the completion of the merger, Pacific Bank will:
- use its reasonable efforts to maintain its business, employees and
advantageous customer relationships and to continue to develop customer
relationships and to retain the services of its officers and key
employees;
- maintain its assets and properties in good condition and repair, obsolete
items and normal wear and tear excepted;
- use its reasonable efforts to maintain in full force and effect insurance
comparable in amount and scope as the time of the merger agreement;
- perform its material contractual obligations;
- charge off all uncollectible loans and assets;
- maintain the allowance for loan and lease losses, as determined in
accordance with generally accepted accounting principles;
- duly observe and conform in all material respects to all lawful
requirements applicable to its business;
- comply in all material respects with government guidelines concerning year
2000 compliance;
- cooperate in all reasonable respects with City National in accomplishing
the merger;
- cooperate and use all reasonable efforts in assisting City National in
obtaining consents and cooperation from all third-party vendors and other
parties with whom Pacific Bank has material agreements;
- use all reasonable efforts in assisting City National in a successful
conversion of their data and other files and records including the hiring
of outside contractors to assist in the conversion;
- provide access to information to City National and permit City National to
make copies of such information;
- provide, on a monthly basis and in a timely manner, financial statements,
loan reports, investment reports, customer loan and deposit information,
and any other updated reports prepared in the ordinary course of business;
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- take no action which is likely to affect or delay the ability of City
National, City National Bank or Pacific Bank to obtain any necessary
regulatory approvals;
- perform its covenants or agreements under the merger agreement in a timely
manner;
- permit City National and City National Bank to conduct joint calls upon
customers of Pacific Bank with representatives of Pacific Bank on a
schedule to be agreed upon;
- promptly notify City National if Pacific Bank receives, from any tax
authority, any of the following:
- a notification of the commencement of an audit;
- a request to extend the statute of limitations;
- a statutory notice of deficiency;
- a revenue agent's report;
- a notice of proposed assessment; or
- any other notification of potential adjustment of Pacific Bank's tax
liability;
- promptly notify City National of any actual or threatened collection
enforcement activity by any tax authority; and
- file all required federal, state and local tax returns and reports in a
timely and proper fashion.
The merger agreement provides that, during the period from September 21,
1999 to the completion of the merger, City National will not:
- take any action which is likely to affect or delay the ability of City
National, City National Bank or Pacific Bank to obtain any necessary
regulatory approvals or to perform its covenants or agreements under the
merger agreement in a timely manner; or
- amend its certificate of incorporation in any way that adversely affects
the rights and privileges of City National common stock.
The merger agreement provides that, during the period from September 21,
1999 to the completion of the merger, City National will:
- upon reasonable request by Pacific Bank, make its chief financial officer
and controller available to discuss City National's on going diligence and
review of Pacific Bank's operations;
- provide Pacific Bank with written information similar to the information
Pacific Bank reviewed in connection with the merger agreement and other
information related to City National's business and operations; and
- cause its representatives and subsidiaries to keep confidential any
information obtained in conducting the merger and all related
investigations.
The merger agreement also provides that each party will:
- use its reasonable efforts to promptly do all things necessary, proper or
advisable under applicable laws and regulations to consummate the
transactions contemplated by the merger agreement;
- consult with the other before it issues any press release or makes any
public statement with respect to the merger unless one party determines,
on advice of counsel, that disclosure is required by law; and
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- give the other party prompt notice of:
- any material change in its business operations;
- the initiation or threat of material litigation;
- any complaints, investigations or hearings of any government agency;
- any event or condition that is likely to cause or causes breach of the
merger agreement; and
- any event or condition that is likely to cause or causes any
representations and warranties in the merger agreement to become untrue.
The merger agreement also provides that Pacific Bank will:
- cooperate to allow City National to review certain loans and leases booked
at or originated by Pacific Bank's Hong Kong office at least seven days
before completion of the merger. Among the loans and leases City National
will review are:
- all loans with outstanding unpaid principal balances of $2,000,000 or
more;
- all leases where Pacific Bank is the lessor with outstanding unpaid
principal balances of $2,000,000 or more;
- all undrawn commitments of $2,000,000 or more; and
- all undrawn commitments subject to renewal for $2,000,000 or more.
The review will be conducted using Pacific Bank's July 31, 1999 evaluations
of such loans and leases as a reference point. If City National concludes
that the condition of such loans and leases has deteriorated since July 31,
1999, Pacific Bank's allowance for loan and lease losses will be adjusted
upward through a charge to Pacific Bank's income. Any disagreement regarding
the adjustment will be resolved by a final determination from
PricewaterhouseCoopers. If PricewaterhouseCoopers is not available or has a
conflict of interest, then a third party chosen by both City National and
Pacific Bank will make the final determination. PricewaterhouseCoopers or
the other third party shall use the same loan grading system and methodology
in its final determination as Pacific Bank used when it evaluated the loans
and leases originating from the Hong Kong office on July 31, 1999. Any
adjustment will then be reflected in Pacific Bank's consolidated financial
statements as of the last day of the last month ended before the merger is
completed.
AMENDMENT AND WAIVER
Subject to applicable law, the merger agreement may be amended by either
City National or Pacific Bank at any time before completion of the merger if
both parties agree in writing and both Boards of Directors approve the
amendment. However, any amendment which reduces or changes the consideration to
be received by Pacific Bank shareholders which is made after the Pacific Bank
shareholders have already approved the merger agreement must also be approved by
the Pacific Bank shareholders to be valid.
Before completion of the merger, any provision of the merger agreement may
be waived by either the benefited party or if both parties agree, unless
prohibited by law.
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SHAREHOLDER AGREEMENTS WITH DIRECTORS OF PACIFIC BANK
City National has entered into a shareholder agreement with each director of
Pacific Bank. Pursuant to the agreement, each director of Pacific Bank has
agreed to vote his shares in favor of the merger agreement at the special
shareholders' meeting and to grant a proxy to City National for these shares.
RESALES OF CITY NATIONAL COMMON STOCK BY PACIFIC BANK SHAREHOLDERS
The shares of City National common stock to be issued to you in the merger
will be registered under the Securities Act. These shares may be traded freely
and without restrictions by you if you are not an affiliate of Pacific Bank as
defined by the Securities Act. An affiliate of Pacific Bank is any person or
entity that directly or indirectly controls or is controlled by Pacific Bank.
Affiliates generally include directors, certain executive officers and holders
of 10% or more of Pacific Bank's common stock. Affiliates must comply with
rule 145 of the Securities Act before trading or selling any City National
common stock they receive.
Prior to completion of the merger, each affiliate of Pacific Bank is
required to deliver to City National an agreement that such person or entity
will not dispose of any City National common stock in violation of the
Securities Act.
STOCK OPTION AGREEMENT
GENERAL. As an inducement and condition to City National entering into the
merger agreement, Pacific Bank entered into a stock option agreement with City
National, dated September 21, 1999. City National and Pacific Bank believe this
summary describes all material terms of the stock option agreement. However,
City National and Pacific Bank recommend that you read carefully the complete
text of the stock option agreement for its precise legal terms and other
information that may be important to you. The stock option agreement is included
in this proxy statement/prospectus as Annex B.
In the stock option agreement, Pacific Bank granted to City National an
option to purchase up to 995,900 authorized but unissued shares of Pacific Bank
common stock at a price of $19.00 per share. The option is exercisable only
under limited and specifically defined circumstances, none of which, to the best
of Pacific Bank's or City National's knowledge, has occurred as of the date of
this proxy statement/prospectus. The number of shares subject to the option may
not exceed 19.9% of Pacific Bank's outstanding stock at the time of exercise.
The number and purchase price of the shares under the option is subject to
adjustment if Pacific Bank changes its capital structure.
The option is intended to increase the likelihood City National and Pacific
Bank will complete the merger in accordance with the terms of the merger
agreement. The option may also be expected to discourage offers by third parties
to acquire Pacific Bank before completion of the merger.
The option significantly increases the cost of a proposed transaction to a
potential acquirer when compared to the cost if the stock option agreement did
not exist. This increased cost might encourage a potential acquirer to pay a
lower price per share to acquire Pacific Bank than it might otherwise have been
willing to pay. In addition, the management of Pacific Bank believes that
exercise of the option is likely to prohibit any reasonably foreseeable acquirer
of Pacific Bank from accounting for any acquisition of Pacific Bank under the
pooling of interests accounting method, thereby further diminishing Pacific
Bank's attractiveness to such an acquirer. Finally, since by exercising the
option, City National could become a significant shareholder of Pacific Bank,
exercise of the option increases the ability of City National to have Pacific
Bank's shareholders approve the merger with City National. Also with a
significant amount of Pacific Bank's shares in the hands of City National, a
third party will find it more difficult to obtain Pacific Bank shareholder
approval for an alternative transaction.
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City National may exercise the option, in whole or in part, and in
accordance with applicable law, upon occurrence of specific circumstances
referred to as "purchase events" in the stock option agreement. These purchase
events all involve some type of attempt by a third party to acquire an interest
in or take over Pacific Bank. When one of these events occurs, City National may
elect to exercise its option and purchase the Pacific Bank shares it is entitled
to. To the extent the option is not exercised, it will terminate and be of no
further force and effect upon the earliest of:
- the completion of the merger;
- the date the merger agreement is terminated pursuant to mutual agreement
by the parties or a significant decline in the price of City National
common stock;
- the date the merger agreement is terminated by Pacific Bank or City
National due to a material breach, or denial of an approval, consent or
waiver by a governmental authority required to consummate the merger;
- the date the merger agreement is terminated by Pacific Bank or City
National because the merger is not consummated by July 1, 2000;
- the date the merger agreement is terminated by Pacific Bank or City
National because Pacific Bank's shareholders do not approve the merger;
- the date the merger agreement is terminated by City National because the
Board of Directors of Pacific Bank has withdrawn, modified or changed its
approval or recommendation of the merger; or
- twenty four months after the earliest to occur of:
- the date of any termination of the merger agreement under reasons other
than those described above; or
- the date of the first occurrence of a "purchase event."
As mentioned above, City National may exercise the option only upon the
occurrence of certain purchase events. A purchase event will have occurred and
City National may elect to exercise its option when:
- Pacific Bank or any subsidiary of Pacific Bank enters into an agreement
with a third party to:
- merge or consolidate with, or enter into any similar transaction with
Pacific Bank or any subsidiary of Pacific Bank;
- acquire all or substantially all of the assets of Pacific Bank; or
- acquire 15% or more of the voting shares of Pacific Bank;
- a third party acquires the beneficial ownership or the right to acquire
beneficial ownership of 15% or more of the voting shares of Pacific Bank;
- a public announcement by Pacific Bank or any person or entity involved
with Pacific Bank authorizing, recommending or endorsing an acquisition
transaction, exchange offer or tender offer involving a third party;
- a public announcement by Pacific Bank or any person or entity involved
with Pacific Bank of an intention to authorize, recommend or endorse an
acquisition transaction, exchange offer or tender offer involving a third
party;
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- the shareholders of Pacific Bank do not approve the merger at the special
shareholders' meeting or the Pacific Bank Board of Directors withdraws or
modifies its recommendation that the shareholders approve the merger,
after public announcement that a third party has:
- disclosed an intention to make an acquisition proposal,
- commenced a tender offer, or
- filed an application (or given notice) with a bank regulatory authority
seeking approval to engage in an acquisition transaction and such
application has been accepted for processing; or
- after a proposal to engage in an acquisition transaction is made by a
third party to Pacific Bank or any of its subsidiaries, or such third
party states its intention to make such a proposal if the merger agreement
is terminated or the option expires, Pacific Bank willfully breaches any
covenant or obligation contained in the merger agreement and following
such breach City National would be entitled to terminate the merger
agreement.
Notwithstanding the foregoing, Pacific Bank is not obligated to issue the
shares under the stock option agreement even after City National exercises the
option if:
- required governmental or regulatory waivers, consents or approvals
necessary for Pacific Bank to issue such shares have not been obtained;
- required governmental or regulatory waivers, consents or approvals
necessary for City National or any transferee to exercise the option have
not been obtained;
- any waiting period required by law has not expired;
- any injunction or other order, decree or ruling issued by any federal or
state court of competent jurisdiction which prohibits the sale or delivery
of the option shares is in effect; or
- at such time City National is in material breach of the agreements or
covenants contained in the merger agreement.
As used in the stock option agreement, a "preliminary purchase event" will
have occurred when:
- any third party commences or files a registration statement under the
Securities Act with respect to a tender offer or exchange offer to
purchase any shares of Pacific Bank common stock, such that the third
party would own or control 10% or more of the shares of Pacific Bank
common stock;
- any third party files an application with a bank regulatory authority for
approval to engage in an acquisition transaction, exchange offer or tender
offer; or
- Pacific Bank or any of its subsidiaries enters into an agreement with any
third party for them to purchase or otherwise acquire securities
representing 10% or more of the voting shares of Pacific Bank.
As of the date of this proxy statement/prospectus, no preliminary purchase
event or purchase event has occurred.
PURCHASE OF OPTION SHARES AND OPTIONS BY PACIFIC BANK. After having
exercised any option in whole or in part, City National will have the right to
require Pacific Bank to purchase some or all of the option shares at a purchase
price per share equal to the higher of:
- $19.00;
- the highest price paid or agreed to be paid for shares of Pacific Bank
common stock by any third party proposing an acquisition of Pacific Bank
during the year preceding the purchase;
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- the highest closing price for shares of Pacific Bank common stock as
reported on the Nasdaq National Market during the 90 days preceding the
purchase; and
- in the event of a sale of all or substantially all of Pacific Bank's
assets, the total value of the purchased and remaining assets of Pacific
Bank divided by the number of shares of Pacific Bank common stock then
outstanding.
LISTING AND REGISTRATION RIGHTS. The stock option agreement provides that
Pacific Bank, if required, will promptly file an application to authorize the
Pacific Bank shares for listing or trading or quotation on the Nasdaq National
Market or other securities exchange.
SUBSTITUTE OPTION. The stock option agreement provides that if Pacific Bank
agrees to be acquired through merger or other business combination then the
agreement governing that transaction shall provide that City National's option
will, upon consummation of any stock transaction, be converted into an option to
acquire securities of the acquiror.
PROFIT LIMITATION. The stock option agreement provides that City National's
total profit with respect to the option may not exceed $7.5 million.
NEW YORK STOCK EXCHANGE LISTING
City National is making an application to list the shares of City National
common stock to be issued in the merger on the New York Stock Exchange. The
stock must be authorized for listing on the New York Stock Exchange for the
merger to proceed.
REGULATORY APPROVALS FOR THE MERGER
Under the merger agreement, City National and Pacific Bank have agreed to
use their commercially reasonable efforts to obtain all necessary actions or
nonactions, extensions, waivers, consents and approvals from any governmental
authority necessary, proper or advisable to consummate the transactions
contemplated by the merger agreement. Such approvals include notices to, and/or
the approvals of the Comptroller of the Currency and the Federal Reserve Board.
The closing of the merger is conditioned upon the receipt of all approvals
of regulatory authorities required for the merger without the imposition of any
conditions or requirements that would in the good faith judgment of City
National be materially burdensome to it or City National Bank. Such a condition
or requirement could relate to the raising of capital or the disposition of
assets.
COMPTROLLER OF THE CURRENCY. The merger is subject to approval by the
Comptroller of the Currency because City National Bank and Pacific Bank are both
national banks, and the Comptroller of the Currency has primary jurisdiction
over this bank merger.
City National Bank filed the application for approval of the Comptroller of
the Currency on November 2, 1999, which was approved on December 29, 1999,
subject to the receipt of approval of the merger agreement by the Pacific Bank
shareholders.
FEDERAL RESERVE BOARD. The merger of Pacific Bank and City National is
subject to prior notice to the Federal Reserve Board under Section 3 of the Bank
Holding Company Act. City National has given such prior notice.
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DISSENTING SHAREHOLDERS' RIGHTS
GENERAL
If you do not wish to accept the $29 cash and/or City National common stock
offered for each of your shares of Pacific Bank as part of the merger, you have
the right to dissent from the merger under Section 215a of Title 12 of the
United States Code. If you dissent you have the right to seek an appraisal of
your shares if you comply with the relevant provisions of Section 215a.
The following is intended as a brief summary of the procedures you must
follow in order to dissent from the merger and obtain appraisal rights. This
summary is not a complete statement of all requirements and City National and
Pacific Bank strongly recommend that you read carefully the complete text of
Section 215a which is set forth in Annex D. If you fail to follow the steps
required by Section 215a for obtaining appraisal rights you may lose these
rights. If you do wish to dissent from the merger and seek appraisal of your
shares you should consult a legal advisor.
WHO MAY EXERCISE APPRAISAL RIGHTS
Generally only the registered holder of the Pacific Bank common stock has
appraisal rights. The registered holder is the person whose name appears on the
stock certificate. If you are not the registered holder, you may still request
appraisal on behalf of a registered holder in limited circumstances, such as in
a fiduciary capacity or as an authorized agent. The request must clearly
identify and state the registered holder's name as it appears on his or her
stock certificate(s) and, if you are making the request on behalf of the
registered holder, you must also disclose that you are the registered holder's
agent and are acting on his or her behalf.
If you are the beneficial owner and not the registered holder, you must have
the registered holder submit the required demand in respect of such shares. If
you have your shares in a brokerage account or in other nominee form and wish to
exercise appraisal rights, you should consult with your broker or other nominees
to determine the appropriate procedures.
If you own shares in a fiduciary capacity, such as a trustee, guardian or
custodian, you may make demand for appraisal in such a capacity on behalf of the
registered holder. Similarly, if you are the authorized agent of the registered
holder, you may request appraisal on the registered holder's behalf. If the
registered holder is more than one person, such as in a joint tenancy or tenancy
in common, demand must be made by or for all joint owners.
A registered holder, such as a broker, who holds shares as nominee for
others, may exercise his or her right of appraisal with respect to some of the
shares held while not exercising this right for other shares held on behalf of
other beneficial owners. In such case, the written demand should state the
number of shares as to which appraisal is being sought. Where no number of
shares is expressly mentioned, the demand will be presumed to cover all shares
held in the name of such registered holder.
ELECTING APPRAISAL RIGHTS
If you are the registered holder of Pacific Bank common stock or are acting
on behalf of a registered holder and are authorized to do so (as discussed
above), to exercise appraisal rights you must:
- vote against the merger at the special shareholders' meeting, or
- give notice in writing that you want to dissent and deliver the notice to
Carol Petricka, Corporate Secretary of Pacific Bank, 351 California St.,
San Francisco, California 94104, at the meeting or before the meeting.
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After satisfying either of the two conditions above, and otherwise complying
with the procedures of Section 215a for the exercise of dissenters' rights, you
will be entitled to receive the value of your shares of Pacific Bank common
stock as determined in the manner described below. To receive your money you
must make a written request to City National within 30 days after completion of
the merger. The request should state that you want City National to purchase
your shares and must be accompanied by the stock certificates for which you seek
appraisal rights. The request and stock certificates should be mailed to:
City National Corporation
Attn: Barbara S. Polsky, Esq.
City National Center
400 North Roxbury Drive
Beverly Hills, California 90210-5021
If you fail to comply with any of the above conditions and the merger has
been completed, you will lose your dissenters' right. If this happens, you will
still be entitled to receive either cash and/or City National common stock for
your shares of Pacific Bank common stock as provided for in the merger
agreement. However, City National will now determine whether you will receive
cash or City National common stock.
DETERMINING VALUE OF DISSENTING SHAREHOLDERS' SHARES
Section 215a(c) outlines the procedure for determining the value of your
shares. The value of your shares will be determined as of the day the merger is
completed by a committee of three people. The committee will consist of:
(1) one person who is selected by the majority of the shares owned by all
dissenting shareholders;
(2) one person selected by the Board of Directors of City National; and
(3) one person chosen by the two appraisers selected as provided in (1) and
(2) above.
The value of your shares will then be the value which two of the three
people on the committee agree upon. If any dissenting shareholder is not
satisfied with this value, that shareholder may appeal to the Comptroller of the
Currency within five days after being notified of the appraised value. The
Comptroller of the Currency must then reappraise the shares. This reappraisal
will then be the final and binding value of all dissenting shares.
If 90 days have passed since completion of the merger and either one or more
of the appraisers has not been selected or the appraisers have not determined an
appraisal value, then any shareholder can make a written request to the
Comptroller of the Currency to make an appraisal. The Comptroller of the
Currency's appraisal will then be final and binding on all parties.
The expenses of the Comptroller of the Currency in making the appraisal or
reappraisal, as the case may be, must be paid by City National. Unless City
National or the dissenting shareholders seek judicial review of the appraisal,
City National must promptly pay the appraised value of the shares to the
dissenting shareholders out of the funds deposited in an escrow account
established for that purpose.
The Comptroller of the Currency uses various methods to determine the fair
value of the shares being appraised. If you are considering seeking appraisal,
you should be aware that the fair value of the shares as determined under
Section 215a could be same as, less than or more than, the value of the cash
and/or stock you would otherwise receive from City National under the merger
agreement. Also you should be aware that investment banking opinions as to
fairness from a financial point of view, including the Keefe, Bruyette opinion
described in and attached to this proxy statement/prospectus, are
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not opinions as to fair value under Section 215a and may indicate a higher or
lesser fair value than the appraisal value under Section 215a.
Section 215a also requires that City National must sell all City National
stock that it would have otherwise delivered to dissenting shareholders at a
public auction. If these shares are then sold for more than the amount paid to
the dissenting shareholders, the excess of such sale price must be paid to the
dissenting shareholders. City National is entitled to purchase any of these
shares at such public auction if it is the highest bidder and then sell these
shares within 30 days at no less than par value to any person determined by the
City National Board of Directors.
DESCRIPTION OF CAPITAL STOCK OF
CITY NATIONAL AND PACIFIC BANK
In the merger, you may elect to exchange your shares of Pacific Bank common
stock for cash, shares of City National common stock or a combination of cash
and shares of City National common stock. City National is a Delaware
corporation subject to the provisions of Delaware law. Pacific Bank is a
national banking association subject to the provisions of the National Bank Act.
If you elect and receive City National common stock, you will become a
stockholder of City National.
Set forth below is a summary of the material features of the City National
common stock and the Pacific Bank common stock. This summary is not a complete
discussion of the charter documents and other instruments of City National and
Pacific Bank that create the rights of the security holders.
CITY NATIONAL
GENERAL. City National has authority to issue 75,000,000 shares of City
National common stock and 5,000,000 shares of preferred stock. As of
January 19, 2000, there were 45,466,822 shares of City National common stock
outstanding. There are no shares of preferred stock outstanding. On any matter
submitted to a vote of the stockholders, holders of City National common stock
are entitled to one vote, in person or by proxy, for each share of City National
common stock held of record in the stockholder's name on the City National books
as of the record date. Holders of City National common stock do not have the
right to cumulate votes at any election of directors. Holders of City National
common stock are entitled to dividends when declared by the City National Board
of Directors, after satisfaction of the prior rights of holders of outstanding
preferred stock, if any. Each share of City National common stock has the same
rights, privileges and preferences as every other share and will share equally
in City National's net assets upon liquidation or dissolution. City National's
common stock has no preemptive, conversion or redemption rights, or sinking fund
provisions.
The City National Board of Directors, without stockholder approval, may
authorize one or more classes of preferred stock with preferences or voting
rights that may adversely affect the rights of holders of City National common
stock. Although it is not possible to state the actual effect any issuance of
preferred stock might have upon the rights of holders of City National common
stock, the issuance of preferred stock might
- restrict dividends on City National common stock if preferred stock
dividends have not been paid;
- dilute the voting power and equity interest of holders of City National
common stock to the extent that any preferred stock series has voting
rights or is convertible into City National common stock; or
- prevent current holders of City National common stock from participating
in City National's assets upon liquidation until any liquidation
preferences granted to the holders of the preferred stock are satisfied.
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In addition, City National's issuance of preferred stock, may, under certain
circumstances, have the effect of discouraging an attempt to change control of
City National.
City National's certificate of incorporation provides that the liability of
City National directors for monetary damages is eliminated to the fullest extent
permissible under Delaware law.
RIGHTS AGREEMENT. On February 26, 1997, the Board of Directors of City
National adopted a Rights Agreement under which preferred stock purchase rights
were distributed as a Rights dividend on March 13, 1997 at the rate of one Right
for each share of City National common stock held as of the close of business on
that date. Until the Distribution Date, (1) the Rights are not exercisable,
(2) the Rights are attached to and trade only together with the City National
common stock, and (3) the stock certificates representing City National common
stock also represent the Rights attached to the City National common stock. Each
share of City National common stock issued after March 13, 1997 and prior to the
Distribution Date incorporates the terms of the Rights Agreement and includes
one Right.
The Distribution Date is the earliest of:
- the tenth business day following the date of the first public announcement
that any person, with certain exceptions, has become the beneficial owner
of 10% or more of the then outstanding shares of City National common
stock. Such person is a 10% Stockholder and the date of such public
announcement is the 10% Ownership Date.
- the tenth business day, or such later day designated by the City National
Board of Directors, following the date of commencement of, or the
announcement of an intention to make, a tender offer or exchange offer,
the consummation of which would cause any person to become a 10%
Stockholder, or
- the first date, on or after the 10% Ownership Date, upon which City
National is acquired by merger or other business combination in which City
National is not the surviving entity or in which the outstanding shares of
common stock are changed into or exchanged for stock or assets of another
person, or upon which 50% or more of City National's consolidated assets
or earning power are sold (other than in transactions in the ordinary
course of business).
Upon the close of business on the Distribution Date, the Rights will
separate from the City National common stock, Rights certificates will be
issued, and the Rights will become exercisable as described below.
Unless the Rights have expired or been redeemed or exchanged, after the
Distribution Date, each Right may be exercised, at the option of the holders, to
purchase one of the following:
- one-hundredth of one share of Series A Junior Participating Cumulative
Preferred Stock of City National, at an exercise price of $90.00, which
will have rights similar to one share of City National common stock except
that each whole share has only one vote per share;
- from and after the close of business on the tenth business day following
the 10% Ownership Date, shares of City National common stock with a market
value equal to twice the exercise price; or
- if, on or after the 10% Ownership Date,
- City National is sold to or merged with another person or entity and is
not the surviving corporation or all or part of the City National common
stock is exchanged for the stock or assets of another person or entity
or 50% or more of City National's assets or earning power are sold,
shares of common stock of the surviving corporation or purchaser with an
aggregate market value equal to twice the exercise price.
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- From and after the first event of the type described in the last point
above, each Right that is beneficially owned by a 10% Stockholder will
be void.
The exercise price, the number of outstanding Rights and the number of
shares of Series A Junior Participating Cumulative Preferred Stock or shares of
City National common stock issuable upon exercise of the Rights are subject to
adjustment from time to time as set forth in the Rights Agreement in order to
prevent dilution.
The Rights expire on March 13, 2007, unless earlier redeemed or exchanged,
unless the Distribution Date has previously occurred and the Rights have
separated from the City National common stock, in which case the Rights will
remain outstanding for ten years.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. Section 203 of the
Delaware General Corporation Law prevents a Delaware corporation from engaging
in a "Business Combination" as described below, with an "Interested
Stockholder," generally defined as a person with 15% or more of a corporation's
outstanding voting stock, for three years following the date such person became
an Interested Stockholder unless: (1) before such person becomes an Interested
Stockholder, the Board of Directors of the corporation approved either the
Business Combination or the transaction in which the Interested Stockholder
became an Interested Stockholder; (2) upon consummation of the transaction in
which the Interested Stockholder became an Interested Stockholder, the
Interested Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding stock held by the
directors who are also officers and employee stock ownership plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (3) following the date on which such person became an Interested Stockholder,
the Business Combination is approved by the Board of Directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of at least 66 2/3% of the outstanding voting stock of the corporation not owned
by the Interested Stockholder.
Under Section 203, the restrictions described above apply to City National
unless, among other things, (1) by the affirmative vote of a majority of shares
entitled to vote, it adopts an amendment to the City National certificate of
incorporation or the City National bylaws expressly electing not to be governed
by Section 203. Such an amendment would not be effective until 12 months after
its adoption and would not apply to any Business Combination between City
National and any person who became an Interested Stockholder on the date of such
adoption; or (2) no class of City National's voting stock is (A) listed on a
national securities exchange, (B) authorized for quotation on an inter-dealer
quotation system of a registered national securities association or (C) held of
record by more than 2,000 stockholders, unless any of the foregoing results from
action taken, directly or indirectly, by an Interested Stockholder or from a
transaction in which a person becomes an Interested Stockholder.
A Business Combination is defined in Section 203 as (1) a merger or
consolidation; (2) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of the aggregate market value of either all assets of the corporation
determined on a consolidated basis or all the outstanding stock of a
corporation; (3) any transaction which results in the issuance or transfer by
the corporation, or by certain subsidiaries thereof, of any of its stock to the
Interested Stockholder, except pursuant to (A) the exercise, exchange or
conversion of securities exercisable for, exchangeable for or convertible into
stock of the corporation or any subsidiary which were outstanding prior to the
time the stockholder became an Interested Stockholder or (B) a transaction which
effects a pro rata distribution to all stockholders of the corporation; (4) any
transaction involving the corporation or certain subsidiaries thereof which has
the effect of increasing the proportionate share of the stock of any class or
series, or securities convertible into the stock of any class or series, of the
corporation or any such subsidiary which is owned directly or indirectly by the
Interested Stockholder (except as a result of immaterial changes due to
fractional share
58
<PAGE>
adjustment); or (5) any receipt by the Interested Stockholder of the benefit
(except proportionately as a stockholder of such corporation) of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
PACIFIC BANK
Pacific Bank has authority to issue 21,000,000 shares of common stock. At
the record date, there were 5,008,948 shares of Pacific Bank common stock issued
and outstanding. On any matter submitted to a vote of the shareholders, holders
of Pacific Bank common stock are entitled to one vote in person or by proxy, for
each share of Pacific Bank common stock held of record in the shareholder's name
on the Pacific Bank books as of the record date. In connection with the election
of directors, the shares may be voted cumulatively. Each share of Pacific Bank
common stock has the same rights, privileges and preferences as every other
share and will share equally in Pacific Bank net assets upon liquidation or
dissolution. The stock has no preemptive, conversion or redemption rights, or
sinking fund provisions.
Shareholders are entitled to dividends when declared by the Pacific Bank
Board of Directors and may be subject to certain restrictions under the National
Bank Act.
COMPARISON OF RIGHTS OF HOLDERS OF PACIFIC BANK COMMON STOCK
AND CITY NATIONAL COMMON STOCK
If, pursuant to the terms of the merger agreement, some or all of your
Pacific Bank common stock is converted into City National common stock, you will
become a stockholder of City National.
Pacific Bank is a national banking association regulated by the Comptroller
of the Currency. Your rights as a holder of Pacific Bank common stock derive
from Pacific Bank's articles of association and bylaws and from the National
Bank Act.
City National is a Delaware corporation and the rights of City National
stockholders derive from the City National certificate of incorporation and
bylaws and from the Delaware General Corporation Law.
Certain differences between your rights as a holder of Pacific Bank common
stock and the rights as a City National stockholder are summarized below. The
following summary does not purport to be a complete statement of the rights of
Pacific Bank shareholders and City National stockholders. For a more complete
understanding of all rights of Pacific Bank shareholders and City National
stockholders, City National and Pacific Bank recommend that you read the
complete text of the governing corporate instruments of both Pacific Bank and
City National as well as the applicable law.
CUMULATIVE VOTING
CITY NATIONAL. The City National certificate of incorporation does not
provide for cumulative voting.
PACIFIC BANK. Pacific Bank shareholders are entitled to cumulate votes in
connection with the election of directors.
CLASSIFIED BOARD OF DIRECTORS
CITY NATIONAL. City National's Board of Directors is divided into three
classes of directors, with each class of directors serving for staggered
three-year terms. City National's certificate of incorporation provides for the
election of directors by class for a term of three years and until his or her
successor is elected and qualified.
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<PAGE>
PACIFIC BANK. Neither the National Bank Act nor Pacific Bank's articles of
association or bylaws provides for a classified Board of Directors.
NUMBER OF DIRECTORS
CITY NATIONAL. City National's Board of Directors consists of 12 directors.
The City National certificate of incorporation provides that the Board of
Directors will consist of not less than five and no more than 14 directors and
that the Board of Directors will determine by resolution the actual number of
directors.
PACIFIC BANK. Pacific Bank currently has seven directors. Pacific Bank's
articles of association provide that the number of directors will consist of not
less than five and no more than 25.
QUALIFICATION OF DIRECTORS
CITY NATIONAL. Delaware law, the City National certificate of incorporation
and the City National bylaws do not contain qualifications for directors.
PACIFIC BANK. The National Bank Act requires that a director of a national
banking association must be a citizen of the United States and must own shares
of capital stock of the association the aggregate par value of which is not less
than $1,000.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
CITY NATIONAL. The City National certificate of incorporation and bylaws
provide that vacancies and newly created directorships may be filled by a
majority vote of the directors in office.
PACIFIC BANK. The National Bank Act provides that vacancies, including
those resulting from an increase in the number of directors, may be filled by
the shareholders, a majority of the board of directors remaining in office, or,
if the directors remaining in office constitute less than a quorum, by an
affirmative vote of a majority of all the directors remaining in office.
PAYMENT OF DIVIDENDS
CITY NATIONAL. Delaware law provides that dividends may be paid either out
of a corporation's surplus or, in the event that no surplus exists, from its net
profits, if any, from either the year the dividends were declared or the prior
year. Capital surplus is the excess of the net assets of the corporation over
the stated capital of the corporation. Dividend payments out of net profits are
subject to certain limitations for the benefit of certain preference shares.
PACIFIC BANK. Under the National Bank Act, Pacific Bank may pay dividends
out of undivided profits. However, no dividends may be declared if the surplus
does not equal common capital unless the dividend is an annual dividend and at
least one-tenth of net income for the preceding two consecutive half-year
periods has been carried to surplus. Pacific Bank must also obtain the prior
approval of the Comptroller of the Currency if total dividends declared in any
calendar year exceeds net income for that year combined with retained earnings
for the preceding two years, less any required transfers to surplus or a fund
for the retirement of any preferred stock.
SPECIAL MEETING OF STOCKHOLDERS
CITY NATIONAL. City National's bylaws provide that a special meeting may be
called by the president and must be called by the president or secretary at the
written request of a majority of the Board of Directors.
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<PAGE>
PACIFIC BANK. Pacific Bank's bylaws provide that special meetings of
shareholders may be called for any purpose at any time by the Board of Directors
or by any one or more shareholders owning, in the aggregate, at least 10% of
Pacific Bank's common stock.
RIGHTS OF STOCKHOLDERS TO DISSENT
CITY NATIONAL. Under the Delaware law, appraisal rights are generally
available for the shares of any class or series of stock of a corporation in a
merger or consolidation. No appraisal rights are available for any stock, which
on the date the stockholder meeting to approve the transaction is held, is
listed on a national securities exchange or held by more than 2,000
stockholders. Also no appraisal rights are available to stockholders of the
surviving corporation in a merger if their approval is not required.
Notwithstanding the foregoing, appraisal rights are available for such class or
series if the holders thereof receive in the merger or consolidation anything
except: (1) shares of stock of the corporation surviving or resulting from such
merger or consolidation; (2) shares of stock of any other corporation which at
the effective date of the merger or consolidation is either listed on a national
securities exchange or held of record by more than 2,000 stockholders; (3) cash
in lieu of fractional shares; or (4) any combination of the foregoing.
PACIFIC BANK. Pacific Bank's appraisal rights are described in detail
herein under "DISSENTING SHAREHOLDERS' RIGHTS."
INDEMNIFICATION
CITY NATIONAL. The City National certificate of incorporation provides that
City National will eliminate the personal liability of its directors to the
fullest extent permitted by Delaware law, and City National has entered into
indemnification agreements with its directors providing for additional
indemnification.
Section 145 of Delaware law authorizes City National to indemnify directors
and officers against liabilities and expenses incurred while acting in their
capacity as a director. However, such indemnification is only available if the
director or officer acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation. To receive
indemnification in a criminal proceeding, the director or officer must also have
had no reasonable cause to believe his or her conduct was unlawful.
PACIFIC BANK. Pacific Bank's articles of association provide that the
liability of Pacific Bank directors for monetary damages will be eliminated to
the fullest extent permissible under California law. Additionally, Pacific Bank
has authority to provide for the indemnification of Pacific Bank agents, as
defined in Section 317 of the California General Corporation Law, in excess of
that expressly permitted by Section 317 for breach of duty to the corporation
and its shareholders. Pacific Bank is allowed to provide this indemnification to
the extent not prohibited by applicable sections of California law. However, the
articles of association provide that no indemnification is permitted with
respect to expenses or payments incurred by an agent in an administrative
proceeding instituted by a bank regulatory agency if the proceeding results in a
final order assessing civil monetary penalties or requiring other payments to
Pacific Bank.
CERTAIN VOTING RIGHTS WITH RESPECT TO MERGERS
CITY NATIONAL. Under Delaware law, any merger, consolidation or sale of all
or substantially all of the assets of a corporation that otherwise requires the
approval of the stockholders requires approval by a majority of the outstanding
shares of such corporation, unless a corporation's certificate of incorporation
requires a higher percentage. Whether approval of stockholders is required by
Delaware law, the City National certificate of incorporation requires a higher
percentage with respect to "business combinations" with Restricted Persons as
discussed below.
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A Restricted Person is any entity or group which during any consecutive
12 month period acquired voting securities of City National representing more
than 5% of the outstanding securities of that class. An entity or group ceases
to be a Restricted Person at the end of the 24th month following the month in
which the Restricted Person acquired voting securities of City National within
that month and the preceding 11 months aggregating more than 5% of the
outstanding securities of that class.
A business combination between City National and a Restricted Person
requires the approval of 70% of the outstanding shares. A "business combination"
includes:
- the sale or other disposition of all, substantially all, or any
substantial part of the assets or business of City National or its
subsidiaries;
- the purchase or other acquisition of all, substantially all, or any
substantial part of the assets or business of another person;
- a merger or consolidation;
- any reclassification of securities or recapitalization designed to
decrease the holders of any class of City National's voting securities if,
immediately thereafter, a Restricted Person will be the owner of more than
35% of any such class; and
- the issuance of voting securities or rights, warrants or options to
acquire any securities of City National or a subsidiary to a Restricted
Person.
PACIFIC BANK. The National Bank Act requires the affirmative vote of at
least two-thirds of the outstanding capital stock of a national banking
association to approve a merger, consolidation or sale of substantially all of
the assets of a national banking association. Pacific Bank's articles of
association do not require a higher percentage.
PREEMPTIVE RIGHTS
CITY NATIONAL. The City National certificate of incorporation does not
provide for preemptive rights.
PACIFIC BANK. The Pacific Bank articles of association do not provide for
preemptive rights.
SHAREHOLDER ACTION BY WRITTEN CONSENT
CITY NATIONAL. The City National certificate of incorporation provides that
any action which is required to be taken or may be taken at a meeting of
stockholders, may be taken by the written consent of the holders of not less
than a majority of the stock entitled to vote upon such action if a meeting were
held.
PACIFIC BANK. Neither the National Bank Act nor Pacific Bank's articles of
association provide for shareholder action by written consent.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND ARTICLES OF ASSOCIATION
CITY NATIONAL. Under Delaware law, the City National certificate of
incorporation may be amended only if the amendment is first proposed by the City
National Board of Directors and is approved by a majority of outstanding shares
entitled to vote thereon. Where the rights of a certain class of shares is
affected by the amendment, a majority of that class of shares must also approve
the amendment, regardless if such class is otherwise entitled to vote on the
amendment.
PACIFIC BANK. Under the National Bank Act and Pacific Bank's articles of
association, Pacific Bank's articles of association may be amended if the
amendment is approved by the holders of a majority of the voting shares of
Pacific Bank.
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<PAGE>
AMENDMENT OF BYLAWS
CITY NATIONAL. The City National bylaws may be made, altered, amended or
repealed by the Board of Directors or the stockholders.
PACIFIC BANK. The Pacific Bank bylaws may be amended or repealed by the
Board of Directors or shareholders.
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EXPERTS
The consolidated financial statements of City National as of December 31,
1998 and 1997, and for each of the years in the three-year period ended
December 31, 1998, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, incorporated by reference herein, and upon the authority of said firm
as experts in accounting and auditing.
The consolidated financial statements of Pacific Bank as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 included in this proxy statement/ prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report which can
be found in Annex E of this proxy statement/prospectus (which report expresses
an unqualified opinion and includes an explanatory paragraph referring to the
restatement of the 1998 financial statements) and have been so included herein
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
Pacific Bank special shareholders' meeting. Such representatives will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of City National common stock to be issued
pursuant to the terms of the merger agreement will be passed upon for City
National by Barbara S. Polsky, General Counsel of City National. The material
federal income tax consequences of the merger will be passed upon for City
National by Manatt, Phelps & Phillips, LLP, Los Angeles, California.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
September 30, 1999 combines the historical consolidated balance sheets of City
National and Pacific Bank as if the merger had been effective on September 30,
1999, after giving effect to the purchase accounting and other merger-related
adjustments described in the notes to pro forma condensed combined financial
statements. The unaudited pro forma condensed combined statements of income for
the nine months ended September 30, 1999 and for the year ended December 31,
1998 present the combined results of operations of City National and Pacific
Bank as if the merger had been effective at the beginning of each period, after
giving effect to the purchase accounting and other merger-related adjustments
described in the accompanying notes. Dollars are in thousands except for per
share data.
The unaudited pro forma condensed combined financial information and
accompanying notes reflect the application of the purchase method of accounting
for the merger. Under this method of accounting, the purchase price will be
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the closing. As described in the accompanying notes,
estimates of the fair values of Pacific Bank's assets and liabilities have been
combined with recorded values of the assets and liabilities of City National.
However, changes to the adjustments included in the unaudited pro forma
condensed combined financial statements are expected as evaluations of assets
and liabilities are completed and as additional information becomes available.
See "THE MERGER--Accounting Treatment of the Merger." In addition, the results
of operations of Pacific Bank subsequent to September 30, 1999 will affect the
allocation of the purchase price. Accordingly, the final pro forma combined
amounts will differ from those set forth in the unaudited pro forma condensed
combined financial statements.
The combined company expects to incur merger-related costs and achieve
merger benefits in the form of operating cost savings. The pro forma earnings,
which do not reflect any merger costs or potential savings which are expected to
result from the consolidation of the operations of City National Bank and
Pacific Bank, are not indicative of the results of future operations. No
assurances can be given with respect to the ultimate level of expense savings.
See "A Warning About Forward-Looking Information" and "Risk Factors."
For purposes of preparing these financial statements, City National and
Pacific Bank used the audited consolidated financial statements which City
National previously filed with the Securities and Exchange Commission for the
year ended December 31, 1998 on Form 10-K. In addition, the unaudited
consolidated financial statements of City National previously filed with the
Securities and Exchange Commission for the quarter ended September 30, 1999 on
Form 10-Q were used to prepare the financial statements as of and for the
nine-month period ended September 30, 1999.
For purposes of preparing these financial statements, City National and
Pacific Bank used the audited consolidated financial statements which Pacific
Bank filed with the Comptroller of the Currency for the year ended December 31,
1998 on Form 10-K/A which is included in this document as Annex E. In addition,
the unaudited consolidated financial statements of Pacific Bank filed with the
Comptroller of the Currency for the quarter ended September 30, 1999 on
Form 10-Q/A, which is included in this document as Annex F, were used to prepare
the financial statements as of and for the ninth-month period ended
September 30, 1999.
City National and Pacific Bank consolidated financial statements are
prepared in conformity with generally accepted accounting principles. In the
opinion of City National and Pacific Bank, the unaudited pro forma condensed
combined financial statements include all normal recurring adjustments necessary
to present fairly the results of the periods presented.
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<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PACIFIC PRO FORMA
CITY NATIONAL BANK PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS WITH PACIFIC
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................... $ 307,549 $ 31,492 $(10,954) $ 328,087
Federal funds sold......................... 60,000 27,200 (72,563) 14,637
Securities................................. 1,060,431 141,581 -- 1,202,012
Trading account securities................. 55,082 -- -- 55,082
Loans...................................... 5,171,924 502,359 -- 5,674,283
Less allowance for credit losses........... 139,015 9,345 -- 148,360
---------- -------- -------- ----------
Net loans................................ 5,032,909 493,014 -- 5,525,923
Premises and equipment, net................ 62,674 3,757 (1,200) 65,231
Customers' acceptance liability............ 2,779 8,620 -- 11,399
Deferred tax asset......................... 59,968 7,906 (12,440) 55,434
Goodwill and core deposit intangibles...... 130,152 7,534 78,874 216,560
Bank owned life insurance.................. 44,182 210 -- 44,392
Affordable housing investments............. 45,769 1,294 -- 47,063
Other assets............................... 74,121 8,995 17,200 100,316
---------- -------- -------- ----------
Total assets............................. $6,935,616 $731,603 $ (1,083) $7,666,136
========== ======== ======== ==========
LIABILITIES
Demand deposits............................ $2,296,288 $138,908 $ -- $2,435,196
Interest bearing deposits.................. 3,014,449 500,631 -- 3,515,080
---------- -------- -------- ----------
Total deposits........................... 5,310,737 639,539 -- 5,950,276
Federal funds purchased and securities sold
under repurchase agreements.............. 347,498 -- -- 347,498
Other short-term borrowings................ 341,725 -- -- 341,725
Subordinated debt.......................... 123,405 -- -- 123,405
Long-term debt............................. 180,000 -- -- 180,000
Other liabilities.......................... 69,084 10,295 -- 79,379
Acceptances outstanding.................... 2,779 8,620 -- 11,399
---------- -------- -------- ----------
Total liabilities........................ 6,375,228 658,454 -- 7,033,682
SHAREHOLDERS' EQUITY
Total shareholders' equity............... 560,388 73,149 (1,083) 632,454
---------- -------- -------- ----------
Total liabilities and shareholders'
equity................................. $6,935,616 $731,603 $ (1,083) $7,666,136
========== ======== ======== ==========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
CITY NATIONAL COMPLETED PRO FORMA PRO FORMA PACIFIC BANK PRO FORMA COMBINED WITH
HISTORICAL ACQUISITIONS ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS PACIFIC BANK
------------- ------------ ----------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans..................... $289,502 $14,283 $ -- $303,785 $34,109 $ -- $337,894
Securities................ 47,967 2,787 -- 50,754 5,468 -- 56,222
Trading account
securities.............. 2,126 -- -- 2,126 -- -- 2,126
Federal funds sold and
securities purchased
under resale
agreements.............. 1,416 2,225 -- 3,641 862 (2,985) 1,518
-------- ------- ------- -------- ------- ------- --------
Total interest
income.............. 341,011 19,295 -- 360,306 40,439 (2,985) 397,760
-------- ------- ------- -------- ------- ------- --------
INTEREST EXPENSE............
Deposits.................. 64,412 7,200 -- 71,612 13,452 -- 85,064
Federal funds purchased
and securities sold
under repurchase
agreements.............. 20,952 2 3,254 24,208 13 -- 24,221
Other short-term
borrowings.............. 5,488 138 -- 5,626 16 -- 5,642
Subordinated debt......... 5,712 -- -- 5,712 -- -- 5,712
Other long-term debt...... 9,353 -- -- 9,353 -- -- 9,353
-------- ------- ------- -------- ------- ------- --------
Total interest
expense............. 105,917 7,340 3,254 116,511 13,481 -- 129,992
-------- ------- ------- -------- ------- ------- --------
Net interest income....... 235,094 11,955 (3,254) 243,795 26,958 (2,985) 267,768
Provision for credit
losses.................. 438 -- 438 2,308 -- 2,746
-------- ------- ------- -------- ------- ------- --------
Net interest income after
provision for credit
losses.................. 235,094 11,517 (3,254) 243,357 24,650 (2,985) 265,022
-------- ------- ------- -------- ------- ------- --------
NONINTEREST INCOME.......... 63,997 3,585 -- 67,582 6,188 -- 73,770
NONINTEREST EXPENSE......... 175,104 13,544 3,107 191,755 24,266 4,722 220,743
-------- ------- ------- -------- ------- ------- --------
Income before income
taxes..................... 123,987 1,558 (6,361) 119,184 6,572 (7,707) 118,049
Income taxes................ 43,797 1,289 (1,627) 43,459 2,272 (1,866) 43,865
-------- ------- ------- -------- ------- ------- --------
Net income.................. $ 80,190 $ 269 $(4,734) $ 75,725 $ 4,300 $(5,841) $ 74,184
======== ======= ======= ======== ======= ======= ========
Net income per share,
basic..................... $ 1.75 $ 1.65 $ 1.54
======== ======== ========
Net income per share,
diluted................... $ 1.70 $ 1.61 $ 1.50
======== ======== ========
Shares used to compute net
income per share;
Basic....................... 45,767 45,767 48,269
======== ======== ========
Diluted..................... 47,049 47,049 49,551
======== ======== ========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
CITY NATIONAL ACQUISITIONS PRO FORMA PRO FORMA PACIFIC BANK PRO FORMA COMBINED WITH
HISTORICAL COMPLETED ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS PACIFIC BANK
------------- ------------ ----------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans..................... $365,352 $18,877 $ -- $384,229 $44,368 $ -- $428,597
Securities................ 52,274 5,776 -- 58,050 5,688 -- 63,738
Trading account
securities.............. 2,865 -- -- 2,865 -- -- 2,865
Federal funds sold,
securities purchased
under resale agreements
and other interest
earning assets.......... 3,458 1,913 -- 5,371 2,392 (3,991) 3,772
-------- ------- -------- -------- ------- -------- --------
Total interest income... 423,949 26,566 -- 450,515 52,448 (3,991) 498,972
-------- ------- -------- -------- ------- -------- --------
INTEREST EXPENSE
Deposits.................. 87,237 10,035 -- 97,272 18,397 -- 115,669
Federal funds purchased
and securities sold
under repurchase
agreements.............. 21,824 3 5,602 27,429 5 -- 27,434
Other short-term
borrowings.............. 4,591 333 -- 4,924 51 -- 4,975
Subordinated debt......... 7,912 -- -- 7,912 -- -- 7,912
Other long-term debt...... 8,714 -- -- 8,714 -- -- 8,714
-------- ------- -------- -------- ------- -------- --------
Total interest
expense............... 130,278 10,371 5,602 146,251 18,453 -- 164,704
-------- ------- -------- -------- ------- -------- --------
Net interest income......... 293,671 16,195 (5,602) 304,264 33,995 (3,991) 334,268
Provision for credit
losses.................... -- 205 -- 205 6,000 -- 6,205
-------- ------- -------- -------- ------- -------- --------
Net interest income after
provision for credit
losses.................... 293,671 15,990 (5,602) 304,059 27,995 (3,991) 328,063
-------- ------- -------- -------- ------- -------- --------
NONINTEREST INCOME.......... 67,684 14,828 -- 82,512 8,667 -- 91,179
NONINTEREST EXPENSE......... 211,331 27,391 5,410 244,132 31,700 6,296 282,128
-------- ------- -------- -------- ------- -------- --------
Income before income
taxes..................... 150,024 3,427 (11,012) 142,439 4,962 (10,287) 137,114
Income taxes................ 53,796 1,550 (3,058) 52,288 2,118 (2,494) 51,912
-------- ------- -------- -------- ------- -------- --------
NET INCOME.................. $ 96,228 $ 1,877 $ (7,954) $ 90,151 $ 2,844 $ (7,793) $ 85,202
======== ======= ======== ======== ======= ======== ========
Net income per share,
basic..................... $ 2.08 $ 1.94 $ 1.74
======== ======== ========
Net income per share,
diluted................... $ 2.00 $ 1.87 $ 1.68
======== ======== ========
Shares used to compute net
income per share;
Basic..................... 46,357 46,357 48,859
======== ======== ========
Diluted................... 48,141 48,141 50,643
======== ======== ========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
68
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
BALANCE SHEET
Assuming a final City National stock price of between $28.05 and $37.95, and
assuming 50% of the merger consideration is paid in City National common stock
and 50% is paid in cash, the total consideration value paid to the existing
Pacific Bank shareholders is $145,126,000 (equal to $29.00 per share) with total
cash consideration of $72,563,000 and the balance in City National common stock.
The cash payment of $72,563,000 will be paid from the proceeds from the sale
of Federal funds. The number of shares to be tendered will be contingent upon
the final City National stock price which is the average of the City National
common stock closing price for the 20 consecutive trading days ending on the
third trading day immediately before the completion of the merger. For the
purpose of the unaudited pro forma condensed combined financial statements, the
stock portion of the total consideration value is comprised of the issuance of
1,467,816 shares of City National common stock held as treasury stock as of
September 30, 1999 plus newly issued shares totaling 1,034,348 with an assumed
market value of $29.00. The issuance of the treasury stock is recorded as a
debit to shareholders' equity of $4,255,000 and a credit to treasury stock of
$46,822,000.
The purchase price of $162,926,000 which includes expenses of $10,000,000
directly attributable to the acquisition and a $7,800,000 payment to cash out
existing unexercised stock options is allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at September 30, 1999
in accordance with APB No. 16. The table below reflects the adjustment of
certain assets and liabilities to estimated fair value and the resultant
goodwill. Total goodwill of approximately $65,254,000 is expected to be
amortized over fifteen years. Total core deposit intangibles of approximately
$13,620,000 is expected to be amortized over seven years.
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO
ACQUISITION
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS/LIABILITIES
Cash...................................................... $(10,954)
Core deposit intangibles.................................. 13,620
Fixed Assets.............................................. (1,200)
Deferred taxes created by core deposit intangibles........ (5,720)
Deferred taxes created by other asset adjustment.......... (6,720)
Other assets.............................................. 17,200
Remaining unallocated purchase price (Goodwill)........... 65,254
</TABLE>
Included in the purchase price is $4,700,000 in consolidation costs,
$3,300,000 for change of control payments and payment of the liability under a
Supplemental Executive Retirement Plan, $500,000 for buyout of data processing
contracts and $1,500,000 in legal and investment banking fees, less tax benefits
of $3,570,000. Included in the total adjustment to Other assets is $17,200,000
to record the fair value of a previously charged off surplus note of American
Star Insurance Company in liquidation and to record the estimated net equity of
Pacific Bank's 100% ownership of American Star in liquidation.
STATEMENT OF INCOME
(a) Decrease in interest on Federal funds sold is due to the utilization
of Federal funds sold to fund the cash portion of the purchase price. The
loss in interest income is estimated to be
69
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS (CONTINUED)
$2,985,000 and $3,991,000 for the nine-month period and 12-month period
beginning January 1, 1999 and January 1, 1998, respectively.
(b) Noninterest expense includes the amortization of core deposit
intangibles and goodwill for the nine-month period beginning January 1, 1999
of $1,459,000 and $3,263,000, respectively and for the 12-month period
beginning January 1, 1998 of $1,946,000 and $4,350,000, respectively.
(c) Additional income taxes are computed using a 42% tax rate. The tax
attributes of Pacific Bank will carry over to City National including all
assets and liabilities and are recorded at amounts previously reflected,
adjusted for purchase price allocations.
(d) The pro forma combined net income per common share data are based on
(i) combined historical income of Pacific Bank and City National assuming
the merger is accounted for as a purchase and (ii) pro forma combined
equivalent of the Pacific Bank common stock converted (as adjusted for an
exchange ratio of one share of City National common stock for each share of
Pacific Bank common stock) and City National common stock as of
September 30, 1999 and December 31, 1998.
COMPLETED ACQUISITIONS
On December 31, 1998, City National completed its acquisition of North
American Trust Company, an independent trust company, for $11,500,000 in an all
cash transaction. This acquisition was accounted for under the purchase method
of accounting and resulted in the recording of goodwill of approximately
$11,000,000.
On August 27, 1999, City National completed its acquisition of American
Pacific State Bank. The total price was approximately $90,000,000 in an all cash
transaction. This acquisition was accounted for under the purchase method of
accounting and resulted in the recording of goodwill and core deposit
intangibles of approximately $63,000,000.
In the fourth quarter of 1998 and in the third quarter of 1999, City
National Bank recorded $800,000 and $1,100,000, respectively, for integration
related costs for these acquisitions.
The pro forma adjustments for these two completed acquisitions are as
follows:
(a) Increase in interest on Federal funds purchased is due to the
utilization of Federal funds purchased to fund the purchase prices. The
additional interest expense is estimated to be $3,254,000 and $5,602,000 for
the nine month period and the 12-month period beginning January 1, 1999 and
January 1, 1998, respectively.
(b) Noninterest expense includes the amortization of core deposit
intangibles (based on seven year lives) and goodwill (based on fifteen year
lives) for the nine-month period beginning January 1, 1999 of $619,000 and
$2,488,000, respectively and for the 12-month period beginning January 1,
1998 of $928,000 and $4,482,000, respectively.
(c) Additional income taxes are computed using a 42% rate.
70
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
City National files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. Pacific Bank
files similar reports with the Comptroller of the Currency.
You may read and copy any reports, statements or other information that City
National files at the Securities and Exchange Commission's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference rooms. City National public filings are also available
to the public from commercial document retrieval services and at the Internet
World Wide Web site maintained by the Securities and Exchange Commission at
"http://www.sec.gov."
You may read and copy any reports, statements or other information that
Pacific Bank files at the Comptroller of the Currency's public reference room in
Washington D.C. Please call the Comptroller of the Currency at (202) 874-5043
for further information on the public reference room. Pacific Bank's public
filings are also available by calling Carol Petricka, Corporate Secretary, at
(415) 578-2778.
City National has filed a registration statement to register with the
Securities and Exchange Commission the shares of City National common stock to
be issued to Pacific Bank shareholders in the merger. This document is a part of
the registration statement and constitutes a prospectus of City National and a
proxy statement of Pacific Bank for its special shareholders' meeting.
As allowed by Securities and Exchange Commission rules, this document does
not contain all the information that shareholders can find in the registration
statement or the exhibits to the registration statement. The Securities and
Exchange Commission allows City National and Pacific Bank to "incorporate by
reference" certain information into this document, which means that the
companies can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is deemed to be a part of this document,
except for any information which contradicts information contained directly in
this document. This document incorporates by reference the documents set forth
below that City National and Pacific Bank have previously filed with the
Securities and Exchange Commission or the Comptroller of the Currency,
respectively. Each of the documents previously filed by Pacific Bank with the
Comptroller of the Currency that is incorporated by reference is included as an
Annex to this proxy statement/prospectus or as an exhibit to the registration
statement. These documents contain important business information about City
National and Pacific Bank and their respective financial condition that is not
included or delivered with this document. This proxy statement/prospectus is
accompanied, however, by copies of Pacific Bank's Annual Report on Form 10-K/A
for the year ended December 31, 1998 which is attached hereto as Annex E and
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1999 which
is attached hereto as Annex F.
<TABLE>
<CAPTION>
PERIOD
------
<S> <C>
CITY NATIONAL
COMMISSION FILINGS (FILE NO. 1-10394)
Annual Report on Form 10-K................... Year ended December 31, 1998.
Quarterly Reports on Form 10-Q............... Periods ended March 31, 1999, June 30, 1999
and September 30, 1999.
Proxy Statement for 1999 Annual Meeting of
Stockholders............................... 1999
Current Report on Form 8-K................... September 22, 1999
Current Report on Form 8-K................... January 26, 2000
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
PERIOD
------
<S> <C>
PACIFIC BANK COMPTROLLER FILINGS
Annual Report on Form 10-K/A................. Year ended December 31, 1998.
Quarterly Reports on Form 10-Q/A............. Periods ended March 31, 1999, June 30, 1999
and September 30, 1999.
Proxy Statement for 1999 Annual Meeting of
Shareholders............................... 1999
Current Report on Form 8-K................... October 26, 1999
</TABLE>
All documents which City National or Pacific Bank file with the Securities
and Exchange Commission or Comptroller of the Currency, respectively, between
the date of this proxy statement/ prospectus and the date of the special
shareholders' meeting are incorporated into this proxy statement/ prospectus by
reference and made a part of this document from the date of the filing of such
documents. These additional documents include periodic reports, such as
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In order to
accomplish the incorporation by reference into this proxy statement/prospectus
of the additional documents that Pacific Bank files with the Comptroller of the
Currency, City National will also file such documents with the Securities and
Exchange Commission on a Form 8-K or other appropriate filing.
City National has supplied all information contained or incorporated by
reference in this document relating to City National and City National Bank.
Pacific Bank has supplied all such information relating to Pacific Bank.
Shareholders of Pacific Bank may obtain documents incorporated by reference
through City National or Pacific Bank or with respect to Pacific Bank the
Comptroller of the Currency or with respect to City National, the Securities and
Exchange Commission or the Securities and Exchange Commission's Internet World
Wide Web site described above. Documents incorporated by reference are available
from City National or Pacific Bank without charge, excluding all exhibits,
unless specifically incorporated by reference in this document. You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone at the following:
City National
City National Center
400 North Roxbury Drive
Beverly Hills, California 90210
Telephone: (310) 888-6266
Attention: Barbara S. Polsky, Esq.
Pacific Bank
351 California Street
San Francisco, California 94104
Telephone: (415) 576-2778
Attention: Carol A. Petricka
If you would like to request documents from City National or Pacific Bank,
please do so at least five business days before the date of the special
shareholders' meeting in order to receive timely delivery of such documents
prior to the special shareholders' meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. City National and
Pacific Bank have not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
January 26, 2000. You should not assume that the information contained in this
documents is accurate as of any date other than that date, and neither the
mailing of this document to shareholders nor the issuance of City National
common stock in the merger creates any implication to the contrary.
72
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
CITY NATIONAL CORPORATION
AND
THE PACIFIC BANK, N.A.
SEPTEMBER 21, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I THE MERGERS AND RELATED TRANSACTIONS........................ 2
Section 1.1 Structure and Effect of the Merger.......................... 2
Section 1.2 Closing..................................................... 2
Section 1.3 Effective Time of the Merger................................ 2
ARTICLE II EFFECT OF THE INTERIM MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS.................................... 2
Section 2.1 Effect on Capital Stock..................................... 2
(a) Common Stock of CNB......................................... 2
(b) Common Stock of Pacific..................................... 2
(c) Dissenting Common Stock..................................... 2
(d) Cancellation of Certain Shares.............................. 2
Section 2.2 Conversion of Pacific Common Stock.......................... 3
Section 2.3 Election and Proration Procedures........................... 3
(a) Election Forms and Types of Elections....................... 3
(b) Proper and Timely Election.................................. 4
(c) Payment and Proration....................................... 4
(d) Calculations................................................ 6
(e) No Fractional Shares........................................ 6
Section 2.4 Stock Options............................................... 6
Section 2.5 Adjustments for Dilution and Other Matters.................. 7
Section 2.6 Conversion of Dissenting Common Stock....................... 7
ARTICLE III EXCHANGE OF SHARES.......................................... 7
Section 3.1 Exchange Procedures......................................... 7
(a) Exchange Agent.............................................. 7
(b) Exchange of Certificates and Cash........................... 7
(c) Affiliates.................................................. 8
Section 3.2 Voting and Dividends........................................ 8
Section 3.3 No Liability................................................ 8
Section 3.4 Withholding Rights.......................................... 8
ARTICLE IV CONDUCT PENDING THE MERGER.................................. 9
Section 4.1 Conduct of Pacific's Business Prior to the Effective Time of
the Merger.................................................. 9
Section 4.2 Forbearance by Pacific and its Subsidiaries................. 9
Section 4.3 Timeliness of CNC's Consent................................. 13
Section 4.4 Conduct by CNC Prior to the Effective Time of the Merger.... 13
ARTICLE V REPRESENTATIONS AND WARRANTIES.............................. 13
Section 5.1 Representations and Warranties of Pacific................... 13
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
(a) Recitals True............................................... 13
(b) Capital Stock............................................... 13
(c) Authority................................................... 13
(d) Subsidiaries................................................ 14
(e) Approvals................................................... 14
(f) No Violations............................................... 14
(g) Compliance with Laws........................................ 14
(h) Regulatory Actions.......................................... 14
(i) Community Reinvestment Act.................................. 15
(j) Bank Secrecy Act............................................ 15
(k) Fair Lending Acts........................................... 15
(l) Reports..................................................... 15
(m) Financial Statements........................................ 15
(n) Absence of Certain Changes or Events........................ 16
(o) Taxes....................................................... 16
(p) Absence of Claims; Litigation............................... 18
(q) Certain Agreements.......................................... 18
(r) Labor Matters............................................... 18
(s) Employee Benefit Plans...................................... 18
(i) Existence of Plans..................................... 18
(ii) Present Value of Benefits............................. 19
(iii) Penalties; Reportable Events.......................... 20
(iv) Deficiencies; Qualification............................ 20
(v) Litigation............................................. 20
(t) Insider Loans; Other Transactions........................... 21
(u) Title to Assets............................................. 21
(v) Knowledge as to Conditions.................................. 22
(w) Fees........................................................ 22
(x) Environmental............................................... 22
(y) Allowance for Possible Loan Losses.......................... 23
(z) Performance of Obligations.................................. 23
(aa) Insurance................................................... 24
(bb) Listing of Loans............................................ 24
(cc) Derivative Transactions..................................... 24
(dd) Trust Administration........................................ 24
(ee) Contingent Asset............................................ 24
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
(ff) Contingent Liabilities...................................... 25
(gg) Statements True and Correct................................. 25
(hh) Accurate Disclosure......................................... 25
(ii) Year 2000 Compliant......................................... 25
Section 5.2 Representations and Warranties of CNC....................... 26
(a) Recitals True............................................... 26
(b) Capital Stock............................................... 26
(c) Authority................................................... 26
(d) Approvals................................................... 26
(e) No Violations............................................... 26
(f) Financial Statements........................................ 27
(g) Absence of Certain Changes or Events........................ 27
(h) Absence of Claims........................................... 27
(i) Knowledge as to Conditions.................................. 27
(j) Compliance with Laws........................................ 27
(k) Regulatory Actions.......................................... 27
(l) Community Reinvestment Act.................................. 28
(m) Bank Secrecy Act............................................ 28
(n) Fair Lending Laws........................................... 28
(o) Statements True and Correct................................. 28
(p) Accurate Disclosure......................................... 28
(q) Year 2000 Compliant......................................... 28
ARTICLE VI COVENANTS................................................... 29
Section 6.1 Cooperation................................................. 29
Section 6.2 Regulatory Matters.......................................... 29
Section 6.3 Shareholders' Approval...................................... 30
Section 6.4 Legal Conditions to Merger.................................. 30
Section 6.5 Information................................................. 30
(a) CNC's Right to Access and Information....................... 30
(b) Pacific's Right to Access and Information................... 31
(c) Customer Data............................................... 31
(d) Customer Calls.............................................. 31
(e) Confidentiality............................................. 31
Section 6.6 Employee Benefits........................................... 31
Section 6.7 Publicity................................................... 32
Section 6.8 Notification of Certain Matters............................. 32
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Section 6.9 Pre-Closing Adjustments..................................... 32
Section 6.10 Director Resignations....................................... 33
Section 6.11 Human Resources Issues...................................... 33
Section 6.12 Assistance with Third-Party Agreements...................... 33
Section 6.13 Notices and Communications.................................. 34
Section 6.14 Insurance Policies Assignment............................... 34
Section 6.15 Additional Agreements....................................... 34
Section 6.16 Indemnification of Directors and Officers................... 34
Section 6.17 Shareholders' Agreement..................................... 35
Section 6.18 Coordination of Dividends................................... 35
Section 6.19 Affiliates.................................................. 35
Section 6.20 Hong Kong Portfolio......................................... 35
ARTICLE VII CONDITIONS TO CONSUMMATION.................................. 36
Section 7.1 Conditions to All Parties Obligations....................... 36
Section 7.2 Conditions to Obligations of CNC and CNB.................... 36
Section 7.3 Conditions To Obligations of Pacific........................ 38
ARTICLE VIII TERMINATION................................................. 38
Section 8.1 Termination................................................. 38
Section 8.2 Effect of Termination....................................... 39
ARTICLE IX OTHER MATTERS............................................... 40
Section 9.1 Certain Definitions; Interpretations........................ 40
Section 9.2 Non-Survival of Representations, Warranties and Covenants... 41
Section 9.3 Waiver and Modification..................................... 41
Section 9.4 Counterparts................................................ 42
Section 9.5 Governing Law, Jurisdiction and Venue....................... 42
Section 9.6 Notices..................................................... 42
Section 9.7 Entire Agreement............................................ 43
Section 9.8 Binding Effect; Assignment.................................. 43
Section 9.9 Severability................................................ 43
Section 9.10 No Third Party Beneficiaries................................ 43
Section 9.11 Specific Performance........................................ 43
Section 9.12 Expenses.................................................... 43
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBITS
Exhibit A Form of Agreement of Merger
Exhibit B Form of Shareholders' Agreement
Exhibit C Form of Affiliates Agreement
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 21st day of September,
1999 (the "AGREEMENT"), by and between City National Corporation ("CNC"), a
Delaware corporation, and The Pacific Bank, N.A., a national banking association
("PACIFIC"), is entered into with reference to the following:
A. CNC is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and subject to regulation and
supervision by the Board of Governors of the Federal Reserve System (the
"BOARD OF GOVERNORS");
B. Pacific is a national banking association subject to regulation and
supervision by the Office of the Comptroller of the Currency (the "OCC") and
the deposits of which (except for Pacific's Grand Cayman and Hong Kong
offices) are insured by the Federal Deposit Insurance Corporation (the
"FDIC") in accordance with the Federal Deposit Insurance Act up to
applicable limits.
C. The Boards of Directors of CNC and Pacific have determined that it
is in the best interests of their respective companies and shareholders to
consummate the business combination transaction provided for in this
Agreement;
D. The parties hereto desire to effect a business combination through a
merger (the "MERGER"), which will be structured so that Pacific will be
merged into City National Bank, a national banking association and the
wholly-owned subsidiary of CNC ("CNB"), and CNB will be the surviving
institution in the Merger;
E. As a condition and inducement to CNC's willingness to enter into
this Agreement, Pacific and CNC are entering into, immediately after the
execution and delivery hereof, a Stock Option Agreement (the "STOCK OPTION
AGREEMENT") dated as of the date hereof, pursuant to which Pacific shall
grant to CNC an option to purchase shares of the common stock, $1.50 par
value, of Pacific (the "PACIFIC COMMON STOCK");
F. The Merger requires certain shareholder and regulatory approvals and
may be effected only after the necessary approvals have been obtained;
G. For federal income tax purposes, it is intended that the Merger shall
qualify as a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "CODE");
H. The parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
I. Subject to any specific provisions of this Agreement, it is the
intent of the parties hereto that CNC by reason of this Agreement shall not
(until consummation of the Merger) control, nor shall be deemed to control,
Pacific or any of its subsidiaries, directly or indirectly, nor shall CNC
exercise or be deemed to exercise, directly or indirectly, a controlling
influence over the management or policies of Pacific or any of its
subsidiaries.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
contained herein, the parties hereto agree as follows:
A-1
<PAGE>
ARTICLE I
THE MERGERS AND RELATED TRANSACTIONS
Section 1.1 STRUCTURE AND EFFECT OF THE MERGER.
(a) At the Effective Time of the Merger, (as defined in Section 1.3),
Pacific will merge with and into CNB, with CNB being the surviving institution,
pursuant to the Agreement of Merger to be entered into by and between CNB and
Pacific substantially in the form of Exhibit A hereto.
(b) At the Effective Time of the Merger, (i) the separate corporate
existence of Pacific shall cease, and (ii) the Articles of Association and
Bylaws of CNB as in effect immediately prior to the Effective Time of the Merger
shall be the Articles of Association and Bylaws of the surviving institution.
(c) At and after the Effective Time of the Merger, the Merger will have the
effects set forth in 12 U.S.C. Section 215a of the National Bank Act ("12 USC
215A").
Section 1.2 CLOSING. The closing of the Merger (the "CLOSING") will take
place at 6:00 P.M. Pacific time, on the first Friday (unless such date is a
holiday, in which case it will be the preceding Business Day (as defined in
Section 9.1)) that is both (a) after satisfaction of each of the conditions set
forth in Article VII; and (b) no less than four Business Days after the
occurrence of the Election Deadline (as defined in Section 2.3), or at such
other time as shall be determined in good faith by CNC in order to ensure an
orderly transition process, including any delay reasonably required due to the
effects, if any, experienced by CNC or CNB with respect to Year 2000 Compliance,
notwithstanding that CNC, CNB and Pacific are Year 2000 Compliant (as defined in
Section 5.1(ii)).
Section 1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective as set forth in the National Bank Act. The term "EFFECTIVE TIME OF THE
MERGER" shall, upon filing of the Agreement of Merger with the OCC, be the date
and time specified in the letter of certification issued by the OCC.
ARTICLE II
EFFECT OF THE INTERIM MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
Section 2.1 EFFECT ON CAPITAL STOCK. Subject to the other provisions of
this Article II, at the Effective Time of the Merger, by virtue of the Merger
and without any additional action on the part of the holders of shares of stock
of Pacific and CNC:
(a) COMMON STOCK OF CNB. Each share of common stock, $1.00 par value per
share of CNB (the "CNB COMMON STOCK"), issued and outstanding immediately prior
to the Effective Time of the Merger shall remain an issued and outstanding share
of common stock of the surviving institution, and shall not be affected by the
Merger,
(b) COMMON STOCK OF PACIFIC. Each share of Pacific Common Stock issued and
outstanding immediately prior to the Effective Time of the Merger shall be
converted into the right to receive common stock, $.01 par value per share, of
CNC ("CNC COMMON STOCK") or cash as provided in Section 2.2(a);
(c) DISSENTING COMMON STOCK. Each share of Pacific Common Stock that is a
"dissenting share" within the meaning of 12 USC 215a ("DISSENTING COMMON STOCK")
shall not be converted into or represent a right to receive CNC Common Stock or
cash hereunder unless and until such shares have lost their status as dissenting
shares, at which time such shares shall either be converted into cash or CNC
Common Stock pursuant to Section 2.6.
(d) CANCELLATION OF CERTAIN SHARES. Any shares of Pacific Common Stock
held by CNC (or any of its Subsidiaries) or by Pacific other than those held in
a fiduciary capacity ("TREASURY STOCK") shall be
A-2
<PAGE>
canceled and retired at the Effective Time of the Merger and no consideration
shall be issued in exchange therefor.
Section 2.2 CONVERSION OF PACIFIC COMMON STOCK.
(a) Subject to the other provisions of this Article II, each share of
Pacific Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger (other than Dissenting Common Stock and Treasury Stock)
shall, by virtue of the Merger, be converted into the right to receive, at the
election of the holder thereof as provided in Section 2.3, either:
(i) a fraction of a share of CNC Common Stock equal to the quotient
(such quotient, the "EXCHANGE RATIO") of (i) $29.00, divided by (ii) the
average of the daily closing prices of a share of CNC Common Stock on the
New York Stock Exchange for the twenty consecutive trading days ending on
the third trading day immediately prior to the Effective Time of the Merger
(such average, the "FINAL CNC STOCK PRICE"); provided, in the event that the
Final CNC Stock Price shall be more than $37.95 but less than or equal to
$41.25 (the "INTERIM CEILING PRICE"), the Exchange Ratio shall be .7642, and
in the event that the Final CNC Stock Price shall be less than $28.05 (the
"FLOOR PRICE"), the Exchange Ratio shall be 1.0339; and provided further,
that in the event that the Final CNC Stock Price shall be more than $41.25,
the Exchange Ratio shall be $31.52 divided by the Final CNC Stock Price; or
(ii) cash in the amount of $29.00 (such amount, the "PER SHARE CASH
CONSIDERATION"); or
(iii) a combination of CNC Common Stock and cash in the amounts as set
forth in Subsections 2.2(a)(i) and (a)(ii) above.
(b) At the Effective Time of the Merger, the stock transfer books of Pacific
shall be closed as to holders of Pacific Common Stock immediately prior to the
Effective Time of the Merger and no transfer of Pacific Common Stock by any such
holder shall thereafter be made or recognized. If, after the Effective Time of
the Merger, certificates are properly presented in accordance with Article III
of this Agreement to the Exchange Agent (as defined in Section 2.3), such
certificates shall be canceled and exchanged for certificates representing the
number of whole shares of CNC Common Stock, if any, and/or a check representing
the amount of cash, if any, into which the Pacific Common Stock represented
thereby was converted in the Merger, plus any payment for a fractional share of
CNC Common Stock.
Section 2.3 ELECTION AND PRORATION PROCEDURES.
(a) ELECTION FORMS AND TYPES OF ELECTIONS. An election form and other
appropriate and customary transmittal materials (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of Common Stock shall pass, only upon proper
delivery of such certificates to an exchange agent selected by CNC and
reasonably acceptable to Pacific (the "EXCHANGE AGENT")) in such form as CNC and
Pacific shall mutually agree ("ELECTION FORM") shall be mailed no less than
thirty-five days prior to the Effective Time of the Merger or on such other date
as Pacific and CNC shall mutually agree ("MAILING DATE") to each holder of
record of Pacific Common Stock as of a date which is at least five Business Days
prior to the Mailing Date ("ELECTION FORM RECORD DATE"). CNC shall make
available one or more Election Forms as may be reasonably requested by all
persons who become holders (or beneficial owners) of Pacific Common Stock after
the Election Form Record Date and prior to the Election Deadline (as defined
herein), and Pacific shall provide to the Exchange Agent all information
reasonably necessary for it to perform its obligations as specified herein. Each
Election Form shall permit the holder (or the Beneficial Owner through
appropriate and customary documentation and instructions) to elect (an
"ELECTION") to receive either (i) CNC Common Stock (a "STOCK ELECTION") with
respect to all of such holder's Pacific Common Stock, or (ii) cash (a "CASH
ELECTION") with respect to all of such holder's Pacific Common Stock, or
(iii) a specified number of shares of Pacific Common Stock to receive CNC Common
Stock (a "COMBINATION STOCK ELECTION") and a specified number of shares of
Pacific Common Stock to receive cash (a "COMBINATION CASH
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ELECTION"). Any Pacific Common Stock (other than Dissenting Common Stock or
Treasury Stock) with respect to which the holder (or the Beneficial Owner, as
the case may be) shall not have submitted to the Exchange Agent, an effective,
properly completed Election Form received prior to the Election Deadline shall
be deemed to be "Undesignated Shares" hereunder.
(b) PROPER AND TIMELY ELECTION. Any Election shall have been properly made
and effective only if the Exchange Agent shall have actually received a properly
completed Election Form by 5:00 P.M. on the later of the 30th day following the
Mailing Date (or such other time and date as CNC and Pacific may mutually agree)
(the "ELECTION DEADLINE"). An Election Form shall be deemed properly completed
only if an Election is indicated for each share of Pacific Common Stock covered
by such Election Form and if accompanied by one or more certificates (or
customary affidavits and indemnification regarding the loss or destruction of
such certificates or the guaranteed delivery of such certificates) representing
all shares of Pacific Common Stock covered by such Election Form, together with
duly executed transmittal materials included in or required by the Election
Form. Any Election Form may be revoked or changed by the person submitting such
Election Form at or prior to the Election Deadline. In the event an Election
Form is revoked prior to the Election Deadline, the shares of Pacific Common
Stock represented by such Election Form shall automatically become Undesignated
Shares unless and until a new Election is properly made with respect to such
shares on or before the Election Deadline, and CNC shall cause the certificates
representing such shares of Pacific Common Stock to be promptly returned without
charge to the person submitting the revoked Election Form upon written request
to that effect from the holder who submitted such Election Form. Subject to the
terms of this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or change
has been properly or timely made and to disregard immaterial defects in the
Election Forms, and any decisions of CNC and Pacific required by the Exchange
Agent and made in good faith in determining such matters shall be binding and
conclusive. Neither CNC nor the Exchange Agent shall be under any obligation to
notify any person of any defect in an Election Form.
(c) PAYMENT AND PRORATION. As promptly as practicable but not later than
five Business Days after the Effective Time of the Merger, CNC shall cause the
Exchange Agent to effect the allocation among the holders of Pacific Common
Stock of rights to receive CNC Common Stock or cash in the Merger in accordance
with the Election Forms as follows:
(i) if the aggregate number of shares of Pacific Common Stock as to
which Stock Elections and Combination Stock Elections shall have effectively
been made results in the issuance of CNC Common Stock pursuant to the Merger
that would be at least 47.0 percent (47.0%) of the aggregate value of the
total consideration paid (valued at the closing price of CNC Common Stock on
the date on which the Effective Time of the Merger occurs (the "CLOSING
PRICE")) in exchange for shares of Pacific Common Stock (the "MINIMUM STOCK
AMOUNT"), but does not result in the issuance of CNC Common Stock exceeding
52.5 percent (52.5%) of the consideration paid in exchange for shares of
Pacific Common Stock (the "MAXIMUM STOCK AMOUNT") (assuming all other shares
of Pacific Common Stock other than Treasury Stock receive the Per Share Cash
Consideration), then:
(A) Each holder of Pacific Common Stock who made an effective Stock
Election or Combination Stock Election shall receive the number of shares
of CNC Common Stock equal to the product of the Exchange Ratio multiplied
by the number of shares of Pacific Common Stock covered by such Stock
Election or Combination Stock Election; and
(B) Each holder of Pacific Common Stock who made an effective Cash
Election or Combination Cash Election, and each holder of Undesignated
Shares shall receive the Per Share Cash Consideration.
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(ii) if the aggregate number of shares of Pacific Common Stock as to
which Stock Elections and Combination Stock Elections shall have effectively
been made exceeds, and is not approximately equal to, the Maximum Stock
Amount (assuming all other shares of Pacific Common Stock other than
Treasury Stock receive the Per Share Cash Consideration), then:
(A) Each holder of Pacific Common Stock who made an effective Cash
Election or Combination Cash Election shall receive the Per Share Cash
Consideration;
(B) All Undesignated Shares shall be deemed to have made Cash
Elections; and
(C) A stock proration factor (the "STOCK PRORATION FACTOR") shall be
determined by dividing (1) the number of shares of CNC Common Stock which
are required to be issued based on the Closing Price to equal the Maximum
Stock Amount by (2) the number of shares of CNC Common Stock which would
be issued based on the product of the Exchange Ratio and the number of
shares of Pacific Common Stock with respect to which effective Stock
Elections and Combination Stock Elections were made. Each holder of
Pacific Common Stock who made an effective Stock Election or Combination
Stock Election shall be entitled to:
(I) the number of shares of CNC Common Stock equal to the product
of (x) the Exchange Ratio, multiplied by (y) the number of shares of
Pacific Common Stock covered by such Stock Election or Combination
Stock Election, multiplied by (z) the Stock Proration Factor, and
(II) cash in an amount equal to the product of (x) the Per Share
Cash Consideration, multiplied by (y) the number of shares of Pacific
Common Stock covered by such Stock Election or Combination Stock
Election, multiplied by (z) one minus the Stock Proration Factor.
(iii) if the aggregate number of shares of Pacific Common Stock as to
which Stock Elections and Combination Stock Elections shall have effectively
been made shall be less than the Minimum Stock Amount (assuming all other
shares of Pacific Common Stock other than Treasury Stock receive the Per
Share Cash Consideration), then:
(A) Each holder of Pacific Common Stock who made an effective Stock
Election or Combination Stock Election shall receive the number of shares
of CNC Common Stock equal to the product of the Exchange Ratio multiplied
by the number of shares of Pacific Common Stock covered by such Stock
Election or Combination Stock Election;
(B) The Exchange Agent shall select by lot such number of holders of
Undesignated Shares (other than holders of Undesignated Shares who voted
against the Merger or gave notice in writing that the holder dissents as
required by 12 USC 215a prior to the meeting of shareholders to be held
pursuant to Section 6.3) to receive CNC Common Stock as shall be
necessary so that the shares of CNC Common Stock to be received by those
holders, when combined with the number of shares for which a Stock
Election or Combination Stock Election has been made shall be equal to
the Minimum Stock Amount. If all of said Undesignated Shares plus all
shares as to which Stock Elections and Combination Stock Elections have
been made together are less than, and not approximately equal to, the
Minimum Stock Amount, then:
(C) A cash proration factor (the "CASH PRORATION FACTOR") shall be
determined by dividing (1) the amount which is the difference between (x)
the number of shares of CNC Common Stock which are required to be issued
based on the Closing Price to equal the Minimum Stock Amount and (y) the
number of shares of CNC Common Stock which would be issued based on the
product of the Exchange Ratio and the sum of the number of shares of
Pacific Common Stock with respect to which effective Stock Elections and
Combination Stock Elections were made and the number of Undesignated
Shares selected pursuant to
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subparagraph (iii)(B) above by (2) the number of shares of Pacific Common
Stock with respect to which effective Cash Elections and Combination Cash
Elections were made. Each holder of Pacific Common Stock who made an
effective Cash Election or Combination Cash Election shall be entitled
to:
(I) cash equal to the product of (x) the Per Share Cash
Consideration, multiplied by (y) the number of shares of Pacific
Common Stock covered by such Cash Election or Combination Cash
Election, multiplied by (z) one minus the Cash Proration Factor, and
(II) the number of shares of CNC Common Stock equal to the product
of (x) the Exchange Ratio, multiplied by (y) the number of shares of
Pacific Common Stock covered by such Cash Election or Combination
Cash Election, multiplied by (z) the Cash Proration Factor.
(iv) Notwithstanding any other provision of this Agreement, if after
applying the allocation rules set forth in the preceding subsections of this
Section 2.3(c), the aggregate value of the CNC Common Stock that would be
issued pursuant to the Merger (valued at the Closing Price) is less than
47.0% of the aggregate value of the total consideration to be paid in
exchange for Pacific Common Stock, CNC shall be authorized to reallocate, in
good faith and in such a manner as it reasonably determine to be fair and
equitable, shares of CNC Common Stock and cash among the holders of Pacific
Common Stock, or to vary the number of shares of CNC Common Stock to be
issued in the Merger, in a manner such that the number of shares of CNC
Common Stock to be issued in the Merger shall not be less than the Minimum
Stock Amount.
(d) CALCULATIONS. The calculations required by Section 2.2(a)(i) shall be
prepared by CNC prior to the Effective Time of the Merger and shall be set forth
in a certificate executed by the Chief Financial Officer of CNC and furnished to
Pacific at least two Business Days prior to the Effective Time of the Merger
showing the manner of calculation in reasonable detail. Any calculation of a
portion of a share of CNC Common Stock shall be rounded to the nearest
ten-thousandth of a share, and any cash payment shall be rounded to the nearest
cent. For purposes of this Section 2.3, the shares of Pacific Common Stock for
which CNC Common Stock is to be issued as consideration in the Merger shall be
deemed to be "approximately equal" to the Maximum Stock Amount or the Minimum
Stock Amount if such number is within 10,000 shares of Pacific Common Stock of
such amount.
(e) NO FRACTIONAL SHARES. Notwithstanding any other provisions of this
Agreement, each holder of shares of Pacific Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of CNC Common Stock (after taking into account all certificates delivered
by such holder) shall receive, in lieu thereof cash (without interest) in an
amount equal to such fractional part of a share of CNC Common Stock multiplied
by the Final CNC Stock Price (as defined in Section 2.2). No holder will be
entitled to dividends, voting rights or any other rights as a shareholder in
respect of any fractional share of CNC Common Stock.
Section 2.4 STOCK OPTIONS. Prior to the Effective Time of the Merger,
Pacific shall take appropriate action such that each option granted pursuant to
the 1993 Stock Option Plan As Amended and the 1998 Stock Option Plan As Amended
(together, the "STOCK OPTION PLANS") by Pacific to purchase shares of the
Pacific Common Stock that is outstanding and unexercised immediately prior to
the Effective Time of the Merger shall be canceled by Pacific in consideration
of the payment by Pacific to each holder of such option of an aggregate amount
in cash equal to the positive difference, if any, between (a) $29.00 times the
number of shares of Pacific Common Stock as to which such holder has options,
and (b) the aggregate exercise price of such options. At the Effective Time of
the Merger, each option to purchase a share of Pacific Common Stock pursuant to
the Stock Option Plans shall terminate and be of no further force or effect, and
any rights thereunder to purchase shares of Pacific Common Stock shall also
terminate and be of no further force or effect.
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Section 2.5 ADJUSTMENTS FOR DILUTION AND OTHER MATTERS. If prior to the
Effective Time of the Merger, (a) Pacific shall declare a stock dividend or
distribution on the Pacific Common Stock, or subdivide, split up, reclassify or
combine the Pacific Common Stock, or declare a dividend, or make a distribution,
on the Pacific Common Stock, in any security convertible into Common Stock
(provided that no such action may be taken by Pacific without CNC's prior
written consent as provided in Section 4.2 (b)), or (b) the outstanding shares
of CNC Common Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities, in each case
as a result of a reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar change in CNC's
capitalization, then an appropriate adjustment or adjustments will be made to
the Exchange Ratio (including the Final CNC Stock Price and the Final CNC Stock
Prices below and above which the Exchange Ratio is a specified amount pursuant
to Section 2.2).
Section 2.6 CONVERSION OF DISSENTING COMMON STOCK.
(a) Pacific shall give CNC prompt notice upon receipt by Pacific of any
written demands for appraisal rights, withdrawal of such demands, and any other
documents received or instruments served pursuant to 12 USC 215a and shall give
CNC the opportunity to direct all negotiations and proceedings with respect to
such demands. Pacific shall not voluntarily make any payment with respect to any
demands for appraisal rights and shall not except with the prior written consent
of CNC, settle or offer to settle such demands. Each holder of Pacific Common
Stock who becomes entitled pursuant to provisions of said 12 USC 215a to payment
for his or her shares of Dissenting Common Stock shall receive payment therefor
from CNC and such shares of Common Stock shall be canceled.
If any holder of Common Stock shall effectively withdraw or lose his or her
right to appraisal of and payment for his or her Dissenting Common Stock after
the Effective Time of the Merger as provided in 12 USC 215a, each share of
Dissenting Common Stock of such holder shall be deemed to be an Undesignated
Share and shall be converted at CNC's discretion into the right to receive the
Per Share Cash Consideration or such number of shares of CNC Common Stock
calculated pursuant to Subsection 2.3(c)(iv) by CNC to be necessary or
appropriate to preserve the status of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
ARTICLE III
EXCHANGE OF SHARES
Section 3.1 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. No later than the Effective Time of the Merger, CNC
shall deposit with the Exchange Agent the number of shares of CNC Common Stock
issuable in the Merger and the amount of cash payable in the Merger. The
Exchange Agent shall not be entitled to vote or exercise any rights of ownership
with respect to CNC Common Stock held by it from time to time hereunder, except
that it shall receive and hold all dividends or other distributions paid or
distributed with respect to such shares for the account of the persons entitled
thereto.
(b) EXCHANGE OF CERTIFICATES AND CASH. After completion of the allocation
procedure set forth in Section 2.3, each holder of a certificate formerly
representing Pacific Common Stock (other than Dissenting Common Stock or
Treasury Stock) who surrenders or has surrendered such certificate (or customary
affidavits and indemnification regarding the loss or destruction of such
certificate), together with duly executed transmittal materials included in or
required by the Election Form, to the Exchange Agent shall, upon acceptance
thereof be entitled to a certificate representing CNC Common Stock and/ or cash
into which the shares of Common Stock shall have been converted pursuant hereto,
as well as cash in lieu of any fractional shares of CNC Common Stock to which
such holder would otherwise be entitled. The Exchange Agent shall accept such
Pacific certificate upon compliance with such reasonable and customary terms and
conditions as the Exchange Agent may impose to effect an orderly
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exchange thereof in accordance with normal practices. Until surrendered as
contemplated by this Section 3.1, each certificate representing Pacific Common
Stock shall be deemed from and after the Effective Time of the Merger to
evidence only the right to receive cash and/or CNC Common Stock, as the case may
be, upon such surrender. CNC shall not be obligated to deliver the consideration
to which any former holder of Common Stock is entitled as a result of the Merger
until such holder surrenders his certificate or certificates representing shares
of Pacific Common Stock for exchange as provided in this Article III. If any
certificate for shares of CNC Common Stock, or any check representing cash
and/or declared but unpaid dividends, is to be issued in a name other than that
in which a certificate surrendered for exchange is issued, the certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and the person requesting such exchange shall affix any requisite stock transfer
tax stamps to the certificate surrendered or provide funds for their purchase or
establish to the satisfaction of the Exchange Agent that such taxes are not
payable.
(c) AFFILIATES. Certificates surrendered for exchange by any person
constituting an "affiliate" of Pacific for purposes of Rule 145 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), shall not be
exchanged for certificates representing whole shares of CNC Common Stock until
CNC has received a written agreement from such person as provided in
Section 6.19.
Section 3.2 VOTING AND DIVIDENDS. Former shareholders of record of Pacific
shall be entitled to vote after the Effective Time of the Merger at any meeting
of CNC shareholders the number of whole shares of CNC Common Stock into which
their respective shares of Pacific Common Stock are converted, regardless of
whether such holders have exchanged their certificates representing Common Stock
for certificates representing CNC Common Stock in accordance with the provisions
of this Agreement. Until surrendered for exchange in accordance with the
provisions of Section 3.1 of this Agreement, each certificate theretofore
representing shares of Common Stock (other than shares to be canceled pursuant
to Section 2.1(d)of this Agreement) shall from and after the Effective Time of
the Merger represent for all purposes only the right to receive shares of CNC
Common Stock, cash in lieu of fractional shares and/or cash, as set forth in
this Agreement. No dividends or other distributions declared or made after the
Effective Time of the Merger with respect to CNC Common Stock with a record date
after the Effective Time of the Merger shall be paid to the holder of any
unsurrendered certificate of Common Stock with respect to the shares of CNC
Common Stock represented thereby, until the holder of such certificate of Common
Stock shall surrender such certificate. Subject to the effect of applicable
laws, following surrender of any such certificates of Common Stock for which
shares of CNC Common Stock are to be issued, there shall be paid to the holder
of the certificates without interest, (i) the amount of any cash payable with
respect to a fractional share of CNC Common Stock to which such holder is
entitled pursuant to Section 2.3(e) and the amount of dividends or other
distributions with a record date after the Effective Time of the Merger
theretofore paid with respect to such whole shares of CNC Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time of the Merger but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of CNC Common Stock.
Section 3.3 NO LIABILITY. Neither CNC, Pacific nor the Exchange Agent
shall be liable to any holder of shares of Common Stock for any shares of CNC
Common Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
Section 3.4 WITHHOLDING RIGHTS. CNC or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Pacific Common Stock such
amounts as CNC or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by CNC or
the Exchange Agent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder
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of the shares of Pacific Common Stock in respect of which such deduction and
withholding was made by CNC or the Exchange Agent.
ARTICLE IV
CONDUCT PENDING THE MERGER
Section 4.1 CONDUCT OF PACIFIC'S BUSINESS PRIOR TO THE EFFECTIVE TIME OF
THE MERGER. Except as expressly provided in this Agreement, or with the prior
written consent of CNC, which consent shall not be unreasonably withheld, during
the period from the date of this Agreement to the Effective Time of the Merger,
Pacific shall, and shall cause each of its Subsidiaries (as defined in
Section 9.1) to, (a) conduct its business in the usual, regular and ordinary
course, consistent with past practices and consistent with prudent banking
practices; (b) use its commercially reasonable efforts to maintain and preserve
intact its business organization, employees and advantageous customer
relationships and to continue to develop such customer relationships and retain
the services of its officers and key employees; (c) maintain and keep its
properties in as good repair and condition as at present except for obsolete
properties and for deterioration due to ordinary wear and tear; (d) use its
commercially reasonable efforts to maintain in full force and effect insurance
comparable in amount and scope of coverage to that now maintained by it;
(e) perform in all material respects all of its obligations under material
contracts, leases and documents relating to and affecting its assets, properties
and businesses except such obligations as it may in good faith reasonably
dispute; (f) charge off all loans and other assets, or portions thereof, deemed
uncollectible in accordance with GAAP (as defined in Section 9.1(i)), RAP (as
defined in Section 9.1) or applicable law or regulation, classified as "loss" or
as directed by its regulators; (g) maintain the ALLL (as defined in
Section 9.1) in accordance with past practices, GAAP and RAP; (h) substantially
comply with and perform all material obligations and duties imposed upon it by
all federal and state laws, and rules, regulations and orders imposed by
federal, state and local Governmental Authorities (as defined in Section 9.1);
(i) comply in all material respects with all published interpretations,
statements, guidelines and similar documents promulgated by any Governmental
Authority with jurisdiction over Pacific concerning Year 2000 Compliance (as
defined in Section 5.1(ii)); and (j) take no action which would reasonably be
expected adversely to affect or delay the ability of CNC, CNB or Pacific to
obtain any necessary approvals, consents or waivers of any Governmental
Authority or other parties required for the Merger or to perform its covenants
or agreements under this Agreement on a timely basis.
Section 4.2 FORBEARANCE BY PACIFIC AND ITS SUBSIDIARIES. Except as
expressly provided in this Agreement or as set forth on the Disclosure Schedule
(as defined in Section 5.1), during the period from the date of this Agreement
to the Effective Time of the Merger, Pacific shall not, and shall cause any of
its subsidiaries not to, without the prior written consent of CNC, which consent
shall not be unreasonably withheld:
(a) incur any indebtedness for borrowed money or assume, guaranty, endorse
or otherwise as an accommodation become responsible for the obligations of any
other person, except (i) in connection with banking transactions with banking
customers in the ordinary course of business, or (ii) for short-term borrowings
(A) not in excess of sixty days, (B) in amounts not greater than $25,000,000 in
the aggregate for Pacific and its Subsidiaries and (C) made at prevailing market
rates and terms applicable for Pacific;
(b) issue any capital stock; adjust, split, combine or reclassify any
capital stock; make, declare or pay any dividend or make any other distribution
on any capital stock (except, subject to Section 6.18, Pacific's regular
quarterly dividend); directly or indirectly, redeem, purchase or otherwise
acquire any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock; grant any
stock appreciation rights; grant any person any right to acquire any shares of
its capital stock (whether pursuant to an option, warrant, right or otherwise);
or issue any additional shares of capital stock; provided, however, that Pacific
may make a cash payment equal to
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the difference between the Per Share Cash Consideration and the exercise price
of any option granted pursuant to the Stock Option Plans, or may make the cash
payment required in connection with the redemption of the rights issued under
the Rights Agreement, or may issue Pacific Common Stock pursuant to exercise of
an exercisable option granted pursuant to the Stock Option Plans;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of its
properties or assets with a book value of $500,000 or more, or cancel, release
or assign any indebtedness of any person or any claim held by any person, except
pursuant to contracts or agreements in full force and effect at the date of this
Agreement or the sale of other real estate owned as a result of foreclosure,
transfer in lieu of foreclosure or other transfer in satisfaction of a debtor's
obligation previously contracted ("OREO") or similarly held properties other
than at a cash price of at least 80% of book value of such property at June 30,
1999;
(d) except as permitted under Subsection (l) of this Section 4.2, make any
material investment either by purchase of stock or securities, contributions to
capital, or purchase of any properties or fixed assets in excess of $50,000;
(e) enter into or renew any material contract or agreement to a date past
December 31, 1999; terminate any material contract or agreement, or make any
material change in any of its material leases or contracts, other than
(i) entering into deposit agreements or (ii) in the ordinary course of business
consistent with past practice with respect to contracts, agreements or leases
terminable on not more than 90 days notice and involving payment or payments of
not more than $150,000 per annum;
(f) alter its method of establishing interest rates for deposits;
(g) except as required by applicable law, increase in any manner the
compensation (including, without limitation, bonuses) or fringe benefits of any
of its directors, employees, former employees or retirees, or pay any pension or
retirement allowance, not required by any existing plan or agreement to any such
directors, employees, former employees or retirees, other than annual salary and
bonus increases made in the ordinary course of business not exceeding 2% in the
aggregate (based upon April 1, 1999 aggregate salary figures) or 6% for any
employee; become a party to, amend or commit to any pension, retirement,
retention, "golden parachute" or other severance (other than in accordance with
Section 6.6(c)), deferred compensation, profit sharing or welfare benefit plan
or agreement or employment agreement with or for the benefit of any employee,
former employee or retiree; or voluntarily accelerate the vesting of any
employee benefits, except for the acceleration of the vesting of options granted
pursuant to the Stock Option Plans;
(h) settle any claim, action or proceeding involving any liability for
material monetary damages (except to the extent fully reserved against on its
books and records) or enter into any settlement agreement containing material
obligations;
(i) hire additional vice presidents or above or any other employees (except
that employees below vice president may be hired to fill vacancies in existing
positions), or enter into new employment arrangements or relationships with new
or existing employees which have the legal effect of any relationship other than
at-will employment;
(j) sell any securities other than securities held as foreclosed collateral;
(k) sell Small Business Administration loans in the aggregate amount in
excess of $2,500,000 per quarter, prorated for partial quarters.
(l) purchase any securities other than United States Treasury or United
States government agency securities with maturities of three years or less;
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(m) engage in speculative trading activities with respect to any securities;
(n) amend its Article of Association or Bylaws, or change in any material
way its material policies and procedures or make any material changes to its tax
or financial accounting policies (except as to changes to its tax or financial
accounting policies as may be required by GAAP or RAP);
(o) introduce any new service or products, institute any new advertising
campaign, open, or apply to open or close any branch or facility, or, in
general, change in any material respects its products and services from those in
effect at the date of this Agreement;
(p) (i) renew, extend the maturity of, or materially alter any of the
material terms of, any loan or forbearance agreement for a period greater than
twelve months, or (ii) except as to certain loans disclosed in writing and
discussed with CNC prior to the date hereof, make, acquire a participation in,
or reacquire an interest in a participation sold of, any loan or forbearance
agreement, without regard to the term thereof, which, in the case of (i) or
(ii), when aggregated with all other loans or extensions of credit to, or
forbearance agreements with, such borrower and its related interests, result in
total obligations that may be outstanding following such renewal, extension or
reacquisition or for which a material term may be altered in excess of: (A) if
any such loans are rated "substandard" or below, $250,000 or (B) if all such
loans are rated "pass," $1,000,000 for unsecured obligations or $1,500,000 for
obligations fully secured under Pacific's loan underwriting policies, except for
an increase of 10% over the previously existing commitment for such borrower and
related interests;
(q) make any extension of credit to any of Pacific's executive officers and
directors and their related interests (as defined under Federal Reserve Board
Regulation "O") other than renewals of existing credits to any of Pacific's
executive officers and directors and their related interests consistent with
Pacific's loan underwriting policies and applicable law. ("REG O LOANS");
(r) make, acquire a participation in, reacquire an interest in a
participation sold or sell any loan that is not in compliance with its normal
credit underwriting standards, policies and procedures as in effect on June 30,
1999, as modified, if necessary, to become or remain in accordance with GAAP or
RAP or in conformity with the recommendations of Pacific's regulators; or renew,
extend the maturity of, or alter any of the material terms of any such loan for
a period of greater than six months;
(s) reduce any material accrual or reserve, including, without limitation,
any contingency reserve, litigation reserve, tax reserve, or the ALLL (as
defined in Section 9.1), by reversal or booking a negative provision, or change
the methodology by which such accounts generally have been handled in past
periods, unless required to do so by GAAP or RAP;
(t) file a 1999 or 2000 (short year) income tax return on Form 1120 with the
Internal Revenue Service ("IRS") or any state taxing agency or authority related
income or franchise Taxes;
(u) take any action that would reasonably be expected to adversely affect
Pacific's ability to perform its covenants or agreements made herein on a timely
basis;
(v) consummate a foreclosure proceeding with respect to non-residential land
or properties, unless (i) a Phase I environmental report has been obtained and
(ii) CNC consents in writing, which consent shall not be unreasonably withheld;
(w) sell any charged-off loan or settle any loan with a contractual balance
of $150,000 or more for less than 50% of the amount of the total obligation;
(x) authorize or permit any of its officers, directors, employees or agents
directly or indirectly to solicit, initiate or encourage any inquiries relating
to, or the making of any proposal which constitutes a Takeover Proposal (as
defined below), or to recommend or endorse any Takeover Proposal, or to
participate in any discussions or negotiations, or to provide third parties with
any nonpublic information, relating to any such inquiry or proposal or otherwise
facilitate any effort or attempt to make or implement a Takeover Proposal;
provided, however, that Pacific may, and may authorize and
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permit its officers, directors, employees or agents to, provide third parties
with nonpublic information, otherwise facilitate any effort or attempt by any
third party to make or implement a Takeover Proposal, recommend or endorse any
Takeover Proposal with or by any third party, and participate in discussions and
negotiations with any third party relating to any Takeover Proposal, if (i) its
Board of Directors, after having consulted with and considered the written
advice of counsel, has reasonably determined in good faith that the failure to
do so would cause the members of its Board of Directors to breach their
fiduciary duties under applicable laws; and (ii) at least forty-eight (48) hours
prior to providing any information or data to any third party or entering into
discussions or negotiations with any third party, the Board of Directors
notifies CNC of any such inquiries, such Takeover Proposal received or any such
information requested from any third party or of any such discussions or
negotiations sought to be initiated or continued by any third party. Pacific
will immediately cease and cause to be terminated any activities, discussions or
negotiations conducted prior to the date of this Agreement with any parties
other than CNC with respect to any of the foregoing and take all necessary steps
to inform promptly all such parties of the obligations undertaken in this
Section. Pacific also agrees that it shall promptly request any third party,
other than CNC, that has heretofore executed a confidentiality agreement in
connection with its consideration of a Takeover Proposal to return all
confidential information heretofore furnished to such person by or on behalf of
Pacific and shall otherwise enforce any such confidentiality agreements. Pacific
shall immediately advise CNC following the receipt by it of any request for
information by, any discussions or negotiations sought to be initiated or
continued by or upon the receipt by Pacific of any Takeover Proposal from any
third party, other than CNC, and the details thereof, and shall advise CNC of
any developments thereafter with respect to such Takeover Proposal immediately
upon the occurrence thereof. As used in this Agreement, "TAKEOVER PROPOSAL"
shall mean, with respect to any person, any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving Pacific or
any proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the assets of, Pacific other than the transactions
contemplated or permitted by this Agreement;
(y) take any action that would prevent or impede the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code;
(z) compromise or otherwise settle or adjust any assertion or claim of a
deficiency in Taxes (or interest or penalties in connection therewith), extend
the statute of limitations with any tax authority or file any pleading in court
in any tax litigation or any administrative appeal from an asserted deficiency,
or file or amend any federal, foreign, state or local income or franchise tax
return or make any tax election without the prior written consent of CNC (which
consent shall not be withheld unreasonably);
(aa) fail to continue to file in the ordinary course of business timely and
proper federal, state and local Tax Returns and reports which Pacific is
required to file, either on its own behalf or on behalf of its employees or
other Persons, all such returns and reports to be true correct and complete in
all material respects;
(bb) change any method or period of tax accounting unless and until required
to do so by an appropriate tax authority;
(cc) fail to promptly notify CNC regarding receipt by Pacific from any tax
authority of any notification of the commencement of an audit, any request to
extend the statute of limitations, any statutory notice of deficiency, any
revenue agent's report, any notice of proposed assessment, or any other similar
notification of potential adjustment to the liabilities of Pacific for Taxes, or
any actual or threatened collection enforcement activity by any tax authority
with respect to alleged liabilities of Pacific for Taxes, and make available to
CNC and its representatives the calculation work papers for federal income tax
estimated payments;
(dd) enter into any settlement or settlement negotiations; accept any
payments or settlement amounts; initiate or enter into any discussions,
negotiations or participate in any proceeding without
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notice to CNC; assume any obligation; release any claim or party or take or
consent to any other action by others that would affect the value or rights to
sale, liquidation or other recovery with respect to the capital stock of
American Star Insurance Company, the Surplus Note and the American Star
Liquidation Proceeding (all as defined in Section 5.1(ee));
(ee) incur or expend non-interest expenses, excluding personnel and those
required under existing contracts, at a monthly level or monthly amounts
materially in excess of such monthly levels or monthly amounts incurred during
the six month period ended June 30, 1999; or
(ff) agree to, or make any commitment to, take any of the actions prohibited
by this Section 4.2.
Section 4.3 TIMELINESS OF CNC'S CONSENT. For purposes of Section 4.2, any
consent required from CNB, unless earlier given or denied, shall be deemed to
have been given three Business Days after the time Pacific shall have requested
such consent in writing, unless during such three-day period CNC shall have
promptly requested further information in writing reasonably necessary to allow
the decision to be made, in which case such consent, unless earlier given or
denied, shall be deemed to have been given three Business Days after the time
such reasonably requested information has been furnished.
Section 4.4 CONDUCT BY CNC PRIOR TO THE EFFECTIVE TIME OF THE
MERGER. Except as expressly provided in this Agreement, during the period from
the date of this Agreement to the Effective Time of the Merger, CNC shall
(a) not take any action which would reasonably be expected to affect adversely
or delay the ability of CNC, Pacific or CNB to obtain any necessary approvals,
consents or waivers of any Governmental Authority required for the transactions
contemplated by this Agreement or to perform its covenants or agreements on a
timely basis under this Agreement, (b) amend its Certificate of Incorporation in
any respect that materially and adversely affects the rights and privileges
attendant to the CNC Common Stock, or (c) agree to, or make any commitment to,
take any of the actions prohibited by this Section 4.4.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 REPRESENTATIONS AND WARRANTIES OF PACIFIC. Pacific represents
and warrants (for itself and, where applicable, separately for any of its
Subsidiaries) that, except as specifically set forth in the Disclosure Schedule
delivered to CNC as of the date of this Agreement ("DISCLOSURE SCHEDULE"):
(a) RECITALS TRUE. The information set forth in the recitals of this
Agreement with respect to Pacific is true and correct.
(b) CAPITAL STOCK. Pacific is authorized to issue 21,000,000 shares of
Common Stock, $1.50 par value, and is not authorized to issue any other class or
series of capital stock, or any other securities giving the holder thereof the
right to vote on any matters on which shareholders of Pacific can vote. As of
the date hereof, 5,004,928 shares of Pacific Common Stock are issued and
outstanding, and 622,500 shares are reserved for issuance under the Stock Option
Plans. All issued and outstanding shares of Pacific Common Stock are duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
are subject to no preemptive rights. No shares are reserved for issuance
pursuant to any other stock option, warrant, restricted stock, stock
appreciation right, dividend reinvestment or similar plan or plans. The Board of
Directors of Pacific has taken all action required under that certain Rights
Agreement, dated as of November 5, 1996, between Pacific and ChaseMellon
Shareholders' Services, LLC, as rights agent (the "RIGHTS AGREEMENT") to order
the redemption of the rights issued under the Rights Agreement and to terminate
the right of any holder of the rights issued under the Rights Agreement to
exercise such rights.
(c) AUTHORITY. Pacific has the power and authority, and is duly qualified
in all jurisdictions where such qualification is required (except for such
qualifications the absence of which, individually or in the
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aggregate, would not have a Material Adverse Effect (as defined in Section 9.1)
on Pacific) to carry on its business as it is now being conducted and to own all
of its material properties and assets. Pacific has all federal, state, local and
foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now being conducted,
except for such powers and authorizations the absence of which, either
individually or in the aggregate, would not have a Material Adverse Effect on
Pacific.
(d) SUBSIDIARIES. Pacific has no Subsidiaries other than BSC Mortgage, TPB
Holdings, Inc. and PB Capital Management and Insurance Services, and does not
own, directly or indirectly, any equity portion or voting interest in any other
corporation, partnership or other entity, except as received in satisfaction of
a debt previously contracted in good faith.
(e) APPROVALS. The execution by Pacific of this Agreement and the
Agreement of Merger has been authorized by all necessary corporate action,
including, but not limited to, a vote by its board of directors (which approval
includes a resolution recommending that this Agreement, the Agreement of Merger
and the Merger be approved by the shareholders of Pacific), subject to approval
of this Agreement and the Agreement of Merger by the affirmative vote of the
holders of two-thirds of the outstanding shares of Pacific as required under
Section 215a. Subject to such shareholder approvals and to receipt of required
approvals, consents or waivers of Governmental Authorities referred to in
Section 7.1(b), this Agreement is, and the Agreement of Merger will be upon due
execution and delivery by CNB and Pacific, valid and binding agreements of
Pacific, enforceable against it in accordance with their respective terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights, general equitable principles, and the rights of the Federal
Deposit Insurance Corporation ("FDIC").
(f) NO VIOLATIONS. The execution, delivery and performance of this
Agreement by Pacific does not, and the execution, delivery and performance of
the Agreement of Merger will not, and the consummation of the Merger will not,
constitute (i) a breach or violation of, or a default under any applicable law,
rule or regulation or any material judgment, decree, order, governmental permit
or license, or material indenture, agreement or instrument of Pacific, or to
which it (or any of its properties) is subject, including its Hong Kong and
Cayman Islands offices, which breach, violation or default would have a Material
Adverse Effect on Pacific or would materially hinder or delay the Merger, or
(ii) a breach or violation of, or a default under, its Articles of Association
or Bylaws; and the consummation of the Merger will not require any approval,
consent or waiver under any such law, any rule, regulation, judgment, decree,
order, governmental permit or license or the approval, consent or waiver of any
other party to any such agreement, indenture or instrument, including any
approval, consent or license from any Governmental Authorities in Hong Kong or
the Cayman Islands, other than (A) the shareholder approvals referred to in
Section 7.1(a), (B) the required approvals, consents and waivers of Governmental
Authorities referred to in Section 7.1(b), (C) the approvals, consents or
waivers as are required under the federal and state securities or Blue Sky laws,
(D) any other material approvals or consents or waivers of third parties as set
forth in the Disclosure Schedule, and (E) any other approvals, consents or
waivers the absence of which, individually or in the aggregate, would not result
in a Material Adverse Effect on Pacific or would not materially hinder or delay
the Merger.
(g) COMPLIANCE WITH LAWS. Pacific is not in violation in respect of any
foreign, federal, state or local laws, rules, regulations or orders applicable
to it or by which its properties may be bound, except such violations as would
not have a Material Adverse Effect on Pacific.
(h) REGULATORY ACTIONS. Pacific is not a party to any cease and desist
order, written agreement, memorandum of understanding or any similar regulatory
action or order with any Governmental Authority nor a recipient of any
extraordinary supervisory letter from, nor has it adopted any board resolution
at the request of any of its regulators, nor has it been advised that any such
issuance or request is contemplated. Except for normal examinations conducted by
a Governmental Authority in
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the regular course of the business of Pacific, or as set forth in the Disclosure
Schedule, (x) no Governmental Authority has initiated any proceeding or, to the
knowledge of Pacific, investigation, into the business or operations of Pacific
since January 1, 1999. To the knowledge of Pacific, there is no material
unresolved violation, criticism or exception by any Governmental Authority with
respect to any report or statement relating to any examinations of Pacific.
(i) COMMUNITY REINVESTMENT ACT. Pacific received a rating of
"satisfactory" in its most recent examination or interim review with respect to
the Community Reinvestment Act. Pacific has not been advised of any supervisory
concerns regarding its compliance with the Community Reinvestment Act.
(j) BANK SECRECY ACT. Pacific has not been advised of any supervisory
concerns regarding its compliance with the Bank Secrecy Act (31 U.S.C. Section
5322, et seq.) or related state or federal anti-money laundering laws,
regulations and guidelines, including (i) those provisions of the United States
Code providing penalties for the laundering of monetary instruments (18 U.S.C.
Section 1956) or engaging in monetary transactions in property derived from
specified unlawful activity (18 U.S.C. Section 1957) and (ii) any "Know Your
Customer" regulations, guidelines or supervisory policies and examination
requirements.
(k) FAIR LENDING ACTS. To Pacific's knowledge, Pacific is not the subject
of a referral to either the United States Department of Justice or the
Department of Housing and Urban Development for alleged violations of the Fair
Lending Acts (as defined in Section 9.1).
(l) REPORTS. Pacific has timely filed all material reports, registrations
and statements, together with any amendments required to be made with respect
thereto, that it was required to file since January 1, 1994 with (i) the OCC,
(ii) the FDIC or (iii) any other Governmental Authority (including in Hong Kong
and the Cayman Islands) and has paid all fees and assessments due and payable in
connection therewith.
(m) FINANCIAL STATEMENTS.
(i) Pacific has delivered to CNC (i) audited consolidated Balance Sheets
as of December 31, 1996, 1997, and 1998, and the related consolidated
Statements of Income, Shareholders' Equity and Cash Flows for each of the
years ended December 31, 1996, 1997, and 1998, the related notes and related
opinions thereon of Deloitte & Touche, LLP, and (ii) an unaudited
consolidated Balance Sheet as of June 30, 1999, and the related consolidated
Statements of Income and Cash Flows as of and for the six months ended
June 30, 1999 (the "PACIFIC FINANCIAL STATEMENTS"). The Pacific Financial
Statements (i) present fairly the consolidated financial condition of
Pacific as of the respective dates indicated and its consolidated results of
operations and the changes in the shareholders' equity and cash flows for
the respective periods indicated and (ii) have been prepared in accordance
with GAAP applied on a consistent basis (except for changes, if any,
required by GAAP and disclosed therein).
(ii) As of their respective dates, none of Pacific's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the "1998 10-K") or
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (the
"10-Q"), nor any other document filed subsequent to December 31, 1998 under
Section 13(a), 13(d), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), each in the form (including exhibits) filed
with the OCC (collectively, the "PACIFIC REPORTS"), contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading. Each of the
balance sheets or statements of condition contained or incorporated by
reference in the Pacific Reports (including any related notes and schedules)
fairly present the financial position of the entity or entities to which it
relates as of its date and each of the statements of operations and retained
earnings and of cash flows or equivalent statements contained or
incorporated by reference in the Pacific Reports (including any related
notes and schedules) fairly present the
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results of operations, retained earnings and cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth
therein (subject, in the case of unaudited interim statements, to normal
year-end audit adjustments that are not material in amount or effect), in
each case in accordance with the published rules and regulations of the OCC,
the SEC and GAAP, except as may be noted therein.
(iii) The books and records of Pacific have been, and are being,
maintained in all material respects in accordance with GAAP and RAP and
other applicable legal and accounting requirements and reflect only actual
transactions.
(n) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1998, there
have not been (i) any changes in the business, assets, financial condition or
results of operations of Pacific that, individually or in the aggregate, have
had or could be reasonably expected to have a Material Adverse Effect on
Pacific; (ii) any amendments to the Articles of Association or Bylaws of
Pacific; (iii) any declarations, setting aside or payment of any dividend or any
other distribution in respect of the capital stock of Pacific, except for
regular quarterly dividends; or (iv) any changes by Pacific in accounting
principles or methods or tax methods, except as required or permitted by, the
Financial Accounting Standards Board or by any Governmental Authorities having
jurisdiction over Pacific.
(o) TAXES.
(i) Pacific has timely and properly filed or caused to be filed all
federal, state, local and foreign Tax Returns which it is or has been
required to file, either on its own behalf or on behalf of its employees or
other Persons, including but not limited to income, profits, franchise,
sales, use, occupation, property, excise, and ad valorem and payroll
(including employee taxes withheld), all such returns and reports and forms
being true and correct and complete in all material respects, and has paid
all Taxes, including penalties and interest, if any, which have become due
pursuant to such returns or reports or forms or pursuant to assessments
received by Pacific. The United States Internal Revenue Service ("IRS") has
not audited the federal income Tax Returns of Pacific for any tax year
ending subsequent to December 31, 1994. No waiver has been granted extending
the time for examination of any Pacific returns. Pacific has properly
accrued all liabilities for Taxes and assessments. Pacific is not (and has
not been at any time during the last 5 years) a U.S. real property holding
corporation for purposes of Section 897 of the Code (or any corresponding
provision of state, local or foreign Tax law), and Pacific does not have any
permanent establishment in any foreign country, as defined in the relevant
tax treaty between the United States and such foreign country.
(ii) Pacific has satisfied or discharged its obligations under all state
and local sales and use tax laws.
(iii) Pacific is not and had never been the "common parent" or a member
otherwise of an "affiliated group" of corporations (as those terms are used
in Section 1504(a) of the Code and the Treasury Regulations promulgated
under Section 1502 of the Code). Pacific is not and has never been required
to join or has joined in the filing of a consolidated federal income Tax
Return.
(iv) Pacific is not required to file or join in the filing of a
consolidated, combined, unitary or group income or franchise Tax Return.
(v) Pacific has timely withheld from its employees, customers and other
payees (and timely paid) all amounts required to be withheld and paid by the
tax withholding provisions of applicable federal, state, local and foreign
laws, statutes, rules and regulations (including, without limitation,
income, social security, and employment tax withholding for all types of
compensation, and withholding on payments to non-United States Persons) for
all payments made through the date hereof.
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(vi) The Disclosure Schedule sets forth, for each taxable period ending
during the three-year period beginning January 1, 1995, and ended
December 31, 1998, all jurisdictions in which Pacific (A) has filed an
income or franchise Tax Return or (B) has been included in a consolidated,
combined, group, or unitary income or franchise Tax Return.
(vii) There is no power of attorney currently in force granted by or for
Pacific with respect to Taxes.
(viii) There is no contract or agreement under which Pacific has, or may
at any time in the future have, an obligation to assume, share, or
contribute to the payment of any portion of Taxes (or any amount calculated
with reference to any portion of Taxes) of any other Person.
(ix) Pacific is not a party to any contract, plan or agreement, which,
individually or collectively with respect to any Person, could give rise to
the payment of any amount that would not be deductible by Pacific or a
successor by reason of Section 280G or Section 162(m) of the Code, but
determined without regard to the effects of any payment made pursuant to any
obligation entered into after the Effective Time of the Merger.
(x) Pacific has made all payments of estimated Taxes required to be made
under the Code and any state, local or foreign law. No penalties or other
charges are or will become due with respect to the late filing of any Tax
Return of Pacific required to be filed on or before the Effective Time of
the Merger.
(xi) Pacific has not received or requested any private tax ruling
addressed specifically to Pacific or entered into any tax closing agreement
with any taxing authority (foreign or domestic).
(xii) No action, suit, proceeding, investigation, arbitration, audit,
claim or assessment is (to the knowledge of Pacific) presently or proposed
to be asserted or commenced by any taxing authority with regard to any Taxes
imposed on Pacific, or to the knowledge of Pacific, for which Pacific may be
liable. No issue has been asserted and not abandoned by any tax authority in
any examination of Pacific by any taxing authority that, if raised with
respect to the same or substantially similar facts arising in any other
period not so examined, would result in a deficiency for such other period,
if upheld.
(xiii) None of the assets of Pacific is an asset or property that is
required to be treated as being (A) owned by any Person other than Pacific
pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code
of 1954, as amended and in effect immediately before the enactment of the
Tax Reform Act of 1986, or (B) tax-exempt use property within the meaning of
Section 168(h)(1) of the Code.
(xiv) Pacific is not required to make any adjustment pursuant to
Section 481 of the Code (or any similar provision of other laws or
regulations) by reason of a change in accounting method or otherwise that
will materially affect any taxable year beginning after the Effective Time
of the Interim Merger; neither the IRS nor any other taxing authority has
proposed any such adjustment or change in accounting method in writing to
Pacific, which proposal is currently pending; and Pacific has no application
pending with any taxing authority requesting permission for any change in
accounting method that relates to its business or operations.
(xv) The Disclosure Schedule contains a list of all countries, states,
provinces, cities, territories, and other jurisdictions (whether foreign or
domestic) in which Pacific is required to file a Tax Return or currently is
subject to Taxes. There is no unresolved claim by a taxing authority in any
jurisdiction where Pacific does not file Tax Returns that it is or may be
subject to taxation by such jurisdiction.
(xvi) There are no liens for Taxes (other than for Taxes not yet due and
payable) upon the assets of Pacific.
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(xvii) Pacific has not participated in or cooperated with an
"international boycott" within the meaning of Section 999 of the Code.
Pacific has not filed a consent under Section 341(f)(1) of the Code or any
comparable provision of state revenue statutes, or agreed under
Section 341(f)(3) of the Code to have the provisions of Section 341(f)(2) of
the Code applied to the sale of its capital stock.
(xviii) Pacific is not a partner or a member of any partnership or joint
venture, or any other entity required to be classified as a partnership for
federal income tax purposes.
(p) ABSENCE OF CLAIMS; LITIGATION. No legal, administrative, arbitration
or other proceedings, claims, actions or governmental or regulatory
investigations of any nature are pending or to its knowledge, threatened against
Pacific which is reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on Pacific or materially to hinder or delay consummation
of the Merger. Pacific is not in default with respect to any material judgment,
order, writ, injunction, decree, regulatory restriction or award of any court,
arbitrator or governmental agency, authority or instrumentality. The Disclosure
Schedule contains a complete listing of litigation pending or, to Pacific's
knowledge, threatened against Pacific as of the date hereof to which Pacific is
a party and which names Pacific as a defendant or cross-defendant and the amount
reserved for litigation matters in the aggregate.
(q) CERTAIN AGREEMENTS. Except as set forth in the Disclosure Statement,
Pacific is not a party to an oral or written (i) consultant agreement, not
terminable on 60 days' or less notice and involving the payment of more than
$150,000 per annum or involving the payment of an amount contingent on the
happening of future events, (ii) agreement with any executive officer or other
key employee, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving it of the
nature contemplated by this Agreement, (iii) agreement with or with respect to
any executive officer providing any term of employment or compensation guarantee
extending for a period longer than six months, or (iv) agreement or plan, any of
the benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of the Merger or the value of any of the
benefits of which will be calculated on the basis of the Merger. CNC has been
provided with a complete and accurate listing of the names and current annual
salary rates of all persons employed by Pacific showing for each such person the
current pay rate as of June 30, 1999, the names of all of the directors and
officers of Pacific, and the names of all persons, if any, holding tax or other
powers of attorney for the Pacific.
(r) LABOR MATTERS. Pacific is not a party to, and is not bound by, any
collective bargaining agreement, contract, or other agreement or understanding
with a labor organization, nor is it the subject of any proceeding asserting
that it has committed an unfair labor practice or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or labor dispute involving Pacific. Pacific considers
its employee relations to be satisfactory.
(s) EMPLOYEE BENEFIT PLANS.
(i) EXISTENCE OF PLANS. For purposes of this Agreement, the term
"Employee Plans" shall mean (i) all "employee benefit plans" (as such term
is defined in Section 3(3) of ERISA) of which Pacific or any member of the
same controlled group of corporations, trades or businesses as Pacific
within the meaning of Section 4001(a)(14) of ERISA (for purposes of this
Section, an "ERISA Affiliate") is a sponsor or participating employer or as
to which Pacific or any of its ERISA Affiliates makes contributions or is
required to make contributions and (ii) any employment, severance or other
agreement, plan, arrangement or policy of Pacific or of any of its ERISA
Affiliates (whether written or oral) providing for insurance coverage
(including self-insured arrangements), workers' compensation, disability
benefits, supplemental unemployment benefits, vacation benefits, retirement
benefits, or for profit sharing, deferred compensation, bonuses, stock
options, stock appreciation, stock awards, stock based compensation or other
forms of incentive
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compensation or post-termination insurance, compensation or benefits. Except
as set forth in the list delivered prior to the date of this Agreement by
Pacific to CNC (the Pacific Employee Plan List"), (i) neither Pacific nor
any of its ERISA Affiliates maintains or sponsors, or makes or is required
to make contributions to any Employee Plans, (ii) none of the Employee Plans
is a "multiemployer plan," as defined in Section 3(37) of ERISA, (iii) none
of the Employee Plans is a "defined benefit pension plan" within the meaning
of Section 3(35) of ERISA, (iv) each of the Employee Plans has been
administered and maintained, and is, in material compliance with all terms,
conditions and provisions of such Employee Plans and all provisions of
ERISA, the Code, the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") and all other applicable laws, and (v) all government reports and
filings required by law have been properly and timely filed and all
information required to be distributed to participants or beneficiaries has
been distributed with respect to each Employee Plan. Notwithstanding any
statement or indication in this Agreement to the contrary, and except
specifically as disclosed in the Pacific Employee Plan List there are no
Employee Plans as to which Pacific or its ERISA Affiliates will be required
to make any contributions whether on behalf of any of the current employees
of Pacific, its ERISA Affiliate or on behalf of any other person, after the
Effective Time of the Bank Merger. With respect to each of such Employee
Plans, at the Effective Time of the Bank Merger there will be no unrecorded
liabilities with respect to the establishment, implementation, operation,
administration or termination of any such Employee Plan, or the termination
of the participation in any such Employee Plan by the Pacific or any of its
ERISA Affiliates. Neither Pacific nor any ERISA Affiliate has any formal
plan or commitment whether legally binding or not, to create any additional
Employee Plan, or modify or change any existing Employee Plan that would
affect any employee or terminated employee of Pacific or any ERISA
Affiliate, except as set forth in the Pacific Employee Plan List. Except as
set forth in the Pacific Employee Plan List, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any
employees of Pacific or any Subsidiary to severance pay, (ii) accelerate the
funding, time of payment or vesting or trigger any payment of compensation
or benefits under, increase the amount payable or trigger any other material
obligation pursuant to, any of the Employee Plans or (iii) result in any
breach or violation of, or default under, any of the Employee Plans. The
Disclosure Schedule contains the Pacific Employee Plan List, and Pacific has
delivered to CNC true and complete copies of: (i) each of the Employee Plans
and any related funding and service agreements thereto (including insurance
contracts, investment management agreements, subscription and participation
agreements and recordkeeping contracts) including all amendments, all of
which are legally valid and binding and in full force and effect and there
are no defaults thereunder, (ii) the currently effective summary plan
description, summary of material modifications and all material employee
communications pertaining to each of the Employee Plans, (iii) the three
most recent annual reports for each of the Employee Plans (including all
relevant schedules), (iv) the most recently filed PBGC Form 1 (if
applicable); and (v) the most recent Internal Revenue Service determination
letter for each Employee Plan which is intended to constitute a qualified
plan under Section 401 of the Code and each amendment to each of the
foregoing documents and any requests for rulings, determinations, or
opinions pending with the Internal Revenue Service or any other governmental
agency.
(ii) PRESENT VALUE OF BENEFITS. The present value of all "benefit
liabilities", as defined in Section 4001(a)(16) of ERISA, under any Employee
Plan subject to Title IV of ERISA (as determined both on the basis of the
actuarial assumptions contained in the Employee Plan's most recent actuarial
valuation and on a termination basis) shall not, as of the Effective Time of
the Merger, exceed the value (as determined both on a fair market value and
actuarial value basis) of the assets of such Employee Plan allocated to such
benefit liabilities. With respect to each Employee Plan that is subject to
Title IV of ERISA (i) no amount is due or owing from Pacific or its ERISA
Affiliates to the Pension Benefit Guaranty Corporation or to any
"multiemployer plan"
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as defined in Section 3(37) of ERISA on account of any withdrawal therefrom
and (ii) no such Employee Plan has been terminated other than in accordance
with ERISA or at a time when the Employee Plan was not sufficiently funded.
The transactions contemplated hereunder, including without limitation the
termination of the Employee Plans at or prior to the Effective Time of the
Merger, shall not result in any such withdrawal or other liability under any
applicable laws.
(iii) PENALTIES; REPORTABLE EVENTS. To Pacific's knowledge, none of
the Employee Plans, nor any trust created thereunder nor any trustee,
fiduciary or administrator thereof, has engaged in any transaction which
might subject Pacific or any Pacific Subsidiary to any material tax or
material penalty on prohibited transactions imposed by Section 4975 of the
Code or Section 406 of ERISA or to any material civil penalty imposed by
Section 502 of ERISA. None of the Employee Plans subject to Title IV of
ERISA has been completely or partially terminated nor has there been any
"reportable event," as such term is defined in Section 4043(b) of ERISA,
with respect to any of such Employee Plans within the 12 month period ending
on the date hereof for which the 30-day reporting requirement has not been
waived, nor has any notice of intent to terminate been filed or given with
respect to any such Employee Plan. There has been no (i) withdrawal by
Pacific or any of its ERISA Affiliates that is a substantial employer from a
single-employer plan which is a Employee Plan and which has two or more
contributing sponsors at least two of whom are not under common control, as
referred to in Section 4063(b) of ERISA, or (ii) cessation by Pacific or any
of its ERISA Affiliates of operations at a facility causing more than 20% of
Employee Plan participants to be separated from employment, as referred to
in Section 4062(f) of ERISA.
(iv) DEFICIENCIES; QUALIFICATION. None of the Employee Plans nor any
trust created thereunder has incurred any "accumulated funding deficiency"
as such term is defined in Section 412 of the Code, whether or not waived.
Furthermore, neither Pacific nor any of its ERISA Affiliates has provided or
is required to provide any security to any Employee Plan pursuant to
Section 401(a)(29) of the Code. Each of the Employee Plans which is intended
to be a qualified plan under Section 401(a) of the Code has received a
favorable determination letter from the IRS and Pacific does not know of any
fact which could adversely affect the qualified status of any such Employee
Plan. All contributions required to be made to each of the Employee Plans
under the terms of the Employee Plan, ERISA, the Code or any other
applicable laws have been timely made. The Financial Statements properly
reflect all amounts required to be accrued as liabilities to date under each
of the Employee Plans. Except as set forth in the Pacific Employee Plan
List, there is no Employee Plan or other contract, agreement or benefit
arrangement covering any employee of Pacific or any Subsidiary which,
individually or collectively, could rise to the payment of any amount which
would constitute an "excess parachute payment" (as defined in Section 280G
of the Code).
(v) LITIGATION. There have occurred and there exists (i) no pending
litigation or controversies against the Employee Plans or against Pacific or
any of its ERISA Affiliates as the "employer" or "sponsor" under the
Employee Plans or against the trustee, fiduciaries or administrators of any
of the Employee Plans and (ii) no pending or, to Pacific's knowledge,
threatened investigations, proceedings, lawsuits, disputes, actions or
controversies involving the Employee Plans, the administrator or trustee of
any of the Employee Plans with any of the Internal Revenue Service,
Department of Labor, Pension Benefit Guaranty Corporation, any participant
in the Employee Plans or any other person whatsoever. Without limiting the
generality of the foregoing, there are no lawsuits or other claims, pending
or to Pacific's knowledge, threatened (other than routine claims for
benefits under an Employee Plan) against (i) any Employee Plan, or (ii) any
"fiduciary" of such Employee Plan (within the meaning of Section 3(21)(A) of
ERISA) brought on behalf of any participant, beneficiary or fiduciary
thereunder.
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(vi) To Pacific's knowledge, neither Pacific nor any of its ERISA
Affiliates has used the services of (i) workers for more than one year who
have been provided by a third party contract labor supplier (e.g., an
outside temporary placement agency) or who may otherwise be eligible to
participate in any of the Employee Plans or to an extent that would
reasonably be expected to result in the disqualification of any of the
Employee Plans or the imposition of penalties or excise taxes with respect
to the IRS, the Department of Labor, the Pension Benefit Guaranty
Corporation or any other Governmental Entity, (ii) temporary employees who
have been directly hired by Pacific or any Subsidiary or any of its ERISA
Affiliates for more than six months or who may otherwise be eligible to
participate in any of the Employee Plans or to an extent that would
reasonably be expected to result in disqualification of any of the Employee
Plans or the imposition of penalties or excise taxes with respect to the
IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or
any other Governmental Entity, (iii) individuals who have provided services
to Pacific or any of its ERISA Affiliates as independent contractors for
more than six months or who may otherwise be eligible to participate in the
Employee Plans or to an extent that would reasonably be expected to result
in the disqualification of any of the Employee Plans or the imposition or
penalties or excise taxes with respect to the IRS, the Department of Labor,
the Pension Benefit Guaranty Corporation or any other Governmental Entity or
(iv) leased employees, as that term is defined in Section 414(n) of the
Code.
(vii) Except as set forth in the Pacific Employee Plan List, with respect
to each Employee Plan that is funded wholly or partially through an
insurance policy, there will be no liability of Pacific, any Subsidiary or
any of their ERISA Affiliates, as of the Effective Time of the Bank Merger,
under any such insurance policy or ancillary agreement with respect to such
insurance policy in the nature of a retroactive rate adjustment, loss
sharing arrangement or other actual or contingent liability arising wholly
or partially out of events occurring prior to the Effective Time of the
Merger.
(t) INSIDER LOANS; OTHER TRANSACTIONS. The Disclosure Schedule contains a
listing, current as of the date of this Agreement, of all Reg O Loans made by
Pacific, all of which have been made in compliance with Regulation O, which
listing is true, correct and complete in all material respects. Pacific does not
owe any amount to, and does not have any contract or lease with or commitment
to, any of the present executive officers or directors of Pacific (other than
for compensation for current services not yet due and payable, and reimbursement
of expenses arising in the ordinary course of business).
(u) TITLE TO ASSETS. Pacific has good and marketable title to all of its
material properties and assets (other than (i) property as to which it is lessee
and (ii) OREO), including, without limitation, all personal and intangible
properties reflected in the 1998 10-K, the 10-Q or the Pacific Financial
Statements, or acquired subsequently thereto, subject to no liens, mortgages,
security interests, encumbrances or charges of any kind except (1) as noted in
the 1998 10-K, the 10-Q or in the Pacific Financial Statements, or as set forth
in the Disclosure Schedule, (2) statutory liens not yet delinquent which are
being contested in good faith by appropriate proceedings, and liens for Taxes
not yet due, (3) pledges of assets in the ordinary course of business to secure
public deposits, (4) for those assets and properties disposed of for fair value
in the ordinary course of business since December 31, 1998, (5) defects and
irregularities of title and encumbrances that do not materially impair the use
thereof for the purpose for which they are held, and (6) any other liens,
mortgages, security interests, encumbrances or charges of any kind, which
individually do not exceed $100,000 in amount. Without limiting the above,
Pacific owns or possesses valid and binding licenses and other rights to itself
use without payment all material patents, copyrights, trade secrets, trade
names, service marks, logos and trademarks used in its business, and none of
them has received any notice of conflicts with respect thereto that asserts the
rights of others.
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(v) KNOWLEDGE AS TO CONDITIONS. Pacific has no knowledge of any reason why
the necessary approvals, consents and waivers of Governmental Authorities
referred to in Section 7.1(b) should not be obtained without the imposition of
any condition of the type referred to therein.
(w) FEES. Other than financial advisory services performed for Pacific by
Keefe, Bruyette & Woods, Inc., neither Pacific nor any of its officers,
directors, employees or agents, has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
finder's fees in connection with this Agreement or the transactions contemplated
hereby.
(x) ENVIRONMENTAL.
(i) To Pacific's knowledge, all of the properties and operations of
Pacific are in compliance in all material respects with all Environmental
Laws (as defined below) applicable to such properties and operations.
(ii) To Pacific's knowledge, Pacific has obtained all material permits,
licenses, and authorizations which are required for Pacific's operations
under Environmental Laws.
(iii) To Pacific's knowledge, no Hazardous Substances (as defined below)
exist on or within, or have been used, generated, stored, treated,
manufactured, produced, processed, transported, disposed of on, or released
from, any of the properties of Pacific in regulated quantities or
concentrations except in accordance in all material respects with
Environmental Laws. Pacific has no knowledge that any prior owners,
occupants or operators of any such property or any other property in which
it has a security interest, ever deposited, disposed of, or allowed to be
deposited or disposed of, in, on, or under or handled or processed on, or
released, emitted or discharged from, such properties any Hazardous
Substances in regulated quantities or concentrations except in accordance in
all material respects with Environmental Laws, or to Pacific's knowledge
that any prior or present owners, occupants or operators of any properties
in which it holds a security interest, mortgage or other lien or interest,
deposited or disposed of, in, on or under or handled and/or processed on, or
released, emitted or discharged from, such properties any Hazardous
Substances except in accordance in all material respects with Environmental
Laws. To the knowledge of Pacific, the use which Pacific has made, makes and
intends to make of its properties will not result in the use, generation,
storage, transportation, accumulation, disposal or release of any Hazardous
Substance in regulated quantities or concentrations on, in, or from any of
such properties except in accordance in all material respects with
applicable Environmental Laws.
(iv) To the knowledge of Pacific, there is no action, suit, proceeding,
investigation, or inquiry before any court, administrative agency or other
Governmental Authority pending, or, to the knowledge of Pacific, threatened
against Pacific relating in any way to any material violation of any
applicable Environmental Law, nor does Pacific have any reason to believe
that any of the above will be forthcoming. To the knowledge of Pacific,
Pacific has no material liability for remedial action with respect to a
violation of an Environmental Law, nor has it received any written requests
for information relating to any material violations of any Environmental Law
from any Governmental Authority with respect to the condition, use, or
operation of any of its properties nor has any of them received any notice
from any Governmental Authority or any written notice from any other person
with respect to any material violation of or material liability for any
remedial action under any Environmental Law, nor does Pacific have any
reason to believe that any of the above will be forthcoming.
(v) As used in this Section, the term "Environmental Law" means, but is
not limited to, any and all Federal, state and local laws, statutes,
charters or ordinances, and any rules, regulations, binding interpretation,
promulgated policy, court order or consent decree issued pursuant to any of
the foregoing which pertains to health, safety and the environment,
including the Comprehensive Environmental Response Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601, ET SEQ. ("CERCLA"), the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, ET
SEQ.
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("RCRA"), the Occupational Safety and Health Act, 29 U.S.C. Section 651, ET
SEQ. (as it relates to the use of, or exposure to, Hazardous Substances),
the Clean Air Act, 42 U.S.C. Section 7401, ET SEQ., the Clean Water Act, 33
U.S.C. Section 1251, ET SEQ., the Toxic Substance Control Act, 15 U.S.C.
Section 2601, ET SEQ., the Carpenter-Presley-Tanner Hazardous Substance
Account Act, as amended, Chapter 6.8 of the California Health and Safety
Code, Section 25300, ET SEQ., and the Hazardous Waste Control Law,
Chapter 6.5 of the California Health and Safety Code, Section 25100, ET SEQ.
(the latter two statutes being referred to herein as the "STATE ACTS"), and
any and all regulations promulgated thereunder, and all similar laws,
regulations, and requirements of any Governmental Authority having
jurisdiction over the environmental activities of Pacific or of its
properties as such laws, regulations, and requirements may be in effect on
the date hereof.
(vi) As used in this Section, the term "properties" shall include: all
real estate property now owned or leased by Pacific or any Subsidiary and
property as to which Pacific or any Subsidiary holds any security interest,
deed of trust, mortgage or other lien.
(vii) As used in this Section, the term "Hazardous Substance" shall mean
(A) any "hazardous waste" as defined by CERCLA and the State Acts, as such
acts are in effect on the date hereof, and any and all regulations
promulgated thereunder; (B) any "hazardous substance" as such term is
defined by CERCLA; (C) any "regulated substance" as defined by the State
Acts; (D) asbestos requiring abatement, removal or encapsulation pursuant to
the requirements of Governmental Authorities; (E) polychlorinated biphenyls;
(F) petroleum products; (G) "hazardous chemicals" or "extremely hazardous
substances" in quantities sufficient to require reporting, registration,
notification and/or optional treatment or handling under the Emergency
Planning and Community Right to Know Act of 1986, as amended; (H) any
"hazardous chemical" in levels that would result in exposure greater than is
allowed by permissible exposure limits established pursuant to the
Occupational Safety and Health Act of 1970; (I) any substance that requires
reporting, registration, notification, removal, abatement and/or special
treatment, storage, handling or disposal, under Section Section 6, 7 and 8
of the Toxic Substance Control Act (15 U.S.C. Section 2601); (J) any toxic
or hazardous chemical described in 29 C.F.R. 1910.1000-1047 in levels that
would result in exposure greater than those allowed by the permissible
exposure limits pursuant to such regulations; and (K) any (1) "hazardous
waste," (2) "solid waste" capable of causing a "release or threatened
release" that present an "imminent and substantial endangerment" to the
public health and safety of the environment, (3) "solid waste" that is
capable of causing a "hazardous substance incident," (4) "solid waste" with
respect to which special requirements are imposed by applicable Governmental
Authorities upon the generation, transportation thereof as such terms are
defined and used within the meaning of the State Acts or (E) any "pollutant"
or "toxic pollutant" as such term is defined in the Federal Clean Water Act,
33 U.S.C. Section Section 1251-1376, as amended, by Public Law 100-4,
February 4, 1987, and the regulations promulgated thereunder, including 40
C.F.R. Section Section 122.1 and 122.26.
(y) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The ALLL for Pacific is adequate
in accordance with GAAP and RAP.
(z) PERFORMANCE OF OBLIGATIONS. (i) Pacific has performed in all material
respects all of the obligations required to be performed by it to date, and is
not in material default under, or in material breach of, any term or provision
of any contract, lease, indenture or any other agreement to which it is a party,
is subject or is otherwise bound and no event has occurred that, with the giving
of notice or the passage of time, or both, would constitute a default or breach;
and (ii) the Disclosure Schedule contains a list of all contracts to which
Pacific is a party, except for deposit agreements, loan agreements or contracts
terminable without penalty on not more than 60 days' notice or involving the
payment of not more than $150,000 per annum.
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(aa) INSURANCE. Pacific has in effect policies of insurance with respect
to its assets and business against such casualties and contingencies and in such
types and forms as in the judgment of its management are appropriate for its
business, operations, properties and assets. Pacific has made available to CNC
copies of all policies of insurance and bonds carried and owned by Pacific as of
the date hereof, which copies are complete and accurate in all material
respects, and which are listed in the Disclosure Schedule. Pacific is not in
default under any such policy of insurance or bond such that it is reasonably
likely to be cancelled. No notice of cancellation or material amendments has
been received with respect to existing material policies and no coverage
thereunder with respect to any material claims is being disputed.
(bb) LISTING OF LOANS. The Disclosure Schedule contains copies of the
detailed listing of all loans and notes receivable of Pacific as of the end of
the month ending immediately prior to the date of this Agreement, including
participations, with the outstanding principal balance of each such loan and
note receivable, and the past due status of any loan or note receivable, and
such copies reflect correctly the detail of trial balance totals in all material
respects as of the date of such reports.
(cc) DERIVATIVE TRANSACTIONS. Pacific is not party to a transaction in or
involving forwards, futures, options on futures, swaps or other derivative
instruments.
(dd) TRUST ADMINISTRATION. All trusts now or heretofore held by Pacific
have been properly administered in all material respects in conformity with the
terms of the applicable governing documents and with the governing law,
including, without limitation, with respect to substitution of fiduciaries,
accountings, distributions, allocations, credits and charges between and to
income and principal accounts, internal account acceptance policies and
procedures, investments, investment review procedures, internal and client
investment guidelines, reporting, obtaining necessary approvals, compliance with
instructions, maintenance and security of assets, fees charged and Taxes. All
material information affecting fiduciary positions and records demonstrating the
correctness of the foregoing representation are maintained by Pacific in its
normal files. In connection with the performance of services related to
fiduciary positions, Pacific has not made any guarantee or assurance to any
person concerning a rate of return or preservation of principal, marketability
or quality of the assets held in the trusts. The trust documents under which
Pacific is serving in fiduciary positions are in full force and effect and
provide Pacific with the requisite authority to act as fiduciary. The term
"trusts now or heretofore held" includes (a) any and all common law or other
trusts between individual, corporate or other entities and Pacific as a trustee
or co-trustee, including, without limitation, pension or other qualified or
non-qualified employee benefit plans, compensation, testamentary, INTER VIVOS,
and charitable trusts and indentures, (b) any and all decedents' estates where
Pacific is serving or has served as a co-executor or sole executor, personal
representative or administrator, administrator DE BONIS NON, administrator DE
BONIS NON with will annexed, or in any similar fiduciary capacity, (c) any and
all guardianships, conservatorships or similar positions where Pacific is
serving or has served as a co-guardian or sole guardian or conservator or
co-conservator of the estate, or any similar fiduciary capacity, (d) any and all
agency and/or custodial accounts and/or similar arrangements, including plan
administration for employee benefit accounts, under which Pacific is serving or
has served as an agent or custodian for the owner or other party establishing
the account with or without investment authority and (e) any and all escrow
arrangements under which Pacific holds or held assets for any party or parties
on stated terms and conditions. All positions now or heretofore held by Pacific
are herein called "fiduciary positions."
(ee) CONTINGENT ASSET. Pacific, through its subsidiary, TPB
Holdings, Inc., indirectly owns 100% of the outstanding capital stock of
American Star Insurance Company ("AMERICAN STAR") which is currently in the
process of liquidation in a proceeding entitled IN THE MATTER OF THE LIQUIDATION
OF AMERICAN STAR INSURANCE COMPANY (Case No. 92-CV-4579) pending in the District
Court of Dane County, State of Wisconsin (the "AMERICAN STAR LIQUIDATION
PROCEEDING"). Pacific owns such outstanding shares of capital stock of American
Star and a surplus note dated May 1, 1986 of American Star in the principal sum
of $5,500,000 (the "SURPLUS NOTE") free and clear of all liens, claims,
encumbrances,
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charges, restrictions, proxies, pledges or adverse equities of any kind.
Pacific's claims to the Surplus Note and capital stock of American Star in the
American Star Liquidation Proceeding are of record and consistent with Chapter
645 of the Wisconsin statutes and neither the Court appointed liquidator nor any
other person has challenged Pacific's claims.
(ff) CONTINGENT LIABILITIES. Pacific has no knowledge of any contingent
liabilities of Pacific which could be material to Pacific, other than those
reflected in the 1998 10-K, the 10-Q or in the Pacific Financial Statements or
the contracts, litigation and other matters listed in the Disclosure Schedule,
whether or not disclosure or accrual is required pursuant to GAAP.
(gg) STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by Pacific for inclusion in the S-4 (as defined in Section 6.2(a))
or the Proxy Statement/Prospectus (as defined in Section 6.2(a)), or
incorporated by reference therein, or any other document to be filed with any
governmental agency or regulatory authority in connection with the transactions
contemplated hereby will, in the case of the Proxy Statement/Prospectus, when it
is first mailed to the shareholders of Pacific, contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the S-4, when it becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting shareholders of Pacific, be false
or misleading with respect to any material fact or omit to state any material
necessary to correct any statement or remedy any omission in any earlier
communication with respect to the solicitation of any proxy of the Pacific
shareholders' meeting.
(hh) ACCURATE DISCLOSURE. Pacific agrees that through the Effective Time
of the Merger, each of its reports, and other filings required to be filed with
any applicable Governmental Authority will comply in all material respects with
all of the applicable statutes, rules and regulations enforced or promulgated by
the Governmental Authority with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of Pacific will fairly present the financial
position of such entities or entity and will be prepared in accordance with GAAP
or RAP consistently applied during the periods involved. Notwithstanding
anything to the contrary set forth in this Section 5.1(ff), Pacific makes no
representation or warranty with respect to any information supplied by CNC or
CNB or in any such report filed by CNC or CNB or any of CNC's Reports (as
defined in Subsection 5.2(f)).
(ii) YEAR 2000 COMPLIANT. (i) Pacific has complied in all material
respects with all published interpretations, regulations, statements, guidelines
and similar documents promulgated by the OCC, FDIC, or Board of Governors with
respect to Year 2000 Compliance; (ii) Pacific has not received a grade lower
than "satisfactory" on any Year 2000 Compliance examination conducted by any
Governmental Authority; (iii) Pacific has not received, and does not reasonably
expect to receive, a "Year 2000 Deficiency Notification Letter" (as such term is
employed by the bank regulatory authorities); (iv) the cost of all past and
projected Year 2000 Compliance actions and adaptations of Pacific's application,
network and operating software and related hardware (including all automated
teller machines), whether owned by Pacific or licensed from a third party (the
"COMPUTER SYSTEM") and systems which are not included within the term Computer
System such as (by way of example only) elevators, ventilation and heating
systems for bank-owned premises, and telephone and other communication systems
(collectively referred to herein as "NON-COMPUTER SYSTEMS") has been expensed,
accrued or reserved and projected future costs of all Year 2000 Compliance
action required prior to January 1, 2000 are not expected to be material; and
(v) Pacific's ALLL procedures have included consideration of reserves for the
possibility that Pacific may suffer losses if any customers are not Year 2000
Compliant but no allocation was considered necessary. As used herein, "Year 2000
Compliant" or
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"Year 2000 Compliance" shall mean the ability of the Computer System and
Non-Computer Systems to provide the following functions, without human
intervention, individually and in combination with other products or systems:
(i) consistently handle record, store, process and present dates and
date-related information before, during and after January 1, 2000, including but
not limited to accepting date input, performing calculations on dates or
portions of dates, and providing date output; (ii) function in accordance with
the published specifications and without undue interruption, before, during, and
after January 1, 2000 (including leap year computations) without any adverse
change in operation associated with the advent of the year 2000; (iii) respond
to two-digit or four-digit dates and date related input in a disclosed, defined
and predetermined manner, and store and provide output of dates and date-related
information in ways that are unambiguous as to the year 2000; and (iv) suitably
interact with other software and related hardware in a way which does not
compromise its year 2000 Compliance capability. Pacific shall immediately notify
CNB if it becomes aware that Pacific, its Computer System or Non-Computer
Systems may not be Year 2000 Compliant or that Pacific may be materially
adversely affected by any third party's failure to be Year 2000 Compliant.
Section 5.2 REPRESENTATIONS AND WARRANTIES OF CNC. CNC represents and
warrants to Pacific that:
(a) RECITALS TRUE. The information set forth in the recitals of this
Agreement with respect to CNC and CNB are true.
(b) CAPITAL STOCK. CNC is authorized to issue 75,000,000 shares of Common
Stock, $1.00 par value, and is not authorized to issue any other class or series
of capital stock, or any other securities giving the holder thereof the right to
vote on any matters on which shareholders of CNC can vote. As of August 31,
1999, 46,885,182 shares of CNC Common Stock were issued and outstanding, and
1,416,368 shares are held as treasury stock. All outstanding shares of CNC
Common Stock are and all shares to be issued pursuant to the Merger will be,
duly authorized, validly issued, fully paid and nonassessable, and are not, or
will not be, subject to preemptive rights. CNC has provided Pacific with true
and correct copies of its Certificate of Incorporation and Bylaws.
(c) AUTHORITY. CNC has the power and authority, and is duly qualified in
all jurisdictions where such qualification is required (except for such
qualifications the absence of which, individually or in the aggregate, would not
have a Material Adverse Effect on CNC), to carry on its business as it is now
being conducted and to own all of its material properties and assets. CNC has
all federal, state, local and foreign governmental authorizations necessary for
it to own or lease its properties and assets and to carry on its business as it
is now being conducted, except for such powers and authorizations the absence of
which, either individually or in the aggregate, would not have a Material
Adverse Effect on CNC.
(d) APPROVALS. The execution by CNC of this Agreement has been authorized
by all necessary corporate actions, including, but not limited to, a vote by its
boards of directors. No vote, consent or approval of the shareholders of CNC is
required to authorize this Agreement or the transactions contemplated herein.
Subject to receipt of the required approvals, consents or waivers of
Governmental Authorities referred to in Section 7.1(b), this Agreement is a
valid and binding agreement enforceable against CNC in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditor's rights, and general equity principles.
(e) NO VIOLATIONS. The execution, delivery and performance of this
Agreement by CNC does not, and the execution, delivery and performance of the
Agreement of Merger and consummation of the Merger will not, constitute (i) a
breach or violation of, or a default under, any applicable law, rule or
regulation or any material judgment, decree, order, governmental permit or
license, or material indenture, agreement or instrument of CNC or CNB to which
either is subject, which breach, violation or default would have a Material
Adverse Effect on CNC or would materially hinder or delay the Merger or (ii) a
breach or violation of, or a default under, the Certificate of Incorporation or
Bylaws of CNC or the Articles of Association or Bylaws of CNB; and the
consummation of the Merger will not
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require any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval, consent
or waiver of any other party to any such agreement, indenture or instrument,
other than (A) the required approvals, consents and waivers of Governmental
Authorities referred to in Section 7.1(b); and (B) any other approvals, consents
or waivers, the absence of which, individually or in the aggregate, would not
result in a Material Adverse Effect on CNC or would not materially hinder or
delay the Merger.
(f) FINANCIAL STATEMENTS. As of their respective dates, none of CNC's
Annual Report on Form 10-K for the fiscal ended December 31, 1998 or Quarterly
Report on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999, nor
any other document filed subsequent to December 31, 1994 under Section 13(a),
13(d), 14 or 15(d) of the Exchange Act, each in the form (including exhibits)
filed with the SEC (collectively, the "CNC REPORTS"), contained or will contain
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading. Each
of the balance sheets or statements of condition contained or incorporated by
reference in the CNC Reports (including any related notes and schedules) fairly
present the financial position of the entity or entities to which it relates as
of its date and each of the statements of operations and retained earnings and
of cash flows or equivalent statements contained or incorporated by reference in
the CNC Reports (including any related notes and schedules) fairly present the
results of operations, retained earnings and cash flows, as the case may be, of
the entity or entities which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments that are not Material in amount or effect), in each case in
accordance with the published rules and regulations of the SEC and GAAP
consistently applied and applicable to bank holding companies during the periods
involved, except as may be noted therein. The books and records of CNC have
been, and are being maintained in all material respects in accordance with GAAP
and RAP and other applicable legal and accounting requirements and reflect only
actual transactions.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in CNC's
Quarterly Report on Form 10-Q for the quarters ended March 31, 1999 and
June 30, 1999, since December 31, 1998, there have not been any changes in the
business, assets, financial condition or results of operations of CNC and its
Subsidiaries that, individually or in the aggregate, have had a Material Adverse
Effect on CNC.
(h) ABSENCE OF CLAIMS. No litigation, proceeding or controversy before any
court or governmental agency or authority is pending against CNC or its
Subsidiaries which is reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on CNC or to materially hinder or delay
consummation of the Merger, and, to its knowledge, no such litigation,
proceeding, controversy, claim or action has been threatened.
(i) KNOWLEDGE AS TO CONDITIONS. CNC knows of no reason why the approvals,
consents and waivers of Governmental Authorities referred to in
Section 7.1(b) should not be obtained without the imposition of any condition of
the type referred to in the provisos thereto.
(j) COMPLIANCE WITH LAWS. CNC and its Subsidiaries are not in material
violation in any respect of any material Federal, state or local laws, rules,
regulations or orders applicable to them or by which their properties may be
bound, except such violations as would not have a Material Adverse Effect on
CNC.
(k) REGULATORY ACTIONS. Neither CNC nor CNB is a party to any cease and
desist order, written agreement, memorandum of understanding or any similar
regulatory action or order with any Governmental Authority, nor a recipient of
any extraordinary supervisory letter from, nor has it adopted any board
resolution at the request of any of its regulators, nor been advised that any
such issuance or request is contemplated. Each material violation, criticism, or
exception by any Governmental Authority with respect to any examinations of CNC
or CNB has been resolved or is in the process of resolution.
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(l) COMMUNITY REINVESTMENT ACT. CNB received a rating of "satisfactory" in
its most recent examination or interim review with respect to the Community
Reinvestment Act. CNB has not been advised of any supervisory concerns regarding
its compliance with the Community Reinvestment Act.
(m) BANK SECRECY ACT. Neither CNC nor CNB has been advised of any
supervisory concerns regarding its compliance with the Bank Secrecy Act (31
U.S.C. Section 5322, et seq.) or related state or federal anti-money laundering
laws, regulations and guidelines, including (i) those provisions of the United
States Code providing penalties for the laundering of monetary instruments (18
U.S.C. Section 1956) or engaging in monetary transactions in property derived
from specified unlawful activity (18 U.S.C. Section 1957) and (ii) any "Know
Your Customer" regulations, guidelines or supervisory policies and examination
requirements.
(n) FAIR LENDING LAWS. To CNC's knowledge, neither CNC nor CNB is the
subject of a referral to either the United States Department of Justice or the
Department of Housing and Urban Development for alleged violations of the Fair
Lending Acts.
(o) STATEMENTS TRUE AND CORRECT. None of the information supplied or to be
supplied by CNC for inclusion in the S-4 (as defined in Section 6.2(a)) or the
Proxy Statement/Prospectus, or incorporated by reference therein, or any other
document to be filed with any governmental agency or regulatory authority in
connection with the transactions contemplated hereby will, in the case of the
Proxy Statement/Prospectus (or incorporated by reference therein), when it is
first mailed to the shareholders of Pacific, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the S-4, when it becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement/Prospectus or any amendment
thereof or supplement thereto, at the time of the meeting of shareholders of
Pacific, be false or misleading with respect to any material fact or omit to
state any material fact necessary to correct any statement or remedy any
omission in any earlier communication with respect to the solicitation of any
proxy of the Pacific shareholders' meeting.
(p) ACCURATE DISCLOSURE. CNC agrees that through the Effective Time of the
Merger, each of its reports, and other filings required to be filed with any
applicable Governmental Authority will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Authority with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of CNC and its Subsidiaries will fairly present
the financial position of CNC and its Subsidiaries, will be prepared in
accordance with generally accepted accounting principles or applicable banking
regulations consistently applied during the periods involved. Notwithstanding
anything to the contrary set forth in this Section 5.2(p), CNC makes no
representation or warranty with respect to any information supplied by Pacific
or Pacific's Subsidiaries (or any of the Pacific Reports).
(q) YEAR 2000 COMPLIANT. (i) CNC and CNB have complied in all material
respects with all published interpretations, regulations, statements, guidelines
and similar documents promulgated by the OCC, FDIC, or Board of Governors with
respect to Year 2000 Compliance; (ii) neither CNC nor CNB has received a grade
lower than "satisfactory" on any Year 2000 Compliance examination conducted by
any Governmental Authority; (iii) neither CNC nor CNB has received, and does not
reasonably expect to receive, a Year 2000 Deficiency Notification Letter;
(iv) the cost of all past and projected Year 2000 Compliance actions and
adaptations of CNC and CNB's Computer System and Non-Computer Systems has been
expensed, accrued or reserved and projected future costs of all Year 2000
Compliance action required prior to January 1, 2000 are not expected to be
material; and (v) CNC and CNB's ALLL procedures have included consideration of
reserves for the possibility that CNC and CNB may suffer losses if any customers
are not Year 2000 Compliant but no allocation was considered necessary. CNC
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shall immediately notify Pacific if it becomes aware that CNC or CNB or their
Computer System or Non-Computer Systems may not be Year 2000 Compliant or that
CNC or CNB may be materially adversely affected by any third party's failure to
be Year 2000 Compliant.
ARTICLE VI
COVENANTS
Section 6.1 COOPERATION. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all commercially reasonable
efforts to take promptly, or cause to be taken promptly, all actions and to do
promptly or cause to be done promptly, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as practicable. Pacific
shall also cooperate with CNB in all commercially reasonable respects in
accomplishing the Merger.
Section 6.2 REGULATORY MATTERS.
(a) CNC and Pacific shall promptly prepare and file with the SEC and the OCC
a registration statement on Form S-4, including the definitive proxy statement
and prospectus (the "PROXY STATEMENT/ PROSPECTUS") to be mailed to the Pacific
Shareholders in connection with the Pacific shareholders' meeting to vote upon
the Merger (the "S-4"). CNC shall use all reasonable efforts to have the S-4
declared effective under the Securities Act, and Pacific shall use all
reasonable efforts to have the OCC approve the Proxy Statement/Prospectus, as
promptly as practicable after such filings, and Pacific shall thereafter mail
the Proxy Statement/Prospectus to its shareholders. CNC shall also use all
reasonable efforts to obtain all necessary state securities law or "Blue Sky"
permits and approvals required to carry out the transactions contemplated by
this Agreement, and obtain the approval for listing on the New York Stock
Exchange of the shares of CNC Common Stock to be issued to holders of Common
Stock in the Merger. Pacific shall furnish all information concerning Pacific
and the holders of Pacific Common Stock as may be reasonably requested in
connection with any such action.
(b) The parties hereto shall cooperate with each other and use commercially
reasonable efforts to promptly prepare and file all necessary documentation, to
effect all applications, notices, petitions and filings, to obtain as promptly
as practicable all permits, consents, approvals and authorizations or waivers of
all Governmental Authorities which are necessary or advisable to consummate the
transactions contemplated by this Agreement, and to comply with the terms and
conditions of all such permits, consents, approvals and authorizations, and to
the extent practicable each will consult the other on, in each case subject to
applicable laws relating to the exchange of information, all the information
relating to Pacific, CNC or to CNB, as the case may be, which appear in any
filing made with, or written materials submitted to, any Governmental Authority
in connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the parties hereto shall act reasonably
and as promptly as practicable. The parties hereto agree that they will consult
with each other and, upon request, furnish each other with information
concerning themselves, their subsidiaries, directors, officers and shareholders
and such other matters as may be reasonably necessary with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) CNC and Pacific shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement/Prospectus, the S-4 or any other
statement, filing, notice or application made by or on behalf of CNC, Pacific or
any of their respective Subsidiaries to any Governmental Authority in connection
with the transactions contemplated by this Agreement.
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(d) CNC and Pacific shall promptly advise each other upon receiving any
communication from any Governmental Authority whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
the approval of any Governmental Authority required pursuant to
Section 7.1(b) will not be obtained or that the receipt of any such approval
will be materially delayed beyond July 1, 2000.
Section 6.3 SHAREHOLDERS' APPROVAL. Pacific shall duly call, give notice
of, convene and hold a meeting of its shareholders to be held as soon as
practicable following the date hereof for the purpose of obtaining the requisite
shareholder approvals required in connection with this Agreement and the Merger.
Subject to the provisions of the next sentence, Pacific shall, through its Board
of Directors, recommend to its shareholders approval of such matters. Pacific's
Board of Directors may fail to make such recommendation, or withdraw, modify or
change any such recommendation in a manner adverse to CNC if such Board of
Directors, after having consulted with and considered the advice of counsel, has
reasonably determined in good faith that the making of such recommendation, or
the failure to withdraw, modify or change its recommendation, would constitute a
breach of the fiduciary duties of the members of such Board of Directors under
applicable law.
Section 6.4 LEGAL CONDITIONS TO MERGER.
(a) Each of Pacific and CNC shall, and shall cause each of its Subsidiaries
to, use commercially reasonable efforts (i) to take, or cause to be taken, all
actions necessary, proper or advisable to comply promptly with all legal
requirements which may be imposed on such party or its Subsidiaries with respect
to the Merger and, subject to the conditions set forth in Article VII hereof, to
consummate the transactions contemplated by this Agreement and (ii) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any Governmental Authority and any
other third party which is required to be obtained by Pacific, CNC or any of
their respective Subsidiaries in connection with the Merger and the other
transactions contemplated by this Agreement, and to comply with the terms and
conditions of any such consent, authorization, order or approval.
(b) Each of CNC and Pacific agrees to use commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective, as soon
as practicable after the date of this Agreement, the transactions contemplated
hereby, including, without limitation, using reasonable efforts to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby;
using reasonable efforts to defend any litigation seeking to enjoin, prevent or
delay the consummation of the transactions contemplated hereby; with respect to
Pacific, using reasonable efforts to defend and resolve any litigation seeking
material or punitive damages; and with respect to Pacific using its reasonable
efforts to obtain all consents of other parties to Pacific's leases, mortgages,
agreements, licenses and permits necessary to permit the transactions
contemplated hereby without a material default, acceleration, breach or loss of
rights thereunder.
Section 6.5 INFORMATION.
(a) CNC'S RIGHT TO ACCESS AND INFORMATION. Upon reasonable notice, Pacific
shall, and shall cause each of its subsidiaries to, afford to CNC and its
representatives (including, without limitation, directors, officers, and
employees, and their affiliates, and counsel, accountants and other
professionals retained) such reasonable access during normal business hours
throughout the period prior to the Effective Time of the Merger to the books,
records (including, without limitation, Tax Returns and work papers of
independent auditors), properties, policies, files, personnel and to such other
information as such persons may reasonably request, permit such persons to
inspect and make copies of all stock records, minute books, books of account,
contracts, commitments and other records, furnish to CNC such counterpart
originals or certified or other copies of such documents or such information
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with respect to its businesses and affairs as CNC may reasonably request and
that Pacific may provide without violation of applicable law or regulation or
jeopardy to any attorney-client or similar privilege to which Pacific may be
entitled as against third parties other than CNC. Without limiting the
foregoing, Pacific shall (i) promptly provide (but in no event more than eight
Business Days after the end of each month) CNC monthly unaudited balance sheets
and operating statements, loan delinquency reports, quarterly reserve for loan
loss adequacy reports, investment reports and such other reports and materials
as are normally prepared and provided to the Board of Directors or senior
management of Pacific and (ii) promptly provide CNC each month (but in no event
more than eight Business Days after the end of each month) and on the date that
is five days prior to the Effective Time of the Merger, a list of loans for
which a Notice of Default has been filed or for which discussions have commenced
that have a reasonable possibility of leading to a deed in lieu of foreclosure
by the obligor thereunder. Pacific shall provide CNC with as much information
concerning any exit interview or similar meetings held in connection with any
regulatory examinations of Pacific and, with respect to the examination findings
and results, as Pacific can provide without violation of law. Without limiting
the generality of the foregoing, CNC shall have the right to conduct (x) a due
diligence review of the operations and assets of Pacific and (y) a specific
credit review of Pacific during the thirty days prior to the Effective Time of
the Merger to update the prior due diligence conducted by CNC.
(b) PACIFIC'S RIGHT TO ACCESS AND INFORMATION. Upon reasonable request by
Pacific, CNC shall (i) make its Chief Financial Officer and Controller available
to discuss with Pacific and its representatives CNC's ongoing diligence and
review of Pacific's operations and (ii) shall provide Pacific with written
information which is (a) similar to the written information that Pacific
reviewed in connection with this Agreement, and (b) related to CNC's and its
Subsidiaries' business condition, operations and prospects.
(c) CUSTOMER DATA. Pacific shall promptly provide to CNC (but in no event
more than ten Business Days after the date of this Agreement and monthly
thereafter prior to the Closing) such customer loan and deposit information and
data as CNC shall request to enable CNC to analyze Pacific's loan and deposit
customer relationships.
(d) CUSTOMER CALLS. Prior to the Effective Time of the Merger,
representatives of CNC or CNB will be permitted to conduct joint calls upon
customers of Pacific, if accompanied by representatives of Pacific, on a
schedule to be agreed upon between the parties; provided, however, that in the
event that either party terminates this Agreement in accordance with the terms
hereof, neither CNC nor CNB shall, for a period of one (1) year from the date of
the termination of this Agreement, contact any customer of Pacific contacted
pursuant to this Section 6.4(c) who is not otherwise a customer of CNC or CNB.
(e) CONFIDENTIALITY. CNC shall, and CNC shall cause its representatives
and Subsidiaries to keep confidential any information obtained pursuant to this
Section 6.5 in the same manner and to the same extent as required by the letter
agreement dated August 23, 1999 between Pacific and CNC (the "CONFIDENTIALITY
AGREEMENT").
Section 6.6 EMPLOYEE BENEFITS.
(a) All employees of Pacific continuing in the employ of CNC or CNB, as the
case may be, shall be entitled to participate in stock plans, bonus plans and
all other benefit plans of CNB or CNC on the same basis as other similarly
situated employees of CNB. Each of these employees will be credited for
eligibility and vesting purposes (provided that no more than 1,040 hours of sick
leave may be carried over into CNC or CNB's sick leave program), with such
employee's respective years of past service or prior service credited with
Pacific as though they had been employees of CNC or CNB.
(b) Pacific has furnished to CNB its severance policies, if any, applicable
to its employees indicating the amount that would be due as a severance payment
to each such employee if he or she is
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not offered continued employment in an equivalent or substantially similar
position by CNC or CNB following the Effective Time of the Merger.
(c) Provided such agreement is listed on the Disclosure Schedule and a
complete copy of such agreement has been provided to CNC prior to the date
hereof, CNC hereby agrees to honor, to the extent commercially reasonable, any
existing individual employment, severance, deferred compensation and similar
agreements between Pacific and any current or former officer, director, employee
or consultant of Pacific in all material respects on the same terms as in
existence immediately before the Effective Time of the Merger. Notwithstanding
any other provision of this Agreement, no employee shall receive duplicative
benefits by reason of this Section. Nothing contained in this Agreement shall
prevent or restrict CNC from exercising any right under any such agreement,
including, without limitation, any right to terminate any such agreement,
whether or not such right arises by reason of the Merger.
(d) Between the date hereof and the Effective Time of the Merger
(i) Pacific and CNC shall cooperate to determine the appropriate treatment of
the Employee Plans, such as termination, merger into a CNC plan, etc.; and
(ii) Pacific shall take such actions as shall be reasonably requested by CNC
with respect to the disposition of the Employee Plans which shall be deemed
effective immediately prior to the Effective Time of the Merger.
Section 6.7 PUBLICITY. The initial press release announcing this Agreement
shall be a joint press release and thereafter CNC and Pacific shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and in making any filings
with any Governmental Authority or with any national securities exchange with
respect thereto. If any party hereto, on the advice of counsel, determines that
a disclosure is required by law or by any applicable self-regulatory
organization, it may make such disclosure without the consent of the other
parties, but only after affording the other parties a reasonable opportunity to
review and comment upon the disclosure.
Section 6.8 NOTIFICATION OF CERTAIN MATTERS. Pacific shall give CNC, and
CNC shall give Pacific, upon having knowledge thereof, prompt notice of:
(a) any material change in its business, operations, or prospects, (b) the
initiation or the threat of material litigation; (c) any complaints,
investigations or hearings (or communications indicating that same may be
contemplated) of any Governmental Authority, or (d) any event or condition that
constitutes a breach of this Agreement, or that might be reasonably expected to
cause the representations or warranties set forth herein not to be true and
correct in all material respects as of the Effective Time of the Merger.
Section 6.9 PRE-CLOSING ADJUSTMENTS. At or before the Effective Time of
the Merger, Pacific shall make such accounting entries or adjustments, including
charge-offs of loans, as CNC shall direct in order to implement its plans
following the Closing or to reflect expenses and costs related to the Merger;
PROVIDED, HOWEVER, that (a) Pacific shall not be required to take such actions
more than one day prior to the Effective Time of the Merger or prior to the time
CNC agrees in writing that all of the conditions to its obligation to close as
set forth in Section 7.2 have been satisfied or waived, and (b) based upon
consultation with counsel and accountants for Pacific, no such adjustment shall
(i) require any filing with any governmental agency or authority, (ii) violate
any law, rule or regulation applicable to Pacific, or (iii) otherwise materially
disadvantage Pacific if the Merger was not consummated; PROVIDED that in any
event, no accrual or reserve made by Pacific pursuant to this Section 6.9, or
any litigation or regulatory proceeding arising out of any such accrual or
reserve, shall constitute or be deemed to be a breach, violation of or failure
to satisfy any representation, warranty, covenant, condition or other provision
of this Agreement or otherwise be considered in determining whether any such
breach, violation or failure to satisfy shall have occurred. The recording of
such adjustments shall not be deemed to imply any misstatement of previously
furnished financial statements or information.
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Section 6.10 DIRECTOR RESIGNATIONS. Pacific shall use reasonable efforts
to cause to be delivered to CNC at the Closing the resignations of the members
of the Board of Directors of Pacific to be effective on or after the Effective
Time of the Merger.
Section 6.11 HUMAN RESOURCES ISSUES. Pacific agrees to cooperate with CNC
with respect to any formal meetings or interviews with one or more employees
called or arranged by Pacific and held for the purpose of discussing the
transactions contemplated by this Agreement or their effect on such employees,
with CNC given the opportunity to participate in such meetings or interviews.
This section is not intended to apply to casual conversations about the
transaction or informal meetings initiated by employees, or to prohibit
discussion in general, but rather to allow CNC a role in the formal presentation
of the transaction to employees, and an opportunity to participate in the
significant, formal meetings at which the transaction is explained and
discussed.
Section 6.12 ASSISTANCE WITH THIRD-PARTY AGREEMENTS.
(a) Pacific shall cooperate with and use all reasonable efforts to assist
CNC in (i) gaining access to and obtaining any required consents from all of its
third-party vendors, landlords of all of their leased properties and other
parties to material agreements, promptly after the date of this Agreement, and
(ii) obtaining the cooperation of such third parties in a smooth transition in
accordance with CNC's timetable at or after the Effective Time of the Merger.
Pacific shall cooperate with CNC in minimizing the extent to which any contracts
will continue in effect following the Effective Time of the Merger, in addition
to complying with the prohibitions of Section 4.2(e) hereof.
(b) Without limiting Section 6.12(a), Pacific shall use all reasonable
efforts to provide data processing and other processing support, including
support from outside contractors, to assist CNC in performing all tasks
reasonably required to result in a successful conversion of their data and other
files and records to CNC's production environment, when requested by CNC and
sufficient to ensure that a successful conversion can occur at such time as CNC
requests at or after the Effective Time of the Merger. Among other things,
Pacific shall and, as applicable, shall cause its subsidiaries to:
(i) cooperate with CNC to establish a mutually agreeable project plan to
effectuate the conversion;
(ii) use their commercially reasonable efforts to have Pacific's outside
contractors continue to support both the conversion effort and its needs
until the conversion can be established;
(iii) provide, or use its commercially reasonable efforts to obtain from
any outside contractors, all data or other files and layouts requested by
CNC for use in planning the conversion, as soon as reasonably practicable;
(iv) provide reasonable access to personnel at corporate headquarters,
data and other processing centers, all branches and, with the consent of
outside contractors, at outside contractors, to enable the conversion effort
to be completed on schedule; and
(v) to the extent reasonably practicable, give notice of termination,
conditioned upon the completion of the transactions contemplated hereby, of
the contracts of outside data and other processing contractors or other
third-party vendors when directed to do so by CNC.
Notwithstanding the foregoing, Pacific shall not be required to give any
notice of termination required by this Section 6.12, (x) more than thirty days
prior to the Effective Time of the Merger and (y) unless CNC states in writing
that, to its knowledge, all conditions to Closing set forth in Article VII have
been or will be satisfied or waived; provided, however, that Pacific shall take
action as directed by CNC at any time (1) to terminate any contract other than
that described in clause (2) hereof, if CNB indemnifies Pacific for the
incremental costs of obtaining a replacement contract in the event that the
Merger is not consummated other than due solely to breaches of this Agreement by
Pacific; and (2) to terminate any of Pacific's outside data processing contracts
(the "DP CONTRACTS") if (A) CNC provides an undertaking to Pacific in form and
substance reasonably satisfactory to Pacific to the effect that CNC shall, in
the event that the Merger is not consummated, indemnify Pacific against all
losses,
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claims, damages or liabilities resulting from such action, and (B) CNC agrees to
compensate Pacific for arrangements through a third-party provider reasonably
acceptable to Pacific providing service levels reasonably comparable to those
provided under the DP Contracts under terms no more burdensome and at a price no
higher to Pacific than is provided in the DP Contracts for their respective
needs in the event such contracts are terminated and the Merger is not
consummated, other than as a result of a failure to consummate the Merger due
solely to breaches of this Agreement by Pacific and further provided, that CNC's
obligations under the foregoing proviso are limited to payments for one year in
an aggregate amount not greater than 150% of that paid by Pacific pursuant to
the DP Contracts for the last twelve months for which such DP Contracts were in
effect. Further, CNC agrees to reimburse Pacific for any penalty fees paid
pursuant to such DP Contracts which are not subsequently rebated.
(c) CNB agrees that all actions taken pursuant to this Section 6.12 shall be
taken in a manner intended to minimize disruption to the customary business
activities of Pacific.
Section 6.13 NOTICES AND COMMUNICATIONS. CNC shall consult with Pacific,
and Pacific upon request shall assist CNC or CNB, with respect to (a) sending
necessary or appropriate customer notifications and communications as prepared
by CNC or CNB with Pacific's approval, which approval shall not be unreasonably
withheld, to advise such customers of the impending transaction and of CNC or
CNB's plans following the Effective Time of the Merger, and (b) taking or
causing to be taken at the direction of and as agent for CNB, following the
receipt of all approvals of Governmental Authorities pursuant to
Section 7.1(b) all actions necessary to comply with the provisions of the Worker
Adjustment and Retraining Notification Act, as amended (12 U.S.C. Section 2101,
ET SEQ.), with respect to all employees of Pacific covered by such act who are
to be terminated by CNC or CNB within sixty days following the Effective Time of
the Merger, including the issuance of notices to such employees.
Section 6.14 INSURANCE POLICIES ASSIGNMENT.
(a) Pacific agrees to make commercially reasonable efforts to obtain consent
to partial or complete assignments of any of their insurance policies if
requested to do so by CNB, to the extent necessary to maintain the benefits to
CNB of such policies as they apply to Pacific. Pacific shall also inform CNC no
later than the Effective Time of the Merger of any material unfiled insurance
claims of which they have knowledge and for which it believes coverage exists.
(b) Pacific and CNC shall cooperate to determine the most appropriate
methodology to obtain "tail" insurance coverage at such limits, mutually
agreeable to the parties, for Errors and Omissions, Bankers Blanket Bond and
Director and Officer Liability Insurance for a period of five years following
the Closing with respect to all insurable claims made against Pacific and
directors and officers of Pacific for events occurring prior to the Closing,
whether through existing insurance coverage of Pacific or CNC, but in any event
Pacific shall reimburse CNC for one-half of the amount of the premiums for
obtaining such coverage.
Section 6.15 ADDITIONAL AGREEMENTS. In case at any time after the
Effective Time of the Merger any further action is necessary or desirable to
carry out the purposes of this Agreement or to vest CNC or CNB with full title
to all properties, assets, rights, approvals, immunities and franchises of
either CNB or Pacific, the proper officers and directors of each party to this
Agreement shall take all necessary or appropriate action.
Section 6.16 INDEMNIFICATION OF DIRECTORS AND OFFICERS. CNC agrees that
all rights to indemnification or exculpation now existing in favor of the
directors, officers, employees and agents of Pacific as provided in its articles
of association, bylaws, indemnification agreements or otherwise in effect as of
the date hereof with respect to matters occurring prior to the Effective Time of
the Merger, shall survive the Merger and shall continue in full force and
effect. CNC further agrees that, following consummation of the Merger, to the
greatest extent permitted by Delaware law and the organizational documents or
bylaws of CNC as in effect of the date hereof, it shall indemnify, defend and
hold harmless individuals who were officers and directors of Pacific as of the
date hereof or immediately prior to the Effective Time of the Merger for any
claim or loss arising out of their actions
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while a director or officer, including any acts relating to this Agreement, and
shall pay the expenses, including attorneys' fees, of such individual in advance
of the final resolution of any claim, provided such individuals shall first
execute an undertaking acceptable to Pacific to return such advances in the
event it has finally concluded such indemnification is not allowed under
applicable law.
Section 6.17 SHAREHOLDERS' AGREEMENT. Pacific will use all reasonable
efforts to cause the directors of Pacific, as shareholders of Pacific Common
Stock, to execute and deliver to CNC within five (5) days after the date of this
Agreement one or more shareholders' agreements ("SHAREHOLDERS' AGREEMENTS")
substantially in the form of Exhibit B hereto, committing such persons, among
other things, to vote their shares of Pacific Common Stock in favor of the
Agreement and the Merger at the shareholders' meeting held for that purpose,
granting a proxy for such shares to CNC, and to certain representations and
covenants.
Section 6.18 COORDINATION OF DIVIDENDS. Pacific shall take such corporate
action as may be required and otherwise coordinate with CNC as to the
declaration of any dividends with respect to Pacific Common Stock that may be
permitted pursuant to Section 4.2(b) and the record date and payment dates
relating thereto such that the holders of Pacific Common Stock shall not receive
two dividends, or fail to receive one dividend, for any calendar quarter with
respect to shares of Pacific Common Stock and any shares of CNC Common Stock any
holder will receive in exchange thereof in the Merger.
Section 6.19 AFFILIATES. At least 40 days prior to the Effective Time of
the Merger, Pacific shall deliver to CNC a letter identifying all persons who
are, at the time this Agreement is submitted for approval to the shareholders of
Pacific, "affiliates" of Pacific for purposes of Rule 145 under the Securities
Act. Pacific shall use commercially reasonable efforts to cause each such
affiliate to deliver to CNC prior to the Effective Time of the Merger a written
"Affiliates" agreement, in the form of Exhibit C hereto, providing that such
person shall dispose of the CNC Common Stock to be received by such person in
the Merger only in accordance with applicable law.
Section 6.20 HONG KONG PORTFOLIO. Not less than seven (7) Business Days
prior to the Effective Time of the Merger, CNC shall complete a review of all
loans (or any leases in which Pacific is lessor) with outstanding unpaid
principal balances of, or undrawn commitments of, or subject to renewal for
$2,000,000 or more which are booked at or were originated by Pacific's Hong Kong
office (the "HONG KONG PORTFOLIO") in cooperation with the management of Pacific
using Pacific's evaluations as of July 31, 1999 as the reference point. Based
upon such review, if CNC concludes that the condition of the Hong Kong Portfolio
has deteriorated since July 31, 1999, Pacific's ALLL shall be adjusted upward as
a result of such deterioration through a charge to income and shall be reflected
in the Closing Financial Statements required pursuant to
Section 7.2(e) hereof. Any disagreement between the parties regarding any
required adjustment to Pacific's ALLL due to the deterioration of the Hong Kong
Portfolio will be resolved by the final determination of PricewaterhouseCoopers.
In the event PricewaterhouseCoopers is not available or has a conflict of
interest, then a third party mutually agreed upon by CNC and Pacific shall make
such a determination. Such determination by PricewaterhouseCoopers shall use the
loan grading system and the methodology for the determination of the ALLL
employed by Pacific for the evaluations of the Hong Kong Portfolio as of
July 31, 1999.
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ARTICLE VII
CONDITIONS TO CONSUMMATION
Section 7.1 CONDITIONS TO ALL PARTIES OBLIGATIONS. The respective
obligations of CNC and Pacific to close the Merger shall be subject to the
satisfaction or waiver by both parties prior to the Effective Time of the Merger
of the following conditions:
(a) The Agreement, the Merger and the Agreement of Merger shall have been
approved by Pacific, CNC and CNB in accordance with applicable law, including
the approval and adoption by the requisite affirmative votes of the holders of
Pacific Common Stock entitled to vote thereon.
(b) CNC and CNB shall have procured, as necessary, the required approvals,
consents or waivers with respect to the Agreement, the Agreement of Merger, the
Merger and the continued operation by CNB of the Pacific Grand Cayman and Hong
Kong offices after the Merger from all required Government Authorities and all
applicable statutory waiting periods shall have expired; provided that no such
approval, consent or waiver referred to in this Section 7.1(b) shall be deemed
to have been received if it shall include any condition or requirement that
would, in the good faith determination of CNC, be a Burdensome Condition (as
defined in Section 9.1) on CNB or CNC.
(c) None of CNC, Pacific, or CNB shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger or any other transactions contemplated
by this Agreement.
(d) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Authority
which prohibits, materially restricts or makes illegal consummation of the
Merger or any other transactions contemplated by this Agreement.
(e) The Form S-4 covering all of the shares of CNC Common Stock to be
issued in the Merger shall have become effective under the Securities Act, no
stop order suspending the effectiveness of such Form S-4 shall have been issued,
no proceedings for that purpose shall have been initiated, and all necessary
"Blue Sky" permits shall have been obtained.
(f) The shares of CNC Common Stock to be issued in the Merger shall be
approved for listing on the New York Stock Exchange, subject to notice of
issuance.
(g) CNC and Pacific shall have received the opinion of Manatt, Phelps &
Phillips, LLP, in form and substance reasonably satisfactory to CNC and Pacific,
to the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, which are consistent with the state of facts existing at
the Effective Time of the Merger, the Merger will qualify as a reorganization
under Section 368 of the Code.
Section 7.2 CONDITIONS TO OBLIGATIONS OF CNC AND CNB. The obligations of
CNC and CNB to consummate the Merger shall be subject to the satisfaction or
waiver prior to the Effective Time of the Merger of the following additional
conditions:
(a) Each of the representations and warranties of Pacific contained in this
Agreement shall, in all material respects, be true at the Effective Time of the
Merger as if made on such date (or on the date when made in the case of any
representation or warranty which relates to an earlier date). The Disclosure
Schedule shall be updated and made current as of the day prior to the Effective
Time of the Merger and a draft of the updated Disclosure Schedule shall have
been delivered to CNC no later than 72 hours prior to the Effective Time of the
Merger; such update of the Disclosure Schedule shall not in any way affect the
representations and warranties set forth in Section 5.1. Pacific shall have
performed, in all material respects, each of its covenants and agreements
contained in this Agreement and CNC shall have received a certificate signed by
the Chief Executive Officer and the Chief Financial Officer of Pacific, at the
Effective Time of the Merger, to the foregoing effect.
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(b) No litigation or proceeding shall be pending against Pacific brought by
any Governmental Authority seeking to prevent consummation of the transactions
contemplated hereby.
(c) CNC shall have received (i) the opinion of Preston Gates & Ellis LLP,
counsel to Pacific, in form and substance reasonably satisfactory to CNC, to the
effect that this Agreement and the Agreement of Merger have been duly
authorized, executed and delivered by Pacific, and each constitutes the valid
and legally binding obligation of Pacific enforceable in accordance with its
terms, subject to customary exceptions and (ii) the opinion of Foley & Lardner,
special counsel to Pacific in the American Star Liquidation Proceeding, in form
and substance reasonably satisfactory to CNC, to the effect that Pacific
indirectly owns all of the capital stock of American Star through its
subsidiary, TPB Holdings, Inc., and the Surplus Note free and clear of all
liens, claims, encumbrances, charges, restrictions, proxies, pledges or adverse
equities of any kind; Pacific has timely filed and perfected all claims with
respect to the capital stock of American Star and the Surplus Note in the
American Star Liquidation Proceeding in accordance with applicable law and, upon
liquidation of American Star, any assets of American Star held in excess of its
liabilities will be paid to Pacific.
(d) Pacific shall exercise its commercially reasonable efforts to ensure
that at least two days prior to the Effective Time of the Merger, all attorneys,
accountants, investment bankers and other advisors and agents for Pacific shall
have submitted to Pacific (with a copy to CNC) estimates of their fees and
expenses for all services rendered or to be rendered in any respect in
connection with the transactions contemplated hereby to the extent not already
paid, and based on such estimates, Pacific shall have prepared and submitted to
CNC a summary of such fees and expenses for the transaction. At the Effective
Time of the Merger (i) such advisors shall have submitted their final bills for
all material fees and expenses to Pacific for services rendered, with a copy to
be delivered to CNB, and based on such summary, Pacific shall have prepared and
submitted to CNC a final calculation of such fees and expenses and (ii) Pacific
shall have accrued and paid, and have caused its Subsidiaries to have accrued
and paid, the amount of such fees and expenses as calculated above, after CNC
has been given an opportunity to review all such bills and calculation of such
fees and expenses. CNC shall not be liable for any such fees and expenses.
(e) At least four Business Days prior to the Effective Time of the Merger,
Pacific shall provide CNC with Pacific's consolidated financial statements
presenting the consolidated financial condition of Pacific as of the close of
business on the last day of the last month ended prior to the Effective Time of
the Merger and Pacific's consolidated results of operations for the period
commencing July 1, 1999 and ending as of the close of business on the last day
of the last month ended prior to the Effective Time of the Merger (the "CLOSING
FINANCIAL STATEMENTS.") Such financial statements shall have been prepared in
all material respects in accordance with GAAP and RAP and other applicable legal
and accounting requirements, and reflect all period-end accruals and other
adjustments.
(f) At the close of business on the last day of the month preceding the
Effective Time of the Merger, total deposits of Pacific, calculated pursuant to
RAP and GAAP, shall be not less than ninety percent (90%) of the average of
total deposits for Pacific for the six-month period ending on the last day of
the same month in the preceding year.
(g) Between the date of this Agreement and the Effective Time of the
Merger, there shall not have occurred any event or development that has had or
could reasonably be expected to have a Material Adverse Effect on Pacific.
(h) CNC shall have received Shareholders' Agreements executed and delivered
by each of the directors of Pacific as contemplated by Section 6.17.
(i) An employment agreement shall have been executed by Michael Tun Zan and
shall remain in effect.
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(j) Pacific shall have obtained all consents of other parties to its
leases, mortgages, agreements, licenses and permits necessary to permit the
Merger and the transactions contemplated herein to be consummated without a
material default, acceleration, breach or loss of rights or benefits thereunder,
including without limitation signage rights under any lease.
(k) Pacific shall have taken all action required to redeem the rights
issued under the Rights Agreement.
(l) The status and resolution of any claim, proceeding or action pending
against Pacific on the date of this Agreement or subsequently brought against
Pacific, without regard to whether such matter is listed on the Disclosure
Schedule, shall be satisfactory to CNC in the exercise of its reasonable
judgment.
Section 7.3 CONDITIONS TO OBLIGATIONS OF PACIFIC. The obligations of
Pacific hereunder shall be subject to the satisfaction or waiver prior to the
Effective Time of the Merger of the following additional conditions:
(a) Each of the representations, warranties and covenants of CNC contained
in this Agreement shall, in all material respects, be true at the Effective Time
of the Merger as if made on such date (or on the date when made in the case of
any representation or warranty which specifically relates to an earlier date);
CNC shall have performed, in all material respects, each of its covenants and
agreements contained in this Agreement; and Pacific shall have received
certificates signed by the Chief Financial Officer or other authorized senior
officers of CNC at the Effective Time of the Merger, to the foregoing effect.
(b) No litigation or proceeding shall be pending against CNC or CNB brought
by any Governmental Authority seeking to prevent consummation of the
transactions contemplated thereby.
(c) Pacific shall have received the opinion of the General Counsel to CNC,
in form and substance reasonably satisfactory to Pacific, to the effect that
this Agreement has been duly authorized, executed and delivered by CNC; the
Agreement of Merger has been duly authorized, executed and delivered by CNB;
each such agreement constitutes the valid and legally binding obligations of CNC
or CNB, as the case may be, enforceable in accordance with its terms, subject to
customary exceptions; and the shares of CNC Common Stock issued as consideration
in the Merger have been duly authorized, validly issued, and are fully paid and
non-assessable.
(d) Pacific shall have received an updated fairness, opinion of Keefe,
Bruyette & Woods, Inc., dated within five (5) days prior to the mailing of the
Proxy Statement/Prospectus to the shareholders of Pacific confirming that the
consideration to be paid to the Pacific shareholders in the Merger is fair from
a financial point of view to such shareholders.
(e) Between the date of this Agreement and the Effective Time of the Merger
there shall not have occurred any event related to the business condition
(financial or otherwise), prospects, operations or properties of CNC and its
Subsidiaries that has had a Material Adverse Effect on CNC.
ARTICLE VIII
TERMINATION
Section 8.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, prior to the Effective Time of the Merger:
(a) by the mutual agreement of Pacific and CNC, if the board of directors,
or duly authorized committee thereof, or duly authorized officers, of each so
determines;
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(b) by CNC or Pacific in the event of a material breach by the other party
hereto of any representation, warranty, covenant or agreement contained herein,
which material breach has had or could reasonably be expected to have a Material
Adverse Effect on either party, materially and adversely impairs the ability of
any of the parties to consummate the transactions contemplated by this Agreement
or perform their respective obligations hereunder or which has resulted or could
reasonably be expected to result in a material impairment of a benefit
reasonably expected to be derived by CNC or Pacific from the performance of such
covenant or agreement by the other party; and is not cured within 30 days after
written notice of such breach is given to the party committing such breach by
the other party;
(c) by CNC or Pacific by written notice to the other party if either
(i) any approval, consent or waiver of a Governmental Authority required to
permit consummation of the Merger shall have been denied or (ii) any
Governmental Authority or court shall have issued a final, non-appealable order
enjoining or otherwise prohibiting consummation of the Merger;
(d) by CNC or Pacific in the event that the Merger is not consummated by
July 1, 2000, unless the failure to so consummate by such time is due to the
breach of any covenant or obligation contained in this Agreement by the party
seeking to terminate;
(e) by CNC or Pacific if any approval of the shareholders of Pacific
contemplated by this Agreement shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of shareholders or
any adjournments or postponement thereof;
(f) by CNC if the Board of Directors of Pacific shall have withdrawn,
modified or changed in a manner adverse to CNC its approval or recommendation of
this Agreement and the Merger;
(g) by CNC, if (i) Pacific shall have exercised a right specified in the
proviso set forth in Section 4.2(x) with respect to any Takeover Proposal and
shall, directly or through agents or representatives, continue discussions with
any third party concerning such Takeover Proposal for more than 15 Business Days
after the date of receipt of such Takeover Proposal; or (ii) a Takeover Proposal
that is publicly disclosed shall have been commenced, publicly proposed or
communicated to Pacific which contains a proposal as to price (without regard to
the specificity of such price proposal) and Pacific shall not have rejected such
proposal within 15 Business Days of its receipt or the date its existence first
becomes publicly disclosed, if earlier; or
(h) by Pacific, if there has been a significant decline in the Final CNC
Stock Price and such decline is not proportionate relative to the NASDAQ Bank
Index (the "INDEX") as published from time to time. For purposes hereof, the
following terms have the following meanings:
(i) "Initial Index" shall mean the Index on the trading day
immediately preceding the public announcement of this Agreement.
(ii) "Final Index" shall mean the average of the Index for the
twenty consecutive trading days ending on the third business day prior to
the Effective Time of the Merger.
(iii) A "significant decline" shall be deemed to have occurred if
the Final CNC Stock Price is less than $24.75.
(iv) A decline is not "proportionate relative to the Index" if the
quotient obtained by dividing the Final CNC Stock Price by $33.00 is less
than the quotient obtained by dividing the Final Index by the Initial
Index and subtracting .15 from the quotient.
Section 8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement by either CNC or Pacific, as provided in Section 8.1, this Agreement
shall thereafter become void and there shall be no liability on the part of any
party hereto or their respective officers or directors, except that any such
termination shall (i) be without prejudice to the rights of any party hereto
arising out of the
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willful breach by any party of any covenant or willful misrepresentation
contained in this Agreement (PROVIDED, that CNC shall have no right of action
based upon the exercise by the Board of Directors of Pacific of its fiduciary
duties under applicable laws as provided in this Agreement), (ii) not affect
Sections 6.5(d), 6.5(e), 6.12 and 9.12 hereof which shall survive such
termination and (iii) not affect any provision of this Agreement which expressly
survives the termination of this Agreement. The Stock Option Agreement shall be
governed by its own terms as to termination.
ARTICLE IX
OTHER MATTERS
Section 9.1 CERTAIN DEFINITIONS; INTERPRETATIONS. As used in this
Agreement, the following terms shall have the meanings indicated:
"ALLL" shall mean the allowance for loan and lease losses, as determined in
accordance with GAAP and RAP.
"BURDENSOME CONDITION" shall mean any condition or requirement included in
any required regulatory approval, consent or waivers of Government Authorities
which imposes any condition or restriction on CNB or CNC, including without
limitation, requirements relating to the raising of additional capital or the
disposition of assets, which in the good faith judgment of CNB or CNC would be
materially burdensome in the context of the transactions contemplated by this
Agreement.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday, national
holiday or any other day on which national banks operating in California are
permitted or required to close.
"CONTROL" shall have the meaning ascribed thereto in Section 2(a) of the
Bank Holding Company Act of 1956, as amended.
"DEFAULT" shall mean, as the case may be, an omission or failure on the part
of (i) Pacific to perform a duty or obligation to a third party and Pacific has
knowledge of such omission or failure or (ii) a third party to perform a duty or
obligation to Pacific and Pacific has knowledge of such omission or failure.
"FAIR LENDING LAWS" shall mean, collectively, the Equal Credit Act (15
U.S.C. Section 1691, et seq., the Fair Housing Act (420 U.S.C. Section 3601, et
seq. or the Home Mortgage Disclosure Act (12 U.S.C. Section 2801, et seq.)
"GAAP" shall mean generally accepted accounting principles, consistently
applied from period to period, applicable to banks or bank holding companies for
the period in question.
"GOVERNMENTAL AUTHORITY" shall mean any state, federal or foreign
governmental entity or agency with jurisdiction or approval, consent, waiver or
other regulatory authority over any of the transactions contemplated by this
Agreement (including the continued operation by CNB of the Pacific Grand Cayman
and Hong Kong offices after the Merger) and any of the parties to this Agreement
or their compliance with any of the laws and regulations which are the subject
of any representation or covenant in this Agreement.
"KNOWLEDGE" shall mean facts and other information which (i) as of the date
of this Agreement, any member of the Management Committee of Pacific, or the
Senior Vice Presidents of Real Estate or Wealth Management (or any officer
superior to any of the foregoing) or any of such comparable executives of CNC or
(ii) after the date of this Agreement, the president, any executive vice
president, the chief financial officer, the chief operating officer or the chief
credit officer, and any senior vice president (and any officer superior to any
of the foregoing) of a party knows as a result of the performance of his or her
duties, or that a senior executive officer of a bank or bank holding company
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similar to such party with similar duties reasonably should know in the normal
course of his or her duties, and includes such diligent inquiry as is reasonable
under the circumstances.
"MATERIAL" means material to CNC or Pacific (as the case may be) and any
respective Subsidiaries, taken as a whole.
"MATERIAL ADVERSE EFFECT", with respect to a person, means a material
adverse effect upon (A) the business, financial condition, operations, or
prospects of such person and its Subsidiaries, taken as a whole, or (B) the
ability of such person to timely perform its obligations under, and to timely
consummate the transactions contemplated by this Agreement, provided, however,
that in determining whether a Material Adverse Effect has occurred, there shall
be excluded any effect on the referenced party the cause of which is (i) any
change in the banking or similar laws, rules or regulations of general
applicability or interpretations thereof by courts or governmental authorities,
(ii) any change in GAAP or RAP applicable to banks or their holding companies
generally, (iii) any action or omission of CNC or Pacific or any Subsidiary of
either of them taken with prior written consent of CNC or Pacific, as applicable
or permitted by this Agreement, and (iv) any changes in general economic
conditions affecting banks or their holding companies generally.
"PERSON" includes an individual, corporation, partnership, association,
trust, limited liability company or partnership or unincorporated organization.
"RAP" shall mean regulatory accounting principles, if any, applicable to a
particular person.
"SUBSIDIARY", with respect to a person, means any other person the stock or
equity of which is more than 50% owned by such person.
"TAXES" shall mean any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other taxes, or assessments in the nature of taxes, of
any kind whatsoever, including any interest, penalty, or addition thereto,
whether disputed or not.
"TAX RETURN" shall mean any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
The table of contents and headings contained in this Agreement offer ease of
reference only and shall not affect the meaning or interpretation of this
Agreement. Whenever the words "include", "includes", or "including" are used in
this Agreement, they shall be deemed followed by the words "without limitation".
Any singular term in this Agreement shall be deemed to include the plural, and
any plural term, the singular.
Section 9.2 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Except for Articles II and III and Sections 6.5(e), 6.6, 6.15, and
6.16, none of the respective representations, warranties, obligations,
covenants, and agreements of the parties shall survive the Effective Time of the
Merger.
Section 9.3 WAIVER AND MODIFICATION. Prior to the Effective Time of the
Merger, any provision of this Agreement may be (a) waived by the party benefited
by the provision or by both parties or (b) amended or modified at any time
(including the structure of the transaction) by an agreement in writing between
the parties hereto, approved by their respective boards of directors, PROVIDED
HOWEVER, that any amendment which reduces the amount or changes the form of the
consideration to be delivered to the Pacific shareholders in the Merger shall
not be valid after the Agreement is approved by the shareholders of Pacific
without any subsequent approval by the shareholders of Pacific.
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Section 9.4 COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
Section 9.5 GOVERNING LAW, JURISDICTION AND VENUE. This Agreement shall be
governed by, and interpreted in accordance with, the laws of the State of
Delaware (however, not to the exclusion of any applicable Federal law), without
regard to Delaware statutes or judicial decisions regarding choice of law
questions. The parties hereby irrevocably submit to the jurisdiction of the
courts of the State of Delaware and the federal courts of the United States of
America located in the State of Delaware solely in respect of the interpretation
and enforcement of the provisions of this Agreement and of the documents
referred to in this Agreement, and in respect of the transactions contemplated
herein and therein, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such Delaware state or federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 9.6 or in such other manner as may
be permitted by law, shall be valid and sufficient service thereof. The
prevailing party shall be entitled to recover all reasonable costs and expenses,
including attorneys' fees, or charges and disbursements incurred in connection
with any such action, suit or proceeding and in the event CNC shall be the
prevailing party, CNC agrees to reimburse Pacific for such additional and
reasonable travel, accommodation and related expenses that reasonably would not
have been incurred had any proceeding held in Delaware pursuant hereto been held
instead in California.
Section 9.6 NOTICES. All notices, requests, acknowledgements and other
communications hereunder (collectively, "NOTICES") to a party shall be in
writing and delivered by hand, Federal Express (or other reputable overnight
delivery service), telecopy or certified mail to such party at its address set
forth below or to such other address as such party may specify by notice to the
other party hereto. All Notices given by telecopy shall be deemed to have been
given upon receipt of confirmation by the sender of such Notice; all other
Notices shall be deemed to have been given when received.
If to Pacific to:
The Pacific Bank, N.A.
351 California Street
San Francisco, CA 94104
Telecopy: (415) 362-5275
Attention: Michael Tun Zan
with a copy to:
Preston Gates & Ellis LLP
One Maritime Plaza
Suite 2400
San Francisco, California 94111
Telecopy: (415) 788-8819
Attention: James E. Topinka, Esq.
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If to CNC, to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy: (310) 888-6704
Attention: Frank P. Pekny
with copies to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy: (310) 888-6232
Attention: Karen Siteman, Esq.
and
Manatt, Phelps & Phillips, LLP
11355 W. Olympic Blvd.
Los Angeles, CA 90064
Telecopy: (310) 312-4224
Attention: William T. Quicksilver, Esq.
Section 9.7 ENTIRE AGREEMENT. Except for the agreements entered into as of
this date or contemplated by this Agreement, the Stock Option Agreement, the
Shareholders' Agreements and the Confidentiality Agreement, this Agreement
(including the Disclosure Schedule attached hereto and incorporated herein)
represents the entire understanding of the parties hereto with respect to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made.
Section 9.8 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, however, that this Agreement may not be
assigned by either party hereto without the prior written consent of the other
party.
Section 9.9 SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any person or circumstance shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof.
Section 9.10 NO THIRD PARTY BENEFICIARIES. Except with respect to Section
6.16 , this Agreement is made solely for the benefit of the parties to this
Agreement and their respective successors and permitted assigns, and no other
person or entity shall have or acquire any right by virtue of this Agreement.
Section 9.11 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof in any court of the U.S.
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
Section 9.12 EXPENSES. Each party hereto shall pay its own costs and
expenses incurred in connection with the Merger, including, without limitation,
attorneys' fees, charges and disbursements and filing or other fees payable in
connection with all applications, notifications and report forms and
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notices to be filed with any Governmental Authority pursuant to the terms of
this Agreement; provided, however, that the costs and expenses of printing and
mailing the S-4 and the Proxy Statement/Prospectus shall be borne by CNC unless
the Merger does not occur, in which event such costs and expenses shall be borne
equally by the parties hereto. All filing and other fees paid to the SEC in
connection with the Merger shall be borne by CNC.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
<TABLE>
<S> <C>
THE PACIFIC BANK, N.A. CITY NATIONAL CORPORATION
By: /s/
---------------------------------------- By: /s/
-------------------------------------------
Michael Tun Zan Russell Goldsmith
PRESIDENT AND CHIEF VICE CHAIRMAN AND
EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER
</TABLE>
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EXHIBIT A
AGREEMENT OF MERGER
BETWEEN
CITY NATIONAL BANK
AND
THE PACIFIC BANK, N.A.
UNDER THE CHARTER OF
CITY NATIONAL BANK
UNDER THE TITLE OF
CITY NATIONAL BANK
This Agreement of Merger, dated as of , 2000, ("AGREEMENT OF
MERGER") is entered into between City National Bank ("CNB"), a national banking
association organized under the laws of the United States, being located at 400
North Roxbury Drive, Beverly Hills, County of Los Angeles, in the State of
California, and The Pacific Bank, N.A. ("PACIFIC"), a national banking
association organized under the laws of the United States, being located at 351
California Street, San Francisco, California, each acting pursuant to a
resolution of its board of directors, adopted by the vote of a majority of its
directors, pursuant to the authority given by and in accordance with the
provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215a). The
terms of this Agreement of Merger are pursuant to that certain Agreement and
Plan of Merger ("AGREEMENT") dated as of September 21, 1999 between CNC and
Pacific.
NOW THEREFORE, the parties hereto agree as follows:
1. BANK MERGER. Pacific shall be merged into CNB under the charter of the
latter (the "MERGER").
2. NAME OF THE BANK. The name of the receiving association shall be City
National Bank.
3. BUSINESS OF THE BANK. The business of CNB shall be that of a national
banking association. This business shall be conducted by the association at its
main office, which shall be located at 400 North Roxbury Drive, Beverly Hills,
California 90210, and at its legally established branches.
4. EFFECT OF THE MERGER. The Merger shall become effective at the time
specified in the certification letter to be issued by the Comptroller of the
Currency of the United States (the "EFFECTIVE TIME OF THE MERGER"). At the
Effective Time of the Merger, Pacific shall be merged with and into CNB, on the
terms and conditions set forth in the Agreement and this Agreement of Merger.
All assets of Pacific as they exist at the Effective Time of the Merger shall
pass to and vest in CNB without any conveyance or other transfer. CNB shall be
responsible for all the liabilities of every kind and description of Pacific. At
the Effective Time of the Merger, the outstanding common stock of Pacific shall
be converted into the stock and cash consideration as provided in the Agreement.
5. BOARD OF DIRECTORS AND OFFICERS. The present board of directors of CNB
shall continue to serve on the board of directors of the association after the
Effective Time of the Merger and until the next annual meeting or until such
time as their successors have been elected and have qualified.
6. ARTICLES AND BYLAWS. At the Effective Time of the Merger, the Merger
shall become effective as specified in the certification letter to be issued by
the Comptroller of the Currency. The articles of association of CNB in effect
immediately prior to the Effective Time of the Merger shall be and remain the
articles of association of the surviving bank until amended as provided by the
bylaws of
1
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CNB. The bylaws of CNB in effect immediately prior to the Effective Time of the
Merger shall be and remain the bylaws of the surviving bank until amended as
provided therein and the terms thereof.
7. OPERATIONS. Except as otherwise provided in the Agreement, between the
date of the Agreement and the Effective Time of the Merger, Pacific shall not
declare or pay any dividend to its shareholders nor dispose of any of its
assets.
8. SHAREHOLDER RATIFICATION. This Agreement of Merger shall be ratified
and confirmed by the affirmative vote of the sole shareholder of CNB and by the
required two-thirds affirmative vote of the outstanding shares of Pacific Common
Stock as required by the National Bank Act.
WITNESS, the signatures and seals of said merging banks this day of
, 2000, each set by its president or a vice president and attested
to by its secretary, pursuant to a resolution of its board of directors, acting
by a majority.
Attest:
CITY NATIONAL BANK
By
--------------------------------------
Frank P. Pekny
Vice Chairman
- -------------------------------------------
- ------------------------, Secretary
[Seal]
Attest:
THE PACIFIC BANK, N.A.
By
--------------------------------------
Michael Tun Zan
President and Chief Executive
Officer
- -------------------------------------------
- ------------------------, Secretary
[Seal]
2
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On this day of , 2000, before me, a notary public for this
state and county, personally came Frank P. Pekny, as Vice Chairman, and
, as Secretary of City National Bank, and each in his/her capacity
acknowledged this instrument to be the act and deed of the association and seal
affixed to it to be its seal.
WITNESS my official seal and signature this day and year.
(Seal of Notary)
- -------------------------------------------
Notary Public,
- ------------------------------------------------------------------County.
My commission expires
- ---------------------------------------------------------------
3
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On this day of , 2000, before me, a notary public for this
state and county, personally came Michael Tun Zan, as President and Chief
Executive Officer, and , as Secretary of The Pacific Bank, N.A., and
each in his/her capacity acknowledged this instrument to be the act and deed of
the corporation and seal affixed to it to be its seal.
WITNESS my official seal and signature this day and year.
(Seal of Notary)
- -------------------------------------------
Notary Public,
- ------------------------------------------------------------------County.
My commission expires
- ---------------------------------------------------------------
4
<PAGE>
EXHIBIT B
SHAREHOLDERS' AGREEMENT
THIS SHAREHOLDERS' AGREEMENT ("Shareholders' Agreement") is made and entered
into as of September 21, 1999 by and between City National Corporation, a
Delaware corporation ("CNC"), and each of the other persons signatory hereto
(each a "Director" and/or a "Shareholder" and collectively the "Shareholders").
WHEREAS, CNC and The Pacific Bank, N.A., a national banking association,
("Pacific"), have entered into that certain Agreement and Plan of Reorganization
(the "Agreement"), dated as of September 21, 1999, pursuant to which Pacific
will be merged (the "Merger"), with and City National Bank, a national banking
association and the wholly owned subsidiary of CNC ("CNB"), whereupon each share
of Pacific common stock ("Pacific Common Stock") will be converted into the
right to receive the cash and stock consideration as set forth in the Agreement;
and
WHEREAS, as a condition to its willingness to enter into the Agreement, CNC
has required that each director of Pacific, as an owner of Pacific Common Stock,
enter into, and each of the Shareholders has agreed to enter into, this
Shareholders' Agreement.
NOW, THEREFORE, in consideration of the foregoing, for good and valuable
consideration, the parties hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each of the
Shareholders hereby, severally only and not for another or jointly, represents
and warrants to CNC as follows:
(a) AUTHORITY; NO VIOLATION. Such Shareholder has all necessary power
and authority to enter into and perform all of such Shareholder's
obligations hereunder. The execution, delivery and performance of this
Shareholders' Agreement by such Shareholder will not violate any other
agreement to which such Shareholder is a party, including any voting
agreement, shareholders' agreement, trust agreement or voting trust. This
Shareholders' Agreement has been duly and validly executed and delivered by
such Shareholder (and such Shareholder's spouse, if the Shares (as defined
below) constitute community property) and constitutes a valid and binding
agreement of such Shareholder and such spouse, enforceable against such
Shareholder and such spouse in accordance with its terms.
(b) OWNERSHIP OF SHARES. Such Shareholder is the beneficial owner or
record holder of the number of shares of Pacific Common Stock indicated
under such Shareholder's name on the signature page hereto (the "Existing
Shares", and together with any shares of Pacific Common Stock acquired by
such Shareholder after the date hereof, the "Shares") and, as of the date
hereof, the Existing Shares constitute all the shares of Pacific Common
Stock owned of record or beneficially by the Shareholder. With respect to
the Existing Shares, subject to applicable community property laws, such
Shareholder has sole voting power and sole power to issue instructions with
respect to the matters set forth in Section 2 hereof, sole power of
disposition, sole power to demand appraisal rights and sole power to engage
in actions set forth in Section 2 hereof, with no restrictions on the voting
rights, rights of disposition or otherwise, subject to applicable laws and
the terms of this Agreement.
(c) NO CONFLICTS. Neither the execution and delivery of this
Shareholders' Agreement nor the consummation by such Shareholder of the
transactions contemplated hereby will conflict with or constitute a
violation of or default under any contract, commitment, agreement,
arrangement or restriction of any kind to which such Shareholder is a party
or by which such Shareholder is bound.
5
<PAGE>
2. VOTING AGREEMENT, PROXY AND AGREEMENT NOT TO TRANSFER.
(a) Each Shareholder hereby severally agrees to vote all of the Shares
held by such Shareholder (i) in favor of the Merger, the Agreement and the
transactions contemplated by the Agreement; (ii) against any action or
agreement that would result in a breach in any material respect of any
covenant, representation or warranty or any other obligation or agreement of
Pacific under the Agreement or the Stock Option Agreement dated as of the
same date between CNC and Pacific (the "Option Agreement"); and (iii) except
with the prior written consent of CNB, against the following actions (other
than the Merger and the transactions contemplated by the Agreement): (A) any
extraordinary corporate transactions, such as a merger, consolidation or
other business combination involving Pacific; (B) any sale, lease or
transfer of a material amount of the assets of Pacific; (C) any change in
the majority of the board of Pacific; (D) any material change in the present
capitalization of Pacific; (E) any amendment of Pacific's Articles of
Association; (F) any other material change in Pacific's corporate structure
or business; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
materially adversely affect the contemplated economic benefits to CNC of the
transactions contemplated by the Agreement or the Option Agreement. Such
Shareholder shall not enter into any agreement or understanding with any
person or entity prior to the Termination Date (as defined below) to vote or
give instructions after the Termination Date in any manner inconsistent with
clauses (i), (ii) or (iii) of the preceding sentence.
(b) Each Shareholder hereby severally grants to CNC, and appoints
Russell Goldsmith, Vice Chairman of CNC, and Frank P. Pekny, Executive Vice
President of CNC, in their respective capacities as officers of CNC, and any
individual who shall succeed to any such office of CNC, and any other
designee of CNC, and each of them, as such Shareholder's irrevocable proxy
and attorney-in-fact (with full power of substitution and resubstitution) to
vote the Shares with respect to the Merger. Such Shareholder intends this
proxy to be irrevocable and coupled with an interest, and will take such
further action and execute such other instruments as may be necessary to
effectuate the intent of this proxy and hereby revokes any proxy previously
granted by such Shareholder with respect to the Shares.
(c) Each Shareholder hereby severally agrees not to (i) sell, transfer,
assign or otherwise dispose of any of his or her Shares without the prior
written consent of CNC, other than Shares sold or surrendered to pay the
exercise price of any stock options or to pay taxes or satisfy Pacific's
withholding obligations with respect to any taxes resulting from such
exercise or (ii) pledge, mortgage or encumber such Shares. Any permitted
transferee of Shares must become a party to this Agreement and any purported
transfer of Shares to a person or entity that has not become a party hereto
shall be null and void.
3. AGREEMENT TO MAINTAIN BANKING RELATIONSHIPS. Each Shareholder hereby
severally expresses his or her intent to maintain his or her, and his or her
affiliated business' banking relationships with Pacific before and with CNB
after the consummation of the Merger for a period of at least two years in a
manner consistent with past practices, to the extent, in each case, that such
Shareholder remains in an area then served by CNB, and further provided that the
types, quality and pricing of services provided by CNB continue to be comparable
to those currently provided.
4. COMMUNITY BOARD OF ADVISORS. Following the Mergers, CNC shall cause CNB
to establish an Pacific Board of Advisors, or similar advisory and community
liaison group of prominent citizens, in order that CNB will be able to continue
visibility in and provide service to the communities formerly served by Pacific.
CNC's current intention is that the Board of Advisors initially be comprised of
approximately 6 to 8 members (including a director of CNB and one or more former
directors of Pacific) who will meet regularly during the year, to focus on
issues relevant to the former Pacific service area, and its business community
and residents. If invited to join the Pacific Board of Advisors,
6
<PAGE>
Shareholder agrees that he/she will meet with a representative of CNB and give
due consideration to committing to participate as a member of the Pacific Board
of Advisors for at least a one-year term.
5. COOPERATION. Shareholder severally agrees that he/she will not directly
or indirectly solicit any inquiries or proposals from any person relating to any
proposal or transaction for the disposition of the business or assets of Pacific
or any of its subsidiaries, or the acquisition of voting securities of Pacific
or any subsidiary of Pacific or any business combination between Pacific or any
subsidiary of Pacific and any person other than CNC or CNB.
6. SHAREHOLDER CAPACITY. Each Shareholder is entering this Shareholders'
Agreement in his capacity as the record or beneficial owner of such
Shareholder's Shares, and not in his or her capacity as a director of Pacific.
Nothing in this Shareholders' Agreement shall be deemed in any manner to limit
the discretion of any Shareholder to take any action, or fail to take any
action, in his or her capacity as a director of Pacific, that may be required of
such Shareholder in the exercise of such Shareholder's duties and
responsibilities as a director of Pacific.
7. TERMINATION. The obligations of the Shareholders, other than those set
forth in Sections 3 and 4 hereof, shall terminate upon the consummation of the
Merger. If the Merger are not consummated, the obligations of the Shareholders
hereunder shall terminate upon the termination of the Agreement, other than
those obligations set forth in Sections 2(a)(ii), 2(a)(iii)(G) and the last
sentence of 2(a) hereof, and such further obligations shall survive until the
Option Agreement shall have terminated or been fully performed. The "Termination
Date" for any particular provision hereunder shall be the date of termination of
the Shareholders' obligations for such provision.
8. SPECIFIC PERFORMANCE. The Shareholders each acknowledge that damages
would be an inadequate remedy to CNC for an actual or prospective breach of this
Agreement and that the obligations of each of the Shareholders hereto shall be
specifically enforceable.
9. MISCELLANEOUS.
(a) Definitional Matters.
(i) Unless the context otherwise requires, "person" shall mean a
corporation, association, partnership, joint venture, organization,
business, individual, trust, estate or any other entity or group (within
the meaning of Section 13(d)(3) of the Exchange Act).
(ii) All capitalized terms used but not defined in this Shareholders'
Agreement shall have the respective meanings that the Agreement ascribes
to such terms.
(iii) The descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect the
meaning or interpretation of this Shareholders' Agreement.
(b) ENTIRE AGREEMENT. This Shareholders' Agreement constitutes the
entire agreement between the parties hereto with respect to the subject
matter hereof and supersedes all other prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to
the subject matter hereof.
(c) PARTIES IN INTEREST. This Shareholders' Agreement shall be binding
upon and inure solely to the benefit of each party hereto and their
respective successors, assigns, heirs, executors, administrators and other
legal representatives. Nothing in this Shareholders' Agreement, express or
implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Shareholders' Agreement.
(d) ASSIGNMENT. This Shareholders' Agreement shall not be assigned
without the prior written consent of the other party hereto, except that CNC
may assign, in its sole discretion, all or
7
<PAGE>
any of its rights, interests and obligations hereunder to any direct or
indirect wholly owned subsidiary or affiliate of CNC.
(e) MODIFICATIONS. This Shareholders' Agreement shall not be amended,
altered or modified in any manner whatsoever, except by a written instrument
executed by the parties hereto.
(f) GOVERNING LAW. This Shareholders' Agreement shall be governed in
all respects, including validity, interpretation and effect, by the laws of
the State of Delaware.
(g) VALIDITY. The invalidity or unenforceability of any provision of
this Shareholders' Agreement shall not affect the validity or enforceability
of any other provision of this Shareholders' Agreement, each of which shall
remain in full force and effect.
(h) COUNTERPARTS. This Shareholders' Agreement may be executed in two
or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
(i) NOTICES. Any notices or other communications required or permitted
hereunder shall be in writing and shall be deemed duly given upon (i)
transmitter's confirmation of a receipt of a facsimile transmission, (ii)
confirmed delivery by a standard overnight carrier or (iii) the expiration
of five business days after the day when mailed by certified or registered
mail, postage prepaid, addressed at the following addresses (or at such
other address as the parties hereto shall specify by like notice):
If to CNC, to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telephone No.: (310) 888-6704
Attention: Mr. Frank P. Pekny, Executive Vice President
If to any of the Shareholders, to the respective addresses noted on the
signature page hereto.
10. FURTHER ASSURANCES. Each Shareholder shall execute and deliver all
such further documents and instruments and take all such further actions as may
be necessary in order to consummate the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Shareholders'
Agreement as of the date first above written.
<TABLE>
<S> <C> <C>
CITY NATIONAL CORPORATION
By:
-----------------------------------------
Frank P. Pekny
Executive Vice President
</TABLE>
SHAREHOLDER:
______________________________________
Name: ________________________________
Number of Shares: ____________________
Address for Notices:
___________________
___________________
___________________
8
<PAGE>
SHAREHOLDER:
______________________________________
Name: ________________________________
___________________
___________________
Number of Shares: ____________________
Address for Notices:
___________________
___________________
___________________
SHAREHOLDER:
______________________________________
Name: ________________________________
Number of Shares: ____________________
Address for Notices:
___________________
___________________
___________________
Spouse: ______________________________
Spouse's Name: _______________________
SHAREHOLDER:
______________________________________
Name: ________________________________
___________________
Number of Shares: ____________________
Address for Notices:
___________________
___________________
___________________
Spouse: ______________________________
Spouse's Name: _______________________
9
<PAGE>
EXHIBIT C
City National Corporation
400 North Roxbury
Beverly Hills, California 90210
Ladies and Gentlemen:
I have been advised that as of the date hereof I may be deemed to be an
"affiliate" of The Pacific Bank, N.A., a national banking association
("Pacific"), as the term "affiliate" is (i) defined for purposes of paragraphs
(c) and (d) of Rule 145 ("Rule 145") of the Rules and Regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"). I have been further
advised that pursuant to the terms of the Agreement and Plan of Reorganization,
dated as of September 21, 1999 (the "Merger Agreement"), by and between you
("CNC") and Pacific, Pacific will be merged into City National Bank, and that as
a result of the Merger, I may receive shares of CNC Common Stock (as defined in
the Merger Agreement) in exchange for shares of Pacific Common Stock (as defined
in the Merger Agreement), owned by me.
I hereby represent, warrant and covenant to CNC that in the event I receive
any CNC Common Stock pursuant to the Merger:
A. I shall not make any sale, transfer or other disposition of the CNC
Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed its requirements and other applicable limitations upon my ability
to sell, transfer or otherwise dispose of CNC Common Stock to the extent I
believed necessary, with my counsel or with counsel for Pacific.
C. I have been advised that the issuance of CNC Common Stock to me
pursuant to the Merger Agreement will be registered with the Commission on a
registration statement on Form S-4. However, I have also been advised that,
since at the time the Merger will be submitted to the shareholders of
Pacific for approval, I may be an "affiliate" of Pacific, any sale or
disposition by me of any of the CNC Common Stock may, under current law,
only be made in accordance with the provisions of paragraph (d) of Rule 145
under the Act, pursuant to an effective registration statement under the Act
or pursuant to an exemption thereunder. I agree that I will not sell,
transfer, or otherwise dispose of CNC Common Stock issued to me in the
Merger unless (i) such sale, transfer or other disposition has been
registered under the Act; (ii) such sale, transfer or other disposition is
made in conformity with the volume and other limitations of Rule 145
promulgated by the Commission under the Act; or (iii) in the written opinion
of counsel, which opinion and counsel shall be reasonably acceptable to CNC,
such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
D. I understand that CNC is under no obligation to register the sale,
transfer or other disposition of the CNC Common Stock by me or on my behalf
or to take any other action necessary to make compliance with an exemption
from registration available.
E. I understand that stop transfer instructions will be given to CNC's
transfer agents with respect to CNC Common Stock and that there will be
placed on the certificates for the CNC Common Stock issued to me, or any
substitutions therefor, a legend stating in substance:
"The securities represented by this certificate have been issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies and may be sold or otherwise transferred only in compliance
with the requirements of Rule 145 or pursuant to a registration statement
under said act or an exemption from such registration."
10
<PAGE>
F. I also understand that unless the transfer by me of my CNC Common
Stock has been registered under the Act or is a sale made in conformity with
the provisions of Rule 145, CNC reserves the right to put the following
legend on the certificates issued to my transferee:
"The sale of the shares represented by this certificate has not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), and the shares were acquired from a person who received such
shares in a transaction to which Rule 145 promulgated under the
Securities Act applies. The shares have been acquired by the holder not
with a view to, or for resale in connection with, any distribution
thereof within the meaning of the Securities Act and may not be sold,
pledged or otherwise transferred except in accordance with an exemption
from the registration requirements of the Securities Act."
It is understood and agreed that this letter agreement shall terminate and
be of no further force and effect and the legends set forth in E or F, as the
case may be, above shall be removed by delivery of substitute certificates
without such legend, and the related stop transfer of restrictions shall be
lifted forthwith, if (i) any such shares of CNC Common Stock shall have been
registered under the Act for sale, transfer or other disposition by me or on my
behalf and are sold, transferred or otherwise disposed of, or (ii) any such
shares of CNC Common Stock are sold in accordance with the provisions of
paragraphs (c), (e), (f) and (g) of Rule 144 promulgated under the Act, or (iii)
I am not at the time an affiliate of CNC and have been the beneficial owner of
the CNC Common Stock for at least one year (or such other period as may be
prescribed by the Act, and the rules and regulations promulgated thereunder),
and CNC has filed with the Commission all of the reports it is required to file
under the Securities Exchange Act of 1934, as amended, during the preceding 12
months, or (iv) I am not and have not been for at least three months an
affiliate of CNC and have been the beneficial owner of the CNC Common Stock for
at least two years (or such other period as may be prescribed by the Act and the
Rules and Regulations), or (v) CNC shall have received a letter from the Staff
of the Commission, or a written opinion of counsel, which opinion and counsel
shall be reasonably acceptable to CNC, to the effect that the stock transfer
restrictions and the legend are not required.
Sincerely,
______________________________________
Dated: _______________________________
Accepted this __ day of ____________, 2000
CITY NATIONAL CORPORATION
By: __________________________________
Name: ____________________________
Title: ___________________________
11
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
This AGREEMENT is dated as of September 21, 1999, between City National
Corporation ("Grantee"), a Delaware corporation, and The Pacific Bank, N.A., a
national banking association ("Issuer").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Grantee and Issuer have approved an
Agreement and Plan of Reorganization (the "Merger Agreement") dated as of the
date hereof which contemplates the acquisition of Issuer by Grantee through a
merger of Issuer into City National Bank, a wholly owned subsidiary of Grantee;
WHEREAS, as a condition to Grantee's having entered into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant to Grantee
the option set forth herein to purchase shares of Issuer's authorized but
unissued common stock, par value $1.50 per share ("Common Stock").
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an option (the "Option") to purchase up to
995,900 shares of fully paid and nonassessable Common Stock (the "Option
Shares"), at a price of $19.00 per share (the "Exercise Price"); PROVIDED,
HOWEVER, that in no event shall the number of shares for which this Option is
exercisable exceed 19.9% of the total number of shares of Common Stock then
issued and outstanding without giving effect to any shares subject or issued
pursuant to this Option. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Exercise Price are subject to
adjustment and increase as herein set forth.
2. EXERCISE OF OPTION.
(a) Grantee may exercise the Option, in whole or in part, in accordance with
and to the extent permitted by applicable law at any time or from time to time
but only upon or after the occurrence of a Purchase Event (as that term is
defined in paragraph (b) of this section); PROVIDED, that to the extent the
Option shall not have been exercised, it shall terminate and be of no further
force and effect upon the earliest to occur (such earliest date, the "Expiration
Date") of (i) the Effective Time of the Merger, (ii) the date the Agreement is
terminated pursuant to Sections 8.1(a) or 8.1(h); (iii) the date the Agreement
is terminated by Grantee or Issuer pursuant to Sections 8.1(b), (c), (d), (e),
or (f) if such date is prior to the occurrence of a Purchase Event or
Preliminary Purchase Event; or (iv) 24 months following the earliest to occur of
(A) the date of any termination of the Agreement other than as described in
clauses (ii) and (iii) of this sentence or (B) the date of the first occurrence
of a Purchase Event. Notwithstanding the foregoing, Issuer shall not be
obligated to issue the Option Shares upon exercise of the Option (i) in the
absence of any required governmental or regulatory waiver, consent or approval
necessary for Issuer to issue such Option Shares or for Grantee or any
transferee to exercise the Option or prior to the expiration or termination of
any waiting period required by law, (ii) so long as any injunction or other
order, decree or ruling issued by any federal or state court of competent
jurisdiction is in effect which prohibits the sale or delivery of the Option
Shares or (iii) if at such time Grantee shall be in material breach of the
agreements or covenants contained in the Merger Agreement.
B-1
<PAGE>
(b) As used herein, a "Purchase Event" shall have occurred when:
(i) Issuer or any subsidiary of Issuer (without prior written consent of
Grantee) enters into an agreement with any Person (other than Grantee or any
of its affiliates or subsidiaries) pursuant to which such Person would:
(x) merge or consolidate with, or enter into any similar transaction with
Issuer or any subsidiary of Issuer (other than a merger, consolidation or
similar transaction involving solely Issuer and one or more of its wholly
owned subsidiaries), (y) purchase, lease or otherwise acquire all or
substantially all of the assets of Issuer or (z) purchase or otherwise
acquire (by merger, consolidation, share exchange or any similar
transaction) securities representing 15% or more of the voting shares of
Issuer (the transactions referred to in subparagraph (x), (y) and (z) are
referred to as an "Acquisition Transaction");
(ii) any Person or group of Persons (other than Grantee or any of its
affiliates or subsidiaries) acquires the beneficial ownership or the right
to acquire beneficial ownership of securities representing 15% or more of
the voting shares of Issuer (the term "beneficial ownership" for purposes of
this Agreement shall have the meaning set forth in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
regulations promulgated thereunder);
(iii) a public announcement by Issuer or any Person involved with Issuer
of the authorization, recommendation or endorsement by Issuer of an
Acquisition Transaction, Exchange Offer (as defined below) or Tender Offer
(as defined below) or a public announcement by Issuer or any Person involved
with Issuer of an intention to authorize, recommend or endorse an
Acquisition Transaction, Exchange Offer or Tender Offer;
(iv) the shareholders of Issuer fail to approve the Merger contemplated
by the Merger Agreement at any meeting of such shareholders which has been
held for that purpose or any adjournment or postponement thereof, the
failure of such a shareholder meeting to occur prior to termination of the
Merger Agreement or the withdrawal or modification (in a manner adverse to
Grantee in any respect) of the recommendation of Issuer's Board of Directors
that the shareholders of Issuer approve the Merger and the Merger Agreement
in each case, after there shall have been a public announcement that any
Person (other than Grantee or any of its affiliates or subsidiaries), shall
have (a) made or publicly disclosed an intention to make a proposal to
engage in an Acquisition Transaction, (b) commenced a Tender Offer, or filed
a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to an Exchange Offer or (c) filed an
application (or given a notice to) with the Federal Reserve Board,
Comptroller of the Currency or other federal or state bank regulatory
authority which application or notice has been accepted for processing, for
approval to engage in an Acquisition Transaction; or
(v) after a proposal is made by a third party to Issuer or any of its
subsidiaries or its shareholders to engage in an Acquisition Transaction, or
such third party states its intention to make such a proposal if the Merger
Agreement terminates and/or the Option expires, Issuer shall have breached
any covenant or obligation contained in the Merger Agreement and following
such breach Grantee would be entitled to terminate the Merger Agreement
(whether immediately or after the giving of notice or passage of time or
both).
(c) As used herein, "Preliminary Purchase Event" shall have occurred when:
(i) any Person or group of Persons (other than Grantee or any of its
affiliates or subsidiaries) shall have commenced (as such term is defined in
Rule 14d-2 under the Exchange Act) or shall have filed a registration
statement under the Securities Act, with respect to a tender offer or
exchange offer to purchase any shares of Common Stock such that such Person
would own
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<PAGE>
or control 10% or more of the shares of Common Stock (such an offer being
referred to herein as a "Tender Offer" or an "Exchange Offer",
respectively);
(ii) any Person (other than Grantee or any of its affiliates or
subsidiaries) shall have filed an application with or given a notice to the
Federal Reserve Board, Comptroller of the Currency or other federal or state
bank regulatory authority for approval to engage in an Acquisition
Transaction, Exchange Offer or Tender Offer; or
(iii) The occurrence of an event described in Section 2(b)(i) hereof,
except that the percentage referred to in clause (z) thereof shall be at
least 10%.
(d) If a Purchase Event has occurred, the Option shall continue to be
exercisable until its termination in accordance with Section 2(a) hereof. Issuer
shall notify Grantee promptly in writing upon learning of the occurrence of a
Preliminary Purchase Event or Purchase Event, it being understood that the
giving of such notice by Issuer shall not be a condition to the right of Grantee
to transfer or exercise the Option.
(e) In the event a Purchase Event occurs, Grantee may elect to exercise the
Option. If Grantee wishes to exercise the Option, it shall send to Issuer a
written notice (the date of which shall be referred to herein as the "Notice
Date") which specifies (i) the total number of Option Shares to be purchased,
and (ii) a place and date not earlier than two Business Days nor later then ten
(10) Business Days from the Notice Date for the closing (the "Closing") of such
purchase (the "Closing Date"); PROVIDED, HOWEVER, that if prior notification to
or approval of the Federal Reserve Board, the Comptroller of the Currency or any
other regulatory agency is required in connection with such purchase, Grantee
shall promptly file the required notice or application for approval, shall
promptly notify Issuer of such filing, and shall expeditiously process the same
and the period of time that otherwise would run pursuant to this sentence shall
run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto. On or prior
to the Closing, Grantee shall have the right to revoke its exercise of the
Option in the event that the transaction constituting a Purchase Event that
gives rise to such right to exercise shall not have been consummated.
3. PAYMENT AND DELIVERY OF CERTIFICATES; GRANTEE REPRESENTATION.
(a) If Grantee elects to exercise the Option, then at the Closing, Grantee
shall pay to Issuer the aggregate purchase price for the Option Shares purchased
pursuant to the exercise of the Option in immediately available funds by a wire
transfer to a bank designated by Issuer.
(b) At such Closing, simultaneously with the delivery of the purchase price
for the Option Shares as provided in paragraph (a) hereof, Issuer shall deliver
to Grantee a certificate or certificates, registered in the name of Grantee or
its designee, representing the number of Option Shares purchased by Grantee.
Such certificates may be endorsed with a legend which shall read as follows:
THE SALE OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND ARE ACCORDINGLY SUBJECT TO RESALE RESTRICTIONS ARISING
UNDER THE ACT. THE TRANSFER OF SUCH SHARES IS SUBJECT TO CERTAIN
PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF
AND THE ISSUER, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE ISSUER. A COPY OF SUCH AGREEMENT WILL BE
PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE
ISSUER OF A REQUEST THEREFOR.
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Any such legend shall be removed by delivery of a substitute certificate without
such legend if Grantee shall have delivered to Issuer an opinion of counsel, in
form and substance satisfactory to Issuer, that such legend is not required for
purposes of assuring compliance with applicable securities or other law or with
this Agreement.
(c) Except as otherwise provided herein, Grantee hereby represents and
warrants to Issuer that the Option is being, and any Option Shares issued upon
exercise of the Option will be, acquired by Grantee for its own account and not
with a view to any distribution thereof, and Grantee will not sell any Option
Shares purchased pursuant to exercise of the Option except in compliance with
applicable securities and other laws.
4. REPRESENTATIONS; COVENANTS. Issuer hereby represents and warrants to
and agrees with Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter into and
perform all of its obligations under this Agreement. The execution, delivery and
performance of this Agreement and all of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Issuer. This Agreement has been duly executed and delivered by Issuer and
constitutes a valid and binding agreement of Issuer, enforceable against Issuer
in accordance with its terms, except as the enforceability hereof may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting the rights
of creditors generally or by equitable principles, whether such enforcement is
sought in law or equity.
(b) The execution and delivery by Issuer of this Agreement and the
consummation of the transactions herein contemplated do not and will not violate
or conflict with Issuer's Articles of Association or Bylaws, any statute,
regulation, judgment, order, writ, decree or injunction applicable to Issuer
(other than as may be effected by Grantee's ownership of Issuer Common Stock
exceeding certain limits set forth by statute or regulation) or its properties
or assets and do not and will not violate, conflict with, result in a breach of,
constitute a default (or an event which with due notice and/ or lapse of time
would constitute a default) under, result in a termination of, accelerate the
performance required by, or result in the creation of any lien, pledge, security
interest, charge or other encumbrance upon any of the properties or assets of
Issuer under the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, or loan agreement or other agreement, instrument or
obligation to which Issuer is a party, or by which Issuer or any of its
properties or assets may be bound or affected.
(c) Issuer has taken all necessary corporate action to authorize and reserve
and to permit it to issue, and at all times from the date hereof through the
termination of this Agreement in accordance with its terms, will have reserved
for issuance upon the exercise of the Option a number of shares of Common Stock
sufficient to satisfy the exercise of the Option in full, all of which Common
Stock, upon issuance pursuant hereto, shall be duly authorized, validly issued,
fully paid and nonassessable, and shall be delivered free and clear of all
claims, liens, encumbrances, security interests and preemptive rights.
(d) Issuer agrees that it will not, by amendment of its Articles of
Association or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions to
be observed or performed hereunder by Issuer.
(e) Issuer shall promptly take all action as may from time to time be
required (including (x) complying with all premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under any federal or state banking
law, prior approval of or notice to the Federal Reserve Board, the Comptroller
of the Currency or to any state regulatory authority is necessary before the
Option may be exercised,
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<PAGE>
cooperating fully with Grantee in preparing such applications or notices and
providing such information to the Federal Reserve Board, the Comptroller of the
Currency or such state regulatory authority as they may require) in order to
permit Grantee to exercise the Option and Issuer duly and effectively to issue
shares of Common Stock pursuant hereto, and to protect the rights of Grantee
against dilution.
5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION AND ISSUANCE OF ADDITIONAL
SHARES.
(a) In the event of any dividend, stock split, split-up, recapitalization,
reclassification, combination, exchange of shares or similar transaction or
event with respect to Common Stock, the type and number of shares or securities
subject to the Option and the Exercise Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Grantee shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that Grantee would
have received in respect of Common Stock if the Option had been exercised
immediately prior to such event, or the record date thereof, as applicable. If
any additional shares of Common Stock are issued or otherwise outstanding after
the date of this Agreement (other than pursuant to this Agreement and other than
pursuant to an event described in the first sentence of this Section 5(a)), the
number of shares of Common Stock subject to the Option shall be adjusted so
that, after such issuance, such number, together with any shares of Common Stock
previously issued pursuant hereto, equals 19.9% of the number of shares of
Common Stock then issued and outstanding, without giving effect to any shares
subject to or issued pursuant to this Option. Nothing contained in this
Section 5(a) or elsewhere in this Agreement shall be deemed to authorize Issuer
to issue shares in breach of any provision of the Merger Agreement.
(b) In the event that Issuer, shall, prior to the Expiration Date, enter in
an agreement: (i) to consolidate with or merge into any Person, other than
Grantee or one of its affiliates or subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any Person, other than Grantee or one of its affiliates or subsidiaries,
to merge into Issuer and Issuer shall be the continuing or surviving
corporation, but, in connection with such merger, the then outstanding shares of
Common Stock shall be changed into or exchanged for stock or other securities of
Issuer or any other Person or cash or any other property or the outstanding
shares of Common Stock immediately prior to such merger shall after such merger
represent less than 50% of the outstanding shares and share equivalents of the
merged company; or (iii) to sell or otherwise transfer all or substantially all
of its assets or any of its affiliates or subsidiaries to any Person, other than
Grantee or one of its subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of Grantee, of either (x) the Succeeding
Corporation (as defined below), (y) any Person that controls the Succeeding
Corporation, or (z) in the case of a merger described in clause (ii), Issuer (in
each case, such Person being referred to as the "Substitute Option Issuer.")
(c) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as hereinafter defined) as is equal to the Assigned
Value (as hereinafter defined) multiplied by the number of shares of Common
Stock for which the Option was theretofore exercisable, divided by the Average
Price (as hereinafter defined). The exercise price of the Substitute Option per
share of the Substitute Common Stock (the "Substitute Option Price") shall then
be equal to the Exercise Price multiplied by a fraction in which the numerator
is the number of shares of the Common Stock for which the Option was theretofore
exercisable and the denominator is the number of shares for which the Substitute
Option is exercisable.
(d) The Substitute Option shall otherwise have the same terms as the Option,
provided, that, if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to Grantee. The Substitute Option
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<PAGE>
Issuer shall also enter into an agreement with the then-holder or holders of the
Substitute Option in substantially the form as this Agreement, which shall be
applicable to the Substitute Option.
(e) The following terms have the meanings indicated:
(i) "Succeeding Corporation" shall mean (x) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than Issuer),
(y) Issuer in a merger in which Issuer is the continuing or surviving
Person, and (z) the transferee of all or any substantial part of Issuer
assets (or the assets of its subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued by the
Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per share
of Common Stock at which a Tender Offer or Exchange Offer therefor has been
made by any Person (other than Grantee or any of its affiliates or its
subsidiaries) (y) the price per share of Common Stock to be paid by any
Person (other than Grantee or any of its affiliates or subsidiaries)
pursuant to an agreement with Issuer, and (z) the highest closing sales
price per share of Common Stock as quoted on the Nasdaq National Market (or
if Common Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Grantee and reasonably acceptable to Issuer)
within the six-month period immediately preceding the agreement referred to
in (y); provided, that in the event of a sale of less than all of Issuer's
assets, the Assigned Value shall be the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of
Issuer as determined by a nationally-recognized investment banking firm
selected by Grantee and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock outstanding at the time of such sale. In
the event that an Exchange Offer is made for Common Stock or an agreement is
entered into for a merger or consolidation involving consideration other
than cash, the value of the securities or other property issuable or
deliverable in exchange for the Common Stock shall be determined by a
nationally-recognized investment banking firm mutually selected by Grantee
and Issuer (or if applicable, the Succeeding Corporation), provided that if
a mutual selection cannot be made as to such investment banking firm, it
shall be selected by Grantee, in either case whose determination shall be
conclusive and binding on all parties.
(iv) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of the Substitute Common Stock on the day
preceding such consolidation, merger or sale, PROVIDED, HOWEVER, that if
such closing price is not ascertainable due to an absence of a public market
for the Substitute Common Stock, "Average Price" shall mean the higher of
(i) the price per share of Substitute Common Stock paid or to be paid by any
third party pursuant to an agreement with the issuer of the Substitute
Common Stock and (ii) the book value per share, calculated in accordance
with generally accepted accounting principles, of the Substitute Common
Stock immediately prior to exercise of the Substitute Option; PROVIDED,
FURTHER, that if Issuer is the issuer of the Substitute Option, the Average
Price shall be computed with respect to a share of common stock issued by
Issuer, the Person merging into Issuer or by any company which controls or
is controlled by such merging Person, as Grantee may elect.
(f) In no event pursuant to any of foregoing paragraphs shall the,
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding immediately prior to exercise
of the Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the aggregate of the shares of Substitute
Common Stock but for this clause (f), the Substitute Option Issuer shall make a
cash payment to Grantee equal
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<PAGE>
to the excess of (i) the value of the Substitute Option without giving effect to
the limitation in this clause (f) over (ii) the value of the Substitute Option
after giving effect to the limitation in this clause (f). This difference in
value shall be determined by a nationally recognized investment banking firm
selected by Grantee and reasonably acceptable to the Substitute Option Issuer,
whose determination shall be conclusive and binding on the parties.
(g) Issuer shall not enter into any transaction described in subsection
(b) of this Section 5 unless the Succeeding Corporation and any Person that
controls the Succeeding Corporation assume in writing all the obligations of
Issuer hereunder and take all other actions that may be necessary so that the
provisions of this Section 5 are given full force and effect (including, without
limitation, any action that may be necessary so that the shares of Substitute
Common Stock are in no way distinguishable from or have lesser economic value
(other than any diminution in value resulting from the fact that the Substitute
Common Stock are restricted securities, as defined in Rule 144 under the
Securities Act or any successor provision) than other shares of common stock
issued by the Substitute Option Issuer).
6. PURCHASE OF OPTION SHARES AND OPTIONS BY ISSUER.
(a) From and after the first date a transaction specified in Section 5(b)
herein is consummated or any Person or group of Persons (other than Grantee or
any of its subsidiaries) shall have acquired beneficial ownership, or the right
to acquire beneficial ownership, of 50% or more of the then outstanding shares
of Common Stock (the "Repurchase Event"), and subject to Section 9 and
applicable regulatory and legal restrictions, Grantee, after having exercised
any Option in whole or in part, shall have the right to require Issuer to
purchase some or all of the Option Shares at a purchase price per share (the
"Purchase Price") equal to the highest of (i) 100% of the Exercise Price,
(ii) the highest price paid or agreed to be paid for shares of Common Stock by
an Acquiring Person (as defined in paragraph (b) of this Section) in any tender
offer, exchange offer or other transaction or series of related transactions
involving the acquisition of 10% or more of the outstanding shares of Common
Stock during the one-year period immediately preceding the Purchase Date (as
defined in paragraph (e) of this Section), (iii) the highest closing price for
shares of Common Stock as reported on the Nasdaq National Market (or if Common
Stock is not quoted on the Nasdaq National Market, the highest bid price per
share on any day as quoted on the principal trading market or securities
exchange on which such shares are traded as reported by a recognized source
chosen by Grantee and reasonably acceptable to Issuer); within the 90-day period
ending on the Purchase Date and (iv) in the event of a sale of all or
substantially all of Issuer's assets, (x) the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of Issuer
as determined by a recognized investment banking firm selected by Grantee and
reasonably acceptable to Issuer, whose determination shall be conclusive and
binding on the parties hereto, divided by (y) the number of shares of Common
Stock then outstanding. In the event that any of the consideration paid or
agreed to be paid by an Acquiring Person for any shares of Common Stock or for
any of Issuer's assets consists in whole or in part of securities, the value of
such securities for purposes of determining the Purchase Price shall be
determined (i) if there is an existing public trading market therefor, by the
average of the last sales prices for such securities on the twenty (20) trading
days ending three trading days prior to the payment of such consideration (if
such consideration has been paid) or prior to the date of determination (if such
consideration has not yet been paid) and (ii) if there is no existing public
trading market for such securities, by a recognized investment banking firm
selected by Grantee and reasonably acceptable to Issuer, whose determination
shall be conclusive and binding on the parties hereto.
(b) For purposes of this Agreement, "Acquiring Person" shall mean a Person
or group (as such terms are defined in the Exchange Act and the rules and
regulations thereunder) other than Grantee or an affiliate or subsidiary of
Grantee who on or after the date of this Agreement engages in a transaction
which gives rise to a Purchase Event.
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(c) Subject to applicable regulatory and legal restrictions, from and after
a Repurchase Event or after Grantee receives official notice that an approval of
the Federal Reserve Board, the Comptroller of the Currency, or any other
regulatory authority, required for the exercise of the Option and purchase of
the Option Shares will not be issued or granted or if as of the date of the
first occurrence of a Purchase Event Issuer shall have not received any
shareholder or governmental or regulatory approvals necessary to permit Issuer
to repurchase from Grantee all of the shares of Common Stock issuable upon
exercise of this Option, Grantee shall, subject to Section 9, have the right to
require Issuer to purchase some or all of the Options held by Grantee at a price
equal to the Purchase Price minus the Exercise Price on the Purchase Date (as
defined in paragraph (e) of this Section) multiplied by the number of shares of
Common Stock that may be purchased on the Purchase Date upon the exercise of the
Options elected to be purchased.
(d) Issuer hereby undertakes to use its best efforts to obtain all required
regulatory and legal approvals and to file any required notices as promptly as
practicable in order to accomplish any repurchase contemplated by this
Section 6. Nonetheless, to the extent that Issuer is prohibited under applicable
law or regulation from repurchasing the Option and/or the Option Shares in full,
Issuer shall immediately so notify Grantee and thereafter deliver or cause to be
delivered, from time to time, to Grantee, the portion of the applicable purchase
price that it is no longer prohibited from delivering, within five (5) Business
Days after the date on which Issuer is no longer so prohibited; PROVIDED,
HOWEVER, that if Issuer at any time after delivery of a notice of repurchase
pursuant to this Section 6 is prohibited under applicable law or regulation from
delivering to Grantee the applicable purchase price in full Grantee may revoke
its notice of repurchase of the Option or the Option Shares either in whole or
in part whereupon, in the case of a revocation in part, Issuer shall promptly
(i) deliver to Grantee that portion of the applicable purchase price that Issuer
is not prohibited from delivering after taking into account any such revocation
and (ii) deliver, as appropriate, either a new Agreement evidencing the right to
purchase that number of shares of Common Stock equal to the number of shares of
Common Stock purchasable immediately prior to the delivery of the notice of
repurchase less the number of shares of Common Stock covered by the portion of
the Option repurchased or a certificate for the number of Option Shares covered
by the revocation. Grantee's right to require Issuer to purchase some or all of
the Option Shares shall expire on the date which is one year following the
Repurchase Event, except that if Issuer is prohibited under applicable law or
regulation from repurchasing the Option Shares, then the Grantee's right to
require Issuer to purchase Option Shares shall expire on the date that is one
year following the date on which Issuer is no longer prohibited from purchasing
such Option Shares. Grantee's right to require Issuer to purchase some or all of
the Options shall expire on the Expiration Date, except that if Issuer is
prohibited under applicable law or regulation from repurchasing some or all of
the Options, then the Grantee's right to require Issuer to purchase Options
shall expire on the date that is one year following the date on which Issuer is
no longer prohibited from purchasing such Options.
(e) Grantee may exercise its right to require Issuer to purchase the Option
Shares or Options (collectively, "Securities") pursuant to this Section by
surrendering for such purpose to Issuer, at its principal office or at such
other office or agency maintained by Issuer for that purpose, within the period
specified above, the certificates or other instruments representing the
Securities to be purchased accompanied by a. written note stating that it elects
to require Issuer to purchase all or a specified number of such Securities.
Within five Business Days after the surrender of such certificates or
instruments and the receipt of such notice relating thereto, to the extent it is
legally permitted to do so, Issuer shall deliver or cause to be delivered to
Grantee (i) a bank cashier's or certified check payable to Grantee in an amount
equal to the applicable purchase price therefor, and (ii) if less than the full
number of Securities evidenced by the surrendered instruments are being
purchased, a new certificate or instrument for the number of Securities
evidenced by such surrendered certificates or other instruments less the number
of Securities purchased. Such purchases shall be deemed to have been made at the
close of business on the date (the "Purchase Date") of the receipt of such
notice and of
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such surrender of the certificates or other instruments representing the
Securities to be purchased and the rights of Grantee, except for the right to
receive the applicable purchase price therefor in accordance herewith, shall
cease on the Purchase Date.
7. REGISTRATION RIGHTS. As promptly as practicable upon Grantee's request
after a Purchase Event, Issuer agrees to prepare and file a registration
statement ("Registration Event") under federal and any applicable state
securities laws to the extent permitted by applicable laws and regulations, with
respect to any proposed dispositions by Grantee of all or any part of the Option
or any or all of the Option Shares, and to use its commercially reasonable
efforts to cause any such registration statement to become effective as
expeditiously as possible and to keep such registration effective for a period
of not less than 180 days unless, in the written opinion of counsel to Issuer,
addressed to Grantee and satisfactory in form and substance to Grantee and its
counsel, registration is not required for such proposed transactions. Issuer
shall be required to file only two such registration statements during the
three-year period following the date of the first Purchase Event and shall have
no obligation to file such a registration statement at any time which is three
years or later after the first Purchase Event. All reasonable fees, expenses and
charges of any kind or nature whatsoever incurred in connection with any
registration of, or the preparation of any prospectus relating to, the Option
Shares pursuant to this Section 7 shall be borne and paid by Issuer (except for
underwriting discounts or commissions and brokers' fees of Grantee related
thereto). In addition, if the Issuer proposes to register Common Stock or any
other securities on a form that would permit the registration of the Option
Shares for public sale under the Securities Act (whether proposed to be offered
for sale by the Issuer or any other Person) it will give prompt written notice
to Grantee of its intention to do so, specifying the relevant terms of such
proposal, including the proposed maximum offering price thereof. Upon the
written notice of Grantee (whether on its own behalf or on behalf of any
subsequent holder of the Option (or part thereof) or any of the shares of Common
Stock issued pursuant hereto) delivered to the Issuer within 15 Business Days
after the giving of any such notice, which request shall specify the number of
Option Shares desired to be disposed by Grantee, the Issuer will use its
commercially reasonable efforts to effect, in connection with its proposed
registration, the registration under the Securities Act of the Option Shares set
forth in such request. Issuer shall be required to effect no more than three
such registrations (each, a "piggyback registration"). In the event Grantee
exercises its registration rights under this Section 7, Issuer shall provide
Grantee, its affiliates, each of their respective officers and directors and any
underwriters used by Grantee, with indemnifications, representations and
warranties and shall cause its attorneys and accountants to deliver to Grantee
and any such underwriters attorneys' opinions and "comfort letters," all of a
type customarily provided or delivered in connection with public underwritten
offerings of securities. The foregoing notwithstanding, if, at the time of any
request by Grantee for piggyback registration of Option Shares as provided
above, in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering, the offer and sale of the Option Shares would interfere with the
successful marketing of the shares of Issuer Common Stock offered by Issuer, the
number of Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; PROVIDED, HOWEVER, that after any such
required reduction the number of Option Shares to be included in such offering
for the account of Grantee shall constitute at least 25% of the total number of
Shares to be sold by Grantee and the Issuer in aggregate; and PROVIDED FURTHER,
HOWEVER, that if such reduction occurs, then the Issuer shall file a
registration statement for the balance as promptly as practicable thereafter as
to which no reduction pursuant to this Section 7 shall be permitted or occur.
Notwithstanding the foregoing, Issuer shall have the right to delay (a "Delay
Right") a Registration Event for a period of up to sixty days, in the event it
receives a request from Grantee to effect a Registration Event, if Issuer
determines, in the good faith exercise of its reasonable business judgment, that
such registration and offering could adversely effect or interfere with BONA
FIDE material financing plans of Issuer or would require disclosure of
information, the premature disclosure of which could materially adversely affect
Issuer or any transaction under active consideration by Issuer. Issuer shall
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have the right to exercise two Delay Rights in any eighteen-month period.
Notwithstanding anything to the contrary stated herein, Issuer shall not be
required to register Options or Option Shares under the Securities Act pursuant
to this Section 7 (a) on more than one occasion during any calendar year or
(b) within 180 days after the effective date of any registration referred to in
this Section 7 pursuant to which Grantee was afforded the opportunity to
register such shares under the Securities Act and such shares were registered as
requested.
8. LISTING.
If Common Stock or any other securities to be acquired upon exercise of the
Option are then authorized for quotation or trading or listing on the Nasdaq
National Market or any other securities exchange or automated quotation system,
Issuer, or any successor thereto, upon the request of the holder of the Option,
will promptly file an application, if required, to authorize for listing or
trading or quotation the shares of Common Stock or other securities to be
acquired upon exercise of the Option on the Nasdaq National Market or any other
securities exchange or automated quotation system and will use its best efforts
to obtain approval, if required, of such listing or quotation as soon as
possible.
9. LIMITATIONS ON TOTAL PROFIT AND NOTIONAL TOTAL PROFIT.
(a) Notwithstanding anything to the contrary contained herein, in no event
shall Grantee's Total Profit (as defined below in Section 9(c) hereof) exceed
$7,500,000 and, if such Total Profit otherwise would exceed such amount,
Grantee, at its sole election, shall either (i) reduce the number of shares of
Issuer Common Stock subject to the Option, (ii) pay cash to Issuer, or
(iii) any combination thereof, so that Grantee's actually realized Total Profit
shall not exceed $7,500,000 after taking into account the foregoing actions.
(b) Notwithstanding anything to the contrary contained herein, the Option
may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below in Section 9(d)
hereof) of more than $7,500,000; provided, that nothing in this sentence
restrict any exercise of the Option permitted hereby on any subsequent date on
which the Notional Total Profit would be less then $7,500,000.
(c) As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) the amount received by Grantee pursuant to
Issuer's repurchase of the Option (or any portion thereof) pursuant to
Section 6 hereof, (ii) (x) the amount received by Grantee pursuant to Issuer's
repurchase of Option Shares pursuant to Section 6 hereof, less (y) Grantee's
purchase price for such Option Shares, (iii) (x) the net cash amounts received
by Grantee pursuant to the sale of Option Shares (or any other securities into
which such Option Shares may be converted or exchanged) to any unaffiliated
party, less (y) Grantee's purchase price of such Option Shares, and (iv) any
equivalent amount with respect to the Substitute Option.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise the Option shall be
the Total Profit determined as of the date of such proposed exercise assuming
that the Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Grantee
as of such date, were sold for cash at the closing market price for the Issuer
Common Stock as of the close of business on the preceding trading day (less
customary brokerage commissions).
10. MISCELLANEOUS.
(a) EXPENSES. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
B-10
<PAGE>
(b) ENTIRE AGREEMENT. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereto, written or oral.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
(c) ASSIGNMENT. At any time after a Purchase Event occurs, Grantee may
sell, assign or otherwise transfer its rights and obligations hereunder, in
whole or in part, by issuing Options or otherwise, to any Person or group of
Persons, subject to applicable law, rule or regulation. In order to effectuate
the foregoing, Grantee shall be entitled to surrender this Agreement to Issuer
in exchange for two or more Agreements entitling the holders thereof to purchase
in the aggregate the same number of shares of Common Stock as may be purchasable
hereunder. The term "Grantee" as used in this Agreement shall also be deemed to
refer to any and all of Grantee's permitted assigns, with such modifications to
the context as are required to vest in such permitted assignees the full
benefits and obligations purported by this Agreement.
(d) NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or by confirmed facsimile transmission or sent by registered or certified mail
or overnight courier, postage prepaid, with return receipt requested, at the
respective addresses of the parties set forth in the Merger Agreement or as
otherwise notified to the other parties in writing.
<TABLE>
<S> <C>
To Grantee: City National Corporation
400 North Roxbury Drive
Beverly Hills, California
Attention: Frank P. Pekny
Facsimile Number: (310) 888-6704
With a copy to: Manatt, Phelps & Phillips, LLP
11355 West Olympic Blvd.
Los Angeles, California 90064
Attention: William T. Quicksilver
Facsimile Number: (310) 312-4224
To Issuer: The Pacific Bank, N.A.
351 California Street
San Francisco, California 94104
Attention: Michael Tun Zan
Facsimile Number: (415) 291-9953
With a copy to: Preston Gates & Ellis, LLP
One Maritime Plaza
Suite 2400
Facsimile Number: (415) 788-8819
Attention: James E. Topinka, Esq.
</TABLE>
A party may change its address for notice purposes by written notice to the
other party hereto.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
B-11
<PAGE>
(f) SPECIFIC PERFORMANCE. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed by them in accordance with their specific terms or conditions or were
otherwise breached and that money damages are an inadequate remedy for breach of
this Agreement because of the difficulty of ascertaining the amount of damage
that will be suffered by the parties in the event that this Agreement is not
performed in accordance with its terms or conditions or otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement by the parties and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which it is entitled at law or in equity.
(g) GOVERNING LAW. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Delaware (however, not to the
exclusion of any applicable federal law) without regard to the conflict of law
principles thereof. The parties hereby irrevocably submit to the jurisdiction of
the courts of the State of Delaware and the federal courts of the United States
of America located in the State of Delaware solely in respect of the
interpretation and enforcement of the provisions of this Agreement and of the
documents referred to in this Agreement, and in respect of the transactions
contemplated herein and therein, and hereby waive, and agree not to assert, as a
defense in any action, suit or proceeding for the interpretation or enforcement
hereof or of any such document, that it is not subject thereto or that such
action, suit or proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that this Agreement
or any such document may not be enforced in or by such courts, and the parties
hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such Delaware state or federal
court. The parties hereby consent to and grant any such court jurisdiction over
the person of such parties and over the subject matter of such dispute and agree
that mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 10(d) or in such other manner as
may be permitted by law, shall be valid and sufficient service thereof.
(h) COMMERCIALLY REASONABLE EFFORTS. Each of Grantee and Issuer will use
its commercially reasonable efforts to make all filings with, and to obtain
consents of, all third parties and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement.
(i) DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for
convenience of reference and are not intended to be part of or to affect the
meaning or interpretation of this Agreement.
(j) SEVERABILITY. If any portion of this Agreement shall be deemed by a
court of competent jurisdiction to be unenforceable, the remaining portions
shall be valid and enforceable only if, after excluding the portion deemed to be
unenforceable, the remaining terms hereof shall provide for the consummation of
the transactions contemplated herein in substantially the same manner as
originally set forth at the date this Agreement was executed.
(k) FURTHER ASSURANCES. In the event of any exercise of the option by
Grantee, Issuer and such Grantee shall execute and deliver all other documents
and instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
(l) DEFINITIONS. Capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Merger Agreement.
B-12
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement,
as of the day and year first written above.
<TABLE>
<S> <C> <C>
CITY NATIONAL CORPORATION
By: /s/
-----------------------------------------
Russell Goldsmith
Vice Chairman and Chief Executive Officer
THE PACIFIC BANK, N.A.
By: /s/
-----------------------------------------
Michael Tun Zan
President and Chief Executive Officer
</TABLE>
B-13
<PAGE>
ANNEX C
[LOGO]
FAIRNESS OPINION OF KEEFE, BRUYETTE & WOODS, INC.
January 26, 2000
The Board of Directors
Pacific Bank, N.A.
351 California Street
San Francisco, CA 94104
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Pacific Bank, N.A. ("Pacific Bank") of the
consideration to be paid (the "Consideration") in connection with the proposed
acquisition (the "Acquisition") of Pacific Bank by City National Corporation
("City National") pursuant to the Agreement dated as of September 21, 1999
between Pacific Bank and City National. It is our understanding that the
Acquisition will be structured as a purchase transaction under generally
accepted accounting principles.
As is more specifically set forth in the Agreement, upon consummation of the
Acquisition, each outstanding share of the common stock of Pacific Bank
("Pacific Bank Common Stock"), except for any dissenting shares and certain
other shares held by Pacific Bank and City National, will be exchanged for
either $29.00 in cash or shares of City National common stock based on a
fluctuating exchange ratio. For the purposes of its analysis, Keefe, Bruyette &
Woods, Inc. ("KBW") calculated the exchange ratio to be .8975 of a share of
common stock of City National ("City National Common Stock") for each
outstanding share of Pacific Bank Common Stock.
KBW, as part of its investment banking business, is continually engaged in
the valuation of bank holding companies and banks, thrift holding companies and
thrifts and their securities in connection with mergers and acquisitions,
underwriting, private placements, competitive bidding processes, market making
as a NASD market maker, and valuations for various other purposes. As
specialists in the securities of banking companies we have experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
our business as a broker-dealer, we may, from time to time, trade the securities
of Pacific Bank or City National, for our own account, and for the accounts of
our customers and, accordingly, may at any time hold a long or short position in
such securities. To the extent we have any such positions as of the date of this
opinion it has been disclosed to Pacific Bank. KBW has served as financial
advisor to Pacific Bank in the negotiation of the Agreement and in rendering
this fairness opinion and will receive a fee from Pacific Bank for those
services.
C-1
<PAGE>
In arriving at our opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition of Pacific Bank and
City National and the merger, including among other things, the following:
i. Reviewed the Agreement;
ii. Reviewed certain historical financial and other information concerning
Pacific Bank for the three months ended June 30, 1999 and the three years
ended December 31, 1998, including Pacific Bank's Annual Report to
Stockholders and Annual Reports on Forms 10-K and 10-K\A, and interim
quarterly reports on Form 10-Q and 10-Q\A;
iii. Reviewed certain historical financial and other information concerning
City National for the three months ended June 30, 1999 and the three
years ended December 31, 1998, including City National's Annual Report to
Stockholders and Annual Reports on Forms 10-K, and interim quarterly
reports on Form 10-Q;
iv. Reviewed and studied the historical stock prices and trading volumes of
the common stock of both Pacific Bank and City National;
v. Held discussions with senior management of Pacific Bank and City
National with respect to their past and current financial performance,
financial condition and future prospects;
vi. Reviewed certain internal financial data, projections and other
information of Pacific Bank and City National, including financial
projections prepared by management;
vii. Analyzed certain publicly available information of other financial
institutions that we deemed comparable or otherwise relevant to our
inquiry, and compared Pacific Bank and City National from a financial
point of view with certain of these institutions;
viii. Reviewed the financial terms of certain recent business combinations
in the banking industry that we deemed comparable or otherwise relevant
to our inquiry; and
ix. Conducted such other financial studies, analyses and investigations and
reviewed such other information as we deemed appropriate to enable us to
render our opinion.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of Pacific Bank and City
National as to the reasonableness and achievability of the financial and
operating forecasts and projections (and the assumptions and bases therefor)
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgments of such managements and
that such forecasts and projections will be realized in the amounts and in the
time periods currently estimated by such managements. We are not experts in the
independent verification of the adequacy of allowances for loan and lease losses
and we have assumed that the current and projected aggregate reserves for loan
and lease losses for Pacific Bank and City National are adequate to cover such
losses. We did not make or obtain any independent evaluations or appraisals of
any assets or liabilities of Pacific Bank, City National, or any of their
respective subsidiaries nor did we verify any of Pacific Bank's or City
National's books or records or review any individual loan or credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following:
(i) the historical and financial position and results of operations of Pacific
Bank and City National; (ii) the assets and liabilities of Pacific Bank and City
National; and (iii) the nature and terms of certain other merger transactions
involving banks and bank holding companies. We also have taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
C-2
<PAGE>
valuation and knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration pursuant to the Agreement is fair, from a
financial point of view, to the holders of the Pacific Bank Common Stock.
Very truly yours,
/s/ Keefe, Bruyette & Woods, Inc.
Keefe, Bruyette & Woods, Inc.
C-3
<PAGE>
ANNEX D
SECTION 215a OF TITLE 12 OF THE UNITED STATES CODE
MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL BANKS
(a) APPROVAL OF COMPTROLLER, BOARD AND SHAREHOLDERS; MERGER AGREEMENT; NOTICE;
CAPITAL STOCK; LIABILITY OF RECEIVING ASSOCIATION
One or more national banking associations or one more State banks, with the
approval of the Comptroller, under an agreement not inconsistent with this
subchapter, may merge into a national banking association located within the
same State, under the charter of the receiving association. The merger agreement
shall--
(1) be agreed upon in writing by a majority of the board of directors of
each association or State bank participating in the plan of merger;
(2) be ratified and confirmed by the affirmative vote of the
shareholders of each such association or State bank owning at least
two-thirds of its capital stock outstanding, or by a greater proportion of
such capital stock in the case of a State bank if the laws of the State
where it is organized so require, at a meeting to be held on the call of the
directors, after publishing notice of the time, place, and object of the
meeting for four consecutive weeks in a newspaper of general circulation
published in the place where the association or State bank is located, or,
if there is no such newspaper, then in the newspaper of general circulation
published nearest thereto, and after sending such notice to each shareholder
of record by certified or registered mail at least ten days prior to the
meeting, except to those shareholders who specifically waive notice, but any
additional notice shall be given to the shareholders of such State bank
which may be required by the laws of the State where it is organized.
Publication of notice may be waived, in cases where the Comptroller
determines that an emergency exists justifying such waiver, by unanimous
action of the shareholders of the association or State banks;
(3) specify the amount of the capital stock of the receiving
association, which shall not be less than that required under existing law
for the organization of a national bank in the place in which it is located
and which will be outstanding upon completion of the merger, the amount of
stock (if any) to be allocated, and cash (if any) to be paid, to the
shareholders of the association or State bank being merged into the
receiving association; and
(4) provide that the receiving association shall be liable for all
liabilities of the association or State bank being merged into the receiving
association.
(b) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
D-1
<PAGE>
(c) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be ascertained,
as of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash;
(2) one selected by the directors of the receiving association; and (3) one
selected by the two so selected. The valuation agreed upon by any two of the
three appraisers shall govern. If the value so fixed shall not be satisfactory
to any dissenting shareholder who has requested payment, that shareholder may,
within five days after being notified of the appraised value of his shares,
appeal to the Comptroller, who shall cause a reappraisal to be made which shall
be final and binding as to the value of the shares of the appellant.
(d) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS; APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF SHARES;
STATE APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
(e) STATUS OF RECEIVING ASSOCIATION; PROPERTY RIGHTS AND INTERESTS VESTED AND
HELD AS FIDUCIARY
The corporate existence of each of the merging banks or banking associations
participating in such merger shall be merged into and continued in the receiving
association and such receiving association shall be deemed to be the same
corporation as each bank or banking association participating in the merger. All
rights, franchises, and interests of the individual merging banks or banking
associations in and to every type of property (real, personal, and mixed) and
choses in action shall be transferred to and vested in the receiving association
by virtue of such merger without any deed or other transfer. The receiving
association, upon the merger and without any order or other action on the part
of any court or otherwise, shall hold and enjoy all rights of property,
franchises, and interests, including appointments, designations, and
nominations, and all other rights and interests as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, and committee of estates of lunatics, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises,
and interests were held or enjoyed by any one of the merging banks or banking
associations at the time of the merger, subject to the conditions hereinafter
provided.
D-2
<PAGE>
(f) REMOVAL AS FIDUCIARY; DISCRIMINATION
Where any merging bank or banking association, at the time of the merger,
was acting under appointment of any court as trustee, executor, administrator,
registrar of stocks and bonds, guardian of estates, assignee, receiver, or
committee of estates of lunatics, or in any other fiduciary capacity, the
receiving association shall be subject to removal by a court of competent
jurisdiction in the same manner and to the same extent as was such merging bank
or banking association prior to the merger. Nothing contained in this section
shall be considered to impair in any manner the right of any court to remove the
receiving association and to appoint in lieu thereof a substitute trustee,
executor, or other fiduciary, except that such right shall not be exercised in
such a manner as to discriminate against national banking associations, nor
shall any receiving association be removed solely because of the fact that it is
a national banking association.
(g) ISSUANCE OF STOCK BY RECEIVING ASSOCIATION; PREEMPTIVE RIGHTS
Stock of the receiving association may be issued as provided by the terms of
the merger agreement, free from any preemptive rights of the shareholders of the
respective merging banks.
D-3
<PAGE>
Annex E
OFFICE OF THE
COMPTROLLER OF THE CURRENCY
Washington, D.C. 20219
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to .
------- --------
THE PACIFIC BANK, NATIONAL ASSOCIATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 94-2865596
------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
351 California Street , San Francisco, California 94104
------------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 576-2700
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock: $1.50 Par Value
(Title of Class)
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 report(s), 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. [ ]
Aggregate market value of the common stock held by nonaffiliates at
March 19, 1999: $97,748,000
------------
Shares outstanding at March 19, 1999: 5,070,328
DOCUMENTS INCORPORATED BY REFERENCE
Restated 1998 Annual Report to Shareholders, as defined herein -
Incorporated into Parts I, II and IV.
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders
- Incorporated into Part III.
Page 1 of 59 sequential pages.
The Index to Exhibits is located at sequential page 15.
1
<PAGE>
THE PACIFIC BANK, NATIONAL ASSOCIATION
TABLE OF CONTENTS - FORM 10-K/A CROSS-REFERENCES INDEX
<TABLE>
<CAPTION>
PAGE
---------------------------------------------------
Form Annual Proxy
PART I 10-K Report(1) Statement(2)
---------------------------------------------------
<S> <C> <C> <C>
Item 1. General Description of Business 3 42
Important Factors Relating to
Forward Looking Statements 3-4
Competition 4-5
Supervision and Regulation 5
Dividends 6 51
Regulatory Examinations 6
Capital Requirements 6 28-29, 51-52
Employees 7 23
Financial Information About Industry Segments 7
Financial Reports Section
Financial Statements 7
Supplemental Financial Data 7
Quarterly Financial Data 56
Volume/Rate Analysis 7
Lending Activities and Loan Portfolio 7-8 25-26, 46-47
Undisbursed Loan Commitments
And Letters of Credit 8 55
Allocations of the Allowance for
Credit Losses 8
Investment Activities 8-9 25, 45-46
Deposits 9 27, 48
Item 2. Properties 10 24, 53
Item 3. Legal Proceedings 10 54
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11 56
Item 6. Selected Financial Data 11 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 17-32
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 11 32-37
Item 8. Financial Statements and Supplementary Data 11 38-57
PART III
Item 10. Directors and Executive Officers of the
Registrant 11 3-4, 7
Item 11. Executive Compensation 11 8-13
Item 12. Security Ownership of Certain Beneficial
Owners and Management 11 5-6
Item 13. Certain Relationships and Related Transactions 11 46-47 17-18
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 12
SIGNATURES 13-14
- ------------------------------------------------------------------------------------------
</TABLE>
(1) The Restated 1998 Annual Report to Shareholders, as defined on page 3 of
this report, which is incorporated by reference into this Form 10-K/A, from
and is attached as Exhibit 99.1 filed herewith.
(2) The Proxy Statement for the 1999 Annual Meeting of Shareholders, portions of
which are incorporated by reference into this Form 10-K/A.
2
<PAGE>
RESTATEMENT
Subsequent to the issuance of Pacific Bank's 1998 financial statements and
the filing of its 1998 Annual Report on Form 10-K with the Office of the
Comptroller of the Currency, management discovered accounting irregularities
and certain operational losses in the bank's trust division. Pacific Bank
conducted a special investigation which determined that trust fee income and
trust fee receivables had been overstated in 1998 and that certain
operational losses had occurred. As a result, the 1998 financial statements
have been restated from amounts previously reported to properly state trust
fee income and trust fee receivables and to recognize the operational losses.
Restated net income was $2,844, or $0.50 per diluted share in 1998, compared
to the previously reported net income of $3,274, or $0.57 per diluted share.
See Note 20, "Restatement" on Page 57 of the Restated 1998 Annual Report,
General Description of Business, Properties, Legal Proceedings, Market for
Registrant's Common Equity and Related Stockholder Matters, Selected
Financial Data, Management's Discussion and Analysis of Financial Condition
and Results of Operations, Quantitative and Qualitative Disclosures about
Market Risk, Financial Statements and Supplementary Data, and Certain
Relationships and Related Transactions (the "Restated 1998 Annual Report")
attached as Exhibit 99.1 to this report for further discussion.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND FORECASTS
This Annual Report on Form 10-K/A contains statements primarily regarding
Pacific Bank's historical performance, and such statements should not be
interpreted to indicate how Pacific Bank will perform in future periods. This
Annual Report on Form 10-K/A also contains forward-looking statements
regarding performance and cost savings that are subject to risks and
uncertainties. Such risks and uncertainties with respect to performance may
include, but are not necessarily limited to, defaults by borrowers,
fluctuations in interest rates, inflation, government policies and
regulations, year 2000 compliance and general economic conditions as well as
competition within the business areas in which Pacific Bank is conducting its
operations, including the real estate market in California and other factors
beyond Pacific Bank's control such as fraudulent conduct by borrowers and
continued economic problems in Asia as well as other parts of the world. Such
risks and uncertainties regarding cost savings may include, but are not
necessarily limited to, Pacific Bank's ability to renegotiate or terminate
existing leases successfully and to reduce its work force in accordance with
its planned schedule and without unforeseen expenses. Such risks and
uncertainties could cause results for 1999 and for subsequent periods to
differ materially from those indicated in this Annual Report on Form 10-K/A.
Readers should not place undue reliance on such forward-looking statements,
which reflect management's view only as of the date hereof. Pacific Bank
undertakes no obligation to publicly revise these forward-looking statements
to reflect subsequent events or circumstances. For a discussion of additional
factors which could affect the bank's performance, please see Pacific Bank's
publicly available filings with the Office of the Comptroller of the Currency
and Pacific Bank's press releases.
PART I
ITEM 1 - BUSINESS
(dollars in thousands, except per share data)
GENERAL DESCRIPTION OF BUSINESS
At December 31, 1998, Pacific Bank had total assets of $712,520, total
deposits of $611,875 and total shareholders' equity of $79,860. Pacific
Bank's principal offices are located at 351 California Street, San Francisco,
California 94104, and its telephone number is (415) 576-2700. For further
information, see the footnote entitled "description of business" and the
footnote entitled "Acquisitions" on pages 42 and 45 of Pacific Bank's
Restated 1998 Annual Report.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
CREDIT RISK
Two of Pacific Bank's three primary businesses are commercial banking and
international/trade finance. The risk that borrowers may fail to perform in
accordance with the terms of their loans is inherent in the lending business.
The ability of borrowers to repay their obligations can be adversely affected by
factors beyond the control of the
3
<PAGE>
bank, including local and general economic and market conditions. A
substantial portion of Pacific Bank's loans is secured by liens on real
estate. These same factors may adversely affect the value of real estate as
collateral. International/ trade finance business is based on transactions
where Pacific Bank receives a security interest in goods to collateralize its
extension of credit and does not always have a reliable secondary source of
repayment. In its trade financing, Pacific Bank runs the risk that collateral
or guarantees will be inadequate, largely due to rapidly changing market
conditions, deteriorating financial condition of guarantors, or fraud in the
underlying trade transaction, which may leave either Pacific Bank or its
customer holding documents of title to non-existent or defective goods.
Financial difficulty or failure of customers of Pacific Bank or of
correspondent banks may also adversely affect Pacific Bank's ability to
recover funds due to it.
Pacific Bank has adopted underwriting and credit monitoring procedures and
credit policies, including the establishment and review of the allowance for
credit losses, that management believes are appropriate to minimize credit
risk. These policies include assessment of the likelihood of nonperformance,
tracking of loan performance and diversification of the credit portfolio.
These policies and procedures, however, may not prevent unexpected losses
that could materially adversely affect the bank's results of operations. See
the "Credit Quality" section of Pacific Bank's Restated 1998 Annual Report to
Shareholders for further discussion of credit risk.
INTEREST RATE SENSITIVITY
Banking has traditionally been a business which depends on rate differentials.
In general, the differences between the interest rate paid by Pacific Bank on
its deposits and its other borrowings, and the interest rate received by Pacific
Bank on loans extended to its customers and securities held in its investment
portfolio, will comprise a major portion of Pacific Bank's earnings. Such rate
differentials are highly sensitive to many factors which are beyond the control
of Pacific Bank, including general economic conditions and the policies of
various governmental and regulatory authorities, in particular, the Board of
Governors of the Federal Reserve System. Although management believes that the
bank's sensitivity to rate changes is reasonable, significant fluctuations in
interest rates may have an adverse affect on the bank's business, financial
condition and results of operations. Due to deregulation of the industry and
increased competition, the banking business is becoming increasingly dependent
on the generation of fees and service charges.
ECONOMIC CONDITIONS
The business and profitability of a financial services organization such as
Pacific Bank is influenced by prevailing economic conditions and governmental
policies, both foreign and domestic. A significant part of the international/
trade finance division's customers engage in trade in the Asia Pacific
region. Deterioration of economic or political conditions or the imposition
of currency exchange or similar controls in Asia could have a material
adverse effect on Pacific Bank's results of operations, financial condition
and prospects. Pacific Bank's domestic commercial banking division is
especially subject to fluctuations in the economic conditions prevailing in
California where substantially all of its borrowers are located and where
most of its full service branch banking offices are located. For further
discussion of the impact of economic conditions in Asia, see the "Credit
Quality" section of Pacific Bank's Restated 1998 Annual Report to
Shareholders.
GOVERNMENT REGULATION AND MONETARY POLICY
The actions and policies 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, as well as having indirect impact on the value of
financial instruments held by Pacific Bank. The nature and impact on Pacific
Bank of future changes in economic and market conditions and monetary and fiscal
policies, both foreign and domestic, are not predictable and are beyond Pacific
Bank's control. In addition, these conditions and policies can impact Pacific
Bank's customers and counterparties that may increase the risk of default on
their obligations. They can also affect the competitive conditions in the market
and products within which Pacific Bank operates, which can have an adverse
impact on Pacific Bank's ability to maintain its revenue streams.
The nature and timing of any future changes in monetary policies and their
impact on Pacific Bank are not predictable. From time to time, legislation is
proposed or enacted which has the effect of increasing the cost of doing
business and changing the competitive balance between banks, other financial
institutions, and other businesses that are not financial institutions but which
provide financial services.
MARKET AND OTHER RISKS
As part of its ongoing business, Pacific Bank assumes market risks in its
role as a financial intermediary. In addition, Pacific Bank is exposed to
other risks in the routine course of business, such as liquidity risk and
operating risk, including risks arising from year 2000 issues. Pacific Bank
is also subject to the risk of litigation
4
<PAGE>
and to an unexpected adverse outcome in such litigation. Competitive
pressures in the marketplace and unfavorable or adverse publicity and news
coverage can have the effect of lessening customer demand for Pacific Bank's
services. See the "Risk Analysis" section on pages 33 to 37 of Pacific Bank's
Restated 1998 Annual Report to Shareholders for further discussion of these
risks.
COMPETITION
The banking business in California, and specifically in the market area
served by Pacific Bank, is highly competitive. Pacific Bank competes for
loans, deposits, and trust business with other commercial banks (including
some of the country's and the world's largest banks or their affiliates),
savings and loan associations, finance companies, money market funds,
brokerage houses, credit unions, and non-financial institutions. By virtue of
their larger capital bases, the great majority of the commercial banks with
which Pacific Bank competes have significantly greater lending limits than
Pacific Bank and perform other functions for their customers which Pacific
Bank can offer only through outside sources, if at all. Deregulation of the
banking industry, increased competition from non-bank entities for the cash
balances of individuals and businesses, and continuing developments in the
computer and communications industries have had, and most likely will
continue to have, a significant impact on Pacific Bank's competitive position.
Interstate banking legislation passed in 1994 and phased in through 1996 allows
banks outside California to acquire branches or banks in the state. In addition,
California banks are allowed to open branches in other states, subject to
nationwide and state-imposed concentration limits. Such branches would be
subject to certain laws of the states in which they operate. Competition may
increase further as banks branch across state lines and enter new markets.
During 1998, consolidation continued among the largest banking institutions in
Pacific Bank's San Francisco market area. Two of the nation's largest retail
branch banking firms merged with out-of-state banks, forming banking entities
with essentially nationwide operations. In the past, such mega-mergers created
opportunities for Pacific Bank from customers disenfranchised during the
combination.
Legislation has been considered in Congress that would repeal the current
statutory restrictions on affiliations between commercial banking, investment
banking and insurance activities. The likelihood of such major legislative
changes and the impact such changes might have on Pacific Bank cannot be
predicted.
Pacific Bank's strategy for meeting increased competition has been to
concentrate on particular segments of the market. Pacific Bank is a commercial
bank that focuses marketing efforts on financing the needs of its traditional
customer base of entities engaged in trade finance, professionals, high net
worth individuals and small and mid-sized businesses. Pacific Bank competes by
offering such customers specialized and personalized banking services which may
not be available from Pacific Bank's larger competitors. Pacific Bank reaches
its customers through traditional banking channels as well as offering the
latest technological tools to facilitate communications. Current product
offerings allow customers to generate wire transfers, originate letters of
credit, and check balances or order stop payments on checks for business or
personal checking accounts through their personal computer.
SUPERVISION AND REGULATION
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the statutory and
regulatory provisions described. No assurance can be given that such statutes
and regulations will not be amended in the future.
Pacific Bank, as a national association, is subject to supervision, examination
and regulation by the Office of the Comptroller of the Currency ("OCC"). It is
also a member of the Federal Reserve System and, as such, is subject to
applicable provisions of the Federal Reserve Act and regulations issued
thereunder. The deposits of Pacific Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") in an amount up to $100 per depositor. Pacific
Bank is consequently subject to the applicable provisions of the Federal Deposit
Insurance Act and the regulations issued thereunder, including the obligation to
pay a semi-annual assessment for such insurance. Pacific Bank is also subject to
applicable provisions of California law, insofar as they do not conflict with or
are not otherwise preempted by federal banking law.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operation of Pacific Bank. Federal
regulations include requirements to maintain reserves against deposits,
limitations on the nature and amount of loans that may be made, capital
requirements, and restrictions on payment of dividends. The OCC regulates the
number and location of the branch offices of a national bank, and may permit
5
<PAGE>
a national bank to maintain branches only to the extent allowable under state
law for state banks. California law presently permits a bank to locate a
branch office in any locality in the state and exempts banks from California
usury laws.
Pacific Bank is subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, which include but are not limited to the
filing of annual, quarterly and other current reports with the OCC.
DIVIDENDS
The payment of cash dividends by Pacific Bank is subject to certain
restrictions set forth in the National Bank Act. Pursuant to the National
Bank Act, no national bank may pay dividends out of its capital. All
dividends must be paid out of net profits then on hand, after deducting
losses and bad debts. Also pursuant to the National Bank Act, the approval of
the OCC will be required if the total of all dividends declared by a national
bank in any calendar year exceeds the total of its retained net profits of
that year combined with its net profits of the two preceding years, less any
required transfers to surplus. These provisions of the National Bank Act do
not currently prohibit Pacific Bank from paying dividends on its common stock.
REGULATORY EXAMINATIONS
Pacific Bank is subject to regulatory examinations conducted by the OCC in
connection with bank safety and soundness, Trust Department operations,
compliance, fair lending, Community Reinvestment Act compliance, and
management information systems, including year 2000 compliance.
Under bank safety and soundness guidelines, each federal banking agency
specifies standards in numerous areas of bank operations, addressing such
issues as internal control and audit systems, loan documentation, credit
underwriting, interest rate risk, asset growth, executive officer and
director compensation, asset quality, and other operational and managerial
standards. The federal banking agency has various powers to enjoin an unsafe
or unsound business activity as a result of a regulatory examination.
Remedies include the power to require affirmative action to correct the
condition, to issue an administrative order that can be judicially enforced,
to direct an increase in capital, to restrict the growth of the bank, to
assess civil monetary penalties, to remove officers and directors and
ultimately to terminate a bank's deposit insurance, which would result in a
revocation of the bank's charter. Pacific Bank is not currently subject to
such actions by the regulatory agency. Compliance with these regulatory
requirements has increased and may continue to increase the cost of, and the
regulatory burden associated with, the banking business.
In May of 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding year 2000 awareness. The
statement provides guidance to financial institutions, providers of data
services, and all examining personnel of the federal banking agencies
regarding year 2000 issues. The federal banking agencies have since conducted
year 2000 compliance examinations on a quarterly basis, and the failure to
implement a satisfactory year 2000 program may be seen by the federal banking
agencies as an unsafe and unsound banking practice. In addition, federal
banking agencies have been taking into account year 2000 compliance programs
when analyzing applications and may deny an application based on year 2000
related issues.
The most recent Community Reinvestment Act examination of Pacific Bank was
performed in 1997. Pacific Bank has been rated as having a Satisfactory
Record of Meeting Community Credit Needs.
CAPITAL REQUIREMENTS
The federal banking agencies have issued risk-based capital guidelines that
establish the minimum capital level based on the risk associated with the
bank's assets and off-balance sheet transactions, such as letters of credit.
The guidelines also require a minimum of Tier 1 capital to total assets,
referred to as the leverage ratio. The federal banking agencies have the
discretion to set individual minimum capital ratios for specific institutions
at rates significantly above the minimum guidelines and ratios.
Federal banking agencies have broad powers to take prompt corrective action
to resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital
ratios. The federal banking agencies have defined five categories in which an
insured depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized, undercapitalized,
6
<PAGE>
significantly undercapitalized and critically undercapitalized. At December
31, 1998, Pacific Bank exceeded the required ratios for classification as
"well capitalized".
EMPLOYEES
At December 31, 1998, Pacific Bank had 298 full-time equivalent employees.
Management considers relations with its employees to be satisfactory.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See the footnote entitled "Segments" on page 54 of Pacific Bank's Restated
1998 Annual Report to Shareholders for segment of business information.
FINANCIAL REPORTS SECTION
FINANCIAL STATEMENTS
See "Part IV, Item 14. Financial Statements" of this report for information
regarding presentation of Pacific Bank's consolidated financial statements.
SUPPLEMENTAL FINANCIAL DATA
The following discussion of Pacific Bank's volume/rate analysis of changes in
net interest revenue, lending activities and loan portfolio, investment
activities and deposits should be read in conjunction with the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 17 of the Restated 1998 Annual Report.
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table attributes changes in net interest income to changes in
either average daily balances or average rates for both interest-earning
assets and interest-bearing sources of funds. Because of the numerous
simultaneous balance and rate changes during any period, it is not possible
to precisely allocate such changes between balances and rates. For purposes
of this table, changes that are not due solely to balance or rate changes are
allocated to balance.
<TABLE>
<CAPTION>
Analysis of Changes in Interest Income and Expense
- -------------------------------------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
---------------------------------------------------------------------
(dollars in thousands) Rate Balance Total Rate Balance Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income
Investment securities $ (253) $ 83 $ (170) $ 343 $(2,192) $(1,849)
Other interest-earning assets (59) (74) (133) 27 1,952 1,979
Loans (1,010) 8,958 7,948 (1,103) 7,533 6,430
Interest rate swaps and floors, net (233) (233) (319) (319)
- -------------------------------------------------------------------------------------------------------------
Total increase (decrease) (1,555) 8,967 7,412 (1,052) 7,293 6,241
- -------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense
Deposits (151) 2,775 2,624 747 2,500 3,247
Other borrowings (7) 9 2 52 (95) (43)
- -------------------------------------------------------------------------------------------------------------
Total increase (decrease) (158) 2,784 2,626 799 2,405 3,204
- -------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Interest
Income $(1,397) $6,183 $4,786 $(1,851) $ 4,888 $3,037
=============================================================================================================
</TABLE>
LENDING ACTIVITIES AND LOAN PORTFOLIO
At December 31, 1998, Pacific Bank had loans outstanding of $484,474, which
represented approximately 79% of Pacific Bank's total deposits and
approximately 68% of its total assets. Pacific Bank's loan portfolio is not
concentrated in any particular industry, although approximately 39.6% of
Pacific Bank's loans are secured by real estate. A loan may be secured (in
whole or in part) by real estate even though the purpose of the loan is not
to facilitate the purchase or development of real estate. See the "Balance
Sheet Analysis" and "Description of Business" sections on pages 25 to 29 and
42 of Pacific Bank's Restated 1998 Annual Report for further discussion of
the loan products and customers.
7
<PAGE>
Contractual maturities for fixed rate loans and repricing frequency for
floating rate loans at December 31, 1998 are set forth in the following
table. Contractual maturities for fixed rate loans do not consider renewals
or prepayments of loans. Nonaccrual and past due loans are considered due
immediately. At December 31, 1998, $249,373 of the Bank's fixed and floating
rate loans have contractual maturities of one year or less. Substantially all
of the loans due or repricing in more than one year earn interest at a fixed
rate.
<TABLE>
<CAPTION>
Loans due or repricing in: As of December 31, 1998
- -------------------------- -----------------------
<S> <C>
Three months or less $360,179
Over three months through twelve months 46,917
Over one year through three years 17,760
Over three years through five years 28,521
Over five years through fifteen years 30,431
Over fifteen years 666
-----------------------
Total loans $484,474
-----------------------
</TABLE>
Lending policies and procedures are established by senior management and are
ratified by the Directors' Loan Committee and by the Board of Directors of
Pacific Bank. New loans may be disbursed or renewals processed by lending
officers up to their lending limit, allowing for immediate responsiveness to
the credit needs of customers. Credit administration reviews all new and
renewed credits, and Directors' Loan Committee reviews all credit approvals
of $250 or more on a monthly basis.
UNDISBURSED LOAN COMMITMENTS AND LETTERS OF CREDIT
Undisbursed loan commitments and letters of credit at December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unused commitments to extend credit $247,244 $223,894 $164,883 $123,404 $119,820
Standby letters of credit 14,375 16,658 7,874 7,399 4,107
Commercial letters of credit 27,894 36,623 22,504 26,713 21,384
--------------------------------------------------------
</TABLE>
Due to the nature of the business of Pacific Bank's clients, there are no
seasonal patterns or predictability to the utilization of unused lines of
credit; therefore Pacific Bank is unable to forecast the extent to which
commitments will be exercised within the current year, but Pacific Bank does
not believe that any such utilization will constitute a material liquidity
demand.
ALLOCATIONS OF THE ALLOWANCE FOR CREDIT LOSSES
Discussion of the methodology utilized to determine the level of the
allowance for credit losses in the "Credit Quality" section of Pacific Bank's
Restated 1998 Annual Report to Shareholders should be read in conjunction
with this table. Allocation of the allowance for credit losses at December 31
were as shown in the following table.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------
As a As a
percentage percentage
Amount of loans Amount of loans
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOCATION BY LOAN TYPE
International/trade finance $ 6,221 4.43% $ 4,475 3.11%
Commercial 3,405 2.62 1,583 1.82
Real estate 599 0.31 342 0.24
Personal and other 211 0.95 511 2.38
Unallocated 1,899 0.00 3,912 0.00
- ---------------------------------------------------------------------------------------------
Total allowance for credit losses $12,335 2.55% $10,823 2.73%
=============================================================================================
ALLOCATION BY TYPE
Formula $ 8,846 $ 5,069
Specific 1,590 1,842
Unallocated 1,899 3,912
- ---------------------------------------------------------------------------------------------
Total allowance for credit losses $12,335 $10,823
=============================================================================================
</TABLE>
8
<PAGE>
INVESTMENT ACTIVITIES
Pacific Bank's investment objectives are to provide for adequate liquidity and
generate a favorable return on investments without undue risk. Pacific Bank's
investment strategy is determined by cash position, projected liquidity needs,
the level of borrowed funds, the quality, maturity, stability and earnings
generated by the loan portfolio, the nature and stability of deposits, and
Pacific Bank's capital position.
To meet its liquidity and operating needs, Pacific Bank maintains a portion of
its investments in cash, federal funds sold, and securities purchased under
agreements to resell. Pacific Bank may also invest in U.S. Treasury obligations,
U.S. Federal agency securities, mortgage-backed securities, asset-backed
securities rated AA by Standard and Poor's investment services (or other such
nationally recognized services), state and municipal tax-exempt leases or bonds,
commercial paper and corporate bonds with a rating of A1 or better, banker's
acceptances of major quality domestic and foreign banks, and negotiable
certificates of deposit of major, quality banks. It is Pacific Bank's policy to
restrict the purchase of investment securities to a maximum maturity or average
maturity not to exceed five years (except investments in municipal bonds), or
ten years for floating rate instruments which reprice at least annually.
At December 31, 1998, Pacific Bank had $75,428 of securities classified as
available-for-sale, $46,325 of securities classified as held-to-maturity and
$4,108 of equity securities. No securities have been classified as held for
trading. Investment securities classified as available-for-sale are reported in
the Consolidated Balance Sheets at fair value. Due to market rate decreases near
year-end, the fair value of Pacific Bank's primarily fixed rate
available-for-sale investment portfolio exceeded unamortized cost by $704 at
December 31, 1998.
The following table summarizes the contractual maturities of Pacific Bank's
investment securities at December 31, 1998. Most of the securities earn interest
based on a fixed rate, with the exception of $26,757 of U.S. Agency
mortgage-backed securities in the available-for-sale portfolio due in more than
10 years that reprice annually.
<TABLE>
<CAPTION>
=========================================================================================================================
AVAILABLE-FOR-SALE SECURITIES (AT FAIR VALUE) U.S. AGENCY CMO'S AND
(DOLLARS IN THOUSANDS) U.S. TREASURY U.S. AGENCY MORTGAGE-BACKED OTHER SECURITIES TOTAL
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 5,071 $ 411 $ 304 $ - $ 5,786
Due after one year through five years 21,305 10,238 10,207 - 41,750
Due after five years through ten years - - - 769 769
Due after ten years - - 26,757 366 27,123
=========================================================================================================================
Total $ 26,376 $ 10,649 $ 37,268 $ 1,135 $ 75,428
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================================================
HELD-TO-MATURITY SECURITIES (AT BOOK VALUE) U.S. AGENCY MUNICIPAL
(DOLLARS IN THOUSANDS) U.S. AGENCY MORTGAGE-BACKED CMO'S SECURITIES TOTAL
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Due in one year or less $ - $ 1,573 $ - $ - $ 1,573
Due after one year through five years 15,000 13,612 - 1,964 30,576
Due after five years through ten years - - - 5,432 5,432
Due after ten years - - 7,008 1,736 8,744
=========================================================================================================================
Total $ 15,000 $ 15,185 $ 7,008 $ 9,132 $ 46,325
=========================================================================================================================
</TABLE>
DEPOSITS
Pacific Bank experienced 21% growth in deposits during 1998. Total deposits
were $611,875 at December 31, 1998, compared to $506,681 at December 31,
1997. The growth in deposits was largely attributable to the acquisition of
Sterling West Bancorp's $99,352 in deposits. Deposits in foreign offices
increased 6%, up from $43,443 in 1997 to $46,055 in 1998. A majority of these
deposits have balances in excess of $100. At December 31, 1998, Pacific Bank
had $143,567 in noninterest bearing demand deposit accounts, $66,729 in money
market checking accounts, $189,221 in money market savings accounts, $17,385
in other savings accounts and $148,918 of time deposits in domestic offices.
Domestic certificates of deposit in excess of $100 represent approximately
16% of total deposits at December 31, 1998. These large certificates of
deposit, which are the most volatile of Pacific Bank's deposit base, are held
primarily by customers in the San Francisco Bay Area. Most of Pacific Bank's
deposits are obtained from affluent individuals, from professionals and from
medium-sized businesses.
Pacific Bank had $44,503 of deposits in its "CD Advantage" product at December
31, 1998. This certificate carries a fixed term of up to thirteen-months and
allows the holder to increase the rate to the then current rate offered on this
product one time prior to maturity. The holder is also entitled to withdraw
funds twice prior to maturity and to make additional deposits to an existing
certificate.
9
<PAGE>
ITEM 2 - PROPERTIES
See the footnote entitled "Restructuring Liability" on page 41 of Pacific
Bank's Restated 1998 Annual Report to Shareholders for a discussion of
planned branch consolidations and closings. Pacific Bank generally leases
properties, primarily in the financial district of San Francisco and other
locations in California. Pacific Bank leases about 55,000 square feet in The
Pacific Bank Building, a 16-story office building in San Francisco,
California. Pacific Bank's main branch occupies the ground floor and
administrative and lending offices occupy the mezzanine and the next four
floors. The sixth floor space has been subleased.
In the San Francisco Financial District, Pacific Bank operates a branch located
on the ground floor of 101 California Street, with Real Estate Lending located
in the mezzanine level. A branch at 100 Montgomery Street, San Francisco also
houses the Wealth Management Group. Pacific Bank has another branch at 5501
Geary Boulevard, San Francisco. A branch at 350 Primrose, Burlingame, was added
as part of the acquisition of Burlingame Bancorp on April 2, 1996. Another
Burlingame branch is located at 1841 El Camino Real. A loan production office
was opened at 555 Capitol Avenue in Sacramento, California during 1996. As part
of the restructuring plan, the Los Angeles branch located at 601 South Figueroa
Street was consolidated during 1998 with the branch at the previous headquarters
of Sterling West Bancorp at 3287 Wilshire Boulevard. Also acquired on July 3,
1998 with Sterling West Bancorp were branches operating in leased facilities in
the Los Angeles suburbs of Beverly Hills, Encino and Burbank, and a branch in an
owned facility in Glendale. Pacific Bank's foreign branches are located at 2301
Alexandra House, 16-20 Chater Road in Central Hong Kong and in Georgetown, Grand
Cayman, British West Indies. The Grand Cayman office is maintained on an agency
fee basis and does not involve a leased or owned facility.
From time to time, Pacific Bank, usually acting through its wholly owned
subsidiary, TPB Holdings, Inc., also acquires legal title to real estate
acquired in (full or partial) satisfaction or default of loans. At December 31,
1998, Pacific Bank reflected in its consolidated financial statements one
property acquired through foreclosure acquired with Sterling West Bancorp.
ITEM 3 - LEGAL PROCEEDINGS
Pacific Bank has no material pending legal proceedings, other than ordinary,
routine litigation incidental to Pacific Bank's business, to which Pacific Bank
is a party or of which any of its property is subject, with the exception of two
matters previously discussed. See Part I, Item 3 - Legal Proceedings of Pacific
Bank's 1997 Annual Report on Form 10-K for discussion of Norman C. Eckersley's
claims against Pacific Bank; such claims are in the discovery stage.
Pacific Bank continues to pursue its claim in the liquidation proceedings of a
Wisconsin-based insurance company. See Part I, Item 3 - Legal Proceedings of
Pacific Bank's quarterly report on Form 10-Q for the period ended June 30, 1998.
The liquidator reported total assets at December 31, 1998 of $43,291. Since
Pacific Bank foreclosed on the company's stock which was pledged to secure its
loan, Pacific Bank is the sole equity shareholder of the company, and Pacific
Bank would receive any net assets remaining after all other claims have been
settled, upon ultimate closure of the liquidation proceedings. The liquidator
reported capital surplus of $6,848 at December 31, 1998. Claims against the
assets totaled $36,443 at December 31, 1998. Pacific Bank's claim as creditor
totaling $8.0 million at December 31, 1998 ranks behind all other claims in the
liquidation. However, because higher priority claims may still be filed, neither
the timing nor results of the liquidation proceedings can be predicted.
10
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See information under the caption "Quarterly Results and Shareholder
Information" on page 56 of the Restated 1998 Annual Report, which information
is attached to this report. For information regarding dividends, see
information under the caption "Dividends" under Part I, Item 1 of this Form
10-K/A on page 7.
ITEM 6 - SELECTED FINANCIAL DATA
See information under the caption "Selected Financial Data" on page 18 of the
Restated 1998 Annual Report, which information is attached to this report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
See information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 17 to 32 of the
Restated 1998 Annual Report, which information is attached to this report.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information under the caption "Risk Analysis" on pages 33 to 37 of the
Restated 1998 Annual Report, which information is attached to this report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included or incorporated
by reference herein as described at Part IV, Item 14 of this Form 10-K/A on
page 12.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference from
Pacific Bank's Proxy Statement for the 1999 annual meeting of shareholders (the
"1999 Proxy Statement") under the captions "Proposal No. 1 -Election of
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance".
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the 1999 Proxy Statement under the captions "Executive Compensation",
"Comparative Stock Performance" and "Director Compensation".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the 1999 Proxy Statement under the captions "Stock Ownership of Management",
"Principal Shareholders" and "Change in Control of the Bank".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the 1999 Proxy Statement under the caption "Certain Relationships and Related
Transactions".
11
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Pacific Bank files reports, proxy and information statements and other
information with the OCC in accordance with the requirements of the Securities
and Exchange Act of 1934, as amended. Copies of these reports may be obtained at
the Securities, Investments and Fiduciary Practices Division of the OCC, 250 E
Street, Washington, DC 20219. Written or oral requests for such copies may also
be directed to Carol Petricka, Corporate Secretary, The Pacific Bank, N.A., 351
California Street, San Francisco, California 94104 (telephone: (415) 576-2778).
Certain financial information filed by Pacific Bank with the OCC is available
electronically at the FDIC World Wide Web site at http://www.fdic.gov.
The consolidated financial statements of The Pacific Bank, NA and
subsidiaries and Independent Auditors' Report listed below and appearing at
the indicated location in the Restated 1998 Annual Report are incorporated by
reference into this report.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report.................................................... 58
Consolidated Balance Sheets as of December 31, 1998 (As Restated) and 1997...... 38
Consolidated Statements of Income for the years ended
December 31, 1998 (As Restated), 1997 and 1996.............................. 39
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998 (As Restated), 1997 and 1996.............................. 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 (As Restated), 1997 and 1996.............................. 41
Notes to Consolidated Financial Statements...................................... 42-57
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or not required or
because the information is included in the financial statements or notes thereto
or is not material.
(a)(3) EXHIBITS
The Index to Exhibits to this Form 10-K/A is included at page 15.
(b) REPORTS ON FORM 8-K
None.
12
<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, in San
Francisco, California, on the 5th day of January, 2000.
THE PACIFIC BANK, NATIONAL ASSOCIATION
By /s/ Michael Tun Zan
-------------------------------------
Michael Tun Zan
President and Chief Executive Officer
13
<PAGE>
SIGNATURES
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 below on the 5th day of January,
2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
<S> <C>
/s/ John P. Halicky Executive Vice President,
------------------------ Chief Financial Officer and
John P. Halicky Principal Financial Officer
/s/ Barbara L. Thomas Vice President, Controller and
------------------------ Principal Accounting Officer
Barbara L. Thomas
</TABLE>
<TABLE>
<S> <C> <C>
Date: January 5, 2000 /s/ Norman E. Dean
---------------------- -----------------------------------------------
Norman E. Dean
Director
Date: January 5, 2000 /s/ Michael Tun Zan
---------------------- -----------------------------------------------
Michael Tun Zan
Director
Date: January 5, 2000 /s/ Frank M. Brown
---------------------- -----------------------------------------------
Frank M. Brown
Director
Date: January 5, 2000 /s/ Scott R. Loring
---------------------- -----------------------------------------------
Scott R. Loring
Director
Date: January 5, 2000 /s/ Anton Qiu
---------------------- -----------------------------------------------
Anton Qiu
Director
Date: January 5, 2000 /s/ Fran A. Streets
---------------------- -----------------------------------------------
Fran A. Streets
Director
Date: January 5, 2000 /s/ James E. Ullakko
---------------------- -----------------------------------------------
James E. Ullakko
Director
==========================================================================================================
</TABLE>
14
<PAGE>
INDEX TO EXHIBITS
1998 REPORT ON FORM 10-K/A
THE PACIFIC BANK, N.A.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3(i) Articles of Association, as amended. Filed as Exhibit 3(i) to Pacific Bank's
Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference.
3(ii) Bylaws, as amended. Filed as Exhibit 3 (ii) to Pacific Bank's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by reference.
4.1 Specimen share certificate. Filed as Exhibit 4.1 to Pacific Bank's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
4.2 Shareholder Rights Plan filed on Form 8-K on November 6, 1996 and incorporated herein
by reference.
10.1 Second amendment to standard office building lease, dated April 29, 1994, for
premises at 100 Montgomery Street, San Francisco. Filed as Exhibit 10.2 to the
Bank's Annual Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference.
10.2 Lease dated April 7, 1983 for premises at 101 California Street, San Francisco. Filed
as Exhibit 5.2 (1) to the Bank's Registration Statement on Form F-1 and incorporated
herein by reference.
10.3 Lease dated October 1, 1985 for premises at 351 California Street, San Francisco.
Filed as Exhibit 5.2 (2) to the Bank's Registration Statement on Form F-1 and
incorporated herein by reference.
10.4 Assignment of lease dated April 30, 1987 for premises at 100 Montgomery Street, San
Francisco. Filed as Exhibit 5.2 (3) to the Bank's Registration Statement on Form F-1
and incorporated herein by reference.
10.5 Assignment of lease dated December 6, 1991 for premises at 5501 Geary Boulevard,
San Francisco. Filed as Exhibit 5.2 (8) to the Bank's Annual Report on Form F-2 for
the fiscal year ended December 31, 1991 and incorporated herein by reference.
10.6 Assignment of lease dated July 10, 1992 for premises at 1841 El Camino Real,
Burlingame, California. Filed as Exhibit 10.12 to the Bank's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 and incorporated herein by
reference.
10.7 Eighth amendment to standard office building lease dated October 15, 1993, for
premises at 351 California Street, San Francisco. Filed as Exhibit 10.14 to the Bank's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference.
10.9 Lease dated December 1, 1994, for premises at 601 South Figueroa Street, Los
Angeles filed as Exhibit 10.23 to the Bank's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by reference.
10.10 Lease dated August 28, 1996 for premises at 555 Capitol Mall, Sacramento. Filed as
Exhibit 10.17 to Pacific Bank's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.11 Lease dated November 20, 1996 for premises at 2301 Alexandra House, 16-20 Chater
Road, Central Hong Kong. Filed as Exhibit 10.20 to Pacific Bank's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
10.14 Directors and Officers Indemnification Agreement. Filed as Exhibit 10.14 to Pacific
Bank's Annual Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.15 Tax Deferred Savings Plan. Filed as Exhibit 5.7 to the Bank's Annual Report on Form
F-2 for the fiscal year ended December 31, 1991 and incorporated herein by reference.
10.16 Supplemental Executive Retirement Plan dated July 1, 1996. Filed as Exhibit 10.16 to
Pacific Bank's Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
10.17 Executive Employment Contract for the President and Chief Executive Officer dated
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
November 5, 1996. Filed as Exhibit 10.18 to Pacific Bank's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by reference.
10.18 Executive Employment Contract for the Chief Financial Officer and Chief Credit
Officer dated November 5, 1996. Filed as Exhibit 10.19 to Pacific Bank's Annual
Report on Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference.
10.19 1993 Stock Option Plan and Agreement, as amended. Filed as Exhibit 10.1 to Pacific
Bank's Registration Statement on Form S-8 on April 21, 1997 and incorporated herein
by reference.
10.20 1998 Stock Option Plan. Filed as Exhibit 4.3 to Pacific Bank's Registration Statement
on Form S-8 on October 21, 1998 and incorporated herein by reference.
10.21 1998 Director Bonus Plan effective as of June 2, 1998, filed as Exhibit 10.21 to
Pacific Bank's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998 and incorporated herein by reference.
10.22 Agreement for Item Processing Services between The Pacific Bank, N.A. and EDS
Corporation dated April 24, 1998, filed as Exhibit 10.22 to Pacific Bank's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.
10.23 Share Repurchase Plan dated September 17, 1998, filed with Pacific Bank's Special
Meeting of Shareholders Proxy Statement on November 10, 1998 and incorporated
herein by reference.
10.24 Second Amendment to the Executive Employment Contract for the Chief Financial
Officer dated December 17, 1998. Filed as Exhibit 10.24 to Pacific Bank's
Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference.
10.25 Second Amendment to the Executive Employment Contract for the Chief Credit
Officer dated December 17, 1998. Filed as Exhibit 10.25 to Pacific Bank's
Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference.
10.26 Executive Employment Contract for Senior Vice Presidents dated December 17, 1998.
Filed as Exhibit 10.26 to Pacific Bank's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
23.1 Consent of Independent Auditors. 59
99.1 Restated 1998 Annual Report to Shareholders, General Description of Business, 17-58
Properties, Legal Proceedings, Market for Registrant's Common Equity and Related
Stockholder Matters, Selected Financial Data, Management's Discussion and Analysis
of Financial Condition and Results of Operations, Quantitative and Qualitative
Disclosures about Market Risk, Financial Statements and Supplementary Data, and
Certain Relationships and Related Transactions.
</TABLE>
16
<PAGE>
RESTATED 1998 ANNUAL REPORT
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ---------------------------------------------------------------------------
(Dollars in thousands, except as noted)
RESTATEMENT
Subsequent to the issuance of Pacific Bank's 1998 financial statements and
the filing of its 1998 Annual Report on Form 10-K with the Office of the
Comptroller of the Currency, management discovered accounting irregularities
and certain operational losses in the bank's trust division. Pacific Bank
conducted a special investigation which determined that trust fee income and
trust fee receivables had been overstated in 1998 and that certain
operational losses had occurred. As a result, the 1998 financial statements
have been restated from amounts previously reported to properly state trust
fee income and trust fee receivables and to recognize the operational losses.
Restated net income was $2,844, or $0.50 per diluted share in 1998, compared
to the previously reported net income of $3,274, or $0.57 per diluted share.
See Note 20, "Restatement" to the consolidated financial statements for
further discussion.
OVERVIEW
Assets of The Pacific Bank, N.A. were $712.5 million at year-end, an 18%
increase over $603.4 million in total assets the prior year-end. During 1998,
Pacific Bank completed the acquisition of Sterling West Bancorp and the
acquisition was accretive to 1998 earnings. Net income in 1998 was $2,844, or
$0.50 per diluted share, compared to $7,250, or $1.28 per diluted share in
1997. The current year results included a $2,610 restructuring charge for
consolidation and closing of several branch locations and staff reductions.
The 1998 results also include a $6,000 provision for loan losses. In the
prior year, a $1,500 reversal of provision for loan losses was recorded.
Excluding the restructuring charge and the provision for loan losses, Pacific
Bank's core earnings would have been $7,719 in 1998, an increase of 21%
compared to $6,376 in core earnings in 1997.
Average assets of Pacific Bank increased 78% over the past five years through
a combined strategy of acquisitions in targeted market areas and expansion of
established product niches through new product offerings and improved
delivery services. Over the same period, the return on equity based on core
earnings improved from a loss of 7.18% in 1994 to profitability of 9.25% in
1998. Core earnings improved over the past five years due to: maintenance of
the net interest margin over generally negative interest rate environments;
growth in fee income in new and established product lines; and asset growth
leveraged over existing staff levels.
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA 1998(1) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS (As restated)
At December 31 $712,520 $603,364 $476,673 $398,718 $351,091
AVERAGE BALANCES:
Average assets $645,828 $538,654 $456,974 $359,429 $362,412
Average loans 449,397 359,116 285,258 205,323 214,837
Average equity 83,451 76,584 71,282 56,184 38,051
INCOME STATEMENT SUMMARY DATA:
Net interest income $ 33,995 $ 29,209 $ 26,172 $ 19,308 $ 16,405
Noninterest income 8,667 7,855 5,410 4,436 4,623
Net income 2,844 7,250 7,129 13,325 15,755
Net income per diluted share(2) 0.50 1.28 1.25 2.35 2.86
Net interest margin 5.76% 5.86% 6.20% 5.55% 4.58%
Efficiency ratio 74.31 69.89 75.22 86.42 119.94
Return on assets 0.44 1.35 1.56 3.71 4.35
Return on equity 3.41 9.47 10.00 23.72 41.40
CORE EARNINGS:
Pre-tax income--as reported $ 4,962 $ 12,659 $ 12,326 $ 8,725 $ 15,808
Less: Provision (reversal of
provision) for credit losses 6,000 (1,500) (4,500) (5,500) (20,000)
Less: Restructuring costs 2,610 -- -- -- --
Core earnings--pretax 13,572 11,159 7,826 3,225 (4,192)
Tax at statutory rates 5,853 4,783 3,440 1,417 (1,459)
Core earnings 7,719 6,376 4,386 1,808 (2,733)
Return on equity--core earnings 9.25% 8.33% 6.15% 3.22% (7.18)%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated-See Note 20 to the consolidated financial statements.
(2) Share and per share data have been restated to reflect
the two-for-one stock split in December 1998.
[LOGO] The Pacific Bank
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ------------------------------------------------------------------------------
FINANCIAL RESULTS - 1998 COMPARED TO 1997
[GRAPH]
NET INTEREST INCOME
The principal source of income for Pacific Bank is net interest income. Net
interest income is affected by both changes in interest rates and changes in
the amount of interest-earning assets and interest-bearing liabilities. Loans
increased 25%, averaging $449.4 million in 1998,
18
<PAGE>
following 26% growth in loans in 1997. Deposits grew 21%, averaging $544.7
million in 1998, following 21% growth in average deposits in 1997. Net
interest income increased 16% in 1998 to $33,995, compared to $29,209 in
1997. Net interest income increased 12% in 1997 compared to $26,172 in 1996.
A majority of Pacific Bank's loans are priced based on its guidance rate,
which approximates other banks' prime lending rate. The guidance rate
decreased 0.25% on three occasions during the fourth quarter, on October 1,
1998, October 19, 1998, and November 18, 1998, ending the year at 7.75%. The
guidance rate is currently at its lowest level since the recent peak in rates
in March 1997. Loans yielded 9.87% in 1998 compared to 10.21% in 1997, a
decrease of 0.34%. While yields on loans decrease with the guidance rate,
deposit rates do not necessarily decrease with market rates. This
inelasticity in deposit rates is due to expectations of depositors and
competitive factors. In recent years, banks have been forced to compete with
brokerage accounts and other nonbank financial institutions for core
deposits. Pacific Bank's rates paid on money market and savings accounts have
increased over the past five years, from 2.22% in 1994 to 3.42% in 1998. In a
declining rate environment such as we have experienced since March 1997,
interest earned on loans declined with market rates while rates paid on
deposits remained level or increased. This resulted in a squeeze on the net
interest margin.
Pacific Bank's net interest margin was 5.76% in 1998, compared to 5.86% in
1997 and 5.91% in 1996 (after excluding a $1,207 interest recovery on
settlement of a distressed loan). The decrease in the net interest margin was
mitigated in 1998 due to the mix of deposits. The acquisition of Sterling West
Bancorp with five branches in the Los Angeles area contributed a significant
base of low-cost checking account balances. Noninterest bearing balances
increased 22% to $111.1 million on average in 1998. Rates paid on business
checking and money market accounts increased from 3.26% in 1997 to 3.42% in
1998, while balances increased 40% to $231.1 million on average in 1998.
Balances in the highest cost deposits, time deposits, increased 5% to $202.5
million on average in 1998. Time deposits yielded 5.18% in 1998 compared to
5.38% in 1997. The overall cost of deposits in 1998 was 3.38%, compared to
3.51% in 1997, a decrease of 0.13%. Pacific Bank anticipates further
deterioration in the net interest margin in 1999 under current interest rate
scenarios.
19
<PAGE>
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------
1998 1997
-------------------------------- -----------------------------------
Average Interest Average Interest
Daily Income/ Yield/ Daily Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INVESTMENT SECURITIES(1)
U.S. Treasury $ 25,232 $ 1,459 5.78% $ 23,438 $ 1,509 6.44%
Federal agency 21,073 1,281 6.08 16,812 1,113 6.62
Collateralized mortgage obligations
and asset-backed securities 41,261 2,526 6.12 49,644 3,025 6.09
Municipal securities(2) 4,417 264 5.98 834 56 6.71
Federal Reserve Bank stock and other 4,002 219 5.47 2,761 168 6.08
--------- --------- ------- ---------- ---------- --------
Total investment securities 95,985 5,749 5.99 93,489 5,871 6.28
--------- --------- ------- ---------- ---------- --------
Federal funds sold and securities purchased
under agreements to resell 43,081 2,314 5.37 45,915 2,524 5.5
Interest-bearing deposits in banks 2,578 78 3.03 56 1 1.79
LOANS(2)
Commercial 104,156 10,422 10.01 80,532 8,775 10.9
International/trade finance 147,574 14,387 9.75 123,130 12,292 9.98
Real estate 173,079 16,999 9.82 136,657 13,724 10.04
Personal and other 24,588 2,713 11.03 18,797 1,782 9.48
Interest rate swaps and floors, net (153) 80
--------- --------- ------- ---------- ---------- --------
Total loans 449,397 44,368 9.87 359,116 36,653 10.21
--------- --------- ------- ---------- ---------- --------
Total earning assets 591,041 52,509 8.88 498,576 45,049 9.04
--------- --------- ------- ---------- ---------- --------
Allowance for credit losses (11,192) (11,036)
Net unrealized gain (loss)
on available-for-sale securities 621 375
Cash and due from banks 31,772 27,327
Other assets 33,586 23,412
--------- --------- ------- ---------- ---------- --------
Total assets $645,828 $52,509 8.13% $538,654 $45,049 8.36%
--------- --------- ------- ---------- ---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing $111,064 $ 90,974
Interest-bearing:
Money market and savings accounts 231,128 $ 7,907 3.42 164,980 $ 5,386 3.26
Time deposits of less than $100 86,820 4,402 5.07 93,619 4,949 5.29
Time deposits of $100 or more 115,716 6,088 5.26 99,367 5,438 5.47
--------- --------- ------- ---------- ---------- --------
Total interest-bearing 433,664 18,397 4.24 357,966 15,773 4.41
--------- --------- ------- ---------- ---------- --------
Total deposits 544,728 18,397 3.38 448,940 15,773 3.51
--------- --------- ------- ---------- ---------- --------
Borrowed funds 808 56 6.93 676 54 7.99
--------- --------- ------- ---------- ---------- --------
Total deposits and borrowed funds 545,536 18,453 3.38 449,616 15,827 3.52
--------- --------- ------- ---------- ---------- --------
Other liabilities 16,841 12,454
Shareholders' equity 83,451 76,584
--------- --------- ------- ---------- ---------- --------
Total liabilities and shareholders' equity $645,828 $538,654
--------- --------- ------- ---------- ---------- --------
NET INTEREST INCOME-TAX EQUIVALENT
BASIS/NET INTEREST MARGIN 34,056 5.76% 29,222 5.86%
Less: tax-equivalent adjustment 61 13
--------- --------- ------- ---------- ---------- --------
Net interest income $33,995 $29,209
--------- --------- ------- ---------- ---------- --------
<CAPTION>
Years Ended December 31
--------------------------------
1996
--------------------------------
Average Interest
Daily Income/ Yield/
Balance Expense Rate
--------- --------- -------
<S> <C> <C> <C>
ASSETS
INVESTMENT SECURITIES(1)
U.S. Treasury $ 36,802 $ 2,227 6.05%
Federal agency 40,144 2,683 6.68
Collateralized mortgage obligations
and asset-backed securities 47,321 2,666 5.63
Municipal securities(2) 136 9 6.62
Federal Reserve Bank stock and other 2,177 124 5.7
--------- --------- -------
Total investment securities 126,580 7,709 6.09
--------- --------- -------
Federal funds sold and securities purchased
under agreements to resell 10,429 545 5.23
Interest-bearing deposits in banks 25 1 4
LOANS(2)
Commercial 62,406 6,699 10.73
International/trade finance 90,141 9,245 10.26
Real estate 118,061 12,715 10.77
Personal and other 14,650 1,484 10.13
Interest rate swaps and floors, net 399
--------- --------- -------
Total loans 285,258 30,542 10.71
--------- --------- -------
Total earning assets 422,292 38,797 9.19
--------- --------- -------
Allowance for credit losses (11,812)
Net unrealized gain (loss)
on available-for-sale securities 176
Cash and due from banks 22,656
Other assets 23,662
--------- --------- -------
Total assets $456,974 $38,797 8.49
--------- --------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing $ 76,565
Interest-bearing:
Money market and savings accounts 124,401 $3,494 2.81%
Time deposits of less than $100 92,156 4,785 5.19
Time deposits of $100 or more 79,385 4,247 5.35
--------- --------- -------
Total interest-bearing 295,942 12,526 4.23
--------- --------- -------
Total deposits 372,507 12,526 3.36
--------- --------- -------
Borrowed funds 1,860 97 5.22
--------- --------- -------
Total deposits and borrowed funds 374,367 12,623 3.37
--------- --------- -------
Other liabilities 11,325
Shareholders' equity 71,282
--------- --------- -------
Total liabilities and shareholders' equity $456,974
--------- --------- -------
Net interest income-tax equivalent
basis/net interest margin 26,174 6.20%
Less: tax-equivalent adjustment 2
--------- --------- -------
Net interest income $26,172
--------- --------- -------
</TABLE>
(1) Yields were calculated based on the historical cost, excluding the net
unrealized gain (loss) on available-for-sale securities
(2) Interest income and yields were calculated on a tax-equivalent basis
using a federal tax rate of 35%.
(3) Includes fees on loans of $2.2 million in 1998, $1.7 million in 1997 and
$1.0 million in 1996
20
<PAGE>
<TABLE>
<CAPTION>
Change Change
NONINTEREST INCOME 1998(1) 1997 1996 1998/97 1997/96
- -----------------------------------------------------------------------------------
(As restated)
<S> <C> <C> <C> <C> <C>
International/trade finance fees $ 3,063 $ 2,871 $ 2,743 7% 5%
Trust fees 2,092 1,805 1,004 16 80
Deposit service fees 1,548 1,106 886 40 25
Investment sales fees 780 969 330 (20) 194
Gain on sales of loans 597 573 -- 4 --
Other 587 531 447 11 19
- ----------------------------------------------------------------------------------
Total noninterest income $ 8,667 $ 7,855 $ 5,410 10% 45%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) Restated - see Note 20 to the consolidated financial statements.
INTERNATIONAL/TRADE FINANCE FEES
International/trade finance fees increased 7% to $3,063 in 1998.
International/trade finance products and services include commercial
documentary letters of credit, bankers' acceptances, discounted trade
acceptances, pre-export financing, warehouse receipt financing, documentary
collections, foreign exchange transactions, standby letters of credit and
international cash management. Difficult economic times in Asia during 1998
caused shifts in the source of Pacific Bank's international/trade finance
services and fee collections. Strong consumer demand in the U.S. coupled
with manufacturers and producers in Asia anxious to raise foreign currency
resulted in a 20% increase in import fees, to $1,040 in 1998. Exporters to
Asia, primarily of luxury brand-name goods, have experienced lower demand for
their goods as a result of the currency devaluations in many Asian countries,
contributing to a 17% decrease in export fees in 1998 to $321. Volatility in
the currency markets contributed to a 52% increase in foreign exchange
income, totaling $288 in 1998. Pacific Bank's customers purchased more
foreign exchange contracts to protect against movements in the value of
payments due at delivery of the shipped goods.
Other international/trade finance fees decreased 1% to $1,415 in 1998.
Pacific Bank is able to compete with other trade finance banks, including
foreign banks, many of which are larger than Pacific Bank, through knowledge
of customers and their businesses. Pacific Bank offers the experience with
trade customers that allows for timely handling of documents and appropriate
provision of services for financing all aspects of the trade cycle. In
particular, Pacific Bank provides guaranteed 24-hour turnaround of documents
financing a trade for its established business customers. The economic
turmoil in Asia created opportunities for Pacific Bank due to customers'
tightened credit availability from other banks or due to required security
in the form of letters of credit earlier in the trade cycle. However,
relationships with some customers were reduced or terminated during 1998 due
to the customers' deteriorating creditworthiness, contributing to the decline
in other fee income. Pacific Bank re-evaluated all customer relationships of
the Hong Kong office during the year. Internal guidelines for outstandings
in Hong Kong were reduced from 10% to 5% of the total loan portfolio.
International/trade finance fees collected by the Hong Kong office totaled
$555 in 1998 and 1997.
TRUST FEES
Trust fees were $2,092 in 1998, an increase of $286, or 16%, compared to the
$1,806 reported in 1997. Fees generated by trust services increased 80% in
1997 compared to 1996. Trust assets under management increased 18% in 1998,
following a 39% increase in 1997. Trust services are
21
<PAGE>
provided for employee benefit trust and agency accounts, personal trust and
estate accounts and custodial arrangements on behalf of customers. Customers
are primarily the executives of existing business customers and high net
worth individuals. Asset management services were added in mid-1996 to offer
investment portfolio management advice to high net worth customers without
requiring a trust account.
DEPOSIT SERVICE FEES
Deposit service fees increased $443, or 40%, totaling $1,548 in 1998 compared
to $1,105 in 1997. Enhanced product offerings and an expanded customer base
utilizing cash management services contributed to the increase during the
year. Deposit customers added with Sterling West Bancorp in mid-year
contributed fee growth of $219 in 1998.
[CHART]
INVESTMENT SALES FEES
The investment sales division was formed to offer investment products such as
mutual funds and annuity contracts to customers. Fees generated by investment
sales increased 194% in 1997, but decreased 20% to $780 in 1998. The
division's contribution to net income was minimal in each year. During 1998,
Pacific Bank decided to outsource the marketing of investment products to
Stone & Youngberg, a broker-dealer operating out of San Francisco since 1931.
Investment sales fees in 1999 are expected to be significantly lower than in
prior years, but the net contribution is expected to approximate the 1998
results due to the elimination of costs associated with the development and
maintenance of marketing and administrative staff.
GAINS ON SALES OF LOANS
Another line of business added in mid-1996 specializes in government
guaranteed lending to small businesses. The SBA loan division generated
gains on sales of loans of $573 in 1997 and $597 in 1998. The SBA lending
division also earns fees for the retained servicing of the sold loans.
Pacific Bank expanded its SBA lending operations in 1998 with the acquisition
of Sterling West Bancorp's SBA group in the Los Angeles area. The group
quickly received Preferred Lender Program status, allowing for expedited
customer service through preapproved loan submission to the SBA.
NONINTEREST EXPENSE
22
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Change Change
1998(1) 1997 1996 1998/97 1997/96
- -----------------------------------------------------------------------------------------
(As restated)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $16,696 $15,876 $13,547 5% 17%
Premises and equipment 4,726 4,240 4,135 11 3
Legal and professional fees 1,382 1,191 1,234 16 (3)
Outsourced data processing 1,436 1,140 969 26 18
Advertising and promotion 1,018 944 756 8 25
Postage and supplies 767 576 511 33 13
Foreclosed property, net 4 (261) (18) 102 (1,350)
Amortization of intangible assets 348 217 298 60 (27)
Restructuring costs 2,610 -- -- -- --
Other 2,713 1,982 2,324 37 (15)
- ------------------------------------------------------------------------------------------
Total noninterest expense $31,700 $25,905 $23,756 22% 9%
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Restated - see Note 20 to the consolidated financial statements.
RESTRUCTURING LIABILITY
A restructuring liability of $2,610 was recorded in 1998 to cover anticipated
costs of branch closings and staff reductions. Pacific Bank plans to
consolidate or close four branches that serve delicate markets. A
significant portion of the liability relates to the cost of terminating the
lease or subleasing the space at the bank's previous headquarters at below
cost. Rent expense will be charged against earnings until the branch
closures are completed in the second quarter of 1999. Planned staff
reductions, including employees affected by the branch closings, total 14% of
the 320 employees prior to the reductions. Severance payments to terminated
employees of up to $447 will be charged against the liability. Severance
payments of $69 were charged during 1998. The restructuring plan anticipates
reduced salary costs on a quarterly basis of $468 beginning in full in the
third quarter of 1999.
Excluding the restructuring costs, noninterest expense increased $3,185, or
12%, in 1998. Noninterest expense as a percentage of average assets
decreased over the past five years, from 6.96% in 1994 to 4.91% in 1998.
Excluding the restructuring costs, noninterest expense as a percentage of
average assets was 4.50% in 1998. The efficiency ratio (expense as a
percentage of revenues) was 74.31% in 1998, compared to 69.89% in 1997. The
restructuring plan is part of management's three-year strategic plan to
achieve an efficiency ratio of below 60%.
SALARIES AND EMPLOYEE BENEFITS EXPENSES
Salaries and employee benefits totaled $16,696 in 1998 compared to $15,876 in
1997, an increase of 5%. Salaries increased $1,810, or 15%, totaling $13,917
in 1998. The number of full-time equivalent employees increased 10% on
average in 1998, primarily due to the acquisition of Sterling West Bancorp in
mid-year. There were 299 full-time equivalent employees at December 31,
1998. Bonuses primary tied to the operating results of the bank decreased
$1,246, or 95%, to $64 in 1998. Other employee benefits increased 10% in
1998. Five years ago, Pacific Bank had 315 full-time equivalent employees.
Leverage measured by assets per employee increased to $2,385 at the end of
1998 compared to $1,301 at the end of 1993, an increase of 83% over the
five-year period.
PREMISES AND EQUIPMENT EXPENSES
Premises and equipment expenses increased $486, or 11%, totaling $4,726 in
1998 compared to $4,240 in 1997. The addition of five branches in the Los
Angeles area contributed $415 to the
23
<PAGE>
increase in 1998. Cost savings under the restructuring plan due to branch
closings is expected to total $341 on a quarterly basis beginning in the
third quarter of 1999, or $1,364 annually thereafter. Offsetting the cost
savings from closed branches will be higher rents at existing facilities of
$1,124 annually. Subsequent to year-end, the lease of Pacific Bank's
headquarters at 351 California Street in San Francisco was repriced to market
rates in accordance with the lease. Current market rates through August of
2001 require additional annual rental payments of $766, or 57% higher than
the $1,352 paid in 1998 and prior years. The lease at 100 Montgomery Street
is currently being negotiated for renewal through April of 2004 at maximum
additional annual rental payments of $358, or 161% higher than the $223 paid
in 1998 and prior years.
[CHART]
OTHER EXPENSES
Legal and professional fees increased $191, or 16%, to $1,382 in 1998.
Outsourced data processing increased $296, or 26%, to $1,436 in 1998. Pacific
Bank outsources substantially all processing of daily financial activity and
related report functions. The cost of outsourced data processing services
generally increases with the volume of loans, deposit services and trust
assets and with the level of payroll activity. During 1998, the contract with
the item processor (handling deposited checks and other teller transactions)
was terminated at a cost of $61, and Pacific Bank entered into a five-year
contract with a different item processor. In early 1999, the contract with the
provider of loan, deposit services and general ledger functions is being
extended for a three-year period at rates that approximate rates paid under
the current contract.
Foreclosed property expenses increased $265, or 102%, to $4 in 1998 compared
to a gain of $261 in 1997. Amortization expense related to acquisitions
accounted for under the purchase method of accounting increased $131, or 60%,
to $348 in 1998 due to the acquisition of Sterling West Bancorp in mid-year.
Other noninterest expense of $2,713 increased $731, or 37% in 1998 compared
to $1,982 in 1997. In the restated statement of income for 1998, losses of
$166 were charged to other expense for operational losses in the Bank's trust
division. Also contributing to the increase in other expenses were merger
related costs (primarily printing of new checks for customers and travel for
training purposes) of $377 in 1998.
FINANCIAL RESULTS -- 1997 COMPARED TO 1996
Net income was $7,250 in 1997, compared to $7,129 in 1996. Reversals of
provisions for loan losses totaled $1,500 in 1997 and $4,500 in 1996. Net
interest income increased 12% in 1997 on
24
<PAGE>
a 26% increase in average loans. Net interest income in 1996 included a
$1,207 interest recovery on settlement of a distressed loan. The net interest
margin excluding this recovery was 5.91% in 1996, compared to 5.86% in 1997.
Noninterest income increased 45% to $7,855 in 1997 compared to $5,410 in
1996. Noninterest expense increased 9% to $25,905 in 1997 compared to $23,756
in 1996. The efficiency ratio (expenses as a percentage of revenues) was 70%
in 1997 and 75% in 1996.
BALANCE SHEET ANALYSIS
ASSETS
Assets of Pacific Bank were $712.5 million at December 31, 1998, an increase
of $109.1 million, or 18%, from $603.4 million at December 31, 1997. The
acquisition of Sterling West Bancorp contributed $106.5 million to asset
growth during 1998. Loans increased $87.4 million, or 22%, to $484.5 million
at December 31, 1998, as discussed below. Investment securities increased
$37.8 million in 1998 and cash and federal funds sold decreased a combined
$26.2 million. Investment securities of $64.5 million were purchased during
the year to replace primarily mortgage-backed securities that have
experienced higher rates of prepayments due to the decreasing rate
environment.
LOANS IN THE DOMESTIC COMMERCIAL BANKING DIVISION
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial loans $119,343 $ 75,287 $ 66,156 $ 37,038 $ 34,365
Real estate loans 175,072 130,024 132,443 86,057 88,223
Personal and other loans 18,220 18,168 14,532 7,880 7,928
-------- -------- -------- -------- --------
Total Domestic Commercial Banking Division $312,635 $223,479 $213,131 $130,975 $130,516
======== ======== ======== ======== ========
</TABLE>
[GRAPH] [GRAPH]
25
<PAGE>
Loans in the Domestic commercial Banking division increased $89.2 million in
1998. The acquisition of Sterling West Bancorp contributed $58.8 million to
loan growth in 1998, including $19.5 million in commercial loans and $37.3
million in real estate loans. Excluding the acquired loans, commercial loans
increased $24.6 million and real estate loans increased $7.7 million in 1998.
The real estate loan portfolio at December 31, 1998 included $46.4 million of
construction finance loans, compared to $19.4 million of construction finance
loans at the prior year-end, an increase of $27.0 million during the year.
Real estate loans secured by single family residences, generally representing
collateral for loans to business owners, totaled $10.6 million at December
31, 1998. Other real estate loans, generally permanent financing of
commercial properties with terms of five to fifteen years, increased $14.8
million to $118.1 million at year-end. Personal and other loans totaling
$18.2 million at December 31, 1998, are primarily extensions of credit to
owners of businesses with which Pacific Bank maintains relationships.
LOANS IN THE INTERNATIONAL/TRADE FINANCE DIVISION
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
International/trade finance loans $140,309 $143,773 $103,795 $84,506 $78,738
Commercial loans 10,810 11,648 7,868 4,314 2,949
Real estate loans 16,724 14,840 5,304 584 327
Personal and other loans 3,996 3,318 1,525 220 81
-------- -------- -------- ------- -------
Total International/Trade Finance Division $171,839 $173,579 $118,492 $89,624 $82,095
======== ======== ======== ======= =======
</TABLE>
Loans in the international/trade finance division decreased $1.7 million, or
1%, during the year to $171.8 million at December 31, 1998. The increase was
primarily attributable to efforts to reduce credit exposure to customers
experiencing difficulties due to the economic slowdown in some Asian
countries. Loans through the Hong Kong office decreased $11.5 million during
the year, and Pacific Bank is evaluating the portfolio for further
reductions. Hong Kong's loans were $27.0 million, or 6% of Pacific Bank's
total loans at December 31, 1998, including $8.1 million from real estate
secured loans. Loans in the International/Trade Finance Division by office
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
San Francisco* $ 59,758 $ 58,224 $ 49,506 $48,692 $42,839
Los Angeles 85,068 76,871 55,639 30,835 26,032
Hong Kong 27,013 38,484 13,347 10,097 13,224
-------- -------- -------- ------- -------
Total International/Trade Finance Division $171,839 $173,579 $118,492 $89,624 $82,095
======== ======== ======== ======= =======
- -----------
* Includes extensions of credit by the loan production office in Sacramento, California.
</TABLE>
The Pacific Bank maintains lines of credit for other banks to facilitate
international/trade finance transactions. Lines for banks in foreign
countries totaled $30.7 million at December 31, 1998, including $2.0 million
of lines for banks in southeast Asia (none of which was utilized at year-end).
Usage of the lines for letters of credit totaled $11.0 million at December
31, 1998. Drafts drawn under letters of credit issued by banks in foreign
countries with which Pacific Bank has no preapproved credit lines totaled
$1.0 million at December 31, 1998, including $0.7 million from banks in
southeast Asia. Pacific Bank generally retains recourse to the customer for
these short-term, discounted bills in the event the issuing bank fails to pay.
26
<PAGE>
ASSETS OF THE WEALTH MANAGEMENT SERVICES DIVISION
Assets of the Wealth Management Services division held in trust accounts on
behalf of customers are not recorded on Pacific Bank's balance sheet. Trust
assets under management at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Trust assets under management $896,817 $762,036 $547,860 $323,006 $262,431
Annual percentage increase 18% 39% 70% 23%
-------- -------- -------- -------- ---------
</TABLE>
DEPOSITS
Deposits increased $105.2 million, or 21%, to $611.9 million at December 31,
1998. The acquisition of Sterling West Bancorp contributed $99.3 million to
the deposit growth in 1998. The acquired deposit mix included a large
proportion of core deposits in the form of business checking accounts that have
for the most part been retained. The acquisition added five branches in the
Los Angeles area where Pacific Bank previously had no street-level banking
presence. As part of the restructuring plan, Pacific Bank's existing branch
in Los Angeles was consolidated at year-end into the previous headquarters of
Sterling West Bancorp. At December 31, 1998, Pacific bank had six branches in
the San Francisco Bay Area, three of which are scheduled to be closed by
mid-1999. Time deposits of less than $100 decreased $14.6 million, or 14%,
during the year to $86.4 million at December 31, 1998. The decrease is
primarily attributable to reduced reliance on deposits placed by institutional
depositors with the Treasury division. Time deposits of $100 or more
increased $9.6 million, or 10%, to $108.6 million at December 31, 1998.
Uninsured deposits from customers of the International/Trade Finance division
increased $2.6 million, or 6%, during the year to $46.1 million at December
31, 1998.
[GRAPH] [GRAPH]
27
<PAGE>
CAPITAL AND CAPITAL RATIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(As restated)
Capital ratios:
Tier 1 capital to risk adjusted assets 12.65% 16.74% 19.36% 25.37% 23.85%
Total capital of risk adjusted assets 13.91 18.00 20.63 26.66 25.17
Tier 1 capital to average assets 10.16 13.21 14.35 16.36 15.21
(leverage ratio)
Book value per share(2) 14.67 14.86 13.85 12.56 9.16
Tangible book value per share(2) 13.20 14.47 13.39 12.50 9.07
Cash dividends declared per share(2) $0.30 $0.14 -- -- --
Dividend payout ratio 57.69% 10.40% -- -- --
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated - see Note 20 to the consolidated financial statements.
(2) Share and per share data have been restated to reflect the two-for-one
stock split in December 1998.
Shareholders' equity decreased $0.1 million, or less than 1%, during the year
totaling $79.9 million at December 31, 1998. Additions from earnings of $2.8
million, proceeds from option exercises of $3.8 million, and a change in
unrealized gains on available-for-sale securities of $0.1 million were offset
by share repurchases totaling $5.3 million and dividends of $1.6 million
during 1998.
The Tier 1 capital to risk adjusted assets ratio was 12.65% at December 31,
1998, compared to 16.74% at the end of the prior year. The regulatory minimum
ratio under prompt corrective action standards for well-capitalized banks is
6%.
Over the past five years, average shareholders' equity increased 119%, from
$38.1 million in 1994 to $83.5 million in 1998. Pacific Bank was recapitalized
in 1993 following net losses in 1992 and 1993. The losses resulted from
writedowns of loans to then current collateral values during the downturn
in California real estate markets. Subsequent recovery of a significant
portion of the loans and the return to profitable operations resulted in
management's assessment that capital was in excess of required reserves. As a
result, excess capital was invested in acquisitions of banks in 1996 and
1998. The acquisitions were executed for cash totaling $20.6 million rather
than financed through equity offerings. The two acquisitions were priced at
an average 1.5 times book value. The acquisitions were accounted for as
purchase transactions with goodwill recorded for the excess purchase price
over the fair value of assets acquired. The initial goodwill of $8.4
million is being amortized against earnings over 15 years. At December 31,
1998, the unamortized balance of goodwill totaled $7.8 million. Goodwill is
excluded for purposes of calculating tangible book value per share and
regulatory capital ratios.
Pacific Bank repurchased $8.8 million of its common stock through purchases
on the open market in 1996 and in 1998, with another $5.2 million repurchased
in early 1999. In the third quarter of 1997, Pacific Bank adopted a quarterly
dividend policy initially equal to $0.07 per share. The quarterly dividend
was increased to $0.08 per share in the third quarter of 1998. Both of these
policies were intended to utilize excess capital and generate benefits to
shareholders. Management of Pacific Bank anticipates utilizing strategies
similar to those used during the past
28
<PAGE>
three years (balance sheet growth through acquisitions and expanded business
with existing customers, share repurchases and dividends) to further reduce
the Tier 1 capital to risk adjusted assets ratio to a range of between 8 -
10% over the next three years.
During 1998, the entire holdings of two foreign investors with a combined
interest of 45% of the bank's outstanding shares were sold pursuant to a
firmly underwritten public offering. Costs were borne by the selling
shareholders and no proceeds form the sale benefited Pacific Bank.
[LOGO] THE PACIFIC BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
CREDIT QUALITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Activity in the allowance for credit losses:
Allowance at beginning of year $10,823 $10,814 $10,400 $15,687 $34,554
Provision (reversal of provision) for credit losses 6,000 (1,500) (4,500) (5,500) (20,000)
Loan charge-offs 7,063 1,937 1,536 5,961 6,440
Recoveries of previously charged-off loans (1,872) (3,446) (5,694) (6,174) (7,573)
Net charge-offs (recoveries) 5,191 (1,509) (4,158) (213) (1,133)
Acquired reserves 703 756
- ----------------------------------------------------------------------------------------------------------------------
Allowance at end of year $12,335 $10,823 $10,814 $10,400 $15,687
- ----------------------------------------------------------------------------------------------------------------------
Loans $484,474 $397,058 $331,623 $220,599 $212,611
Ratios:
Allowance to loans 2.55% 2.73% 3.26% 4.71% 7.38%
Allowance to nonperforming loans 481.27 787.13 670.01 126.47 137.28
Net charge-offs (recoveries) to average loans 1.16 (0.42) (1.46) (0.10) (0.53)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES - Credit quality had steadily improved since 1994
when Pacific Bank was in the process of liquidating assets from the downturn
in the California real estate market. Recoveries of previously charged-off
loans totaled $24,759 in the past five years. Prior to the fourth quarter of
1998, no charges to earnings for provisions for loan losses were required and
$31,500 was reversed out of the allowance for the losses over the past five
years to avoid excessive reserves, based on management's assessment of the
credit quality of the portfolio at the time.
Loan charge-offs totaled $7,063 in 1998, with $5,483 loan charge-offs in the
fourth quarter of 1998. The fourth quarter loan charge-offs resulted from
three credits in the International/Trade Finance division. Two of the credit
losses resulted from potentially fraudulent handling of the inventory that
served as the primary collateral for the loans. In November, a customer of
the Hong Kong office converted its inventory to cash and fled the country
with the proceeds. In another situation, Pacific Bank learned during the
fourth quarter that an established Los Angeles office customer was unable to
produce audited financial statements for its fiscal year. On further
investigation, an inventory shortage was discovered, resulting in the loan
charge-off. The third loan charge-off resulted from a customer of the Hong
Kong office being forced into receivership when a consortium of banks, led by
a major Japanese bank, called its loans during the fourth quarter of 1998.
As a result of the loan charge-offs in the fourth quarter of 1998 and based
on management's assessment of the adequacy of the allowance for credit losses
at December 31, 1998 as discussed below, a provision for credit losses of
$6,000 was recorded in the fourth quarter of 1998. The provision for credit
losses to be recorded in 1999 will be affected by a variety of factors
discussed below to adjust the allowance for credit losses to a level deemed
appropriate by
29
<PAGE>
management to absorb losses inherent in the portfolio at the time of the
assessment. Based on management's assessment of the allowance for credit
losses at December 31, 1998, Pacific Bank expects to record normalized
quarterly provisions for credit losses in 1999.
ALLOWANCE FOR CREDIT LOSSES - Credit risk is the risk of loss due to the
inability of borrowers to repay amounts advanced. The Pacific Bank manages
this risk through credit approval guidelines and procedures as well as
ongoing monitoring of the financial condition of borrowers collateral.
Reserves are established for known and inherent risks in loans and, to a
lesser extent, unused commitments to extend credit.
Pacific Bank's methodology for assessing the adequacy of the allowance
consists of several key elements, which include:
- - the formula allowance;
- - specific allowances for identified problem loans; and
- - the unallocated allowance.
In addition, the allowance incorporates the results of measuring impaired
loans as provided in Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan", and SFANS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These accounting standards prescribe the measurement methods,
income recognition and disclosures concerning impaired loans. At December
31, 1998, impaired loans were $2,563, with an impairment allowance of $433,
comp impaired loans of $1,375 and an impairment allowance of $773 at December
31, 1997.
The formula allowance is calculated by applying loss factors to current
balances of loans and off-balance sheet commitments. The loss factors are
calculated based on a migration model that uses three years of loss
experience. Management uses three years of loss experience based on
industry models that indicate that evaluation period to be statistically
valid for our loan portfolio. The loss factors may be adjusted by management
for particular factors that affect the collectibility of the portfolio at that
time. Changes in risk grades of both performing and nonperforming loans
affect the amount of the formula allowance.
Pass graded loans, criticized credits and off-balance sheet commitments
receive an allocation of the allowance based on the formula. Industry
established loss factors are applied to the lowest-graded classified credits
for the formula allowance. The second element of the allowance methodology
requires loan-by-loan analysis of all significant criticized credits for
determination of the adequacy of the formula allowance. Specific allocations
of the allowance may be made where management has identified significant
circumstances affecting specific credits which management believes indicate
the probability that a loss has been incurred in excess of the amount
determined by the formula allowance. Specific allocations of the allowance
are also assigned to pools of loans with similar credit risk characteristics.
The unallocated allowance is composed of two parts. The first part is based
on management's evaluation of various conditions that are not directly measured
in the determination of the formula allowance or specific allocations. The
evaluation of the inherent loss due to these conditions is more difficult to
measure since the losses are not tied to specific credits or
30
<PAGE>
portfolios. Conditions at the balance sheet date considered in connection
with the unallocated allowance include the following:
- - economic conditions and business conditions affecting our key lending
portfolios;
- - credit quality trends, including trends in nonaccrual loans expected to
result from existing conditions;
- - quality and value of supporting collateral;
- - the volume of loans and loan terms;
- - lending policies and the affect of policy changes;
- - industry concentrations;
- - bank regulatory examination results; and
- - findings of our external credit examiners.
Executive management reviews these conditions on a quarterly basis in
discussion with senior credit officers. The affect of current conditions is
evaluated for each key lending portfolio. The second part of the unallocated
allowance is based on management's estimate of the risk associated with model
and estimation errors associated with the formula and specific allowances.
At the December 31, 1998 assessment date, management focused on the continued
effects of the Asian economic crisis and other factors affecting the
International/Trade Finance portfolio. The unallocated allowance provides
for losses inherent in loans due to the factors listed above, such as current
economic conditions in Asia. The effect of the downgrading of credits
experiencing difficulties was reflected in the formula allowance at year-end,
and management considered specific allocations for known losses in excess of
the formula allowance for each credit. Management considered the impact of
the Asia crisis on the collectibility of loans that has not yet been
reflected in the level of nonperforming loans or in internal risk gradings in
evaluating the adequacy of the unallocated allowance.
Management continually reviews the conditions that are considered in
determining the adequacy of the unallocated allowance. Changes in the
conditions considered may affect the analysis. Beginning in 1998, assessment
of the impact of the year 2000 issue on customer's credit risk has been
considered as an integral part of the credit review process for all of
Pacific Bank's large credits. Identifiable losses from customers with year
2000 compliance issues have not arisen to date. As a result, no specific
allocation of the allowance for loan losses was made to cover year 2000 risks
at December 31, 1998. In addition to the charge-off of the two potentially
fraudulent credits in the fourth quarter of 1998 discussed above, a
potentially fraudulent credit extended by the Domestic Commercial Banking
division totaling $730 was charged off in 1997. As a result of these loan
charge-offs, management added fraud losses to the risk factors considered in
determining the adequacy of the unallocated allowance for credit losses
beginning in the fourth quarter of 1998.
Determination of the level of the allowance and provision for loan losses is
based on estimates of probable losses inherent in loans and off-balance sheet
commitments. The amount actually observed for these losses can vary
significantly from the estimated amounts. The methodology includes several
features intended to reduce the differences between estimated and actual
losses. The loss migration model used to determine the formula allowance is
designed to be self-
31
<PAGE>
correcting by taking into account recent loan loss experience. The
methodology allows for adjustments to the formula allowance in the event that
significant factors affecting the collectibility of specified credits
indicate losses not reflected in the loss factors. By assessing probable
estimated losses on a quarterly basis, management is able to evaluate loss
estimates based on more recent information that has become available.
The allowance for credit losses totaled $12,335, or 2.55% of loans, and 481%
of nonperforming loans at December 31, 1998. At the prior year-end, the
allowance for credit losses totaled $10,823, or 2.73% of loans, and 787% of
nonperforming loans. Nonperforming assets were $2,945, 0.61% of loans and
other real estate at December 31, 1998, compared to $1,375, or 0.35% of loans
and other real estate at December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,563 $1,375 $1,564 $6,867 $11,387
Loans past due 90 days still accruing interest - - 50 1,356 40
Nonperforming loans 2,563 1,375 1,614 8,223 11,427
Other real estate owned 382 - 175 387 1,505
Nonperforming assets 2,945 1,375 1,789 8,610 12,932
Nonperforming assets to loans and other real estate 0.61% 0.35% 0.54% 3.90% 6.04%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
RISK ANALYSIS
MARKET RISK
Market risk is the risk of loss from the potential change in the value of on-
or off-balance sheet financial instruments as a result of fluctuation in
interest and currency exchange rates and in equity and commodity prices.
Pacific Bank's exposure to market risk is directly related to its result as a
financial intermediary in customer-related transactions. Pacific Bank is not
exposed to significant equity and commodity price risk since it is not
engaged in trading activities. Management considers interest rate risk to be
its most significant market risk and could potentially have the largest
material effect on its financial condition and results of operations, other
than credit risk (discussed in the "Credit Quality" section of Management's
Discussion and Analysis).
INTEREST RATE RISK
Pacific Bank's net interest income is dependent on the rate differential
between the income received from loans and securities, and the interest paid
to obtain deposits and other borrowings. Such rate differentials are highly
sensitive to many factors which are beyond the control of Pacific Bank,
including general economic conditions and the policies of various
governmental and regulatory authorities, in particular, the Board of
Governors of the Federal Reserve System.
Pacific Bank's Asset and Liability Committee meets every two weeks to monitor
and manage interest rate sensitivity. Depending on interest trends and
forecasts, the committee may modify asset pricing or liability rates offered
in a particular time frame, or acquire hedging instruments, thus managing
interest rate risk.
SENSITIVITY ANALYSIS - In accordance with Pacific Bank's Asset and Liability
Management Policy, interest rate risk analysis is performed on a quarterly
basis by computer simulations of projected net interest income and the net
present value of equity given various immediate and sustained shifts in interest
rates. Current policy limits allow for no more than a 10% change in net
interest income and a change in the net present value of equity of up to 1.5%
of assets for an immediate and sustained 2% increase or decrease in interest
rates during a subsequent twelve-month period. Pacific Bank's estimated
change in net interest income of +6% and -7%, respectively, is within the
policy limit at December 31, 1998. The effect on the net present value of
equity for an immediate and sustained change in interest rates of 2% was
estimated less than 1% of assets at December 31, 1998, also within the policy
limit. In the prior year, sensitivity to interest rate changes was higher.
Increase in interest rates of 2% was estimated to increase net interest
income by 10% while an immediate and sustained decrease of 2% was estimated
to decrease net interest income by 9%, based on assets and liabilities at
December 31, 1997. The projected sensitivity to changes as of December 31,
1998 is shown in the following table.
33
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Net Interest Income Net Present Value of Equity
-------------------- ----------------------------
Percentage Percentage
Amount Change Amount Change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate change
+2% $ 38,129 6% $106,498 (0.4)%
+1% 36,866 2 108,100 (0.2)
Static 35,969 - 109,577 -
- -1% 34,631 (4) 109,959 0.1
- -2% 33,283 (7) 110,209 0.1
- ------------------------------------------------------------------------------------------------
</TABLE>
Approximately 87% of loans are expected to mature or reprice within the next
year. Historically, savings and interest-bearing checking and money market
accounts have not repriced in concert with or in proportion to changes in
overall market interest rates. The projected increase or decrease in net
interest income when rates change immediately and for a sustained period
results from modeling assumptions that the variable rate loans reprice faster
than deposits.
The model includes the effect of off-balance sheet interest rate floor
contracts which Pacific Bank utilizes to reduce the risk resulting from
fixed-rate funding and floating rate assets. The notional amount of interest
rate floor contracts outstanding totaled $100 million at December 31, 1998.
Strike prices based on 3-month LIBOR ranged between 5.56% and 5.75%. Current
3-month LIBOR rates were below the strike prices all contracts at December
31, 1998, entitling Pacific Bank to receive interest payments from the
sellers of the contracts for the difference between the current rate and the
strike price. The current contracts mature in the third quarter of 1999
through the third quarter of 2000.
Due to various assumptions used for this simulation analysis, no assurance
can be given that actual results will correspond with projected results. For
example, simulation analysis requires assuming that the composition of
interest sensitive assets and liabilities remains constant over the period
being measured. The model also assumes that a particular change in interest
rates is reflected uniformly across the yield curve. Accordingly, although
the net present value of equity and net interest income simulation analyses
provided an indication of Pacific Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates
on Pacific Bank's net interest income and will differ from actual results.
Gap Analysis - Interest rate sensitivity is measured over time and is based
on Pacific Bank's ability to reprice assets and liabilities. The difference
between the amount of assets and the amount of liabilities which may be
repriced in the same time period is referred to as the interest sensitivity
gap. This interest sensitivity gap represents the risk, or opportunity, in
repricing. If more assets than liabilities are repriced in a given time, net
interest income tends to improve in a rising rate environment and to
deteriorate in a declining rate environment. If more liabilities than assets
are repriced under the same conditions, the opposite results tend to prevail.
This table is not necessarily indicative of the impact of general interest
rate movements on Pacific Bank's net interest income because the actual
repricing of various assets and liabilities is subject to customer discretion
and competitive and other factors. The following table shows Pacific Bank's
interest sensitivity gap over the stated time periods from December 31, 1998.
34
<PAGE>
<TABLE>
<CAPTION>
Three Over three Over one Over one Non
months to twelve year to year to Over five interest
or less months three years five years years bearing(1) Total
- ----------------------------------------------------------------------------------------------------------------------------------
(As restated) (As restated)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold, securities purchased
under agreements to resell and
deposits in other banks $ 45,047 $ 45,047
Investment securities 16,473 $32,733 $ 41,976 $ 15,919 $ 18,760 125,861
Loans 388,359 31,541 16,940 22,311 25,323 484,474
Allowance for credit losses $ (12,335) (12,335)
Noninterest-earning assets 69,473 69,473
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $449,879 $64,274 $ 58,916 $ 38,230 $ 44,083 $ 57,138 $712,520
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 143,567 $143,567
Money market and savings accounts $273,335 273,335
Time deposits 119,178 $70,874 $ 4,604 $ 306 $ 11 194,973
Other borrowings 1,047 1,047
Noninterest-bearing liabilities 19,738 19,738
Shareholders' equity 79,860 79,860
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $393,560 $70,874 $ 4,604 $ 306 $ 11 $ 243,165 $712,520
- ----------------------------------------------------------------------------------------------------------------------------------
Gap $ 56,319 $(6,600) $ 54,312 $ 37,924 $ 44,072 $(186,027)
Cumulative Gap $ 56,319 $49,719 $104,031 $141,955 $186,027
Cumulative Gap as a percentage of
total assets 8% 7% 15% 20% 26%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated-See Note 20 to the consolidated financial statements.
FOREIGN CURRENCY RISK
Foreign currency risk is the risk of loss due to pricing changes of assets
denominated in one currency in relation to another currency. Pacific Bank's
Hong Kong office extended primarily short-term loans denominated in Hong Kong
dollars totaling $4,654 (in U.S. dollars) at December 31, 1998. To date, the
effect of translating these assets and interest earned has not been material
to equity or operations.
OPERATING RISK
Operating risk is the potential for loss arising from limitations in the
Pacific Bank's financial systems and controls, deficiencies in legal
documentation and the execution of legal and fiduciary responsibilities,
deficiencies in technology and the risk of loss attributable to operational
problems. These risks are less direct than credit and market risk, but
managing them is critical, particularly in a rapidly changing environment
with increasing transaction volumes. In order to mitigate these risks, the
Pacific Bank establishes and maintains policies and procedures and internal
controls designed to ensure that operational policies and procedures are
being followed.
THE YEAR 2000 ISSUE
STATE OF READINESS -- A significant known operating risk is the year 2000
issue. The year 2000 issue in the result of computer programs that may
recognize a date using "00" as the year 1900 rather than the year 2000.
Pacific Bank completed in 1997 and continuously updates comprehensive review
of its computer systems to identify systems that could be affected by the
year 2000 issue. Pacific Bank has no critical internally developed software
programs that require remediation to become year 2000 compliant. Pacific Bank
has no significant embedded
35
<PAGE>
technology such as microcontrollers. Pacific Bank's third party providers of
computer systems that have been identified as critical to bank operations are
in the remediation or testing stage. They have indicated that they plan to
complete customer testing in early to mid-1999. We are examined by our
primary regulator, the Office of the Controller of the Currency ("OCC"), on a
quarterly basis concerning our progress with year 2000 readiness. To date,
these examinations indicated no particular criticisms of our efforts. There
can be no assurance that Pacific Bank's systems or the systems of other
companies will be timely converted or that any such failure to convert by
another company would not have a material adverse effect on the Pacific
Bank's business, including its ability to process and account for the
transfer of funds electronically.
COST -- Personal computers and other bank equipment that are not year 2000
compliant are scheduled to be updated or replaced. The cost of accelerated
equipment purchases is estimated at less than $100 over the next year. The
direct cost of year 2000 efforts are limited to the additional information
technology staff member specifically hired to coordinate the year 2000
effort, estimated at less than $100 each year. Pacific Bank has participated
in testing efforts by third party providers of computer systems, incurring
incremental travel costs for participating employees. An indirect cost may be
incurred through renewal of contracts with third party providers of computer
systems at rates that pass on their costs of year 2000 efforts. While
management believes these cost estimates are achievable, additional
substantial costs could be incurred to resolve unanticipated problems.
RISKS -- As a financial intermediary, Pacific Bank is reliant on the swift
transfer of funds electronically to and from a wide network of customers,
including but not limited to other financial institutions worldwide. Failure
of the payment system in whole or in part would delay the transfer of funds,
largely affecting the ability of Pacific Bank to operate effectively. During
the third quarter of 1998, Pacific Bank's loan officers completed their
initial reviews of all large credit customers' year 2000 compliance. The loan
officers' assessment was considered as an integral part of the credit review
process. Pacific Bank could experience credit loses resulting from material
adverse effects of the year 2000 issue on its customers.
Pacific Bank purchases products and services from over 2,500 vendors. While
there is a risk of failure by a vendor to deliver or bill for services
provided due to noncompliance with year 2000 issues, Pacific Bank has no one
vendor, other than the third party providers of computer systems discussed
above, on which undue reliance is placed. Pacific Bank primarily leases its
space and is reliant on the management of each leased location to ensure year
2000 compliance at its facilities.
Pacific Bank's core lines of business may face different year 2000 risks. The
International/Trade Finance division's customers are largely importers
located in the U.S., but their suppliers may be located anywhere in the
world. Awareness and remediation of the year 2000 issue in other countries
varies considerably. Lack of preparedness could adversely affect such
suppliers which could adversely affect the division's customers and Pacific
Bank. The Wealth Management Services division relies on efficient operation
of securities markets and timely dissemination of market information. The
Domestic Commercial Banking division faces risks from smaller credit
customers that may not have the resources to deal effectively with the year
2000 issue. The legal ramifications of year 2000 issues are difficult to
enumerate or value, but
36
<PAGE>
potentially Pacific Bank could be named as a party to lawsuits from
customers, or Pacific Bank could file lawsuits against vendors as a result of
year 2000 difficulties.
CONTINGENCY PLANS -- Pacific Bank's line managers and year 2000 staff are in
the process of developing contingency plans in the event of breaks in service
from year 2000 difficulties. The OCC requires that contingency plans for
critical functions be well under way by June 30, 1999. Pacific Bank considers
the reasonably most likely worst case scenario to be short-term inability to
access up-to-the-minute balances of customers' accounts. Pacific Bank has
developed contingency plans to limit the impact on customer withdrawals in
the event of systems failures. Balance information will be tracked manually
in the event of a short-term systems failure. Additional cash is expected to
be maintained on and in the event of increased liquidity needs that may
result from concerns about the availability of deposited funds. Branch
managers and line officers have limited credit authority to cover withdrawals
when balance information is not obtainable. While there can be no assurance
that Pacific Bank's systems or systems of third-party providers will not be
adversely affected by year 2000 difficulties, our contingency plans are
intended to reduce the impact of such failures on our customers.
LIQUIDITY RISK Liquidity risk is the inability to meet present or future
financial obligations, either through the sale or maturity of existing assets
or by the acquisition of funds through liability management. Pacific Bank
maintains a portion of its assets in short-term investments and cash and cash
equivalents to ensure that maturing deposit liabilities can be met with
available funds. These liquid assets averaged $158.7 million, or 22% of
assets in 1998. Management also monitors the Bank's loan-to-deposit ratio to
further access the Bank's liquidity position. A ratio in excess of 100%
indicates that loans have been given to customers out of funds other than
customer deposits. Pacific Bank's loan-to-deposit ratios were 79.2% and 78.4%
at December 31, 1998 and 1997, respectively. Pacific Bank maintains lines
with broker-dealers under repurchase agreements. Lines of credit of $45.0
million in the form of overnight federal funds lines were maintained at other
banks. Pacific Bank has the ability to borrow from the Federal Home Loan Bank
and Federal Reserve Bank systems. No such borrowings were outstanding at
December 31, 1998 or 1997.
RECENT ACCOUNTING DEVELOPMENTS
As part of its accounting for business combinations project, the Financial
Accounting Standards Board announced in December 1998 that it believes that
one method of accounting for business combinations is preferable, and that
the purchase method of accounting is the appropriate method to use. Pacific
Bank's mergers were accounted for under the purchase method of accounting.
However, pooling-of-interests accounting is considered one of the bank's
strategic acquisition alternatives. If the Financial Accounting Standards
Board changes methods of accounting or business combinations, Pacific Bank's
strategic alternatives may be adversely impacted.
37
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(As restated -
see Note 20)
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,453 $ 46,104
Federal funds sold and securities purchased under agreements to resell 42,500 57,000
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 76,953 103,104
- ---------------------------------------------------------------------------------------------------------------------------------
Investment securities
Available-for-sale, at fair value 75,428 52,974
Held-to-maturity, at amortized cost (fair value; 1998, $46,752; 1997, $31,632) 46,325 31,532
Federal Reserve Bank stock and other securities 4,108 3,603
- ---------------------------------------------------------------------------------------------------------------------------------
Investment securities 125,861 88,109
- ---------------------------------------------------------------------------------------------------------------------------------
Loans 484,474 397,058
Less: Allowance for credit losses (12,335) (10,823)
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 472,139 386,235
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,687 4,011
Customers' acceptance liability 8,438 9,254
Other real estate owned 382 --
Accrued interest receivable and other assets 24,060 12,651
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $712,520 $603,364
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $143,567 $101,753
Interest-bearing:
Money market and savings accounts 273,335 204,932
Time deposits of less than $100 86,382 100,971
Time deposits of $100 or more 108,591 99,025
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 611,875 506,681
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and other borrowed funds 1,047 24
Acceptances outstanding 8,438 9,254
Accrued interest payable and other liabilities 11,300 7,378
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 632,660 523,337
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $1.50 per share; authorized, 21,000,000 shares,
outstanding, 5,443,728 shares in 1998 and 5,385,028 shares in 1997(1) 8,166 8,078
Additional paid-in capital 64,872 63,823
Accumulated other comprehensive income 356 203
Retained earnings 6,466 7,923
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 79,860 80,027
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $712,520 $603,364
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated to effect a two-for-one stock split distributed on
December 31, 1998.
See notes to consolidated financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(As restated -
see Note 20)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $44,368 $36,653 $30,542
Interest on investment securities 5,688 5,858 7,708
Interest on federal funds sold and deposits in banks 2,392 2,525 545
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 52,448 45,036 38,795
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits
Interest on money market and savings accounts 7,937 5,386 3,494
Interest on time deposits of less than $100 4,371 4,950 4,785
Interest on time deposits of $100 or more 6,089 5,437 4,247
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 18,397 15,773 12,526
Interest on borrowed funds 56 54 97
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 18,453 15,827 12,623
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 33,995 29,209 26,172
Provisions (reversals of provisions) for credit losses 6,000 (1,500) (4,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 27,995 30,709 30,672
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
International/trade finance fees 3,063 2,871 2,743
Trust Fees 2,092 1,806 1,004
Deposit service fees 1,548 1,105 886
Investment sales fees 780 969 330
Gains on sales of loans 597 573 --
Other 587 531 447
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 8,667 7,855 5,410
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 16,696 15,876 13,547
Premises and equipment 4,726 4,240 4,135
Legal and professional fees 1,382 1,191 1,234
Outsourced data processing 1,436 1,140 969
Advertising and promotion 1,018 944 756
Postage and supplies 767 576 511
Foreclosed property, net 4 (261) (18)
Amortization of intangible assets 348 217 298
Restructuring costs 2,610 -- --
Other 2,713 1,982 2,324
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 31,700 25,905 23,756
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,962 12,659 12,326
INCOME TAX PROVISION 2,118 5,409 5,197
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,844 $ 7,250 7,129
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
BASIC $ .52 $ 1.36 $ 1.31
DILUTED $ .50 $ 1.28 $ 1.25
- -----------------------------------------------------------------------------------------------------------------------------------
Average common share outstanding (1) 5,463 5,332 5,449
Average common shares-diluted (1) 5,720 5,677 5,724
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated to effect a two-for-one stock split distributed on December 31,
1998.
See notes to consolidated financial statement.
39
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON NET UNREALIZED
PAID-IN AVAILABLE-FOR-SALE LOSS ON UNFUNDED RETAINED EARNINGS
(dollars in thousands) COMMON STOCK(1) CAPITAL SECURITIES PENSION LIABILITY (DEFICIT) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $8,262 $66,085 $ 359 $(5,561) $69,145
Comprehensive income:
Net income 7,129 7,129
Other comprehensive income (163) (163)
-------
Total comprehensive income 6,966
Repurchase of 270,000 common shares (405) (3,032) (3,437)
Issuance of 20,000 common shares
under the 1993 Stock Option Plan 30 79 109
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 7,887 63,132 196 1,568 72,783
Comprehensive income:
Net income 7,250 7,250
Other comprehensive income 69 $(62) 7
------
Total comprehensive income 7,257
Issuance of 127,224 common shares
under the 1993 Stock Option Plan 191 691 (141) 741
Dividends declared on common shares
($0.14 per share) (754) (754)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 8,078 63,823 265 (62) 7,923 80,027
Comprehensive income:
Net income (as restated--see Note 20) 2,844 2,844
Other comprehensive income 145 8 153
------
Total comprehensive income 2,997
Repurchase of 215,200 common shares (322) (2,361) (2,654) (5,337)
Issuance of 273,900 common shares
under the 1993 Stock Option Plan 410 3,410 3,820
Dividends declared on common shares
($0.30 per share) (1,647) (1,647)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $8,166 $64,872 $ 410 $(54) $ 6,466 $79,060
(as restated--see Note 20)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of shares and per share amounts have been restated to effect the
two-for-one stock split distributed on December 31, 1998.
40
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FOR THE YEARS
ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(AS RESTATED -
SEE NOTE 20)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,844 $ 7,250 $ 7,129
Reconcilation to net cash provided by operating activities
Depreciation and amortization 327 2,671 2,453
Provision (reversal of provision) for credit losses 6,000 (1,500) (4,500)
Deferred income taxes (benefit) (1,283) 59 1,679
Gain on sale of foreclosed property and other assets, net (594) (670) (80)
Changes in:
Accrued interest receivable and other assets (194) (5,050) (899)
Accrued interest payable and other liabilities (474) 5,863 1,765
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,626 8,623 7,547
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of available-for-sale securities 22,937 31,069 46,068
Proceeds from sale of available-for-sale securities 2,231
Purchases of available-for-sale securities (34,461) (15,989) (5,577)
Proceeds from maturity of held-to-maturity securities 14,749 16,907 3,596
Purchases of held-to-maturity securities (29,542) (12,132) (186)
Purchases of other securities (505) (1,473) (347)
Proceeds from sale of other securities 38
Net increase in loans (44,164) (75,688) (64,706)
Proceeds from sales of loans 10,465 7,837
Recoveries of previously charged-off loans 1,872 3,449 5,694
Cost of acquisitions net of cash acquired of $35,023
in 1998 and $5,050 in 1996 22,728 (3,283)
Proceeds from sales of foreclosed property 300 289 277
Purchases of interest rate floor contracts (298) (244) (140)
Purchases of bank premises and equipment (1,000) (1,030) (761)
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (36,919) (46,967) (17,134)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, savings and
money market accounts 20,726 88,381 7,779
Net increase (decrease) in certificates of deposit (14,884) 25,763 833
Net increase (decrease) in federal funds purchased
and borrowed funds 1,023 (1,044) 945
Dividends paid on common stock (1,206) (377)
Proceeds from issuance of common stock 3,820 741 109
Repurchase of Pacific Bank common stock (5,337) (3,437)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,142 113,464 6,229
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (26,151) 75,120 (3,358)
Cash and cash equivalents at beginning of year 103,104 27,984 31,342
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 76,953 $103,104 $ 27,984
- -----------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR
Interest on deposits and other borrowings $ 18,039 $ 15,633 $ 12,604
Income taxes 3,722 4,052 3,410
- -----------------------------------------------------------------------------------------------------
NONCASH INVESTING ACTIVITIES
Loans transferred to held for sale 9,774 11,753 2,950
Loans transferred to foreclosed property 175
- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1998
1997, AND 1996 (DOLLARS IN THOUSANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Pacific Bank N.A. and its wholly-owned subsidiaries, TPB Holdings, Inc.
and PB Capital Management and Insurance Services, operate as a nationally
chartered banking association in the following lines of business.
DOMESTIC COMMERCIAL BANKING
Pacific Bank conducts its domestic commercial banking business primarily
through its twelve branches in and around San Francisco and Los Angeles,
California. Pacific Bank targets its services primarily to professionals,
individuals and medium-sized businesses in its market areas. Pacific Bank
offers a variety of credit products, including revolving lines of credit,
working capital loans, standby letters of credit and lines secured by
accounts receivable and inventory. In addition, Pacific Bank provides
depository and non-credit services such as business checking accounts, cash
management and automated services such as computer-linked transaction
abilities and balance reporting for home or business. Pacific Bank offers
government-guaranteed loans for small businesses through offices in
Burlingame and Glendale, California. Substantially all of Pacific Bank's real
estate loans are secured by property located in California. Pacific Bank
originates real estate loans if such loans satisfy prudent underwriting
criteria and are supported by adequate cash flows. Additionally, Pacific Bank
extends credit for the acquisition and development of primarily residential
property. Pacific Bank provides consumer banking services through its branch
system, primarily consisting of checking and savings accounts, money market
accounts, overdraft protection in the form of lines of credit, safe deposit
facilities and other related financial services. The acquisition of
Burlingame Bancorp in 1996 added $71.3 million in assets and the acquisition
of Sterling Bancorp in 1998 added $106.5 million in assets to this line of
business.
INTERNATIONAL/TRADE FINANCE
Pacific Bank has been involved in international operations since its
inception in 1983. Offices in San Francisco, Los Angeles and Sacramento in
California and branches in Hong Kong and Cayman Islands extend credit to
domestic and foreign corporations engaged in international business. Pacific
Bank has no material foreign loans incurring foreign country risk which are
not trade related. Except for importers and exporters, extensions of credit
are not concentrated in any particular group.
International credit services are provided to customers in the import/export
business through a line of credit which is drawn in the form of loans or
letters of credit. International credit services generate fee income from
processing of title documents necessary to collect and/or distribute funds,
as well as interest income from loans to customers involved in the trades.
Non-credit international services also are provided, including correspondent
banking and funds transfer services. A significant portion of Pacific Bank's
international business activity is for customers who engage in trade in the
Asia Pacific region.
WEALTH MANAGEMENT SERVICES
The Wealth Management Services division of Pacific Bank provides trust and
asset management services primarily to the executives of existing business
customers and high net worth individuals. Personal trust services include
trust administration, probate administration, and investment advisory, agency
and custody services. Employee benefit trust services include trust
administration and custody and investment advisory services relating to
corporate retirement plans, individual retirement accounts, Keogh plans and
other retirement or health and welfare plans. Stone & Youngberg, a San
Francisco based full-service brokerage firm, also offers investment products
to Pacific Bank customers.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the
company include the accounts of The Pacific Bank, N.A. and its subsidiaries
after elimination of intercompany accounts and transactions. Certain
reclassifications have been made to the 1997 and 1996 financial statements in
order to conform to the 1998 presentation.
42
<PAGE>
ACCOUNTING CHANGES -- During 1998, Pacific Bank adopted Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources:
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers; and No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits," which revises
employers' disclosures about pension and other postretirement benefit plans.
USE OF ESTIMATES -- The accounting and reporting policies of Pacific Bank
conform with generally accepted accounting principles and with general
practice within the banking industry. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expense during the reporting period. Actual results could differ from
those estimates.
LOANS -- Loans are stated at the amount of principal outstanding reduced by
the unearned interest. Interest income is recognized using methods which
approximate a level yield on principal amounts outstanding. Interest accruals
are discontinued on certain loans, generally when principal or interest is
past due 90 days or more, or when in the opinion of management, such interest
is doubtful of collection. Loan origination and commitment fees and related
loan origination costs are deferred and amortized to interest income over the
contractual lives of the underlying loan or commitment.
ALLOWANCE FOR CREDIT LOSSES -- Pacific Bank provides for credit losses by
charging current income in such amounts as are required to adjust the
allowance for credit losses to a level management anticipates is required to
cover known and inherent risks in existing loans and commitments to extend
credit. The allowance is based upon management's continuing assessment of
various factors affecting the collectibility of the loans and commitments to
extend credit, including current and projected economic conditions, past
credit experience, underwriting policies, results of the Bank's ongoing loan
grading process, the amount of past due and nonperforming loans,
recommendations of independent credit examiners or requirements of regulatory
authorities and other factors.
Loans deemed uncollectible are charged to the allowance and any subsequent
recoveries are credited to the allowance, Pacific Bank bases the measurement
of impaired loans on the fair value of the loans' collateral properties or
the expected cash flows on the loans discounted at the loan's effective
rates. Cash receipts on impaired loans not performing according to
contractual terms are used to reduce principal balances. Impairment losses
are included in the allowance for credit losses through a charge to the
provision for credit losses, if applicable. Adjustments arising from changes
in the fair value of impaired loans' collateral properties or discounted cash
flows are included in the provision for credit losses, if applicable.
INVESTMENT SECURITIES -- Investment securities are classified as held to
maturity or available-for-sale based on Pacific Bank's intent and ability to
hold to maturity. Held to maturity securities are reported at cost adjusted
for the amortization of premiums and accretion of discounts to maturity or, in
the case of mortgage-backed securities, over the estimated life of the
security. Available-for-sale securities are reported at fair value with net
unrealized gains and losses of $705 and $453 at December 31, 1998 and 1997,
respectively, reported net of income taxes of $295 and $188, respectively, as
a component of other comprehensive income in the statements of shareholders'
equity. The specific identification method is used to determine realized
gains and losses. Pacific Bank has no securities or risk management contracts
held for trading purposes at December 31, 1998 or 1997, and traded no such
securities or risk management contracts during the years ended December 31,
1998, 1997 and 1996.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Such assets are depreciated using
the straight-line method over the estimated useful lives of 3 to 25 years.
Long-lived assets and related depreciation and amortization expense are
included in the balances and results of operations of the segments.
43
<PAGE>
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impaired assets are
written down to the lower of cost or fair value less cost to sell.
FORECLOSED PROPERTY - Foreclosed property consists of property acquired in
settlement of indebtedness. When property is acquired through foreclosure, any
excess of related loan balance over the fair value of the property is charged
to the allowances for credit losses. Any subsequent valuation adjustments are
recorded as foreclosed property expense. Operating expenses of such
properties, net of related income, are included in foreclosed property
expense.
INTANGIBLE ASSETS - Intangible assets are amortized over periods ranging from
five to fifteen years. Pacific Bank reviews the carrying value of these
assets for impairment whenever conditions or events indicate that the
carrying value may not be recoverable. If the forecasted net cash flows of
the operation do not cover the carrying value including the intangible asset,
the carrying value will be written down to fair value by first reducing the
intangible asset and then the other long-lived assets of the operation. Fair
value is determined based on discounted cash flows or appraised values,
depending on the nature of the assets.
TRUST ASSETS - Trust assets (other than cash deposited in Pacific Bank)
held in fiduciary or agency capacities for Pacific Bank's customers are not
reflected in the accompanying balance sheets because such items are not
assets of Pacific Bank.
FOREIGN CURRENCY TRANSLATION - Substantially all assets and liabilities of
Pacific Bank's foreign operations are translated into United States dollars
at exchange rates prevailing at period end. The resulting cumulative
translation adjustment is not material and is included in other liabilities
in the accompanying consolidated balance sheets.
INCOME TAXES - Income taxes are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are established based on the tax rates that are
expected to apply when the temporary differences are recovered or settled.
EARNINGS PER SHARE - Diluted earnings per share reflects the potential
dilution that would occur if common shares were issued pursuant to the
exercise of options under Pacific Bank's stock option plans. Earnings per
share amounts have been adjusted for all periods presented, to reflect the
two-for-one stock split of the Bank's common stock effective December 1998.
RISK MANAGEMENT CONTRACTS - Pacific Bank uses interest rate floor contracts
as part of its asset and liability management. Premiums paid are recorded in
other assets and are amortized as an adjustment of the yield of the
underlying assets and liabilities over the life of the contracts. Gains and
losses resulting from changes in the market value that qualify as
hedges, having been specifically designated as a hedge and with a high degree
of correlation between the changes in the market value of the derivative
instrument and the item being hedged, to the extent that such conditions
continue to exist, are deferred and recognized as interest income or interest
expense over the lives of the related assets or liabilities. In the event
that an instrument failed to qualify as a hedge, the instrument would be
marked to market through the statements of income.
In addition, Pacific Bank acts as an intermediary on behalf of customers in
the foreign exchange markets. Such contracts are marked to market and gains
and losses are included in noninterest income. Gains and losses on foreign
exchange contracts that hedge foreign currency risk are deferred and
recognized over the lives of the hedged assets or liabilities.
STOCK OPTIONS - Pacific Bank accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25. "Accounting for Stock Issued to Employees." Pro forma
measurement of compensation under the fair value based method defined in
SFAS No. 123. "Accounting for Stock-Based Compensation," is disclosed in the
accompanying notes to the consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board ("the FASB") issued Statement No. 133. "Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"),
44
<PAGE>
which the Bank is required to adopt effective January 1, 2000. SFAS 133 will
require the company to record all derivatives on the balance sheet at fair
value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred
and recorded as a component of accumulated comprehensive income in
shareholders' equity until the hedged transactions occur and are recognized
in earnings. Bank regulatory agencies recently issued guidance that excludes
derivative-related amounts recorded in shareholders' equity from risk based
capital calculations. The ineffective portion of a hedging derivative's
change in fair value will be immediately recognized in earnings. The impact
of SFAS 133 on Pacific Bank's financial statements will depend on a variety
of factors, including future interpretative guidance from the FASB, the
future level of forecasted and actual foreign currency transactions, the
extent of the Pacific Bank's hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. However, Pacific
Bank does not believe the effect of adopting SFAS 133 will be material to its
financial position or results of operations.
2. ACQUISITIONS
On July 3, 1998, Pacific Bank acquired Sterling West Bancorp, the holding
company for Sterling Bank in a cash transaction totaling $12,295, or $7.11
per share of Sterling West Bancorp's outstanding shares of stock. The source
of funds was general working capital of Pacific Bank. The former offices of
Sterling Bank were merged into Pacific Bank and are being operated as
branches of Pacific Bank. The acquisition was accounted for as a purchase.
Assets and liabilities of Sterling West Bancorp were adjusted to their fair
value and combined with the recorded book values of assets and liabilities of
Pacific Bank. Goodwill totaling $6,289 was recorded as the excess of cash
paid over the fair value of net assets acquired, including acquisition costs
and deferred tax benefits. The goodwill is being amortized over 15 years.
Pacific Bank acquired Burlingame Bancorp on April 2, 1996, in a cash
transaction totaling $8,333 accounted for as a purchase. Goodwill of $2,083
is being amortized over 15 years. The unaudited pro forma information below
presents results of operations as if the Burlingame Bancorp acquisition has
been completed on January 1, 1996 and as if the Sterling West Bancorp
acquisition had been completed on January 1, 1997. The unaudited pro forma
information is not necessarily indicative of the results of operations of the
combined bank had these events occurred at the beginning of the years
presented, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $45,934 $43,450 $33,091
Income before income taxes 4,752 11,158 12,151
Net income 2,636 5,641 7,002
Net income per diluted share 0.46 0.99 1.22
- ------------------------------------------------------------------------------
</TABLE>
3. CASH AND DUE FROM BANKS
Cash and due from banks include balances with the Federal Reserve Bank. Pacific
Bank is required by federal regulations to maintain certain minimum average
balances with the Federal Reserve Bank or in cash on hand, based primarily on
daily deposit balances. Pacific Bank had minimum required balances of $4,505
at December 31, 1997. No minimum required balance was required at December
31, 1998, due to improved management of reservable deposit balances.
4. INVESTMENT SECURITIES
A summary comparison of amortized cost and estimated fair value of
available-of-sale and held-to-maturity securities as of December 31, 1998 and
1997, by type, is as follows:
45
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE SECURITIES COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury securities $25,878 $498 $26,376
U.S. Federal agency securities 10,482 167 10,649
U.S. Federal agency mortgage-backed securities 37,228 113 $ 72 37,268
Collateralized mortgage obligations and other securities 1,136 -- (1) 1,135
- ---------------------------------------------------------------------------------------------------------------------------------
Total $74,724 $778 $ 73 $75,428
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Treasury securities $24,204 $ 67 $24,271
U.S. Federal agency securities 2,001 7 2,008
U.S. Federal agency mortgage-backed securities 23,447 416 $(23) 23,840
Collateralized mortgage obligations and other securities 2,869 1 (15) 2,855
- ---------------------------------------------------------------------------------------------------------------------------------
Total $52,521 $491 $(38) $52,974
- ---------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
DECEMBER 31, 1998
U.S. Federal agency securities $15,000 $124 $15,124
U.S. Federal agency mortgage-backed securities 15,185 99 15,284
Collateralized mortgage obligations 7,008 17 $ (2) 7,023
Municipal securities 9,132 195 (16) 9,311
- ---------------------------------------------------------------------------------------------------------------------------------
Total $46,325 $435 $(18) $46,742
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
U.S. Federal agency securities $15,000 $ 4 $15,004
U.S. Federal agency mortgage-backed securities 13,465 34 13,499
Collateralized mortgage obligations 749 -- $ (2) 747
Municipal securities 2,318 63 -- 2,382
- ---------------------------------------------------------------------------------------------------------------------------------
Total $31,532 $101 $ (2) $31,632
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, available-for-sale securities of $1,616 and
$1,606, respectively, were pledged to secure public deposits and $13,622 and
$10,756, respectively, were pledged to secure certain trust assets,
bankruptcy court deposits and treasury tax and loan accounts.
Pacific Bank did not sell any held-to-maturity securities during the years
presented.
5. LOANS AND ALLOWANCES FOR CREDIT LOSSES
LOAN PORTFOLIO BY BUSINESS LINE--Loans, net of unearned interest of $2,136 at
December 31, 1998 and $1,533 and December 31, 1997, by line of business were
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $119,343 $ 75,287
Real estate loans 175,072 130,024
Personal and other loans 18,220 18,168
- ----------------------------------------------------------------------------------
Total Domestic Commercial Banking Division 312,635 223,479
- ----------------------------------------------------------------------------------
International / trade finance loans 140,309 143,773
Commercial loans 10,810 11,648
Real estate loans 16,724 14,840
Personal and other loans 3,996 3,318
- ----------------------------------------------------------------------------------
Total International / Trade Finance Division 171,839 173,579
- ----------------------------------------------------------------------------------
Total Loans $484,474 $397,058
- ----------------------------------------------------------------------------------
</TABLE>
Loans held for sale totaled $641 and $735 at December 31, 1998 and 1997,
respectively. Loans to executive officers, directors and their associated
companies totaled $1,616 as of December 31, 1998. There were no such
46
<PAGE>
loans outstanding as of December 31, 1997. National banking regulations
require that these loans be on substantially similar terms as other
extensions of credit.
LOAN CONCENTRATIONS--Pacific Bank's loans are not highly concentrated among
one particular industry or economic sector, although 40% of loans are secured
by real estate. A loan may be secured (in whole or in part) by real estate
even though the purpose of the loan is not to facilitate the purchase or
development of real estate. Pacific Bank's secured loans are collateralized
primarily by real estate, business assets, or personal assets. Pacific Bank's
customers are located primarily in the San Francisco Bay Area and the Los
Angeles Basin. Accordingly, the ultimate collectibility of a substantial
portion of the loan portfolio is susceptible to changes in market conditions
in the San Francisco Bay Area and the Los Angeles Basin. International trade
finance activity is generally for customers who engage in trade in the Asia
Pacific region, with a portion of the financings completed through Pacific
Bank's Hong Kong office.
IMPAIRED LOANS--A loan is impaired when, based on current information and
events, it is probable that Pacific Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Pacific
Bank's policy is to disclose as impaired loans all loans that are past due 90
days or more as to either principal or interest, individually or collectively
for homogenous loans with balances of $100 or less. Interest payments
received on impaired loans are recorded as a reduction of principal owed,
unless collection of the remaining balance is considered probable. Impaired
loans averaged $2,068 in 1998 and $917 in 1997. Loans considered by Pacific
Bank to be impaired at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
RECORDED IMPAIRMENT RECORDED IMPAIRMENT
INVESTMENT ALLOWANCES INVESTMENT ALLOWANCES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loans with impairment allowance:
Commercial and trade finance $2,386 $433 $1,271 $762
Real estate -- -- -- --
---------- ---------- ---------- ----------
Total loans with impairment allowance 2,386 $433 1,271 762
---------- ---------- ---------- ----------
Loans not requiring an impairment allowance:
Commercial and trade finance 69 --
Real estate 108 100
Personal and other -- 4
---------- ---------- ---------- ----------
Total loans not requiring an impairment allowance 177 104
---------- ---------- ---------- ----------
TOTAL IMPAIRED LOANS $2,563 $433 $1,375 $762
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
ALLOWANCE FOR CREDIT LOSSES--The activity in the allowance for credit losses
for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $10,823 $10,814 $10,400
Provision (reversal of provision) for credit losses 6,000 (1,500) (4,500)
Charge-offs (7,063) (1,937) (1,536)
Recoveries 1,872 3,446 5,694
Acquired reserves 703 -- 756
---------- ---------- ----------
BALANCE, END OF YEAR $12,335 $10,823 $10,814
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
6. BANK PREMISES AND EQUIPMENT
Pacific Bank generally leases its facilities. Bank-owned equipment consists
of computer systems, telephone switches and equipment, and other equipment
specific to the banking industry. Depreciation and amortization expense on
Bank-owned premises and equipment was $1,229 in 1998, $1,063 in 1997 and
$1,090 in 1996. The original cost of bank premises and equipment and related
accumulated depreciation and amortization at December 31 was as follows:
47
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 5,098 $ 4,624
Machinery and equipment 7,196 6,099
Furniture and fixtures 3,519 3,328
Land and buildings 337 --
- -------------------------------------------------------------------------------
Subtotal 16,150 14,051
- -------------------------------------------------------------------------------
Accumulated depreciation and amortization (11,463) (10,040)
- -------------------------------------------------------------------------------
Premises and equipment, net $ 4,687 $ 4,011
- -------------------------------------------------------------------------------
</TABLE>
7. OTHER REAL ESTATE OWNED
At December 31, 1998, Pacific Bank held one foreclosed real estate property
with a carrying value of $680 reduced by a valuation allowance of $298.
Pacific Bank owned no foreclosed real estate at December 31, 1997. Four
properties were acquired with Sterling West Bancorp in July 1998. Three
properties were subsequently sold at a combined net loss of $1 in 1998. Gains
on favorable settlements of foreclosed real estate totaled $261 in 1997 and
$18 in 1996.
8. OTHER ASSETS
At December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest receivable on loans and securities $ 3,775 $ 3,365
Deferred tax assets, net of valuation allowance 7,906 4,405
Prepaid expenses 666 746
Goodwill 7,782 1,840
Other intangible assets 219 283
Other assets 3,712 2,012
- -------------------------------------------------------------------------------
Total other assets $24,060 $12,651
- -------------------------------------------------------------------------------
</TABLE>
9. DEPOSITS
Overnight and time deposits in foreign offices totaled $46,055 at December 31,
1998 and $43,443 at December 31, 1997. Time deposits of $100 or more at
December 31, 1998 are scheduled to mature as follows:
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
Domestic office time deposits of $100 or more:
Three months or less $ 53,662
Over three months through six months 19,388
Over six months through twelve months 21,056
Over one year through three years 1,243
Over three years --
- -------------------------------------------------------------------------------
Domestic time deposits of $100 or more 95,349
Foreign office time deposits of $100 or more 13,242
- -------------------------------------------------------------------------------
Total time deposits of $100 or more $108,591
===============================================================================
</TABLE>
10. FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
AND OTHER BORROWED FUNDS
Federal funds purchased and securities sold under agreements to repurchase
are short-term financings under prearranged lines of credit with other
financial institutions. Investment securities are used to collateralize
securities sold under agreements to repurchase. No such borrowings were
outstanding at December 31, 1998 or 1997. Other
48
<PAGE>
borrowed funds consists of overdrafts in cash accounts and short-term
advances from commercial banks in Hong Kong.
11. RESTRUCTURING LIABILITY
During 1998, Pacific Bank recorded a charge to earnings and established a
liability of $2,610 for the planned consolidation or sale of four branches in
duplicate markets served and staff reductions of approximately 45 employees.
Activity in the liability in 1998 included payments of $69 for severance
benefits paid to terminated employees. Pacific Bank anticipates that the
restructuring plan will be completed in 1999. However, a substantial portion
of the reserve relates to an above-market lease obligation that requires
payments through August 2008.
12. INCOME TAXES
PROVISION FOR INCOME TAXES--Pacific Bank recorded income tax provisions in
the consolidated statements of income generally at the statutory income tax
rates. Expense recorded in 1998 for the restructuring liability required a
deferred tax provision that is expected to be realized for tax purposes as
the reserve is utilized (see footnote 11. "Restructuring Liability").
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
CURRENT TAX PROVISION
Federal $ 2,530 $4,274 $3,117
State 871 1,076 401
------- ------ ------
Total current 3,401 5,350 3,518
------- ------ ------
DEFERRED TAX PROVISION
Federal (992) (269) 732
State (291) 328 947
------- ------ ------
Total deferred (1,283) 59 1,679
------- ------ ------
Total income tax provision $ 2,118 $5,409 $5,197
------- ------ ------
------- ------ ------
</TABLE>
RECONCILIATION TO STATUTORY TAX RATES--In 1998, deferred tax assets for
expiring state net operating loss carryforwards and related valuation
allowances were written off, with no net income tax effect, as shown in the
following table.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income tax provision at Federal statutory rate $1,684 $4,431 $4,314
Increase (decrease) resulting from:
State income tax, net of Federal tax benefit 355 913 881
Reduction in valuation allowance for state income tax (37) (35) (35)
Federal tax effect for reduction in state valuation allowance 13 12 12
Other, net 103 88 25
------- ------- -------
Total income tax provision $2,118 $5,409 $5,197
------- ------- -------
------- ------- -------
</TABLE>
FEDERAL TAX CREDITS AND CARRYFORWARDS--Federal net operating loss
carryforwards of $4,216 and state net operating loss carryforwards of $4,313
were acquired with Sterling West Bancorp in 1998. Utilization of the net
operating loss carryforwards will be limited for federal and state income tax
reporting under Section 382 of the Internal Revenue Code to $677 annually.
Pacific Bank expects to realize the tax benefit of the net operating loss
carryforwards in full during the carryforward period allowable under current
law, so that no valuation allowance has been established. Net operating loss
carryforwards of $2,380 at December 31, 1997 acquired with Burlingame Bancorp
expired in 1998, and the related valuation allowance was reversed.
49
<PAGE>
DEFERRED TAX INVENTORY -- The tax effects of temporary differences and tax
carryforwards at December 31 are detailed as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses $3,985 $3,621
Allowance for losses on foreclosed property 136 --
Bank premises and equipment 153 167
Deferred compensation 479 365
Restructuring liability 1,164 --
Other accruals 40 159
State taxes currently payable 163 418
Fair value adjustments for assets acquired 947 --
Net operating loss carryforwards 1,704 2,380
Foreign tax credit carryforward 25 25
Capital loss carryforward -- 20
- -------------------------------------------------------------------------------
Total deferred tax assets 8,796 7,155
- -------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Federal taxes arising from deferred state
tax assets (474) (79)
Accumulated other comprehensive income (256) (188)
FHLB stock dividends (48) (18)
Loan fees (112) (65)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (890) (350)
- -------------------------------------------------------------------------------
Subtotal 7,906 6,805
Less: valuation allowance -- (2,400)
- -------------------------------------------------------------------------------
Net deferred tax assets $7,906 $4,405
===============================================================================
</TABLE>
13. PENSION AND OTHER BENEFIT PROGRAMS
SERP -- During 1996, Pacific Bank established the Supplemental Executive
Retirement Plan ("SERP"). This unfunded plan provides supplemental retirement
benefits to certain key employees. The SERP provides for benefits paid out of
the general assets of Pacific Bank. The projected benefit obligation at
December 31 was as follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at
begining of year $1,173 $ 795
Service cost 130 118
Interest cost 82 55
Actuarial loss -- 205
- -------------------------------------------------------------------------------
Projected benefit obligation at end of year $1,385 $1,173
===============================================================================
</TABLE>
The projected benefit obligation was determined using a weighted-average
discount rate of 7% and an assumed weighted-average increase in future
compensation of 4%. The accumulated benefit obligation was $1,280 at December
31, 1998 and $1,075 at December 31, 1997. Amounts recognized in the
consolidated financial statements at December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Pension expense $ 278 $ 231
Liability for unfunded pension benefits (660) (733)
Unamortized prior service costs 568 626
Accumulated other comprehensive income
net of tax 54 62
Deferred tax assets -- accumulated other
comprehensive income 38 45
- -------------------------------------------------------------------------------
Net amount recognized in the consolidated
balance sheets $ 278 $ 231
===============================================================================
</TABLE>
401(k) PLAN -- Pacific Bank established a 401(k) tax-deferred savings plan in
1990. Eligible employees may elect to have a portion of their compensation
deferred and contributed to the Plan. Pacific Bank matches one-half of
employee contributions to a maximum of 3% of the employee's salary. Expense
under this matching program was
50
<PAGE>
$303 in 1998, $250 in 1997 and $196 in 1996. Pacific Bank also incurs costs
for the administration of this and the SERP discussed above.
14. SHAREHOLDERS' EQUITY
STOCK SPLIT -- In December 1998, Pacific Bank effected a two-for-one stock
split of the common stock, by means of a reduction in the par value of the
common stock from $3 per share to $1.50 per share approved by shareholders on
December 29, 1998. All share and per share data included herein have been
restated to reflect the two-for-one stock split. In addition, Pacific Bank
amended its corporate charter to increase the number of authorized common
shares from 7,000,000 shares to 21,000,000 shares as approved by shareholders
in December 1998.
SHARE REPURCHASE PLANS -- Under the 1996 Share Repurchase Plan, Pacific Bank
had authority to repurchase $7,000 of its outstanding common stock. The
remaining authority under the plan was utilized during 1998 with the
repurchase of 130,000 shares at a cost of $3,561. On December 29, 1998,
shareholders approved the 1998 Share Repurchase Plan under which Pacific Bank
has authority to repurchase $12,000 of its outstanding common stock. During
1998, 85,200 shares were repurchased at a cost of $1,776. Subsequent to
year-end, 247,800 shares were repurchased in January 1999 at a cost of $5,175.
RIGHTS PLAN -- A shareholder rights plan was adopted in 1996 that provides
for the issuance of dilutive shares in the event of the acquisition of 15% or
more of Pacific Bank's outstanding shares, if the acquisition is not deemed
by the Board of Directors to be in the best interests of the shareholders.
DIVIDENDS -- Dividends declared in 1998 totaled $1,647, or $0.30 per share.
During 1998, Pacific Bank increased the dividend rate on common shares by 14%
to $0.08 per share on a quarterly basis. Pacific Bank's retained earnings of
$6,466 at December 31, 1998 is unrestricted and available to pay dividends
under regulations issued by the Office of the Comptroller of the Currency.
CHANGE IN CONTROL -- In the event of a change in control, the Director Bonus
Plan, Supplemental Executive Retirement Plan and employment agreements with
certain executive officers may require payments to be made by Pacific Bank
that are not currently recognized in the financial statements.
CAPITAL ADEQUACY -- Pacific Bank is subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on Pacific Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action. Pacific Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Pacific
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Pacific Bank to maintain minimum amounts and ratios as set forth in
the table below. Management believes, as of December 31, 1998 and 1997, that
Pacific Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notifications from the OCC
categorized Pacific Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, Pacific
Bank must maintain minimum ratios of total capital to risk-based assets. Tier
1 capital to risk-based assets and Tier 1 Capital to average total assets
(leverage ratios) as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
institution's category.
51
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Minimum Adequately Minimum Well Capitalized
Capitalized for Under Prompt Corrective
At December 31 Capital Adequacy Action Provisions
- -------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Tier 1 Capital (to Risk Weighted Assets) $71,081 12.65% $22,476 4.00% $33,714 6.00%
Total Capital (to Risk Weighted Assets) 78,173 13.91 44,959 8.00 56,199 10.00
Tier 1 Capital (to Average Assets) 71,081 10.16 27,985 4.00 34,981 5.00
- ---------------------------------------------------------------------------------------------------------
1997
Tier 1 Capital (to Risk Weighted Assets) $77,701 16.74% $18,567 4.00% $27,850 6.00%
Total Capital (to Risk Weighted Assets) 83,564 18.00 37,140 8.00 46,424 10.00
Tier 1 Capital (to Average Assets) 77,701 13.21 23,528 4.00 29,410 5.00
- ---------------------------------------------------------------------------------------------------------
</TABLE>
15. STOCK OPTIONS
1993 STOCK OPTION PLAN -- A total of 800,000 shares were available for
issuance under the 1993 Stock Option Plan. The remaining available shares
under the 1993 Stock Option Plan were granted to employees in 1998.
1998 STOCK OPTION PLAN -- During 1998, shareholders approved the 1998 Stock
Option Plan with a total of 300,000 shares available for grant, including
50,000 shares reserved for grants to nonemployee directors. During 1998,
95,000 shares were granted to employees under the 1998 Stock Option Plan.
OPTION ACTIVITY -- The Compensation Committee of the Board determines the
eligibility, exercisability, term, vesting period and stock option price.
Options granted under the plans have been granted at exercise prices equal to
fair market value of Pacific Bank's common stock on the date of grant.
Transactions involving options for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 541,200 $ 8.00 705,000 $ 7.30 616,000 $ 6.33
Granted 163,200 22.40 6,000 19.88 120,000 12.03
Canceled or expired (11,140) 19.52 (1,200) 12.38 (11,000) 7.97
Exercised (273,900) 6.69 (168,600) 5.46 (20,000) 5.48
- ------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 419,360 14.16 541,200 8.00 705,000 7.30
- ------------------------------------------------------------------------------------------------------------------------------
Shares exercisable, end of year 277,360 $11.00 465,933 $ 7.38 577,999 $ 6.53
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $11.92 $10.54 $ 7.15
Weighted average remaining contractual
life (years) of options outstanding
at December 31 7.69 6.99 7.89
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For options outstanding at December 31, 1998, the range of exercise prices and
weighted average exercise prices were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Exercise Options Weighted Average Weighted Average Options Weighted Average
Price Range Outstanding Exercise Price Remaining Life Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.38 - $ 8.75 167,800 $ 7.43 6.08 167,800 $ 7.43
10.00 - 13.63 88,100 12.15 7.66 68,200 12.35
18.78 - 19.88 104,400 18.84 9.91 21,600 18.87
27.50 - 28.00 59,060 27.98 9.27 19,760 27.95
====================================================================================================================
</TABLE>
Pacific Bank applies APB Opinion 25 and related Interpretations in accounting
for stock-based compensation plans and no compensation cost has been
recognized in the financial statements. If the computed fair values of stock
awards had been amortized to expense over the vesting periods of the awards,
pro forma amounts would have been
52
<PAGE>
as shown in the following table. The impact of outstanding nonvested stock
options granted prior to 1995 has been excluded from the pro forma
calculation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $2,844 $7,250 $7,129
Pro forma 2,307 7,077 6,920
Earnings per share
Basic
As reported 0.52 1.36 1.31
Pro forma 0.42 1.33 1.27
Diluted
As reported 0.50 1.28 1.25
Pro forma 0.41 1.25 1.21
===============================================================================
</TABLE>
Pacific Bank's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. These calculations require the
use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from Pacific Bank's
stock option awards. These models also require subjective assumptions,
including future stock price volatility, dividend yield and expected time to
exercise, which greatly affect the calculated values. Pacific Bank's
calculations were made using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.38% 1.23% --
Expected volatility 63% 61% 66%
Risk-free interest rate 5.14% 6.21% 6.21%
Expected lives (years) 4.16 4.37 4.96
===============================================================================
</TABLE>
16. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS -- Pacific Bank leases buildings and equipment for its
branch banking offices and administration facilities. Total rent expense on
premises and equipment leased under operating leases was $2,915 in 1998,
$2,688 in 1997 and $2,524 in 1996.
Under existing leases at December 31, 1998, Pacific Bank is obligated to make
future minimum rental payments as shown in the following table.
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
1999 $ 3,331
2000 2,998
2001 2,377
2002 1,421
2003 1,319
Thereafter 3,175
- -------------------------------------------------------------------------------
Total $14,621
===============================================================================
</TABLE>
Minimum rentals are subject to adjustment based on various cost or market
price factors. The initial terms of these leases expire at various dates
through 2008. Under the provisions of several of the leases, Pacific Bank has
the option to extend the leases beyond their original terms at rental rates
adjusted for changes reported in certain economic indices or as reflected by
market conditions. Subsequent to December 31, the lease at the Bank's
headquarters at 351 California Street in San Francisco was renewed at an
additional annual rent of $766 through August 2001, and the lease at 100
Montgomery Street in San Francisco is being negotiated at an estimated
maximum additional annual rent of $358 through April 2004.
53
<PAGE>
Pacific Bank subleases certain premises to various outside parties. The
proceeds from these subleases reduces rent expense. Anticipated collections
of rent under these subleases have not been used to reduce the future minimum
rental commitments provided above.
MATERIAL CONTRACTS -- Pacific Bank has contracted with an outside processor
substantially all data processing services. The term of this contract extends
through January 1999. Minimum fees under the terms of the existing contract
are $357 annually, however, additional fees are charged based on the level of
services provided. Pacific Bank is currently in negotiations to renew the
contract for a three-year period at rates that approximate rates paid under
the current contract.
LEGAL MATTERS -- Pacific Bank is involved in various claims and legal actions
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the financial position of Pacific Bank.
17. SEGMENTS
SEGMENT RESULTS AND ASSETS -- Pacific Bank's three core lines of business are
organized around the specific products and services provided to their
customers (see footnote 1, "Description of Business"). Revenues include net
interest income from customers, intersegment interest credits or charges, and
noninterest income. The operating results and assets of the core lines of
business for the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC COMMERCIAL BANKING
Revenues $ 24,768 $ 20,295 $ 16,210
Pretax income 12,232 10,054 9,338
Identifiable assets 316,384 219,866 212,884
- -------------------------------------------------------------------------------
INTERNATIONAL/TRADE FINANCE
Revenues 12,088 10,437 8,365
Pretax income 5,969 3,944 3,306
Identifiable assets 156,310 164,208 123,403
- -------------------------------------------------------------------------------
WEALTH MANAGEMENT SERVICES
Revenues 2,966 2,880 1,382
Pretax income (loss) 614 886 (303)
Identifiable assets 439 1,342 193
- -------------------------------------------------------------------------------
</TABLE>
The domestic commercial banking group generally provides funding to the
international/trade finance division by gathering deposits through the branch
network, for which the group received an interest credit based on the current
federal funds rate totaling $10,795 in 1998, $7,962 in 1997, and $5,866 in
1996. The Domestic Commercial Banking division and the International/Trade
Finance division are charged for costs that can be directly associated with
the generation and maintenance of the lending portfolios. Allocations are
generally based on the size of the portfolio, the number of transactions, and
the amount of real estate secured loans in the portfolio.
The reconciliation of segment amounts to consolidated results was as shown in
the following table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
REVENUES PRETAX INCOME
- ----------------------------------------------------------------------------------------------------------------
TOTAL TOTAL
SEGMENTS OTHER CONSOLIDATED SEGMENTS OTHER CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 (As restated) $39,822 $2,840 $42,662 $18,815 ($13,853) $ 4,962
1997 33,612 3,452 37,064 14,884 (2,225) 12,659
1996 25,957 5,625 31,582 12,341 (15) 12,326
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
Corporate overhead, provision for loan losses, goodwill amortization and
restructuring costs are not directly allocable to the segment results shown
in the table above. Revenues generated other than in the core lines of
business primarily resulted from Treasury operations. The Treasury division
is responsible for maintaining the bank's cash position to ensure adequate
liquidity and to invest excess liquidity that is not currently invested in
loans by the core lines of business. The Treasury division obtains interest
income primarily through investments in securities and federal funds sold.
Consolidated assets includes cash and investments not allocated to the
segments.
GEOGRAPHIC SEGMENTS -- Revenues from customers by country of the customers'
domicile for the year ended December 31, 1998 and nonfinancial assets held in
bank offices by country at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
REVENUES NONFINANCIAL ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
United States $40,622 $4,653
Hong Kong 2,040 34
Other foreign countries -- --
- -------------------------------------------------------------------------------
Total $42,662 $4,687
- -------------------------------------------------------------------------------
</TABLE>
18. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -- In the normal course of
business, Pacific Bank is a party to various financial instruments with
off-balance sheet risk, in order to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The following is a summary of the various financial instruments with
off-balance sheet risk entered into by Pacific Bank as of December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Unused commitments to extend credit $247,244 $223,894
Standby letters of credit 14,375 16,658
Commercial letters of credit 27,894 36,623
- -----------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts significantly exceed the amount of credit risk
Forward foreign exchange contracts 1,000 2,500
Interest rate floors 100,000 125,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements which may become contracts to
extend financing to a customer if certain enumerated conditions are met. All
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts disclosed
above are very unlikely to represent future cash requirements. Substantially
all commitments are floating rate. Standby letters of credit are conditional
commitments issued by Pacific Bank to assure the performance of a customer to
a third party. Commercial letters of credit are issued primarily to finance
the shipments of merchandise from seller to buyer. These transactions are
generally collateralized by merchandise. Pacific Bank follows the same
policies in making these commitments and conditional obligations as it does
for on-balance sheet instruments.
Pacific Bank utilizes forward foreign exchange contracts to reduce
risk related to Hong Kong denominated loans. Pacific Bank uses interest rate
swaps and floors for asset and liability management in order to reduce its
exposure to movements in interest rates. Interest rate swap transactions
involve the exchange of fixed and floating interest payments or the exchange
of payments based on two different floating indices. Interest rate floors
involve the payment from the seller to Pacific Bank of an interest payment in
the event that an interest rate index falls below the contracted floor level.
The interest payments are based on the notional principal amount of the
transactions. Pacific Bank is exposed to credit loss in the event of
nonperformance by the other parties to the agreements. Pacific Bank reduces
this credit risk by entering into agreements only with major,
well-established financial institutions. Interest income (expense) from these
transactions was $(153) in 1998, $80 in 1997 and $399 in 1996.
55
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The amounts at which cash and cash
equivalents, customers' acceptance liability and acceptances outstanding and
short-term borrowings are presented in the balance sheet approximate their
fair value at the balance sheet dates. The fair value on loans and deposits
was estimated by discounting future cash flows using current rates offered
for similar products. The fair value of investments of off-balance sheet
financial instruments was based on quoted market prices or dealer quotes.
Changes in the market assumptions or estimation techniques could
significantly affect the fair value estimates. Because of limitations, the
aggregate fair value amounts presented below are not necessarily indicative
of the amounts that could be realized in a current market exchange.
The carrying amounts and the estimated fair values of Pacific Bank's
noncurrent financial instruments are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investment securities $125,861 $126,940 $ 88,109 $ 88,209
Loans, net 472,139 473,506 386,235 386,385
Liabilities
Deposits 611,875 612,330 506,681 507,037
Off-balance sheet financial instruments
Interest rate floor contracts 347 738 285 269
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
19. QUARTERLY RESULTS AND SHAREHOLDER INFORMATION (Unaudited)
Pacific Bank's stock is traded on the NASDAQ National Market System (symbol
"PBSF") and was held by approximately 1,173 holders of record at December 31,
1998. The closing price of the stock on December 31, 1998 was $21.81 per
share. All share and per share data have been restated to effect the
two-for-one stock split on December 31, 1998. The 1998 quarterly results have
been restated from amounts previously reported to properly state trust income
and to record losses for unauthorized checks as discussed in Note 20.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------------
(As previously (As (As previously (As (As previously (As (As previously (As
reported) restated) reported) restated) reported) restated) reported) restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,902 $11,902 $12,278 $12,278 $14,351 $14,351 $13,917 $13,917
Net interest income 7,592 7,592 7,820 7,820 9,220 9,220 9,363 9,363
Provision for
credit losses -- -- -- -- -- -- 6,000 6,000
Income (loss) before
income taxes 3,025 2,714 3,130 2,948 3,415 3,205 (3,872) (3,905)
Net income (loss) 1,746 1,564 1,815 1,709 1,943 1,820 (2,230) (2,249)
Net income (loss)
per diluted share 0.30 0.27 0.31 0.30 0.34 0.32 (0.40) (0.40)
Common Stock Price
Price Range - high 26.63 26.63 31.50 31.50 28.00 28.00 24.38 24.38
- low 21.63 21.63 26.00 26.00 18.38 18.38 17.25 17.25
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $10,121 $11,024 $11,655 $12,236
Net interest income 6,836 7,347 7,329 7,697
Reversal of provision for credit losses -- (1,500) -- --
Income before income taxes 2,538 4,046 3,012 3,063
Net income 1,433 2,302 1,748 1,767
Net income per diluted share 0.25 0.41 0.31 0.31
Common Stock Price Range - high 18.81 18.25 19.75 24.38
- low 13.34 16.13 17.75 18.75
- ------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
20. RESTATEMENT
Subsequent to the issuance of Pacific Bank's 1998 financial statements and
the filing of its 1998 Annual Report on Form 10-K with the Office of the
Comptroller of the Currency, management discovered accounting irregularities
and certain operational losses in the bank's trust division. Pacific Bank
conducted a special investigation which determined that trust fee income and
trust fee receivables had been overstated in 1998 and that unauthorized
checks had been drawn on the trust division's bank account in 1998. As a
result, the 1998 financial statements have been restated from amounts
previously reported to properly state trust fee income and trust fee
receivables and to recognize the loss for the unauthorized checks. The
following table presents the significant effects of the restatement:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1998
AS PREVIOUSLY AS RESTATED
REPORTED
- ----------------------------------------------------------------
<S> <C> <C>
At December 31:
Accrued interest receivable
and other assets $24,797 $24,060
Accrued interest payable
and other liabilities 11,607 11,300
Shareholders' equity 80,290 79,860
For the year ended December 31:
Noninterest income $ 9,237 $ 8,667
Noninterest expense 31,534 31,700
Income before income taxes 5,698 4,962
Net income 3,274 2,844
Net income per share - basic $ 0.60 $ 0.52
Net income per share - diluted $ 0.57 $ 0.50
- ----------------------------------------------------------------
</TABLE>
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of The Pacific Bank, N.A.
We have audited the accompanying consolidated balance sheets of The Pacific
Bank, N.A. and subsidiaries ("Pacific Bank") as of December 31, 1998 and
1997, and the related consolidated statements of income, 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 Pacific 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, such consolidated financial statements present fairly, in all
material respects, the financial position of The Pacific Bank, N.A. 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.
As discussed in Note 20 the accompanying 1998 financial statements have been
restated.
/s/ Deloitte & Touche LLP
San Francisco, California
January 21, 1999
(January 5, 2000 as to Note 20)
58
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
on Form S-8 of The Pacific Bank, N.A., filed with the Office of the
Comptroller of the Currency on or about April 21, 1997 and October 21, 1998,
of our report dated January 21, 1999, January 5, 2000 as to Note 20 (which
expresses an unqualified opinion and includes an explanatory paragraph
relating to the restatement described in Note 20) appearing in this Annual
Report on Form 10-K/A for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
San Francisco, California
January 7, 2000
59
<PAGE>
Annex F
OFFICE OF THE
COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
THE PACIFIC BANK, NATIONAL ASSOCIATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 94-2865596
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
351 California Street, San Francisco, California 94104
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 576-2700
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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, $1.50 Par Value
-----------------------------
(Title of Class)
Shares outstanding as of November 4, 1999 - 5,006,648
Page 1 of 27 sequential pages.
<PAGE>
THE PACIFIC BANK, N.A.
THIRD QUARTER 1999 FORM 10-Q/A
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
ITEM 1 Financial Statements
<S> <C>
Consolidated Balance Sheets (As Restated) 3
Consolidated Statements of Income (As Restated) 4
Consolidated Statements of Changes in Shareholders' Equity (As Restated) 5
Consolidated Statements of Cash Flows (As Restated) 6
Notes to Condensed Consolidated Financial Statements (As Restated) 7-9
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-21
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 22-23
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 24
ITEM 6 Exhibits and Reports on Form 8-K 24-26
SIGNATURES 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PACIFIC BANK, N.A.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands, except per share data) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(As restated - see Note 6)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 31,492 $ 34,453 $ 34,715
Federal funds sold and securities purchased under agreements to resell 27,200 42,500 55,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 58,692 76,953 89,715
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Available-for-sale, at fair value 93,533 75,428 56,037
Held-to-maturity, at amortized cost (fair value: $42,036 at September 30, 1999;
$46,742 at December 31, 1998 and $45,578 at September 30, 1998) 42,743 46,325 44,971
Federal Reserve Bank stock and other securities 5,305 4,108 4,082
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities 141,581 125,861 105,090
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 502,359 484,474 471,332
Less: Allowance for credit losses (9,345) (12,335) (11,380)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 493,014 472,139 459,952
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 3,757 4,687 4,883
Customers' acceptance liability 8,620 8,438 9,218
Other real estate owned - 382 681
Goodwill 7,534 8,001 8,156
Other assets 18,405 16,059 15,311
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $731,603 $712,520 $693,006
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $138,908 $143,567 $125,367
Interest-bearing:
Money market and savings accounts 312,693 304,823 283,155
Time deposits of less than $100 69,740 54,894 58,565
Time deposits of $100 or more 118,198 108,591 123,471
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 639,539 611,875 590,558
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and other borrowed funds - 1,047 820
Acceptances outstanding 8,620 8,438 9,218
Other liabilities (including $700 reserve for losses on off-balance sheet
commitments at September 30, 1999) 10,295 11,300 7,782
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 658,454 632,660 608,378
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, par value $1.50 per share: authorized 21,000,000 shares;
outstanding (5,005,588 shares at September 30, 1999; 5,443,728 shares at
December 31, 1998; and 5,528,928 at September 30, 1998) 7,508 8,166 8,293
Additional paid-in capital 59,630 64,872 65,862
Accumulated other comprehensive income (269) 356 683
Retained earnings 6,280 6,466 9,790
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,149 79,860 84,628
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $731,603 $712,520 $693,006
===================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
THE PACIFIC BANK, N.A.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(in thousands, except share and per share data) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(As restated - see Note 6)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $11,853 $11,999 $34,109 $32,531
Interest on investment securities 2,043 1,396 5,468 3,941
Interest on federal funds sold and deposits in banks 338 956 862 2,059
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 14,234 14,351 40,439 38,531
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits
Interest on money market and savings accounts 2,688 2,670 7,155 6,748
Interest on time deposits of less than $100 841 816 2,316 2,525
Interest on time deposits of $100 or more 1,381 1,627 3,981 4,589
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 4,910 5,113 13,452 13,862
Interest on borrowed funds 9 18 29 37
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,919 5,131 13,481 13,899
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,315 9,220 26,958 24,632
Provisions for credit losses 2,183 - 2,308 -
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for credit losses 7,132 9,220 24,650 24,632
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
International/trade finance fees 645 768 2,022 2,379
Trust fees 663 475 1,821 1,361
Deposit service fees 442 450 1,353 1,082
Investment sales fees 55 163 144 740
Gains on sales of loans 56 156 189 448
Other 209 155 659 388
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,070 2,167 6,188 6,398
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 4,466 4,722 13,447 13,318
Premises and equipment 1,317 1,288 4,133 3,417
Legal and professional fees 457 361 1,280 943
Outsourced data processing 424 351 1,319 1,018
Travel and entertainment 131 220 416 427
Postage and supplies 171 213 487 544
Amortization of intangible assets 140 139 419 208
Reversal of restructuring costs (395) - (395) -
Other 1,418 888 3,160 2,288
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 8,129 8,182 24,266 22,163
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,073 3,205 6,572 8,867
INCOME TAX PROVISION 339 1,385 2,272 3,774
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 734 $ 1,820 $ 4,300 $ 5,093
==================================================================================================================================
NET INCOME PER SHARE:
BASIC $ 0.15 $ 0.33 $ 0.85 $ 0.94
DILUTED $ 0.14 $ 0.32 $ 0.82 $ 0.89
==================================================================================================================================
Average common shares outstanding 5,005 5,529 5,077 5,441
Average common shares - diluted 5,147 5,694 5,221 5,737
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE PACIFIC BANK, N.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------
(As restated - see Note 6)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at January 1 $ 8,166 $ 8,078
Issuance of 7,660 shares in 1999 and 273,900 shares
in 1998 under stock option plans 12 410
Repurchases of 445,800 common shares in 1999 and
130,000 common shares in 1998 (670) (195)
- -----------------------------------------------------------------------------------------------------
Total common stock 7,508 8,293
- -----------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1 64,872 63,823
Issuance of shares under stock option plans 70 3,385
Repurchases of common shares (5,312) (1,346)
- -----------------------------------------------------------------------------------------------------
Total additional paid-in capital 59,630 65,862
- -----------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1 356 203
Comprehensive income:
Net income 4,300 5,093
Other comprehensive income (loss) due to the change
in market value of available-for-sale securities, net
of tax (benefit) of $(460) in 1999 and $352 in 1998 (625) (625) 480 480
- -----------------------------------------------------------------------------------------------------
Total comprehensive income 3,675 5,573
- -----------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (269) 683
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1 6,466 7,923
Dividends declared on common shares ($0.24 per share
in 1999 and $0.22 per share in 1998) (1,200) (1,206)
Repurchases of common shares (3,286) (2,020)
Net income 4,300 5,093
- -----------------------------------------------------------------------------------------------------
Total retained earnings 6,280 9,790
- -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 73,149 $ 84,628
=====================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
THE PACIFIC BANK, N.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------
(As restated - see Note 6)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,300 $ 5,093
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 720 565
Provision for credit losses 2,308
Gains on sale of loans and other assets, net (205) (444)
Changes in:
Accrued interest receivable and other assets (2,044) (1,774)
Accrued interest payable and other liabilities (1,247) (3,212)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,832 228
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of available-for-sale securities 9,589 18,561
Purchases of available-for-sale securities (28,940) (10,392)
Proceeds from maturity of held-to-maturity securities 4,443 12,285
Purchases of held-to-maturity securities (861) (25,724)
Purchases of other securities (1,391) (479)
Redemption of Federal Reserve Bank stock 194
Net increase in loans (30,231) (23,309)
Proceeds from sales of loans 7,027 7,332
Recoveries of previously charged-off loans 1,871 1,454
Proceeds from sales of foreclosed property 398
Purchases of bank premises and equipment (437) (864)
Acquisition of Sterling West Bancorp (cash and cash
equivalents acquired of $35,023, less the purchase price,
including acquisition costs, of $12,295 -- 22,728
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (38,338) 1,592
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, savings and
money market accounts 3,211 (15,465)
Net increase (decrease) in time deposits 24,453 (10)
Net increase (decrease) in federal funds purchased and
borrowed funds (1,047) 796
Dividends paid on common stock (1,186) (764)
Proceeds from issuance of common stock 82 3,795
Repurchase of common stock (9,268) (3,561)
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 16,245 (15,209)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18,261) (13,389)
Cash and cash equivalents at beginning of year 76,953 103,104
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 58,692 $ 89,715
- -----------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR
Interest on deposits and other borrowings $ 13,142 $ 13,573
Income taxes 1,981 3,722
- -----------------------------------------------------------------------------------------------
NONCASH INVESTING ACTIVITIES
Loans transferred to held for sale $ 6,838 $ 6,149
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
THE PACIFIC BANK, N.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of The Pacific Bank, N.A. and its
subsidiaries ("Pacific Bank") conform with generally accepted accounting
principles and with general practice within the banking industry. In the
opinion of management, the unaudited interim condensed consolidated financial
statements as of September 30, 1999 and for the three and nine-month periods
ended September 30, 1999 and 1998, include all adjustments (consisting of
normal recurring adjustments) necessary to fairly present Pacific Bank's
financial position at September 30, 1999 and results of operations and cash
flows for the three and nine-month periods ended September 30, 1999 and 1998.
The unaudited interim consolidated financial statements do not include all
disclosures required by generally accepted accounting principles for annual
financial statements. Accordingly, this report should be read in conjunction
with Pacific Bank's 1998 Annual Report on Form 10-K/A. The results of
operations for the three and nine-month periods ended September 30, 1999 are
not necessarily indicative of results to be expected for the entire 1999 year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
2. RESTRUCTURING LIABILITY
Pacific Bank established a restructuring liability in the fourth quarter of 1998
that provided for the combination or closure of three branches serving duplicate
markets and severance for employees throughout the organization. During the
third quarter of 1999, a sublease was arranged at more favorable terms than
originally estimated when the restructuring liability was established. Reduction
in the number of employees anticipated in the restructuring plan was achieved
with payments $122 less than the $447 severance reserve initially established.
As a result, the restructuring liability was reduced by $395 through a reduction
in expense recorded in the Bank's consolidated statement of income for the
quarter. For the nine months ended September 30, 1999, rent of $335 for branches
not yet subleased, leasehold improvements written off of $515 and severance
benefits totaling $188 were paid out of the restructuring liability.
3. SEGMENTS
Pacific Bank's three core lines of business are organized around the specific
products and services provided to their customers. Revenues include net interest
income from customers, intersegment interest credits or charges, and noninterest
income. The operating results of the core lines of business for the three and
nine month periods ended September 30, 1999 and 1998 were as shown on the
following page.
7
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic Commercial Banking
Revenues $7,460 $6,913 $21,371 $17,420
Pretax income 4,015 3,292 10,685 8,353
International / Trade Finance
Revenues 2,398 3,148 7,275 9,279
Pretax income 739 1,242 2,156 3,764
Wealth Management Services
Revenues 673 666 1,853 2,183
Pretax income (199) 149 462 280
- ----------------------------------------------------------------------------------------
</TABLE>
Corporate overhead, provision for loan losses and goodwill amortization are not
directly allocable to the segment results shown in the table above. The
reconciliation of segment amounts to consolidated results is as shown in the
following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Revenues Pretax Income
- ------------------------------------------------------------------------------
Total Total
Segments Other Consolidated Segments Other Consolidated
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Third Quarter 1999 $10,531 $ 854 $11,385 $ 4,953 $(3,880) $1,073
Third Quarter 1998 10,727 660 11,387 4,683 (1,478) 3,205
Nine Months 1999 30,499 2,647 33,146 13,303 (6,731) 6,572
Nine Months 1998 28,882 2,148 31,030 12,397 (3,530) 8,867
- ------------------------------------------------------------------------------
</TABLE>
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
standardizes the accounting for changes in the fair value of derivative
instruments. Market value adjustments for derivatives designated as hedges are
recognized in the statements of income and in other comprehensive income during
the period of the change together with the gain or loss on the item being
hedged. Management is reviewing the impact of SFAS No. 133 at this time, however
adoption of this standard is not expected to have a material impact on Pacific
Bank's consolidated financial position, results of operations or cash flows.
SFAS No. 137 delays the effective date of SFAS No. 133 for one year, with
adoption now required by January 1, 2001.
5. MERGER ANNOUNCEMENT
On September 22, 1999, the Bank announced the signing of a definitive agreement
to merge with City National Bank, a wholly owned subsidiary of City National
Corporation (NYSE: CYN). Under the terms of the agreement, City National
Corporation will acquire the Bank for cash, common stock or a combination
thereof valued at $29.00 per share. The merger is subject to regulatory approval
and other conditions specified in the merger agreement. The merger is also
subject to approval by the Bank's shareholders. The merger is expected to close
in the first quarter of next year.
8
<PAGE>
6. RESTATEMENT
Subsequent to the issuance of Pacific Bank's Report on Form 10-Q for the
quarterly period ended September 30, 1999 with the Office of the Comptroller
of the Currency, management discovered accounting irregularities and certain
operational losses in the bank's trust division. Pacific Bank conducted a
special investigation which determined that trust fee income and trust fee
receivables had been overstated in 1999 and 1998 and that certain operational
losses had occurred. As a result, the financial statements have been
restated from amounts previously reported to properly state trust fee income
and trust fee receivables and to recognize the operational losses. The
following table presents the significant effects of the restatement:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
At or for the quarter ended At or for the quarter ended
September 30, 1999 September 30, 1998
As Previously As Restated As Previously As Restated
Reported Reported
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data:
Other assets and goodwill $26,790 $25,939 $24,170 $23,467
Other liabilities 10,649 10,295 8,074 7,782
Shareholders' equity 73,646 73,149 85,039 84,628
Income statement data:
Noninterest income $ 2,110 $ 2,070 $ 2,355 $ 2,167
Noninterest expense 8,572 8,129 8,160 8,182
Income before income taxes 670 1,073 3,415 3,205
Net income 499 734 1,943 1,820
Net income per share - basic $ 0.10 $ 0.15 $ 0.35 $ 0.33
Net income per share - diluted $ 0.10 $ 0.14 $ 0.34 $ 0.32
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
At or for the nine months ended At or for the nine months ended
September 30, 1999 September 30, 1998
As Previously As Restated As Previously As Restated
Reported Reported
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income statement data:
Noninterest income $ 6,620 $ 6,188 $ 6,968 $ 6,398
Noninterest expense 24,584 24,266 22,030 22,163
Income before income taxes 6,686 6,572 9,570 8,867
Net income 4,367 4,300 5,504 5,093
Net income per share - basic $ 0.86 $ 0.85 $ 1.01 $ 0.94
Net income per share - diluted $ 0.84 $ 0.82 $ 0.96 $ 0.89
- ------------------------------------------------------------------------------------------------------
At December 31, 1998
As Previously As Restated
Reported
- --------------------------------------------------------------------
Balance sheet data:
Accrued interest receivable and
other assets $24,797 $24,060
Accrued interest payable and
other liabilities 11,607 11,300
Shareholders' equity 80,290 79,860
- --------------------------------------------------------------------
</TABLE>
9
<PAGE>
THE PACIFIC BANK, N.A.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This report on Form 10-Q/A contains statements primarily regarding Pacific
Bank's historical performance, and such statements should not be interpreted
to indicate how Pacific Bank will perform in future periods. This report on
Form 10-Q/A also contains forward-looking statements. The Pacific Bank wishes
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 as to "forward-looking" statements in this Form
10-Q/A. For a discussion of the factors which could affect the Bank's
performance, please see The Pacific Bank's Annual Report on Form 10-K/A for
the year ended December 31, 1998, particularly the section entitled
"Cautionary Statement Regarding Forward-Looking Statements and Forecasts." In
addition, the anticipated merger with City National Corporation is subject to
risks and uncertainties. Such risks and uncertainties include, but are not
limited to regulatory and shareholder approval, the performance of City
National Corporation's stock in relation to certain market indices and other
conditions specified in the merger agreement which is available from the
Bank. Readers should not place undue reliance on such forward-looking
statements, which reflect management's view only as of the date hereof.
Pacific Bank undertakes no obligation to publicly revise these
forward-looking statements to reflect subsequent events or circumstances.
RESTATEMENT
Subsequent to the issuance of Pacific Bank's Report on Form 10-Q for the
quarterly period ended September 30, 1999 with the Office of the Comptroller
of the Currency, management discovered accounting irregularities and certain
operational losses in the bank's trust division. Pacific Bank conducted a
special investigation which determined that trust fee income and trust fee
receivables had been overstated in 1999 and 1998 and that certain operational
losses had occurred. As a result, the financial statements have been restated
from amounts previously reported to properly state trust fee income and trust
fee receivables and to recognize the operational losses. Restated net income
was $4,300 or $0.82 per diluted share in the nine months ended September 30,
1999, compared to the previously reported net income of $4,367, or $0.84 per
diluted share. See Note 6, "Restatement" to the consolidated financial
statements for further discussion.
MERGER ANNOUNCEMENT
- --------------------------------------------------------------------------------
On September 22, 1999, the Bank announced the signing of a definitive agreement
to merge with City National Bank, a wholly owned subsidiary of City National
Corporation (NYSE: CYN). City National Bank is the largest independent bank
headquartered in Southern California. The combined bank is expected to have
assets of $7.5 billion and trust assets under administration and management of
over $14 billion.
Under the terms of the agreement, City National Corporation will acquire the
Bank for cash, common stock or a combination thereof valued at $29.00 per share.
The merger is subject to regulatory approval and other conditions specified in
the merger agreement. The merger is also subject to approval by the Bank's
shareholders. The merger is expected to close in the first quarter of next year.
In conjunction with the signing of the merger agreement, the Bank's Board
resolved to redeem the shareholder rights granted under the Rights Agreement
dated November 5, 1996. The redemption payment was made on November 10, 1999 to
shareholders of record on October 27, 1999.
10
<PAGE>
RESULTS OF OPERATIONS
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Net income totaled $734, or $0.14 per share in the three months ended September
30, 1999, compared to $1,820, or $0.32 per share in the same period last year.
During the quarter, Pacific Bank settled litigation with a former executive
related to his employment contract and retirement benefits. In accordance with
the settlement, the Bank recorded expense of $644. Including legal costs, the
settlement of this litigation reduced net income in the current quarter by $520,
or $0.10 per diluted share.
NET INTEREST INCOME
Net interest income increased 1% in the third quarter compared to the prior
year. Average assets increased $39,698, or 6%, over the same period a year ago.
The net interest margin decreased to 5.47% from 5.75% in the third quarter of
1998. The decrease in the net interest margin was primarily due to increased
balances in lower-yielding real estate loans. Real estate loan balances grew
from 39% of average total loans in the third quarter of the prior year to 44% of
average total loans in the current quarter. Yields on real estate loans
decreased to 8.99% in the current quarter compared to 10.10% in the year ago
third quarter.
For the nine months ended September 30, 1999, net interest income totaled
$26,958, an increase of $2,326, or 9%, over the $24,632 net interest income in
the year-to-date period of the prior year. The improvement in net interest
income over the prior year was attributable to 14% growth in average assets. The
net interest margin was 5.56% in the nine months ended September 30, 1999
compared to 5.76% in the comparable period a year ago.
A majority of the Bank's loans are priced based on the guidance rate, which
approximates other banks' prime lending rate. The guidance rate was increased
by 0.25% on each of three occasions in the third quarter, on July 1, 1999,
August 18, 1999 and September 1, 1999. The guidance rate now stands at 8.50%,
equivalent to the rate in effect one year ago at September 30, 1998. While
adjustable-rate loans reprice upward immediately, rates paid on certificates of
deposits may not be reset at the same time or to the same extent of the increase
in the guidance rate. As a result, the Bank generally enjoys higher net interest
income in periods of rising rates. However, the reversal of interest previously
accrued on nonaccrual and charged-off loans negatively impacted net interest
income during the current quarter.
Average balances, net interest income and yields for the quarter and
year-to-date periods of 1999 and the prior year are shown in the tables on the
following pages.
11
<PAGE>
AVERAGE BALANCE SHEET/NET INTEREST INCOME/YIELDS - THIRD QUARTER
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
-------------------------------------- --------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
DAILY INCOME/ YIELD/ DAILY INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities(1):
U.S. Treasury and agency securities $ 58,147 $ 854 5.83% $ 51,975 $ 764 5.83%
Collateralized mortgage obligations
and asset-backed securities 70,178 1,043 5.90 33,669 527 6.21
Municipal securities(2) 9,985 160 6.36 5,086 88 6.86
Federal Reserve Bank stock and other 4,202 37 3.49 4,025 45 4.44
------------ ------------ ------------ ------------ ------------ ------------
Total investment securities 142,512 2,094 5.83 94,755 1,424 5.96
Federal funds sold and other interest-
earning assets 26,573 338 5.05 68,782 956 5.51
Loans(3):
International/trade finance 133,419 2,982 8.87 151,960 3,795 9.91
Commercial 131,751 3,302 9.94 116,799 3,055 10.38
Real estate 222,773 5,047 8.99 185,308 4,716 10.10
Personal and other 22,197 491 8.78 20,472 481 9.32
Interest rate swaps and floors, net 31 (48)
------------ ------------ ------------ ------------ ------------ ------------
Total loans 510,140 11,853 9.22 474,539 11,999 10.03
Total earning assets 679,225 14,285 8.34 638,076 14,379 8.94
Allowance for credit losses (10,857) (11,216)
Net unrealized gain (loss)
on available-for-sale securities (230) 551
Cash and due from banks 33,792 32,125
Other assets 36,971 39,667
------------ ------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 738,901 14,285 7.67 $ 699,203 14,379 8.16
============ ------------ ------------ ============ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 136,935 $ 124,442
Interest-bearing:
Money market and savings accounts 319,682 2,688 3.34 288,713 2,670 3.67
Time deposits of less than $100 70,232 841 4.75 61,105 816 5.30
Time deposits of $100 or more 117,836 1,381 4.65 123,243 1,627 5.24
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing 507,750 4,910 3.84 473,061 5,113 4.29
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 644,685 4,910 3.02 597,503 5,113 3.40
Borrowed funds 690 9 5.17 795 18 8.98
------------ ------------ ------------ ------------ ------------ ------------
Total deposits and borrowed funds 645,375 4,919 3.02 598,298 5,131 3.40
------------ ------------ ------------ ------------
Other liabilities 18,889 16,711
Shareholders' equity 74,637 84,194
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 738,901 $ 699,203
============ ============
NET INTEREST INCOME - TAX EQUIVALENT
BASIS/NET INTEREST MARGIN 9,366 5.47% 9,248 5.75%
============ ============
Less: tax-equivalent adjustment 51 28
------------ ------------
NET INTEREST INCOME $ 9,315 $ 9,220
============ =============
</TABLE>
(1) Yields were calculated based on the historical cost, excluding the net
unrealized gain (loss) on available-for-sale securities.
(2) Interest income and yields were calculated on a tax-equivalent basis
using a federal tax rate of 35%.
(3) Includes fees on Loans of $0.4 million in 1999 and 1998.
12
<PAGE>
AVERAGE BALANCE SHEET/ NET INTEREST INCOME/ YIELDS - YEAR-TO-DATE
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------------------
(dollars in thousands) 1999 1998
----------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE INTEREST
DAILY INCOME/ YIELD/ DAILY INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- --------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities (1):
U.S. Treasury and agency securities $ 53,593 $ 2,356 5.88% $ 44,505 $1,982 5.95%
Collateralized mortgage obligations
and asset-backed securities 61,097 2,629 5.75 35,793 1,672 6.25
Municipal securities (2) 9,959 477 6.40 3,577 188 7.03
Federal Reserve Bank stock and other 4,210 158 5.02 3,852 158 5.48
---------- -------- ------- ---------- --------- -------
Total investment securities 128,859 5,620 5.83 87,727 4,000 6.10
Federal funds sold and other interest
earning assets 24,837 862 4.64 50,738 2,059 5.43
Loans (3):
International/trade finance 131,632 8,663 8.80 151,005 11,153 9.87
Commercial 131,432 9,399 9.56 101,279 7,766 10.25
Real estate 213,919 14,423 9.01 162,048 12,298 10.15
Personal and other 20,981 1,422 9.06 20,815 1,459 9.37
Interest rate swaps and floors, net 202 (145)
---------- -------- ------- ---------- --------- -------
Total loans 497,964 34,109 9.16 435,147 32,531 10.00
Total earning assets 651,660 40,591 8.33 573,612 38,590 8.99
Allowance for credit losses (11,989) (11,207)
Net unrealized gain (loss)
on available-for-sale securities 255 495
Cash and due from banks 33,125 30,305
Other assets 37,442 31,649
---------- -------- ------- ---------- --------- -------
TOTAL ASSETS $ 710,493 40,591 7.64 $ 624,854 38,590 8.26
========== ======== ======= ========== ========= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing: $ 135,999 $ 103,513
Interest-bearing
Money market and savings accounts 303,192 7,155 3.16 244,528 6,748 3.69
Time deposits of less than $100 64,874 2,316 4.77 62,206 2,525 5.43
Time deposits of $100 or more 112,944 3,981 4.71 114,873 4,589 5.34
---------- -------- ------- ---------- --------- -------
Total interest-bearing 481,010 13,452 3.74 421,607 13,862 4.40
---------- -------- ------- ---------- --------- -------
Total deposits 617,009 13,452 2.91 525,120 13,862 3.53
Borrowed funds 704 29 5.51 618 37 8.00
---------- -------- ------- ---------- --------- -------
Total deposits and borrowed funds 617,713 13,481 2.92 525,738 13,899 3.53
-------- ------- --------- -------
Other liabilities 17,892 16,463
Shareholders' equity 74,888 82,653
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 710,493 $ 624,854
========== ==========
NET INTEREST INCOME - TAX EQUIVALENT
BASIS / NET INTEREST MARGIN 27,110 5.56% 24,691 5.76%
======= =======
Less: tax-equivalent adjustment 152 59
NET INTEREST INCOME $26,958 $24,632
========= =========
</TABLE>
(1) Yields were calculated based on the historical cost, excluding the net
unrealized gain (loss) on available-for-sale securities.
(2) Interest income and yields were calculated on a tax-equivalent basis
using a federal tax rate of 35%.
(3) Includes fees on loans of $1.0 million in 1999 and $0.9 million in 1998.
13
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2,183 in the current quarter and $2,308
in the year-to-date period. No provisions for credit losses were charged to
earnings in the comparable periods of the prior year. See the discussion of the
allowance for credit losses in the "Credit Quality" section of Management's
Discussion and Analysis for further information.
NONINTEREST INCOME
Noninterest income totaled $2,070 in the third quarter of 1999 compared to
$2,167 in the prior year third quarter, a decrease of $97, or 4%. Trust fees
totaled $663 in the third quarter of 1999 compared to $475 in the prior year
third quarter, an increase of $188, or 40%. Trust assets under administration
and management increased 35% from a year ago. Deposit service fees totaled
$442 in the current quarter, a decrease of $8, or 2%, compared to $450 in the
third quarter of 1998. International /trade finance fees decreased $123, or
16%, to $645 in the three months ended September 30, 1999. International/
trade finance fees are generally based on the volume of transactions
financing trade activities. Gains on sales in the secondary market of loans
guaranteed by the Small Business Administration totaled $56 in the third
quarter of 1999 compared to $156 in the third quarter of 1998, a decrease of
$100. Investment sales fees totaled $55 in the third quarter of 1999 compared
to $163 in the prior year third quarter, a decrease of $108. Pacific Bank
outsourced the sales of mutual funds and annuities to customers in December
of 1998. Investment sales fees this year represent net gains from the
activity, while prior year investment sales fees have not been reduced by the
cost of salaries and commissions paid to sales personnel.
Noninterest income this quarter was below levels recorded in the prior quarter
of this year by $9. Noninterest income for the nine months ended September 30,
1999 totaled $6,188, compared to $6,398 in the prior year period.
NONINTEREST EXPENSE
Noninterest expense of $8,129 decreased $53, or 1%, compared to $8,182
recorded in the prior year third quarter. The third quarter results were
impacted by unusual items, including the $879 net charge during the quarter
for legal and settlement costs on the lawsuit discussed above, partially
offset by the reversal of restructuring costs of $395. Excluding these
unusual items, noninterest expense decreased $537, or 7% compared to the
third quarter of 1998. The lower expenses this year can be attributed to cost
savings related to the branch consolidations and staff reductions outlined in
the restructuring plan announced in the fourth quarter of 1998.
Salaries and benefits expenses totaled $4,466 in the third quarter of 1999
compared to $4,722 in the third quarter of 1998, a decrease of $256, or 5%.
There were 279 full-time equivalent employees at September 30, 1999 compared to
325 full-time equivalent employees at September 30, 1998. This represents a
decrease over last year's staffing levels of 14%, equivalent to the 14% decrease
projected in the restructuring plan.
14
<PAGE>
Premises and equipment expense increased $29, or 2%, compared to the third
quarter of 1998. Rent increases at Pacific Bank's headquarters in San Francisco
contributed $192 to the increase, partially offset by rent reductions under the
branch restructuring plan. A sublease of the space at one of the closed branches
was arranged at terms favorable to those used a year ago when the restructuring
liability was established. As a result, the excess restructuring liability,
including unused severance reserves, was reversed in the current quarter. The
net reduction to expense related to this liability reversal was $395.
Expenses other than those discussed separately above totaled $1,862 in the
third quarter of 1999, a decrease of $310, or 14%, over the $2,172 third
quarter. The Bank previously reported a charge of $456 related to the
writeoff of receivables in the Bank's Wealth Management Services division in
the third quarter of 1999. The first three quarters of 1999 have been
restated to reflect this write off as a reduction of Trust fee income in each
quarter to maintain comparability with the restated 1998 quarters. In the
restatement, the Bank recorded an additional charge to earnings of $114 for
operational losses in the Trust division for the nine months ended September
30, 1999. Outsourced data processing expense, which is largely based on
transaction volumes, increased $73, or 21%, in the current year compared to
the third quarter of 1998. Legal and professional fees other than those
related to the lawsuit discussed above decreased $139 in the current quarter
compared to the same period a year ago.
Total noninterest expense this quarter was equal to the prior quarter expense
of $8,129. Excluding costs related to the settlement of the lawsuit,
noninterest expenses decreased $879 this quarter compared to the prior
quarter. Noninterest expenses totaled $24,266 in the nine months ended
September 30, 1999 compared to $22,163 in the prior year period, a 9%
increase.
INCOME TAX PROVISION
An income tax provision totaling $339 was recorded in the third quarter of 1999,
or an effective tax rate of 32% of pretax income. In the prior year third
quarter, $1,385 income tax expense was recorded, or an effective tax rate of
43%. The decrease in the effective tax rate in 1999 is primarily due to
utilization of California tax credits generated in current and prior years
available for lending to companies in designated economic development zones. In
addition, Pacific Bank has increased investments in tax-favored assets during
the past year. Holdings of securities issued by states and local municipalities
averaged $9,985 in the third quarter of 1999 compared to $5,086 in the prior
year third quarter. Pacific Bank has also participated in tax-favored projects
that provide subsidized housing to low- and moderate-income California
residents. The lower effective tax rate in the current quarter compared to the
second quarter of 1999 reflects the year-to-date adjustment to a lower tax
bracket attributable to the lower than expected results.
15
<PAGE>
THE PACIFIC BANK, N.A.
FINANCIAL CONDITION
(dollars in thousands)
- --------------------------------------------------------------------------------
Pacific Bank's total assets were $731,603 at September 30, 1999, an increase of
$19,083, or 3%, from $712,520 at December 31, 1998. The asset growth this year
was primarily attributable to increased loan balances, as detailed below.
Investment securities increased $15,720 this year to $141,581 at September 30,
1999, while balances in federal funds sold decreased $15,300 since year-end. The
Bank shifted excess liquidity from overnight federal funds sold to investments
in higher-yielding asset-backed securities.
LOANS IN THE DOMESTIC COMMERCIAL BANKING DIVISION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
9/30/99 9/30/98 12/31/98 12/31/97
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans $116,097 $101,411 $119,343 $ 75,287
Real estate loans 206,859 174,513 175,072 130,024
Personal and other loans 19,771 17,290 18,220 18,168
- -----------------------------------------------------------------------------------------
Total Domestic Commercial Banking Division $342,727 $293,214 $312,635 $223,479
=========================================================================================
</TABLE>
Loans in the domestic commercial banking division increased $30,092, or 10%,
since year-end, totaling $342,727, or 68% of total loans at September 30, 1999.
Commercial loans are generally extended as lines of credit to businesses
operating predominantly in California. Asset based loans (financing secured by
the inventory and receivables of the business) totaled $19,617, or 6% of this
division's loans at September 30, 1999. Loans to small businesses totaling
$2,190 were originated and sold in the secondary market during the quarter.
Real estate loans increased $6,450 during the quarter and $31,787 this year,
totaling $206,859 at September 30, 1999. Pacific Bank's real estate loan
portfolio includes credits extended for the finance of primarily commercial real
estate properties; real estate collateral for loans to commercial businesses;
and construction loans. Construction loans decreased $2,943 during the quarter,
totaling $46,113 at September 30, 1999. At September 30, 1999, approximately 77%
of the real estate loans are secured by properties located in Northern
California (primarily in the San Francisco Bay Area), while 23% are secured by
real estate in the Los Angeles area of Southern California.
LOANS IN THE INTERNATIONAL/TRADE FINANCE DIVISION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
9/30/99 9/30/98 12/31/98 12/31/97
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International / trade finance loans $127,585 $146,649 $140,309 $143,773
Commercial loans 12,581 12,381 10,810 11,648
Real estate loans 19,145 17,408 16,724 14,840
Personal and other loans 321 1,680 3,996 3,318
- -----------------------------------------------------------------------------------------
Total Trade Finance Division Loans $159,632 $178,118 $171,839 $173,579
=========================================================================================
</TABLE>
16
<PAGE>
Loans in the international/trade finance division decreased $12,207, or 7%
since year-end. During the quarter, commercial and real estate loans extended
by this division increased $5,445. International/ trade finance loans
decreased $1,131 during the quarter, totaling $127,585 at September 30, 1999.
Management has actively been reviewing credit exposure to importers in the
international/ trade finance division in anticipation of a slowdown in the
U.S. economy.
Loans by office in the international/ trade finance division were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
9/30/99 9/30/98 12/31/98 12/31/97
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
San Francisco* $ 54,097 $ 55,341 $ 59,758 $ 58,224
Los Angeles 82,611 93,193 85,068 76,871
Hong Kong 22,924 29,584 27,013 38,484
- -----------------------------------------------------------------------------------------
Total loans $159,632 $178,118 $171,839 $173,579
=========================================================================================
</TABLE>
* Includes extensions of credit by the loan production office in Sacramento,
California.
ASSETS OF THE WEALTH MANAGEMENT SERVICES DIVISION
Assets of the Wealth Management Services division held in trust accounts on
behalf of customers or invested through the portfolio management unit are not
recorded on Pacific Bank's balance sheet. Trust assets under administration and
management increased $101,500 during the quarter, totaling $1,092,700 at
September 30, 1999. Trust assets under administration and management increased
35% over the past year.
DEPOSITS
Deposits increased $27,674, or 5%, since year-end, totaling $639,539 at
September 30, 1999 compared to $611,875 at December 31, 1998. The deposit growth
since year-end was primarily due to marketing efforts to promote the Bank's
expanded branch presence in the Los Angeles area. During the quarter, deposits
increased $1,742, primarily due to an increase in core deposits. Time deposits
of less than $100,000 decreased $926 and deposits of $100,000 or more increased
$735 during the quarter.
CAPITAL AND CAPITAL RATIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Sept. 30, Sept. 30, Dec. 31, Dec. 31,
1999 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(As restated)
<S> <C> <C> <C> <C>
Capital ratios:
Tier 1 capital to risk adjusted assets 11.40% 15.03% 12.65% 16.74%
Total capital to risk adjusted assets 12.65 13.77 13.91 18.00
Tier 1 capital to average assets (leverage ratio) 8.96 10.97 10.16 13.21
Book value per share $ 14.61 $ 15.31 $ 14.67 $ 14.86
Tangible book value per share 13.11 13.84 13.20 14.47
Cash dividends declared per share-year-to-date 0.24 0.22 0.30 0.14
Dividend payout ratio 28.24% 23.40% 57.69% 10.40%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Shareholders' equity decreased $6,711 since year-end, totaling $73,149 at
September 30, 1999. The decrease in capital was primarily due to the repurchase
of 531,000 shares at a cost of $11,043 under the $12,000 Share Repurchase Plan
approved by shareholders in December 1998. The quarterly dividend was increased
from $0.07 per share to $0.08 per share in the third quarter of 1998. Dividends
declared this year total $1,200. Net income of $4,300 in the nine months ended
September 30, 1999 partially offset these decreases in shareholders' equity.
17
<PAGE>
Pacific Bank's capital ratios remain well in excess of regulatory minimums under
prompt corrective action standards for well-capitalized banks. The Tier 1
capital to average assets (leverage ratio) was 8.96% at September 30, 1999,
compared to the 5.00% regulatory minimum. The unamortized balance of intangible
assets related to acquisitions accounted for under the purchase method of
accounting was $7,534 at September 30, 1999. Equity capital is reduced by the
unamortized balance of goodwill for purposes of calculating regulatory capital
ratios and tangible book value per share.
THE PACIFIC BANK, N.A.
CREDIT QUALITY
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Allowance Off-Balance Sheet
Total Reserves for Loan Losses Reserve
For the nine months ended September 30 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Activity in the allowances for credit losses:
Reserves at beginning of period $12,335 $10,823 $12,335 $10,823 $ - $ -
Provision for credit losses 2,308 - 2,308
Loan charge-offs 6,469 1,600 6,469 1,600
Recoveries of previously charged-off loans (1,871) (1,454) (1,871) (1,454)
------------------ ------------------ ------------------
Net charge-offs (recoveries) 4,598 146 4,598 146
Acquired reserves - 703 703
Reclassification of off-balance reserves - - (700) 700
- ----------------------------------------------------------------------------------------------------------
Reserves at end of period $10,045 $11,380 $ 9,345 $11,380 $ 700 $ -
==========================================================================================================
Loans
Ratios:
Reserves to loans 2.00% 2.41%
Reserves to nonperforming loans 404.71 896.06
Net charge-offs to average loans 0.92 0.03
==================================================================
</TABLE>
Reserves for credit losses totaled $10,045, or 2.00% of loans and 405% of
nonperforming loans at September 30, 1999. At the prior year-end, reserves for
credit losses totaled $12,335, or 2.55% of loans, and 481% of nonperforming
loans.
PROVISION FOR LOAN LOSSES - The provision for loan losses totaled $2,183 during
the quarter and $2,308 in the year-to-date period. Loan charge-offs totaled
$4,941 and recoveries of previously charged off loans totaled $340 during the
quarter. Year-to-date loan charge-offs of $6,469 included $6,024 loan
charge-offs in the international/ trade finance division. Charge-offs in the
domestic commercial banking division were $445 in the nine months ended
September 30, 1999.
ALLOWANCE FOR LOAN LOSSES - Credit risk is the risk of loss due to the inability
of borrowers to repay amounts advanced. The Pacific Bank manages this risk
through credit approval guidelines and procedures as well as ongoing monitoring
of the financial condition of borrowers and collateral. Reserves are established
for known and inherent risks in loans and, to a lesser extent, unused
commitments to extend credit.
18
<PAGE>
Pacific Bank's methodology for assessing the adequacy of the allowance consists
of several key elements, which include:
- - the formula allowance;
- - specific allowances for identified problem loans; and
- - the unallocated allowance.
In addition, the allowance incorporates the results of measuring impaired loans
as provided in Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These accounting standards prescribe the measurement methods,
income recognition and disclosures concerning impaired loans. At September 30,
1999, impaired loans were $2,482 with an impairment allowance of $217, compared
to impaired loans of $2,563 and an impairment allowance of $433 at December 31,
1998.
Allocations of the allowance by portfolio and by risk type at September 30, 1999
and December 31, 1998 are shown in the table below.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-----------------------------------------------------------
As a percent As a percent
Amount of loans Amount of loans
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOCATION BY PORTFOLIO
International/trade finance division $4,319 2.71% $6,221 3.62%
Commercial lending division 2,685 2.31 3,405 2.85
Domestic real estate loans 788 0.38 599 0.34
Personal and other loans 36 0.18 211 1.16
Unallocated 2,217 - 1,899 -
- ------------------------------------------------------------------------------------------------------------
Total reserves for credit losses $10,045 2.00 $12,335 2.55
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
ALLOCATION BY RISK TYPE
Formula allowance $6,592 $8,846
Allocations to specific credits - 669
Allocations for indenified portfolio risks 1,236 921
Unallocated 2,217 1,899
- -------------------------------------------------------------------------------------------------------------
Total reserves for credit losses $10,045 $12,335
=============================================================================================================
</TABLE>
The formula allowance is determined by applying loss factors to current balances
of loans and off-balance sheet commitments. The loss factors are based on a
migration model that uses three years of loss experience. Management believes
that three years reflects the average life of the portfolio. The loss factors
may be adjusted by management for significant factors that affect the
collectibility of the portfolio at that time. Changes in risk gradings of both
performing and nonperforming loans affect the amount of the formula allowance.
Pass graded loans, criticized credits and off-balance sheet commitments receive
an allocation of the allowance based on the formula. The second element of the
allowance methodology requires loan-by-loan analysis of all significant
criticized credits for determination of the adequacy of the formula allowance.
Specific allocations of the allowance may be made where management has
identified significant circumstances affecting specific credits which management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the formula allowance.
19
<PAGE>
Management determined that the formula allowance was adequate to cover estimated
losses in criticized credits, so there were no specific allocations of the
reserve at September 30, 1999. Specific allocations decreased during the quarter
due to charge-offs or other reductions in the loan balances identified at the
end of the prior quarter as having potential losses in excess of reserve amounts
determined under the formula allowance.
The unallocated allowance is composed of two parts: allocations to identified
portfolio risks; and allocations for estimation errors. The first part is based
on management's evaluation of various conditions that are not directly measured
in the determination of the formula allowance or specific allocations. The
evaluation of the inherent loss due to these conditions is more difficult to
measure since the losses are not tied to specific credits or portfolios.
Conditions at the balance sheet date considered in connection with the
unallocated allowance include the following:
- - economic conditions and business conditions affecting our key lending
portfolios, in the U.S. and overseas;
- - credit quality trends, including trends in nonaccrual loans expected to
result from existing conditions;
- - quality and value of supporting collateral ;
- - the volume of loans and loan terms;
- - lending policies and the affect of policy changes;
- - industry concentrations;
- - bank regulatory examination results; and
- - findings of our credit examiners.
Executive management reviews these conditions on a quarterly basis in discussion
with senior credit officers. The affect of current conditions is evaluated for
each key lending portfolio. The third part of the unallocated allowance is based
on management's estimate of the risk associated with model and estimation errors
associated with the formula and specific allowances.
Management continually reviews the conditions that are considered in determining
the adequacy of the unallocated allowance. Changes in the conditions considered
may affect the analysis. Assessment by the Bank's lending officers of the impact
of the year 2000 issue on customers' credit risk has been considered as an
integral part of the credit review process for all of Pacific Bank's large
credits. During the most recent evaluation of customers' Y2K compliance, there
was an increase in the number of customers that indicated they were not yet
fully remediated. However, management was not aware of any losses the Bank might
incur as a result of customers' noncompliance with year 2000 issues. As a
result, no specific allocation of the allowance for loan losses was made to
cover year 2000 risks at September 30, 1999.
Determination of the level of the allowance and provision for loan losses is
based on estimates of probable losses inherent in loans and off-balance sheet
commitments. The amount actually reserved for these losses can vary
significantly from the estimated amounts. The methodology includes several
features intended to reduce the differences between estimated and actual losses.
The loss migration model used to determine the formula allowance is designed to
be self-correcting by taking into account recent loan loss experience. The
methodology allows for adjustments to the formula allowance in the event that
significant factors affecting the collectibility of specified credits indicate
losses not reflected in the loss factors. By assessing probable estimated losses
on a quarterly basis, management is able to evaluate loss estimates based on
more recent information that has become available.
20
<PAGE>
Nonperforming assets were $2,482, or 0.49% of loans and other real estate at
September 30, 1999, compared to $2,945, or 0.61% of loans and other real estate
at December 31, 1998. Nonaccrual loans in the international/ trade finance
division decreased since year-end due to payments, charge-offs and other
reductions in the balances of these problem credits. Nonaccrual loans in the
domestic commercial banking portfolio increased since year-end, primarily due to
deterioration in several credits guaranteed by the Small Business
Administration. No loans were 90 days past due and still accruing interest at
September 30, 1999 or December 31, 1998. No foreclosed real estate assets were
held at September 30, 1999.
Nonperforming assets at quarter-end of this year and the prior year, as well as
at the end of last year, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 2,482 $ 2,563 $ 1,270
Loans past due 90 days and still accruing interest - - -
Nonperforming loans 2,482 2,563 1,270
Other real estate owned - 382 681
Nonperforming assets 2,482 2,945 1,951
Nonperforming assets to loans and other real estate 0.49% 0.61% 0.41%
====================================================================================================
</TABLE>
21
<PAGE>
THE PACIFIC BANK, N.A.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK (dollars in thousands)
- --------------------------------------------------------------------------------
INTEREST RATE RISK
Pacific Bank prepares computer simulations of interest rate risk on a
quarterly basis. The analysis projects the effect of an immediate and
sustained change in interest rates of 2% on net interest income and the net
present value of equity over the following twelve-month period. At September
30, 1999, Pacific Bank's sensitivity to rate decreases was slightly higher
than at year-end due to the maturity of interest rate floor contracts, but
was still within policy limits. For further information, refer to the
disclosure in Pacific Bank's Restated 1998 Annual Report on Form 10-K.
THE YEAR 2000 ISSUE
PACIFIC BANK'S EFFORTS TO DATE - A significant known operating risk is the year
2000 issue. The year 2000 issue is the result of computer programs that may
recognize a date using "00" as the year 1900 rather than the year 2000. Pacific
Bank has no critical internally developed software programs that require
remediation to become year 2000 compliant. Pacific Bank is reliant on
third-party providers of critical systems to process daily transaction activity.
As a result, Pacific Bank's year 2000 staff have been coordinating with these
systems vendors to verify their continued progress with year 2000 efforts. These
third party providers of computer systems reported that their remediation
efforts were completed prior to the June 30, 1999 deadline established by bank
regulatory agencies. Changes since June 30 to tested systems are being
controlled and retested if necessary. Due to Pacific Bank's reliance on third
party providers, there can be no assurance that failure by another company to
remediate their systems would not have a material adverse effect on the Pacific
Bank's ability to process and account for the transfer of funds electronically.
Pacific Bank's efforts to address the year 2000 issue were focused during the
quarter on verifying upgrades to tested systems, as well as testing of
contingency plans for core business processes. Efforts during the next few
months will be directed toward testing of non-mission critical systems and
communications with customers. Also during the quarter the Bank arranged a $30
million line of credit through its participation in the Federal Home Loan
Board's Y2K contingency program. The line of credit provides added assurance of
the Bank's liquidity in the event of customers' withdrawal of funds from the
banking system as the end of the millennium approaches.
The Bank's primary regulator, the Office of the Comptroller of the Currency
("OCC"), completed their final quarterly examination for Y2K compliance at June
30. The examination indicated that Pacific Bank had met the requirements
established by the regulatory agencies for Y2K compliance.
COSTS - Personal computers and other bank equipment that are not year 2000
compliant have been updated or replaced. The cost of accelerated equipment
purchases was less than $100 over the past three years. The direct cost of
year 2000 efforts has been limited to the two additional information
technology staff members coordinating the year 2000 effort, estimated at less
than $100 each year. Pacific Bank's loan officers have reviewed year 2000
compliance efforts of all large credit customers as an integral part of the
credit administration process. No customers were
22
<PAGE>
rated as high risk due to year 2000 concerns, although several customers
indicated for the first time in their recent review that they will not be
compliant by year-end.
RISKS - As a financial intermediary, Pacific Bank is reliant on the swift
transfer of funds electronically to and from a wide network of customers,
including but not limited to other financial institutions worldwide. Failure
of the payment system in whole or in part would delay the transfer of funds,
largely affecting the ability of Pacific Bank to operate effectively.
Pacific Bank purchases products and services from over 800 vendors. While
there is a risk of failure by a vendor to deliver or bill for services
provided due to noncompliance with year 2000 issues, Pacific Bank has no one
vendor, other than the third party providers of computer systems discussed
above, on which undue reliance is placed. Pacific Bank primarily leases its
space and is reliant on the management of each leased location to ensure year
2000 compliance at its facilities.
Pacific Bank's core lines of business may face different year 2000 risks. The
International/Trade Finance division's customers are largely located in the
U.S., but their trading partners may be located anywhere in the world. Awareness
and remediation of the year 2000 issue in other countries varies considerably.
The Wealth Management Services division relies on efficient operation of
securities markets and timely dissemination of market information. The Domestic
Commercial Banking division faces risks from smaller credit customers that may
not have the resources to deal effectively with the year 2000 issue. The legal
ramifications of year 2000 issues are difficult to enumerate or value, but
potentially Pacific Bank could be named as a party to lawsuits from customers,
or Pacific Bank could file lawsuits against vendors as a result of year 2000
difficulties.
CONTINGENCY PLANS - Pacific Bank's line managers and year 2000 staff tested
contingency plans for critical business processes prior to the June 30, 1999,
deadline established by the OCC. Contingency plans outline the actions necessary
by bank staff to maintain bank operations in the event of a short-term
disruption in electrical power, telecommunications or computer equipment. The
scope of the plans is limited to two or three days of isolated systems failures.
Longer outages or widespread failures affecting San Francisco and Los Angeles
simultaneously are beyond the scope of the contingency plans. During the
remainder of 1999, testing of nonmission critical systems will continue. Bank
staff will participate in event planning training sessions to simulate problem
situations and actions necessary to resolve the problems.
Pacific Bank considers the reasonably most likely worst case scenario to be
short-term inability to access up-to-the minute balances of customers' accounts.
Pacific Bank has developed contingency plans to limit the impact on customer
withdrawals in the event of systems failures. Balance information will be
tracked manually in the event of a short-term systems failure. Additional cash
is expected to be maintained on hand in the event of increased liquidity needs
that may result from concerns about the availability of deposited funds. Branch
managers and line officers have overdraft authority to cover withdrawals when
balance information is not obtainable. While there can be no assurance that
Pacific Bank's systems or systems of third-party providers will not be adversely
affected by year 2000 difficulties, our contingency plans are intended to reduce
the impact of such failures on our customers.
23
<PAGE>
THE PACIFIC BANK, N.A.
PART II OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
During the quarter, Pacific Bank settled litigation with a former executive
related to his employment contract and retirement benefits. In accordance
with the settlement, the Bank recorded expense of $644 in the third quarter
of 1999. See the section titled "Item 3 - Legal Proceedings" of Pacific
Bank's 1998 Annual Report on Form 10-K/A regarding certain other pending
litigation. Other than these matters, there are no material pending legal
proceedings, other than ordinary, routine litigation incidental to Pacific
Bank's business, to which Pacific Bank is a party or of which any of its
property is subject.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS PAGE NO.
<S> <C> <C>
3 (i) Articles of Association, as amended. Filed as Exhibit 3 (i) to
Pacific Bank's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference.
3 (ii) Bylaws, as amended. Filed as Exhibit 3 (ii) to Pacific Bank's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
4.1 Specimen share certificate. Filed as Exhibit 4.1 to Pacific
Bank's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
4.2 Shareholder Rights Plan filed on Form 8-K on November 6, 1996 and
incorporated herein by reference.
10.1 Third amendment to standard office building lease, dated April
29, 1994, for premises at 100 Montgomery Street, San Francisco.
Filed as Exhibit 10.2 to the Bank's Annual Report on Form 10-K
for the year ended December 31, 1994, and incorporated herein by
reference.
10.2 Lease dated April 7, 1983 for premises at 101 California Street,
San Francisco. Filed as Exhibit 5.2 (1) to the Bank's
Registration Statement on Form F-1 and incorporated hereinby
reference.
10.3 Lease dated October 1, 1985 for premises at 351 California
Street, San Francisco. Filed as Exhibit 5.2 (2) to the Bank's
Registration Statement on Form F-1 and incorporated herein by
reference.
10.4 Assignment of lease dated April 30, 1987 for premises at 100
Montgomery Street, San Francisco. Filed as Exhibit 5.2 (3) to the
Bank's Registration Statement on Form F-1 and incorporated herein
by reference.
10.5 Assignment of lease dated December 6, 1991 for premises at 5501
Geary Boulevard, San Francisco. Filed as Exhibit 5.2 (8) to the
Bank's Annual Report on Form F-2 for the fiscal year ended
December 31, 1991 and incorporated herein by reference.
24
<PAGE>
10.6 Assignment of lease dated July 10, 1992 for premises at 1841 El
Camino Real, Burlingame, California. Filed as Exhibit 10.12 to
the Bank's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 and incorporated herein by reference.
10.7 Eighth amendment to standard office building lease dated October
15, 1993, for premises at 351 California Street, San Francisco.
Filed as Exhibit 10.14 to the Bank's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
10.9 Lease dated December 1, 1994, for premises at 601 South Figueroa
Street, Los Angeles filed as Exhibit 10.23 to the Bank's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference.
10.10 Lease dated August 28, 1996 for premises at 555 Capitol Mall,
Sacramento. Filed as Exhibit 10.17 to Pacific Bank's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
10.11 Lease dated November 20, 1996 for premises at 2301 Alexandra
House, 16-20 Chater Road, Central Hong Kong. Filed as Exhibit
10.20 to Pacific Bank's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
10.14 Directors and Officers Indemnification Agreement. Filed as
Exhibit 10.14 to Pacific Bank's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
10.15 Tax Deferred Savings Plan. Filed as Exhibit 5.7 to the Bank's
Annual Report on Form F-2 for the fiscal year ended December 31,
1991 and incorporated herein by reference.
10.16 Supplemental Executive Retirement Plan dated July 1, 1996. Filed
as Exhibit 10.16 to Pacific Bank's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference.
10.17 Executive Employment Contract for the President and Chief
Executive Officer dated November 5, 1996. Filed as Exhibit 10.18
to Pacific Bank's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.18 Executive Employment Contract for the Chief Financial Officer and
Chief Credit Officer dated November 5, 1996. Filed as Exhibit
10.19 to Pacific Bank's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
10.19 1993 Stock Option Plan and Agreement, as amended. Filed as
Exhibit 10.1 to Pacific Bank's Registration Statement on Form S-8
on April 21, 1997 and incorporated herein by reference.
10.20 1998 Stock Option Plan. Filed as Exhibit 4.3 to Pacific Bank's
Registration Statement on Form S-8 on October 21, 1998 and
incorporated herein by reference.
10.21 Agreement for Item Processing Services between The Pacific Bank,
N.A. and EDS Corporation dated April 24, 1998, filed as Exhibit
10.22 to Pacific Bank's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998 and incorporated herein
by reference.
10.22 Share Repurchase Plan dated September 17, 1998, filed with
Pacific Bank's Special Meeting of Shareholders Proxy Statement on
November 10, 1998 and incorporated herein by reference.
25
<PAGE>
10.23 Third Amendment to the Executive Employment Contract for the
Chief Financial Officer dated December 17, 1998. Filed as Exhibit
10.24 to Pacific Bank's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
10.24 Third Amendment to the Executive Employment Contract for the
Chief Credit Officer dated December 17, 1998. Filed as Exhibit
10.25 to Pacific Bank's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
10.25 Executive Employment Contract for Senior Vice Presidents dated
December 17, 1998. Filed as Exhibit 10.26 to Pacific Bank's
Annual Report on Form 10-K for the year ended December 31, 1998
and incorporated herein by reference.
10.26 Executive Employment Contract for the Senior Lending Officer
dated April 16, 1999. Filed as Exhibit 10.26 to Pacific Bank's
Report on Form 10-Q for the quarterly period ended June 30, 1999
and incorporated herein by reference.
10.27 Outsourcing Agreement by and between The Pacific Bank, N.A. and
Marshall & Ilsley Corporation acting through its division M&I
Data Services dated as of May 15, 1999. Filed as Exhibit 10.27
to Pacific Bank's Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
26
<PAGE>
THE PACIFIC BANK, N.A.
SIGNATURES
- --------------------------------------------------------------------------------
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.
The Pacific Bank, National Association
Date: January 5, 2000 /s/ John P. Halicky
----------------------------
John P. Halicky
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Barbara L. Thomas
----------------------------
Barbara L. Thomas
Vice President and Controller
(Principal Accounting Officer)
27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware Code authorizes City National to indemnify
directors and officers in certain circumstances against liabilities, including
expenses, incurred while acting in such capacities; provided, generally, that
any such indemnified director or officer acted in good faith and in a manner he
or she reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The City National By-laws provide for the
indemnification of directors and officers to the maximum extend permitted by the
Delaware Code.
In addition, the City National Certificate of Incorporation provides that
City National shall eliminate the personal liability of its directors to the
fullest extent permitted by the Delaware Code, and City National has entered
into indemnification agreements with certain of its directors providing for
additional indemnification. City National has policies of directors' and
officers' liability insurance which insure directors and officers against the
cost of defense, settlement, or payment of a judgment under certain
circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement or are incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
4.1 Certificate of Incorporation (incorporated by reference to
City National's Registration Statement on Form S-4
(333-16197) filed on November 15, 1996).
4.2 Bylaws (incorporated by reference to City National's Annual
Report on Form 10-K for the year ended December 31, 1994).
5 Opinion of Barbara S. Polsky, Executive Vice President and
General Counsel of Registrant (previously filed)
8 Opinion of Manatt, Phelps & Phillips, LLP (previously filed)
23.1 Consent of KPMG LLP
23.2 Consent of Ms. Polsky (included within Exhibit 5)
(previously filed)
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Manatt, Phelps & Phillips, LLP (included within
Exhibit 8) (previously filed)
24 Power of Attorney is set forth on the signature page of the
Registration Statement (previously filed)
99.1 Form of Letter of Transmittal and Form of Election and
Instructions (previously filed)
99.2 Form of Proxy
99.3 The Pacific Bank, N.A. Quarterly Report on Form 10-Q/A-2 for
the quarter ended March 31, 1999. (previously filed)
99.4 The Pacific Bank, N.A. Quarterly Report on Form 10-Q/A for
the quarter ended June 30, 1999. (previously filed)
99.5 The Pacific Bank, N.A. Proxy Statement for the 1999 Annual
Meeting of Shareholders. (previously filed)
99.6 The Pacific Bank, N.A. Current Report on Form 8-K dated
October 26, 1999. (previously filed)
99.7 Form of Election to be sent to beneficial owners
</TABLE>
II-1
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(A) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(B) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the
effective registration statement; and
(C) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of any employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of all
such securities at that time shall be deemed to be the initial BONA FIDE
offering thereof.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
<PAGE>
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions of this Item 22, or otherwise,
each of the registrants has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of such registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Beverly Hills,
California on January 25, 2000.
<TABLE>
<S> <C> <C>
CITY NATIONAL CORPORATION
By: /s/ Frank P. Pekny
-----------------------------------------
Frank P. Pekny
Executive Vice President and Chief
Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
*
- ------------------------------------------- Chairman of the Board January 25, 2000
Bram Goldsmith
*
- ------------------------------------------- Vice Chairman and Chief January 25, 2000
Russell Goldsmith Executive Officer
*
- ------------------------------------------- Chief Financial Officer January 25, 2000
Frank P. Pekny
*
- ------------------------------------------- President and Director January 25, 2000
George H. Benter, Jr.
*
- ------------------------------------------- Director January 25, 2000
Richard L. Bloch
*
- ------------------------------------------- Director January 25, 2000
Stuart D. Buchalter
*
- ------------------------------------------- Director January 25, 2000
Ezunial Burts
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
*
- ------------------------------------------- Director January 25, 2000
Barry M. Meyer
*
- ------------------------------------------- Director January 25, 2000
Michael L. Meyer
*
- ------------------------------------------- Director January 25, 2000
Charles E. Rickerhauser Jr.
*
- ------------------------------------------- Director January 25, 2000
Edward Sanders
*
- ------------------------------------------- Director January 25, 2000
Andrea L. Van de Kamp
*
- ------------------------------------------- Director January 25, 2000
Kenneth Ziffren
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Frank P. Pekny
--------------------------------------
Frank P. Pekny
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
City National Corporation
We consent to the incorporation by reference in the Registration Statement
(No. 333-94353), Amendment No. 1 to Form S-4 of City National Corporation of our
report, dated January 14, 1999, on the consolidated financial statements of City
National Corporation and its subsidiaries as of December 31, 1998 and 1997, and
for each of the years in the three-year period ended December 31, 1998, which
report appears in the December 31, 1998 annual report on Form 10-K of City
National Corporation incorporated herein by reference, and to the reference to
our firm under the heading of "Experts" and "Selected Consolidated Financial
Data" in the Prospectus.
KPMG LLP
Los Angeles, California
January 25, 2000
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-94353 of City National Corporation on Form S-4 of our report on the
consolidated financial statements of The Pacific Bank, N.A. ("Pacific Bank")
dated January 21, 1999, January 5, 2000 as to Note 20 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
restatement described in Note 20) included in Pacific Bank's Annual Report on
Form 10-K/A for the year ended December 31, 1998, and to the references to us
under the headings "Selected Consolidated Financial Data" and "Experts" in the
Proxy Statement/Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
San Francisco, California
January 26, 2000
<PAGE>
- ------------------------------------------------------------------------------
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THE PACIFIC BANK, NATIONAL ASSOCIATION
The undersigned appoints Fran A. Streets and Scott R. Loring as
proxies, with power to act without the other and with power of substitution,
and hereby authorizes them to represent and vote, as designated on the other
side, all the shares of stock of The Pacific Bank, National Association
standing in the name of the undersigned with all powers which the undersigned
would possess if presented at the Special Meeting of Shareholders of The
Pacific Bank, National Association to be held February 29, 2000 or at any
adjournment thereof.
(Continued, and to be marked, dated and signed, on the other side)
- ------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
YOUR VOTE IS IMPORTANT!
You can vote in one of two ways:
1. Call toll free 1-800-840-1208 on a Touch Tone telephone and follow the
instructions on the reverse side. There is NO CHARGE to you for this call.
OR
2. Mark, sign and date your proxy card and return it promptly in the
enclosed envelope.
PLEASE VOTE
<PAGE>
Please mark
your votes as /X/
indicated in
this example
1. To approve the merger agreement that provides for the acquisition of The
Pacific Bank by City National Corporation by means of a merger of The
Pacific Bank with and into City National Bank, a wholly owned subsidiary
of City National Corporation.
FOR AGAINST ABSTAIN
/ / / / / /
I/WE PLAN TO ATTEND MEETING
/ /
- -------------------------------------------------------------------------------
***IF YOU WISH TO VOTE BY TELEPHONE, PLEASE READ THE INSTRUCTIONS BELOW***
- -------------------------------------------------------------------------------
Signature(s) Dated / /
----------------------------------------------- -----------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
TELEPHONE VOTE BY TELEPHONE TELEPHONE
QUICK *** EASY *** IMMEDIATE
Your telephone vote authorizes the named proxies to vote your shares in the
same manner as if you marked, signed and returned your proxy card.
- - You will be asked to enter a Control Number which is located in the box
in the lower right hand corner of this form.
- - To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.
The Instructions are the same for all remaining proposals.
YOUR VOTE WILL BE CONFIRMED AND CAST AS YOU DIRECTED. END OF CALL.
PLEASE DO NOT RETURN THE ABOVE PROXY CARD IF VOTED BY PHONE
CALL ** TOLL FREE ** ON A TOUCH TONE TELEPHONE
1-800-840-1208 ANYTIME
There is NO CHARGE to you for this call.
<PAGE>
FORM OF ELECTION
WITH RESPECT TO SHARES OF COMMON STOCK OF
THE PACIFIC BANK, N.A.
IN CONNECTION WITH THE PROPOSED MERGER OF THE PACIFIC BANK, N.A.
WITH AND INTO
CITY NATIONAL BANK
You have already received copies of the Proxy Statement/Prospectus dated
January 26, 2000 (the "Proxy Statement/Prospectus"), relating to the merger (the
"Merger") of The Pacific Bank, N.A. ("Pacific Bank") with and into City National
Bank, a wholly-owned subsidiary of City National Corporation ("City National").
This Form of Election is being delivered to you (1) in connection with the
Merger and (2) as the beneficial owner of shares of Common Stock, $1.50 par
value, of Pacific Bank ("Pacific Bank Stock") held by us for your account but
not registered in your name.
As part of the Merger, each outstanding share of Pacific Bank Stock will be
converted into the right to receive one of the following (the "Merger
Consideration"): (1) $29.00 in cash; (2) shares of common stock of City
National, par value $1.00 per share ("City National Stock"), calculated as
described in the enclosed Proxy Statement/Prospectus; or (3) a combination of
cash and City National Stock calculated as described in the enclosed Proxy
Statement/Prospectus. Elections as to the form of Merger Consideration may only
be made by us as the registered holder of your shares of Pacific Bank Stock
("Pacific Bank Shares"). Accordingly, we request your instructions on the table
below entitled "Election Instructions" (the "Election Instructions") as to
whether to make a Cash Election, a Stock Election or a Combination Election with
respect to the Pacific Bank Shares beneficially owned by you.
If you wish to make an Election as to the form of Merger Consideration into
which your Pacific Bank Shares will be converted in the Merger, you must arrange
for this Form of Election, properly completed to be received by us in time for
us to forward your election to Continental Stock Transfer & Trust Company (the
"Exchange Agent") prior to 5:00 p.m., Eastern Standard Time on February 23,
2000, unless extended to a later date by the mutual agreement of City National
and Pacific Bank (the "Election Deadline"). PLEASE NOTE THAT THE ELECTION
DEADLINE IS THE DEADLINE FOR US TO DELIVER YOUR ELECTION TO THE EXCHANGE AGENT
AND, ACCORDINGLY, WE MUST RECEIVE YOUR ELECTION INSTRUCTIONS PRIOR TO THE
ELECTION DEADLINE. THEREFORE, WE URGE YOU TO RETURN THE ELECTION INSTRUCTIONS TO
US AS SOON AS POSSIBLE.
Your Election is subject to the terms, conditions, and limitations set forth
in (a) the Proxy Statement/ Prospectus, and (b) the Merger Agreement, attached
as Appendix A to the Proxy Statement/Prospectus, each of which you are urged to
read.
YOUR ELECTION INSTRUCTIONS TO US SHOULD BE FORWARDED AS PROMPTLY AS POSSIBLE
TO ENABLE US TO SUBMIT YOUR INSTRUCTIONS TO THE EXCHANGE AGENT PRIOR TO THE
ELECTION DEADLINE.
IF WE DO NOT RECEIVE YOUR COMPLETED ELECTION INSTRUCTIONS, WE WILL NOT MAKE
AN ELECTION WITH RESPECT TO YOUR SHARES AND YOUR SHARES WILL BE UNDESIGNATED
SHARES.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ELECTION INSTRUCTIONS
(Check only one box)
<CAPTION>
/ / COMBINATION ELECTION
TOTAL NUMBER OF PACIFIC
BANK SHARES WITH CASH STOCK
RESPECT TO WHICH AN / / / / (NUMBER OF PACIFIC (NUMBER OF PACIFIC
ELECTION IS BEING MADE CASH ELECTION STOCK ELECTION BANK SHARES) BANK SHARES)
<S> <C> <C> <C> <C>
SIGNATURE(S) PLEASE TYPE OR PRINT NAME(S) BELOW
- ------------------------------------------- --------------------------------------
- ------------------------------------------- --------------------------------------
- ------------------------------------------- --------------------------------------
</TABLE>
