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Filed Pursuant to Rule 424(b)(1)
File No. 333-48907
FIRST SECURITY CORPORATION CALIFORNIA STATE BANK
PROSPECTUS/PROXY STATEMENT
April 20, 1998
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PROSPECTUS/PROXY STATEMENT
FIRST SECURITY CORPORATION CALIFORNIA STATE BANK
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This Prospectus/Proxy Statement is furnished by California State Bank ("the
Bank") and First Security Corporation ("FSC"), in connection with the Annual
Meeting of the Bank's Shareholders called for May 26, 1998 (the "Bank
Shareholders' Meeting") where the shareholders of the Bank ("Bank Shareholders")
will be asked to vote on the following business items:
1. THE ELECTION OF DIRECTORS TO SERVE UNTIL THE NEXT ANNUAL MEETING OR
UNTIL THEIR SUCCESSORS SHALL BE DULY ELECTED AND SERVING (SUBSTANTIALLY ALL
OF THE DIRECTORS ELECTED AT THE BANK SHAREHOLDERS' MEETING WILL RESIGN IF
THE MERGER BECOMES EFFECTIVE TO ALLOW FOR THE ELECTION OF FSC NOMINEES (SEE
ITEM 2));
2. THE PROPOSED MERGER AGREEMENT, WHEREBY THE BANK WOULD MERGE WITH FS
MERGER CORP. ("FSMC"), A WHOLLY-OWNED SUBSIDIARY OF FSC, AND THEREBY THE
BANK WOULD BECOME A WHOLLY OWNED SUBSIDIARY OF FSC (THE "MERGER").
At present, the Bank knows of no other matters to be presented at the Bank
Shareholders' Meeting.
This Prospectus/Proxy Statement will be mailed to Bank Shareholders on or
about April 20, 1998, together with the Appendices attached hereto. It
constitutes the Bank's Proxy Statement relating to the Bank Shareholders'
Meeting and FSC's Prospectus, which was filed with the Securities and Exchange
Commission (the "Commission") as part of a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to up to 12,297,518 shares of FSC's common stock
(the "FSC Common Stock"), to be issued to the Bank Shareholders pursuant to the
Agreement and Plan of Reorganization dated as of February 18, 1998 (the "Merger
Agreement") in exchange for their shares of the Bank's outstanding common stock
("Bank Common Stock").
FSC has supplied all the information contained herein with respect to
itself and FSMC. FSC's principal executive offices are located at 79 South Main
Street, Salt Lake City, Utah 84111. FSC's information telephone number with
respect to this transaction is (801) 246-5706 (Attn: Scott C. Ulbrich, Chief
Financial Officer).
The Bank has supplied all the information contained in this
Prospectus/Proxy Statement with respect to it. The principal executive offices
of the Bank are located at 100 North Barranca Street, West Covina, California
91791. Questions with respect to this transaction may be directed to Thomas A.
Bishop, Chief Executive Officer of the Bank, at (626) 915-4424.
Neither the delivery of this Prospectus/Proxy Statement nor any sale or
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs or operations of FSC, FSMC, or the
Bank since the date hereof.
THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY WITHIN ANY
JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION WITHIN SUCH JURISDICTION. NO AGENT OR OFFICER OF FSC, FSMC OR THE
BANK, NOR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN; AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FSC, FSMC OR THE BANK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus/Proxy Statement is April 20, 1998
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(cover page continued)
THE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
THE PRINCIPAL INVESTED.
THE SECURITIES OFFERED ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION ("FDIC").
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
PROSPECTUS SUMMARY.......................................... 3
COMPARATIVE SUMMARY CAPITALIZATION AND PRO FORMA
CAPITALIZATION OF FSC AND THE BANK........................ 11
SELECTED COMPARATIVE FINANCIAL DATA......................... 11
SELECTED COMPARATIVE HISTORICAL, PRO FORMA AND EQUIVALENT
PRO FORMA PER SHARE DATA.................................. 14
HISTORICAL MARKET PRICES AND DIVIDENDS...................... 15
FSC....................................................... 15
The Bank.................................................. 16
THE BANK SHAREHOLDERS' MEETING.............................. 17
General................................................... 17
Revocability of Proxies................................... 17
Costs of Solicitation of Proxies.......................... 17
Outstanding Securities and Voting Rights; Quorum.......... 18
Security Ownership of Certain Beneficial Owners and
Management............................................. 18
Section 16(a) Reporting Compliance........................ 20
PROPOSAL NUMBER ONE: ELECTION OF DIRECTORS.................. 21
Nominees.................................................. 21
Executive Officers........................................ 22
The Board of Directors and Certain Committees............. 22
Compensation of Executive Officers and Directors.......... 24
Aggregated Option Exercises in 1997 and FY-End 1997 Option
Values................................................. 25
Option Grants in Last Fiscal Year......................... 25
1998 Salary Compensation.................................. 25
Deferred Compensation Plans............................... 25
Certain Transactions...................................... 27
Directors' Compensation................................... 27
Compensation Committee Interlocks and Insider
Participation.......................................... 27
Performance Graph......................................... 28
Compensation Committee Report............................. 28
JOINT REPORT OF THE BANK'S BUDGET AND COMPENSATION COMMITTEE
AND THE STOCK OPTION COMMITTEE............................ 28
Compensation Philosophy................................... 29
Attracting and Retaining Executives and Other Key
Employees.............................................. 29
Compensation of the Chief Executive Officer and Other
Executive Officers..................................... 29
Stock Options and Other Programs.......................... 30
PROPOSAL NUMBER TWO: THE PROPOSED MERGER AGREEMENT.......... 31
Background of and Reasons for the Merger; Recommendation
of the Bank's Board of Directors....................... 31
Opinion of the Bank's Financial Advisor................... 32
Interests of Certain Persons in the Merger................ 39
Agreements with Certain Bank Shareholders................. 39
Terms of the Merger Agreement............................. 40
Consideration to Be Received by Bank Shareholders......... 40
Exchange of Certificates.................................. 41
Covenants; Conduct of Business Prior to Effective Time.... 41
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Accounting Treatment...................................... 42
Regulatory Approvals...................................... 42
Other Conditions to the Merger............................ 43
Termination of the Merger Agreement....................... 44
Termination Fee Agreement................................. 44
Operations of the Bank After the Merger................... 44
Effect of the Merger on the Bank's Employee Benefit
Plans.................................................. 44
FEDERAL INCOME TAX CONSEQUENCES............................. 45
Opinions Under the Code................................... 45
Federal Income Tax Treatment of the Exercise of
Dissenters' Rights..................................... 46
RIGHTS OF DISSENTING BANK SHAREHOLDERS...................... 46
RESALES OF FSC COMMON STOCK................................. 48
INFORMATION ABOUT FSC....................................... 48
General................................................... 48
Competition............................................... 49
Supervision and Regulation................................ 49
Capitalization............................................ 57
Description of FSC's Capital Stock........................ 58
INFORMATION ABOUT THE BANK.................................. 59
General................................................... 59
Real Estate Subsidiaries.................................. 61
Competition............................................... 62
Employees................................................. 62
COMPARATIVE RIGHTS OF BANK SHAREHOLDERS..................... 62
Certain Voting Rights..................................... 62
Dividends................................................. 63
Election of Directors; Board of Directors................. 63
Removal of Directors; Filling Vacancies on the Board of
Directors.............................................. 64
Special Meetings of Bank Shareholders; Shareholder Action
by Written Consent..................................... 64
Amendment of Bylaws....................................... 65
Amendment of Charter...................................... 65
Dissenters' Rights........................................ 65
Certain Business Combinations and Reorganizations......... 65
LEGAL MATTERS............................................... 66
EXPERTS..................................................... 66
DEADLINE FOR FSC SHAREHOLDER PROPOSALS...................... 67
INFORMATION CONCERNING THE BANK SHAREHOLDERS MEETING ONLY... 67
DEADLINE FOR BANK SHAREHOLDER PROPOSALS..................... 67
OTHER BUSINESS.............................................. 67
APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION, AS AMENDED
APPENDIX B THE BANK'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1997 FILED PURSUANT TO
SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934.
APPENDIX C FAIRNESS OPINION OF KEEFE, BRUYETTE & WOODS,
INC.
APPENDIX D DISSENTERS' RIGHTS STATUTE
APPENDIX E TERMINATION FEE AGREEMENT
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AVAILABLE INFORMATION
Both FSC and the Bank are subject to the informational reporting
requirements of the Securities Exchange Act of 1934, or amended (the "Exchange
Act").
FSC files periodic reports, proxy statements and other information with the
Commission. FSC's recent filings with the Commission can be inspected and copied
at the Public Reference Facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Office at
1801 California Street, Suite 4800, Denver, Colorado 80202-2648. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (www.sec.gov).
The Bank also files periodic reports in compliance with the Exchange Act,
but its reports are filed with the Federal Deposit Insurance Corporation
("FDIC"). The FDIC maintains public reference facilities at the Registration,
Disclosure and Securities Operations Unit, Room F-6043, 550 11th Street N.W.,
Washington, D.C. 20429. Requests for copies may be made by telephone at (202)
898-8913 or by fax at (202) 898-3909.
FSC Common Stock and Bank Common Stock are traded by means of the Nasdaq
National Market under the symbols "FSCO" and "CSTB", respectively, and such
reports, proxy statements and other information concerning FSC or the Bank are
available for inspection and copying at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
FSC has filed the Registration Statement with the Commission under the
Securities Act with respect to the FSC Common Stock offered hereby. This
Prospectus/Proxy Statement does not contain all the information set forth in the
Registration Statement and the exhibits thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, including
the exhibits thereto.
Statements contained in this Prospectus/Proxy Statement or in any documents
incorporated in this Prospectus/Proxy Statement by reference as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference. The Registration Statement may be inspected by anyone without charge
at the principal office of the Commission in Washington, D.C., and copies of all
or any part of it may be obtained through the Commission's website at
WWW.SEC.GOV or from the Commission upon payment of the prescribed fees.
[THIS SPACE LEFT BLANK INTENTIONALLY]
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents filed
with the Commission by FSC (File No. 1-6906):
(a) FSC's Annual Report on Form 10-K for the year ended December 31,
1997; and
(b) FSC's Proxy Statement dated March 15, 1998; and
(c) FSC's Current Report on Form 8-K dated January 27, 1998; and
(d) Description of FSC Common Stock as included in FSC's Registration
Statement on Form S-3, filed with the Commission on September 13, 1991,
Commission File Number 33-42784.
All documents filed by FSC, respectively, with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus/Proxy Statement and prior to the date of the Bank Shareholders'
Meeting are incorporated herein by reference, and such documents shall be deemed
to be a part hereof from the date of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus/Proxy Statement to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus/Proxy Statement.
The Bank incorporates herein by this reference its Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the FDIC and the Nasdaq
National Market by this reference. A copy of this Report is attached to this
Prospectus/Proxy Statement as Appendix B.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH FSC
DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE
TO ANY PERSON TO WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED UPON WRITTEN
OR ORAL REQUEST TO FIRST SECURITY CORPORATION, ATTENTION: SCOTT C. ULBRICH,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SUITE 200, 79 SOUTH MAIN
STREET, SALT LAKE CITY, UTAH 84111; TELEPHONE NUMBER (801) 246-5706. IN ORDER TO
ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE BANK SHAREHOLDERS'
MEETING, ANY REQUEST SHOULD BE RECEIVED ON OR BEFORE MAY 10, 1998. COPIES OF
SUCH DOCUMENTS WILL ALSO BE AVAILABLE UPON REQUEST THEREAFTER UNTIL THE
EFFECTIVE TIME (AS DEFINED HEREINAFTER).
No agent or officer of FSC or the Bank, nor any other person has been
authorized to give any information or to make any representations other than as
contained herein and in the documents incorporated herein by reference; and, if
given or made, such information or representations should not be relied upon as
having been authorized by FSC or the Bank. Neither the delivery of this
Prospectus/Proxy Statement nor any sale or exchange made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs or operations of FSC or the Bank since the date hereof, or that the
information herein is correct as of any time subsequent to such date.
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PROSPECTUS SUMMARY
The following is a summary of certain significant information contained in
this Prospectus/Proxy Statement or in documents incorporated herein by
reference. This summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus/Proxy Statement, the
Appendices hereto, and the documents incorporated herein by reference. Bank
Shareholders are urged to read carefully this Prospectus/Proxy Statement and the
Appendices attached to this Prospectus/Proxy Statement in their entirety. ALL
NUMBERS OF SHARES OF FSC COMMON STOCK AND FSC PER SHARE NUMBERS USED IN THIS
PROSPECTUS/PROXY STATEMENT ARE RESTATED TO REFLECT A NUMBER OF 2-FOR-1 FORWARD
SPLITS, EFFECTED AS 50% STOCK DIVIDENDS, OF FSC, DECLARED AND PAID IN THE PERIOD
1993-1998, THE MOST RECENT HAVING BEEN PAID ON FEBRUARY 24, 1998.
FSC FSC is a regional bank holding company
headquartered in Salt Lake City, Utah. FSC owns and
operates five banks, with offices in the six (6)
Western States of Idaho, New Mexico, Nevada,
Oregon, Utah and Wyoming, and several other
financial services companies, some having a
national presence. Through its subsidiaries, FSC
provides commercial and agricultural finance,
consumer banking, trust, capital markets, treasury
management, investment management, data processing,
leasing, insurance and securities brokerage
services. At December 31, 1997, FSC and its
subsidiaries had consolidated assets of $17.3
billion, consolidated deposits of $10.7 billion and
shareholders' equity of $1.3 billion. FSC has paid
a regular dividend on its Common Stock since its
incorporation in 1928. (See "INFORMATION ABOUT
FSC.")
FSC's principal executive offices are located at 79
South Main Street, Salt Lake City, Utah 84111, and
its telephone number is (801) 246-6000.
THE BANK The Bank is a California state-chartered bank and
is regulated by the FDIC and the California
Commissioner of Financial Institutions (the
"Commissioner"). It is not a member of Federal
Reserve System. The Bank owns all of the
outstanding stock of certain other companies (the
"Bank Subsidiaries"). The Bank had consolidated
assets of approximately $849.2 million, deposits of
$701.7 million and shareholders' equity of $83.4
million at December 31, 1997. (See "INFORMATION
ABOUT THE BANK".)
The Bank's principal executive offices are located
at 100 N. Barranca Street, West Covina, California
91791, and its telephone number is (626) 915-4424.
FSMC FSMC is a newly created special purpose corporation
to be used solely as the vehicle for the Merger.
THE BANK
SHAREHOLDERS'
MEETING The Bank Shareholders' Meeting will be held at the
Industry Hills Sheraton Resort & Conference Center,
One Industry Hills Parkway, City of Industry,
California 91744 on Tuesday, May 26, 1998 at 4:00
p.m. local time for the purposes of asking the Bank
Shareholders to (a) elect 14 persons to the Board
of Directors for the coming year and (b) to approve
the Merger Agreement. If the Merger Agreement is
approved and the Merger is consummated,
substantially all of the Directors of the Bank will
resign at the Effective Time (as defined below) to
make way for FSC nominees. If the Merger Agreement
is not approved, or if it fails to close and is
terminated, the newly elected Board of Directors
will govern the Bank until the next Annual Meeting
of
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Shareholders. (See "PROPOSAL NUMBER TWO: THE
PROPOSED MERGER AGREEMENT," below.)
Under applicable law, the shareholders of FSC are
not entitled to vote on the Merger. FSC, as the
sole shareholder of FSMC, has approved the Merger.
(See "THE BANK SHAREHOLDERS' MEETING.")
PERSONS ENTITLED
TO VOTE
The Bank Board of Directors has fixed the close of
business on April 14, 1998 as the "Record Date" for
determining who is entitled to notice of and to
vote at the Bank Shareholders' Meeting.
PROPOSAL NUMBER ONE:
ELECTION OF DIRECTORS
All members of the Bank's current Board of
Directors have been nominated for election at the
Bank Shareholders' Meeting. The fourteen (14)
nominees receiving the highest number of votes at
the Bank Shareholders' Meeting will be elected. The
Directors will serve until the next annual meeting
of Bank Shareholders; provided, however, that if
the proposed Merger Agreement is approved by the
Bank Shareholders and is otherwise consummated,
substantially all of the Directors of the Bank will
resign at the Effective Time (as defined below).
PROPOSAL NUMBER TWO:
THE PROPOSED MERGER
AGREEMENT FSC, FSMC and the Bank have executed and delivered
the Merger Agreement pursuant to which the Bank
will merge with FSMC. As a result of the Merger,
each outstanding share of Bank Common Stock will be
exchanged for 2.13 shares of FSC Common Stock, and
the Bank will become a wholly-owned subsidiary of
FSC.
EXCHANGE OF SHARES Each share of Bank Common Stock (including all
shares issued in connection with options) shall be
converted into 2.13 shares of FSC Common Stock
("the Conversion Ratio"). There were 5,279,451
shares of Bank Common Stock issued and outstanding
and 489,032 shares of Bank Common Stock reserved
for issuance upon the exercise of outstanding stock
options as of the Record Date. Each stock option
not previously exercised will be surrendered at the
Effective Time (as defined below) in exchange for
FSC stock options representing the economical
equivalent number of shares of FSC Common Stock and
with an exercise price adjusted for the Conversion
Ratio (the "Converted Bank Options"). FSC has
agreed to file a registration statement on Form S-8
to cover resales of the FSC Common Stock underlying
the Converted Bank Options.
The Conversion Ratio will be adjusted to reflect
any stock dividends, subdivisions, split ups,
reclassifications or combinations of FSC Common
Stock prior to the Effective Time (as defined
below).
IT IS IMPOSSIBLE TO PREDICT THE FINAL VALUE OF THE
CONVERSION RATIO BECAUSE OF THE POTENTIAL FOR
CHANGES IN THE MARKET VALUE OF SHARES OF FSC COMMON
STOCK. (See "PROPOSAL NUMBER TWO: THE PROPOSED
MERGER AGREEMENT -- Consideration to Be Received by
Bank Shareholders.")
TREATMENT OF
FRACTIONAL SHARES
No fractional shares of FSC Common Stock will be
issued; instead, a cash payment will be made for
fractional shares determined by the average of the
daily closing prices for FSC Common Stock quoted on
the Nasdaq National Market for the five (5)
consecutive trading days ending on the second day
immediately preceding the Effective Time (as
defined below).
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FAIRNESS OPINION OF
KEEFE, BRUYETTE &
WOODS, INC.
The Bank has retained Keefe, Bruyette & Woods, Inc.
("KBW") as its independent financial adviser and to
render an opinion on the fairness of the Merger to
the Bank Shareholders from a financial point of
view. The KBW Fairness Opinion is attached to this
Prospectus/Proxy Statement as Appendix C.
THE BANK'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS APPROVAL OF THE MERGER.
FSC COMMON
STOCK
The shares of FSC Common Stock to be issued in
connection with the Merger will be entitled along
with all other outstanding shares of FSC Common
Stock to receive dividends when, as and if declared
by the Board of Directors of FSC. Holders of FSC
Common Stock are entitled to one vote for each
share held. The holders of FSC Common Stock do not
have any preemptive rights to subscribe for
additional shares of FSC should FSC decide to issue
additional shares in the future. (See "INFORMATION
ABOUT FSC -- Description of FSC's Capital Stock.")
Each share of FSC Common Stock received by
Shareholders will have an attached Right, which
Right is part of a shareholder-rights plan adopted
by FSC in 1989. The Rights give holders the
opportunity to purchase additional equity interests
in FSC at a significant discount under certain
circumstances. (See "INFORMATION ABOUT FSC --
Description of FSC's Capital Stock.")
The Bank is a California corporation and FSC is a
Delaware corporation. Bank Shareholders will become
FSC shareholders through the Merger. The laws
governing the rights of shareholders differ between
California and Delaware. (See "COMPARATIVE RIGHTS
OF BANK SHAREHOLDERS.")
CLOSING DATE AND
EFFECTIVE TIME
The Bank and FSC currently expect closing of the
Merger to take place during the second quarter of
1998, once all of the necessary conditions to the
Merger occur (the "Closing"). (The day on which
Closing takes place is referred to as the "Closing
Date.") The Merger will become effective (the
"Effective Time") at the close of business on the
date the Commissioner deems the Merger to be
effective under the California Financial Code. (See
"PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Other Conditions to the Merger," and
"-- Regulatory Approvals.")
EXCHANGE OF
CERTIFICATES
As soon as practicable after the Effective Time,
FSC will send, or cause to be sent, to Bank
Shareholders of record at the Effective Time a
letter of transmittal advising them of the
procedure for surrendering certificates
representing shares of Bank Common Stock in
exchange for certificates representing shares of
FSC Common Stock and cash in lieu of fractional
shares of FSC Common Stock. BANK SHAREHOLDERS
SHOULD NOT SURRENDER THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL. All shares of
FSC Common Stock issued in the Merger will be
deemed issued as of the Effective Time.
The holder of a certificate representing shares of
Bank Common Stock will have no rights with respect
to such shares other than to surrender such
certificates, as provided in the letter of
transmittal, in exchange for
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certificates representing shares of FSC Common
Stock and cash in lieu of fractional shares of FSC
Common Stock or, in the event such holder has
dissented from the Merger, to surrender such
certificates in connection with a request to
receive the fair market value of the shares
represented by such certificates. (See "RIGHTS OF
DISSENTING BANK SHAREHOLDERS.") Upon surrender of
any certificate representing shares of Bank Common
Stock to be exchanged for FSC Common Stock, the
holder thereof shall be entitled to receive (i) a
certificate representing the shares of FSC Common
Stock to which such holder is entitled and a check
in the amount of any cash to be paid to such
holder; and (ii) funds on account of dividends and
other distributions paid to holders of record of
shares of FSC Common Stock as of a record date
after the Effective Time but prior to surrender.
(See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Exchange of Certificates.")
CONDITIONS TO THE
MERGER
The Merger is subject to a number of conditions,
including but not limited to (a) obtaining the
consent of all government regulatory authorities
whose consent is legally required to consummate the
Merger, and the expiration of all associated
statutory waiting periods; (b) obtaining Bank
Shareholder approval of the Merger Agreement; (c)
that the Merger will qualify for "pooling of
interests" accounting treatment; (d) delivery of
required opinions of counsel, including that the
Merger and the issuance of shares of FSC Common
Stock to Bank Shareholders will not result in the
recognition of gain or loss for federal income tax
purposes, and financial advisors, and required
letters from certified public accountants; (e) the
delivery of agreements not to compete by the
nonemployee Directors and the delivery of
employment agreements with Messrs. Thomas and
Eugene Bishop; and (f) the performance of certain
covenants agreed among the parties to the Merger
Agreement, including but not limited to maintenance
of an agreed net worth level by the Bank, and
limitations on dividends and other corporate
actions by the Bank. (See "PROPOSAL NUMBER TWO: THE
PROPOSED MERGER AGREEMENT -- Other Conditions to
the Merger" and the Merger Agreement, Appendix A).
REGULATORY
APPROVALS
Neither FSC nor the Bank knows of any reason why
the Merger will not be approved by the applicable
government regulatory authorities in time to effect
the Closing; however, there can be no assurances as
to when, if or with what conditions such approvals
will be granted.
AN APPROVAL BY THE FEDERAL RESERVE BOARD, THE FDIC
OR THE COMMISSIONER REFLECTS ONLY THE VIEW THAT THE
MERGER DOES NOT CONTRAVENE APPLICABLE COMPETITIVE
STANDARDS IMPOSED BY LAW, AND THAT THE MERGER IS
CONSISTENT WITH REGULATORY POLICIES RELATING TO
SAFETY AND SOUNDNESS; AN APPROVAL BY THE FEDERAL
RESERVE BOARD, THE FDIC OR THE COMMISSIONER IS NOT
AN OPINION BY THE FEDERAL RESERVE BOARD, THE FDIC
OR THE COMMISSIONER THAT THE MERGER IS FAVORABLE TO
THE BANK SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW OR THAT THE FEDERAL RESERVE BOARD, THE FDIC OR
THE COMMISSIONER HAS CONSIDERED THE ADEQUACY OF
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THE TERMS OF THE MERGER; AND AN APPROVAL BY THE
FEDERAL RESERVE BOARD, THE FDIC OR THE COMMISSIONER
IS NOT AN ENDORSEMENT OR RECOMMENDATION OF THE
MERGER.
(See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Regulatory Approvals," and
"-- Termination of the Merger Agreement.")
TERMINATION OR
AMENDMENT OF THE
MERGER AGREEMENT The Merger Agreement may be amended at any time
prior to the Effective Time upon mutual agreement
of the parties; provided, however, that after
approval by the Bank Shareholders, the Conversion
Ratio may not be changed. In addition, the
structure of the Merger cannot be changed if such
change would adversely effect the amount or form of
consideration to the Bank Shareholders, would delay
the Closing, or would otherwise be prejudicial to
the Bank Shareholders.
The Merger Agreement may be terminated at any time
prior to the Effective Time by the mutual consent
of FSMC, the Bank and FSC, or by either the Bank or
FSC at any time after November 30, 1998, if Closing
has not yet occurred, or at any time prior to
Closing by either FSC or the Bank if any warranty
or covenant of the other party is breached and
remains uncured for more than 30 days, or by FSC or
the Bank if less than a majority of the shares of
Bank Common Stock approve the Merger or if the Bank
solicits an acquisition transaction with a third
party, or if the Merger is not approved by any
required governmental authority, or by the Bank if
there is a significant decline in the market price
of FSC Common Stock that is not proportionate to
the KBW 50 Index, or if an environmental assessment
determines that remediation is necessary and the
aggregate cost of such remediation will exceed
$1,000,000.
(See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Termination of the Merger Agreement.")
FSC and the Bank have entered into a Termination
Fee Agreement which provides that the Bank will pay
certain compensation to FSC if it terminates the
Merger Agreement under certain circumstances and
thereafter is acquired by another entity. (See
Termination Fee Agreement, Appendix E.)
NO SOLICITATION The Bank has agreed that it will not directly or
indirectly initiate, solicit or encourage any
inquiries or the making of any proposal or offer
for, furnish any confidential information relating
to, or engage in any negotiations or discussions
concerning, any acquisition or purchase of the
Bank.
(See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Termination Fee Agreement.")
OPERATION OF THE
BANK AFTER
THE MERGER Following the Merger, the Bank will survive in its
legal form and with its present charter and bylaws.
There is no current plan to reduce staffing or
management at the Bank following the Merger. FSC
has not decided whether to rename the Bank after
the Merger to better reflect the Bank's membership
in the FSC family of banks. FSC manages all of its
subsidiary banks as one "virtual bank" under
centralized management, with approval from its
regulators. Ultimately, all decisions as to the
7
<PAGE> 13
future operation of the Bank following the Merger
will be in the sole discretion of FSC.
AGREEMENTS WITH
CERTAIN BANK
SHAREHOLDERS FSC has entered into shareholder's agreements (the
"Shareholder's Agreements") with certain Bank
Shareholders, each of whom is also a Director of
the Bank (the "Bank Directors"), pursuant to which
the Bank Directors have agreed (i) to vote all
shares of the Bank Common Stock which they own or
hereafter acquire in favor of the approval of the
Merger Agreement, thereby increasing the likelihood
that the Merger Agreement will be approved by the
Bank Shareholders; and (ii) not to sell or
otherwise transfer any of their shares of Bank
Common Stock prior to the Effective Time. (See
"PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Agreements with Certain Bank
Shareholders.")
FSC has entered into noncompetition agreements (the
"Noncompetition Agreements") with each of the Bank
Directors, pursuant to which the Bank Directors
have agreed, among other things, not to participate
or engage in any business which is competitive with
FSC or the Bank for a period of two years after the
Effective Time. (See "PROPOSAL NUMBER TWO: THE
PROPOSED MERGER AGREEMENT -- Agreements with
Certain Bank Shareholders.")
The Directors and executive officers of the Bank
have entered into agreements (the "Affiliate
Agreements") with FSC restricting their ability to
sell shares of the FSC Common Stock which they may
acquire in connection with the Merger except in
accordance with such Affiliate Agreements. (See
"PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Agreements with Certain Bank
Shareholders.")
INTERESTS OF
CERTAIN PERSONS
IN THE MERGER The Bank's Directors and certain Executive Officers
own a total of 709,269 shares of Bank Common Stock
which will be converted in the Merger on the same
terms and conditions as apply to all other shares
of Bank Common Stock. In addition, Directors and
Executive Officers of the Bank held as of the
Record Date options to purchase 368,032 shares of
Bank Common Stock, which, upon the consummation of
the Merger, will be assumed by and deemed to be
options granted by FSC, adjusted appropriately to
reflect the Conversion Ratio. Moreover, Directors
and Executive Officers of the Bank have deferred
compensation and other benefits that accelerate or
are otherwise affected for the benefit of the
Directors and Executive Officers as a result of the
Merger. If exercised prior to the Merger, the
shares of Bank Common Stock acquired through the
exercise of current outstanding stock options will
be converted into the right to receive FSC Common
Stock at the Effective Time at the Conversion
Ratio.
The Bank's Executive Officers and Directors have
been indemnified by the Bank for acts or omissions
while acting for the Bank. Moreover, the current
Directors and Executive Officers of the Bank will
be indemnified by FSC for certain acts or omissions
occurring prior to the Effective Time.
Messrs. Eugene and Thomas Bishop have agreed to
enter into employment and noncompete agreements
with FSC which will result in significant
compensation to these two Executive Officers of the
Bank.
8
<PAGE> 14
FSC has agreed to continue to provide employees of
the Bank who are employed following the Merger with
benefits on substantially the same basis and
applying the same eligibility standards as are
currently in force pending a review of such
benefits following the Merger.
(See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT -- Interests of Certain Persons in the
Merger," and "-- Effect of the Merger on the Bank's
Employee Benefit Plans.")
FEDERAL
INCOME TAX
CONSEQUENCES
Ray, Quinney & Nebeker, special tax counsel to FSC,
have rendered an opinion with respect to certain
federal income tax consequences of the Merger. In
summary, the opinion is to the effect that, for
federal income tax purposes, the Merger will
constitute a nontaxable reorganization and that no
gain or loss will be recognized by Bank
Shareholders who exchange all of their Bank Common
Stock solely for FSC Common Stock. Gain or loss
will be recognized to holders of Bank Common Stock
who receive cash in lieu of fractional share
interests pursuant to the Merger, and by Bank
Shareholders exercising Dissenters' Rights. The
amount of the gain or loss will be the difference
between the cash received and the basis of the
fractional share interests surrendered in exchange
for the cash or the shares surrendered by the Bank
Shareholders exercising Dissenters' Rights. The
opinion is based on certain assumptions and
representations. THE BANK SHAREHOLDERS SHOULD
CONSULT WITH THEIR OWN TAX ADVISERS REGARDING THE
TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR
OWN TAX SITUATIONS. (See "FEDERAL INCOME TAX
CONSEQUENCES.")
DISSENTERS' RIGHTS A Bank Shareholder who, not later than the date of
the Bank Shareholders' Meeting, delivers to the
Bank a written demand for dissenters' rights, who
votes against the approval of the Merger Agreement
and who complies with all other applicable
requirements of Chapter 13 of the California
General Corporation Law ("Chapter 13"), will have
the right to receive payment in cash of the "fair
market value" of such holder's shares of Bank
Common Stock as of February 18, 1998, the last
trading day prior to the public announcement of the
Merger; provided, however, that no holder of Bank
Common Stock will be entitled to dissenters' rights
unless holders of at least 5% of the outstanding
shares of Bank Common Stock have perfected their
dissenters' rights in accordance with Chapter 13.
The high, low and closing sales prices for Bank
Common Stock on February 18, 1998 were $43.75,
$40.25 and $43.75, respectively. The procedure for
perfecting dissenters' rights is summarized under
the caption "RIGHTS OF DISSENTING BANK
SHAREHOLDERS" and the pertinent provisions of
Chapter 13, which are included as Appendix D to
this Prospectus/Proxy Statement.
THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 MUST
BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY
BE LOST.
ACCOUNTING
TREATMENT
The parties expect that the Merger will be treated
as a pooling of interests for accounting and
financial reporting purposes. Prior to the
Effective Time and as a condition precedent to the
closing, Deloitte & Touche LLP ("D&T") will confirm
in writing the accounting and financial reporting
treatment of the Merger as a pooling of interests.
9
<PAGE> 15
MARKET PRICES The closing price of FSC Common Stock as reported
on the Nasdaq National Market was $24.75 per share
on February 18, 1998, the last trading day prior to
the public announcement of the execution of the
Merger Agreement; and $24.81 per share on the
Record Date.
The closing price of Bank Common Stock as reported
on the Nasdaq National Market was $43.75 per share
on February 18, 1998, the last trading day prior to
the public announcement of the execution of the
Merger Agreement; and $51.00 per share on the
Record Date.
10
<PAGE> 16
COMPARATIVE SUMMARY CAPITALIZATION AND PRO FORMA CAPITALIZATION
OF FSC AND THE BANK
The following table is a summary of the capitalization of FSC and the Bank
as of December 31, 1997. The information presented is derived from the audited
consolidated financial statements of the companies. Also shown is the pro forma
capitalization of the combined companies as a result of the Merger:
<TABLE>
<CAPTION>
PRO FORMA
FSC THE BANK COMBINED
---------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Common Equity.................................... $1,316,912 $83,433 $1,400,345
Preferred Equity................................. 501 0 501
Long-Term Debt................................... 1,304,463 30,000 1,334,463
Short-term Debt.................................. 3,551,851 22,298 3,574,149
</TABLE>
SELECTED COMPARATIVE FINANCIAL DATA
The following selected historical financial information on FSC and the Bank
is derived from audited year-end consolidated financial statements of FSC,
certain of which are incorporated herein by reference, and from the audited
1997, 1996, 1995, 1994 and 1993 year-end consolidated financial statements of
the Bank. (The Bank's financial statements at December 31, 1997 and 1996 are
included in the Bank's Annual Report on Form 10-K, which is attached as Appendix
B to this Prospectus/Proxy Statement.) All FSC results have been restated to
reflect FSC's significant historical pooling of interests acquisitions, as
previously announced in the time relevant time periods, and to reflect in per
share amounts the stock splits effected by means of 50% stock dividends on
February 15, 1996, May 15, 1997 and February 24, 1998. In addition, FSC results
reflect the 1993 adoption of SFAS No. 109 "Accounting for Income Taxes" and the
1997 adoption of SFAS No. 128 "Earnings Per Share." This information should be
read in conjunction with such financial statements and notes thereto, and the
information hereinafter set forth under the captions "INFORMATION ABOUT FSC,"
and "INFORMATION ABOUT THE BANK," below. (See "AVAILABLE INFORMATION," and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," above.)
11
<PAGE> 17
FSC
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME
Interest Income............... $ 1,153,785 $ 987,808 $ 934,859 $ 773,517 $ 644,732
Net Interest Income........... 582,500 516,576 474,991 458,102 403,938
Provision for Possible Loan
Losses..................... 62,686 40,300 21,082 825 11,684
Income Before Taxes........... 109,383 99,752 70,191 81,043 59,211
Net Income.................... 205,944 177,843 120,005 140,134 114,056
PER COMMON SHARE DATA
Earnings per share: basic..... $ 1.20 $ 1.05 $ 0.71 $ 0.85 $ 0.72
Earnings per share: diluted... 1.16 1.02 0.70 0.83 0.70
Cash Dividends Declared....... 0.44 0.38 0.33 0.31 0.26
Book Value.................... 7.59 6.69 6.09 5.31 5.11
AVERAGE BALANCE SHEET DATA
Earning Assets................ $13,554,151 $11,671,304 $11,038,396 $10,072,306 $ 8,319,615
Total Assets.................. 15,207,247 13,045,607 12,232,262 11,139,838 9,214,260
Total Deposits................ 9,628,895 8,884,443 8,391,856 7,699,627 6,956,114
Long-Term Debt................ 1,040,147 746,885 728,788 368,096 204,129
Stockholders' Equity.......... 1,216,090 1,067,847 986,175 868,735 784,658
END OF PERIOD BALANCE SHEET DATA
Earning Assets................ $15,285,028 $13,115,096 $11,746,677 $11,019,059 $ 9,329,273
Total Assets.................. 17,307,411 14,708,024 13,034,607 12,148,982 10,211,689
Total Deposits................ 10,716,325 9,439,263 8,773,642 8,053,344 7,503,707
Long-Term Debt................ 1,304,463 944,055 720,521 685,426 224,836
Stockholders' Equity.......... 1,317,413 1,140,648 1,030,263 889,474 835,731
</TABLE>
12
<PAGE> 18
THE BANK
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME
Interest Income............... $ 59,506 $ 51,521 $ 39,156 $ 28,142 $ 23,334
Net Interest Income........... 43,352 37,425 29,212 21,522 17,312
Provision for Possible Loan
Losses..................... 700 1,000 1,600 720 1,320
Income Before Taxes........... 15,463 10,393 6,771 3,623 1,014
Net Income.................... 9,330 6,629 4,626 3,568 1,204
PER COMMON SHARE DATA
Earnings per share: basic..... $ 1.81 $ 1.42 $ 1.32 $ 1.03 $ 0.35
Earnings per share: diluted... 1.69 1.35 1.26 1.02 0.35
Cash Dividends Declared....... 0.44 0.40 0.40 0.40 0.40
Book Value.................... 16.28 15.08 14.82 13.80 13.55
AVERAGE BALANCE SHEET DATA
Earning Assets................ $ 680,329 $ 569,310 $ 401,644 $ 329,764 $ 293,833
Total Assets.................. 782,035 669,527 468,407 385,384 346,374
Total Deposits................ 678,411 585,466 396,933 321,762 293,511
Long-Term Debt................ 493 -- -- -- --
Stockholders' Equity.......... 80,633 68,443 50,548 47,148 47,054
END OF PERIOD BALANCE SHEET DATA
Earning Assets................ $ 759,449 $ 637,190 $ 428,926 $ 391,330 $ 301,366
Total Assets.................. 849,232 753,707 499,237 457,762 344,486
Total Deposits................ 701,658 663,744 428,649 388,628 293,150
Long-Term Debt................ 30,000 -- -- -- --
Stockholders' Equity.......... 83,433 77,192 52,732 47,894 46,527
</TABLE>
13
<PAGE> 19
SELECTED COMPARATIVE HISTORICAL, PRO FORMA AND
EQUIVALENT PRO FORMA PER SHARE DATA
The following table, which shows comparative historical per common share
data for FSC and the Bank (separately and pro forma combined), and equivalent
pro forma per share data for the Bank, should be read in conjunction with the
financial information appearing elsewhere in this Prospectus/Proxy Statement or
incorporated herein by reference to other documents. The pro forma data in the
table, presented as of December 31, 1997, 1996 and 1995, are presented for
comparative and illustrative purposes only and are not necessarily indicative of
the combined financial position of FSC following the Merger or FSC's results of
operations in the future or what the combined financial position or results of
operations would have been had the Merger Agreement been consummated during the
periods or as of the dates for which the information in the table is presented:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA COMBINED
----------------- -------------------------
FSC AND
THE BANK THE BANK
PRO-FORMA EQUIVALENT
PER COMMON SHARE FSC THE BANK COMBINED PRO-FORMA(4)
---------------- ----- -------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INCOME:(1)(5)
For the year ended
December 31, 1997...................... $1.16 $ 1.69 $1.14 $ 2.43
December 31, 1996...................... 1.02 1.35 1.00 2.13
December 31, 1995...................... 0.70 1.26 0.69 1.47
CASH DIVIDENDS:(2)
For the year ended
December 31, 1997...................... $0.44 $ 0.44 $0.44 $ 0.94
December 31, 1996...................... 0.38 0.40 0.38 0.81
December 31, 1995...................... 0.33 0.40 0.33 0.70
BOOK VALUE:(3)
As of December 31, 1997.................. $7.59 $16.28 $7.54 $16.06
</TABLE>
- ---------------
(1) Net Income per Common Share: diluted is based on weighted average Common
Shares outstanding and assumes conversion of preferred shares and exercise
of outstanding options calculated using the treasury stock method.
(2) Pro forma cash dividends represent historical cash dividends of FSC.
(3) Book value per Common Share is based on total period-end Shareholders'
equity and, for FSC, less preferred equity of $501,000 at December 31, 1997,
1996 and 1995. Period-end data are not shown because the pro forma effect is
immaterial.
(4) Pro forma equivalent amounts are computed by multiplying the pro forma
combined amounts by the estimated exchange ratio as of the dates shown. (See
"PROPOSAL NUMBER TWO: THE PROPOSED MERGER AGREEMENT -- Consideration to Be
Received by Bank Shareholders.")
(5) For FSC, the weighted average shares outstanding were 176,995,000,
174,531,000 and 172,185,000 for the years ended December 31, 1997, 1996 and
1995, respectively. For the Bank, the weighted average shares outstanding
were 5,513,832, 4,914,932 and 3,680,720 for the years ended December 31,
1997, 1996 and 1995, respectively.
14
<PAGE> 20
HISTORICAL MARKET PRICES AND DIVIDENDS
FSC Common Stock and Bank Common Stock are quoted through the Nasdaq
National Market under the symbols "FSCO" and "CSTB," respectively.
The following table sets forth by quarter the high and low sales price of
FSC Common Stock and Bank Common Stock as reported on the Nasdaq National
Market, and the cash dividends declared per share for the calendar periods
indicated. The information presented below was obtained from the National
Association of Securities Dealers, Inc. and reflects interdealer prices, without
retail markup, markdown or commissions, and may not represent actual
transactions. AS ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, ALL FSC NUMBERS
OF SHARES AND PER SHARE INFORMATION ARE ADJUSTED FOR A NUMBER OF FSC STOCK
SPLITS TAKING PLACE IN THE PERIOD 1993-1998, THE MOST RECENT BEING PAID ON
FEBRUARY 24, 1998.
<TABLE>
<CAPTION>
CASH DIVIDENDS
DECLARED
PER SHARE
--------------
FSC HIGH FSC LOW BANK HIGH BANK LOW FSC BANK
-------- ------- --------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1997
Fourth Quarter...................... $27.92 $19.08 $41.75 $29.00 $0.11 $0.12
Third Quarter....................... 21.33 17.58 31.13 24.75 0.11 0.12
Second Quarter...................... 19.00 14.45 26.13 20.75 0.11 0.10
First Quarter....................... 16.56 14.22 23.75 17.00 0.10 0.10
1996
Fourth Quarter...................... $15.17 $12.50 $17.50 $15.00 $0.10 $0.10
Third Quarter....................... 12.50 10.57 16.00 14.50 0.09 0.10
Second Quarter...................... 12.28 10.17 16.13 13.75 0.09 0.10
First Quarter....................... 12.33 10.30 14.75 12.75 0.09 0.10
1995
Fourth Quarter...................... $11.26 $ 9.04 $15.00 $13.00 $0.08 $0.10
Third Quarter....................... 9.85 8.15 15.50 12.38 0.08 0.10
Second Quarter...................... 8.48 6.81 13.00 11.97 0.08 0.10
First Quarter....................... 7.60 6.52 13.25 10.00 0.08 0.10
1994
Fourth Quarter...................... $ 8.44 $ 6.37 $11.50 $ 9.50 $0.08 $0.10
Third Quarter....................... 9.48 8.22 11.75 10.25 0.08 0.10
Second Quarter...................... 9.19 8.08 10.63 7.63 0.08 0.10
First Quarter....................... 8.59 7.63 9.50 7.75 0.08 0.10
1993
Fourth Quarter...................... $ 8.89 $ 7.11 $10.00 $ 7.50 $0.07 $0.10
Third Quarter....................... 8.44 7.85 10.50 7.88 0.07 0.10
Second Quarter...................... 8.89 7.56 12.25 8.13 0.07 0.10
First Quarter....................... 8.96 7.56 14.50 11.50 0.06 0.10
</TABLE>
FSC
The closing price of FSC Common Stock as reported on the Nasdaq National
Market on February 18, 1998, the last trading day prior to the public
announcement of the Merger Agreement was $24.75 per share. On April 14, 1998,
the closing price for FSC Common Stock was $24.81 per share.
FSC has paid cash dividends on its common and preferred stock without
reduction in amount for over 60 consecutive years. Since 1983, these dividends
have been paid quarterly. Dividends on FSC's $3.15 Cumulative Preferred Stock
are paid semi-annually and are current.
15
<PAGE> 21
Future dividends on FSC Common Stock will be determined by FSC's Board of
Directors in light of circumstances existing at the time, including the earnings
and financial condition of FSC, and there is no assurance that dividends will
continue to be paid at current levels. No material restrictions have been
imposed on FSC's ability to pay dividends from its earned surplus by bank
regulations or applicable law.
Payment of dividends on the FSC Common Stock is also subject to the prior
rights of FSC's outstanding Preferred Stock.
The Bank Shareholders are advised to obtain current market quotations for
FSC Common Stock. No assurances can be given concerning the market price of the
FSC Common Stock before or after the date on which the Merger is consummated.
The market price of FSC Common Stock will fluctuate between the date of this
Prospectus/Proxy Statement and the Closing Date and thereafter. Because the
Conversion Ratio is subject to the adjustment mechanisms described earlier in
this Prospectus/Proxy Statement, and because the market price of FSC Common
Stock is subject to fluctuation, the value of the shares of FSC Common Stock
that the Bank Shareholders will receive under the Merger Agreement may increase
or decrease prior to and following the Closing.
THE BANK
The last reported sales price for Bank Common Stock on February 18, 1998,
as reported on the Nasdaq National Market, was $43.75 per share. On April 14,
1998, the closing price for Bank Common Stock was $51.00 per share.
The Bank has learned that the following securities dealers were market
makers in Bank Common Stock in February 1998: Crowell, Weedon & Co.; Herzog,
Heine, Geduld, Inc.; Hoefer & Arnett, Incorporated; Keefe, Bruyette & Woods,
Inc.; Sutro & Co. Inc.; Torrey Pines Securities Inc.; Tucker Anthony
Incorporated; and Wedbush Morgan Securities, Inc.
On December 31, 1997, there were approximately 1,682 shareholders of record
of Bank Common Stock.
The Bank has declared quarterly cash dividends of $.10 per share from the
first quarter of 1993 through the second quarter of 1997, and cash dividends of
$.12 for each of the last two quarters of 1997. Payment of future cash dividends
will be subject to the discretion of the Board of Directors and will depend upon
the earnings of the Bank, its financial condition, its capital requirements, its
need for funds, applicable governmental policies and regulations and such other
matters as the Board deems appropriate. The terms of the Merger Agreement
further limit the Bank's ability to pay cash dividends except in accordance with
past practices provided, however, that the Bank may not pay a dividend in the
quarter in which the Merger is consummated if the Effective Time is prior to
FSC's record date for payment of its quarterly dividend in such quarter. The
Board periodically reviews whether to pay cash dividends based on the foregoing
facts, but there is no present dividend policy committing the Bank to pay cash
dividends in the future.
Because the Bank is a California state chartered bank, its ability to pay
dividends or make distributions to its shareholders is subject to restrictions
set forth in the California Financial Code. The California Financial Code
provides that neither a bank nor any majority-owned subsidiary of a bank may
make a distribution to its shareholders in an amount which exceeds the lesser of
(i) the bank's retained earnings, or (ii) the bank's net income for its last
three fiscal years, less the amount of any distributions made by the bank or by
any majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank or a majority-owned subsidiary of a bank may, with
the prior approval of the Commissioner, make a distribution to the shareholders
of the bank in an amount not exceeding the greatest of (i) its retained
earnings, (ii) its net income for its last fiscal year, or (iii) its net income
for its current fiscal year. In the event that the Commissioner determines that
the stockholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order
the bank to refrain from making a proposed distribution. As of December 31,
1997, the Bank had approximately $15.0 million legally available for the payment
of dividends.
16
<PAGE> 22
THE BANK SHAREHOLDERS' MEETING
GENERAL
This Prospectus/Proxy Statement is being furnished in connection with the
solicitation of Proxies by the Board of Directors of the Bank for use at the
Bank Shareholders' Meeting to be held at the Industry Hills Sheraton Resort &
Conference Center, One Industry Hills Parkway, City of Industry, California
91744 on Tuesday, May 26, 1998, at 4:00 p.m. local time, and at any and all
adjournments thereof. It is expected that this Prospectus/Proxy Statement and
enclosed form of Proxy will be mailed to Bank Shareholders on or about April 20,
1998.
The matters to be considered and voted upon at the Meeting will be:
1. Election of Directors. To elect 14 persons to the Board of
Directors to serve until the 1999 Annual Meeting of Bank Shareholders and
until their successors are elected and have qualified. (See "PROPOSAL
NUMBER ONE: ELECTION OF DIRECTORS.")
2. Merger with FSMC. To consider and vote on the Merger Agreement and
the transactions contemplated thereby. Pursuant to the Merger Agreement the
Bank will become a wholly-owned subsidiary of FSC, and subject to the
adjustments described therein, upon consummation of the Merger, each
outstanding share of Bank Common Stock will be converted into 2.13 shares
of FSC Common Stock. (See "PROPOSAL NUMBER TWO: THE PROPOSED MERGER
AGREEMENT.")
3. Other Business. To transact such other business as may properly
come before the Bank Shareholders' Meeting and at any and all adjournments
thereof.
REVOCABILITY OF PROXIES
A Proxy for use at the Bank Shareholders' Meeting is enclosed. Any Bank
Shareholder who executes and delivers such Proxy has the right to revoke it at
any time before it is exercised by filing with the Corporate Secretary of the
Bank an instrument revoking it or a duly executed Proxy bearing a later date. It
may also be revoked by attending the Bank Shareholders' Meeting and electing to
vote thereat. Subject to such revocation, all shares represented by a properly
executed Proxy received in time for the Bank Shareholders' Meeting will be voted
by the Proxy Holders in accordance with the instructions on the Proxy. If no
instruction is specified in respect to a matter to be acted upon, the shares
represented by the Proxy will be voted "FOR" the election of the nominees for
directors set forth herein and "FOR" the Merger Agreement. It is not anticipated
that any matters will be presented at the Bank Shareholders' Meeting other than
as set forth in the accompanying Notice of the Bank Shareholders' Meeting. If,
however, any other matters properly are presented at the Bank Shareholders'
Meeting, the Proxy will be voted in accordance with the best judgment and in the
discretion of the Proxy Holders.
COSTS OF SOLICITATION OF PROXIES
The Bank will bear the costs of this solicitation, including the expense of
preparing, assembling, printing and mailing this Proxy Statement and the
material used in this solicitation of Proxies. It is contemplated that Proxies
will be solicited principally through the mails, but directors, officers and
regular employees of the Bank may solicit Proxies personally or by telephone.
Although there is no formal agreement to do so, the Bank may reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expense in forwarding these Proxy materials to their principals. The
Bank has retained Corporate Investor Communications, Inc. ("CIC") to assist it
in the solicitation of Proxies as well as the distribution of Proxies. The Bank
has agreed to pay CIC the sum of approximately $3,500 plus its out-of-pocket
expenses incurred in providing all of these services. In addition, the Bank may
pay for and utilize the services of other individuals or companies not regularly
employed by the Bank in connection with the solicitation of Proxies, if the
Board of Directors deems it advisable.
17
<PAGE> 23
OUTSTANDING SECURITIES AND VOTING RIGHTS; QUORUM
There were issued and outstanding 5,279,451 shares of Bank Common Stock on
the Record Date. A majority of the outstanding shares of Bank Common Stock
constitutes a quorum for the conduct of business at the Bank Shareholders'
Meeting. Abstentions will be treated as shares present and entitled to vote for
purposes of determining the presence of a quorum.
Each Bank Shareholder of record will be entitled to one vote, in person or
by proxy, for each share of Common Stock standing in his or her name on the
books of the Bank as of the record date for the Bank Shareholders' Meeting on
any matter submitted to the vote of the Bank Shareholders, except that in
connection with the election of directors the shares are entitled to be voted
cumulatively if a Bank Shareholder present at the Bank Shareholders' Meeting has
given notice at the Bank Shareholders' Meeting prior to the voting of his or her
intention to vote his or her shares cumulatively. If any Bank Shareholder has
given such notice, all Bank Shareholders may cumulate their votes for candidates
in nomination. Cumulative voting entitles a Bank Shareholder to give one nominee
as many votes as is equal to the number of directors to be elected, multiplied
by the number of shares owned by such Bank Shareholder, or to distribute his or
her votes on the same principle between two or more nominees as he or she sees
fit. Discretionary authority to cumulate votes is hereby solicited by the Board
of Directors and return of the Proxy shall grant such authority.
IF YOU HOLD YOUR BANK COMMON STOCK IN "STREET NAME" AND YOU FAIL TO
INSTRUCT YOUR BROKER OR NOMINEE AS TO HOW TO VOTE YOUR SHARE(S) OF BANK COMMON
STOCK, YOUR BROKER OR NOMINEE MAY, IN ITS DISCRETION AND IN COMPLIANCE WITH
APPLICABLE EXCHANGE RULES, VOTE YOUR BANK COMMON STOCK "FOR" THE ELECTION OF THE
BOARD OF DIRECTOR'S NOMINEES, BUT MAY NOT VOTE YOUR BANK COMMON STOCK ON THE
PROPOSAL TO APPROVE THE MERGER AGREEMENT.
In the election of directors, the 14 candidates receiving the highest
number of votes will be elected. Accordingly, abstentions and broker non-votes
will have no effect on the proposal to elect directors. Approval of the Merger
Agreement requires the affirmative vote of a majority of the outstanding shares
of the Bank's Common Stock. Accordingly, abstentions and broker non-votes will
have the same effect as a vote "AGAINST" the Merger Agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Board of Directors of the Bank knows of no Bank Shareholder who owns
beneficially more than 5% of the Bank's Common Stock.
18
<PAGE> 24
The following table sets forth certain information, as of the Record Date,
with respect to current Directors and to those persons who have been nominated
by the Board of Directors for election as Directors, the Named Executives (as
defined below), as well as for all Directors and Executive Officers(1) of the
Bank, as a group:
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED(2)
-----------------------------------------
NAME AND POSITION NUMBER OF SHARES PERCENT OF CLASS(3)
- ----------------- ---------------- -------------------
<S> <C> <C>
John B. Allen............................................ 68,247 1.29%
Director
Robert W. Arnett, Jr..................................... 33,761 *
Director
Rodney A. Baker.......................................... 63,280 1.20%
Director and Secretary
Eugene D. Bishop(4)...................................... 140,749(5) 2.62%
President, Chief Operating Officer and Director
Thomas A. Bishop(4)...................................... 185,645(6) 3.45%
Chairman of the Board, Chief Executive Officer and
Director
Clifton C. Booth......................................... 45,987 *
Director
Jack B. Campbell......................................... 57,858 1.10%
Director
Robert C. Glenn, D.D.S................................... 24,169 *
Director
Richard J. Jett.......................................... 55,357(7) 1.04%
Executive Vice President and Director
Warren J. Kraft.......................................... 12,431 *
Director
James R. Mulligan........................................ 79,435 1.50%
Director
Steven N. Reenders....................................... 48,924 *
Director
John W. Russell.......................................... 33,298(8) *
Director
Emmett A. Tompkins, Jr................................... 34,893 *
Director
David T. Blankenhorn..................................... 9,000(9) *
Executive Vice President and Branch Administrator
Thomas E. Vessey......................................... 32,659(10) *
Executive Vice President and Senior Credit Officer
All Directors and Executive Officers, as a group (19
persons)............................................... 979,801(11) 17.65%
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise noted, as used throughout this Prospectus/Proxy
Statement, the term "Executive Officer" means Chairman of the Board/Chief
Executive Officer, President/Chief Operating Officer, Executive Vice
President/Branch Administrator, Executive Vice President/Chief Financial
Officer, Executive Vice President/SBA Administrator, Executive Vice
President/Senior Credit Officer, Senior Vice President/Cashier and Senior
Vice President/Loan Administrator.
(2) Except as otherwise noted below, each nominee named directly or indirectly
has sole or shared voting and investment power with respect to the shares
shown as beneficially owned by them.
(3) The percentage for each of these persons or group is based upon the total
number of shares of the Bank's Common Stock outstanding plus the shares
which the respective individual or group has the right to acquire within 60
days after the Record Date (without giving effect to the acceleration of
vesting as a result of the Merger), by the exercise of stock options vested
pursuant to the Bank's 1988 Stock Option Plan and/or the Bank's 1994 Stock
Option Plan (the "Option Plans").
(footnotes continued on following page)
19
<PAGE> 25
(footnotes continued from prior page)
(4) Eugene D. Bishop and Thomas A. Bishop are brothers.
(5) Includes 89,100 shares which Mr. E. Bishop has the right to acquire within
60 days after the Record Date by the exercise of stock options vested
pursuant to the Bank's Option Plans.
(6) Includes 99,435 shares which Mr. T. Bishop has the right to acquire within
60 days after the Record Date by the exercise of stock options vested
pursuant to the Bank's Option Plans.
(7) Includes 33,562 shares which Mr. Jett has the right to acquire within 60
days after the Record Date by the exercise of stock options vested pursuant
to the Bank's Option Plans. Also includes shares beneficially owned by
Michelle D. Jett, Mr. Jett's wife and an Executive Officer of the Bank.
(8) Includes 15,435 shares which Mr. Russell has the right to acquire within 60
days after the Record Date by the exercise of stock options vested pursuant
to the Bank's Option Plans.
(9) Represents 9,000 shares which Mr. Blankenhorn has the right to acquire
within 60 days after the Record Date by the exercise of stock options
vested pursuant to the Bank's Option Plans.
(10) Includes 9,000 shares which Mr. Vessey has the right to acquire within 60
days after the Record Date by the exercise of stock options vested pursuant
to the Bank's Option Plans.
(11) Includes 270,532 shares which members of the group have the right to
acquire within 60 days after the Record Date by the exercise of stock
options vested pursuant to the Bank's Option Plans.
SECTION 16(a) REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, the Bank's Directors, Executive
Officers and any persons holding ten percent or more of the Common Stock of Bank
are required to report their ownership of Bank Common Stock and any changes in
that ownership to the Federal Deposit Insurance Corporation (the "FDIC") and to
furnish the Bank with copies of such reports. Specific due dates for these
reports have been established and the Bank is required to report in this Proxy
Statement any failure to file on a timely basis by such persons. Based solely
upon a review of copies of reports filed with the FDIC during the fiscal year
ended December 31, 1997, all persons subject to the reporting requirements of
Section 16(a) filed all required reports on a timely basis.
[THIS SPACE LEFT BLANK INTENTIONALLY]
20
<PAGE> 26
PROPOSAL NUMBER ONE: ELECTION OF DIRECTORS
NOMINEES
The Bylaws of the Bank provide that the number of directors shall be not
less than nine nor more than 17 until changed by a bylaw amending Section 2.2 of
the Bank's Bylaws, duly adopted by the vote or written consent of the Bank's
Shareholders. The Bylaws further provide that the exact number of directors
shall be fixed from time to time, within the foregoing range, by a bylaw or
amendment thereof duly adopted by the vote or written consent of the Bank's
Board of Directors. The Board of Directors has adopted a resolution to fix the
number of directors at 14.
The nominees identified below, all of whom are current members of the Board
of Directors of the Bank, have been nominated for election to serve until the
next Annual Meeting of Bank Shareholders and until their successors are elected
and have qualified. If the Merger is consummated prior to the 1999 Annual
Meeting of Bank Shareholders, the Directors of the Bank at the Effective Time
will continue as directors of the Bank, except that the Bank will then be a
subsidiary of FSC; provided that substantially all Bank Directors will resign
following the Effective Time in favor of FSC's nominees. Votes will be cast
pursuant to the enclosed Proxy in such a way as to effect the election of the 14
nominees, or as many thereof as possible, under applicable voting rules. In the
event that any of the nominees should be unable or unwilling to accept
nomination for election as a director, it is intended that the Proxy Holders
will vote for the election of such substitute nominees, if any, as shall be
designated by the Board of Directors. The Board of Directors has no reason to
believe that any nominee will be unable or unwilling to serve if elected to
office.
The biographical information of the nominees is set forth below. Certain
Directors of the Bank were directors of banks which merged with the Bank.
Messrs. Allen, Arnett, E. Bishop, Russell and Tompkins were directors of Granada
Bank prior to becoming directors of the Bank. Messrs. Jett and Reenders were
directors of Empire Bank, N.A. prior to becoming Directors of the Bank. Messrs.
Campbell, Glenn and Kraft were directors of Landmark Bank prior to becoming
Directors of the Bank. Mr. Jett is the husband of another Executive Officer of
the Bank, Ms. Michelle D. Jett. Messrs. Thomas A. Bishop and Eugene D. Bishop
are brothers.
<TABLE>
<CAPTION>
NAME AND POSITION OCCUPATION YEAR FIRST APPOINTED
WITH BANK FOR PAST FIVE YEARS AGE DIRECTOR OF BANK
----------------- ------------------- --- --------------------
<S> <C> <C> <C>
John B. Allen..................... Chairman of the Board and Chief 67 1985
Director Executive Officer, Crestview
Cadillac and Bewley Allen Cadillac
(automobile dealerships)
Robert W. Arnett, Jr.............. Chairman and Chief Executive 66 1985
Director Officer, Fry Reglet Corporation
(manufacturing and distribution)
Rodney A. Baker................... Attorney at Law 68 1979
Director and Secretary
Eugene D. Bishop.................. President and Chief Operating 62 1985
President, Chief Operating Officer, California State Bank
Officer and Director
Thomas A. Bishop.................. Chairman of the Board and Chief 60 1979
Chairman of the Board, Chief Executive Officer, California
Executive Officer and Director State Bank
Clifton C. Booth.................. President and Chief Executive 61 1980
Director Officer, Alpha Financial
Corporation; previously President
of Occidental Mortgage Corporation
(mortgage banking)
</TABLE>
21
<PAGE> 27
<TABLE>
<CAPTION>
NAME AND POSITION OCCUPATION YEAR FIRST APPOINTED
WITH BANK FOR PAST FIVE YEARS AGE DIRECTOR OF BANK
----------------- ------------------- --- --------------------
<S> <C> <C> <C>
Jack B. Campbell.................. President and Chief Executive 75 1996
Director Officer of Travelers Inns, a motel
chain developer and operator. He
is also a Managing Partner of both
Campbell Enterprises and Campbell
Holdings, involved in investments
and real estate development.
Robert C. Glenn, D.D.S............ Retired dentist 65 1996
Director
Richard J. Jett................... Senior Executive Vice President 57 1990
Executive Vice President and and Branch Administrator,
Director California State Bank
(1990 - 1994); Executive Vice
President and SBA Administrator,
California State Bank (1994 -
present)
Warren J. Kraft................... President and owner of La Habra 69 1996
Director Fence Company
James R. Mulligan................. President, Mulligan Sales, Inc. 76 1979
Director (wholesale dairy products)
Steven N. Reenders................ President, The Reenders Company 47 1990
Director (real estate development and
property management)
John W. Russell................... Chief Executive Officer, Rusco, 60 1985
Director Inc.; President, The Alethian
Group (business consulting)
Emmett A. Tompkins, Jr............ Partner, Tompkins & Parrington 62 1985
Director (Attorneys at Law)
</TABLE>
EXECUTIVE OFFICERS
Set forth below is biographical information concerning the Executive
Officers of the Bank except for Messrs. E. Bishop, T. Bishop and R. Jett for
whom biographical information has already been provided above. (See "Nominees.")
PAUL E. BRANDT, age 66, assumed the position of Executive Vice President
and Chief Financial Officer of the Bank in October 1991.
DAVID T. BLANKENHORN, age 58, assumed the position of Executive Vice
President and Branch Administrator in 1994. Prior to that he was President and
Chief Executive Officer of Bank of Newport during 1994 and President and Chief
Operating Officer of Commercial Center Bank from 1991 to 1994.
HOWARD R. CRAWFORD, age 52, assumed the position of Senior Vice President
and Loan Administrator of the Bank in January 1988.
MICHELLE D. JETT, age 41, assumed the position of Senior Vice President and
Cashier of the Bank in December 1995. Prior to that she was Senior Vice
President and Controller of the Bank from January 1992 to December 1995. Prior
to that she was Vice President and Controller of the Bank from January 1986 to
January 1992. Ms. Jett is the wife of Richard J. Jett, Executive Vice President
and Director of the Bank.
THOMAS E. VESSEY, age 58, has served as Executive Vice President and Senior
Credit Officer of the Bank since 1991.
THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES
The Board of Directors has a standing Audit Committee, Budget and
Compensation Committee and Stock Option Committee. The Bank has also established
a Special Committee to meet on an ad hoc basis in connection with matters
concerning the Merger.
22
<PAGE> 28
The Board does not have a standing Nominating Committee; however, the
procedures for nominating directors, other than by the Board of Directors
itself, are set forth in the Bank's Bylaws and in the Notice of Annual Meeting
of Bank Shareholders.
The Audit Committee is currently composed of Messrs. Allen, Kraft, Russell
and Tompkins. The Audit Committee held twelve (12) meetings during 1997. The
purpose of the Audit Committee is to direct the activities of the internal audit
department and the loan review department in order to fulfill the legal and
technical requirements necessary to adequately protect the directors,
shareholders, and employees of the Bank. It is also the responsibility of the
Audit Committee to meet with the Bank's outside auditors to discuss the scope
and results of its audit.
The Budget and Compensation Committee is currently composed of Messrs.
Arnett, Baker, E. Bishop, T. Bishop and Mulligan. This committee met nine (9)
times during 1997. The purpose of the Budget and Compensation Committee is to
review and administer budget and compensation plans.
The Stock Option Committee is currently composed of Messrs. Allen, Arnett,
Booth, Campbell, Glenn, Kraft, Mulligan, Reenders, Russell and Tompkins. This
committee met four (4) times during 1997. The purpose of the Stock Option
Committee is to administer the Bank's Option Plans.
The Special Committee consists of Messrs. Allen, Arnett, Baker, E. Bishop,
T. Bishop and Reenders. The Special Committee did not meet during 1997.
During the year ended December 31, 1997, the Board of Directors of the Bank
held a total of thirteen (13) meetings. All of the persons who were directors of
the Bank during 1997 and are nominees attended at least 75% of the aggregate of
(a) the total number of such Bank Board meetings, and (b) the total number of
meetings held by all committees of the Board of Directors of the Bank on which
he served during the year.
[THIS SPACE LEFT BLANK INTENTIONALLY]
23
<PAGE> 29
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain compensation information for the
Chief Executive Officer and the four most highly compensated Executive Officers
of the Bank at the end of 1997 (the "Named Executives").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION PAYOUTS
------------------- AWARDS -----------------------------------
---------- SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) ($) (#) ($) ($)
--------------------------- ---- -------- -------- ------------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas A. Bishop................ 1997 250,000 207,500 -- -- -- -- 231,811(4)(5)
Chairman of the Board and 1996 250,000 150,000 -- -- -- -- 151,191(4)(5)
Chief Executive Officer 1995 207,500 155,625 -- -- -- -- 116,822(4)(5)
Eugene D. Bishop................ 1997 250,000 207,500 -- -- -- -- 266,820(4)(6)
President and 1996 250,000 150,000 -- -- -- -- 170,564(4)(6)
Chief Operating Officer 1995 207,500 155,625 -- -- -- -- 130,707(4)(6)
David T. Blankenhorn............ 1997 125,000 45,000 -- -- 7,500 -- 4,500(7)
Executive Vice President and 1996 125,000 25,000 -- -- -- -- 3,750(7)
Branch Administrator 1995 120,000 25,000 -- -- -- -- 2,400(7)
Richard J. Jett................. 1997 157,000 25,000 -- -- -- -- 96,276(4)(8)
Executive Vice President and 1996 157,000 20,000 -- -- -- -- 89,307(4)(8)
SBA Administrator 1995 157,000 20,000 -- -- -- -- 80,353(4)(8)
Thomas E. Vessey................ 1997 135,000 50,000 -- -- -- -- 73,391(9)
Executive Vice President and 1996 123,050 37,000 -- -- -- -- 63,708(9)
Senior Credit Officer 1995 115,000 35,000 -- -- -- -- 37,510(9)
</TABLE>
- ---------------
(1) Includes amounts deferred by the named executive pursuant to the Executives'
Deferred Compensation Plan.
(2) 1997 bonuses paid in 1998, 1996 bonuses paid in 1997, and 1995 bonuses paid
in 1996.
(3) Excludes the cost to the Bank of other compensation which, with respect to
the Named Executives, does not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported.
(4) Includes directors' fees of $18,300, $18,000 and $12,600 for 1997, 1996 and
1995, respectively.
(5) Includes amounts accrued pursuant to the Executive's Deferred Compensation
Plan of $208,761, $128,691 and $100,072 for 1997, 1996, and 1995,
respectively. Also includes amounts contributed pursuant to the 401(k) Plan
for 1997, 1996 and 1995 of $4,750, $4,500 and $4,150, respectively.
(6) Includes amounts accrued pursuant to the Executive's Deferred Compensation
Plan of $244,520, $150,064 and $116,724 for 1997, 1996 and 1995,
respectively. Also includes amounts contributed pursuant to the 401(k) Plan
for 1997, 1996 and 1995 of $4,000, $2,500 and $1,383, respectively.
(7) Includes amounts contributed pursuant to the 401(k) Plan for 1997, 1996 and
1995 of $4,500, $3,750 and $2,400, respectively.
(8) Includes amounts accrued pursuant to the Executive's Deferred Compensation
Plan of $74,436, $68,211 and $65,660 for 1997, 1996 and 1995, respectively.
Also includes amounts contributed pursuant to the 401(k) Plan for 1997, 1996
and 1995 of $3,540, $3,096 and $2,093, respectively.
(9) Includes amounts accrued pursuant to the Executive's Deferred Compensation
Plan of $68,641, $60,017 and $35,210 for 1997, 1996 and 1995, respectively.
Also includes amounts contributed pursuant to the 401(k) Plan for 1997, 1996
and 1995 of $4,750, $3,691 and $2,300, respectively.
24
<PAGE> 30
The following table sets forth certain information regarding the options
exercised by the Named Executives during 1997 and the value of the unexercised
options held by the Named Executives at December 31, 1997. The Bank has no plans
pursuant to which stock appreciation rights may be granted.
AGGREGATED OPTION EXERCISES IN 1997
AND FY-END 1997 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES 12/31/97(#) 12/31/97($)
ACQUIRED ON --------------------------------- ----------------------------
NAME EXERCISE(#) VALUE REALIZED EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE UNEXERCISABLE
---- ----------- -------------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Bishop............. -- -- 99,435 30,000 $2,725,204 $832,500
Eugene D. Bishop............. -- -- 99,435 30,000 2,725,204 832,500
David T. Blankenhorn......... -- -- 9,000 13,500 249,750 258,375
Richard J. Jett.............. 10,657 $162,771 33,562 4,000 930,685 111,000
Thomas E. Vessey............. -- -- 9,000 6,000 249,750 166,500
</TABLE>
The following table sets forth certain information regarding the grant of
options to the Named Executives in 1997. The only Named Executive to receive a
grant of options during 1997 was Mr. Blankenhorn. This grant was made pursuant
to the Bank's 1988 Option Plan and vests 20% per year over a period of five
years beginning one year from the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------- REALIZED VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES PRICE EXPIRATION --------------------------------
NAME (#) IN FISCAL YEAR ($/SH) DATE 5% 10%
---- ----------- -------------- -------- ---------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
David T. Blankenhorn.......... 7,500 27.3% $25.00 6/18/07 $117,900 $298,800
</TABLE>
1998 SALARY COMPENSATION
The salaries for Messrs. T. Bishop, E. Bishop, D. Blankenhorn, R. Jett and
T. Vessey during 1998 are currently set at $250,000, $250,000, $135,000,
$157,000 and $146,000, respectively. These five individuals may also receive
annual bonuses in the discretion of the Board of Directors.
DEFERRED COMPENSATION PLANS
The following tables set forth the estimated annual benefits payable upon
retirement under the Bank's Executives' Deferred Compensation Plan for each of
the three classes of retirement benefits percentages. To participate, an
executive must defer five percent of his base compensation for eight consecutive
years. The Board of Directors determines which class an employee will
participate in for the purposes of deferred compensation benefits. An executive
becomes 20% vested in death and retirement benefits payable under the Plan after
two years, and thereafter at the rate of 10% per year until the executive is
fully vested after ten years. Footnote (1) follows the presentation of all three
tables.
[THIS SPACE LEFT BLANK INTENTIONALLY]
25
<PAGE> 31
PENSION PLAN TABLE -- CLASS A
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000............................ $ 87,500 $ 87,500 $ 87,500 $ 87,500 $ 87,500
150,000............................ 105,000 105,000 105,000 105,000 105,000
175,000............................ 122,500 122,500 122,500 122,500 122,500
200,000............................ 140,000 140,000 140,000 140,000 140,000
225,000............................ 157,500 157,500 157,500 157,500 157,500
250,000............................ 175,000 175,000 175,000 175,000 175,000
300,000............................ 210,000 210,000 210,000 210,000 210,000
400,000............................ 280,000 280,000 280,000 280,000 280,000
450,000............................ 315,000 315,000 315,000 315,000 315,000
500,000............................ 350,000 350,000 350,000 350,000 350,000
</TABLE>
PENSION PLAN TABLE -- CLASS B
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000............................ $ 75,000 $ 75,000 $ 75,000 $ 75,000 $ 75,000
150,000............................ 90,000 90,000 90,000 90,000 90,000
175,000............................ 105,000 105,000 105,000 105,000 105,000
200,000............................ 120,000 120,000 120,000 120,000 120,000
225,000............................ 135,000 135,000 135,000 135,000 135,000
250,000............................ 150,000 150,000 150,000 150,000 150,000
300,000............................ 180,000 180,000 180,000 180,000 180,000
400,000............................ 240,000 240,000 240,000 240,000 240,000
450,000............................ 270,000 270,000 270,000 270,000 270,000
500,000............................ 300,000 300,000 300,000 300,000 300,000
</TABLE>
PENSION PLAN TABLE -- CLASS C
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000............................ $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500
150,000............................ 75,000 75,000 75,000 75,000 75,000
175,000............................ 87,500 87,500 87,500 87,500 87,500
200,000............................ 100,000 100,000 100,000 100,000 100,000
225,000............................ 112,500 112,500 112,500 112,500 112,500
250,000............................ 125,000 125,000 125,000 125,000 125,000
300,000............................ 150,000 150,000 150,000 150,000 150,000
400,000............................ 200,000 200,000 200,000 200,000 200,000
450,000............................ 225,000 225,000 225,000 225,000 225,000
500,000............................ 250,000 250,000 250,000 250,000 250,000
</TABLE>
- ---------------
(1) Under the Executives' Deferred Compensation plan, at normal retirement, a
participant will receive a percentage based on the retirement benefit
formula class, of the average of his base compensation using the highest
five years during the preceding ten years of employment, payable monthly for
life. The benefits are not subject to deduction for Social Security or other
offset amounts. As of December 31, 1997, the average base compensation using
the highest five years during the preceding ten years of employment, the
years of participation and the class category for each of the executive
officers named in
26
<PAGE> 32
the Summary Compensation table who participate in this plan are: T. Bishop,
$218,300, ten years, Class A; E. Bishop, $218,300, ten years, Class A; R.
Jett, $157,000, ten years, Class A; and T. Vessey $116,610, ten years, Class
B. As of the date of this Prospectus/Proxy Statement, Mr. Blankenhorn does
not participate in the Executives' Deferred Compensation Plan.
CERTAIN TRANSACTIONS
Some of the Directors and Executive Officers of the Bank and Bank
Subsidiaries and the companies with which they are associated were customers of,
and had banking transactions with, the Bank in the ordinary course of business
during 1997, and the Bank expects to have such banking transactions in the
future. All loans and commitments included in such transactions were made on
substantially the same terms, including interest rates, collateral and repayment
terms, as those prevailing at the time for comparable transactions with other
persons of similar creditworthiness and, in the opinion of the Board of
Directors of the Bank, did not involve more than a normal risk of collectibility
or present other unfavorable features.
DIRECTORS' COMPENSATION
The Bank has a policy of paying fees to Directors for serving on the Board
of Directors and for their attendance at committee meetings. During 1997, all
Directors received $1,500 per month and $300 for each special meeting attended
and, for non-officer Directors, $300 for each committee meeting attended. In
addition, Directors are eligible to participate in the Bank's 1988 Stock Option
Plan, the 1994 Stock Option Plan and the Directors' Deferred Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Eugene Bishop and Mr. Thomas Bishop, both of whom serve on the Budget
and Compensation Committee, are the President and the Chief Executive Officer of
the Bank, respectively.
27
<PAGE> 33
PERFORMANCE GRAPH
The following graph compares, for the period from January 1, 1993 through
December 31, 1997, the yearly percentage change in the Bank's cumulative total
shareholder return on Bank Common Stock with (i) the cumulative total return of
the Nasdaq market index and (ii) the cumulative total return of a published
index comprised by Media General Financial Services, Inc. of banks and bank
holding companies in the "Pacific States," which are Alaska, California, Hawaii,
Oregon and Washington (the MG Group Index line depicted below). The graph
assumes an initial investment of $100 and reinvestment of dividends. The graph
is not necessarily indicative of future price performance.
The graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Prospectus/Proxy Statement into any
filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that the Bank
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
<TABLE>
<CAPTION>
Measurement Period CALIFORNIA NASDAQ MG GROUP
(Fiscal Year Covered) STATE BANK MARKET INDEX INDEX
<S> <C> <C> <C>
1992 100 100 100
1993 65.96 128.89 119.95
1994 88.56 126.39 125.94
1995 113.9 153.71 163.35
1996 157.41 218.62 202.99
1997 342.87 237.93 248.3
</TABLE>
COMPENSATION COMMITTEE REPORT
The Report of The Budget and Compensation Committee and the Stock Option
Committee of the Board of Directors shall not be deemed incorporated by
reference by any general statement incorporating by reference this
Prospectus/Proxy Statement into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent that the Bank specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
JOINT REPORT OF THE BANK'S BUDGET AND COMPENSATION COMMITTEE
AND THE STOCK OPTION COMMITTEE
The Budget and Compensation Committee is responsible for overseeing the
various compensation programs of the Bank, except for the Stock Option Plans.
During 1997, the Budget and Compensation Committee was comprised of non-employee
Directors Arnett, Baker and Mulligan and Executive Officers-Directors Thomas A.
Bishop and Eugene D. Bishop.
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<PAGE> 34
The Stock Option Committee is responsible for overseeing the Bank's Stock
Option Plans. During 1997, the Stock Option Committee was comprised of
non-employee Directors Allen, Arnett, Booth, Mulligan, Reenders, Russell,
Tompkins, Campbell, Glenn and Kraft.
The two committees are herein referred to as the "Compensation Committees."
The Compensation Committees answer to the Board of Directors, and
recommendations from these committees are submitted to the Board of Directors
for ratification and approval.
The following report is submitted by the members of the Compensation
Committees with respect to the executive compensation policies established by
the Compensation Committees and approved by the Board of Directors of the Bank.
COMPENSATION PHILOSOPHY
In establishing and evaluating the effectiveness of the compensation
programs for Executive Officers, as well as other employees of the Bank, the
Compensation Committees are guided by three basic principles:
- The Bank must be able to attract and retain highly qualified and
experienced banking professionals with proven performance records.
- Bonus compensation for Executive Officers should be tied to the Bank's
performance and financial condition, which is measured in terms of the
Bank's profitability, growth and asset quality.
- The financial interests of the Bank's executives should be aligned with
the financial interests of the shareholders, primarily through stock
option grants and other compensation programs which reward executives for
improvements in operating results and in the market performance of the
Bank's Common Stock.
ATTRACTING AND RETAINING EXECUTIVES AND OTHER KEY EMPLOYEES
There is substantial competition among banks and other financial
institutions and service organizations for qualified banking professionals. In
order to retain executives and other key employees, and to attract additional
well-qualified banking professionals when the need arises, the Bank strives to
offer salaries and health care, retirement and other employee benefit programs
to its executives and other key employees which are competitive with those
offered by other financial institutions.
In recommending salaries for the two Executive Officers, Messrs. Eugene D.
Bishop and Thomas A. Bishop, the Budget and Compensation Committee reviews the
historical performance of the executives and available information regarding
prevailing salaries and compensation programs at banks and other financial
organizations which are comparable, in terms of assets size, capitalization and
performance to the Bank. Another factor which is considered in establishing
salaries of executive and other officers is the cost of living in Southern
California where the Bank operates, as such cost generally is higher than in
many other parts of the country.
In order to attract and retain highly qualified banking professionals in
the face of competition for their services from other financial institutions,
the Compensation Committees believe that it is prudent to provide competitive
salaries, bonuses and other compensation benefits to its executive and senior
officers. The Bank's practice, however, is not to provide multi-year employment
contracts to such executives as all employees of the Bank are employed at will.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER AND OTHER EXECUTIVE OFFICERS
The Compensation Committees believe that the compensation for the Executive
Officers should be made dependent on the Bank's performance, including
profitability and performance measured goals established for the Bank by the
Board of Directors. As a result, a program has been established under which the
annual compensation, in excess of annual salaries, that is payable to Thomas A.
Bishop and Eugene D. Bishop is made dependent on the achievement by the Bank of
annual profitability and other performance goals. Although other Executive
Officers do not participate in this program, the Bank's policy is to award
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<PAGE> 35
discretionary compensation to other Executive Officers, in excess of their
annual salary, if the Bank achieves or exceeds the annual performance goals
expected by the Board of Directors and individual goals are met.
The Compensation Committees have identified several performance factors
which affect a bank's profitability and long-term performance, including asset,
loan and deposit growth, net earnings and the quality of the Bank's assets.
Performance goals in each of these areas, as well as goals for profitability,
measured in terms of net earnings and return on equity, are established and if
the performance goals are achieved or exceeded, a percentage of the Bank's
earnings in excess of the minimum earnings goal established for the year is set
aside as a pool from which bonuses are paid. Generally, the more senior the
position held by an executive, the greater the allocation that is made to him or
her because his or her performance has a greater impact on the Bank's
performance.
As a result of the Compensation Committees' policy to award bonus
compensation to the Executive Officers when the Bank achieves or exceeds annual
performance goals and the performance-based programs that have been adopted to
implement that policy, executive compensation generally will be higher in those
years in which the Bank achieves or exceeds annual performance goals. On the
other hand, in years in which the Bank has experienced lower than anticipated
profit and growth, bonuses and total executive compensation tend to be lower. In
1997, Thomas A. Bishop and Eugene D. Bishop were awarded cash bonuses of
$207,500 each or 83% of their base annual salaries, and the other six Executive
Officers were awarded a total of $215,000 in cash bonuses, based on the
performance of the Bank. The cash bonus awards for 1997 to Thomas A. Bishop and
Eugene D. Bishop were based on the Bank's financial results in 1997. Under their
direction, average total assets, loans and deposits increased by 16.8%, 10.3%
and 15.9%, respectively, over the 1996 levels. Net earnings improved 40.7% to
$9.3 million from $6.6 million in 1996, and the ratio of non-performing assets
as a percentage of year-end loans, leases and other real estate owned was 1.12%
at December 31, 1997 compared to 1.08% at December 31, 1996.
STOCK OPTIONS AND OTHER PROGRAMS
In order to align the financial interests of Executive Officers and other
key employees with those of the shareholders, the Bank grants stock options to
its Executive Officers and other key employees on a periodic basis and makes
contributions, for the account of its officers and other employees, to the
California State Bank 401(k) Plan which began in 1995. Prior to 1995, the Bank
made contributions to the Employee Stock Ownership Plan (the "ESOP"); however,
the ESOP was terminated in 1995 in favor of the establishment of the 401(k)
Plan. Stock option grants reward Executive Officers and other key employees for
performance that results in improved market performance of the Bank's stock,
which directly benefits all shareholders. Generally, options become exercisable
in cumulative annual installments, usually over a period of five to ten years.
The Compensation Committees believe that this feature of the option grants not
only provides an incentive for Executive Officers to remain in the employ of the
Bank, but also makes longer-term growth in share prices important for the
Executive Officers and other officers who receive stock options.
As of March 18, 1998
<TABLE>
<S> <C>
BUDGET AND COMPENSATION COMMITTEE STOCK OPTION COMMITTEE
- ---------------------------------------- --------------------------
Robert W. Arnett, Jr. John B. Allen
Rodney A. Baker Robert W. Arnett, Jr.
Eugene D. Bishop Clifton C. Booth
Thomas A. Bishop Jack B. Campbell
James R. Mulligan Robert C. Glenn, D.D.S.
Warren J. Kraft
James R. Mulligan
Steven N. Reenders
John W. Russell
Emmett A. Tompkins, Jr.
</TABLE>
THE BANK BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
ELECTION OF ALL FOURTEEN (14) NOMINEES FOR DIRECTOR
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<PAGE> 36
PROPOSAL NUMBER TWO: THE PROPOSED MERGER AGREEMENT
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BANK'S BOARD OF
DIRECTORS
From the inception of the Bank, the Board of Directors maintained the
philosophy that it was in the best interests of the Bank and its shareholders to
remain independent. The philosophy was tempered, however, by an understanding
that appropriate consideration should be given to opportunities to increase
shareholder value through a combination with a larger financial institution.
During 1997, the Board was aware of significant merger activity among financial
institutions and determined that it was appropriate for the Bank to review
various options that might be available to it.
During the fourth quarter of 1997, representatives of the Bank engaged in
preliminary discussions with two potential purchasers, neither of which
proceeded beyond initial inquiries of interest. In addition, a Bank customer
meeting with the Bank's Chief Operating Officer, Eugene D. Bishop, offered to
approach a Director of FSC with whom the customer was acquainted, for the
purpose of discussing FSC's plans for expansion into California and its interest
in acquiring the Bank.
Following that initial introduction, on December 11, 1997, L. Scott Nelson,
Executive Vice President of FSC and Chairman of First Security Bank, N.A.,
contacted the Bank's Chairman of the Board and Chief Executive Officer, Thomas
A. Bishop, regarding the possibility of a business combination between the two
companies. Thereafter, on January 5, 1998, Mr. Bishop and the Bank's President
and Chief Operating Officer, Eugene D. Bishop, met with Mr. Nelson and J.
Patrick McMurray, Executive Vice President of FSC and President of First
Security Bank, N.A. On January 8, 1998, FSC and the Bank entered into a
confidentiality agreement and the Bank provided certain information desired by
FSC to determine if it would be interested in pursuing further discussions with
the Bank.
In connection with the Bank's discussions with FSC, the Bank contacted KBW
regarding a financial analysis of the potential transaction. On January 16,
1998, the Bank engaged KBW to be the Bank's exclusive financial advisor with
respect to a business combination.
On January 22, 1998, FSC delivered a non-binding letter of intent to the
Bank's Board of Directors which set forth a non-binding proposal to acquire the
Bank through the merger of the Bank into a subsidiary of FSC, in consideration
of which each outstanding share of Bank Common Stock would be exchanged for 2.07
shares of FSC Common Stock ("the January 22 Proposal"). The January 22 Proposal
was subject, among other things, to satisfactory completion of due diligence by
FSC, and that for a six month period, FSC would have the exclusive right to
negotiate for the acquisition of the Bank.
On January 26, 1998, the Bank's Board of Directors held a special meeting
to discuss the January 22 Proposal. At the special meeting, the Board voted not
to accept the January 22 Proposal but approved entering into negotiations with
FSC regarding a potential business transaction between the two companies. The
Board also ratified the engagement of KBW as the Bank's financial advisor with
respect to any such transaction and appointed a special committee (the "Special
Committee") for the purpose of supervising and directing the negotiations with
FSC in connection with the proposed transaction. The Special Committee commenced
their first meeting on January 26, 1998, following the January 26, 1998 meeting
of the Board of Directors.
Following the January 26 board meeting, representatives of KBW met with
senior officers of FSC and FSC's investment bankers to negotiate with respect to
the conversion ratio in a possible transaction between the Bank and FSC. The KBW
representatives reported to the Special Committee regarding such negotiations on
January 28, 1998, indicating that FSC had agreed to increase the Conversion
Ratio to 2.13. The Special Committee authorized the commencement of due
diligence by FSC and to proceed with the negotiation and documentation of a
definitive agreement based upon the Conversion Ratio. During that week, FSC
commenced its due diligence investigation of the Bank.
On February 2, 1998, Thomas and Eugene Bishop met with Spencer Eccles,
FSC's Chairman and Chief Executive Officer, and Morgan J. Evans, FSC's President
and Chief Operating Officer, to introduce FSC to the Bank's market area and to
show them the Bank's branch offices. On February 3, 1998, Thomas and Eugene
Bishop met with Mr. Nelson and Mark D. Howell, FSC's Executive Vice
President/Business
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<PAGE> 37
Banking, to discuss the Bank's growth potential and how FSC's services, such as
its automobile dealer business, may be beneficial to the Bank's customers. Over
the course of the next few weeks, representatives of the Bank and FSC met and
had numerous telephone conversations to negotiate the final terms of the Merger
Agreement.
On February 11, 1998, the Special Committee met with the Bank's attorneys
and with representatives of KBW regarding the current state of negotiations. KBW
was instructed to communicate the Bank's position on several open issues to FSC.
On February 13, 1998, KBW delivered to the Bank's Board of Directors a
package which contained information and analyses relating to the proposed
transaction and how the terms of the proposed transaction compared to those of
similar transactions by financial institutions. (See "Opinion of the Bank's
Financial Advisor," below.)
The Bank's Board of Directors met on February 18, 1998 to receive
presentations made by management and attorneys on the FSC offer. In addition,
representatives of KBW made a presentation to the Board on the information
previously delivered to the Board relating to the proposed transaction between
the Bank and FSC and comparable transactions. After such presentations, the
Board asked questions and conducted discussions relating to the FSC offer. The
Board then unanimously approved the terms of FSC's proposal and the Merger
pursuant to the Merger Agreement. The Merger Agreement, the Termination Fee
Agreement and the other related agreements were executed on February 18, 1998.
In evaluating the proposed Merger with FSC, the Board of Directors of the
Bank considered a variety of factors, reviewed information relating to FSC and
the Bank and received reports and presentations from its officers, financial
advisers and legal counsel. Among the factors considered by the Board of
Directors was the fact that the value of the consideration to be paid in the
Merger represents a premium over the current market price of the Bank Common
Stock; the value and form of the consideration to be paid in the Merger compared
with prices paid in acquisitions of other banks and bank holding companies; the
book value and earnings per share of the Bank; the results of operations and
prospects of the Bank and FSC, and particularly, the compatibility of the two
institutions' customer bases and the additional services and higher lending
limits that FSC could offer the Bank's customers; alternatives to an acquisition
of the Bank, including the advisability of continuing to operate the Bank as an
independent entity; the opinion of KBW, confirmed in a letter to the Board of
Directors, that the consideration to be received in the Merger is fair from a
financial point of view to the shareholders of the Bank (See "Opinion of the
Bank's Financial Advisor" below); the tax consequences of the transaction to the
shareholders of the Bank, and the value of FSC Common Stock as an investment,
including the fact that it offers the Bank Shareholders the opportunity to
participate in the future performance of a larger financial institution than the
Bank. The Board of Directors did not assign any special weight to any of these
factors. The Bank's Board concluded, in light of these factors and other factors
it considered appropriate, that the Merger is in the best interests of the Bank
and the Bank Shareholders.
OPINION OF THE BANK'S FINANCIAL ADVISOR
On January 16, 1998 the Bank engaged KBW to act as its exclusive financial
advisor in connection with the Merger. The Bank selected KBW because KBW is a
nationally recognized investment banking firm with substantial experience in
transactions similar to the Merger and is familiar with the Bank and its
business. As part of its investment banking business, KBW is continually engaged
in the valuation of financial service businesses and their securities in
connection with mergers and acquisitions.
As part of its engagement, representatives of KBW attended the meeting of
the Bank's Board held on February 18, 1998 at which the Board considered and
approved the Merger Agreement. At the February 18, 1998 meeting, KBW opined
that, as of such date, the Conversion Ratio was fair to the holders of shares of
Bank Common Stock from a financial point of view.
The full text of KBW's updated written opinion dated as of the date of this
Prospectus/Proxy Statement is attached as Appendix C to this Prospectus/Proxy
Statement and is incorporated herein by reference. The description of the
opinion set forth herein is qualified in its entirety by reference to Appendix
C. The Bank Shareholders are urged to read the opinion in its entirety for a
description of the procedures followed,
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<PAGE> 38
assumptions made, matters considered, and qualifications and limitations on the
review undertaken by KBW in connection therewith.
KBW'S OPINION IS DIRECTED TO THE BANK'S BOARD AND ADDRESSES ONLY THE
CONVERSION RATIO. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO
PROCEED WITH THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF THE BANK AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE MEETING
WITH RESPECT TO THE MERGER OR ANY OTHER MATTER RELATED THERETO.
KBW has informed the Bank that, in arriving at its written opinion, KBW,
among other things: (1) reviewed the Bank's Annual Reports on Form F-2 and
related audited financial information for the three fiscal years ended December
31, 1996 and the Bank's quarterly reports on Form F-4 and related unaudited
financial information for the quarterly periods ended September 30, 1997, June
30, 1997 and March 31, 1997; (2) reviewed FSC's Annual Reports on Form 10-K and
related audited financial information for the three fiscal years ended December
31, 1996 and FSC's quarterly reports on Form 10-Q and related unaudited
financial information for the quarterly periods ended September 30, 1997, June
30, 1997 and March 31, 1997; (3) reviewed certain limited financial information,
including financial forecasts, relating to the respective businesses, earnings,
assets and prospects of the Bank furnished to KBW by senior management of the
Bank; (4) conducted certain limited discussions with members of senior
management of the Bank and FSC concerning the respective businesses, financial
condition, earnings, assets, liabilities, operations, regulatory condition,
financial forecasts, contingencies and prospects of the Bank and FSC and their
respective views as to the future financial performance of the Bank, FSC, and
the combined entity, as the case may be, following the Merger; (5) reviewed the
historical market prices and trading activity for the Bank Common Stock and FSC
Common Stock and compared them with that of certain publicly traded companies
which KBW deemed to be relevant; (6) compared the respective results of
operations of the Bank and FSC with those of certain companies which KBW deemed
to be relevant; (7) compared the proposed financial terms of the Merger
contemplated by the Merger Agreement with the financial terms of certain other
mergers and acquisitions which KBW deemed to be relevant; (8) considered the pro
forma impact of the Merger on the earnings per share of FSC; (9) reviewed the
Merger Agreement; and (10) reviewed such other financial studies and analyses
and performed such other investigations and took into account such other matters
as KBW deemed necessary. No limitations were imposed by the Bank upon KBW with
respect to the investigations made or procedures followed by KBW in connection
with rendering its opinion.
In preparing its opinion, KBW, with the Bank's consent, assumed and relied
on the accuracy and completeness of all financial and other information supplied
or otherwise made available to it by the Bank and FSC, including that
contemplated in the numbered items above, and KBW has not assumed responsibility
for independently verifying such information or undertaken an independent
evaluation or appraisal of the assets or liabilities, contingent or otherwise,
of the Bank, FSC or any of their respective subsidiaries, nor has it been
furnished any such evaluation or appraisal. KBW is not an expert in the
evaluation of allowances for loan losses, and, with the Bank's consent, it has
not made an independent evaluation of the adequacy of the allowance for loan
losses of the Bank or FSC, nor has it reviewed any individual credit files
relating to the Bank or FSC, and, with the Bank's consent, it assumed that the
respective aggregate allowances for loan losses for both the Bank and FSC are
adequate to cover such losses and will be adequate on a pro forma basis for the
combined entity. In addition, it has not conducted any physical inspection of
the properties or facilities of the Bank or FSC. With the Bank's consent, KBW
also assumed and relied upon the senior management of the Bank and FSC as to the
reasonableness and achievability of the financial forecasts (and the assumptions
and bases therefore) provided to, and discussed with, KBW. In that regard, KBW
has assumed with the Bank's consent that such forecasts, including without
limitation, financial forecasts, evaluations of contingencies resulting from the
Merger and projections regarding underperforming and non-performing assets, net
charge-offs, adequacy of reserves, future economic conditions and results of
operations reflect the best currently available estimates and judgements of the
senior management of the Bank and FSC and/or the combined entity, as the case
may be. KBW's opinion is predicated on the Merger receiving the tax and
accounting treatment contemplated in the Merger Agreement. KBW's opinion was
necessarily based on economic,
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<PAGE> 39
market and other conditions as in effect on, and the information made available
to it as of, the date of its opinion.
KBW's opinion was rendered without regard to the necessity for, or level
of, any restrictions, obligations, undertakings or divestitures that may be
imposed or required in the course of obtaining regulatory approval for the
Merger.
In connection with rendering its opinion of February 18, 1998, KBW
performed a variety of financial analyses, consisting of those summarized below.
The summary set forth below does not purport to be a complete description of the
analyses performed by KBW in this regard, although it describes all material
analyses performed by KBW. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to a
partial analysis or summary description. Accordingly, notwithstanding the
separate factors summarized below, KBW believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
considered by it, without considering all analyses and factors, or attempting to
ascribe relative weights to some or all such analyses and factors, could create
an incomplete view of the evaluation process underlying KBW's opinion.
In performing its analyses, KBW made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of FSC, the Bank and KBW. The
analyses performed by KBW are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of KBW's analysis
of the fairness to the shareholders of the Bank of the Conversion Ratio and were
provided to the Bank's Board in connection with the delivery of KBW's opinion.
KBW gave the various analyses described below approximately similar weight and
did not draw any specific conclusions from or with regard to any one method of
analysis. With respect to the comparison of selected companies analysis and the
analysis of selected merger transactions summarized below, no company utilized
as a comparison is identical to the Bank or FSC. Accordingly, an analysis of
comparable companies and comparable business combinations is not mathematical;
rather it involves complex considerations and judgements concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values or announced merger
transaction values, as the case may be, of the companies concerned. The analyses
do not purport to be appraisals or to reflect the process at which the Bank and
FSC might actually be sold or the prices at which any securities may trade at
the present time or at any time in the future. In addition, as described above,
KBW's opinion is just one of many factors taken into consideration by the Bank's
Board.
The projections furnished to KBW and used by it in certain of its analyses
were prepared by the senior management of the Bank. The Bank does not publicly
disclose internal management projections of the type provided to KBW in
connection with its review of the Merger, and 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, including,
without limitation, factors related to general economic and competitive
conditions, and accordingly, actual results could vary significantly from those
set forth in such projections.
The following is a summary of the material analyses presented by KBW to the
Bank's Board on February 18, 1998 (the "KBW Report") in connection with its
February 18, 1998 opinion. All per share figures, where applicable, have been
adjusted to account for the 50% stock dividend of FSC effective February 24,
1998.
Summary of Proposal. KBW calculated multiples which were based on the
assumed per share purchase price of $52.45 (derived by multiplying the
Conversion Ratio of 2.13 by $24.62, the last reported sale price for the FSC
Common on February 17, 1998, the last day of trading prior to KBW's
presentation). The Bank's December 31, 1997 stated book value was $16.28 ($15.61
on a fully diluted basis after giving effect to the exercise of stock options);
tangible book value was $13.13 ($12.79 on a fully diluted basis after giving
effect to the exercise of stock options); 1997 earnings per share and cash
earnings per share were $1.69 and $1.97,
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<PAGE> 40
respectively; and, 1998 earnings per share and cash earnings per share estimates
(provided by the Bank) were $2.12 and $2.39, respectively. Based on this data,
the price to book value multiple was 3.22 times (3.36 times on fully diluted
book value), the price to tangible book value multiple was 3.99 times (4.10
times on fully diluted tangible book value), the price to 1997 earnings per
share and cash earnings per share were 31.04 and 26.62 times, respectively, and
the price to 1998 estimated earnings per share and cash earnings per share were
24.74 and 21.95 times, respectively.
Analysis of Selected Merger Transactions. KBW reviewed certain financial
data related to comparable nationwide acquisitions of bank holding companies
with announced deal values between $100 million and $500 million announced after
July 1, 1997. The following transactions comprised the group: Cullen Frost
Bankers/Overton Bancshares, Banco Bilbao Vizcaya/PonceBank, Union Planters
Corp./Merchants Bancshares, First Midwest Bancorp/Heritage Financial Services,
Mercantile Bancorp/CBT Corp., BB&T Corp./Franklin Bancorp, Sovereign
Bancorp/Carnegie Bancorp, Regions Financial/First State Corp., Citizens
Bancshares/Century Financial, Union Planters Corp./Peoples First Corp.,
FirstMerit Corp./CoBancorp, Inc., WesBanco/Commercial Bancshares, United
Bankshares/George Mason Bankshares, Fulton Financial Corp./Keystone Heritage,
Union Planters Corp./Capital Bancorp, Western Bancorp/Santa Monica Bank,
Hibernia Corporation/ArgentBank, and Zions Bancorp/GB Bancorporation.
KBW calculated average and median values for both announcement date and
current (based on closing buyer stock prices from the last day of trading prior
to the KBW presentation) deal multiples. Current multiples were calculated by
(1) multiplying announced deal multiples by the percentage change in the buyer's
stock price from time of announcement to closing on the last day of trading
prior to KBW's presentation, (2) adjusting deal multiples to reflect assumed
interim growth rates in book value and earnings of seller companies between
announcement date and February 17, 1998. KBW then calculated average and median
multiples of price to target's book value at announcement of 2.96 times and 2.87
times, respectively, and current deal value to adjusted book value of 3.13 times
and 3.06 times, respectively, compared to 3.22 times for the Merger (3.36 times
using fully diluted book value); multiples of price to target's tangible book
value at announcement of 3.12 times and 2.95 times, respectively, and current
deal value to adjusted tangible book value of 3.30 times and 3.21 times,
respectively, compared to 3.99 times for the Merger (4.10 times using fully
diluted tangible book value); multiples of price to target's last twelve months
earnings at announcement of 22.61 times and 22.18 times, respectively, and
current deal value to last twelve months earnings of 24.01 times and 23.46
times, respectively, compared to 31.04 times for the Merger; multiples of price
to target's projected twelve months earnings from announcement of 20.78 times
and 20.41 times, respectively, and current deal value to projected twelve months
earnings of 22.04 times and 21.33 times, respectively, compared to 24.74 times
for the Merger; multiples of price to target's last twelve months cash earnings
at announcement of 21.95 times and 21.24 times, respectively, and current deal
value to last twelve months cash earnings of 23.32 times and 22.25 times,
respectively, compared to 26.76 times for the Merger; multiples of price to
target's projected twelve months cash earnings from announcement of 20.19 times
and 19.64 times, respectively, and current deal value to projected twelve months
earnings of 21.41 times and 20.41 times, respectively, compared to 21.95 times
for the Merger. For the same group of deals, where available, KBW calculated
average and median values for estimated cost savings of 27.25% and 25.00%,
respectively.
Selected Peer Groups Analyses. KBW compared the financial performance and
market performance of FSC to both similar institutions and potential alternative
acquirors of the Bank based on various financial measures of 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 those of selected bank holding companies. For
purposes of such analysis, the financial information used by KBW was as of and
for the quarter ended December 31, 1997. Market price information was as of
February 17, 1998. The companies in the FSC peer group were Wells Fargo & Co.,
Norwest Corporation, KeyCorp, U.S. Bancorp, BB&T Corporation, Zions
Bancorporation, City National Corporation, Cullen/Frost Bankers, Inc., and
Community First Bankshares, Inc. The companies in the "potential alternative
acquiror" peer group were Norwest Corporation, Mellon Bank, FSC, Zions
Bancorporation, and City National Corporation.
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<PAGE> 41
For the FSC peer group, KBW's analysis showed the following concerning
FSC's financial performance: return on assets on an annualized basis was 1.34%,
compared with an average of 1.44% and median of 1.39%; return on equity on an
annualized basis was 16.99%, compared with an average of 17.59% and median of
18.47%; net interest margin on an annualized basis was 4.31%, compared with an
average of 5.13% and median of 5.03%; efficiency ratio on an annualized basis
was 59.77%, compared with an average of 55.81% and median of 54.84%; ratio of
equity to total assets was 7.61%, compared with an average of 8.39% and median
of 7.80%; ratio of tangible equity to total assets was 6.75%, compared with an
average of 6.21% and median of 6.39%; ratio of loan loss reserve to
nonperforming loans was 457%, compared to an average of 411% and median of 340%;
and ratio of nonperforming assets to net loans and other real estate owned was
0.36%, compared with an average of 0.68% and median of 0.63%.
For the FSC peer group, KBW's analysis further showed the following
concerning FSC's market performance: that FSC's price to earnings per share
multiple based on 1998 KBW Research Department estimated earnings was 18.47
times, compared to an average of 18.89 and median of 18.71; price to earnings
per share multiple based on 1999 estimated earnings was 16.79 times, compared to
an average of 16.66 and median of 17.06; that its price to book value per share
was 3.25 times, compared to an average of 3.57 times and median of 3.42 times;
that its price to tangible book value per share was 3.70 times, compared to an
average of 4.94 times and median of 4.37 times; and its dividend yield was
1.95%, compared to an average of 1.64% and median of 1.62%.
For the "potential alternative acquiror" peer group, KBW's analysis showed
the following concerning FSC's financial performance: return on assets on an
annualized basis was 1.34%, compared with an average of 1.56% and median of
1.67%; return on equity on an annualized basis was 16.99%, compared with an
average of 18.73% and median of 18.47%; net interest margin on an annualized
basis was 4.31%, compared with an average of 4.90% and median of 4.43%;
efficiency ratio on an annualized basis was 59.77%, compared with an average of
60.86% and median of 60.03%; ratio of equity to total assets was 7.61%, compared
with an average of 8.14% and median of 7.93%; ratio of tangible equity to total
assets was 6.75%, compared with an average of 6.61% and median of 6.75%; ratio
of loan loss reserve to nonperforming loans was 457%, compared to an average of
529% and median of 500%; and ratio of nonperforming assets to net loans and
other real estate owned was 0.36%, compared with an average of 0.58% and median
of 0.54%.
For the "potential alternative acquiror" peer group, KBW's analysis further
showed the following concerning FSC's market performance: that FSC's price to
earnings per share multiple based on 1998 KBW Research Department estimated
earnings was 18.47 times, compared to an average of 19.50 and median of 19.87;
price to earnings per share multiple based on 1999 estimated earnings was 16.79
times, compared to an average of 17.28 and median of 17.21; that its price to
book value per share was 3.25 times, compared to an average of 3.94 times and
median of 4.28 times; that its price to tangible book value per share was 3.70
times, compared to an average of 5.13 times and median of 5.27 times; and its
dividend yield was 1.95%, compared to an average of 1.59% and median of 1.66%.
Conversion Ratios/Price Sensitivity Analysis. KBW produced a table showing
deal multiples derived from a range of FSC's stock price and resulting deal
price per share of the Bank given the Conversion Ratio of 2.13 shares of FSC
Common Stock to each share of Bank Common Stock. For FSC stock prices between
$22.33 and $26.67 per share adjusting for the split effective February 24, 1998,
deal price per share was from $47.56 to $56.81, price to 1997 earnings was from
28.14 times to 33.62 times, price to 1997 cash earnings was from 24.14 times to
28.84 times, price to 1998 earnings was from 22.43 times to 26.80 times, price
to 1998 cash earnings was from 19.90 to 23.77, price to book value was from 2.92
times to 3.49 times (3.05 times to 3.64 times for fully diluted book value), and
price to tangible book value was from 3.62 times to 4.33 times (3.72 times to
4.44 times for fully diluted tangible book value).
Contribution and Benefit Analysis. Based on FSC's 1997 cash earnings of
$1.23, KBW Research Department 1998 cash earnings estimate of $1.40, December
31, 1997 book and tangible book value per share of $7.59 and $6.66, and
annualized dividend of $0.52 per share (all adjusted for split effective
February 24, 1998), KBW calculated the equivalent per share values for the Bank
given the Conversion Ratio. Equivalent Bank 1997 cash earnings of $2.58 per
share was 31% greater than the Bank's independent value, equivalent
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<PAGE> 42
1998 estimated cash earnings of $2.94 per share was 23% greater, equivalent book
value of $16.12 was 1% less, equivalent tangible book value of $14.09 was 7%
greater, and equivalent dividend of $1.11 was 178% greater. Based on FSC and the
Bank's last reported per share sale prices on the last day of trading prior to
the KBW presentation of $24.62 and $42.25, respectively, the deal price of
$52.45 per share represented a 24% premium to the Bank's market price.
KBW also produced a table showing the contribution of the Bank to the pro
forma company's cash earnings, book value and tangible book value. The Bank
would have contributed 5.0% of 1997 pro forma cash earnings, 5.4% of 1998 cash
earnings, 6.4% of stated book value, and 6.0% of tangible book value, while
owning 6.6% of the combined company.
Ability to Pay Analysis. KBW analyzed the ability to pay of five potential
theoretical acquirors of the Bank: FSC, Zions Bancorp ("Zions"), City National
Corporation ("City National"), Norwest Corporation ("Norwest"), and Mellon Bank
Corporation ("Mellon"). This group was chosen because of demonstrated
acquisition history in California, or in the case of Norwest, an interest in
acquiring banking companies similar to the Bank. To develop a range of
theoretical values, KBW made assumptions on potential cost savings and revenue
increases available to each of the potential acquirors in a combination. KBW
then took 70% of the after-tax contribution and added it to the Bank's internal
1998 cash earnings estimates to produce total cash earnings to holders of Bank
Common Stock. This adjustment would effectively lead to valuations that resulted
in the Bank's Shareholders getting 70% of the benefits to be received from a
combination. For each potential acquiror, this value was divided by the amount
of the Bank's fully diluted shares of Common Stock outstanding to produce a cash
earnings per share contribution. This value was then multiplied by the potential
acquiror's price to 1998 estimated cash earnings ratio. This produced
theoretical values of $53.72 per share and $50.31 per share (excluding revenue
increases) for FSC, $56.23 per share and $54.50 per share (excluding revenue
increases) for Zions, $57.81 per share and $55.39 per share (excluding revenue
increases) for City National, $51.30 per share and $49.63 per share (excluding
revenue increases) for Norwest, and $50.13 per share and $49.12 per share
(excluding revenue increases) for Mellon. Although in theory two of the
potential buyers might have been able to pay higher than the proposed value, KBW
commented that in a "real world" negotiation, such theoretical prices would be
affected by a number of factors including, but not limited to, the buyer's
willingness to pay, negotiating position, theoretical cost savings and revenue
increases, ability to attract buyer's interest and attention at a given time,
post-announcement reactions in stock prices and effects on the seller's
franchise. In addition, comparable market transactions would also influence a
buyer's decision on what price to offer a seller in a given situation.
KBW specifically commented that City National had traditionally paid
substantially lower prices than those indicated in the analysis (including a
recent transaction) and, given their in-state nature, a combination would likely
lead to greater cost cuts than a deal with FSC. This would make it more
difficult to hold the Bank franchise together during the shareholder and
regulatory approval process and could lead to a lower franchise value for the
Bank if the transaction did not consummate. In the case of Zions, a national
newspaper reporting on the banking industry had published rumors of a
negotiation between the Bank and Zions in late January indicating a per share
price of $42. Before and subsequent to that report there had in fact been no
communication between Zions and the Bank or their representatives. KBW ventured
that while this did not definitively mean there would have been no interest on
the part of Zions, it certainly did not have positive implications either.
Finally, Zions stock was trading at earnings and book multiples substantially
higher than FSC and KBW offered that the stock had potentially more downside
risk in the event of a market downturn or revaluation. In addition, KBW observed
that negotiating with a demonstrably interested buyer such as FSC put the Bank
in a stronger bargaining position than having to try to interest others with
less or no history of interest. Finally, due to the numerous factors listed
above, the theoretical ability to pay does not mean the probability or
possibility that such a price would be paid.
Discounted Cash Flow Analysis. KBW estimated the present value of the
future cash flows that would accrue to a holder of a share of Bank Common Stock
assuming the shareholder held the stock through the year 2002 and then sold it
(as part of a control sale offer) at the end of year 2002. The analysis was
based on several assumptions, including cash earnings per share of $2.39 in 1998
and a 25% dividend payout ratio through the year 2002. A terminal value was
calculated for 2002 by multiplying the Bank's projected 2002
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<PAGE> 43
earnings by a price/earnings multiple of 21.24 times trailing earnings. KBW
presented a table with a range of discount rates of 11.0% to 15.0%, and a range
of terminal multiples from 20 times cash earnings to 24 times cash earnings
resulting in a range of present values for a share of Bank Common Stock of
$41.26 to $58.29. These values were determined by adding (1) the present value
of the estimated future dividend stream that the Bank would generate over the
period beginning January 1998 and ending in December 2002 and (2) the present
value of the "terminal value" of the Bank Common Stock.
KBW derived a focus present value price of $49.68 per share using what it
described as a fairly aggressive set of assumptions including cash earnings
growth of 13%, a discount rate of 12% and a terminal cash price to earnings
multiple of 21.2 (with such multiple implying a control sale at the end of the
period). While this set of assumptions yielded a control sale price comparable
to the proposed deal price, $49.68 -- and other sets of assumptions could imply
values higher than the deal price -- KBW opined that discount rates higher than
13% were more realistic and the terminal multiple valuation of 21.2 was also
high on a historical basis. KBW indicated that any combination of higher
discount rates and a lower terminal multiple would lead to lower present values
than the focus price (keeping the cash growth rate and dividend payout
assumptions constant). In addition KBW opined that the on-going independent
valuation of the Bank (using trading multiples rather than control sale
multiples) would lower discounted present values on average by 20% to 30%. KBW
stated that the discounted cash flow analysis is a widely used valuation
methodology but noted that it relies on numerous assumptions, including asset
and earnings growth rates, dividend payout rates, terminal values and discount
rates. The analysis did not purport to be indicative of the actual values or
expected values of the Bank Common Stock.
In connection with its opinion attached as Appendix C to this
Prospectus/Proxy Statement, KBW performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith. KBW did not perform any analyses in addition to those
described above in updating its February 18, 1998 opinion.
The Board of Directors of the Bank has retained KBW as an independent
contractor to act as financial adviser to the Bank with respect to the Merger.
KBW as part of its investment banking business, 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, KBW has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, KBW may, from time to time, purchase securities from, and sell
securities to, the Bank and FSC and as a market maker in securities KBW may from
time to time have a long or short position in, and buy or sell, debt or equity
securities of the Bank and FSC for KBW's own account and for the accounts of its
customers. KBW previously served the Bank as advisor for its August 31, 1987
acquisition of Southland Bank, N.A., for its November 30, 1990 acquisition of
Empire Bancorp, for its September 16, 1994 acquisition of Bank of Anaheim, N.A.
and as sole-manager for its September 27, 1989 offering of $9.2 million of Bank
Common Stock.
The Bank and KBW have entered into an agreement dated January 16, 1998
relating to the services to be provided by KBW in connection with the Merger.
The Bank has agreed to pay KBW fees as follows: a cash fee of $100,000 following
the signing of the definitive agreement contemplating the consummation of a
transaction, an additional cash fee of $250,000 after the mailing of this
Prospectus/Proxy Statement, which amounts are refundable if the Merger is not
consummated. In addition, the Bank will pay to KBW at the time of Closing a cash
fee ("Contingent Fee") equal to 0.75% of the market value of the aggregate
consideration offered in exchange for the outstanding shares of Bank Common
Stock in the Merger, less fees previously paid. Pursuant to the KBW engagement
letter, the Bank also agreed to reimburse KBW for reasonable out-of-pocket
expenses and disbursements incurred in connection with its retention and to
indemnify it against certain liabilities, including liabilities under the
federal securities laws.
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<PAGE> 44
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Record Date, the Directors and Executive Officers of the Bank
beneficially owned 709,269 shares of Bank Common Stock (not including shares
such persons may acquire through the exercise of vested stock options) which
will be converted into the right to receive FSC Common Stock at the Effective
Time in the same manner as will the shares of Bank Common Stock held by all
other Bank Shareholders. In addition, Directors and Executive Officers of the
Bank held as of such date options to purchase 368,032 shares of Bank Common
Stock, which may be exercised or surrendered in exchange for Converted Bank
Options exercisable for that number of shares of FSC Common Stock equal to (i)
the number of shares of Bank Common Stock purchasable under the original options
immediately prior to the Effective Time, multiplied by the Conversion Ratio,
rounded down to the nearest whole number of shares of FSC Common Stock.
Immediately after the Effective Time, Directors and Executive Officers of the
Bank as a group will own less than 1.5% of the outstanding shares of FSC Common
Stock.
In considering the recommendations of the Bank's Board of Directors with
respect to the Merger Agreement, Bank Shareholders should be aware that certain
representatives of the Bank have interests in the Merger Agreement being
approved that are in addition to the interests of Bank Shareholders generally.
At the Effective Time, the Bank's Chairman and Chief Executive Officer, Thomas
A. Bishop, and the Bank's President and Chief Operating Officer, Eugene D.
Bishop, will enter into employment agreements with FSC that provide for their
continued employment by FSC following the Merger. The agreements provide that
each of Thomas and Eugene Bishop will receive an annual base salary of $250,000.
In addition, each of Thomas and Eugene Bishop will be entitled to participate in
bonus and incentive compensation programs and other employee benefits as may be
made available to similarly situated employees of FSC or its subsidiaries from
time to time during their employment with FSC. Furthermore, each of the
agreements provide for the payment of a severance payment in the event of
termination of employment without cause. Finally, because each of the agreements
contain a provision prohibiting either Thomas or Eugene Bishop from competing
with FSC for two years following the term of his employment with FSC, FSC has
agreed to pay each of Thomas and Eugene Bishop $750,000 eighteen months from the
date employment commences.
The Bank has entered into indemnification agreements with each of its
Directors and Executive Officers. The agreements provide that the Bank will
indemnify the indemnitee against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred by the indemnitee in connection
with any threatened or pending proceeding, including any proceeding brought by
or in the right of the Bank by reason of the fact that the indemnitee is or was
a Director or Officer of the Bank. The agreements further provide that expenses
incurred by the indemnitee will be paid by the Bank in advance, subject to
indemnitee's obligation to reimburse the Bank in the event it is ultimately
determined that the indemnitee is not entitled to indemnification under the
provisions of the agreement.
The Merger Agreement provides that all rights to indemnification now
existing in favor of the Directors and Officers of the Bank as provided in the
Bank's Articles, the Bank's Bylaws and its indemnification agreements in effect
as of the date of the Merger Agreement will survive the Merger and shall
continue in full force and effect. FSC further agreed that following the
consummation of the Merger, to the greatest extent permitted by Delaware law and
the FSC Certificate or the FSC Bylaws, it would indemnify, defend and hold
harmless individuals who were Directors and Officers of the Bank for any claim
or loss arising out of their actions while a Director or Officer, and shall pay
the expenses, including attorneys' fees, of such individual in advance of the
final resolution of any claim, provided such individual shall first execute an
undertaking acceptable to FSC to return such advances in the event it is finally
concluded such indemnification is not allowed under applicable law.
AGREEMENTS WITH CERTAIN BANK SHAREHOLDERS
FSC has entered into Shareholder's Agreements with certain Bank
Shareholders, each of whom is also a Bank Director, pursuant to which the Bank
Directors have agreed (i) to vote all shares of Bank Common Stock which they own
or hereafter acquire in favor of the approval of the Merger Agreement, thereby
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<PAGE> 45
increasing the likelihood that the Merger Agreement will be approved by the Bank
Shareholders; and (ii) not to sell or otherwise transfer any of their shares of
Bank Common Stock prior to the Effective Time.
FSC has entered into the Agreements Not To Compete with each of the Bank
Directors, other than Thomas and Eugene Bishop, pursuant to which the Bank
Directors have agreed, among other things, not to participate or engage in any
business which is competitive with FSC or the Bank for a period of two years
after the Effective Time.
The Bank Directors and Executive Officers have entered into Affiliate
Agreements with FSC restricting their ability to sell shares of the FSC Common
Stock which they may acquire in connection with the Merger except in accordance
with such Affiliate Agreements. The restrictions provide that the resales of FSC
Common Stock may be made until FSC publishes a financial statement showing at
least 30 days of combined operations with the Bank. Thereafter resale will be in
accordance with Rule 145 under the Security Act of 1933.
TERMS OF THE MERGER AGREEMENT
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, the form of which is attached to this Prospectus/Proxy
Statement as Appendix A and incorporated herein by reference. The descriptions
in this Prospectus/Proxy Statement of the terms of and conditions to the Merger
Agreement are qualified by, and made subject to, the more complete information
set forth in the text of the Merger Agreement.
Subject to the terms of and conditions to the Merger Agreement, at the
Effective Time FSMC will merge with and into the Bank. As a result, the Bank
will become a wholly-owned subsidiary of FSC. Bank Shareholders who do not
exercise Dissenters' Rights will receive FSC Common Stock in exchange for their
shares of Bank Common Stock.
CONSIDERATION TO BE RECEIVED BY BANK SHAREHOLDERS
The Merger Agreement provides that each share of Bank Common Stock
outstanding at the Effective Time, other than Bank Common Stock held by
dissenting Bank Shareholders who have perfected their dissenters' rights under
Chapter 13, will be converted into 2.13 shares of FSC Common Stock, and each
outstanding stock option will be converted into stock options covering FSC
Common Stock, with the numbers of shares and exercise prices of such options
adjusted for the Conversion Ratio. There were 5,279,451 shares of issued and
outstanding Bank Common Stock to be converted in the Merger, as of the Record
Date, and 489,032 additional shares underlying stock options then outstanding.
With the Conversion Ratio fixed, the number of shares of FSC Common Stock to be
received by Bank Shareholders under the Merger Agreement will not fluctuate with
market price changes in FSC Common Stock. The Conversion Ratio, and ultimately
the number of shares of FSC Common Stock to be received by Bank Shareholders,
may be adjusted to reflect any stock dividends, subdivisions, split ups,
reclassifications or combinations of FSC Common Stock prior to the Effective
Time.
No certificates for fractional shares of FSC Common Stock will be issued in
connection with the Merger. Any Bank Shareholder who would otherwise be entitled
to receive a certificate for a fraction of a share of FSC Common Stock will
receive, instead, an amount of cash, without interest, determined by the average
of the daily closing sale prices for FSC Common Stock as reported on the Nasdaq
National Market for the five (5) consecutive trading days including and ending
on the second day preceding the Effective Time.
Each share of FSC Common Stock will have an attached Right, which Right is
part of a shareholder-rights plan adopted by FSC in 1989. The Rights give
holders the opportunity to purchase additional equity interests in FSC at a
significant discount under certain circumstances. (See "INFORMATION ABOUT
FSC -- Description of FSC's Capital Stock.")
The Conversion Ratio was determined by arm's length negotiations between
representatives of the Bank and representatives of FSC. In arriving at their
opinion that such consideration is fair to the Bank Shareholders, the Bank's
Board of Directors reviewed and considered, among other things, the historical
and current financial position and results of operations of the Bank; the
business prospects for the Bank; the general economic, market, and financial
conditions relating to the Bank; the KBW Opinion; and other recent bank
acquisition transactions.
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It is impossible to predict the final value of the FSC Common Stock to be
received with certainty because of the potential for changes in the market price
for shares of FSC Common Stock.
EXCHANGE OF CERTIFICATES
At the Effective Time, the Bank Shareholders will cease to have any rights
as shareholders of the Bank, and their sole rights will pertain to their right
to receive shares of FSC Common Stock and any cash payment, if applicable, for
fractional shares.
As promptly as practicable after the Effective Time, First Chicago Trust
Company of New York, the exchange agent for the Merger (the "Exchange Agent")
will mail transmittal materials to all the Bank Shareholders required to
exchange their shares in the Merger, including a Letter of Transmittal, for use
in exchanging certificates of Bank Common Stock for certificates of FSC Common
Stock. As soon as practicable after the Letter of Transmittal is properly
completed and returned along with the certificates of Bank Common Stock to the
Exchange Agent, FSC will cause to be issued to the person specified in the
Letter of Transmittal certificates for the number of shares of FSC Common Stock
and, to the extent applicable, any cash in lieu of fractional shares of FSC
Common Stock, to which such person is entitled under the Merger Agreement.
The risk of loss of certificates mailed to the Exchange Agent will be on
the tendering Bank Shareholder. Bank Shareholders claiming rights based on stock
certificates that are lost or stolen must provide the Exchange Agent with a bond
or insurance undertaking sufficient to indemnify FSC in the event a third party
also makes claim under the Merger Agreement based on the same certificates.
If any certificate for shares of FSC Common Stock is to be issued in a name
other than that in which the Bank share certificate surrendered in exchange
therefor is registered, the Bank certificate so surrendered must be properly
endorsed and otherwise in proper form for transfer, and the person requesting
such exchange must pay FSC any transfer or other taxes required by reason of the
issuance of a certificate for shares of FSC Common Stock in any name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of FSC that such tax has been paid or is not payable.
Each share of FSC Common Stock issued in connection with the Merger will be
deemed to have been issued at the Effective Time. Accordingly, the Bank
Shareholders who receive FSC Common Stock in the Merger will be entitled to
receive any dividends or other distributions which may be payable to all holders
of record of FSC Common Stock as of any date after the Effective Time. However,
no Bank Shareholder will be entitled to receive shares of FSC Common Stock or
cash, and no dividends or other distributions will actually be paid with respect
to any shares of FSC Common Stock, until the certificate or certificates
formerly representing the shares of Bank Common Stock have been surrendered in
accordance with the procedures described above. At the time such surrender has
been accomplished, a certificate representing the appropriate number of shares
of FSC Common Stock will be issued and accrued dividends and other distributions
on such shares of FSC Common Stock, if any, will be paid without interest and
less taxes, if any, imposed thereon.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
The Merger Agreement provides that, during the period from the date of the
Merger Agreement to the Effective Time, the Bank will conduct its business only
in the normal and customary manner and in accordance with sound banking
practices and will not, without the prior written consent of FSC, which will not
be unreasonably withheld, take any of the following actions, among others: (i)
issue any security except pursuant to the exercise of options outstanding as of
the date of the Merger Agreement; (ii) declare, set aside or pay any dividend
(other than its regular cash dividend, which under the terms of the Merger
Agreement, will in no event exceed $0.12 per share per quarter or make any other
distribution upon, or purchase or redeem any shares of its stock; (iii) except
as may be required to effect the transactions contemplated by the Merger
Agreement, amend its articles of incorporation or its bylaws; (iv) enter into or
amend any benefit plan applicable to directors, officers or employees of the
Bank except as contemplated by the Merger Agreement; (v) acquire any other
company or branch or significant assets of another company; (vi) mortgage,
pledge or subject to a lien or other encumbrance, any of the Bank's assets,
dispose of any of the assets of the Bank or the
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Other Subsidiaries, enter into a purchase or lease commitment in excess of
$100,000 or increase any compensation or benefits payable to the officers or
employees of the Bank, except for routine merit increases and to pay retention
bonuses if necessary to retain certain employees' services; (vii) except as
required by law, knowingly take or cause to be taken any action which would
prevent the transactions contemplated hereby from qualifying as tax free
reorganizations under Section 368 of the Code or prevent FSC from accounting for
the business combination to be effected by the Merger as a pooling of interests.
In addition, pending the Closing, the Bank is required to use its
commercially reasonable efforts to preserve for FSC the continuing services of
officers and employees, the goodwill of customers and others having a business
relationship with the Bank, preserve the Bank's deposit levels, preserve the
benefits of all material contractual relationships and maintain all current
insurance policies. The Bank is also required to provide on an ongoing basis
certain information regarding the Bank to FSC, cooperate in obtaining regulatory
approvals and preparation of this Prospectus/Proxy Statement, consult with FSC
regarding employee matters, continue to make all filings that are required by
any governmental agency, use its commercial reasonable efforts to remove any
condition imposed by a regulatory agency, and, provided certain conditions are
met, make certain pre-closing accounting adjustments to the Bank's financial
statements prior to Closing.
The Bank is also required within 60 days of the date of the Merger
Agreement to conduct an environmental assessment of all real properties owned by
the Bank and to provide Phase I environmental investigation reports to FSC. In
the event that any remedial action is required, the Bank shall use commercially
reasonable efforts to complete such remediation at its own expense; provided
that if the aggregate amount of all assessment and remediation costs exceeds
$1,000,000 or is not readily determinable, the Bank or FSC may terminate the
Merger Agreement.
FSC has agreed to take or refrain from taking many of the same actions as
the Bank pending the Closing, and not to take any action that would materially
and adversely affect the rights and privileges attendent to the FSC Common
Stock, use its commercially reasonable efforts to have the FSC Common Stock
qualified or registered under the blue sky laws of the states where Bank
Shareholders reside, provide indemnification and directors and officers'
liability coverage to the Bank's Directors and Officers, register the shares of
FSC Common Stock to be issued to the Bank Shareholders with the SEC and apply
for the inclusion of such shares on the Nasdaq National Market. In addition, FSC
agreed that Bank employees who continue on after the Closing shall continue to
participate in the Bank's employee benefit plans, to the extent such plans are
not terminated or, if terminated, to permit such employees to participate in
comparable FSC employee benefit plans.
ACCOUNTING TREATMENT
It is a condition to Closing that the Merger will be accounted for under
generally accepted accounting principles as a "pooling of interests."
REGULATORY APPROVALS
The Commissioner, the FDIC and the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") must approve the Merger. If
approved by the Federal Reserve Board and the FDIC, the U.S. Department of
Justice will have 15 days within which to challenge the Merger on antitrust
grounds. Receipt of all necessary regulatory approvals is a condition to
Closing.
All of the applications for such approvals have been filed and are now
pending before the three (3) agencies. FSC and the Bank do not know of any
reason why the required regulatory approvals will not be given. THERE IS NO
ASSURANCE THAT THESE REGULATORY APPROVALS WILL BE RECEIVED TIMELY OR AT ALL, OR
WHETHER ANY APPROVALS WILL CONTAIN ANY CONDITIONS THAT FSC OR THE BANK WOULD
DEEM TO BE MATERIALLY BURDENSOME. (See "-- Other Conditions to the Merger,
below.")
In determining whether to approve the Merger, the Federal Reserve Board
will consider factors such as (i) whether FSC is well managed and well
capitalized; (ii) compliance with convenience and needs criteria,
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including satisfactory Community Reinvestment Act ("CRA") records; and (iii)
whether there are any anti-competitive effects of the transaction.
In determining whether to approve the Merger, the Commissioner will
consider factors such as (i) the effects of the Merger on competition; (ii) the
effects of the Merger on the convenience and needs of the communities to be
served; (iii) the financial condition of FSC; (iv) whether the Merger is fair
and reasonable to the depositors, creditors and Shareholders of the Bank and
FSC; (v) the competence, experience and integrity of FSC's management; and (vi)
whether the Merger is fair, just and equitable to the Bank and FSC.
In determining whether to approve the Merger, the FDIC will consider
factors such as (i) the financial condition, competence, experience and
integrity of FSC's management; and (ii) the effect of the Merger on competition.
AN APPROVAL BY THE FEDERAL RESERVE BOARD, THE FDIC AND/OR THE COMMISSIONER
REFLECTS ONLY THE VIEW THAT THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT DO
NOT CONTRAVENE APPLICABLE COMPETITIVE STANDARDS IMPOSED BY LAW, AND THAT SUCH
TRANSACTIONS ARE CONSISTENT WITH REGULATORY POLICIES RELATING TO SAFETY AND
SOUNDNESS; AN APPROVAL BY THE FEDERAL RESERVE BOARD, THE FDIC OR THE
COMMISSIONER IS NOT AN OPINION THAT THE MERGER IS FAVORABLE TO THE BANK
SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW OR THAT THE AGENCY HAS CONSIDERED
THE ADEQUACY OF THE TERMS OF THE TRANSACTIONS; AND AN APPROVAL BY THE FEDERAL
RESERVE BOARD, THE FDIC OR THE COMMISSIONER IS NOT AN ENDORSEMENT OR
RECOMMENDATION OF THE MERGER.
OTHER CONDITIONS TO THE MERGER
The obligations of the parties to effect the Merger are conditioned, among
other things, on (i) approval by the Boards of Directors of the Bank, FSC and
FSMC (which actions have all occurred); (ii) approval by the Bank Shareholders;
(iii) certain of the Bank Shareholders having delivered letters concerning
future sales of the FSC Common Stock received in the Merger (See "RESALES OF FSC
COMMON STOCK," below); (iv) the Registration Statement (covering the FSC Common
Stock to be issued under the Merger Agreement) becoming effective and no stop
order suspending its effectiveness being issued and continuing in effect; (v)
receipt, in form and substance reasonably satisfactory to the Bank and FSC, of
all necessary orders, consents and approvals of regulatory authorities and
expiration of all applicable statutory waiting periods without the imposition of
significant conditions which FSC or the Bank deems materially burdensome or
disadvantageous; (vi) FSC shall have received a required letter from Deloitte &
Touche LLP, independent auditors for the Bank, with respect to the Bank's
financial condition; (vii) receipt of an opinion of special tax counsel that the
Merger will qualify as a tax free reorganization (See "FEDERAL INCOME TAX
CONSEQUENCES"); (viii) FSC and the Bank shall have received the opinion of
Deloitte & Touche LLP, FSC's independent auditors, that the Merger will qualify
to be accounted for as a pooling of interests, (ix) the Bank shall have a net
worth, after certain adjustments as of the month end immediately preceding the
Closing Date, of at least $80.4 million if the Effective Time is in May 1998,
$81.4 million if the Effective Time is in June 1998 and $82.5 million if the
Effective Time is after June 30, 1998; (x) the absence of a material adverse
change in the assets, liabilities, permits, methods of accounting or accounting
practices or business of FSC or the Bank; (xi) each Director of the Bank, except
for Messrs. Eugene and Thomas Bishop, having executed and delivered to FSC the
Agreements Not To Compete in a form acceptable to FSC; (xii) Messrs. Eugene and
Thomas Bishop shall each have executed and delivered an employment agreement
with FSC in form satisfactory to FSC; (xiii) counsel for the parties having
delivered satisfactory opinions; (xiv) the absence of any litigation, regulatory
proceeding or other matter which challenges the legality or effectiveness of the
transactions contemplated hereby or seeks an order, decree or injunction
enjoining or prohibiting the consummation of the Merger; and (xv) the KBW
fairness opinion shall have been updated just prior to the Closing Date, subject
to certain limitations.
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The parties may agree to waive or modify certain of these conditions,
although there is no present intention to do so.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time by (i) mutual consent of the parties; (ii) any party at any time after
November 30, 1998, if the Closing has not yet occurred; (iii) any party if the
other party's warranties or covenants are in breach and such breach is not cured
within 30 days of notice, or if the Merger is not approved by any required
governmental authority or if the Board of Directors of a party shall have
reasonably determined in good faith that any of the requisite regulatory
approvals contains a materially burdensome condition; (iv) FSC or the Bank if
the Bank Shareholders do not approve the Merger, (v) the Bank if there has been
a significant decline in the average of the daily "last sale" price of FSC
Common Stock as reported on the Nasdaq National Market for the twenty (20)
consecutive trading days in which such shares are traded on the Nasdaq National
Market ending on the fifth business day prior to the Effective Time, provided
such decline is not proportionate relative to the KBW 50 Index as published from
time to time by KBW (See Merger Agreement, Appendix A); (vi) the Bank or FSC, if
the Bank shall have solicited or participated in negotiations for a transaction
with an entity other than FSC; (vii) the Bank or FSC if any condition to closing
is not met and cannot be met by November 30, 1998; (viii) the Bank or FSC if an
environmental assessment determines that remediation is necessary and the
aggregate cost of such remediation will exceed $1,000,000.
Termination of the Merger Agreement will not relieve any party of any
liability for default occurring prior to such termination.
The Merger Agreement may be amended at any time prior to the Effective Time
upon mutual agreement of the parties; provided, however, that after approval of
the Bank Shareholders, the Conversion Ratio may not be changed. In addition, the
structure of the Merger cannot be changed if such change would adversely effect
the amount or form of consideration to the Bank Shareholders, would delay the
Closing, or would otherwise be prejudicial to the Bank Shareholders.
TERMINATION FEE AGREEMENT
FSC and the Bank entered into a Termination Fee Agreement in connection
with the Merger whereby the Bank will pay FSC $5,000,000 if the Bank terminates
the Merger Agreement under certain circumstances, and whereby the Bank will pay
to FSC an additional $7,000,000 if following such termination the Bank is
acquired by another entity within 15 months of the termination. The detailed
conditions and definitions of the Termination Fee Agreement are not set out here
in detail, and reference should be made to the full text of the Termination Fee
Agreement which is included as Appendix E to this Prospectus/Proxy Statement.
OPERATIONS OF THE BANK AFTER THE MERGER
At the Effective Time, FSMC will merge with and into the Bank, making the
Bank a wholly-owned subsidiary of FSC. In that context, the Bank will continue
its legal existence. The decision has not yet been made to rename the Bank to
identify it as part of the FSC family of banks. There has been no decision
reached as to the closure or modification of any branch office of the Bank
following the Merger.
EFFECT OF THE MERGER ON THE BANK'S EMPLOYEE BENEFIT PLANS
Until at least January 1, 1999, all retirement and health insurance plans
maintained by the Bank for the benefit of employees will remain in effect
without substantive change, except as may be required by applicable law in
connection with the intended termination of these plans as part of the Merger.
The Bank and FSC will determine whether it is in the best interests of the
parties and the employees of the Bank to terminate the Bank's 401(k) Plan or to
merge such plan into a 401(k) Plan maintained by FSC to the extent of any Bank
employees hired by FSC ("Transferred Employees"); provided, however, that if the
Bank's 401(k) Plan is terminated, FSC shall not accept any rollovers from the
Bank's 401(k) Plan by the Transferred Employees without the express written
consent of FSC to such rollovers, which approval shall not be given in any event
without receipt of such documentation from the Bank as may be requested by FSC,
including, without
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limitation, a favorable determination letter from the Internal Revenue Service
regarding the qualification of the Bank's 401(k) Plan on its termination. The
Bank's current health insurance plans likely will continue through January 1,
1999.
FEDERAL INCOME TAX CONSEQUENCES
This description of the material federal income tax consequences of the
Merger Agreement is included solely for the information of the Bank
Shareholders. No information is provided with respect to the consequences of any
applicable state, local or foreign tax laws. Also, the specific tax consequences
to a Bank Shareholder may depend upon the individual situation of a Bank
Shareholder. Therefore, each Bank Shareholder is urged to consult his or her own
tax adviser concerning the specific tax consequences of the Merger Agreement to
such Bank Shareholder.
Ray, Quinney & Nebeker, special tax counsel to FSC, has rendered its
opinion addressing certain tax consequences of the Merger Agreement, which
opinion is summarized below. The opinion is to the effect that if the
transactions contemplated in the Merger Agreement take place as described
therein, more likely than not:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
(ii) No gain or loss will be recognized by the holders of Bank Common
Stock who exchange such stock for FSC Common Stock pursuant to the Merger
(with the possible exception of gain or loss recognized upon the receipt of
cash in lieu of fractional shares (see below)).
(iii) The basis of the FSC Common Stock received by the holders of
Bank Common Stock in the Merger will be the same as the basis of Bank
Common Stock surrendered in exchange therefor, after appropriate reduction
for the basis of fractional shares for which cash is received.
(iv) The holding period of the FSC Common Stock received by the
holders of Bank Common Stock pursuant to the Merger will include the
holding period of Bank Common Stock surrendered in exchange therefor,
provided that Bank Common Stock surrendered was held as a capital asset at
the time of the exchange.
(v) Any cash received by the holders of Bank Common Stock in lieu of a
fractional share of FSC Common Stock will be treated as having been
received in redemption of the fractional share so cashed out, and will
result in taxable gain or loss. The amount of such gain or loss will be the
difference between the cash received and the basis of the fractional share
interest surrendered in exchange therefor. Provided the fractional share
interest was held as a capital asset at the time of redemption, such gain
or loss will constitute capital gain or loss.
(vi) No gain or loss will be recognized by the Bank or FSC as a result
of the Merger.
OPINIONS UNDER THE CODE
An opinion of counsel is not binding upon the Internal Revenue Service (the
"IRS") or the courts. It is uncertain whether the IRS would issue a favorable
ruling on the Merger Agreement. The tax opinion is based upon certain factual
assumptions, and upon certain representations and assurances made by the Bank,
FSC and FSMC. Counsel has expressed no opinion concerning the consequences of
the Merger Agreement on the Bank Shareholders under applicable state or local
income tax laws.
The Bank Shareholders should also be aware that the IRS may examine
transactions taking place before, contemporaneously with, or after a
reorganization to determine whether reorganization treatment is appropriate, or
in some cases to determine whether shareholders will be taxed on other economic
benefits that are included as part of the overall transaction. Thus, loan
transactions between parties, compensation arrangements, agreements not to
compete, consulting arrangements and other transactions could be reviewed by the
IRS and determined to constitute taxable income to specific parties to the
Merger or could be a basis for
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assertion that reorganization treatment is not appropriate to the Merger.
Furthermore, if the IRS were to establish as to some Bank Shareholders that part
of the FSC Common Stock received in the Merger is severable from the Merger,
resulting in a proportionally increased equity interest being received in the
Merger by other Bank Shareholders, the Bank Shareholders whose equity interests
were deemed to be constructively increased by the Merger may be treated as
having received a taxable stock dividend. Thus, notwithstanding the opinions of
counsel, Bank Shareholders should consult with their tax advisers as to the tax
consequences of the Merger.
Under Section 3406 of the Code, the Bank Shareholders may be subject to
"backup withholding" at the rate of 31% on "reportable payments" to be received
by them if they fail to furnish their correct taxpayer identification numbers or
for certain other reasons. FSC will report to these persons and to the IRS for
each calendar year the amount of any reportable payments during that year and
the amount of tax withheld, if any, with respect to those reportable payments.
Holders of stock options for shares of Bank Common Stock who elect to
exercise those options prior to the Effective Time will receive shares of FSC
Common Stock in exchange for the shares of Bank Common Stock received through
the exercise of the options. IF THE OPTIONS WERE "NONQUALIFIED" UNDER THE CODE,
the exercise of the stock option will likely result in ordinary income to the
extent of the difference between the exercise price and the fair market value of
the underlying Bank Common Stock at the time of exercise. The optionee's basis
in the FSC Common Stock will be the fair market value of their Bank Common Stock
received through the exercise of stock options determined at the time of
exercise. IF THE OPTIONS WERE "INCENTIVE STOCK OPTIONS" UNDER THE CODE, the
exercise of the option will not result in taxable income at that time, and the
optionee's basis in FSC Common Stock will be the exercise price paid for their
Bank Common Stock received upon exercise of their options.
The Code also imposes an alternative minimum tax and excise taxes on
certain types of transactions. Applicability of such taxes is usually
controlled, in whole or part, by other matters unrelated to the Merger or by the
unique characteristics of the particular taxpayer. Accordingly, the Bank
Shareholders are encouraged to consult their tax advisers if they are or might
be subject to such taxes.
FEDERAL INCOME TAX TREATMENT OF THE EXERCISE OF DISSENTERS' RIGHTS
Any Bank Shareholder who effectively dissents from the Merger (see "RIGHTS
OF DISSENTING SHAREHOLDERS," below) and who receives cash for his or her shares
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) the
Dissenting Shareholder's 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 the shares
were held by the Dissenting Shareholder, whether the shares are held as a
capital asset, and whether the Dissenting Shareholder is deemed to own other
shares of Bank Common Stock pursuant to the attribution rules of Section 318 of
the Code. In certain circumstances, a Dissenting Shareholder can be deemed for
tax purposes to own shares that are actually owned by a non-dissenter that is
related to the Dissenting Shareholder, with the possible result that the cash
received in the exercise of the dissenter's rights could be treated as a
dividend received pursuant to a corporate distribution rather than an amount
received pursuant to a sale or exchange of Bank Common Stock.
RIGHTS OF DISSENTING BANK SHAREHOLDERS
Because Bank Common Stock is traded on Nasdaq National Market, dissenters'
rights will be available to the Shareholders of the Bank only if the holders of
five percent (5%) or more of Bank Common Stock make a written demand upon the
Bank for the purchase of dissenting shares in accordance with Chapter 13. If
this condition is satisfied and the Merger is consummated, Shareholders of the
Bank who dissent from the Merger by complying with the procedures set forth in
Chapter 13 would be entitled to receive an amount equal to the fair market value
of their shares as of February 18, 1998, the last trading day before the public
announcement of the Merger. The high, low and closing sales prices for Bank
Common Stock on February 18, 1998 were $43.75, $40.25 and $43.75, respectively.
A copy of Chapter 13 is attached hereto as Appendix D
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and should be read for more complete information concerning dissenters' rights.
Specifically, Bank Shareholders are referred to Section 1309 of the California
Corporations Code for an outline of ways that dissenting shares lose their
status as dissenting shares. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 OF
THE CALIFORNIA CODE MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE
LOST. The information set forth below is a general summary of dissenters' rights
as they apply to Shareholders of the Bank and is qualified in its entirety by
reference to Appendix D, which contains a copy of the relevant California law
regarding dissenters' rights.
In order to be entitled to exercise dissenters' rights, a Bank Shareholder
must vote "AGAINST" the Merger. Thus, any Bank Shareholder who wishes to dissent
and executes and returns a proxy in the accompanying form must specify that his
or her shares are to be voted "AGAINST" the Merger. If the Bank Shareholder
returns a proxy without voting instructions or with instructions to vote "FOR"
the Merger, the Bank Shareholder will lose any dissenters' rights. In addition,
if the Bank Shareholder abstains from voting his or her shares, the Bank
Shareholder will lose his or her dissenters' rights.
Further, in order to preserve his or her dissenters' rights, a Bank
Shareholder must make a written demand upon the Bank for the purchase of
dissenting shares and payment to such Bank Shareholder of their fair market
value, specifying the number of shares held of record by such Bank Shareholder
and a statement of what the Bank Shareholder claims to be the fair market value
of those shares as of February 18, 1998. Such demand must be addressed to
California State Bank, 100 N. Barranca Street, Suite 1400, West Covina, CA
91791; Attention: Paul E. Brandt, and must be received by the Bank not later
than the date of the Meeting. A vote "AGAINST" the Merger does not constitute
such written demand.
If the holders of five percent (5%) or more of the outstanding shares of
Bank Common Stock have submitted a written demand for the Bank to purchase their
shares and these demands are received by the Bank on or before the date of the
Bank Shareholders' Meeting and the Merger is approved by the Bank Shareholders,
the Bank will have 10 days after such approval to send to those Bank
Shareholders who have voted against the approval of the Merger written notice of
such approval accompanied by a copy of Chapter 13 of the California Code, a
statement of the price determined by the Bank to represent the fair market value
of the dissenting shares as of February 18, 1998, and a brief description of the
procedure to be followed if a Bank Shareholder desires to exercise dissenters'
rights. Within 30 days after the date on which the notice of the approval of the
Merger is mailed, the dissenting Bank Shareholder must surrender to the Bank at
the office designated in the notice of approval, the certificates representing
the dissenting shares to be stamped or endorsed with a statement that they are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Any shares of Bank Common Stock that are
transferred prior to their submission for endorsement lose their status as
dissenting shares.
If the Bank and the dissenting Bank Shareholder agree that the surrendered
shares are dissenting shares and agree upon the price of the shares, the
dissenting Shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of such agreement. Payment
of the fair market value of the dissenting shares shall be made within 30 days
after the amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided otherwise
by agreement.
If the Bank denies that the shares surrendered are dissenting shares, or
the Bank and the dissenting Bank Shareholder fail to agree upon a fair market
value of such shares of Bank Common Stock, then the dissenting Bank Shareholder
of the Bank must, within six months after the notice of approval is mailed, file
a complaint in the Superior Court of the proper county requesting the court to
make such determinations or intervene in any pending action brought by any other
dissenting Bank Shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenters' rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting Bank Shareholder may not withdraw his or her dissent or demand
for payment unless the Bank consents to such withdrawal.
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Under Delaware law, stockholders of FSC Common Stock are not entitled to
any appraisal rights. (See "COMPARATIVE RIGHTS OF BANK SHAREHOLDERS.")
RESALES OF FSC COMMON STOCK
The shares of FSC Common Stock to be issued to Bank Shareholders in
connection with the Merger Agreement will be registered with the Securities and
Exchange Commission under the provisions of the Securities Act. Based on
recently enacted federal legislation preempting such requirements for Nasdaq
National Market securities, no registration or qualification of such shares will
be pursued in any state in which any Bank Shareholder currently resides.
Resales of the FSC Common Stock received in connection with the Merger
Agreement will need to be in compliance with applicable state securities laws
and regulations, and this compliance will be the responsibility of the selling
or transferring Bank Shareholder.
FSC shares received by persons who are deemed to be "affiliates" of the
Bank for purposes of Rule 145 under the Securities Act, may be resold by them
only in transactions permitted by such Rule, or as otherwise permitted under the
Securities Act. Rule 145 applies certain of the requirements and provisions of
Rule 144 (applicable to unregistered shares) to registered shares received by an
affiliate of a party to a merger transaction. Rule 144, in turn, applies certain
restrictions on method and amount of securities sales. As a condition to the
Closing, each person who is so identified is required to deliver to FSC at or
prior to Closing a written agreement satisfactory to counsel for FSC that such
person and his or her "associates" (as defined for purposes of Rule 145) shall
not offer to sell or otherwise dispose of any shares of FSC Common Stock issued
to such person or his or her associates pursuant to the Merger Agreement in
violation of the Securities Act or the regulations thereunder.
INFORMATION ABOUT FSC
GENERAL
FSC is a regional bank holding company headquartered in Salt Lake City,
Utah. FSC owns and operates five banks, with offices in the six (6) Western
States of Idaho, New Mexico, Nevada, Oregon, Utah and Wyoming, and several other
financial services companies, some having a national presence. Through its
subsidiaries, FSC provides commercial and agricultural finance, consumer
banking, trust, capital markets, treasury management, investment management,
data processing, leasing, insurance and securities brokerage services. At
December 31, 1997, FSC and its consolidated subsidiaries had consolidated assets
of $17.3 billion, consolidated deposits of $10.7 billion and shareholders'
equity of $1.3 billion. FSC has paid a regular dividend on its Common Stock
since its incorporation in 1928.
FSC maintains its executive offices at 79 South Main Street, Salt Lake
City, Utah 84111, telephone (801) 246-6000.
The principal assets of FSC are the capital stock of First Security Bank,
N.A. ("FSBNA") (100% owned), and First Security Bank of New Mexico ("FSBNM")
(100% owned), all of which provide a broad range of banking, fiduciary,
financial and other services. Based on deposits of approximately $7.8 billion at
June 30, 1997, FSBNA was ranked the 74th largest commercial bank in the United
States, and is the largest bank in the State of Utah, with 123 branches, and the
second largest bank in the State of Idaho, with 81 branches. Based on deposits
of nearly $1.2 billion at June 30, 1997, FSBNM was ranked as the 287th largest
commercial bank in the United States, and the 3rd largest bank in the State of
New Mexico. It currently has 29 branches.
FSC also owns 100% of the outstanding capital stock of First National Bank
of Nevada (FSB Nevada), a Nevada state bank, and 100% of the shares of First
Security Bank of Chaves County and First National Bank of Dona Ana County, two
national banks located in Southern New Mexico. Along with these banking
organizations, FSC also directly or indirectly owns the stock of various nonbank
companies engaged in
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businesses related to banking and finance, including management services,
securities brokerage, equipment leasing, insurance and investment management
subsidiaries and a small business investment company.
In addition to its equity investment in subsidiaries, FSC directly or
indirectly raises funds principally to finance the operations of its nonbank
subsidiaries. A substantial portion of FSC's annual income is typically derived
from dividends directly from its bank and nonbank subsidiaries, and from
interest on loans to FSC's nonbank subsidiaries.
COMPETITION
As indicated above, as of December 31, 1997, FSBNA was the largest bank in
Utah, the second largest bank in Idaho and FSBNM was the third largest bank in
New Mexico (second largest in Albuquerque). In Nevada, FSC's subsidiary bank is
a smaller, more localized competitor, with competition coming from a variety of
larger banks and credit unions. FSBNA's operations in Oregon, based on deposits
at the last measurement date, made it the 6th largest bank in Oregon. FSBNA's
operations in Wyoming, at the most recent measurement date, made it the 5th
largest bank in Wyoming. FSB Nevada has a presence in the Clark County, Nevada
market of approximately 5% market share in deposits.
FSC's banks compete with other banking organizations in the states in which
they operate on the basis of price, service and convenience. Other types of
financial institutions, such as savings banks, savings and loan associations,
and credit unions offer a wide range of deposit and loan services (including
commercial loans) and, in some instances, fiduciary services. FSC's banks also
compete with brokerage firms and mutual funds which provide the substantial
equivalent of checking accounts, credit cards and similar devices which strongly
resemble deposit products. Major retailers compete for loans by offering credit
cards and retail installment contracts. It is anticipated that competition from
nonbank organizations will continue to grow.
SUPERVISION AND REGULATION
References in this section to applicable statutes and regulations are brief
summaries only, and do not purport to be complete. The reader should consult
such statutes and regulations themselves for a full understanding of the details
of their operation.
FSC is a bank holding company registered under the Bank Holding Company Act
of 1956 (the "BHC Act"), and is subject to supervision and regulation by the
Federal Reserve Board. Federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violation of laws and policies.
Activities "Closely Related" to Banking. The BHC Act prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking, managing, or controlling banks as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by FSC of companies engaged in banking-related activities, the
Federal Reserve Board considers a number of factors, including the expected
benefits to the public, such as greater convenience and increased competition or
gains in efficiency, which are weighed against the risks of possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced through acquisition of a going concern.
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Securities Activities. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer-receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In very limited situations, holding companies have been
permitted to underwrite and deal in corporate debt and equity securities through
such subsidiaries. As of the date hereof, FSC has recently organized a Section
20 subsidiary to expand its securities business opportunities. This Section 20
subsidiary will likely provide securities underwriting and dealing functions in
and for all of the states and locations, including California, in which FSC has
business operations.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe or unsound banking practices. The Federal Reserve Board may
order a bank holding company to terminate an activity or control of a nonbank
subsidiary if such activity or control constitutes a significant risk to the
financial safety, soundness or stability of a subsidiary bank and is
inconsistent with sound banking principles. Regulation Y also requires a holding
company to give the Federal Reserve Board prior notice of any redemption or
repurchase of its own equity securities, if the consideration to be paid,
together with the consideration paid for any repurchases or redemptions in the
preceding year, is equal to 10% or more of the company's consolidated net worth.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's authority to prohibit activities
of bank holding companies and their nonbanking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations. Notably, FIRREA increased the amount of civil money penalties which
the Federal Reserve Board can assess for such practices or violations. The
penalties can be as high as $1 million per day. FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.
Anti-Tying Restrictions. Bank holding companies and their bank and nonbank
affiliates are prohibited from tying the provision of certain services, such as
extensions of credit, to other services offered by a holding company or its
affiliates.
Annual Reporting; Examinations. FSC is required to file an annual report
with the Federal Reserve Board, and such additional information as the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may
examine a bank holding company or any of its subsidiaries, and charge the
company for the cost of such an examination. FSC also will be subject to
reporting and disclosure requirements under the state and federal securities
laws subsequent to the offering contemplated by these materials.
Bank Holding Company Capital Adequacy Requirements. The Federal Reserve
Board monitors the capital adequacy of bank holding companies. The Federal
Reserve Board uses a combination of risk-based guidelines and leverage ratios to
evaluate capital adequacy. The Federal Reserve Board has adopted a system using
internationally consistent risk-based capital adequacy guidelines to evaluate
the capital adequacy of bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally on the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a "risk-weighted"
asset base. Certain off-balance sheet items, which previously were not expressly
considered in capital adequacy computations, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning to
them the appropriate risk weight. Total capital is defined as the sum of "Tier
1" and "Tier 2" capital elements, with "Tier 2" being limited to 100% of "Tier
1." For bank holding companies, "Tier 1" capital includes, with certain
restrictions, common stockholders' equity, perpetual preferred stock and
minority interests in consolidated subsidiaries less certain intangibles. "Tier
2" capital includes, with certain limitations, certain forms of perpetual
preferred stock, as well as maturing capital instruments and the reserve for
possible loan losses and specified levels of certain intangibles.
In addition to the risk-based capital guidelines, the Federal Reserve Board
has adopted the use of a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted total assets.
The leverage
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ratio adopted by the federal banking agencies requires a 3.0% "Tier 1" capital
to adjusted total average assets ratio for institutions with a CAMELS rating of
1. Institutions which are not CAMELS 1 rated will be expected to maintain a 100
to 200 basis point cushion; i.e., these institutions will be expected to
maintain a leverage ratio of 4.0% to 5.0%, and institutions planning
acquisitions are expected to maintain higher ratios.
The following table sets forth the current regulatory requirements for
capital ratios of bank holding companies as compared with FSC's capital ratios
at December 31, 1997 (similar information about the Bank can be found on the
Bank's Annual Report on Form 10-K for the years ended December 31, 1997, found
at the Appendix F attached hereto.):
<TABLE>
<CAPTION>
TIER 1 TOTAL
CAPITAL TO CAPITAL TO
LEVERAGE RISK-WEIGHTED RISK-WEIGHTED
RATIO(1) ASSETS(2) ASSETS(3)
--------- ------------- -------------
<S> <C> <C> <C>
Regulatory minimum........................... 4.00-5.00% 4.00% 8.00%
FSC at December 31, 1997..................... 7.51% 10.58% 13.46%
</TABLE>
- ---------------
(1) The leverage ratio is defined as the ratio of Tier 1 capital (using final
1992 risk-based capital guidelines to define Tier 1 capital) to average
assets, net of goodwill. Federal Reserve Board Guidelines provide that all
bank holding companies (other than those that meet certain criteria)
maintain a minimum leverage ratio of 3%, plus an additional cushion of 100
to 200 basis points. The guidelines also state that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain "strong capital positions" substantially above the minimum
supervisory levels without significant reliance on intangible assets.
(2) Bank Shareholders' equity less goodwill (Tier 1 capital) divided by
risk-weighted assets.
(3) Tier 1 capital plus reserve for possible loan losses (limited to 1.25% of
total risk-weighted assets) plus qualified subordinated and convertible debt
(Tier 2 capital) divided by risk-weighted assets.
Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However management is unable to predict whether and when higher capital
requirements would be imposed and, if so, to what levels and on what schedule.
Imposition of Liability for Undercapitalized Subsidiaries. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each
federal banking agency to revise its risk-based capital standards within
eighteen months of enactment of FDICIA to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and the
risks of non-traditional activities, as well as reflect the actual performance
and expected risk of loss on multi-family mortgages. The law also requires each
federal banking agency to specify within nine months after the date of the
enactment of the statute, by regulation, the levels at which an insured
institution would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under the regulations adopted by the banking agencies, all of
FSC's subsidiary banks would be deemed to be "well capitalized."
FDICIA requires bank regulators to take "prompt corrective action" to
resolve problems associated with insured depository institutions. In the event
an institution becomes "undercapitalized," it must submit a capital restoration
plan. If an institution becomes "significantly undercapitalized" or "critically
undercapitalized," additional and significant limitations are placed on the
institution. The capital restoration plan of an undercapitalized institution
will not be accepted by the regulators unless each company "having control of"
the undercapitalized institution "guarantees" the subsidiary's compliance with
the capital restoration plan until it becomes "adequately capitalized." FSC has
control of all of its subsidiaries for purposes of this statute.
Under FDICIA, the aggregate liability of all companies controlling a
particular institution is limited to the lesser of 5% of the institution's
assets at the time it became undercapitalized or the amount necessary to bring
the institution into compliance with applicable capital standards. FDICIA grants
greater powers to the bank regulators in situations where an institution becomes
"significantly" or "critically" undercapitalized or fails to submit a capital
restoration plan. For example, a bank holding company controlling such an
institution can be required to obtain prior Federal Reserve Board approval of
proposed dividends, or might be required to consent to a merger or to divest the
troubled institution or other affiliates.
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<PAGE> 57
Additionally, Federal Reserve Board policy discourages the payment of
dividends by a bank holding company from borrowed funds as well as payments that
would adversely affect capital adequacy. Failure to meet the capital guidelines
may result in the Federal Reserve Board taking appropriate supervisory or
enforcement actions.
The "PROMPT CORRECTIVE ACTION" provisions of FDICIA reflect the same
concerns which gave rise to a position adopted by the Federal Reserve Board
known as the "source of strength doctrine," which is based on the Federal
Reserve Board's Regulation Y. Regulation Y directs bank holding companies to
"serve as a source of financial and managerial strength" to their subsidiary
banks, and bars them from engaging in unsafe and unsound practices.
Audit Reports. Beginning January 1, 1994, FDICIA requires insured
institutions with $500 million or more in total assets to submit annual audit
reports prepared by independent auditors to federal and state regulators. In
most cases, the audit report of the institution's holding company can be used to
satisfy this requirement. The annual audit report shall include financial
statements prepared in accordance with generally accepted accounting principles,
statements concerning management's responsibility for the financial statements,
internal controls and compliance with legal requirements designated by the FDIC,
and an attestation by the auditor regarding the statements of management. FDICIA
requires that independent audit committees be formed, consisting of outside
directors only. The committees of institutions with assets of $3 billion or more
must include members with experience in banking or financial management, must
have access to outside counsel, and must not include representatives of large
customers.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors. The Attorney General of the United States may, within 15 days after
approval of an acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in which case the
effectiveness of such approval is stayed pending a final ruling by the courts.
Interstate Acquisitions. Under the federally enacted Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"), individual
states could "opt-out" of the federal law that would allow banks on an
interstate basis to engage in interstate branching by merging out-of-state banks
with host state banks after June 1, 1997. In addition under IBBEA, individual
states could also "opt-in" and allow out-of-state banks to merge with host state
banks prior to June 1, 1997. The host state is allowed under IBBEA to impose
certain nondiscriminatory conditions on the resulting depository institution
until June 1, 1997.
On September 29, 1994, IBBEA was enacted which has eliminated many of the
current restrictions to interstate banking and branching. The IBBEA permits full
nationwide interstate banking to adequately capitalized and adequately managed
bank holding companies beginning September 29, 1995, without regard to whether
such transaction is expressly prohibited under the laws of any state. The
IBBEA's branching provisions permit full nationwide interstate bank merger
transactions to adequately capitalized and adequately managed banks.
The states that opt-out must have enacted a law after September 29, 1994,
and before June 1, 1997, that (i) applies equally to all out-of-state banks and
(ii) expressly prohibits merger transactions with out-of-state banks. States
which opted out of allowing interstate bank merger transactions precludes the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opted out are not permitted to have
interstate branches. States could also "opt-in" which means states could permit
interstate branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide
that transactions, which result in the bank holding company or bank controlling
or holding in excess of ten percent of the total deposits
52
<PAGE> 58
nationwide or thirty percent of the total deposits statewide, will not be
permitted except under certain specified conditions. However, any state may
waive the thirty percent provision for such state. In addition, a state may
impose a cap of less than thirty percent of the total amount of deposits held by
a bank holding company or bank provided such cap is not discriminatory to
out-of-state bank holding companies or banks.
Deposit Insurance Assessments. FDICIA required the FDIC to make effective,
no later than January 1, 1994, regulations setting up a risk-based deposit
insurance system. In addition, the FDIC can impose special assessments to cover
the cost of borrowings from the U.S. Treasury, the Federal Financing Bank, and
Bank Insurance Fund ("BIF") member banks. The semiannual assessment must be
based on: (1) the probability of a loss to the BIF; (2) the potential magnitude
of the loss; and (3) the revenue and reserve needs of the fund.
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act")
as part of the Omnibus Appropriations Bill was enacted on September 30, 1996 and
includes many banking related provisions. The most important banking provision
is the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
1996 Act provides for a one time assessment of approximately 65 basis points per
$100 of deposits of SAIF insured deposits including Oakar deposits payable on
November 30, 1996. For the years 1997 through 1999, the banking industry will
assist in the payment of interest on Financing Corporation ("FICO") bonds that
were issued to help pay for the cleanup of the savings and loan industry. Banks
will pay approximately 1.3 cents per $100 of deposits for this special
assessment, and after the year 2000, banks will pay approximately 2.4 cents per
$100 of deposits until the FICO bonds mature in 2017. There is a three-year
moratorium on conversions of SAIF deposits to BIF deposits.
Mergers of Banks and Thrifts. FDICIA has eased restrictions on
cross-industry mergers. Members of the BIF and SAIF are generally allowed to
merge, assume each other's deposits, and transfer assets in exchange for an
assumption of deposit liabilities. A formula applies to treat insurance
assessments relating to acquired deposits as if they were still insured through
the acquired institution's insurance fund. The transaction must be approved by
the appropriate federal banking regulator. In considering such approval, the
regulators take into account applicable capital requirements, certain interstate
banking restrictions, and other factors.
Bank Regulation. Four of FSC's banks are national banks, which are subject
to regulation and supervision by the office of the Comptroller of the Currency
(the "Comptroller"). The other bank, FSB Nevada, is a state-chartered bank in
Nevada, subject to regulation and supervision by the State of Nevada and by the
FDIC. Bank regulations on both the federal and state levels are broad in their
scope and materially affect the business of FSC and its banks.
All of FSC's banks are subject to the requirements and restrictions under
federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Banks.
In addition to the impact of regulation, commercial banks are affected
significantly by actions of the Federal Reserve Board as it attempts to control
the money supply and credit availability in order to influence the economy.
Permissible Activities for State-Chartered Institutions/Equivalence to
National Bank Powers. FDICIA provides that, effective December 19, 1992, no
state bank or subsidiary thereof may engage as principal in any activity not
permitted for national banks, unless the institution complies with applicable
capital requirements and the FDIC determines that the activity poses no
significant risk to the insurance fund. In general, statutory restrictions on
the activities of banks are aimed at protecting the safety and soundness of
depository institutions. Many of the statutory restrictions limit the
participation of such institutions in the securities and insurance product
markets. The state-chartered banking subsidiary of FSC is in compliance with the
restrictions imposed by FDICIA.
Equity Investments. In general, FDICIA prohibits state banks from directly
or indirectly acquiring or retaining any equity investment of a type, or in an
amount, not permitted for national banks. This prohibition does not apply to (1)
investments in majority-owned subsidiaries; (2) qualified lower-income housing
53
<PAGE> 59
projects; (3) certain investments in shares listed on a national exchange or
shares of a registered investment company; (4) investments in providers of
directors' and officers' liability insurance; and (5) shares of state-examined
institutions engaging only in activities permissible for a national bank. Other
restrictions may apply to such investments. FSC's state-chartered subsidiary
bank has aligned its investment portfolio with the requirements of FDICIA, and
is presently in compliance with FDICIA's equity requirements.
Restrictions on Transactions With Affiliates. One set of restrictions is
found in Section 23A of the Federal Reserve Act, which affects loans to and
investments in FSC and any of its subsidiaries. Section 23A imposes quantitative
and qualitative limits on transactions between a bank and any affiliate, and
also requires certain levels of collateral for such loans. It also limits the
amount of advances to third parties which are collateralized by the securities
or obligations of FSC or its subsidiaries.
Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions between
FSC's subsidiary banks and their affiliates must be on terms substantially the
same, or at least as favorable to FSC or its subsidiaries, as those prevailing
at the time for comparable transactions with or involving other nonaffiliated
companies. In the absence of such comparable transactions, any transaction
between FSC and its affiliates must be on terms and under circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. FSC is also subject to certain prohibitions
against advertising which suggests that FSC is responsible for the obligations
of its affiliates.
The restrictions on loans to insiders contained in the Federal Reserve Act
and Regulation O now apply to all insured institutions and their subsidiaries
and holding companies. The aggregate amount of an institution's loans to
insiders is limited to the amount of its unimpaired capital and surplus, unless
the FDIC determines that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions. Loans made prior to the enactment of FDICIA are not subject to the
restrictions.
Restrictions on Subsidiary Bank Dividends. The Federal Reserve Board, the
Comptroller and the FDIC have each issued policy statements to the effect that
bank holding companies and member banks, national banks and state banks should
generally only pay dividends out of current operating earnings. The prior
approval of the Comptroller is required if the total of all dividends declared
by the board of directors of a national bank in any calendar year will exceed
the aggregate of the bank's net profits (as defined by regulatory authorities)
for that year and its retained net profits for the preceding two years. Similar
restrictions govern FSB Nevada. In addition, national banks can pay dividends
only to the extent that retained net profits exceed "bad debts," which are
generally defined to include the principal amount of loans that are in arrears
as to interest by nine months or more and that are not secured and that are not
in the process of collection. As of December 31, 1997, FSC's subsidiary banks
could have declared additional dividends to FSC totalling approximately $332.18
million without regulatory approval or restriction. Federal banking regulators
also may prohibit federally insured banks from paying dividends if the payment
of such dividend would leave the bank "undercapitalized" as defined in FDICIA
and the implementing regulations, or the payment of dividends would, in light of
the financial condition of such bank, constitute an unsafe or unsound practice.
Applicable Nevada law places similar restrictions on the payment of dividends by
banks organized under the laws of that state.
Branch Closing Requirements. FDICIA requires FSC's banks to notify the
FDIC and branch customers 90 days prior to a branch closing, including a
detailed statement regarding the reasons for the closing. Notice of the closing
must be posted at the facility 30 days prior to the closing.
Truth in Savings Disclosures. FDICIA subjects FSC's banks to information
requirements concerning advertisements and solicitations for deposits. The FDIC
requires such advertisements and solicitations to disclose the following: (1)
annual percentage yield and the period for which it is in effect; (2) minimum
balance and initial deposit requirements; (3) a statement that fees could reduce
the yield; and (4) interest penalty for early withdrawal. Misleading
advertisements are prohibited. Schedules of rates, fees, and other terms must be
distributed to customers, and notice of any changes must be mailed 30 days
before they go into effect. Violations of these restrictions are subject to
enforcement actions by regulators, civil suits by depositors,
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<PAGE> 60
and could result in the payment of penalties and attorneys' fees. FDICIA
requires depository institutions to disclose fees, interest rates and other
terms concerning deposit accounts to consumers before they open accounts. FDICIA
requires depository institutions that provide periodic statements to consumers
to include information about fees imposed, interest earned and the annual
percentage yield on those statements. FDICIA imposes substantive limitations on
the methods by which institutions determine the balance on which interest is
calculated. Rules dealing with advertisements for deposit accounts are also
included in the law.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of an insured
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. FDICIA requires that these onsite examinations be conducted every 12
months, except that certain well capitalized banks may be examined every 18
months. FDICIA authorizes the FDIC to assess the institution for its costs of
conducting the examinations. The rules and regulations of the Comptroller, which
regulates FSC's national banks, and the Nevada state banking authorities
regulating FSC's state-chartered bank, also provide for periodic examinations by
those agencies.
Standards for Safety and Soundness. As part of FDICIA's efforts to promote
the safety and soundness of depository institutions and their holding companies,
the appropriate federal banking regulators were required to promulgate by
December 1, 1993 regulations specifying operational and management standards
(addressing internal controls, loan documentation, credit underwriting and
interest rate risk) and asset quality, earnings and stock valuation standards
(including a minimum ratio of market value to book value of the publicly traded
shares of such depository institutions and holding companies). The Federal
Reserve Board issued on April 19, 1993 proposed regulations on standards for
safety and soundness, and revised guidelines were issued in 1995.
Real Estate Lending Evaluations. FDICIA requires uniform standards for
evaluations by the regulators of loans secured by real estate or made to finance
improvements to real estate that take into consideration the risk posed to the
insurance funds by real estate loans, the availability of credit, and the need
for safe and sound operation of insured depository institutions. FDICIA also
prohibits the regulators from adversely evaluating a real estate loan or
investment solely on the grounds that the investment involves commercial,
residential or industrial property, unless the safety and soundness of an
institution may be affected.
In order to implement these provisions, on December 31, 1992, the agencies
adopted regulations establishing loan-to-value (LTV) ratio limitations on real
estate lending by insured depository institutions. The Federal Reserve Board
also established loan-to-value ratio limitations on real estate lending by bank
holding companies and their nonbank subsidiaries. Certain transactions are
excluded from the LTV ratio limitations. Specifically, these limits do not apply
to: loans guaranteed or insured by the U.S. Government or an agency thereof, or
backed by the full faith and credit of a state government; loans facilitating
the sale of real estate acquired by the lending institution in the ordinary
course of collecting a debt previously contracted; loans where real estate is
taken as additional collateral solely through an abundance of caution by the
lender; loans renewed, refinanced, or restructured by the original lender(s) to
the same borrower(s), without the advancement of new funds; or loans originated
prior to the effective date of the regulation.
Brokered Deposit Restrictions. FIRREA and FDICIA generally bar
institutions which are not well capitalized from accepting brokered deposits.
The FDIC has issued rules which prohibit undercapitalized institutions from
soliciting or accepting such deposits. Adequately capitalized institutions would
be allowed to solicit such deposits, but could only accept them if a waiver is
obtained from the FDIC.
Real Estate Appraisal Requirements. The federal banking agencies issued
final regulations requiring, after December 31, 1992, insured institutions to
obtain appraisals by certified or licensed appraisers for transactions having a
value over $100,000.
FIRREA's Impact. FIRREA's primary purpose was to restructure the statutory
and regulatory framework applicable to savings associations, and establish a
mechanism for resolving insolvent thrift institution cases. Certain provisions
of FIRREA, however, affect the bank subsidiaries of holding companies, including
FSC. Among the most significant of these provisions are those which: (1) clarify
the powers and
55
<PAGE> 61
duties of the FDIC as receiver or conservator of a bank; (2) enhance the
enforcement powers of the federal banking regulators; (3) establish new
reporting requirements under the Home Mortgage Disclosure Act designed to
prevent discriminatory lending practices; (4) require the federal banking
agencies to make public a rating of a bank's performance under the Community
Reinvestment Act; and (5) prohibit banks from entering into contracts with
persons providing goods, products or services if the performance of such
contracts would adversely affect the bank's safety and soundness. FIRREA's
primary impact on commercial banks has been to increase the enforcement
authority of federal regulators and to expand the scope of potential targets of
enforcement actions.
FIRREA also contains a "cross-guarantee" provision which makes commonly
controlled insured depository institutions liable to the FDIC for any losses
incurred in connection with the failure of an affiliated insured depository
institution.
Expanding Enforcement Authority. One of the major additional burdens
imposed on the banking industry by FDICIA is the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board, Comptroller and FDIC possess extensive
authority to police unsafe or unsound practices and violations of applicable
laws and regulations by depository institutions and their holding companies. For
example, the FDIC may terminate the deposit insurance of any institution which
it determines has engaged in an unsafe or unsound practice. The agencies can
also assess civil money penalties of up to $1 million per day, issue cease and
desist or removal orders, seek injunctions, and publicly disclose such actions.
FDICIA, FIRREA and other laws have expanded the agencies' authority in recent
years, and the agencies have not yet fully tested the limits of their powers.
Instability of Regulatory Structure. The laws and regulations affecting
banks and bank holding companies are in a state of flux. The rules and the
regulatory agencies in this area have changed significantly over recent years,
and there is reason to expect that similar changes will continue in the future.
It is difficult to predict the outcome of these changes.
[THIS SPACE LEFT BLANK INTENTIONALLY]
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<PAGE> 62
CAPITALIZATION
The following table sets forth the historical capitalization of FSC as of
December 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
LONG-TERM DEBT
Medium Term Notes due 1999-2003........................... $ 28,750
7.875% Senior Notes due 1999.............................. 98,962
6.875% Senior Notes due 2006.............................. 150,000
7.5% Subordinated Notes due 2002.......................... 75,000
7.0% Subordinated Notes due 2005.......................... 125,000
Guaranteed Preferred Beneficial Interests 8.41%
Subordinated Capital Income Securities due 2026........ 150,000
Bank Notes & FHLB Borrowings(1,2)......................... 676,349
Non-Bank.................................................. 402
----------
Total long-term debt...................................... 1,304,463
----------
STOCKHOLDERS' EQUITY
Series A, $3.15 Cumulative Convertible Preferred Stock:
(9,541 shares outstanding)................................ 501
Common Stock (par value $1.25, authorized 300,000,000
shares, issued 175,162,714 shares)(3)..................... 218,953
Paid-in surplus........................................ 79,892
Retained earnings...................................... 1,048,202
Net unrealized gain on available for sale securities... 22,733
----------
Subtotal.................................................. 1,369,780
Common treasury stock at cost (1,653,491 shares).......... (52,868)
----------
Total common stockholders' equity......................... 1,316,912
----------
Total stockholders' equity........................ 1,317,413
----------
Total long-term debt and stockholders' equity..... $2,621,876
==========
</TABLE>
- ---------------
(1) These obligations are direct obligations of subsidiaries of FSC, and as
such, constitute claims against such subsidiaries ranking prior to FSC's
equity therein.
(2) Federal Home Loan Bank borrowings mature in 1999-2012.
(3) Shares issued and outstanding and as adjusted exclude 8,885,769 shares
reserved for issuance upon exercise of outstanding employee stock options,
391,241 shares reserved for issuance upon exercise of conversion rights of
preferred stock, 1,006,000 shares reserved for issuance under the dividend
reinvestment and stock purchase plan, 5,736,445 shares reserved for issuance
under FSC's Comprehensive Management Incentive Plan, 2,626,634 shares
reserved for issuance under the 1994 Employee Stock Purchase Plan, and
1,660,500 shares reserved for issuance under FSC's Non-Employee Director
Stock Option Plan.
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<PAGE> 63
DESCRIPTION OF FSC'S CAPITAL STOCK
The following statements are brief summaries of the material provisions
relating to FSC's Preferred Stock and FSC Common Stock and are qualified in
their entirety by the provisions of FSC's Certificate of Incorporation, which
has been filed with the Commission. (See "COMPARATIVE RIGHTS OF BANK
SHAREHOLDERS.")
Preferred Stock. The Certificate of Incorporation authorizes the issuance
of 400,000 shares of preferred stock with no par value ("Preferred Stock"). On
December 31, 1997, there were 9,541 shares of $3.15 Cumulative Convertible
Preferred Stock, Series "A" (the "Series A Preferred Stock") outstanding.
Holders of Series A Preferred Stock have the right to receive semi-annual
dividends at the annual rate of $3.15 per share. Such right is cumulative and
such dividends are payable before dividends may be paid on the FSC Common Stock.
The Series A Preferred Stock is convertible into the FSC Common Stock at a ratio
of 41.00625 shares of FSC Common Stock for each share of Series A Preferred
Stock. This conversion right is subject to adjustment in certain events to
protect against dilution of the conversion rights attached to the Series A
Preferred Stock. In the event of a liquidation, dissolution or winding up of
FSC, the holders of Series A Preferred Stock are entitled to receive cash value
of $52.50 per share plus unpaid accumulated preferred dividends before any
distribution is made to holders of the FSC Common Stock. FSC may, at the option
of the Board of Directors, redeem the whole or any part of the outstanding
Series A Preferred Stock at the redemption price of $52.50 per share plus unpaid
accumulated preferred dividends.
Holders of FSC's Series A Preferred Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders. Voting for the
election of directors is not cumulative. If at any time four or more semi-
annual dividends on the Series A Preferred Stock are in default, in whole or in
part, the holders of the Series A Preferred Stock as a class will be entitled to
elect four directors and the holders of the FSC Common Stock will be entitled to
elect the remaining directors. Holders of any additional Preferred Stock
hereafter issued may have such full or limited voting rights as are provided by
the Board of Directors.
The Board of Directors of FSC is authorized by the Certificate of
Incorporation to provide, without further shareholder action, for the issuance
of one or more series of preferred stock. The Board of Directors has the power
to fix various terms with respect to each series, including voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations, restrictions and redemption, conversion or
exchangeability provisions. Holders of preferred stock have no pre-emptive
rights. The Series A Preferred Stock is not publicly traded.
FSC Common Stock. FSC is authorized to issue 300,000,000 shares of FSC
Common Stock with a par value of $1.25 per share. (FSC has asked its
shareholders to approve an increase of authorized common stock to 600,000,000
shares at its Annual Meeting in April 1998.) As of December 31, 1997, there were
outstanding 173,509,223 (net of Treasury Stock) shares of FSC Common Stock. At
such date, there were 5,736,445 shares reserved for issuance under FSC's
Comprehensive Management Incentive Plan as stock bonuses and other awards;
1,006,000 shares reserved for issuance under FSC's Dividend Reinvestment Plan;
391,241 shares reserved for issuance upon the conversion of FSC's Series A
Preferred Stock, 8,885,769 shares reserved for issuance upon exercise of
outstanding employee stock options, and 1,660,500 shares reserved for issuance
under FSC's Non-Employee Director Option Plan. Payment of dividends on the FSC
Common Stock is also subject to the prior rights of FSC's outstanding Series A
Preferred Stock.
The holders of FSC Common Stock are entitled to voting rights for the
election of directors and for other purposes, subject to the voting rights of
the holders of Preferred Stock conferred by law and to the specific voting
rights granted to each series of Preferred Stock and to voting rights which may
in the future be granted to subsequently created series of Preferred Stock.
Holders of FSC Common Stock are entitled to receive dividends when and if
declared by the Board of Directors of FSC out of any funds legally available
therefor, and are entitled upon liquidation, after claims of creditors and
preferences of FSC's Series A Preferred Stock and any other series of Preferred
Stock hereafter authorized, to receive pro rata the net assets of FSC. FSC
Common Stock has no pre-emptive or conversion rights.
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<PAGE> 64
As of August 28, 1989, FSC adopted a Shareholder Rights Agreement (the
"Plan") and the Board of Directors of FSC on that date (a) declared a dividend
of one "Right" for each share of FSC Common Stock held of record as of the close
of business on September 8, 1989, and (b) authorized the issuance of one Right
in respect of each share of FSC Common Stock issued after September 8, 1989 and
prior to the occurrence of certain events described in the Plan, primarily
involving the acquisition of target levels of FSC shares by persons not then
holding such amounts. Each Right entitles the registered holder to purchase from
FSC a unit consisting of one one-thousandth of a share of Junior Series B
Preferred Stock at a purchase price of $13.17 per unit. The Rights are attached
to all shares of FSC Common Stock that were outstanding on September 8, 1989 or
have been issued since that date, and no separate Rights Certificates have been
or will be distributed until the occurrence of certain events described in the
Rights Agreement. Until the occurrence of such events, no Right may be exercised
or traded separately from the FSC Common Stock. Following separation, the Rights
may, depending upon the occurrence of certain events described in the Rights
Agreement, entitle the holders thereof to either purchase or receive additional
shares of FSC Common Stock. The Rights will expire at the close of business on
August 28, 1999, unless earlier redeemed by FSC, which may be done at $0.01 per
Right, in accordance with the terms of the Plan.
The Plan is designed to protect FSC's stockholders' interests in the event
of an unsolicited attempt to acquire FSC, including a gradual accumulation of
shares in the open market. FSC believes that the Plan provides protection
against a partial or two-tier tender offer that does not treat all stockholders
equally and against other coercive takeover tactics which could impair FSC's
Board of Directors' ability to represent FSC's stockholders fully. Management
believes that the Rights should also deter any attempt by a controlling
stockholder to take advantage of FSC through self-dealing transactions. The Plan
is not intended to prevent a takeover of FSC. Issuing the Rights has no dilutive
effect, does not affect reported earnings per share, and does not change the way
in which FSC's shares are traded. However, the exercise of Rights by some but
not all of FSC's stockholders would have a dilutive effect on nonexercising
stockholders. Moreover, some may argue that the Plan has the potential for
"entrenching" current management by allowing current voting stockholders to
increase their voting shares, thus making a tender offer more difficult and
costly. Shares of FSC Common Stock do not have cumulative voting rights.
FSC Common Stock is not subject to redemption by either FSC or a
stockholder, and there is no restriction on the repurchase by FSC of shares of
FSC Common Stock except for certain regulatory limits.
FSC's Certificate of Incorporation provides that, in general, an
affirmative vote of not less than 80% of the outstanding shares of FSC Common
Stock is required to approve or authorize certain major corporate transactions
involving FSC and holders of more than 10% of the FSC Common Stock (including
certain mergers, substantial dispositions of assets, liquidation or dissolution,
or recapitalization). The 80% vote is not required in some such circumstances,
including certain transactions which have been approved in advance by a majority
of the Board of Directors, or where holders of FSC Common Stock receive a price
per share that satisfies the fairness criteria set forth in the Certificate of
Incorporation.
INFORMATION ABOUT THE BANK
A copy of the Bank's Annual Report on Form 10-K, as filed with the FDIC and
the Nasdaq National Market, is attached to this Prospectus/Proxy Statement as
Appendix B. The Annual Report contains the Bank's audited consolidated financial
statements for the years ended December 31, 1997, 1996 and 1995, the Bank's
Management's Discussion and Analysis of the Bank's financial statements and
condition, and additional statistical disclosures concerning the Bank and its
business. Bank Shareholders are referred to Appendix B for a full understanding
of the Bank, its operations and results.
GENERAL
The Bank is a California state chartered bank that commenced operations in
October, 1979. At December 31, 1997, the Bank had consolidated assets of $849.2
million, net loans of $442.8 million, deposits of $701.7 million and
stockholders' equity of $83.4 million.
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The principal executive and administrative offices of the Bank are located
at 100 North Barranca Street, West Covina, California.
Currently, the Bank operates seventeen branch banking offices: 925 West
Badillo Street, Covina, California ("Covina Main Branch"); 100 North Barranca
Street, West Covina, California ("West Covina Branch"); 385 East Sixth Street,
Beaumont, California ("Beaumont Branch"); 123 South Chapel Avenue, Alhambra,
California ("Alhambra Branch"); 444 East Huntington Drive, Arcadia, California
("Arcadia Branch"); 3401 Centrelake Drive, Ontario, California ("Ontario
Branch"); 301 North Second Street, Covina, California ("Covina Downtown
Branch"); 12470 Hesperia Road, Victorville, California ("Victorville Branch");
1201 Dove Street, Newport Beach, California ("Newport Beach Branch"); 721 North
Euclid, Anaheim, California ("Anaheim Branch"), 2101 East Coast Highway, Newport
Beach, California ("Corona del Mar Branch"); 2099 South State College Boulevard,
Anaheim, California ("Anaheim Stadium Branch"); 390 North Brea Boulevard, Brea,
California ("Brea Branch" ); 15771 Rockfield Boulevard, Irvine, California
("Irvine Branch"); 441 West Whittier Boulevard, La Habra, California ("La Habra
Branch"); 4875 La Palma Avenue, La Palma, California ("La Palma Branch"); and
111 East Yorba Linda Boulevard, Placentia, California ("Placentia Branch").
In January, 1997, the Bank closed its Orange Branch which was located at
170 South Main Street, Orange, California and transferred the deposit and loan
business to its Anaheim Stadium Branch. In December, 1997, the Bank closed its
Glendora Branch which was located at 655 South Grand Avenue, Glendora,
California and transferred the deposit and loan business to its Covina Main
Branch.
The Bank is a community bank that offers personalized commercial banking
services to businesses, professionals and individuals located in and around the
San Gabriel Valley, Inland Empire and High Desert areas of Southern California,
Orange County and in Beaumont, California. The Bank engages in a variety of
lending activities, including commercial and industrial, agribusiness,
construction and land development, real estate-conventional and installment
loans with emphasis on commercial loans and construction loans for residential
properties. Commercial and industrial loans include equipment financing,
short-term operating loans and accounts receivable financing. Installment loans
include consumer loans for automobiles, home improvements, debt consolidation
and other personal needs. Real estate loans include secured short-term mini-perm
and construction and land development loans. As of December 31, 1997, commercial
and industrial, construction and land development, real estate-conventional and
installment loans accounted for 39.6%, 7.4%, 43.6% and 9.3%, respectively, of
the Bank's loan portfolio, with the remaining .1% consisting of outstanding
leases.
Through its Small Business Administration "SBA" Loan Department, the Bank
offers loans for equipment, inventory, real estate acquisition and construction,
refinancing, and working capital. The Bank is a participant in both the
Preferred Lender Program ("PLP") and the Certified Lender Program under the SBA
program. As a Preferred Lender, the Bank may, without prior SBA review, issue
SBA guarantees for loans approved by the Bank under PLP procedures for which the
guaranteed portion does not exceed certain limits set by legislation, thereby
avoiding possible lengthy delays in the SBA approval process. Legislative
guarantees for PLP lenders range from 70% -- 90% based upon the size and
maturity of the loan. It is estimated that fewer than 1% of SBA-approved lenders
are approved by the SBA as PLP lenders. The Bank may hold the
government-guaranteed portions of its SBA loans in its own loan portfolio, or
sell these portions into the secondary market and retain the servicing income.
The Bank offers a variety of deposit instruments. These include personal
and business checking accounts and savings accounts, including interest-bearing
negotiable order of withdrawal accounts, money market accounts and time
certificates of deposit. The Bank also offers a wide range of specialized
services designed to attract and service the needs of customers. These services
include drive-up facilities, ATM facilities, cash management systems, electronic
funds transfers by way of domestic and international wires and automated
clearing house, merchant windows, courier services, computer accounting services
and sales of travelers' checks. Additionally, the Bank issues MasterCard credit
cards and honors merchant drafts for both MasterCard and VISA.
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The Bank offers international banking services, including issuing letters
of credit and bankers' acceptances, buying and selling foreign exchange and
handling the collection and transfer of money.
The Bank offers through its Alternative Investments Department a wide
variety of investment products including mutual funds and annuities for sale to
its customers. None of the products offered through the Alterative Investment
Department are insured by the FDIC.
The Bank does not operate a trust department. The Bank holds no patents,
registered trademarks, licenses (other than licenses obtained from bank
regulatory agencies), franchises or concessions.
REAL ESTATE SUBSIDIARIES
The Bank has two real estate development subsidiaries which are engaged in
activities authorized by Section 751.3 of the California Financial Code. Citrus
State Development Corp., was incorporated on January 18, 1984, and Granada
Realty Services, Inc., was incorporated on April 17, 1984. These real estate
development subsidiaries had combined capital of $4.5 million at December 31,
1997, and net income of $22,000, $184,000, and $54,000, for 1997, 1996 and 1995
respectively. See Note H to the Bank's audited consolidated financial
statements, found at Appendix B, attached hereto, for a summary of the financial
position of the Bank's real estate subsidiaries.
Federal law restricts insured state chartered banks and their subsidiaries
from engaging as a principal in any activity which is not permissible for a
national bank or a subsidiary of a national bank unless the FDIC permits such
activity and the bank meets all of its regulatory capital requirements.
Currently, neither national banks nor their subsidiaries are permitted to engage
as a principal in real estate development activities, such as those currently
engaged in by the Bank's real estate subsidiaries, with certain limited
exceptions.
The real estate development subsidiaries are engaged primarily in the
business of developing single family homes. The subsidiaries acquire and take
title to the property to be developed and provide the funds necessary for such
development. The subsidiaries generally engage real estate contractors to
perform construction work for a fee. The subsidiaries market and sell the homes
upon completion. Such properties are accounted for at the lower of cost,
including direct development cost and interest incurred during the development
stage, or net realizable value. Ordinarily, once projects are started they are
completed within a twelve-month period. The Bank generally does not finance the
sale of the homes which are built.
In March 1996, the FDIC approved the Bank's application to continue the
real estate development activities of the subsidiaries. The approval is subject
to certain conditions, including, among other things, that (a) the Bank's total
investment in the real estate development subsidiaries (defined to include
equity investments in and loans to the subsidiaries) not exceed 20% of the
Bank's Tier I capital, (b) for purposes of the prompt corrective action
provisions of federal law and the calculation of the Bank's risk adjusted
deposit insurance premium, the Bank's capital ratios be based on the Bank's
capital levels after deducting its total investment in the real estate
development subsidiaries, (c) the Bank's capital levels, after deducting its
total investment in the real estate development subsidiaries, equal or exceed
the levels required for a "well capitalized" institution under federal law and
(d) the real estate development subsidiaries contract with the Bank for any
services on terms and conditions comparable to those available to or from
independent entities.
At December 31, 1997, the Bank had a total investment, comprised entirely
of equity investments, in the real estate development subsidiaries of
approximately $4.5 million, constituting 5.4% of its total stockholders' equity
and 7.3% of Tier I capital. During 1997, the Bank's real estate development
subsidiaries sold six homes compared to the sale of nine homes in 1996 and seven
homes in 1995. At December 31, 1997, the subsidiaries held one completed home
pending close of escrow, one completed home listed for sale and two single
family residential properties in various stages of construction.
Management believes the Bank is in compliance with the conditions of the
FDIC approval at December 31, 1997. While management believes that it can
continue to satisfy the conditions of the FDIC approval, it is currently
evaluating and will continue to evaluate the extent to which it will engage in
its real estate development activities and the manner in which it engages in and
funds such activities. Any decision will be based on a number of factors
including, but not limited to, the growth and capital requirements of the
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Bank, the profitability of the Bank and the real estate development
subsidiaries, economic conditions on both a national and local level, and the
condition of the real estate market in Southern California.
COMPETITION
The banking and financial services business in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader range of financial services than the Bank. In order to compete
with the other financial services providers, the Bank principally relies upon
local promotional activities, personal relationships established by officers,
directors and employees with its customers, and specialized services tailored to
meet needs of the communities served. In those instances where the Bank is
unable to accommodate a customer's needs, the Bank may arrange for those
services to be provided by its correspondents. The Bank has seventeen branch
offices, five in Los Angeles County, nine in Orange County, one in Riverside
County and two in San Bernardino County. Neither the deposits nor loans of the
offices of the Bank exceed 1% of all financial services companies located in the
counties in which the Bank operates.
EMPLOYEES
As of December 31, 1997, the Bank had approximately 323 full-time
equivalent employees. The Bank believes that its employee relations are
satisfactory.
COMPARATIVE RIGHTS OF BANK SHAREHOLDERS
FSC is incorporated under the laws of the State of Delaware and the Bank is
incorporated under the laws of the State of California. Bank Shareholders whose
rights as shareholders are currently governed by California law, the Bank's
Articles and the Bank's Bylaws, will, in the event that such Bank Shareholders
receive FSC Common Stock as consideration in the Merger, become stockholders of
FSC, and their rights as such will be governed by Delaware law, the FSC
Certificate and the FSC Bylaws. Certain material differences between the rights
of holders of shares of Bank Common Stock and shares of FSC Common Stock are
summarized below.
The following summary does not purport to be a complete statement of the
rights of the Bank Shareholders under the applicable California laws, the Bank's
Articles and the Bank's Bylaws, as compared with the rights of FSC stockholders
under the applicable Delaware laws, the FSC Certificate and the FSC Bylaws or a
complete description of the specific provisions referred to herein. The
identification of specific differences is not meant to indicate that other
equally or more significant differences do not exist. The summary is qualified
in its entirety by reference to the California Corporations Code (the
"California Code") and the Delaware General Corporation Law (the "Delaware
Code") and the governing corporate instruments of the Bank and FSC to which such
Bank Shareholders are referred.
CERTAIN VOTING RIGHTS
California law generally requires approval of any reorganization (which
includes a merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation by the affirmative vote of the holders of a majority (unless the
articles of incorporation require a higher percentage) of the outstanding shares
of each class of capital stock of the corporation entitled to vote thereon. The
Bank's Articles do not require a higher percentage.
Under Delaware law, any merger, consolidation or sale of all or
substantially all of the assets of a corporation requires the approval of the
holders of a majority (unless the certificate of incorporation requires a
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higher percentage) of the outstanding shares of such corporation entitled to
vote thereon. The FSC Certificate requires a higher percentage vote in certain
merger contexts. FSC also has issued rights to its shareholders entitling its
shareholders to acquire additional shares of FSC capital stock in certain
circumstances associated with certain merger contexts. (See "INFORMATION ABOUT
FSC -- Description of FSC's Capital Stock.")
In general, under California law, no approval of a reorganization is
required by the holders of the outstanding shares in the case of any corporation
if such corporation, or its shareholders immediately before such reorganization,
or both, own, immediately after such reorganization, equity securities (other
than warrants or rights) of the surviving or acquiring corporation, or the
parent of either of the constituent corporations, possessing more than
five-sixths of the voting power of such surviving or acquiring corporation or
such parent. The Bank's Articles do not require a higher percentage.
Delaware law provides that (unless required by the certificate of
incorporation) no authorization by stockholders of a surviving or acquiring
corporation is necessary for a merger if (1) the merger does not amend the
certificate of incorporation of the corporation, (2) each share of stock of the
corporation outstanding prior to the merger remains identical after the merger,
and (3) either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into such shares are to be issued
or delivered under the plan of merger or the authorized unissued shares or the
treasury shares of common stock of the corporation to be issued or delivered
under the merger plus shares issuable upon conversion of any other shares,
securities or obligations to be issued or delivered under the merger do not
exceed 20% of the shares of common stock of the corporation outstanding prior to
the merger. The FSC Certificate does not require stockholder authorization for
mergers of the type described in the preceding sentence.
Under California law, a parent corporation may, without shareholder
approval, merge into itself a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Similarly, Delaware law permits a merger of a 90% owned subsidiary
corporation into its parent without shareholder approval so long as the
resolution of the Board of Directors of the parent providing for the merger
states the terms and conditions of the merger, including the consideration to be
given by the parent in exchange for the subsidiary shares not owned by the
parent, if any.
DIVIDENDS
Generally, a California corporation may pay dividends out of retained
earnings or if, after giving effect thereto: (1) the sum of the assets
(excluding goodwill and certain other assets) of the corporation is at least
equal to 1 1/4 times its liabilities (excluding certain deferred credits) and
(2) the current assets of such corporation are at least equal to (A) its current
liabilities or (B) if the average of the earnings of such corporation before
taxes and interest expense for the two preceding fiscal years was less than the
average of the interest expense of such corporation for such fiscal years, 1 1/4
times its current liabilities. In addition, the ability of a California
corporation to pay dividends is restricted by certain limitations for the
benefit of certain preference shares.
Under Delaware law, a corporation may pay dividends out of surplus or, in
the event that no surplus exists, out of its net profits for the fiscal year in
which the dividend is declared or its net profits for the preceding fiscal year,
subject to certain limitations for the benefit of certain preference shares. The
FSC Bylaws provide that the Board of Directors may, in accordance with
applicable law, declare dividends.
ELECTION OF DIRECTORS; BOARD OF DIRECTORS
Under California law (unless a listed corporation's articles of
incorporation or bylaws provide otherwise), any shareholder of a corporation is
entitled to cumulate his or her votes for the election of directors provided
that at least one shareholder has given notice at the meeting prior to the
voting of such shareholder's intention to cumulate his or her votes. Cumulative
votes may only be cast for candidates who have been nominated before the voting.
The Bank's Articles of Incorporation do not restrict cumulative voting.
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Delaware law permits cumulative voting in the election of directors of a
corporation if the certificate of incorporation of such corporation provides for
cumulative voting. The FSC Certificate does not provide for cumulative voting.
Under Delaware law, FSC is permitted to provide in its certificate of
incorporation or in an initial bylaw for classification of its Board of
Directors into up to three classes. The FSC Certificate does not provide for the
classification of directors.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under California law, the holders of at least 10% of the number of
outstanding shares of any class of stock may initiate a court action to remove
any director for cause. In addition, any or all of the directors of a California
corporation may be removed without cause by the affirmative vote of a majority
of the outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected.
Under Delaware law, any or all directors of a corporation may be removed,
with or without cause, by the holders of a majority of the shares entitled to
vote at an election of directors. However, in the case of a corporation whose
board is classified, shareholders may remove directors only for cause, and in
the case of a corporation having cumulative voting, if less than the entire
board is to be removed, no director may be removed without cause if the votes
cast against his removal would be sufficient to elect him if then cumulatively
voted at an election of the entire board of directors, or, if there are classes
of directors, at an election of the class of directors of which he or she is a
part.
Under California law (unless otherwise provided in the articles of
incorporation or bylaws and except for a vacancy created by the removal of a
director), vacancies on the board of directors may be filled by approval of the
board. In addition, any vacancy not filled by the directors may be filled by the
vote of the majority of shares entitled to vote. Neither the Bank's Articles nor
the Bank's Bylaws provide otherwise.
Under Delaware law (unless otherwise provided in the certificate of
incorporation or bylaws), vacancies and newly-created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors in office. Neither the FSC Certificate nor the FSC
Bylaws provides otherwise.
SPECIAL MEETINGS OF BANK SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
Under California law, a special meeting of shareholders may be called by
the board of directors, the chairman of the board, the president or the holders
of shares entitled to cast not less than 10% of the votes at the meeting or such
additional persons as may be provided in the articles of incorporation or
bylaws. The Bank's Bylaws also permit the Chief Executive Officer to call a
special meeting, but neither the Articles nor the Bylaws permit any other person
to call a special meeting.
Under Delaware law, a special meeting of shareholders may be called by the
board of directors or such other persons as may be authorized by the certificate
of incorporation or bylaws. The FSC Bylaws provide that a special meeting may be
called by the chairman or a majority of the board of directors.
Under California law (unless otherwise provided in the articles) and the
Bank's Bylaws, any action which may be taken at a meeting of shareholders may
also be taken by the written consent of the holders of at least the same
proportion of outstanding shares as would be necessary to take such action at a
meeting at which all shares entitled to vote were present and voted, except that
the election of directors by written consent generally requires the unanimous
consent of all shares entitled to vote for the election of directors. The Bank's
Articles do not provide otherwise.
Under Delaware law (unless otherwise provided in the certificate of
incorporation), any action which is required to be taken or may be taken at a
meeting of stockholders, may be taken by a written consent signed
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by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting. The
FSC Certificate does not provide otherwise.
AMENDMENT OF BYLAWS
Under California law, bylaws may be adopted, amended or repealed either by
the vote of a majority of the outstanding shares entitled to vote thereon or
(subject to any restrictions in the articles of incorporation or bylaws) by the
approval of the board of directors, except that amendments to the bylaws
specifying or changing a fixed number of directors or the maximum or minimum
number or changing from a fixed to a variable board or vice versa may only be
adopted by approval of the affirmative vote of a majority of the outstanding
shares entitled to vote.
Under Delaware law, the power to adopt, amend or repeal bylaws is vested in
the stockholders entitled to vote unless the certificate of incorporation
confers the power to adopt, amend or repeal bylaws upon the directors as well.
The FSC Certificate provides that the FSC Bylaws may be made, altered, amended
or repealed by the Board of Directors and may only be amended by a vote of at
least 80% of FSC stockholders.
AMENDMENT OF CHARTER
Under California and Delaware law, amendments to the charter of a
corporation generally require approval by vote of the Board of Directors and the
holders of a majority of outstanding shares entitled to vote thereon and, where
their rights are affected, by the holders of a majority of the outstanding
shares of a class, whether or not such class is entitled to vote thereon by the
provision of the charter.
DISSENTERS' RIGHTS
Under California law, in the event of a merger of a corporation for which
the approval of outstanding shares is required, dissenting shareholders of such
corporation who follow prescribed statutory procedures are entitled to receive
payment of the fair market value of their shares. (For a more complete
description of such rights, see "RIGHTS OF DISSENTING BANK SHAREHOLDERS.")
Under 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;
provided that no appraisal rights are available for the shares of any class or
series of stock which, at the record date for the meeting held to approve such
transaction, were either (1) listed on a national securities exchange or (2)
held of record by more than 2,000 stockholders. Further, no appraisal rights are
available to stockholders of the surviving corporation if their vote is not
required in connection with the merger. Notwithstanding the foregoing
provisions, appraisal rights are available if stockholders receive in the merger
or consolidation consideration other than: (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.
CERTAIN BUSINESS COMBINATIONS AND REORGANIZATIONS
Under California law, if a tender offer or written proposal to acquire a
corporation by a reorganization or certain sales of assets is made to a
corporation's shareholders by an Interested Party (as hereinafter defined) (each
an "Interested Party Proposal"), (1) an affirmative opinion in writing as to the
fairness of the consideration to the shareholders of such corporation must be
delivered to shareholders of such corporation (or, in the event that no
shareholder approval is required for the consummation of the transaction, to the
corporation's Board of Directors) and (2) such shareholders must be (a) informed
of certain later tender offers or written proposals for a reorganization or sale
of assets made by other persons and (b) afforded a reasonable opportunity to
withdraw any vote, consent or proxy previously given or shares previously
tendered in connection with the Interested Party Proposal. For the purposes of
this paragraph, "Interested Party" shall mean a person who is a party to the
transaction and (x) directly or indirectly controls the corporation that is the
subject of the tender offer or proposal; (y) is, or is directly or indirectly
controlled by, an officer or director
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of the subject corporation; or (z) is an entity in which a material financial
interest (as defined in Section 310 of the California Code) is held by any
director or executive officer of the subject corporation.
In addition, in connection with any merger transaction, California law
generally requires that, unless all shareholders of a class or series consent
(and except with respect to fractional shares), each share of such class or
series must be treated equally with respect to any distribution of cash,
property, rights or securities. California law also provides generally that if a
corporation that is party to a merger, or its parent, owns more than 50% but
less than 90% of the voting power of the other corporation that is party to such
merger, the nonredeemable shares of common stock of the controlled corporation
may be converted only into nonredeemable shares of the surviving corporation or
a parent party unless all of the shareholders of the class consent.
Generally, Delaware law would prevent an Interested Stockholder (as defined
in the Delaware Code) from engaging in a Business Combination (as defined in
Section 203 of the Delaware Code) with a corporation for three years following
the date such person became an Interested Stockholder unless: (1) before such
person became an Interested Stockholder, the Board of Directors of such
corporation approved either the business combination or the transaction in which
the Interested Stockholder became an Interested Stockholder; (2) upon
consummation of the transaction which resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of such corporation outstanding at the time the
transaction commenced (excluding stock held by (A) directors who are also
officers and (B) 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) at or
subsequent to such time, the Business Combination is (x) approved by the Board
of Directors of such corporation and (y) authorized at a meeting of stockholders
by the affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock of such corporation not owned by the Interested Stockholder.
THE BANK'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
PROPOSAL NUMBER TWO: THE PROPOSED MERGER AGREEMENT.
LEGAL MATTERS
The legality of the FSC Common Stock offered hereby and certain other
matters with respect to the Merger will be passed upon for FSC and FSMC by Ray,
Quinney & Nebeker. As of the Record Date, attorneys at Ray, Quinney & Nebeker,
as a group, were beneficial owners of approximately 3.5% of the total
outstanding FSC Common Stock, and held no shares of Bank Common Stock. A
shareholder of Ray, Quinney & Nebeker is the daughter of the Chairman and Chief
Executive Officer of FSC. Another shareholder acts as Assistant Secretary of
FSC.
The law firm of Manatt, Phelps & Philips, LLP will pass upon certain
matters in connection with the Merger for the Bank. As of the Record Date,
attorneys at Manatt, Phelps & Philips, LLP beneficially owned 1,400 shares of
the Bank Common Stock and no shares of FSC Common Stock.
EXPERTS
FSC's consolidated financial statements as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997
incorporated in this Prospectus/Proxy Statement by reference from FSC's Annual
Report on Form 10-K have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The Bank's consolidated financial statements as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997
incorporated in this Prospectus/Proxy Statement by reference from the Bank's
Annual Report on Form 10-K have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is incorporated herein by
reference, and have been so
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incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
DEADLINE FOR FSC SHAREHOLDER PROPOSALS
Any FSC shareholder who wishes to present a proposal for action at the 1999
ANNUAL MEETING of the FSC shareholders, must submit his or her proposal in
writing by Certified Mail -- Return Receipt Requested, to First Security
Corporation, Attention: Secretary of the Corporation, 79 South Main Street, Salt
Lake City, Utah 84111, on or before December 31, 1998.
In addition, FSC's Bylaws provide for minimum and maximum notice periods to
FSC of any shareholder nomination for Director and for any other shareholder
proposal for action at an annual or special meeting of FSC shareholders. A copy
of the relevant portions of the FSC Bylaws may be obtained by writing to the
Secretary of FSC at the above address. The FSC Bylaws were filed as an exhibit
to FSC's Annual Report on Form 10-K for the year ended December 31, 1997, as
filed with the Commission. FSC's Annual Report on Form 10-K for the year ended
December 31, 1997 is available over the Internet through the Commission's
website at www.sec.gov.
INFORMATION CONCERNING THE BANK SHAREHOLDERS MEETING ONLY
The Board of Directors of the Bank has appointed Deloitte & Touche LLP as
the Bank's independent accountants for the fiscal year ending December 31, 1998.
The appointment was recommended by the Audit Committee. Deloitte & Touche LLP
has been the Bank's accountants since 1988 and performed audit services which
included the examination of the consolidated financial statements and services
related to filings with the FDIC. All professional services rendered by Deloitte
& Touche LLP during 1997 were furnished at customary rates and terms.
Representatives of Deloitte & Touche LLP will be present at the Bank
Shareholders' Meeting, will have the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions from
Bank Shareholders.
DEADLINE FOR BANK SHAREHOLDER PROPOSALS
Assuming the Merger Agreement is not approved at the Bank Shareholders'
Meeting, or that the Merger Agreement otherwise fails to close and is
terminated, a Bank Shareholder who wishes to present a proposal for action at
the 1999 ANNUAL MEETING of Shareholders, must submit his proposal in writing by
Certified Mail -- Return Receipt Requested, to California State Bank, Attention:
Corporate Secretary, 100 N. Barranca Street, West Covina, California 91791, on
or before December 21, 1998.
OTHER BUSINESS
The Board of Directors knows of no other business which will be presented
for consideration at the Bank Shareholders' Meeting other than as stated in the
Notice of Meeting. If, however, other matters are properly brought before the
Bank Shareholders' Meeting, it is the intention of the persons named in the
accompanying form of Proxy to vote the shares represented thereby in accordance
with their best judgment and in their discretion, and authority to do so is
included in the Proxy.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AS AMENDED
("MERGER AGREEMENT")
<PAGE> 74
AGREEMENT AND PLAN OF REORGANIZATION
DATED FEBRUARY 18, 1998
BY AND AMONG
FIRST SECURITY CORPORATION,
FIRST SECURITY MERGER CORP.
AND
CALIFORNIA STATE BANK
This Agreement and Plan of Reorganization, dated as of the 18th day of
February, 1998 ("Agreement"), is made and entered into by and among FIRST
SECURITY CORPORATION, a Delaware corporation ("FSC"), FIRST SECURITY MERGER
CORP., a California corporation ("Merger Co."), and CALIFORNIA STATE BANK, a
bank organized under the laws of the State of California ("Bank").
R E C I T A L S:
A. FSC is a corporation duly organized and existing under the laws of the
State of Delaware, with its principal place of business located at 79 South Main
Street, Salt Lake City, Utah 84111. FSC is authorized by its Articles of
Incorporation to issue (i) 400,000 shares of preferred stock, each of no par
value ("FSC Preferred Stock"), 18,052 of which are designated as Class A
Preferred Stock, of which 9,541 were issued and outstanding on December 31,
1997, and (ii) 300,000,000 shares of common stock, each of $1.25 par value ("FSC
Common Stock"), of which as of December 31, 1997, there were 115,672,815 (net of
Treasury) shares issued and outstanding.
B. Merger Co. is a corporation duly organized under the laws of the State
of California for the sole purpose of facilitating the acquisition of Bank, and
is a wholly-owned subsidiary of FSC.
C. Bank is a bank incorporated under the laws of the State of California,
having its principal place of business located at 100 N. Barranca Street, West
Covina, California 91791. Bank is authorized by its Articles of Incorporation to
issue 15,000,000 shares of common stock, each of no par value, ("Bank Common
Stock") of which as of January 31, 1998 there were 5,150,111 shares issued and
outstanding and 618,372 shares reserved for issuance upon the exercise of
outstanding incentive options ("ISO") and non-statutory options ("NSO", and
together with the ISOs, the "Options"), and 5,000,000 shares of serial preferred
stock, none of which are issued and outstanding.
D. Bank owns beneficially and of record all of the issued and outstanding
shares of capital stock of Granada Realty Services, Inc., a California
corporation, Citrus State Development Corp., a California corporation, and
Excelmark Financial Services, Inc., a California corporation (collectively, the
"Subsidiaries").
E. The parties hereto desire that Merger Co. be merged with and into Bank,
with the Bank to be the surviving entity (the "Merger") pursuant to that certain
Agreement of Merger attached hereto as Exhibit A (the "Merger Agreement").
F. As a condition to the execution of this Agreement, FSC and Bank are
entering into that certain Termination Fee Agreement of even date herewith (the
"Termination Agreement").
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A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions set forth herein, the parties hereto covenant and agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Pursuant to the laws of the State of California, and
subject to the terms and conditions of this Agreement and the Merger Agreement,
at the Effective Time (as defined in Section 8.2 hereof) Merger Co. shall be
merged with and into Bank, which shall be the surviving corporation (the
"Surviving Corporation").
1.2 Effect of the Merger. By virtue of the Merger, all the rights,
privileges, powers and franchises and all property and assets of every kind and
description of Merger Co. and Bank shall be vested in and be held and enjoyed by
the Surviving Corporation, without further act or deed, and all the interests of
every kind of Merger Co. and Bank, including all debts due to either of them on
whatever account, shall be the property of the Surviving Corporation as they
were of Merger Co. and Bank and the title to any interest in real property and
any interest in personal property vested by deed or otherwise in either Merger
Co. or Bank shall not revert or be in any way impaired by reason of the Merger;
and all rights of creditors and liens upon any property of Merger Co. and Bank
shall be preserved unimpaired and all debts, liabilities and duties of Merger
Co. and Bank shall be debts, liabilities and duties of the Surviving Corporation
and may be enforced against it to the same extent as if said debts, liabilities
and duties had been incurred or contracted by it.
The outstanding shares of capital stock of Bank shall be converted on the
basis, terms, and conditions described in Section 1.3.
1.2.1 Articles of Incorporation; Bylaws; Directors and Officers. The
Articles of Incorporation and Bylaws of Bank in effect immediately prior to the
Merger shall govern Bank after the Merger. The directors and officers of Bank
shall be those individuals presently serving as directors and officers of the
Bank.
1.3 Conversion of Shares. The manner and basis of converting the
outstanding shares of capital stock of Merger Co. and Bank shall be as follows:
1.3.1 Merger Co. Common Stock. Each share of Merger Co. common stock
which is outstanding immediately prior to the Effective Time and all rights in
respect thereof, ipso facto, shall be converted into one share of common stock
of the Surviving Corporation.
1.3.2 Conversion of Bank Common Stock.
(a) Conversion Ratio. Subject to Section 1.4, each share of Bank Common
Stock which is outstanding immediately prior to the Effective Time (of which
there shall be no more than 5,773,483 shares fully diluted and assuming all
Options have been exercised), shall be converted ipso facto, and without any
action on the part of the holder thereof, at the Effective Time, into 1.42 (2.13
after giving effect to the 50% stock dividend on the FSC Common Stock payable on
February 24, 1998) shares of FSC Common Stock (the "Conversion Ratio"), subject
to adjustment as specified in Subsection (d) below, if applicable.
(b) No Fractional Shares. Notwithstanding any other provision of this
Agreement to the contrary, neither certificates nor scrip representing
fractional shares of FSC Common Stock shall be issued in the Merger, and such
fractional share interests shall not entitle the owner thereof to vote or to any
rights of a shareholder of FSC. In lieu of any such fractional shares, each
holder of shares of Bank Common Stock (on an aggregate basis) who would
otherwise have been entitled to a fraction of a share of FSC Common Stock upon
surrender of certificates as provided in this Section 1.3 shall upon such
surrender be paid an amount of cash (without interest) determined by multiplying
(a) the fractional share interest to which such holder would otherwise be
entitled, (b) by the Average Closing Price (as such term is hereafter defined)
of a share of FSC Common Stock. The "Average Closing Price" shall be the average
of the daily closing prices of a share
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of FSC Common Stock as reported on the NASDAQ Market during the period of five
(5) consecutive trading days ending on the second trading day immediately
preceding the Effective Time.
(c) Options.
(i) Each person (other than non-employee directors of Bank who must
exercise their Options prior to the Effective Time) holding one or more Options
to purchase Bank Common Stock pursuant to Bank's 1988 Stock Option Plan or 1994
Stock Option Plan, each as amended to date (collectively, "Stock Option Plans")
shall have the right, in his or her discretion, to either:
(A) exercise the vested portion (including the portion of the Option
which vests immediately prior to the Effective Time as a result of the
Merger) of the Option to acquire Bank Common Stock prior to the Effective
Time, or
(B) as of the Effective Time, surrender the Option agreement to FSC,
in which event such person will be entitled to receive a substitute option
("Substitute Option"). Such Substitute Option shall be exercisable for that
number of shares of FSC Common Stock equal to the product of (1) the number
of shares of Bank Common Stock that were purchasable under such Option
immediately prior to the Effective Time multiplied by (2) the Conversion
Ratio, rounded down to the nearest whole number of shares of FSC Common
Stock. The per share exercise price for the shares of FSC Common Stock
issuable upon exercise of such Substitute Option shall be equal to the
quotient determined by dividing (1) the exercise price per share of Bank
Common Stock at which such Option was exercisable immediately prior to the
Effective Time by (2) the Conversion Ratio. At the Effective Time, FSC
shall issue to each holder of an outstanding Option a document evidencing
the Substitute Option pursuant to this Section 1.3(c).
(ii) The Substitute Options to be received in exchange for Options shall be
fully vested, shall be exercisable as provided in the original applicable Option
agreement and shall otherwise preserve the characteristics, terms and conditions
of the original Option to the greatest extent possible, subject to the
requirements of law, including insuring that Options that qualify as incentive
stock options prior to the Effective Time qualify as incentive stock options of
FSC after the Effective Time.
(iii) At or prior to the Effective Time, FSC shall take all corporate
action necessary to reserve for issuance a sufficient number of shares of FSC
Common Stock for delivery upon exercise of the Substitute Options issued in
accordance with this Section 1.3(c). At the Effective Time, or as soon as
practicable thereafter, FSC shall file a registration statement on Form S-8 (or
any successor or other appropriate forms), or another appropriate form with
respect to the shares of FSC Common Stock subject to such Substitute Options and
shall use all reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Substitute Options remain
outstanding.
(d) Adjustments for FSC Dilution. If prior to the Effective Time, FSC
shall declare a stock dividend or distribution upon or subdivide, split up,
reclassify or combine the FSC Common Stock, or make a distribution on the FSC
Common Stock in any security convertible into FSC Common Stock, as of a record
date prior the Effective Time, appropriate adjustment or adjustments (rounded to
three digits to the right of the decimal point) will be made to the Conversion
Ratio and the total number of shares of FSC Common Stock to be issued in the
transaction so as to maintain the proportional interest in FSC Common Stock
which the shareholders of Bank would otherwise have received.
1.3.3 Exchange of Certificates.
(a) Deposit with Exchange Agent. As of the Effective Time, FSC shall have
deposited with the Exchange Agent, as defined in 1.3.3(b) below, for the benefit
of holders of Bank Common Stock, for exchange in accordance with this Section,
certificates representing shares of FSC Common Stock issuable pursuant to
Section 1.3.1 and funds in an amount not less than the amount of cash payable in
lieu of fractional shares pursuant to this Section 1.3.
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(b) Exchange Procedures. Promptly after the Effective Time, FSC shall mail
to each Bank shareholder of record (other than holders of shares as to which
dissenters' rights are perfected) (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates shall pass, only upon delivery of the Bank certificates to First
Chicago Trust Company of New York, the exchange agent for FSC (the "Exchange
Agent"), and shall be in such form and have such other provisions as FSC and
Bank may reasonably specify), and (ii) instructions for use in effecting the
surrender of the Bank certificates in exchange for certificates representing
shares of FSC Common Stock. Upon surrender of a Bank certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, the holder of such Bank certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares of
FSC Common Stock and cash in lieu of any fractional share of FSC Common Stock
which such holder has the right to receive pursuant to the provisions of this
Section 1.3, and the certificate so surrendered shall forthwith be canceled.
Until so surrendered, the certificates which prior to the Merger represented
shares of Bank Common Stock shall be deemed for all corporate purposes to
evidence ownership of the shares of FSC Common Stock into which such shares of
Bank Common Stock shall have been converted; provided, however, that no
dividends or other distributions declared or made after the Effective Time with
respect to FSC Common Stock with a record date after the Effective Time shall be
paid until the holder shall have surrendered certificates therefore, at which
time the holder shall be paid the amount of dividends, if any, without interest,
which shall theretofore have become payable with respect to the shares of FSC
Common Stock into which such shares shall have been converted.
If any certificate for shares of FSC Common Stock is to be issued in a name
other than that in which the certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, and that the person requesting such exchange pay to the Exchange Agent
for such purposes any applicable transfer or other taxes required by reason of
the issuance of a certificate for shares of FSC Common Stock in any name other
than that of the registered holder of the certificate surrendered, or establish
to the satisfaction of the Transfer Agent that such tax has been paid or is not
payable. Until surrendered as contemplated by this Section 1.3, each certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the certificate representing shares of FSC Common
Stock and cash in lieu of any fractional shares of FSC Common Stock as
contemplated by this Section 1.3.
(c) No Further Ownership Rights in Bank Common Stock. All shares of FSC
Common Stock issued upon the surrender for exchange of shares of Bank Common
Stock in accordance with the terms hereof (including any cash paid pursuant to
Subsection 1.3.2 (b)) shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of Bank Common Stock, and there shall be
no further registration of transfers on the stock transfer books of FSC of the
shares of Bank Common Stock which were outstanding immediately prior to the
Effective Time.
1.4 Shares of Dissenting Holders. Notwithstanding anything to the
contrary in this Agreement, any holders of dissenting shares, as defined in
Section 1301 of the California General Corporation Law ("CGCL"), which have not
effectively withdrawn or lost their rights under Section 1309 of the CGCL shall
not have their Bank Common Stock converted as described in Section 1.3; such
dissenting shares shall from and after the Effective Time represent only the
right to receive such consideration as may be determined to be due to such
dissenting holder pursuant to Chapter 13 of the CGCL; provided, however, that
each share of Bank Common Stock outstanding immediately prior to the Effective
Time, and held by a dissenting holder who shall, after the Effective Time,
withdraw his or her demand for appraisal or lose his or her right of appraisal
shall be deemed to be converted, as of the Effective Time, into FSC Common Stock
in accordance with Section 1.3 and the certificates representing such Bank
Common Stock shall be surrendered in accordance with Section 1.3.
1.5 Tax Consequences. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that this Agreement shall constitute a
"plan of reorganization" for purposes of the Code.
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ARTICLE II
COVENANTS OF BANK
2.1 Limitations on Bank's and Subsidiaries' Conduct Prior to Effective
Time. Except as otherwise contemplated hereby, between the date hereof and the
Effective Time or the time when this Agreement terminates as provided herein,
Bank agrees to conduct its business, and to cause the Subsidiaries to conduct
their respective businesses, in the ordinary course and in substantially the
manner heretofore conducted and in accordance with sound banking practices, (the
parties hereto recognize that the operation of Bank and the Subsidiaries until
the Effective Time is the responsibility of Bank and the Subsidiaries,
respectively, and the Boards of Directors and officers of the Bank and the
Subsidiaries, respectively; nevertheless, Bank shall keep FSC advised of all
important changes in the financial condition (present or prospective), business,
properties, assets or operations of Bank and the Subsidiaries) and subject to
requirements of law and regulation generally applicable to California banks, and
Bank shall not, without the prior written authorization of the Chairman,
President or an Executive Vice President of FSC (which consent shall not be
unreasonably withheld):
2.1.1 Change in Capital Stock; Issuance of Shares. Make any change in its
or the Subsidiaries' authorized capital stock, or issue (except pursuant to the
exercise of outstanding Options), agree to issue or permit Bank or the
Subsidiaries to become obligated to issue any shares of their respective capital
stock, or securities convertible into their respective capital stock;
2.1.2 Options, Warrants, and Rights. Grant or issue any options, warrants
or other rights, including stock appreciation rights, of any kind relating to
the purchase of shares of capital stock of the Bank or the Subsidiaries, or
securities convertible into their respective capital stock;
2.1.3 Dividends. Declare or pay any dividends or other distributions on
any shares of the capital stock of Bank or the Subsidiaries; provided, however,
that nothing herein shall prohibit Bank from paying quarterly cash dividends
consistent with past practices in an amount not to exceed $0.12 per outstanding
share of Bank Common Stock per quarter; provided further that Bank shall not pay
such quarterly dividend for the quarter in which the Merger is consummated if
the Effective Time is prior to FSC's record date for payment of its quarterly
dividend for such quarter.
2.1.4 Purchase of Shares. Purchase or otherwise acquire, or agree to
acquire, any shares of its stock, other than in a fiduciary capacity;
2.1.5 Benefit Plans. Except as required by law, enter into or amend any
pension, retirement, stock option, stock appreciation, profit sharing, deferred
compensation, consultant, bonus, group insurance or similar benefit plan in
respect of any of the directors, officers or other employees of the Bank or the
Subsidiaries; provided, however, Bank may make such amendments to the benefit
plans to facilitate the matters specifically contemplated by this Agreement.
2.1.6 Acquisitions and Mergers. Acquire any other company by purchase,
merger or otherwise, or acquire any branch or other significant part of the
assets of any other company;
2.1.7 Liens; Indebtedness; Increase in Compensation, etc. Except in the
ordinary course of business, as set forth in Schedule 2.1.7, or for matters
previously disclosed to FSC in writing, (i) mortgage, pledge or subject to a
lien or any other encumbrance, any of its assets or dispose of any of the assets
of the Bank or the Subsidiaries, incur or cancel any indebtedness or claims,
enter into any commitment to purchase or lease any assets having a purchase
price or lease cost, in the aggregate, of more than $100,000, or (ii) increase
any compensation or benefits payable to the officers or employees of the Bank or
the Subsidiaries, except to pay to those employees other than the senior
management, which shall be defined for purposes of this Agreement as Senior Vice
President, Executive Vice President or above of the Bank, routine merit
increases in accordance with past practices and to pay to any officer or
employee such retention bonuses as the Bank may deem necessary to retain the
services of an officer or employee.
2.1.8 Amendments to Charter, etc. Amend the Articles of Incorporation or
make any material amendments to the Bylaws of Bank or the Subsidiaries which
would interfere in any manner with the transactions contemplated by this
Agreement;
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2.1.9 Other.
(a) Take any action which would or is reasonably likely to (i) adversely
affect the ability of Bank to obtain any necessary approvals of any Governmental
Entity required for the transactions contemplated hereby; (ii) adversely affect
Bank's ability to perform its covenants and agreements under this Agreement; or
(iii) result in any of the conditions to the performance of Bank's obligations
hereunder not being satisfied;
(b) Take or cause to be taken any action which would disqualify the Merger
as a "reorganization" within the meaning of Section 368 of the Code.
(c) Take or cause to be taken any action which would prevent the Merger
from qualifying for "pooling of interests" accounting treatment.
2.2 Preservation of Business, Employees. Bank shall use its commercially
reasonable efforts to retain for the benefit of FSC the continuing services of
the present officers and employees of Bank and the Subsidiaries, to preserve the
goodwill of customers and others having business relations with Bank and the
Subsidiaries, to preserve the deposit levels of Bank, to preserve the benefits
of all material contractual relationships with others and to keep in force at
least at their present limits all policies of insurance currently in effect.
2.3 Investigation; Access. Bank shall diligently endeavor to (i) take or
cause to be taken all action required of it under this Agreement as promptly as
practicable so as to permit the consummation of the transactions contemplated by
this Agreement at the earliest possible date and cooperate fully with FSC to
that end, including, without limitation, providing to FSC and its employees,
accountants and counsel, upon reasonable notice, access during normal business
hours to the books, records, reports, tax returns and facilities of the Bank and
the Subsidiaries, other than (a) books, records and documents covered by the
attorney-client privilege, or that are attorneys' work product, and (b) books,
records and documents that the Bank or its Subsidiaries is legally obligated to
keep confidential, and to their respective employees, accountants, and counsel;
provided, however, that such investigation to be conducted by FSC shall be
performed in such a manner which will not unreasonably interfere with the normal
operations, customers or employee relations of Bank or the Subsidiaries, and
shall be in accordance with procedures established by the parties having due
regard for the foregoing, and (ii) furnish all necessary information for
inclusion in any applications relating to the consents, approvals and
permissions of regulatory authorities referred to in Article VII.
From execution of the Agreement until Closing, Bank shall deliver to FSC,
as soon as practicable following the end of each calendar month, (i) a list
setting forth all of the changes during the month to the classified, criticized
and nonperforming assets of Bank ("Classified Assets") as identified by Bank or
by the most recent examination by Bank's federal or state bank examiner, along
with an explanation of management's response for dealing with such assets, (ii)
a list of all changes during the month to loans which are more than thirty (30)
days past due ("Past Due Loans"), (iii) Bank management's analysis of expected
losses to be incurred with respect to the loans (assets) identified in items (i)
and (ii); (iv) a summary of loan and lease and deposit activity during the
month, and (v) interim financial reports relating to the Bank provided to the
Board or filed with regulatory authorities.
No examination or review conducted under this section shall constitute a
waiver or relinquishment on the part of FSC of the right to rely upon the
representations and warranties made by the Bank herein; provided, however, that
FSC shall disclose to the Bank any fact or circumstance it may discover which
FSC believes renders any representation or warranty made by the Bank hereunder
incorrect in any respect.
FSC covenants and agrees that it and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning the Bank and Subsidiaries received from any of them
(except to the extent that such documents or information are a matter of public
record or require disclosure in the Proxy Statement/Prospectus ("Prospectus"),
the Registration Statement on Form S-4 ("Form S-4") to be filed by FSC pursuant
to Section 3.10, or any of the public information of any applications required
to be filed with any governmental or regulatory agency to obtain the approvals
and consents required to effect the transactions contemplated hereby), and if
the transactions contemplated herein are not consummated, such confidence shall
be maintained and all such documents shall be returned to the Bank.
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2.4 Regulatory Approvals. Bank shall (i) use its commercially reasonable
efforts in good faith to obtain all necessary regulatory approvals and to take
or cause to be taken all other action required under this Agreement on its part
to be taken as promptly as practicable so as to permit the consummation of the
transactions contemplated by this Agreement at the earliest possible date, and
cooperate fully with FSC to that end, (ii) furnish all necessary information for
inclusion in any applications relating to the consents, approvals, and
permissions of regulatory authorities referred to in Article VII. Bank shall
have the right to review all applications to such regulatory authorities before
the filing thereof and to comment upon the form of such applications and the
information contained therein.
2.5 Information for Prospectus. Upon request by FSC, Bank shall timely
prepare and deliver to FSC, in such form required by rules and regulations of
the United States Securities and Exchange Commission (the "SEC"), all
information, descriptions, accounting reports and schedules (including audited
financial statements in the form required by Regulation S-X of the SEC, as may
be required) and other materials required for preparation and filing of the Form
S-4 contemplated by Section 3.10 of this Agreement.
2.6 Environmental Assessment and Remediation. Bank shall provide FSC with
all Phase I environmental investigation reports that it possesses with respect
to real property owned by the Bank or the Subsidiaries, including Bank's branch
facilities and assets held by Bank as other assets, other real estate owned, or
as insubstance foreclosure and shall cause to be prepared within 30 days of the
date of this Agreement one or more Phase I environmental investigation reports
covering such properties for which it does not have a Phase I environmental
investigation report. In the event any such Phase I environmental investigation
report, or any information from a governmental entity, discloses facts which, in
the sole discretion of FSC, warrants further investigation, FSC shall provide
written notice to the Bank, and the Bank shall use commercially reasonable
efforts to cause to be completed within sixty (60) days of such written notice,
at the sole cost and expense of the Bank, a Phase II environmental investigation
report with respect to such property. FSC shall have ten (10) days from the
receipt of any such Phase II environmental investigation report to object
thereto, which objection shall be by written notice. In the event of any such
objection the Bank shall engage a consultant which is mutually satisfactory to
FSC and Bank ("Consultant"), who shall provide an estimate of the cost of taking
any remedial action recommended or suggested in such Phase II environmental
investigation report and, unless FSC or Bank terminates this Agreement as
provided in this Section 2.7, Bank shall use commercially reasonable efforts to
immediately commence and diligently prosecute such remediation, all at the sole
cost and expense of the Bank (subject to applicable rights of reimbursement from
third parties). In the event the Aggregate Environmental Assessment and
Remediation Cost (as defined herein) is in excess of $1,000,000, or is not
reasonably determinable, either FSC or Bank shall have the right to terminate
this Agreement pursuant to Section 9.1(l) hereof. The Aggregate Environmental
Assessment and Remediation Costs shall be the sum of (i) the costs of all Phase
I environmental investigation reports conducted pursuant to this section (or
otherwise in connection with this Agreement) and paid by the Bank; (ii) the
costs of all Phase II environmental assessments conducted pursuant to this
section (or otherwise in connection with this Agreement) and paid by the Bank;
(iii) the actual cost of remediation conducted pursuant to this section (or
otherwise in connection with this Agreement) and paid by the Bank; and (iv) the
estimated cost of remediation as determined by the Consultant. In the event
either FSC or Bank disagrees with the estimate of remediation costs provided by
the Consultant, such estimate shall be reviewed, at the option of either party,
by an environmental engineer mutually satisfactory to the parties, whose
determination shall be conclusive on the parties. If neither FSC nor Bank elects
to terminate this Agreement, the Bank shall use commercially reasonable efforts
to commence and complete such remediation promptly thereafter. FSC shall have
the right, notwithstanding any other provision of this Agreement, to extend the
Closing until such remediation can be fully accomplished; provided that in no
event shall the Closing be extended beyond November 30, 1998.
2.7 Employee Matters. FSC will consult with Bank concerning, and Bank
will use all reasonable efforts to keep available to FSC, the services of the
officers and employees of Bank prior to the Effective Time.
2.8 Notification of Actions. Bank covenants and agrees to immediately
notify FSC in the event of any action which materially affects any of the
covenants set forth in this Article II or would cause the breach of
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any of its representations and warranties in this Agreement, or in the event
that Bank determines that it is unable to fulfill any of the conditions to the
performance of FSC's obligations hereunder.
2.9 Advice of Changes. Bank shall keep FSC advised of all important
changes in the financial condition (present or prospective), business,
properties, assets or operations of Bank and the Subsidiaries.
2.10 Filings. Bank agrees that through the Effective Time, each of its
reports, statements and other filings required to be filed with any applicable
Governmental Entity will comply in all material respects with all of the
applicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. As used in this
Agreement, the term Governmental Entity shall mean any court, administrative
agency or commission or other governmental authority or instrumentality. Any
financial statement contained in any such report, statement or other filing that
is intended to present the financial position of the entities or entity to which
it relates will fairly present the financial position of such Bank will be
prepared in accordance with generally accepted accounting principles or
applicable banking regulations consistently applied during the periods involved.
2.11 Applications. Bank covenants and agrees that the information
provided to FSC for inclusion in the Form S-4 or regulatory agencies for
approval or consent to the Merger will comply in all material respects with the
provisions of applicable law, and will not contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. Bank will use its
commercially reasonable efforts to obtain all regulatory approvals or consents
necessary to effect the Merger.
2.12 Removal of Conditions. In the event of the imposition of a condition
to any regulatory approvals which Bank deems to materially adversely affect it
or to be materially burdensome, Bank shall use its commercially reasonable
efforts for purposes of obtaining the removal of such condition.
2.13 Update of Schedules. Between the date hereof and the fifth business
day immediately preceding the Closing, Bank shall provide to FSC any updates and
additional information as is necessary to update as of the Closing Date the
Schedules provided to FSC under Article IV. However, any such updates shall not
be deemed to modify the representations and warranties made herein as of the
date of this Agreement.
2.14 Pre-Closing Adjustments. At or before the Effective Time, Bank shall
make, and shall cause its Subsidiaries to make, such accounting entries or
adjustments, including charge-offs of loans, as FSC shall direct in order to
reflect expenses and costs related to the Merger; provided, however, that (a)
Bank and its Subsidiaries shall not be required to take such actions more than
one day prior to the Effective Time or prior to the time FSC agrees in writing
that all of the conditions to its obligations to close as set forth in Sections
7.1.1 and 7.1.2 of this Agreement have been satisfied or waived, and (b) based
upon consultation with counsel and accountants for Bank and its Subsidiaries, no
such adjustment shall (i) require any filing with any Governmental Entity, (ii)
violate any law, rule or regulation applicable to Bank or its Subsidiaries, or
(iii) otherwise materially disadvantage Bank or its Subsidiaries if the Merger
were not consummated; provided that in any event, no accrual or reserve made by
Bank or its Subsidiaries pursuant to this Section 2.14, 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, including but not limited to the condition set forth in Section
7.1.2(f) 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, shall not be construed as
concurrence of Bank or its Subsidiaries' management with any such adjustments,
and shall not affect the Conversion Ratio.
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ARTICLE III
COVENANTS OF FSC
FSC covenants and agrees with the Bank as follows:
3.1 Limitations on FSC's Conduct Prior to Effective Time. Between the
date hereof and the Effective Time or the time when this Agreement terminates as
provided herein, except as contemplated by this Agreement, and subject to the
requirements of law and regulation generally applicable to FSC and its
subsidiaries, FSC agrees to conduct its business, and to cause each of its
subsidiaries to conduct its business, in the ordinary course of business and in
substantially the manner heretofore conducted and in accordance with sound
business and banking practices, and each of FSC and its subsidiaries shall not,
without prior written consent of Bank:
(a) take any action which would or is reasonably likely to (i)
adversely affect the ability of FSC to obtain any necessary approvals of
any Governmental Entity required for the transactions contemplated hereby;
(ii) adversely affect FSC's ability to perform its covenants and agreements
under this Agreement; or (iii) result in any of the conditions to the
performance of FSC's obligations hereunder not being satisfied;
(b) take or cause to be taken any action which would disqualify the
Merger as a "reorganization" within the meaning of Section 368 of the Code.
(c) amend its Certificate of Incorporation or take any other action in
any respect which would materially and adversely affect the rights and
privileges attendant to the FSC Common Stock;
(d) enter into any agreement to acquire, merge or consolidate with
another entity which transaction any Governmental Entity advises FSC in
writing would result in the disapproval of the transactions contemplated in
this Agreement or the delay thereof until after November 30, 1998;
(e) take or cause to be taken any action which would prevent the
Merger from qualifying for "pooling of interests" accounting treatment.
3.2 Access to Information. Upon reasonable request by Bank, FSC shall
make the President and Chief Financial Officer available to discuss with Bank
and its representatives, counsel, accountants, agents and employees its ongoing
credit diligence and review of the Bank's operations, and shall provide Bank and
its representatives with such written information as FSC, in its sole
discretion, deems appropriate. No examination or review conducted under this
section shall constitute a waiver or relinquishment on the part of Bank of the
right to rely upon the representations and warranties made by FSC herein;
provided, that Bank shall disclose to FSC any fact or circumstance it may
discover which Bank believes renders any representation or warranty made by FSC
hereunder incorrect in any respect. Bank covenants and agrees that it and its
representatives, counsel, accountants, agents and employees will hold in strict
confidence all documents and information concerning FSC or any of its
subsidiaries so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the Form S-4
or any of the public information of any applications required to be filed with
any governmental or regulatory agency to obtain the approvals and consents
required to effect the transactions contemplated hereby), and if the
transactions contemplated herein are not consummated, such confidence shall be
maintained and all such documents shall be returned to FSC.
3.3 Filings. FSC agrees that through the Effective Time, each of its
reports, registrations, statements and other filings required to be filed with
any applicable Governmental Entity will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Entity with which it will be filed and none will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, registration, statement or other filing
that is intended to present the financial position of the entities or entity to
which it relates will fairly present the financial position of such entities or
entity and will be prepared
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in accordance with generally accepted accounting principles or applicable
banking regulations consistently applied during the periods involved.
3.4 Applications. FSC will promptly prepare and file or cause to be
prepared and filed (i) an application for approval of the Merger with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"); (ii)
an application for approval of the Merger with the Federal Deposit Insurance
Corporation (the "FDIC"); (iii) an application for approval of the transactions
contemplated hereby with the California Department of Financial Institutions
("DFI"); (iv) the Form S-4; and (v) any other applications that may be necessary
to consummate the transactions contemplated herein. FSC shall afford Bank a
reasonable opportunity to review the Form S-4 and all such applications (except
the confidential portions thereof relating to FSC or its subsidiaries) and all
amendments and supplements thereto before the filing thereof. FSC covenants and
agrees that the Form S-4 and all applications to the appropriate regulatory
agencies for approval or consent to the Merger will comply in all material
respects with the provisions of applicable law, and will not contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading. FSC will use
its commercially reasonable efforts to obtain all regulatory approvals or
consents necessary to effect the Merger.
3.5 Blue Sky. FSC agrees to use commercially reasonable efforts to have
the shares of FSC Stock to be issued in connection with the Merger qualified or
registered for offer and sale, to the extent required, under the securities laws
of each jurisdiction in which shareholders of Bank reside.
3.6 Removal of Conditions. In the event of the imposition of a condition
to any regulatory approvals which FSC deems to materially adversely affect it or
to be materially burdensome, FSC shall use its commercially reasonable efforts
for purposes of obtaining the removal of such condition.
3.7 Indemnification of Bank Directors and Officers. FSC agrees that all
rights to indemnification or exculpation now existing in favor of the directors,
officers, employees and agents of Bank and its Subsidiaries as provided in their
respective articles of incorporation, bylaws, indemnification agreements or
otherwise in effect as of the date hereof with respect to matters occurring
prior to the Effective Time, shall survive the Merger and shall continue in full
force and effect. FSC further agrees that following consummation of the Merger,
to the greatest extent permitted by Delaware law and the organizational
documents of FSC as in effect that it shall indemnify defend and hold harmless
individuals who were officers and directors of Bank and the Subsidiaries as of
the date hereof or immediately prior to the Effective Time for any claim or loss
arising out of their actions while a director or officer and shall pay the
expenses, including attorneys' fees, of such individuals in advance of the final
resolution of any such claim, provided such individuals shall first execute an
undertaking acceptable to FSC to return such advances in the event it has
finally concluded that such indemnification is not allowed under applicable law.
FSC shall use its best efforts to cause the persons serving as directors
and officers of Bank and its Subsidiaries immediately prior to the Effective
Time to be covered for a period of three (3) years after the Effective Time by
directors and officers liability coverage with substantially equivalent terms
and conditions to those of the current Directors and Officers Liability
Insurance policy maintained by Bank and its Subsidiaries with respect to acts or
commissions occurring prior to the Effective Time which were committed by such
officers and directors in their capacity as such (provided that FSC may
substitute policies of at least the same coverage and limits containing terms
and conditions which are no less advantageous to such officers and directors);
provided, however, that FSC shall not be obligated to make premium payment for
such insurance to the extent such premium exceeds 150% of the premium paid by
Bank and its Subsidiaries for such D&O insurance as of the date hereof.
3.8 NASDAQ Listing. FSC shall take all actions necessary to assure that
the shares of FSC Stock to be issued to Bank shareholders in the Merger are
qualified for inclusion on the NASDAQ National Market as of the Effective Time.
3.9 Regulatory Approvals. FSC shall (i) use its commercially reasonable
efforts to obtain all necessary regulatory approvals and to take or cause to be
taken all other action required under this Agreement
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on its part to be taken as promptly as practicable so as to permit the
consummation of the transactions contemplated by this Agreement at the earliest
possible date, and cooperate fully with Bank to that end, and (ii) furnish all
necessary information for inclusion in any applications relating to the
consents, approvals, and permissions of regulatory authorities referred to in
Article VII.
3.10 Registration of Shares. FSC will use its best efforts to cause a
Form S-4 or other appropriate form to be filed and declared effective under the
Securities Act of 1933, as amended (the "1933 Act"), with respect to the FSC
Common Stock which is to be issued in connection with the transactions
contemplated by this Agreement.
3.11 Notification of Actions. FSC covenants and agrees to immediately
notify Bank in the event of any action which materially affects any of the
covenants set forth in this Article III or in the event of the breach of any of
the representation and warranties in this Agreement, or in the event that FSC
determines that it is unable to fulfill any of the conditions to the performance
of Bank's obligations hereunder.
3.12 Action by Merger Co. FSC shall file and shall cause Merger Co. to
execute and file any documents or agreements required to be executed or filed to
consummate the Merger and the transactions contemplated hereby.
3.13 Treatment of Bank Employees Under FSC Employee Benefit Plans. FSC
covenants and agrees that employees of the Bank immediately before the Closing
Date who continue to be employees of the Bank after the Closing Date ("Bank
Employees") shall continue to participate in such Plans (as the term is defined
in Section 4.1.16) as FSC agrees to continue after the Closing Date. To the
extent that some or all of the Plans are terminated or merged into comparable
employee benefit plans maintained by FSC for the benefit of its employees
("Comparable FSC Plans"), then Bank Employees shall be entitled to participate
in such Comparable FSC Plans in accordance with the terms thereof and in
accordance with FSC policy. For purposes of determining each such Bank
Employee's eligibility and vesting under such Comparable FSC Plans, FSC shall
recognize such Bank Employee's service with Bank beginning on the date such Bank
Employee commenced employment with Bank; provided, however, that with respect to
the First Security Retirement Plan, prior service credit shall be given only for
purposes of vesting and shall not be recognized for purposes of accrual of
benefits.
FSC also covenants and agrees that any pre-existing condition, limitation
or exclusion in its health plans shall not apply to Bank Employees or their
covered dependents who are covered under similar Bank health plans on the
Closing Date and who change coverage to FSC's health plans at the time such Bank
Employees are first given the option to enroll in FSC's health plans.
3.14 Ongoing Credit Review. With respect to its ongoing credit review of
Bank between the date hereof and the Effective Time, FSC covenants and agrees
that it shall apply the same credit review procedures and credit standards it
used in the initial credit review and that in its ongoing credit review it will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a material
adverse event. FSC hereby acknowledges based on its initial credit review of the
Bank, the loan grading and classification policy of the Bank is acceptable to
FSC and that as of the date hereof the allowance for credit losses of the Bank
is adequate.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BANK
4.1 Representations and Warranties of Bank. As an inducement to FSC to
enter into this Agreement, Bank hereby represents and warrants to FSC that the
statements contained in this Article IV are correct and complete in all material
respects (provided, however, that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) as of the date hereof.
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4.1.1 Organization, Conduct of Business, etc. Bank and each of the
Subsidiaries (i) are each duly organized and validly existing and in good
standing under the laws of the State of California, (ii) have all requisite
power and authority (corporate and other) to own their respective properties and
conduct business as now being conducted, and (iii) except where failure to so
qualify would not have a Material Adverse Effect on Bank (as defined below), are
each duly qualified to do business and are in good standing in each jurisdiction
in which the character of the properties owned or leased by them therein or in
which the transaction of their respective businesses makes such qualification
necessary. As used in this Agreement, "Material Adverse Effect" shall mean with
respect to a person, 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 the Agreement and to timely consummate the Merger; 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 banking or similar laws, rules or regulations of general applicability or
interpretations thereof by courts or governmental authorities, (ii) any change
in generally accepted accounting principles or regulatory accounting principles
applicable to banks or their holding companies generally, (iii) any action or
omission of FSC or Bank or any subsidiary of either of them taken with the prior
written consent of FSC or Bank, as applicable or permitted by this Agreement,
and (iv) any changes in general economic conditions affecting banks or their
holding companies generally.
4.1.2 Options, SARs, Warrants, etc. Schedule 4.1.2 of the Disclosure
Schedule identifies (i) the holders of each of the Options, the number of
Options held by each holder of Options and the Option exercise price with
respect thereto, under the Stock Option Plans. Except for the Options and as set
forth on Schedule 4.1.2, there are no outstanding stock appreciation rights or
options, warrants, calls, units or commitments of any kind relating to the
issuance, sale, purchase or redemption of, or securities convertible into,
capital stock of Bank.
4.1.3 Authorization of Capital Stock. All of the outstanding shares of
capital stock of Bank and each of the Subsidiaries have been duly authorized and
are validly issued, fully paid and nonassessable. Bank owns all of the issued
and outstanding capital stock of the Subsidiaries and such shares of stock are
owned and will be owned by Bank at the Closing free and clear of any liens,
encumbrances or claims. Except for the Subsidiaries, the Red Fox Limited
Partnership, a California limited partnership, shares of Stock of the Federal
Home Loan Bank of San Francisco and investment securities set forth on Schedule
4.1.3, Bank does not own any equity interest in any other business organization,
except as a pledgee pursuant to loans or upon acquisition in satisfaction of
debts previously contracted.
4.1.4 Authorization; Validity of Agreement. The execution and delivery by
Bank of this Agreement and of the Merger Agreement and, subject to the requisite
approval of the shareholders of Bank of this Agreement and the transactions
contemplated hereby, the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary corporate
action on the part of Bank, and the Agreement is, and the Agreement of the
Merger will be, upon due execution and delivery by the respective parties
thereto, a valid and binding obligation of Bank, enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by
bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles.
4.1.5 Bank Reports. Since January 1, 1995, Bank and each of the
Subsidiaries has filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that were required to
be filed with (i) the FDIC, (ii) the DFI, and (iii) any other applicable state
and federal regulatory authorities. (All such reports and statements filed by
Bank and the Subsidiaries with the FDIC, the DFI, and other applicable federal
or state securities, banking or real estate authorities are collectively
referred to herein as the "Bank Reports".) As of their respective dates, the
Bank Reports complied in all material respects with all the statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed and did not and as of the date hereof do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. Except as set forth
on
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Schedule 4.1.5, neither Bank nor any of the Subsidiaries is subject to any
cease-and-desist or other order issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has adopted any board resolutions at the request of any
regulatory agency or other governmental entity that restricts the conduct of its
business or that in any manner relates to the capital adequacy, its credit
policies, its management or its business, nor has Bank or any of the
Subsidiaries been advised by any regulatory agency or other governmental entity
that it is considering issuing or requesting any regulatory agreement.
4.1.6 Bank Financial Statements and Tax Returns. Bank's Consolidated
Balance Sheets as of December 31, 1996 and December 31, 1997, and its
Consolidated Statements of Income and Consolidated Statements of Cash Flow for
the years ended December 31, 1996 and December 31, 1997, in each case
accompanied by the audit report of Deloitte & Touche, independent auditors with
respect to Bank, heretofore delivered to FSC (hereinafter the "Financial
Statements"), were prepared in accordance with generally accepted accounting
principles consistently applied and present fairly Bank's financial condition,
results of operations and changes in cash flow as of such dates or for such
periods.
Bank has delivered true and correct copies of all corporate income tax
returns filed for the years ending 1994, 1995 and 1996. Except as set forth on
Schedule 4.1.6, to the Bank's knowledge (as defined in Section 10.16, below),
Bank has timely filed or caused to be filed all returns, declarations, reports,
estimates, information returns and statements required to be filed under
federal, state, local or any foreign tax laws, including but not limited to
forms 1099 and all currency transaction reports required by the Bank Secrecy
Act, as amended (the "Tax Returns") with respect to Bank or any of its
Subsidiaries, except where failure to file timely such Tax Returns, individually
or in the aggregate, would not have and would not reasonably be expected to have
a Material Adverse Effect on Bank. All taxes, charges, fees, levies or other
assessments ("Taxes") shown to be due on such Tax Returns have been paid or,
where payment of Taxes is not required to be made as of the date hereof,
adequate reserves have been established for the payment of such Taxes, except
where the failure to pay or establish adequate reserves would not have and would
not reasonably be expected to have a Material Adverse Effect. Bank has exercised
due diligence in obtaining certified taxpayer identification numbers as required
pursuant to Treasury Regulation 35a.9999.
4.1.7 Other Liabilities. Except as and to the extent stated in the
Financial Statements and the interim financial statements delivered or to be
delivered pursuant to Sections 4.1.6 and 2.3 and as set forth on Schedule 4.1.7
or Schedule 4.1.14, and except for those liabilities incurred in the normal
course of the Bank's or the Subsidiaries' business, Bank and Subsidiaries have
not incurred any material liabilities or obligations, secured or unsecured
(whether accrued, absolute, contingent or otherwise), and whether due or to
become due, including but not limited to liabilities on account of taxes, other
governmental charges or lawsuits subsequently brought, which have had or
reasonably would be expected to have a Material Adverse Effect on Bank.
4.1.8 Environmental Matters. For purposes of this Section 4.1.8, the term
"environmental laws" shall include all state and federal laws designed to
protect human health or the environment, as amended from time to time, and all
regulations promulgated thereunder, including, without limitation, the Clean Air
Act, 42 U.S.C.A. sec.sec. 7401, et seq., the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C.A. sec.sec. 9601, et seq.,
the Federal Water Pollution Control Act, 33 U.S.C.A. sec.sec. 1251, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C.A. sec.sec. 6901, et seq., and
the Toxic Substances Control Act, 15 U.S.C.A. sec.sec. 2601, et seq. "Hazardous
substance" shall include all petroleum products as well as any toxic or
hazardous material, hazardous waste or other hazardous or regulated substance
defined in or regulated by any environmental law.
Except as set forth on Schedule 4.1.8, to Bank's knowledge, neither Bank
nor any of the Subsidiaries nor any property owned by Bank or the Subsidiaries
is subject to any pending or threatened claim, liability or obligation to any
person arising under any environmental law.
The use which Bank and each of its Subsidiaries has made of its properties
does not result in the use, generation, storage, transportation, accumulation,
disposal or release of any hazardous materials, on, in, or from any of such
properties except in accordance in all material respects with applicable
environmental laws.
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With respect to the real property owned by Bank and the Subsidiaries
(including other real estate), except as set forth on Schedule 4.1.8, to the
Bank's knowledge:
(a) No such property is presently contaminated by, and no such
property has ever been used or is presently being used by any person to
generate, manufacture, refine, transport, treat, store, handle or dispose
of, any hazardous substance in any regulated form or quantity.
(b) No such property has ever contained or presently contains, or has
been used or is being used by any person for storage of, asbestos,
ureaformaldehyde foam insulation, PCB's, dioxins, mercury, lead or uranium
(or other heavy metal) products or tailings, or any other hazardous
substance in any regulated form or quantity, whether contained in
construction or fill materials or used or stored thereon or therein.
(c) Neither Bank nor any of the Subsidiaries has received a summons,
citation, directive, letter, notice of violation, request for information
or other communication, written or oral, from any local, state or federal
agency concerning any possible intentional or unintentional action or
omission on the part of any person which has resulted in the possible
release of any hazardous substance affecting such property or concerning
any other possible violation of any environmental law affecting the
property.
(d) To the extent any permit, approval or registration is or has been
required to be obtained or maintained under any environmental law with
respect to any such property, any improvement of or on any such property or
any activity occurring on any such property, each such permit, approval or
registration has been obtained and is in good standing. In addition, all
such permits, approvals and registrations have been disclosed to FSC in
writing.
(e) No such property contains or has ever contained any storage tank
used or intended for use to store any hazardous substance.
4.1.9 Credit Reserves. The Allowance for Credit Losses of Bank as
established from time to time by Bank are adequate as determined by the
standards applied to Bank by the applicable bank regulatory agencies and
pursuant to generally accepted accounting principles.
4.1.10 Title to Properties. To the Bank's knowledge, except as reflected
in the Financial Statements or interim financial statements delivered or to be
delivered pursuant to Sections 4.1.6 and 2.3, Bank and each of the Subsidiaries
own, free and clear of any liens, claims, charges, options, or other
encumbrances, all of the property, real, personal or mixed, reflected as owned
by Bank or Subsidiaries in the Financial Statements of Bank and all property
acquired since such date, except (A) encumbrances that in the aggregate do not
detract from the value, interfere with the use, or restrict the sale, transfer
or disposition, of such properties and assets or otherwise would have a Material
Adverse Effect; (B) any lien for taxes not yet due; (C) any encumbrances arising
under the document that created the interest in the real property (other than
encumbrances arising as a result of any breach or default by Bank); and (D)
assets and properties disposed of since December 31, 1997 in the ordinary course
of business and consistent with past practice. All such properties which are
material to the business or operations of Bank and the Subsidiaries are in a
good state of maintenance and repair and are adequate for its current uses and
purposes. Except as set forth on Schedule 4.1.10, Bank has delivered to FSC true
and correct copies of all deeds, title insurance policies it has with respect to
the real property owned by Bank and the Subsidiaries and copies of all leases
with respect to real property leased by Bank and the Subsidiaries.
4.1.11 Insurance. During each of the past three calendar years, Bank and
each of the Subsidiaries and their respective properties have been insured for
customary risks with customary limits, deductibles, and exclusions, including
but not limited to Bankers Blanket Bond, and such insurance protection continues
in effect as of the date hereof.
4.1.12 Absence of Defaults; Violations. The execution of this Agreement
does not and the execution of the Merger Agreement will not, and performance of
the transactions contemplated hereby do not and thereby will not, (assuming Bank
shareholder approval and receipt of all applicable regulatory approvals of the
Agreement and the expiration of applicable waiting periods) (a) violate the
provisions of the Articles of Incorporation or Bylaws of Bank or any of the
Subsidiaries, or, except as set forth in Schedule 4.1.12,
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(b) (i) to the Bank's knowledge, violate any judgment, order, writ, decree or
injunction applicable to Bank or any of the Subsidiaries or any of their
respective properties or assets, or (ii) subject to obtaining any of the
consents referred to in Schedule 4.1.12, violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien upon any of the respective properties or
assets of Bank or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Bank or any of the
Subsidiaries is a party, or by which they or any of their respective properties
or assets may be bound or affected, except (in the case of clause (b) above) for
such violations, conflicts, breaches or defaults which, either individually or
in the aggregate, will not have and would not reasonably be expected to have a
Material Adverse Effect on Bank.
4.1.13 Absence of Material Adverse Changes. Except as set forth on
Schedule 4.1.13, since December 31, 1997, there has not been, occurred or arisen
(whether or not in the ordinary course of business unless otherwise indicated)
any change in any of the assets, liabilities, permits, methods of accounting or
accounting practice, business, or manner of conducting business, of the Bank or
its Subsidiaries or any other event, circumstance or development that has had or
may reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Bank.
4.1.14 Actions, Proceedings and Investigations. Set forth on Schedule
4.1.14 is a complete and accurate listing of all litigation, administrative or
other proceeding to which Bank or any of the Subsidiaries is a party in which
the amount in controversy exceeds $25,000 as of the date of this Agreement,
except for such proceedings in which Bank is seeking to collect on a loan or
lease transaction and no counterclaim or similar claim has been filed against
Bank, and there are no actions, proceedings or investigations pending, or, to
the knowledge of Bank, threatened or contemplated against or relating to Bank or
any of the Subsidiaries, or any of their respective properties or assets (and to
the knowledge of Bank there are no facts that would give rise to any such
claim), which would reasonably be expected, if determined adversely to the Bank,
to have a Material Adverse Effect on Bank or prevent the Bank from consummating
the Merger contemplated hereby. Except as set forth on Schedule 4.1.14 or
reflected on Bank's Financial Statements, there are no suits, actions or
proceedings pending or, to Bank's knowledge, threatened, or facts which give
rise to unasserted claims of which Bank is aware which would give rise to any
right of indemnification on the part of any director or officer of Bank or the
Subsidiaries or his or her heirs, executors or administrators, as against Bank
or Subsidiaries or any successor to the business of Bank or Subsidiaries.
4.1.15 Absence of Brokerage Commissions, etc. Except with respect to
Keefe, Bruyette and Woods, Inc., ("KBW"), all negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by Bank
directly with FSC without the participation or intervention of any other person,
firm or corporation employed or engaged by or on behalf of Bank in such a manner
as to give rise to any valid claim against Bank or FSC for a brokerage
commission, finder's fee or like payment.
4.1.16 Material Contracts. Except for those material contracts,
arrangements, commitments or understandings listed on Schedule 4.1.16, copies of
which have been provided by Bank to FSC, neither Bank nor any of the
Subsidiaries is a party to any contract, arrangement, commitment or
understanding, whether written or oral ("Bank Contract") which is material to
the Bank or the Subsidiaries, including but not limited to any lease, service
contract, employment agreement or any pension, retirement, stock option, profit
sharing, deferred compensation, consultant, bonus, group insurance or similar
plan. Each material Bank Contract, whether or not set forth on Schedule 4.1.15,
is valid, binding and in full force and effect and Bank, or any Subsidiary, as
applicable, has in all material respects performed all obligations required to
be performed by it to date under each Bank Contract; no event or condition
exists which constitutes or, after notice or lapse of time or both, would
constitute a material default on the part of Bank or any of the Subsidiaries
under any such Bank Contract, except, in each case, where such invalidity,
failure to be binding, failure to so perform or default, individually or in the
aggregate, would not have or reasonably be expected to have a Material Adverse
Effect on Bank.
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4.1.17 Compliance With Laws; Documentation.
(a) Except as set forth on Schedule 4.1.17, to knowledge of Bank: the
conduct by Bank and the Subsidiaries of their respective businesses or operation
of any properties owned or leased by them does not violate or infringe any
domestic or foreign laws, statutes, ordinances, rules or regulations, except for
such violations or infringement the enforcement of which, individually or in the
aggregate, would have a Material Adverse Effect on the Bank; and Bank and each
of the Subsidiaries has complied in all material respects with every local,
state or federal law or ordinance, and every regulation or order issued
thereunder, now in effect and applicable to Bank or the Subsidiaries governing
or pertaining to fair housing, anti-redlining, equal credit opportunity,
truth-in-lending, real estate settlement procedures, fair credit reporting and
every other prohibition against unlawful discrimination in residential lending,
or governing consumer credit, including, but not limited to, the Consumer Credit
Protection Act, Truth-in-Lending Law, Regulation Z promulgated by the Federal
Reserve Board, and the Real Estate Settlement Procedures Act of 1974 except
where failure to do so would not have a Material Adverse Effect on Bank.
(b) To the Bank's knowledge, all loans, leases, contracts and accounts
receivable (billed and unbilled), security agreements, guarantees and recourse
agreements of Bank and the Subsidiaries as held in their respective portfolios,
or as sold into the secondary market, represent and are valid and binding
obligations of their respective parties and debtors, enforceable in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of materiality, commercial
reasonableness, good faith and fair dealing (regardless of whether enforcement
is sought in a proceeding at law or in equity) and except where failure to do so
would not have a Material Adverse Effect on Bank, each of which has been
executed and delivered in compliance, with any and all federal, state or local
laws applicable to the Bank and the Subsidiaries, or to the other party or
parties to the contract(s) or commitment(s), including without limitation the
Truth in Lending Act, Regulations Z and U of the Federal Reserve Board, laws and
regulations providing for non discriminatory practices in the granting of loans
or credit, applicable usury laws, laws imposing lending limits, and each has
been administered in compliance with all applicable federal, state or local laws
or regulations, except where the failure to do so would not have a Material
Adverse Effect on Bank. Except as set forth on Schedule 4.1.17, to the Bank's
knowledge, all Uniform Commercial Code filings, or filings of trust deeds, or of
lien or other security interest documentation that are required by any
applicable federal, state or local government laws and regulations to perfect
the security interests referred to in any and all of such documents or other
security agreements have been made, and all security interests under such deeds,
documents or security agreements have been perfected, and all contracts have
been entered into or assumed in compliance with all applicable material legal or
regulatory requirements, except where failure to do so would not have a Material
Adverse Effect on Bank.
(c) To the knowledge of Bank, all loan files of Bank and the Subsidiaries
are complete and accurate in all material respects and have been maintained in
accordance with good banking practice except where failure to do so would not
have a Material Adverse Effect on Bank.
(d) All notices of default, foreclosure proceedings or repossession
proceedings against any real or personal property collateral have been issued,
initiated and conducted by Bank and/or the Subsidiaries, in all material
respects, in compliance with all applicable federal, state or local laws and
regulations, except where failure to do so would not have a Material Adverse
Effect on Bank.
(e) To the knowledge of Bank, neither Bank nor any of the Subsidiaries is
in violation of any applicable servicer or other requirement of the FHA, VA,
FNMA, GNMA, FHLMC or any private mortgage insurer which insures any loans owned
by Bank or the Subsidiaries or as to which Bank has sold to other investors, and
with respect to such mortgage loans, neither Bank nor any of the Subsidiaries
has done or failed to do, or caused to be done or omitted to be done, any act
the effect of which act or omission impairs or invalidates (i) any FHA insurance
or commitments of the FHA to insure, (ii) any VA guarantee or commitment of the
VA to guarantee, (iii) any private mortgage insurance or commitment of any
private mortgage insurer to insure, (iv) any title insurance policy, (v) any
hazard insurance policy, or (vi) any flood insurance policy
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required by the National Flood Insurance Act of 1968, as amended, except where
failure to do so would not have a Material Adverse Effect on Bank.
(f) To the Bank's knowledge, neither Bank nor any of the Subsidiaries is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any margin stock.
4.1.18 Bank's Employee Benefits.
(a) Schedule 4.1.18 contains a true and complete list of each employee
benefit, compensation or welfare benefit plan, program or agreement maintained
or contributed to or required to be contributed to by Bank and the Subsidiaries
(the "Plans"). Except as set forth on Schedule 4.1.18, neither Bank nor any of
the Subsidiaries has any formal plan or commitment, whether legally binding or
not, to create any additional Plan or modify or change any existing Plan that
would affect any employee or terminated employee of Bank or the Subsidiaries.
(b) Except as set forth on Schedule 4.1.18, there are no employment
agreements entered into by Bank or the Subsidiaries and no other deferred
compensation agreements or commitments maintained or agreed to by Bank or the
Subsidiaries.
(c) With respect to each of the Plans, Bank has heretofore delivered to FSC
true and complete copies of each of the following documents: (i) each Plan and
related trust, if any, (including all amendments thereto); (ii) annual report
and actuarial report, if required to be filed under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), for the last two (2) years
and the latest financial statement, if any, for each such Plan; (iii) the most
recent summary plan description, together with each summary of material
modifications, required under ERISA; (iv) the most recent determination letter
received from the Internal Revenue Service ("IRS") with respect to each Plan
that is intended to be qualified under Section 401 of the Code; and (v)
information which identifies (x) all asserted or unasserted claims arising under
any Plan, (y) all claims presently outstanding against any Plan, (z) a
description of any future compliance action required with respect to any Plan
under ERISA, or federal or state law.
(d) All required contributions have been, or will be, made with respect to
each Plan on or prior to the date of this Agreement and have been properly
recorded on the Financial Statements. Except as set forth on Schedule 4.1.18,
each trust associated with the Plans, if any, is fully funded as of the date of
this Agreement.
(e) Each of the Plans has been created, funded, operated and administered
since inception in all material respects in accordance with applicable laws,
including, but not limited to, ERISA and the Code and each of the Plans that is
intended to be "qualified" within the meaning of Section 401(a) of the Code is
so qualified. The Plans are legally valid and binding and in full force and
effect.
(f) All amendments required under the Code have been made or will have been
made to each of the Plans that is intended to be "qualified" within the meaning
of Section 401(a) of the Code by the Bank with respect to each such Plan prior
to the remedial amendment period as provided in Section 401(b) of the Code or on
or prior to the effective date of the termination of each such Plans, whichever
is earlier.
(g) Except as set forth on Schedule 4.1.18, no Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees beyond their retirement or
other termination of service (other than (A) coverage mandated by applicable
law, (B) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (C) deferred
compensation benefits accrued as liabilities on the books of Bank, or (D)
benefits the full cost of which is borne by the current or former employee (or
his or her beneficiary)).
(h) There are no pending or, to Bank's best knowledge, threatened or
anticipated claims (other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trusts related thereto.
(i) Except as set forth on Schedule 4.1.18, the consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) (A) entitle any current or former
employee of Bank or the Subsidiaries to severance pay, employment compensation
or any
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other payment, benefit or award, or (B) accelerate or modify the time of payment
or vesting, or increase the amount of any benefit, award or compensation due any
such employee.
(j) Neither Bank nor any of the Subsidiaries has had liabilities to the
Pension Benefit Guaranty Corporation ("PBGC"). No material liability to the PBGC
has been or will be incurred by Bank or the Subsidiaries or other trade or
business under "common control" with Bank or any of the Subsidiaries (as
determined under section 414(c) of the Code) ("Common Control Entity") on
account of any termination of a Plan subject to title IV of ERISA. On and after
September 2, 1974, no filing has been made by Bank or the Subsidiaries (or any
Common Control Entity) with the PBGC (and no proceeding has been commenced by
the PBGC) to terminate any Plan subject to Title IV of ERISA maintained, or
wholly or partially funded, by Bank or the Subsidiaries (or any Common Control
Entity). Neither Bank nor any of the Subsidiaries nor any Common Control Entity,
has (i) ceased operations at a facility so as to become subject to the
provisions of section 4062(e) of ERISA, (ii) withdrawn as a substantial employer
so as to become subject to the provisions of section 4063 of ERISA, (iii) ceased
making contributions on or before the Closing Date to any Plan subject to
section 4064(a) of ERISA to which Bank or the Subsidiaries (or any Common
Control Entity) made contributions during the five years prior to the Closing
Date, or (iv) made a complete or partial withdrawal from a multi-employer plan
(as defined in section 3(37) of ERISA) so as to incur withdrawal liability as
defined in section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under section 4207 or 4208 of ERISA).
4.1.19 Repurchase Agreements. To the Bank's knowledge, Bank and each of
the Subsidiaries has valid and perfected first position security interests in
all government securities subject to repurchase agreements, and, to the
knowledge of the Bank, as of the date hereof, the value of the collateral
securing each such repurchase agreement equals or exceeds the amount of the debt
secured by such collateral under such agreement, except where failure to do so
would not have a Material Adverse Effect on Bank.
4.1.20 State Takeover Laws. The Board of Directors of Bank has taken all
action required to be taken by it to provide that this Agreement, the
Termination Fee Agreement and the transactions contemplated hereby and thereby
shall be exempt from the requirements of any "moratorium," "control share,"
"fair price," or other anti-takeover laws or regulations of any state.
4.1.21 Consents and Approvals. Except for (i) the filing of an
application and notices, as applicable, with the FDIC and approval of such
application, (ii) the filing of any required applications or notices with any
state agencies and approval of such applications and notices (the "State
Approvals"), (iii) the filing with the FDIC of a proxy statement in definitive
form relating to the meeting of Bank's stockholders to be held in connection
with this Agreement and the transactions contemplated hereby (the "Proxy
Statement"), (iv) the filing of the Merger Agreement with the California
Secretary of State pursuant to the CGCL, (v) the adoption of the Merger
Agreement (within the meaning of Section 1201 of the CGCL) contained in this
Agreement by the requisite votes of the stockholders of Bank, (vi) the consents
and approvals set forth in Schedule 4.1.12, and (vii) to Bank's knowledge, the
consents and approvals of third parties which are not Governmental Entities, the
failure of which to obtain will not have and would not be reasonably expected to
have a Material Adverse Effect on Bank, no consents or approvals of, or filings
or registrations with, any Governmental Entity or with any third party are
necessary in connection with (A) the execution and delivery by Bank of the
Agreement and Merger Agreement and (B) the consummation by Bank of the Merger
and the other transactions contemplated hereby and thereby.
4.1.22 Interest Rate Risk Management Instruments. All interest rate
swaps, caps, floors and option agreements and other interest rate risk
management arrangements, whether entered into for the account of Bank or for the
account of a customer of Bank, were entered into in accordance with prudent
banking practices and applicable rules, regulations and policies of any
regulatory authority and with counterparties believed to be financially
responsible at the time and are legal, valid and binding obligations of Bank
enforceable in accordance with their terms (except as enforcement may be limited
by general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally), and are in full force and effect, except where
failure to do so would not have a Material Adverse Effect. Bank has duly
performed in all respects all of its obligations
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thereunder to the extent that such obligations to perform have accrued; and, to
the best of Bank's knowledge, there are no breaches, violations or defaults or
allegations or assertions of such by any party thereunder which would have or
would reasonably be expected to have a Material Adverse Effect on Bank.
4.1.23 Regulatory Approvals. Bank knows of no reasons why the
transactions contemplated by this Agreement should not be approved by the
regulatory authorities.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FSC
5.1 Representations and Warranties of FSC. As an inducement to Bank to
enter into this Agreement, FSC hereby represents and warrants to Bank that the
statements contained in this Article V are correct and complete in all material
respects (provided, however, that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) as of the date hereof.
5.1.1 Organization, Conduct of Business, etc. Each of FSC and Merger Co.
(i) is duly organized and validly existing and in good standing under the laws
of Delaware and California, respectively, (ii) has all requisite power and
authority (corporate and other) to own its properties and conduct its businesses
as now being conducted, and (iii) except where failure to so qualify would not
have a Material Adverse Effect on FSC, is duly qualified to do business and is
in good standing in each jurisdiction in which the character of the properties
owned or leased by it therein or in which the transaction of its business makes
such qualification necessary.
5.1.2 Authorization; Validity of Agreement.
(a) Of FSC. The execution and delivery by FSC of this Agreement and of the
Merger Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary corporate
action on the part of FSC, and this Agreement is, and the Agreement of the
Merger will be, upon due execution and delivery by the respective parties
thereto, a valid and binding obligation of FSC enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by
bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles.
(b) Of Merger Co. The execution and delivery by Merger Co. of this
Agreement and the Merger Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of Merger Co. and this Agreement is and
the Merger Agreement will be, upon due execution and delivery by the respective
parties, a valid and binding obligation of Merger Co. enforceable in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles.
5.1.3 FSC Reports. Since January 1, 1995, FSC and its consolidated
subsidiaries have filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that were required to
be filed with (i) the SEC including, but not limited to, Form 10-K, Form 10-Q,
Form 8-K and proxy statements, (ii) the Federal Reserve Board, (iii) the Office
of the Comptroller of the Currency, (iv) the FDIC, and (v) other applicable
state securities or banking authorities. All such reports and statements filed
with the SEC, the Federal Reserve Board, the FDIC, and other applicable state
securities or banking authorities are collectively referred to herein as the
"FSC Reports." As of their respective dates, to the knowledge of FSC, the FSC
Reports complied in all material respects with all the statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
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5.1.4 FSC Financial Statements; Tax Returns. FSC's Consolidated Balance
Sheets as of December 31, 1996 and December 31, 1997, and its Consolidated
Statements of Income and Consolidated Statements of Cash Flow for the years then
ended, heretofore delivered to Bank, were prepared in accordance with generally
accepted accounting principles consistently applied and present fairly its
consolidated financial condition, results of operations and changes in financial
position as of such dates and for such periods. FSC has filed or caused to be
filed all Tax Returns which are required by law to be filed or delivered as of
the date hereof, except where failure to file timely such Tax Returns would not
have and would not reasonably be expected to have a Material Adverse Effect on
FSC. All Taxes shown to be due on such Tax Returns have been paid or, where
payment of such Taxes is not required to be made as of the date hereof, FSC has
set up an adequate reserve or accrual for the payment of such Taxes, except
where the failure to pay or establish adequate reserves would not have and would
not reasonably be expected to have a Material Adverse Effect on FSC.
Except as and to the extent stated in the FSC Financial Statements provided
by FSC to Bank and except for those liabilities incurred in the normal course of
FSC's or any of its subsidiaries' respective business, FSC and its consolidated
subsidiaries do not have any material liabilities or obligations, secured or
unsecured (whether accrued, absolute, contingent or otherwise), and whether due
or to become due, including but not limited to liabilities on account of taxes,
other governmental charges or lawsuits subsequently brought.
(a) Absence of Material Adverse Changes. Since December 31, 1997, there
has not been, occurred or arisen any of the following (whether or not in the
ordinary course of business unless otherwise indicated) any change in any of the
assets, liabilities, permits, methods of accounting or accounting practice,
business, or manner of conducting business of FSC or any other event or
development that has had or may reasonably be expected to have a Material
Adverse Effect on FSC.
5.1.5 Actions, Proceedings, and Investigations. Except as set forth in
FSC's filings with the SEC, there are no actions, proceedings or investigations
pending, or to the knowledge of FSC, threatened or contemplated against or
relating to FSC or any of its consolidated subsidiaries, or any of its
properties (and to the knowledge of FSC there are no facts which would give rise
to any such claim) which would reasonably be expected, if determined adverse to
FSC, to have a Material Adverse Affect on FSC and its consolidated subsidiaries,
or prevent FSC from consummating the Merger contemplated hereby.
5.1.6 Regulatory Approvals. FSC knows of no reasons why the transactions
contemplated by this Agreement should not be approved by the regulatory
authorities.
5.1.7 FSC Common Stock; Options, Warrants, etc. All of the outstanding
FSC Common Stock is duly authorized and validly issued, fully paid and
nonassessable. The FSC Common Stock to be issued and delivered pursuant to the
Merger, when issued as contemplated hereby, shall be duly authorized, validly
issued, fully paid and nonassessable. As of the date of this Agreement, except
as disclosed in the FSC Financial Statements and except for director and
employee stock options covering an aggregate of 6,726,105 shares of FSC Stock
granted pursuant to the FSC Comprehensive Management Incentive Plan for
employees and the FSC Non Employee Director Stock Option Plan for directors and
FSC's obligations under this Agreement, there were no outstanding options,
warrants or other rights in or with respect to the unissued shares of FSC Stock
or FSC preferred stock nor any securities convertible into such stock, and FSC
is not obligated to issue any additional shares of its common or preferred stock
or any additional options, warrants or other rights in or with respect to the
unissued shares of such stock or any other securities convertible into such
stock.
5.1.8 Interest Rate Risk Management Instruments. All interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements, whether entered into for the account of FSC or for the account of
a customer of FSC, were entered into in accordance with prudent banking
practices and applicable rules, regulations and policies of any regulatory
authority and with counterparties believed to be financially responsible at the
time and are legal, valid and binding obligations of FSC enforceable in
accordance with their terms (except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally), and are in full force and effect, except where failure to
do so would not have a
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Material Adverse Effect. FSC has duly performed in all respects all of its
obligations thereunder to the extent that such obligations to perform have
accrued; and, to the best of FSC's knowledge, there are no breaches, violations
or defaults or allegations or assertions of such by any party thereunder which
would have or would reasonably be expected to have a Material Adverse Effect on
Bank.
5.1.9 Consents and Approvals. Except for (i) the filing of applications
and notices, as applicable, with the FRB under the Bank Holding Company Act and
the FDIC under the Federal Deposit Insurance Act and approval of such
applications and notices, (ii) the filing of any required State Approvals, (iii)
the filing with the SEC of the Prospectus and the filing and declaration of
effectiveness of the Form S-4 in which the Prospectus will be included, (iv) the
filing of the Merger Agreement with the California Secretary of State pursuant
to the CGCL, such filings and approvals as are required to be made or obtained
under the securities or "Blue Sky" laws of various states in connection with the
issuance of the shares of FSC Common Stock pursuant to this Agreement, (v) to
FSC's knowledge, the consents and approvals of third parties which are not
Governmental Entities, the failure of which to obtain will not have and would
not be reasonably expected to have a Material Adverse Effect on FSC, no consents
or approvals of, or filings or registrations with, any Governmental Entity or
with any third party are necessary in connection with (A) the execution and
delivery by FSC and Merger Co. of the Agreement and Merger Agreement and (B) the
consummation by FSC and Merger Co. of the Merger and the other transactions
contemplated hereby and thereby.
5.1.10 Compliance with Laws. Except as set forth on the FSC Reports, to
FSC's knowledge; the conduct by FSC of its business or operation of any
properties owned or leased by it does not violate or infringe any domestic or
foreign laws, statutes, ordinances, rules or regulations, except for such
violations or infringements the enforcement of which, individually or in the
aggregate, would have a Material Adverse Effect on FSC and to FSC's knowledge,
and FSC has complied in all material respects with every local, state or federal
law or ordinance, and every regulation or order issued thereunder, now in effect
and applicable to FSC governing or pertaining to fair housing, anti-redlining,
equal credit opportunity, truth-in-lending, real estate settlement procedures,
fair credit reporting and every other prohibition against unlawful
discrimination in residential lending, or governing consumer credit, including,
but not limited to, the Consumer Credit Protection Act, Truth-in-Lending Law,
Regulation Z promulgated by the Federal Reserve Board, and the Real Estate
Settlement Procedures Act of 1974 except where failure to do so would not have a
Material Adverse Effect on FSC.
5.1.11 Absence of Defaults; Violations. The execution of this Agreement
does not and the execution of the Merger Agreement will not, and performance of
the transactions contemplated hereby and thereby will not, assuming receipt of
all applicable regulatory approvals of the Agreement and the expiration of
applicable waiting periods violate the provisions of the Certificate of
Incorporation or Bylaws of FSC, or to FSC's knowledge, violate any judgment,
order, writ, decree or injunction applicable to FSC or any of its properties or
assets, or, subject to obtaining any of the consents referred to in Section
5.1.10, violate, conflict with, result in a breach of any provision of or the
loss of any benefit under, constitute a default (or an event which, with notice
or lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any lien upon any of the
respective properties or assets of FSC under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which FSC is a party, or
by which they or any of its properties or assets may be bound or affected,
except for such violations, conflicts, breaches or defaults which, either
individually or in the aggregate, will not have and would not reasonably be
expected to have a Material Adverse Effect on FSC.
ARTICLE VI
PROXY STATEMENT; SHAREHOLDER MEETING
6.1 Proxy Statement. FSC (with the assistance of Bank) shall prepare the
Form S-4, as provided in Paragraph 3.10 above, which Form S-4 will include a
Prospectus to be used with respect to providing the shareholders notice of the
shareholder meeting for Bank. Bank represents and warrants that the information
it provides for use in the Proxy Statement will comply in all material respects
with the requirements of the
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Securities Exchange Act of 1934 (the "1934 Act") and the applicable rules and
regulations promulgated by the SEC under such Act (the "1934 Rules"), and will
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements contained
therein not misleading, except that Bank makes no representation with respect to
information furnished by FSC expressly for inclusion in the Form S-4. FSC
represents and warrants that the Form S-4 will comply in all material respects
with the requirements of the Act and the applicable rules and regulations
promulgated by the SEC and/or the Act and the 1934 Act, and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading, except that FSC makes no representation with respect to information
furnished in writing by Bank expressly for inclusion in the Proxy
Statement/Prospectus that is part of the Form S-4.
6.2 Bank Meeting. This Agreement and the Merger Agreement shall be
submitted for approval, ratification and confirmation by the shareholders of
Bank at a meeting thereof to be called in accordance with the applicable
provisions of law and held as promptly as practicable after the execution of
this Agreement and of the Merger Agreement, and in no event later than the
expiration of sixty (60) days following the effectiveness of the Form S-4
without the filing of any post-effective amendment to the Form S-4. Bank will
mail, or cause to be mailed, the Prospectus prepared by FSC as part of the Form
S-4 to its shareholders for purposes of the meeting of its shareholders.
ARTICLE VII
CONDITIONS OF CLOSING
7.1 Conditions of Closing.
7.1.1 Conditions of Closing For All Parties. The obligations of either
FSC or Bank to consummate the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Shareholder Approval. The Agreement and Merger Agreement and the
transactions contemplated hereby and thereby shall have received the
requisite approval of the shareholders of Bank.
(b) Regulatory Approval. All consents, approvals and permissions and
the satisfaction of all of the requirements prescribed by law, including
but not limited to, the consents, approvals and permissions of all
applicable regulatory authorities which are necessary to the carrying out
of the Merger as described in this Agreement, shall have been procured;
provided, however, the approvals referred to in this Section 7.1.1(b) shall
not have imposed any significant conditions which FSC on the one hand, or
Bank, on the other, reasonably deem to be materially disadvantageous or
burdensome.
(c) Form S-4, etc. The FSC Common Stock to be issued by FSC hereunder
shall be the subject of the Form S-4 and to qualification or exemption
under state securities laws as appropriate. The Form S-4 shall have been
declared effective and shall not be subject to a stop order or any
threatened stop order. Such FSC Common Stock shall have been included for
listing in the NASDAQ National Market.
(d) No Injunction, etc. No party shall be subject to an order, decree
or injunction enjoining or prohibiting the consummation of the Merger or
any of the other transactions contemplated by this Agreement.
(e) Tax Opinions. Bank and FSC shall have received from Ray, Quinney
& Nebeker an opinion reasonably satisfactory to them, respectively, to the
general effect that the Merger shall not result in the recognition of gain
or loss for federal income tax purposes by Bank, FSC or Merger Co., nor
shall the issuance of the FSC Common Stock result in the recognition of
gain or loss by the holders of Bank Common Stock who receive such stock in
connection with the Merger, dated prior to the date the Prospectus is first
mailed to the shareholders of Bank and such opinion shall not have been
withdrawn or modified in any material respect.
(f) Pooling of Interests. FSC and Bank shall have received an opinion
from Deloitte & Touche to the effect that the Merger qualifies and will be
given pooling of interest accounting treatment.
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<PAGE> 96
7.1.2 Conditions of Closing For FSC. The obligation of FSC to consummate
the transactions contemplated by this Agreement is conditioned upon the
following unless waived in writing by FSC:
(a) Bank Resolutions; Corporate Documents. Bank shall have delivered
to FSC certified copies of resolutions duly adopted by the Board of
Directors of Bank approving this Agreement, the Merger Agreement, and the
Merger, all as contemplated hereby, and directing the submission thereof to
a vote of the shareholders of Bank, and certified copies of resolutions
duly adopted by the shareholders of Bank (owning the outstanding shares as
required by subparagraph (a) above) approving this Agreement, the Merger
Agreement and the Merger, all as contemplated hereby. Bank shall deliver to
FSC (i) copies of the Articles of Incorporation for Bank and each of the
Subsidiaries certified by the California Secretary of State's Office; (ii)
copies of the Bylaws of Bank and each of the Subsidiaries certified by
their respective Corporate Secretaries; and (iii) a certificate of good
standing as to Bank and each of the Subsidiaries, dated as of a date
reasonably close to the Closing Date, issued by the California Secretary of
State.
(b) Bank Representations and Warranties. The representations and
warranties of Bank contained in this Agreement (except to the extent such
representation and warranty speaks solely as of an earlier date or for
changes expressly contemplated by this Agreement) shall be correct in all
material respects (provided, however, that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects) on and as of the
Effective Time with the same effect as though made on and as of such date.
Except as otherwise contemplated by this Agreement, Bank shall have
performed in all material respects all of its obligations and agreements
hereunder theretofore to be performed by it. FSC shall have received at the
Closing a certificate to the foregoing effect dated the Effective Time and
executed on behalf of Bank by one of its duly authorized executive
officers.
(c) Comfort Letters. FSC shall have received letters from Deloitte &
Touche dated (1) the effective date of the Form S-4 and (2) shortly prior
to the Effective Time, in form and substance satisfactory to FSC, with
respect to Bank's financial condition, which letters shall be based upon
customary specified procedures undertaken by such firm. The "comfort
letters" contemplated hereby shall include, but not be limited to, those
matters identified in Exhibit B attached hereto.
(d) Opinion of Bank Counsel. FSC shall have received at the Closing
from Manatt, Phelps & Phillips, L.L.P., counsel to Bank, a written opinion,
dated the Effective Time, substantially in the form of Exhibit C hereto.
(e) Affiliates Letter. FSC shall have received a letter from each
person who, in the opinion of Bank and its counsel (who shall be entitled
to rely on written certificates of such persons), is an "affiliate" (as
that term is defined in Rule 405 promulgated by the SEC under the 1933 Act)
of Bank substantially in the form attached hereto as Exhibit D.
(f) Net Worth. FSC shall have determined in good faith based on its
ongoing credit review between the date of this Agreement and the Effective
Time to assess the adequacy of Bank's Allowance for Credit Losses by its
officers, accountants and legal counsel to update its initial credit review
due diligence, that (i) as of the end of the month immediately preceding
the Effective Time, the consolidated stockholders' equity of Bank,
calculated in accordance with generally accepted accounting principles, and
after accrual or payment of the expenses incurred by Bank with respect to
the Merger, but excluding any separate stockholders' equity account for net
unrealized gain or loss on investment securities available for sale, net of
tax effect, and any Aggregate Environmental Assessment and Remediation Cost
as defined in Section 2.6 of the Agreement, and any costs or liabilities
incurred in connection with freezing or terminating any employee Plan (as
defined in Section 4.1.18) (the "Adjusted Net Worth") will exceed the
amount set forth on Exhibit 7.1.2 hereto.
(g) Agreement Not to Compete. Each of the members of Bank's Board of
Directors, other than Thomas Bishop and Eugene Bishop, shall have executed
and delivered an Agreement Not to Compete substantially in the form set
forth as Exhibit E attached hereto.
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<PAGE> 97
(h) Employment Agreements. Thomas A. Bishop and Eugene D. Bishop
shall have executed and delivered an Employment Agreement substantially in
the form set forth as Exhibit F attached hereto.
(i) Absence of Material Adverse Changes. Between the date of this
Agreement and the Effective Time there shall not have been, occurred or
arisen (whether or not in the ordinary course of business) any change in or
with respect to any of the assets, liabilities, permits, methods of
accounting or accounting practice, business or manner of conducting
business, of the Bank or its Subsidiaries, or any other event, circumstance
or development, nor has FSC become aware of any fact, condition or
circumstance concerning Bank or its Subsidiaries not otherwise disclosed by
Bank in this Agreement or in the schedules hereto that has had or may
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Bank.
7.1.3 Conditions of Closing For Bank. The obligation of Bank to
consummate the transactions contemplated by this Agreement is conditioned upon
the following unless waived in writing by the Bank:
(a) FSC Resolutions; Corporate Documents. FSC shall have delivered to
Bank certified copies of resolutions duly adopted by the Board of Directors
of FSC approving this Agreement, the Merger Agreement, and the Merger, all
as contemplated hereby. FSC shall deliver to Bank (i) copies of the
Certificate of Incorporation for FSC certified by the Delaware Secretary of
State's Office; (ii) copies of the Bylaws of FSC certified by its Corporate
Secretary; and (iii) a certificate of good standing as to FSC, dated as of
a date reasonably close to the Closing Date, issued by the Delaware
Secretary of State.
(b) Merger Co. Resolutions; Corporate Documents. Merger Co. shall
have delivered to Bank certified copies of resolutions duly adopted by the
Board of Directors of Merger Co. approving the Merger Agreement and the
Merger as contemplated thereby. Merger Co. shall deliver to Bank (i) copies
of the Articles of Incorporation for Merger Co. certified by the California
Secretary of State's Office; (ii) copies of the Bylaws of Merger Co.
certified by its Corporate Secretary; and (iii) a certificate of good
standing as to Merger Co., dated as of a date reasonably close to the
Closing Date, issued by the California Secretary of State.
(c) FSC Representations and Warranties. The representations and
warranties of FSC contained in this Agreement (except to the extent such
representation and warranty speaks solely as of an earlier date or for
changes expressly contemplated by this Agreement) shall be correct in all
material respects (provided, however, that where any statements in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects) on and as of the
Effective Time with the same effect as though made on and as of such date.
Except as otherwise contemplated by this Agreement, FSC shall have
performed in all material respects all of its obligations and agreements
hereunder theretofore to be performed by it. Bank shall have received at
the Closing a certificate to the foregoing effect dated the Effective Time
and executed on behalf of FSC by one of its duly authorized executive
officers.
(d) Opinion of FSC Counsel. Bank shall have received at the Closing
from Ray, Quinney & Nebeker, counsel to FSC, a written opinion, dated the
Effective Time, substantially in the form of Exhibit G.
(e) Absence of Certain Changes. Between the date of this Agreement
and the Effective Time, there shall not have been, occurred or arisen
(whether or not in the ordinary course of business) any change in or with
respect to any of the assets, liabilities, permits, methods of accounting
or accounting practice, business or manner of conducting business, of FSC,
or any other event, circumstance or development, nor has Bank become aware
of any fact, condition or circumstance concerning FSC not otherwise
disclosed by FSC in this Agreement that has had or may reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on FSC.
(f) Fairness Opinion. Bank shall have received a letter from KBW,
dated as of a date within five (5) days of the mailing of the Prospectus to
the shareholders of Bank, to the effect that the transactions contemplated
by this Agreement are fair from a financial point of view to the
shareholders of Bank.
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ARTICLE VIII
CLOSING OF THE MERGER
8.1 Closing. Unless this Agreement is earlier terminated in accordance
with Article IX, Merger Co. shall be merged with and into Bank, with Bank being
the Surviving Corporation, all as contemplated by this Agreement and the Merger
Agreement, at a closing (the "Closing") to be held at the offices of Ray,
Quinney & Nebeker, located at 79 South Main Street, Suite 400, Salt Lake City,
Utah at 10:00 A.M., local time, on a date (the "Closing Date") mutually agreed
upon by the parties as soon as practicable after satisfaction of the conditions
precedent set forth in Article VII and the expiration of the required waiting
period following approval of FSC's application to the DFI, the FDIC and to the
Federal Reserve Board relating to the Merger, but in no event later than 30 days
after the expiration of such period.
8.2 Filing of Articles of Merger. Bank, FSC and Merger Co. shall execute
the Merger Agreement and shall cause such Merger Agreement, together with all
requisite certificates, to be approved by the DFI, if applicable, and filed with
the California Secretary of State's office, on the Closing Date. The time when
the Merger shall become effective under the laws of the State of California is
herein called the "Effective Time."
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by mutual consent of FSC and Bank; or
(b) by FSC or Bank if the Merger shall not have been consummated by
November 30, 1998, unless the failure to consummate by such time is due to
the breach of any covenant or obligation in the Agreement by the party
seeking to terminate; or
(c) by Bank, upon written notice to FSC at any time in the event of a
material breach by FSC of any representation, warranty, covenant or
agreement of FSC contained in this Agreement which is not cured within
thirty (30) days after notice of such breach is given to FSC by Bank; or
(d) by FSC upon written notice to Bank at any time in the event of a
material breach by Bank of any representation, warranty, covenant or
agreement of Bank contained in this Agreement which is not cured within
thirty (30) days after notice of such breach is given to Bank by FSC; or
(e) by FSC or Bank upon written notice to the other at any time if a
majority of Bank's shareholders does not approve the Merger contemplated
hereby; or
(f) by either the Board of Directors of FSC or the Board of Directors
of Bank if such board shall have reasonably determined in good faith that
any of the requisite regulatory approvals contains a materially burdensome
condition or if the Merger is disapproved by any Governmental Entity whose
approval is necessary; or
(g) by Bank, if there has been a significant decline in the average of
the daily last sales price of the FSC Common Stock as reported on the
NASDAQ/NMS for the twenty (20) consecutive trading days in which such
shares are traded on the NASDAQ/NMS ending on the fifth business day prior
to Effective Time (the "Section 9.1(g) Average Closing Price"), and (ii)
such decline is not proportionate relative to the Keefe, Bruyette & Woods
50 Index (the "Index") as published from time to time by KBW. 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 fifth business day prior
to the Effective Time.
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<PAGE> 99
(iii) A "significant decline" shall be deemed to have occurred if
the Section 9.1(g) Average Closing Price is less than $30.00 ($20.00
after giving effect to the fifty percent (50%) stock dividend on the FSC
Common Stock payable on February 24, 1998) per share.
(iv) A decline is not "proportionate relative to the Index" if the
quotient obtained by dividing the Section 9.1(g) Average Closing Price
by $37.19 ($24.79 after giving effect to the fifty percent (50%) stock
dividend on the FSC Common Stock payable on February 24, 1998) is less
than the quotient obtained by dividing the Final Index by the Initial
Index and subtracting .15 from the quotient.
(h) by either Bank or FSC, if Bank shall have failed to act or refrain
from doing any act as required under this Agreement pursuant to Section
10.8;
(i) by either FSC or Bank if any condition set forth in Section 7.1.1
shall not have been met by November 30, 1998;
(j) by FSC if any condition set forth in Section 7.1.2 shall not have
been met by November 30, 1998, or at such earlier time as it becomes
apparent that any such condition cannot be met;
(k) by Bank if any condition set forth in Section 7.1.3 shall not have
been met by November 30, 1998, or at such earlier time as it becomes
apparent that any such condition cannot be met; or
(l) by Bank or FSC under the circumstances set forth in Section 2.6
hereof.
9.2 Effect of Termination. In the event of termination and abandonment
hereof pursuant to the provisions of Section 9.1, this Agreement shall become
void and have no force or effect, except that (i) Sections 9.2, 10.1 and 10.10
of this Agreement shall survive the termination, and (ii) notwithstanding
anything to the contrary contained in this Agreement, neither FSC nor Bank shall
be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement and (iii) FSC shall be
entitled to exercise any and all rights that it may have under the Termination
Fee Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Costs. Except as provided in the Termination Fee Agreement or in
Section 9.2 above, each of the parties to this Agreement shall pay its own
charges and costs incurred or to be incurred in connection with the execution
and performance of this Agreement.
10.2 Instruments of Transfer, etc. Each of the parties hereto shall
cooperate with the other parties in every way in carrying out the transactions
contemplated herein, in delivering instruments to perfect the conveyances,
assignments and transfers contemplated herein, and in delivering all documents
and instruments reasonably deemed necessary or useful by counsel for any party
hereto.
10.3 Notices. All notices, requests, consents and demands shall be given
to or made upon the parties at their respective addresses set forth below, or at
such other address as a party may designate in writing delivered to the other
parties. Unless otherwise agreed in this Agreement, all notices, requests,
consents and demands shall be given or made by personal delivery, by confirmed
air courier, by confirmed facsimile transmission ("fax"), or by certified first
class mail, return receipt requested, postage prepaid, to the party or parties
addressed as aforesaid. If sent by confirmed air courier, such notice shall be
deemed to be given upon the earlier to occur of the date upon which it is
actually received by the addressee or the business day upon which delivery is
made at such address as confirmed by the air courier (or if the date of such
confirmed delivery is not a business day, the next succeeding business day). If
mailed, such notice shall be deemed to be given upon the earlier to occur of the
date upon which it is actually received by the addressee or the second business
day following the date upon which it is deposited in a first-class
postage-prepaid envelope in the
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<PAGE> 100
United States mail addressed as aforesaid. If given by fax, such notice shall be
deemed to be given upon the date of the confirmed transmission.
(a) If to FSC, to:
First Security Corporation
79 South Main Street
Salt Lake City, Utah 84111
Attn: Brad D. Hardy, Esq.
Executive Vice-President & General Counsel
Fax Number: (801) 359-6928
With a copy to:
Sylvia I. Iannucci, Esq.
Ray, Quinney & Nebeker
400 Deseret Building
79 South Main Street
Salt Lake City, Utah 84111
Fax Number: (801) 532-7543
(b) If to Bank, to:
California State Bank
100 N. Barranca Street, Suite 1400
West Covina, California 91791
Attn: Thomas A. Bishop, Chairman
and Chief Executive Officer
Fax Number: (626) 915-4706
With a copy to:
William T. Quicksilver, Esq.
Manatt, Phelps, & Phillips, L.L.P.
11355 West Olympic Boulevard
Los Angeles, California 90064
Fax Number: (310) 312-4224
Each party hereto shall notify promptly the other in writing of the
occurrence of any event which will or may result in the failure to satisfy the
conditions specified in Article VI hereof. Between the date of this Agreement
and the Effective Time, each party hereto will advise the other of the
satisfaction of such conditions as they occur.
10.4 Amendments. Prior to the Effective Time, any provision of this
Agreement and of the Merger Agreement, except for Section 1.3 of this Agreement
and Article VI of the Merger Agreement, which establish the Conversion Ratio,
may be amended or modified at any time, either before or after its approval by
the shareholders of either party to this Agreement, by an agreement in writing
between the parties hereto approved by their respective Boards of Directors (or
Executive Committee in the case of FSC) and executed in the same manner as this
Agreement.
10.5 Entire Agreement. This Agreement, the Disclosure Schedules and all
exhibits hereto, together with the documents and the instruments referred to
herein, constitute the entire agreement of the parties and there are no
representations, inducements or other provisions other than those expressed in
writing. No modification, waiver or discharge of any provision of or breach of
this Agreement shall (i) be effective unless it is executed in writing by the
party effecting such modification, waiver or discharge, or (ii) affect the right
of either party hereto thereafter to enforce any other provision or to exercise
any right or remedy in the event of a breach by a party hereto, whether or not
similar.
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10.6 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, this Agreement may not be assigned by any party
hereto except with the prior written consent of the other parties.
10.7 Counterparts. Any number of counterparts of this Agreement may be
signed and delivered and each shall be considered an original and together they
shall constitute one agreement.
10.8 Exclusive Merger Agreement. Bank covenants and agrees that, between
the date hereof and the Effective Time it will not, and it will not permit any
of its officers or directors to, either directly or indirectly, solicit or
attempt to procure offers relating to the merger or acquisition of Bank with or
by any entity not a party to this Agreement, discuss or negotiate or enter into
any agreements relating to the merger or acquisition of Bank with or by any such
third party. Notwithstanding any other provision in this Section 10.8 or
elsewhere in this Agreement, the parties hereto acknowledge the obligations of
Bank in this Agreement are subject to the continuing fiduciary duties of the
Board of Directors of Bank to the shareholders of Bank. In the event the Board
of Directors of Bank receives a bona fide offer relating to the merger or
acquisition of Bank with another entity and reasonably determines in good faith,
after consulting with Bank's outside legal counsel, that as a result of such
offer, any duty to act or to refrain from doing any act pursuant to this
Agreement, other than under Section 10.10 will constitute a breach of the
fiduciary duties of the Bank's Board of Directors to the shareholders of Bank,
such failure to act or refrain from doing any act shall not constitute the
failure of any condition, breach of any covenant or otherwise constitute any
breach of this Agreement, except that any such failure to act or refrain from
doing any act shall entitle FSC or Bank to terminate this Agreement pursuant to
Section 9.1(h). Bank will immediately notify FSC following the receipt of any
tender or exchange offer, proposal for a merger, consolidation or other business
combination involving Bank or any proposal or offer to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets of, Bank
other than the transactions contemplated or permitted by this Agreement.
10.9 Public Statements. No party to this Agreement shall issue any press
release or other public statement concerning the transactions contemplated by
this Agreement without first providing the other parties hereto with a written
copy of the text of such release or statement and obtaining the consent of the
other parties respecting such release or statement, which consent will not be
unreasonably withheld. The consent provided for in this Section shall not be
required if the delay necessary to obtain such consent would preclude the timely
issuance of a press release or public statement as required by law. The
provisions of this Section 10.9 shall not be construed as prohibiting the filing
of copies of this Agreement or descriptions of this Agreement with regulatory
agencies as to which regulatory approvals are contemplated by this Agreement.
10.10 Confidentiality. Each party shall use all information that it
obtains from the others pursuant to this Agreement solely for the effectuation
of the transactions contemplated by this Agreement or for other purposes
consistent with the intent of this Agreement and shall not use any of such
information for any other purpose, including, without limitation, the
competitive detriment of the other parties. Each party shall maintain as
strictly confidential all information it learns from the others and shall upon
expiration or termination of this Agreement, return promptly to the other
parties all documentation (and copies thereof) provided by them or made
available by third parties. Each party may disclose such information to its
respective affiliates, counsel, accountants, tax advisors and consultants. This
provision shall not prohibit the use or disclosure of confidential information
pursuant to court order or which has otherwise become publicly available.
10.11 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties and agreements in this Agreement shall survive
the Effective Time, except for the agreements contained in Section 1.3, 3.7,
3.13, 10.1, 10.2 and 10.10 and the agreements of the Affiliates contained in the
letters referred to in Section 7.1.2(e).
10.12 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, the parties may
mutually agree to revise the structure of the Merger and related transactions
provided that each of the transactions comprising such revised structure shall
(i) not change the amount or form of consideration to be received by the holders
of Bank Common Stock, (ii) be capable of consummation in as timely a manner as
the structure contemplated herein and (iii) not otherwise be
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<PAGE> 102
prejudicial to the interest of the stockholders of Bank. This Agreement and any
related documents shall be appropriately amended in order to reflect any such
revised structure.
10.13 Severability. Except to the extent that application of this Section
10.13 would have a material adverse effect on either party, any term or
provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
10.14 Third Parties. Except with respect to Sections 1.3, 3.7 and 3.13
which are intended to benefit the shareholders, employees, officers and
directors of Bank, each party hereto intends that this Agreement shall not
benefit or create any right or cause of action to any person other than parties
hereto. As used in this Agreement the term "parties" shall refer only to FSC,
Merger Co. or the Bank as the context may require.
10.15 Governing Law. This Agreement is made and entered into in the State
of Utah, and except to the extent that the provisions of federal law are
mandatorily applicable, the laws of the State of Utah shall govern the validity
and interpretation hereof and the performance of the parties hereto of their
respective duties and obligations hereunder.
10.16 Knowledge. For purposes of this Agreement, any representation or
warranty made upon the "knowledge" or "best knowledge" of a party means facts
and other information which as of the date of this Agreement any executive vice
president, chief financial officer, superior officer, controller (and, after the
date of this Agreement, shall also include 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 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.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
FIRST SECURITY CORPORATION
By: /s/ MORGAN J. EVANS
------------------------------------
ATTEST:
By: /s/ BRAD D. HARDY
--------------------------------------------
Secretary
FIRST SECURITY MERGER CORP.
By: /s/ MORGAN J. EVANS
------------------------------------
ATTEST:
By: /s/ BRAD D. HARDY
--------------------------------------------
Secretary
CALIFORNIA STATE BANK
By: /s/ THOMAS A. BISHOP
------------------------------------
Thomas A. Bishop, Chairman &
Chief Executive Officer
ATTEST:
/s/ RODNEY A. BAKER
- ---------------------------------------------
Secretary
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<PAGE> 104
APPENDIX B
THE BANK'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
FILED PURSUANT TO SECTION 13 OF THE EXCHANGE ACT
<PAGE> 105
================================================================================
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FDIC CERTIFICATE NO. 23888-1
CALIFORNIA STATE BANK
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-3369563
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 N. BARRANCA STREET, WEST COVINA, 91791
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(626) 915-4424
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
COMMON STOCK (NO PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) 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. [X]
The aggregate market value of Common Stock of the registrant held by
non-affiliates at February 20, 1998 was $216,271,395 based on the sales price as
reported on the Nasdaq National Market.
The number of shares of common stock of the registrant outstanding as of
February 20, 1998: 5,232,616.
The following documents are incorporated by reference:
<TABLE>
<CAPTION>
DOCUMENT LOCATION IN FORM 10-K
-------- ---------------------
<S> <C>
Definitive Proxy Statement for the Annual Meeting Part III
of Stockholders which will be filed within 120 days
of the fiscal year ended December 31, 1997
</TABLE>
================================================================================
B-1
<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I ............................................................ B-4
ITEM 1. Business.................................................... B-4
ITEM 2. Properties.................................................. B-20
ITEM 3. Legal Proceedings........................................... B-21
ITEM 4. Submission of Matters to a Vote of Security Holders......... B-21
PART II ............................................................ B-22
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... B-22
ITEM 6. Selected Financial Data..................................... B-23
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... B-23
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ B-35
ITEM 8. Financial Statements and Supplementary Data................. B-35
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... B-35
PART III ............................................................ B-36
ITEM 10. Directors and Executive Officers of the Registrant.......... B-36
ITEM 11. Executive Compensation...................................... B-36
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. B-36
ITEM 13. Certain Relationships and Related Transactions.............. B-36
PART IV ............................................................ B-36
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... B-36
</TABLE>
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INTRODUCTION
Certain information discussed in this annual report may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Bank and its
subsidiaries operate, projections of future performance, perceived and
anticipated opportunities in its market and statements regarding the entities
mission and vision. The Bank and its subsidiaries' actual results, performance,
or achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
additional information concerning factors that might cause such differences, see
"Item 1. Business -- Factors that May Affect Future Results."
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PART I
ITEM 1. BUSINESS
CALIFORNIA STATE BANK
California State Bank (as used herein, the "Bank" refers to California
State Bank and its subsidiaries, unless the context indicates otherwise) is a
California state chartered bank that commenced operations in October, 1979. At
December 31, 1997, the Bank had consolidated assets of $849.2 million, net loans
of $442.8 million, deposits of $701.7 million and stockholders' equity of $83.4
million.
On February 18, 1998, the Bank and First Security Corporation ("FSC")
announced that they had reached a definitive agreement pursuant to which the
Bank would merge (the "Merger") with a wholly-owned subsidiary of FSC and
thereby become a subsidiary of FSC. Under the terms of the agreement, the Bank's
shareholders will receive 2.13 shares of FSC common stock $1.25 par value ("FSC
Common Stock") for each share of the Bank's common stock. Based on a closing
price of $23.50 on March 10, 1998, for FSC Common Stock, this exchange ratio
represents a price of $50.06 for each share of the Bank's common stock. The Bank
currently anticipates that this matter will be submitted to the Bank's
shareholders in May 1998 for approval, and that the Merger will be consummated
in the second quarter of 1998.
The principal executive and administrative offices of the Bank are located
at 100 North Barranca Street, West Covina, California.
Currently, the Bank operates seventeen branch banking offices: 925 West
Badillo Street, Covina, California ("Covina Main Branch"); 100 North Barranca
Street, West Covina, California ("West Covina Branch"); 385 East Sixth Street,
Beaumont, California ("Beaumont Branch"); 123 South Chapel Avenue, Alhambra,
California ("Alhambra Branch"); 444 East Huntington Drive, Arcadia, California
("Arcadia Branch"); 3401 Centrelake Drive, Ontario, California ("Ontario
Branch"); 301 North Second Street, Covina, California ("Covina Downtown
Branch"); 12470 Hesperia Road, Victorville, California ("Victorville Branch");
1201 Dove Street, Newport Beach, California ("Newport Beach Branch"); 721 North
Euclid, Anaheim, California ("Anaheim Branch"), 2101 East Coast Highway, Newport
Beach, California ("Corona del Mar Branch"); 2099 South State College Boulevard,
Anaheim, California ("Anaheim Stadium Branch"); 390 North Brea Boulevard, Brea,
California ("Brea Branch"); 15771 Rockfield Boulevard, Irvine, California
("Irvine Branch"); 441 West Whittier Boulevard, La Habra, California ("La Habra
Branch"); 4875 La Palma Avenue, La Palma, California ("La Palma Branch"); and
111 East Yorba Linda Boulevard, Placentia, California ("Placentia Branch").
In January 1997, the Bank closed its Orange Branch which was located at 170
South Main Street, Orange, California and transferred the deposit and loan
business to its Anaheim Stadium Branch. In December 1997, the Bank closed its
Glendora Branch which was located at 655 South Grand Avenue, Glendora,
California and transferred the deposit and loan business to its Covina Main
Branch.
The Bank is a community bank that offers personalized commercial banking
services to businesses, professionals and individuals located in and around the
San Gabriel Valley, Inland Empire and High Desert areas of Southern California,
Orange County and in Beaumont, California. The Bank engages in a variety of
lending activities, including commercial and industrial, agribusiness,
construction and land development, real estate-conventional and installment
loans with emphasis on commercial loans and construction loans for residential
properties. Commercial and industrial loans include equipment financing,
short-term operating loans and accounts receivable financing. Installment loans
include consumer loans for automobiles, home improvements, debt consolidation
and other personal needs. Real estate loans include secured short-term mini-perm
and construction and land development loans. As of December 31, 1997, commercial
and industrial, construction and land development, real estate-conventional and
installment loans accounted for 39.6%, 7.4%, 43.6% and 9.3%, respectively, of
the Bank's loan portfolio, with the remaining .1% consisting of outstanding
leases.
Through its Small Business Administration "SBA" Loan Department, the Bank
offers loans for equipment, inventory, real estate acquisition and construction,
refinancing, and working capital. The Bank is a
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participant in both the Preferred Lender Program ("PLP") and the Certified
Lender Program under the SBA program. As a Preferred Lender, the Bank may,
without prior SBA review, issue SBA guarantees for loans approved by the Bank
under PLP procedures for which the guaranteed portion does not exceed certain
limits set by legislation, thereby avoiding possible lengthy delays in the SBA
approval process. Legislative guarantees for PLP lenders range from 70% -- 90%
based upon the size and maturity of the loan. It is estimated that fewer than 1%
of SBA-approved lenders are approved by the SBA as PLP lenders. The Bank may
hold the government-guaranteed portions of its SBA loans in its own loan
portfolio, or sell these portions into the secondary market and retain the
servicing income.
The Bank offers a variety of deposit instruments. These include personal
and business checking accounts and savings accounts, including interest-bearing
negotiable order of withdrawal accounts, money market accounts and time
certificates of deposit. The Bank also offers a wide range of specialized
services designed to attract and service the needs of customers. These services
include drive-up facilities, ATM facilities, cash management systems, electronic
funds transfers by way of domestic and international wires and automated
clearing house, merchant windows, courier services, computer accounting services
and sales of travelers' checks. Additionally, the Bank issues MasterCard credit
cards and honors merchant drafts for both MasterCard and VISA.
The Bank offers international banking services, including issuing letters
of credit and bankers' acceptances, buying and selling foreign exchange and
handling the collection and transfer of money.
The Bank offers through its Alternative Investments Department a wide
variety of investment products including mutual funds and annuities for sale to
its customers. None of the products offered through the Alternative Investment
Department are insured by the FDIC.
The Bank does not operate a trust department. The Bank holds no patents,
registered trademarks, licenses (other than licenses obtained from bank
regulatory agencies), franchises or concessions.
REAL ESTATE SUBSIDIARIES
The Bank has two real estate development subsidiaries which are engaged in
activities authorized by Section 751.3 of the California Financial Code. Citrus
State Development Corp., was incorporated on January 18, 1984, and Granada
Realty Services, Inc., was incorporated on April 17, 1984. These real estate
development subsidiaries had combined capital of $4.5 million at December 31,
1997. The two subsidiary corporations had net income of $22,000, $184,000, and
$54,000, for 1997, 1996 and 1995 respectively. See Note H to the Bank's audited
consolidated financial statements for a summary of the financial position of the
Bank's real estate subsidiaries
Federal law restricts insured state chartered banks and their subsidiaries
from engaging as a principal in any activity which is not permissible for a
national bank or a subsidiary of a national bank unless the FDIC permits such
activity and the bank meets all of its regulatory capital requirements.
Currently, neither national banks nor their subsidiaries are permitted to engage
as a principal in real estate development activities, such as those currently
engaged in by the Bank's real estate subsidiaries, with certain limited
exceptions.
The real estate development subsidiaries are engaged primarily in the
business of developing single family homes. The subsidiaries acquire and take
title to the property to be developed and provide the funds necessary for such
development. The subsidiaries generally engage real estate contractors to
perform construction work for a fee. The subsidiaries market and sell the homes
upon completion. Such properties are accounted for at the lower of cost,
including direct development cost and interest incurred during the development
stage, or net realizable value. Ordinarily, once projects are started they are
completed within a twelve-month period. The Bank generally does not finance the
sale of the homes which are built.
In March 1996, the FDIC approved the Bank's application to continue the
real estate development activities of the subsidiaries. The approval is subject
to certain conditions, including, among other things, that (a) the Bank's total
investment in the real estate development subsidiaries (defined to include
equity investments in and loans to the subsidiaries) not exceed 20% of the
Bank's Tier 1 capital, (b) for purposes of the prompt corrective action
provisions of federal law and the calculation of the Bank's risk adjusted
deposit
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insurance premium, the Bank's capital ratios be based on the Bank's capital
levels after deducting its total investment in the real estate development
subsidiaries, (c) the Bank's capital levels, after deducting its total
investment in the real estate development subsidiaries, equal or exceed the
levels required for a "well capitalized" institution under federal law and (d)
the real estate development subsidiaries contract with the Bank for any services
on terms and conditions comparable to those available to or from independent
entities.
At December 31, 1997, the Bank had a total investment, comprised entirely
of equity investments, in the real estate development subsidiaries of
approximately $4.5 million, constituting 5.4% of its total stockholders' equity
and 7.3% of Tier 1 capital. During 1997, the Bank's real estate development
subsidiaries sold six homes compared to the sale of nine homes in 1996 and seven
homes in 1995. At December 31, 1997, the subsidiaries held one completed home
pending close of escrow, one completed home listed for sale and two single
family residential properties in various stages of construction.
Management believes the Bank is in compliance with the conditions of the
FDIC approval at December 31, 1997. While management believes that it can
continue to satisfy the conditions of the FDIC approval, it is currently
evaluating and will continue to evaluate the extent to which it will engage in
its real estate development activities and the manner in which it engages in and
funds such activities. Any decision will be based on a number of factors
including, but not limited to, the growth and capital requirements of the Bank,
the profitability of the Bank and the real estate development subsidiaries,
economic conditions on both a national and local level, and the condition of the
real estate market in Southern California.
COMPETITION
The banking and financial services business in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader range of financial services than the Bank. In order to compete
with the other financial services providers, the Bank principally relies upon
local promotional activities, personal relationships established by officers,
directors and employees with its customers, and specialized services tailored to
meet needs of the communities served. In those instances where the Bank is
unable to accommodate a customer's needs, the Bank may arrange for those
services to be provided by its correspondents. The Bank has seventeen branch
offices, five in Los Angeles County, nine in Orange County, one in Riverside
County and two in San Bernardino County. Neither the deposits nor loans of the
offices of the Bank exceed 1% of all financial services companies located in the
counties in which the Bank operates.
EMPLOYEES
As of December 31, 1997, the Bank had approximately 323 full-time
equivalent employees. The Bank believes that its employee relations are
satisfactory.
ECONOMIC CONDITIONS, GOVERNMENTAL POLICIES, LEGISLATION AND REGULATION
The Bank's profitability, like most financial institutions, is dependent on
interest rate differentials. In general, the difference between the interest
rate paid by the Bank on interest-bearing liabilities, such as deposits and
other borrowings, and the interest rate received by the Bank on its
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprises the major portion of the Bank's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Bank, such as inflation, recession and unemployment, and the
impact which future changes in domestic and foreign economic conditions might
have on the Bank cannot be predicted.
The business of the Bank is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System
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(the "Federal Reserve Board"). The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) through its open-market operations in U.S. Government securities by
adjusting the required level of reserves for depository institutions subject to
its reserve requirements and by varying the target federal funds and discount
rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and
impact on the Bank of any future changes in monetary policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial services providers are frequently made in U.S.
Congress, in the state legislature and before various bank regulatory agencies.
See " -- Supervision and Regulation."
SUPERVISION AND REGULATION
GENERAL
Banks are extensively regulated under both federal and state law. This
regulation is intended primarily for the protection of depositors and the
deposit insurance fund and not for the benefit of stockholders of the Bank. Set
forth below is a summary description of certain laws and regulations which
relate to the operations of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.
In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act and the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and to expand permissible
activities for banks, principally to facilitate the convergence of commercial
and investment banking. Certain proposals also sought to expand insurance
activities of banks. It is unclear whether any of these proposals, or any form
of them, will be introduced in the current Congress and become law.
Consequently, it is not possible to determine what effect, if any, they may have
on the Bank.
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination, and regulation by the California Commissioner
of Financial Institutions ("Commissioner") and the Federal Deposit Insurance
Corporation ("FDIC"). To a lesser extent, the Bank is also subject to certain
regulations promulgated by the Federal Reserve Board. If, as a result of an
examination of the Bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of the Bank's operations are unsatisfactory or that the bank or
its management is violating or has violated any law or regulation, various
remedies are available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, to remove
officers and directors and ultimately to terminate the Bank's deposit insurance,
which for a California state chartered bank would result in a revocation of the
Bank's charter. The Commissioner has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "-- Capital Standards."
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The Bank's securities are registered with the FDIC under the 1934 Act. As
such, the Bank is subject to the information, proxy solicitation, insider
trading, and other requirements and restrictions of the 1934 Act.
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends to its stockholders. Under such restrictions, the
amount available for payment of dividends to stockholders by the Bank totaled
$15.0 million at December 31, 1997. In addition, the Commissioner and the
Federal Reserve Board have the authority to prohibit the Bank from paying
dividends, depending upon the Bank's financial condition, if such payment is
deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC or the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank may pay. An insured depository institution may be
prohibited from paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions if after such
transaction the institution would be undercapitalized. See "-- Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and "-- Capital Standards"
for a discussion of these additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by state and federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of affiliates, the purchase of, or investments in, stock or
other securities of its affiliates, the taking of such securities as collateral
for loans, and the purchase of assets of affiliates. Such restrictions prevent
affiliates of the Bank from borrowing from the Bank unless the loans are secured
by collateral having a market value equal to the amount required by law.
Further, the appropriate amount of covered transactions of the Bank with any
affiliate is limited, individually, to 10.0% of the Bank's capital and surplus
(as defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, as to all affiliates, to 20.0% of the Bank's capital
and surplus (as defined by federal regulations).
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
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The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to the minimum regulatory capital
requirements as of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
MINIMUM CAPITAL
ACTUAL REQUIRED EXCESS
----------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage...................... $61,960 7.65% $32,397 4.00% $29,563 3.65%
Tier 1 risk-based capital..... 61,960 11.11 22,317 4.00 39,643 7.11
Total risk-based capital...... 68,952 12.36 44,633 8.00 24,319 4.36
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1997, the
Bank exceeded the required ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed two-percent of the bank's total assets.
Federal guidelines generally define "tangible equity" as a bank's tangible
assets less liabilities. Federal regulators may, among other alternatives,
require the appointment of a conservator or a receiver for a critically
undercapitalized bank. In California, the Commissioner may require the
appointment of a conservator or receiver for a state-chartered bank if its
tangible equity does not exceed three-percent of the bank's total assets or $1
million.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
Additional restrictions on transactions with affiliates may be imposed on
the Bank under the prompt corrective action provisions of federal law.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take
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appropriate corrective action to resolve problem assets, (v) consider the size
and potential risks of material asset concentrations, and (vi) provide periodic
asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act"), at January 1, 1997, the Bank began
paying, in addition to its normal deposit insurance premium as a member of the
BIF, an amount equal to approximately 1.3 basis points per $100 of insured
deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds")
issued in the 1980's to assist in the recovery of the savings and loan industry.
Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in
addition to their normal deposit insurance premium, approximately 6.4 basis
points. Under the Act, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999, provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the Fico Bonds would be equal.
INTERSTATE BANKING AND BRANCHING
The BHCA currently permits banks from any state to acquire banks and bank
holding companies located in any other state, subject to certain conditions,
including certain nationwide- and state-imposed concentration limits. The Bank
has the ability, subject to certain restrictions, to acquire by acquisition or
merger branches outside its home state. The establishment of new interstate
branches is also possible in those states with laws that expressly permit it.
Interstate branches are subject to certain laws of the states in which they are
located. Competition may increase further as banks branch across state lines and
enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is rated on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted July 22, 1996, the Bank was
rated "satisfactory" in complying with its CRA obligations.
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YEAR 2000 COMPLIANCE
In May 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 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. The Bank has formed a management and
information technology committee to effectively deal with the year 2000 issue.
The committee's year 2000 plan includes awareness seminars, evaluations of
existing hardware, software, ATMs, vaults, alarm systems, communication systems
and other electrical devices, testing critical application programs and systems,
establishing a contingency plan and upgrading hardware and software as
necessary. The Bank estimates that the expenditures related to the year 2000
project will be $300,000. Approximately $200,000 of the total is attributable to
the purchase of new hardware and software which will be capitalized in the
normal course of business. The remaining $100,000, which will be expensed as
incurred, is not expected to have a material effect on the results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Bank's
financial results and operations.
Economic Conditions and Geographic Concentration. The Bank's operations are
located in Southern California and specifically concentrated in the San Gabriel
Valley area of Los Angeles County, Orange County, San Bernardino County and
Riverside County. As a result of the geographic concentration, the Bank's
results depend largely upon the economic conditions in these areas. While the
Southern California and national economies have recently exhibited positive
economic and employment trends, there is no assurance that such trends will
continue. A deterioration in economic conditions could have a material adverse
impact on the quality of the Bank's loan portfolio and demand for its products
and services.
Competition. The banking and financial services business in the Bank's
market areas are highly competitive. The increasingly highly competitive market
is the result of changes in regulation, changes in technology and product
delivery systems and the consolidation of banks and financial services
providers. Nonbanks, such as securities and insurance companies not subject to
the regulatory capital requirements and constraints placed on banks, compete for
products and services traditionally provided by banks.
Interest Rates. The Bank's anticipated results for 1998 may differ
significantly from actual results if interest rates fluctuate significantly from
current levels. Changes in interest rates may influence the growth of loans,
investments and deposits. A significant decrease in interest rates may cause the
net interest margin to narrow, thereby negatively impacting the results of
operations.
Credit Quality. Deterioration of the credit quality of the loan portfolio
resulting in significant unexpected losses may have a negative adverse impact on
the Bank's future results of operations or financial condition. Management
attempts to minimize such losses by adopting prudent credit underwriting and
monitoring policies and procedures, including the establishment and review of
the allowance for credit losses.
Technology and Computer Systems. Advances and changes in technology can
significantly impact the business and operations of the Bank. The Bank faces
many challenges including the increased demand for providing computer access to
bank accounts and the systems to perform banking transactions electronically.
The Bank's business and operations is susceptible to negative impacts from
computer system failures, communication and energy disruptions, and unrestrained
and unethical individuals with the technological ability to cause failures or
disruptions to the Bank's data processing systems.
B-11
<PAGE> 116
Many computer programs were designed and developed utilizing only two
digits in date fields, thereby creating the inability to recognize the year 2000
or years thereafter. This year 2000 issue creates risks for the Bank from
unforeseen or unanticipated problems in its internal computer systems as well as
from computer systems of the Federal Reserve Bank, correspondent banks,
customers and vendors. Failures of these systems or untimely corrections could
have a material impact on the Bank's ability to conduct its business and results
of operations. The Bank's computer systems and programs are designed and
supported by companies specifically in the business of providing such products
and services. The Bank has obtained from certain vendors assurances that
hardware and software critical to the Bank's business will operate and not
produce erroneous results relating to the year 2000 problem. The Bank has formed
a management and information technology committee to effectively deal with the
year 2000 issue. The committee's year 2000 plan includes awareness seminars,
evaluations of existing hardware, software, ATMs, vaults, alarm systems,
communication systems and other electrical devices, testing critical application
programs and systems, establishing a contingency plan and upgrading hardware and
software as necessary. The Bank estimates that the expenditures related to the
year 2000 project will be $300,000. Approximately $200,000 of the total is
attributable to the purchase of new hardware and software which will be
capitalized in the normal course of business. The remaining $100,000, which will
be expensed as incurred, is not expected to have a material effect on the
results of operations.
Government Regulations and Monetary Policy. The Bank is subject to
extensive federal and state supervision and regulation. New laws or changes in,
or repeals of, existing laws may cause the Bank's results to differ materially.
Further, changes in federal monetary policy, particularly as implemented through
the Federal Reserve System, significantly affects credit conditions for the
Bank, primarily through open market operations in United States government
securities, the discount rate for bank borrowings and bank reserve requirements,
may have a material impact on the Bank's results.
Other Risks. From time to time, the Bank details other risks with respect
to its business and/or financial results in its filings with the FDIC.
ACCOUNTING CHANGES
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes financial accounting and
reporting standards for stock-based compensation plans, including employee stock
purchase plans, stock options and restricted stock. SFAS No. 123 encourages all
entities to adopt a fair value method of accounting for stock-based compensation
plans, whereby compensation cost is measured at the grant date based on the fair
value of the award and is realized as an expense over the service or vesting
period. However, SFAS No. 123 also allows an entity to continue to measure
compensation cost for these plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees." Under the intrinsic value method, compensation
cost is generally the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount which must be paid to
acquire the stock. The Bank has elected to continue to account for stock-based
compensation plans using the intrinsic value method prescribed by APBO No. 25.
The pro forma disclosures required under SFAS No. 123 did not have a material
impact on the Bank's financial statements. See Note N to the Bank's audited
consolidated financial statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
fair value, if practicable. It also requires that servicing rights and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Furthermore, SFAS No. 125 requires that debtors reclassify financial assets
pledged as collateral, and that
B-12
<PAGE> 117
secured parties recognize those assets and their obligation to return them in
certain circumstances in which the secured party has taken control of those
assets. Finally, SFAS No. 125 requires that a liability be eliminated if either:
(a) the debtor pays the creditor and is relieved of its obligation for the
liability, or (b) the debtor is legally released from being the primary obligor
under the liability, either judicially or by the creditor. Accordingly, a
liability is not considered extinguished by an in-substance defeasance. SFAS No.
125 supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights." In
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." SFAS No. 127 defers for one year
the effective date of SFAS No. 125 as it relates to transactions involving
secured borrowings and collateral and transfers and servicing of financial
assets. SFAS No. 127 also provides additional guidance on these types of
transactions. The adoption of these statements did not have a material impact on
the Bank's results of operations or financial position.
In August 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The adoption of the statement did not have a material
impact on the Bank's results of operations or financial position.
In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The adoption of the
statement did not have a material impact on the Bank's results of operations or
financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. The
adoption of the statement did not have a material impact on the Bank's results
of operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. The adoption of the statement did
not have a material impact on the Bank's results of operations or financial
position.
B-13
<PAGE> 118
SELECTED STATISTICAL FINANCIAL DATA
The following tables and data set forth, for the respective periods shown,
selected statistical information relating to the Bank. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following table contains information on the Bank's average asset and
liability structure and related interest income or expense and yield or rate for
each of the three years in the period ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold (1)............... $ 32,183 $ 1,719 5.34% $ 25,599 $ 1,272 4.97% $ 22,569 $ 1,320 5.85%
Taxable securities................... 206,605 13,184 6.38% 142,798 8,911 6.24% 97,315 5,931 6.09%
Tax-exempt securities (2)............ 4,713 369 7.83% 5,496 432 7.86% 1,462 143 9.78%
Loans and leases, net of unearned
income(3)(4)....................... 436,828 44,356 10.15% 395,417 41,044 10.38% 280,298 31,808 11.35%
-------- ------- ----- -------- ------- ------ -------- ------- -----
Total earning assets (2)............. 680,329 59,628 8.76% 569,310 51,659 9.07% 401,644 39,202 9.76%
======== ======= ===== ======== ======= ====== ======== ======= =====
Nonearning assets.................... 101,706 100,217 66,763
-------- -------- --------
Total assets................. 782,035 669,527 468,407
======== ======== ========
Liabilities and Stockholders' Equity
Savings, money market accounts and
other interest-bearing deposits.... 308,599 7,931 2.57% 267,659 6,732 2.52% 175,432 3,791 2.16%
Time certificates of deposit......... 145,436 7,512 5.17% 136,718 7,047 5.15% 107,338 5,494 5.12%
Borrowings........................... 12,770 711 5.57% 7,009 317 4.52% 14,226 659 4.63%
-------- ------- ----- -------- ------- ------ -------- ------- -----
Total interest-bearing liabilities... 466,805 16,154 3.46% 411,386 14,096 3.43% 296,996 9,944 3.35%
======== ======= ===== ======== ======= ====== ======== ======= =====
Noninterest-bearing deposits......... 224,376 181,089 114,163
Other liabilities.................... 10,221 8,609 6,700
Stockholders' equity................. 80,633 68,443 50,548
-------- -------- --------
Total liabilities and stockholders'
equity............................. $782,035 $669,527 $468,407
======== ======== ========
Interest income/earning assets....... 59,628 8.76% 51,659 9.07% 39,202 9.76%
Interest expense/earning assets...... 16,154 2.37% 14,096 2.47% 9,944 2.48%
------- ----- ------- ------ ------- -----
Net interest income/earning assets... 43,474 6.39% 37,563 6.60% 29,258 7.28%
===== ====== =====
Less FTE adjustment.................. 122 138 46
------- ------- -------
Net interest income, per consolidated
statement of earnings.............. $43,352 $37,425 $29,212
======= ======= =======
</TABLE>
- ---------------
(1) Includes certificates of deposit at other financial institutions of $365 for
1996 and $1,783 for 1995.
(2) Yields are calculated on a fully taxable equivalent (FTE) basis using a rate
of 42.0% for 1997 and 41% for 1996 and 1995.
(3) Loan fees of $1,913 for 1997, $2,062 for 1996 and $2,515 for 1995 are
included in interest income.
(4) Includes nonperforming loans.
The changes in interest income, interest expense and resultant net interest
income are attributable to changes in average earning asset and interest-bearing
liability balances (volume) and changes in average yield
B-14
<PAGE> 119
or rate (rate). The interest increase (decrease) attributable to volume, rate
and both volume and rate are summarized as follows:
<TABLE>
<CAPTION>
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
--------------------------------- -------------------------------------
VOLUME/ VOLUME/
VOLUME RATE RATE TOTAL VOLUME RATE RATE TOTAL
------ ----- ------- ------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Federal funds sold(1)........................... $ 327 $ 96 $ 25 $ 448 $ 177 $ (199) $ (26) $ (48)
Taxable securities.............................. 3,982 201 89 4,272 2,772 142 66 2,980
Tax-exempt securities........................... (62) (2) 1 (63) 395 (28) (78) 289
Loans -- interest and fees...................... 4,298 (893) (93) 3,312 13,064 (2,713) (1,115) 9,236
------ ----- ---- ------ ------- ------- ------- -------
Total earning assets...................... 8,545 (598) 22 7,969 16,408 (2,798) (1,153) 12,457
------ ----- ---- ------ ------- ------- ------- -------
Interest expense
Savings, money market accounts and other
interest-bearing deposits..................... 1,453 (184) (70) 1,199 2,232 428 281 2,941
Time certificates of deposit.................... 449 15 1 465 1,504 39 10 1,553
Borrowings...................................... 261 73 60 394 (334) (16) 8 (342)
------ ----- ---- ------ ------- ------- ------- -------
Total interest-bearing liabilities........ 2,163 (96) (9) 2,058 3,402 451 299 4,152
------ ----- ---- ------ ------- ------- ------- -------
Change in net interest income..................... $6,382 $(502) $ 31 $5,911 $13,006 $(3,249) $(1,452) $ 8,305
====== ===== ==== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes certificates of deposit at other financial institutions.
LOAN PORTFOLIO
TYPES OF LOANS
The following table sets forth the amount of loans and leases in each
category and the percentage of total loans and leases outstanding for each
category, before adjustment for unearned income and the allowance for credit
losses, as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial............... $179,497 39.62% $166,877 38.15% $147,703 48.49% $145,084 53.16% $ 90,183 48.82%
Real estate construction
and land development..... 33,652 7.43% 20,637 4.72% 28,541 9.37% 10,776 3.95% 16,201 8.77%
Real estate conventional... 197,528 43.60% 198,035 45.27% 98,561 32.36% 83,622 30.64% 53,852 29.15%
Installment................ 42,236 9.32% 51,426 11.76% 28,887 9.49% 31,642 11.60% 24,140 13.07%
Leases..................... 157 0.03% 438 0.10% 895 0.29% 1,780 0.65% 347 0.19%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans and
leases........... $453,070 100.00% $437,413 100.00% $304,587 100.00% $272,904 100.00% $184,723 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
MATURITY DISTRIBUTION OF LOAN PORTFOLIO
The following table sets forth the maturity distribution of the Bank's loan
portfolio at December 31, 1997. The table excludes real estate-conventional,
installment loans and leases and does not include nonaccrual loans of $175,000:
<TABLE>
<CAPTION>
MATURING
------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial...................... $ 76,374 $38,848 $64,100 $179,322
Real estate construction....................... 27,444 6,208 -- 33,652
-------- ------- ------- --------
Total................................ $103,818 $45,056 $64,100 $212,974
======== ======= ======= ========
</TABLE>
B-15
<PAGE> 120
SENSITIVITY TO CHANGES IN INTEREST RATES
The following table sets forth the sensitivity of commercial and industrial
and construction and land development loans to changes in interest rates at
December 31, 1997. The table does not include nonaccrual loans of $175,000:
<TABLE>
<CAPTION>
MATURING
------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans:
With fixed interest rates.................... $ 4,976 $21,275 $ 6,665 $ 32,916
With variable interest rates................. 98,842 23,781 57,435 180,058
-------- ------- ------- --------
Total................................ $103,818 $45,056 $64,100 $212,974
======== ======= ======= ========
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table sets forth loans which were delinquent 90 days or more
but still accruing and nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans delinquent for 90 days or more and still
accruing.................................... $ 750 $1,067 $ 167 $ 322 $ 380
====== ====== ====== ====== ======
Nonperforming assets
Nonaccrual loans............................ $2,364 $2,474 $2,203 $2,223 $6,300
Restructured loans.......................... 1,916 -- 10 12 36
Other real estate owned..................... 784 2,267 1,750 1,170 1,402
------ ------ ------ ------ ------
Total nonperforming assets.......... $5,064 $4,741 $3,963 $3,405 $7,738
====== ====== ====== ====== ======
Nonperforming assets as a percentage of
year-end gross loans and leases plus other
real estate owned........................... 1.12% 1.08% 1.29% 1.24% 4.16%
====== ====== ====== ====== ======
</TABLE>
Generally, the Bank's policy is to discontinue accruing interest when loans
are 90 days past due. When a loan is classified as nonaccrual, any accrued and
unpaid interest is reversed against current income except where the loan is well
secured and it is anticipated that all unpaid principal and interest will be
collected. When collectibility of principal is in doubt, all payments are
applied as a reduction to principal. Had the nonaccrual loans been performing in
accordance with the original terms and conditions of their notes, interest
income would have been $167,000 higher for 1997. Interest income recognized on
nonaccrual loans totaled $16,000 for 1997.
B-16
<PAGE> 121
SUMMARY OF CREDIT LOSS EXPERIENCE
The following table reflects the changes in the allowance for credit losses
and provides information relating to the Bank's credit loss experience for the
years indicated:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at beginning of
year........................................ $8,265 $5,029 $4,252 $3,203 $2,802
Provision charged to operations............... 700 1,000 1,600 720 1,320
Allowance added through acquisition........... -- 3,493 -- 1,425 --
Loans charged off
Commercial and industrial loans............. 413 833 403 742 505
Real estate loans -- construction and land
development.............................. -- -- 252 109 1
Real estate loans -- conventional........... 111 302 54 139 --
Consumer loans.............................. 361 439 609 335 510
Leases...................................... -- 12 -- -- --
------ ------ ------ ------ ------
Total loans charged off....................... 885 1,586 1,318 1,325 1,016
------ ------ ------ ------ ------
Recoveries
Commercial and industrial loans............. 89 223 400 164 54
Real estate loans -- construction and land
development.............................. 3 -- -- -- --
Real estate loans -- conventional........... 2 19 -- -- --
Consumer loans.............................. 209 83 95 47 43
Leases...................................... 18 4 -- 18 --
------ ------ ------ ------ ------
Total recoveries.............................. 321 329 495 229 97
------ ------ ------ ------ ------
Net loans charged off......................... 564 1,257 823 1,096 919
------ ------ ------ ------ ------
Allowance for credit losses at end of year.... $8,401 $8,265 $5,029 $4,252 $3,203
====== ====== ====== ====== ======
Allowance for credit losses to average gross
loans and leases............................ 1.91% 2.08% 1.77% 2.00% 1.59%
Allowance for credit losses to gross loans and
leases at year end.......................... 1.85% 1.89% 1.65% 1.56% 1.73%
Net loans charged off to average gross loans
and leases.................................. 0.13% 0.32% 0.29% 0.51% 0.46%
Net loans charged off to gross loans and
leases at year end.......................... 0.12% 0.29% 0.27% 0.40% 0.50%
Net loans charged off to allowance for credit
losses at year end.......................... 6.71% 15.21% 16.37% 25.78% 28.69%
Net loans charged off to provision for credit
losses...................................... 80.57% 125.70% 51.44% 152.22% 69.62%
</TABLE>
Management performs regular evaluations of the loan portfolio to determine
the adequacy of the allowance for credit losses. These evaluations include
identifying borrowers experiencing difficulty in making payments under the terms
of the loan, reviewing the adequacy of the general allowance using historical
loss experience, segmenting the portfolio by risk rating and loan type, and
keeping abreast of the economic environment. While management believes the
allowance for credit losses was adequate at year-end 1997, no assurances can be
given that adverse economic conditions or other adverse circumstances affecting
borrowers will not subject the Bank to increasing the provision for credit
losses in the future. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following table provides a summary of the allocation of the allowance
for credit losses for specific loan categories at the dates indicated. The
allocation presented is based on management's assessment as of a given point in
time of the risk characteristics of each of the component parts of the loan
portfolio and is subject to changes as and when the risk factors of each such
component part change. Such allocation is not indicative of either the specific
amounts or the loan categories in which future charge-offs may be taken, nor
should it be
B-17
<PAGE> 122
interpreted as an indicator of future loss trends. In addition, presentation of
such allocation does not mean that the allocation is exact or that the allowance
has been precisely determined from such allocation.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial..... $1,745 39.62% $3,277 38.15% $2,956 48.49% $1,710 53.16% $1,265 48.82%
Real estate construction and
land development............ 168 7.43% 103 4.72% 143 9.37% 54 3.95% 81 8.77%
Real estate conventional...... 2,347 43.60% 1,858 45.27% 529 32.36% 629 30.64% 914 29.15%
Installment................... 808 9.32% 1,190 11.76% 668 9.49% 583 11.60% 415 13.07%
Leases........................ 1 0.03% 2 0.10% 4 0.29% 9 0.65% 2 0.19%
Unallocated................... 3,332 N/A 1,835 N/A 729 N/A 1,267 N/A 526 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total......................... $8,401 100.00% $8,265 100.00% $5,029 100.00% $4,252 100.00% $3,203 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
INVESTMENT SECURITIES
The following table sets forth the carrying amounts of investment
securities available for sale as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities available for sale
U.S. Treasury securities................................. $ 24,280 $ 25,107 $ 10,024
Obligations of U.S. agencies and corporations............ 60,010 6,903 8,878
Federal agency mortgage-backed securities................ 198,822 118,870 78,311
Obligations of state and political subdivisions.......... 1,801 7,192 987
Small Business Administration pool certificates.......... 4,867 15,044 11,020
Equity securities........................................ 3,849 1,405 854
-------- -------- --------
Total investment securities available for sale........... $293,629 $174,521 $110,074
======== ======== ========
</TABLE>
No securities were classified as held to maturity at December 31, 1997,
1996 and 1995.
B-18
<PAGE> 123
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table sets forth the maturity distribution of the investments
available for sale at December 31, 1997, except marketable equity securities
which have no stated maturity. The yield on obligations of state and political
subdivisions has not been adjusted to a fully taxable equivalent basis.
<TABLE>
<CAPTION>
AMORTIZED CARRYING AND WEIGHTED
COST FAIR VALUE AVERAGE YIELD
--------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities:
Within one year....................................... $ -- $ -- --
After one but within five years....................... 24,078 24,280 6.16%
After five but within ten years....................... -- -- --
After ten years....................................... -- -- --
-------- -------- ----
Total U.S. Treasury securities................ 24,078 24,280 6.16%
-------- -------- ----
Obligations of U.S. agencies and corporations:
Within one year....................................... 2,983 2,990 6.33%
After one but within five years....................... 33,762 33,955 6.54%
After five but within ten years....................... 23,075 23,065 6.27%
After ten years....................................... -- -- --
-------- -------- ----
Total obligations of U.S. agencies and
corporations................................ 59,820 60,010 6.42%
-------- -------- ----
Federal agency mortgage-backed securities:
Within one year....................................... 545 543 6.79%
After one but within five years....................... 20,038 20,102 6.74%
After five but within ten years....................... 139,570 139,914 6.65%
After ten years....................................... 37,936 38,263 6.91%
-------- -------- ----
Total Federal agency mortgage-backed
securities.................................. 198,089 198,822 6.71%
-------- -------- ----
Obligations of state and political subdivisions:
Within one year....................................... -- -- --
After one but within five years....................... 135 140 6.89%
After five but within ten years....................... -- -- --
After ten years....................................... 1,570 1,661 5.49%
-------- -------- ----
Total obligations of state and political
subdivisions................................ 1,705 1,801 5.60%
-------- -------- ----
Small Business Administration pool certificates:
Within one year....................................... -- -- --
After one but within five years....................... -- -- --
After five but within ten years....................... -- -- --
After ten years....................................... 4,648 4,867 7.29%
-------- -------- ----
Total Small Business Administration pool
certificates................................ 4,648 4,867 7.29%
-------- -------- ----
Total investment securities................... $288,340 $289,780 6.61%
======== ======== ====
</TABLE>
B-19
<PAGE> 124
DEPOSITS
The following table sets forth information regarding the average deposits
and the average rate paid for certain deposit categories for each of the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings, money market accounts and other
interest-bearing deposits.............. $308,599 2.57% $267,659 2.52% $175,432 2.16%
Time certificates of deposit............. 145,436 5.17% 136,718 5.15% 107,338 5.12%
-------- ----- -------- ----- -------- -----
Total interest-bearing deposits.......... 454,035 3.40% 404,377 3.41% 282,770 3.28%
Noninterest-bearing deposits............. 224,376 -- 181,089 -- 114,163 --
-------- ----- -------- ----- -------- -----
Total deposits........................... $678,411 2.28% $585,466 2.35% $396,933 2.34%
======== ===== ======== ===== ======== =====
</TABLE>
MATURITIES OF TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 and over had the following
schedule of maturities:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less................................. $65,634
Over three months through six months................. 19,228
Over six months through twelve months................ 13,617
Over one year through five years..................... 329
Over five years...................................... --
-------
Total................................................ $98,808
=======
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table sets forth selected financial ratios for the periods
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Return on average assets (net earnings/average total
assets)................................................... 1.19% 0.99% 0.99%
Return on average stockholders' equity (net earnings/average
equity)................................................... 11.57% 9.69% 9.15%
Dividend payout ratio (dividends declared/net earnings)..... 24.21% 28.39% 30.46%
Average equity to average assets............................ 10.31% 10.22% 10.79%
</TABLE>
ITEM 2. PROPERTIES
The Bank owns and leases various locations throughout its service area for
branch, operations and administrative purposes.
The Bank's Corporate Headquarters and West Covina Branch are located in a
leased modern 13-story building at 100 North Barranca Street, West Covina,
California. The top two floors, comprising 27,000 square feet, are used for
certain non-branch functions including executive offices, personnel and
centralized accounting and note operations, together with branch, loan and
operations supervision. The West Covina Branch occupies 5,000 square feet of
space on the first floor at this location. Other functions, such as SBA loan
administration, warehouse, data processing and the operations service center are
located in leased and owned facilities elsewhere.
The Bank owns the property and improvements located at and adjacent to 925
West Badillo Street, Covina, California, for the operation of its Covina Main
Branch. It also owns the properties and improvements where its Alhambra,
Anaheim, Beaumont, Brea, Covina Downtown, Irvine, La Palma and Victorville
B-20
<PAGE> 125
branches are located and the improvements where its La Habra and Placentia
branches are located. There are no encumbrances with respect to these
properties.
The Bank leases properties where its Anaheim Stadium, Arcadia, Corona del
Mar, Newport Beach and Ontario branches are located.
In the normal course of business, the Bank leases or subleases to others
excess space at various locations which is not needed for Bank purposes.
The Bank's total occupancy expense, exclusive of furniture and equipment
expense, for the year ending December 31, 1997, was $3.5 million. See Notes G
and Q to the Bank's audited consolidated financial statements for additional
information relating to properties, lease rental expense and commitments.
As of December 31, 1997, the Bank's real estate subsidiaries owned various
properties in the San Gabriel Valley, (Los Angeles County) for the purpose of
developing single-family residences. See "Item 1. Business -- Real Estate
Subsidiaries."
ITEM 3. LEGAL PROCEEDINGS
From time to time the Bank is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to the Bank as to the current status of various
claims and legal proceedings to which the Bank is a party, management of the
Bank believes that the ultimate aggregate liability represented thereby, if any,
will not have a material adverse effect on the Bank's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter of
1997.
B-21
<PAGE> 126
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently traded in the over-the-counter market on the
Nasdaq National Market under the symbol "CSTB." The following table sets forth
the high and low sales prices of the Common Stock during 1997 and 1996 as
reported by Nasdaq:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First quarter..................................... $23.75 $17.00 $14.75 $12.75
Second quarter.................................... 26.13 20.75 16.13 13.75
Third quarter..................................... 31.13 24.75 16.00 14.50
Fourth quarter.................................... 41.75 29.00 17.50 15.00
</TABLE>
The last reported sales price of the common stock on February 20, 1998, as
reported on the Nasdaq National Market, was $47.50 per share.
Nasdaq has reported that the following securities dealers were market
makers in the Bank's stock in February 1998: Crowell, Weedon & Co.; Herzog,
Heine, Geduld, Inc.; Hoefer & Arnett, Incorporated; Keefe, Bruyette & Woods,
Inc.; Sutro & Co. Inc.; Torrey Pines Securities Inc.; Tucker Anthony
Incorporated; and Wedbush Morgan Securities, Inc.
On December 31, 1997, there were approximately 1,682 shareholders of record
of the common stock.
The Bank has declared quarterly cash dividends of $0.10 per share from the
first quarter of 1993 through the second quarter of 1997, and cash dividends of
$0.12 for each of the last two quarters of 1997. Payment of future cash
dividends will be subject to the discretion of the Board of Directors and will
depend upon the earnings of the Bank, its financial condition, its capital
requirements, its need for funds, applicable governmental policies and
regulations and such other matters as the Board deems appropriate. The terms of
the definitive agreement between the Bank and First Security Corporation further
limit the Bank's ability to pay cash dividends except in accordance with past
practices. The Board periodically reviews whether to pay cash dividends based on
the foregoing factors, but there is no present dividend policy committing the
Bank to pay cash dividends in the future.
Since the Bank is a California state chartered bank, its ability to pay
dividends or make distributions to its shareholders is subject to restrictions
set forth in the California Financial Code. The California Financial Code
provides that neither a bank nor any majority-owned subsidiary of a bank may
make a distribution to its shareholders in an amount which exceeds the lesser of
(i) the bank's retained earnings, or (ii) the bank's net income for its last
three fiscal years, less the amount of any distributions made by the bank or by
any majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank or a majority-owned subsidiary of a bank may, with
the prior approval of the Commissioner make a distribution to the shareholders
of the bank in an amount not exceeding the greatest of (i) its retained
earnings, (ii) its net income for its last fiscal year, or (iii) its net income
for its current fiscal year. In the event that the Commissioner determines that
the stockholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order
the bank to refrain from making a proposed distribution. As of December 31,
1997, the Bank had approximately $15.0 million legally available for the payment
of dividends.
B-22
<PAGE> 127
ITEM 6. SELECTED FINANCIAL DATA
The consolidated results of operations for the years ended December 31,
1997, 1996 and 1995 and the consolidated balance sheet data as of December 31,
1997 and 1996 are derived from, and are qualified by reference to, the audited
consolidated financial statements of the Bank included elsewhere in this Form
10-K. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1997 1996(2) 1995 1994(1) 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income(3)............... $ 43,352 $ 37,425 $ 29,212 $ 21,522 $ 17,312
Provision for credit losses.......... 700 1,000 1,600 720 1,320
Noninterest income................... 7,288 7,788 4,146 4,473 4,588
Noninterest expenses................. 34,477 33,820 24,987 21,652 19,566
Net earnings......................... 9,330 6,629 4,626 3,568 1,204
Earnings per share:
Basic.............................. $ 1.81 $ 1.42 $ 1.32 $ 1.03 $ 0.35
Diluted............................ 1.69 1.35 1.26 1.02 0.35
Weighted average shares outstanding:
Basic.............................. 5,151,415 4,673,991 3,506,721 3,459,526 3,423,458
Diluted............................ 5,513,832 4,914,932 3,680,720 3,481,122 3,461,531
Cash dividends per share............. $ 0.44 $ 0.40 $ 0.40 $ 0.40 $ 0.40
AVERAGE BALANCE SHEET DATA(4)
Gross loans.......................... $ 439,017 $ 398,178 $ 284,001 $ 212,852 $ 200,942
Earning assets(5).................... 680,329 569,310 401,644 329,764 293,833
Total assets......................... 782,035 669,527 468,407 385,384 346,374
Deposits............................. 678,411 585,466 396,933 321,762 293,511
Stockholders' equity................. 80,633 68,443 50,548 47,148 47,054
FINANCIAL RATIOS
Return on average assets............. 1.19% 0.99% 0.99% 0.93% 0.35%
Return on average stockholders'
equity............................. 11.57% 9.69% 9.15% 7.57% 2.56%
Net interest margin(6)............... 6.39% 6.60% 7.28% 6.55% 5.92%
</TABLE>
- ---------------
(1) In July 1994, the Bank acquired all of the insured deposits and certain
assets of the failed CommerceBank from the FDIC. In addition, in September
1994, the Bank acquired all of the assets and liabilities of Bank of
Anaheim, N.A. in a transaction accounted for under the purchase method of
accounting.
(2) In April 1996, the Bank acquired all of the assets and liabilities of
Landmark in a transaction accounted for under the purchase method of
accounting.
(3) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis.
(4) Average balance sheet data has been derived from daily average balances.
(5) Earning assets are reported net of unearned income.
(6) Net interest margin has been adjusted to a fully taxable equivalent basis.
The rate used was approximately 42% for 1997 and 1994, and 41% for 1996,
1995 and 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis is intended to provide information to
facilitate a better understanding and assessment of significant changes and
trends related to the financial condition and results of operations of the Bank.
This discussion and analysis should be read in conjunction with the 1997 audited
consolidated
B-23
<PAGE> 128
financial statements of the Bank and notes thereto contained in this report.
Certain information discussed in this annual report may constitute
"forward-looking statements" within the meaning of the 1933 Act and the 1934
Act, and as such may involve risks and uncertainties. These forward-looking
statements relate to, among other things, expectations of the business
environment in which the Bank and its subsidiaries operate, projections of
future performance, perceived and anticipated opportunities in its market and
statements regarding the entities mission and vision. The Bank and its
subsidiaries' actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements. For additional information
concerning factors that might cause such differences, see "Factors that May
Affect Future Results."
SUBSEQUENT EVENT
On February 18, 1998, the Bank and First Security Corporation ("FSC")
announced that they had reached a definitive agreement pursuant to which the
Bank would merge (the "Merger") with a wholly-owned subsidiary of FSC and
thereby become a subsidiary of FSC. Under the terms of the agreement, the Bank's
shareholders will receive 2.13 shares of FSC common stock $1.25 par value ("FSC
Common Stock") for each share of the Bank's common stock. Based on a closing
price of $23.50 on March 10, 1998, for FSC Common Stock, this exchange ratio
represents a price of $50.06 for each share of the Bank's common stock. The Bank
currently anticipates that this matter will be submitted to the Bank's
shareholders in May 1998 for approval and that the Merger will be consummated in
the second quarter of 1998.
OVERVIEW
The Bank reported net earnings of $9.3 million for 1997, an increase of
40.7% compared to the $6.6 million earned in 1996, which in turn was an increase
of 43.3% from the $4.6 million earned in 1995. Diluted earnings per share were
$1.69 in 1997, compared with $1.35 in 1996 and $1.26 in 1995. Return on average
assets and return on average equity are two key ratios measuring performance.
The Bank generated a return on average assets of 1.19% for 1997 and .99% for
both 1996 and 1995. Return on average equity improved to 11.57% for 1997
compared to 9.69% for 1996 and 9.15% for 1995.
The Bank reported total assets of $849.2 million at December 31, 1997, an
increase of 12.7% compared to $753.7 million at December 31, 1996, which in turn
was an increase of 51.0% from $499.2 million at December 31, 1995. Internal
growth contributed to the growth in 1997 over 1996 while the increase in 1996
over 1995 was primarily due to the acquisition of Landmark Bancorp ("Landmark").
RESULTS OF OPERATIONS
Net Interest Income
The principal component of the Bank's earnings is net interest income,
which is the difference between interest and fees earned on earning assets and
interest paid on deposits and borrowings. When net interest income is expressed
as a percentage of average earning assets, the result is the net interest
margin. The net interest spread is the yield on average earning assets minus the
rate on average interest-bearing liabilities. Throughout this section, interest
income and net interest income differ from the Bank's consolidated financial
statements presented elsewhere in this report in that they are presented on a
fully taxable equivalent basis ("FTE").
B-24
<PAGE> 129
The following table contains information on the Bank's average asset and
liability structure and related interest income or expense and yield or rate for
each of the three years in the period ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold(1)................ $ 32,183 $ 1,719 5.34% $ 25,599 $ 1,272 4.97% $ 22,569 $ 1,320 5.85%
Taxable securities................... 206,605 13,184 6.38% 142,798 8,911 6.24% 97,315 5,931 6.09%
Tax-exempt securities(2)............. 4,713 369 7.83% 5,496 432 7.86% 1,462 143 9.78%
Loans and leases, net of unearned
income(3)(4)....................... 436,828 44,356 10.15% 395,417 41,044 10.38% 280,298 31,808 11.35%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning assets(2)...... 680,329 59,628 8.76% 569,310 51,659 9.07% 401,644 39,202 9.76%
======== ======= ===== ======== ======= ===== ======== ======= =====
Nonearning assets.................... 101,706 100,217 66,763
-------- -------- --------
Total assets................. 782,035 669,527 468,407
======== ======== ========
Liabilities and Stockholders' Equity
Savings, money market accounts and
other interest-bearing deposits.... 308,599 7,931 2.57% 267,659 6,732 2.52% 175,432 3,791 2.16%
Time certificates of deposit......... 145,436 7,512 5.17% 136,718 7,047 5.15% 107,338 5,494 5.12%
Other borrowings..................... 12,770 711 5.57% 7,009 317 4.52% 14,226 659 4.63%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities................ 466,805 16,154 3.46% 411,386 14,096 3.43% 296,996 9,944 3.35%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-bearing deposits......... 224,376 181,089 114,163
Other liabilities.................... 10,221 8,609 6,700
Stockholders' equity................. 80,633 68,443 50,548
-------- -------- --------
Total liabilities and
stockholders' equity....... $782,035 $669,527 $468,407
======== ======== ========
Interest income/earning assets....... 59,628 8.76% 51,659 9.07% 39,202 9.76%
Interest expense/earning assets...... 16,154 2.37% 14,096 2.47% 9,944 2.48%
------- ----- ------- ----- ------- -----
Net interest income/earning assets... 43,474 6.39% 37,563 6.60% 29,258 7.28%
------- ===== ------- ===== ------- =====
Less FTE adjustment.................. 122 138 46
------- ------- -------
Net interest income, per consolidated
statement of earnings.............. $43,352 $37,425 $29,212
======= ======= =======
</TABLE>
- ---------------
(1) Includes certificates of deposit at other financial institutions of $365 for
1996 and $1,783 for 1995.
(2) Yields are calculated on a fully taxable equivalent basis ("FTE") using a
rate of 42.0% for 1997 and 41% for 1996 and 1995.
(3) Loan fees of $1,913 for 1997, $2,062 for 1996 and $2,515 for 1995 are
included in interest income.
(4) Includes nonperforming loans.
The changes in interest income, interest expense and resultant net interest
income are attributable to changes in average earning asset and interest-bearing
liability balances (volume) and changes in average yield
B-25
<PAGE> 130
or rate (rate). The interest increase (decrease) attributable to volume, rate
and both volume and rate are summarized as follows:
<TABLE>
<CAPTION>
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
--------------------------------- -------------------------------------
VOLUME/ VOLUME/
VOLUME RATE RATE TOTAL VOLUME RATE RATE TOTAL
------ ----- ------- ------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Federal funds sold(1).......................... $ 327 $ 96 $ 25 $ 448 $ 177 $ (199) $ (26) $ (48)
Taxable securities............................. 3,982 201 89 4,272 2,772 142 66 2,980
Tax-exempt securities.......................... (62) (2) 1 (63) 395 (28) (78) 289
Laons -- interest and fees..................... 4,298 (893) (93) 3,312 13,064 (2,713) (1,115) 9,236
------ ----- ---- ------ ------- ------- ------- -------
Total earning assets............................. 8,545 (598) 22 7,969 16,408 (2,798) (1,153) 12,457
------ ----- ---- ------ ------- ------- ------- -------
Interest expense
Savings, money market accounts and other
interest-bearing deposits.................... 1,453 (184) (70) 1,199 2,232 428 281 2,941
Time certificates of deposit................... 449 15 1 465 1,504 39 10 1,553
Borrowings..................................... 261 73 60 394 (334) (16) 8 (342)
------ ----- ---- ------ ------- ------- ------- -------
Total interest-bearing liabilities............... 2,163 (96) (9) 2,058 3,402 451 299 4,152
------ ----- ---- ------ ------- ------- ------- -------
Change in net interest income.................... $6,382 $(502) $ 31 $5,911 $13,006 $(3,249) $(1,452) $ 8,305
====== ===== ==== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes certificates of deposit at other financial institutions.
Net interest income was $43.5 million in 1997, compared to $37.6 million in
1996, an increase of $5.9 million or 15.7%. This improvement resulted from an
increase in interest income exceeding an increase in interest expense due
primarily to the increase in earning assets. The net interest margin declined to
6.39% in 1997 from 6.60% in 1996, as the yield on average earning assets
declined more than the rate paid to fund those assets.
Interest income totaled $59.6 million in 1997, compared to $51.7 million in
1996, an increase of $8.0 million or 15.4%. While the yield on earning assets
declined to 8.76% for 1997 from 9.07% for 1996, average earning assets rose
$111.0 million in 1997, to $680.3 million, or 19.5% over 1996. This increase was
primarily attributable to the additional earning assets acquired from Landmark
during April 1996, and complemented by internal growth.
Interest expense totaled $16.2 million in 1997 compared to $14.1 million in
1996, an increase of $2.1 million or 14.6%. This increase was largely due to the
increase in average interest-bearing liabilities of $55.4 million in 1997, to
$466.8 million, or 13.5% over 1996, coupled with a small increase in the rate
paid on interest-bearing liabilities, increasing to 3.46% in 1997 from 3.43% in
1996.
Net interest income was $37.6 million in 1996, compared to $29.3 million in
1995, an increase of $8.3 million or 28.4%. This improvement resulted from an
increase in interest income exceeding an increase in interest expense. The net
interest margin declined to 6.60% in 1996 from 7.28% in 1995, as the yield on
average earning assets declined more than the rate paid to fund those assets.
Interest income totaled $51.7 million in 1996 compared to $39.2 million in
1995, an increase of $12.5 million or 31.8%. While the yield on earning assets
declined to 9.07% for 1996 from 9.76% for 1995, average earning assets rose
$167.7 million in 1996, to $569.3 million, or 41.7% over 1995. This increase was
primarily attributable to the additional earning assets acquired from Landmark
during April 1996.
Interest expense totaled $14.1 million in 1996 compared to $9.9 million for
1995, an increase of $4.2 million or 41.8%. This increase was largely due to the
increase in average interest-bearing liabilities of $114.4 million in 1996, to
$411.4 million, or 38.5% over 1995, coupled with a small increase in rate paid
on interest-bearing liabilities, increasing to 3.43% in 1996 from 3.35% in 1995.
B-26
<PAGE> 131
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The Bank maintains an allowance for potential credit losses at a level
which management deems sufficient to absorb losses associated with known and
inherent risks in the loan portfolio. Loans deemed uncollectible are charged
against the allowance and subsequent recoveries, if any, are credited back to
the allowance. Typically, additions to the allowance are made periodically
through a charge to operations and are reflected in the statements of earnings
as a provision for credit losses. The provision for credit losses was $700,000
for 1997, $1,000,000 for 1996 and $1,600,000 for 1995. The provision for credit
losses generally corresponds to the level of the allowance which management
deems adequate to offset potential credit losses. The allowance was $8.4 million
or 1.85% of gross loans at year-end 1997 and $8.3 million or 1.89% of gross
loans at year-end 1996.
The Bank recognizes a loan as impaired when it is probable that all
contractual principal and interest payments under the terms of the loan
agreement will not be collected. The Bank generally measures impairment based
upon the present value of the loan's expected future cash flows, except where
foreclosure or liquidation is probable or when the primary source of repayment
is provided by real estate collateral. In these circumstances, impairment is
measured based upon the fair value of the collateral. In addition, in rare
circumstances, impairment may be based on the loan's observable fair value. See
Notes A and F to the Bank's audited consolidated financial statements.
Management performs regular evaluations of the loan portfolio to determine
the adequacy of the allowance for credit losses. These evaluations include
identifying borrowers experiencing difficulty in making payments under the terms
of the loan, reviewing the adequacy of the general allowance using historical
loss experience, segmenting the portfolio by risk rating and loan type, and
keeping abreast of the economic environment. While management believes the
allowance for credit losses was adequate at year-end 1997, no assurances can be
given that adverse economic conditions or other adverse circumstances affecting
borrowers will not subject the Bank to increasing the provision for credit
losses in the future.
The following table reflects the changes in the allowance for credit losses
and provides information relating to the Bank's credit loss experience for the
periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning of year............ $ 8,265 $ 5,029 $ 4,252
Provision charged to operations............................. 700 1,000 1,600
Allowance added through acquisition......................... -- 3,493 --
Loans charged off
Commercial and industrial loans............................. 413 833 403
Real estate loans -- construction and land development.... -- -- 252
Real estate loans -- conventional......................... 111 302 54
Consumer loans............................................ 361 439 609
Leases.................................................... -- 12 --
------- ------- -------
Total loans charged off........................... 885 1,586 1,318
------- ------- -------
Recoveries
Commercial and industrial loans............................. 89 223 400
Real estate loans -- construction and land development.... 3 -- --
Real estate loans -- conventional......................... 2 19 --
Consumer loans............................................ 209 83 95
Leases.................................................... 18 4 --
------- ------- -------
Total recoveries.................................. 321 329 495
------- ------- -------
Net loans charged off....................................... 564 1,257 823
------- ------- -------
Allowance for credit losses at end of year.................. $ 8,401 $ 8,265 $ 5,029
======= ======= =======
Allowance for credit losses to average gross loans and 1.91% 2.08% 1.77%
leases....................................................
Allowance for credit losses to gross loans and leases at 1.85% 1.89% 1.65%
year end..................................................
Net loans charged off to average gross loans and leases..... 0.13% 0.32% 0.29%
Net loans charged off to gross loans and leases at year 0.12% 0.29% 0.27%
end.......................................................
Net loans charged off to allowance for credit losses at year 6.71% 15.21% 16.37%
end.......................................................
</TABLE>
B-27
<PAGE> 132
NONINTEREST INCOME
Excluding the gain on sales of SBA loans totaling $659,000 during 1996,
noninterest income increased $159,000 or 2.2%, to $7.3 million for 1997 compared
to $7.1 million for 1996. No sales of SBA loans were recorded in 1997.
Contributing to this improvement were increases in service charge income on
deposits of $70,000, and merchant bank card income of $198,000, offset by
decreases in gain on sales of investment securities of $4,000 and other income
of $105,000. Fee income from sales of alternative investments, included in other
income, totaled $314,000 for 1997 compared to $400,000 for 1996, a decrease of
$86,000 or 21.5%.
Total noninterest income for 1996 increased $3.6 million or 87.8% as
compared to 1995. Contributing in part to this improvement were increases in
service charge income on deposits of $935,000, merchant bank card income of
$917,000 and other income of $916,000. These increases were primarily due to the
acquisition of Landmark. Sales of SBA loans generated a gain of $659,000 in 1996
compared to no gain in 1995, because no SBA loans were sold. Net gain on sales
of investment securities totaled $69,000 for 1996 compared to a net loss of
$146,000 for 1995. Fee income from sales of alternative investments, included in
other income, totaled $400,000 for 1996 compared to $204,000 for 1995, an
increase of $196,000 or 96.1%.
The Bank's real estate subsidiaries sold six homes in 1997 compared to nine
homes in 1996 and seven in 1995. Gain on sales of these homes are included in
other income which totaled $92,000, $374,000, and $92,000 for 1997, 1996 and
1995, respectively. The condensed financial summary of the subsidiaries is shown
in Note H to the Bank's audited consolidated financial statements. At December
31, 1997, the subsidiaries held one completed home pending close of escrow, one
completed home listed for sale and two single family residential properties in
various stages of construction. At December 31, 1996, the subsidiaries held four
completed homes listed for sale, four single family residential properties in
various stages of construction and two residential lots pending the start of
construction. Acquisition, development and construction costs have been
capitalized to the projects, including interest, property taxes and insurance
during the construction period. Real estate acquired for development is
accounted for at the lower of cost or net realizable value.
NONINTEREST EXPENSES
Noninterest expenses increased $657,000 or 1.9% to $34.5 million for 1997
compared to $33.8 million for 1996, which in turn increased $8.8 million or
35.4% for 1995. During 1997, the Bank initiated a project to control costs and
improve operating efficiencies while maintaining a high level of service for
customers. The implementation of this project began in the first quarter of 1997
and was completed in the third quarter of 1997. Changes in operating procedures
and centralization of certain functions helped keep noninterest expenses from
increasing significantly. Full time equivalent positions were decreased,
primarily through attrition, to 323 at December 31, 1997, down 51 or 13.6% from
year-end 1996. As a percent of average assets, total noninterest expenses
improved to 4.4% for 1997 compared to 5.1% for 1996 and 5.3% for 1995. The
efficiency ratio, total noninterest expenses divided by the sum of net interest
income before provision for credit losses and noninterest income, excluding net
gain (loss) on sale of investment securities, improved to 68.2% for 1997
compared to 74.9% for 1996 and 74.6% for 1995.
B-28
<PAGE> 133
The following table presents the principal categories of noninterest
expenses for each of the years in the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------
1997 OVER 1996 1996 OVER 1995
----------------- ----------------
1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee $17,203 $16,725 $12,638 $ 478 2.86% $4,087 32.34%
benefits.....................
Occupancy...................... 3,460 3,320 2,495 140 4.22% 825 33.07%
Equipment...................... 2,808 2,402 1,202 406 16.90% 1,200 99.83%
Professional services and 2,693 1,944 1,417 749 38.53% 527 37.19%
fees.........................
Merchant bank card expense..... 1,739 1,666 885 73 4.38% 781 88.25%
Goodwill amortization.......... 1,506 1,272 428 234 18.40% 844 197.20%
Real estate investment 297 467 595 (170) (36.40)% (128) (21.51)%
amortization.................
Other real estate owned........ 210 215 218 (5) (2.33)% (3) (1.38)%
Other.......................... 4,561 5,809 5,109 (1,248) (21.48)% 700 13.70%
------- ------- ------- ------- ------- ------ -------
Total noninterest expenses..... $34,477 $33,820 $24,987 $ 657 1.94% $8,833 35.35%
======= ======= ======= ======= ======= ====== =======
</TABLE>
Total noninterest expenses increased modestly, considering the Bank
recorded twelve months of operating results for 1997 relating to the Landmark
acquisition compared to approximately eight and one-half months for 1996. The
acquisition was accounted for using the purchase method of accounting in
accordance with APBO No. 16, "Business Combinations." As such, income and
expenses relating to the operation of Landmark for 1996 were recorded from the
date of acquisition, April 1996.
For the most part, the increase for 1996 over 1995 reflects the costs of
operating six additional branches and a data processing facility resulting from
the acquisition of Landmark.
The Bank estimates that the expenditures related to the year 2000 project
will be $300,000. Approximately $200,000 of the total is attributable to the
purchases of new hardware and software which will be capitalized in the normal
course of business. The remaining $100,000, which will be expensed as incurred,
is not expected to have a material effect on the results of operations.
INCOME TAXES
Provisions for income taxes were $6.1 million, $3.8 million and $2.1
million for 1997, 1996 and 1995, respectively. The Bank utilized federal low
income housing tax credits of $676,000 for each of the three years ended
December 31, 1997. No state tax credits were available for 1997 compared to
$386,000 for 1996 and $676,000 for 1995. These tax credits resulted from the
Bank's investment in a limited partnership that was formed to develop and
operate a 124 unit residential apartment complex designed as affordable housing
for lower income tenants in Sacramento County. See Note I to the Bank's audited
consolidated financial statements. The potential federal tax credit available
for 1998 from this investment is $676,000. The Bank utilized all of the
remaining state tax credits in 1996. Including the utilization of these tax
credits, the effective tax rate expressed as a percentage of earnings before
income taxes was 39.7%, 36.2% and 31.7% for 1997, 1996 and 1995, respectively.
FINANCIAL CONDITION
LOANS AND LEASES
Loans and leases before unearned income increased $15.7 million or 3.6% to
$453.1 million at year-end 1997, compared to $437.4 million at year-end 1996,
which in turn was an increase of $132.8 million or 43.6% compared to $304.6
million at year-end 1995. Although loan production was good in 1997, after
repayments of existing loans, net loans increased modestly compared to 1996. The
increase in 1996 over 1995 was attributable primarily to the acquisition of
Landmark. The Bank did not sell any SBA guaranteed loans during 1997 and 1995
compared to sales of $10.1 million in 1996. SBA guaranteed loans available for
sale at December 31, 1997, totaled $18.4 million compared to $8.7 million and
$11.8 million at December 31, 1996
B-29
<PAGE> 134
and 1995, respectively. Loans and leases represented 53.4% of total assets at
December 31, 1997, compared to 58.0% and 61.0% at December 31, 1996 and 1995,
respectively.
NONPERFORMING ASSETS
The following table sets forth loans which were delinquent 90 days or more
but still accruing and nonperforming assets at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans delinquent for 90 days or more and still accruing..... $ 750 $1,067 $ 167
====== ====== ======
Nonperforming assets
Nonaccrual loans.......................................... $2,364 $2,474 $2,203
Restructured loans........................................ 1,916 -- 10
Other real estate owned................................... 784 2,267 1,750
------ ------ ------
Total nonperforming assets.................................. $5,064 $4,741 $3,963
====== ====== ======
Nonperforming assets as a percentage of year-end gross loans
and leases plus other real estate owned................... 1.12% 1.08% 1.29%
====== ====== ======
</TABLE>
Nonperforming assets, which include nonaccrual loans, restructured loans
and other real estate owned, increased to $5.1 million at December 31, 1997,
compared to $4.7 million and $4.0 million at December 31, 1996 and 1995,
respectively. There were nine nonaccrual loans totaling $2.4 million at year-end
1997 compared to twenty-one loans totaling to $2.5 million at year-end 1996 and
eighteen loans totaling to $2.2 million at year-end 1995. The $2.4 million in
nonaccrual loans at December 31, 1997, was comprised of $2.2 million in real
estate secured loans and $165,000 in commercial and industrial loans.
There were five restructured loans totaling $1.9 million at December 31,
1997, all of which were secured by real estate and performing in accordance with
their modified terms.
Other real estate owned decreased $1.5 million to $784,000 at December 31,
1997, from $2.3 million at December 31, 1996, which in turn was an increase of
$517,000 from $1.8 million at December 31, 1995. The Bank owned six properties
at December 31, 1997, consisting of three commercial properties, one residential
property and two unimproved properties compared to twelve properties at December
31, 1996, consisting of seven commercial properties, three residential
properties and two unimproved properties.
INVESTMENT PORTFOLIO
The Bank maintains a portfolio of investment securities to provide income
and serve as a source of liquidity for its ongoing operations. Note C of the
audited consolidated financial statements of the Bank sets forth investment
securities held as available for sale at December 31, 1997 and 1996. Securities
available for sale increased $119.1 million to $293.6 million at year-end 1997
from $174.5 million at year-end 1996. The higher levels of investment securities
were funded primarily by borrowings from the Federal Home Loan Bank, deposits
and reduction of cash and due from banks and federal funds sold. Securities
available for sale were 34.6% of total assets at December 31, 1997, compared to
23.2% at December 31, 1996.
At December 31, 1996, securities available for sale totaled $174.5 million
compared to $110.1 million at December 31, 1995, an increase of $64.4 million or
58.5%. This increase was primarily due to the acquisition of Landmark.
Generally, the change in fair value of investment securities is related
inversely to the change in bond rates. As rates move lower, the fair value of
the securities increases and as rates move higher, the fair value of the
securities decreases. The net unrealized gain on investment securities was $1.4
million at December 31, 1997, compared to $33,000 at December 31, 1996.
B-30
<PAGE> 135
DEPOSITS
Total deposits increased to $701.7 million at December 31, 1997, from
$663.7 million at December 31, 1996, an increase of $37.9 million or 5.7% which
in turn increased $235.1 million or 54.8% from $428.6 million at December 31,
1995. Deposit levels increased during 1997 primarily due to the Bank's success
in developing commercial and professional business relationships compared to the
significant contribution through the acquisition of Landmark during 1996. The
composition of deposits at year-end 1997 was 36.4% noninterest-bearing and 63.6%
interest-bearing. This compares to 33.9% noninterest-bearing and 66.1%
interest-bearing at year-end 1996. The Bank's strategy of targeting commercial
and professional business relationships contributed to the high percentage of
noninterest-bearing deposits to total deposits. Time certificates of deposit
increased to $155.4 million at December 31, 1997, an increase of $17.0 million
or 12.3%, compared to $138.3 million at December 31, 1996, which in turn was
increased $12.0 million or 9.5% from $126.3 million at December 31, 1995.
CAPITAL RESOURCES
Stockholders' equity totaled $83.4 million at December 31, 1997, an
increase of $6.2 million or 8.1% over $77.2 million at December 31, 1996. This
growth was due primarily to the retention of earnings, as well as the issuance
of common stock from the exercise of options and increases in net unrealized
gain on investment securities available for sale, and offset by the declaration
of dividend payments and the repurchase of common stock. The Bank terminated its
common stock repurchase program in February 1998.
During September and October 1997, the Bank repurchased and retired an
aggregate of 98,166 shares of its common stock totaling $3.0 million. These
purchases were pursuant to a program authorizing the purchase of common stock in
an aggregate amount of up to $5.0 million at prevailing market prices through
the open market or in privately negotiated transactions.
The Bank declared cash dividends of $0.10 per common share in each of the
first two quarters in 1997 and $0.12 per share in each of the last two quarters
of 1997, for a total of $0.44 per share for 1997. During 1996 and 1995, the Bank
declared quarterly cash dividends of $0.10 per common share for a total of $0.40
for each of the two years. Cash dividends paid on common stock totaled $2.3
million in 1997 for a dividend payout ratio (dividends declared divided by net
earnings) of 24.21%, compared to $1.9 million and 28.39% for 1996 and $1.4
million and 30.46% for 1995. Average stockholders' equity to average assets was
10.31%, 10.22% and 10.79% for 1997, 1996 and 1995, respectively.
Federal and state regulations require the Bank to meet certain capital
standards. The risk-based capital standard currently requires the Bank to
achieve a minimum ratio of total qualifying capital to risk-weighted assets of
8% of which at least 4% must consist of Tier 1 capital, which consists primarily
of common stock and retained earnings, less goodwill. The Bank is also required
to maintain a minimum leverage ratio of 4%. The leverage ratio basically
consists of tangible Tier 1 capital divided by average total assets. As in the
case of the risk-based capital guidelines, the leverage ratio constitutes only a
supervisory minimum, and those institutions experiencing or anticipating
significant growth or those with high or inordinate levels of risk will be
expected to maintain capital above the minimum level. See Notes H and P to the
Bank's audited consolidated financial statements for commitments for capital
expenditures and anticipated sources of funds to meet such commitments. The
Bank's risk-based capital ratios at December 31, 1997 and 1996, respectively
were: total capital at 12.36%, up from 11.76, and Tier 1 capital at 11.11%, up
from 10.51%. The leverage ratio at December 31, 1997, was 7.65%, up from 7.50%
at year-end 1996.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objectives of the management of assets and liabilities of the
Bank are to maintain adequate liquidity while effectively managing interest rate
risks. The objective of liquidity management is to maintain a balance between
sources and uses of funds in order to meet the cash requirements of customers
for loans and deposit withdrawals. The objective of interest rate management for
the Bank is to stabilize the fluctuations of net interest income which can
result from changes in interest rates.
B-31
<PAGE> 136
Liquid assets at December 31, 1997, consisted of $52.7 million in cash and
cash equivalents, $212.5 million in unpledged investment securities and $18.4
million in SBA guaranteed loans available for sale, totaling $283.6 million
compared to liquid assets totaling $229.4 million at December 31, 1996. Other
funding sources include the Bank's ability to borrow federal funds totaling
$58.7 million from four non-affiliated financial institutions. The Bank's
liquidity ratio was 47.5% at December 31, 1997, compared to 37.3% at December
31, 1996. This ratio reflects the percentage of liquid assets to the sum of
total deposits and short-term borrowings not requiring collateralization. The
Bank's net loans to deposits ratio is another measurement utilized to manage and
monitor liquidity. The net loans to total deposits ratio was 63.1% and 64.3% at
December 31, 1997 and 1996, respectively.
The Bank's overall liquidity position is enhanced by a sizable
concentration of core deposits which management believes provides a stable and
relatively inexpensive funding base. Management defines core deposits as total
deposits less time certificates of deposits of $100,000 and over. At December
31, 1997, core deposits totaled $602.9 million or 85.9% of total deposits
compared with $579.2 million or 87.3% at December 31, 1996.
The Bank manages its interest rate risk by attempting to match repricing
opportunities on its earning assets to its funding sources, generally deposits
and other borrowings. While no single measure can completely identify the impact
of changes in interest rates on net interest income, one way to gauge the impact
is through a gap analysis. The difference between assets and liabilities subject
to repricing in specified time periods represents the gap. The difference, or
gap, provides an indication of the extent to which net interest income may be
affected by future changes in interest rates. A positive gap exists when assets
exceed liabilities in the specified repricing period. Generally, a positive gap
in a rising interest rate environment indicates net interest income will be
enhanced, however, it will narrow when interest rates decline. Conversely, a
negative gap in a rising interest rate environment may inhibit net interest
income while it will be enhanced in a declining rate environment.
The following table provides the rate sensitivity gap at December 31, 1997.
The rate sensitive assets and liabilities are presented by repricing period,
based upon maturity or first repricing opportunity.
<TABLE>
<CAPTION>
OVER THREE OVER ONE
THREE MONTHS YEAR OVER
MONTHS THROUGH THROUGH FIVE
OR LESS ONE YEAR FIVE YEARS YEARS
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal funds sold.............................. $ 14,600 $ -- $ -- $ --
Investment securities........................... 49,431 24,401 191,759 28,038
Gross loans and leases excluding nonaccrual
loans......................................... 281,905 15,104 114,813 38,884
-------- -------- -------- --------
Total interest rate sensitive
assets.............................. 345,936 39,505 306,572 66,922
-------- -------- -------- --------
Savings, money market accounts and other
interest-bearing deposits..................... 290,971 -- -- --
Time certificates of deposit.................... 89,924 61,078 4,355
Borrowings...................................... 22,298 -- 30,000 --
-------- -------- -------- --------
Total interest rate sensitive
liabilities......................... 403,193 61,078 34,355 --
-------- -------- -------- --------
Interest rate sensitivity gap................... $(57,257) $(21,573) $272,217 $ 66,922
Cumulative interest rate sensitivity gap........ $(57,257) $(78,830) $193,387 $260,309
Cumulative gap as a percentage of total
assets........................................ (6.74)% (9.28)% 22.77% 30.65%
</TABLE>
The Bank had a cumulative one year negative gap of $78.8 million at
December 31, 1997. In theory, $78.8 more liabilities over assets will reprice
within one year. If interest rates rise, this negative gap would result in a
lower net interest margin. If interest rates decline, this negative gap would
result in a higher net interest margin.
Gap analysis is only an indicator of the interest rate sensitivity position
of the Bank. Since changes in interest rates do not affect all asset and
liability products equally or simultaneously, the Bank's cumulative one year
negative gap does not necessarily indicate that the net interest margin would
increase with rates declining,
B-32
<PAGE> 137
nor would it indicate a net interest margin decrease with rates rising. In
addition to the traditional gap analysis, management considers other factors in
evaluating the net interest margin variability including contractual terms of
underlying obligations, prepayment patterns of mortgage-backed securities and
interest rate sensitivity of core deposits.
The following table sets forth the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity and the
estimated fair values at December 31, 1997. This table groups cash flows by
expected maturities rather than by the earliest repricing opportunity, as shown
in the gap analysis. The Bank uses certain assumptions to estimate expected
maturities and fair values. For assets, expected maturities are based on
contractual maturity, projected repayments and prepayments of principal.
Expected maturities for time certificates of deposit and borrowings are based on
contractual maturity. Deposits that do not have a stated maturity, as in
noninterest-bearing, savings, money market accounts and other interest-bearing
deposits, are considered long term in nature by the Bank and are reported in the
Thereafter column.
The estimated fair value of federal funds sold, deposits other than time
certificates of deposit and borrowings approximate their carrying value. The
fair value of investment securities is based on quoted market prices, dealer
quotes and prices obtained from an independent pricing service. The fair value
of loans and time certificates of deposit is estimated based on present values
using risk-adjusted spreads to the U.S. Treasury curve to approximate current
entry-value interest rates applicable to each category of such financial
instruments. The fair value of loans held available for sale is based on dealer
quotes.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
ESTIMATED
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
-------- -------- ------- ------- ------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold................. $ 14,600 $ -- $ -- $ -- $ -- $ -- $ 14,600 $ 14,600
Weighted average yield............. 5.69% -- -- -- -- -- 5.69%
Variable rate investment
securities(2).................... 9,825 4,707 3,828 3,289 2,841 20,789 45,279 46,632
Weighted average yield............. 6.36% 6.84% 6.91% 6.91% 6.92% 6.83% 6.75%
Fixed rate investment
securities(2).................... 40,190 61,994 27,603 12,106 10,794 90,982 243,669 246,997
Weighted average yield............. 6.44% 6.50% 6.39% 6.72% 6.65% 6.63% 6.54%
Variable rate loans(1)............. 146,224 38,726 25,221 18,177 16,081 44,192 288,621 289,966
Weighted average yield............. 9.67% 9.77% 9.80% 9.79% 9.57% 9.68% 9.70%
Fixed rate loans(1)................ 38,053 31,620 33,538 23,123 20,881 14,870 162,085 167,485
Weighted average yield............. 9.11% 9.28% 9.37% 9.19% 9.30% 9.13% 9.23%
-------- -------- ------- ------- ------- -------- -------- --------
Total interest rate
sensitive assets......... $248,892 $137,047 $90,190 $56,695 $50,597 $170,833 $754,254 $765,680
======== ======== ======= ======= ======= ======== ======== ========
Noninterest-bearing deposits....... $ -- $ -- $ -- $ -- $ -- $255,330 $255,330 $255,330
Savings, money market accounts and
other interest-bearing
deposits......................... -- -- -- -- -- 290,971 290,971 290,971
Weighted average rate.............. -- -- -- -- -- 2.52% 2.52%
Variable rate time certificates of
deposit.......................... 3,229 171 2 -- -- -- 3,402 3,402
Weighted average rate.............. 5.10% 5.10% 5.10% -- -- -- 5.10%
Fixed rate time certificates of
deposit.......................... 147,599 3,969 387 -- -- -- 151,955 147,215
Weighted average rate.............. 5.21% 5.37% 5.20% -- -- -- 5.21%
Borrowings......................... 22,298 -- 30,000 -- -- -- 52,298 52,298
Weighted average rate.............. 5.65% -- 5.53% -- -- -- 5.58%
-------- -------- ------- ------- ------- -------- -------- --------
Total interest rate
sensitive liabilities.... $173,126 $ 4,140 $30,389 $ -- $ -- $546,301 $753,956 $749,216
======== ======== ======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) Does not include nonaccrual loans, net deferred income or allowance for loan
losses.
(2) Does not include premiums, discounts or net unrealized gains.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. Although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different
B-33
<PAGE> 138
degrees to changes in market interest rates. In addition, the interest rate on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Also, certain assets, such as variable rate loans, may
have features, such as interest rate floors and/or caps, that restrict changes
in interest rates on a short-term basis and over the life of the asset. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in the table.
Finally, in the event of an interest rate increase, many borrowers may not have
the ability to continue to service their debt.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Bank's
financial results and operations.
Economic Conditions and Geographic Concentration The Bank's operations are
located in Southern California and specifically concentrated in the San Gabriel
Valley area of Los Angeles County, Orange County, San Bernardino County and
Riverside County. As a result of the geographic concentration, the Bank's
results depend largely upon the economic conditions in these areas. While the
Southern California and national economies have recently exhibited positive
economic and employment trends, there is no assurance that such trends will
continue. A deterioration in economic conditions could have a material adverse
impact on the quality of the Bank's loan portfolio and demand for its products
and services.
Competition The banking and financial services business in the Bank's
market areas are highly competitive. The increasingly highly competitive market
is the result of changes in regulation, changes in technology and product
delivery systems and the consolidation of banks and financial services
providers. Nonbanks, such as securities and insurance companies not subject to
the regulatory capital requirements and constraints placed on banks, compete for
products and services traditionally provided by banks.
Interest Rates The Bank's anticipated results for 1998 may differ
significantly from actual results if interest rates fluctuate significantly from
current levels. Changes in interest rates may influence the growth of loans,
investments and deposits. A significant decrease in interest rates may cause the
net interest margin to narrow, thereby negatively impacting the results of
operations.
Credit Quality Deterioration of the credit quality of the loan portfolio
resulting in significant unexpected losses may have a negative adverse impact on
the Bank's future results of operations or financial condition. Management
attempts to minimize such losses by adopting prudent credit underwriting and
monitoring policies and procedures, including the establishment and review of
the allowance for credit losses.
Technology and Computer Systems Advances and changes in technology can
significantly impact the business and operations of the Bank. The Bank faces
many challenges including the increased demand for providing computer access to
bank accounts and the systems to perform banking transactions electronically.
The Bank's business and operations is susceptible to negative impacts from
computer system failures, communication and energy disruptions, and unrestrained
and unethical individuals with the technological ability to cause failures or
disruptions to the Bank's data processing systems.
Many computer programs were designed and developed utilizing only two
digits in date fields, thereby creating the inability to recognize the year 2000
or years thereafter. This year 2000 issue creates risks for the Bank from
unforeseen or unanticipated problems in its internal computer systems as well as
from computer systems of the Federal Reserve Bank, correspondent banks,
customers and vendors. Failures of these systems or untimely corrections could
have a material impact on the Bank's ability to conduct its business and results
of operations. The Bank's computer systems and programs are designed and
supported by companies specifically in the business of providing such products
and services. The Bank has obtained from certain vendors assurances that
hardware and software critical to the Bank's business will operate and not
produce erroneous results relating to the year 2000 problem. The Bank has formed
a management and information technology committee to effectively deal with the
year 2000 issue. The committee's year 2000 plan includes awareness seminars,
evaluations of existing hardware, software, ATMs, vaults, alarm systems,
communication systems and other electrical devices, testing application programs
and systems and upgrading hardware and software as necessary. The Bank estimates
that the expenditures related to the year 2000 project will be
B-34
<PAGE> 139
$300,000. Approximately $200,000 of the total is attributable to the purchase of
new hardware and software which will be capitalized in the normal course of
business. The remaining $100,000, which will be expensed as incurred, is not
expected to have a material effect on the results of operations.
Government Regulations and Monetary Policy The Bank is subject to extensive
federal and state supervision and regulation. New laws or changes in, or repeals
of, existing laws may cause the Bank's results to differ materially. Further,
changes in federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions for the Bank,
primarily through open market operations in United States government securities,
the discount rate for bank borrowings and bank reserve requirements, may have a
material impact on the Bank's results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Bank's 1997 Annual Report filed in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following audited consolidated financial statements and related
documents are set forth in this report on the following pages:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ B-39
Consolidated Balance Sheets at December 31, 1997 and 1996... B-40
Consolidated Statements of Earnings For the Years Ended
December 31, 1997, 1996 and 1995.......................... B-41
Consolidated Statements of Stockholders' Equity For the
Years Ended December 31, 1997, 1996 and 1995.............. B-42
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1997, 1996, and 1995......................... B-43
Notes to Consolidated Financial Statements.................. B-44
</TABLE>
All schedules are omitted because they are not applicable, not material or
because the information is included in the Bank's audited consolidated financial
statements or the notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
B-35
<PAGE> 140
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the Bank is
incorporated by reference from the sections entitled "PROPOSAL NUMBER ONE:
ELECTION OF DIRECTORS -- Nominees," "-- Executive Officers," "-- The Board of
Directors and Certain Committees" and "THE SHAREHOLDERS' MEETING -- Section
16(a) Reporting Compliance" of the Bank's definitive proxy statement to be filed
pursuant to Regulation 14A of the 1934 Act ("Regulation 14A") within 120 days
after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is
incorporated by reference from the section entitled "PROPOSAL NUMBER ONE:
ELECTION OF DIRECTORS -- Compensation of Executive Officers and Directors" of
the Bank's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the section entitled "THE
SHAREHOLDERS' MEETING -- Security Ownership of Certain Beneficial Owners and
Management" of the Bank's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management and others is incorporated by reference from the section entitled
"PROPOSAL NUMBER ONE: ELECTION OF DIRECTORS -- Certain Transactions" of the
Bank's definitive proxy statement to be filed pursuant to Regulation 14A within
120 days after the end of the last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS. Financial statements are listed in the index set
forth in Item 8 of this Report.
EXHIBITS. Reference is made to the Index to Exhibits at Page B-59 for a
list of exhibits filed as a part of this Report.
REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last
quarter of the annual period covered by this Report.
B-36
<PAGE> 141
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CALIFORNIA STATE BANK
/s/ THOMAS A. BISHOP
--------------------------------------
Dated: March 18, 1998 By: THOMAS A. BISHOP
Chairman of the Board and
Chief Executive Officer
/s/ PAUL E. BRANDT
--------------------------------------
By: PAUL E. BRANDT
Executive Vice President and
Chief Financial Officer
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 in the capacities and on the dates indicated:
<TABLE>
<C> <C> <S>
/s/ JOHN B. ALLEN Director Dated: March 18, 1998
- ----------------------------------------
JOHN B. ALLEN
/s/ ROBERT W. ARNETT, JR. Director Dated: March 18, 1998
- ----------------------------------------
ROBERT W. ARNETT, JR.
/s/ RODNEY A. BAKER Director Dated: March 18, 1998
- ----------------------------------------
RODNEY A. BAKER
/s/ EUGENE D. BISHOP President, Chief Operating Dated: March 18, 1998
- ---------------------------------------- Officer and Director
EUGENE D. BISHOP
/s/ THOMAS A. BISHOP Chairman of the Board, Dated: March 18, 1998
- ---------------------------------------- Chief Executive Officer and
THOMAS A. BISHOP Director (Principal
Executive Officer)
Director Dated: March 18, 1998
- ----------------------------------------
Clifton C. Booth
/s/ JACK B. CAMPBELL Director Dated: March 18, 1998
- ----------------------------------------
JACK B. CAMPBELL
/s/ ROBERT C. GLENN Director Dated: March 18, 1998
- ----------------------------------------
ROBERT C. GLENN, D.D.S.
/s/ RICHARD J. JETT Director and Dated: March 18, 1998
- ---------------------------------------- Executive Vice President
RICHARD J. JETT
</TABLE>
B-37
<PAGE> 142
<TABLE>
<C> <C> <S>
/s/ WARREN J. KRAFT Director Dated: March 18, 1998
- ----------------------------------------
WARREN J. KRAFT
/s/ JAMES R. MULLIGAN Director Dated: March 18, 1998
- ----------------------------------------
JAMES R. MULLIGAN
/s/ STEVEN N. REENDERS Director Dated: March 18, 1998
- ----------------------------------------
STEVEN N. REENDERS
/s/ JOHN W. RUSSELL Director Dated: March 18, 1998
- ----------------------------------------
JOHN W. RUSSELL
/s/ EMMETT A. TOMPKINS, JR. Director Dated: March 18, 1998
- ----------------------------------------
EMMETT A. TOMPKINS, JR.
</TABLE>
B-38
<PAGE> 143
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
California State Bank and Subsidiaries
West Covina, California:
We have audited the consolidated balance sheets of California State Bank
and subsidiaries (the "Bank") as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of California
State Bank and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 23, 1998
B-39
<PAGE> 144
CALIFORNIA STATE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks (Note P)............................ $ 38,091,000 $ 60,183,000
Federal funds sold.......................................... 14,600,000 27,800,000
------------ ------------
Cash and cash equivalents................................. 52,691,000 87,983,000
Investment securities available for sale (Note C)........... 293,629,000 174,521,000
Loans and lease finance receivables, net (Notes D, E and
F)........................................................ 442,819,000 426,604,000
Premises and equipment, net (Note G)........................ 16,483,000 18,317,000
Real estate acquired for development (Note H)............... 1,433,000 3,550,000
Real estate investment (Note I)............................. 1,485,000 1,828,000
Other real estate owned..................................... 784,000 2,267,000
Accrued interest receivable................................. 5,184,000 4,031,000
Goodwill and other intangible assets........................ 16,142,000 17,648,000
Cash surrender value of life insurance...................... 11,150,000 8,368,000
Other assets (Note O)....................................... 7,432,000 8,590,000
------------ ------------
Total assets...................................... $849,232,000 $753,707,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note J):
Noninterest-bearing....................................... $255,330,000 $225,248,000
Interest-bearing.......................................... 446,328,000 438,496,000
------------ ------------
Total deposits.................................... 701,658,000 663,744,000
Borrowings (Note K)......................................... 52,298,000 2,735,000
Deferred compensation (Note Q).............................. 5,654,000 4,656,000
Other liabilities........................................... 6,189,000 5,380,000
------------ ------------
Total liabilities................................. 765,799,000 676,515,000
------------ ------------
Commitments and contingencies (Note Q)
Stockholders' equity (Notes N and P) Serial preferred
stock -- authorized but unissued, 5,000,000 shares........ -- --
Common stock -- no par value
Authorized -- 15,000,000 shares
Issued -- 5,123,575 shares in 1997 and 5,119,746 shares
in 1996................................................ 49,095,000 49,050,000
Net unrealized gain on investment securities available for
sale, net of tax effects (Note C)...................... 835,000 19,000
Retained earnings......................................... 33,503,000 28,123,000
------------ ------------
Total stockholders' equity........................ 83,433,000 77,192,000
------------ ------------
Total liabilities and stockholders' equity........ $849,232,000 $753,707,000
============ ============
</TABLE>
See notes to consolidated financial statements.
B-40
<PAGE> 145
CALIFORNIA STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees........................ $44,356,000 $41,044,000 $31,808,000
Investment securities................................... 13,431,000 9,205,000 6,028,000
Federal funds sold...................................... 1,719,000 1,251,000 1,215,000
Deposits in other financial institutions................ -- 21,000 105,000
----------- ----------- -----------
Total interest income......................... 59,506,000 51,521,000 39,156,000
----------- ----------- -----------
INTEREST EXPENSE
Deposits (Note J)....................................... 15,443,000 13,779,000 9,285,000
Borrowings.............................................. 711,000 317,000 659,000
----------- ----------- -----------
Total interest expense........................ 16,154,000 14,096,000 9,944,000
----------- ----------- -----------
Net interest income before provision for credit
losses................................................ 43,352,000 37,425,000 29,212,000
Provision for credit losses (Note F).................... 700,000 1,000,000 1,600,000
----------- ----------- -----------
Net interest income after provision for credit losses... 42,652,000 36,425,000 27,612,000
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts..................... 3,192,000 3,122,000 2,187,000
Merchant bank card income............................... 2,315,000 2,117,000 1,200,000
Gain on sales of SBA loans.............................. -- 659,000 --
Net gain (loss) on sales of investment securities (Note
C).................................................... 65,000 69,000 (146,000)
Other................................................... 1,716,000 1,821,000 905,000
----------- ----------- -----------
Total noninterest income...................... 7,288,000 7,788,000 4,146,000
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits (Notes M, N and Q)....... 17,203,000 16,725,000 12,638,000
Occupancy (Note Q)...................................... 3,460,000 3,320,000 2,495,000
Equipment............................................... 2,808,000 2,402,000 1,202,000
Professional services and fees.......................... 2,693,000 1,944,000 1,417,000
Merchant bank card expense.............................. 1,739,000 1,666,000 885,000
Goodwill amortization................................... 1,506,000 1,272,000 428,000
Real estate investment amortization (Note I)............ 297,000 467,000 595,000
Other real estate owned................................. 210,000 215,000 218,000
Other................................................... 4,561,000 5,809,000 5,109,000
----------- ----------- -----------
Total noninterest expenses.................... 34,477,000 33,820,000 24,987,000
----------- ----------- -----------
Earnings before income taxes............................ 15,463,000 10,393,000 6,771,000
Provision for income taxes (Note O)..................... 6,133,000 3,764,000 2,145,000
----------- ----------- -----------
Net earnings............................................ $ 9,330,000 $ 6,629,000 $ 4,626,000
=========== =========== ===========
Basic earnings per share (Note L)....................... $ 1.81 $ 1.42 $ 1.32
=========== =========== ===========
Diluted earnings per share (Note L)..................... $ 1.69 $ 1.35 $ 1.26
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
B-41
<PAGE> 146
CALIFORNIA STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- UNREALIZED RETAINED
SHARES AMOUNT GAIN (LOSS) EARNINGS
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at January 1, 1995................... 3,471,199 $29,007,000 $(1,100,000) $19,987,000
Stock options exercised..................... 87,442 869,000 -- --
Tax benefit resulting from certain stock
option transactions...................... -- -- -- 47,000
Cash dividends declared..................... -- -- -- (1,409,000)
Change in net unrealized loss on investment
securities available for sale, net of tax
effects.................................. -- -- 705,000 --
Net earnings................................ -- -- -- 4,626,000
--------- ----------- ----------- -----------
Balances at December 31, 1995................. 3,558,641 29,876,000 (395,000) 23,251,000
Stock options exercised..................... 75,357 680,000 -- --
Issuance of common stock.................... 1,485,748 18,494,000
Tax benefit resulting from certain stock
option transactions...................... -- -- -- 125,000
Cash dividends declared..................... -- -- -- (1,882,000)
Change in net unrealized loss on investment
securities available for sale, net of tax
effects.................................. -- -- 414,000 --
Net earnings................................ -- -- -- 6,629,000
--------- ----------- ----------- -----------
Balances at December 31, 1996................. 5,119,746 49,050,000 19,000 28,123,000
Stock options exercised..................... 101,995 985,000 -- --
Repurchase and retirement of common stock... (98,166) (940,000) -- (2,029,000)
Tax benefit resulting from certain stock
option transactions...................... -- -- -- 338,000
Cash dividends declared..................... -- -- -- (2,259,000)
Change in net unrealized gain on investment
securities available for sale, net of tax
effects.................................. -- -- 816,000 --
Net earnings................................ -- -- -- 9,330,000
--------- ----------- ----------- -----------
Balances at December 31, 1997................. 5,123,575 $49,095,000 $ 835,000 $33,503,000
========= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
B-42
<PAGE> 147
CALIFORNIA STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.............................................. $ 9,330,000 $ 6,629,000 $ 4,626,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for credit losses........................... 700,000 1,000,000 1,600,000
Depreciation and amortization......................... 2,940,000 2,724,000 1,717,000
Net investment premium amortization................... 1,034,000 767,000 324,000
Goodwill amortization................................. 1,506,000 1,272,000 428,000
Gain on sales of SBA loans............................ -- (659,000) --
Gain on sales of other real estate owned.............. (215,000) (40,000) (52,000)
Accretion of unearned income.......................... (1,747,000) (1,888,000) (2,098,000)
Deferred income tax (benefit) provision............... (202,000) 357,000 (61,000)
Increase in other assets.............................. (2,868,000) (1,219,000) (1,787,000)
Increase in other liabilities......................... 1,807,000 1,621,000 1,874,000
------------- ------------ ------------
Net cash provided by operating activities........ 12,285,000 10,564,000 6,571,000
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale.... 82,302,000 52,259,000 16,969,000
Proceeds from maturities of securities available for
sale.................................................. 43,783,000 36,146,000 20,929,000
Proceeds from maturities of securities held to
maturity.............................................. -- -- 2,120,000
Purchases of securities available for sale.............. (244,755,000) (77,755,000) (37,292,000)
Purchases of securities held to maturity................ -- -- (6,073,000)
Net decrease in interest-bearing deposits in other
financial institutions................................ -- 1,084,000 2,351,000
Net increase in loans................................... (16,183,000) (19,823,000) (35,409,000)
Proceeds from sales of SBA loans........................ -- 10,800,000 --
Proceeds from sales of other real estate owned.......... 2,482,000 1,882,000 3,092,000
Proceeds from sales of real estate acquired for
development........................................... 3,659,000 4,123,000 2,028,000
Additions to real estate acquired for development....... (1,450,000) (977,000) (3,174,000)
Purchases of premises and equipment..................... (852,000) (2,704,000) (1,291,000)
Acquisition of financial institution.................... -- (15,856,000) --
Other................................................... 99,000 164,000 75,000
------------- ------------ ------------
Net cash used in investing activities............ (130,915,000) (10,657,000) (35,675,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................ $ 37,914,000 $ 17,421,000 $ 40,510,000
Net increase (decrease) in borrowings................... 49,563,000 (6,565,000) (5,710,000)
Cost of issuance of common stock........................ -- (376,000) --
Dividends paid.......................................... (2,155,000) (1,727,000) (1,400,000)
Exercise of stock options............................... 985,000 680,000 869,000
Repurchase and retirement of common stock............... (2,969,000) -- --
------------- ------------ ------------
Net cash provided by financing activities........ 83,338,000 9,433,000 34,269,000
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents...... (35,292,000) 9,340,000 5,165,000
Cash and cash equivalents, beginning of year.............. 87,983,000 50,032,000 44,867,000
------------- ------------ ------------
Cash and cash equivalents, end of year before
acquisitions............................................ 52,691,000 59,372,000 50,032,000
Cash and cash equivalents received in acquisitions........ -- 28,611,000 --
------------- ------------ ------------
Cash and cash equivalents, end of year.................... $ 52,691,000 $ 87,983,000 $ 50,032,000
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................... $ 15,782,000 $ 14,518,000 $ 9,305,000
Income taxes paid....................................... 6,525,000 2,581,000 2,454,000
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Transfer of securities from held to maturity to
available for sale.................................... $ -- $ -- $ 46,389,000
Transfer from loans to other real estate owned.......... 1,015,000 964,000 3,620,000
Tax benefit resulting from certain stock option
transactions.......................................... 338,000 125,000 47,000
</TABLE>
See notes to consolidated financial statements.
B-43
<PAGE> 148
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of California State Bank and
subsidiaries (the "Bank") conform to generally accepted accounting principles
and practices within the banking industry. Management makes estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.
The following is a summary of the more significant accounting and reporting
policies.
Principles of Consolidation
The consolidated financial statements include California State Bank and its
wholly owned subsidiaries, Citrus State Development Corp., Granada Realty
Services, Inc. and Excelmark Financial Services, Inc. All material intercompany
balances and transactions have been eliminated.
Certain amounts in the prior years' consolidated financial statements and
related footnote disclosures have been reclassified to conform to the current
year presentation.
Nature of Operations
The Bank operates a network of 17 branches and offers commercial banking
services to businesses, professionals and individuals located in and around the
San Gabriel Valley, Inland Empire, Orange County, Beaumont and the High Desert
area of Southern California. The Bank's primary operations are related to
traditional banking activities, including the acceptance of deposits and the
lending and investing of money. The Bank also performs certain real estate
development activities in its market area through its real estate subsidiaries,
Citrus State Development Corp. and Granada Realty Services, Inc.
Investment Securities
The Bank classifies as held to maturity those investment securities which
management has the positive intent and ability to hold to maturity. The Bank
classifies all other investment securities as available for sale. Securities
held to maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts over the estimated terms of the securities using the
interest method. Securities available for sale are carried at fair value with
unrealized gains and losses, net of tax effects, reported as a component of
stockholders' equity. Gains or losses on sales of securities are computed based
on the adjusted cost of the specific security.
Loans and Lease Finance Receivables
Loans and lease finance receivables are reported at the principal amount
outstanding, net of unearned discounts, deferred fees and costs, and allowance
for credit losses.
Loan origination fees and costs and commitment fees are deferred and
amortized over the life of the related loan or commitment period as a yield
adjustment.
The Bank periodically sells the guaranteed portion of SBA loans into the
secondary market. A portion of the premium received on the sales of SBA loans is
deferred and amortized over the lives of the loans as an adjustment to yield.
On January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards, ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Accordingly, the Bank
accounts for a transfer of financial assets as a sale to the extent that
consideration other than beneficial interests has been received and when the
control over the transferred asset has been
B-44
<PAGE> 149
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
surrendered. The Bank recognizes either a servicing asset or liability when it
undertakes an obligation to service financial assets under a servicing contract.
The servicing asset or liability is amortized in proportion to and over the
period of estimated net servicing income or loss and is assessed for impairment
or increased obligation based on its fair value. The effective date of certain
provisions in SFAS No. 125, specifically related to repurchase agreements and
secured borrowings that may apply to the Bank, have been delayed to January 1,
1998, under SFAS No. 127 "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." The effect of adopting this statement was not
material to the results of operations or the financial position of the Bank.
Provision and Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and
decreased by charge-offs (net of recoveries) and represents an amount that, in
management's judgment, is adequate to provide for potential losses in the loan
and lease finance receivable portfolio. Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past credit loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
The Bank recognizes a loan as impaired when it is probable that all
contractual principal and interest payments under the terms of the loan
agreement will not be collected. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as an expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The Bank
selects the measurement method on a loan-by-loan basis, except that collateral-
dependent loans for which foreclosure is probable must be measured at the fair
value of the collateral. The Bank measures impairment of a restructured loan by
discounting the total expected future cash flows at the loan's effective rate of
interest in the original loan agreement.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the properties. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the terms of the leases.
Real Estate Acquired for Development
The Bank, through its wholly owned real estate subsidiaries, is engaged in
the acquisition, development and sale of residential lots, single-family homes
and condominium projects. The subsidiaries finance the construction projects
either with their capital or by obtaining financing from the Bank or other
banks. Such properties are accounted for at the lower of cost, including direct
development costs and interest incurred during the development stage, or net
realizable value.
Other Real Estate Owned
Other real estate owned, which represents real estate acquired through
foreclosure in satisfaction of real estate and other loans, is stated at
estimated fair value minus costs to sell. Loan balances in excess of fair value
of the real estate acquired at the date of acquisition are charged against the
allowance for credit losses. Any subsequent operating expenses or income,
reduction in estimated values, and gains or losses on disposition of such
properties are charged to current operations.
B-45
<PAGE> 150
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Goodwill and Other Intangible Assets
The Bank has engaged in the acquisition of other financial institutions,
including the assumption of deposits and the purchase of assets, in its market
area. Goodwill representing the excess of the purchase price over the fair value
of the net assets acquired is amortized on a straight-line basis over a 15-year
period.
Core deposit intangibles represent the intangible value of depositor
relationships resulting from the assumption of deposits in an acquisition. These
intangibles are being amortized on a straight-line basis over their estimated
economic life, not to exceed seven years.
Statements of Cash Flows
Cash and cash equivalents as reported in the consolidated statements of
cash flows include cash and due from banks and federal funds sold.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings per Share
Effective December 31, 1997, the Bank adopted SFAS No. 128, "Earnings per
Share." Accordingly, basic earnings per share are computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during each year. The computation of diluted earnings per share
considers the number of shares issuable upon the assumed exercise of outstanding
common stock options, using the treasury stock method. All earnings per share
data have been restated in accordance with the provisions of this statement. A
reconciliation of the numerator and the denominator used in the computation of
basic and diluted earnings per share is included in Note L.
B. BUSINESS ACQUISITIONS
On April 12, 1996, the Bank completed the acquisition of Landmark Bancorp
and its wholly owned subsidiary, Landmark Bank . A summary of the significant
components of the acquisition, which was accounted for as a purchase, is as
follows:
<TABLE>
<S> <C>
Cash and cash equivalents acquired.................... $ 28,611,000
Fair value of assets acquired......................... 209,542,000
Fair value of liabilities assumed..................... (217,656,000)
Goodwill and other intangible assets.................. 14,229,000
-------------
Consideration paid in cash and stock.................. $ 34,726,000
=============
</TABLE>
The results of operations since the date of the acquisition are included in
the accompanying consolidated statements of earnings.
B-46
<PAGE> 151
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
C. INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities................... $ 24,078,000 $ 202,000 $ -- $ 24,280,000
Obligations of U.S. agencies and
corporations............................ 59,820,000 261,000 71,000 60,010,000
Federal agency mortgage-backed
securities.............................. 198,089,000 922,000 189,000 198,822,000
Small Business Administration pool
certificates............................ 4,648,000 219,000 -- 4,867,000
Obligations of state and political
subdivisions............................ 1,705,000 96,000 -- 1,801,000
Federal Home Loan Bank stock............... 3,849,000 -- -- 3,849,000
------------ ---------- -------- ------------
$292,189,000 $1,700,000 $260,000 $293,629,000
============ ========== ======== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities................... $ 25,002,000 $ 105,000 $ -- $ 25,107,000
Obligations of U.S. agencies and
corporations............................ 6,963,000 30,000 90,000 6,903,000
Federal agency mortgage-backed
securities.............................. 119,182,000 464,000 776,000 118,870,000
Small Business Administration pool
certificates............................ 14,973,000 204,000 133,000 15,044,000
Obligations of state and political
subdivisions............................ 6,963,000 229,000 -- 7,192,000
Federal Home Loan Bank stock............... 1,405,000 -- -- 1,405,000
------------ ---------- -------- ------------
$174,488,000 $1,032,000 $999,000 $174,521,000
============ ========== ======== ============
</TABLE>
The carrying value of investment securities pledged to secure public
deposits and for other purposes, as required or permitted by law, amounts to
approximately $81,105,000 and $41,839,000 at December 31, 1997 and 1996,
respectively.
B-47
<PAGE> 152
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The amortized cost and market value of debt securities available for sale
at December 31, 1997, by contractual maturities, are shown in the following
table. Expected maturities will differ from contractual maturities, particularly
with mortgage-backed securities, because borrowers may have the right to prepay
or the issuers may call certain securities.
<TABLE>
<CAPTION>
LESS THAN ONE TO FIVE TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury securities.................. $ -- $24,078,000 $ -- $ --
Obligations of U.S. agencies and
corporations........................... 2,983,000 33,762,000 23,075,000 --
Federal agency mortgage-backed
securities............................. 545,000 20,038,000 139,570,000 37,936,000
Small Business Administration pool
certificates........................... -- -- -- 4,648,000
Obligations of state and political
subdivisions........................... -- 135,000 -- 1,570,000
---------- ----------- ------------ -----------
$3,528,000 $78,013,000 $162,645,000 $44,154,000
========== =========== ============ ===========
Fair value:
U.S. Treasury securities.................. $ -- $24,280,000 $ -- $ --
Obligations of U.S. agencies and
corporations........................... 2,990,000 33,955,000 23,065,000 --
Federal agency mortgage-backed
securities............................. 543,000 20,102,000 139,914,000 38,263,000
Small Business Administration pool
certificates........................... -- -- -- 4,867,000
Obligations of state and political
subdivisions........................... -- 140,000 -- 1,661,000
---------- ----------- ------------ -----------
$3,533,000 $78,477,000 $162,979,000 $44,791,000
========== =========== ============ ===========
</TABLE>
Sales of investment securities for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sales of securities available for sale.... $82,302,000 $52,259,000 $16,969,000
Gross realized gains.................................... 406,000 150,000 2,000
Gross realized losses................................... 341,000 81,000 148,000
</TABLE>
D. LOANS AND LEASE FINANCE RECEIVABLES
Loans and lease finance receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commercial and industrial loans............................. $179,497,000 $166,877,000
Loans to individuals for household, family and other
consumer expenditures..................................... 42,236,000 51,426,000
Construction and land development........................... 33,652,000 20,637,000
Real estate loans -- conventional........................... 197,528,000 198,035,000
Direct financing leases..................................... 157,000 438,000
------------ ------------
453,070,000 437,413,000
Less:
Unearned discounts and deferred loan fees................. 1,850,000 2,544,000
Allowance for credit losses............................... 8,401,000 8,265,000
------------ ------------
$442,819,000 $426,604,000
============ ============
</TABLE>
B-48
<PAGE> 153
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The Bank makes loans to customers primarily in its immediate service area.
The Bank, therefore, has a natural geographic concentration of borrowers in the
San Gabriel Valley, Inland Empire and Orange County areas of Southern
California. In management's opinion, the Bank has no undue risk of concentration
as it pertains to any one industry or individual borrower.
E. LOANS TO RELATED PARTIES
In the ordinary course of business, the Bank has granted loans to certain
officers, directors and the companies with which they are associated. In
management's opinion, all such loans and commitments to lend were made under
terms consistent with the Bank's normal lending policies.
The following is a summary of activities for all such loans:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1................................. $1,149,000 $1,130,000 $1,196,000
New loans granted, including renewals................ 464,000 208,000 179,000
Repayments........................................... (184,000) (189,000) (245,000)
---------- ---------- ----------
Balance at December 31............................... $1,429,000 $1,149,000 $1,130,000
========== ========== ==========
</TABLE>
F. ALLOWANCE FOR CREDIT LOSSES
Activity in the allowance for credit losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1................................. $8,265,000 $ 5,029,000 $ 4,252,000
Provisions charged to operations..................... 700,000 1,000,000 1,600,000
Allowance added through acquisitions................. -- 3,493,000
Loans charged off.................................... (885,000) (1,586,000) (1,318,000)
Recoveries on loans previously charged off........... 321,000 329,000 495,000
---------- ----------- -----------
Balance at December 31............................... $8,401,000 $ 8,265,000 $ 5,029,000
========== =========== ===========
</TABLE>
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" as amended by SFAS No. 118, "Accounting by Creditors for impairment of a
Loan -- Income Recognition and Disclosures", the table below sets forth the
Bank's impaired loans and related allowance for potential credit losses at
December 31, 1997 and 1996. Included in the impaired loan totals are nonaccrual
loans of $2,364,000 and $2,474,000 at December 31, 1997 and 1996, respectively.
The average recorded investment in impaired loans was $4,763,000, $4,200,000 and
$3,152,000 for 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Total impaired loans........................................ $4,688,000 $4,030,000
Impaired loans requiring an allowance....................... 4,175,000 4,030,000
Allowance for potential credit losses....................... 889,000 1,329,000
</TABLE>
Generally, the Bank's policy is to discontinue accruing interest when loans
are 90 days past due. When collectibility of principal is in doubt, all payments
are applied as a reduction to principal. Interest income recognized on impaired
loans totaled $261,000, $130,000 and $196,000 for 1997, 1996 and 1995,
respectively.
Management believes that the Bank's allowance for credit losses at December
31, 1997 was adequate to absorb known and inherent risks in the loan and lease
finance receivables portfolio. No assurances can be given
B-49
<PAGE> 154
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
that continued future economic conditions, including rising interest rates and
declining real estate values, will not lead to higher amounts of problem loans,
provisions for credit losses or charge-offs.
G. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 5,674,000 $ 5,674,000
Bank premises............................................... 9,765,000 9,757,000
Furniture and equipment..................................... 15,576,000 15,170,000
Leasehold improvements...................................... 2,079,000 2,358,000
Construction in progress.................................... -- 111,000
----------- -----------
33,094,000 33,070,000
Less accumulated depreciation and amortization.............. 16,611,000 14,753,000
----------- -----------
$16,483,000 $18,317,000
=========== ===========
</TABLE>
H. REAL ESTATE ACQUIRED FOR DEVELOPMENT
The following summarizes the combined condensed financial information for
the Bank's real estate subsidiaries, which hold all real estate acquired for
development:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Summary of financial position
Assets
Cash................................................... $2,925,000 $ 802,000
Real estate projects................................... 1,433,000 3,550,000
Other assets........................................... 136,000 120,000
---------- ----------
4,494,000 4,472,000
========== ==========
Liabilities and Stockholder's Equity
Other liabilities...................................... 9,000 9,000
Common stock........................................... 4,250,000 4,250,000
Retained earnings...................................... 235,000 213,000
---------- ----------
$4,494,000 $4,472,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Summary of earnings
Revenue from real estate sales....................... $3,882,000 $4,123,000 $2,028,000
Cost of sales........................................ 3,790,000 3,749,000 1,936,000
---------- ---------- ----------
Gain on sales........................................ 92,000 374,000 92,000
Other income......................................... 7,000 1,000 24,000
Other expenses....................................... (61,000) (57,000) (23,000)
---------- ---------- ----------
Income before taxes.................................. 38,000 318,000 93,000
Provision for income taxes........................... 16,000 134,000 39,000
---------- ---------- ----------
Net income........................................... $ 22,000 $ 184,000 $ 54,000
========== ========== ==========
</TABLE>
B-50
<PAGE> 155
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Interest capitalized during the development and construction phases of
these projects was $49,000, $14,000 and $93,000 for 1997, 1996 and 1995,
respectively.
In March 1996, the FDIC approved the Bank's application to continue the
real estate development activities of its subsidiaries. The approval is subject
to certain conditions, including, among other things, that (a) the Bank's total
investment in the real estate development subsidiaries (defined to include
equity investments in and loans to the subsidiaries) not exceed 20% of the
Bank's Tier 1 capital, (b) for purposes of the prompt corrective action
provisions of federal law and the calculation of the Bank's risk adjusted
deposit insurance premium, the Bank's capital ratios be based on the Bank's
capital levels after deducting its total investment in the real estate
development subsidiaries, (c) the Bank's capital levels, after deducting its
total investment in the real estate development subsidiaries, equal or exceed
the levels required for a "well capitalized" institution under federal law, and
(d) the real estate development subsidiaries contract with the Bank for any
services on terms and conditions comparable to those available to or from
independent entities. Management believes the Bank is in compliance with the
conditions of the FDIC approval at December 31, 1997.
I. REAL ESTATE INVESTMENT
The Bank has invested in a limited partnership that was formed to develop
and operate a 124-unit residential apartment complex designed as high-quality
affordable housing for lower income tenants in Sacramento County. The Bank is
currently a 97.32% limited partner in the project. The investment was made in
the partnership for the purpose of purchasing tax credits and is reported as a
net investment, which does not require the partnership assets to be consolidated
into the Bank's financial statements. The investment is being amortized on a
level yield method over the life of the related tax credits. The partnership
must meet the regulatory requirements for affordable housing for a minimum
15-year compliance period to fully utilize the tax credits. If the partnership
ceases to qualify during the compliance period, the credit is denied for any
period in which the project is not in compliance and a portion of the credit
previously taken is subject to recapture with interest.
The Bank's portion of tax credits to be utilized over a multiple-year
period is $6.8 million in federal tax credits and $2.4 million in state tax
credits. The Bank utilized $676,000 in federal tax credits each year for 1997,
1996 and 1995. No state tax credits were available for 1997. The Bank utilized
$386,000 and $676,000 in state tax credits for 1996 and 1995, respectively.
Investment amortization was $297,000, $467,000 and $595,000 for 1997, 1996 and
1995, respectively.
J. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $98,808,000 and $84,550,000 at December 31, 1997 and 1996,
respectively. Interest expense on such deposits amounted to approximately
$4,790,000 in 1997, $4,453,000 in 1996, and $3,868,000 in 1995.
At December 31, 1997, the scheduled maturities of time certificates of
deposit were as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------------------------------- ------------
<S> <C>
1998........................................... $150,828,000
1999........................................... 4,140,000
2000........................................... 389,000
------------
$155,357,000
============
</TABLE>
B-51
<PAGE> 156
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
K. BORROWINGS
Securities sold under the repurchase agreements at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Repurchase agreements....................................... $2,298,000 $2,735,000
Investment securities pledged as collateral, at fair
value..................................................... 2,744,000 3,773,000
Maximum amount outstanding at any month-end................. 2,545,000 10,395,000
Average balance outstanding during the year................. 1,789,000 6,970,000
</TABLE>
As of December 31, 1997, the Bank had advances of $50,000,000 from the
Federal Home Loan Bank (FHLB). The balance included a $20,000,000 advance with a
fixed interest rate of 5.70% and a maturity date of March 25, 1998. The
remaining $30,000,000 has a fixed rate of 5.45% with a maturity date of December
26, 2000, callable by the FHLB on December 26, 1998, and every six months
thereafter until maturity. The FHLB is holding certain investment securities of
the Bank as collateral for the borrowings.
L. EARNINGS PER SHARE RECONCILIATION
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
WEIGHTED
AVERAGE
INCOME SHARES EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings......................................... $9,330,000 5,151,415 $1.81
=====
EFFECT OF DILUTIVE SECURITIES
Incremental shares issued on assumed exercise of
outstanding stock options......................... 362,417
---------- ---------
DILUTED EARNINGS PER SHARE
Net earnings......................................... $9,330,000 5,513,832 $1.69
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings......................................... $6,629,000 4,673,991 $1.42
=====
EFFECT OF DILUTIVE SECURITIES
Incremental shares issued on assumed exercise of
outstanding stock options......................... 240,941
---------- ---------
DILUTED EARNINGS PER SHARE
Net earnings......................................... $6,629,000 4,914,932 $1.35
========== ========= =====
</TABLE>
B-52
<PAGE> 157
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings......................................... $4,626,000 3,506,721 $1.32
=====
EFFECT OF DILUTIVE SECURITIES
Incremental shares issued on assumed exercise of
outstanding stock options......................... 173,999
---------- ---------
DILUTED EARNINGS PER SHARE
Net earnings......................................... $4,626,000 3,680,720 $1.26
========== ========= =====
</TABLE>
M. EMPLOYEE BENEFIT PLANS
The Bank sponsors a 401(k) Plan (the "Plan") for the benefit of its
employees. Employees are eligible to participate in the Plan if they have
completed 12 months of consecutive service with a minimum 1,000 hours of service
in the plan year. Employees may make contributions to the Plan, and the Bank may
make matching or special contributions, subject to certain limitations. The
Bank's contributions are determined by the Board of Directors and amounted to
approximately $289,000 in 1997, $225,000 in 1996, and $138,000 in 1995.
N. STOCK OPTION PLANS
The Bank has stock option plans for directors and key employees. Under the
plans, both incentive stock options and nonqualified stock options are granted.
The exercise price of each option granted is not less than the market price of
the Bank's stock at the date of grant. Generally, options granted may be
exercised at a rate of 20% per year and expire ten years from the date of grant.
Activity in the stock option plans for the three years ended December 31, 1997
follows:
<TABLE>
<CAPTION>
OPTIONS PRICE OPTIONS
AVAILABLE PER SHARE OUTSTANDING
--------- -------------- -----------
<S> <C> <C> <C>
Balance at January 1, 1995............................. 143,934 $ 5.98 - 13.95 894,362
Options granted...................................... (20,800) 12.50 - 14.38 20,800
Options exercised.................................... 8.29 - 10.21 (87,442)
Options canceled..................................... 17,756 9.50 - 13.95 (18,011)
------- -------------- --------
Balance at December 31, 1995........................... 140,890 5.98 - 14.38 809,709
Options granted...................................... (20,000) 14.88 - 15.50 20,000
Options exercised.................................... 7.86 - 10.13 (75,357)
Options canceled..................................... 7,500 9.50 - 12.50 (7,500)
------- -------------- --------
Balance at December 31, 1996........................... 128,390 5.98 - 15.50 746,852
Options granted...................................... (27,500) 21.19 - 28.75 27,500
Options exercised.................................... 5.98 - 15.50 (101,995)
Options canceled..................................... 24,500 9.00 - 28.75 (24,500)
------- -------------- --------
Balance at December 31, 1997........................... 125,390 $ 8.25 - 25.00 647,857
======= ============== ========
</TABLE>
At December 31, 1997, 467,557 shares were exercisable at prices varying
from $8.25 to $15.50. An additional 78,400 shares become exercisable in 1998 at
prices ranging from $8.25 to $25.00 per share.
The Bank applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Bank's stock option plans been determined based on the
fair value at the grant dates for awards under the plans consistent with the
method of SFAS No. 123, "Accounting for Stock-Based
B-53
<PAGE> 158
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Compensation," the Bank's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net earnings as reported.................................... $9,330,000 $6,629,000
Net earnings pro forma...................................... $9,205,000 $6,588,000
Basic earnings per share as reported........................ $1.81 $1.42
Basic earnings per share pro forma.......................... $1.79 $1.41
Diluted earnings per share as reported...................... $1.69 $1.35
Diluted earnings per share pro forma........................ $1.67 $1.34
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
1.65% and 3.00%; expected volatility of 20.29% and 17.75%; expected lives of 7.8
and 7.0 years; and risk-free interest rates of 6.66% and 6.30%.
O. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current -- Federal............................. $4,720,000 $2,976,000 $2,100,000
Current -- State............................... 1,615,000 431,000 106,000
---------- ---------- ----------
6,335,000 3,407,000 2,206,000
---------- ---------- ----------
Deferred -- Federal............................ (406,000) (90,000) (44,000)
Deferred -- State.............................. 204,000 447,000 (17,000)
---------- ---------- ----------
(202,000) 357,000 (61,000)
---------- ---------- ----------
Provision for income taxes..................... $6,133,000 $3,764,000 $2,145,000
========== ========== ==========
</TABLE>
The provision for income taxes differs from the federal statutory rate of
35% as follows:
<TABLE>
<CAPTION>
1997 1996 1995
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ----- ----------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate.......... $5,412,000 35.0% $ 3,638,000 35.0% $ 2,370,000 35.0%
State franchise taxes, net
of federal benefit...... 1,201,000 7.8% 834,000 8.0% 505,000 7.5%
Tax-exempt interest....... (85,000) (0.6)% (102,000) (1.0)% (57,000) (0.9)%
Officers' life
insurance............... (131,000) (0.8)% (70,000) (0.7)% (69,000) (1.0)%
Goodwill amortization..... 504,000 3.3% 424,000 4.1% 139,000 2.0%
Low income housing
credits................. (676,000) (4.4)% (1,062,000) (10.2)% (1,122,000) (16.6)%
Other..................... 8,000 0.1% 206,000 2.0% 447,000 6.7%
Tax rate offset........... (100,000) (0.7)% (104,000) (1.0)% (68,000) (1.0)%
---------- ----- ----------- ------ ----------- -----
Provision for income
taxes................... $6,133,000 39.7% $ 3,764,000 36.2% $ 2,145,000 31.7%
========== ===== =========== ====== =========== =====
</TABLE>
B-54
<PAGE> 159
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The tax effects of temporary differences giving rise to the deferred tax
assets and liabilities at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets
Provision for credit losses..................... $2,701,000 $2,489,000
Deferred loan fees.............................. 107,000 217,000
Deferred compensation........................... 2,512,000 2,109,000
Loss reserves on real estate.................... 88,000 196,000
Purchase accounting............................. 83,000 405,000
Other........................................... 1,211,000 879,000
---------- ----------
6,702,000 6,295,000
---------- ----------
Deferred tax liabilities
Depreciation.................................... -- 187,000
Franchise tax................................... -- 347,000
Loan origination costs.......................... 404,000 288,000
Unrealized gain on investment securities........ 605,000 14,000
Other........................................... 1,000,000 377,000
---------- ----------
2,009,000 1,213,000
---------- ----------
Net deferred tax asset............................ $4,693,000 $5,082,000
========== ==========
</TABLE>
P. CAPITAL REQUIREMENTS AND RESTRICTIONS OF CASH BALANCES
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as "well capitalized'
under the prompt corrective action regulations. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios (tangible Tier I capital divided by average total
assets) as set forth in the table below. There are no conditions or events since
that notification which management believes have changed the Bank's capital
rating category.
B-55
<PAGE> 160
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
MINIMUM CAPITAL WELL CAPITALIZED
REQUIREMENT REQUIREMENT
ACTUAL ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total risk-based capital........... $68,952,000 12.36% $44,633,000 8% $55,792,000 10%
Tier I risk-based capital.......... 61,960,000 11.11 22,317,000 4 33,475,000 6
Tier I leverage ratio.............. 61,960,000 7.65 32,397,000 4 40,497,000 5
December 31, 1996
Total risk-based capital........... 61,189,000 11.76 41,617,000 8 52,022,000 10
Tier I risk-based capital.......... 54,665,000 10.51 20,809,000 4 31,213,000 6
Tier I leverage ratio.............. 54,665,000 7.50 29,146,000 4 36,433,000 5
</TABLE>
California Banking Law limits the amount of dividends a bank can pay
without obtaining prior approval from bank regulators. Under this law, the Bank
could, as of December 31, 1997, declare and pay additional dividends of
approximately 15,035,000. The remaining amount of Bank equity is restricted with
respect to dividends.
Banking regulations require that all banks maintain reserve balances. These
reserve balances vary, depending on the level of certain types of deposits
maintained by customers at the Bank. At December 31, 1997, the reserve
requirement was satisfied with cash on hand, therefore no reserve balance was
required to be maintained at the Federal Reserve Bank.
Q. COMMITMENTS AND CONTINGENCIES
The Bank leases facilities from nonaffiliates for varying periods through
2007. The Bank can exercise options that could extend the leases to 2039. Future
minimum annual rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31,
1997, excluding property taxes and insurance, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1998............................. $1,880,000
1999............................. 1,834,000
2000............................. 1,686,000
2001............................. 1,121,000
2002............................. 710,000
Thereafter....................... 2,165,000
----------
$9,396,000
==========
</TABLE>
Total rental expense for 1997, 1996 and 1995 was approximately $2,315,000,
$2,240,000 and $1,736,000, respectively.
The Bank is a party to claims and legal proceedings arising in the ordinary
course of business. Although the amount of ultimate liability, if any, with
respect to such matters cannot be determined, management, after consultation
with legal counsel, believes that the litigation and claims will not have a
material adverse effect on the Bank's consolidated financial position or results
of operations.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. When viewed in
terms of maximum exposure, those instruments may involve, to varying degrees,
credit and interest-rate risk in excess of the amount recognized in the
consolidated balance sheets. At December 31,
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<PAGE> 161
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997, the Bank had commitments to extend credit of $145,672,000 and obligations
under standby and commercial letters of credit of $4,615,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby and commercial letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. At December 31, 1997 and 1996, all of the Bank's credit
commitments were scheduled to expire in less than five years.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for extending loan facilities to customers.
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable; inventory; property,
plant and equipment; income-producing commercial properties; and single-family
residences.
The Bank maintains deferred compensation agreements with certain directors
and officers. The agreements provide monthly cash payments to the directors and
officers or their beneficiaries in the event of death or disability, beginning
in the month after their respective retirement date or death. The payments will
continue for the greater of the life of the director or officer or, in the event
of death, 15 or 20 years.
R. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents....... $ 52,691,000 $ 52,691,000 $ 87,983,000 $ 87,983,000
Investment securities available
for sale..................... 293,629,000 293,629,000 174,521,000 174,521,000
Loans, net...................... 442,819,000 449,564,000 426,604,000 429,357,000
Liabilities
Noninterest-bearing deposits.... 255,330,000 255,330,000 225,248,000 225,248,000
Interest-bearing deposits....... 446,328,000 441,588,000 438,496,000 437,018,000
Repurchase agreements........... 2,298,000 2,298,000 2,735,000 2,735,000
FHLB advances................... 50,000,000 50,000,000 -- --
</TABLE>
B-57
<PAGE> 162
CALIFORNIA STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The fair value of investment securities is based on quoted market prices,
dealer quotes, and prices obtained from an independent pricing service. The fair
value of loans, time deposits and other financial instruments is estimated based
on present values using applicable risk-adjusted spreads to the U.S. Treasury
curve to approximate current entry-value interest rates applicable to each
category of such financial instruments. The carrying amount of repurchase
agreements approximates estimated fair value. The fair value of the FHLB
advances, based on the market value of similar debt, is estimated at their
carrying amount.
No adjustments were made to the entry-value interest rates for changes in
credit of performing commercial loans for which there are no known credit
concerns. Management segregates loans in appropriate risk categories. Management
believes that the risk factor embedded in the entry-value interest rates, along
with the general reserves applicable to the performing commercial loan portfolio
for which there are no known credit concerns, results in a fair valuation of
such loans on an entry-level basis. The fair value of nonaccrual loans at
December 31, 1997 and 1996 was not estimated because it is not practicable to
reasonably assess the credit adjustment that would be applied in the marketplace
for such loans.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
S. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Net interest income................... $10,344,000 $10,845,000 $10,797,000 $11,366,000
Provision for credit losses........... 250,000 150,000 150,000 150,000
Net earnings.......................... 2,018,000 2,223,000 2,391,000 2,698,000
Basic earnings per share.............. $ 0.39 $ 0.43 $ 0.46 $ 0.53
Diluted earnings per share............ $ 0.37 $ 0.40 $ 0.43 $ 0.49
1996
Net interest income................... $ 7,019,000 $ 9,632,000 $10,375,000 $10,399,000
Provision for credit losses........... 250,000 250,000 250,000 250,000
Net earnings.......................... 1,174,000 1,620,000 1,820,000 2,015,000
Basic earnings per share.............. $ 0.33 $ 0.33 $ 0.36 $ 0.39
Diluted earnings per share............ $ 0.31 $ 0.32 $ 0.34 $ 0.37
</TABLE>
B-58
<PAGE> 163
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ----------- ----
<C> <S> <C>
2.1 Agreement and Plan of Reorganization by and among the Bank,
First Security Corporation and First Security Merger Corp.,
dated February 18, 1998(1).................................. *
3.1 Articles of Incorporation, as amended(2).................... *
3.2 Bylaws, as amended(2)....................................... *
10.1 1988 Stock Option Plan, as amended(4)+...................... *
10.2 California State Bank Directors' Deferred Compensation
Plan(5)+.................................................... *
10.3 California State Bank Executives' Deferred Compensation
Plan(5)+.................................................... *
10.4 Form of Indemnification Agreement(3)+....................... *
10.5 1994 Stock Option Plan(2)+.................................. *
10.6 Agreement of Limited Partnership of Red Fox Apartments,
L.P., a California Limited Partnership(6)................... *
11.1 Computation of Per Share Earnings degrees................... *
21.1 Subsidiaries of the Bank(5)#................................ *
</TABLE>
- ---------------
* Not applicable.
+ Management contract or compensatory plan or agreement.
degrees See Notes A and L to the Bank's audited consolidated financial
statements.
# See Note H to the Bank's audited consolidated financial statements.
(1) Filed as Exhibit 2.1 to Registrant's current Report on Form 8-K on March 3,
1998, and incorporated herein by this reference.
(2) Filed as Exhibit 1.1, 1.2 and 3.10, respectively, to Registrant's Annual
Report on Form F-2 for the fiscal year ended December 31, 1995, which are
incorporated herein by this reference.
(3) Filed as Exhibit 3.1 to Registrant's Annual Report on Form F-2 for the
fiscal year ended December 31, 1988, which is incorporated herein by this
reference.
(4) Filed as Exhibit 3.2 to Registrant's Annual Report on Form F-2 for the
fiscal year ended December 31, 1989, which is incorporated herein by this
reference.
(5) Filed as Exhibits F, G and I, respectively, to Registrant's Annual Report on
Form F-2 for the fiscal year ended December 31, 1987 which are incorporated
herein by this reference.
(6) Filed as Exhibit 10.0 to Registrant's Annual Report on Form F-2 for the
fiscal year ended December 31, 1992, which are incorporated herein by this
reference.
B-59
<PAGE> 164
APPENDIX C
FAIRNESS OPINION OF KEEFE, BRUYETTE & WOODS, INC.
<PAGE> 165
KEEFE, BRUYETTE & WOODS, INC.
TWO WORLD TRADE CENTER
85TH FLOOR
NEW YORK, NY 10048
April 20, 1998
The Board of Directors
California State Bank
100 North Barranca
Fourteenth Floor
West Covina, CA 91791
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the stockholders of California State Bank
("California State") of the exchange ratio in the proposed merger (the "Merger")
of California State Bank and First Security Corporation ("FSCO") pursuant to the
Agreement and Plan of Reorganization, dated as of February 18, 1998, between
California State and FSCO (the "Agreement"). Pursuant to the terms of the
Agreement, each outstanding share of common stock, of no par value, of
California State (the "Common Shares") will be converted into 2.13 shares of
common stock, of $1.25 par value, of FSCO, subject to adjustment for any stock
splits or stock dividends, and as further described in the Agreement.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business,
is continually engaged in the valuation of bank and bank holding company
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As specialists in the securities of
banking companies, we have experience in, and knowledge of, the valuation of the
banking enterprises. In the ordinary course of our business as a broker-dealer,
we may, from time to time purchase securities from, and sell securities to,
California State and FSCO, and as a market maker in securities, we may from time
to time have a long or short position in, and buy or sell, debt or equity
securities of California State and FSCO for our own account and for the accounts
of our customers. To the extent we have any such position as of the date of this
opinion it has been disclosed to California State. We have acted exclusively for
the Board of Directors of California State in rendering this fairness opinion
and will receive a fee from California State for our services.
In connection with this opinion, we have reviewed, analyzed and relied upon
material bearing upon the financial and operating condition of California State
and FSCO and the Merger, including among other things, the following: (i) the
Agreement; (ii) the Annual Reports to Stockholders and Annual Reports on Form
F-2 or Form 10-K, as applicable, for the three years ended December 31, 1996 of
California State and FSCO; (iii) certain interim reports to stockholders and
Quarterly Reports on Form F-4 or Form 10-Q, as applicable, of California State
and FSCO and certain other communications from California State and FSCO to
their respective stockholders; and (iv) other financial information concerning
the businesses and operations of California State and FSCO furnished to us by
California State and FSCO for purposes of our analysis. We have also held
discussions with senior management of California State and FSCO regarding the
past and current business operations, regulatory relations, financial condition
and future prospects of their respective companies and such other matters as we
have deemed relevant to our inquiry. In addition, we have compared certain
financial and stock market information for California State and FSCO with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the banking industry and performed such other studies and
analyses as we considered appropriate.
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 California State and FSCO as
to the reasonableness and achievability of the
C-1
<PAGE> 166
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, with your consent, that the aggregate
allowances for loan and lease losses for California State and FSCO are adequate
to cover such losses. In rendering our opinion, we have not made or obtained any
evaluations or appraisals of the property of California State or FSCO, nor have
we examined any individual 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 current financial position and results of operations of
California State and FSCO; (ii) the assets and liabilities of California State
and FSCO; and (iii) the nature and terms of certain other merger transactions
involving banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and 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 exchange ratio in the Merger is fair, from a financial point of
view, to holders of the Common Shares.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC.
C-2
<PAGE> 167
APPENDIX D
DISSENTERS' RIGHTS STATUTE
<PAGE> 168
APPENDIX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13 -- DISSENTERS' RIGHTS
sec.1300. Right to Require Purchase -- "Dissenting Shares" and "Dissenting
Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the OTC margin stocks issued with the Board
of Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held or record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applied in any case
where the approval required by Section 1021 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
sec.1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of approval of the reorganization by its outstanding shares (section 152) within
10 days after the date of such approval, accompanied by a copy of Section 1300,
1302, 1303, 1304 and this section, a statement or price determined by the
corporation to represent the fair market value of the dissenting shares, and a
brief description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares
D-1
<PAGE> 169
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) or paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(b) The demand shall state the number and class of the shares held of
record by the shareholder with the shareholder remands hat the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
sec.1302. Endorsement of Shares.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issues therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
sec.1303. Agreed Price -- Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
sec.1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of the shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
D-2
<PAGE> 170
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issues. If the fair market value of the dissenting shares is in
issues, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
D-3
<PAGE> 171
APPENDIX E
TERMINATION FEE AGREEMENT
<PAGE> 172
TERMINATION FEE AGREEMENT
TERMINATION FEE AGREEMENT, dated as of February 18, 1998 (the "Agreement"),
by and between California State Bank, a California corporation ("Bank"), and
First Security Corporation, a Delaware corporation ("FSC").
RECITALS
(A) California State Bank ("Bank"), First Security Corporation ("FSC") and
First Security Merger Corp., a California corporation ("Merger Co.") have agreed
to enter into that certain Agreement and Plan of Reorganization (the "Merger
Agreement") of even date herewith.
(B) In order to induce FSC and Merger Co. to enter into the Merger
Agreement, and in consideration of FSC's undertaking of efforts in furtherance
of the transactions contemplated thereby, and intending to be legally bound
hereby, Bank agrees as follows:
AGREEMENT
1. Defined Terms. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. Representations and Warranties. Bank hereby represents and warrants to
FSC that Bank has all requisite corporate power and authority to enter into this
agreement (this "Agreement") and to perform its obligations set forth herein.
The execution, delivery and performance of this Agreement have been duly
authorized by all necessary corporate action on the part of Bank. This Agreement
has been duly executed and delivered by Bank.
3. Termination Fee.
(a) Unless a Nullifying Event (as such term is defined below) shall have
occurred and be continuing at the time the Merger Agreement is terminated, in
the event that the Merger Agreement is terminated pursuant to Sections 9.1(b),
(d), (e), or (h) thereof (regardless of whether such termination is by FSC or
Bank) and prior to or concurrently with such termination a First Trigger Event
(as such term is defined below) shall have occurred, Bank shall pay to FSC a
cash fee of $5 million. Such fee shall be payable in immediately available funds
on or before the second business day following such termination of the Merger
Agreement.
(b) In addition, unless a Nullifying Event shall have occurred and be
continuing at the time the Merger Agreement is terminated, in the event that (i)
the Merger Agreement shall have been terminated pursuant to Sections 9.1(b),
(d), (e), or (h) thereof, (ii) prior to or concurrently with such termination a
First Trigger Event shall have occurred, and (iii) prior to, concurrently with
or within 15 months after such termination an Acquisition Event (as such term is
defined below) shall have occurred, Bank shall pay to FSC an additional cash fee
of $7 million, for an aggregate total payment under this Section 3 of $12
million. Such fee shall be payable in immediately available funds on or before
the second business day following the occurrence of such Acquisition Event.
(c) As used herein, a "First Trigger Event" shall mean the occurrence of
any of the following events:
(i) Bank's Board of Directors shall have withdrawn, modified or
changed in any manner adverse to FSC its recommendation of the Merger
Agreement or the Merger, (within the meaning of Section 1200 of the
California General Corporation Law ("CGCL")) or shall have resolved or
publicly announced an intention to do either of the foregoing, unless such
withdrawal, modification or change is made because there has occurred an
event that has had, or could reasonably be expected to have, a material
adverse effect upon the business or financial condition of FSC and its
consolidated subsidiaries taken as a whole;
(ii) Bank or the Board of Directors of Bank shall have recommended
that the stockholders of Bank approve any Acquisition Proposal (as such
term is defined below) or shall have entered into an agreement
E-1
<PAGE> 173
with respect to, or authorized, approved, proposed or publicly announced
its intention to enter into, any Acquisition Proposal;
(iii) the Merger Agreement or the Merger shall not have been approved
at a meeting of Bank stockholders which has been held for that purpose
prior to termination of the Merger Agreement in accordance with its terms,
if prior thereto an Acquisition Proposal has occurred;
(iv) any person (together with its affiliates and associates) or group
(as such terms are used for purposes of Section 13(d) of the Exchange Act)
(other than FSC and its affiliates) shall have acquired beneficial
ownership (as such term is used for purposes of Section 13(d) of the
Exchange Act) 50% or more of the then outstanding shares of the stock then
entitled to vote generally in the election of directors of Bank; or
(v) following the occurrence of an Acquisition Proposal, Bank shall
have willfully breached any covenant or agreement contained in the Merger
Agreement such that FSC would be entitled to terminate the Merger Agreement
under Section 9.1(d) thereof (without regard to any grace period provided
for therein) unless such breach is promptly cured without jeopardizing
consummation of the Merger pursuant to the terms of the Merger Agreement.
(d) As used herein, "Acquisition Event" shall mean the consummation of any
"Transaction" described in Section 3(e) below, except that the percentage
reference contained in clause (C) of such definition shall be 50% instead of
20%.
(e) As used herein, "Acquisition Proposal" shall mean any (i) publicly
announced proposal, (ii) the filing of a regulatory application or notice, (iii)
written agreement or understanding, or (iv) public disclosure of an intention to
make a proposal, in each case with respect to any of the following transactions
with a person other than FSC or any of its affiliates: (A) a merger or
consolidation, or any similar transaction, involving Bank (other than mergers,
consolidations, or any similar transactions involving solely Bank and/or one or
more of its subsidiaries and other than a merger or consolidation or any similar
transaction as to which the shareholders of Bank immediately prior thereto in
the aggregate own at least 70% of the common stock of the publicly held
surviving or successor corporation (or any publicly held ultimate parent company
thereof) immediately following consummation thereof; (B) a purchase, lease or
other acquisition of all or substantially all of the assets or deposits of Bank;
or (C) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing 20% or
more of the voting power of Bank other than pursuant to a public offering of
securities by Bank for the sole purpose of raising capital to fund the
operations of the Bank (each of A, B and C, a "Transaction".
(f) As used herein, "Nullifying Event" shall mean, if at a time when Bank
is not in material breach of any of its covenants or agreements contained in the
Merger Agreement, FSC shall be in breach of any of its covenants or agreements
contained in the Merger Agreement such that Bank shall be entitled to terminate
the Merger Agreement pursuant to Section 9.1(c) thereof (without regard to any
grace period provided for therein).
4. To the extent that Bank is prohibited by applicable law or regulation,
or by administrative actions or policy of a Federal or state financial
institution supervisory agency having jurisdiction over it, from making the
payments required to be paid by Bank herein in full, it shall immediately so
notify FSC and thereafter deliver or cause to be delivered, from time to time,
to FSC, the portion of the payments required to be paid by it herein that it is
no longer prohibited from paying, within five (5) business days after the date
on which Bank is no longer so prohibited; provided, however, that if Bank at any
time is prohibited by applicable law or regulation, or by administrative actions
or policy of a Federal or state financial institution supervisory agency having
jurisdiction over it, from making the payments required hereunder in full, it
shall (i) use its commercially reasonable efforts to obtain all required
regulatory and legal approvals and to file any required notices as promptly as
practicable in order to make such payments, (ii) within five (5) days of the
submission or receipt of any documents relating to any such regulatory and legal
approvals, provide FSC with copies of the same, and (iii) keep FSC advised of
both the status of any such request for regulatory and legal approvals, as well
as any discussions with any relevant regulatory or other third party reasonably
related to the same.
E-2
<PAGE> 174
5. Except where federal law and specifically applies, the Agreement shall
be construed and interpreted according to the laws of the State of Delaware
without regard to conflicts of laws principles thereof.
6. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7. Nothing contained herein shall be deemed to authorize Bank or FSC to
breach any provision of the Merger Agreement.
IN WITNESS WHEREOF, Bank and FSC have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the day and year
first written above.
CALIFORNIA STATE BANK
By: /s/ THOMAS A. BISHOP
----------------------------------------------------------
Thomas A. Bishop,
Chairman and Chief Executive Officer
FIRST SECURITY CORPORATION
By: /s/ MORGAN J. EVANS
----------------------------------------------------------
Morgan J. Evans,
President and Chief Operating Officer
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