SCHEDULE 14A
Information Required in Proxy Statement
Schedule 14A is proposed to be amended. See below.
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14 (a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement (AMENDMENT NO. 1)
[ ] Confidential for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SDNB Financial Corp.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form. Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
[SDNB FINANCIAL CORP. LETTERHEAD]
January ,1996
Dear SDNB Financial Corp. Shareholder:
You are cordially invited to attend the Special Meeting of
Shareholders of SDNB Financial Corp. ("SDNB"), which will be held
on Wednesday, February 12, 1997, at 10:00 a.m. (San Diego time)
at the San Diego National Bank Building, 1420 Kettner Boulevard,
San Diego, 92101 (the "Special Meeting"). At this meeting, you
will be asked to consider and vote upon a proposal to approve an
Agreement and Plan of Merger, as amended (the "Merger Agreement")
pursuant to which FBOP Acquisition Company will merge (the
"Merger") with and into SDNB, which will survive the merger as a
wholly owned subsidiary of FBOP Corporation, and each share of
your SDNB Common Stock will be converted into the right to
receive the Per Share Merger Consideration (as defined in the
Merger Agreement) which will consist of a cash payment per share
in a range of $8.00 to $8.03, without interest, subject to
adjustment as set forth in the accompanying Proxy Statement.
The proposed Merger has been approved by the Board of
Directors of each company. Your Board of Directors has
determined that the Merger is in the best interests of SDNB and
its shareholders and unanimously recommends that you vote FOR
approval of the Merger Agreement and the terms of the Merger.
Consummation of the Merger is subject to certain conditions,
including the approval of the Merger Agreement by SDNB's
shareholders and the approval of the Merger by the Federal
Reserve Bank. That agency approved the transaction on December
10, 1996. Subject to the foregoing conditions, the Merger
currently is expected to occur in the first quarter of 1997.
The enclosed Notice of Special Meeting of Shareholders and
Proxy Statement describe the Merger and provide specific
information concerning the Special Meeting. Please read these
materials carefully and consider the information contained in
them.
It is very important that your shares be represented at the
Special Meeting, regardless of whether you plan to attend in
person. The affirmative vote of a majority of the outstanding
shares entitled to vote at the Special Meeting is required to
approve the Merger Agreement. Therefore, I urge you to execute,
date and return the enclosed proxy card in the enclosed postage-
paid envelope as soon as possible to ensure that your shares will
be voted at the Special Meeting. You should not send in
certificates for your shares of SDNB Common Stock at this time.
You will receive instructions as to the surrender of your shares
of SDNB Common Stock after consummation of the Merger.
On behalf of SDNB's Board of Directors, I extend our thanks
and appreciation to all shareholders for your support.
Sincerely,
/s/Murray L. Galinson
Murray L. Galinson
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
SDNB FINANCIAL CORP.
1420 Kettner Boulevard
San Diego, California 92101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on February 12, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of
Shareholders (the "Special Meeting") of SDNB Financial Corp., a
California corporation (the "Company") will be held on Wednesday,
February 12, 1997 at 10:00 a.m., local time at the San Diego
National Bank Building, 1420 Kettner Boulevard, San Diego,
California.
A Proxy Statement and Proxy Card for the Special
Meeting are enclosed herewith. The Special Meeting is being held
for the purpose of considering and voting upon the following
matters:
1. A proposal to approve and adopt the Agreement and
Plan of Merger, dated as of July 12, 1996, as amended, among the
Company, FBOP Corporation, an Illinois corporation ("FBOP"), and
FBOP Acquisition Company, an Illinois corporation and a wholly
owned subsidiary of FBOP ("FBOP Acquisition"), pursuant to which
among other things, FBOP Acquisition will merge (the "Merger")
with and into the Company, which will survive the Merger as a
wholly owned subsidiary of FBOP, and each share of the Company's
common stock, no par value (the "Common Stock"), other than
shares of Common Stock as to which dissenter's rights have been
duly asserted and perfected in accordance with California law,
will be converted into the right to receive the Per Share Merger
Consideration as defined in the Agreement and Plan of Merger, as
amended, which will consist of a cash payment per share in a
range of $8.00 to $8.03, without interest, subject to adjustment,
all as more fully described in the accompanying Proxy Statement.
2. The transaction of such other business as may
properly come before the Special Meeting or any adjournments or
postponements thereof.
Pursuant to the Bylaws of the Company, the Board of
Directors has fixed January 3, 1997 as the record date (the
"Record Date") for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournments
or postponements thereof. Only holders of Common Stock of record
at the close of business on the Record Date will be entitled to
notice of and to vote at the Special Meeting or any adjournments
or postponements thereof.
Shareholders of the Company who comply with the
requirements of Chapter 13 of the California General Corporation
Law will be entitled, if the Merger is consummated, to seek an
appraisal of their shares of Common Stock. See "THE MERGER --
Dissenters' Rights" in, and Appendix C to the attached Proxy
Statement."
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF
SHARES YOU OWN. EACH SHAREHOLDER, WHETHER OR NOT HE OR SHE PLANS
TO ATTEND THE SPECIAL MEETING, IS REQUESTED TO SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY A SHAREHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED IN THE MANNER PROVIDED
IN THE ACCOMPANYING PROXY STATEMENT. SEE "THE SPECIAL MEETING --
PROXIES" IN THE ATTACHED PROXY STATEMENT.
YOU SHOULD NOT SEND IN CERTIFICATES REPRESENTING YOUR
SHARES OF COMMON STOCK AT THIS TIME. YOU WILL RECEIVE
INSTRUCTIONS AS TO THE EXCHANGE OF YOUR SHARES OF COMMON STOCK
AFTER CONSUMMATION OF THE MERGER.
By Order of the Board of Directors
/s/Howard W. Brotman
Howard W. Brotman, Secretary
January , 1997
San Diego, California
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT
YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND
PLAN OF MERGER.
<PAGE>
SDNB FINANCIAL CORP.
1420 Kettner Boulevard
San Diego, California 92101
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
February 12, 1997
INTRODUCTION
This Proxy Statement is being furnished to holders of
shares of common stock, no par value (the "Common Stock"), of SDNB
Financial Corp., a California corporation ("SDNB" or the "Company"),
in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board of Directors" or the "Board")
for use at a Special Meeting of Shareholders (the "Special Meeting")
to be held at 10:00 a.m., local time, on Wednesday, February 12,
1997, at the San Diego National Bank Building, 1420 Kettner
Boulevard, San Diego, California, and at any adjournments or
postponements thereof.
At the Special Meeting, shareholders will be asked to
consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 12, 1996, as amended, (the
"Merger Agreement"), among the Company, FBOP Corporation, an Illinois
corporation ("FBOP"), and FBOP Acquisition Company, an Illinois
corporation and a wholly owned subsidiary of FBOP ("FBOP
Acquisition"), pursuant to which, among other things, FBOP Acquisition
will merge (the "Merger") with and into SDNB, which will survive the
Merger as a wholly owned subsidiary of FBOP, and each share of Common
Stock, other than shares of Common Stock as to which dissenters'
rights have been duly asserted and perfected in accordance with
California law, will be converted into the right to receive the Per
Share Merger Consideration as defined in the Merger Agreement which
will consist of a cash payment per share in the range of $8.00 to
$8.03, without interest, subject to adjustment, all as more fully
described in the accompanying Proxy Statement. See "THE MERGER --
Per Share Merger Consideration."
Consummation of the Merger is conditioned upon, among
other things, approval and adoption of the Merger Agreement by the
requisite vote of the Company's shareholders and the receipt of all
necessary governmental approvals and consents. There can be no
assurance that the conditions to the Merger will be satisfied or,
where permissible, waived, or that the Merger will be consummated.
See "THE MERGER AGREEMENT -- Conditions to the Merger."
No persons have been authorized to give any information or
to make any representation other than those contained in this Proxy
Statement in connection with the solicitation of proxies made hereby
and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or any other
person. This Proxy Statement does not constitute a solicitation of a
proxy by any person in any jurisdiction from any person to whom it
would be unlawful to make any such solicitation in such jurisdiction.
The delivery of this Proxy Statement shall not, under any
circumstances, create an implication that there has been no change in
the affairs of the Company since the date of this Proxy Statement or
that the information herein is correct as of any time subsequent to
such date. All information contained in this Proxy Statement
relating to the Company has been supplied by the Company and all
information contained in this Proxy Statement relating to FBOP and to
FBOP Acquisition has been supplied by FBOP.
The Board of Directors knows of no additional matters that
will be presented for consideration at the Special Meeting.
Execution of a proxy, however, confers on the designated proxyholders
discretionary authority to vote the shares of Common Stock covered
thereby in accordance with their best judgment on such other
business, if any, that may properly come before the Special Meeting
or any adjournments or postponements thereof provided, however, no
proxy voted against the proposal to approve and adopt the Merger
Agreement will be voted in favor of any proposal to adjourn or
postpone the Special Meeting for the purpose of soliciting additional
proxies or otherwise.
The date of this Proxy Statement is January ___, 1997.
This Proxy Statement and the accompanying form of proxy
are first being mailed to shareholders on or about January , 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
Introduction i
Available Information v
Summary 1
Selected Historical Financial Information 8
The Special Meeting 9
General 9
Matters to Be Considered at the Special Meeting 9
Record Date; Vote Required 9
Proxies 10
The Merger 11
Form of the Merger 11
Per Share Merger Consideration 11
Effective Date of the Merger 13
Conversion of Shares; Procedures for Exchange
of Certificates 13
Background of the Merger 14
Recommendation of the Board of Directors; Reasons
for the Merger 15
Opinion of Financial Advisor 16
Interests of Certain Persons in the Merger 20
Certain Tax Consequences 23
Financing Arrangements by FBOP and FBOP Acquisition 24
Regulatory Matters 24
Accounting Treatment 26
Dissenters' Rights 26
The Merger Agreement 29
Representations and Warranties 29
Certain Covenants 30
Conduct of Business Pending the Merger 30
No Solicitation 32
Conditions to the Merger 32
Termination 34
Termination Fee 34
Expenses 34
Stock Prices 34
Security Ownership of Certain Beneficial Owners
and Management 36
Five Percent Shareholders 36
Directors and Management 37
Independent Auditors 38
Shareholder Proposals 38
Incorporation of Certain Documents by Reference;
Additional Information 38
<PAGE>
Appendices
A. Agreement and Plan of Merger, dated as of July 12,
1996, among the Company, FBOP and FBOP Acquisition
and Amendment dated as of November 26, 1996.
B. Opinion of Keefe, Bruyette & Woods, Inc. dated
January , 1997.
C. Chapter 13 of the California General Corporation Law
D. Annual Report to Shareholders of the Company for the
year ended December 31, 1995.
E. Quarterly Report on Form 10-Q of the Company for the
nine months ended September 30, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements
and other information with the Securities and Exchange Commission
(the "Commission") relating to its business, financial statements and
other matters. The reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Pacific Regional
Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036; Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; Central Regional Office, 1801
California Street, Suite 4800, Denver, Colorado 80202; and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Information may also
be accessed through the Commission's Web Site at http://www.sec.gov.
In addition, material filed by the Company is available for
inspection at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
All information relating to the Company in this Proxy
Statement has been supplied by the Company and all information
contained in this Proxy Statement relating to FBOP and to FBOP
Acquisition has been supplied by FBOP.
<PAGE>
SUMMARY
The following summary is a description of the material
facts regarding the Company, FBOP Corporation, FBOP Acquisition and
the matters to be considered at the Special Meeting and is qualified
in all respects by the information appearing elsewhere in this Proxy
Statement and the Appendices hereto. Unless otherwise defined herein,
capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Proxy Statement. Shareholders are
urged to read this Proxy Statement and the Appendices hereto in their
entirety.
The Companies
SDNB Financial Corp.
The Company is a bank holding company incorporated under
the laws of the State of California in 1982 and is registered under
the federal Bank Holding Company Act (the "BHCA"). The Company's
principal subsidiary is San Diego National Bank (the "Bank"), a
national banking association organized in 1981, the deposits of which
are insured by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation up to applicable limits. Through the Bank, the
Company provides general commercial banking services in the
metropolitan San Diego area, focusing primarily upon wholesale
commercial banking operations and emphasizing the needs of small and
medium size business firms and corporations and the personal banking
needs of business executives and professional persons located in the
Bank's service area. At September 30, 1996, the Company had
consolidated assets of approximately $192.2 million, consolidated
liabilities of approximately $175.3 million (which includes total
deposits through the Bank of approximately $156.4 million), and
shareholders' equity of approximately $16.9 million. The Company's
principal executive office is located at 1420 Kettner Boulevard, San
Diego, California 92101, and its telephone number at such office is
(619) 233-1234.
The Company is a joint venture partner in the San Diego
National Banking Building Joint Venture (the "Joint Venture"), a
partnership formed for the purpose of constructing and developing the
office building that houses the Company and the Bank (the "Bank
Building"). The Joint Venture is 62% owned by the Company and the
Company is the general partner. In addition, the Company owns SDNB
Mortgage Bankers, a California corporation, which is currently
inactive.
FBOP Corporation
FBOP is a privately owned registered bank holding company
and savings and loan holding company organized under the laws of the
State of Illinois. The principal assets of FBOP are its investments
in five banks and one thrift institution located in Illinois, Texas
and California. At September 30, 1996 FBOP had consolidated total
assets of approximately $2,054.1 million, total deposits of $1,824.5
million and consolidated equity of approximately $140.9 million. The
principal executive offices of FBOP are located at 11 West Madison,
Oak Park, Illinois 60302, and its telephone number at such office is
(708) 386-5000. FBOP will fund the cash purchase with a combination
of external financing and cash available to it through dividends
from its subsidiary banks. See "THE MERGER--Financing Arrangements
by FBOP and FBOP Acquisition."
FBOP Acquisition Company
FBOP Acquisition, an Illinois corporation, is a wholly-
owned subsidiary of FBOP and was organized by FBOP solely to
effectuate the Merger. The principal executive offices of FBOP
Acquisition are located at 11 West Madison, Oak Park, Illinois 60302,
and its telephone number at such office is (708) 386-5000. On the
consummation of the Merger, FBOP Acquisition will, pursuant to the
terms of the Merger Agreement, merge with and into the Company, with
the Company surviving the Merger as a wholly-owned subsidiary of
FBOP. See "THE MERGER."
The Special Meeting
Time, Date and Place
The Special Meeting will be held at 10:00 a.m., local
time, on February 12, 1997, at the San Diego National Bank Building,
1420 Kettner Boulevard, San Diego, California. See "THE SPECIAL
MEETING -- General."
Record Date; Shares Entitled to Vote
Holders of record of Common Stock at the close of business
on January 3, 1996 (the "Record Date") are entitled to notice of and
to vote at the Special Meeting and any adjournments or postponements
thereof. On the Record Date there were 3,082,276 shares of Common
Stock outstanding, each of which will be entitled to one vote on each
matter to be acted upon or which may properly come before the Special
Meeting and any adjournments or postponements thereof. See "THE
SPECIAL MEETING -- Record Date; Vote Required."
Purposes of the Special Meeting
The purposes of the Special Meeting are: (1) to consider
and vote upon a proposal to approve and adopt the Merger Agreement,
and (2) to transact any other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
Vote Required
The presence, in person or by proxy, of at least a
majority of the shares of Common Stock outstanding on the Record Date
is necessary to constitute a quorum at the Special Meeting. Assuming
a quorum is present, the affirmative vote of a majority of the votes
cast at the Special Meeting is necessary to approve the Merger
Agreement. See "THE SPECIAL MEETING -- Record Date; Vote Required."
Security Ownership of Management
and Certain Other Persons
As of the Record Date, directors and executive officers of
the Company may be deemed to be the beneficial owners of
approximately 6.45% of the outstanding shares of Common Stock
(excluding shares of Common Stock which are issuable upon exercise of
stock options and which are not outstanding and entitled to vote as
of the Record Date). As of the Record Date, neither FBOP nor FBOP
Acquisition owned, directly or indirectly, any shares of Common
Stock. See "THE SPECIAL MEETING -- Record Date; Vote Required."
The Merger
Form of the Merger; Effective Time
Pursuant to the Merger Agreement, at the Effective Time
(as defined below), FBOP Acquisition will merge with and into the
Company, with the Company surviving the Merger as a wholly-owned
subsidiary of FBOP. See "THE MERGER -- Form of the Merger."
The Effective Time of the Merger will be the date on which
an Agreement of Merger and other filings required by the California
General Corporation Law ("CGCL") are filed with the Secretary of
State of California or at such later time as specified in the
Articles of Merger and Agreement of Merger (the "Effective Time").
Upon consummation of the Merger, the shares of Common
Stock will, except as described below, be converted into the right to
receive the Per Share Merger Consideration (as defined below), and
the Company's shareholders will have no ownership interest in or
control over either the Company or FBOP.
Per Share Merger Consideration
Upon consummation of the Merger, each outstanding share of
Common Stock (except for shares of Common Stock with respect to which
dissenters' rights have been perfected) will be automatically
converted into the right to receive the Per Share Merger
Consideration in cash, without interest, to be determined by the
following formula:
<PAGE>
Aggregate plus Supplemental plus Aggregate minus Expenses
Merger Merger Strike
Consideration Consideration Price of
Options
divided by
outstanding shares plus aggregate shares of
of Common Stock Common Stock
subject to Options
For purposes of the above formula the terms have the following
meanings:
(a) Aggregate Merger Consideration shall be $26,627,222
(subject to increase by an amount equal to the
exercise price of any outstanding options, warrants
or rights to purchase the Common Stock ("Options")
which have been exercised prior to the consummation
of the Merger).
(b) Expenses shall be all fees and expenses incurred
by the Company in connection with the Merger,
including finders' and brokers' fees, legal expenses
and filing and printing fees, but not including up
to $250,000.00 of the fee payable to Keefe, Bruyette
& Woods, Inc. ("Keefe Bruyette").
(c) Supplemental Merger Consideration shall mean an
increase in the Aggregate Merger Consideration due
to a decrease of the prepayment penalty negotiated
by the Company in connection with the prepayment of
the mortgage loan on the Bank Building. The Company
and FBOP have negotiated a reduction in the
prepayment penalty with the mortgage holder
resulting in Supplemental Merger Consideration in
the amount of $300,000. See "THE MERGER -- Per
Share Merger Consideration."
(d) Aggregate Strike Price of Options shall be the sum
of the exercise price of each outstanding Option.
Assuming that all Options are not exercised and assuming
Expenses are equal to $400,000, the Per Share Merger Consideration
would be $7.93. In addition to the reduction in the prepayment
penalty negotiated with the mortgage holder (as described above) the
mortgage holder also agreed to surrender warrants to purchase 150,000
shares of the Company's Common Stock at $5.44 per share (which
warrants are included in the calculation of the Per Share Merger
Consideration). As a result of the surrender of the warrants and the
accompanying redistribution of the proceeds of these warrants, the
shareholders and Option holders will receive distributions of an
additional 10 cents per share, for a total Per Share Merger
Consideration of approximately $8.03 per share. THERE CAN BE NO
ASSURANCE THAT THE PER SHARE MERGER CONSIDERATION WILL BE MORE OR
LESS THAN THIS NUMBER. Shareholder approval of the Merger Agreement
will be resolicited in the event the minimum Per Share Merger
Consideration to be paid to the Company's shareholders is less than
$8.00 per share.
The Common Stock is included for quotation on the National
Association of Securities Dealers Automated Quotation System/National
Market System (the "NASDAQ/NMS"). There is only a limited market for
the Common Stock. On July 12, 1996, the last trading day before the
announcement of the execution of the Merger Agreement, the closing
price for the Common Stock as reported on the NASDAQ/NMS was $6.25
per share. On January ___, 1997 (the last practicable date prior to
the mailing of this Proxy Statement), the closing price for the
Common Stock as reported by the NASDAQ/NMS was $_______ per share.
SDNB SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
THE COMMON STOCK. For certain additional information concerning the
trading history and dividends paid on the Common Stock, see "STOCK
PRICES."
Recommendation of the Board of Directors
The Board of Directors believes that the Merger is fair
to, and in the best interests of, the Company and its shareholders,
and has unanimously approved the Merger Agreement and recommends that
the Company's shareholders vote FOR the approval and adoption of the
Merger Agreement. The Board of Directors' recommendation is based
upon a number of factors described in this Proxy Statement. In
considering the Board's recommendation, shareholders should be aware
that certain members of the management and the Board of Directors of
the Company have certain interests in the Merger that are in addition
to their interests as shareholders of the Company generally. See
"THE MERGER -- Recommendation of the Board of Directors; Reasons for
the Merger" and -- "Interests of Certain Persons in the Merger."
Opinion of Financial Advisor
Keefe Bruyette has served as the Company's financial
advisor in connection with the Merger. On July 11, 1996, the date on
which the Board of Directors approved the Merger Agreement, Keefe
Bruyette delivered to the Board of Directors its oral opinion
(subsequently confirmed in writing) to the effect that, as of the
date of its opinion, the consideration to be received by the
shareholders of the Company pursuant to the Merger Agreement is fair
from a financial point of view to such shareholders. Keefe Bruyette
subsequently confirmed such opinion to the Board of Directors as of
January ___, 1997 (the "Fairness Opinion"). A copy of the Fairness
Opinion of Keefe Bruyette is attached to this Proxy Statement as
Appendix B. The attached Fairness Opinion sets forth the assumptions
made, matters considered, the scope and limitations of the review
undertaken and procedures followed by Keefe Bruyette, and should be
read in its entirety. See "THE MERGER -- Opinion of Financial
Advisor."
Interests of Certain Persons in the Merger
Certain members of the management and the Board of
Directors of the Company have certain interests in the Merger that
are in addition to their interests as shareholders of the Company.
These interests include: (i) FBOP and FBOP Acquisition's covenant to
use their best efforts to purchase insurance to be effective after
the Effective Time, subject to a maximum premium limitation of
$80,000, protecting the Company's directors and officers against
liabilities and claims (and related expenses) made against them
resulting from their service to the Company prior to the Effective
Time; (ii) the condition to consummation of the Merger that FBOP
shall have entered into separate three year employment agreements
with Murray L. Galinson, Robert B. Horsman, Howard W. Brotman and
Joyce Chewning-Johnson who are currently executive officers of both
the Company and the Bank providing for (x) salaries not less than
amounts paid to each of them as of the date of the Merger Agreement
($190,946, $132,966, $106,806 and $114,008 respectively for Messrs.
Galinson, Horsman and Brotman and Ms. Chewning-Johnson) plus an
annual bonus to be determined by FBOP; (y) severance payments in the
event of certain terminations; and (z) substantially the same job
responsibilities held as of the date of the Merger Agreement;
(iii) in the event an employment agreement with FBOP does not become
effective, benefits payable to Messrs. Galinson, Horsman and Brotman
and Ms. Chewning-Johnson in the amounts of approximately $543,000,
$358,000, $296,000 and $306,000 respectively under their current
change in control agreements and employment agreements with the
Company in the event their respective employment is terminated within
certain specified periods prior to or following the Effective Time
for certain reasons other than for cause, as defined therein; and
(iv) for directors and officers of the Company holding Options which
are not currently exercisable, such Options will become exercisable
in connection with the Merger and holders of such Options shall have
the right at the Effective Time to receive payment for each such
Option in an amount equal to the excess of the Per Share Merger
Consideration over the exercise price per share of each such Option
("Cash Consideration Per Option"). These interests are described
in more detail in this Proxy Statement. See "THE MERGER -- Interests
of Certain Persons in the Merger."
Certain Tax Consequences
The receipt of cash for shares of Common Stock in the
Merger will be a taxable transaction to the Company's shareholders
for federal income tax purposes and may also be a taxable transaction
under applicable state, local, foreign and other tax laws. In
general, a shareholder of the Company should recognize capital gain
or loss for federal income tax purposes per share in an amount equal
to the difference between the Per Share Merger Consideration and the
adjusted tax basis per share of his or her Common Stock. See "THE
MERGER -- Certain Tax Consequences."
Conditions to the Merger
The obligations of the Company and FBOP and FBOP
Acquisition to consummate the Merger are subject to various
conditions, including obtaining requisite shareholder and regulatory
approvals. See "THE MERGER AGREEMENT -- Conditions to the Merger."
Regulatory Matters
The Merger is subject to prior approval by the Federal
Reserve Board. On December 10, 1996, The Federal Reserve Board
approved FBOP's application to acquire the Company. See "THE MERGER
AGREEMENT -- Conditions to the Merger" and "THE MERGER -- Regulatory
Matters."
Termination
The Merger Agreement may be terminated under certain
circumstances by the Company and/or FBOP and FBOP Acquisition at any
time prior to the Effective Time, whether before or after approval
and adoption of the Merger Agreement by the shareholders of the
Company. See "THE MERGER AGREEMENT -- Termination."
Termination Fee
If the Merger is not consummated and the Company enters
into a letter of intent, commitment letter or agreement with a third
party regarding a merger, consolidation, sale of assets or similar
transaction involving the Company within 12 months following
termination of the Merger Agreement, then the Merger Agreement
provides under certain circumstances that the Company shall pay a fee
of $2,500,000 to FBOP Acquisition on the consummation of such third
party merger, consolidation, sale of assets or such other transaction
(the "Termination Fee").
The Termination Fee is intended to increase the likelihood
that the Merger will be consummated in accordance with the terms of
the Merger Agreement. Consequently, the Termination Fee may have the
effect of discouraging persons who might now or prior to the
Effective Date be interested in acquiring all or a significant
interest in the Company from considering or proposing such an
acquisition, even if such persons were prepared to pay a higher price
per share for the Common Stock than the Per Share Merger
Consideration. See "MERGER AGREEMENT -- Termination Fee."
Rights of Dissenting Shareholders
Pursuant to Chapter 13 of the CGCL, the Company's
shareholders will be entitled to dissenters' rights of appraisal with
respect to the Merger. The Company's shareholders desiring to
exercise appraisal rights and to obtain an appraisal of the "fair
value" of their shares of Common Stock should be aware that the
failure to comply strictly with the provisions of Chapter 13 of the
CGCL may result in a waiver or forfeiture of their appraisal rights.
See "THE MERGER -- Dissenters' Rights" and Appendix C to this Proxy
Statement.
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following is a summary of certain selected historical
consolidated financial information of the Company. This summary
information has been derived in part from, and should be read in
conjunction with, the consolidated financial statements of the
Company and the related notes thereto which are incorporated by
reference in this Proxy Statement. Results of interim periods are
not necessarily indicative of results to be expected for any other
interim period or for the year as a whole. Historical information
for certain periods is derived from financial statements not included
herein.
<TABLE>
Nine Months Ended Year Ended December 31
September 30
1996 1995 1995 1994 1993 1992 1991
FOR THE PERIOD,
in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Total Interest Income $9,738 $9,530 $12,743 $11,818 $11,930 $12,334 $15,116
Net Interest Income 6,960 7,187 9,527 8,912 8,571 8,321 8,468
Securities Gain, Net 3 11 11 --- --- 25 80
Provision for Loan Losses --- 250 200 1,850 2,950 1,320 1,270
Net Income (Loss) 279 158 212 (159) (2,562) (2,211) (511)
AT PERIOD END,
in thousands
Assets $192,230 $169,401 $178,572 $173,185 $170,693 $194,689 $205,232
Deposits 156,406 134,648 140,409 138,276 138,150 164,739 154,979
Loans, net 102,034 89,971 90,329 94,910 108,511 130,010 119,817
Investment Securities 38,183 25,283 34,441 27,231 30,227 17,943 15,006
Long Term Obligations 7,892 10,158 7,989 10,158 10,379 10,630 10,881
Shareholders' Equity 16,868 14,032 16,686 8,969 9,488 12,050 14,261
PER SHARE DATA
Net Income (Loss) $0.09 $0.08 $0.10 $(0.10) $(1.67) $(1.44) $(0.33)
Cash Dividends Paid --- --- --- --- --- --- 0.08
Shareholders' Equity 5.48 4.57 5.43 5.83 6.17 7.83 9.27
</TABLE>
<PAGE>
THE SPECIAL MEETING
General
This Proxy Statement is being furnished to holders of
Common Stock in connection with the solicitation of proxies by the
Board of Directors for use at the Special Meeting of Shareholders to
be held at 10:00 a.m., local time, on Wednesday, February 12, 1997 at
the San Diego National Bank Building, 1420 Kettner Boulevard, San
Diego, California, and at any adjournments or postponements thereof.
This Proxy Statement and the accompanying form of proxy
are first being mailed to the shareholders of the Company on or about
January ___, 1997.
Matters to Be Considered at the Special Meeting
At the Special Meeting, the shareholders of the Company
will be asked: (1) to consider and vote upon a proposal to approve
and adopt the Merger Agreement; and (2) to transact such other
business as may properly come before the Special Meeting and any
adjournments or postponements thereof. See "THE MERGER AGREEMENT."
The Board of Directors has unanimously approved the Merger
Agreement and recommends that the shareholders of the Company vote
FOR the approval and adoption of the Merger Agreement. In
considering the Board's recommendation, shareholders should be aware
that certain members of the management and the Board of Directors of
the Company have certain interests in the Merger that are in addition
to their interests as shareholders of the Company generally. See "THE
MERGER -- Interests of Certain Persons in the Merger."
Record Date; Vote Required
The Board of Directors has fixed the close of business on
January 3, 1997 as the record date (the "Record Date") for the
determination of shareholders of the Company entitled to notice of
and to vote at the Special Meeting and any adjournments or
postponements thereof. Only holders of record on such date will be
entitled to notice of and to vote at the Special Meeting. On the
Record Date, there were 3,082,276 shares of Common Stock issued and
outstanding and entitled to vote at the Special Meeting which were
held by approximately 253 holders of record. Each holder of record
of Common Stock on the Record Date is entitled to cast one vote per
share, exercisable in person or by properly executed proxy, on the
approval and adoption of the Merger Agreement and on any other matter
properly submitted for the vote of the shareholders of the Company at
the Special Meeting and any adjournments or postponements thereof.
The presence at the Special Meeting, in person or by properly
executed proxy, of the holders of a majority of the shares of Common
Stock outstanding and eligible to be voted at the Special Meeting is
necessary to constitute a quorum at the Special Meeting.
Approval of the Merger Agreement requires the affirmative
vote of the holders of a majority of the outstanding shares entitled
to vote at the Special Meeting. Approval of the Merger Agreement by
the Company's shareholders is a condition to consummation of the
Merger.
For purposes of determining the number of votes cast with
respect to a matter, only those votes cast "for" and "against" a
proposal are counted. Proxies marked as abstentions will not be
counted as votes cast. In addition, shares held in street name as to
which proxies have been designated as not voted by brokers will not
be counted as votes cast. Proxies marked as abstentions or as
"broker non-votes", however will be treated as shares present for
purposes of determining whether a quorum is present.
As of the Record Date, directors and executive officers of
the Company and their affiliates may be deemed to be the direct or
indirect beneficial owners of 198,661 shares of Common Stock
representing approximately 6.45% of the outstanding shares of Common
Stock (excluding shares of Common Stock which are issuable upon
exercise of stock options and which are not outstanding and entitled
to vote as of the Record Date). As of the Record Date, neither FBOP
nor FBOP Acquisition owned, directly or indirectly, any shares of
Common Stock.
Proxies
This Proxy Statement is being furnished to shareholders of
the Company in connection with the solicitation of proxies by the
Board of Directors for use at the Special Meeting. All shares of
Common Stock which are entitled to vote and are represented at the
Special Meeting by properly executed proxies received prior to or at
the Special Meeting, and not duly revoked, will be voted at the
Special Meeting in accordance with instructions indicated on such
proxies. If no instructions are indicated on a properly executed
proxy, such proxy will be voted FOR the approval and adoption of the
Merger Agreement.
If any other matters are properly presented for
consideration at the Special Meeting, including, among other things,
consideration of a motion to adjourn or postpone the Special Meeting
to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment,
provided, however, no proxy voted against the proposal to approve and
adopt the Merger Agreement will be voted in favor of any proposal to
adjourn or postpone the Special Meeting for the purpose of soliciting
additional proxies or otherwise. The Company has no knowledge of any
matters to be presented at the Special Meeting other than those
matters described herein.
SDNB SHAREHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS. SDNB SHAREHOLDERS WILL RECEIVE SEPARATE
INSTRUCTIONS REGARDING THE SURRENDER OF CERTIFICATES IF THE MERGER IS
CONSUMMATED.
Any proxy given pursuant to this solicitation may be
revoked by the person giving it at any time before it is voted.
Proxies may be revoked by (i) filing with the Secretary of the
Company at the Company's corporate address at or before the taking of
the vote at the Special Meeting, a written notice of revocation
bearing a later date than the proxy, (ii) duly executing a later
dated proxy relating to the same shares and delivering it to the
Secretary of the Company at the Company's corporate address at or
before the taking of the vote at the Special Meeting or (iii)
attending the Special Meeting and voting in person. Attendance at
the Special Meeting will not in and of itself constitute a revocation
of a proxy. If you are a shareholder whose shares are not registered
in your own name, you will need additional documentation from your
record holder to vote personally at the Special Meeting.
All expenses of this solicitation, including the cost of
preparing this Proxy Statement, will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of the Company or its
subsidiaries in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not
receive any additional compensation for these activities, but may be
reimbursed for reasonable out-of-pocket expenses in connection with
such solicitation. Arrangements will also be made with custodians,
nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse
such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
THE MERGER
Form of the Merger
Pursuant to the Merger Agreement, on the Effective Date of
the Merger (as defined below under "Effective Date"), FBOP
Acquisition will merge with and the Company, with the Company
surviving the Merger as a wholly owned subsidiary of FBOP.
Per Share Merger Consideration
Upon consummation of the Merger, except as described
below, each outstanding share of Common Stock will be converted into
the right to receive the Per hare Merger Consideration in cash,
without interest to be determined by the following formula:
Aggregate plus Supplemental plus Aggregate minus Expenses
Merger Merger Strike Price
Consideration Consideration of Options
divided by
outstanding plus aggregate shares of
of Common Stock Common Stock
subject to Options
For purposes of the above formula the terms have the following
meanings:
(a) Aggregate Merger Consideration shall be $26,627,222
(subject to increase by an amount equal to the
exercise price of any outstanding Options to
purchase the Common Stock which have been
exercised prior to the consummation of the Merger).
(b) Expenses shall be all fees and expenses incurred
by the Company in connection with the Merger,
including finders' and brokers' fees, legal expenses
and filing and printing fees, but not including up
to $250,000.00 of the fee payable to Keefe Bruyette.
(c) Supplemental Merger Consideration shall mean an
increase in the Aggregate Merger Consideration due
to a decrease of the prepayment penalty negotiated
by the Company in connection with the prepayment of
the mortgage loan on the Bank Building. The Company
and FBOP have negotiated a reduction in the
prepayment penalty with the mortgage holder
resulting in Supplemental Merger Consideration in
the amount of $300,000.
(d) Aggregate Strike Price of Options shall be the sum
of the exercise price of each outstanding Option.
Assuming that all Options are not exercised, and assuming
Expenses are equal to $400,000, the Per Share Merger Consideration
would be $7.93 per share. In addition to the reduction in the
prepayment penalty negotiated with the mortgage holder (as described
above), the mortgage holder also agreed to surrender warrants to
purchase 150,000 shares of the Company's Common Stock at $5.44 per
share (which warrants are included in the calculation of the Per
Share Merger Consideration). As a result of the surrender of the
warrants and the accompanying redistribution of the proceeds of these
warrants, the shareholders and Option holders will receive
distributions of an additional 10 cents per share, for a total Per
Share Merger Consideration of approximately $8.03 per share. THERE
CAN BE NO ASSURANCE THAT THE PER SHARE MERGER CONSIDERATION WILL BE
MORE OR LESS THAN THIS NUMBER. Shareholders approval of the Merger
Agreement will be resolicited in the event the minimum Per Share
Merger Consideration to be paid to the Company's shareholders is
less than $8.00 per share.
The Merger Agreement prohibits the payment of dividends by
the Company pending the consummation of the Merger. The Per Share
Merger Consideration was determined through arms-length negotiations
between the Company with the assistance of its financial advisor,
Keefe Bruyette, and FBOP and FBOP Acquisition.
All shares of Common Stock owned by the Company, FBOP and
FBOP Acquisition and their respective subsidiaries, if any, (other
than shares held directly or indirectly in trust accounts, managed
accounts and the like or otherwise held in a fiduciary capacity that
are beneficially owned by third parties or held in respect of a debt
previously contracted) will be canceled.
On July 12, 1996, the last trading day preceding the
public announcement by the Company of the execution of the Merger
Agreement, the closing price of the Common Stock on the NASDAQ/NMS
was $6.25 per share. On January ___, 1997, the last practicable
trading day preceding the mailing of this Proxy Statement, the
closing price of the Common Stock on the NASDAQ/NMS was $ per
share. SDNB SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE COMMON STOCK. See "STOCK PRICES."
Effective Date of the Merger
The Merger Agreement provides that as soon as practicable
after the satisfaction or waiver of the conditions to the Merger, the
parties will file Articles of Merger with the Secretary of State of
Illinois and make all other filings or recordings required by the
Illinois Business Corporation Act ("ILBCA") and will file an
Agreement of Merger and related filings required by the CGCL in
connection with the Merger. The Effective Time shall be such date on
which the Agreement of Merger and related filings are filed with the
Secretary of State of California or at such later date as is
specified in the Articles of Merger and Agreement of Merger.
It is expected that a period of time will pass between the
Special Meeting and the Effective Date while the parties file the
necessary merger documents in order to consummate the Merger. The
Merger Agreement may be terminated by either party if, among other
reasons, the Merger has not been consummated by 5:00 p.m. Pacific
Time on April 30, 1997. See "THE MERGER AGREEMENT -- Termination".
Conversion of Shares; Procedures for Exchange of Certificates
As soon as practicable after the Effective Time, but in no
event later than seven days after the Effective Time, FBOP
Acquisition shall send or cause to be sent to each holder of Common
Stock a form letter of transmittal which will specify instructions
for use in surrendering certificates representing shares of Common
Stock in exchange for the cash into which such shares have been
converted.
SHAREHOLDERS SHOULD NOT FORWARD THEIR SDNB STOCK
CERTIFICATES UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS AND
INSTRUCTIONS. SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH
THE ENCLOSED PROXY.
American Stock Transfer & Trust Company will act as Paying
Agent and at the Effective Time, FBOP and FBOP Acquisition will make
available to the Paying Agent the cash necessary to pay the Per Share
Merger Consideration and the Cash Consideration Per Option. The
Paying Agent will invest such cash as directed by FBOP Acquisition.
Until the certificates representing Common Stock are
surrendered for exchange after the consummation of the Merger,
holders of such certificates will not be paid the cash amount into
which such shares of Common Stock have been converted. The Merger
Agreement requires that when such certificates are surrendered, such
amount will be paid promptly without interest.
Background of the Merger
From time to time the Company's management and its Board
has considered and evaluated the Company's strategic plan and
direction. The acceleration of consolidation activity in the banking
industry and, more recently, merger activity in California coupled
with an improving economic environment in Southern California
prompted SDNB to explore strategic alternatives.
In early February 1996, representatives of Keefe Bruyette
met with the management of the Company to discuss the merger and
acquisition environment nationwide and in California and how it could
impact the competitive environment that the Company operated in and
how it may impact shareholder value. After subsequent conversations
with management, Keefe Bruyette was formally engaged by the Company
on February 21, 1996 to explore strategic alternatives.
As a result, Keefe Bruyette contacted a number of
potential acquirors that it believed might have an interest in and
capacity to acquire the Company. Torrey Pines Securities, Inc.
("TPS"), which has had an ongoing relationship with the Company,
introduced FBOP to the Company and Keefe Bruyette. As a result of
these activities, three potential acquirors emerged.
On May 11, 1996, Keefe Bruyette met with the Board to
discuss initial indications of interest that had been sent by the
three potential acquirors, including FBOP, earlier in the week. At
this meeting, Keefe Bruyette discussed the current merger and
acquisition environment and what was driving recent acquisitions
across the nation. Keefe Bruyette also discussed the banking
landscape in California and how recent acquisition activity, mainly
the First Interstate/Wells Fargo transaction, the First Interstate
branch divestiture and the California Bancshares deal impacted
transaction valuations. In addition, Keefe Bruyette presented an
exhibit reviewing recent bank acquisitions in California to determine
a range of prices that may be acceptable to the Company's
shareholders. Keefe Bruyette reviewed multiples of price to book
value, price to tangible book value , and price to earnings for
recent bank acquisitions. Keefe Bruyette also performed a present
value analysis which compared selling the Company in the near term
versus selling the Company in five years with a price to earnings
multiple to projected earnings. Finally, Keefe Bruyette reviewed the
three indications of interest and recommended that the Company
continue negotiations with two of the potential acquirors, including
FBOP, in an effort to increase the price which may be obtained in a
transaction and receive more favorable terms. The third indication
of interest was not competitive with the other two.
Keefe Bruyette then contacted each of the two potential
acquirors and began further negotiations on the terms of the
transaction. In addition, each of the potential acquirors performed
on-site due diligence during the following weeks.
Keefe Bruyette attended a meeting of the Board on June 20,
1996, to update the Board on the status of negotiations with FBOP and
the other potential acquiror and review the current prices and
structures of each bid. In conjunction with the price discussion,
Keefe Bruyette discussed the pricing multiples of each bid relative
to various earnings estimates, book value and tangible book value.
Keefe Bruyette also performed a present value analysis again using
updated financial projections from management with different
scenarios. The Board also considered an analysis of the financial
prospects of the Company if it remained independent. The Board
recommended that Keefe Bruyette continue negotiations with the two
bidders.
On June 26, 1996, Keefe Bruyette again met with the Board
to review final bids that were received from the two bidders, the
status of negotiations with each of the bidders and how the
discussions had progressed. Subsequent to the June 26, 1996 Board
meeting, an unsolicited offer from a third party was received by the
Company. The third party was allowed to conduct due diligence, but
it did not complete its review and subsequently withdrew its offer.
On July 5, 1996 Keefe Bruyette presented to the Board, the
final terms of the offers of each bidder and Keefe Bruyette was
instructed to negotiate a definitive agreement with the party which
at the time was the higher bidder. After informing the lower bidder
(FBOP) that the Company was going to go forward with the other party,
FBOP sent a letter to the Company significantly increasing its bid,
making it the higher of the two bids. The Board reconvened and
decided to negotiate a definitive agreement with the then highest
bidder which was FBOP. The Board approved the Merger Agreement on
July 11, 1996.
Recommendation of the Board of Directors; Reasons for the Merger
The Board of Directors believes that the Merger is fair
to, and in the best interests of, the Company and its shareholders.
Accordingly, the Board of Directors has unanimously approved the
Merger Agreement and recommends to the Company's shareholders that
they vote FOR the approval and adoption of the Merger Agreement. In
considering the Board's recommendation, shareholders should be aware
that certain members of the management and the Board of Directors of
the Company have certain interests in the Merger that are in addition
to their interests as shareholders of the Company generally. See "THE
MERGER -- Interests of Certain Persons in the Merger."
In reaching its determination that the Merger is fair to,
and in the best interests of, the Company's shareholders, the Board
of Directors considered the following primary factors:
(i) The Board's familiarity with and review of the
Company's business, operations, financial condition, earnings
and the Board's review of an analysis concerning the Company's
prospects;
(ii) The current and prospective economic and
competitive environment facing the Company;
(iii) The financial presentation of Keefe Bruyette, the
Company's independent financial advisor, and the Fairness
Opinion of Keefe Bruyette that, as of the date of such opinion,
the consideration to be received by shareholders of the Company
pursuant to the Merger Agreement is fair from a financial point
of view to such shareholders. A copy of the Fairness Opinion of
Keefe Bruyette is attached hereto as Appendix B and is
incorporated herein by reference (see --"Opinion of Financial
Advisor" below);
(iv) The Company's discussions with other potential
acquirors and the responses of the other potential acquirors
contacted by the Company's management and Keefe Bruyette in the
weeks prior to the execution of the Merger Agreement;
(v) The business, operations, earnings and financial
condition of FBOP;
(vi) The fact that consummation of the Merger was not
conditioned upon either FBOP or FBOP Acquisition obtaining
financing for its acquisition of the Company;
(vii) The Board's evaluation of the risks to consummation
of the Merger, including the risks associated with obtaining all
necessary regulatory approvals without the imposition of terms
or conditions which are materially burdensome to FBOP or FBOP
Acquisition and the impact to the Company in the event the
Merger is not consummated;
(viii) The Board's review of the possible alternatives to
the Merger, the range of possible values to the Company's
shareholders of such alternatives and the timing and likelihood
of actually receiving those values;
(ix) The potential for expansion of products and
services to be made available to the Bank's customers through an
affiliation with a much larger company like FBOP;
(x) The terms of the Merger Agreement.
In view of the wide variety of factors considered in
connection with its evaluation of the Merger, the Board of Directors
did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered
in reaching its determination.
Opinion of Financial Advisor
The Company retained Keefe Bruyette to act as its
financial advisor in connection with the Merger and related matters.
Keefe Bruyette was selected to act as the Company's financial advisor
based upon Keefe Bruyette's qualifications, expertise and reputation.
On July 11, 1996, at the meeting at which the Board of
Directors of the Company approved and adopted the Merger Agreement,
Keefe Bruyette delivered an oral opinion (subsequently confirmed in
writing) to the Board of Directors that as of the date of such
opinion, the consideration to be received by the Company's
shareholders pursuant to the Merger Agreement is fair, from a
financial point of view, to such shareholders. Keefe Bruyette
subsequently confirmed such opinion to the Board of Directors as of
January ___, 1997 (the "Fairness Opinion"). No limitations were
placed on Keefe Bruyette by the Company's management or the Board of
Directors with respect to the investigations made or the procedures
followed by Keefe Bruyette in rendering either opinion. In
considering the Fairness Opinion, the Board of Directors was aware of
and considered the fact that in connection with the Merger, Keefe
Bruyette would be entitled to receive a transaction fee which, as
described more fully below, is in part contingent upon consummation
of the Merger. The Company's shareholders are urged to read
carefully the full text of the Fairness Opinion, a copy of which is
attached as Appendix B to this Proxy Statement and is incorporated
herein by reference.
The full text of the Fairness Opinion of Keefe Bruyette, which
sets forth a description of the procedures followed, assumptions
made, matters considered and limits on the review undertaken, is
attached to this Proxy Statement as Appendix B and is incorporated
herein by reference. Shareholders are urged to read the opinion in
its entirety. Keefe Bruyette's Fairness Opinion is addressed to the
Board of Directors and does not constitute a recommendation as to how
any shareholder of the Company should vote with respect to the
Merger. The following summary of the opinion is qualified in its
entirety by reference to the full text of the Fairness Opinion.
In rendering its Fairness Opinion, Keefe Bruyette (i) reviewed
the Merger Agreement, Annual Reports to Shareholders and Annual
Reports on Form 10-K of the Company for the five years ended December
31, 1995, certain interim reports to shareholders and Quarterly
Reports of Form 10-Q of the Company and certain internal financial
analyses and forecasts prepared by the Company's management; (ii)
reviewed the last five years of audited financial statements for the
years ending December 31, 1995 for FBOP along with certain unaudited
interim financial information for FBOP; (iii) held discussions with
members of senior management of the Company and FBOP regarding the
past and current business operations, regulatory relationships,
financial condition and future prospects of the respective companies;
(iv) compared certain financial and stock market information for the
Company with similar information for certain other companies, the
securities of which are publicly traded; (v) reviewed the financial
terms of certain recent business combinations in the banking
industry; and (vi) performed such other studies and analyses as it
considered appropriate.
In conducting its review and arriving at its Fairness Opinion,
Keefe Bruyette relied upon and assumed the accuracy and completeness
of all the financial and other information provided to it or publicly
available, and Keefe Bruyette did not assume any responsibility for
independently verifying any such information. Keefe Bruyette relied
upon the management of the Company as to the reasonableness and
achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to it,
and Keefe Bruyette assumed that such forecasts and projections
reflect the best currently available estimates and judgements of the
Company as to the time periods for which they relate. Keefe Bruyette
also assumed that the aggregate allowances for loan losses for the
Company are adequate to cover such losses. In rendering its opinion,
Keefe Bruyette did not make or obtain any evaluations or appraisals
of the property of the Company or FBOP, nor did it examine any
individual credit files.
The following is a summary of the material financial analyses
employed by Keefe Bruyette in connection with providing its oral
opinion of July 11, 1996, and does not purport to be a complete
description of all analyses employed by Keefe Bruyette. Keefe
Bruyette has not prepared any subsequent analyses since it gave its
oral opinion on July 11, 1996.
Financial Summary of the FBOP Transaction. Keefe Bruyette
calculated the multiple which the Per Share Merger Consideration,
assumed to be approximately $8.00, represents when compared to the
Company's March 31, 1996 stated fully diluted book value per share of
$5.37, its March 31, 1996 fully diluted tangible book value per share
of $5.34, its 1995 earnings per share of $0.10, its trailing twelve
month earnings per share of $0.09 and its estimated 1996 earnings per
share of $0.24. The price to book value was 149%, the price to
tangible book value was 149%, the price to 1995 earnings was 80.0
times, the price to the trailing twelve months earnings was 88.9
times and the price to estimated 1996 earnings was 33.3 times.
Although the Per Share Merger Consideration is subject to adjustment,
Keefe Bruyette estimated that such adjustments at the time the
Fairness Opinion was rendered were not likely to diminish the Per
Share Merger Consideration by more than ten cents per share which
would not have changed the Fairness Opinion.
Selected Transactions Analysis. Keefe Bruyette analyzed certain
comparable merger and acquisition transactions for banking companies
based upon the acquisition price relative to stated book value,
stated tangible book value, and the latest twelve months earnings.
The information analyzed was compiled by Keefe Bruyette from both
internal sources and a data firm that monitors and publishes
transaction summaries and descriptions of mergers and acquisitions in
the financial services industry. The analysis included a review and
comparison of average and median acquisition price multiples to
stated book value, tangible book value, and trailing twelve month
earnings per share. The sample included, to the best of Keefe
Bruyette's knowledge, all acquisitions of California banking
companies announced during 1995 and 1996 in which the value of the
consideration paid to the shareholders of the acquired banks ranged
from $10 million to $100 million. The following acquisitions
comprised the group reviewed: ValliCorp Holdings' acquisition of
Auburn Bancorp; Monarch Bancorp's acquisition of Western Bank;
Dartmouth Capital's acquisition of Commerce Security Bank; Home
Interstate Bancorp's acquisition of CU Bancorp; Union Safe Deposit
Bank's acquisition of Great Valley Bank; CVB Financial Corp's
acquisition of Citizens Commercial; Shinhan Bank's acquisition of
Marine National Bank; Dartmouth Capital Corp.'s acquisition of
Liberty National Bank of California; City National Corp.'s
acquisition of First Los Angeles Bank; First Banks, Inc.'s
acquisition of First Commercial Bancorp; ValliCorp Holdings'
acquisition of CoBank Financial Corp; California State Bank's
acquisition of Landmark Bancorp; Eldorado Bancorp's acquisition of
Mariners Bancorp; ValliCorp Holding's acquisition of El Capitan
Bancshares; and California Bancshares' acquisition of Centennial
Bank.
The average and median acquisition prices as a multiple of
stated book value of the above group was 154% and 150%, respectively
(with the range of 113 % to 220 %) compared with 149 % for the
Company under the proposed Merger. The average and median
acquisition prices as a multiple of tangible book value of the above
group was 161% and 164% respectively (with a range of 113% to 220%)
compared with 149% for the Company under the proposed Merger; and
the average and median prices as a multiple of the trailing twelve
months earnings per share of the above group was 17.52 times and
16.21 times, respectively (with a range of 10.95 times to 28.57
times), compared with 88.9 times for the Company under the proposed
Merger.
Discounted Cash Flow Analysis. Keefe Bruyette compared the
present value of future cash flows that would accrue to a holder of a
share of Common Stock assuming the Company was to remain independent
to the Per Share Merger Consideration. The present value of future
case flows was determined by adding (i) the present value of the
estimated future dividend stream that the Company could generate over
the three year period beginning in 1996 and (ii) the present value of
the "terminal value" of the Company's Common Stock at the end of that
period. Keefe Bruyette presented a table showing the four earnings
scenarios of the Company based on estimates supplied to it by
management of the Company and based on a number of assumptions
generally characterized by management as "aggressive" or optimistic
cases. Keefe Bruyette used each of four earnings scenarios as a base
and applied terminal price to earnings multiples to each scenario
ranging from 10.0 times earnings to 13.5 times earnings assuming at
the lower terminal price to earnings multiples, the Company's Common
Stock could be traded in the market at those levels, and at the
higher terminal price to earnings multiples, a control sale of the
Company. Finally, Keefe Bruyette discounted these future cash flows
back using rates of discount rates of 15.0% and 20.0%. In addition,
Keefe Bruyette prepared two additional analyses that used earnings
scenarios for the Company based on the average profitability of the
Company during the past ten years (using only those years in which
the Company made a profit) and, secondly, an earnings scenario using
profitability projections based on the average of the projections
described immediately above and the most profitable of the four
earnings scenarios prepared by management of the Company. These two
scenarios were also subjected to a range of terminal price earnings
multiples ranging from 10.0 times to 13.5 times earnings. Of the 48
scenarios run (6 earnings scenarios each at 4 terminal price to
earnings multiples and each of those at 2 discount rates) Keefe
Bruyette noted only one scenario produced a valuation higher than the
estimated Per Share Merger Consideration with only three others
within five percent of the estimated Per Share Merger Consideration.
Those scenarios were aggressive and were not deemed likely to be
achieved. The majority of the other scenarios were significantly
(more than 20%) below the estimated Per Share Merger Consideration.
The discounted cash flow analysis for the Company was based on
a range of assumptions described above. Keefe Bruyette stated that
the discounted cash flow analysis is a widely used valuation
methodology but noted that it relies on numerous assumptions
including assets 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
Company's Common Stock.
Other Analyses. Keefe Bruyette also reviewed the relative
financial and market performance of the Company to a relevant peer
group and discussed with the Board the overall market for bank
acquisitions from the perspectives of the national, California, and
San Diego market.
The preparation of a fairness opinion is a complex process and
is not necessarily amenable to partial analysis or summary
description. Selecting portions of the analyses or of the summary
set forth above, without considering the analysis as a whole could
create an incomplete view of the processes underlying Keefe
Bruyette's opinion. In arriving at its fairness determination, Keefe
Bruyette considered the results of all such analyses. None of the
financial institutions selected for use in developing comparisons is
identical to the Company, and none of the other acquisitions
evaluated by Keefe Bruyette is identical to the Merger. Accordingly,
Keefe Bruyette indicated to the Company's Board that analysis of the
results described above are not purely mathematical, but involve
complex consideration and judgments concerning differences in
operation and financial characteristics, including among other
things, differences in revenue composition, earnings performance, and
capital ratios among the Company and the selected companies and
acquisitions reviews. The analyses were prepared by Keefe Bruyette
solely for the purpose of preparing its Fairness Opinion to the
Company's Board of Directors as to the fairness of the Per Share
Merger Consideration to the shareholders of the Company, and does not
purport to be appraisals or necessarily reflect the prices at which
the Company or it securities may actually be sold. Analyses based
upon future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than
suggested by such analyses.
Pursuant to an engagement letter, dated February 21, 1996 (the
"Keefe Bruyette Engagement Letter"), the Company agreed to pay Keefe
Bruyette a cash fee (the "Contingent Fee") equal to 1.00% of the
market value of the aggregate consideration offered to the
shareholders of the Company in a merger or acquisition transaction or
a sale of all, or substantially all of the Company's assets to an
acquiror (the "Transaction") and to reimburse Keefe Bruyette for all
reasonable out-of-pocket expenses and disbursements. The Contingent
Fee is to be payable in two parts with $15,000 payable with the first
to be executed of an agreement in principle or a definitive agreement
contemplating the consummation of a Transaction and 1.00 % of the
market value of the aggregate consideration offered to the
shareholders of the Company in a Transaction, payable at the closing
of the Transaction, with the $15,000 fee described above being
credited against the Contingent Fee. Assuming a range of $8.00 to
$8.03 per share for the Per Share Merger Consideration, the
Contingent Fee would be in a range of $264,100 to $265,200. In
addition to the fee payable to Keefe Bruyette, the Company has
agreed to pay a fee of approximately $152,700 payable on the closing
of the Transaction to TPS in connection with that firm's
introduction of FBOP as a potential acquiror of the Company. The
Keefe Bruyette Engagement Letter further provided for the payment
to Keefe Bruyette of a $75,000 finder's fee in the event Keefe
Bruyette introduced the successful acquiror to the Company. No
finders fee will be paid to Keefe Bruyette in connection with the
Transaction.
Keefe Bruyette is a nationally recognized investment banking
firm that regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions. The Board
selected Keefe Bruyette to act as its financial advisor on the basis
of expertise and its reputation in investment banking and mergers and
acquisitions.
Keefe Bruyette has advised the Company that, in the ordinary
course of its business as a full-service securities firm, Keefe
Bruyette may, subject to certain restrictions, actively trade the
equity and/or debt securities of the Company for its own accounts or
for the accounts of its customers, and accordingly, may at any time
hold a long or short position in such securities. As of the date of
its Fairness Opinion, Keefe Bruyette held no position in either the
securities of the Company or FBOP.
The foregoing description of Keefe Bruyette's opinion is
qualified in its entirety by reference to the full text of the
Fairness Opinion, which is attached hereto as Appendix B.
Interests of Certain Persons in the Merger
Certain members of the Company's management and the Board
may be deemed to have certain interests in the Merger that are in
addition to their interests as shareholders of the Company generally.
The Board was aware of these interests and considered them, among
other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
Insurance
In the Merger Agreement, FBOP and FBOP Acquisition have
agreed to use their best efforts to provide to persons who served as
directors and officers of the Company on or before the Effective
Time, insurance against liabilities and claims (and related expenses)
made against them resulting from their service as such prior to the
Effective Time substantially similar in all material respects to the
insurance coverage provided to them in such capacities as of the date
of the Merger Agreement. The Merger Agreement further provides that
in no event will FBOP or FBOP Acquisition be required to expend more
than $80,000 in the aggregate for such insurance coverage. In the
event either FBOP or FBOP Acquisition is unable to maintain or obtain
such insurance on commercially reasonable terms, FBOP and FBOP
Acquisition have agreed use their best efforts to obtain as much
comparable insurance coverage as may be available up to a cost of
$80,000. The cost of such insurance in excess of $80,000 will be
borne by the Company or its shareholders.
Employment Agreements
FBOP desires to retain certain management of the Company,
and has entered into employment agreements with Murray L. Galinson,
Chairman, President and Chief Executive Officer of the Company and
Chairman and Chief Executive Officer of the Bank, Robert B. Horsman,
Executive Vice President of the Company and President of the Bank,
Howard W. Brotman, Senior Vice President, Secretary and Chief
Financial Officer of the Company and Senior Vice President and Chief
Financial Officer of the Bank and Joyce Chewning-Johnson, Senior
Vice President of the Company and Executive Vice President and
Secretary of the Bank, each for three-year terms, to be effective as
of the Effective Date and providing for: (a) salary not less than the
amounts paid to each executive as of the date of the Merger Agreement
and eligibility for an annual bonus to be determined by FBOP; (b)
job responsibilities substantially similar to the executives'
responsibilities as of the date of the Merger Agreement; and (c)
severance benefits in the event the executive is terminated (other
than termination for cause, illness or disability) or resigns for any
reason to be paid in a lump sum in an amount equal to the executive's
five-year average monthly compensation multiplied by the number of
months remaining in the term of the employment agreement, subject to
certain limits which would amount to approximately $543,000,
$358,000, $296,000 and $306,000 respectively for Messrs. Galinson,
Horsman and Brotman and Ms. Chewning-Johnson. These employment
agreements provide for initial annual salaries of $200,000, $137,000,
$110,000, and $117,000, respectively for Messrs. Galinson, Horsman
and Brotman and Ms. Chewning-Johnson. See "THE MERGER AGREEMENT --
Conditions to the Merger".
SDNB Change in Control Agreements and Employment Agreements
The Company has entered into change in control agreements
with certain executive officers of the Company and the Bank (Murray
L. Galinson, Robert B. Horsman, Howard W. Brotman and Joyce Chewning-
Johnson) which provide for certain payments and benefits to the
executive in the event the executive's employment is terminated
following a change in control or potential change in control as those
terms are defined in the agreements (the "Change in Control Events").
These agreements also provide for reimbursement to the executive of a
portion of the excise taxes payable (if any) as a result of receipt
by the executive of payments and benefits due to a termination of
employment following a Change in Control Event. The Merger Agreement
constitutes a Change in Control Event for purposes of these
agreements. If, under the terms of these change of control
agreements, payments were required to be made to Messrs. Galinson,
Horsman and Brotman and Ms. Chewning-Johnson, the estimated amount of
such payments would be $541,702, $356,582, $295,599 and $304,840,
respectively. To the extent that an executive is entitled to and
receives benefits under the change in control agreements, the
executive is not entitled to any compensation or benefits under the
executive's employment agreement described below.
The Company has also entered into employment agreements
with Messrs. Galinson, Brotman, Horsman and Ms. Chewning-Johnson
which provide, in part, for the extension of each executive's
employment for a period of three years after a change in control of
the Company. During such three-year term, each executive is entitled
to the payment of compensation and benefits commensurate with
compensation and benefits payable to the executive at the time of the
change in control and each executive is entitled to a minimum of a
10% increase in salary each year.
Since each of the executives with existing change in
control agreements and employment agreements have entered into new
employment agreements with FBOP to be effective on the Effective
Date, the change in control payments and compensation and benefits
pursuant to the existing change in control and employment agreements
discussed above will not be paid to such executives if the Merger is
consummated. See "Employment Agreements" above.
Options
In the Merger Agreement, FBOP and FBOP Acquisition have
agreed to pay to each holder of an Option an amount per share of
Common Stock equal to the excess of the Per Share Merger
Consideration over the exercise price per share of such Option (the
"Cash Consideration Per Option"). Concurrently with the payment of
the Cash Consideration Per Option to a holder of an Option, the
Option will be canceled and shall cease to exist.
Certain members of management and the Board of Directors
of the Company hold Options to purchase Common Stock. The following
table illustrates the Cash Consideration Per Option Payable and total
cash payable for Options to the members of the Board of Directors and
the executive officers of the Company assuming a Per Share Merger
Consideration of $8.03:
<PAGE>
<TABLE>
NAME NUMBER AVERAGE CASH TOTAL CASH
POSITION WITH OF EXERCISE CONSIDERATION PAYABLE FOR
COMPANY OPTIONS PRICE PER OPTION OPTIONS
<S> <C> <C> <C> <C> <C>
Ronald Bird Senior Vice President of Bank 8,000 $3.68 $4.35 $34,800
Howard W. Brotman Director, Senior Vice President,
Secretary, Chief Financial Officer
of Company, Senior Vice President,
Chief Financial Officer of Bank 19,114 5.24 2.79 53,328
Joyce Chewning-Johnson Senior Vice President of
Company, Executive Vice
President, Secretary of Bank 14,099 3.83 4.20 59,216
Margaret Costanza Director 14,000 6.00 2.03 28,420
Murray L. Galinson Director, Chairman of Board,
President and CEO of Company,
CEO of Bank 76,492 5.08 2.95 225,651
Karla J. Hertzog Director 24,500 4.82 3.21 78,645
Robert B. Horsman Director, Executive Vice
President of Company, President
of Bank 61,133 4.70 3.33 203,573
Gail Jensen-Bigknife Senior Vice President of Bank 5,810 3.25 4.78 27,772
Mark P. Mandell Director 24,500 4.82 3.21 78,645
Debra Perkins Vice President of Bank 6,973 5.08 2.95 20,570
Connie Reckling Vice President of Bank 5,106 4.75 3.28 16,748
Patricia L. Roscoe Director 38,990 5.66 2.37 92,406
Julius H. Zolezzi Director 47,404 5.93 2.10 99,548
</TABLE>
Directors
It is anticipated that following the Merger, the current
members of the board of directors of the Bank (all of whom serve on
the Board of the Company) will continue to serve on the board of
directors of the Bank for a term or terms to be determined by FBOP
and FBOP Acquisition.
Certain Tax Consequences
The receipt of cash for shares of Common Stock pursuant to
the Merger will be a taxable transaction for Federal income tax
purposes and may also be a taxable transaction under applicable
state, local and foreign tax laws. In general, a shareholder who
receives cash for shares of Common Stock pursuant to the Merger will
recognize a gain or loss for Federal income tax purposes equal to the
difference between the amount of cash received in the exchange of
such shareholder's shares and such shareholder's adjusted tax basis
in such shares. Provided that the shares of Common Stock constitute
capital assets in the hands of the shareholder, such gain or loss
will be capital gain or loss, and will be long-term capital gain or
loss if the shareholder has held the shares for more than one year at
the time of the exchange.
The foregoing discussion may not be applicable to certain
types of shareholders, including shareholders who acquired shares of
Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation, individuals who are not citizens or
residents of the United States, foreign corporations and entities
that are otherwise subject to special tax treatment under the Code
(such as insurance companies, tax exempt entities and regulated
investment companies).
The federal income tax discussion set forth above is
included for general information only and is based upon present law.
Shareholders are urged to consult their tax advisors with respect to
the specific tax consequences of the Merger to them, including the
application and effect of the alternative minimum tax, and state,
local and foreign tax laws.
Financing Arrangements by FBOP and FBOP Acquisition
Consummation of the Merger is not conditioned upon either
FBOP or FBOP Acquisition obtaining the cash necessary in order to pay
the aggregate Merger consideration due to the holders of Common Stock
upon consummation of the Merger. In the Merger Agreement, FBOP and
FBOP Acquisition have represented that they have sufficient funds
available to fulfill their obligations under the Merger Agreement.
FBOP will fund the cash purchase price with a combination of external
financing and cash available to it through dividends from its
subsidiary banks.
Regulatory Matters
Consummation of the Merger Agreement is subject to the
approval of the Federal Reserve Board because consummation of the
Merger will result in FBOP obtaining control of both the Company
and the Bank. Accordingly, under the Bank Holding Company Act of
1956, as amended (the "BHC Act") and regulations promulgated
thereunder, the Federal Reserve Board must approve the Merger. The
BHC Act provides that the Federal Reserve Board may not approve any
transaction that would result in a monopoly, or that would be
in furtherance of any combination or conspiracy to monopolize or to
attempt to monopolize the business of banking in any part of the
United States, or the effect of which in any section of the country
may be substantially to lessen competition, or to tend to create a
monopoly, or that in any other manner would be in restraint of trade,
unless the Federal Reserve Board finds that the anticompetitive
effects of the proposed transaction are clearly outweighed in the
public interest by the probable effect of the transaction in meeting
the convenience and needs of the communities to be served.
In conducting its review of any application for approval,
the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the company or companies
and the bank concerned, and the convenience and needs of the
communities to be served. Under the BHC Act as interpreted by the
Federal Reserve Board and the courts, the Federal Reserve Board may
deny any application if it determines that the financial or
managerial resources of the acquiring bank holding company are
inadequate. The BHC Act provides that a transaction approved by the
Federal Reserve Board may not be consummated for 30 days after such
approval or, if certain conditions are met, a shorter period, but in
no event less than 15 days after the date of approval.
On December 10, 1996, the Federal Reserve Board approved
FBOP's application to acquire the Company and consummate the Merger,
provided the Merger is not consummated prior to December 26, 1996 or
no later than March 10, 1996, unless the approval is further extended
by the Federal Reserve Board. The shareholders of the Company should
be aware that regulatory approvals of the Merger may be based upon
different considerations than those that would be important to such
shareholders in determining whether or not to approve the Merger.
Any such approvals should in no event be construed by a shareholder
as a recommendation by any regulatory agency with respect to the
Merger.
Accounting Treatment
It is anticipated that the Merger will be accounted for
and treated by FBOP as a purchase business combination transaction.
Dissenters' Rights
Pursuant to Chapter 13 of the CGCL, any holder of Common
Stock who does not wish to accept the consideration to be paid
pursuant to the Merger Agreement may dissent from the Merger and
elect to have the fair value of his or her shares of Common Stock
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) judicially determined and paid to him or
her in cash, provided that he or she complies with the provisions of
Chapter 13 of the CGCL.
The following is a summary of all material aspects of the
statutory procedures to be followed by a holder of Common Stock in
order to dissent from the Merger and perfect appraisal rights under
the CGCL. This summary is not intended to be complete and is
qualified in its entirety by reference to Chapter 13 of the CGCL, the
text of which is attached as Appendix C to this Proxy Statement.
If the Merger is completed, certain of the shareholders who have
fully complied with all applicable provisions of Chapter 13 of the
CGCL may have the right to require the Company to purchase the shares
of Common Stock held by them for cash at the fair market value of
those shares on the day before the terms of the Merger were first
announced, excluding any appreciation or depreciation because of the
Merger. Persons who are beneficial owners of shares of Common Stock
but whose shares are held by another person, such as a trustee,
broker or nominee, should instruct the record holder to follow the
procedures outlined below if such persons wish to dissent with
respect to any or all of their shares. Under the CGCL, no
shareholder who is entitled to exercise dissenters' rights has any
right at law or in equity to attack the validity of the Merger or to
have the Merger set aside or rescinded, except in an action to test
whether the number of shares required to authorize or approve the
Merger have been legally voted in favor of the Merger.
Shares of Common Stock must be purchased by the Company upon
demand from a dissenting shareholder if such shareholder has complied
with all applicable requirements. For a shareholder to exercise the
right to have the Company purchase his or her shares of Common Stock,
the procedures to be followed under Chapter 13 of the CGCL include
the following requirements:
(a) The shareholder of record must not vote the shares
in favor of the Merger. The shareholder may vote part of his or her
shares for the Merger without losing the right to have the Company
purchase those shares which were voted against the Merger or as to
which the shareholder has abstained from voting.
(b) Any such shareholder who voted against the Merger or
abstained from voting, and who wishes to have purchased his or her
shares which were voted against the Merger or shares which were
abstained from voting, must make a written demand to have the Company
purchase those shares for cash at their fair market value. The
demand must include the information specified below under "Demand for
Purchase" and must be received by the Company or its transfer agent
not later than 30 days after the date the Approval Notice (as defined
below) is mailed to such shareholder.
Within ten days after the approval of the Merger by the
Company's shareholders, the respective holders of shares of Common
Stock who voted against the Merger or abstained from voting must be
notified by the Company of the approval (the "Approval Notice") and
the Company must offer all of these shareholders a cash price for
their shares which the Company considers to be the fair market value
of the shares on the day before the terms of the Merger were first
announced, excluding any appreciation or depreciation because of the
proposed Merger. The statement of price will constitute an offer by
the Company to purchase at the price stated any dissenting shares,
unless they lose their status as dissenting shares. The Approval
Notice also must contain a brief description of the procedures to be
followed under Chapter 13 of the CGCL in order for the shareholder to
exercise the right to have the Company purchase his or her shares and
attach a copy of the relevant provisions of the CGCL.
Demand for Purchase. Merely voting against, or delivering a
proxy directing a vote against, the approval of the Merger, or
failing to deliver a proxy or vote as to approval of the Merger does
not constitute a demand for purchase. A written demand is essential.
A shareholder's written demand must be delivered to the Company
within 30 days after the date on which the Approval Notice was mailed
to the shareholder.
In all cases, the written demand that the dissenting shareholder
must deliver to the Company must:
(a) Be made by the person who was the shareholder of
record on the Record Date (or his or her duly authorized
representative) and not by someone who is merely a beneficial owner
of the shares and not by a shareholder who acquired the shares
subsequent to the Record Date;
(b) State the number of dissenting shares; and
(c) Include a demand that the Company purchase the
shares at what the shareholder claims to be the fair market value of
such shares on the day before the terms of the Merger were first
announced, excluding any appreciation or depreciation because of the
proposed Merger. Because the Company announced the proposed Merger
on July 12, 1996, it is the Company's position that this day is
July 11, 1996. The shareholder's statement of fair market value
constitutes an offer by such dissenting shareholder to sell the
shares of Common Stock to the Company at such price.
In addition, it is recommended that the following be complied
with to ensure that the demand is properly executed and delivered:
(a) The demand should be sent by registered or certified
mail, return receipt requested.
(b) The demand should be signed by the shareholder of
record (or his or her duly authorized representative) exactly as his
or her name appears on the stock certificates evidencing the shares.
(c) A demand for the purchase of shares owned jointly by
more than one person should identify and be signed by all such
holders.
(d) Any person signing a demand for purchase in any
representative capacity (such as attorney-in-fact, executor,
administrator, trustee or guardian) should indicate his or her title
and, if the Company so requests, furnish written proof of his or her
capacity and authority to sign the demand.
A shareholder may not withdraw a demand for payment without the
consent of the Company. Under the terms of the CGCL, a demand by a
shareholder is not effective for any purpose unless it is received by
the Company (or any transfer agent thereof) within 30 days after the
date the Approval Notice is mailed to such shareholder.
Other Requirements. Within 30 days after the date on which the
Approval Notice is mailed by the Company to its shareholders, the
stock certificates representing any shares of Common Stock which the
shareholder demands be purchased must be submitted to the Company at
its principal office, or at the office of any transfer agent thereof,
to be stamped with a statement that the shares are dissenting shares.
Upon subsequent transfer of these shares, the new certificates will
be similarly stamped, and marked with the name of the original
dissenting shareholder.
If the Company and a dissenting shareholder agree that the
shares held by such shareholder are eligible for dissenters' rights
and agree upon the price of such shares, the dissenting shareholder
is entitled to receive from the Company the agreed upon price with
interest thereon at the legal rate on judgments from the date of such
agreement. Any agreement fixing the fair market value of dissenting
shares as between the Company and the holders thereof must be filed
with the Secretary of the Company at the address set forth below.
Subject to certain provisions of Section 1306 and Chapter 5 of
the CGCL, 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 within 30 days after the statutory or contractual conditions
to the Merger are satisfied, whichever is later. Cash dividends
declared and paid by the Company upon the dissenting shares after the
date of approval of the Merger by its shareholders and prior to
payment for the shares shall be credited against the total amount to
be paid by the Company.
If the Company and a dissenting shareholder fail to agree on
either the fair market value of the shares or on the eligibility of
the shares to be purchased, then the shareholder, the Company or FBOP
Acquisition may file a complaint for judicial resolution of the
dispute in the superior court of the proper county. The complaint
must be filed within six months after the date on which the Approval
Notice is mailed to shareholders. If a complaint is not filed within
six months, the shares will lose their status as dissenting shares.
Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in such an action. If the eligibility of the
shares is at issue, the court will first decide this issue. If the
fair market value of the shares is in dispute, the court will
determine, or shall appoint one or more impartial appraisers to
assist in the determination of, the fair market value. The costs of
the action will be assessed or apportioned as the court considers
equitable, but if the appraisal exceeds the price offered to the
shareholder, the Company will be required to pay such costs,
including, in the discretion of the court, attorneys' fees, expert
witnesses' fees and interest if the value awarded by the court for
the shares is more than 125% of the price offered by the Company to
the shareholder.
Any demands, notices, certificates or other documents required
to be delivered to the Company described herein may be sent by mail
to SNDB Financial Corp., 1420 Kettner Boulevard, San Diego, California
92101, Attention: Corporate Secretary or delivered in person to the
Corporate Secretary, San Diego National Bank, 1420 Kettner Boulevard,
San Diego, California 92101.
Failure to comply fully with these procedures will cause
the shareholder to lose his dissenters' rights. Consequently, any
shareholder who desires to exercise his or her dissenters' rights may
want to consult a legal advisor before attempting to exercise such
rights.
THE MERGER AGREEMENT
The following is a summary of certain terms of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement and is incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement.
Terms which are not otherwise defined in this summary have the
meaning set forth in the Merger Agreement. Shareholders are urged to
read the Merger Agreement carefully.
As of the date of this Proxy Statement, nothing has come
to the Company's attention that has led it to believe that the
representations and warranties made by each of the Company and FBOP
and FBOP Acquisition in the Merger Agreement are not true and correct
in all material respects or that the respective covenants of each
party contained therein have not been complied with in all material
respects by the respective parties. Accordingly, nothing has come to
the Company's attention that has led it to believe that, if the
shareholders of the Company approve the Merger Agreement, the other
conditions to the Merger will not ultimately be satisfied. There can
be no assurance, however, that such conditions will be satisfied or
that the Merger will be consummated.
Representations and Warranties
The Merger Agreement contains various representations and
warranties of each of the Company and FBOP and FBOP Acquisition.
These include, among other things, representations and warranties of
the Company as to (i) the organization and good standing of the
Company and the Bank; (ii) its capitalization; (iii) the identity and
ownership of its subsidiaries; (iv) the authorization of the Merger
Agreement; (v) material compliance with laws; (vi) the absence of the
need (except as specified) for governmental or third party consents
to the Merger; (vii) material conformity to applicable accounting
standards of the Company's financial statements and the accuracy of
the Company's filings with the SEC and the applicable bank regulatory
agencies; (viii) the absence of material pending or threatened
material litigation or other actions; (ix) employee benefit plans;
(x) taxes; (xi) certain material contracts of the Company; (xii)
agreements with employees, including employment agreements; (xiii)
insurance; (xiv) certain environmental matters; (xv) properties;
(xvi) deposits; and (xvii) loans and reserves.
FBOP'S and FBOP Acquisition 's representations and
warranties include, among other things, those as to (i) their
respective organization and good standing, (ii) the authorization of
the Merger Agreement, (iii) the absence of the need (except as
specified) for governmental or third party consents to the Merger,
(iv) the availability to FBOP and FBOP Acquisition of sufficient
funds to fulfill their respective obligations under the Merger
Agreement, and (v) the conformity to applicable accounting standards
of FBOP's audited financial statements for the year ended December
31, 1995.
Certain Covenants
Pursuant to the Merger Agreement, each of the Company and
FBOP and FBOP Acquisition has made various customary covenants for
transactions of this type, including, among others, that each party
cooperate and take or cause to be taken all actions necessary, proper
or advisable to consummate the Merger on a prompt basis. The Company
has agreed, among other things, to provide FBOP and FBOP Acquisition
access to certain offices, properties, contracts, books and records
of, and other information regarding the Company.
Pursuant to the Merger Agreement FBOP and FBOP Acquisition
have agreed, among other things, to use their best efforts to timely
obtain all required governmental consents and approvals and to comply
with all of the terms and conditions thereof.
Conduct of Business Pending the Merger
The Company has agreed that it and its subsidiaries will
conduct their respective operations in the ordinary course of
business substantially in the manner as conducted prior to the
execution of the Merger Agreement. In addition, the Company has
agreed that, without the written consent of FBOP Acquisition, neither
the Company or any of its subsidiaries will: (a) fail to maintain
its tangible property and assets in their present state of repair,
order and condition, reasonable wear and tear and damage by fire or
other casualty excepted; (b) fail to maintain its books, accounts and
records in accordance with generally accepted accounting principles
consistently applied; (c) fail to comply in all material respects
with applicable laws and regulations; (d) make, renew or modify the
terms (including, but not limited to, any release or substitution of
collateral, change of the interest rate, or release or substitution
of any guarantor) of any loan, letter of credit or other extension of
credit, or commitment to make a loan, in excess of $200,000; (e)
except as required by law or applicable regulation and except for the
exercise of the Options, enter into, adopt, amend or terminate any
bonus, profit sharing, compensation, termination, stock option, stock
appreciation right, restricted stock, performance unit, pension,
retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust or plan; (f) except for pay raises
pursuant to scheduled annual reviews in the ordinary course of
business not to exceed 5% of annual W-2 compensation, authorize or
enter into any employee contract or employment agreement, grant any
pay raise or increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not
required by an existing plan or arrangement or authorize or enter
into any contract, agreement, commitment or arrangement to do any of
the foregoing; (g) authorize or enter into any contract, commitment
or obligation (excluding all loans and loan commitments) including,
but not limited to obligations for services, which provides for the
receipt or payment of amounts, in the aggregate, in excess of
$25,000; (h) sell, transfer, convey, assign or otherwise dispose of
any material assets or properties, or authorize any of the foregoing,
or sell loans in bulk; (i) acquire, lease or encumber any assets in
excess of $125,000 for any item or series of similar items; (j)
authorize or make any amendment to its charter or bylaws; (k) fail to
keep in force all insurance policies presently in effect, including
insurance of deposit accounts with the FDIC; (l) do any act which, or
omit to do any act the omission of which, will cause a material
breach of any contract, commitment or obligation; (m) make any
borrowing, incur any debt (other than (i) deposits in the ordinary
course of business and consistent with past practice and (ii)
overnight borrowings from the Federal Reserve Bank consistent with
past practices), or assume, guarantee, endorse (except for the
negotiation or collection of negotiable instruments in the ordinary
course of business and consistent with past practice) or otherwise
become liable (whether directly, contingently or otherwise) for the
obligations of any other person, or make any payment or repayment in
respect of any indebtedness (other than deposits and accrued expenses
in the ordinary course of business and consistent with past
practice); (n) accept any deposits for which the interest rate
payable thereon exceeds by more than 0.5 percent the average interest
rate being paid on similar deposits by banks in the San Diego area
market; (o) waive, release or cancel any claims in excess of $25,000
against third parties or debts in excess of $25,000 owing to it, or
any rights which have any value in excess of $25,000; (p) make any
change in its accounting systems, policies or practices; (q) enter
into, authorize, or permit any transaction, except as now existing,
with any affiliate or subsidiary of the Company; (r) make any capital
contribution to any person or purchase or invest in any securities
issued by any person other than securities which are issued or
guaranteed by the United States government or any agency thereof
having a maturity of more than twelve (12) months from the date of
purchase; (s) sell any investment securities; (t) enter into or renew
any data processing service contract; (u) change or amend its
schedules and policies relating to service charges or service fees;
(v) enter into loan transactions not in accordance with sound credit
practices and not on terms and conditions which are materially more
favorable than those available to the borrower from competitive
sources in transactions in the ordinary course of business; (w) fail
to use its best efforts to preserve the present business
organizations intact, to keep available the services of its present
officers and employees or to preserve its present relationships with
persons having business dealings with it; (x) fail to maintain,
consistent with its past practices, a reserve for possible loan and
lease losses which is adequate under the requirements of generally
accepted accounting principles to provide for possible losses, net of
recoveries relating to loans previously charged off, on loans
outstanding (including, without limitation, accrued interest
receivable); (y) make any material change in any lease of real
property; (z) fail to file in a timely manner all required filings
with all proper regulatory authorities and fail to cause such filings
to be true and correct; (aa) foreclose upon or take deed or title to
any commercial real estate without first conducting a Phase I
environmental assessment of the property; or foreclose upon such
commercial real estate if such environmental assessment indicates the
presence of hazardous material in amounts that, if such foreclosure
were to occur, would be reasonably likely to result in a material
adverse effect on the Bank; (bb) amend or modify any of its
promotional, deposit account or account loan practices, other than
amendments or modifications in the ordinary course of business; or
(cc) (i) make any change in its authorized capital stock, (ii) issue
any stock options, or issue any warrants, or other rights calling for
the issue, transfer, sale or delivery of its capital stock or other
securities, (iii) pay any stock dividend or make any reclassification
in respect of its outstanding shares of capital stock, (iv) except
for the issuance of shares upon exercise of any Options, issue, sell,
exchange or deliver any shares of its capital stock (or securities
convertible into or exchangeable, with or without additional
consideration, for such capital stock), (v) purchase or otherwise
acquire for consideration any outstanding shares of its capital
stock, or (vi) declare, pay or set apart in respect of its capital
stock any dividends or other distributions or payments.
No Solicitation
Except as required by any regulatory authority, or except
to the extent required by fiduciary obligations of the Board of
Directors under applicable law in reliance upon a written opinion of
counsel, the Company has agreed in the Merger Agreement that it will
not, directly or indirectly, solicit, encourage, initiate, or respond
favorably to any inquiries or proposals from, or provide any
confidential information or access to the Company's or the Bank's
properties, or participate in any negotiations or discussions with
any other person concerning: (i) any merger, sale of assets or other
business combination involving the Company or the Bank with any other
person; (ii) any purchase by any person of shares of capital stock of
the Company or the Bank; or (iii) any issuance by the Company or the
Bank of any shares of capital stock. The Company has agreed to
promptly notify FBOP and FBOP Acquisition of any such inquiries,
offers or proposals.
Conditions to the Merger
The respective obligations of each party to effect the
Merger are subject to the satisfaction, at or prior to the Effective
Time, of the following conditions: (i) the authorization or approval
of the Federal Reserve Board and any other state or federal agency
having jurisdiction over the parties or the transactions contemplated
by the Merger Agreement which are necessary for the consummation of
the Merger will have been obtained and remain in full force and
effect in a form and under terms not materially burdensome to FBOP or
FBOP Acquisition; (ii) the consummation of the Merger shall not have
been restrained, enjoined or prohibited by any court or governmental
authority of competent jurisdiction and no material litigation or
administrative proceeding shall be pending or threatened as of the
Effective Time seeking to restrain, enjoin or prohibit the
consummation of the Merger; and (iii) the Merger will have been
consummated by no later than 5:00 P.M. Pacific Time on April 30,
1997.
The obligations of the Company to consummate the Merger are
further subject to the conditions that (a) the representations and
warranties of FBOP and FBOP Acquisition set forth in the Merger
Agreement will be true and correct in all material respects at the
Effective Time with the same force and effect as though such
representations and warranties had been made on and as of such date;
(b) all consents, waivers, approvals, authorizations or orders
required to be obtained by FBOP Acquisition shall have been obtained
and delivered to the Company; (c) FBOP and FBOP Acquisition will have
performed in all material respects, their respective obligations, and
agreements and complied in all material respects with their
respective covenants and agreements under the Merger Agreement to be
performed and complied with on or before the Effective Date; (d) the
Company will have received a legal opinion from FBOP's counsel, dated
as of the Effective Date, in the form set forth in the Merger
Agreement; (e) the Company will have received an update to the
Fairness Opinion as of the consummation of the Merger from Keefe
Bruyette that the consideration to be paid to the Company's
shareholders is fair to such shareholders from a financial point of
view; (f) FBOP shall have entered into separate employment agreements
with Messrs Galinson, Horsman and Brotman and Ms. Chewning-Johnson
effective as of the Effective Time; and (g) FBOP and FBOP Acquisition
will have made available to the Paying Agent the aggregate Merger
Consideration Per Share and aggregate Cash Consideration Per Option.
The obligations of FBOP and FBOP Acquisition to consummate
the Merger are further subject to the conditions that (a) the
representations and warranties of the Company set forth in the Merger
Agreement are true and correct in all material respects on the
Effective Time with the same force and effect as though such
representations and warranties had been made on and as of such date;
(b) all required consents, waivers, approvals, authorizations or
orders in connection with the Merger shall have been obtained by the
Company and delivered to FBOP; (c) the Company will have performed in
all material respects all obligations and agreements and complied in
all material respects with all covenants and conditions contained in
the Merger Agreement to be performed and complied with by it at or
prior to the Effective Time; (d) FBOP Acquisition will have received
the opinion of the Company's counsel dated as of the Effective Date
in the form specified in the Merger Agreement; (e) the Merger
Agreement will have been approved and adopted by the shareholders of
the Company; (f) the holders of not more than 10% of the issued and
outstanding shares of the Common Stock at the Effective Time shall
have delivered written demand for payment of the fair market value of
their shares of Common Stock pursuant to Chapter 13 of the CGCL; (g)
the directors and officers of the Company will have tendered their
resignations in writing, effective on the Effective Time; (h) from
March 31, 1996 to the Effective Time, there shall not have been any
Material Adverse Change in the business, operations, results of
operations, assets, liabilities, investments, properties, condition
(financial or otherwise), affairs, prospects or other attributes of
the Company or Bank, taken as a whole. The term "Material Adverse
Change" means with respect to the Company, any change that (i) is
material and adverse to the business, operations, results of
operations, assets, liabilities, investments, properties, condition
(financial or otherwise), affairs, prospects or other attributes of
the Company, or (ii) materially impairs the ability of the Company to
perform its obligations under the Merger Agreement or consummate the
Merger; provided, however, that Material Adverse Change shall not be
deemed to include the impact of (x) changes in banking and similar
laws, (y) changes in generally accepted accounting principles or
regulatory requirements applicable to banks and bank holding
companies generally; or (z) circumstances affecting banks and bank
holding companies generally, (i) neither the Company, Bank nor any
subsidiaries of the Company or Bank shall have in existence or have
authorized a pension plan, (j) FBOP Acquisition shall have received
evidence satisfactory to it that all Options and any other options or
warrants for Common Stock have been canceled.
Termination
The Merger Agreement may be terminated in certain
circumstances, including the following: (i) by mutual consent of the
Company and FBOP Acquisition, (ii) by the Company if the conditions
to the obligations of the Company to consummate the Merger have not
been satisfied or waived; (iii) by FBOP Acquisition if the conditions
to the obligations of FBOP Acquisition to consummate the Merger have
not been satisfied or waived; or (iv) by either the Company or FBOP
Acquisition if the mutual conditions to their respective obligations
to effect the Merger have not been satisfied or waived. See"
Conditions to Merger" above.
Termination Fee
The Merger Agreement provides that if the Company and FBOP
Acquisition fail to consummate the Merger and the Company enters into
a letter of intent, commitment letter or other written agreement with
a third party regarding a merger, consolidation, sale of assets or
other similar transaction involving the Company within twelve months
following the termination of the Merger, the Company will, upon
consummation of such other transaction, promptly pay the Termination
Fee of $2,500,000 to FBOP Acquisition. The Termination Fee is not
payable, however if the Merger Agreement is terminated by mutual
consent or because a condition to the Company's obligation to
consummate the Merger has not been satisfied or waived.
This Termination Fee is intended to increase the
likelihood that the Merger will be consummated in accordance with the
terms of the Merger Agreement. Consequently, the Termination Fee may
have the effect of discouraging other persons from considering or
proposing an acquisition of or merger with the Company.
Expenses
The Merger Agreement provides that each party will bear
its own expenses in connection with the Merger Agreement, except that
if the Merger is consummated, FBOP has agreed to pay $250,000 of the
total fee payable by the Company to Keefe Bruyette for financial
advisory services provided to the Company in connection with the
Merger.
STOCK PRICES
The Common Stock is included for quotation on the
NASDAQ/NMS. There is only a limited market for the Common Stock.
The following table sets forth, for the periods indicated, the high
and low prices per share of the Common Stock as reported by
NASDAQ/NMS. No stock or cash dividends were declared during the
periods shown.
<PAGE>
High Low
1994 First Quarter $ 3.25 $ 2.50
Second Quarter 3.25 2.50
Third Quarter 4.75 2.50
Fourth Quarter 4.75 3.00
1995 First Quarter $ 4.25 $ 3.25
Second Quarter 4.25 3.63
Third Quarter 4.50 3.50
Fourth Quarter 6.25 4.50
1996 First Quarter $ 5.38 $ 5.00
Second Quarter 6.75 4.75
Third Quarter 7.63 6.13
Fourth Quarter 7.88 7.13
1997 First Quarter
(through January
, 1997)
On July 12, 1996, the last trading day before the
announcement of the execution of the Merger Agreement, the closing
price for the Common Stock as reported on the NASDAQ/NMS was $6.25
per share.
On January ___, 1997 (the last practicable date prior to
the mailing of this Proxy Statement), the closing price for the
Common Stock as reported by the NASDAQ/NMS was $___________ per
share.
SDNB shareholders are advised to obtain current market
quotations for the Common Stock.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Five Percent Shareholders
Persons and groups owning in excess of 5% of the Common
Stock are required to file certain reports regarding such ownership
with the Company and with the Commission, in accordance with Exchange
Act. The following table sets forth information regarding shares of
Common Stock of the Company as of December 31, 1996 known to be
beneficially owned by persons who own more than 5% of the Common
Stock outstanding, based on the most recent reports filed with the
Company and the Commission.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class (3)
(1)(2)
Two limited 765,314 19.87%
partnerships managed
by WHR Management Corp.
767 Third Avenue
New York, New York 10017(6)
Basswood Partners, L.P. 295,000 7.66%
57 Forest Avenue
Paramus, New Jersey 07652(6)
Charles I. Feurzeig 381,164 9.89%
6363 El Cajon Blvd.
Ste. 206
San Diego, California 92115
Murray L. Galinson 221,403(4) 5.75%
1420 Kettner Boulevard
San Diego, California 92101
<PAGE>
Directors and Management
The following table sets forth information with respect to
beneficial ownership of the Common Stock as of December 31, 1996 by
each director and named executive officer of the Company and by all
directors and named executive officers of the Company as a group.
Amount and Nature
of Beneficial
Name Position With Ownership of Percent of
Company Common Stock Class (3)
(1)(2)
Douglas E. Barnhart Director 7,000 *
Howard W. Brotman Director, Senior Vice 22,147 *
President, Secretary,
Chief Financial
Officer of Company,
Senior Vice President,
Chief Financial
Officer of Bank
Joyce Chewning-Johnson Senior Vice President 10,919 *
of Company, Executive
Vice President,
Secretary of Bank
Margaret Costanza Director 14,200 *
Murray L. Galinson Director, Chairman of 221,403(4) 5.75%
Board, President and
CEO of Company, CEO of Bank
Karla J. Hertzog Director 24,700 *
Robert B. Horsman Director, Executive Vice 59,983 1.56%
President of Company
President of Bank
Mark P. Mandell Director 24,700 *
Patricia L. Roscoe Director 40,551 1.05%
Julius H. Zolezzi Director 80,948 2.10%
All executive officers 534,327(1)(2) 13.87%
and directors as a group
(14 persons)
(1) All percentages and shares amounts were calculated on the basis
of outstanding securities plus shares issuable pursuant to
vested stock options and warrants. Includes shares owned
beneficially and of record, directly or indirectly, together
with associates. Also includes shares held by or on behalf of
minor and/or adult children and family trusts.
(2) Does not include shares owned by San Diego National Bank Profit
Sharing Plan and 401(k) Savings Plan attributable to executive
officers' vested interests therein.
(3) Asterisk indicates percentage less than 1%
(4) Includes 86,358 shares held as trustee.
(5) Unless otherwise indicated, each person (or jointly with
spouse) exercises sole voting and dispositive power as to the
shares reported.
(6) The limited partnerships managed by WHR Management Corp. are
the Whittman Hefferman & Rhein Workout Fund II, L.P. and the
Whitman Hefferman & Rhein Workout Fund IIA, L.P. and WHR
Management Corp. is the general partner of each fund. Basswood
Management Inc. is the general partner of Basswood Partners, L.P.
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of the Company
incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, have been
audited by Coopers & Lybrand, L.L.P. Coopers & Lybrand, L.L.P. were
appointed to serve at the Company's independent accountants for 1996.
Representatives of Coopers & Lybrand, L.L.P. are expected to be
present at the Special Meeting and they will have an opportunity to
make a statement if they so desire and will be available to respond
to appropriate questions.
SHAREHOLDER PROPOSALS
It is possible that the Company's next Annual Meeting of
Shareholders will be held prior to consummation of the Merger. Any
shareholder who wishes to submit a proposal for presentation to such
annual meeting, and for inclusion, if appropriate, in the Company's
proxy statement and the form of proxy relating to such annual
meeting, must comply with the rules and regulations of the Commission
then in effect and must submit such proposal to the Secretary of the
Company. In the event that the Company's Annual Meeting of
Shareholders is held on or before May 14, 1997, any shareholder
proposal must have been received by the Company not later than
March 14, 1997. In the event that the Company's Annual Meeting of
Shareholders is held after May 14, 1997, any shareholder proposal
must be received by the Company a reasonable time before the
solicitation of proxies for such annual meeting is made.
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; ADDITIONAL INFORMATION
The following documents filed with the Commission by the
Company (File No. 0-11117) pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement:
1. The Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
2. The Company's Current Report on Form 8-K dated
July 22, 1996.
3. The Company's Quarterly Reports on Form 10-Q for the
three months ended March 31, 1996, the six months ended June
30, 1996, and the nine months ended September 30, 1996.
Attached as Appendix D to, and incorporated by reference
in, this Proxy Statement is the Company's Annual Report to
Shareholders for the year ended December 31, 1995. In addition, the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1996 is attached to this Proxy Statement as Appendix E.
All documents and reports filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Proxy Statement and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement and to be a part hereof from the dates of filing of such
documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any
other subsequently filed document which also is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
This Proxy Statement incorporates documents by reference
which are not present herein or delivered herewith. Such documents
(other than exhibits to such documents unless such exhibits are
specifically incorporated by reference) are available, without
charge, to any person, including any beneficial owner, to whom this
Proxy Statement is delivered, on written or oral request to the
Secretary of the Company, Howard W. Brotman, 1420 Kettner Boulevard,
San Diego, California 92101 (telephone no. 619-233-1234). In order
to ensure timely delivery of the documents, requests should be
received by January 31, 1997.
<PAGE>
(front of enclosed Proxy Card)
SDNB FINANCIAL CORP.
REVOCABLE PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Murray L. Galinson, Robert B.
Horsman or either of them with full power of substitution, proxies to vote
at the Special Meeting of Shareholders of SDNB Financial Corp. ("the
Company") to be on February 12, 1997 at 10:00 a.m., local time, and at any
adjournment or adjournments thereof, hereby revoking proxies heretofore
given, to vote all shares of common stock of the Company held or owned by
the undersigned as directed on the reverse side of the proxy card, and in
their discretion upon such other matters as may come before the Special
Meeting provided, however, no proxy voted against the proposal to approve
and adopt the Merger Agreement will be voted in favor of any proposal to
adjourn or postpone the Special Meeting for the purpose of soliciting
additional proxies or otherwise.
(To Be Signed on Reverse Side.)
(reverse side of Proxy Card)
X Please mark your
votes as in this
example.
FOR AGAINST ABSTAIN
PROPOSAL TO APPROVE AND ADOPT AGREEMENT
AND PLAN OF MERGER DATED JULY 12, 1996 AMONG
THE COMPANY, FBOP CORPORATION AND FBOP
ACQUISITION COMPANY.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY
OTHER BUSINESS IS PRESENTED AT THE SPECIAL MEETING, INCLUDING MATTERS
RELATING TO THE CONDUCT OF THE MEETING, THIS PROXY WILL BE VOTED BY THOSE
NAMED IN THIS PROXY IN THEIR BEST JUDGMENT, PROVIDED, HOWEVER, NO PROXY
VOTED AGAINST THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT WILL
BE VOTED IN FAVOR OF ANY PROPOSAL TO ADJOURN OR POSTPONE THE SPECIAL
MEETING FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES OR OTHERWISE. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE SPECIAL MEETING.
SIGNATURES: DATE:
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustees or
guardian please give full title as such.
<PAGE>
APPENDIX "A"
AGREEMENT AND PLAN OF MERGER, DATED AS OF
JULY 12, 1996, AMONG THE COMPANY, FBOP AND FBOP
ACQUISITION AND AMENDMENT DATED AS OF NOVEMBER 26, 1996
<PAGE>
_________________________________________________________________
AGREEMENT AND PLAN OF MERGER
BETWEEN
SDNB FINANCIAL CORP.,
FBOP CORPORATION
AND
FBOP ACQUISITION COMPANY
As of July 12, 1996
_________________________________________________________________
TABLE OF CONTENTS
Page
ARTICLE I MERGER 1
(a) Merger 1
(b) Effective Time 2
(c) Effects of the Merger 2
(d) Prior Approvals 2
(e) Articles of Incorporation 2
(f) Bylaws 2
(g) Directors and Officers 3
(h) Additional Actions 3
(i) Conversion of Shares 3
(j) Total Merger Consideration 4
(k) Prepayment Penalty Reduction 5
(l) Surrender of Shares 5
(m) Designation of Paying Agent; Investment
of Funds. 5
(n) Transmittal Materials 5
(o) Dissenting Shares 5
(p) Termination of Paying Agent's Duties 6
(q) Closing of Holding Company's Transfer
Books 6
(r) Stock Options and Warrants 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF HOLDING
COMPANY 7
(a) Organization and Standing of Holding Company 7
(b) Organization and Standing of Bank 7
(c) Holding Company Subsidiaries 7
(d) Capitalization 8
(e) Authorization 8
(f) Articles of Incorporation and Bylaws 8
(g) Consents and Approvals 8
(h) Defaults and Conflicts 9
(i) SEC Reports; Financial Statements 9
(j) Regulatory Reports 10
(k) Changes Since March 31, 1996 11
(l) Properties 11
(i) Real Estate and Mortgages 11
(ii) Investments 11
(iii) Title to Property; Zoning 12
(m) Environmental Laws 12
(n) Proprietary Rights 12
(o) Agreements 13
(p) Litigation; Claims 13
(q) Compliance with Laws 14
(r) Taxes 14
(s) Related Party Transactions 15
(t) Employee Benefit Plans 15
(u) Insurance 17
(v) Regulatory Filings 17
(w) Deposits 17
(x) Loans 18
(y) Reserves 18
(z) Agreements with Regulatory Agencies 18
(aa) Information for Regulatory Approvals 19
(ab) Governmental Notices 19
(ac) SEC Filings 19
(ad) Finders and Investment Bankers 19
(ae) Disclosure 19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND
FBOP 20
(a) Organization of Acquisition and FBOP 20
(b) Authorization 20
(c) Consents and Approvals 20
(d) Defaults and Conflicts 20
(e) SEC Filings 20
(f) Funds Available 21
(g) Finders and Investment Bankers 21
(h) Governmental Notices 21
(i) Financial Statement 21
(j) Agreements 21
(k) Articles; Bylaws. 21
ARTICLE IV RIGHT TO INVESTIGATE 21
ARTICLE V COVENANTS OF HOLDING COMPANY 22
(a) Operation in Ordinary Course 22
(b) Exclusivity 25
(c) Stockholder Meeting 25
(d) Intentionally Omitted. 26
(e) Reports. 26
(f) Notice 26
(g) Regulatory Matters 26
(h) Supplemental Information 26
(i) Cooperation 27
(j) Conditions Precedent 27
(k) Best Efforts 27
(l) Schedules 27
ARTICLE VI COVENANTS OF ACQUISITION 27
(a) Consents 27
(b) Cooperation 27
(c) Conditions Precedent 27
(d) Best Efforts 27
(e) Liability Insurance 28
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF ACQUISITION AND
FBOP 28
(a) Validity of Representation and Warranties 28
(b) Consents 28
(c) Compliance with Covenants; Schedules 28
(d) Opinion of Counsel 28
(e) Approval of Holding Company Stockholders 28
(f) Dissenting Holding Company Shares 29
(g) Resignations 29
(h) Adverse Changes 29
(i) Effective Time 29
(j) No Pension or Retirement Plans 29
(k) Stock Option Plans and Incentive Plans;
Options 29
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF HOLDING COMPANY 29
(a) Validity of Representations and Warranties 29
(b) Consents 30
(c) Compliance with Covenants 30
(d) Opinion of Counsel 30
(e) Fairness Opinion 30
(f) Employment Agreements 30
ARTICLE IX CONDITIONS APPLICABLE TO ACQUISITION, FBOP AND
HOLDING COMPANY 30
(a) Governmental Approvals 30
(b) Injunction 31
ARTICLE X CLOSING AND CLOSING DOCUMENTS 31
(a) Closing 31
(b) Holding Company Closing Documents 31
(c) Acquisition Closing Documents 32
ARTICLE XI TERMINATION AND TERMINATION FEE 32
(a) Termination 32
(b) Termination Fee 32
(c) Survival of Rights 33
ARTICLE XII SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS 33
ARTICLE XIII MISCELLANEOUS 33
(a) Payment of Expenses 33
(b) Commitment to the San Diego Community and
to Customers and Employees 33
(c) Entire Agreement 33
(d) Modifications, Amendments and Waivers 33
(e) Assignment 34
(f) Schedules 34
(g) Press Releases 34
(h) Notices 34
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is
entered into as of the close of business on the 12th day of July,
1996, by and among SDNB Financial Corp., a bank holding company
organized under the laws of the State of California (the "Holding
Company"), FBOP Corporation, a bank holding company organized
under the laws of the State of Illinois ("FBOP"), and FBOP
Acquisition Company, a corporation organized under the laws of
the State of Illinois ("Acquisition"). Holding Company and
Acquisition are sometimes referred to herein as the "Constituent
Corporations."
W I T N E S S E T H:
WHEREAS, Acquisition is a wholly-owned subsidiary of FBOP
Corporation, an Illinois corporation; and
WHEREAS, San Diego National Bank, a federally-chartered
national banking association ("Bank"), is a wholly-owned
subsidiary of Holding Company; and
WHEREAS, the parties desire that Holding Company be acquired
by Acquisition through the merger of Holding Company with and
into Acquisition upon the terms and conditions contained herein
and in accordance with applicable laws (the "Merger"); and
WHEREAS, the Board of Directors of Holding Company deems the
Merger to be advisable and in the best interests of Holding
Company and its stockholders and has adopted a resolution
approving this Agreement and directing that this Agreement be
submitted for consideration at a meeting of its stockholders; and
WHEREAS, the Boards of Directors of Acquisition and FBOP
deem the Merger to be advisable and in the best interests of
their respective stockholders and each has adopted a resolution
approving this Agreement.
NOW, THEREFORE, for and in consideration of the premises and
the mutual agreements, representations, warranties and covenants
herein contained, and for the purpose of prescribing the terms
and conditions of the Merger (the Merger and the transactions
contemplated thereby are referred to herein as the
"Transaction"), and such other details and provisions as are
deemed desirable in connection with the Merger, the parties,
intending to be bound, hereby agree as follows:
ARTICLE I
MERGER
(a) Merger. In accordance with the provisions of this
Agreement, the Illinois Business Corporation Act of 1983 (the "IL
BCA") and the California General Corporation Law (the "CGCL"), at
the Effective Time (as herein defined), Holding Company shall be
merged with and into Acquisition and the separate existence of
Holding Company thereupon shall cease. Following the Merger,
Acquisition shall continue as the surviving corporation
("Surviving Corporation"). At Acquisition's option, the Merger
may be structured so that Holding Company merges into FBOP or
another direct or indirect wholly-owned subsidiary of FBOP (such
entity, if any, to be included in the definition of
"Acquisition"); provided, however, that Acquisition shall assign
to such entity, and such entity shall assume, all rights and
obligations of Acquisition under this Agreement.
(b) Effective Time. As soon as practicable after the
satisfaction or waiver of the conditions set forth in Article X,
the parties hereto will file articles of merger (the "Articles of
Merger") with the Secretary of State of Illinois and make all
other filings or recordings required by the IL BCA and the CGCL
in connection with the Merger. The Merger shall become effective
at such time as (i) the Secretary of State of Illinois issues a
certificate of merger and, if applicable, the filing required by
Section 1108(d) of the CGCL is made with the Secretary of State
of California, or (ii) at such later time as is specified in the
Articles of Merger (the "Effective Time").
(c) Effects of the Merger. The Merger shall have the
effects set forth in the IL BCA and the CGCL. Without limiting
the generality of the foregoing, and subject thereto, at the
Effective Time, all the properties, rights, privileges, powers
and franchise of the Constituent Corporations shall vest in the
Surviving Corporation, and all debts, liabilities and duties of
the Constituent Corporations shall become the debts, liabilities
and duties of the Surviving Corporation.
(d) Prior Approvals. The parties hereto acknowledge that
the requisite approvals for the Transaction must be received from
or notices must be given to certain federal governmental bodies
and agencies including, but not limited to (i) the Office of the
Comptroller of the Currency of the Department of the Treasury
(the "OCC"); (ii) the Federal Deposit Insurance Corporation (the
"FDIC"); (iii) the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"); and (iv) any other
regulatory authorities having jurisdiction, which approvals or
notices shall not contain conditions that are materially
burdensome to FBOP or Acquisition (collectively, the governmental
bodies and agencies referred to in items (i)-(iv) above are
referred to herein as the "Applicable Governmental Authorities").
(e) Articles of Incorporation. The Articles of
Incorporation of Acquisition in effect at the time of the Merger
shall be the Articles of Incorporation of the Surviving
Corporation, until thereafter amended as provided thereunder and
in the IL BCA.
(f) Bylaws. The Bylaws of Acquisition in effect at the
time of the Merger shall be the Bylaws of the Surviving
Corporation until altered, amended or repealed, as provided
thereunder and in the Articles of Incorporation and the IL BCA.
(g) Directors and Officers. The directors and officers of
Acquisition at the time of the Merger shall be the directors and
officers of the Surviving Corporation, in each case to serve, in
accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation, until their successors shall have been
elected and shall qualify. If at the Effective Time a vacancy
shall exist on the Board of Directors or in any of the offices of
the Surviving Corporation, such vacancy may thereafter be filled
in the manner provided by the Bylaws of the Surviving
Corporation.
(h) Additional Actions. If, at any time after the
Effective Time, the Surviving Corporation shall consider or be
advised that any further assignments or assurances in law or any
other acts are necessary or desirable (a) to best perfect or
confirm, of record or otherwise, in the Surviving Corporation,
title to and possession of any property or right of Acquisition
acquired or to be acquired by reason of, or as a result of, the
Merger, or (b) otherwise necessary to carry out the purposes of
this Agreement, Holding Company and its proper officers and
directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and
deliver all such proper deeds, assignments and assurances in law
and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such property or rights in the
Surviving Corporation are fully authorized in the name of Holding
Company or otherwise to take any and all such actions.
(i) Conversion of Shares. The manner and basis of
converting and exchanging the shares of Holding Company Common
Stock, and the manner and basis of making distributions, if any,
to stockholders of Holding Company, shall be as follows:
(i) Each share of common stock, no par value per share, of
Holding Company (the "Common Stock") which is issued and
outstanding immediately prior to the Effective Time other than
Dissenting Shares (as defined below) shall, by virtue of the
Merger and without any action on the part of the holder thereof,
at and after the Effective Time be converted into the right to
receive the "Per Share Merger Consideration".
"Per Share Merger Consideration" shall be equal to:
Aggregate plus Supplemental plus Aggregate minus Expenses
Merger Merger Strike
Consideration Consideration Price of
Options
divided by
outstanding shares plus aggregate shares of
of Common Stock Common Stock subject to
Options
where,
Aggregate Merger
Consideration = $26,627,222 (subject to adjustment as
set forth in subpart (j) below).
Expenses = All fees and expenses incurred by Holding
Company in connection with the Merger,
including finders' and brokers' fees, legal
expenses and filing and printing fees,
but not including up to $250,000 of the
fee to Keefe, Bruyette & Woods as
described at Article XIII(a), and not
including any amounts described at
Article VI(e).
Supplemental Merger
Consideration = Defined below at subpart (k).
Aggregate Strike
Price of Options = The sum of the exercise price of each
outstanding Option (defined below).
(ii) At the Effective Time, Acquisition shall pay or cause
to be paid to each of the persons listed on Section 1(r) of
Holding Company Schedule, with respect to the outstanding
options, warrants and rights for Holding Company Common Stock
(without regard to the expiration date thereof) (collectively,
the "Options") set forth opposite such person's name therein, an
amount per share of Common Stock subject to an Option equal to
the excess of the Per Share Merger Consideration over the
exercise price per share of such Option, as set forth on Section
1(r) of Holding Company Schedule (the "Cash Consideration Per
Option"). Concurrently with the payment of the Cash
Consideration Per Option, each holder of an Option shall deliver
to Acquisition evidence satisfactory to Acquisition of the
cancellation of such Option. At the Effective Time, each Option
shall be canceled and retired and shall cease to exist and shall
be deemed to represent only the right to receive the Cash
Consideration Per Option. Payment of the Cash Consideration Per
Option in accordance with this Article I(i)(ii) shall be deemed
to be full satisfaction of all rights pertaining to the Options.
All amounts payable under this Article I(i)(ii) shall be subject
to any required withholding of taxes and shall be paid without
interest.
(j) Total Merger Consideration. Notwithstanding the
preceding subparts of this Article, except to the extent payments
made to holders of Dissenting Shares exceed the Per Share Merger
Consideration, and except for any Supplemental Merger
Consideration paid in accordance with subpart (k) below, in no
event shall the value of the total consideration paid by
Acquisition hereunder (the "Aggregate Merger Consideration")
exceed $26,627,222. To the extent that any of the Options are
exercised prior to the Closing, the Aggregate Merger
Consideration shall be increased by an amount equal to the
exercise price of such Options.
(k) Prepayment Penalty Reduction. In the event that prior
to the Closing, Holding Company obtains a decrease in the
prepayment penalty associated with the prepayment of the mortgage
loan on the main office of the Bank, then the Aggregate Merger
Consideration shall be increased by $0.60 for each $1.00 that
said penalty is reduced ("Supplemental Merger Consideration").
(l) Surrender of Shares. As promptly as practicable after
the Effective Time, each holder of shares of Holding Company
Common Stock shall, upon presentation and surrender of the
certificate or certificates therefor to the Paying Agent (as
defined below) for cancellation in accordance with the
transmittal materials described below, be entitled to receive in
exchange therefor a check or checks payable to such person
representing the payment of cash into which such holder's shares
of Holding Company Common Stock have been converted at the
Effective Time. Each certificate which represented issued and
outstanding shares of Holding Company Common Stock immediately
prior to the Effective Time shall be deemed cancelled at the
Effective Time and shall represent only the right to receive cash
for each share represented by such certificate. In no event
shall the holder of any such surrendered certificates be entitled
to receive interest on any of the funds to be received in the
Merger.
(m) Designation of Paying Agent; Investment of Funds.
Acquisition and FBOP shall make available to American Transfer to
act as paying agent (the "Paying Agent") at the Effective Time
(i) an amount in cash equal to the product of the Per Share
Merger Consideration times the number of shares of Holding
Company Common Stock outstanding immediately prior to the
Effective Time, less the number of Holding Company Dissenting
Shares whose holders have complied with the provisions of Section
1300 of the CGCL as described in subpart (o) below at or prior to
the Effective Time and less any shares owned by Acquisition or
any other subsidiary or affiliate of Acquisition plus (ii) an
amount in cash equal to the aggregate Cash Consideration Per
Option. The cash deposited with the Paying Agent shall be
invested by the Paying Agent as directed by Acquisition.
(n) Transmittal Materials. As promptly as practicable, but
in no event later than seven days following the Effective Time,
Acquisition shall send or cause to be sent to each former holder
of record of shares of Holding Company Common Stock transmittal
materials for use in surrendering their certificate or
certificates in exchange for cash. The letter of transmittal
will contain instructions with respect to the surrender of such
certificates. Acquisition shall instruct record date holders of
Holding Company Common Stock who hold such shares for the account
of others to provide the respective beneficial holders of such
shares instructions with respect to the surrender of their
shares.
(o) Dissenting Shares. Each outstanding share of Holding
Company Common Stock as to which a written demand for purchase is
made upon Holding Company in accordance with Section 1301 of the
CGCL, and with respect to which the holder complies with all
other applicable provisions of Section 1300 of the CGCL, shall
not be converted into or represent a right to receive cash
hereunder unless and until the holder shall have failed to
perfect or shall have effectively withdrawn or lost his or her
right to appraisal of and payment for such shares of Common Stock
under Section 1300 of the CGCL, at which time such shares of
Common Stock shall be converted into a right to receive cash in
the same manner and subject to the same conditions as provided
for other outstanding shares of Common Stock in this Article.
All such shares of Holding Company Common Stock as to which the
holder complies with the applicable provisions of Section 1300 of
the CGCL, except any such shares of Holding Company Common Stock
the holder of which shall have effectively withdrawn or lost his
or her right to appraisal of and payment for such shares of
Common Stock under the CGCL, are herein called "Dissenting
Shares" and each holder is herein called a "Dissenting
Shareholder." Holding Company shall give Acquisition prompt
notice upon receipt by Holding Company of any written demand for
purchase of and payment for Dissenting Shares. Holding Company
agrees that prior to the Effective Time it will not, except with
the prior written consent of Acquisition, voluntarily make any
payment with respect to, or settle or offer to settle, any such
demand. Each Dissenting Shareholder who becomes entitled,
pursuant to the provisions of the CGCL, to payment for the fair
market value of his or her shares of Holding Company Common Stock
shall receive payment therefor from Acquisition as the Surviving
Corporation (but only after the amount thereof shall have been
agreed upon or finally determined pursuant to such provisions),
and such shares of Common Stock shall be retired and cancelled.
(p) Termination of Paying Agent's Duties. Promptly
following the date which is twelve months after the Effective
Time, the Paying Agent shall deliver to FBOP all cash and other
documents in its possession relating to the transactions
described in this Agreement, and the Paying Agent's duties shall
terminate. Thereafter, each holder of a certificate formerly
representing shares of Holding Company Common Stock who has not
previously surrendered such certificate may surrender such
certificate to FBOP and (subject to applicable abandoned
property, escheat and similar laws) receive in exchange therefore
the Per Share Merger Consideration.
(q) Closing of Holding Company's Transfer Books. At the
Effective Time, the stock transfer records of Holding Company
shall be closed and no transfer of shares of Holding Company
Common Stock shall thereafter be made.
(r) Stock Options and Warrants. Section 1(r) of Holding
Company Schedule contains an accurate and complete list of all
outstanding Options, including the name of the holder thereof,
date of grant, number of shares and exercise price of each
Option.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY
Holding Company represents and warrants to Acquisition and
FBOP as follows:
(a) Organization and Standing of Holding Company. Holding
Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Holding
Company has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it
is now being conducted. Holding Company is duly registered as a
bank holding company under the Bank Holding Company Act of 1956,
as amended, (the "BHC Act"), and the regulations issued
thereunder. The Certificate of Incorporation and Bylaws of
Holding Company, copies of which have previously been made
available to Acquisition, are true and complete copies of such
documents as in effect as of the date of this Agreement.
(b) Organization and Standing of Bank. Bank is a national
banking association, duly organized, validly existing, and in
good standing under the laws of the United States of America.
Bank is duly authorized to conduct a banking business, and is
duly authorized to operate each of its offices, including branch
offices (collectively, the main office and each branch location
are referred to herein as the "Branches"). Bank is a wholly-
owned subsidiary of Holding Company.
(c) Holding Company Subsidiaries. Section 2(c) of Holding
Company Schedule sets forth a list of all of Holding Company's
direct and indirect subsidiaries including the Bank (hereinafter
separately called a "Subsidiary" and collectively called the
"Subsidiaries"). Unless expressly provided otherwise, each
reference to Subsidiary or Subsidiaries in this Agreement shall
include Bank. As used herein, references to "Subsidiary" or
"Subsidiaries" shall not include interests in corporations which
are less than 50% owned by Holding Company or its Subsidiaries
and which are described on such Schedule. Except as otherwise
indicated thereon, the Schedule sets forth the authorized capital
stock, the number of shares duly issued and outstanding, the
number so owned by each shareholder of the Subsidiary and the
jurisdiction of incorporation of each Subsidiary. Except as
disclosed on such Schedule, Holding Company owns 100% of the
issued and outstanding shares of the capital stock of each
Subsidiary. Except as disclosed on such Schedule, the shares of
capital stock of the Subsidiaries are validly issued, fully paid
and non-assessable (subject to statutory obligations of holders,
if any), and are owned free and clear of any liens, claims,
charges or encumbrances. Except as disclosed on such Schedule,
neither Holding Company nor any of the Subsidiaries has any
investment in any subsidiary or any investment in any
partnership, joint venture, limited liability company or similar
entity, all of which investments are owned free and clear of any
liens, claims, charges or encumbrances except as disclosed
thereon. Except as disclosed on the Schedule, each of the
Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power to own or lease its
properties and carry on its business as now being conducted.
Holding Company Schedule sets forth a true and correct
description of the activities of each of the Subsidiaries. No
certificate of authority identified in such Schedule has been
revoked, restricted, suspended, limited or modified nor is any
certificate of authority the subject of, nor to the knowledge of
Holding Company is there a basis for, a proceeding for
revocation, restriction, suspension, limitation or modification.
(d) Capitalization. The authorized capital stock of
Holding Company consists of 15,000,000 shares of Common Stock, no
par value per share, of which 3,076,737 shares are issued and
outstanding as of the date hereof. The Holding Company has no
treasury shares. All of the issued and outstanding shares of
Holding Company Common Stock have been validly issued and are
fully paid and non-assessable (subject to statutory obligations
of holders, if any) and free of preemptive rights. As of the
date hereof, 769,531 shares of Holding Company Common Stock were
reserved for issuance upon exercise of outstanding Options.
Except for the Options, Holding Company has no contract,
understanding, restriction or agreement, including any voting
trust or other agreement or understanding with respect to the
voting of any of the capital stock of Holding Company, or any
convertible, exchangeable or exercisable security, option,
warrant, call, or commitment on the part of Holding Company of
any character relating to issued or unissued shares of the
capital stock of Holding Company.
(e) Authorization. The Board of Directors of Holding
Company has adopted resolutions approving the Agreement and the
Transaction and has authorized the execution and delivery of the
Agreement and has directed by resolution that the Agreement be
submitted to a vote of the holders of shares of Holding Company
Common Stock taken at a meeting called for the purpose of
considering and acting upon this Agreement. Holding Company has
full power and authority to enter into this Agreement and, upon
appropriate consent of its stockholders in accordance with law,
subject to obtaining all required regulatory approvals, to
consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Holding Company and
constitutes the valid and legally binding obligation of Holding
Company, enforceable against it in accordance with its terms,
subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors
rights generally and subject to general principles of equity.
(f) Articles of Incorporation and Bylaws. Holding Company
has delivered to Acquisition true and complete copies of its and
each of the Subsidiaries' Articles of Incorporation and Bylaws as
in effect as of the date hereof, and in the case of Bank, has
delivered true and complete copies of Bank's Charter and Bylaws.
(g) Consents and Approvals. Except for the consents and
approvals of the Applicable Governmental Authorities, no filing
with, and no permit, authorization, consent or approval of, any
public body or authority is necessary for the consummation by
Holding Company of the transactions contemplated by this
Agreement.
(h) Defaults and Conflicts. Except as disclosed in Section
2(h) of Holding Company Schedule, neither Holding Company, Bank
or any other Subsidiary is or immediately prior to the Effective
Time will be in conflict with or default under its Articles of
Incorporation (or similar organizational document) or Bylaws, or
in default under any material indenture or under any material
agreement or other material instrument to which it is a party or
by which it or any of its properties is bound or to which it is
subject. Subject to the receipt of all consents and approvals
contemplated by this Agreement, neither the execution and
delivery of this Agreement, the consummation of the Transaction
nor the fulfillment of and compliance with the terms and
provisions hereof, will (i) violate any judicial, administrative
or arbitral order, writ, award, judgment, injunction or decree
involving Holding Company, Bank or any other Subsidiary, (ii)
conflict with the terms, conditions or provisions of the charter
or Bylaws of Holding Company, Bank or any other Subsidiary, (iii)
conflict with, result in a breach of, constitute a default under
or accelerate or permit the acceleration of the performance
required by, any material agreement or other material instrument
to which Holding Company, Bank or any other Subsidiary is a party
or by which Holding Company, Bank or any other Subsidiary is
bound, (iv) result in the creation of any material lien, charge
or encumbrance upon any of the assets of Holding Company, Bank or
any other Subsidiary under any such agreement or instrument, or
(v) terminate or give any party thereto the right to terminate
any such indenture, agreement or instrument. Except as disclosed
in Section 2(h) of Holding Company Schedule, no consent of any
third party to any material indenture or any material agreement
or other material instrument to which Holding Company, Bank or
any other Subsidiary is a party is required in connection with
the Transaction. Holding Company agrees that prior to the
Effective Time it will use its best efforts to obtain all
required consents to the Transaction of parties to any such
material indenture, material agreement, or other material
instrument which is material to the business.
(i) SEC Reports; Financial Statements. Holding Company has
filed all required forms, reports, registration statements and
documents with the Securities and Exchange Commission (the
"SEC"), since December 31, 1992 (collectively, the "SEC
Reports"), each of which, as of its respective date, complied in
all material respects with all applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act") and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
As of their respective dates, none of the SEC Reports, including,
without limitation, any financial statements or schedules
included therein, contained any untrue statement of a material
fact or omitted 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 were made, not
misleading. The audited consolidated financial statements of
Holding Company included in its Annual Report on Form 10-K for
the years ended December 31, 1992, 1993, 1994, and 1995 and the
unaudited consolidated interim financial statements included in
its Quarterly Reports on Form 10-Q for the quarter ended March
31, 1996, fairly present in conformity with generally accepted
accounting principles applied on a consistent basis (except as
may be indicated therein or in the notes thereto), the
consolidated financial position of Holding Company and its
Subsidiaries as of the dates thereof and their consolidated
statements of operations, stockholders' equity, and cash flows
for the periods then ended (in the case of any unaudited interim
financial statements, subject to (i) normal year-end adjustments
and (ii) standard limitations on the application of generally
accepted accounting principles).
Except as and to the extent reflected in the interim
consolidated statement of financial position of Holding Company
and the Subsidiaries as of March 31, 1996, and notes thereto (the
"March 31, 1996 Balance Sheet") or in Section 2(i) of Holding
Company Schedule, neither Holding Company nor any Subsidiary had,
as of March 31, 1996, any liability or obligation (absolute,
contingent or otherwise) except for contractual liabilities
arising in the ordinary course which are not required to be
reflected in a balance sheet prepared in accordance with
generally accepted accounting principles that could have a
material adverse effect on Holding Company and its Subsidiaries
taken as a whole. Except as and to the extent disclosed in
Section 2(i) of Holding Company Schedule, neither Holding Company
nor any Subsidiary has incurred any liability or obligation
(absolute, contingent or otherwise) since March 31, 1996, other
than in the ordinary course of business that could have a
material adverse effect on Holding Company and its Subsidiaries
taken as a whole.
(j) Regulatory Reports. Holding Company and Bank each has
filed all reports, notices and other statements, together with
any amendments required to be made with respect thereto, if any,
that it was required to file with the OCC, the FDIC, the Federal
Reserve Board, and any other governmental agency or authority
with jurisdiction over Holding Company or Bank and each such
report, notice and other statement, including the financial
statements, exhibits and schedules thereto, complied in all
material respects with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority
with which it was filed. To the extent permitted by applicable
laws or regulations, Holding Company has furnished to Acquisition
copies of all regulatory filings (and all related correspondence)
for Holding Company and Bank for the years ended December 31,
1992, 1993, 1994 and 1995 and the quarter ended March 31, 1996,
as filed with the Applicable Governmental Authorities (the
"Regulatory Reports"). The Regulatory Reports, including,
without limitation, the provisions made therein for investments
and the valuation thereof, and loan loss reserves, together with
the notes thereto, fairly present the financial position, assets,
liabilities, change in financial position, surplus and other
funds of Holding Company and Bank as of the dates thereof and the
results of its operations for the periods indicated in conformity
with regulatory accounting principles prescribed or permitted by
law or the rules and regulations of the Applicable Governmental
Authorities, applied on a consistent basis with prior periods,
except as set forth therein. Each such Regulatory Report was in
material compliance with applicable law and correct in every
material respect when filed and there were no material omissions
therefrom. Except for liabilities and obligations disclosed or
provided for in the Regulatory Reports, Bank did not have, as of
the respective dates of each such Regulatory Reports, any
liabilities or obligations (whether absolute or contingent and
whether due or to become due) except for contractual liabilities
arising in the ordinary course which are not required to be
reflected in regulatory financial statements. All books of
account of Bank and each other Subsidiary fully and fairly
disclose all the transactions, properties, assets, investments,
liabilities and obligations of Bank or the respective Subsidiary
and all such books of account are in the possession of Bank or
the respective Subsidiary and are true and complete in all
material respects.
(k) Changes Since March 31, 1996. Except as disclosed in
Section 2(k) of Holding Company Schedule, since March 31, 1996
there has been no material adverse change in the assets,
properties, business, financial condition or results of
operations of Holding Company, Bank and the Subsidiaries taken as
a whole; and neither Holding Company, Bank nor any other
Subsidiary has, since March 31, 1996 (i) made any change in its
authorized capital stock, (ii) issued any stock options, warrants
or other rights calling for the issue, transfer, sale or delivery
of its capital stock or other securities, (iii) paid any stock
dividend or made any reclassification in respect of its
outstanding shares of capital stock, (iv) issued, transferred,
sold or delivered any shares of its capital stock (or securities
convertible into or exchangeable, with or without additional
consideration, for such capital stock), (v) purchased or
otherwise acquired for consideration any outstanding shares of
its capital stock, (vi) disposed of a material portion of its
assets, properties or business other than in the ordinary course
of business, or (vii) authorized or made any distribution to
Holding Company's stockholders of any assets of Holding Company,
Bank or any other Subsidiary, by way of cash dividends or
otherwise.
(l) Properties.
(i) Real Estate and Mortgages. Section 2(l)(i) of Holding
Company Schedule sets forth a list and summary description of (a)
all real property owned by Holding Company or any Subsidiary and
all buildings and other structures located on such real property,
(b) all leases, subleases or other agreements under which Holding
Company or any Subsidiary is the lessor or lessee of any real
property, (c) all unexpired options held by Holding Company or
any Subsidiary or contractual obligations on its part to purchase
or acquire any interest in real property, (d) all unexpired
options granted by Holding Company or any Subsidiary or
contractual obligations on its part to sell or dispose of any
interest in real property, and (e) all mortgages held by Holding
Company (other than as investment securities), identifying all
such mortgages, if any, for which deficiency notices have been
issued or that are otherwise not current. Except as disclosed in
Section 2(l)(i) of Holding Company Schedule, as of the date
hereof such leases, subleases, options and other agreements are
in full force and effect and neither Holding Company nor any
Subsidiary has received any notice of any material default
thereunder.
(ii) Investments. The common stock, preferred stock, bonds,
and other investments owned by Holding Company or any Subsidiary
as of the date hereof are evidenced by appropriate written
instruments and certificates (except where in non-certificated
form), are valid and genuine in all material respects and
enforceable in accordance with their terms against all persons
against whom they purport to create an obligation, subject to
bankruptcy, receivership, insolvency, reorganization, moratorium,
or other similar laws affecting or relating to creditors' rights
generally and subject to general principles of equity. All such
bonds, stocks, and other investments conform in all material
respects to the requirements of applicable laws and regulations.
Except as disclosed in Section 2(l)(ii) of Holding Company
Schedule, none of such investments is in default on the payment
of principal, interest or other required distributions.
(iii) Title to Property; Zoning. Except as disclosed
in Section 2(l)(iii) of Holding Company Schedule, to the best
knowledge of Holding Company, Holding Company and each Subsidiary
has good and marketable title to all real properties reflected in
Section 2(l)(i) and good and marketable title to all other assets
and properties shown as owned by it on Holding Company March 31,
1996 balance sheet or acquired since that date (except properties
disposed of in the ordinary course of business subsequent to said
date), in each case free of all mortgages, liens, security
interests, charges and encumbrances of any nature whatsoever,
other than liens reflected in the Holding Company financial
statements and liens for Taxes (as defined below) not yet due and
payable. All such real property complies in all material
respects with all applicable private agreements, zoning
requirements, Environmental Laws (defined below), and other
governmental laws and regulations relating thereto, and there are
no condemnation proceedings pending or, to the best knowledge of
Holding Company, threatened with respect to the Real Property.
(m) Environmental Laws. Except as disclosed in Section
2(m) of Holding Company Schedule, to the best knowledge of
Holding Company, Holding Company and each Subsidiary has
conducted and is conducting its business in compliance in all
material respects with all applicable federal, state, and local
laws, regulations and requirements currently in force relating to
the protection of the environment ("Environmental Laws"). There
is no pending or, to the best knowledge of Holding Company,
threatened, civil or criminal litigation, written notice of
violation, or administrative proceeding relating to such
Environmental Laws involving Holding Company or any Subsidiary.
There has not been and there is no condition existing with
respect to the release, emission, discharge or presence of
hazardous substances in connection with the business of Holding
Company or any Subsidiary, which condition could subject Holding
Company or any Subsidiary to any proceeding or remediation under
such Environmental Laws or could otherwise have a material
adverse effect on the assets, properties, business, financial
condition or results of operations of Holding Company and its
Subsidiaries taken as a whole. Holding Company and each
Subsidiary has received all approvals, consents, licenses, and
permits with respect to environmental matters necessary to carry
on its business substantially as currently conducted.
(n) Proprietary Rights. Section 2(n) of Holding Company
Schedule discloses all the trademarks, trade names and service
marks (and all registrations and applications with respect
thereto) (collectively the "Proprietary Rights") used in the
business of Holding Company or any Subsidiary. Except as
otherwise disclosed in such Schedule, either Holding Company or
one of the Subsidiaries owns or is duly authorized to use all of
such Proprietary Rights. Such Proprietary Rights as used by
Holding Company or a Subsidiary in its business do not violate or
infringe upon the proprietary rights of any third party, and
there is no claim, action, proceeding or investigation pending
or, to the best of Holding Company's knowledge, threatened
against Holding Company or any of the Subsidiaries with respect
to any such Proprietary Rights.
(o) Agreements. Except as set forth in Section 2(o) of
Holding Company Schedule, neither Holding Company nor any
Subsidiary is a party to nor is Holding Company or any Subsidiary
bound by any oral or written (i) contract for the employment of
any officer or employee, or contract with a former officer or
employee pursuant to which payments are required to be made at
any time following the date hereof, or contract with any labor
union or association representing any employee, (ii) stock
ownership, profit-sharing, bonus, deferred compensation, stock
option, warrant, severance pay, pension, retirement or similar
plan or agreement, (iii) mortgage, indenture, note or installment
obligation the unpaid balance of which exceeds $25,000, or other
instrument for or relating to any borrowing of money by Holding
Company or any of the Subsidiaries, the unpaid balance of which
exceeds $25,000, (iv) guaranty of any obligation for borrowings
or otherwise which in the aggregate exceed $25,000, (v) agreement
or arrangement for the sale or lease of any material amount of
its assets or part of its business other than in the ordinary
course of business or for the grant of preferential rights to
purchase or lease any material amount of its assets or part of
its business, (vi) agreement or arrangement obligating it to
register any of its outstanding shares or other securities with
the SEC, (vii) agreement or arrangement with any officer or
director of Holding Company, any Subsidiary, or any other
affiliate of Holding Company, or (viii) contract, agreement or
other instrument which is material to the assets, properties,
business, financial condition or results of operations of Holding
Company and its Subsidiaries taken as a whole. True and correct
copies of each such document described in (i) - (viii) have been
provided to Acquisition. All contracts, plans, mortgages,
indentures, guaranties and other agreements disclosed in Section
2(o) of Holding Company Schedule are in full force and effect as
of the date hereof, and neither Holding Company nor any
Subsidiary or any other party thereto is in default in any
material respect as to any provision thereof and no event has
occurred which with the passage of time or the taking of any
action, or both, would constitute a material default under any
such agreement. No party thereto may terminate any of such
agreements by reason of the transactions contemplated by this
Agreement.
(p) Litigation; Claims. Except as disclosed in Section
2(p) of Holding Company Schedule, there are no actions, suits,
claims, investigations or proceedings pending, or to the best
knowledge of Holding Company, threatened, against or affecting
Holding Company or any Subsidiary or its properties or
businesses, at law or in equity, or before any governmental or
administrative body or agency or before any arbitrator (i) which
involve a claim in excess of $50,000 or (ii) which alone or in
the aggregate, could materially and adversely affect the assets,
properties, business, financial condition or results of
operations of Holding Company and its Subsidiaries taken as a
whole or the ability of Holding Company and its Subsidiaries
taken as a whole to carry out the transactions contemplated in
this Agreement. Holding Company is not aware of any facts that
would reasonably afford a basis for any such actions, suits,
claims, investigations or proceedings. Except as may be
disclosed on such Schedule, there are no unresolved disputes
under any contract to which Holding Company or any Subsidiary is
a party or by which Holding Company or any Subsidiary is bound
involving in the aggregate an amount in excess of $50,000.
Neither Holding Company nor any Subsidiary is in default with
respect to any order, writ, award, judgment, injunction or decree
of any court, governmental or administrative body or agency, or
arbitrator applicable to it which could have a material adverse
effect on the assets, properties, business, financial condition
or results of operations of Holding Company and its Subsidiaries,
taken as a whole.
(q) Compliance with Laws. Holding Company and each of the
Subsidiaries has complied in all material respects with all laws,
regulations, opinions, orders, ordinances, judgments or decrees
of all governmental authorities (federal, state, local, foreign
or otherwise) applicable to its businesses, including without
limitation, the OCC, FDIC and Federal Reserve Board, except where
the failure to have so complied would not, individually or in the
aggregate, have a material adverse effect on the assets,
properties, business, financial condition or results of
operations of Holding Company and its Subsidiaries taken as a
whole. Except as disclosed in Section 2(q) of Holding Company
Schedule, or as disclosed in Holding Company's proxy statement
for the 1996 annual meeting of stockholders, neither Holding
Company nor any Subsidiary has received any notification of any
asserted failure by it to comply with any of such laws.
(r) Taxes.
(i) Except as disclosed in Section 2(r)(i) of Holding
Company Schedule: (a) all Tax Returns (as defined below)
required to be filed with the appropriate taxing authorities have
been filed by or on behalf of Holding Company or any Subsidiary
and all Taxes (as defined below) shown to be due on such Tax
Returns have been paid or provided for in full; (b) there are no
liens for Taxes upon the assets of Holding Company or any
Subsidiaries except statutory liens for Taxes not yet due; (c)
there are no outstanding deficiencies in respect of Taxes
asserted or threatened or assessments of Taxes made or
threatened, nor any administrative or judicial proceedings
pending or threatened concerning Taxes, with respect to Holding
Company or any Subsidiary and any deficiencies, assessments or
proceedings shown in Holding Company Schedule are being contested
in good faith through appropriate proceedings; (d) Holding
Company has established on the financial statements described in
Section 2(i) of this Agreement reserves and accruals adequate for
the payment of all Taxes accruing with respect to or payable by
Holding Company and each Subsidiary for all periods reflected
therein; (e) there are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any
Tax Returns required to be filed with respect to Holding Company
or any Subsidiary; and (f) Neither Holding Company nor any
Subsidiary has requested any extension of time within which to
file any Tax Return, which Tax Return has not been filed.
(ii) The appropriate income Tax Returns of Holding Company
and each Subsidiary have been examined by (a) the Internal
Revenue Service or the statute of limitations has expired for all
periods up to and including December 31, 1991 and (b) the taxing
authorities of all of the states disclosed in Holding Company
Schedule pursuant to Section 2(c) or the statute of limitations
has expired for all periods up to and including December 31,
1991, respectively, and there are no outstanding or unresolved
proposed adjustments.
(iii) Except as disclosed in Section 2(r)(iii) of
Holding Company Schedule, no power of attorney has been granted
by Holding Company or any Subsidiary with respect to any matter
relating to Taxes which is currently in force.
For purposes of this Agreement, the term "Taxes" shall mean
all taxes, charges, fees, levies or other assessments, including
without limitation, all net income, gross income, premium or
privilege, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment,
excise, estimated, severance, stamp, occupation, property or
other taxes, customs duties, fees, assessments, or charges of any
kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any
governmental authority (domestic or foreign) upon Holding Company
or any Subsidiary and the term "Tax Returns" shall mean all
returns, declarations, reports, estimates, and statements,
regarding Taxes, required to be filed under United States
federal, state, local or any foreign laws.
(s) Related Party Transactions. Except as disclosed in
Section 2(s) of Holding Company Schedule, or as disclosed in
Holding Company's proxy statement for the 1996 annual meeting of
stockholders, and other than transactions exclusively between or
among Holding Company and/or any of the Subsidiaries, neither
Holding Company nor any Subsidiary has made any loan to any
director, officer or other affiliate of Holding Company or a
Subsidiary which remains outstanding nor has Holding Company or
any Subsidiary entered into any agreement, other than an
agreement referred to in subpart (o) hereof, for the purchase or
sale of any property or services from or to any director, officer
or other affiliate of Holding Company or a Subsidiary.
(t) Employee Benefit Plans.
(i) Section 2(t)(i) of Holding Company Schedule sets forth
a true and complete list of each employee benefit plan, as
defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and each other plan,
arrangement and agreement providing employee benefits
(collectively the "Plans"), that covers current or former
employees of Holding Company or any Subsidiary or affiliate and
is presently maintained by Holding Company or any Subsidiary or
any affiliate thereof or by any trade or business, whether or not
incorporated (an "ERISA Affiliate"), which together with Holding
Company would be deemed a "single employer" within the meaning of
Section 4001 of ERISA. None of the Plans is a "multiemployer
plan," as defined in Section 3(37) of ERISA. Holding Company has
delivered or made available to Acquisition: copies of all such
Plans; any related trust agreements, group annuity contracts,
insurance policies or other funding agreements or arrangements
relating thereto; the most recent determination letter, if any,
from the Internal Revenue Service with respect to each of the
Plans which is subject to ERISA ("ERISA Plans"); actuarial
valuations, if applicable, for the most recent plan year for
which such valuations are available; the current summary plan
descriptions; and the annual return/report on Form 5500 and
summary annual reports for each of the Plans for each of the last
three years.
(ii) Each of the ERISA Plans is in substantial compliance
with all applicable provisions of law, including the Code and
ERISA. Neither Holding Company nor any ERISA Affiliate currently
maintains or sponsors a defined benefit pension plan as defined
in Section 414(j) of the Code and neither Holding Company nor any
ERISA Affiliate has ever maintained or sponsored any such plan
that could give rise to a liability against Holding Company or
any Subsidiary.
(iii) The written terms of each of the Plans, and any
related trust agreement, group annuity contract, insurance policy
or other funding arrangement are in substantial compliance with
all applicable laws including ERISA, the Code, and the Age
Discrimination in Employment Act, as applicable, and each of such
Plans has been administered in substantial compliance with such
requirements.
(iv) Except with respect to income taxes on benefits paid or
provided, no income, excise or other tax or penalty (federal or
state) has been waived or excused, has been paid or is owed by
any person (including, but not limited to, any Plan, any Plan
fiduciary, Holding Company and ERISA Affiliates) with respect to
the operations of, or any transactions with respect to, any Plan.
No action has been taken, nor has there been any failure to take
any action, nor is any action or failure to take action
contemplated, that would subject any person or entity to any
liability for any tax or penalty in connection with any Plan. No
reserve for any taxes or penalties has been established with
respect to any Plan, nor has any advice been given to any person
with respect to the need to establish such a reserve.
(v) There are no (A) actions, suits, arbitrations or claims
(other than routine claims for benefits), (B) legal,
administrative or other proceedings or governmental
investigations or audits, or (C) complaints to or by any
governmental entity, which are pending, anticipated or
threatened, against the Plans or their assets.
(vi) The present value of the future cost to Holding Company
and ERISA Affiliates of post-retirement medical benefits that
Holding Company or any ERISA Affiliate is obligated to provide,
calculated on the basis of actuarial assumptions Holding Company
considers reasonable estimates of future experience and which
have been provided to Acquisition, does not exceed the amount
specified in Section 2(t)(vi) of Holding Company Schedule.
(vii) Neither Holding Company nor any ERISA Affiliate,
nor any of the ERISA Plans, nor any trust created thereunder, nor
any trustee or administrator thereof has engaged in a transaction
in connection with which Holding Company or any ERISA Affiliate,
any of the ERISA Plans, any such trust, or any trustee or
administrator thereof, or any party dealing with the ERISA Plans
or any such trust could be subject to either a civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a tax
imposed pursuant to Section 4975 or 4976 of the Code. Neither
Holding Company nor any ERISA Affiliate is, or, as a result of
any actions, omissions, occurrences or state of facts existing
prior to the Effective Time, may become liable for any tax
imposed under Section 4978 of the Code.
(u) Insurance. All properties of Holding Company and each
Subsidiary are covered by valid and currently effective insurance
policies issued in favor of Holding Company or a Subsidiary and
such insurance policies provide Holding Company and its
Subsidiaries with adequate coverage and limits for its
operations. Disclosed in Section 2(u) of Holding Company
Schedule is a true and correct list of all insurance policies
covering Holding Company and the Subsidiaries. Holding Company
or a Subsidiary is included as an insured party under such
policies or has full rights as a loss payee. No notice of
cancellation or termination has been received with respect to any
such policy. Such policies will not be terminable or cancelable
by reason of this Agreement and the consummation of the
transactions contemplated hereby.
(v) Regulatory Filings. To the extent permitted by
applicable laws or regulations, Holding Company has made
available for inspection by Acquisition all registrations,
filings or submissions made by Holding Company or any Subsidiary
with any governmental or regulatory body and delivered to
Acquisition each and every annual and quarterly report filed with
or submitted to any governmental or regulatory body since
December 31, 1992. Holding Company and each Subsidiary has filed
all reports, statements, documents, registrations, filings or
submissions required to be filed by it with any governmental or
regulatory body. All such registrations, filings and submissions
were in material compliance with applicable law when filed, and
no material deficiencies have been asserted by any such
governmental or regulatory body with respect to such
registrations, filings and submissions that have not been
satisfied. Bank duly has filed with appropriate governmental and
regulatory authorities, to the extent that filing of the same is
required by laws, rules or regulations, all annual and quarterly
statements and other statements, documents and reports required
to be filed by it. All such statements and filings are correct
in all material respects as filed, and there are no material
omissions therefrom. All issues raised in such reports have been
resolved to the satisfaction of the issuer of such reports.
(w) Deposits. Section 2(w) of the Holding Company Schedule
is a schedule of the aggregate deposit accounts of Bank, prepared
as of the date indicated thereon, listing by category and by
Branch the amount of such deposits, together with the amount of
accrued but unpaid interest thereon (the "Deposits"). All such
Deposits are insured to the fullest permissible extent by the
Bank Insurance Fund ("BIF") administered by the FDIC. All
related insurance premiums due and owing have been paid to the
FDIC as of the date hereof. As of the date hereof, with respect
to the Deposits, subject to immaterial bookkeeping errors, Bank
has administered all of the Deposits in accordance with good and
sound financial practices and procedures, and has properly made
all appropriate credits and debits thereto, has delivered to its
customers on a regular basis, statements adequately and
accurately reflecting the amount, date and nature of such credit
and debit; in the event a question, complaint or objection by any
depositors with respect to any of the Deposits has occurred, Bank
has promptly and properly reviewed and responded and taken
corrective action, in accordance with good and sound financial
practice; and to the best knowledge of Holding Company, Bank is
not liable to any depositors for any shortages, or for any
errors, acts or omissions by Bank that in the aggregate would
exceed $5,000.
(x) Loans.
(i) All loans of Bank (the "Loans") and loan commitments
extended by Bank and any extensions, renewals or continuations of
such Loans and loan commitments were made in accordance with
customary lending standards of national banking associations in
the ordinary course of business. The Loans are evidenced by
appropriate and sufficient documentation based upon customary and
ordinary past practices for national banking associations.
(ii) Except for participations purchased or sold by the Bank
or loans pledged and fully described at Section 2(x) of the
Holding Company Schedule, the note evidencing each Loan and the
collateral documents securing each Loan have not been assigned or
pledged, the Bank has good and marketable title thereto, and the
Bank is the sole owner and holder of each note evidencing a Loan
and each collateral document securing such Loan.
(y) Reserves. The loan loss reserves of Bank, as set forth
on the March 31, 1996 financial statements have been computed in
accordance with generally accepted methods and principles
consistently applied, have been properly computed and, in
management's opinion, are adequate to provide for all reasonably
foreseeable losses on Loans outstanding.
(z) Agreements with Regulatory Agencies. Except as set
forth in Section 2(z) of Holding Company Schedule, neither
Holding Company nor any of its 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 (each a "Regulatory Agreement"), with any
regulatory agency or other government entity that restricts in
any respect the conduct of its business or that relates to its
capital adequacy, its credit policies or its management, nor has
Holding Company or any of its Subsidiaries been notified by any
regulatory agency or other governmental entity that it is
considering issuing or requesting any Regulatory Agreement.
Except as set forth in Section 2(z) of Holding Company Schedule
and as disclosed in the proxy statement for the 1996 annual
meeting of Holding Company's stockholders, no regulatory agency
has initiated any investigation or proceeding into the business
or operations of Holding Company or any of its Subsidiaries.
(aa) Information for Regulatory Approvals. The information
furnished or to be furnished by Holding Company or Bank in any
regulatory application filed by Holding Company, Bank, FBOP or
Acquisition in connection with the Transaction, will be true and
complete in all material respects as of the date so furnished.
(ab) Governmental Notices. Neither Holding Company nor Bank
has received notice from any federal, state, or other
governmental agency indicating that such agency would oppose or
not grant or issue its consent or approval, if requested, with
respect to the Transaction. To the best knowledge of Holding
Company, there are no facts that could reasonably be expected to
have an adverse effect on the ability of Holding Company or Bank
to obtain all requisite regulatory consents or to perform their
respective obligations under this Agreement and in connection
with the Transaction.
(ac) SEC Filings. Except with respect to written
information supplied by Acquisition or FBOP expressly for
inclusion in the Holding Company proxy statement, none of the
information contained in the proxy statement to be mailed to the
stockholders of Holding Company in connection with the Merger or
in any amendments thereof or supplements thereto (the "Proxy
Statement") will, at the time of (i) the first mailing thereof
and (ii) the meeting of stockholders to be held in connection
with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(ad) Finders and Investment Bankers. Neither Holding
Company nor any Subsidiary has retained any broker, finder or
other agent or incurred any liability for any brokerage fees,
commissions or finders' fees with respect to the Transaction
except for Holding Company's retention of Keefe, Bruyette & Woods
and Torrey Pines Securities, Inc.
(ae) Disclosure. No representation or warranty of Holding
Company and no statement or information relating to Holding
Company or any Subsidiary or their respective businesses or
properties contained in (i) this Agreement, (ii) Holding Company
Schedule, or (iii) in any certificate furnished or to be
furnished to Acquisition pursuant to this Agreement contains or
will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the
statements made herein or therein, in light of the circumstances
in which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND FBOP
FBOP and Acquisition each represent and warrant to Holding
Company as follows:
(a) Organization of Acquisition and FBOP. Acquisition is a
corporation duly organized, validly existing and in good standing
under the laws of Illinois. Acquisition is a wholly-owned
subsidiary of FBOP. FBOP is a corporation duly organized,
validly existing and in good standing under the laws of Illinois.
(b) Authorization. The Boards of Directors of Acquisition
and FBOP have adopted resolutions approving the Agreement and the
Transaction and have authorized the execution and delivery of
this Agreement. Acquisition and FBOP have full power and
authority to enter into this Agreement and subject to obtaining
all required regulatory approvals, to consummate the transactions
contemplated hereby. This Agreement has been duly executed and
delivered by Acquisition and FBOP and constitutes the valid and
legally binding obligation of Acquisition and FBOP, enforceable
against them in accordance with its terms, subject to bankruptcy,
receivership, insolvency, reorganization, moratorium or similar
laws affecting or relating to creditors rights generally and
subject to general principles of equity.
(c) Consents and Approvals. Except for consents and
approvals of the Applicable Governmental Authorities, no filing
with, and no permit, authorization, consent or approval of, any
public body or authority is necessary for the consummation by
Acquisition and FBOP of the transactions contemplated by this
Agreement.
(d) Defaults and Conflicts. Subject to the receipt
of all consents and approvals contemplated by this Agreement, the
execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby or the fulfillment of and
compliance with the terms and provisions hereof will not (i)
violate any judicial or administrative order, writ, award,
judgment, injunction or decree involving Acquisition or FBOP, or
(ii) conflict with any of the terms, conditions or provisions of
the Articles of Incorporation or Bylaws of Acquisition or FBOP.
No consent of any third party to any indenture or any material
agreement or other material instrument to which Acquisition or
FBOP is a party is required in connection with the Transaction.
(e) SEC Filings. None of the information supplied or
to be supplied by Acquisition or FBOP in writing expressly for
inclusion in the Proxy Statement will, at the time of (i) the
first mailing thereof and (ii) the meeting of stockholders to be
held in connection with the Merger, contain any untrue statement
of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(f) Funds Available. Acquisition and FBOP has
available to it sufficient funds to perform all of its
obligations pursuant to the Merger.
(g) Finders and Investment Bankers. Acquisition and
FBOP will be responsible for any of their respective brokerage
fees, commissions or finders' fees with respect to the
Transaction.
(h) Governmental Notices. Neither Acquisition nor
FBOP has received notice from any federal, state, or other
governmental agency indicating that such agency would oppose or
not grant or issue its consent or approval, if requested, with
respect to the Transaction. To the best knowledge of Acquisition
and FBOP, there are no facts that could reasonably be expected to
have an adverse effect on the ability of Acquisition or FBOP to
obtain all requisite regulatory consents or to perform its
obligations under this Agreement.
(i) Financial Statement. Within 10 days of the date
of this Agreement, FBOP will make available to Holding Company
its audited financial statements for the year ended December 31,
1995, which have been prepared in accordance with generally
accepted accounting principles on a consistent basis throughout
the period covered by such statement (except as may be indicated
in the notes thereto), and which present fairly the consolidated
financial position and results of operations for the period
covered by such statement.
(j) Agreements. Neither FBOP nor Acquisition is a
party to any written agreement or memorandum of understanding
with, or is subject to, any order or directive by any
governmental entity.
(k) Articles; Bylaws. Within 10 days of the date of
this Agreement, FBOP will deliver to Holding Company true and
complete copies of its Articles of Incorporation and Bylaws as in
effect as of the date hereof.
ARTICLE IV
RIGHT TO INVESTIGATE
To the extent permitted by applicable laws or regulations,
Holding Company shall afford to the officers and authorized
representatives of Acquisition and FBOP reasonable access during
regular business hours and upon reasonable request to the
offices, properties, books, contracts, commitments and records of
Holding Company and its Subsidiaries in order that Acquisition
may have full opportunity to make such investigations as it shall
desire of the affairs of Holding Company, Bank and the other
Subsidiaries, and the officers of Holding Company shall furnish
Acquisition and FBOP with such additional financial and operating
data and other information as to the assets, properties and
business of Holding Company, Bank and the other Subsidiaries as
Acquisition and FBOP shall from time to time reasonably request.
Holding Company, Bank and the Subsidiaries shall consent to the
review by the officers and authorized representatives of
Acquisition of the reports and working papers of Holding
Company's independent auditors upon reasonable advance notice as
to the area of review.
ARTICLE V
COVENANTS OF HOLDING COMPANY
(a) Operation in Ordinary Course. From the date hereof to
the Effective Time, each of Holding Company, Bank and the other
Subsidiaries shall: (a) not engage in any transaction except in
the ordinary course of business and shall conduct its business
consistent with past practices; (b) maintain the Branches in a
condition substantially the same as on the date of this
Agreement, reasonable wear and use excepted; (c) maintain its
books of accounts and records in the usual, regular and ordinary
manner; and (d) duly maintain compliance in all material respects
with all laws, regulatory requirements and agreements to which it
is subject or by which it is bound. Without limiting the
generality of the foregoing, prior to the Effective Time, Holding
Company, Bank and other Subsidiaries shall not, without the prior
written consent of Acquisition;
(1) fail to maintain its tangible property and assets in their
present state of repair, order and condition, reasonable wear and
tear and damage by fire or other casualty excepted;
(2) fail to maintain its books, accounts and records in
accordance with generally accepted accounting principles
consistently applied;
(3) fail to comply in all material respects with all
applicable laws and regulations;
(4) make, renew or modify the terms (including, but not
limited to, any release or substitution of collateral, change of
the interest rate, or release or substitution of any guarantor)
of any loan, letter of credit or other extension of credit, or
commitment to make a loan, in excess of $200,000, provided,
however, that loans not in excess of $200,000 that are secured by
secondary market qualified mortgages on single-family dwellings
shall be permitted under this subsection;
(5) except as required by law or applicable regulation and
except for the exercise of the Options identified on the Holding
Company Schedule to which Acquisition hereby consents, enter
into, adopt, amend or terminate any bonus, profit sharing,
compensation, termination, stock option, stock appreciation
right, restricted stock, performance unit, pension, retirement,
deferred compensation, employment, severance or other employee
benefit agreement, trust or plan;
(6) except for pay raises pursuant to scheduled annual reviews
in the ordinary course of business not to exceed 5% of annual W-2
compensation, authorize or enter into any employee contract or
employment agreement, grant any pay raise or increase in any
manner the compensation or fringe benefits of any director,
officer or employee or pay any benefit not required by an
existing plan or arrangement or authorize or enter into any
contract, agreement, commitment or arrangement to do any of the
foregoing;
(7) authorize or enter into any contract, commitment or
obligation (excluding all loans and loan commitments) including,
but not limited to obligations for services, which provides for
the receipt or payment of amounts, in the aggregate, in excess of
$25,000;
(8) sell, transfer, convey, assign or otherwise dispose of any
material assets or properties, or authorize any of the foregoing,
or sell loans in bulk;
(9) acquire, lease or encumber any assets in excess of
$125,000 for any item or series of similar items;
(10) authorize or make any amendment to its charter or bylaws;
(11) fail to keep in force all insurance policies presently in
effect, including insurance of deposit accounts with the FDIC;
(12) do any act which, or omit to do any act the omission of
which, will cause a material breach of any contract, commitment
or obligation;
(13) make any borrowing, incur any debt (other than (i)
deposits in the ordinary course of business and consistent with
past practice and (ii) overnight borrowings from the Federal
Reserve Bank consistent with past practices), or assume,
guarantee, endorse (except for the negotiation or collection of
negotiable instruments in the ordinary course of business and
consistent with past practice) or otherwise become liable
(whether directly, contingently or otherwise) for the obligations
of any other person, or make any payment or repayment in respect
of any indebtedness (other than deposits and accrued expenses in
the ordinary course of business and consistent with past
practice);
(14) accept any deposits for which the interest rate payable
thereon exceeds by more than 0.5 percent the average interest
rate being paid on similar deposits by banks in the San Diego
area market;
(15) waive, release or cancel any claims in excess of $25,000
against third parties or debts in excess of $25,000 owing to it,
or any rights which have any value in excess of $25,000;
(16) make any changes in its accounting systems, policies or
practices;
(17) enter into, authorize, or permit any transaction, except
as now existing and disclosed to Acquisition, with any Affiliate
of Holding Company or any Subsidiary;
(18) make any capital contribution to any person or purchase or
invest in any securities issued by any person other than
securities which are issued or guaranteed by the United States
government or an agency thereof having a maturity of more than
twelve (12) months from the date of purchase;
(19) sell any investment securities;
(20) enter into or renew any data processing service contract;
(21) change or amend its schedules and policies relating to
service charges or service fees;
(22) enter into loan transactions not in accordance with sound
credit practices and not on terms and conditions which are
materially more favorable than those available to the borrower
from competitive sources in transactions in the ordinary course
of business;
(23) fail to use its best efforts to preserve the present
business organizations intact, to keep available the services of
its present officers and employees or to preserve its present
relationships with persons having business dealings with it;
(24) fail to maintain, consistent with its past practices, a
reserve for possible loan and lease losses which is adequate
under the requirements of generally accepted accounting
principles to provide for possible losses, net of recoveries
relating to loans previously charged off, on loans outstanding
(including, without limitation, accrued interest receivable);
(25) make any material change in any lease of real property;
(26) fail to file in a timely manner all required filings with
all proper regulatory authorities and fail to cause such filings
to be true and correct;
(27) foreclose upon or take deed or title to any commercial
real estate without first conducting a Phase I environmental
assessment of the property; or foreclose upon such commercial
real estate if such environmental assessment indicates the
presence of hazardous material in amounts that, if such
foreclosure were to occur, would be reasonably likely to result
in a material adverse effect on Bank;
(28) amend or modify any of its promotional, deposit account or
account loan practices, other than amendments or modifications in
the ordinary course of business; or
(29) (i) make any change in its authorized capital stock, (ii)
issue any stock options, or issue any warrants, or other rights
calling for the issue, transfer, sale or delivery of its capital
stock or other securities, (iii) pay any stock dividend or make
any reclassification in respect of its outstanding shares of
capital stock, (iv) except for the issuance of shares upon
exercise of any Options, issue, sell, exchange or deliver any
shares of its capital stock (or securities convertible into or
exchangeable, with or without additional consideration, for such
capital stock), (v) purchase or otherwise acquire for
consideration any outstanding shares of its capital stock, or
(vi) declare, pay or set apart in respect of its capital stock
any dividends or other distributions or payments.
(b) Exclusivity. Except as may be required by any
regulatory authority, or except to the extent required by
fiduciary obligations under applicable law in reliance upon a
written opinion of counsel, neither Holding Company, Bank, nor
any other Subsidiary or any of their respective directors,
officers, employees, representatives, agents or Affiliates (as
defined below) shall, directly or indirectly, solicit, initiate,
encourage or respond favorably to inquiries or proposals from, or
provide any confidential information or access to Bank's or
Holding Company's premises to, or participate in any discussions
or negotiations with, any person (other than Acquisition and FBOP
and their directors, officers, employees, representatives and
agents) concerning (i) any merger, sale of assets not in the
ordinary course of business, acquisition, business combination,
change of control or other similar transaction involving Holding
Company or Bank, or (ii) any purchase or other acquisition by any
person of any shares of capital stock of Holding Company or Bank,
or (iii) any issuance by Holding Company or Bank of any shares of
its capital stock. Holding Company will promptly advise
Acquisition or FBOP of, and communicate to Acquisition or FBOP
the terms and conditions of (and the identity of the person
making), any such inquiry or proposal received, and will promptly
furnish Acquisition or FBOP with copies of any documents received
and summaries of any other communications with respect thereto.
Holding Company will cease any such existing activities,
discussions or negotiations with any person conducted heretofore
with respect to any of the foregoing.
As used in this Agreement, the term "Affiliate" shall mean,
with respect to any specified person, (1) any other person which,
directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such
specified person, (2) any other person which is a director,
officer or partner or is, directly or indirectly, the beneficial
owner of 5 percent or more of any class of equity securities, of
the specified person or a person described in clause (1) of this
paragraph, (3) another person of which the specified person is a
director, officer or partner or is, directly or indirectly, the
beneficial owner of 5 percent or more of any class of equity
securities, (4) another person in which the specified person has
a substantial beneficial interest or as to which the specified
person serves as trustee or in a similar capacity, or (5) any
relative or spouse of the specified person or any of the
foregoing persons, any relative of such spouse or any spouse of
any such relative.
(c) Stockholder Meeting. Subject to subpart (b) above,
Holding Company shall take all steps necessary to duly call, give
notice of, convene and hold a meeting of its stockholders to be
held as soon as is practicable for the purpose of voting upon the
approval of the Merger and this Agreement. Holding Company will,
through its Board of Directors, use its best efforts to obtain
stockholder approval and will recommend to its stockholders
approval of this Agreement and the transactions contemplated
hereby and such other matters as may be submitted to its
stockholders in connection with this Agreement. As soon as
practicable, Holding Company shall prepare and cause to be filed
with the SEC the related proxy material and shall use its best
efforts to obtain clearance by the SEC for the mailing of such
material to Holding Company stockholders. Acquisition shall have
the right to review the proxy material prior to filing with the
SEC.
(d) Intentionally Omitted.
(e) Reports. Promptly after filing with the applicable
authorities, Holding Company shall provide to Acquisition copies
of (i) all reports filed with the SEC, including its Annual
Report on Form 10-K for the year ended December 31, 1995, and its
Quarterly Report on Form 10-Q, which shall conform to the
requirements for SEC Reports specified in Article II(i) above;
and (ii) to the extent permitted by applicable laws or
regulations its Regulatory Reports, which shall conform to the
requirements for Regulatory Reports specified in Article II(j)
and (v) above.
(f) Notice. Holding Company shall give prompt notice to
Acquisition of (i) any notice of, or other communication relating
to, a default or event which with notice or lapse of time or both
would become a default, received by Holding Company or any
Subsidiary subsequent to the date of this Agreement and prior to
the Effective Time, under its charter or bylaws or any indenture,
or material instrument or agreement, to which Holding Company or
any Subsidiary is a party, by which it or any of its properties
is bound or to which it or any of its properties is subject, (ii)
any notice or other communication from any third party alleging
that the consent of such third party is or may be required in
connection with the transactions contemplated hereby and (iii)
any matter which, if it had occurred prior to the date hereof,
would have been required to be included on Holding Company
Schedule.
(g) Regulatory Matters. Holding Company shall, from the
date hereof through the Effective Time, keep Acquisition advised
with respect to any and all regulatory matters or proceedings
affecting Holding Company or Bank and shall promptly forward to
Acquisition copies of all correspondence, notices, orders,
memoranda or other written material received from any regulatory
agency (to the extent permitted by law) and shall provide
Acquisition full access to its regulatory files to the extent
permitted by law.
(h) Supplemental Information; Disclosure Supplements. From
time to time prior to the Effective Time, Holding Company will
promptly disclose in writing to Acquisition any matter hereafter
arising which, if existing, occurring or known at the date of
this Agreement would have been required to be disclosed or which
would render inaccurate any of the representations, warranties or
statements set forth in this Agreement. From time to time prior
to the Effective Time, Holding Company will promptly supplement
or amend Holding Company Schedule delivered in connection with
the execution of this Agreement to reflect any matter which, if
existing, occurring or known at the date of this Agreement, would
have been required to be set forth or described in such Schedule
or which is necessary to correct any information in such Schedule
that has been rendered inaccurate thereby.
(i) Cooperation. Holding Company and its Subsidiaries
shall execute such documents and other papers, provide such
information, and take such further actions as may be reasonably
requested by Acquisition to carry out the provisions hereof and
to consummate the Transaction.
(j) Conditions Precedent. Holding Company and the
Subsidiaries shall use their best efforts to cause all of the
conditions precedent to the consummation of the Transaction
applicable to them to be met.
(k) Best Efforts. Holding Company and the Subsidiaries
shall use their best efforts to take or cause to be taken all
actions necessary, proper or advisable to consummate the Merger
on a prompt basis.
(l) Schedules. Within 10 days of the date hereof, Holding
Company shall deliver to Acquisition final Holding Company
Schedules, which Schedules shall not be materially different from
the draft Schedules provided herewith.
ARTICLE VI
COVENANTS OF ACQUISITION AND FBOP
(a) Consents. Acquisition and FBOP shall, as soon as
practicable, prepare and make all necessary filings with all
Applicable Governmental Authorities and shall use their best
efforts to obtain all consents, waivers, approvals,
authorizations, rulings or orders from all governmental or
regulatory bodies or other entities and furnish true, correct and
complete copies of each to Holding Company.
(b) Cooperation. Acquisition and FBOP shall execute such
documents and other papers, provide such information, and take
such further actions as may be reasonably requested by Holding
Company to carry out the provisions hereof and to consummate the
transactions contemplated hereby.
(c) Conditions Precedent. Acquisition and FBOP shall use
their best efforts to cause all of the conditions precedent to
the consummation of the Transaction applicable to each to be met.
(d) Best Efforts. Acquisition and FBOP will use their best
efforts to take or cause to be taken all actions necessary,
proper or advisable to consummate the Merger on a prompt basis.
(e) Liability Insurance. FBOP or Acquisition will use its
best efforts to provide to persons who served as directors and
officers of Holding Company or any Subsidiary on or before the
Effective Time, insurance against liabilities and claims (and
related expenses) made against them resulting from their services
as such prior to the Effective Time, substantially similar in all
materials respects to the insurance coverage provided them in
such capacities at the date hereof; provided, however, that in no
event shall FBOP or Acquisition be required to spend more than
$80,000 in the aggregate (the "Insurance Amount") to maintain or
procure insurance coverage pursuant hereto, and, provided
further, that if FBOP or Acquisition is unable to maintain or
obtain the insurance called for by this section on commercially
reasonable terms, FBOP or Acquisition shall use its best efforts
to obtain as much comparable insurance as is available for the
Insurance Amount.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF ACQUISITION AND FBOP
The obligations of Acquisition and FBOP under this Agreement
to cause this Agreement to become effective and have the
transactions contemplated hereby be consummated are, at its
option, subject to the conditions that:
(a) Validity of Representation and Warranties. The
representations and warranties of Holding Company herein
contained shall be true and correct in all material respects when
made and, in addition, shall be true and correct in all material
respects on and at the Effective Time with the same force and
effect as though made on and at the Effective Time.
(b) Consents. All required consents, waivers, approvals,
authorizations or orders in connection with the Transaction shall
have been obtained by Holding Company and copies of the same
shall have been delivered to Acquisition.
(c) Compliance with Covenants; Schedules. Holding Company
shall have performed in all material respects all obligations and
agreements and complied in all material respects with all
covenants and conditions contained in this Agreement to be
performed and complied with by it at or prior to the Effective
Time; and Acquisition shall have received all of the Schedules
referred to herein, which Schedules shall not be, in the
reasonable judgment of Acquisition, materially different from the
draft Schedules provided to Acquisition on the date of this
Agreement.
(d) Opinion of Counsel. Acquisition shall have received
the opinion of Sherman & Lapidus LLP, counsel for Holding
Company, specified in Article X(b)(ii).
(e) Approval of Holding Company Stockholders. This
Agreement shall have been approved and adopted at a duly called
meeting of the stockholders of Holding Company Common Stock by at
least a majority of the issued and outstanding shares of Holding
Company Common Stock entitled to vote thereon.
(f) Dissenting Holding Company Shares. The holders of not
more than 10% of the issued and outstanding shares of Holding
Company Common Stock at the Effective Time shall have delivered
written demand for payment of the fair market value of their
shares of Holding Company Common Stock pursuant to Section 1301
of the CGCL.
(g) Resignations. The directors and officers of Holding
Company shall have tendered their resignations in writing,
effective on the Effective Time.
(h) Adverse Changes. From March 31, 1996 to the Effective
Time, there shall not have been any Material Adverse Change in
the business, operations, results of operations, assets,
liabilities, investments, properties, condition (financial or
otherwise), affairs, prospects or other attributes of Holding
Company or Bank, taken as a whole. The term "Material Adverse
Change" shall mean with respect to Holding Company, any change
that (i) is material and adverse to the business, operations,
results of operations, assets, liabilities, investments,
properties, condition (financial or otherwise), affairs,
prospects or other attributes of Holding Company, or (ii)
materially impairs the ability of Holding Company to perform its
obligations under this Agreement or consummate the Merger;
provided, however, that Material Adverse Change shall not be
deemed to include the impact of (a) changes in banking and
similar laws, (b) changes in generally accepted accounting
principles or regulatory requirements applicable to banks and
bank holding companies generally, or (c) circumstances affecting
banks and bank holding companies generally.
(i) Effective Time. The Effective Time shall be no later
than 5:00 P.M. Pacific Time on April 30, 1997.
(j) No Pension Plans. Neither Holding Company, Bank, nor
the Subsidiaries shall have in existence or have authorized a
pension plan.
(k) Stock Option Plans and Incentive Plans; Options.
Acquisition shall have received evidence satisfactory to it that
all Options and any other options or warrants for Common Stock
have been cancelled.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF HOLDING COMPANY
The obligations of Holding Company under this Agreement to
cause this Agreement to become effective and have the
transactions contemplated hereby be consummated are, at its
option, subject to the conditions that:
(a) Validity of Representations and Warranties. The
representations and warranties of Acquisition and FBOP herein
contained shall have been true and correct in all material
respects when made and, in addition, shall be true and correct in
all material respects on and at the Effective Time with the same
force and effect as though made on and at the Effective Time.
(b) Consents. All consents, waivers, approvals,
authorizations or orders required to be obtained by Acquisition
shall have been obtained and copies of the same shall have been
delivered to Holding Company.
(c) Compliance with Covenants. Acquisition and FBOP shall
have performed in all material respects all obligations and
agreements and complied in all material respects with all
covenants and conditions contained in this Agreement to be
performed and complied with by them at or prior to the Effective
Time.
(d) Opinion of Counsel. Holding Company shall have
received the opinion of Lord, Bissell & Brook, counsel for
Acquisition, specified in Article X(c)(ii).
(e) Fairness Opinion. Holding Company shall have received
an opinion from Keefe, Bruyette & Woods to the effect that, in
its opinion, the consideration to be paid to the shareholders of
Holding Company hereunder is fair to such shareholders from a
financial point of view and an update to such opinion, without
adverse change of such opinion, (i) as of a date not more than
three days prior to the date the Proxy Statement/Prospectus is
mailed to Holding Company's shareholders and (ii) as of the
Closing.
(f) Employment Agreements. FBOP shall have entered into
separate employment agreements with Messrs. Galinson, Horsman and
Brotman and Ms. Chewning effective as of the Effective Time
providing for (i) salaries not less than the salary of each on
the date hereof; (ii) three year terms; (iii) change-of-control
provisions limiting termination compensation to 299% of the
average of overall compensation for each of past five years; and
(iv) substantially the same job responsibilities as currently
held.
(g) Effective Time. The Effective Time shall be no later
than 5:00 P.M. Pacific Time on April 30, 1997.
(h) Funds to Paying Agent. FBOP or Acquisition shall have
made available to the Paying Agent the funds as described at
Article I(m) hereof.
ARTICLE IX
CONDITIONS APPLICABLE TO ACQUISITION, FBOP AND HOLDING COMPANY
The obligations of Acquisition, FBOP and Holding Company
under this Agreement to cause this Agreement to become effective
and have the transactions contemplated hereby be consummated are
subject to the following terms and conditions:
(a) Governmental Approvals. To the extent required by
applicable law or regulation, the OCC, the Federal Reserve Board,
the FDIC and/or such other state or federal agencies whose
approval of the transactions contemplated by this Agreement is so
required, shall have approved or authorized all of the
transactions contemplated by this Agreement in form and under
terms not materially burdensome to FBOP or Acquisition. All
other statutory or regulatory requirements for the valid
consummation of the Transaction shall have been satisfied and all
other required governmental consents and approvals shall have
been obtained.
(b) Injunction. The consummation of the Merger shall not
have been restrained, enjoined or prohibited by any court or
governmental authority of competent jurisdiction. No material
litigation or administrative proceeding shall be pending or
threatened as of the Effective Time seeking to restrain, enjoin
or prohibit the consummation of this Agreement, the Merger or the
Transaction.
ARTICLE X
CLOSING AND CLOSING DOCUMENTS
(a) Closing. The closing ("Closing") under this Agreement
shall be held at the Bank, as promptly as practicable after the
fulfillment or waiver of all the terms and conditions contained
in Articles VII, VIII, IX and X of this Agreement, or at such
other place and time as shall be mutually agreeable to the
parties. The required number of fully executed and verified
copies of the Articles of Merger shall be filed immediately after
the Closing with the Secretary of State of Illinois and the
parties shall make all other filings and recordings required by
the IL BCA and the CGCL in connection with the Merger.
(b) Holding Company Closing Documents. At the Closing,
Holding Company shall deliver, or cause to be delivered, to
Acquisition:
(i) A certificate of Holding Company, signed by its
President, which shall confirm the compliance by Holding Company
with its covenants and agreements contained in this Agreement and
the accuracy of the representations and warranties made by
Holding Company in this Agreement at and as of the Effective Time
as if made at such time and as contemplated by this Agreement.
(ii) The opinion of Sherman & Lapidus LLP, counsel for
Holding Company, dated the Effective Time, and in form and
substance satisfactory to FBOP and Acquisition, covering matters
customarily treated in similar merger transactions.
(iii) A certificate of Holding Company's inspector of
elections as to the vote taken at the meeting of the holders of
shares of Holding Company Common Stock with respect to this
Agreement and as to the holders of shares of Holding Company
Common Stock that shall have demanded payment of the fair value
of their shares of Holding Company Common Stock pursuant to the
CGCL.
(iv) Written resignations, effective the Effective Time, of
all of the directors and officers of Holding Company.
(v) Articles of Incorporation and Certificate of Good
Standing of Holding Company each certified by the Secretary of
State of California within ten (10) days prior to the Closing.
(c) Acquisition Closing Documents. At the Closing,
Acquisition shall deliver, or cause to be delivered, to Holding
Company:
(i) A Certificate of Acquisition, signed by its President
or Vice President, which shall confirm the compliance by
Acquisition with its covenants and agreements contained in this
Agreement and the accuracy of the representations and warranties
made by it in this Agreement at and as of the Effective Time as
if made at such time and as contemplated by this Agreement.
(ii) The opinion of Lord, Bissell & Brook, counsel for
Acquisition, dated the Effective Time, and in form and substance
satisfactory to Holding Company, covering matters customarily
treated in similar merger transactions.
ARTICLE XI
TERMINATION AND TERMINATION FEE
(a) Termination. This Agreement and the Transaction may be
terminated at any time prior to the filing of the Articles of
Merger with the Secretary of State of Illinois, whether before or
after action by the stockholders of Holding Company as
contemplated by Article V(k) of this Agreement and without
further approval by the outstanding stockholders of Holding
Company (i) by mutual written consent of the Boards of Directors
of Acquisition and Holding Company, (ii) by action of the Board
of Directors of Acquisition in the event of a failure of a
condition set forth in Article VII of this Agreement as of the
time such condition is required hereunder to be fulfilled, (iii)
by action of the Board of Directors of Holding Company in the
event of failure of a condition set forth in Article VIII of this
Agreement as of the time such condition is required hereunder to
be fulfilled, or (iv) by action of the Board of Directors of
either Acquisition or Holding Company in the event of a failure
of a condition set forth in Article IX of this Agreement as of
the time such condition is required hereunder to be fulfilled.
(b) Termination Fee. If Holding Company and Acquisition
fail to consummate the Merger and (i) Holding Company enters into
a letter of intent, commitment letter or other written agreement
with a third party regarding a merger, consolidation, sale of
assets or other similar transaction involving Holding Company
within twelve (12) months following the termination of the
Merger, and (ii) Holding Company shall not have terminated this
Agreement by reason of paragraphs (a)(iii) or (iv) above, and
(iii) Acquisition shall not have terminated this Agreement by
reason of paragraph (a)(i) above, Holding Company shall, upon
consummation of such transaction, promptly pay $2,500,000 to
Acquisition, and Holding Company shall have no further liability
or obligation to Acquisition with respect to this Agreement.
(c) Survival of Rights. Except as otherwise provided in
paragraph (b) above, nothing in this Article XI or in this
Agreement shall be construed as limiting the rights of any party
in the event of a breach by any party of this Agreement.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
Except for the agreements set forth in Articles I, II(ad),
V(j), VII(g), VII(h), XI, XII, XIII(a), XIII(f) and XIII(g), no
representations, warranties or agreements shall survive beyond
the Effective Time.
ARTICLE XIII
MISCELLANEOUS
(a) Payment of Expenses. Except as provided in Article XI,
whether or not the Merger shall be consummated, each party hereto
shall pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and incident to the
consummation of the Merger and the Transaction, except that in
the event that Merger is consummated, Acquisition shall be
responsible for $250,000 of the broker fee of Keefe Bruyette &
Woods.
(b) Commitment to the San Diego Community and to Customers
and Employees. Each party acknowledges the importance for it to:
(i) use best efforts in good faith to offer comparable or
expanded products and services to customers and to continue the
customer service traditions of the parties; (b) continue the
tradition of community support within San Diego County; and (c)
use best efforts to treat all employees fairly and equitably.
(c) Entire Agreement. This Agreement (together with the
Schedules and Exhibits hereto and the documents referred to
herein) contains, and is intended as, a complete statement of all
of the terms of the arrangements between the parties with respect
to the matters provided for herein, and supersedes any previous
agreements and understandings between the parties with respect to
those matters.
(d) Modifications, Amendments and Waivers. At any time
prior to the Effective Time, the parties hereto may, by written
agreement, (a) extend the time for the performance of any of the
obligations or other acts of the parties hereto, (b) waive any
inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant hereto, (c)
waive compliance with any of the covenants or agreements
contained in this Agreement, or (d) make any other modification
of this Agreement approved by the respective Boards of Directors
of the parties hereto. This Agreement shall not be altered or
otherwise amended except pursuant to an instrument in writing
executed and delivered on behalf of each of the parties hereto.
For the convenience of the parties hereto, this Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
(e) Assignment. Except as provided in Article I(a) hereto,
this Agreement shall not be assignable by any of the parties
hereto and shall be construed in accordance with the laws of the
State of California.
(f) Schedules. All information set forth in Holding
Company Schedule shall be deemed a representation and warranty of
Holding Company as to the accuracy and completeness of such
information.
(g) Press Releases. Except as may otherwise be required by
law, no publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made
prior to the Effective Time without advance approval thereof by
Holding Company and Acquisition. Holding Company and Acquisition
will cooperate with each other in the development and
distribution of all news releases and other public information
disclosures with respect to this Agreement, the Transaction or
any of the transactions contemplated hereby or thereby.
(h) Notices. Any notice, request, instruction or other
document to be given hereunder by any party to the others shall
be in writing and delivered personally or sent by registered or
certified mail, postage prepaid, overnight express service or
confirmed facsimile transmission as follows:
If to Holding Company: Murray L. Galinson
SDNB Financial Corp.
1420 Kettner Blvd.
San Diego, CA 92101
FAX NO: (619) 233-7017
With a copy to: Lawrence Sherman
Sherman & Lapidus LLP
350 West Ash Street
Suite 1100
San Diego, CA 92101
FAX NO: (619) 231-8770
If to Acquisition: Robert M. Heskett
FBOP Corporation
11 W. Madison Street
Oak Park, IL 60302
FAX NO: (708) 445-3223
With a copy to: Edward C. Fitzpatrick
Lord, Bissell & Brook
115 S. LaSalle Street
Chicago, IL 60603
FAX NO: (312) 443-0336
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed and delivered as of the day and year first above
written.
SDNB FINANCIAL CORP.
Attest:
/s/Howard W. Brotman By: /s/Murray L. Galinson
Name: MURRAY GALINSON
Title: PRESIDENT
FBOP ACQUISITION COMPANY
Attest:
/s/Edward C. Fitzpatrick By: /s/Robert M. Heskett
Name: R M Heskett
Title: President
FBOP CORPORATION
Attest:
/s/Edward C. Fitzpatrick By: /s/Robert M. Heskett
Name: R M Heskett
Title: President
<PAGE>
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 (the "Amendment") to Agreement and Plan
of Merger by and among SDNB Financial Corp., FBOP Corporation and
FBOP Acquisition Company is made as of November 26, 1996.
WITNESSETH:
WHEREAS, SDNB Financial Corp., FBOP Corporation and FBOP
Acquisition Company have entered into an Agreement and Plan of
Merger dated as of the close of business on the 12th day of July,
1996 (the "Merger Agreement") (with terms used herein but not
otherwise defined having the meanings set forth therein);
WHEREAS, the Merger Agreement provides for the Holding
Company to be acquired by Acquisition through the merger of
Holding Company with and into Acquisition upon the terms and
conditions contained therein and in accordance with applicable
laws (the "Merger");
WHEREAS, the parties wish to amend the Merger Agreement to
provide that Acquisition will be merged with and into the Holding
Company, with the Holding Company, rather than Acquisition, being
the Surviving Corporation;
NOW, THEREFORE, for and in consideration of the foregoing
premises and of the mutual agreements, promises and covenants
contained herein, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Merger. Articles I(a), I(b), I(e) and I(f) of the
Merger Agreement hereby are deleted in their entirety and
replaced by the following:
"(a) Merger. In accordance with the provisions of
this Agreement, the Illinois Business Corporation Act of
1983 (the "IL BCA") and the California General Corporation
Law (the "CGCL"), at the Effective Time (as herein defined),
Acquisition shall be merged with and into Holding Company
and the separate existence of Acquisition thereupon shall
cease. Following the Merger, Holding Company shall continue
as the surviving corporation ("Surviving Corporation"). At
Acquisition's option, the Merger may be structured so that
FBOP or another direct or indirect wholly-owned subsidiary
of FBOP (such entity, if any, to be included in the
definition of "Acquisition") merges into Holding Company;
provided, however, that Acquisition shall assign to such
entity, and such entity shall assume, all rights and
obligations of Acquisition under this Agreement."
"(b) Effective Time. As soon as practicable after the
satisfaction or waiver of the conditions set forth in
Article X, the parties hereto will file articles of merger
(the "Articles of Merger") with the Secretary of State of
Illinois and an agreement of merger ("Agreement of Merger")
and related officer's certificates with the California
Secretary of State, and will make all other filings or
recordings required by the IL BCA and the CGCL in connection
with the Merger. The Merger shall become effective at such
time as (i) the Agreement of Merger is filed with the
California Secretary of State, or (ii) at such later time as
is specified in the Articles of Merger and Agreement of
Merger (the "Effective Time")."
"(e) Articles of Incorporation. The Articles of
Incorporation of Holding Company in effect at the time of
the Merger shall be the Articles of Incorporation of the
Surviving Corporation, until thereafter amended as provided
thereunder and in the CGCL."
"(f) Bylaws. The Bylaws of Holding Company in effect
at the time of the Merger shall be the Bylaws of the
Surviving Corporation until altered, amended or repealed, as
provided thereunder and in the Articles of Incorporation and
the CGCL."
2. Conversion of Shares. The following subparagraph (iii)
hereby is added to Article I(i) of the Merger Agreement:
"(iii) Each share of common stock, par value $1.00
per share, of Acquisition issued and outstanding immediately
prior to the Effective Time shall be converted into and
exchangeable for one share of common stock, no par value per
share, of the Surviving Corporation ("Surviving Corporation
Common Stock")."
3. Supplemental Merger Consideration. The Supplemental
Merger Consideration shall be $300,000.
4. Governing Law; Successors and Assigns. This Amendment
shall be governed by and construed in accordance with the
internal laws of the State of California to the extent not
preempted by applicable federal law. This Amendment shall be
binding upon the parties hereto and their respective heirs,
successors, or representatives.
5. Ratification. The Merger Agreement and all of the
documents referred to therein or contemplated thereby hereby are
amended such that all references therein to the Merger Agreement
are deemed to include this Amendment. The Merger Agreement as
amended hereby shall remain in full force and effect.
6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an original
hereof and all of which together shall constitute one and the
same document.
IN WITNESS WHEREOF, the parties have caused this Amendment
to be executed and delivered as of the day and year first above
written.
SDNB FINANCIAL CORP.
By:/s/Murray L. Galinson
Name: Murray L. Galinson
Title: President and CEO
FBOP ACQUISITION COMPANY
By:/s/Robert M. Heskett
Name: Robert M. Heskett
Title: President
FBOP CORPORATION
By:/s/Robert M. Heskett
Name: Robert M. Heskett
Title: President
<PAGE>
APPENDIX "B"
OPINION OF KEEFE, BRUYETTE & WOODS, INC. DATED JANUARY , 1997
<PAGE>
(KBW LETTERHEAD)
January , 1997
The Board of Directors
SDNB Financial Corp.
1420 Kettner Boulevard
San Diego, CA 92101
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the common shareholders of
SDNB Financial Corp. ("SDNB") of the consideration in the proposed merger
(the "Merger") of FBOP Acquisition Company ("FBOP Acquisition") with and
into SDNB, which will survive the merger as a wholly-owned subsidiary of
FBOP Corporation ("FBOP") pursuant to the Agreement and Plan of Merger,
dated as of July 12, 1996, among SDNB, FBOP and FBOP Acquisition Company
(the "Agreement"). Pursuant to the terms of the Agreement, each
outstanding share of common stock, no par value, of SDNB (the "Common
Shares"), other than shares for which dissenter's rights have been duly
asserted and perfected in accordance with California law, will be
converted into the right to receive the Per Share Merger Consideration as
defined in the Agreement which will consist of a cash payment per share
(in a range of $8.00 to $8.03), without interest, subject to adjustment,
all as more fully described in the proxy statement mailed to shareholders
of SDNB in connection with the special meeting of shareholders.
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 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, SDNB and FBOP, 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 SDNB 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 SDNB.
We have acted for the Board of Directors of SDNB in rendering this fairness
opinion and will receive a fee from SDNB for our services.
<PAGE>
In connection with this opinion, we have reviewed, analyzed and
relied upon material bearing upon the financial and operating
condition of SDNB and FBOP and the Merger, including among other things,
the following: (i) the Agreement; (ii) the proxy statement for the
special meeting of shareholders of SDNB to be held in connection with
the Merger dated December , 1996; (iii) the Annual Reports to
Shareholders and Annual Reports on Form 10-K for the three years ended
December 31, 1995 of SDNB and the audited financial statements of FBOP
for the corresponding periods; (iv) certain interim reports to
shareholders and Quarterly Reports on Form 10-Q of SDNB and certain
interim reports to banking and regulatory authorities of FBOP, and
certain other communications from SDNB and FBOP to their respective
shareholders; and (v) other financial information concerning the
businesses and operations of SDNB and FBOP furnished to us by SDNB and
FBOP for purposes of our analysis. We have also held discussions with
senior management of SDNB and FBOP 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 SDNB 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 SDNB and FBOP as to the reasonableness and achievability
of the financial and operating forecasts and projections (and the
assumptions and bases therefor) provided to us, and we have assumed
that such forecasts and projections reflect the best currently
available estimates and judgments of such management's and that such
forecasts and projections will be realized in the amounts and in the
time periods currently estimated by such managments. 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 SDNB and FBOP
are adequate to cover such losses. In rendering our opinion, we have
not made or obtained any evaluations or appraisals of the property of
SDNB or FBOP , nor have we examined any individual credit files.
<PAGE>
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 SDNB and FBOP ; (ii) the assets and
liabilities of SDNB and FBOP; 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 consideration to be received in the Merger
is fair, from a financial point of view, to holders of the Common Shares.
Very truly yours,
/s/Keefe, Bruyette & Woods, Inc.
Keefe, Bruyette & Woods, Inc.
<PAGE>
APPENDIX "C"
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
<PAGE>
Appendix C
Section 1300. Reorganization or short-form merger;
dissenting shares; corporate purchase at fair market value;
definitions
(a) If the approval of the outstanding shares (Section
152) of a corporation is required for a reorganization under
subdivisions (a) and (b) or subdivision (e) or (f) of Section
1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds
shares to purchase for cash at their fair market value the shares
owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed
action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means
shares which come within all of the following descriptions:
(1) Which were not immediately prior to the
reorganization or short-form merger either (A) listed on any
national securities exchange certified by the Commissioner of
Corporations under subdivision (o) of Section 25100 or (B) listed
on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed
by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of
shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of
record on the effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of
this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a
meeting.
(3) Which the dissenting shareholder has demanded
that the corporation purchase at their fair market value, in
accordance with Section 1301.
(4) Which the dissenting shareholder has submitted
for endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder"
means the recordholder of dissenting shares and includes a
transferee of record.
Section 1301. Notice to holders of dissenting shares in
reorganizations; demand for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders
of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b)
thereof, to require the corporation to purchase their shares for
cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303,
1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting
shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer
by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the
corporation to purchase the shareholder's shares for cash under
Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, and who desires the corporation to
purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is
not effective for any purpose unless it is received by the
corporation or any transfer agent thereof (1) in the case of
shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos
in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case
within 30 days after the date on which the notice of the approval
by the outstanding shares pursuant to subdivision (a) or the
notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder.
(c) The demand shall state the number and class of the
shares held of record by the shareholder which the shareholder
demands that the corporation purchase and shall contain a
statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to
sell the shares at such price.
1302. Submission of share certificates for endorsement;
uncertified securities
Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder,
the shareholder shall submit to the corporation at its principal
office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder
demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be
exchanged for certificates of appropriate denomination so stamped
or endorsed or (b) if the shares are uncertificated securities,
written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together
with the name of the original dissenting holder of the shares.
1303. Payment of agreed price with interest; agreement
fixing fair market value; filing; time of payment
(a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to the agreed
price with interest thereon at the legal rate on judgments from
the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of
the fair market value of dissenting shares shall be made within
30 days after the amount thereof has been agreed or within 30
days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case
of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
1304. Action to determine whether shares are dissenting
shares or fair market value; limitation; joinder; consolidation;
determination of issues; appointment of appraisers
(a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to
agree upon the fair market value of the shares, then the
shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, but not thereafter, may file
a complaint in the superior court of the proper county praying
the court to determine whether the shares are dissenting shares
or the fair market value of the dissenting shares or both or may
intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine
the issues. If the status of the shares as dissenting shares is
in issue, the court shall first determine that issue. If the
fair market value of the dissenting shares is in issue, the court
shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Report of appraisers; confirmation; determination
by court; judgment; payment; appeal; costs
(a) If the court appoints an appraiser or appraisers,
they shall proceed forthwith to determine the fair market value
per share. Within the time fixed by the court, the appraisers, or
a majority of them, shall make and file a report in the office of
the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the
report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to
make and file a report within 10 days from the date of their
appointment or within such further time as may be allowed by the
court or the report is not confirmed by the court, the court
shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment
shall be rendered against the corporation for payment of an
amount equal to the fair market value of each dissenting share
multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgment shall be payable forthwith with
respect to uncertificated securities and, with respect to
certificated securities, only upon the endorsement and delivery
to the corporation of the certificates for the shares described
in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, shall be
assessed or apportioned as the court considers equitable, but, if
the appraisal exceeds the price offered by the corporation, the
corporation shall pay the costs (including in the discretion of
the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court
for the shares is more than 125 percent of the price offered by
the corporation under subdivision (a) of Section 1301).
1306. Prevention of immediate payment; status as
creditors; interest
To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market
value, they shall become creditors of the corporation for the
amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other
creditors in any liquidation proceeding, such debt to be payable
when permissible under the provisions of Chapter 5.
1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon
the dissenting shares after the date of approval of the
reorganization by the outstanding shares (Section 152) and prior
to payment for the shares by the corporation shall be credited
against the total amount to be paid by the corporation therefor.
1308. Rights of dissenting shareholders pending
valuation; withdrawal of demand for payment
Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market value of their
shares is agreed upon or determined. A dissenting shareholder
may not withdraw a demand for payment unless the corporation
consents thereto.
1309. Termination of dissenting share and shareholder
status
Dissenting shares lose their status as dissenting shares
and the holders thereof cease to be dissenting shareholders and
cease to be entitled to require the corporation to purchase their
shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on
demand to any dissenting shareholder who has initiated
proceedings in good faith under this chapter all necessary
expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission
for endorsement in accordance with Section 1302 or are
surrendered for conversion into shares of another class in
accordance with the articles.
(c) The dissenting shareholder and the corporation do not
agree upon the status of the shares as dissenting shares or upon
the purchase price of the shares, and neither files a complaint
or intervenes in a pending action as provided in Section 1304,
within six months after the date on which notice of the approval
by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of
the dissenting shares.
1310. Suspension of right to compensation or valuation
proceedings; litigation of shareholders' approval
If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a
reorganization, any proceedings under Sections 1304 and 1305
shall be suspended until final determination of such litigation.
1311. Exempt shares
This chapter, except Section 1312, does not apply to
classes of shares whose terms and provisions specifically set
forth the amount to be paid in respect to such shares in the
event of a reorganization or merger.
1312. Right of dissenting shareholder to attack, set
aside or rescind merger or reorganization; restraining order or
injunction; conditions
(a) No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by the
shareholder shall have any right at law or in equity to attack
the validity of the reorganization or short-form merger, or to
have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of
a class whose terms and provisions specifically set forth the
amount to be paid in respect to them in the event of a
reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal
terms of the reorganization are approved pursuant to subdivision
(b) of Section 1202, is entitled to payment in accordance with
the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-
form merger is directly or indirectly controlled by, or under
common control with, another party to the reorganization or
short-form merger, subdivision (a) shall not apply to any
shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if
the shareholder institutes any action to attack the validity of
the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter.
The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization
or short-form merger set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon 10
days' prior notice to the corporation and upon a determination by
the court that clearly no other remedy will adequately protect
the complaining shareholder or the class of shareholders of
which such shareholder is a member.
(c) If one of the parties to a reorganization or short-
form merger is directly or indirectly controlled by, or under
common control with, another party to the reorganization or
short-form merger, in any action to attack the validity
of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a
party to a reorganization or short-form merger which controls
another party to the reorganization or short-form merger shall
have the burden of proving that the transaction is just and
reasonable as to the shareholders of the controlled party, and
(2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and
reasonable as to the shareholders of any party so controlled.
<PAGE>
APPENDIX "D"
ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1995
<PAGE>
SDNB Financial Corp. Annual Report 1995 cover page.
(Cover page includes four graphics illustrating concepts of Diversification,
International, Community and Branching Out.)
<PAGE>
DIVERSIFICATION, GROWTH AND PROFITABILITY SIGNIFY THE SUCCESS OF SDNB
FINANCIAL CORP. IN 1995. WE COMMISSIONED TOM VOSS, A LOCAL SAN DIEGO
ILLUSTRATOR, TO CREATE ART THAT REPRESENTS FOUR AREAS OF ACHIEVEMENT FOR SDNB
FINANCIAL CORP. EACH WORK OF ART DEPICTS A SEGMENT OF OUR GROWTH THROUGH THE
EYES OF THE ARTIST. AS A SUPPORTER OF THE SAN DIEGO COMMUNITY AND THE ARTS,
WE ARE PROUD TO DISPLAY THE ORIGINAL ART IN OUR DOWNTOWN OFFICE.
SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
FOR THE YEAR, IN THOUSANDS
Total interest income $12,743 $11,818 $11,930 $12,334 $15,116
Net interest income 9,527 8,912 8,571 8,321 8,468
Securities gains, net 11 0 0 25 80
Provision for loan losses 200 1,850 2,950 1,320 1,270
Net income (loss) 212 (159) (2,562) (2,211) (511)
AT YEAR END, IN THOUSANDS
Assets $178,572 $173,185 $170,693 $194,689 $205,232
Deposits 140,409 138,276 138,150 164,739 154,979
Loans, net 90,329 94,910 108,511 130,010 119,817
Investment securities 34,441 27,231 30,227 17,943 15,006
Long term obligations 7,989 10,158 10,379 10,630 10,881
Shareholders' equity 16,686 8,969 9,488 12,050 14,261
PER SHARE
Net income (loss) $0.10 ($0.10) ($1.67) ($1.44) ($0.33)
Cash dividends paid 0.00 0.00 0.00 0.00 0.08
Shareholders' equity 5.43 5.83 6.17 7.83 9.27
<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear Shareholders, it is fair to say this was a very significant year!
In 1995, SDNB Financial Corp's vision for expansion and diversification
became a reality. We welcomed 300 new shareholders and gave thanks to 700
existing shareholders who reconfirmed their support by participating in our
capital offering. Our capital grew from $9 million to $16.7 million. We
also refinanced the San Diego National Bank headquarters building,
increasing the book value of each share of stock by 48 cents.
Good news from the bottom line: 1995 brought a significant turn in
profits for the holding company and San Diego National Bank. SDNB Financial
Corp enjoyed earnings of $212,000, a dramatic improvement over 1994's loss
of $159,000. The bank gave a stellar performance with increased earnings of
$989,000, compared to the year-earlier profits of $328,000.
1995 brought to a close the final chapter and costs of the Pioneer
Mortgage Company litigation.
We believed 1995 was ripe for capturing the disgruntled and besieged
victims of the megamerger frenzy going on with San Diego banks. For those
who did not find "bigger to be better," San Diego National Bank offered
itself as the friendly alternative to the corporate indifference of large
banks. While giant banks wrestled for turf and acquisitions, we
concentrated on building our assets by meeting the needs of customers.
Innovative product lines and state-of-the-art banking technologies were
designed to match businesses with industry-sensitive services tailored to
specific types of businesses. For example, we created a package of services
for property management companies and home owners associations to meet their
individual processing needs. In addition to building on our solid customer
following in the legal, medical and accountancy professions, we branched out
into select new areas, like manufacturing and wholesaling.
At the end of the year, we proudly announced our new international
division. Concerned that San Diego would miss the boat without local
financial institution backing to ensure local entrepreneurs the necessary
support to compete, we decided to get involved. This was done with the
recognition that this new area is for serious bankers - bankers who are
willing to do everything it takes to extend themselves in assisting local
companies to enter the global market place.
We are excited by the staff (continued on page 6)
<PAGE>
(Graphic picture illustating Diversification & Growth)
Diversification & Growth
1995 WAS A PROSPEROUS YEAR FOR SDNB FINANCIAL CORP. THE ANNUAL HARVEST
BROUGHT DIVERSIFICATION AND GROWTH IN SERVICES, NEW FINANCIAL MARKETS AND
PROFITS. THE MANY DIFFERENT FRUITS OF OUR LABOR WERE REALIZED WHEN WE
OPENED OUR NEW INTERNATIONAL DEPARTMENT AND AN OFFICE IN THE SOUTH BAY.
<PAGE>
(Graphic picture illustating International)
International
SDNB FINANCIAL CORP. LOOKED TO THE FUTURE AND PLANTED SEEDS THAT WOULD
ALLOW SAN DIEGO AND THE COMPANY TO PARTICIPATE IN THE EMERGING GLOBAL
ECONOMY. THE NEWLY-OPENED INTERNATIONAL DEPARTMENT NOT ONLY FILLS A VOID IN
SAN DIEGO'S FINANCIAL COMMUNITY, BUT ESTABLISHES OUR PRESENCE IN AN EVOLVING
AND FERTILE MARKET.
<PAGE>
(Graphic picture illustating Branching Out)
Branching Out
NEW BRANCHES ARE A FIRST SIGN OF GROWTH. A SIGN OF OUR GROWTH BEGINS WITH
OUR NEW BRANCH IN CHULA VISTA, STRENGTHENING OUR COMMITMENT TO SERVING THE
GREATER SAN DIEGO REGION AND YIELDING NEW BUSINESS OPPORTUNITIES BOTH FOR
THE COMPANY AND THE SOUTH BAY.
<PAGE>
(Graphic picture illustating Community)
Community
DEEPLY ROOTED IN THE COMMUNITY AND REMEMBERING THE IMPORTANCE OF GIVING BACK
TO OUR COMMUNITY, THE PEOPLE OF SDNB CONTINUED TO EXPAND SERVICE AND
PARTICIPATION IN BETTERING THE QUALITY OF LIFE IN SAN DIEGO THROUGH
INVOLVEMENT IN SOCIAL AND HEALTH SERVICE ORGANIZATIONS, THE ARTS AND CIVIC
PROGRAMS.
<PAGE>
LETTER TO OUR SHAREHOLDERS
Continued from page 1
and resources we have put together, as well as the challenge and opportunity
international banking offers, for both the San Diego business community and
your company.
Our expansion and diversification of product lines, services and
markets culminated with the opening of our new South Bay office, located in
Chula Vista. Always a good customer source for the bank, the timing and
proximity to the international border and developing manufacturing and
wholesale clientele was a perfect fit. We expect great things from this
enthusiastic and energetic office.
The courier service continued to extend our customer reach countywide.
San Diego National Bank and courier banking have become synonymous, setting
the standard for bringing banking to the office.
For SDNB employees, directors and management, service to the community
extended past closing time and beyond banking business. As San Diego's
leading community bank, we invested in the civic, charitable, arts and
culture infrastructure that make up the heart of our community. Time,
expertise and monetary contributions went to more than 100 charities and
organizations.
None of this would have been possible without your faith and vision.
The vision that became reality in 1995 was also the result of top-notch
banking professionals, working together with a collective mission of
excellence and service.
Looking to superior achievements every year, we are pleased to
announce a number of promotions. Robert Horsman has been named President
of San Diego National Bank, and Joyce Chewning, Executive Vice President.
Howard Brotman will join the Board Of Directors of SDNB Financial Corp and
Mark Mandell will be joining the senior management team of the bank, along
with Ron Bird, Senior Vice President and Director of the Business Services
Department.
It was a great year. Thanks to all of you for sharing it with us.
Sincerely,
/s/ Murray L. Galinson
MURRAY L. GALINSON
PRESIDENT AND CEO
(picture of Murray L. Galinson next to his signature)
/s/ Charles I. Feurzeig
CHARLES I. FEURZEIG
CHAIRMAN OF THE BOARD
(picture of Charles I. Feurzeig next to his signature)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SDNB Financial Corp. and Subsidiaries
OVERVIEW
The operations and financial condition of the Company improved substantially
during 1995. The Company recorded a profit in 1995 of $212,000 compared to
losses of $159,000 and $2,562,000 in 1994 and 1993, respectively. In
addition to the return to profitability, the Company also benefited by:
1. A successful capital infusion program which added a net of $5.7
million to capital.
2. Refinancing of the mortgage on the San Diego National Bank Building
which resulted in a gain of $1.46 million credited to shareholders' equity.
3. Settlement of the long standing Pioneer Mortgage litigation against
San Diego National Bank.
4. Opening of the new South Bay Office and International Department of
the Bank.
For the past several years, the Company and the Bank had been adversely
affected by a number of factors emanating primarily from the condition of
the economy in San Diego. These factors, which are more fully described
herein, have included:
a. The continued need for a high loan loss provisions.
b. OREO losses and expenses from higher than normal levels of OREO
property.
c. Reduction in the level of the loan portfolio resulting from continuing
low loan demand.
Additionally, the Company has incurred substantial expense in
connection with legal fees and provisions for settlement costs of the Pioneer
Mortgage litigation (see "Other Non-Interest Expenses").
Loan loss provision and OREO losses and expenses were reduced
dramatically in 1995 and as cited above, the Pioneer Mortgage litigation has
been settled, although there was still substantial expense in 1995.
While the Company reports a profit in 1995 and a much reduced loss in
1994 than in 1993, there can be no assurances of the factors noted above, or
other factors, will not continue to adversely impact the Company and the
Bank. Discussion of the individual elements of the Company's operations is
contained in subsequent sections of this report.
Liquidity and Asset/Liability Management
By the nature of its commercial/wholesale focus, the Bank has moderate
interest-rate risk exposure in a declining-rate environment. This
phenomenon can be seen in the "Static Gap Summary" (Table 1). At
December 31, 1995, approximately 70% of the Bank's earning assets adjust
immediately to changes in interest rates. Within three months, this
increases to 86% of earning assets. Consequently, the Bank utilizes deposit
liabilities that also adjust relatively quickly. Within the same three-
month period, approximately 92% of the Bank's interest-bearing liabilities
(mostly deposits) adjust to current rates.
The Bank's cumulative gap position at the three month repricing
interval has increased approximately $10.8 million, or 43% from $26.0 million
at December 31, 1994 to $35.8 million at December 31, 1995. Volume of
assets and liabilities have both increased from the year earlier. Increases
of $13.0 million in securities and $4.5 million in deposits are partially
offset by a decrease of $1.2 million in loans within the three month horizon.
During February 1995, the Bank entered into an interest rate swap to
hedge against the effects on income of falling interest rates. If the prime
interest rate falls below eight percent during the life of the contract, the
Bank will receive payments amounting to the difference between the then
existing prime rate and eight percent on the contract amount of $20 million.
These payments continue while the prime interest rate stays below eight
percent or until expiration of the contract, February 3, 1998. This contract
helps to stabilize the Bank's net interest spread which, absent any hedge,
decreases during periods of rapidly falling interest rates. To date, there
have been no payments received under this contract.
The Bank's liquidity needs are projected by comparing anticipated
funding needs against current resources and anticipated deposit growth.
Any current surplus of funds is invested to maximize income while maintaining
safety and providing for future liquidity.
During the year ended December 31, 1995, cash and cash equivalents
increased $3.6 million. Operating activities provided $1.2 million during
the period. Approximately $2.3 million was used by investing activities.
The two major components were net investment of $6.5 million in securities
($27.1 million purchases of securities offset by $20.6 million of sales,
maturities, and calls) and decrease in gross loans totaling $4.3 million.
Financing activities provided $4.7 million during the period. Deposits
increased $2.1 million while borrowings decreased $3.1 million. The
issuance of new stock during the year provided a net amount of $5.7 million.
Liquidity is provided on a daily basis by federal funds sold and on a
longer-term basis by the structuring of the Bank's investment portfolio to
provide a steady stream of maturing issues. Additionally, the Bank may
raise additional funds from time to time through money desk operations or
via the sale of loans to another institution.
The Bank has never purchased high-yield securities or participated in
highly-leveraged transactions.
<PAGE>
<TABLE>
TABLE 1. STATIC GAP SUMMARY
DECEMBER 31, 1995
Immediately Non-rate
Adjustable 1 Day Sensitve
Or 1 Day Through 3 Through 6 Through And Over
(In thousands) Maturity 3 Months 6 Months 12 Months 12 Months Total
<S> <C> <C> <C> <C> <C> <C>
Loans (net) 82,630 1,881 982 1,26 5,575 92,331
Investment securities 22,580 1,963 1,001 8,425 33,969
Certificates of deposit in other banks - - 1,490 793 - 2,283
Federal funds sold 24,700 - - - - 24,700
Total interest earning assets 107,330 24,461 4,435 3,05 14,000 153,283
Non-interest earning assets - - - - 14,367 14,367
Total assets 107,330 24,461 4,435 3,057 28,367 167,650
Deposits:
Savings, NOW accounts and
money markets 68,330 - - - - 68,330
Time deposits - 14,762 4,680 3,157 136 22,735
Total deposits 68,330 14,762 4,680 3,157 136 91,065
Securities sold under agreement
to repurchase 12,934 - - - - 12,934
Total interest bearing liabilities 81,264 14,762 4,680 3,157 136 103,999
Non-interest bearing liabities - - - - 50,036 50,036
Shareholders' equity - - - - 13,615 13,615
Total liabilities and shareholders'
equity 81,264 14,762 4,680 3,157 63,787 167,650
Interest rate sensitivity gap 26,066 9,699 (245) (100) (35,420)
Cumulative interest rate sensitivity gap 26,066 35,765 35,520 35,420 -
</TABLE>
Capital Resources
Since its initial capitalization in 1981, the Company had relied primarily
on internally generated income to fund its growth and provide for depositor
protection. During 1994, the Company concluded that additional capital
would be beneficial and proposed a plan for additional capitalization which
was approved by regulatory authorities on March 9, 1995, and by the
shareholders of the Company on March 17, 1995. The plan encompassed the
following steps:
1. Sale of 510,121 newly issued shares of the Company's Common Stock to
two limited partnerships managed by WHR Management Corp. ("WHR") at $4.34
per share for a gross amount of $2,213,925. This step was completed on
March 28, 1995.
2. A rights offering to existing shareholders and, pursuant to a best-
efforts underwriting agreement, to third parties encompassing 769,582 shares
of newly issued Common Stock at a subscription price of $4.34 per share for
a gross amount of $3,339,986. This step was completed on September 28, 1995.
3. Sale to WHR of an additional 255,193 newly issued shares of Common
Stock at $4.34 per share for a gross amount of $1,107,538. This step was
completed on October 6, 1995.
Additionally, in 1995 the Company issued the following warrants to
purchase shares of Common Stock:
1. A warrant to purchase 37,363 shares at $4.34 per share to Torrey Pines
Securities, Inc. pursuant to a Rights Agent Agreement as further
compensation for its services in connection with the rights offering to
existing shareholders.
2. A warrant to purchase 150,000 shares at a price of $5.44 per share to
PKH Kettner Investors, LLC as additional consideration for granting a loan
secured by a first trust deed on the Bank Building.
The net proceeds from the sale of Common Stock have been used for
general corporate purposes which include the following:
1. $250,000 loan to San Diego National Bank Building Joint Venture
("Joint Venture") which in turn made a partial payment on a note (the "PV
Note") owed to PVCC, Inc. which was secured by a second trust deed on the
Bank Building. PVCC, Inc. is a corporation controlled by Charles I.
Feurzeig, chairman of the Company's Board of Directors.
2. $630,000 to pay off Company notes payable which included $390,000 due
to officers and/or directors of the Company.
3. $1,125,640 to purchase customer notes from the Bank, at par, which
were then assigned to the Joint Venture, which in turn assigned the notes to
PVCC, Inc. as further payment of the PV Note.
4. $1,188,172, which along with $8,000,000 in proceeds of a new note
secured by a first trust deed on the Bank Building, to refinance the Bank
Building, paying $8,579,000 to WHR (and realizing a prepayment discount of
$1,579,000) and $524,360 to pay the balance of the PV Note.
5. $1,000,000 additional invested in San Diego National Bank.
The remaining proceeds will be used for general corporate purposes,
which may include investments in or extensions of credit to the Company's
subsidiaries, reduction of existing debt, or financing possible future
acquisitions of other banking institutions or related businesses.
<PAGE>
At the present time, the Company does not have any specific plans,
agreements or understandings, written or oral, pertaining to the proposed
acquisition of any banking institution or related business.
As a national bank subject to the regulation of the Office of the
Comptroller of the Currency (the "Comptroller"), the Bank is subject to
legal limitations on the source and amount of dividends it is permitted to
pay to the Company. The approval of the Comptroller is required for any
dividend by a national bank if the total of all dividends declared by the
bank in any calendar year would exceed the total of its net profits, as
defined by the Comptroller, for that year, combined with its retained net
profits for the preceding two years. As of January 1, 1996, the Bank had
available for dividends approximately $1,370,000 without the approval of the
Comptroller. The payment of dividends by the Bank may also be affected by
other factors, such as requirements for the maintenance of adequate
capital. In addition, the Comptroller and the Federal Deposit Insurance
Corporation (the "FDIC") are authorized to determine under certain
circumstances relating to the financial condition of a national bank whether
the payment of dividends would be an unsafe or unsound banking practice and
to prohibit payment thereof. Finally, under the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"), an insured depository institution is
prohibited from making any capital distribution to its owner, including any
dividend, if, after making such distribution, the depository institution
fails to meet the required minimum level for any relevant capital measure,
including the risk-based capital adequacy and leverage standards discussed
under "Capital" below.
The Company and the Federal Reserve Bank of San Francisco ("Reserve
Bank") entered into an agreement on November 20, 1992, pursuant which the
Company must obtain the approval of the Reserve Bank prior to, among other
actions, the declaration of any cash dividends.
The Comptroller has established a framework for supervisory
requirements of national banks based upon capital ratios. Based upon this
framework, a bank's capitalization is defined as well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized or
critically undercapitalized. Under the Comptroller's framework a bank is
well capitalized if its ratios are greater than or equal to 6% and 10% for
tier 1 capital and risk weighted capital, respectively. As of December 31,
1995, the Bank was considered "well capitalized".
The Federal Reserve Board ("Reserve Board"), as the regulatory body of
the Company, has capital ratio requirements. Under the Reserve Board's
Capital Adequacy Guidelines, all bank holding companies should meet a
minimum ratio of qualifying total capital to weighted-risk assets of 8
percent, of which at least 4.0 percentage points should be in the form of
tier 1 capital.
The Reserve Board and the Comptroller have also imposed a leverage
standard to supplement their risk-based ratios. This leverage standard
focuses on a banking institution's ratio of Tier 1 capital to average total
assets adjusted for goodwill and other certain items. Under these
guidelines, banking institutions that meet certain criteria, including
excellent asset quality, high liquidity, low interest rate exposure and good
earnings, and have received the highest regulatory rating must maintain a
ratio of Tier 1 capital to total assets of at least 3%. Institutions not
meeting this criteria, as well as institutions with supervisory, financial
or operational weaknesses, along with those experiencing or anticipating
significant growth are expected to maintain a Tier 1 capital to total assets
ratio equal to at least 4% to 5%.
As reflected in the following table, the risk-based capital ratios and
leverage ratios of the Company and the Bank as of December 31, 1995,
exceeded the fully phased-in regulatory risk-based capital adequacy
guidelines and the leverage standard.
Capital Components and Ratios
December 31, 1995 December 31, 1994
(dollars in thousands) Company Bank Company Bank
Capital Components:Tier 1 Capital $16,726 $13,656 $9,329 $11,667
Total Capital 18,207 15,006 10,868 13,081
Risk-weighted assets
and off-balance
sheet instruments 117,967 107,310 122,833 112,672
Tier 1 risk-based:
Actual 14.18% 12.73% 7.59% 10.35%
Required 4.00% 6.00% 4.00% 6.00%
Excess 10.18% 6.73% 3.59% 4.35%
Total risk-based:
Actual 15.43% 13.98% 8.85% 11.61%
Required 8.00% 10.00% 8.00% 10.00%
Excess 7.43% 3.98% .85% 1.61%
Leverage:
Actual 9.37% 8.43% 5.33% 7.09%
Required 5.00% 5.00% 5.00% 5.00%
Excess 4.37% 3.43% .33% 2.09%
Investment Securities
As reflected in the consolidated financial statements and in the
accompanying notes thereto, the investment portfolio of the Bank has
recovered a substantial portion of the loss in market value experienced
in 1994. That loss was due to higher interest rates during 1994, compounded
by adverse market conditions for "structured notes" and other derivative
securities. Management believes that there is sufficient current liquidity
and available sources of liquidity to allow all structured notes (which are
issued by United States government agencies) to mature as scheduled and thus
avoid realization of any material amount of loss due to decline in market
value.
Net Interest Income/Net Interest Margin
Net interest income for 1995 was $9,527,000 compared to $8,912,000 for
1994 and $8,571,000 for 1993, which represents increases of 7% and 4%,
respectively.
Net interest income is determined by the spread of earnings on assets
over the cost of funds. The three-year history is shown in the following
chart:
1995 1994 1993
NET INTEREST SPREAD
Yield on average earnings assets
(taxable equivalent) 9.12% 7.75% 7.60%
Cost of funds 2.29% 1.89% 2.11%
Net interest spread 6.83% 5.86% 5.49%
<PAGE>
<TABLE>
TABLE 2. VOLUME/RATE VARIANCE ANALYSIS
1995 COMPARED TO 1994 1994 COMPARED TO 1993 1993 COMPARED TO 1992
Volume Rate Total Volume Rate Total Volume Rate Total
INCREASE (DECREASE) IN INTEREST ON EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
Commercial loans (856) 1,159 303 (1,320) 316 (1,004) (466) 36 (430)
Real estate loans (71) 351 280 (275) 452 177 258 (269) (11)
Installment loans (20) 27 7 (25) (52) (77) (51) 71 20
Total loans (947) 1,537 590 (1,620) 716 (904) (259) (162) (421)
Investment securities
U.S. Treasury securities 73 60 133 18 18 36 (5) (58) (63)
Securities of government
agencies (109) 132 23 312 67 379 376 (82) 294
State and political
obligations (167) (14) (181) 130 (139) (9) (25) (5) (30)
Other securities 61 3 64 (13) (3) (16) (65) 19 (46)
Total investment
securities (142) 181 39 447 (57) 390 281 (126) 155
Certificates of deposit
in other bank 42 32 74 (1) (3) (4) (78) (27) (105)
Federal funds sold (127) 299 172 172 196 368 19 (63) (44)
Total interest
income change (1,174) 2,049 875 (1,002) 852 (150) (37) (378) (415)
INCREASE (DECREASE) IN INTEREST PAID ON LIABILITIES:
Interest on deposits
Savings, NOW accounts,
and money markets (49) 314 265 158 90 248 (194) (279) (473)
Other domestic
time deposits (170) 336 166 (794) (103) (897) 76 (326) (250)
Total interest on
deposits (219) 650 431 (636) (13) (649) (118) (605) (723)
Securities sold under
agreement to repurchase and
federal funds purchased (129) 17 (112) 171 11 182 101 (60) 41
Short-term debt (64) 32 (32) 5 30 35 29 (10) 19
Long-term debt (18) 194 176 (15) (37) (52) (20) (140) (160)
Total interest expense
change (430) 893 463 (475) (9) (484) (8) (815) (823)
Net change in net
interest income (744) 1,156 412 (527) 861 334 (29) 437 408
Note: Change in interest income or expense can be attributed to (a) changes in volume (change in volume times old rate), (b)
changes in rate (change in rate times old volume),and (c) changes in rate/volume (change in rate times the change in volume).
The rate/volume variances are allocated proportionally between the rate and the volume variances based on their absolute values.
</TABLE>
Since the vast majority of the Bank's loans (91% at December 31, 1995)
are at variable rates, changes in the prime interest rate impact the yield
shown above. The Wall Street Prime interest rate during this period was as
follows:
1995 1994 1993
High 9.00% 8.50% 6.00%
Low 8.50% 6.00% 6.00%
Average 8.83% 7.14% 6.00%
In addition to interest rates, changes in the volumes of assets and
liabilities also affect net interest income. The volume/rate variance
analysis (Table 2) shows the change in net interest income that is
attributable to changes in volume versus changes in rates. As reflected
in Table 2, net interest spread is affected by several factors, including:
1. The reduction of average loan balances, which began in 1993, continued
during 1995, resulting in a substantial decrease in interest earned based on
volume.
2. The amount of time deposits has declined from $45.3 million average in
1993 to $18.5 million average in 1995. The decline in time deposits is
attributable to two major factors:
a. In response to slowing loan demand, the Bank priced "money desk"
certificates of deposit unattractively, assuring that those funds already in
the Bank would be withdrawn at maturity.
b. Continuing depositors have apparently chosen to shift to the more
flexible money market accounts as the interest rate differential between
those accounts and time certificates diminished.
<PAGE>
Loans and Allowance and Provision for Loan Losses
Management employs a 'migration analysis method' to establish the required
amount of loan loss allowance. This process tracks realized loan losses
back through the prior two years to estimate loss exposure on the classified
and unclassified loan portfolios. Additionally, loss experience is tracked
in pools of loans with similar characteristics to estimate the loss exposure
unique to various loan types. The measured loss exposure is then applied to
the current loan portfolio and further adjusted for 'qualitative factors'
such as:
Changes in the trends of the volume and severity of past due and
classified loans; and trends in the volume of non-accrual loans, troubled
debt restructurings and other loan modifications;
Changes in the nature and volume of the portfolio;
Changes in the experience, ability, and depth of lending management and
staff;
Changes in lending policies and procedures, including underwriting
standards and collections, charge-offs and recovery practices;
Changes in national and local economic and business conditions and
developments, including the condition of various market segments;
The existence and effect of any concentrations of credit, and changes in
the level of such concentrations;
Changes in the quality of the loan review system and the degree of
oversight by the Board of Directors; and
The effect of external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
current portfolio.
This method of establishing loan loss reserves complies with the
policies of the Office of the Comptroller of the Currency as reflected in
Banking Circular 201, revised, dated February 20, 1992, and in Banking
Bulletin 93-60, dated December 21, 1993. The Company began testing this new
method during 1992 and comparing its results to results reached by the
previously existing procedures employed by the Company. The test proved
that the two methods were comparable, and the Company adopted the new
migration analysis method during 1993.
Evaluation and classification of problem loans is an ongoing process
involving grading by loan officers, evaluation by the credit administration
department of the Bank, and a review on a regular basis by an independent
loan review firm. Additionally, in response to the problems in the economy
and increases in the level of classified loans, in 1993 the Bank established
a Special Assets Department to deal solely with problem loans including
identification, modification where appropriate, and early recognition of
loss potential. The introduction of the Special Assets Department has
resulted in improved early recognition of problem loans and opportunity to
restructure them, thereby increasing the amount of loans reported as
nonperforming (both those that are current in payment and those that are not
current), but improving the collection record on such loans. The migration
analysis adequately recognizes the loss potential included in those credits.
Accordingly, the Company believes its method for establishing the loan
loss allowance is sound. But no method, however valid, can consistently
predict future events with complete accuracy. In recent years, several
factors used by the Bank to establish loan loss allowances have been subject
to considerable volatility, and this in turn has affected the volatility of
nonperforming loans, charge-offs, and the coverage ratio. In addition, the
Bank's method of reporting, particularly its conservative listing of loans
as nonperforming, is not always an accurate indicator of actual future
losses.
The economy in San Diego suffered a sharp downturn in recent years,
particularly in the real estate market. The Bank is a community bank with a
relatively small loan portfolio comprised of mostly commercial/real estate
loans that tend to be individually larger in amount than loans made by
retail banks. As a result of these and other factors, the Bank can
experience large swings in nonperforming loans, charge-offs, and the
coverage ratio when one or a few loans are transferred from one category to
another. These factors are not reasons for changing a valid method of
determining loan loss allowances and are not always accurate predictors of
losses, but they do have short-term effects on those allowances and related
reported figures.
Significant components of the loan loss charge-offs in 1994 ($1.2
million of a total of $2.4 million) and in 1993 ($660,000 of a total of $2.7
million) were attributable in each year to a single loan which became a
problem loan late in the year. In both cases, the Bank responded with a
partial charge-off, consistent with its conservative reporting of problem
loans.
Conservative reporting of nonperforming loans is a useful management
tool, but it is not always a good predictor of loan losses (nor is it
intended to be) and there is no direct correlation between nonperforming
loans and the proper level of loan loss reserves (nor should there be). As
the following chart shows, a significant portion of the loans reported as
"nonperforming" are in fact performing in that payments on those loans are
current. (See the percentages in the final line of the chart.) Also, many
of the Bank's loans are collateralized (84% were collateralized at December
31, 1995), and that collateral can improve the recovery on troubled loans.
Loans reported as non-performing at December 31:
(in thousands) 1995 1994 1993
CURRENT AND NONCURRENT
Non-accrual loans 6,969 6,046 5,343
Restructured loans (still accruing) 1,364 2,316 3,162
Loans 90 days past due 93 20 481
8,426 8,382 8,986
Other real estate owned 181 268 1,050
Total 8,607 8,650 10,036
NONCURRENT
Non-accrual loans 3,160 1,276 3,373
Restructured loans (still accruing) 0 0 0
Loans 90 days past due 93 20 481
3,253 1,296 3,854
Other real estate owned 181 268 1,050
Total 3,434 1,564 4,904
Loans reported as nonperforming
but which are current, as a
percentage of total loans reported
as nonperforming 61% 82% 51%
<PAGE>
Miscellaneous Other Operating Income
During 1994, the Bank and its directors' and officers' insurer settled
their dispute regarding the Bank's legal and settlement costs in the Pioneer
Mortgage federal class action and state court cases (see notes to
consolidated financial statements). Under the terms of the settlement, the
insurer paid the Bank $712,500 (in addition to the $750,000 the insurer had
previously advanced toward the Bank's settlement with the plaintiffs) which
was credited to miscellaneous other operating income.
Other Non-Interest Expenses
Included in other non-interest expenses are the following:
1. Legal fees and settlement costs (and provisions therefor) in
connection with the Pioneer Mortgage Company and Pioneer Liquidating
Corporation litigation:
In 1995 $988,000
In 1994 $504,000
In 1993 $592,000
Matters pertaining to the federal class action and state court cases
resulting from the 1991 Pioneer Mortgage Company litigation, including the
Bank's claim against its insurer, have been settled. The 1993 litigation
brought by Pioneer Liquidating Corporation was settled in 1995.
2. Other Real Estate Owned ("OREO") losses and expenses:
In 1995 $129,000
In 1994 $462,000
In 1993 $754,000
OREO property, which peaked at approximately $5 million in 1991,
continued to decline in 1995 (to $181,000 at December 31, 1995) as
Management continued vigorous efforts to dispose of repossessed property.
Management expects that there will be other repossessions in the future but
intends to continue to dispose of such properties as quickly as is prudent.
3. Miscellaneous expense in 1993 includes provision for a loss in the
amount of $500,000 due to an unfavorable arbitration decision which required
the Bank to rescind the 1988 sale of a single family residence which it had
taken in foreclosure in 1987. The property was resold in 1994.
Subsidiary Data
San Diego National Bank. The Bank earned $989,000 in 1995 and $382,000 in
1994 compared to a loss of $1,870,000 in 1993. Return on average assets
(ROA) was 0.65%, 0.23%, and (1.07%), respectively. Return on average equity
(ROE) was $8.07%, 3.20%, and (14.65%), respectively. The reasons for the
change in Bank earnings have been enumerated in the preceding pages.
See notes to the consolidated financial statements and "Capital
Resources" for information regarding the Bank's capital ratios.
San Diego National Bank Building Joint Venture. The Joint Venture recorded
pre-consolidation gross building revenues of $1,947,000, $2,046,000, and
$2,048,000 in 1995, 1994, and 1993, respectively, resulting in pre-
consolidation pre-tax losses of $769,000, $447,000, and $453,000,
respectively. Depreciation and amortization expenses were $601,000,
$636,000, and $640,000 in 1995, 1994 and 1993, respectively. The increased
loss in 1995 is attributable primarily to the reduced revenues (see
discussion below) and increased interest payable to the Company on advances
used to pay down the building mortgage loans, which is eliminated from the
financial statements in consolidation (see "Capital Resources").
At the beginning of the Joint Venture, the limited partners' share of
its losses were charged against the investment capital accounts of the
limited partners. During 1990, these capital accounts reached zero,
requiring the Company to absorb additional operating losses of approximately
$288,000 in 1995, $168,000 in 1994 and $194,000 in 1993 which would
otherwise have been charged to the limited partners. In 1995, the limited
partners' cumulative share of the operating losses absorbed by the Company
was reduced by their share of the gain on the prepayment discount on the
mortgage (see below; approximately $562,000) resulting in net losses
absorbed by the Company of $1,017,000 as of December 31, 1995.
There is substantial amount of vacant office space in downtown San Diego.
A recent study indicated that the downtown occupancy level was approximately
79% (29th lowest among 31 U.S. cities included in the survey). This creates
a highly competitive rental market, generally requiring the granting of
generous lease concessions and/or low rental rates to obtain new tenants or
retain existing ones. Some tenants with limited time remaining on existing
leases have negotiated for lower current rental rates in exchange for
extensions of their leases. At the end of 1995, the building was
approximately 98% leased, although concessions to some tenants who are not
utilizing all of their leased premises would reduce the effective occupancy
to approximately 93%.
In November 1994, the then existing first mortgage loan on the building
was purchased by the two limited partnerships managed by WHR Management
Corp. which subsequently purchased the Company's stock (see "Capital
Resources"). In January 1995, the Joint Venture and WHR entered into a
modification agreement which, inter alia, allowed for prepayment of the loan
at a discount. On November 30, 1995 the loan was paid off at a discount of
$1,579,000 from face value resulting in a net gain, after expenses and taxes
of $1,457,000. Because the mortgage was held by a related party, the gain
has been credited directly to shareholders' equity.
Business Environment
Through the 1990's, economic recovery of San Diego and the entire Southern
California area has lagged behind that of the nation as a whole.
Interest rates began to fall during 1995 after rising in 1994. Should
interest rates continue to decline, net interest spread will be negatively
impacted. The majority of the Bank's variable rate loans adjust on the day
that a rate reduction is made. The offsetting reduction in interest paid
on deposits is delayed until certificates of deposit mature and,
additionally, competitive pressure from savings institutions and non-bank
money funds may inhibit reduction in rates paid on these and other interest-
bearing accounts.
<PAGE>
CONSOLIDATED BALANCE SHEETS
SDNB Financial Corp. and Subsidiaries
December 31,
(dollars in thousands) 1995 1994
ASSETS
Cash and due from banks $ 13,440 $11,936
Interest bearing deposits in other banks 2,780 1,381
Investment securities held-to-maturity 7,408 17,321
Investment securities available-for-sale 27,033 9,910
Federal funds sold 24,700 24,000
Loans 92,331 97,058
Less allowance for loan losses 2,002 2,148
Net loans 90,329 94,910
Premises and equipment, net 10,975 11,089
Other real estate owned 181 268
Accrued interest receivable and other assets 1,726 2,370
$ 178,572 $173,185
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 49,505 $45,693
Interest bearing 90,904 92,583
Total deposits 140,409 138,276
Securities sold under agreement to repurchase 12,934 12,285
Accrued interest payable and other liabilities 554 953
Notes payable 7,989 12,702
Total liabilities 161,886 164,216
Commitments and contingencies (notes 9, 10 and 11)
Shareholders' equity:
Common stock, no par value; authorized
15,000,000 shares, issued and outstanding
3,073,260 in 1995 and 1,538,364 in 1994 20,314 14,585
Accumulated deficit (3,587) (5,256)
Net unrealized holding losses on
available-for-sale securities (41) (360)
Total shareholders' equity 16,686 8,969
$178,572 $173,185
The accompanying notes are an integral part of the financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SDNB Financial Corp. and Subsidiaries
Years ended December 31,
(dollars in thousands except per share amounts) 1995 1994 1993
Interest Income:
Interest and fees on loans $10,090 $9,500 $10,404
Interest on federal funds sold 904 732 364
Interest on investment securities:
Taxable 1,655 1,394 899
Exempt from federal income tax 94 192 263
Total interest income 12,743 11,818 11,930
Interest Expense:
Deposits 2,928 2,497 3,146
Short-term borrowings 288 409 213
Total interest expense 3,216 2,906 3,359
Net interest income 9,527 8,912 8,571
Provision For Loan Losses 200 1,850 2,950
Net interest income after provision
for loan losses 9,327 7,062 5,621
Other Operating Income:
Security gains, net 11 0 0
Building income 903 1,067 1,088
Miscellaneous 816 1,580 1,017
Total other operating income 1,730 2,647 2,105
Other Operating Expenses:
Salaries and employee benefits 4,056 3,630 3,371
Occupancy 532 492 486
Building operating expenses, including interest
expense of $941, $788, and $820
for 1995, 1994 and 1993, respectively 2,422 2,296 2,310
Other non-interest expenses 3,830 3,447 4,355
Total other operating expenses 10,840 9,865 10,522
Income (loss) before income tax
and cumulative effect of accounting change 217 (156) (2,796)
Income Tax 5 3 0
Income (loss) before cumulative effect
of accounting change 212 (159) (2,796)
Cumulative Effect of Accounting
Change ($0.15 Per Share) 0 0 234
Net income (loss) $ 212 $(159) $(2,562)
Net income (loss) per share $ 0.10 $(0.10) $ (1.67)
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SDNB Financial Corp. and Subsidiaries
Net unrealized
holding losses in
For years ended December 31, 1995, 1994 and 1993 Common Accumulated available-for-sale
(dollars in thousands) Stock Deficit securities Total
<S> <C> <C> <C> <C>
Balances at January 1, 1993 $ 14,585 $ (2,535) $0 $12,050
Net loss 0 (2,562) 0 (2,562)
Balances at December 31, 1993 14,585 (5,097) 0 9,488
Effect of adopting Statement of Financial
Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities
("SFAS No.115"), on January 1, 1994 0 0 (10) (10)
Net change in fair value of
available-for-sale securities 0 0 (350) (350)
Net loss 0 (159) 0 (159)
Balances at December 31, 1994 $ 14,585 ($ 5,256) ($ 360) $ 8,969
Proceeds from issuance of common stock, 1,534,896
shares issued at $4.34/share less associated
costs of $932. A warrant to purchase 37,363
shares of common stock at $4.34 per share until
September 29, 1997 was issued to Torrey Pines
Securities, Inc. which acted as underwriter in
the stock offering. 5,729 0 0 5,729
Gain on early payment of loan (Note 22) 0 1,457 0 1,457
Net change in fair value of available-for-sale
securities 0 0 319 319
Net income 0 212 0 212
Balances at December 31, 1995 $ 20,314 $( 3,587) ($ 41) $ 16,686
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SDNB Financial Corp. and Subsidiaries
Years ended December 31,
(dollars in thousands) 1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 212 $(159) $(2,562)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for loan losses 200 1,850 2,950
Provision for depreciation and amortization 1,279 1,332 1,102
Cumulative effect of accounting change 0 0 (234)
Amortization of investment security discounts (240) (65) (84)
Other expense not utilizing (providing) cash 173 175 106
Unearned loan fees 157 104 (5)
Taxes refundable 33 (30) 477
Interest receivable and other assets (807) (144) (691)
Interest payable and other liabilities (399) (66) 545
Total adjustments 396 3,156 4,166
Net cash provided by operating activities 608 2,997 1,604
INVESTING ACTIVITIES:
Proceeds from maturities of held for
investment securities 0 0 10,699
Proceeds from maturities of
held-to-maturity securities 6,504 9,443 0
Proceeds from called held-to-maturity securities,
including gross realized gains of $10 1,802 0 0
Proceeds from maturities of
available-for-sale securities 6,993 6,927 0
Proceeds from sales of available-for-sale securities,
including gross realized gains of $1 5,324 0 0
Purchases of held for investment securities 0 0 (23,037)
Purchases of held-to-maturity securities (2,000) (8,847) 0
Purchases of available-for-sale securities (25,097) (4,950) 0
Net change in gross loans 4,320 11,508 18,549
Proceeds from OREO properties 556 889 1,041
Purchases of OREO properties 0 (520) 0
Purchases of premises and equipment (737) (232) (221)
Net cash provided (used)
by investing activites (2,335) 14,218 7,031
FINANCING ACTIVITIES:
Net change in deposits 2,133 126 (26,589)
Net change in short-term borrowings (1,894) 3,172 4,619
Proceeds from issuance of long-term debt,
net of associated costs of $48 7,952 0 0
Payments of long-term borrowings (8,590) (222) (251)
Proceeds from issuance of common stock 6,661 0 0
Payments of costs associated with issuance
of common stock (932) 0 0
Net cash provided (used)
by financing activities 5,330 3,076 (22,221)
Change in cash and cash equivalents 3,603 20,291 (13,586)
Cash and cash equivalents at beginning of year 37,317 17,026 30,612
Cash and cash equivalents at end of year $40,920 $37,317 $17,026
For the purpose of the statement of cash flows, the Company considers cash and
cash equivalents to be as follows at December 31, 1995 1994 1993
Cash and due from banks $13,440 $11,936 $9,044
Interest-bearing deposits in other banks 2,780 1,381 1,682
Federal funds sold 24,700 24,000 6,300
Totals $40,920 $37,317 $17,026
Supplemental cash flow information: 1995 1994 1993
CASH PAID FOR:
Interest $4,316 $3,661 $4,163
Income Taxes $1 $3 $0
Non-cash items: transfer of loans to OREO $553 $0 $739
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SDNB Financial Corp. and Subsidiaries
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of SDNB Financial Corp. (the Company)
and subsidiaries are in accordance with generally accepted accounting
principles and conform to general practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and iabilities and disclosure
of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). Actual results differ from those estimates. The
following is a summary of the more significant policies:
BASIS OF PRESENTATION All dollar amounts are presented in thousands
unless otherwise indicated.
The consolidated financial statements include the accounts of SDNB
Financial Corp. and all companies which are more than 50% owned, directly or
indirectly, including San Diego National Bank (the Bank), 100% owned, the
Company's principal subsidiary. All significant inter-company items are
eliminated.
INVESTMENT SECURITIES The Company implemented Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS No. 115") effective January 1, 1994. The
impact of adoption was immaterial. SFAS No. 115 was issued in May 1993 and
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Investments are to be classified in three categories and
accounted for as follows:
CLASSIFICATION ACCOUNTING
Held-to-maturity Reported at amortized cost
Trading securities Reported at fair value; unrealized
gains and losses included in net
income
Available-for-sale Reported at fair value; unrealized
gains and losses included as a
separate component of shareholders' equity
Prior to adoption of SFAS No. 115, due to management's intent and
ability to hold to maturity, all securities in the investment portfolio were
classified as held for investment and were stated at cost, adjusted for
amortization of premiums and accretion of discounts. Such amortization and
accretion were recognized as adjustments to interest income on investment
securities. On November 15, 1995, the Financial Accounting Standards Board
("FASB") authorized a one-time transfer between classifications which was
required to be made no later than December 31, l995. Pursuant to such
authority, the Bank transferred securities with an amortized cost of $3.8
million and an unrealized loss of $19 thousand from "held to maturity" to
"available for sale."
Realized gains or losses, if any, are determined using the specific
identification method.
LOANS Interest on loans is credited to income based on the principal
amount outstanding. Loan fees received, to the extent they exceed
origination costs, are deferred and amortized over the expected loan term.
Effective January 1, 1995, the Company implemented Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114") as amended by Statement of Financial
Accounting Standards No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures ("SFAS No. 118"). Under SFAS No.
114, a loan is considered impaired, based on current information and events,
if it is probable the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at the
historical effective interest rate, except that collateral dependent loans
are measured for impairment based on the fair value of the collateral.
Adoption of SFAS No. 114 did not have a material effect on the Company's
financial statements.
Loans are placed on non-accrual when a reasonable doubt exists as to
the collectibility of interest or principal. Loans may be returned to
accrual status when all principal and interest amounts contractually due
are reasonably assured of repayment in an acceptable period of time, and
there is a sustained period of repayment performance (generally a minimum of
six months) by the borrower.
While a loans is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case of
a partially charged-off loan, interest income is limited to that which would
have been recognized on the remaining recorded loan balance. Cash interest
receipts in excess of that amount are recorded as recoveries to the
allowance for loan losses until prior charge-offs have been fully recovered.
ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained
at the level deemed appropriate by management to provide for known and
inherent risks in the loan portfolio. The allowance is based on a
continuing review of the portfolio, past loan loss experience, current
economic conditions which may affect the borrowers' ability to pay, and the
underlying collateral value of the loans. Loans which are deemed to be
uncollectible are charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans previously charged off are
added to the allowance.
The allowance for possible loan losses is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operating expense
using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized to operating
expense over the term of the respective lease or the estimated useful life
of the improvement, whichever is shorter. When assets are sold or retired,
the assets and accumulated depreciation are removed from the accounts. Gains
or losses on disposals are credited or charged to income.
OTHER REAL ESTATE OWNED (OREO) OREO property is accounted for at the
lower of the recorded investment in the loan satisfied or its appraised
value at the time of transfer to the OREO category, less estimated selling
costs. Investment in the loan satisfied is the unpaid balance of the loan
increased by accrued and uncollected interest, unamortized premium, and loan
acquisition costs, if any, and decreased by previous direct write-down,
finance charges, and unamortized discount,
<PAGE>
if any. Any excess of the recorded investment in the loan satisfied over
the appraised value of the property is charged against the allowance for
loan losses. Legal fees and direct costs of acquiring the property and
costs of carrying the property subsequent to recording as OREO are expensed
as incurred. Any reduction in the value of the property subsequent to its
being recorded as OREO is charged directly to expense and is recorded as an
allowance. The allowance for OREO at December 31, 1995 and 1994 was $14 and
$20, respectively.
INCOME TAXES The Company files a consolidated federal income tax
return and a combined California state franchise tax return with its
subsidiaries. Amounts equal to tax benefits of those companies having
taxable losses or credits are reimbursed by those companies which incur
tax liabilities. Any excess of alternative minimum tax over regular tax
determined on a consolidated basis will be borne by the parent company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"),
which requires the use of the liability method in the computation of income
tax expense and current and deferred income taxes payable. Under SFAS No.
109, income tax expense consists of taxes payable for the year and the
changes during the year in deferred tax assets and liabilities. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
EARNINGS PER SHARE Net income per share for 1995 is based on 2,197,615
weighted average shares outstanding. Net loss per share for 1994 and 1993
are based on 1,538,364 shares outstanding.
EMPLOYEE STOCK COMPENSATION PLANS In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123"). Under the provisions of SFAS No. 123,
the Company is encouraged, but not required, to measure compensation costs
related to its employee stock compensation plans under the fair value
method. Under this method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. If the Company elects not to
recognize compensation expense under this method it is required to disclose
the pro forma net income and earnings per share effects based on the SFAS No.
123 fair value methodology. SFAS No. 123 applies to financial statements
for fiscal years beginning after December 15, 1995. Earlier implementation
is permitted. The Company will implement the requirements of SFAS No. 123
in 1996 and will only adopt the disclosure provisions of this statement.
NOTE 2: CASH AND DUE FROM BANKS
The Bank is required to maintain reserves with the Federal Reserve
Bank. Reserve requirements are based on a percentage of deposit
liabilities. The average amounts held at the Federal Reserve Bank for
the years ended December 31, 1995 and 1994 were approximately $1,706 and
$1,371, respectively.
NOTE 3: INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
are summarized as follows at December 31, 1995:
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
DECEMBER 31, 1995:
Available for sale:
U.S. Treasury $13,532 $0 $(17) $13,515
U.S. Government agencies 12,797 28 (52) 12,773
Other 472 0 0 472
Federal Reserve Bank stock 273 0 0 273
$27,074 $28 $(69) $27,033
Held to maturity:
U.S. Treasury $1,000 $0 $(2) $998
U.S. Government agencies 4,021 10 (61) 3,970
States and municipalities 1,637 6 (12) 1,631
Other 750 0 0 750
$7,408 $16 $(75) $7,349
DECEMBER 31, 1994:
Available for sale:
U.S. Government agencies $9,997 $0 $(360) $9,637
Federal Reserve Bank stock 273 0 0 273
$10,270 $0 $(360) $9,910
Held to maturity:
U.S. Treasury $1,998 $0 $(45) $1,953
U.S. Government agencies 11,397 0 (602) 10,795
States and municipalities 3,176 0 (33) 3,143
Other 750 0 0 750
$17,321 $0 $(680) $16,641
Estimated
Amortized Market
Cost Value
DECEMBER 31, 1995:
Available for sale:
Due in one year or less $15,804 $15,786
Due after one year through five years 10,997 10,974
Due after five years through ten years 0 0
Federal Reserve Bank stock 273 273
$27,074 $27,033
Held to maturity:
Due in one year or less $3,000 $2,997
Due after one year through five years 3,137 3,082
Due after five years through ten years 1,271 1,270
$7,408 $7,349
Investment securities with a carrying value of $3,778 and
$3,276 at December 31, 1995 and 1994, respectively, were pledged
as security for public deposits and other purposes.
NOTE 4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
At December 31, 1995 and 1994 loans consist of the following:
1995 1994
Commercial $54,628 $57,808
Real estate 35,192 37,534
Installment 2,877 2,239
Unearned loan fees (366) (523)
$92,331 $97,058
<PAGE>
In the normal course of business, the Bank has made loans to certain
executive officers and directors or entities with which these individuals
are associated under terms consistent with the Bank's general lending
policies. In October 1990, the Bank discontinued further lending to such
persons or entities (except for cash secured loans) beyond the maturity of
existing loans. Exceptions to this policy were granted to one director
where the amounts of loans outstanding are less than the amounts outstanding
when the policy was adopted and to another whose guarantee of a loan was
made prior to his becoming a director.
A summary of the activity in the allowance for loan losses is as
follows:
1995 1994 1993
Balance at beginning of year $2,148 $2,522 $2,111
Provision charged to operating expenses 200 1,850 2,950
Loans charged off (655) (2,362) (2,716)
Recoveries 309 138 177
Balance at end of year $2,002 $2,148 $2,522
As of December 31, 1995 and 1994, restructured loans were $6,925 and
$3,460, respectively. Of these totals, $1,364 and $2,316 were accruing at
December 31, 1995 and 1994, respectively. The difference between interest
income recorded as restructured and interest income that would have been
recorded if not restructured was immaterial.
As of December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled
$5,422. Of this total , $1,265 related to loans with no valuation
allowance, either because the loans have been partially written down
through charge-offs or because collateral value exceeds contractual amounts
due. The remaining $4,157 related to to loans with a valuation allowance
of $241. For the year ended December 31, 1995, the average recorded
investment in impaired loans was approximately $2,951. The Company
recognized $212 of interest on impaired loans (during the portion of the
year they were impaired) all of which represents income recognized using a
cash basis method of accounting during the time within the year the loans
were impaired.
NOTE 5: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized
as follows:
1995 1994
Building $11,705 $11,708
Furniture, fixtures and equipment 2,936 2,855
Leasehold improvements 4,010 4,356
18,651 18,919
Less accumulated depreciation
and amortization 7,676 7,830
$10,975 $11,089
NOTE 6: DEPOSITS
The year-end balances for deposits by major classification are as follows:
1995 1994
Non-interest bearing demand $ 49,505 $ 45,693
Interest bearing demand 64,185 69,839
Savings 3,982 4,844
Time deposits of $100 or more 12,748 10,374
Other time deposits 9,989 7,526
$140,409 $138,276
Interest expense on deposits was comprised of the following:
1995 1994 1993
Interest bearing demand $1,873 $1,623 $1,373
Savings 92 77 79
Time deposits of $100 or more 471 347 725
Other time deposits 492 450 969
$2,928 $2,497 $3,146
Domestic time deposits over $100 at December 31, 1995 mature in the
following periods:
Time Certificates All Other
of Deposit Time Deposits
Three months or less $6,167 $201
Over three through six months 3,360 200
Over six through twelve months 2,498 0
Over twelve months 0 322
$12,025 $723
NOTE 7: NOTES PAYABLE
Notes payable consist of the following:
1995 1994
Note payable to a limited liability company
payable in monthly installments of $76 which
include interest at 9.8%. The loan is
collateralized by the bank building and is due
December 1, 2005. As additional consideration for
the loan the Company issued warrants to purchase
150,000 shares of Common Stock at $5.44 per share
until November 30, 1999. $7,989 $0
Note payable to two limited partnerships, managed
by WHR Management Corp. (owner of 24.9% of the
Company's Common Stock) paid November 29, 1995 at a
discount (see Note 22). 0 10,158
Note payable to a corporation (which is owned by a
member of the Company's Board of Directors); paid
November 29, 1995. 0 1,900
Notes payable to individuals (officers and/or
directors of the Company)paid September 30, 1995. 0 390
Notes payable to individuals paid March 31, 1995. 0 240
Notes payable to a corporation paid May 9, 1995. 0 14
$7,989 $12,702
NOTE 8: INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"), as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes
increased 1993 net income by $234 ($0.15 per share) and is reported
separately in the consolidated statement of operations.
<PAGE>
The components of income tax expense attributable to continuing
operations for the years ended December 31, are as follows:
1995 1994 1993
Current:
Federal $2 $0 $0
State 3 3 0
Total current 5 3 0
Deferred:
Federal 0 0 0
State 0 0 0
Total deferred 0 0 0
Income tax expense $5 $3 $0
Income tax expense attributable to operations differs from the
amounts computed using the federal statutory income tax rate as a result
of the following at December 31:
1995 1994 1993
Computed expected taxes $74 $(57) $(951)
California franchise tax,net
of federal income tax benefit 3 0 0
Nontaxable interest income (30) (113) (84)
Alternative minimum tax 2 0 0
Net operating loss (57) 0 0
Adjustment of the valuation
allowance 0 168 1,003
Other 13 5 32
Income tax expense $5 $3 $0
The components of net deferred taxes at December 31, 1995 and 1994
are as follows:
Deferred
December (Expense) December
31,1994 Benefit 31,1995
OREO gains/losses ($438) $483 $45
Joint venture (313) 28 (285)
Bad debt allowance 373 94 467
Deferred compensation 14 2 16
Land lease 163 (114) 49
Depreciation (149) (49) (198)
Miscellaneous 30 37 67
Net operating loss 2,292 (1,071) 1,221
Debt refinance 0 622 622
AMT credit carryforward 0 148 148
Net deferred tax asset 1,972 180 2,152
Valuation allowance (1,972) (180) (2,152)
$0 $0 $0
At December 31, 1995, the Company has net operating loss ("NOL")
carryforwards for Federal tax purposes of approximately $3,083, to offset
future Federal taxable income. The Company also has NOL carryforwards for
California Franchise Tax purposes of approximately $4,944, of which 50% is
available to offset future state taxable income, subject to the limitations
below. The Federal NOLs begin to expire in 2007 and the California NOLs
begin to expire in 1997.
The Company also has Alternative Minimum Tax credits for financial
reporting purposes to offset future federal taxes of approximately $148.
Current tax statutes impose substantial limitations under certain
circumstances on the use of carryforwards upon the occurrence of an
"ownership change". An ownership change can result from the issuance of
equity securities by the Company, purchases of the Company's securities
in the secondary market or a combination of the foregoing.
NOTE 9: LEASE COMMITMENTS
At December 31, 1995, minimum rental payments due under the Company's
operating leases having initial or remaining non-cancelable lease terms
in excess of one year are as follows:
1996 $ 1,122
1997 1,029
1998 1,033
1999 1,033
2000 988
Thereafter 17,994
$ 23,199
Total minimum lease payments include $6,787 of rental payments to
the Joint Venture (the Company's 62%-owned subsidiary). The other
primary component of the minimum lease payments is the Joint Venture's
rental payments under a 99 year ground lease.
Total rental expense under operating leases was $1,337 in 1995,
$1,289 in 1994, and $1,259 in 1993. There are no contingent rental
payments applicable to any of the leases. All leases provide that the
Company pay taxes, maintenance, insurance and certain other operating
expenses applicable to the leased premises or property in addition to
the monthly minimum payments. Certain of the leases contain renewal
clauses at the option of the lessee.
NOTE 10: CONTINGENCIES
In the ordinary course of business, there are outstanding various
commitments to extend credit and guarantees, as well as certain claims
resulting from law suits, which are not reflected in the accompanying
consolidated financial statements. Management does not believe that
these items will have a material adverse effect on the consolidated
financial condition of the Company.
In January 1993, the Bank was named as a defendant in an adversary
proceeding filed by Pioneer Liquidating Corporation ("PLC"), successor
to six bankrupt Pioneer Mortgage Company entities (collectively,
"Pioneer") in the Bankruptcy Court of the Southern District of
California. Investors in Pioneer had previously filed suit against the
Bank, which litigation was settled in 1992. The PLC case was settled
with the final settlement agreement approved by the Federal District
Court for the Southern District of California on November 29, 1995.
A preliminary agreement between the Bank and PLC contemplated that
the Bank would make payment to PLC on execution of the settlement
agreement and assign to PLC certain charged-off loans, without recourse.
The preliminary agreement further provided that after being given credit
for the payment by the Bank and the collections on the assigned charged-
off loans, payment of the remaining balance of the total settlement
amount was to be guaranteed by Charles I. Feurzeig, Chairman of the
Board of the Company, and PVCC, Inc., a corporation controlled by Mr.
Feurzeig (collectively, the "Feurzeig Entities"). Such guarantee was
being given by the Feurzeig Entities for consideration independent of
Mr. Feurzeig's investment in the Company.
Subsequent negotiations led to the settlement agreement approved by
the Court whereby the Bank paid $600 to PLC and the Feurzeig Entities
paid $1,050 to PLC upon execution of the settlement agreement and the
Feurzeig Entities took the place of PLC with respect to assignment of
the charged-off loans. In consideration of the modification of the
original list of charged-off loans to eliminate certain loans which had
been only partially charged-off, the Bank agreed to assign additional
newly charged-off loans (90 days after charge-off) to the Feurzeig
Entities, until the first to occur of:
(a) Five years after the date of the settlement agreement; or
(b) Such time as the Feurzeig Entities have collected on such
loans $1,050 plus a return equal to the rate of 9.5% per year on the
unpaid portion of such $1,050.
<PAGE>
Pursuant to the settlement agreement the Feurzeig Entities do not
have recourse or a claim against the Bank should the collections on the
assigned charged-off loans amount to less than $1,050. Should the
collections exceed $1,050 plus the return referred to above, the
Feurzeig Entities have agreed to pay to the Bank 50% of such excess
collections.
NOTE 11: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments may include loan commitments,
interest rate exchange contracts, and standby letters of credit. The
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the financial
statements.
The Bank's exposure to credit loss in the event of non-performance
by the other party for loan commitments and letters of credit is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Bank has
no significant concentrations of credit risk with any individual
counterparty or groups of counterparties to originate loans. The Bank's
lending is concentrated in San Diego County. Variable rate loans
totaled $84,076 at December 31, 1995. The total contract amounts of
financial instruments with off-balance sheet risk at December 31 are
as follows:
1995 1994
LOAN COMMITMENTS:
Variable rate $42,667 $48,140
Fixed rate 707 431
Letters of credit 2,633 1,997
$46,007 $50,568
Since many of the loan commitments may expire without being drawn
upon, the total commitment amount does not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on Management's
credit evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
and residential and income-producing properties. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
During February 1995, the Bank entered into an interest rate swap
to hedge against the effects of falling interest rates on income. If
the prime interest rate falls below eight percent during the life of the
contract, the Bank will receive payments amounting to the difference
between the then existing prime rate and eight percent on the contract
amount of $20 million. These payments continue while the prime interest
rate stays below eight percent or until expiration of the contract,
February 3, 1998. The Bank's exposure to credit loss in the event of
non-performance of the counterparty is represented by the amount of
these payments, which is presently undeterminable.
NOTE 12: EMPLOYEE BENEFIT PLANS
The Bank maintains a Profit Sharing Plan and Deferred Savings Plan for
the benefit of all employees. Contributions to the Profit Sharing Plan
are made at the discretion of the Board. The Deferred Savings Plan
provides a 401(k) plan for which the Bank may make discretionary
matching contributions on a percentage basis. The Bank accrued $59
under the plans in 1995. No accrual was made for the years 1994 and
1993.
NOTE 13: AVAILABILITY OF FUNDS FROM SUBSIDIARIES
Funds available for the payment of dividends by the Company would be
obtained from the Bank.
There are legal limitations on the ability of the Bank to provide
funds for the Company. Under federal banking law, dividends declared by
the Bank in any calendar year may not, without the approval of the
Comptroller of the Currency, exceed its net income, as defined, for that
year combined with its retained net income for the preceding two years.
At January 1, 1996, the Bank had available for dividends to the Company
approximately $1,370 without approval of the Comptroller. Federal
banking law also restricts the Bank from extending credit to the Company
in excess of 10% of capital stock and surplus, as defined, of the Bank.
Any such extensions of credit are subject to strict collateral requirements.
The Company and the Federal Reserve Bank of San Francisco ("Reserve
Bank") entered into an agreement on November 20, 1992, pursuant to which
the Company must obtain the approval of the Reserve Bank prior to the
declaration of any cash dividends.
NOTE 14: STOCK OPTIONS
In 1994 the Board of Directors adopted the "1994 Stock Option Plan"
("1994 Plan"), which was approved by the Company's shareholders on
March 17, 1995. The Company has reserved 400,000 shares for issuance
under the plan. Options are granted under the plan at a price not less
than the fair market value of the Company's common stock on the date of
grant. The options are exercisable in increments over a number of years
as determined by the Board of Directors but not to exceed 10 years and
expire three months after termination of employment or cessation of
affiliation as a director. The plan expires September 10, 2004, as to
any shares not at the time subject to option. Options can, depending on
the circumstances of issuance, be either incentive stock options, which
are qualified under provisions of the Internal Revenue Code for certain
tax-advantaged treatment, or non-qualified options.
The 1994 Plan replaced a similar plan, the "1984 Stock Option Plan"
("1984 Plan") which had expired.
As of December 31, 1995, there were non-qualified options
outstanding under the 1984 Plan for 168,294 shares at exercise prices
ranging from $3.25 to $7.94 per share and Incentive Stock Options
outstanding for 250,401 shares at exercise prices ranging from $3.25 to
$11.13 per share.
As of December 31, 1995, there were non-qualified options
outstanding under the 1994 Plan for 98,000 shares at a price of $6.00
per share and Incentive Stock Options outstanding for 67,000 shares at
prices ranging from $3.25 to $6.00 per share.
NOTE 15: LEASE INCOME
The Joint Venture (the Company's 62%-owned subsidiary) is the lessor of
the Building in which the Bank has its main office. The lease term is
20 years. Certain of the Building leases contain renewal clauses at the
option of the lessees. At December 31, 1995, minimum lease payments to
be received by the Joint Venture on non-cancelable operating leases are
as follows:
1996 $ 1,724
1997 1,471
1998 1,302
1999 1,199
2000 1,155
Thereafter 3,800
$10,651
<PAGE>
NOTE 16: INVESTMENT IN JOINT VENTURE
The Company's wholly-owned subsidiary, SDNB Development Corp ("Devco")
was the general partner with a 62% interest in a joint venture with a
limited partnership, Kettner Building Associates, Ltd. ("KBA"), in the
ownership and operation of the Building in which the Company has its
headquarters. On July 1, 1993, Devco was merged into the Company and
the Company became the general partner.
The results of operations attributable to the Company's controlling
interest in the Joint Venture are included in consolidated results of
operations with an appropriate allocation to the minority interest, the
remaining limited partners in KBA. During 1990, however, the allocation
exhausted the contributed capital of the remaining limited partners and
the Company began absorbing the entire loss.
NOTE 17: PARENT COMPANY INFORMATION
The following financial information represents the condensed balance
sheets of SDNB Financial Corp. (parent company only) as of December 31,
1995 and 1994, and the related condensed statements of income and cash
flows for each of the three years in the period ended December 31, 1995.
CONDENSED BALANCE SHEETS 1995 1994
ASSETS
Cash in San Diego National Bank $142 $30
Interest bearing deposits in other banks 497 0
Investment securities available-for-sale 472 0
Investment in San Diego National Bank 13,615 11,307
Investment in SDNB Building Joint Venture (2,647) (3,375)
Investment in SDNB Mortgage Bankers 6 6
Note receivable from Joint Venture 4,558 1,413
Other assets 119 462
$16,762 $9,843
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Due to subsidiaries for income taxes $7 $32
Other liabilities 69 212
Notes payable 0 630
Total Liabilities $76 $874
Shareholder's equity:
Common Stock, no par value; authorized
15,000,000 shares, issued 3,073,260
in 1995 and 1,538,364 in 1994 20,314 14,585
Accumulated Deficit (3,587) (5,256)
Net unrealized holding losses on
available-for-sale securities (41) (360)
Total shareholders' equity 16,686 8,969
$16,762 $9,843
CONDENSED STATEMENTS
OF OPERATIONS 1995 1994 1993
Management income $39 $41 $21
Interest income 311 136 66
Rental income 198 225 218
Total income 548 402 305
Operating expenses 584 498 433
Loss before income taxes and equity in
undistributed income (loss) of subsidiaries
and cumulative effect of accounting change (36) (96) (128)
Allocated income tax 21 (1) 0
Loss before equity in undistributed
income (loss) of subsidiaries and cumulative
effect of accounting change (15) (97) (128)
Equity in undistributed income (loss)
of subsidiaries 227 (62) (2,313)
Income (loss) before cumulative effect of
accounting change 212 (159) (2,441)
Cumulative effect of accounting change 0 0 (121)
Net income (loss) $212 $(159) $(2,562)
CONDENSED STATEMENTS
OF CASH FLOWS 1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $212 $(159) $(2,562)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Net change in taxes payable 0 (30) (600)
Provision for depreciation and amortization 15 4 6
Cumulative effect of accounting changes 0 0 (121)
Net change in other assets 345 (267) 16
Net change in other liabilities (148) 59 50
(Income) loss of wholly-owned subsidiaries (227) 62 2,434
Total adjustments (15) (172) 1,785
Net cash provided (used) by operating activities 197 (331) (777)
INVESTING ACTIVITIES:
Purchase of investment activities (3,336) 0 0
Sales of investment securities 2,864 0 0
Purchase of leasehold improvements 0 0 30
Advances to subsidiaries (4,161) 0 0
Payments from subsidiaries 0 100 173
Net cash provided (used) by
investing activities (4,633) 100 203
FINANCING ACTIVITIES
Proceeds from short-term borrowings 0 275 440
Repayments of short-term borrowings (630) (85) 0
Proceeds from advances from subsidiaries 0 83 488
Repayment of advances from subsidiaries (54) (26) (516)
Proceeds from issuance of common stock 5,729 0 0
Payments for costs associated with
issuance of common stock (932) 0 0
Net cash provided by financing activities 5,045 247 412
Increase (decrease) in cash 609 16 (162)
Cash at beginning of year 30 14 176
Cash at end of year $639 $30 $14
<PAGE>
NOTE 18: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1992, the Company adopted SFAS 107 which requires the disclosure of
the estimated fair value of its financial instruments. The following
methods and assumptions were used to estimate the fair value of the
other classes of financial instruments for which it is practice to
estimate that value. Carrying value approximates fair value for cash
and due from banks, federal funds sold and securities sold under
agreements to repurchase.
Interest Bearing Deposits In Other Banks For privately placed
certificates of deposit, fair value is estimated using the rates
currently offered for deposits of similar remaining maturities.
Investment Securities Fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans Fair value for variable rate loans is determined by using
the present value of cash flows discounted from the first repricing
opportunity. For fixed rate loans, the cash flows to maturity are
discounted to achieve the present value. In each case, the discount
rate is equal to the rate at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Non-accrual loans are discounted based on cash flows
including principal repayment only at maturity.
Deposit Liabilities The fair value of demand deposits, savings
accounts, NOW accounts and money market accounts is the amount payable
on demand at the reporting date. The fair value of certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Acceptances Outstanding And Commercial Letters Of Credit
Settlement value approximates fair value.
Notes Payable Rates currently available to the Company for debt
with similar terms and remaining maturities are used to estimate fair
value of existing debt.
Commitments, Guarantees And Standby Letters Of Credit The fair
values approximate the carrying amounts which are comprised of
unamortized fee income.
Interest Rate Contracts The fair value approximates the carrying
amount which represents remaining unamortized contract price.
Carrying amount Fair value
FINANCIAL ASSETS:
Cash and due from banks $13,440 $13,440
Interest bearing deposits in other banks 2,780 2,782
Investment securities held-to-maturity 7,408 7,349
Investment securities available-for-sale 27,033 27,033
Federal funds sold 24,700 24,700
Loans 92,331
Less allowance for loan losses 2,002
Net loans 90,329 90,312
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing $49,505 $49,505
Interest bearing 90,904 90,922
Total deposits 140,409 140,427
Securities sold under agreements
to repurchase 12,934 12,934
Notes payable 7,989 7,989
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Acceptances outstanding and commercial
letters of credit $785
Commitments, guarantees and standby
letters of credit $128
Interest rate contracts $ 27
NOTE 19: MISCELLANEOUS OPERATING INCOME
Miscellaneous operating income consists of the following:
1995 1994 1993
Service charge on deposits $ 583 $ 633 $ 737
Other service charges 162 149 165
OREO income 44 55 93
Other 27 743 22
$ 816 $1,580 $1,017
NOTE 20: OTHER NON-INTEREST EXPENSES
Other non-interest expenses consist of the following:
1995 1994 1993
Data Processing $ 210 $ 223 $ 239
FDIC insurance premiums and
OCC assessments 273 442 487
Professional fees 865 506 758
Provision for litigation settlement 350 250 150
Loan and collection expense 416 330 318
OREO expense 52 59 168
Losses on OREO property 77 403 586
Miscellaneous 1,587 1,234 1,649
$3,830 $3,447 $4,355
NOTE 21: CAPITAL RATIOS
The Comptroller of the Currency ("OCC") has established a framework for
supervisory requirements of national banks based upon capital ratios.
Based upon this framework, a bank's capitalization is defined as well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. As of December 31,
1995, the Bank's capital ratios were 12.73% and 13.98% for tier 1
capital and risk weighted capital, respectively. Under the OCC
framework, a bank is well capitalized if its ratios are greater than or
equal to 6% and 10% for tier 1 capital and risk weighted capital,
respectively.
The Federal Reserve Bank ("FRB"), as the regulatory body of the
Company, has capital ratio requirements. Under the FRB Capital Adequacy
Guidelines, all bank holding companies should meet a minimum ratio of
qualifying total capital to weighted-risk assets of 8 percent, of which
at least 4.0 percentage points should be in the form of tier 1 capital.
At December 31, 1995, the Company's capital ratios were 14.18% and
15.43% for tier 1 capital and risk weighted capital, respectively.
NOTE 22: GAIN ON EARLY PAYMENT OF LOAN
In January 1995, the note payable to the two limited partnerships
managed by WHR Management Corp. was modified to provide for a discount
for early payment. In November 1995, the note was paid in full.
Because the transaction was with a related party, the gain, $1,457, net
of expenses and income taxes, has been credited directly to
shareholders' equity.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of SDNB Financial Corp.
We have audited the accompanying consolidated balance sheets of SDNB
Financial Corp. and the subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SDNB Financial Corp. and subsidiaries at December 31, 1995 and 1994,
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in notes 1 and 8 to the consolidated financial
statements, the Company changed its method of accounting for income
taxes effective January 1, 1993.
/s/Coopers & Lybrand L.L.P.
San Diego, California
February 5, 1996
INVESTOR RELATIONS INFORMATION
Availability Of Form 10-K
The Company will furnish, without charge, upon written request of any
shareholder, a copy of the Company's annual report to the Securities and
Exchange Commission on Form 10-K (including financial statements and
financial statement schedules, but without exhibits) for the fiscal year
ended December 31, 1995. Requests should be addressed to:
Howard W. Brotman, Secretary
SDNB Financial Corp.
Post Office Box 12605
San Diego, CA 92112-3605
Direct Mailing To "Street Name" Holders
Shareholders who have certificates of SDNB Financial Corp. common stock
held in brokerage accounts or otherwise not in their own names should
receive the Company's annual reports from their brokers or other record
holders. If you are such a shareholder and desire to receive those and
other reports directly from SDNB Financial Corp. at the same time as
record holders, please contact in writing:
Howard W. Brotman, Secretary
SDNB Financial Corp.
Post Office Box 12605
San Diego, CA 92112-3605
Independent Accountants
Coopers & Lybrand L.L.P.
402 West Broadway
San Diego, CA 92101
Stock Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Stock Information
Since October 6, 1987 the Company's common stock has been listed on the
NASDAQ National Market System. There is only a limited market for the
Company's common stock.
The Company had approximately 1,000 shareholders as of December 31, 1995.
Price Information By Period
1995 1994
First quarter
Low $3.25 $2.50
High 4.25 3.25
Second quarter
Low 3.625 2.50
High 4.25 3.25
Third quarter
Low 3.50 2.50
High 4.50 4.75
Fourth quarter
Low 4.50 3.00
High 6.25 4.75
Dividend Information
There were no stock or cash dividends declared in 1995 or 1994.
Common Stock Listing
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: SDNB.
<PAGE>
BOARD OF DIRECTORS
SDNB Financial Corp.
(Individual pictures of SDNB Financial Corp. Board of Directors. From left
to right (top row) Charles I. Feurzig, Douglas E. Barnhart, Howard W.
Brotman, Julius H. Zolezzi, Karla Hertzog, (bottom row) Mark P. Mandell,
Margaret "Midge" Costanza, Murray L. Galinson, Patricia L. Roscoe and Robert
B. Horsman.)
(Group picture of SDNB Senior Management Team (from left to right): Robert
B. Horsman, Murray L. Galinson, Ronald P. Bird, Mark P. Mandell, Joyce
Chewning-Johnson, Howard W. Brotman.)
<PAGE>
Board of Directors
Douglas E. Barnhart Howard W. Brotman
Chief Executive Officer, Director,
Douglas E. Barnhart, Inc. SDNB Financial Corp.
Senior Vice President,
San Diego National Bank
Margaret "Midge" Costanza Charles I. Feurzeig
Partner, Chairman of the Board,
Martin & Costanza SDNB Financial Corp;
Communications President,
PVCC, Inc.
Murray L. Galinson Karla J. Hertzog
Chief Executive Officer, President,
San Diego National Bank TOPS Total Personnel Services,
President, Chief Executive Officer, Inc.
SDNB Financial Corp.
Robert B. Horsman Mark P. Mandell
President, Attorney-at-Law
San Diego National Bank
Patricia L. Roscoe Julius H. Zolezzi
Chairman, President,
Patti Roscoe & Associates, Inc. Zolezzi Enterprises
Officers of SDNB Financial Corp.
Murray L. Galinson Robert B. Horsman
President, President,
Chief Executive Officer San Diego National Bank
Howard W. Brotman Joyce Chewning-Johnson
Senior Vice President, Secretary, Executive Vice President
Chief Financial Officer
San Diego National Bank
Business Advisory Council
John L. Baldwin Betty Byrnes
President, Medical Administrator
Baldwin Pacific Corp.
Shlomo Caspi Marvin Cohen
President, Architect
Caspi, Inc. & Caspi Enterprises
Michael H. Dessent Norman Eisenberg, CPA
Dean, Eisenberg & Bonk
California Western School Of Law
James T. Gianulis Wayne L. Hanson
President, President,
Pacific Income Properties, Inc. Cygnus Corp.
Warren O. Kessler, M.D. Ed Mendelsohn
Hillcrest Urological President,
Medical Group ESM & Associates
Rebecca Newman James S. Nierman
Real Estate Broker Real Estate Investor
Gordon W. Parkman Reint Reinders
President, President,
Parkman Realty Corp. San Diego Convention and
Visitors Bureau
Winifred Reno Nancy L. Scott
Owner, President,
The Plantry Capital Equities of La Jolla
C. Randolph Strada William Verbeck
President, President,
First San Diego Co.,Inc. WNV, Inc.
Arnold Winston
President,
BancCorp Companies, Inc.
San Diego National Bank
Senior Management Committee
Murray L. Galinson Robert B. Horsman
Chief Executive Officer President
Joyce Chewning-Johnson Howard W. Brotman
Executive Vice President Senior Vice President,
Chief Financial Officer
Ronald P. Bird Mark P. Mandell
Senior Vice President, Director of Strategic Planning
Director of Business Services and Business Development
San Diego National Bank Officers
Gail Jensen-Bigknife Richard Nance
Senior Vice President, Senior Vice President,
Real Estate Department Credit Administration
Nancy A. Aul Paul A. Fairweather
Vice President, Vice President,
Commercial Banking Group Commercial Banking Group,
Manager
Julius J. Kukta Eric W. Larson
Vice President, Vice President,
Corporate Banking Group Finance
Rafael Martinez Pamela A. McMahon
Vice President, Vice President, Manager,
International Banking Corporate Banking Group
John K. McNulty Debra Perkins
Vice President, Vice President,
Business Development Manager Compliance
Connie M. Reckling Roger Remnant
Vice President, Vice President
Human Resources Real Estate Department
Carlos Rivera Dawn Serafin
Vice President, Vice President,
Lending Manager, Operations
South Bay Office
Margherita Stutz John G. Weaver
Vice President, Vice President,
Corporate Banking Group Commercial Banking Group
Don R. Wolfe Kristy Gregg
Vice President, Assistant Vice President,
Corporate Administration Community Relations Manager
Kaye Hobson JoAnn Piper
Assistant Vice President, Assistant Vice President,
Finance Business Services
Carol A. States Cynthia Velez
Assistant Vice President, Assistant Vice President,
Commercial Banking Group Operations
Willie Armas Barbara J. Bellini
Operations Officer Operations Officer
Daryl Durham Linda Eggen
EDP Manager Real Estate Administration
Officer
Susie Mummery Jacqueline M. Murphy
Administrative Officer Operations Officer
Susan Ohlendorf William D. Scheffel
Operations Officer, Corporate Banking Lending Officer
Bankcard Services
Thomas S. Sperla Mary Beth Wilder
Special Assets Manager Financial Analyst
SDNB Financial Corp., 1420 Kettner Boulevard, San Diego, CA 92101,
(619) 231-4989
SAN DIEGO NATIONAL BANK is a member of FDIC and an Equal Housing Lender
<PAGE>
APPENDIX "E"
QUARTERLY REPORT ON FORM 10-Q OF THE COMPANY FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-11117
SDNB FINANCIAL CORP.
(Exact name of Registrant as Specified in its Charter)
Incorporated in California - IRS Employer I.D. No. 95-3725079
1420 Kettner Boulevard, San Diego, California 92101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number including area code: 619-233-1234
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
The number of shares of Common Stock outstanding as of the close
of business on October 31, 1996: 3,080,609
<PAGE>
SDNB FINANCIAL CORP.
INDEX
PART I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) 1
September 30, 1996 and December 31, 1995
Consolidated Statements of Operations (unaudited) 2
Three and nine months ended September 30, 1996
Three and nine months ended September 30, 1995
Consolidated Statements of Cash Flows (unaudited) 3
Nine months ended September 30, 1996
Nine months ended September 30, 1995
Notes to Consolidated Financial Statements (unaudited) 4
September 30, 1996
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SDNB Financial Corp. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(In thousands)
September 30, December 31,
Assets 1996 1995
Cash and due from banks $ 10,659 $ 13,440
Interest bearing deposits in other banks 2,728 2,780
Investment securities held-to-maturity 14,699 7,408
Investment securities available-for-sale 23,484 27,033
Federal funds sold 26,110 24,700
Loans 103,655 92,331
Less allowance for loan losses 1,621 2,002
Net loans 102,034 90,329
Premises and equipment, net 10,638 10,975
Other real estate owned 232 181
Accrued interest receivable and other assets 1,646 1,726
Total assets $ 192,230 $ 178,572
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 49,506 $ 49,505
Interest bearing 106,900 90,904
Total deposits 156,406 140,409
Securities sold under agreement to
repurchase 10,525 12,934
Accrued interest payable and other
liabilities 539 554
Notes payable 7,892 7,989
Total liabilities 175,362 161,886
Shareholders' equity:
Common stock 20,314 20,314
Accumulated deficit (3,308) (3,587)
Net unrealized holding losses on
available-for-sale securities (138) (41)
Total shareholders' equity 16,868 16,686
Total liabilities and shareholders' equity $ 192,230 $ 178,572
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
SDNB Financial Corp. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(In thousands, except amounts per share)
3 months 3 months 9 months 9 months
ended ended ended ended
9/30/96 9/30/95 9/30/96 9/30/95
Interest income:
Interest and fees on loans $ 2,574 $ 2,609 $ 7,264 $ 7,752
Interest on federal funds sold 361 200 950 573
Interest on investments 545 400 1,524 1,205
Total interest income 3,480 3,209 9,738 9,530
Interest expense:
Interest on deposits 950 756 2,633 2,117
Interest on repurchase agreements 59 52 145 193
Interest on notes payable 0 9 0 33
Total interest expense 1,009 817 2,778 2,343
Net interest income 2,471 2,392 6,960 7,187
Provision for loan losses 100 (200) 0 250
Net interest income after
provision for loan losses 2,371 2,592 6,960 6,937
Other operating income:
Security gains, net 3 0 3 11
Building income 183 245 618 709
Other non-interest income 268 207 764 593
Total other operating income 454 452 1,385 1,313
Other operating expenses:
Salaries and employee benefits 1,209 1,033 3,492 2,978
Occupancy 155 120 450 357
Professional fees 178 232 407 564
Building operating expenses 557 622 1,612 1,841
Other non-interest expenses 655 1,001 2,094 2,344
Total other operating expenses 2,754 3,008 8,055 8,084
Income before income tax 71 36 290 166
Income tax 3 2 11 8
Net income $ 68 $ 34 $ 279 $ 158
Net income per share $ 0.02 $ 0.02 $ 0.09 $ 0.08
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
SDNB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine months ended September 30,
1996 1995
OPERATING ACTIVITIES:
Net income $ 279 $ 158
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 0 250
Provision for depreciation and amortization 685 930
Amortization of investment security discounts (576) (85)
Other expense not utilizing cash 102 76
Unearned loan fees 5 148
Taxes refundable (4) (8)
Interest receivable and other assets (76) (515)
Interest payable and other liabilities (485) 412
Total adjustments (349) 1,208
Net cash provided (used) by operating
activities (70) 1,366
INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity
securties 2,000 6,504
Proceeds from called held-to-maturity securities 2,243 395
Proceeds from maturities of available-for-sale 28,750 5,990
Proceeds from called available-for-sale
securities 1,000 0
Proceeds from sale of available-for-sale
securities 375 3,024
Purchases of held-to-maturity securities (11,353) (2,000)
Purchases of available-for-sale securities (25,803) (11,466)
Net change in gross loans (12,802) 4,503
Proceeds from OREO properties 1,041 556
Proceeds from sale of premises and equipment 35 25
Purchases of premises and equipment (360) (306)
Net cash provided (used) by investing
activities (14,874) 7,225
FINANCING ACTIVITIES:
Net change in deposits 15,997 (3,628)
Net change in short-term borrowings (2,409) (5,630)
Payments of long-term borrowings (97) 0
Proceeds from issuance of common stock 0 5,553
Proceeds from exercise of stock options 25 0
Payments for costs associated with issuance of
common stock (25) (922)
Net cash provided (used) by financing
activities 13,491 (4,627)
Change in cash and cash equivalents (1,453) 3,964
Cash and cash equivalents at beginning of period 40,920 37,317
Cash and cash equivalents at end of period $39,467 $41,281
For the purpose of the statement of cash flows, the Company considers cash
and cash equivalents to be as follows
at September 30, 1996 1995
Cash and due from banks $10,629 $14,305
Interest-bearing deposits in other banks 2,728 2,976
Federal funds sold 26,110 24,000
Totals $39,467 $41,281
Supplemental cash flow information for the period ended September 30,
1996 1995
CASH PAID FOR:
Interest $3,715 $3,050
Income Taxes $16 $0
Non-cash items: transfer of loans to OREO $1,034 $553
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
SDNB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1996
1. In the opinion of Management, the accompanying unaudited
interim consolidated financial statements contain all
adjustments (which are of a normal recurring nature)
necessary to present fairly the financial position as of
September 30, 1996, the results of operations for the three
and nine months ended September 30, 1996 and 1995, and cash
flows for the nine months ended September 30, 1996 and 1995.
Certain prior year amounts have been reclassified to conform
with the current year presentation.
2. Earnings per share for the three and nine months ended
September 30, 1996 and 1995 are based on the following
weighted average shares outstanding:
Three months ended :
September 30, 1996 3,077,528
September 30, 1995 2,092,219
Nine months ended:
September 30, 1996 3,075,092
September 30, 1995 1,902,526
3. At September 30, 1996, approximately $15.3 million in
securities were pledged to secure deposits and other
liabilities.
<PAGE>
SDNB FINANCIAL CORP.
Form 10-Q
PART I - FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
For the past several years, SDNB Financial Corp. (the "Company")
and San Diego National Bank (the "Bank") have been adversely
affected by a number of factors emanating primarily from the
condition of the economy in San Diego. The first nine months of
1996 has seen a cessation of the impact of most of those factors.
Loan loss provisions have been exceptionally high over the last
several years but a substantial reduction in the amount of
classified loans has allowed for a minimal provision in the third
quarter of 1996, which offset the recovery of a portion of the
previously committed loan loss provisions during the quarter
ended March 31, 1996, resulting in no net provision for the nine
months ended September 30, 1996.
The level of OREO property peaked in 1991 and has been generally
declining since that time, therefore reducing losses and expenses
in connection therewith.
Additionally, the Company had incurred substantial expense in
connection with legal fees and the provision for additional costs
from the Pioneer Mortgage litigation which was settled late in
1995.
The Bank had also suffered from a reduction in the level of the
loan portfolio resulting from continuing low loan demand;
however, the level of the loan portfolio has increased
significantly between December 31, 1995 and September 30, 1996.
Discussion of the individual segments of the Company's operations
is contained in subsequent sections of this report.
LIQUIDITY AND ASSETS/LIABILITY MANAGEMENT
By the nature of its commercial/wholesale focus, the Bank has
moderate interest-rate risk exposure in a declining-rate
environment. This phenomenon can be seen in the "Static Gap
Summary" (Table 1). At September 30, 1996, approximately 69% of
the Bank's earning assets adjust immediately to changes in
interest rates. Within three months, this increases to 78% of
earning assets. Consequently, the Bank utilizes deposit
liabilities that also adjust relatively quickly. Within the same
three-month period, approximately 93% of the Bank's interest-
bearing liabilities (mostly deposits) adjust to current rates.
The Bank's cumulative gap position at the three month repricing
interval has decreased approximately $12.6 million, or 35
percent, from $35.8 million at December 31, 1995 to $23.1 million
at September 30, 1996. This change is attributable primarily to
a net increase in liabilities of $12.8 million (increase in
deposits of $15.2 million less a decrease in securities sold
under agreements to repurchase of $2.4 million) offset by a net
increase in assets of $0.1 million (an increase in net loans of
$8.7 million, in certificates of deposit of $1.9 million and in
federal funds purchased of $1.4 million, offset by a decrease in
investment securities of $11.8 million.)
During February 1995, the Bank entered into an interest rate swap
to hedge against the effects on income of falling interest rates.
If the prime interest rate falls below eight percent during the
life of the contract, the Bank will receive payments amounting to
the difference between the then existing prime rate and eight
percent on the contract amount of $20 million. These payments
continue while the prime interest rate stays below eight percent
or until expiration of the contract, February 3, 1998. This
contract helps to stabilize the Bank's net interest spread which,
absent any hedge, decreases during periods of rapidly falling
interest rates. To date, there have been no payments received
under this contract.
The Bank's liquidity needs are projected by comparing anticipated
funding needs against current resources and anticipated deposit
growth. Any current surplus of funds is invested to maximize
income while maintaining safety and providing for future
liquidity.
During the nine months ended September 30, 1996, cash and cash
equivalents decreased $1.5 million. Approximately $14.9 million
cash was used by investing activities. The two major components
were net purchases of $2.8 million of securities ($37.2 million
of purchases offset by maturities of $34.4 million) and increase
in gross loans of $12.8 million. Financing activities provided
$13.5 million, (increase in deposits of $16 million offset by a
decrease in repurchase agreements of $2.4 million).
Liquidity is provided on a daily basis by federal funds sold and
on a longer-term basis by the structuring of the Bank's
investment portfolio to provide a steady stream of maturing
issues. Additionally, the Bank may raise additional funds from
time to time through money desk operations or via the sale of
loans to another institution.
The Bank has never purchased high-yield securities or
participated in highly-leveraged transactions.
CAPITAL RESOURCES
The Comptroller of the Currency ("Comptroller") has established a
framework for supervisory requirements of national banks based
upon capital ratios. Based upon this framework, a bank's
capitalization is defined as well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized or
critically capitalized. Under the Comptroller's framework, a
bank is well capitalized if its ratios are greater than or equal
to 6% and 10% for tier 1 capital and risk weighted capital,
respectively.
The Federal Reserve Board ("Reserve Board"), as the regulatory
body of the Company, has capital ratio requirements. Under the
Reserve Board's Capital Adequacy Guidelines, all bank holding
companies should meet a minimum ratio of qualifying total capital
to weighted-risk assets of 8 percent, of which at least 4.0
percentage points should be in the form of tier 1 capital.
The Reserve Board and the Comptroller have also imposed a
leverage standard to supplement their risk based ratios. This
leverage standard focuses on a banking institution's ratio of
Tier 1 capital to average total assets adjusted for goodwill and
other certain items. Under these guidelines, banking
institutions that meet certain criteria, including excellent
asset quality, high liquidity, low interest rate exposure and
good earnings, and have received the highest regulatory rating
must maintain a ratio of Tier 1 capital to total assets of at
least 3%. Institutions not meeting this criteria, as well as
institutions with supervisory, financial or operational
weaknesses, along with those experiencing or anticipating
significant growth are expected to maintain a Tier 1 capital to
total assets ratio equal to at least 4% to 5%.
As reflected in the following table, the capital and leverage
ratios of the Company as of September 30, 1996 and December 31,
1995 exceeded the fully phased-in regulatory risk-based capital
adequacy guidelines and the leverage standard. As also
reflected, at both dates the Bank exceeded the capital and
leverage ratios for a "well capitalized" institution.
Capital Components and Ratios
(dollars in thousands)
September 30, 1996 December 31,1995
Company Bank Company Bank
Capital Components
Tier 1 Capital $17,005 $14,412 $16,726 $13,656
Total Capital 18,626 15,912 18,218 15,017
Risk-weighted assets
and off-balance sheet
instruments 130,002 119,904 117,967 107,310
Regulatory Capital
Tier 1 risk-based:
Actual 13.08% 12.02% 14.18% 12.73%
Required 4.00 6.00 4.00 6.00
Excess 9.08% 6.02% 10.18% 6.73%
Total risk-based:
Actual 14.33% 13.27% 15.44% 13.99%
Required 8.00 10.00 8.00 10.00
Excess 6.33% 3.27% 7.44% 3.99%
Leverage:
Actual. 9.11% 8.06% 9.37% 8.43%
Required 5.00 5.00 5.00 5.00
Excess 4.11% 3.06% 4.37% 3.43%
Funds available for the payment of dividends by the Company would
be obtained from the Bank. There are legal limitations on the
ability of the Bank to provide funds for the Company. Under
federal banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the Comptroller of
the Currency, exceed its net income, as defined, for that year
combined with its retained net income for the preceding two
years. At September 30, 1996, the Bank had available for
dividends to the Company approximately $2,120,000 without
approval of the Comptroller. Federal banking law also restricts
the Bank from extending credit to the Company in excess of 10% of
capital stock and surplus, as defined, of the Bank. Any such
extensions of credit are subject to strict collateral
requirements.
The Company and the Federal Reserve Bank of San Francisco
("Reserve Bank") entered into an agreement on November 20, 1992,
pursuant to which the Company was required to obtain the approval
of the Reserve Bank prior to the declaration of any cash
dividends. Such agreement and requirement were terminated by the
Reserve Bank in September, 1996. The Agreement and Plan of
Merger between the Company and FBOP Corporation (see Part II Item
5), however, precludes declaration of any dividends prior to the
closing of the transaction.
INVESTMENT SECURITIES
During the first nine months of 1996, the gross unrealized losses
in the available-for-sale category increased from $41,000 to
$138,000 and in the held-to-maturity category from $75,000 to
$117,000. Management continues to believe that there is
sufficient liquidity and available sources of liquidity to allow
all such securities (which are fully guaranteed by United States
Government instrumentalities as to principal) to mature and thus
avoid realization of any material amount of the presently
unrealized losses.
NET INTEREST INCOME/NET INTEREST MARGIN
The following is a comparison of the net interest spread between
the first nine months of 1996 and the same period of 1995.
1996 1995
Yield on average earning assets
(taxable equivalent) 8.24% 9.37%
Cost of funds 2.35% 2.29%
Net interest spread 5.89% 7.08%
In addition to interest rates, changes in the volumes of assets
and liabilities also affect net interest income. The volume/rate
variance analysis (Table 2) shows the change in net interest
income that is attributable to changes in volume versus changes
in rates. As reflected in Table 2, the comparison of net
interest income between the first nine months of 1996 and the
similar period of 1995 was impacted by the significant decrease
in the prime interest rate (8.28% average in 1996 vs. 8.86%
average in 1995) coupled with a shift in an increased proportion
of lower earning investments as opposed to higher earning loans.
LOANS AND ALLOWANCE AND PROVISION FOR LOAN LOSSES
A summary of the activity in the allowance for loan loss is as
follows:
(In thousands)
Nine months ended
September 30,
1996 1995
Balance at beginning of period $2,002 $2,148
Provision charged to operating expenses 0 250
Loans charged off (406) (600)
Recoveries 25 335
Balance at end of period $1,621 $2,133
Management employs a 'migration analysis method' to establish the
required amount of loan loss allowance. This process tracks
realized loan losses back through the prior two years to estimate
loss exposure on the classified and unclassified loan portfolios.
Additionally, loss experience is tracked in pools of loans with
similar characteristics to estimate the loss exposure unique to
various loan types. The measured loss exposure is then applied
to the current loan portfolio and further adjusted for
'qualitative factors'.
This method of establishing loan loss reserves complies with the
policies of the Office of the Comptroller of the Currency as
reflected in Banking Circular 201, revised, dated February 20,
1992, and in Banking Bulletin 93-60, dated December 21, 1993.
The Company began testing this new method during 1992 and
comparing its results to results reached by the previously
existing procedures employed by the Company. The test proved
that the two methods were comparable, and the Company adopted the
new migration analysis method during 1993.
Accordingly, the Company believes its method for establishing the
loan loss allowance is sound. But no method, however valid, can
consistently predict future events with complete accuracy. In
recent years, several factors used by the Bank to establish loan
loss allowances have been subject to considerable volatility, and
this in turn has affected the volatility of nonperforming loans,
charge-offs, and the coverage ratio. In addition, the Bank's
method of reporting, particularly its conservative listing of
loans as nonperforming, is not always an accurate indicator of
actual future losses. These issues are explained in greater
detail below.
The economy in San Diego had suffered a sharp downturn in past
years, particularly in the real estate market. The Bank is a
community bank with a relatively small loan portfolio comprised
of mostly commercial/real estate loans that tend to be
individually larger in amount than loans made by retail banks.
As a result of these and other factors, the Bank can experience
large swings in nonperforming loans, charge-offs, and the
coverage ratio when one or a few loans are transferred from one
category to another. These factors are not reasons for changing
a valid method of determining loan loss allowances and are not
always accurate predictors of losses, but they do have short-term
effect on those allowances and related reported figures.
The volatility of "non-performing" loans is illustrated in
the following chart:
ASSETS REPORTED AS NONPERFORMING
(In thousands)
At At At
September 30, December 31, September 30,
1996 1995 1995
CURRENT AND NONCURRENT
Non-accrual loans $4,367 $6,969 $3,720
Restructured loans
(still accruing) 2,076 1,364 1,370
Loans 90 days past due 1,232 93 981
7,675 8,426 6,071
Other real estate owned 232 181 181
Total $ 7,907 $8,607 $6,252
NONCURRENT
Non-accrual loans $3,848 $3,160 $467
Restructured loans
(still accruing) 0 0 0
Loans 90 days past due 1,232 93 981
5,080 3,253 1,448
Other real estate owned 232 181 181
Total $5,312 $3,434 $1,629
Loans reported as
nonperforming but which
are current, as a
percentage of total
loans reported as
nonperforming 33% 61% 76%
OTHER OPERATING INCOME
Building income declined in 1996 due to renegotiation of some
tenant leases during 1995 and temporary vacancies in 1996.
Virtually all vacant space has been rerented by October, 1996.
Other non-interest income increased in 1996 when bank service
charges increased as a result of lower earnings credit allowed on
customer account balances and by fees generated by the Bank's new
International Department.
OTHER OPERATING EXPENSES
Salaries and employee benefits and occupancy expense increased
between 1995 and 1996 primarily because of the opening of the
Bank's South Bay office and International Department late in
1995.
Professional fees and other non-interest expenses declined in
1996 because both three and nine month periods of 1995 include
attorneys fees and settlement costs in connection with litigation
against the Bank.
Building operating expenses declined in 1996 largely due to
refinancing of the building late in 1995 which reduced interest
paid to non-consolidated creditors.
SUBSIDIARY DATA
San Diego National Bank
The Bank earned $281,000 and $757,000 for the three and nine
months ended September 30, 1996 respectively, compared to
$233,000 and $784,000, respectively, for the same periods of
1995. The return on average assets (ROA) for the nine month
periods was .60% and .70%, respectively. The return on equity
(ROE) for the six month periods was 7.23% and 8.59% respectively.
The reasons for the change in Bank earnings have been enumerated
on the preceding pages.
San Diego National Bank Building Joint Venture
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
Pre-consolidation
gross building
revenues $458,000 $497,000 $1,446,000 $1,447,000
Pre-consolidation,
pre-tax loss 237,000 194,000 573,000 572,000
Depreciation and
amortization
expense 131,000 151,000 407,000 437,000
<PAGE>
<TABLE>
Table 1
San Diego National Bank
Static Gap Summary
September 30, 1996
(In thousands)
Immediately Non-rate
Adjustable 1 Day 3 6 Sensitive
Or 1 Day Through Through Through And Over
Maturity 3 Months 6 Months 12 Months 12 Months Total
<S> <C> <C> <C> <C> <C> <C>
Loans 90,716 2,486 2,662 2,688 5,103 103,655
Investment securities - 10,744 8,389 11,219 7,719 38,071
Certificates of deposit in
other banks - 1,881 399 50 - 2,330
Federal funds sold 26,110 - - - - 26,110
Total interest earning assets 116,826 15,111 11,450 13,957 12,822 170,166
Non-interest earning assets - - - - 11,768 11,768
Total assets 116,826 15,111 11,450 13,957 24,590 181,934
Deposits:
Savings, NOW accounts and
money markets 74,305 - - - - 74,305
Time deposits - 23,972 4,858 3,450 509 32,789
Total deposits 74,305 23,972 4,858 3,450 509 107,094
Securities sold under
agreement to repurchase 10,525 - - - - 10,525
Total interest bearing liabilities 84,830 23,972 4,858 3,450 509 117,619
Non-interest bearing liabilities - - - - 50,040 50,040
Shareholders' equity - - - - 14,275 14,275
Total liabilities and
shareholders' equity 84,830 23,972 4,858 3,450 64,824 181,934
Interest rate sensitivity gap 31,996 (8,861) 6,592 10,507 (40,234)
Cumulative interest rate
sensitivity gap 31,996 23,135 29,727 40,234 -
</TABLE>
<PAGE>
Table 2
SDNB Financial Corp.
Volume/Rate Variance Analysis
Nine months ended September 30, 1996 and 1995
(In thousands)
1996 compared to 1995
Volume Rate Total
Increase(decrease) in interest on earning assets:
Commercial loans $ 75 $ (282) $ (207)
Real estate loans (55) (333) (388)
Installment loans 117 (10) 107
Ready Money 0 0 0
Total loans 137 (625) (488)
U.S. Treasury securities 437 6 443
Securities of government agencies (105) 42 (63)
State and political obligations (66) (51) (117)
Other securities 12 (5) 7
Total investment securities 278 (8) 270
Interest-bearing deposits in other banks 25 (14) 11
Federal funds sold 457 (80) 377
Total interest income change 897 (727) 170
Increase(decrease) in interest paid on liabilities:
Savings accounts (17) 0 (17)
NOW accounts (7) (24) (31)
Super NOW accounts 2 (8) (6)
Money market accounts (71) (76) (147)
Executive money market accounts 224 (6) 218
Total savings deposits 131 (114) 17
Time deposits under $100,000 266 20 286
Time deposits of $100,000 or above 179 34 213
Total time deposits 445 54 499
Federal funds purchased and securities sold
under agreement to repurchase (46) (2) (48)
Short-term debt (84) (84) (168)
Long-term debt (146) 136 (10)
Total interest expense change 300 (10) 290
Net change in net interest income $ 597 $ (717) $ (120)
1) Interest income on state and political obligations has been adjusted for
tax effect at current rates. Interest expense on short- and long-term debt
is included in Building Operating Expenses in the Consolidated Statement of
Earnings.
2) Change in interest income or expense can be attributed to (a) changes in
volume (change in volume times old rate), (b) changes in rates (change in
rate times old volume), and (c) changes in rate/volume (change in rate
times the change in volume). The rate/volume variances are allocated
proportionally between the rate and volume variances based on their
absolute values.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
None
ITEM 2 Changes in Securities
None
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
On July 15, 1996, SDNB Financial Corp. announced
it had entered into an Agreement and Plan of
Merger with FBOP Acquisition Company and FBOP
Corporation. Pursuant to the terms of that
Agreement, which is subject to shareholder and
regulatory approval, shareholders of the Company
will receive cash for their shares and the Company
would cease to exist.
ITEM 6 Exhibits and Reports on Form 8-K
A. Exhibits (listed by number corresponding
to the Exhibit Table of Item 601 of Regulation
S-K)
27 Financial Data Schedule (submitted
only in electronic format and omitted
from paper copies pursuant to Paragraph
(c) (v) of Regulation S-K (17 CFR
220.601(c) (v)) and Note 2 to Paragraph
(c) (1) (vi) of Regulation S-K (17 CFR
229.601(c) (1) (vi)).
B. Reports on Form 8-K
A report on Form 8-K was filed on July
22, 1996 describing the Agreement and Plan of
merger disclosed in Item 5, above.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: November 12, 1996 SDNB FINANCIAL CORP.
By:/s/ HOWARD W. BROTMAN
Howard W. Brotman,
duly authorized officer
and Chief Financial Officer
