<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from____________to____________
Commission File No. 2-78293-LA
SOUTH VALLEY BANCORPORATION
(Exact name of registrant as specified in its charter)
California 94-2818095
- ---------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
500 Tennant Station, Morgan Hill, CA 95037
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(408) 848-2161
----------------------------
(Registrant's telephone
number, including area code)
Indicate by check or check mark whether the registrant (1) has filed all report
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 1,313,986 shares outstanding as of July 15, 1996
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, December 31,
1996 1995*
(unaudited)
-------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 9,215,000 $ 9,436,000
Federal funds sold 12,200,000 27,900,000
------------------------------------
Total cash and equivalents 21,415,000 37,336,000
------------------------------------
Securities available for sale (amortized cost-1996,
$46,549,000; 1995, $34,145,000) 45,841,000 34,247,000
Securities held to maturity (market value-1996,
$5,771,000; 1995, $7,213,000) 5,722,000 7,089,000
Loans:
Commercial 33,046,000 32,721,000
Real estate-construction 13,882,000 15,338,000
Real estate-other 33,199,000 28,524,000
Installment 14,109,000 13,496,000
-------------------------------------
Total loans 94,236,000 90,079,000
Allowance for credit losses (1,452,000) (1,313,000)
Deferred loan fees-net (535,000) (528,000)
--------------------------------------
Net loans 92,249,000 88,238,000
-------------------------------------
Premises and equipment, net 5,935,000 5,984,000
Accrued interest receivable and other assets 5,300,000 4,379,000
-------------------------------------
Total assets $ 176,462,000 $ 177,273,000
=====================================
Liabilities and Shareholders' Equity:
Deposits
Demand, noninterest bearing $ 35,078,000 $ 43,873,000
Demand, interest bearing 43,469,000 37,900,000
Savings 34,508,000 36,593,000
Time 43,623,000 39,323,000
-------------------------------------
Total deposits 156,678,000 157,689,000
Other liabilities 1,899,000 2,027,000
-------------------------------------
Total liabilities 158,577,000 159,716,000
-------------------------------------
Commitments and contingencies (note 5 )
Shareholders' equity:
Preferred stock-no par value; authorized 2,000,000
shares; no shares issued
Common stock-no par value; authorized 4,000,000
shares; issued and outstanding: 1,313,986 shares in 13,123,000 11,331,000
1996 and 1,194,697 shares in 1995
Retained earnings 5,179,000 6,166,000
Unrealized gain (loss) on securities available for sale (417,000) 60,000
-------------------------------------
Shareholders' equity 17,885,000 17,557,000
-------------------------------------
Total liabilities and shareholders' equity $ 176,462,000 $ 177,273,000
=====================================
</TABLE>
*Derived from December 31, 1995 audited balance sheets included in the Company's
1995 Annual Report on Form 10-K.
See Notes to Condensed Consolidated Financial Statements
<PAGE> 3
<TABLE>
<CAPTION>
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Six months ended
JUNE 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 2,634,000 $ 2,535,000 $ 5,102,000 $ 4,957,000
Investment securities 818,000 409,000 1,475,000 832,000
Other 170,000 216,000 473,000 382,000
--------------------------------- ---------------------------------
Total interest income 3,622,000 3,160,000 7,050,000 6,171,000
- -
INTEREST EXPENSE - -
Deposits 973,000 1,002,000 1,982,000 1,894,000
Other 4,000 24,000 17,000 49,000
--------------------------------- ---------------------------------
Total interest expense 977,000 1,026,000 1,999,000 1,943,000
- -
NET INTEREST INCOME 2,645,000 2,134,000 5,051,000 4,228,000
Provision for credit losses 74,000 90,000 179,000 150,000
--------------------------------- ---------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 2,571,000 2,044,000 4,872,000 4,078,000
Other income 285,000 435,000 559,000 628,000
Other expense 1,896,000 1,839,000 3,719,000 3,470,000
--------------------------------- ---------------------------------
INCOME BEFORE
INCOME TAXES 960,000 640,000 1,712,000 1,236,000
Provision for income taxes 382,000 235,000 677,000 453,000
--------------------------------- ---------------------------------
NET INCOME $ 578,000 $ 405,000 $ 1,035,000 $ 783,000
================================= =================================
NET INCOME PER
COMMON AND
EQUIVALENT SHARE $ 0.43 $ 0.31 $ 0.78 $ 0.59
================================= =================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
<TABLE>
<CAPTION>
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
June 30,
1996 1995
---- ----
<S> <C> <C>
Increase in cash and cash equivalents:
Operations:
Net income $ 1,035,000 $ 783,000
Reconciliation to net cash used in operations:
Provision for credit losses 179,000 150,000
Depreciation and amortization 221,000 159,000
Origination of loans held for sale (503,000) (1,205,000)
Proceeds from sale of loans held for sale - 924,000
Increase in other assets (752,000) (152,000)
Decrease in other liabilities (239,000) (389,000)
Increase in deferred loan fees, net 7,000 12,000
----------------------------------
Net cash provided by (used for) operations (52,000) 282,000
Investing Activities:
Proceeds from maturities of securities:
Held to maturity 1,367,000 1,696,000
Available for sale 1,852,000 3,442,000
Purchase of securities:
Held to maturity - (2,360,000)
Available for sale (14,153,000) (4,792,000)
Net increase in loans (3,654,000) (225,000)
Capital expenditures (151,000) (869,000)
----------------------------------
Net cash used for investment activities (14,739,000) (3,108,000)
Financing Activities:
Net (decrease) increase in deposit accounts (1,011,000) 14,292,000
Net increase (decrease) in other borrowings 111,000 (287,000)
Payment of cash dividends (230,000) (191,000)
-----------------------------------
Net cash (used for) provided by financing activities (1,130,000) 13,814,000
----------------------------------
Net (decrease) increase in cash and cash equivalents (15,921,000) 10,988,000
Cash and cash equivalents, beginning of period 37,336,000 19,715,000
----------------------------------
Cash and cash equivalents, end of period $ 21,415,000 $ 30,703,000
==================================
Interest paid $ 1,973,000 $ 1,920,000
Income taxes paid $ 701,000 $ 438,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include
South Valley Bancorporation (the "Company") and its wholly-owned subsidiary,
South Valley National Bank (the "Bank"). All material intercompany accounts and
transactions are eliminated in consolidation.
The accounting and reporting policies of the Company and the
Bank conform to generally accepted accounting principles and prevailing
practices within the banking industry. Certain information and footnote
disclosures normally presented in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These interim
consolidated condensed financial statements contain all adjustments, consisting
solely of normal adjustments necessary for a fair presentation of the financial
information and should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1995 Annual Report to
Shareholders. The results of operations for the three months and six months
ended June 30, 1996 may not necessarily be indicative of the operating results
for the full year.
ESTIMATES. In preparing such financial statements in
conformity with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to significant
changes in the near term relates to the determination of the allowance for
credit losses. Management also uses information provided by an independent loan
review service in connection with its determination of the allowance for loan
losses.
SECURITIES. The Bank classifies debt and equity securities at
time of purchase into one of three categories: held to maturity, trading or
available for sale. Investment securities classified as held to maturity are
measured at amortized cost based on the Bank's positive intent and ability to
hold such securities to maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term and are carried at
market value with a corresponding recognition of unrecognized holding gain or
loss in the results of operations. The remaining investment securities are
classified as available for sale and are measured at market value with a
corresponding recognition of the unrealized holding gain or loss (net of tax
effect) as a separate component of shareholders' equity until realized. Any
gains and losses on sales of investments are computed on a specific
identification basis.
LOANS are stated at the principal amount outstanding, net of
unearned income. Unearned income consists of deferred loan fees net of deferred
direct incremental loan origination costs and is amortized to interest income by
a method approximating the effective interest method generally over the
contractual life of the loan.
The Bank originates small business loans. A portion of certain
loans is guaranteed by the Small Business Administration ("SBA"). In determining
the gain realized on the guaranteed portion of the loans sold, the recorded
investment is allocated between the portion of the loan sold
<PAGE> 6
and the portion retained based on an estimate of the relative fair values of
those portions as of the date the loan is sold. Loans held for sale were
$682,000 at June 30, 1996 and $445,000 at December 31, 1995. No losses on sale
are anticipated.
Interest income is accrued as earned. The accrual of interest
on loans is discontinued and any accrued and unpaid interest is reversed when
principal or interest is ninety days past due, when payment in full of principal
or interest is not expected or when a portion of the principal balance has been
charged off. Income on such loans is then recognized only to the extent that
cash is received and future collection of principal is probable. Generally, a
loan may be returned to accrual status when all delinquent interest and
principal become current in accordance with the original terms of the loan
agreement or when the loan is both well secured and in process of collection.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. A loan is
considered impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreement. Impaired
loans are required to be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The accrual of interest is
discontinued on loans determined to be impaired. Income on such loans is then
recognized only to the extent that cash is received and future collection of
principal is probable.
THE ALLOWANCE FOR CREDIT LOSSES is an amount that management
believes will be adequate to absorb losses inherent in existing loans and
commitments to extend credit, based on evaluations of collectability and prior
loss experience. The allowance is established through a provision charged to
expense. Loans are charged against the allowance when management believes that
the collectability of the principal is unlikely. In evaluating the adequacy of
the reserve, management considers numerous factors such as changes in the
composition of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, and current and anticipated local economic conditions
that may affect the borrowers' ability to pay.
Management believes that the allowance for credit losses at
June 30, 1996 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
OTHER REAL ESTATE OWNED. Real estate and other assets acquired
in satisfaction of indebtedness are recorded at the lower of the recorded loan
amount or the estimated fair market value net of anticipated selling costs, and
any difference between this and the loan amount is treated as a loan loss. Costs
of maintaining other real estate owned, subsequent declines in fair value, if
any, and gains or losses on sale are reflected in current earnings.
PREMISES AND EQUIPMENT are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on a
straight-line basis over the lesser of the lease terms or estimated useful lives
of the assets, which are generally 3 to 30 years.
INCOME TAXES are provided at current rates. Deferred income
taxes are provided for temporary differences between financial statement and
income tax reporting purposes.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE is
calculated using the weighted average shares outstanding plus the dilutive
effect of shares issuable under stock option plans, adjusted retroactively for
subsequent stock dividends and splits. On January 25, 1996
<PAGE> 7
the Company declared a 10% stock dividend for shareholders of record of common
stock as of February 16, 1996 and payable February 23, 1996. The number of
shares used to compute net income per common and equivalent share amounts,
adjusted for the stock dividend, for the six month periods ended June 30, 1996
and 1995 were 1,331,770 and 1,316,406, respectively, and for the three month
periods ended June 30, 1996 and 1995 were 1,331,890 and 1,316,254, respectively.
The difference between primary and fully diluted net income per share is not
significant.
NOTE 2. CASH AND DUE FROM BANKS
The Company, through its bank subsidiary, is required to
maintain reserves with the Federal Reserve Bank. Reserve requirements are based
on a percentage of deposits. At June 30, 1996, the Company maintained reserves
of $1,266,000 in the form of vault cash and balances at the Federal Reserve to
satisfy regulatory requirements.
NOTE 3. SECURITIES
The carrying value and approximate market value of securities
are as follows (in thousands):
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Loss Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
June 30, 1996
U.S. Treasury and agency securities $ 25,992 $ 18 $ 280 $ 25,730
Mortgage backed securities 19,511 - 456 19,055
Other 1,046 10 - 1,056
-------------------------------------------------------------------
Total $ 46,549 $ 28 $ 736 $ 45,841
===================================================================
SECURITIES HELD TO MATURITY:
June 30, 1996
State and Municipal obligations $ 4,302 $ 31 $ 16 $ 4,317
Mortgage backed securities 1,420 47 13 1,454
-------------------------------------------------------------------
Total $ 5,722 $ 78 $ 29 $ 5,771
===================================================================
<CAPTION>
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Loss Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
December 31, 1995
U.S. Treasury and agency securities $ 23,492 $ 163 $ 56 $ 23,599
Mortgage backed securities 10,123 3 8 10,118
Other 530 - - 530
-------------------------------------------------------------------
Total $ 34,145 $ 166 $ 64 $ 34,247
===================================================================
SECURITIES HELD TO MATURITY:
December 31, 1995
State and Municipal obligations $ 5,500 $ 56 $ 7 $ 5,549
Mortgage backed securities 1,589 80 5 1,664
-------------------------------------------------------------------
Total $ 7,089 $ 136 $ 12 $ 7,213
===================================================================
</TABLE>
<PAGE> 8
At June 30, 1996, securities with a book value of
approximately $2,921,000 were pledged to secure certain deposits of public funds
as required by law or contract. There were no sales of securities during 1996 or
1995.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank's loans are virtually all made within its defined
market area of South Santa Clara and San Benito counties. Real
estate-construction loans represented 14.7% of total loans at June 30, 1996,
almost all of which are for the construction of single family residential
properties. In addition, 35.2% of the Bank's loans (excluding construction
loans) were real estate secured term loans. These loans were primarily made to
Bank depositors and are secured by first deeds of trust on commercial and
residential properties with original loan to value ratios not exceeding 75%.
Commercial loans comprise 35.1% of total loans. The Bank's loans are not
concentrated in any particular industry. The Bank's service area is somewhat
dependent on the economy of the greater Santa Clara Valley which has a
concentration of high technology companies and, accordingly, the ability of the
Bank's borrowers to repay loans may be affected by the performance of this
sector of the economy. Virtually all loans are collateralized, and the majority
have adjustable rates. Generally, real estate loans are secured by real
property, and commercial and other loans are secured by bank deposits and
business or personal assets.
For commercial and other loans, repayment is generally
expected to come from the cash flow of the borrower. In the case of construction
loans, repayment is generally expected from the sale of the related property or
refinance upon completion of construction.
The activity in the allowance for credit losses is summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED Six months ended
JUNE 30, June 30,
In thousands 1996 1995 1996 1995
- ------------ ------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Beginning balance $ 1,484 $ 1,347 $ 1,313 $ 1,331
Provision charged to expense 74 90 179 150
Loans charged-off (145) (273) (147) (395)
Recoveries 39 1 107 79
------------------------------- -----------------------------
Ending balance $ 1,452 $ 1,165 $ 1,452 $ 1,165
=============================== =============================
</TABLE>
Management believes that the allowance for credit losses at
June 30, 1996 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
<PAGE> 9
Past due, nonaccrual and restructured loans at June 30, 1996
and December 31, 1995, are summarized below:
<TABLE>
<CAPTION>
JUNE 30, December 31,
In thousands 1996 1995
- ------------
------------------------
<S> <C> <C>
Past due 90 days or more
and still accruing:
Real estate $ - $ 37
Commercial 16 83
Installment and other 2 -
------------------------
Subtotal 18 120
------------------------
Nonaccrual:
Real estate 148 363
Commercial 426 1,116
Installment and other 8 9
------------------------
Subtotal 582 1,488
------------------------
Restructured:
Real estate 147 255
Commercial 107 249
Installment and other - 9
------------------------
Subtotal 254 513
------------------------
Total $ 854 $ 2,121
========================
Other real estate owned $ 2,352 $ 1,953
========================
</TABLE>
The recorded investment in impaired loans was $582,000 and the
portion of the allowance for credit losses related to loan impairment was
$282,000 at June 30, 1996. Average impaired loans for the quarter ended June 30,
1996 were $1,195,000. The Bank recognized $27,000 in interest income from
impaired loans for the six months and three months ended June 30, 1996.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the financial
statements, including unused loan commitments of approximately $45,635,000 and
standby letters of credit of $1,140,000 at June 30, 1996. However, all such
commitments will not necessarily culminate in actual extensions of credit by the
Bank in the future. The Bank does not anticipate any losses as a result of these
transactions.
Approximately $13,941,000 of loan commitments outstanding at
June 30, 1996 relate to construction loans and are expected to fund within the
next twelve months. The remainder relate primarily to revolving lines of credit
or other commercial loans and many of these commitments are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements.
Standby letters of credit are commitments written by the Bank
to guarantee the performance of a customer to a third party. These guarantees
are issued primarily relating to purchases of inventory by the Bank's commercial
customers and are typically short term in nature. Credit risk is similar to that
involved in extending loan commitments to customers and the Bank accordingly
uses evaluation and collateral requirements similar to those for loan
commitments. Virtually all such commitments are collateralized.
<PAGE> 10
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and short term investments
For cash and short term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment securities
For investment securities, fair value equals quoted market
prices. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
The fair value of loans with fixed rates is estimated
discounting the future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings. For loans with variable
rates which adjust with changes in market rates of interest, the carrying amount
is a reasonable estimate of fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts and
certain money market deposits, is the amount payable on demand at the reporting
date and is equal to the carrying value. The fair value of fixed maturity
certificates of deposit is estimated using rates currently offered for deposits
of similar remaining maturities.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit are
issued in the normal course of business by the Bank. Commitments to extend
credit are issued with variable interest rates tied to market interest rates at
the time the commitment is funded . Standby letters of credit are supported by
commitments to extend credit with variable interest rates tied to market
interest rates at the time the commitment is funded. The fair values of
commitments to extend credit and standby letters of credit were not
significantly different from the carrying amounts.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 Carrying amount Fair value
- -----------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 21,415 $ 21,415
Investment securities 51,563 51,612
Loans 94,236 94,172
Allowance for credit losses (1,452) (1,452)
- -----------------------------------------------------------------------------
$ 165,762 $ 165,747
=============================================================================
FINANCIAL LIABILITIES:
Deposits $ 156,678 $ 156,548
=============================================================================
</TABLE>
<PAGE> 11
NOTE 7. PROPOSED MERGER
On July 18, 1996, the Company announced the signing of a
definitive agreement whereby it would be acquired by Pacific Capital Bancorp in
a tax free exchange to be accounted for as a pooling of interests. The agreement
provides for shareholders of the Company to receive 0.92 shares, subject to
adjustment, of Pacific Capital Bancorp common stock for each outstanding share
of Company stock. The transaction is valued at approximately $34.7 million, or
$24.84 per Common share, based on the $27.00 per share market value of Pacific
Capital Bancorp on July 17, 1996. South Valley National Bank will become a
separate subsidiary of Pacific Capital Bancorp upon completion of the
transaction.
Pacific Capital Bancorp, which is headquartered in Salinas,
California, is the holding company for First National Bank of Central California
which has branches in Salinas, Monterey, Carmel and Watsonville. For the six
months ended June 30, 1996, Pacific Capital Bancorp reported earnings of
$2,759,000, or $1.01 per share.
<PAGE> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
EARNINGS
THREE MONTHS ENDED JUNE 30, 1996
The table below presents a comparison of results for the
quarters ended June 30, 1996 and 1995:
TABLE I. EARNINGS COMPARISON
<TABLE>
<CAPTION>
Three months ended
June 30, Change
1996 1995 $ %
---- ---- - -
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 2,634,000 $ 2,535,000 $ 99,000 3.91%
Investment securities 818,000 409,000 409,000 100.00%
Other 170,000 216,000 (46,000) -21.30%
------------------------------------------------------------------
Total interest income 3,622,000 3,160,000 462,000 14.62%
INTEREST EXPENSE
Deposits 973,000 1,002,000 (29,000) -2.89%
Other 4,000 24,000 (20,000) -83.33%
------------------------------------------------------------------
Total interest expense 977,000 1,026,000 (49,000) -4.78%
NET INTEREST INCOME 2,645,000 2,134,000 511,000 23.95%
Provision for credit losses 74,000 90,000 (16,000) -17.78%
------------------------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 2,571,000 2,044,000 527,000 25.78%
Other income 285,000 435,000 (150,000) -34.48%
Other expense 1,896,000 1,839,000 57,000 3.10%
------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 960,000 640,000 320,000 50.00%
Provision for income taxes 382,000 235,000 147,000 62.55%
------------------------------------------------------------------
NET INCOME $ 578,000 $ 405,000 $ 173,000 42.72%
==================================================================
NET INCOME PER
COMMON AND
EQUIVALENT SHARE $ 0.43 $ 0.31
===============================
</TABLE>
Earnings for the quarter ended June 30, 1996 increased from $405,0
$578,000, primarily as the result of higher net interest income, partially
offset by a decrease in other income and an increase in other expense and tax
expense.
<PAGE> 13
NET INTEREST INCOME
Net interest income refers to the difference between interest paid on
deposits and borrowings, and the interest earned on loans and investments. It is
the primary component of the net earnings of a financial institution. Factors to
consider in analyzing net interest income are the composition and volume of
earning assets and interest bearing liabilities including deposits, levels of
noninterest bearing liabilities and loans on nonaccrual, and changes in market
interest rates.
Table II presents an analysis of the Company's net interest income for
the quarters ended June 30, 1996 and 1995, respectively:
TABLE II. COMPOSITION OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Three months ended June 30,
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
In thousands Average Average Average Average
(except percentages) Balance Interest Rate(1) Balance Interest Rate(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans(2) $ 91,202 $ 2,634 11.6% $ 87,400 $ 2,535 11.6%
Investment securities
Taxable 47,462 755 6.4% 21,465 324 6.0%
Nontaxable(3) 4,962 95 8.3% 6,907 129 7.5%
Federal funds sold
and other 13,201 170 5.2% 14,546 216 5.9%
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 156,827 3,654 9.4% 130,318 3,204 9.8%
- ----------------------------------------------------------------------------------------------------------------------
Cash and due from banks 8,907 8,050
Other assets 8,322 11,775
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 174,056 $ 150,143
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities
Demand deposits $ 41,723 201 1.9% $ 35,496 256 2.9%
Savings deposits 37,322 233 2.5% 35,470 258 2.9%
Time deposits 40,474 539 5.4% 33,491 488 5.8%
Borrowed funds 485 4 3.3% 1,391 24 6.9%
- ----------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 120,004 977 3.3% 105,848 1,026 3.9%
- ----------------------------------------------------------------------------------------------------------------------
Demand deposits 35,140 26,588
Other liabilities 1,153 967
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 156,297 133,403
Shareholders' equity 17,759 16,740
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 174,056 $ 150,143
========== =========
Net interest income and
margin (net yield)(3)(4) $ 2,677 6.9% $ 2,178 6.7%
======================================================================================================================
</TABLE>
1. Annualized.
2. Loan interest includes loan fees of $330,000 and $224,000 for the quarters
ended June 30, 1996 and 1995, respectively.
3. Tax exempt income includes $32,000 and $44,000 for the quarters ended June
30, 1996 and 1995, respectively, to adjust to a fully tax equivalent basis
using the Federal statutory rate of 34%.
4. Net interest margin is computed by dividing net interest income by total
average earning assets.
The Company experienced an increase in net interest income in the
quarter ended June 30, 1996 as compared to the same quarter in 1995. This
increase was primarily attributable to a higher volume of earning assets,
partially offset by higher volumes of interest bearing deposits and a change in
the composition of earning assets to a higher percentage of investment
securities
<PAGE> 14
compared to higher yielding loans. During this same period, the net
interest margin increased from 6.7% to 6.9%, as the result of higher volumes of
earning assets, primarily loans and investment securities partially offset by
increases in interest bearing liabilities, primarily deposits. The interest
expense associated with increased volumes of interest bearing liabilities was
partially offset by reductions in market rates of interest.
OTHER INCOME
Other income consists primarily of service charges related to deposit
accounts. The decrease in other income for the quarter ended June 30, 1996 as
compared to June 30, 1995 is primarily attributable to lower gains on the sale
of the portion of loans guaranteed by the Small Business Administration which
occurred in 1995 but did not occur in 1996. The absence of these items in 1996
was partially offset by higher volumes of consumer checking and money market
accounts which resulted in higher fee income. The Company had no gains or losses
from the sale of investment securities in either the second quarter of 1996 or
1995.
OTHER EXPENSES
Other expenses consist of the Company's operating expenses. The
increase in other expense for the quarter ended June 30, 1996 as compared to the
same quarter in 1995 is primarily attributable to higher salary and benefit
expenses, offset by a decrease in deposit premiums. The higher payroll expenses
are directly related to higher levels of full time equivalent staff associated
with the Bank's growth in assets.
PROVISION FOR INCOME TAXES
The provision for income taxes was 39.8% of income before income taxes
for the quarter ended June 30, 1996, compared to 36.7% for the comparable prior
year quarter and 39.3% for all of 1995. The increased rate in 1996 is due to a
decrease in interest income from tax exempt securities and differences in timing
of the recognition of income for financial statement and income tax purposes.
<PAGE> 15
SIX MONTHS ENDED JUNE 30, 1996
The table below presents a comparison of results for the six months ended
June 30, 1996 and 1995:
TABLE III. EARNINGS COMPARISON
<TABLE>
<CAPTION>
Six months ended
June 30, Change
1996 1995 $ %
---- ---- -- -
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 5,102,000 $ 4,957,000 $ 145,000 2.93%
Investment securities 1,475,000 832,000 643,000 77.28%
Other 473,000 382,000 91,000 23.82%
---------------------------------------------------------------
Total interest income 7,050,000 6,171,000 879,000 14.24%
INTEREST EXPENSE
Deposits 1,982,000 1,894,000 88,000 4.65%
Other 17,000 49,000 (32,000) -65.31%
---------------------------------------------------------------
Total interest expense 1,999,000 1,943,000 56,000 2.88%
NET INTEREST INCOME 5,051,000 4,228,000 823,000 19.47%
Provision for credit losses 179,000 150,000 29,000 19.33%
---------------------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 4,872,000 4,078,000 794,000 19.47%
Other income 559,000 628,000 (69,000) -10.99%
Other expense 3,719,000 3,470,000 249,000 7.18%
---------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 1,712,000 1,236,000 476,000 38.51%
Provision for income taxes 677,000 453,000 224,000 49.45%
---------------------------------------------------------------
NET INCOME $ 1,035,000 $ 783,000 $ 252,000 32.18%
===============================================================
NET INCOME PER
COMMON AND
EQUIVALENT SHARE $ 0.78 $ 0.59
================================
</TABLE>
Earnings for the six months ended June 30, 1996 increased from
$783,0000 to $1,035,000, primarily as the result of higher net interest income,
partially offset by a decrease in other income and an increase in other expense
and tax expense.
<PAGE> 16
Table IV presents an analysis of the Company's net interest income for
the six months ended June 30, 1996 and 1995, respectively:
TABLE IV. COMPOSITION OF NET INTEREST INCOME
<TABLE>
<CAPTION>
(Unaudited)
Six months ended June 30,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
In thousands Average Average Average Average
(except percentages) Balance Interest Rate(1) Balance Interest Rate(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans(2) $ 89,618 $ 5,102 11.4% $ 86,480 $ 4,957 11.5%
Investment securities
Taxable 42,671 1,345 6.3% 21,000 664 6.3%
Nontaxable(3) 5,114 197 7.7% 6,821 255 7.5%
Federal funds sold
and other 17,808 473 5.3% 13,011 382 5.9%
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 155,211 7,117 9.2% 127,312 6,258 9.8%
- --------------------------------------------------------------------------------------------------------------------------------
Cash and due from 9,334 8,670
banks
Other assets 7,969 10,029
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 172,514 $ 146,011
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities
Demand deposits $ 40,690 410 2.0% $ 34,140 479 2.8%
Savings deposits 37,626 491 2.6% 36,242 614 3.4%
Time deposits 39,981 1,081 5.4% 30,341 801 5.3%
Borrowed funds 625 17 5.4% 1,520 49 6.4%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 118,922 1,999 3.4% 102,243 1,943 4.5%
- --------------------------------------------------------------------------------------------------------------------------------
Demand deposits 34,508 26,312
Other liabilities 1,363 879
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 154,793 129,434
Shareholders' equity 17,721 16,577
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 172,514 $ 146,011
========= =========
Net interest income and
margin (net yield) (3,4) $ 5,118 6.6% $ 4,315 6.8%
================================================================================================================================
</TABLE>
1. Annualized.
2. Loan interest includes loan fees of $588,000 and $466,000 for the six months
ended June 30, 1996 and 1995, respectively.
3. Tax exempt income includes $67,000 and $87,000 for the quarters ended June
30, 1996 and 1995, respectively, to adjust to a fully tax equivalent basis
using the Federal statutory rate of 34%.
4. Net interest margin is computed by dividing net interest income by total
average earning assets.
The Company experienced an increase in net interest income in the six
months ended June 30, 1996 as compared to the same period in 1995. This increase
was primarily attributable to a higher volume of earning assets and lower rates
on interest bearing liabilities, partially offset by higher volumes of interest
bearing liabilities, primarily deposits and a change in the composition of
earning assets to a higher percentage of investment securities compared to
higher yielding loans. During this same period, the net interest margin declined
from 6.8% to 6.6%, primarily as the result of lower market interest rates for
investment securities and federal funds sold.
<PAGE> 17
OTHER INCOME
Other income consists primarily of service charges related to deposit
accounts. The decrease in other income for the six months ended June 30, 1996 as
compared to June 30, 1995 is primarily attributable to lower gains on the sale
of the portion of loans guaranteed by the SBA which occurred in 1995 but did not
occur in 1996. The absence of these items in 1996 was partially offset by higher
volumes of consumer checking and money market accounts which resulted in higher
fee income. The Company had no gains or losses from the sale of investment
securities in either the first six months of 1996 or 1995.
OTHER EXPENSES
Other expenses consist of the Company's noninterest expenses. The
increase in other expense for the six months ended June 30, 1996 as compared to
the same six months in 1995 is primarily attributable to higher salary and
benefit expenses, offset by a decrease in deposit premiums. The higher payroll
expenses are directly related to higher levels of full time equivalent staff
associated with the Bank's growth in assets.
PROVISION FOR INCOME TAXES
The provision for income taxes was 39.8% of income before income taxes
for the quarter ended June 30, 1996, compared to 36.7% for the comparable prior
year quarter and 39.3% for all of 1995. The increased rate in 1996 is due to a
decrease in interest income from tax exempt securities and differences in timing
of the recognition of income for financial statement and income tax purposes.
BALANCE SHEET
Total assets of the Company declined from $177,273,000 to $176,462,000
from December 31, 1995 to June 30, 1996. This decrease is attributable to a
seasonal decline in deposits with one of the Bank's major depositors, who
typically reduces deposit balances and borrowing under a commercial line of
credit immediately after the calendar year end. For the quarter ended June 30,
1996, average assets were $174,056,000 as compared to $150,143,000 for the
quarter ended June 30, 1995.
Tables V presents the composition of the Company's loan portfolio at
June 30, 1996 and December 31, 1995:
TABLE V. LOANS BY TYPE
<TABLE>
<CAPTION>
Loans: June 30, 1996 December 31, 1995 $ Change % Change
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 33,046,000 $ 32,721,000 $ 325,000 0.99%
Real estate-construction 13,882,000 15,338,000 (1,456,000) -9.49%
Real estate-other 33,199,000 28,524,000 4,675,000 16.39%
Installment 14,109,000 13,496,000 613,000 4.54%
------------------------------------------------------------------------
Total loans 94,236,000 90,079,000 4,157,000 4.61%
Allowance for credit losses (1,452,000) (1,313,000) (139,000) 10.59%
Deferred loan fees-net (535,000) (528,000) (7,000) 1.33%
------------------------------------------------------------------------
Net loans $ 92,249,000 $ 88,238,000 $ 4,011,000 4.55%
========================================================================
</TABLE>
<PAGE> 18
RISK ELEMENTS - The Company assesses and manages credit risk
on an ongoing basis through stringent credit review and approval policies,
extensive internal monitoring and established formal lending policies.
Additionally, the Bank contracts with an outside loan review consultant to
periodically grade new loans and to review the existing loan portfolio.
Management believes its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for profitability
and growth. Management strives to continue the historically low level of credit
losses by continuing its emphasis on credit quality in the loan approval
process, active credit administration and regular monitoring. With this in mind,
management has designed and implemented a comprehensive loan review and grading
system that functions to continually assess the credit risk inherent in the loan
portfolio. Additionally, management believes its ability to manage portfolio
credit risk is enhanced by the employment of lending personnel with knowledge of
the Bank's service area. Each Bank office is staffed with lending personnel who
live in the communities served by the office and virtually all of the directors
of the Company and the Bank are active members of the communities served by the
Bank. Further, the senior management and the Board of Directors of the Company
and the Bank have experienced minimal turnover since inception of the Company in
1982 and the Bank in 1983.
At June 30, 1996, construction loans and other real estate
secured loans comprised 14.7% and 35.2% respectively, of total loans
outstanding. Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn; however, there
is no assurance that losses will be limited to the extent provided for under
such circumstances. The Bank's loan policies and underwriting standards include,
but are not limited to, the following: 1) maintaining a thorough understanding
of the Bank's service area and limiting investments outside of this area, 2)
maintaining a thorough understanding of the borrowers' knowledge and capacity in
their field of expertise, 3) basing real estate construction loan approval not
only on marketability of the project, but also on the borrowers' capacity to
support the project financially in the event it does not sell within the
original projected time period, and 4) maintaining conforming and prudent loan
to value and loan to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by Bank construction lending officers. In
addition, the Bank strives to diversify the risk inherent in the construction
portfolio by avoiding concentrations to individual borrowers and on any one
project.
POTENTIAL PROBLEM LOANS - At June 30, 1996, the Company did
not have any loans other than those disclosed as nonaccrual loans, loans past
due 90 days or more and still accruing and troubled debt restructurings, where
known information about possible credit problems of the borrowers cause
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms.
CONCENTRATIONS - At June 30, 1996, the Company does not have
any concentration of loans to multiple borrowers engaged in similar activities
which would cause them to be similarly impacted by economic or other conditions,
other than real estate-construction loans.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES - The
provision for credit losses is based upon management's evaluation of the
adequacy of the existing allowance for loans outstanding. This allowance is
increased by provisions charged to expense and reduced by loan charge-offs net
of recoveries. Management determines an appropriate provision based upon the
interaction of three primary factors: (1) the loan portfolio growth in the
period, (2) a comprehensive grading and review formula for total loans
outstanding, and (3) actual previous charge-offs. At June 30, 1996, the
allowance for credit losses was $1,452,000, or 1.54% of total
<PAGE> 19
loans, as compared to $1,313,000, or 1.46% of total loans, at December 31, 1995.
fsSee Note 4 of Notes to Condensed Consolidated Financial Statements.
In evaluating the adequacy of the allowance for loan losses,
the Company does not attempt to allocate the allowance for loan losses to
specific categories of loans. Management believes that any breakdown or
allocation of the allowance for possible loan losses into loan categories lends
an appearance of exactness which does not exist in that the allowance is
utilized as a single unallocated allowance available for all loans.
FUNDING SOURCES
The Company's principal funding source is core deposits, primarily
obtained from local individuals and businesses. At June 30, 1996, core deposits
represented 89.3% of total deposits, as compared to 90.9% at December 31, 1995.
Table VI presents the deposit portfolio by type of deposits at June 30, 1996 and
December 31, 1995:
TABLE VI. DEPOSITS BY TYPE
<TABLE>
<CAPTION>
Deposits June 30, 1996 December 31, 1995 $ Change % Change
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand, noninterest bearing $ 35,078,000 $ 43,873,000 $(8,795,000) -20.05%
Demand, interest bearing 43,469,000 37,900,000 5,569,000 14.69%
Savings 34,508,000 36,593,000 (2,085,000) -5.70%
Time 43,623,000 39,323,000 4,300,000 10.94%
----------------------------------------------------------------
Total deposits $156,678,000 $157,689,000 $(1,011,000 -0.64%
================================================================
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY - Liquidity management refers to the Bank's ability
to provide funds on an ongoing basis to meet fluctuations in deposit levels as
well as the credit needs and requirements of its clients. The liquidity position
of the Bank involves both assets and liabilities. In addition, off balance sheet
items such as loan commitments and available borrowing lines play an important
role in liquidity management. Cash and Federal funds lines, investment
securities, loan repayments and the acquisition of new deposits represent
sources of immediate, or short term, liquidity. This liquidity is available to
fund new loans and deposit withdrawals. The Bank assesses projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains a
line of credit with one of its correspondent banks for up to $10,000,000 which
is available on a short term basis. Formal and informal agreements are also in
place with various other banks to purchase participations in the Bank's loan
portfolio, if necessary.
The Bank manages its liquidity by maintaining a majority of
its investment portfolio in Federal funds sold and other liquid investments.
Liquidity is measured by various ratios, the most common being the liquidity
ratio of cash, Federal funds sold and unpledged investment securities, compared
to total deposits. At June 30, 1996, this ratio was 44.7% compared to 48.0% at
December 31, 1995. Another key liquidity ratio is the ratio of loans to
deposits, which was 60.1% at June 30, 1996 and 57.1% at December 31, 1995.
During 1995 and 1996, the Bank has experienced higher levels of liquidity than
normal and compared to recent prior periods. The high levels of liquidity are
attributable, in part, to large increases in deposits which were deployed in
investment securities and Federal funds sold. Management of the Bank expects
that a portion of its liquid assets at June 30, 1996 will ultimately be used to
fund growth in the loan portfolio.
<PAGE> 20
INTEREST RATE SENSITIVITY - Interest rate sensitivity is a
measure of the exposure of the Bank's future earnings to fluctuations in
interest rates. Generally, if assets and liabilities do not reprice
simultaneously and in equal volumes, the Bank's net interest margin and net
interest income will change. It is management's objective to maintain stability
in the net interest margin in times of fluctuating interest rates by maintaining
an appropriate mix of interest sensitive assets and liabilities. To achieve this
goal, the Bank prices the majority of its interest bearing liabilities at
variable rates that adjust with the prime rate. At the same time, the majority
of its interest earning assets are also priced at variable rates that float with
the prime rate. This pricing structure tends to stabilize the net interest
margin.
Table VII sets forth the distribution of repricing for
interest sensitive earning assets and interest bearing liabilities included in
the Company's condensed consolidated balance sheet at June 30, 1996, and the
related interest rate sensitivity gap, both for each individual repricing period
and on a cumulative basis.
TABLE VII. INTEREST RATE SENSITIVITY (IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Assets and liabilities which Immediately Over thirty Over three Over one year Over five years Total
mature or reprice: and within 30 days and within months and and within five
days three months within one year years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 12,200 $ - $ - $ - $ - $ 12,200
Investment securities 115 2,225 5,876 28,703 15,244 52,163
Loans excluding nonaccrual
loans and overdrafts 57,697 1,511 15,792 11,884 6,641 93,525
- -------------------------------------------------------------------------------------------------------------------------------
Period total $ 70,012 $ 3,736 $ 21,668 $ 40,587 $ 21,885 $157,888
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative total $ 70,012 $ 73,748 $ 95,416 $136,003 $157,888
- -------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Interest bearing demand $ 43,469 $ - $ - $ - $ - $ 43,469
Savings 36,582 - - - - 36,582
Time certificates 7,653 5,936 22,313 5,646 - 41,548
Other borrowings - 527 - - - 527
- -------------------------------------------------------------------------------------------------------------------------------
Period total $ 87,704 $ 6,463 $ 22,313 $ 5,646 $ - $122,126
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative total $ 87,704 $ 94,167 $116,480 $122,126 $122,126
- -------------------------------------------------------------------------------------------------------------------------------
Amounts:
Interest rate sensitivity gap $(17,692) $ (2,727) $ (645) $ 34,941 $ 21,885 $ -
Cumulative interest rate
sensitivity gap $(17,692) $(20,419) $(21,064) $ 13,877 $ 35,762 $ -
Ratios:
Interest rate sensitivity gap 0.80 0.58 0.97 7.19 N/A -
Cumulative interest rate
sensitivity gap 0.80 0.78 0.82 1.11 1.29 -
</TABLE>
The table indicates the time periods in which interest earning
assets and interest bearing liabilities will mature or reprice in accordance
with their contractual terms. The table does not necessarily indicate the impact
of general interest rate movements on the net interest margin since the
repricing of various categories of assets and liabilities is subject to
competitive pressures. The Company and the Bank have historically maintained a
cumulative interest rate sensitivity gap ratio approximating 1:1 for assets and
liabilities repricing within one month, that is, approximately an
<PAGE> 21
equal amount of interest earning assets and interest bearing liabilities will
reprice or mature within 30 days. At June 30, 1996, the cumulative interest rate
sensitivity gap for assets and liabilities that reprice within 30 days was
0.80:1, which is lower than historical levels. The change is the result of a
shift from investments in Federal funds, which reprice daily, to longer term
investment securities. Similarly, the cumulative interest rate gap ratio at one
year is 0.82:1. The Bank attempts to maximize its net interest income while
maintaining a stable net interest margin through management of its interest
bearing assets and liabilities.
CAPITAL RESOURCES
The Company has been able to sustain its growth in capital
through profit retention and the exercise of stock options by directors and
officers of the Company. Prior to 1994, all earnings were retained to maintain
the Company's capital position and support additional growth in the future. In
the third quarter of 1994, the Company declared and paid an initial cash
dividend of $.08 per common share. An additional cash dividend of $.08 per
common share was declared and paid in the fourth quarter of 1994. The Company
declared and paid four quarterly dividends of $.08 per common share during 1995.
In the first quarter of 1996, the Company declared and paid a cash dividend of
$.08 per common share and a 10% stock dividend. In the second quarter of 1996,
the Company declared and paid a cash dividend of $.10 per common share. In
addition, the Company declared a cash dividend of $.10 per share for
shareholders of record on August 6, 1996, to be paid on August 16, 1996.
The Company and Bank are subject to capital adequacy
guidelines issued by the Board of Governors of the Federal Reserve System (the
"FRB") and the Office of the Comptroller of the Currency (the "OCC"). The FRB
and the OCC have adopted risk based capital guidelines for bank holding
companies and national banks. The Company and the Bank are required to maintain
capital equal to at least 8.0% of assets and commitments to extend credit,
weighted by risk. At least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock or a limited amount of loan loss reserves.
Certain assets and commitments to extend credit present less risk than others
and will be assigned to lower risk weighted categories requiring less capital
allocation than the 8.0% total ratio. For example, cash and government
securities are assigned to a 0% risk weighted category; most home mortgage loans
are assigned to a 50% risk weighted category requiring a 4.0% capital
allocation; and commercial loans are assigned to a 100% risk weighted category
requiring an 8.0% capital allocation.
In addition, the FRB and the OCC have adopted a 3.0% minimum
leverage ratio for banking organizations as a supplement to the risk weighted
capital guidelines. The minimum leverage ratio is intended to limit the ability
of banking organizations to leverage their equity capital base by increasing
assets and liabilities without increasing capital proportionately. The 3.0%
ratio constitutes a minimum ratio for well-run banking organizations under the
FRB standards and organizations experiencing or anticipating significant growth
or failing to meet such standards will be required to maintain a minimum
leverage ratio ranging from 100 to 200 basis points in excess of the 3.0% ratio.
<PAGE> 22
Table VIII presents the capital and leverage ratios of the
Company as of June 30, 1996 and December 31, 1995:
TABLE VIII. RISK BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
Risk Based Capital Ratios June 30, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $ 17,940 15.1% $ 17,141 14.8%
Total capital $ 19,392 16.3% $ 18,448 16.0%
Total risk adjusted assets $119,013 $115,452
LEVERAGE RATIOS
- ----------------------------------------------------------------------------------------------
Tier 1 capital $ 17,940 10.3% $ 17,141 10.1%
Quarterly average total assets $174,056 $170,132
- ----------------------------------------------------------------------------------------------
</TABLE>
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"). The FDICIA, among
other matters, substantially revises banking regulations and establishes a
framework for determination of capital adequacy of financial institutions. Under
the FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "well capitalized" consisting of institutions with a
total risk based capital ratio of 10% or greater, a Tier 1 risk based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "adequately capitalized" consisting of
institutions with a total risk based capital ratio of 8% or greater, a Tier 1
risk based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "undercapitalized" consisting of institutions with a total risk
based capital ratio less than 8%, a Tier 1 risk based capital ratio of less than
4%, or a leverage ratio of less than 4%; (4) "significantly undercapitalized"
consisting of institutions with a total risk based capital ratio of less than
6%, a Tier 1 risk based capital ratio of less than 3%, or a leverage ratio of
less than 3%; and, (5) "critically undercapitalized" consisting of an
institution with a ratio of tangible equity to total assets that is equal to or
less than 2%.
Financial institutions classified as undercapitalized or below
are subject to various limitations including, among other matters, certain
supervisory actions by bank regulatory authorities and restrictions related to
(i) growth of assets, (ii) payment of interest on subordinated indebtedness,
(iii) payment of dividends or other capital distributions, and (iv) payment of
management fees to a parent holding company. The FDICIA requires the bank
regulatory authorities to initiate corrective action regarding financial
institutions which fail to meet minimum capital requirements. Such action may,
among other matters, require a financial institution to augment capital and
reduce total assets. Critically undercapitalized financial institutions may also
be subject to appointment of a receiver or conservator unless the financial
institution submits an adequate capitalization plan.
<PAGE> 23
RETURN ON EQUITY AND ASSETS
Table IX presents return on average assets, return on
beginning equity, dividend payout ratio and the average equity to average assets
ratio.
TABLE IX. RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
THREE MONTHS ENDED Six months ended
JUNE 30, June 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.33% 1.08% 1.20% 1.07%
Return on beginning equity 13.12% 9.78% 11.79% 9.64%
Dividend payout ratio 16.95% 23.46% 22.22% 24.27%
Average equity to average assets ratio 10.20% 11.14% 10.27% 11.35%
</TABLE>
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company indirectly through its effect on market
rates of interest, and thus the ability of the Bank to attract loan customers.
Inflation affects the growth of total assets by increasing the level of loan
demand, and potentially adversely affects the Company's capital adequacy because
loan growth in inflationary periods can increase at rates higher than the rate
that capital grows through retention of earnings which the Company may generate
in the future. In addition to its effects on interest rates, inflation directly
affects the Company by increasing the Company's operating expenses.
<PAGE> 24
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 VOTE OF SECURITY HOLDERS.
The shareholders of South Valley Bancorporation took the
following actions at the Annual Meeting of Shareholders held on May 16, 1996 at
the Golden Oak Restaurant located at 16695 Condit Road, Morgan Hill, California.
(a) Approved the election of management's slate of nominees for
director, each of whom was an incumbent director, as follows:
<TABLE>
<CAPTION>
Votes: For Withheld
----- --- --------
<S> <C> <C>
Laurence M. Connell 700,139 226
Joseph A. Filice 698,575 1,790
Eugene R. Guglielmo 700,139 226
Roger C. Knopf 681,436 18,929
Edward J. Lazzarini 686,850 13,515
Donald G. Mountz 673,864 26,501
James R. Price 700,139 226
Mary Lou Rawitser 692,567 7,798
Brad L. Smith 700,139 226
</TABLE>
b) Approved the 1995 Stock Option Plan.
Votes:
For Against Abstain
--- ------- -------
402,150 41,759 -0-
c) Approved the selection of Deloitte & Touche, LLP as independent
auditors for the Company.
Votes:
For Against Abstain
--- ------- -------
700,365 -0- -0-
ITEM 5. OTHER INFORMATION.
None
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
(2.1) Agreement and Plan of Reorganization dated July 18, 1996.
(3.1) Articles of Incorporation of South Valley Bancorporation,
as amended, incorporated by reference to Exhibit 2.1 of
Registrant's Exhibits to Form S-18 Registration
Statement, as filed with the Securities and Exchange
Commission on July 2, 1982, and Exhibit 3.3 of
Registrant's Exhibits to Form 10-K for the fiscal year
ended December 31, 1988.
(3.2) Bylaws of South Valley Bancorporation, as amended,
incorporated by reference to Exhibit 2.2 of Registrant's
Exhibits to Form S-18 Registration Statement, as filed
with the Securities and Exchange Commission on July 2,
1982.
(4.1) Specimen Stock Certificate incorporated by reference to
Exhibit 3.1 of Registrant's Exhibits to Amendment No. 2
to Form S-18 Registration Statement, filed with the
Securities and Exchange Commission on September 2, 1982.
(10.1) Certificate of South Valley Directors dated July 18, 1996
and attached as Exhibit C to the Agreement and Plan of
Reorganiza- tion dated July 18, 1996 and referenced as
Exhibit 2.1 herein.
(10.2) Certificate of Affiliate dated July 18, 1996 and attached
as Exhibit D to the Agreement and Plan of Reorganization
dated July 18, 1996 and referenced as Exhibit 2.1 herein.
(10.3) Nonsolicitation Agreement dated July 18, 1996 and
attached as Exhibit E to the Agreement and Plan of
Reorganization dated July 18, 1996 and referenced as
Exhibit 2.1 herein.
(27.1) Financial Data Schedule
(99.1) Press Release dated July 19, 1996.
(b) Reports on Form 8-K -
- Form 8-K dated May 16, 1996 reporting on actions at the Annual
Meeting of Shareholders held May 16, 1996 filed with the
Commission on May 23, 1996.
- Form 8-K dated July 22, 1996 reporting on declaration of cash
dividend filed with the Commission on July 25, 1996.
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 30, 1996 SOUTH VALLEY BANCORPORATION
By: /s/ RICHARD L. CONNIFF
-----------------------------------------------
Richard L. Conniff, Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ BRAD L. SMITH
-----------------------------------------------
Brad L. Smith, Chief Executive Officer
(Principal Executive Officer & Director)
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27.1 Financial Data Schedule
2.1 Agreement and Plan of Reorganization dated July 18, 1996
10.1 Certificate of South Valley Directors dated July 18, 1996
(included in Exhibit 2.1)
10.2 Certificate of Affiliate dated July 18, 1996
(included in Exhibit 2.1)
10.3 Nonsolicitation Agreement dated July 18, 1996
(included in Exhibit 2.1)
99.1 Press Release dated July 19, 1996
</TABLE>
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
between
PACIFIC CAPITAL BANCORP
and
SOUTH VALLEY BANCORPORATION
DATED AS OF JULY 18, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. THE MERGER.................................................................................... 1
1.1 Effective Time....................................................................... 1
1.2 Effect of the Merger................................................................. 1
2. CONVERSION AND CANCELLATION OF SHARES......................................................... 2
2.1 Conversion of Common Stock of South Valley........................................... 2
2.2 Fractional Shares.................................................................... 3
2.3 Surrender of South Valley Shares..................................................... 3
2.4 No Further Transfers of South Valley Shares.......................................... 3
2.5 Adjustments.......................................................................... 3
2.6 Treatment of Stock Options........................................................... 3
3. COVENANTS OF THE PARTIES...................................................................... 4
3.1 Covenants of Pacific Capital......................................................... 4
(a) Reservation, Issuance and Registration of Pacific Capital Common Stock...... 4
(b) Government Approvals........................................................ 4
(c) Notification of Breach of Representations, Warranties and Covenants......... 4
(d) Financial Statements........................................................ 4
(e) Press Releases.............................................................. 5
(f) Business Combinations....................................................... 5
(g) Director and Officer Liability Insurance.................................... 5
(h) Approval by Pacific Capital Shareholders.................................... 5
(i) Access to Properties, Books and Records; Confidentiality.................... 6
(j) Dividends................................................................... 6
(k) Executive Employees......................................................... 6
(l) Conduct of Business in the Ordinary Course.................................. 6
(m) Additions to Pacific Capital Board of Directors............................. 6
(n) Nasdaq National Market Listing.............................................. 6
(o) Changes in Capital Stock.................................................... 6
3.2 Covenants of South Valley............................................................ 6
(a) Approval by South Valley Shareholders....................................... 6
(b) Shareholder Lists and Other Information..................................... 7
(c) Government Approvals........................................................ 7
(d) Capital Commitments and Expenditures........................................ 7
(e) Notification of Breach of Representations, Warranties and Covenants......... 7
(f) Financial Statements........................................................ 7
(g) Compensation................................................................ 8
(h) Conduct of Business in the Ordinary Course.................................. 8
(i) Press Releases.............................................................. 9
(j) No Merger or Solicitation................................................... 10
(k) South Valley Cash or Deferred 401(k) Plan................................... 10
(l) Changes in Capital Stock.................................................... 10
(m) Dividends................................................................... 10
(n) Accounting Methods.......................................................... 10
(o) Affiliates.................................................................. 11
(p) Additional Agreements....................................................... 11
(q) Access to Properties, Books and Records; Confidentiality.................... 11
(r) Employee Welfare Benefit Plans.............................................. 11
(s) Nonsolicitation Agreements.................................................. 11
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
(t) Additions to SVNB Board of Directors........................................ 11
3.3 Covenants of the Parties............................................................. 11
4. REPRESENTATIONS AND WARRANTIES OF SOUTH VALLEY................................................ 11
(a) Corporate Status and Power to Enter Into Agreements......................... 11
(b) Articles, Bylaws, Books and Records......................................... 12
(c) Compliance With Laws, Regulations and Decrees............................... 12
(d) Capitalization.............................................................. 12
(e) Equity Interests............................................................ 12
(f) Financial Statements, Regulatory Reports.................................... 13
(g) Tax Returns................................................................. 13
(h) Material Adverse Change..................................................... 13
(i) No Undisclosed Liabilities.................................................. 14
(j) Properties and Leases....................................................... 14
(k) Material Contracts.......................................................... 15
(l) Employment Contracts and Benefits........................................... 15
(m) Compliance With ERISA....................................................... 16
(n) Collective Bargaining and Employment Agreements............................. 16
(o) Compensation of Officers and Employees...................................... 16
(p) Legal Actions and Proceedings............................................... 16
(q) Execution and Delivery of the Agreement..................................... 17
(r) Insurance................................................................... 17
(s) Transactions With Affiliates................................................ 17
(t) Information in Registration Statement....................................... 17
(u) Accuracy of Representations and Warranties.................................. 18
(v) Loans....................................................................... 18
(w) Restrictions on Investments................................................. 18
5. REPRESENTATIONS AND WARRANTIES OF PACIFIC CAPITAL............................................. 18
(a) Corporate Status and Power to Enter Into Agreements......................... 18
(b) Articles, Bylaws, Books and Records......................................... 18
(c) Compliance With Laws, Regulations and Decrees............................... 19
(d) Capitalization.............................................................. 19
(e) Equity Interests............................................................ 19
(f) Financial Statements, Regulatory Reports.................................... 19
(g) Tax Returns................................................................. 20
(h) Material Adverse Change..................................................... 20
(i) No Undisclosed Liabilities.................................................. 20
(j) Properties and Leases....................................................... 21
(k) Material Contracts.......................................................... 21
(l) Employment Contracts and Benefits........................................... 22
(m) Compliance With ERISA....................................................... 22
(n) Collective Bargaining and Employment Agreements............................. 23
(o) Compensation of Officers and Employees...................................... 23
(p) Legal Actions and Proceedings............................................... 23
(q) Execution and Delivery of the Agreement..................................... 23
(r) Insurance................................................................... 24
(s) Transactions With Affiliates................................................ 24
(t) Information in Registration Statement....................................... 24
(u) Accuracy of Representations and Warranties.................................. 24
(v) Loans....................................................................... 24
(w) Restrictions on Investments................................................. 25
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
6. SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934....................................... 25
(a) Preparation and Filing of Registration Statement............................ 25
(b) Effectiveness of Registration Statement..................................... 25
(c) Sales and Resales of Common Stock........................................... 25
(d) Rule 145.................................................................... 25
7. CONDITIONS TO THE OBLIGATIONS OF PACIFIC CAPITAL.............................................. 26
(a) Representations and Warranties.............................................. 26
(b) Compliance and Performance Under Agreement.................................. 26
(c) Material Adverse Change..................................................... 26
(d) Approval of Agreement....................................................... 26
(e) Officer's Certificate....................................................... 26
(f) Opinion of Counsel.......................................................... 26
(g) Absence of Legal Impediment................................................. 26
(h) Effectiveness of Registration Statement..................................... 26
(i) Government Approvals........................................................ 26
(j) Tax Opinion................................................................. 27
(k) Dissenting Shares........................................................... 27
(l) Unaudited Financials........................................................ 27
(m) Closing Documents........................................................... 27
(n) Consents.................................................................... 27
(o) Additions to SVNB Board of Directors........................................ 27
(p) Pooling-of-Interests Accounting............................................. 28
(r) Regulatory Examination...................................................... 28
(s) Accountant's Letter......................................................... 28
8. CONDITIONS TO THE OBLIGATIONS OF SOUTH VALLEY................................................. 28
(a) Representations and Warranties.............................................. 28
(b) Compliance and Performance Under Agreement.................................. 28
(c) Material Adverse Change..................................................... 28
(d) Approval of Agreement....................................................... 28
(e) Officer's Certificate....................................................... 28
(f) Opinion of Counsel.......................................................... 29
(g) Effectiveness of Registration Statement..................................... 29
(h) Government Approvals........................................................ 29
(i) Tax Opinion................................................................. 29
(j) Closing Documents........................................................... 29
(k) Absence of Legal Impediment................................................. 29
(l) Fairness Opinion............................................................ 29
(m) Pooling-of-Interests Accounting Treatment................................... 29
(n) Additions to Pacific Capital Board of Directors............................. 29
(o) Dissenting Shares........................................................... 29
(p) Nasdaq National Market Listing.............................................. 29
(q) Accountant's Letter......................................................... 29
9. CLOSING....................................................................................... 29
(a) Closing Date................................................................ 29
(b) Delivery of Documents....................................................... 30
(c) Filings..................................................................... 30
10. EXPENSES...................................................................................... 30
11. AMENDMENT; TERMINATION........................................................................ 30
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
(a) Amendment..................................................... 30
(b) Termination................................................... 30
(c) Notice........................................................ 31
(d) Breach of Obligations......................................... 31
(e) Termination and Expenses...................................... 31
12. MISCELLANEOUS....................................................... 32
(a) Notices....................................................... 32
(b) Binding Agreement............................................. 32
(c) Governing Law................................................. 33
(d) Attorneys' Fees............................................... 33
(e) Entire Agreement; Severability................................ 33
(f) Counterparts.................................................. 33
(g) Waivers....................................................... 33
(h) No Survival of Representations and Warranties................. 33
(i) Knowledge..................................................... 33
</TABLE>
SCHEDULE OF EXHIBITS
Exhibit A - Merger Agreement
Exhibit B - Certificate of Pacific Capital Directors
Exhibit C - Certificate of South Valley Directors
Exhibit D - Certificate of Affiliates
Exhibit E - Nonsolicitation Agreement
Exhibit F - Opinion of South Valley Counsel
Exhibit G - Opinion of Pacific Capital Counsel
-iv-
<PAGE> 6
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of July 18, 1996
("Agreement"), is between PACIFIC CAPITAL BANCORP, a California corporation
("Pacific Capital"), and SOUTH VALLEY BANCORPORATION, a California corporation
("South Valley").
A. South Valley is the sole shareholder of South Valley National Bank,
a national association ("SVNB"), and Pacific Capital is the sole shareholder of
First National Bank of Central California, a national association ("FNB").
B. The Boards of Directors of Pacific Capital and South Valley deem it
advisable and in the best interests of Pacific Capital, South Valley and their
respective shareholders to consummate the business combination provided for
herein whereby Pacific Capital would acquire South Valley and the goodwill
associated therewith through the merger of South Valley with and into Pacific
Capital with Pacific Capital as the survivor (the "Merger") such that on the
effective date of the Merger, Pacific Capital will be the surviving corporation.
C. This Agreement and the Merger Agreement, as defined herein, have
been approved by the Boards of Directors of Pacific Capital and South Valley and
will be submitted for approval of the respective shareholders of South Valley
and Pacific Capital at special meetings of their respective shareholders.
D. The Merger is intended to qualify as a tax-free reorganization
within the meaning of the provisions of Section 368 of the Internal Revenue Code
of 1986, as amended (the "IRC").
E. Pursuant to the Merger and subject to the terms and conditions
herein, each holder of common stock of South Valley will receive, in exchange
for common stock of South Valley, Pacific Capital common stock in the ratio of
.92 of a share of Pacific Capital common stock for each share of South Valley
common stock, subject to adjustment as more fully set forth in this Agreement.
In consideration of the foregoing and the respective representations,
warranties, covenants and agreements provided for or contained herein, the
parties hereto agree as follows:
1. THE MERGER.
1.1 Effective Time. Subject to the terms and conditions of this
Agreement, upon the filing with the California Secretary of State of a duly
executed Merger Agreement substantially in the form attached hereto as Exhibit A
for the merger of South Valley into Pacific Capital (the "Merger Agreement") and
officers' certificates prescribed by Section 1103 of the California General
Corporation Law ("GCL") the Merger shall become effective (the "Effective
Time"). The date on which the Merger is effective as specified in the Merger
Agreements shall be referred to herein as the "Effective Date."
1.2 Effect of the Merger. Subject to the terms and conditions of this
Agreement and the Merger Agreement, at the Effective Time on the Effective Date,
South Valley shall be merged with and into Pacific Capital and Pacific Capital
shall be the surviving corporation (the "Surviving Corporation") in the Merger.
All assets, rights, goodwill, privileges, immunities, powers, franchises and
interests of South Valley in and to every type of property (real, personal and
mixed) and choses in action, as they exist as of the Effective Date, including
appointments, designations and nominations and all other rights and interests as
trustee, executor, administrator, registrar of stocks and bonds, guardian of
estate, assignee, receiver and in every other fiduciary capacity, shall pass and
be transferred to and vest in the Surviving Corporation by virtue of the Merger
at the Effective Time without any deed, conveyance or other transfer; the
separate existence of South Valley shall cease and the corporate existence of
Pacific Capital as the Surviving Corporation shall continue unaffected and
unimpaired by the Merger; and the Surviving Corporation shall be deemed to be
the same entity as South Valley and shall be subject to all of its duties and
liabilities of every kind and description. The Surviving Corporation shall be
responsible and liable for all the liabilities and obligations of South Valley
and any claim existing or action or proceeding pending by or against South
Valley may be prosecuted as if the Merger had not taken place, or the Surviving
Corporation may be substituted in its place. Neither the rights of creditors nor
any liens upon the property of South Valley shall be impaired by reason of the
Merger.
-1-
<PAGE> 7
2. CONVERSION AND CANCELLATION OF SHARES.
2.1 Conversion of Common Stock of South Valley. At the Effective Time,
by virtue of the Merger and without any action on the part of the holder of any
common stock of South Valley (a "South Valley Share" or "South Valley Shares"):
(a) Each issued and outstanding South Valley Share (other than
fractional shares or any shares as to which dissenters' rights have been
perfected) shall be converted into .92 of a fully paid and nonassessable share
of the registered common stock, without par value, of Pacific Capital (the
"Pacific Capital Common Stock" or "Pacific Capital Shares"), subject to
adjustment as specified in subsections (b) and (c) herein (the "Exchange
Ratio"). All such South Valley Shares shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
the Pacific Capital Shares into which such South Valley Shares have been
converted. Certificates previously representing South Valley Shares shall be
exchanged for certificates representing whole shares of Pacific Capital Common
Stock issued in consideration therefor upon the surrender of such certificates
in accordance with Section 2.3.
(b) The Exchange Ratio shall be adjusted downward for any Significant
Liabilities (as defined below) to the extent that such Significant Liabilities
total more than $500,000. "Significant Liabilities", as used in this Agreement,
shall mean those liabilities or expenses described below which have not been
reflected as reductions to South Valley's consolidated book value pursuant to
generally accepted accounting principles as of June 30, 1996 adjusted for any
applicable taxes (whether actual or estimated). Significant Liabilities shall
consist of (i) new or expanded contingent liabilities based upon threatened or
pending litigation or other proceedings or hazardous or toxic substances and
legal fees and costs (whether actual or estimated) related thereto; and (ii) any
expenses, fines, fees, penalties or similar obligations, except those which
arose in the Ordinary Course of Business as defined in Section 3.2(h)(i) and
except severance payments or other existing payment obligations. Significant
Liabilities shall not include fees of South Valley's financial advisors or South
Valley's legal fees directly attributable to this Merger, provided such
financial advisory and legal fees do not exceed $800,000 in the aggregate. As a
result of any Significant Liabilities in excess of $500,000 in the aggregate
through the close of business on the day preceding the Effective Date, the
Exchange Ratio shall be adjusted according to the following formula:
(Significant Liabilities - $500,000)
.92 - -------------------------------------
$39 Million
(c) If, as of two days preceding the Effective Date, the average of the
closing price of Pacific Capital Common Stock quoted on the OTC Bulletin Board
(calculated by taking an average of the closing prices quoted on the OTC
Bulletin Board on each of the thirty (30) consecutive trading days prior to two
business days prior to the Effective Date, rounded to 4 decimal places, whether
or not trades occurred on those days (the "Average Price")) is more than $31.50
or if the Average Price is more than 12.5% below the closing price on the last
business day prior to the date of this Agreement, then the Exchange Ratio will
be adjusted as follows, rounded to 4 decimal places:
(1) If the Average Price is more than 12.5% below the
closing price on the last business day prior to the date of this Agreement,
South Valley may accept the Exchange Ratio calculated solely in accordance with
Sections 2.1(a) and (b) hereof or Pacific Capital and South Valley shall have
the right, but not the obligation, to renegotiate the Exchange Ratio. Should
South Valley fail to accept the Exchange Ratio as described in the preceding
sentence or should the parties fail to renegotiate the Exchange Ratio, South
Valley may terminate this Agreement pursuant to the provisions of Section 11(b).
(2) If the Average Price is more than $31.50, the Exchange
Ratio as adjusted pursuant to Section 2.1(b), will be adjusted according to the
following formula:
(Average Price + $31.50)/2
.92 x ----------------------------
Average Price
(d) From and after the Effective Time, the holders of certificates
formerly representing South Valley Shares shall cease to have any rights with
respect thereto other than any dissenters' rights they have perfected pursuant
to Chapter 13 of the GCL.
2.2 Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional shares of Pacific
-2-
<PAGE> 8
Capital Common Stock shall be issued to holders of South Valley Shares. In lieu
thereof, each such holder entitled to a fraction of a share of Pacific Capital
Common Stock shall receive, at the time of surrender of the certificate or
certificates representing such holder's South Valley Shares, an amount in cash
equal to the Average Price (defined in Section 2.1(c)) multiplied by the
fraction of a share of Pacific Capital Common Stock to which such holder
otherwise would be entitled. No such holder shall be entitled to dividends,
voting rights, interest on the value of, or any other rights in respect of a
fractional share.
2.3 Surrender of South Valley Shares.
(a) Prior to the Effective Date, Pacific Capital shall appoint First
Interstate Bank or its successor, or any other bank or trust company mutually
acceptable to South Valley and Pacific Capital, as exchange agent (the "Exchange
Agent") for the purpose of exchanging certificates representing the Pacific
Capital Shares. At and after the Effective Date, Pacific Capital shall issue and
deliver to the Exchange Agent certificates representing the Pacific Capital
Shares, as shall be required to be delivered to holders of South Valley Shares
pursuant to Section 2.1 of this Agreement. As soon as practicable after the
Effective Date, each holder of South Valley Shares converted pursuant to Section
2.1, upon surrender to the Exchange Agent of one or more certificates for such
South Valley Shares for cancellation, will be entitled to receive a certificate
representing the number of Pacific Capital Shares determined in accordance with
Section 2.1 and a payment in cash with respect to fractional shares, if any,
determined in accordance with Section 2.2.
(b) No dividends or other distributions of any kind which are
declared payable to shareholders of record of the Pacific Capital Shares after
the Effective Date will be paid to persons entitled to receive such certificates
for Pacific Capital Shares until such persons surrender their certificates
representing South Valley Shares. Upon surrender of such certificate
representing South Valley Shares, the holder thereof shall be paid, without
interest, any dividends or other distributions with respect to the Pacific
Capital Shares as to which the record date and payment date occurred on or after
the Effective Date and on or before the date of surrender.
(c) If any certificate for Pacific Capital Shares is to be issued in
a name other than that in which the certificate for South Valley Shares
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the person requesting such exchange shall pay to the Exchange
Agent any transfer costs, taxes or other expenses required by reason of the
issuance of certificates for such Pacific Capital Shares in a name other than
the registered holder of the certificate surrendered, or such persons shall
establish to the satisfaction of Pacific Capital and the Exchange Agent that
such costs, taxes or other expenses have been paid or are not applicable.
(d) All dividends or distributions, and any cash to be paid pursuant
to Section 2.2 in lieu of fractional shares, if held by the Exchange Agent for
payment or delivery to the holders of unsurrendered certificates representing
South Valley Shares and unclaimed at the end of one year from the Effective
Date, shall (together with any interest earned thereon) at such time be paid or
redelivered by the Exchange Agent to Pacific Capital, and after such time any
holder of a certificate representing South Valley Shares who has not surrendered
such certificate to the Exchange Agent shall, subject to applicable law, look as
a general creditor only to Pacific Capital for payment or delivery of such
dividends or distributions or cash, as the case may be.
2.4 No Further Transfers of South Valley Shares. On the Effective
Date, the stock transfer books of South Valley shall be closed and no transfer
of South Valley Shares theretofore outstanding shall thereafter be made.
2.5 Adjustments. If, between the date of this Agreement and the
Effective Date, the outstanding shares of Pacific Capital Common Stock shall
have been changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, reorganization, merger,
consolidation, split-up, combination, exchange of shares or readjustment, or a
stock or other dividend thereon shall be declared (except pursuant to Section
3.1(j) below) with a record date within such period, the number of Pacific
Capital Shares to be issued and delivered in the Merger in exchange for each
outstanding South Valley Share shall be correspondingly adjusted with the result
that the holders of South Valley Shares shall receive the same economic benefit
set forth in Section 2.1 above.
2.6 Treatment of Stock Options. Each person holding one or more
options to purchase South Valley Shares pursuant to the 1991 Directors' Stock
Option Plan and the 1995 Stock Option Plan (the "Option Plans"), shall have the
right to:
(a) exercise any vested options granted under the Option Plans to
acquire South Valley Shares prior to the Effective Date and South Valley will
facilitate the exercise of those options by allowing the options to be exercised
and taxes paid by South Valley withholding the appropriate number of shares from
the shares subject to the options or by any other method permitted by applicable
law; and/or
-3-
<PAGE> 9
(b) receive the fair value, as of the Effective Date, of any
unexercised vested and/or unvested options granted under the Option Plans which
fair value shall be determined by an independent financial advisor to Pacific
Capital and shall be paid on the Effective Date by Pacific Capital in the form
of Pacific Capital Common Stock rounded down to the nearest whole share.
3. COVENANTS OF THE PARTIES.
3.1 Covenants of Pacific Capital.
(a) Reservation, Issuance and Registration of Pacific Capital Common Stock.
Pacific Capital shall reserve and make available for issuance in connection with
the Merger and in accordance with the terms of this Agreement (i) the Pacific
Capital Shares; and (ii) the maximum number of shares of common stock of Pacific
Capital to which the option holders of South Valley may be entitled pursuant to
Section 2.6 above at or after the Effective Date. Pacific Capital shall file and
cause to be declared effective at or before the Effective Time pursuant to the
Securities Act of 1933, as amended (the "1933 Act") one or more registration
statements covering all such shares and shall cause all such shares to be issued
in compliance with the 1933 Act and in compliance with all applicable state
securities laws and regulations. It is anticipated that a registration statement
(the "Registration Statement") will be filed on Form S-4 and will include the
Proxy Statement referred to in Section 3.2(a) below.
(b) Government Approvals. Prior to the Effective Date, Pacific Capital, with
the cooperation of South Valley, shall use its best efforts in good faith to
take or cause to be taken as promptly as practicable all such steps as shall be
necessary to obtain (i) the prior approval of the Merger by the Board of
Governors of the Federal Reserve System (the "FRB") under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), and (ii) all other consents and
approvals of government agencies as are required by law or otherwise, and shall
do any and all acts deemed by Pacific Capital to be necessary or appropriate in
order to cause the Merger to be consummated on the terms provided in this
Agreement as promptly as practicable. All approvals referred to in clauses (i)
and (ii) of this Section 3.1(b) are hereinafter referred to as the "Government
Approvals."
(c) Notification of Breach of Representations, Warranties and Covenants.
Pacific Capital shall promptly give written notice to South Valley upon becoming
aware of the occurrence or impending or threatened occurrence of any event which
would cause or constitute a breach of any of the representations, warranties or
covenants of Pacific Capital contained or referred to in the Merger Agreement or
this Agreement and shall use its best efforts to prevent the same or remedy the
same promptly.
(d) Financial Statements.
(i) Pacific Capital has delivered or shall deliver to South
Valley prior to the Effective Date true and correct copies of consolidated
statements of income, changes in shareholders' equity and statements of cash
flows for the six (6) months ended June 30, 1996, any subsequent quarter ends,
and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, and
consolidated balance sheets at June 30, 1996, any subsequent quarter ends, and
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. Such
consolidated financial statements at and for the years ended December 31,
1995, 1994, 1993, 1992 and 1991 have been audited by KPMG Peat Marwick LLP
("KPMG") and include an opinion of such accounting firm to the effect that
such financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and present fairly, in all material
respects, the consolidated financial position, results of operations and cash
flow of Pacific Capital at the dates indicated and for the periods then
ending. The opinions of such accounting firm do not and shall not contain any
qualifications.
(ii) Pacific Capital has provided or shall provide to South
Valley at or prior to the Effective Date copies of all financial statements
and proxy statements, issued or to be issued to Pacific Capital's shareholders
and/or directors after December 31, 1995 and at or prior to the Effective
Date.
(iii) Pacific Capital has provided or shall provide to
South Valley prior to the Effective Date copies of (a) its Annual Report on
Form 10-K for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 as
filed with the Securities and Exchange Commission (the "Commission"); (b) all
periodic reports required to be filed by it pursuant to Sections 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
since December 31, 1993; and (c) all proxy statements, annual reports and
other written materials furnished to Pacific Capital shareholders since
December 31, 1993, and all other material reports relating to Pacific Capital
filed by Pacific Capital or any of its subsidiaries with the Office of the
Comptroller of the Currency (the
-4-
<PAGE> 10
"OCC"), the FRB or the Commission during 1993, 1994, 1995 and in 1996 prior to
the Effective Date. As of their respective dates, each of the documents
provided hereunder complied or shall comply in all material respects with all
legal and regulatory requirements applicable thereto.
(iv) Pacific Capital shall cause to be delivered to South
Valley letters of KPMG, Pacific Capital's independent auditors, dated a date
no more than two business days prior to the date on which the Registration
Statement (as defined herein) shall become effective and two business days
before the Closing, and addressed to South Valley, in form and substance
reasonably satisfactory to South Valley, and in scope and substance consistent
with applicable professional standards for letters delivered by independent
public accountants in connection with registration statements similar to the
Registration Statement.
(e) Press Releases. Pacific Capital shall not issue any press release or
written statement for general circulation to the public relating to the Merger,
this Agreement or the Merger Agreement unless previously provided to South
Valley for review and approval (which approval will not be unreasonably withheld
or delayed) and shall cooperate with South Valley in the development and
distribution of all news releases and other public information disclosures with
respect to this Agreement or the Merger; provided that Pacific Capital may,
without the consent of South Valley, make any disclosure with regard to this
Agreement or the Merger that it determines is required under any applicable law
or regulation and shall provide a copy thereof to South Valley.
(f) Business Combinations. Pacific Capital shall not solicit nor make any
offer to any third party or accept any offer from any third party regarding a
Business Combination of Pacific Capital with any other entity or person unless
such offer is expressly conditioned upon the performance by Pacific Capital or
its successor in interest of all Pacific Capital's obligations under this
Agreement. In the event Pacific Capital fails to comply with the provisions of
this Section 3.1(f), South Valley shall be entitled to terminate this Agreement
without any liability to Pacific Capital or any agent thereof pursuant to
Section 11(b), provided, however, that the obligations and liabilities of
Pacific Capital set forth in Section 11(e) hereof shall continue in full force
and effect. As used in this Agreement, "Business Combination" shall mean any
tender or exchange offer, proposal for a merger, consolidation, or other
takeover proposal involving any party hereto (except as explicitly contemplated
in this Agreement) or any offer or proposal to acquire in any manner a 10% or
greater equity interest in, or a substantial portion of any party hereto other
than transactions contemplated hereunder.
(g) Director and Officer Liability Insurance. Upon the Effective Date, any
South Valley executive officer or director who becomes an officer or director of
Pacific Capital (including any subsidiaries thereof) shall be included in
Pacific Capital's director and officer insurance policy. Pacific Capital shall
cooperate with South Valley to obtain extended coverage under South Valley's
director and officer insurance policy to cover claims made for a period of two
years after the Effective Time regarding acts or omissions of South Valley's
directors or officers prior to the Effective Time.
(h) Approval by Pacific Capital Shareholders. Pacific Capital shall cause the
Merger, this Agreement and the Merger Agreement to be submitted promptly for the
approval of its shareholders at a special meeting to be called and held in
accordance with applicable laws. Subject to its continuing fiduciary duties to
the shareholders of Pacific Capital, the Board of Directors of Pacific Capital,
in authorizing the execution and delivery of this Agreement by Pacific Capital,
shall recommend that this Agreement and the Merger be approved. Pacific Capital
shall use its best efforts to cause such meeting of its shareholders to take
place as soon as possible subject to effectiveness of the Registration Statement
(as defined in Section 6(a)(i)). In connection with the call of such meeting,
Pacific Capital shall cause such proxy materials to be mailed to its
shareholders. Subject to its continuing fiduciary duties to the shareholders of
Pacific Capital, the Board of Directors of Pacific Capital shall at all times
prior to and during such meeting of Pacific Capital shareholders recommend that
the transactions contemplated hereby be adopted and approved, and, subject to
such fiduciary duties, use its best efforts to cause such adoption and approval.
Within 15 business days after the time of execution and delivery of this
Agreement, members of the Board of Directors of Pacific Capital shall deliver to
South Valley undertakings in the form attached hereto as Exhibit B confirming
such directors' approval of the transactions contemplated hereby, setting forth
such directors' commitment to use his best efforts to cause the shareholders of
Pacific Capital to adopt and approve the transactions contemplated hereby,
subject to their above-mentioned continuing fiduciary duties to the shareholders
of Pacific Capital. Except with the prior approval of South Valley, neither
Pacific Capital nor any member of its Board of Directors shall, at the Pacific
Capital shareholders' meeting, submit any other matters for approval of its
shareholders, other than matters incidental to the conduct of such meeting.
(i) Access to Properties, Books and Records; Confidentiality. Prior to the
Effective Time, Pacific Capital shall give South Valley and its counsel and
accountants full access, during normal business hours and upon reasonable
request, to all of its properties, books, contracts, commitments and records
including, but not limited to, the corporate, financial and operational records,
papers, reports,
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instructions, procedures, tax returns and filings tax settlement letters,
material contracts or commitments, regulatory examinations and correspondence
and shall allow South Valley to make copies of such materials (to the extent not
legally prohibited) and shall furnish South Valley with all such information
concerning its affairs as South Valley may reasonably request.
(j) Dividends. Except for customary quarterly dividends consistent with past
practices and policies, Pacific Capital shall not declare, set aside or pay any
dividend or other distribution in respect of its common stock (including,
without limitation, any stock dividend, dividends in kind or other
distribution).
(k) Executive Employees. Executive employees of South Valley or SVNB who shall
become or remain, as the case may be, executive employees of SVNB after the
Effective Date shall enter into employment agreements with SVNB which are
mutually acceptable to SVNB and such executive employees. In the event that
existing employment agreements with executive employees of SVNB are terminated,
the terms and conditions of such employment agreements shall be complied with.
(l) Conduct of Business in the Ordinary Course. Pacific Capital shall conduct
its business in the ordinary course as heretofore conducted. For purposes of
this Section 3.1(l), the ordinary course of business shall consist of the
banking and related business as presently conducted by Pacific Capital.
(m) Additions to Pacific Capital Board of Directors. Pacific Capital shall
amend its Bylaws or take any other action necessary to increase the number of
authorized directors on its board to permit the appointment of three additional
directors to be designated by South Valley and acceptable to Pacific Capital at
least five business days prior to the Closing Date.
(n) Nasdaq National Market Listing. Pacific Capital shall apply to Nasdaq for
the designation of Pacific Capital Common Stock, including the shares of Pacific
Capital Common Stock to be issued pursuant to this Agreement, as a Nasdaq
National Market security and shall use its best efforts to obtain such
designation not later than the Effective Date.
(o) Changes in Capital Stock. At or after the date hereof and at or prior to
the Effective Time, except with the prior written consent of South Valley,
Pacific Capital shall not amend its Articles of Incorporation or Bylaws; make
any change in its authorized, issued or outstanding capital stock or any other
equity security; issue, sell, pledge, assign or otherwise encumber or dispose
of, or purchase, redeem or otherwise acquire, any of its shares of capital stock
or other equity securities or enter into any agreement, call or commitment of
any character so to do; grant or issue any stock option relating to, right to
acquire, or security convertible into, shares of its capital stock or other
equity security; purchase, redeem, retire or otherwise acquire (other than in a
fiduciary capacity) any shares of, or any security convertible into, its capital
stock or other equity securities, or agree to do any of the foregoing, except
that nothing herein shall prohibit the grant of options or the issuance of
shares pursuant to the Pacific Capital Option Plans (as defined herein) or the
repurchase of shares of Pacific Capital Common Stock pursuant to its share
repurchase program.
3.2 Covenants of South Valley.
(a) Approval by South Valley Shareholders. South Valley shall cause the
Merger, this Agreement and the Merger Agreement to be submitted promptly for the
approval of its shareholders at a special meeting to be called and held in
accordance with applicable laws. Subject to its continuing fiduciary duties to
the shareholders of South Valley, the Board of Directors of South Valley, in
authorizing the execution and delivery of this Agreement by South Valley, shall
recommend that this Agreement and the Merger be approved. South Valley shall use
its best efforts to cause such meeting of its shareholders to take place as soon
as possible, subject to effectiveness of the Registration Statement (as defined
in Section 6(a)(i)). In connection with the call of such meeting, South Valley
shall cause such proxy materials to be mailed to its shareholders (the proxy
materials, together with any amendments or supplements thereto, being herein
referred to as the "Proxy Statement"). Subject to its continuing fiduciary
duties to the shareholders of South Valley, the Board of Directors of South
Valley shall at all times prior to and during such meeting of South Valley
shareholders recommend that the transactions contemplated hereby be adopted and
approved, and, subject to such fiduciary duties, use its best efforts to cause
such adoption and approval. Within 15 business days after the time of execution
and delivery of this Agreement, members of the Board of Directors of South
Valley shall deliver to Pacific Capital undertakings in the form attached hereto
as Exhibit C confirming such directors' approval of the transactions
contemplated hereby, setting forth such directors' commitment to vote his shares
of South Valley stock in favor of the transactions contemplated hereby, setting
forth such directors' commitment to use his best efforts to cause the
shareholders of South Valley to adopt and approve the transactions contemplated
hereby, subject to their above-mentioned continuing fiduciary duties to the
shareholders of South Valley. Except with the prior approval of Pacific Capital,
neither South Valley nor any member of its Board of Directors shall, at the
South
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Valley shareholders' meeting, submit any other matters for approval of its
shareholders, other than matters incidental to the conduct of such meeting.
(b) Shareholder Lists and Other Information. After execution hereof, South
Valley shall from time to time make available to Pacific Capital, upon request,
a list of its shareholders and their addresses, a list showing all transfers of
the South Valley Common Stock and such other information as Pacific Capital
shall reasonably request regarding both the ownership and prior transfers of the
South Valley Common Stock.
(c) Government Approvals. South Valley shall cooperate in all reasonable
respects with Pacific Capital in its undertaking pursuant to Section 3.1(b) to
obtain the Government Approvals and South Valley further agrees, subject to the
continuing fiduciary duties of the Board of Directors of South Valley to the
shareholders of South Valley, to take such actions as may be reasonably
requested by Pacific Capital to cause the Merger to be consummated on the terms
provided in the Merger Agreement and this Agreement as promptly as is
practicable.
(d) Capital Commitments and Expenditures. After the execution of this
Agreement, no new capital commitments in excess of $50,000 shall be entered
into, and no capital expenditures in excess of $100,000 in the aggregate shall
be made by South Valley. South Valley shall not create any new branches or,
except as permitted pursuant to Section 3.2(h), enter into any acquisitions or
leases of real property, including both new leases and lease extensions without
the prior approval of Pacific Capital.
(e) Notification of Breach of Representations, Warranties and Covenants. South
Valley shall promptly give written notice to Pacific Capital upon becoming aware
of the occurrence or impending or threatened occurrence of any event which would
cause or constitute a breach of any of the representations, warranties or
covenants of South Valley contained or referred to in this Agreement and shall
use its best efforts to prevent the same or remedy the same promptly.
(f) Financial Statements.
(i) South Valley has delivered or shall deliver to Pacific
Capital prior to the Effective Date true and correct copies of consolidated
statements of income, changes in shareholders' equity and statements of cash
flows for the six (6) months ended June 30, 1996 any subsequent quarter ends,
and for the fiscal years ended December 31, 1995, 1994, 1993, 1992 and 1991
and consolidated balance sheets at June 30, 1996 and any subsequent quarter
ends, and for the fiscal years ended December 31, 1995, 1994, 1993, 1992 and
1991. Such consolidated financial statements at December 31, 1995, 1994, 1993,
1992 and 1991 and for the fiscal years ended December 31, 1995, 1994, 1993,
1992 and 1991 have been audited by Deloitte & Touche LLP as independent public
accountants for South Valley and include an opinion of such accounting firm to
the effect that such financial statements have been prepared in accordance
with GAAP and present fairly, in all material respects, the consolidated
financial position, results of operations and cash flows of South Valley at
the dates indicated and for the periods then ending. The opinions of such
accounting firm do not and shall not contain any qualifications.
(ii) South Valley shall provide to Pacific Capital, at or
prior to the Effective Date, copies of all financial statements and proxy
statements issued to South Valley's shareholders and/or directors after
December 31, 1995 and at or prior to the Effective Date.
(iii) South Valley has provided or shall provide to Pacific
Capital prior to the Effective Date copies of (a) its Annual Report on Form
10-K for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, as
filed with the Commission; (b) all periodic reports required to be filed by it
pursuant to Section 13(a) or 15(d) of the 1934 Act since December 31, 1993;
and (c) all proxy statements and other written material furnished to South
Valley's shareholders since December 31, 1993, and all other material reports
relating to South Valley filed by South Valley or any of its subsidiaries with
the OCC, the FRB or the Commission during 1993, 1994, 1995 and in 1996 prior
to the Effective Date. As of their respective dates, each of the documents
provided hereunder complied or shall comply in all material respects with all
legal and regulatory requirements applicable thereto.
(iv) South Valley shall cause to be delivered to Pacific
Capital letters of Deloitte & Touche LLP, South Valley's independent auditors,
dated a date no more than two business days prior to the date on which the
Registration Statement (as defined herein) shall become effective and two
business days before the Closing, and addressed to Pacific Capital, in form
and substance reasonably satisfactory to Pacific Capital, and in scope and
substance consistent with applicable professional standards
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for letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement.
(g) Compensation. South Valley shall not make or approve any increase in the
compensation (including but not limited to compensation through any profit
sharing, pension, retirement, severance, incentive or other employee benefit
program or arrangement), payable or to become payable by South Valley to any of
their officers, employees or agents with annual salaries in excess of $70,000 at
the date hereof nor shall any bonus payment or any agreement or commitment to
make a bonus payment be made (except with Pacific Capital's prior approval which
shall not be unreasonably withheld), nor shall any stock option, warrant or
other right to acquire capital stock be granted, or employment agreement (other
than any such employment agreement that may arise by operation of law upon the
hiring of any new employee) or consulting agreement be entered into by South
Valley with any such directors, officers, employees or agents unless Pacific
Capital has given its prior written consent. Nothing herein shall prevent the
payment to South Valley employees (with salaries of $70,000 or less at the date
hereof) of regular salary increases, in connection with regular salary reviews
consistent with past practices, as heretofore disclosed to Pacific Capital.
South Valley shall not hire any new employee at an annual rate in excess of
current customary practice or, in any event, in excess of $50,000 per year,
except with the prior written consent of Pacific Capital, which consent shall
not be unreasonably withheld.
(h) Conduct of Business in the Ordinary Course. As used in this Section
3.2(h), the term "South Valley" shall collectively mean South Valley and SVNB.
Prior to the Effective Time:
(i) South Valley shall conduct its businesses in the
ordinary course as heretofore conducted. For purposes of this Agreement, the
"Ordinary Course of Business" shall consist of the banking and related
businesses as presently conducted by South Valley. Unless Pacific Capital has
given its previous written consent to any act or omission to the contrary,
South Valley shall, through the Effective Date, cause its officers to:
A. use their best efforts to preserve its business and
business organizations intact;
B. use their best efforts to preserve the goodwill of
customers and others having business relations with it and take no action that
would materially impair the benefit to Pacific Capital of the goodwill of
South Valley, or the other benefits of the Merger;
C. consult with Pacific Capital as to the making of any
decisions or the taking of any actions in matters other than in the Ordinary
Course of Business;
D. maintain its properties in customary repair, working
order and condition (reasonable wear and tear excepted);
E. comply in all material respects with all laws,
regulations and decrees applicable to the conduct of its business;
F. keep in force at not less than its present limits all
policies of insurance (including deposit insurance of the FDIC) to the extent
reasonably practicable in light of the prevailing market conditions in the
insurance industry;
G. use its best efforts, subject to Section 3.2(g), to keep
available to Pacific Capital the services of its present officers and
employees (it being understood that South Valley shall have the right to
terminate the employment of any officer or employee in accordance with its
established employment procedures);
H. comply with all orders, agreements and memoranda of
understanding made by or with the OCC or any other regulatory authority of
competent jurisdiction and promptly forward to Pacific Capital all
communications received from any such authority that are not prohibited by
such authority from being so disclosed and inform Pacific Capital of any
material restrictions imposed by any governmental authority on the business of
South Valley or SVNB;
I. file in a timely manner (taking into account any
extensions duly obtained) all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities;
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J. conduct a phase I environmental audit prior to
foreclosure on any real property concerning which South Valley has knowledge
that asbestos or asbestos-containing materials, PCB's or PCB-contaminated
materials, any petroleum product, or hazardous substance or waste (as defined
under any applicable environmental laws) was or is present, manufactured,
recycled, reclaimed, released, stored, treated, or disposed of, and provide
the results of such audit to and consult with Pacific Capital regarding the
significance of the audit prior to the foreclosure on any such property;
K. not sell, lease, pledge, assign, encumber or otherwise
dispose of any of its assets except in the Ordinary Course of Business, for
adequate value, without recourse and consistent with its customary practice;
L. with respect to any extension of credit in excess of
$50,000 not waive or release any right or collateral or cancel or compromise
any debt or claim, except in the Ordinary Course of Business;
M. not make, renegotiate, renew, increase, extend or
purchase any loans, advances or loan commitments, in each case to any of its
officers, directors or any affiliated or related persons of such directors or
officers except in the Ordinary Course of Business consistent with its
established loan procedures and in compliance with FRB Regulation O;
N. not take any action to create, relocate or terminate the
operations of any banking office or branch, or to form any new subsidiary or
affiliated entity;
O. not settle or otherwise take any action to release or
reduce any of its rights with respect to any litigation involving a claim of
more than $50,000 or claims of more than $75,000 in the aggregate in which it
is a party;
P. consult with Pacific Capital on problem loan workout
strategies, and obtain Pacific Capital's concurrence on any loan loss in
excess of $15,000 (or $50,000 in the aggregate) or any writedown of other real
estate owned.
(ii) South Valley shall not, without first having obtained
the written consent of Pacific Capital, which consent shall not be
unreasonably withheld, cause the officers of South Valley to:
A. commit to any new contract or extend any existing
contract that would obligate South Valley for an aggregate amount over time in
excess of $50,000 (including data processing, servicing or any other agreement
or contract);
B. accelerate the vesting of pension or other benefits;
C. grant any new stock options or accelerate the vesting of
any existing stock options to fulfill the requirements of Section 2.6 above;
or
D. fail to promptly notify Pacific Capital in writing upon
becoming aware of the occurrence of any of the following:
(1) the classification of any loan in the amount of $50,000
or more as substandard, doubtful or loss;
(2) the filing or commencement of any legal action or other
proceeding or investigation against South Valley (or any director or executive
officer); or
(3) the monthly pretax earnings of South Valley are less
than $200,000.
(i) Press Releases. South Valley shall not issue any press release or written
statement for general circulation relating to this Agreement or the Merger
unless previously provided to Pacific Capital for review and approval (which
approval will not be unreasonably withheld or delayed) and shall cooperate with
Pacific Capital in the development and distribution of all news releases and
other public information disclosures with respect to this Agreement or the
Merger; provided that South Valley may, without the consent of Pacific Capital,
make any disclosure with regard to this Agreement or the Merger that it
determines is required under any applicable law or regulation and shall provide
a copy thereof to Pacific Capital.
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(j) No Merger or Solicitation.
(i) Subject to the continuing fiduciary duties of the Board
of Directors of South Valley to the shareholders of South Valley, prior to the
Effective Time, South Valley shall not effect or agree to effect any Business
Combination (as defined in Section 3.1(f)), acquire or agree to acquire any of
its own capital stock or the capital stock (except in a fiduciary capacity) or
assets (except in the Ordinary Course of Business) of any other entity, or
commence any proceedings for winding up and dissolution affecting either of
them.
(ii) Subject to the continuing fiduciary duties of the Board
of Directors of South Valley to the shareholders of South Valley, prior to the
Effective Date, neither South Valley, nor any officer, director or affiliate
of South Valley, nor any investment banker, attorney, accountant or other
agent, advisor or representative retained by South Valley shall (A) solicit or
encourage, directly or indirectly, any inquiries, discussions or proposals
for, continue, propose or enter into discussions or negotiations looking
toward, or enter into any agreement or understanding providing for, any
Business Combination; or (B) disclose, directly or indirectly, any nonpublic
information to any corporation, partnership, person or other entity or group
concerning the business and properties of South Valley or afford any such
party access to the properties, books or records of South Valley or otherwise
assist or encourage any such party in connection with the foregoing, or (C)
furnish or cause to be furnished any information concerning the business,
financial condition, operations, properties or prospects of South Valley to
another person, having any actual or prospective role with respect to any such
transaction; provided, however, that with respect to any investment banker,
South Valley shall use its best efforts to ensure that said investment banker
complies with the foregoing.
(iii) South Valley shall notify Pacific Capital of the
details of any indication of interest of any person, corporation, firm,
association or group to acquire by any means a controlling interest in South
Valley or engage in any Business Combination with South Valley within two
business days of any such indication of interest.
(iv) In the event the Board of Directors of South Valley
receives a bona fide offer for a Business Combination with another entity, and
reasonably determines, upon advice of counsel, that as a result of such offer,
any duty to act or to refrain from doing any act pursuant to this Agreement is
inconsistent with the continuing fiduciary duties of said Board of Directors
to the shareholders of South Valley, such failure to act or refrain from doing
any act shall not constitute the failure of any condition, breach of any
covenant or otherwise constitute any breach of this Agreement, provided,
however, that any such failure to act or refrain from doing any act shall
entitle Pacific Capital to terminate this Agreement pursuant to Section 11(b)
and provided further, that the obligations and liabilities of South Valley set
forth in Section 11(e) hereof shall continue in full force and effect but
neither South Valley nor its officers, directors or agents shall have any
further liability with regard thereto for any failure to act or omission of
any act pursuant to this subsection (iv).
(k) South Valley Cash or Deferred 401(k) Plan. South Valley agrees the South
Valley Cash or Deferred 401(k) Plan (the "Plan") may be terminated, frozen,
modified or merged into the Pacific Capital 401(k) Plan on or after the
Effective Date, as determined by Pacific Capital in its sole discretion, subject
to compliance with applicable law so long as any such action preserves the
rights of the participants in such Plan (including, without limitation, vesting
rights).
(l) Changes in Capital Stock. At or after the date hereof and at or prior to
the Effective Time, except with the prior written consent of Pacific Capital,
South Valley shall not amend its Articles of Incorporation or Bylaws; make any
change in its authorized, issued or outstanding capital stock or any other
equity security; issue, sell, pledge, assign or otherwise encumber or dispose
of, or purchase, redeem or otherwise acquire, any of its shares of capital stock
or other equity securities or enter into any agreement, call or commitment of
any character so to do; grant or issue any stock option relating to, right to
acquire, or security convertible into, shares of its capital stock or other
equity security; purchase, redeem, retire or otherwise acquire (other than in a
fiduciary capacity) any shares of, or any security convertible into, its capital
stock or other equity securities, or agree to do any of the foregoing, except
that nothing herein shall prohibit the issuance of shares pursuant to the Option
Plans with respect to options outstanding at the date of this Agreement (except
as limited in Section 2.6).
(m) Dividends. Except for customary quarterly dividends consistent with past
practices and policies, South Valley shall not declare, set aside or pay any
dividend or other distribution in respect of its common stock (including,
without limitation, any stock dividend or other distribution).
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(n) Accounting Methods. South Valley shall not change its methods of
accounting in effect at December 31, 1995, except as required by changes in GAAP
as concurred in by its independent auditors.
(o) Affiliates. At least 40 days prior to the Closing, South Valley shall
deliver to Pacific Capital a letter identifying all persons who are "affiliates"
of South Valley for purposes of Rule 145 under the 1933 Act. South Valley shall
use all reasonable efforts to cause each person named in the letter delivered by
it to deliver to Pacific Capital prior to the Closing a written "affiliates"
agreement, in substantially the form attached hereto as Exhibit D, providing
that such person shall dispose of the Pacific Capital Common Stock to be
received by such person in the Merger only in accordance with applicable law
and, in addition, in such agreement, such affiliate shall represent that they
have no present plan or intention to dispose of any such shares of Pacific
Capital Common Stock.
(p) Additional Agreements. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of South
Valley, the proper officers and directors of each party to this Agreement shall
take all such necessary or appropriate action.
(q) Access to Properties, Books and Records; Confidentiality. Prior to the
Effective Time, South Valley shall give Pacific Capital and its counsel and
accountants full access, during normal business hours and upon reasonable
request, to all of its properties, books, contracts, commitments and records
including, but not limited to, the corporate, financial and operational records,
papers, reports, instructions, procedures, tax returns and filings tax
settlement letters, material contracts or commitments, regulatory examinations
and correspondence and shall allow Pacific Capital to make copies of such
materials (to the extent not legally prohibited) and shall furnish Pacific
Capital with all such information concerning its affairs as Pacific Capital may
reasonably request.
(r) Employee Welfare Benefit Plans. South Valley agrees that South Valley's
employee welfare benefit plans, as defined in Section 3(1) of Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), may be terminated,
modified or merged into Pacific Capital's welfare benefit plans on or after the
Effective Date, as determined by Pacific Capital in its sole discretion, subject
to compliance with applicable law so long as any such action preserves the
rights of the participants in such plans, including, without limitation, vesting
rights.
(s) Nonsolicitation Agreements. South Valley shall use its best efforts to
have each of its directors execute a nonsolicitation agreement substantially in
the form attached hereto as Exhibit E.
(t) Additions to SVNB Board of Directors. South Valley shall take any actions
necessary to have SVNB amend its Bylaws or to take any actions to increase the
number of authorized directors on SVNB's board to permit the appointment of
three additional directors to be designated by Pacific Capital at least five
business days prior to the Closing Date.
3.3 Covenants of the Parties. Each party shall use its best efforts to cause
its officers, directors, employees, auditors, agents, and attorneys to cooperate
with the other in the reasonable requests for information by the other parties
hereto. Each party shall treat as confidential all such information in the same
manner as each party treats similar confidential information of its own, and if
this Agreement is terminated, each party shall continue to treat all such
information as confidential and to cause its employees to keep all such
information confidential and shall return such documents theretofore delivered
by the other party as the other party shall request, and shall use such
information, or cause it to be used, solely for the purposes of evaluating and
completing the transactions contemplated hereby; provided that each party may
disclose any such information to the extent required by federal or state
securities laws or otherwise required by any governmental agency or authority,
or by generally accepted accounting principles. The foregoing confidentiality
obligations shall not apply in respect of any information publicly available or
to any information previously known to the party in question, the use of which
is not otherwise restricted.
4. REPRESENTATIONS AND WARRANTIES OF SOUTH VALLEY.
South Valley represents and warrants to Pacific Capital, except as disclosed
to Pacific Capital in writing on the date of this Agreement (the "South Valley
Disclosure Statement"), that:
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(a) Corporate Status and Power to Enter Into Agreements. South Valley (i) is a
corporation duly incorporated, validly existing and in good standing under the
laws of California and is a registered bank holding company under the BHC Act,
(ii) subject to the approval of this Agreement and the transactions contemplated
hereby by the shareholders of South Valley and the FRB, it has all necessary
corporate power to enter into this Agreement and to carry out all of the terms
and provisions hereof and thereof to be carried out by it, and (iii) is not
subject to any directive, order (formal or informal) or agreement, of the FRB or
any other regulatory authority having jurisdiction over its business or any of
its assets or properties, and (iv) is in full compliance with any agreements,
understandings or orders of the FRB or any other regulatory authority having
jurisdiction over its business or any of its assets or properties. SVNB (i)
holds a currently valid license issued by the OCC to engage in business as a
national association under the National Bank Act, and (ii) is not subject to any
directive, order (formal or informal) or agreement, of the OCC or any other
regulatory authority having jurisdiction over its business or any of its assets
or properties, and (iii) is in full compliance with any agreements,
understandings or orders of the OCC or any other regulatory authority having
jurisdiction over its business or any of its assets or properties. Neither the
scope of the business of South Valley or SVNB nor the location of their
respective properties requires it to be licensed to do business in any
jurisdiction other than the State of California.
(b) Articles, Bylaws, Books and Records. The copies of the respective Articles
of Incorporation or Association and Bylaws of South Valley and SVNB to be
delivered to Pacific Capital prior to the date hereof are complete and accurate
copies thereof as in effect on the date hereof. The minute books of South Valley
and SVNB made available to Pacific Capital contain a complete and accurate
record of all meetings of the Board of Directors (and committees thereof) and
shareholders. The corporate books and records (including financial statements)
of South Valley and SVNB fairly reflect the material transactions to which South
Valley or SVNB is a party or by which their respective properties are subject or
bound, and such books and records have been properly kept and maintained. The
Articles of Incorporation and Bylaws of South Valley and the Articles of
Association and Bylaws of SVNB and all amendments thereto have been duly
approved by all requisite corporate action and by the appropriate regulatory
authority to the extent required by law.
(c) Compliance With Laws, Regulations and Decrees. To the best knowledge of
South Valley and SVNB, each (i) has the corporate power to own or lease its
properties and to conduct its business as currently conducted, (ii) has complied
with, and is not in default in any material respects of any laws, regulations,
ordinances, orders or decrees applicable to the conduct of its business and the
ownership of its properties, including but not limited to all federal and state
laws (including but not limited to the Bank Secrecy Act), rules and regulations
relating to the offer, sale or issuance of securities, and the operation of a
national association, other than where such noncompliance or default is not
likely to result in a material limitation on the conduct of its business or is
not likely to otherwise have a material adverse effect on South Valley or SVNB
taken as a whole, (iii) has not failed to file with the proper federal, state,
local or other authorities any material report or other document required to be
so filed, (iv) has all material approvals, authorizations, consents, licenses,
clearances and orders of, and have currently effective all registrations with,
all governmental and regulatory authorities which are necessary to the business
and operations of South Valley and SVNB as now being conducted, and (v) has
received no notification, formally or informally, from any agency or department
of any federal, state or local government or any regulatory agency or the staff
thereof (A) asserting that South Valley or SVNB is not in material compliance
with any of the statutes, regulations or ordinances which such government or
regulatory authority enforces, or (B) threatening to revoke any licenses,
franchise, permit or governmental authorization of South Valley or SVNB.
(d) Capitalization. The authorized capital stock of South Valley consists of
4,000,000 shares of South Valley common stock, no par value, of which 1,313,986
are duly authorized, validly issued, fully paid and nonassessable and currently
outstanding. The authorized capital stock of SVNB consists of 500,000 shares of
SVNB common stock, no par value, of which 400,000 are duly authorized, validly
issued, fully paid and nonassessable and currently outstanding. Said stock has
been issued in compliance with all applicable registration or qualification
provisions of state and federal securities laws. No other equity securities of
South Valley or SVNB have been issued or are outstanding. There are currently
outstanding options to purchase 176,660 shares of South Valley common stock, at
a weighted average exercise price of $13.49 per share, issued pursuant to the
Option Plans. Said options were issued and, upon issuance in accordance with the
terms of the outstanding options said shares shall be issued, in compliance with
all applicable securities laws. There are no outstanding (i) options,
agreements, calls or commitments of any character which would obligate South
Valley to issue, sell, pledge, assign or otherwise encumber or dispose of, or to
purchase, redeem or otherwise acquire, any South Valley common stock or any
other equity security of South Valley, or (ii) warrants or options relating to,
rights to acquire, or debt or equity securities convertible into, shares of
South Valley common stock or any other equity security of South Valley. Attached
to the South Valley Disclosure Statement is a list of all option holders and the
number of vested and unvested options as of June 30, 1996. The outstanding
common stock of South Valley has been duly and validly registered with the
Commission pursuant to the 1934 Act, to the extent required thereunder.
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<PAGE> 18
(e) Equity Interests. Except as disclosed in the South Valley Disclosure
Statement or as collateral for outstanding loans held in its loan portfolio,
South Valley does not own, directly or indirectly, any equity interest in any
bank, corporation, or other entity.
(f) Financial Statements, Regulatory Reports. No financial statement or other
document provided or to be provided to Pacific Capital as required by Section
3.2(f) hereof, as of the date of such document, contained, or as to documents to
be delivered after the date hereof, will contain, any untrue statement of a
material fact, or, at the date thereof, omitted or will omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements were or will be made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify information as of any earlier date. South Valley and SVNB have
filed all material documents and reports relating to South Valley and/or SVNB
required to be filed by South Valley or SVNB with the Commission, the FRB, the
OCC or any other governmental authority having jurisdiction over their
businesses or any of their assets or properties. All such reports conform in all
material respects with the requirements promulgated by such regulatory agencies.
All compliance or corrective action relating to South Valley required by
governmental authorities and regulatory agencies having jurisdiction over South
Valley and SVNB have been taken. South Valley and SVNB have not received
notification, formally or informally, from any agency or department of any
federal, state or local government or any regulatory agency or the staff thereof
(A) asserting that South Valley and/or SVNB is not in compliance with any of the
statutes, regulations or ordinances which such government or regulatory
authority enforces, or (B) threatening to revoke any license, franchise, permit
or governmental authorization of South Valley and/or SVNB. Neither South Valley
nor SVNB is subject to any order, agreement or written directive with any
regulatory authority with respect to its assets or business except for matters
of general application. South Valley and SVNB have paid all assessments made or
imposed by any governmental agency. South Valley shall make available to Pacific
Capital for inspection copies of all annual management letters and opinions and
all reviews, correspondence and other documents in the files of South Valley
prepared by Deloitte & Touche LLP or any other certified public accountant
engaged by South Valley and delivered to South Valley since January 1, 1991. The
consolidated financial records of South Valley have been, and are being and
shall be, maintained in all material respects in accordance with all applicable
legal and accounting requirements sufficient to insure that all transactions
reflected therein are, in all material respects, executed in accordance with
management's general or specific authorization and recorded in conformity with
GAAP at the time in effect. The data processing equipment, data transmission
equipment, related peripheral equipment and software used by South Valley in the
operation of its business to generate and retrieve its financial records are
adequate for the current needs of South Valley.
(g) Tax Returns.
(i) South Valley has timely filed all federal, state,
county, local and foreign tax returns required to be filed by it, including,
without limitation, estimated tax, use tax, excise tax, real property and
personal property tax reports and returns, employer's withholding tax returns,
other withholding tax returns and Federal Unemployment Tax Returns, and all
other reports or other information required or requested to be filed by each
of them, and each such return, report or other information was, when filed,
complete and accurate in all material respects. South Valley has paid all
taxes, fees and other governmental charges, including any interest and
penalties thereon, when they have become due and payable, except those that
are being contested in good faith, which contested matters have been disclosed
in writing to Pacific Capital. South Valley has not requested to give or has
given any currently effective waivers extending the statutory period of
limitation applicable to any tax return required to be filed by either of them
for any period. There are no claims pending against South Valley for any
alleged deficiency in the payment of any taxes, and no pending or threatened
audits, investigations or claims for unpaid taxes or relating to any liability
in respect of any taxes. There have been no events, including a change in
ownership, that would result in a reappraisal and establishment of a new
base-year full value for purposes of Articles XIII.A of the California
Constitution, of any real property owned in whole or in part by South Valley
or to the best of South Valley's knowledge, of any real property leased by
South Valley.
(ii) South Valley shall deliver to Pacific Capital when
available, copies of all its and its subsidiaries' tax returns with respect to
taxes payable to the United States of America and the State of California for
the fiscal years ended December 31, 1995, 1994 and 1993.
(iii) No consent has been filed relating to South Valley
pursuant to Section 341(f) of the IRC.
(h) Material Adverse Change. Except as reflected on South Valley's financial
statements issued prior to the date hereof and delivered to Pacific Capital or
as otherwise disclosed in writing by South Valley to Pacific Capital prior to
the date hereof, since December 31, 1995, there has been (i) no material adverse
change in the business, assets, licenses, permits, franchises, results of
operations or financial condition of South Valley and SVNB taken as a whole
(whether or not in the Ordinary Course of Business), (ii) no change in
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<PAGE> 19
any of the assets, licenses, permits or franchises of South Valley or that has
had or, to South Valley's knowledge, can reasonably be expected to have a
material adverse effect on any of the items listed in clause (h)(i) above, (iii)
no damage, destruction, or other casualty loss (whether or not covered by
insurance) that has had or can reasonably be expected to have a material adverse
effect on any of the items listed in clause (h)(i) above, (iv) no amendment,
modification, or termination of any existing, or entering into of any new,
contract, agreement, plan, lease, license, permit or franchise that is material
to the business, financial condition, assets, liabilities or operations of South
Valley and SVNB taken as a whole, except in the Ordinary Course of Business; or
(v) no disposition by South Valley of one or more assets that, individually or
in the aggregate, are material to South Valley and SVNB taken as a whole, except
sales of assets in the Ordinary Course of Business.
(i) No Undisclosed Liabilities. Except for items for which reserves have been
established in the unaudited consolidated balance sheets of South Valley as of
June 30, 1996, since such date South Valley has not incurred or discharged, and
is not legally obligated with respect to, any indebtedness, liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar arrangement) or obligation (accrued or
contingent, whether due or to become due, and whether or not subordinated to the
claims of its general creditors), other than as a result of operations in the
Ordinary Course of Business. South Valley has not knowingly made nor shall make
any representations or covenants in any such agreement that contained or shall
contain any untrue statement of a material fact or omitted or shall omit to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such representations and/or
covenants were made or shall be made, not misleading. No cash, stock or other
dividend or any other distribution with respect to the stock of South Valley has
been declared, set aside or paid, nor have any shares of the stock of South
Valley been purchased, redeemed or otherwise acquired, directly or indirectly,
by South Valley since June 30, 1996.
(j) Properties and Leases.
(i) South Valley and SVNB have good and marketable title,
free and clear of all liens and encumbrances and the right of possession,
subject to existing leaseholds, to all real properties and good title to all
other property and assets, tangible and intangible, reflected in the South
Valley unaudited consolidated balance sheet as of June 30, 1996 (except
property held as lessee under leases entered into since June 30, 1996 and
disclosed in writing prior to the date hereof and except personal property
sold or otherwise disposed of since June 30, 1996 in the Ordinary Course of
Business), except (a) liens for taxes or assessments not delinquent, (b) such
other liens and encumbrances and imperfections of title as do not materially
affect the value of such property as reflected in the South Valley unaudited
consolidated balance sheet as of June 30, 1996, or as currently shown on the
books and records of South Valley and which do not interfere with or impair
the present and continued use, or (c) immaterial exceptions disclosed in title
reports and preliminary title reports, copies of which shall be provided to
Pacific Capital. All tangible properties of South Valley conform in all
material respects with all applicable ordinances, regulations and zoning laws.
All material tangible properties of South Valley and SVNB are in a good state
of maintenance and repair and are adequate for the current business of South
Valley. No properties of South Valley or SVNB and, to the best of South
Valley's knowledge, no properties in which it holds a collateral or contingent
interest or purchase option, are the subject of any pending or to the best of
South Valley's knowledge, threatened investigation, claim or proceeding
relating to the use, storage or disposal on such property of or contamination
of such property by any toxic or hazardous waste material or substance. To
South Valley's knowledge, South Valley and SVNB do not own, possess or have a
collateral or contingent interest or purchase option in any properties or
other assets which contain or have located within or thereon any hazardous or
toxic waste material or substance unless the location of such hazardous or
toxic waste material or other substance or its use thereon conforms in all
material respects with all federal, state and local laws, rules, regulations
or other provisions regulating the discharge of materials into the
environment. As to any asset not owned or leased by South Valley or SVNB, to
the best of South Valley's knowledge, neither South Valley nor SVNB has
controlled, directed or participated in the operation or management of any
such asset or any facilities or enterprise conducted thereon, such that it has
become an owner or operator of such asset under applicable environmental laws.
(ii) All properties held by South Valley or SVNB under
leases are held under valid, binding and enforceable leases, with such
exceptions as are not material and do not interfere with the conduct of the
business of South Valley or SVNB, and South Valley or SVNB, as the case may
be, enjoys quiet and peaceful possession of such leased property. South Valley
is not in default in any material respect under any material lease, agreement
or obligation regarding its properties to which it is a party or by which it
is bound.
(iii) Except as disclosed to Pacific Capital in the South
Valley Disclosure Statement, all of South Valley's and SVNB's rights and
obligations under the leases referred to in Section 4(j)(ii) above do not
require the consent of any other party
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<PAGE> 20
to the transaction contemplated by this Agreement. Where required, South
Valley shall use its best efforts to obtain, prior to the Effective Date, the
consent of all parties to any such transactions.
(k) Material Contracts. Except as disclosed to Pacific Capital in the South
Valley Disclosure Statement and excluding loans, lines of credit, loan
commitments or letters of credit to which South Valley or SVNB is a party,
neither South Valley nor SVNB is a party to or bound by any contract or other
agreement made in the Ordinary Course of Business which involves aggregate
future payments by or to it of more than $50,000 and which is made for a fixed
period expiring more than one year from the date hereof, and neither South
Valley nor SVNB is a party to or bound by any agreement not made in the Ordinary
Course of Business which is to be performed at or after the date hereof. Each of
the contracts and agreements disclosed to Pacific Capital pursuant to this
Section 4(k) is a legal and binding obligation (subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and subject, as to enforceability, to equitable principles of general
applicability), and no material breach or default (and no condition which, with
notice or passage of time, or both, could become a breach or default) exists
with respect thereto. No power of attorney or similar authorization given
directly or indirectly by South Valley is currently outstanding.
(l) Employment Contracts and Benefits.
(i) South Valley shall provide to Pacific Capital access to
all bonus, incentive compensation, profit-sharing, pension, retirement, stock
purchase, stock option, deferred compensation, severance, hospitalization,
medical, dental, vision, group insurance, death benefits, disability and other
fringe benefit plans, trust agreements, arrangements and commitments of South
Valley and SVNB (including but not limited to such plans, agreements,
arrangements and commitments applicable to former employees or retired
employees, or for which such persons are eligible), if any, together with
copies of all such plans, agreements, arrangements and commitments that are
documented, any and all contracts of employment and has made available to
Pacific Capital any Board of Directors' minutes (or committee minutes) from
meetings held within the five-year period ending as of the Closing
authorizing, approving or guaranteeing such plans and contracts.
(ii) With respect to each employee benefit plan (as defined
in Section 3(3) of ERISA) of South Valley which is subject to the reporting,
disclosure and record retention requirements set forth in the IRC and Part 1
of Subtitle B of Title I of ERISA and the regulations thereunder, each of such
requirements has been met in all material respects on a timely basis.
(iii) With respect to each employee benefit plan (as defined
in Section 3(3) of ERISA) of South Valley which is subject to Part 4 of
Subtitle B of Title I of ERISA, none of the following now exists or has
existed within the six-year period ending on the date hereof:
(1) Any act or omission constituting a material violation of
Section 402 of ERISA;
(2) Any act or omission constituting a material violation of
Section 403 of ERISA;
(3) Any act or omission by South Valley or any of its
subsidiaries, or by any director, officer or employee thereof, constituting a
material violation of Sections 404 and 405 of ERISA;
(4) To the best of South Valley's knowledge, any act or
omission by any other person constituting a material violation of Sections 404
or 405 of ERISA;
(5) Any act or omission which constitutes a material
violation of Sections 406 or 407 of ERISA and is not exempted by Section 408
of ERISA or which constitutes a material violation of Section 4975(c) of the
IRC and is not exempted by Section 4975(d) of the IRC; or
(6) Any act or omission constituting a material violation of
Sections 503, 510 or 511 of ERISA.
(iv) All contributions, premiums or other payments due from
South Valley and its subsidiaries to (or under) any employee benefit plan of
South Valley have been fully paid or adequately provided for on the audited
financials for the year ended December 31, 1995 and the unaudited financials
for the period ended June 30, 1996. All accruals thereon (including, where
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<PAGE> 21
appropriate, proportional accruals for partial periods) have been made in all
material respects in accordance with GAAP consistently applied on a reasonable
basis.
(v) Each employee benefit plan of South Valley complies in
all material respects with all applicable requirements of (A) the Age
Discrimination in Employment Act of 1967, as amended, and the regulations
thereunder and (B) Title VII of the Civil Rights Act of 1964, as amended, and
the regulations thereunder.
(vi) Each employee benefit plan of South Valley complies in
all material respects with all applicable requirements of (A) the health care
continuation coverage provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, and the regulations thereunder.
(vii) South Valley shall disclose in writing to Pacific
Capital the names of each director, officer and employee of South Valley and
SVNB.
(m) Compliance With ERISA. South Valley has not, since its inception, either
maintained or contributed to an employee pension benefit plan, as defined in
Section 3(2) of ERISA, including multiemployer plans, other than the Plan and a
true and accurate copy of which has been provided to Pacific Capital. With
respect to the Plan and its related trust (the "South Valley Trust"), as of the
Effective Time, (i) the Plan will in all material respects be (and currently is)
in compliance in form with all the applicable requirements of Section 401(a) of
the IRC, and the form of the South Valley Trust will be exempt from income tax
under Section 501(a) of the IRC; (ii) the Plan represents the adoption of a
standardized prototype plan that received a favorable opinion letter ("Opinion
Letter") from the Internal Revenue Service ("IRS") as to its form dated April 1,
1992; (iii) South Valley relies on such Opinion Letter as authorized under IRS
Revenue Procedure 96-4 as support for the fact that the Plan is qualified under
section 401(a) of the IRC; (iv) no contributions have exceeded the limitations
set forth in Section 415 of the IRC; (v) required filings with the IRS and
Department of Labor with respect to the Plan and the South Valley Trust for
periods from inception and ending at or prior to the Effective Time will have
been made by South Valley and the plan administrator; (vi) there shall have been
no material violation of Parts 1 and 4 of Subtitle B of Title I of ERISA or of
Section 4975 of the IRC; and (vii) there shall have been no action, claim or
demand of any kind known to South Valley brought by any claimant or
representative of such claimant under the Plan or South Valley Trust where South
Valley may be either (A) liable directly on such action, claim or demand, or (B)
obligated to indemnify any person, group of persons or entity with respect to
such action, claim or demand, unless such action, claim or demand is covered by
adequate reserves reflected in South Valley's June 30, 1996 financial statements
or an insurer of South Valley has agreed to defend against and pay the amount of
any resulting liability without reservation.
(n) Collective Bargaining and Employment Agreements. Except as provided in
this Agreement or as disclosed to Pacific Capital in the South Valley Disclosure
Statement, South Valley does not have any union or collective bargaining or
written employment agreements, contracts or other agreements with any labor
organization or with any member of management, or any management or consultation
agreement not terminable at will by South Valley without liability and no such
contract or agreement has been requested by, or is under discussion by
management with, any group of employees, any member of management or any other
person. There are no material controversies pending between South Valley and any
current or former employees, and to the best of their knowledge, there are no
efforts presently being made by any labor union seeking to organize any of such
employees.
(o) Compensation of Officers and Employees. Except as disclosed to Pacific
Capital in the South Valley Disclosure Statement and except as otherwise
provided in this Agreement, (i) no officer or employee of South Valley or SVNB
is receiving aggregate direct remuneration at a rate exceeding $65,000 per
annum, and (ii) the consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional or
further acts or events) result in any payment (whether of severance pay or
otherwise) becoming due from South Valley, SVNB or Pacific Capital to any
employee of South Valley or SVNB.
(p) Legal Actions and Proceedings. Except as disclosed to Pacific Capital in
writing prior to the date hereof, neither South Valley nor SVNB is a party to,
or to the best of their knowledge threatened with, any legal action or other
proceeding or investigation before any court, any arbitrator of any kind or any
government agency, and, to the best of South Valley's knowledge, neither South
Valley nor SVNB is subject to any potential adverse claim, the outcome of which
could involve the payment or receipt by South Valley or SVNB of any amount in
excess of $25,000, unless an insurer of South Valley has agreed to defend
against and pay the amount of any resulting liability without reservation, or,
if any such legal action, proceeding, investigation or claim will not involve
the payment by South Valley or SVNB of a monetary amount, which could materially
adversely affect South Valley, SVNB or their respective businesses or properties
or the transactions contemplated hereby. South Valley has no knowledge of any
pending or threatened claims or charges under the Community
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<PAGE> 22
Reinvestment Act, before the Equal Employment Opportunity Commission, the
California Department of Fair Housing & Economic Development, the California
Unemployment Appeals Board, or any human relations commission. There is no labor
dispute, strike, slow-down or stoppage pending or, to the best of the knowledge
of South Valley, threatened against South Valley or SVNB.
(q) Execution and Delivery of the Agreement.
(i) The execution and delivery of this Agreement has been
duly authorized by the Board of Directors of South Valley and, when this
Agreement and the Merger have been duly approved by the affirmative vote of
the holders of a majority of the outstanding shares of South Valley common
stock at a meeting of shareholders duly called and held, this Agreement and
the Merger will be duly and validly authorized by all necessary corporate
action on the part of South Valley.
(ii) This Agreement has been duly executed and delivered by
South Valley and (assuming due execution and delivery by and enforceability
against Pacific Capital) constitutes the legal and binding obligations of
South Valley.
(iii) The execution and delivery by South Valley of this
Agreement and the consummation of the transactions herein (A) do not violate
any provision of the Articles of Incorporation or Bylaws of South Valley, any
provision of federal or state law or any governmental rule or regulation
(assuming (1) receipt of the Government Approvals, (2) receipt of the
requisite South Valley shareholder approval referred to in Section 3.2(a)
hereof, (3) due registration of the Pacific Capital Shares under the 1933 Act,
(4) receipt of appropriate permits or approvals under applicable state
securities laws, and (5) accuracy of the representations of Pacific Capital
set forth herein), and (B) do not require any consent of any person under,
conflict with or result in a breach of, or accelerate the performance required
by any of the terms of, any material debt instrument, lease, license,
covenant, agreement or understanding to which South Valley is a party or by
which it is bound or any order, ruling, decree, judgment, arbitration award or
stipulation to which South Valley is subject, or constitute a material default
thereunder or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or similar right of any third party upon any
of the properties or assets of South Valley.
(r) Insurance. South Valley and SVNB are and continuously since their
respective inceptions have been, insured with reputable insurers against all
risks normally insured against by corporations such as South Valley and national
associations, and all of the insurance policies (including directors' and
officers' liability insurance) and bonds maintained by South Valley are in full
force and effect, and to the best of its knowledge, South Valley is not in
material default thereunder and all material claims thereunder have been filed
in due and timely fashion. In the best judgment of the management of South
Valley, such insurance coverage is adequate for South Valley. Since December 31,
1990, there has not been any damage to, destruction of, or loss of any assets of
South Valley not covered by insurance that could materially and adversely affect
the business, financial condition, properties, assets or results of operations
of South Valley and SVNB taken as a whole.
(s) Transactions With Affiliates. Except as may arise in the Ordinary Course
of Business, South Valley has not extended credit, committed to extend credit,
or transferred any asset to or assumed or guaranteed any liability of the
employees or directors of South Valley, or any spouse or child of any of them,
or to any of their "affiliates" or "associates" as such terms are defined in
Rule 405 under Regulation C of the 1933 Act. South Valley has not entered into
any other transactions with the employees or directors of South Valley or any
spouse or child of any of them, or any of their affiliates or associates, except
as disclosed in writing to Pacific Capital in the South Valley Disclosure
Statement. Any such transactions have been on terms no less favorable than those
which would prevail in an arm's-length transaction with an independent third
party.
(t) Information in Registration Statement. The information pertaining to South
Valley which will be furnished to Pacific Capital for or on behalf of South
Valley for inclusion in the Registration Statement, the Prospectus or the Proxy
Statement (each as herein defined), or in the applications to be filed to obtain
the Government Approvals (the "Applications"), will not contain any untrue
statement of any material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading; provided,
however, that information of a later date shall be deemed to modify information
as of an earlier date. All financial statements of South Valley included in the
Prospectus and Proxy Statement will present fairly in all material respects the
financial condition and results of operations of South Valley at the dates and
for the periods covered by such statements in accordance with GAAP consistently
applied throughout the periods covered by such statements. South Valley shall
promptly advise Pacific Capital in writing if prior to the Effective Time South
Valley shall obtain knowledge of any facts that would make
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<PAGE> 23
it necessary to amend the Registration Statement, the Proxy Statement or any
Application, or to supplement the Prospectus, in order to make the statements
therein not misleading or to comply with applicable law.
(u) Accuracy of Representations and Warranties. No representation or warranty
by South Valley, and no statement by South Valley in any certificate, agreement,
schedule or other document furnished in connection with the transactions
contemplated by this Agreement, contains or will contain any untrue statement of
a material fact or omits or will omit to state any material fact necessary to
make such representation, warranty or statement not misleading to Pacific
Capital; provided, however, that information as of a later date shall
automatically modify information as of an earlier date.
(v) Loans. South Valley has disclosed to Pacific Capital in writing prior to
the date hereof, and will promptly inform Pacific Capital of the amounts of all
loans, leases, other extensions of credit or commitments, or other
interest-bearing assets of SVNB, that have been classified as of the date hereof
or hereafter by any internal bank examiner or any bank regulatory agency as
"Other Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful,"
"Loss," or words of similar import in the case of loans (or that would have been
so classified, in the case of other interest-bearing assets, had they been
loans). South Valley has furnished and will continue to furnish to Pacific
Capital true and accurate information concerning the loan portfolio of SVNB, and
no material information with respect to the loan portfolio has been or will be
withheld from Pacific Capital. All loans and investments of SVNB are legal,
valid and binding obligations enforceable in accordance with their respective
terms and are not subject to any setoffs, counterclaims or disputes (subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of general
applicability), except as disclosed to Pacific Capital in writing or reserved
for in the unaudited balance sheet of South Valley as of June 30, 1996, and were
duly authorized under and made in compliance with applicable federal and state
laws and regulations. South Valley and SVNB do not have any extensions of
credit, investments, guarantees, indemnification agreements or commitments for
the same (including without limitation commitments to issue letters of credit,
to create acceptances, or to repurchase securities, federal funds or other
assets) other than those documented on the books and records of South Valley and
SVNB.
(w) Restrictions on Investments. Except for pledges to secure public and trust
deposits and repurchase agreements in the Ordinary Course of Business or those
securities classified as "held-to-maturity" as defined under SFAS No. 115, none
of the investments reflected in the unaudited balance sheet of South Valley as
of June 30, 1996, and none of the investments made by South Valley or SVNB since
June 30, 1996, is subject to any restriction, whether contractual or statutory,
which materially impairs the ability of South Valley to freely dispose of such
investment at any time.
5. REPRESENTATIONS AND WARRANTIES OF PACIFIC CAPITAL.
Pacific Capital represents and warrants to South Valley, except as disclosed
to South Valley in writing on the date of this Agreement (the "Pacific Capital
Disclosure Statement"), that:
(a) Corporate Status and Power to Enter Into Agreements. Pacific Capital (i)
is a corporation duly incorporated, validly existing and in good standing under
the laws of California and is a registered bank holding company under the BHC
Act, (ii) subject to the approval of this Agreement and the transactions
contemplated hereby by the shareholders of Pacific Capital and the FRB, it has
all necessary corporate power to enter into this Agreement and to carry out all
of the terms and provisions hereof and thereof to be carried out by it, and
(iii) is not subject to any directive, order (formal or informal) or agreement,
of the FRB or any other regulatory authority having jurisdiction over its
business or any of its assets or properties, and (iv) is in full compliance with
any agreements, understandings or orders of the FRB or any other regulatory
authority having jurisdiction over its business or any of its assets or
properties. FNB (i) holds a currently valid license issued by the OCC to engage
in business as a national association under the National Bank Act, and (ii) is
not subject to any directive, order (formal or informal) or agreement, of the
OCC or any other regulatory authority having jurisdiction over its business or
any of its assets or properties, and (iii) is in full compliance with any
agreements, understandings or orders of the OCC or any other regulatory
authority having jurisdiction over its business or any of its assets or
properties. Neither the scope of the business of Pacific Capital or FNB nor the
location of their respective properties requires it to be licensed to do
business in any jurisdiction other than the State of California.
(b) Articles, Bylaws, Books and Records. The copies of the respective Articles
of Incorporation or Association and Bylaws of Pacific Capital and FNB to be
delivered to South Valley prior to the date hereof are complete and accurate
copies thereof as in effect on the date hereof. The minute books of Pacific
Capital and FNB made available to South Valley contain a complete and accurate
record of all meetings of the Board of Directors (and committees thereof) and
shareholders. The corporate books and records (including financial
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statements) of Pacific Capital and FNB fairly reflect the material transactions
to which Pacific Capital or FNB is a party or by which their respective
properties are subject or bound, and such books and records have been properly
kept and maintained. The Articles of Incorporation and Bylaws of Pacific Capital
and the Articles of Association and Bylaws of FNB and all amendments thereto
have been duly approved by all requisite corporate action and by the appropriate
regulatory authority to the extent required by law.
(c) Compliance With Laws, Regulations and Decrees. To the best knowledge of
Pacific Capital and FNB, each (i) has the corporate power to own or lease its
properties and to conduct its business as currently conducted, (ii) has complied
with, and is not in default in any material respects of any laws, regulations,
ordinances, orders or decrees applicable to the conduct of its business and the
ownership of its properties, including but not limited to all federal and state
laws (including but not limited to the Bank Secrecy Act), rules and regulations
relating to the offer, sale or issuance of securities, and the operation of a
national association, other than where such noncompliance or default is not
likely to result in a material limitation on the conduct of its business or is
not likely to otherwise have a material adverse effect on Pacific Capital or FNB
taken as a whole, (iii) has not failed to file with the proper federal, state,
local or other authorities any material report or other document required to be
so filed, (iv) has all material approvals, authorizations, consents, licenses,
clearances and orders of, and have currently effective all registrations with,
all governmental and regulatory authorities which are necessary to the business
and operations of Pacific Capital and FNB as now being conducted, and (v) has
received no notification, formally or informally, from any agency or department
of any federal, state or local government or any regulatory agency or the staff
thereof (A) asserting that Pacific Capital or FNB is not in material compliance
with any of the statutes, regulations or ordinances which such government or
regulatory authority enforces, or (B) threatening to revoke any licenses,
franchise, permit or governmental authorization of Pacific Capital or FNB.
(d) Capitalization. The authorized capital stock of Pacific Capital consists
of 20,000,000 shares of common stock, without par value, of which 2,607,438
shares are duly authorized, fully paid, validly issued, nonassessable and are
currently outstanding and 20,000,000 shares of preferred stock, without par
value, of which no preferred shares are issued or outstanding. The authorized
capital stock of FNB consists of 1,800,000 shares of FNB common stock, $5.00 par
value, of which 1,800,000 are duly authorized, validly issued, fully paid and
nonassessable and currently outstanding. Said stock has been issued in
compliance with all applicable registration or qualification provisions of state
and federal securities laws. No other equity securities of Pacific Capital or
FNB have been issued or are outstanding. There are currently outstanding options
to purchase 169,319 shares of Pacific Capital Common Stock, at a weighted
average exercise price of $16.36 per share, issued pursuant to the 1994 Stock
Option Plan. There are currently outstanding options to purchase 89,306 shares
of Pacific Capital Common Stock, at a weighted average exercise price of $14.50
per share, issued pursuant to the 1991 Directors Stock Option Plan. There are
currently outstanding options to purchase 56,778 shares of Pacific Capital
Common Stock, at a weighted average exercise price of $14.50 per share, issued
pursuant to the 1984 Stock Option Plan. The foregoing option plans are referred
to herein collectively as the "Pacific Capital Option Plans." Said options were
issued and, upon issuance in accordance with the terms of the outstanding
options said shares shall be issued, in compliance with all applicable
securities laws. There are no outstanding (i) options, agreements, calls or
commitments of any character which would obligate Pacific Capital to issue,
sell, pledge, assign or otherwise encumber or dispose of, or to purchase, redeem
or otherwise acquire, any Pacific Capital common stock or any other equity
security of Pacific Capital, or (ii) warrants or options relating to, rights to
acquire, or debt or equity securities convertible into, shares of Pacific
Capital common stock or any other equity security of Pacific Capital. Attached
to the Pacific Capital Disclosure Statement is a list of all option holders and
the number of vested and unvested options as of June 30, 1996. The outstanding
common stock of Pacific Capital has been duly and validly registered with the
Commission pursuant to the 1934 Act, to the extent required thereunder.
(e) Equity Interests. Except as disclosed in the Pacific Capital Disclosure
Statement or as collateral for outstanding loans held in its loan portfolio,
Pacific Capital does not own, directly or indirectly, any equity interest in any
bank, corporation, or other entity.
(f) Financial Statements, Regulatory Reports. No financial statement or other
document provided or to be provided to South Valley as required by Section
3.1(d) hereof, as of the date of such document, contained, or as to documents to
be delivered after the date hereof, will contain, any untrue statement of a
material fact, or, at the date thereof, omitted or will omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements were or will be made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify information as of any earlier date. Pacific Capital and FNB
have filed all material documents and reports relating to Pacific Capital and/or
FNB required to be filed by Pacific Capital or FNB with the Commission, the FRB,
the OCC or any other governmental authority having jurisdiction over their
businesses or any of their assets or properties. All such reports conform in all
material respects with the requirements promulgated by such regulatory agencies.
All compliance or corrective action relating to Pacific Capital required by
governmental authorities and regulatory agencies having jurisdiction over
Pacific Capital and FNB have been taken. Pacific Capital and FNB have not
received notification, formally or informally,
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from any agency or department of any federal, state or local government or any
regulatory agency or the staff thereof (A) asserting that Pacific Capital and/or
FNB is not in compliance with any of the statutes, regulations or ordinances
which such government or regulatory authority enforces, or (B) threatening to
revoke any license, franchise, permit or governmental authorization of Pacific
Capital and/or FNB. Neither Pacific Capital nor FNB is subject to any order,
agreement or written directive with any regulatory authority with respect to its
assets or business except for matters of general application. Pacific Capital
and FNB have paid all assessments made or imposed by any governmental agency.
Pacific Capital shall make available to South Valley for inspection copies of
all annual management letters and opinions and all reviews, correspondence and
other documents in the files of Pacific Capital prepared by KPMG or any other
certified public accountant engaged by Pacific Capital and delivered to Pacific
Capital since January 1, 1991. The consolidated financial records of Pacific
Capital have been, and are being and shall be, maintained in all material
respects in accordance with all applicable legal and accounting requirements
sufficient to insure that all transactions reflected therein are, in all
material respects, executed in accordance with management's general or specific
authorization and recorded in conformity with GAAP at the time in effect. The
data processing equipment, data transmission equipment, related peripheral
equipment and software used by Pacific Capital in the operation of its business
to generate and retrieve its financial records are adequate for the current
needs of Pacific Capital.
(g) Tax Returns.
(i) Pacific Capital has timely filed all federal, state,
county, local and foreign tax returns required to be filed by it, including,
without limitation, estimated tax, use tax, excise tax, real property and
personal property tax reports and returns, employer's withholding tax returns,
other withholding tax returns and Federal Unemployment Tax Returns, and all
other reports or other information required or requested to be filed by each
of them, and each such return, report or other information was, when filed,
complete and accurate in all material respects. Pacific Capital has paid all
taxes, fees and other governmental charges, including any interest and
penalties thereon, when they have become due and payable, except those that
are being contested in good faith, which contested matters have been disclosed
in writing to South Valley. Pacific Capital has not requested to give or has
given any currently effective waivers extending the statutory period of
limitation applicable to any tax return required to be filed by either of them
for any period. There are no claims pending against Pacific Capital for any
alleged deficiency in the payment of any taxes, and no pending or threatened
audits, investigations or claims for unpaid taxes or relating to any liability
in respect of any taxes. There have been no events, including a change in
ownership, that would result in a reappraisal and establishment of a new
base-year full value for purposes of Articles XIII.A of the California
Constitution, of any real property owned in whole or in part by Pacific
Capital or to the best of Pacific Capital's knowledge, of any real property
leased by Pacific Capital.
(ii) Pacific Capital shall deliver to South Valley when
available, copies of all its and its subsidiaries' tax returns with respect to
taxes payable to the United States of America and the State of California for
the fiscal years ended December 31, 1995, 1994 and 1993.
(iii) No consent has been filed relating to Pacific Capital
pursuant to Section 341(f) of the IRC.
(h) Material Adverse Change. Except as reflected on Pacific Capital's
financial statements issued prior to the date hereof and delivered to South
Valley or as otherwise disclosed in writing by Pacific Capital to South Valley
prior to the date hereof, since December 31, 1995, there has been (i) no
material adverse change in the business, assets, licenses, permits, franchises,
results of operations or financial condition of Pacific Capital and FNB taken as
a whole (whether or not in the Ordinary Course of Business), (ii) no change in
any of the assets, licenses, permits or franchises of Pacific Capital or that
has had or, to Pacific Capital's knowledge, can reasonably be expected to have a
material adverse effect on any of the items listed in clause (h)(i) above, (iii)
no damage, destruction, or other casualty loss (whether or not covered by
insurance) that has had or can reasonably be expected to have a material adverse
effect on any of the items listed in clause (h)(i) above, (iv) no amendment,
modification, or termination of any existing, or entering into of any new,
contract, agreement, plan, lease, license, permit or franchise that is material
to the business, financial condition, assets, liabilities or operations of
Pacific Capital and FNB taken as a whole, except in the Ordinary Course of
Business; or (v) no disposition by Pacific Capital of one or more assets that,
individually or in the aggregate, are material to Pacific Capital and FNB taken
as a whole, except sales of assets in the Ordinary Course of Business.
(i) No Undisclosed Liabilities. Except for items for which reserves have been
established in the unaudited consolidated balance sheets of Pacific Capital as
of June 30, 1996, since such date Pacific Capital has not incurred or
discharged, and is not legally obligated with respect to, any indebtedness,
liability (including, without limitation, a liability arising out of an
indemnification, guarantee, hold harmless or similar arrangement) or obligation
(accrued or contingent, whether due or to become due, and whether or not
subordinated
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to the claims of its general creditors), other than as a result of operations in
the Ordinary Course of Business. Pacific Capital has not knowingly made nor
shall make any representations or covenants in any such agreement that contained
or shall contain any untrue statement of a material fact or omitted or shall
omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which such
representations and/or covenants were made or shall be made, not misleading. No
cash, stock or other dividend or any other distribution with respect to the
stock of Pacific Capital has been declared, set aside or paid, nor have any
shares of the stock of Pacific Capital been purchased, redeemed or otherwise
acquired, directly or indirectly, by Pacific Capital since June 30, 1996.
(j) Properties and Leases.
(i) Pacific Capital and FNB have good and marketable title,
free and clear of all liens and encumbrances and the right of possession,
subject to existing leaseholds, to all real properties and good title to all
other property and assets, tangible and intangible, reflected in the Pacific
Capital unaudited consolidated balance sheet as of June 30, 1996 (except
property held as lessee under leases entered into since June 30, 1996 and
disclosed in writing prior to the date hereof and except personal property
sold or otherwise disposed of since June 30, 1996 in the Ordinary Course of
Business), except (a) liens for taxes or assessments not delinquent, (b) such
other liens and encumbrances and imperfections of title as do not materially
affect the value of such property as reflected in the Pacific Capital
unaudited consolidated balance sheet as of June 30, 1996, or as currently
shown on the books and records of Pacific Capital and which do not interfere
with or impair the present and continued use, or (c) immaterial exceptions
disclosed in title reports and preliminary title reports, copies of which
shall be provided to South Valley. All tangible properties of Pacific Capital
conform in all material respects with all applicable ordinances, regulations
and zoning laws. All material tangible properties of Pacific Capital and FNB
are in a good state of maintenance and repair and are adequate for the current
business of Pacific Capital. No properties of Pacific Capital or FNB and, to
the best of Pacific Capital's knowledge, no properties in which it holds a
collateral or contingent interest or purchase option, are the subject of any
pending or, to the best of Pacific Capital's knowledge, threatened
investigation, claim or proceeding relating to the use, storage or disposal on
such property of or contamination of such property by any toxic or hazardous
waste material or substance. To Pacific Capital's knowledge, Pacific Capital
and FNB do not own, possess or have a collateral or contingent interest or
purchase option in any properties or other assets which contain or have
located within or thereon any hazardous or toxic waste material or substance
unless the location of such hazardous or toxic waste material or other
substance or its use thereon conforms in all material respects with all
federal, state and local laws, rules, regulations or other provisions
regulating the discharge of materials into the environment. As to any asset
not owned or leased by Pacific Capital or FNB, to the best of Pacific
Capital's knowledge, neither Pacific Capital nor FNB has controlled, directed
or participated in the operation or management of any such asset or any
facilities or enterprise conducted thereon, such that it has become an owner
or operator of such asset under applicable environmental laws.
(ii) All properties held by Pacific Capital or FNB under
leases are held under valid, binding and enforceable leases, with such
exceptions as are not material and do not interfere with the conduct of the
business of Pacific Capital or FNB, and Pacific Capital or FNB, as the case
may be, enjoys quiet and peaceful possession of such leased property. Pacific
Capital is not in default in any material respect under any material lease,
agreement or obligation regarding its properties to which it is a party or by
which it is bound.
(iii) Except as disclosed to South Valley in the Pacific
Capital Disclosure Statement, all of Pacific Capital's and FNB's rights and
obligations under the leases referred to in Section 5(j)(ii) above do not
require the consent of any other party to the transaction contemplated by this
Agreement. Where required, Pacific Capital shall use its best efforts to
obtain, prior to the Effective Date, the consent of all parties to any such
transactions.
(k) Material Contracts. Except as disclosed to South Valley in the Pacific
Capital Disclosure Statement and excluding loans, lines of credit, loan
commitments or letters of credit to which Pacific Capital or FNB is a party,
neither Pacific Capital nor FNB is a party to or bound by any contract or other
agreement made in the Ordinary Course of Business which involves aggregate
future payments by or to it of more than $50,000 and which is made for a fixed
period expiring more than one year from the date hereof, and neither Pacific
Capital nor FNB is a party to or bound by any agreement not made in the Ordinary
Course of Business which is to be performed at or after the date hereof. Each of
the contracts and agreements disclosed to South Valley pursuant to this Section
5(k) is a legal and binding obligation (subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and subject,
as to enforceability, to equitable principles of general applicability), and no
material breach or default (and no condition which, with notice or passage of
time, or both, could become a breach or default) exists with respect thereto. No
power of attorney or similar authorization given directly or indirectly by
Pacific Capital is currently outstanding.
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(l) Employment Contracts and Benefits.
(i) Pacific Capital shall provide to South Valley access to
all bonus, incentive compensation, profit-sharing, pension, retirement, stock
purchase, stock option, deferred compensation, severance, hospitalization,
medical, dental, vision, group insurance, death benefits, disability and other
fringe benefit plans, trust agreements, arrangements and commitments of
Pacific Capital and FNB (including but not limited to such plans, agreements,
arrangements and commitments applicable to former employees or retired
employees, or for which such persons are eligible), if any, together with
copies of all such plans, agreements, arrangements and commitments that are
documented, any and all contracts of employment and has made available to
South Valley any Board of Directors' minutes (or committee minutes) from
meetings held within the five-year period ending as of the Closing
authorizing, approving or guaranteeing such plans and contracts.
(ii) With respect to each employee benefit plan (as defined
in Section 3(3) of ERISA) of Pacific Capital which is subject to the
reporting, disclosure and record retention requirements set forth in the IRC
and Part 1 of Subtitle B of Title I of ERISA and the regulations thereunder,
each of such requirements has been met in all material respects on a timely
basis.
(iii) With respect to each employee benefit plan (as defined
in Section 3(3) of ERISA) of Pacific Capital which is subject to Part 4 of
Subtitle B of Title I of ERISA, none of the following now exists or has
existed within the six-year period ending on the date hereof:
(1) Any act or omission constituting a material violation of
Section 402 of ERISA;
(2) Any act or omission constituting a material violation of
Section 403 of ERISA;
(3) Any act or omission by Pacific Capital or any of its
subsidiaries, or by any director, officer or employee thereof, constituting a
material violation of Sections 404 and 405 of ERISA;
(4) To the best of Pacific Capital's knowledge, any act or
omission by any other person constituting a material violation of Sections 404
or 405 of ERISA;
(5) Any act or omission which constitutes a material
violation of Sections 406 or 407 of ERISA and is not exempted by Section 408
of ERISA or which constitutes a material violation of Section 4975(c) of the
IRC and is not exempted by Section 4975(d) of the IRC; or
(6) Any act or omission constituting a material violation of
Sections 503, 510 or 511 of ERISA.
(iv) All contributions, premiums or other payments due from
Pacific Capital and its subsidiaries to (or under) any employee benefit plan
of Pacific Capital have been fully paid or adequately provided for on the
audited financials for the year ended December 31, 1995 and the unaudited
financials for the period ended June 30, 1996. All accruals thereon
(including, where appropriate, proportional accruals for partial periods) have
been made in all material respects in accordance with GAAP consistently
applied on a reasonable basis.
(v) Each employee benefit plan of Pacific Capital complies
in all material respects with all applicable requirements of (A) the Age
Discrimination in Employment Act of 1967, as amended, and the regulations
thereunder and (B) Title VII of the Civil Rights Act of 1964, as amended, and
the regulations thereunder.
(vi) Each employee benefit plan of Pacific Capital complies
in all material respects with all applicable requirements of (A) the health
care continuation coverage provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, and the regulations thereunder.
(vii) Pacific Capital shall disclose in writing to South
Valley the names of each director, officer and employee of Pacific Capital and
FNB.
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(m) Compliance With ERISA. Pacific Capital has not, since its inception,
either maintained or contributed to an employee pension benefit plan, as defined
in Section 3(2) of ERISA, including multiemployer plans, other than the Pacific
Capital 401(k) Plan (the "Pacific Capital Plan") and a true and accurate copy of
which has been provided to South Valley. With respect to the Pacific Capital
Plan and its related trust (the "Trust"), as of the Effective Time, (i) the
Pacific Capital Plan will in all material respects be (and currently is) in
compliance in form with all the applicable requirements of Section 401(a) of the
IRC, and the form of Trust will be exempt from income tax under Section 501(a)
of the IRC; (ii) the Pacific Capital Plan represents the adoption of a
standardized prototype plan that received a favorable opinion letter ("Opinion
Letter") from the Internal Revenue Service ("IRS") as to its form dated April 1,
1992; (iii) Pacific Capital relies on such Opinion Letter as authorized under
IRS Revenue Procedure 96-4 as support for the fact that the Pacific Capital Plan
is qualified under section 401(a) of the IRC; (iv) no contributions have
exceeded the limitations set forth in Section 415 of the IRC; (v) required
filings with the IRS and Department of Labor with respect to the Pacific Capital
Plan and the Trust for periods from inception and ending at or prior to the
Effective Time will have been made by Pacific Capital and the plan
administrator; (vi) there shall have been no material violation of Parts 1 and 4
of Subtitle B of Title I of ERISA or of Section 4975 of the IRC; and (vii) there
shall have been no action, claim or demand of any kind known to Pacific Capital
brought by any claimant or representative of such claimant under the Pacific
Capital Plan or Trust where Pacific Capital may be either (A) liable directly on
such action, claim or demand, or (B) obligated to indemnify any person, group of
persons or entity with respect to such action, claim or demand, unless such
action, claim or demand is covered by adequate reserves reflected in Pacific
Capital's June 30, 1996 financial statements or an insurer of Pacific Capital
has agreed to defend against and pay the amount of any resulting liability
without reservation.
(n) Collective Bargaining and Employment Agreements. Except as provided in
this Agreement or as disclosed to South Valley in the Pacific Capital Disclosure
Statement, Pacific Capital does not have any union or collective bargaining or
written employment agreements, contracts or other agreements with any labor
organization or with any member of management, or any management or consultation
agreement not terminable at will by Pacific Capital without liability and no
such contract or agreement has been requested by, or is under discussion by
management with, any group of employees, any member of management or any other
person. There are no material controversies pending between Pacific Capital and
any current or former employees, and to the best of their knowledge, there are
no efforts presently being made by any labor union seeking to organize any of
such employees.
(o) Compensation of Officers and Employees. Except as disclosed to South
Valley in the Pacific Capital Disclosure Statement and except as otherwise
provided in this Agreement, (i) no officer or employee of Pacific Capital or FNB
is receiving aggregate direct remuneration at a rate exceeding $65,000 per
annum, and (ii) the consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional or
further acts or events) result in any payment (whether of severance pay or
otherwise) becoming due from Pacific Capital, FNB or Pacific Capital to any
employee of Pacific Capital or FNB.
(p) Legal Actions and Proceedings. Except as disclosed to South Valley in
writing prior to the date hereof, neither Pacific Capital nor FNB is a party to,
or, to the best of their knowledge, threatened with, any legal action or other
proceeding or investigation before any court, any arbitrator of any kind or any
government agency, and to the best of Pacific Capital's knowledge, neither
Pacific Capital nor FNB is subject to any potential adverse claim, the outcome
of which could involve the payment or receipt by Pacific Capital or FNB of any
amount in excess of $50,000, unless an insurer of Pacific Capital has agreed to
defend against and pay the amount of any resulting liability without
reservation, or, if any such legal action, proceeding, investigation or claim
will not involve the payment by Pacific Capital or FNB of a monetary amount,
which could materially adversely affect Pacific Capital, FNB or their respective
businesses or properties or the transactions contemplated hereby. Pacific
Capital has no knowledge of any pending or threatened claims or charges under
the Community Reinvestment Act, before the Equal Employment Opportunity
Commission, the California Department of Fair Housing & Economic Development,
the California Unemployment Appeals Board, or any human relations commission.
There is no labor dispute, strike, slow-down or stoppage pending or, to the best
of the knowledge of Pacific Capital, threatened against Pacific Capital or FNB.
(q) Execution and Delivery of the Agreement.
(i) The execution and delivery of this Agreement has been
duly authorized by the Board of Directors of Pacific Capital and, when this
Agreement and the Merger have been duly approved by the affirmative vote of
the holders of a majority of the outstanding shares of Pacific Capital common
stock at a meeting of shareholders duly called and held, this Agreement and
the Merger will be duly and validly authorized by all necessary corporate
action on the part of Pacific Capital.
(ii) This Agreement has been duly executed and delivered by
Pacific Capital and (assuming due execution and delivery by and enforceability
against Pacific Capital) constitutes the legal and binding obligations of
Pacific Capital.
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(iii) The execution and delivery by Pacific Capital of this
Agreement and the consummation of the transactions herein (A) do not violate
any provision of the Articles of Incorporation or Bylaws of Pacific Capital,
any provision of federal or state law or any governmental rule or regulation
(assuming (1) receipt of the Government Approvals, (2) receipt of the
requisite Pacific Capital shareholder approval referred to in Section 3.1(h)
hereof, (3) due registration of the Pacific Capital Shares under the 1933 Act,
(4) receipt of appropriate permits or approvals under applicable state
securities laws, and (5) accuracy of the representations of Pacific Capital
set forth herein), and (B) do not require any consent of any person under,
conflict with or result in a breach of, or accelerate the performance required
by any of the terms of, any material debt instrument, lease, license,
covenant, agreement or understanding to which Pacific Capital is a party or by
which it is bound or any order, ruling, decree, judgment, arbitration award or
stipulation to which Pacific Capital is subject, or constitute a material
default thereunder or result in the creation of any lien, claim, security
interest, encumbrance, charge, restriction or similar right of any third party
upon any of the properties or assets of Pacific Capital.
(r) Insurance. Pacific Capital and FNB are and continuously since their
respective inceptions have been, insured with reputable insurers against all
risks normally insured against by corporations such as Pacific Capital and
national associations, and all of the insurance policies (including directors'
and officers' liability insurance) and bonds maintained by Pacific Capital are
in full force and effect, and to the best of its knowledge, Pacific Capital is
not in material default thereunder and all material claims thereunder have been
filed in due and timely fashion. In the best judgment of the management of
Pacific Capital, such insurance coverage is adequate for Pacific Capital. Since
December 31, 1990, there has not been any damage to, destruction of, or loss of
any assets of Pacific Capital not covered by insurance that could materially and
adversely affect the business, financial condition, properties, assets or
results of operations of Pacific Capital and FNB taken as a whole.
(s) Transactions With Affiliates. Except as may arise in the Ordinary Course
of Business, Pacific Capital has not extended credit, committed to extend
credit, or transferred any asset to or assumed or guaranteed any liability of
the employees or directors of Pacific Capital, or any spouse or child of any of
them, or to any of their "affiliates" or "associates" as such terms are defined
in Rule 405 under Regulation C of the 1933 Act. Pacific Capital has not entered
into any other transactions with the employees or directors of Pacific Capital
or any spouse or child of any of them, or any of their affiliates or associates,
except as disclosed in writing to South Valley in the Pacific Capital Disclosure
Statement. Any such transactions have been on terms no less favorable than those
which would prevail in an arm's-length transaction with an independent third
party.
(t) Information in Registration Statement. The information pertaining to
Pacific Capital in the Registration Statement, the Prospectus or the Proxy
Statement (each as herein defined), or in the Applications, will not contain any
untrue statement of any material fact or omits or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that information of a later date shall be deemed
to modify information as of an earlier date. All financial statements of Pacific
Capital included in the Prospectus and Proxy Statement will present fairly in
all material respects the financial condition and results of operations of
Pacific Capital at the dates and for the periods covered by such statements in
accordance with GAAP consistently applied throughout the periods covered by such
statements. Pacific Capital shall promptly advise South Valley in writing if
prior to the Effective Time Pacific Capital shall obtain knowledge of any facts
that would make it necessary to amend the Registration Statement, the Proxy
Statement or any Application, or to supplement the Prospectus, in order to make
the statements therein not misleading or to comply with applicable law.
(u) Accuracy of Representations and Warranties. No representation or warranty
by Pacific Capital, and no statement by Pacific Capital in any certificate,
agreement, schedule or other document furnished in connection with the
transactions contemplated by this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary to make such representation, warranty or statement not misleading to
South Valley; provided, however, that information as of a later date shall
automatically modify information as of an earlier date.
(v) Loans. Pacific Capital has disclosed to South Valley in writing prior to
the date hereof, and will promptly inform South Valley of the amounts of all
loans, leases, other extensions of credit or commitments, or other
interest-bearing assets of FNB, that have been classified as of the date hereof
or hereafter by any internal bank examiner or any bank regulatory agency as
"Other Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful,"
"Loss," or words of similar import in the case of loans (or that would have been
so classified, in the case of other interest-bearing assets, had they been
loans). Pacific Capital has furnished and will continue to furnish to South
Valley true and accurate information concerning the loan portfolio of FNB, and
no material information with respect to the loan portfolio has been or will be
withheld from South Valley. All loans and investments of FNB are legal, valid
and binding obligations
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enforceable in accordance with their respective terms and are not subject to any
setoffs, counterclaims or disputes (subject to applicable bankruptcy, insolvency
and similar laws affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general applicability), except as
disclosed to South Valley in writing or reserved for in the unaudited balance
sheet of Pacific Capital as of June 30, 1996, and were duly authorized under and
made in compliance with applicable federal and state laws and regulations.
Pacific Capital and FNB do not have any extensions of credit, investments,
guarantees, indemnification agreements or commitments for the same (including
without limitation commitments to issue letters of credit, to create
acceptances, or to repurchase securities, federal funds or other assets) other
than those documented on the books and records of Pacific Capital and FNB.
(w) Restrictions on Investments. Except for pledges to secure public and trust
deposits and repurchase agreements in the Ordinary Course of Business or those
securities classified as "held-to-maturity" as defined under SFAS No. 115, none
of the investments reflected in the unaudited balance sheet of Pacific Capital
as of June 30, 1996, and none of the investments made by Pacific Capital or FNB
since June 30, 1996, is subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Pacific Capital to freely
dispose of such investment at any time.
6. SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934.
(a) Preparation and Filing of Registration Statement. Pacific Capital shall
promptly prepare and file with the Commission (i) the Registration Statement as
defined in Section 3.1(a) above under and pursuant to the provisions of the 1933
Act for the purpose of registering the Pacific Capital Shares and, (ii) shall
prepare and file, one or more registration statements or amendments to existing
registration statements under the 1933 Act for the purpose of registering the
maximum number of shares of common stock of Pacific Capital to which the option
holders of South Valley shall be entitled to receive pursuant to Section 2.6
above on the Effective Date. Pacific Capital and South Valley shall promptly
prepare a proxy statement (the "Proxy Statement") which shall be part of the
Registration Statement for the purpose of submitting this Agreement and the
Merger (including the principal terms thereof) to the shareholders of South
Valley and Pacific Capital for their approval. South Valley and Pacific Capital
shall cooperate in all reasonable respects with regard to the preparation of the
Proxy Statement. The Proxy Statement in definitive form is expected to serve as
the prospectus (the "Prospectus") to be included in the Registration Statement.
Pacific Capital and South Valley shall each provide promptly to the other such
information concerning its business and financial condition and affairs as may
be required or appropriate for inclusion in the Registration Statement, the
Prospectus or the Proxy Statement, and shall cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Registration Statement, the Prospectus and the Proxy Statement.
(b) Effectiveness of Registration Statement. Pacific Capital and South Valley
shall use their best efforts to have the Registration Statement and any
amendments or supplements thereto declared effective under the 1933 Act on or
before the Effective Date, and thereafter they shall distribute at their own
cost the Proxy Statement to holders of their common stock in accordance with
applicable laws and their Articles of Incorporation and Bylaws.
(c) Sales and Resales of Common Stock. Pacific Capital shall not be required
to maintain the effectiveness of the Registration Statement for the purpose of
sale or resale of the Pacific Capital Shares by any person.
(d) Rule 145. Securities representing Pacific Capital Shares issued to persons
deemed to be affiliates of South Valley (as determined by counsel to Pacific
Capital) under Rule 145 of the Rules and Regulations under the 1933 Act pursuant
to the Merger Agreement may be subject to stop transfer orders and may bear a
restrictive legend in substantially the following form:
The security represented by this instrument has been issued or transferred to
the registered holder as the result of a transaction to which Rule 145 under
the 1933 Act applies. The security represented by this instrument may not be
sold, hypothecated, transferred or assigned, and the issuer shall not be
required to give effect to any attempted sale, hypothecation, transfer or
assignment, except (i) pursuant to a then current effective registration under
the 1933 Act, (ii) in a transaction permitted by the Commission's Rule 145;
(iii) in a transaction which, in the opinion of counsel satisfactory to the
issuer, is not required to be registered under the 1933 Act, or (iv) pursuant
to an applicable no action letter or interpretative release.
Should any opinion of counsel described in clause (ii) of the foregoing legend
indicate that the legend and any stop transfer order then in effect with respect
to the shares may be removed, Pacific Capital will upon request substitute
unlegended securities and remove any stop transfer orders. Pacific Capital shall
timely file annual and quarterly reports pursuant to all applicable securities
laws.
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7. CONDITIONS TO THE OBLIGATIONS OF PACIFIC CAPITAL.
The obligations of Pacific Capital under this Agreement are, at its option,
subject to fulfillment at or prior to the Effective Date of each of the
following conditions; provided, however, that any one or more of such conditions
may be waived by the Board of Directors of Pacific Capital at any time at or
prior to the Effective Time:
(a) Representations and Warranties. The representations and warranties of
South Valley in Section 4 hereof shall be true and correct in all material
respects on the date hereof and as of the Effective Date, with the same effect
as though such representations and warranties had been made on and as of such
date except as to any representation or warranty which specifically relates to a
specified date and does not contain any material inaccuracies or omissions the
circumstances as to which either individually or in the aggregate have, or
reasonably could be expected to have, a material adverse effect on the business,
financial condition, results of operations or prospects of South Valley and SVNB
taken as a whole.
(b) Compliance and Performance Under Agreement. South Valley shall have
performed and complied in all material respects with all terms of this Agreement
required to be performed or complied with by it at or prior to the Effective
Date. Each of the directors of South Valley also shall have performed and
complied in all material respects with all of the terms and conditions of the
undertaking referred to in Section 3.2(a) above.
(c) Material Adverse Change. Except as disclosed to Pacific Capital in writing
prior to the date hereof, no material adverse change shall have occurred since
December 31, 1995, in the business, financial condition, properties, results of
operations or prospects of South Valley and SVNB taken as a whole and South
Valley shall not be a party to or, so far as South Valley is aware, threatened
with, and to South Valley's knowledge there is no reasonable basis for, any
legal action or other proceeding before any court, any arbitrator of any kind or
any government agency if, in the reasonable judgment of Pacific Capital, such
legal action or proceeding could materially adversely affect South Valley and
SVNB or their business, financial condition, properties, results of operations
or prospects taken as a whole.
(d) Approval of Agreement. This Agreement and the Merger shall have been duly
approved by the affirmative vote of the holders of a majority of the outstanding
shares of South Valley Common Stock at the meeting of shareholders duly called
and held after distributing the Proxy Statement to all shareholders entitled to
vote at such meeting as required by Section 3.2(a) hereof and by the affirmative
vote of the holders of a majority of the outstanding shares of Pacific Capital
Common Stock at the meeting of shareholders duly called and held after
distributing the Proxy Statement to all shareholders entitled to vote at such
meeting as required by Section 3.1(h) hereof.
(e) Officer's Certificate. Pacific Capital shall have received a certificate,
dated the Effective Date, signed on behalf of South Valley by its Chief
Executive Officer and by its Chief Financial Officer, to the effect that the
conditions in Sections 7(a)-(c) and as to the approval of the shareholders of
South Valley in Section 7(d) have been satisfied.
(f) Opinion of Counsel. The counsel of South Valley shall have delivered to
Pacific Capital an opinion in substantially the form attached hereto as Exhibit
F.
(g) Absence of Legal Impediment. No significant legal impediment to the Merger
shall have arisen and no litigation, proceeding or investigation shall be
pending or threatened before any court or government agency relating to the
transactions contemplated by this Agreement which affords a material basis for a
determination that it would be inadvisable or inexpedient to continue to carry
out the terms of, or to attempt to consummate the transactions contemplated by
this Agreement.
(h) Effectiveness of Registration Statement. The Registration Statement and
any amendments or supplements thereto shall have become effective under the 1933
Act, no stop order suspending the effectiveness of such Registration Statement
shall be in effect and no proceedings for such purpose shall have been initiated
or threatened by or before the Commission. All state securities permits or
approvals required by applicable state securities laws to consummate the
transactions contemplated by this Agreement and the Merger Agreement shall have
been received and remain in effect.
(i) Government Approvals. All Government Approvals shall be in effect, and all
conditions or requirements prescribed by law or by any such Government Approval
shall have been satisfied; provided, however, that no Government Approval shall
be deemed to have been received if it shall require the divestiture or cessation
of any of the present businesses or operations conducted by either of the
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parties hereto or shall impose any other condition or requirement, which
divestiture, cessation, condition or requirement Pacific Capital in its
reasonable judgment shall deem to be materially burdensome (in which case
Pacific Capital shall promptly notify South Valley). For purposes of this
Agreement no condition shall be deemed to be "materially burdensome" if such
condition does not materially differ from conditions regularly imposed by the
FRB in orders approving transactions of the type contemplated by this Agreement
and compliance with such condition would not (A) require the taking of any
action materially inconsistent with the manner in which Pacific Capital or South
Valley has conducted its business previously, (B) have a material adverse effect
upon the business, financial condition or results of operations of Pacific
Capital or South Valley, or (C) preclude satisfaction of any of the material
conditions to consummation of the transactions contemplated by this Agreement.
(j) Tax Opinion. Pacific Capital and South Valley shall have received an
opinion of Pacific Capital's counsel or independent accountants, subject to
assumptions and exceptions normally included, in form and substance reasonably
satisfactory to Pacific Capital and its counsel, substantially to the effect
that under federal income tax law and California income and franchise tax law:
(i) The Merger will not result in any recognized gain or
loss to Pacific Capital or South Valley;
(ii) Except for any cash received in lieu of any fractional
share, no gain or loss will be recognized by holders of South Valley Shares
who receive Pacific Capital Shares in exchange for the South Valley Shares
which they hold;
(iii) The holding period of Pacific Capital Shares exchanged
for South Valley Shares will include the holding period of the South Valley
Shares for which it is exchanged, assuming the shares of South Valley Shares
are capital assets in the hands of the holder thereof at the Effective Date;
and
(iv) The basis of the Pacific Capital Shares received in the
exchange will be the same as the basis of the South Valley Shares for which it
was exchanged, less any basis attributable to fractional shares for which cash
is received.
(k) Dissenting Shares. The aggregate number of shares of South Valley Common
Stock and Pacific Capital Common Stock held by persons who have taken all of the
steps required at or prior to the shareholders' meetings referenced in Sections
3.2(a) and 3.1(h), respectively, to perfect their right (if any) to be paid the
value of such shares under the GCL shall not exceed 9% of the outstanding shares
of South Valley Common Stock and Pacific Capital Common Stock.
(l) Unaudited Financials. Not later than three business days prior to the
Effective Date, South Valley shall have furnished Pacific Capital a copy of its
most recently prepared unaudited year-to-date consolidated financial statements,
including a balance sheet and year-to-date statement of income and statement of
cash flows of South Valley, each prepared in accordance with GAAP. At least five
business days prior to the Effective Time, all attorneys, accountants,
investment bankers and other advisors and agents for South Valley shall have
submitted to South Valley (with a copy to Pacific Capital) estimates of their
fees and expenses for all services rendered in any respect in connection with
the transactions contemplated hereby to the extent not already paid, and based
on such estimates, South Valley shall have prepared and submitted to Pacific
Capital a summary of such fees and expenses for the transaction which shall be
reflected in the foregoing financial statement. At the Effective Time, (i) such
advisors shall have submitted their final bills for such fees and expenses to
South Valley for services rendered, with a copy to be delivered to Pacific
Capital, and based on such summary, South Valley shall have prepared and
submitted to Pacific Capital a final calculation of such fees and expenses, (ii)
South Valley shall have accrued and paid the amount of such fees and expenses as
calculated above after Pacific Capital has been given an opportunity to review
all such bills and calculation of such fees and expenses, and (iii) such
advisors shall have released Pacific Capital from liability for any fees and
expenses.
(m) Closing Documents. Pacific Capital shall have received from South Valley
such certificates and other closing documents as counsel for Pacific Capital
shall reasonably request.
(n) Consents. South Valley shall have received, or Pacific Capital shall have
satisfied itself that South Valley will receive, all consents of other parties
to and required by material mortgages, notes, leases, franchises, agreements,
licenses and permits applicable to South Valley, in each case in form and
substance reasonably satisfactory to Pacific Capital, and no such consent or
license or permit shall have been withdrawn or suspended.
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(o) Additions to SVNB Board of Directors. South Valley shall have taken any
actions necessary to have SVNB amend its Bylaws or to take any other actions to
increase the number of authorized directors on SVNB's board to permit the
appointment of three additional directors to be designated by Pacific Capital at
least five business days prior to the Closing Date.
(p) Pooling-of-Interests Accounting. Pacific Capital shall have determined and
shall have received a letter from KPMG to the effect that the Merger shall
qualify for the pooling-of-interests method of accounting in accordance with
GAAP and all applicable rules, regulations and policies of the Commission. In
addition, there shall have been no determination by any court, tribunal,
regulatory agency or other governmental entity, that the Merger fails or will
fail to qualify for pooling-of-interests accounting treatment.
(q) Compliance Examinations. Prior to the Effective Date, South Valley shall
have taken corrective action, if any, recommended by or resulting from its most
recent compliance examinations and any significant regulatory compliance
violations shall have been corrected by South Valley prior to the Effective
Date.
(r) Regulatory Examination. Prior to the Effective Date, South Valley shall be
in compliance with all requirements, if any, arising from its most recent safety
and soundness regulatory examination.
(s) Accountant's Letter. Pacific Capital shall have received letters addressed
to Pacific Capital from Deloitte & Touche LLP pursuant to the provisions of
Section 3.2(f)(iv).
8. CONDITIONS TO THE OBLIGATIONS OF SOUTH VALLEY.
The obligations of South Valley under this Agreement are, at its option,
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions provided, however, that any one or more of such conditions
may be waived by the Board of Directors of South Valley at any time at or prior
to the Effective Time:
(a) Representations and Warranties. The representations and warranties of
Pacific Capital in Section 5 hereof shall be true and correct in all material
respects on the date hereof and as of the Effective Date, with the same effect
as though such representations and warranties had been made on and as of such
date except as to any representation or warranty which specifically relates to a
specified date and does not contain any material inaccuracies or omissions the
circumstances as to which either individually or in the aggregate have, or
reasonably could be expected to have, a material adverse effect on the business,
financial condition, results of operations or prospects of Pacific Capital and
FNB taken as a whole.
(b) Compliance and Performance Under Agreement. Pacific Capital and its
subsidiaries shall have performed and complied in all material respects with all
of the terms of this Agreement required to be performed or complied with by them
at or prior to the Effective Time. Each of the directors of Pacific Capital also
shall have performed and complied in all material respects with the terms and
conditions of the undertaking referred to in Section 3.1(h) above.
(c) Material Adverse Change. Except as disclosed to South Valley in writing
prior to the date hereof, no material adverse change shall have occurred since
December 31, 1995, in the business, financial condition, properties, results of
operations or prospects of Pacific Capital and FNB taken as a whole, and Pacific
Capital shall not be a party to or so far as Pacific Capital is aware,
threatened with, and to Pacific Capital's knowledge there is no reasonable basis
for, any legal action or other proceeding before any court, any arbitrator of
any kind or any government agency if in the reasonable judgment of South Valley,
such legal action or proceeding could materially adversely affect Pacific
Capital and FNB or its business, financial condition, properties, results of
operations or prospects taken as a whole.
(d) Approval of Agreement. This Agreement and the Merger shall have been duly
approved by the affirmative vote of the holders of a majority of the outstanding
shares of South Valley Common Stock at a meeting of shareholders duly called and
held after distributing the Proxy Statement to all shareholders entitled to vote
at such meeting as required by Section 3.2(a) hereof and by the affirmative vote
of the holders of a majority of the outstanding shares of Pacific Capital Common
Stock at the meeting of shareholders duly called and held after distributing the
Proxy Statement to all shareholders entitled to vote at such meeting as required
by Section 3.1(h) hereof.
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(e) Officer's Certificate. South Valley shall have received a certificate,
dated the Effective Date, signed on behalf of Pacific Capital by its President
and Chief Executive Officer and Chief Financial Officer, certifying to the
fulfillment of the conditions stated in Sections 8(a)-(c) and as to the approval
of the Shareholders of Pacific Capital in Section 8(d) hereof.
(f) Opinion of Counsel. The counsel of Pacific Capital shall have delivered to
South Valley an opinion in substantially the form attached hereto as Exhibit G.
(g) Effectiveness of Registration Statement. The Registration Statement and
any amendments or supplements thereto shall have become effective under the 1933
Act. No stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall have been initiated
or threatened by or before the Commission. All state securities permits or
approvals required by applicable state securities laws to consummate the
transactions contemplated by this Agreement and the Merger Agreement shall have
been received and remain in effect.
(h) Government Approvals. The Government Approvals shall have been received
and shall be in effect, and all conditions or requirements prescribed by law or
by any such Government Approval shall have been satisfied.
(i) Tax Opinion. Pacific Capital and South Valley shall have received the
opinions referred to in Section 7(j) hereof which opinions shall meet the
requirements of such Section.
(j) Closing Documents. South Valley shall have received from Pacific Capital
such certificates and other closing documents as counsel for South Valley shall
reasonably request.
(k) Absence of Legal Impediment. No significant legal impediment to the Merger
shall have arisen and no litigation, proceeding or investigation shall be
pending or threatened before any court or government agency relating to the
transactions contemplated by this Agreement which affords a material basis for a
determination that it would be inadvisable or inexpedient to continue to carry
out the terms of, or to attempt to consummate the transactions contemplated by
this Agreement.
(l) Fairness Opinions. The Board of Directors of South Valley shall have
received an opinion of Hoefer & Arnett, Incorporated dated the date of this
Agreement within three business days of the effective date of the Registration
Statement and if requested by South Valley, the Closing Date to the effect that
the terms of the Merger are fair, from a financial point of view, to South
Valley and its shareholders and such opinion shall not have been withdrawn prior
to the Effective Date.
(m) Pooling-of-Interests Accounting Treatment. South Valley shall have
determined and shall have received a letter from Deloitte & Touche LLP to the
effect that the Merger shall qualify for the pooling-of-interests method of
accounting in accordance with GAAP and all applicable rules, regulations and
policies of the Commission. In addition, there shall have been no determination
by any court, tribunal, regulatory agency or other governmental entity, that the
Merger fails or will fail to qualify for pooling-of-interests accounting
treatment.
(n) Additions to Pacific Capital Board of Directors. Pacific Capital shall
have amended its Bylaws or taken any other action necessary to increase the
number of authorized directors on its board to permit the appointment of three
additional directors to be designated by South Valley and acceptable to Pacific
Capital at least five business days prior to the Closing Date.
(o) Dissenting Shares. The aggregate number of shares of South Valley Common
Stock and Pacific Capital Common Stock held by persons who have taken all of the
steps required at or prior to the shareholders' meetings referenced in Sections
3.2(a) and 3.1(h), respectively, to perfect their right (if any) to be paid the
value of such shares under the GCL shall not exceed 9% of the outstanding shares
of South Valley Common Stock and Pacific Capital Common Stock.
(p) Nasdaq National Market Listing. Pacific Capital shall have obtained
designation of Pacific Capital Common Stock, including shares of Pacific Capital
Common Stock issued pursuant to this Agreement, as a Nasdaq National Market
security.
(q) Accountant's Letter. South Valley shall have received letters addressed to
South Valley from KPMG prepared pursuant to the provisions of Section
3.1(d)(iv).
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9. CLOSING.
(a) Closing Date. The closing (the "Closing") shall, unless another date, time
or place is agreed to in writing by Pacific Capital and South Valley, be held at
the offices of Graham & James, 1 Maritime Plaza, San Francisco, California on
the Effective Date. In no event shall the Closing be later than sixty (60) days
after the Effective Date.
(b) Delivery of Documents. At the Closing, the opinions, certificates and
other documents required to be delivered by this Agreement shall be delivered.
(c) Filings. At the Closing, Pacific Capital and South Valley shall instruct
their respective representatives to make or confirm such filings as shall be
required in the opinion of counsel to Pacific Capital and South Valley to give
effect to the Merger.
10. EXPENSES.
Pacific Capital and South Valley hereto agree to pay, without right of
reimbursement from the other party and whether or not the transactions
contemplated by this Agreement or the Merger Agreement shall be consummated, the
costs incurred by each such party incident to the performance of its obligations
under this Agreement and the Merger Agreement, including without limitation,
costs incident to the preparation of this Agreement, the Registration Statement,
Prospectus and the Proxy Statement (including the audited financial statements
of the parties contained therein) and incident to the consummation of the Merger
and of the other transactions contemplated herein and in the Merger Agreement,
including the fees and disbursements of counsel, accountants, consultants and
financial advisers employed by such party in connection therewith. South Valley
shall bear its own costs of printing and distributing (including postage) the
Proxy Statement to its shareholders and other information relating to these
transactions.
11. AMENDMENT; TERMINATION.
(a) Amendment. This Agreement and the Merger Agreement may be amended by
Pacific Capital and South Valley at any time prior to the Effective Time without
the approval of the shareholders of Pacific Capital and shareholders of South
Valley with respect to any of their terms except the terms relating to the form
or amount of consideration to be delivered to the South Valley shareholders in
the Merger.
(b) Termination. This Agreement and the Merger Agreement may be terminated as
follows:
(i) By the mutual consent of the Boards of Directors of both
Pacific Capital and South Valley at any time prior to the consummation of the
Merger.
(ii) By the Board of Directors of Pacific Capital on or
after December 31, 1996, if (A) any of the conditions in Section 7 to which
the obligations of Pacific Capital are subject have not been fulfilled, or (B)
such conditions have been fulfilled or waived by Pacific Capital and South
Valley shall have failed to complete the Merger.
(iii) By the Board of Directors of Pacific Capital if (A)
after the date of South Valley's Disclosure Statement, Pacific Capital has
become aware of any facts or circumstances of which it was not previously
aware and which materially adversely affect South Valley and SVNB or their
respective business, properties, results of operations, financial condition or
prospects (taken as a whole), (B) a material adverse change shall have
occurred since December 31, 1995, in the business, properties, financial
condition, results of operations or prospects of South Valley and SVNB taken
as a whole, (C) there has been a material breach (including any material
anticipatory breach) on the part of South Valley of its obligations under this
Agreement, or any material breach (including any material anticipatory breach)
of any covenants or conditions contained in this Agreement which, in either
event, has not been cured as provided in Section 11(d), or (D) the provisions
of Section 3.2(j)(iv) become operable.
(iv) By the Board of Directors of South Valley on or after
December 31, 1996, if (A) any of the conditions contained in Section 8 to
which the obligations of South Valley are subject have not been fulfilled, or
(B) such conditions have been fulfilled or waived but Pacific Capital shall
have failed to complete the Merger; provided, however, that if Pacific Capital
is engaged
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at the time in litigation (including an administrative appeal procedure)
relating to an attempt to obtain one or more of the Governmental Approvals or
if Pacific Capital shall be contesting in good faith any litigation which
seeks to prevent consummation of the transactions contemplated hereby, such
nonfulfillment shall not give South Valley the right to terminate this
Agreement until the earlier of (A) eight (8) months after the date of this
Agreement and (B) sixty (60) days after the completion of such litigation and
of any further regulatory or judicial action pursuant thereto including any
further action by a governmental agency as a result of any judicial remand,
order or directive or otherwise or any waiting period with respect thereto.
(v) By the Board of Directors of South Valley if (A) after
the date of Pacific Capital's Disclosure Statement South Valley has become
aware of any facts or circumstances of which it was previously not aware and
which materially adversely affect Pacific Capital and FNB or their respective
business, properties, results of operations, financial condition or prospects
(taken as a whole), (B) a material adverse change shall have occurred since
December 31, 1995 in the business, properties, financial condition, results of
operations or prospects of Pacific Capital and FNB taken as a whole, (C) there
has been a material breach (including any material anticipatory breach) on the
part of Pacific Capital of its obligations under this Agreement or any
material breach (including any material anticipatory breach) of any conditions
or covenants contained in this Agreement, which, in either event, has not been
cured as provided in Section 11(d), (D) Pacific Capital fails to comply with
the provisions of Section 3.1(f) or (E) South Valley fails to accept the
Exchange Ratio or the parties fail to renegotiate the Exchange Ratio as
provided in Section 2.1(c)(1).
(c) Notice. The power of termination hereunder may be exercised by Pacific
Capital or South Valley, as the case may be, only by giving written notice,
signed on behalf of such party by its Chairman of the Board or President, to the
other party.
(d) Breach of Obligations. If there has been a material breach by either party
of the representations, covenants, agreements or other obligations contained
herein which shall not have been cured within twenty (20) business days after
written notice thereof has been given to the defaulting party, the nondefaulting
party shall have the right to terminate this Agreement upon written notice to
the other party. In any event, the nondefaulting party shall have no obligation
to consummate any transaction or take any further steps toward such consummation
contemplated hereunder until such breach is cured.
(e) Termination and Expenses. Termination of this Agreement shall not
terminate or affect the obligations of the parties to pay expenses as provided
in Section 10, to maintain the confidentiality of the other party's information
pursuant to Section 3.3, or the provisions of this Section 11(e) or of Sections
12(a), (d) or (e) or the second sentence of Section 12(b) below and shall not
affect any agreement after such termination. If this Agreement shall be
terminated by Pacific Capital pursuant to Section 11(b)(iii)(D), or if a
Business Combination involving South Valley occurs within twelve (12) months
following termination of this Agreement pursuant to Section 11(b) as a result of
the interference of a third party or group who thereafter attempts to acquire
South Valley, South Valley shall pay to Pacific Capital, on demand, the sum of
$1,000,000. If this Agreement shall be terminated by South Valley pursuant to
Section 11(b)(v)(D) or if Pacific Capital terminates this Agreement
notwithstanding the fact that all terms and conditions of this Agreement have
been satisfied by South Valley and no event has occurred which provides Pacific
Capital the right under this Agreement to terminate the Agreement, Pacific
Capital shall pay to South Valley, on demand, the sum of $1,000,000. Any payment
required pursuant to this Section 11(e) shall be paid no more than two business
days after demand by the party entitled to make such demand by wire transfer of
immediately available federal funds. Except as otherwise provided in this
Agreement South Valley and Pacific Capital agree that any termination of this
Agreement shall not in any manner release or be construed as so releasing either
party from any liability or damage to the other party or parties arising out of,
in connection with or otherwise relating to, directly or indirectly, such
parties' failure in performance of any of its covenants or agreements hereunder.
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12. MISCELLANEOUS.
(a) Notices. Any notice or other communication required or permitted under
this Agreement shall be effective only if it is in writing and delivered
personally, or by overnight express or by facsimile or sent by first class
United States mail, postage prepaid, registered or certified mail, addressed as
follows:
To Pacific Capital: To South Valley:
D. Vernon Horton, Chairman Roger Knopf, Chairman
Pacific Capital Bancorp Brad L. Smith, President &
1001 South Main Street Chief Executive Officer
Salinas, California 93902-1786 South Valley Bancorporation
8000 Santa Teresa Boulevard
Clayton C. Larson, President Gilroy, California 95020
Pacific Capital Bancorp
495 Washington Street
P.O. Box 2718
Monterey, California 93942
With a copy to: With a copy to:
James E. Topinka, Esq. Glenn T. Dodd, Esq.
Graham & James LLP Bronson, Bronson & McKinnon LLP
One Maritime Plaza, Suite 300 10 Almaden Boulevard, Suite 600
San Francisco, California 94111 San Jose, CA 95113-2237
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
(b) Binding Agreement. This Agreement is binding upon and is for the benefit
of Pacific Capital and South Valley and their respective successors and
permitted assigns. This Agreement is not made for the benefit of any person,
firm, corporation or association not a party hereto (except as provided in
Section 3.1(g)), and no other person, firm, corporation or association shall
acquire or have any right under or by virtue of this Agreement. No
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party may assign this Agreement or any of its rights, privileges, duties or
obligations hereunder without the prior written consent of the other party to
this Agreement.
(c) Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of California.
(d) Attorneys' Fees. In any action at law or suit in equity in relation to
this Agreement, the prevailing party in such action or suit shall be entitled to
receive a reasonable sum for its attorneys' fees and all other reasonable costs
and expenses incurred in such action or suit.
(e) Entire Agreement; Severability. This Agreement and the documents,
certificates, agreements, letters, schedules and exhibits attached or required
to be delivered pursuant hereto set forth the entire agreement and understanding
of the parties in respect of the transactions contemplated hereby, and supersede
all prior agreements, arrangements and understandings relating to the subject
matter hereof. Each provision of this Agreement shall be interpreted in a manner
to be effective and valid under applicable law, but if any provision hereof
shall be prohibited or ruled invalid under applicable law, the validity,
legality and enforceability of the remaining provisions shall not, except as
otherwise required by law, be affected or impaired as a result of such
prohibition or ruling.
(f) Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(g) Waivers. Prior to or at the Effective Time, each of Pacific Capital and
South Valley shall have the right to waive any default in the performance of any
term of this Agreement by the other, to waive or extend the time for the
compliance or fulfillment by the other of any and all of the other's obligations
under this Agreement and to waive any or all of the conditions precedent to its
obligations under this Agreement, except any condition which, if not satisfied,
would result in the violation of any law or applicable governmental regulation.
No failure to exercise and no delay in exercising any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy or power provided
herein or by law or in equity. The waiver by any party of the time for
performance of any act or condition hereunder does not constitute a waiver of
the act or condition itself. Any requests for waivers or waivers granted
pursuant to this Section 12(g) shall be in accordance with the provisions of
Section 12(a) hereof.
(h) No Survival of Representations and Warranties. The representations and
warranties of the parties to this Agreement shall terminate on the Closing.
(i) Knowledge. Wherever the term "to the best knowledge" or similar terms are
used in this Agreement in connection with a party's representations or
warranties, it shall mean actual knowledge after due inquiry of a party's
executive officers.
Pacific Capital and South Valley have each caused this Agreement and Plan of
Reorganization to be signed by its authorized officer and attested by the
signature of its Secretary all as of the day and year first written above.
ATTEST: PACIFIC CAPITAL BANCORP
- -------------------------- --------------------------------------------
Secretary Clayton C. Larson,
President and Chief Administrative Officer
ATTEST: SOUTH VALLEY BANCORPORATION
- -------------------------- --------------------------------------------
Secretary Brad L. Smith,
President and Chief Executive Officer
-33-
<PAGE> 39
Exhibit B
Certificate of Pacific Capital Directors
July , 1996
South Valley Bancorporation
8000 Santa Teresa Boulevard
Gilroy, California 95020
Gentlemen:
In connection with the proposed business combination in which South Valley
Bancorporation ("South Valley") will be merged with and into Pacific Capital
Bancorp ("Pacific Capital") in consideration of the exchange of shares of common
stock of Pacific Capital ("Pacific Capital Common Stock") for common stock of
South Valley ("South Valley Common Stock") (the "Merger"), the undersigned
member of the Board of Directors of Pacific Capital hereby certifies and
confirms that, in his or her capacity as a member of the Board of Directors, he
or she has voted in favor of said Merger, the execution and delivery of all
related agreements and all actions contemplated thereby.
In addition to the foregoing, the undersigned hereby represents and agrees that
he or she will use his or her reasonable efforts to recommend that the
shareholders of Pacific Capital adopt and approve the transactions contemplated
by the Merger.
The undersigned acknowledges that South Valley has entered into the proposed
Merger with Pacific Capital in reliance on the agreement set forth herein and on
that basis covenants and agrees that he or she will vote in favor of the Merger
and other transactions contemplated by the Agreement and Plan of Reorganization
dated as of July , 1996, all shares of Pacific Capital Common Stock held of
record or beneficially by the undersigned (representing all shares as to which
the undersigned has sole or shared voting power) as of the date hereof or
hereinafter acquired.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the day
of July , 1996.
Sincerely,
____________________
Printed Name:
<PAGE> 40
Exhibit C
Certificate of South Valley Directors
July , 1996
Pacific Capital Bancorp
495 Washington Street
Monterey, California 93942
Gentlemen:
In connection with the proposed business combination in which South Valley
Bancorporation ("South Valley") will be merged with and into Pacific Capital
Bancorp ("Pacific Capital") in consideration of the exchange of shares of common
stock of Pacific Capital ("Pacific Capital Common Stock") for common stock of
South Valley ("South Valley Common Stock") (the "Merger"), the undersigned
member of the Board of Directors of South Valley hereby certifies and confirms
that, in his or her capacity as a member of the Board of Directors, he or she
has voted in favor of said Merger, the execution and delivery of all related
agreements and all actions contemplated thereby.
In addition to the foregoing, the undersigned hereby represents and agrees that
he or she will use his or her reasonable efforts to recommend that the
shareholders of South Valley adopt and approve the transactions contemplated by
the Merger.
The undersigned acknowledges that Pacific Capital has entered into the proposed
Merger with South Valley in reliance on the agreement set forth herein and on
that basis covenants and agrees that he or she will vote in favor of the Merger
and other transactions contemplated by the Agreement and Plan of Reorganization
dated as of July , 1996, all shares of South Valley Common Stock held of record
or beneficially by the undersigned (representing all shares as to which the
undersigned has sole or shared voting power) as of the date hereof or
hereinafter acquired.
IN WITNESS WHEREOF, the undersigned has executed this Certificate and Agreement
as of the day of July , 1996.
Sincerely,
_________________________
Printed Name:
<PAGE> 41
Exhibit D
Certificate of Affiliate
Pacific Capital Bancorp
495 Washington Street
Monterey, California 93942
Gentlemen:
In connection with the proposed business combination in which South
Valley Bancorporation ("South Valley") will be acquired by Pacific Capital
Bancorp ("Pacific Capital") by means of a merger of South Valley with and into
Pacific Capital, in consideration of the exchange of Pacific Capital Common
Stock for South Valley Common Stock as provided in the Agreement and Plan of
Reorganization dated as of July 18, 1996 (the "Agreement"), the undersigned
hereby represents and agrees that he or she will not from the date hereof (a)
offer, sell or transfer any Pacific Capital Common Stock (including any
securities which may be paid as a dividend or otherwise distributed thereon) to
be so received pursuant to the business combination; or (b) offer, sell or
transfer any Pacific Capital Common Stock received pursuant to the exercise of
stock options except that the undersigned may offer, sell or transfer such
Pacific Capital Common Stock: (i) pursuant to a then current effective
registration under the Securities Act of 1993 ("1993 Act"); (ii) in a
transaction permitted by the Securities and Exchange Commission's Rule 145;
(iii) in a transaction which, in the opinion of counsel satisfactory to Pacific
Capital, is not required to be registered under the 1933 Act or (iv) pursuant to
an applicable no action letter or interpretative release.
In addition to the above, the undersigned also agrees that in order to
preserve pooling-of-interests accounting treatment for this transaction, he or
she, as an affiliate of South Valley will not sell or otherwise reduce his or
her risk with respect to any (a) shares of Pacific Capital Common Stock received
in the transaction or otherwise acquired in any other manner or (b) shares of
South Valley Common Stock (however acquired) for a period beginning 30 days
prior to the consummation of such acquisition by merger and ending on the date
the financial results covering at least 30 days of post-acquisition combined
operations of South Valley and Pacific Capital have been published. The
undersigned has been advised by Pacific Capital that, if the merger were to
occur on or before December 31, 1996, public issuance of these financial results
would occur no later than the filing with the Securities and Exchange Commission
by Pacific Capital of its Form 10-K for the year ended December 31, 1996. The
undersigned has been advised that this Form 10-K will be filed on or about March
, 1997.
Further, the undersigned represents and warrants that the undersigned
has no plan or intention to sell, exchange, pledge or otherwise dispose of any
of the acquired shares of Pacific Capital Common Stock received in the
transaction except that sufficient shares may be sold, exchanged, pledged or
otherwise disposed of solely for the purpose of the payment of applicable
withholding taxes resulting from receipt of shares of Pacific Capital Common
Stock pursuant to Section 2.6(b) of the Agreement.
The undersigned acknowledges that the above agreements are supported by
valid consideration.
Very truly yours,
---------------------------------
<PAGE> 42
Exhibit E
NONSOLICITATION AGREEMENT
THIS AGREEMENT, dated as of July __, 1996, by and between
___________________________ (referred to herein as the "Director"), a member of
the Board of Directors of SOUTH VALLEY BANCORPORATION, a California corporation
and a bank holding company registered under the Bank Holding Company Act of
1956, as amended ("BHC Act") ("South Valley"), and PACIFIC CAPITAL BANCORP, a
California corporation and a bank holding company registered under the BHC Act
("Pacific Capital").
RECITALS
A. South Valley has its principal place of business in Morgan Hill,
California and does business in the counties of Santa Clara, Monterey and San
Benito; and
B. The Director serves on the Board of Directors of South Valley and is
a shareholder thereof;
and
C. Pacific Capital has its principal place of business in Monterey,
California; and
D. Pacific Capital and South Valley have entered into an Agreement and
Plan of Reorganization dated as of July __, 1996 (the "Agreement'), whereby
Pacific Capital will acquire South Valley and all the goodwill of South Valley
associated therewith through the merger (the "Merger") of South Valley into
Pacific Capital and the Director will receive valuable consideration as a result
thereof; and
E. Pursuant to the Agreement, South Valley, upon the Merger, will be
merged with and into Pacific Capital, and the outstanding shares of South Valley
common stock, including all the shares of South Valley common stock held by the
Director, will be exchanged for shares of Pacific Capital common stock; and
F. The parties hereto recognize and acknowledge the interest of Pacific
Capital and South Valley in protecting the business and goodwill associated with
South Valley and its subsidiaries following the Merger and Section 16601 of the
California Business and Professions Code authorizes this Agreement for such
purpose.
IN CONSIDERATION OF THE FOREGOING, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Terms herein shall have the same meaning as in the Agreement as it
may be amended and restated from time to time.
2. At the Effective Time, except as a director, officer or employee of
Pacific Capital or any subsidiary thereof, the undersigned Director agrees that,
without prior written consent of Pacific Capital, he will not at any time within
the two (2)-year period immediately following the consummation of the Merger,
directly or indirectly, within the counties of Santa Clara, Monterey and San
Benito (the "Counties") in the State of California, whether or not for
compensation, solicit any customers of South Valley or Pacific Capital or any
transferee of all or substantially all of the assets of South Valley or Pacific
Capital, or their subsidiaries or any successors thereof ("Transferee").
3. Notwithstanding any other provision hereof, the Director agrees to
treat as confidential all information concerning Pacific Capital's, South
Valley's or their respective subsidiaries' records, properties, books,
contracts, commitments and affairs, including but not limited to, information
regarding accounts, shareholders, finances, strategies, marketing, customers,
customer lists and potential customers (their identities, preferences, likes and
dislikes) and other information of a similar nature not available to the public.
If this Agreement is terminated, the Director shall continue to treat all such
information as confidential and shall return such documents and any electronic
storage media containing such information as shall reasonably be requested by
Pacific Capital or any Transferee.
<PAGE> 43
4. The Director shall not, during the term of this Agreement, induce
any employee of South Valley or Pacific Capital or their subsidiaries to leave
the employment thereof.
5. This Agreement will expire two (2) years from the Effective Date of
the Merger.
6. No rights under this Agreement shall be assignable nor duties
delegable by either party, except that Pacific Capital may assign any of its
rights hereunder to a Transferee. Nothing contained in this Agreement is
intended to confer upon any person or entity, other than the parties hereto,
their successors in interest and Transferees, any rights or remedies under or by
reason of this Agreement unless expressly so stated to the contrary.
7. This Agreement shall be construed and enforced in accordance with
the substantive laws of the State of California.
8. It is the intention of the parties hereto that the provisions of
this Agreement shall be enforced to the fullest extent permissible under all
applicable laws and public policies, but that the unenforceability or the
modification to conform with such laws or public policies of any provision
hereof shall not render unenforceable or impair the remainder of the Agreement.
Accordingly, if any provision shall be determined to be invalid or unenforceable
either in whole or in part, this Agreement shall be deemed amended to delete or
modify as necessary, the invalid or unenforceable provisions to alter the
balance of this Agreement in order to render the same valid and enforceable.
9. The Director acknowledges that Pacific Capital would not have
entered into or consummated the Merger unless the Director had, among other
things, entered into this Agreement. Any breach of this Agreement will result in
irreparable damage to Pacific Capital for which Pacific Capital will not have an
adequate remedy at law. Director further acknowledges that Pacific Capital shall
be entitled to injunctive relief hereunder and the parties hereby consent to an
injunction in favor of Pacific Capital, without bond, enjoining any breach of
any of the foregoing by any court of competent jurisdiction, without prejudice
to any other right or remedy to which Pacific Capital may be entitled, provided,
however, that nothing contained in this paragraph shall in any way impair the
Director's right to contest whether a breach has occurred.
10. If an action is instituted to enforce any of the provisions of this
Agreement, the prevailing party in such action shall be entitled to recover from
the losing party its or his reasonable attorneys' fees and costs.
11. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
DIRECTOR
____________________________________________
PACIFIC CAPITAL BANCORP
____________________________________________
Clayton C. Larson,
President and Chief Administrative Officer
2
<PAGE> 44
Exhibit G
______________________, 1996
Board of Directors
South Valley Bancorporation
8000 Santa Teresa Boulevard
Gilroy, California 95020
RE: AGREEMENT AND PLAN OF REORGANIZATION AMONG PACIFIC CAPITAL
BANCORP AND SOUTH VALLEY BANCORPORATION
Ladies and Gentlemen:
We have acted as counsel to Pacific Capital Bancorp, a California corporation
("Pacific Capital"), in connection with the preparation, execution and delivery
of the Agreement and Plan of Reorganization dated as of July _____, 1996 (the
"Agreement"), among Pacific Capital and South Valley Bancorporation, a
California corporation ("South Valley"). All capitalized terms used herein
shall, unless otherwise defined herein or the context otherwise requires, have
the meanings assigned to them in the Agreement.
In our capacity as counsel, we have examined such corporate instruments,
documents, proceedings and certificates of corporate officers as we have deemed
appropriate in rendering the opinions set forth below. We have assumed the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as copies. We have also
assumed, without investigation, the accuracy of the representations, warranties
and covenants as to factual matters made by Pacific Capital in the Agreement,
and the accuracy of representations and statements as to factual matters made by
the officers and employees of Pacific Capital and by government officials.
Whenever a statement herein is qualified by the phrase "to our knowledge,"
"known to us," or similar phrase, it indicates that in the course of our
representation of Pacific Capital no information that would give us current
actual knowledge of the inaccuracy of such statement has come to the attention
of the attorneys in this firm who have rendered legal services in connection
with this transaction. We have not made any independent investigation to
determine the accuracy of such statement (including any search of litigation
filings in any court), except as expressly described herein. No inference as to
our knowledge of any matters bearing on the
<PAGE> 45
Board of Directors
______________________, 1996
Page 2
accuracy of such statement should be drawn from the fact of our representation
of Pacific Capital in other matters in which such attorneys are not involved.
Our opinion is subject to the following qualifications:
a. Our opinion in paragraph 2 below is subject to (a) the effect of
bankruptcy, insolvency, reorganization, moratorium and other similar laws nor or
hereafter in effect affecting creditors' rights or by general equity principles,
regardless of whether such enforceability is considered in a proceeding in
equity or at law; and (b) general principles of equity, including, without
limitation, (i) the effect of federal or state laws, rules or regulations and
court decisions upon the enforceability of the remedies provisions contained in
the Agreement, including but not limited to the position of the Securities and
Exchange Commission that indemnification by an issuer of its directors, officers
and controlling persons for liabilities arising under the Securities Act is
against public policy expressed under such Act and is therefore unenforceable,
and (ii) the effect of court decisions which have held that certain covenants
and provisions of agreements are unenforceable where: (A) the breach of such
covenants or provisions imposes restrictions or burdens upon a party and it
cannot be demonstrated that the enforcement of such restrictions or burdens is
reasonably necessary for the protection of the other party; or (B) a party's
enforcement of such covenants or provisions under the circumstances would
violate such party's implied covenants of good faith and fair dealing.
b. Our opinion is limited to the effect of the laws of the State of
California and the federal laws of the United States and the transaction
contemplated by the Agreement, and we express no opinion as to matters governed
by other laws.
c. In making our examination of documents and instruments executed by
persons or entities other than Pacific Capital, we have assumed, without
investigation, the power and legal capacity of each such person or other entity
to enter into and perform all its obligations under such documents and
instruments, the due authorization by each such other person or entity of such
documents and instruments.
d. Our opinions are subject to and qualified by the information in the
Pacific Capital Disclosure Statement and all other information delivered by
Pacific Capital or its representatives pursuant to the Agreement, including all
updates and amendments thereof. We express no opinion regarding the accuracy,
completeness or correctness of any matter contained or described in such
Disclosure Statement or information and their effect, individually
<PAGE> 46
Board of Directors
______________________, 1996
Page 3
and/or in the aggregate, upon the transactions contemplated pursuant to the
Agreement or any opinion given herein by us with respect to any matter affected
thereby and the content thereof, including, without limitation, any
misstatements or omissions relating thereto.
e. Our opinions are limited to the matters expressly set forth in this
opinion letter, and no opinion is to be implied or may be inferred beyond the
matters expressly so stated.
f. This opinion letter is dated as of the Effective Date and,
therefore, relates only to events that exist as of that time. We disclaim any
obligation to update this opinion letter for any events, and any changes in law
or the interpretation thereof, occurring after the date of this opinion letter.
g. Our opinion as to the good standing of Pacific Capital is based
solely upon certificates from public officials, dated _______________, 1996 as
to the good standing of Pacific Capital under applicable law.
Based upon and subject to the foregoing, we are of the opinion that:
1. Pacific Capital is a California corporation duly organized,
validly existing and in good standing under the laws of California and is a
registered bank holding company under the BHC Act. Pacific Capital has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted and is duly qualified to do
business and in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
necessary, other than such jurisdictions where the failure so to qualify would
not have a material adverse effect with respect to Pacific Capital.
2. Pacific Capital has all requisite corporate power and
authority to enter into the Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Agreement and the
consummation of the transactions contemplated thereby have been duly authorized
by all necessary corporate action on the part of Pacific Capital. The Agreement
has been duly executed and delivered by Pacific Capital and constitutes a valid
and binding obligation of Pacific Capital, enforceable against Pacific Capital
in accordance with its terms, subject only to the effect
<PAGE> 47
Board of Directors
______________________, 1996
Page 4
of bankruptcy, insolvency, reorganization, receivership, conservatorship,
arrangement, moratorium or other laws affecting or relating to the rights of
creditors generally or the availability of equitable remedies.
3. Neither the execution and delivery of the Agreement by
Pacific Capital, nor the consummation by Pacific Capital of the transactions
contemplated thereby, nor compliance by Pacific Capital with any provisions
thereof will (i) conflict with or result in a breach of any provision of Pacific
Capital's Articles of Incorporation or Bylaws or (ii) to our knowledge, violate
any order, write, injunction, decree, statute, rule or regulation applicable to
Pacific Capital which violation would have a material adverse effect on Pacific
Capital.
4. At the Effective Time, Pacific Capital Common Stock issued
pursuant to the Merger will be duly authorized, and, upon issuance in accordance
with the provisions of the Agreement, will be validly issued, fully paid and
nonassessable. The Pacific Capital Common Stock conforms in all material
respects to the description thereof contained in the Registration Statement.
5. All consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any governmental entity required to
be obtained by Pacific Capital, for the execution and delivery of the Agreement
by Pacific Capital or the consummation by Pacific Capital of the transactions
contemplated thereby, have, as appropriate, been made, obtained or given, except
for those consents, approvals, orders or authorizations of, or registrations,
declarations or filings with any governmental entity, the failure to obtain
which would not be likely to have a material adverse effect.
6. The Registration Statement and any supplements or
amendments (except for financial statements and schedules and other tabular
financial and statistical information, as to which we express no opinion) comply
as to form in all material respects with the 1933 Act and the 1934 Act and the
rules and regulations of the SEC promulgated thereunder. The Registration
Statement has become effective under the 1933 Act, and we are not aware that any
stop order suspending the effectiveness thereof has been issued or any
proceedings for that purpose have been instituted or are pending or threatened
under the 1933 Act.
<PAGE> 48
Board of Directors
______________________, 1996
Page 5
7. During the course of the preparation of the Registration
Statement and the Proxy Statement, we have participated in conferences with
representatives of Pacific Capital and its accountants and your representatives
concerning the Registration Statement and the Proxy Statement, although we have
not independently verified the accuracy, completeness or fairness of such
statements. Based upon and subject to the foregoing, nothing has come to our
attention that leads us to believe that the Registration Statement (excluding
the statements therein relating solely to South Valley and/or SVNB, but
including all documents relating to Pacific Capital incorporated by reference
therein), at the time it was filed with the FRB and at the time it became
effective under the 1933 Act contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Proxy Statement
(excluding the statements therein relating solely to South Valley and/or any of
its subsidiaries but including all documents relating to Pacific Capital
incorporated by reference therein), on the date of the mailing thereof, the date
of the Pacific Capital shareholders' meeting and the date of this opinion,
contained any untrue statement of material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (it
being understood that we have not been requested and do not make any comment in
this paragraph with respect to the financial statements, supporting schedules,
footnotes, and other financial and statistical information contained in the
Registration Statement or the Proxy Statement).
This opinion letter is rendered solely for the benefit of South Valley in
connection with the above transaction. Without our prior written consent, this
opinion letter may not be: (i) relied upon by any other party or for any other
purpose; (ii) quoted in whole or in part or otherwise referred to in any report
or document other than a closing memorandum relating to the subject
transactions; or (iii) furnished (the original or copies thereof) to any party
except in connection with the enforcement of the Agreement.
Very truly yours,
<PAGE> 49
Board of Directors
______________________, 1996
Page 6
GRAHAM & JAMES LLP
<PAGE> 50
[HOEFER & ARNETT LETTERHEAD]
, 1996
Members of the Board of Directors
South Valley Bancshares, Inc.
500 Tennant Station
Morgan Hill, CA 95037
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of South Valley Bancorporation
("South Valley") of the Exchange Ratio, as defined in the Agreement and Plan of
Reorganization, dated as of July 19, 1996 (the "Agreement"). In the proposed
merger (the "Merger") of South Valley with and into Pacific Capital Corporation
("Pacific Capital"), pursuant to the Agreement and subject to the terms and
conditions therein, each holder of common stock of South Valley will receive,
in exchange for common stock of South Valley, Pacific Capital common stock in
the ratio of 0.92 shares of Pacific Capital common stock for each share of
South Valley common stock subject to certain adjustments as described in the
Agreement.
We have acted for South Valley and for the Board of Directors as financial
advisor in connection with this transaction and will receive a fee for our
services. We have not previously provided investment banking and financial
advisory services to South Valley or Pacific Capital. We currently are a market
maker in South Valley and Pacific Capital Common Shares.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) Annual Reports to Shareholders and
Annual Reports on Form 10-K of South Valley and Pacific Capital for the year
ended December 31, 1995; (iii) Quarterly Reports on Form 10-Q of Pacific
Capital and quarterly FDIC Call reports for South Valley and Pacific Capital
for the quarters ended March 31, 1996 and June 30, 1996; (iv) certain other
publicly available financial and other information concerning South Valley and
Pacific Capital and the trading markets for the publicly traded securities of
South Valley and Pacific Capital; (v) publicly available information concerning
other banks and holding companies, the trading markets for their securities and
the nature and terms of certain other merger transactions we believe relevant
to our inquiry; and (vi) evaluations and analyses prepared and presented to the
Board of Directors of South Valley or a committee thereof in connection with
this business combination with Pacific Capital. We have held discussions with
senior management of South Valley and of Pacific Capital concerning their past
and current operations, financial condition and prospects, as well as the
results of regulatory examinations.
We have reviewed with major senior management of South Valley earnings
projections for 1996 for South Valley as a stand-alone entity, assuming the
Merger does not occur, prepared by South Valley. We reviewed with the senior
management of Pacific Capital earnings projections for 1996 for Pacific Capital
as a stand-alone entity, assuming the Merger does not occur prepared by Pacific
Capital, as well as projected operating cost savings expected to be achieved in
the years 1997 through 2000 resulting from the Merger. We have also reviewed
with the managements of South Valley and Pacific Capital earnings growth
assumptions for the years 1997 through 2000 for their respective companies.
<PAGE> 51
[HOEFER & ARNETT LETTERHEAD]
South Valley Bancorporation
_______________, 1996
Page 2
Certain pro forma financial projections for the years 1996 through 2000 for the
combined entity were derived by us based upon the projections and growth
assumptions discussed above, as well as our own assessment of general economic,
market and financial conditions. In certain cases, such combined pro forma
financial projections included projected operating cost savings derived by us
based upon the projections discussed above and believed by us to be realizable
in the Merger.
In conducting our review and in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied upon
the managements of South Valley and Pacific Capital as to the reasonableness of
the financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts, projections and projected operating cost savings
reflect the best currently available estimates and judgments of the applicable
managements. We have also assumed, without assuming any responsibility for the
independent verification of same, that the aggregate allowances for loan losses
for South Valley and Pacific Capital are adequate to cover such losses. We have
not made or obtained any evaluations or appraisals of the property of South
Valley or Pacific Capital, nor have we examined any individual loan credit
files. For purposes of this opinion, we have assumed that the Merger will have
the tax, accounting and legal effects (including, without limitation, that the
Merger will be accounted for as a pooling-of-interest) described in the
Agreement and assumed the accuracy of the disclosures set forth in the
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of the Common Shares of South Valley of
the Exchange Ratio in the Merger and does not address South Valley's underlying
business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
South Valley and Pacific Capital, including interest income, interest expense,
net interest income, net interest margin, provision for loan losses,
non-interest income, non-interest expense, earnings, dividends, internal
capital generation, book value, intangible assets, return on assets, return on
shareholders' equity, capitalization, the amount and type of non-performing
assets, loan losses and the reserve for loan losses, all as set forth in the
financial statements for South Valley and for Pacific Capital; (ii) the assets
and liabilities of South Valley and Pacific Capital, including the loan,
investment and mortgage portfolios, deposits, other liabilities, historical and
current liability sources and costs and liquidity; and (iii) the nature and
terms of certain other merger transactions involving banks and bank holding
companies. We have also taken into account our assessment of general economic,
market and financial conditions and our experience in other transactions, as
well as our experience in securities valuation and our knowledge of the banking
industry generally. Our opinion is necessarily based upon conditions as they
exist and can be evaluated on the date hereof and the information made
available to us through the date hereof.
<PAGE> 52
[HOEFER & ARNETT LETTERHEAD]
South Valley Bancorporation
________________, 1996
Page 3
It is understood that this letter is for the information of the Board of
Directors of South Valley only and may not be relied upon by any other person
or used for any other purpose without our prior written consent. This letter
does not constitute a recommendation to the Board of Directors or to any
shareholder of South Valley with respect to any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Exchange Ratio in the Merger is fair,
from a financial point of view, to the holders of the Common Shares of South
Valley.
Very truly yours,
HOEFER & ARNETT INCORPORATED
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,215
<INT-BEARING-DEPOSITS> 121,600
<FED-FUNDS-SOLD> 12,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,841
<INVESTMENTS-CARRYING> 5,771
<INVESTMENTS-MARKET> 51,612
<LOANS> 94,236
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<DEPOSITS> 156,678
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<LIABILITIES-OTHER> 1,899
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0
0
<COMMON> 13,123
<OTHER-SE> 4,762
<TOTAL-LIABILITIES-AND-EQUITY> 176,462
<INTEREST-LOAN> 2,634
<INTEREST-INVEST> 818
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<INTEREST-TOTAL> 3,622
<INTEREST-DEPOSIT> 973
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<INTEREST-INCOME-NET> 2,645
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<INCOME-PRETAX> 960
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</TABLE>
<PAGE> 1
EXHIBIT 99.1
[SOUTH VALLEY NATIONAL BANK LETTERHEAD]
FOR IMMEDIATE RELEASE July 18, 1996
For information, contact
Brad L. Smith, President & CEO
408-848-2161
PACIFIC CAPITAL BANCORP AND
SOUTH VALLEY BANCORPORATION TO MERGE
Morgan Hill, CA -- Pacific Capital Bancorp, holding company for First National
Bank of Central California, and South Valley Bancorporation, holding company
for South Valley National Bank, announced today the signing of a definitive
agreement whereby South Valley National Bank would become a separate subsidiary
of Pacific Capital Bancorp.
The agreement provides for South Valley Bancorporation shareholders to receive
0.92 shares, subject to adjustment, of Pacific Capital Bancorp common stock for
each outstanding share of South Valley Bancorporation's common stock in a
tax-free exchange to be accounted for as a "pooling of interests". The
transaction is estimated to be valued at $34.7 million, or approximately $24.84
per South Valley share.
The merger is anticipated to close in the fourth quarter of 1996, subject to
shareholder and regulatory approvals. It is anticipated that the merger will be
accretive to earnings per share in the second full operating quarter for the
combined companies.
The proposed merger would bring Pacific Capital Bancorp's total assets to
approximately $567 million, and represents the collective achievements of two
of the top performing locally owned banks in Central California.
-more-
<PAGE> 2
Vern Horton, Chairman of the Board of Pacific Capital stated, "The combination
of two of the highest performing locally owned banks operating in adjacent
counties represents an exceptional opportunity for the customers, employees and
shareholders of both companies." Mr. Horton continued, "The merger with South
Valley National Bank is consistent with Pacific Capital Bancorp's strategy of
preserving community banking and fostering growth while, at the same time,
achieving significant revenue enhancements and cost savings in order to provide
long term value to shareholders."
"We are very excited about the natural synergies resulting from this merger,"
stated Clay Larson, President of Pacific Capital Bancorp. "The complementary
nature of our business philosophies, the strategic geography involved, and both
banks' reputations for providing exceptional service to our respective
communities make this merger an outstanding fit. Our new combined company will
be very well positioned and extremely well capitalized to support continued
growth and profitability. The merger will enable the combined organization to
provide exceptional community banking to an expanded client base on a more cost
effective basis."
"An affiliation with First National will be a major building block in putting
together an organization of premier quality institutions for the Central Coast,"
said Roger Knopf, Chairman of the Board for South Valley Bancorporation. Mr.
Knopf continued, "The cultures and quality of both organizations mirror each
other, particularly in the areas of customer service, quality of staff and
community involvement."
-more-
<PAGE> 3
"We are confident that we are associating with an outstanding institution,
management team and board of directors, and together will continue to lead the
resulting company to superior results," said Brad Smith, President of South
Valley National Bank.
First National Bank of Central California, formed in 1984, has branches in
Salinas, Monterey, Carmel and Watsonville. For the six months ended June 30,
1996, Pacific Capital Bancorp reported earnings of $2,759,000 or $1.01 per
share. South Valley National Bank, formed in 1983, operates branches in Gilroy,
Hollister, Morgan Hill and San Juan Bautista. For the six months ended June 30,
1996, South Valley Bancorporation reported earnings of $1,035,000 or $.79 per
share.
<PAGE> 4
COMBINED SUMMARY FINANCIALS
(Dollars in thousands, except per share amounts)
Unaudited
June 30, 1996
<TABLE>
<CAPTION>
PACIFIC CAPITAL SOUTH VALLEY PRO FORMA
BANCORP BANCORPORATION COMBINED
--------------- -------------- ---------
<S> <C> <C> <C>
Total Assets 391,045 176,462 567,507
Total Loans 236,490 92,249 328,739
Total Deposits 344,671 156,678 501,349
Shareholders' Equity 43,973 17,885 61,858
Equity/Assets 11.24% 10.14% 10.90%
Leverage Ratio 11.65% 10.24% 11.50%
Non-Performing Assets 2,161 2,952 5,113
Loan Loss Allowance/Non-
Performing Loans 231.95% 242.00% 235.57%
Common Shares Outstanding(1)(2) 2,600,863 1,313,986 3,884,730(3)
Book Value per Share(1)(2) $16.91 $13.61 $15.92
Number of Banking Offices 5 4 9
</TABLE>
- ----
(1) Based on shares outstanding as of June 30, 1996
(2) No effect has been given to stock options outstanding
(3) Reflects exchange ratio of .92 shares of Pacific Capital stock for every
share of South Valley Bancorporation stock outstanding. Assumes
approximately 77,500 shares issued to option holders of SVB Common Stock.
Actual number will be determined at closing date.
