<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
WELLS FARGO & COMPANY
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 6712 41-0449260
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
(800) 411-4932
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Stanley S. Stroup
Executive Vice President and General Counsel
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
415-396-6019
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
Robert J. Kaukol Keith T. Holmes
Wells Fargo & Company Fried, Bird & Crumpacker
1050 17th Street, Suite 120 1900 Avenue of the Stars--25th Floor
Denver, Colorado 80265 Los Angeles, California
(303) 899-5802 (310) 282-8989
</TABLE>
---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount Of
Title Of Securities To Amount To Be Offering Price Offering Registration
Be Registered Registered Per Share Price(1) Fee(2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $1 2/3 par
value (and associated
preferred stock purchase
rights)................ 3,850,000 N/A $111,375,000 $29,403.00
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Computed in accordance with Rule 457(f)(1) based on the aggregate market
value on December 1, 1999 of the maximum number of shares of North County
Bancorp common stock expected to be received by the registrant in the
merger and calculated by multiplying (i) the last sale price of North
County Bancorp common stock as reported on the Nasdaq National Market
System for December 1, 1999 ($20.25) by (ii) 5,500,000, representing the
approximate maximum number of shares of North County Bancorp common stock
expected to be received by the registrant in the merger.
(2)Based on .000264 of the proposed maximum aggregate offering price.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NORTH COUNTY BANCORP
444 SOUTH ESCONDIDO BOULEVARD
ESCONDIDO, CALIFORNIA 92025
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 25, 2000
----------------
TO THE SHAREHOLDERS OF NORTH COUNTY BANCORP:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of North
County Bancorp, a California corporation ("North County"), will be held on
Tuesday, January 25, 2000, at 9:00 a.m., local time, at the California Center
for the Arts, Escondido Conference Center, Salon One, 340 North Escondido
Boulevard, Escondido, California 92025, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization, dated as of September 29, 1999, and as amended as of
November 29, 1999 (as amended, the "Reorganization Agreement"), by and
between North County and Wells Fargo & Company ("Wells Fargo"), pursuant
to which, among other things, a wholly-owned subsidiary of Wells Fargo
will merge with and into North County upon the terms and subject to the
conditions set forth in the Reorganization Agreement, as more fully
described in the proxy statement-prospectus which follows this notice.
2. To transact such other business as may properly be brought before the
special meeting and any adjournments or postponements of the special
meeting.
The board of directors of North County has fixed the close of business on
December 10, 1999 as the record date for determining those shareholders
entitled to vote at the special meeting and any adjournments or postponements
of the special meeting. Only shareholders of record on this date are entitled
to notice of, and to vote at, the special meeting and any adjournments or
postponements of the special meeting.
In connection with the merger described in Item 1 above, North County
shareholders may be entitled to dissenters' rights under Chapter 13 of the
California General Corporation Law. The provisions of Chapter 13 are attached
as Appendix C to the proxy statement-prospectus that follows this notice. A
summary of these provisions is also provided in the proxy statement-prospectus.
By Order of the Board of Directors
Burnet F. Wohlford
Corporate Secretary
Escondido, California
December 21, 1999
Please promptly complete, sign, date and return the enclosed proxy card
whether or not you plan to attend the special meeting. Failure to return a
properly executed proxy or to vote at the meeting will have the same effect
as a vote against the Reorganization Agreement and the merger. You may still
vote at the special meeting even if you have previously returned your proxy
card.
<PAGE>
The board of directors of North County Bancorp has approved the sale of
North County to Wells Fargo & Company. The sale requires the approval of North
County's shareholders. A special meeting of shareholders will be held to vote
on the proposed sale. The date, time and place of the meeting are as follows:
Tuesday, January 25, 2000
9:00 a.m., local time
California Center for the Arts
Escondido Conference Center, Salon One
340 North Escondido Boulevard
Escondido, California 92025
If the sale is completed, Wells Fargo will exchange approximately $21 of its
common stock for each outstanding share of North County common stock.
The exchange ratio, or the number of shares of Wells Fargo common stock you
will receive for each share of North County common stock you own, will be
determined by dividing the share value of approximately $21 by a measurement
price. The measurement price will be the average of the closing prices of a
share of Wells Fargo common stock as reported on the New York Stock Exchange
for the period of 20 trading days ending on the day immediately before the
special meeting.
The following table shows the approximate exchange ratios that would result
from three different measurement prices, each based on a share value of $21.
The actual measurement price--and thus the actual exchange ratio--will not be
known until immediately before the special meeting.
<TABLE>
<CAPTION>
Exchange
Measurement Price Calculation Ratio
- ----------------- ------------ --------
<S> <C> <C>
$42.50.................................................... $21 / $42.50 0.4941
$45.00.................................................... $21 / $45.00 0.4667
$47.50.................................................... $21 / $47.50 0.4421
</TABLE>
On September 29, 1999, the day before the proposed sale was announced, Wells
Fargo common stock closed at $38.56 a share and North County common stock last
traded at $19.63 a share. On December , 1999, Wells Fargo common stock closed
at $ a share and North County common stock last traded at $ a share.
This proxy statement-prospectus provides detailed information about the
proposed sale. Please read this entire document carefully. You can find
additional information about Wells Fargo and North County from documents filed
with the Securities Exchange Commission.
Whether or not you plan to attend the meeting, please complete and mail the
enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be voted in favor of the sale.
If you fail to return your proxy card, or if you fail to instruct your broker
how to vote shares held for you in the broker's name, the effect will be the
same as a vote against the sale.
No vote of Wells Fargo's stockholders is required to approve the
transaction.
James M. Gregg
Chairman of the Board and
Chief Executive Officer
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Wells Fargo common stock to be
issued or determined if this proxy statement-prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
----------------
Proxy Statement-Prospectus dated December 21, 1999.
First mailed to North County shareholders on or about December 21, 1999.
<PAGE>
ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business and
financial information about Wells Fargo and North County that is not included
in or delivered with this document. See "Where You Can Find More Information"
on page for a list of the documents that Wells Fargo and North County have
incorporated into this proxy statement-prospectus. The documents are available
to you without charge upon written or oral request made as follows:
Wells Fargo Documents: North County Documents:
Corporate Secretary Corporate Secretary
Wells Fargo & Company North County Bancorp
MAC N9305-173 444 South Escondido Boulevard
Sixth and Marquette Escondido, California 92025
Minneapolis, Minnesota 55479 (760) 743-2200
(612) 667-8655
To obtain documents in time for the special meeting, your request should be
received by January 18, 2000.
North County's Annual Report on Form 10-K for the year ended December 31,
1998, its definitive Proxy Statement for its 1999 annual meeting of
shareholders and its Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 are included in this proxy statement-prospectus as Appendix
D, Appendix E and Appendix F, respectively. North County's definitive Proxy
Statement for its 1999 annual meeting of shareholders is incorporated by
reference in response to Item 13 of North County's Form 10-K for the year ended
December 31, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THIS DOCUMENT................................... iv
SUMMARY..................................................................... 1
The Merger................................................................ 1
The Companies............................................................. 1
Exchange Of Wells Fargo Shares For North County Shares.................... 1
Cash Instead Of Fractional Shares......................................... 2
Redemption Of Unexercised Options......................................... 2
Surrender Of North County Shares.......................................... 2
Federal Income Tax Consequences........................................... 2
Fairness Opinion.......................................................... 3
Recommendation Of North County's Board.................................... 3
Additional Benefits To North County Management............................ 3
Dissenters' Rights........................................................ 3
Special Meeting........................................................... 4
Vote Required To Approve Merger........................................... 4
Differences In The Rights Of Shareholders................................. 4
Regulatory Approvals...................................................... 4
Other Conditions To Completing The Merger................................. 4
Termination Of The Merger Agreement....................................... 5
Accounting Treatment...................................................... 5
Market Price Information.................................................. 5
Regulation Of Wells Fargo................................................. 5
Selected Financial Data................................................... 7
Comparative Per Common Share Data......................................... 8
SPECIAL MEETING OF SHAREHOLDERS............................................. 9
Date, Time And Place...................................................... 9
Record Date............................................................... 9
Vote Required To Approve Merger........................................... 9
Agreements To Vote For The Merger......................................... 9
Voting And Revocation Of Proxies.......................................... 9
Solicitation Of Proxies................................................... 10
Other Matters Considered At The Meeting................................... 10
THE MERGER.................................................................. 11
Effect Of The Merger...................................................... 11
Background Of And Reasons For The Merger.................................. 11
Opinion Of North County's Financial Advisor............................... 13
Additional Interests Of North County Management........................... 17
Dissenters' Rights........................................................ 19
Availability Of Dissenters' Rights........................................ 19
Agreement As To Fair Market Value......................................... 20
Exchange Of Certificates.................................................. 21
Regulatory Approvals...................................................... 22
Effect Of Merger On North County's Employee Benefit Plans................. 22
U.S. Federal Income Tax Consequences Of The Merger........................ 22
Resale Of Wells Fargo Common Stock Issued In The Merger................... 23
Stock Exchange Listing.................................................... 24
Accounting Treatment...................................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
THE MERGER AGREEMENT....................................................... 25
Basic Plan Of Reorganization............................................. 25
Redemption Of Unexercised North County Options........................... 26
Cash In Lieu Of Fractional Shares........................................ 26
Effective Date And Time Of The Merger.................................... 26
Representations And Warranties........................................... 26
Certain Covenants........................................................ 26
Conditions To The Merger................................................. 29
Termination Of The Merger Agreement...................................... 29
Effect Of Termination.................................................... 30
Waiver And Amendment..................................................... 30
Expenses................................................................. 30
COMPARISON OF STOCKHOLDER RIGHTS........................................... 31
General.................................................................. 31
Authorized And Outstanding Capital Stock................................. 31
Rights Plan.............................................................. 31
Number And Election Of Directors......................................... 32
Amendment Of Governing Documents......................................... 32
Wells Fargo.............................................................. 32
Approval Of Mergers And Assets Sales..................................... 33
Preemptive Rights........................................................ 33
Appraisal Rights......................................................... 33
Special Meetings......................................................... 34
Directors' Duties........................................................ 34
Action Without A Meeting................................................. 35
Limitations On Directors' Liability...................................... 35
Indemnification Of Officers And Directors................................ 36
Dividends................................................................ 36
Corporate Governance Procedures; Nomination Of Directors................. 37
INFORMATION ABOUT WELLS FARGO.............................................. 38
General.................................................................. 38
Management And Additional Information.................................... 38
Information On Wells Fargo's Web Site.................................... 38
REGULATION AND SUPERVISION OF WELLS FARGO.................................. 39
General.................................................................. 39
Regulatory Agencies...................................................... 39
Bank Holding Company Activities.......................................... 39
Dividend Restrictions.................................................... 40
Holding Company Structure................................................ 41
Capital Requirements..................................................... 41
FDIC Insurance........................................................... 43
Fiscal And Monetary Policies............................................. 43
Competition.............................................................. 44
Financial Modernization.................................................. 44
INFORMATION ABOUT NORTH COUNTY............................................. 45
General.................................................................. 45
Certain Additional Information Incorporated by Reference and Delivered
Herewith................................................................ 45
PRICE RANGE OF COMMON STOCK AND DIVIDENDS.................................. 46
Wells Fargo Share Prices And Dividends................................... 46
North County Share Prices And Dividends.................................. 47
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
EXPERTS................................................................... 48
Wells Fargo's Independent Accountants................................... 48
North County's Independent Accountants.................................. 48
OPINIONS.................................................................. 48
Share Issuance.......................................................... 48
Tax Matters............................................................. 48
WHERE YOU CAN FIND MORE INFORMATION....................................... 49
SEC Filings............................................................. 49
Registration Statement.................................................. 49
Documents Incorporated By Reference..................................... 49
Documents Available Without Charge...................................... 50
APPENDIX A Agreement and Plan of Reorganization and Amendment to Agreement
APPENDIX B Opinion of Hovde Financial, Inc.
APPENDIX C California Dissenters' Rights Statute
APPENDIX D North County Bancorp's Form 10-K for the year ended December
31, 1998
APPENDIX E North County Bancorp's definitive Proxy Statement for its 1999
annual meeting of shareholders
APPENDIX F North County Bancorp's Form 10-Q for the quarter ended
September 30, 1999
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THIS DOCUMENT
What is the purpose of this document?
This document serves as both a proxy statement of North County and a
prospectus of Wells Fargo. As a proxy statement, it's being provided to you
because North County's board of directors is soliciting your proxy for use at
the special meeting of shareholders called to consider and vote on the proposed
sale of North County to Wells Fargo. As a prospectus, it's being provided to
you because Wells Fargo is offering to exchange shares of its common stock for
your shares of North County common stock.
Do I need to read the entire document?
Absolutely. Much of this proxy statement-prospectus summarizes information
that is in greater detail elsewhere in this document or in the appendices to
this document. Each summary discussion is qualified by reference to the full
text. For example, the summary of the terms of the merger agreement is
qualified by the actual terms of the merger agreement, a copy of which is
attached as Appendix A.
Is there other information I should consider?
Yes. Much of the business and financial information about Wells Fargo and
North County that may be important to you is not included in this document.
Instead, this information is incorporated by reference to documents separately
filed by Wells Fargo and North County with the Securities and Exchange
Commission. This means that Wells Fargo and North County may satisfy their
disclosure obligations to you by referring you to one or more documents
separately filed by them with the Securities and Exchange Commission. See
"Where You Can Find More Information" on page for a list of documents that
Wells Fargo and North County have incorporated by reference into this proxy
statement-prospectus and for instructions on how to obtain copies of these
documents. The documents are available to you without charge.
What if there is a conflict between documents?
You should rely on the later filed document. Information in this proxy
statement-prospectus may update information contained in one or more of the
Wells Fargo or North County documents incorporated by reference. Similarly,
information in documents that Wells Fargo or North County may file after the
date of this proxy statement-prospectus may update information in this proxy
statement-prospectus or information in previously filed documents.
What if I choose not to read the incorporated documents?
Information contained in a document that is incorporated by reference is
part of this proxy statement-prospectus, unless it is superseded by information
contained directly in this proxy statement-prospectus or in one or more
documents filed with the SEC after the date of this proxy statement-prospectus.
Information that is incorporated from another document is considered to have
been disclosed to you whether or not you choose to read the document.
iv
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, and for a more complete description of the legal terms of the
merger, you should carefully read this document and the other documents to
which this document refers you. See "Where You Can Find More Information" on
page . Each item in this summary includes a page reference to a more complete
description of that item.
The Merger (page )
In the proposed transaction, Wells Fargo will acquire North County through
the merger of a Wells Fargo subsidiary into North County, with North County
surviving as a subsidiary of Wells Fargo. If the merger is completed, Wells
Fargo will exchange shares of its common stock for shares of North County
common stock so that, after the merger is completed, Wells Fargo will own all
of the outstanding stock of North County.
The merger agreement and the amendment to the merger agreement are attached
to this proxy statement-prospectus as Appendix A. When used in this proxy
statement-prospectus, the term "merger agreement" refers to the merger
agreement, as amended. Please read the merger agreement as it is the document
that governs the merger.
The Companies (pages and )
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
(800) 411-4932
Wells Fargo & Company is a diversified financial services company whose
subsidiaries and affiliates provide banking, insurance, investments, and
mortgage and consumer finance through stores located across North America. At
September 30, 1999, Wells Fargo had $207 billion of assets, 7th largest among
U.S. bank holding companies.
North County Bancorp
444 South Escondido Boulevard
Escondido, California 92025
(760) 743-2200
North County Bancorp is a bank holding company whose only active subsidiary
and principal asset is North County Bank, a California state bank with ten
branches and one loan production office. North County Bank provides a wide
range of banking services to small and medium-sized businesses, real estate
construction and development companies, and professionals and individuals
located in San Diego and Riverside counties. The bank also offers small
business loans through its loan production office in the Seattle, Washington
area. At September 30, 1999, North County had assets of $340 million.
Exchange Of Wells Fargo Shares For North County Shares (page )
If the merger is completed, Wells Fargo will exchange approximately $21 of
Wells Fargo common stock for each outstanding share of North County common
stock. The exchange ratio, or the number of shares of Wells Fargo common stock
you will receive for each share of North County common stock you own, will be
determined by dividing the share value of approximately $21 by a measurement
price. The measurement price will be the average of the closing prices of a
share of Wells Fargo common stock as reported on the New York Stock Exchange
for the period of 20 trading days ending on the day immediately before the
special meeting.
1
<PAGE>
The following table shows the approximate exchange ratios that would result
from three different measurement prices, each based on a $21 share value.
<TABLE>
<CAPTION>
Measurement Price Calculation Exchange Ratio
----------------- ------------ --------------
<S> <C> <C>
$42.50....................................... $21 / $42.50 0.4941
$45.00....................................... $21 / $45.00 0.4667
$47.50....................................... $21 / $47.50 0.4421
</TABLE>
The actual measurement price--and thus the actual exchange ratio--will not
be known until immediately before the special meeting.
Cash Instead Of Fractional Shares (page )
Wells Fargo will not issue fractional shares in the merger. If the total
number of shares of Wells Fargo common stock you will receive in the merger
does not equal a whole number, you will receive cash instead of the fractional
share.
Redemption Of Unexercised Options (page )
North County has agreed to redeem for cash each non-qualified option to
purchase North County common stock that has not been exercised as of
immediately before the merger and as to which the holder has elected in
writing, prior to the special meeting of North County shareholders, to have
North County redeem. The option redemption price for each option share will
equal $21 minus the exercise price per share of the option. For example, the
holder of an option to purchase 1,000 shares of North County common stock at an
exercise price of $10 a share would receive a total of $11,000 in cash upon
redemption of the option, calculated as follows: ($21-$10) x 1,000 = $11,000
Surrender Of North County Shares (page )
To receive certificates for your shares of Wells Fargo common stock, you
will need to surrender your North County share certificates. After the merger
is completed, Wells Fargo's stock transfer agent will send you written
instructions for exchanging your stock certificates.
Please do not send in your certificates until you receive these
instructions.
Federal Income Tax Consequences (page )
North County shareholders generally will not recognize gain or loss for U.S.
federal income tax purposes from the exchange of their shares of North County
common stock for shares of Wells Fargo common stock. North County shareholders
will be taxed on cash they receive instead of fractional shares.
The tax treatment described above may not apply to every North County
shareholder. Determining the tax consequences of the merger to you may be
complicated. You should consult your own advisor for a full understanding of
the merger's tax consequences.
If you are a North County option holder, you should consult your own advisor
for the tax consequences of exercising your option before the merger or
receiving cash upon redemption of your option by North County, as this document
does not address the tax consequences of either of these events.
2
<PAGE>
Fairness Opinion (page )
Hovde Financial, Inc., North County's financial advisor for the merger, has
given its opinion to North County's board of directors that, as of the date of
this proxy statement-prospectus, the share value of approximately $21 of Wells
Fargo common stock for each share of North County common stock is fair to North
County shareholders from a financial point of view. A copy of the fairness
opinion is attached to this proxy statement-prospectus as Appendix B.
Recommendation Of North County's Board (page )
North County's board of directors believes that the merger is in the best
interests of North County shareholders and recommends that North County
shareholders approve the merger. North County's board believes that, as a
result of the merger, North County shareholders will have the potential for
greater stock value appreciation than they would if North County had remained
independent.
Additional Benefits To North County Management (page )
Some of North County's directors and officers have interests in the merger
that are different from yours. These interests include the following:
. severance agreements with North County that require payments upon the
occurrence of specified events following a change in control of North
County;
. retention agreements with Wells Fargo that provide for payments upon
completion of specified periods of employment following the merger; and
. North County benefit plans that provide for the acceleration of the
vesting of stock options upon a change in control.
The merger will constitute a change in control of North County.
Hovde Financial, Inc. will receive a fee as North County's financial advisor
in connection with the merger. Affiliates of Hovde are the holders of an
aggregate of 595,589 shares of North County common stock, representing
approximately 11.6% of North County common stock outstanding at the record date
for the special meeting.
The board of directors of North County was aware of these additional
interests when it approved the merger agreement.
Dissenters' Rights (page )
North County shareholders who do not vote for the merger and who have fully
complied with the applicable provisions of the California General Corporation
Law may have the right to require North County to purchase for cash their
shares of North County common stock at the fair market value of the shares as
of the day prior to the date the merger was announced, excluding any
appreciation or depreciation resulting from the proposed merger. Because North
County common stock is traded on the Nasdaq National Market, North County
shareholders will be entitled to exercise dissenters' rights in connection with
the merger only if demands for cash payment are made by holders of 5% or more
of the outstanding shares of North County common stock.
Appendix C to this proxy statement-prospectus contains the relevant
provisions of the California General Corporation Law. The fair market value of
dissenting shares as determined under the California General Corporation Law
may be more or less than the value of the shares of Wells Fargo common stock to
be received in the merger.
3
<PAGE>
Special Meeting (page )
North County will hold the special meeting of shareholders at 9:00 a.m.,
local time, on Tuesday, January 25, 2000, at the California Center for the
Arts, Escondido Conference Center, Salon One, 340 North Escondido Boulevard,
Escondido, California 92025. You can vote at the meeting if you owned North
County common stock at the close of business on December 10, 1999, the record
date for the meeting.
Vote Required To Approve Merger (page )
Approval of the merger requires the affirmative vote of a majority of the
outstanding shares of North County common stock entitled to vote at the special
meeting. Not voting will have the same effect as voting against the merger.
At the record date, excluding shares subject to stock options, North
County's directors and executive officers beneficially owned a total of
1,401,613 shares of North County common stock, representing approximately 27.3%
of the shares of North County common stock entitled to vote at the special
meeting. Two of North County's directors and two other shareholders have agreed
to vote in favor of the merger all shares of North County common stock
beneficially owned by them at the record date for the special meeting. At the
record date, excluding shares subject to stock options, these directors and
other shareholders beneficially owned a total of 34.9% of the North County
common stock entitled to vote at the special meeting.
Differences In The Rights Of Shareholders (page )
Your rights as a North County shareholder are currently governed by
California law and North County's articles of incorporation and bylaws. Upon
completion of the merger, you will become a Wells Fargo stockholder, and your
rights will be governed by Delaware law and Wells Fargo's restated certificate
of incorporation and bylaws.
Regulatory Approvals (page )
The Board of Governors of the Federal Reserve System and the California
Department of Financial Institutions must approve the merger before it can be
completed. Wells Fargo believes that it has filed all the required applications
or notices with the Federal Reserve Board and the California Department of
Financial Institutions. As of the date of this proxy statement-prospectus,
neither the Federal Reserve Board nor the California Department of Financial
Institutions had acted on Wells Fargo's application for approval of the merger.
Although Wells Fargo expects that both regulatory agencies will approve the
merger, it cannot be certain when or if, or on what terms and conditions, the
required approvals will be given.
Other Conditions To Completing The Merger (page )
In addition to the receipt of regulatory approvals, there are a number of
other conditions that must be met before the merger can be completed. These
conditions include:
. North County shareholders must approve the merger agreement;
. North County must receive an opinion from its counsel or its independent
accountants concerning the tax consequences of the merger;
. North County's and Wells Fargo's representations in the merger agreement
must continue to be accurate and their respective covenants must have
been performed; and
. the New York and Chicago Stock Exchanges must approve the listing of the
shares of Wells Fargo common stock to be issued in the merger.
4
<PAGE>
Wells Fargo or North County may waive a condition it is entitled to assert
so long as the law does not require the condition to be met.
Termination Of The Merger Agreement (page )
Wells Fargo and North County can agree to terminate the merger agreement at
any time without completing the merger. Also, either company can terminate the
merger agreement without the consent of the other under the following
circumstances:
. a court or other governmental authority prohibits the merger;
. the merger is not completed by April 30, 2000, unless the failure to
complete the merger on or before that date is the fault of the company
seeking to terminate; or
. a third party makes a competing bid for North County that North County's
board of directors determines to be superior to the Wells Fargo merger
transaction.
If the merger agreement is terminated because North County receives a
competing bid as described above, North County must pay Wells Fargo a
termination fee of $3,500,000. North County also will be required to pay a
termination fee of $3,500,000 if the merger agreement is terminated under other
specified circumstances and, within 12 months after termination, North County
or North County Bank enters into an agreement with a third party for the sale
of North County or North County Bank or other similar transaction.
Accounting Treatment (page )
Wells Fargo expects to account for the merger under the purchase method of
accounting. Wells Fargo will record, at fair value, the acquired assets and
assumed liabilities of North County. To the extent the total purchase price
exceeds the fair value of the assets acquired and liabilities assumed, Wells
Fargo will record goodwill.
Market Price Information (page )
Wells Fargo common stock is listed on the New York and Chicago Stock
Exchanges under the symbol "WFC." On September 29, 1999, the last trading day
before public announcement of the proposed merger, Wells Fargo common stock
closed on the New York Stock Exchange at $38.56 per share.
North County common stock is traded on the Nasdaq National Market System
under the symbol "NCBH." Because of limited trading volume, there is not an
active market for North County common stock. On September 29, 1999, North
County common stock last traded at $19.63 per share.
Regulation Of Wells Fargo (page )
Wells Fargo & Company, its banking subsidiaries and many of its nonbanking
subsidiaries are subject to extensive regulation by a number of federal and
state agencies. This regulation, among other things, may restrict Wells Fargo's
ability to diversify into other areas of financial services, acquire depository
institutions in certain states and pay dividends on its stock. It may also
require Wells Fargo to provide financial support to one or more of its
subsidiary banks, maintain capital balances in excess of those desired by
management and pay higher deposit premiums as a result of the deterioration in
the financial condition of depository institutions in general.
5
<PAGE>
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act that, effective March 11, 2000, will permit bank holding companies
to become financial holding companies and thereby affiliate with securities
firms and insurance companies and engage in other activities that are financial
in nature. The Gramm-Leach-Bliley Act defines "financial in nature" to include:
. securities underwriting, dealing and market making;
. sponsoring mutual funds and investment companies;
. insurance underwriting and agency;
. merchant banking activities; and
. activities that the Board of Governors of the Federal Reserve System has
determined to be closely related to banking.
Under the Gramm-Leach-Bliley Act, securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. The Act may significantly change the competitive
environment in which the Company and its subsidiaries conduct business.
6
<PAGE>
Selected Financial Data
The following financial information is to aid you in your analysis of the
financial aspects of the merger. The Wells Fargo balance sheet data for 1994
through 1998 is derived from Wells Fargo's audited consolidated balance sheets
as of December 31, 1998, 1997 and 1996 and its unaudited financial information
for 1995 and 1994. The Wells Fargo income statement data for 1994 through 1998
is derived from Wells Fargo's audited consolidated statement of income for each
of the years in the four-year period ended December 31, 1998 and its unaudited
financial information for 1994. The Wells Fargo data as of and for the nine
months ended September 30, 1999 and 1998 is derived from unaudited financial
statements for those periods. The North County data is derived from its audited
consolidated financial statements for 1994 through 1998 and its unaudited
financial statements for the nine months ended September 30, 1999 and 1998. The
information in the table is only a summary and should be read with the full
financial statements and related notes of Wells Fargo and North County. You
should not rely on the information for the nine months ended September 30, 1999
as being indicative of the results expected for the entire year.
----------------
Wells Fargo & Company and Subsidiaries
<TABLE>
<CAPTION>
Nine Months
Ended September
30 Years Ended December 31
---------------- ---------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income..... $ 6,959 6,689 8,990 8,648 8,222 5,923 5,414
Net income.............. 2,777 2,144 1,950 2,499 2,228 1,988 1,642
Diluted earnings per
share.................. 1.65 1.29 1.17 1.48 1.36 1.62 1.36
Cash dividends per
share.................. 0.585 0.515 0.700 0.615 0.525 0.450 0.383
Book value per share.... 13.17 12.40 12.35 11.92 11.66 10.27 5.86
Total assets............ 207,060 195,863 202,475 185,685 188,633 122,200 112,674
Long-term debt.......... 24,911 18,486 19,709 17,335 18,142 16,726 12,039
</TABLE>
----------------
North County Bancorp and Subsidiaries
<TABLE>
<CAPTION>
Nine Months
Ended September
30 Years Ended December 31
---------------- ---------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income..... $ 15,404 14,293 19,365 16,354 14,728 14,122 13,122
Net income.............. 3,112 3,358 4,769 3,509 2,744 1,532 85
Diluted earnings per
share.................. 0.62 0.66 0.94 0.72 0.58 0.37 --
Cash dividends per
share.................. -- -- -- -- -- -- --
Book value per share.... 6.59 5.88 6.16 5.17 4.57 3.96 3.65
Total assets............ 340,268 324,992 337,413 280,734 257,306 237,034 246,840
Long-term debt.......... 362 405 387 415 3,513 3,640 3,669
</TABLE>
7
<PAGE>
Comparative Per Common Share Data
The following table shows comparative per share data for Wells Fargo common
stock on a historical and pro forma combined basis and for North County common
stock on a historical and pro forma equivalent basis. The information in the
table assumes that Wells Fargo will account for the merger as a purchase and
will exchange 0.4667 shares of its common stock for each share of North County
common stock. This is the exchange ratio that would result if the measurement
price is $45. The actual measurement price--and thus the actual exchange
ratio--will not be known until immediately before the special meeting. The pro
forma equivalent information for North County is calculated by multiplying the
pro forma basic and diluted earnings per share, the historical cash dividends
declared per share of Wells Fargo common stock and the pro forma stockholders'
equity per share by the assumed exchange ratio of 0.4667.
You should read the data with the historical financial statements and
related notes of Wells Fargo and North County. Wells Fargo's and North County's
historical financial statements are included or incorporated in documents filed
with the SEC. See "Where You Can Find More Information" on page . Amounts are
in U.S. dollars.
<TABLE>
<CAPTION>
Wells Fargo North County
-------------------- ---------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings Per Share
Basic
Nine Months Ended September 30,
1999............................. 1.67 1.67 0.64 0.78
Year Ended December 31, 1998...... 1.18 1.18 0.98 0.55
Diluted
Nine Months Ended September 30,
1999............................. 1.65 1.65 0.62 0.77
Year Ended December 31, 1998...... 1.17 1.17 0.94 0.55
Cash Dividends Declared Per Share
Nine Months Ended September 30,
1999............................. 0.585 0.585 -- 0.273
Year Ended December 31, 1998...... 0.700 0.700 -- 0.327
Stockholders' Equity Per Share
September 30, 1999................ 13.17 13.17 6.59 6.15
December 31, 1998................. 12.35 12.35 6.16 5.76
</TABLE>
8
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
Date, Time And Place
The date, time and place of the special meeting of North County shareholders
called to consider and vote on the merger agreement are:
January 25, 2000
9:00 a.m., local time
California Center for the Arts, Salon One
340 North Escondido Boulevard
Escondido, California 92025
Record Date
North County's board of directors has established December 10, 1999 as the
record date for the meeting. Only shareholders of record on that date are
entitled to attend and vote at the special meeting.
Vote Required To Approve Merger
On the record date, there were 5,126,878 shares of North County common stock
outstanding and entitled to vote at the special meeting. The holders of North
County common stock are entitled to one vote per share. The presence, in person
or by proxy, at the special meeting of the holders of a majority of the
outstanding shares entitled to vote is necessary for a quorum. Approval of the
merger requires the affirmative vote, in person or by proxy, of the holders of
a majority of the outstanding shares of North County common stock on the record
date.
Agreements To Vote For The Merger
Two North County directors and two other North County shareholders have
agreed to vote in favor of the merger all shares of North County common stock
beneficially owned by them at the record date for the special meeting. At the
record date, excluding shares subject to stock options, these directors and
other shareholders beneficially owned a total of 34.9% of the shares of North
County common stock entitled to vote at the special meeting, as follows:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Financial Institution Partners, L.P................................ 581,834
Walter D. Buchanan................................................. 465,518
James M. Gregg..................................................... 430,371
Ronald K. Goode.................................................... 311,452
---------
Total............................................................ 1,789,175
=========
</TABLE>
See "Information About North County--"Certain Additional Information
Incorporated By Reference And Delivered Herewith" for more information about
share ownership by North County's officers and directors and principal
shareholders.
Voting And Revocation Of Proxies
All shares of North County common stock represented at the special meeting
by a properly executed proxy will be voted in accordance with the instructions
indicated on the proxy, unless the proxy is revoked before a vote is taken. If
you sign and return a proxy without voting instructions, and do not revoke the
proxy, the proxy will be voted FOR the merger.
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<PAGE>
You may revoke your proxy at any time before it is voted by (a) filing
either an instrument revoking the proxy or a duly executed proxy, in either
case bearing a later date, with the corporate secretary of North County before
or at the special meeting or (b) voting the shares subject to the proxy in
person at the special meeting. Attendance at the special meeting will not by
itself result in your proxy being revoked.
A proxy may indicate that all or a portion of the shares represented by the
proxy are not being voted with respect to a specific proposal. This could
occur, for example, when a broker is not permitted to vote shares held in the
name of a nominee on certain proposals in the absence of instructions from the
beneficial owner. Shares that are not voted with respect to a specific proposal
will be considered as not present for that proposal, even though the shares
will be considered present for purposes of determining a quorum and voting on
other proposals. Abstentions on a specific proposal will be considered as
present but will not be counted as voting in favor of the proposal.
The proposal to approve the merger must be approved by the holders of a
majority of the shares of North County common stock outstanding at the record
date. Because approval of the merger requires the affirmative vote of a
specified percentage of outstanding shares, not voting on the proposal will
have the same effect as voting against the proposal.
Solicitation Of Proxies
In addition to solicitation by mail, directors, officers and employees of
North County and its subsidiaries may solicit proxies from North County
shareholders, either personally or by telephone or other form of communication.
None of the foregoing persons who solicit proxies will be specifically
compensated for such services. Nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy material to
beneficial owners. North County will bear its own expenses in connection with
any solicitation of proxies for the special meeting.
Other Matters Considered At The Meeting
If an insufficient number of votes for the merger is received before the
scheduled meeting date, Wells Fargo and North County may decide to postpone or
adjourn the special meeting. If this happens, proxies that have been received
that either have been voted for the merger or contain no instructions will be
voted for adjournment.
North County's board of directors is not aware of any business to be brought
before the special meeting other than the proposal to approve the merger. If
other matters are properly brought before the special meeting or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have authority to vote the shares represented by properly executed proxies
in accordance with their discretion and judgment as to the best interests of
North County.
10
<PAGE>
THE MERGER
Effect Of The Merger
As a result of the merger:
. Wells Fargo will exchange shares of its common stock for shares of North
County common stock.
. Wells Fargo will acquire all of the outstanding common stock of North
County, resulting in North County becoming a wholly-owned subsidiary of
Wells Fargo.
. North County shareholders will become Wells Fargo stockholders, with
their rights governed by Delaware law and Wells Fargo's restated
certificate of incorporation and bylaws. See "Comparison Of Stockholder
Rights."
Background Of And Reasons For The Merger
Background of the Merger
As the nature of banking has become increasingly competitive, larger
financial organizations have demonstrated a willingness to pay a premium for
attractive franchises in high-growth markets such as southern California.
During the normal course of its business, North County has occasionally
received inquiries regarding its willingness to consider an acquisition by, or
affiliation with, larger financial institutions. Consistent with its fiduciary
obligations to its shareholders, North County has considered such inquiries and
evaluated them for the level and form of consideration proposed, the
seriousness and specificity which has been conveyed to North County in terms of
consideration, the expected future operation of North County, and other
considerations and factors deemed relevant by North County, in formulating its
business plan with the intent to provide maximum value to its shareholders by
enhancing its franchise as the pre-eminent independent bank serving the
northern San Diego metropolitan area. The board of directors of North County
continually evaluates the cost of providing the increasingly broad array of
financial products and alternative delivery channels to remain competitive in
the marketplace, while continuing to deliver excellent service to its customers
and providing exceptional returns to its shareholders.
In June 1997, North County retained Hovde Financial, Inc. as its financial
advisor for strategic planning, stock valuation and advisory services. While no
specific acquisition or sale transaction was pending or pursued at such time,
North County wanted the benefit of Hovde's assistance and advice respecting
these and other strategic options in the future. In the summer of 1998 North
County received an unsolicited indication of interest from a major regional
bank in acquiring North County for the acquiror's stock. Negotiations ensued
but were ultimately terminated in December 1998.
In April 1999, in light of the continuation of the interest of major
organizations in acquiring California banks, current transaction pricing and
its consideration of alternative business strategies, the board of directors
elected to seek to sell the company and authorized Hovde to prepare preliminary
marketing materials and to expose North County for sale to a limited group of
major prospective bidders. As a result, in May 1999, Hovde approached 10
potential acquirors, nine of which were provided information, pursuant to a
confidentiality agreement, regarding North County. Of these nine potential
acquirors, three submitted acquisition proposals, two of which the board of
directors of North County believed merited further consideration, including the
proposal of Wells Fargo. As a result of further discussions with each potential
acquiror, North County and Wells Fargo commenced negotiations in August 1999.
In evaluating whether to affiliate with Wells Fargo, North County considered
the following:
. the value of Wells Fargo common stock;
. the competitive conditions in the market served by North County;
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<PAGE>
. North County's ability to provide, on a cost-effective basis, the ever-
increasing and broadening array of financial services products demanded
by customers;
. the fact that Wells Fargo common stock is widely-traded, thereby
representing a more liquid investment than North County's common stock;
and
. the appreciation in the price of Wells Fargo common stock over the past
ten years and Wells Fargo's dividend history.
In addition, North County believed that affiliating with Wells Fargo, a larger
financial institution with significantly greater resources and expertise,
offered expansion opportunities, financial products and services not otherwise
available to North County and its customers, which would better enable North
County to compete. North County and its board of directors determined that
North County's competitive position and the value of its stock could best be
enhanced through affiliation with Wells Fargo.
Following arm's-length negotiations between representatives of Wells Fargo
and North County, Wells Fargo and North County entered into the merger
agreement on September 29, 1999. The aggregate price to be paid to holders of
North County common stock resulted from negotiations which considered the
historical earnings and dividends of Wells Fargo and North County; the
potential growth in North County's market and earnings, both as an independent
entity and as a part of a larger organization, such as Wells Fargo;
North County's asset quality, and the effect of the merger on the shareholders,
customers, and employees of North County. In addition, the board of directors
of North County specifically considered Hovde's oral opinion, presented at the
board of directors meeting held to consider the merger proposal, that the terms
offered by Wells Fargo were fair to North County's shareholders from a
financial point of view.
The merger agreement was executed and a press release issued announcing the
terms of the merger on September 30, 1999.
For the reasons set forth above, North County's board of directors
unanimously approved the merger and recommended approval of the transaction by
North County's shareholders.
North County's Board of Directors' Reasons for the Merger
Subject to satisfaction of certain conditions contained in the merger
agreement, North County's board of directors believes the merger to be fair and
in the best interest of North County's shareholders.
The terms of the proposed merger are the result of arm's-length negotiations
by representatives of North County and Wells Fargo, which culminated in the
signing of the merger agreement as of September 29, 1999. In arriving at its
decision to approve and recommend the terms of the merger agreement, the board
of directors of North County considered a number of factors, including, but not
limited to, the following:
. North County's business, results of operations, financial condition and
future prospects;
. Wells Fargo's business, results of operations, financial condition and
future prospects, which the board of directors of North County believes
to be superior to those of North County. Specifically, when compared to
Wells Fargo, the board of directors of North County believes that Wells
Fargo (a) serves both national and international marketplaces with
greater and more diversified opportunities for growth than presented by
San Diego County alone; (b) has higher loan limits, more diversified
product offerings and other competitive advantages for expanding its
customer base; and (c) has far greater capacity to access capital
markets to support future expansion;
. Hovde's presentation to the board of directors and the opinion of Hovde,
North County's financial advisor, that the merger consideration of
approximately $21.00 per share of Wells Fargo common stock was fair from
a financial point of view to the shareholders of North County;
12
<PAGE>
. The review by the board of directors of North County with its legal and
financial advisors of the provisions of the proposed merger agreement;
. The belief of the board of directors of North County that the terms of
the merger were attractive and that they would allow North County's
shareholders to receive shares of Wells Fargo common stock, an
investment with much greater liquidity than shares of North County;
. The ability of shareholders of North County to defer paying taxes on the
disposition of shares of North County common stock until the sale of
shares of Wells Fargo common stock received in exchange for their shares
of North County common stock in the merger;
. An increase in competition in the market for financial services from
existing and potential competitors, many of which have far greater
assets and resources than North County;
. The financial resources of Wells Fargo, its experience in acquiring
independent community banks, the absence of any financing contingencies
in its proposal and the track record of Wells Fargo in receiving the
requisite regulatory approvals for similar transactions in a timely
manner.
Certain members of the board of directors have interests in the merger in
addition to their interests as stockholders generally, including future
employment and severance arrangements and the acceleration of outstanding stock
options. Shareholders may wish to consider those interests in evaluating the
recommendation of the North County board of directors that shareholders vote
for approval of the merger. See "Additional Interests of North County
Management."
In reaching its determination to approve and recommend the merger, the board
of directors of North County did not assign any relative or specific weights to
the foregoing factors, and individual directors may have given different
weights to different factors.
North County's board of directors unanimously recommends that North County
shareholders approve the merger agreement and the merger.
Opinion Of North County's Financial Advisor
The fairness opinion of North County's financial advisor, Hovde Financial,
Inc., is described below. To the extent that the description contains Hovde's
projections, estimates and/or other forward-looking statements about the future
earnings or other measures of the future performance of Wells Fargo and North
County, you should not rely on any of these statements as having been made or
adopted by Wells Fargo or North County.
The full text of the fairness opinion, which sets forth, among other things,
assumptions made, matters considered and qualifications and limitations on the
review undertaken, is attached hereto as Appendix B and is incorporated herein
by reference. North County's shareholders are urged to read the fairness
opinion in its entirety. The fairness opinion, which was directed to the North
County board of directors, addresses only the fairness to the shareholders of
North County, from a financial point of view, of the consideration to be
received by shareholders in the merger, and does not constitute a
recommendation to any North County shareholder as to how such shareholder
should vote with respect to the merger. The fairness opinion was rendered to
North County's board of directors for its consideration in determining whether
to approve the merger agreement. The following summary of the fairness opinion
is qualified in its entirety by reference to the full text of the fairness
opinion.
No limitations were imposed by North County on the scope of Hovde's
investigation or the procedures to be followed by Hovde in rendering the
fairness opinion. Hovde did not make any recommendation to North County's board
of directors as to the form or amount of consideration to be paid by Wells
Fargo to North County shareholders in connection with the merger, both of which
were determined through arm's-length negotiations between the parties. In
arriving at its opinion, Hovde did not ascribe a specific range of value to
Wells Fargo or North County, but rather made its determination as to the
fairness, from a financial point of
13
<PAGE>
view, of the consideration to be received by shareholders in the merger, on the
basis of the financial and comparative analyses described below. Hovde was not
requested to opine as to, and the fairness opinion does not address, North
County's underlying business decision to proceed with or effect the merger.
During the course of the engagement, Hovde reviewed and analyzed material
bearing upon the financial and operating condition of Wells Fargo and North
County and material prepared in connection with the merger, including the
following:
. the merger agreement;
. certain publicly available information concerning Wells Fargo and North
County, including, as applicable: Wells Fargo's and North County's
audited consolidated financial statements for each of the three years
ended December 31, 1998, and unaudited statements for the quarters ended
March 31, 1999 and June 30, 1999;
. documents filed with the Securities and Exchange Commission (SEC), the
Federal Deposit Insurance Corporation, Federal Reserve and other state
or other regulatory agencies, as applicable and/or appropriate, for the
aforementioned three-year period and for the quarterly periods ended
March 31, 1999 and June 30, 1999, respectively; and
. as applicable, recent internal reports and/or financial projections
regarding Wells Fargo and North County; the nature and terms of recent
sale and merger transactions involving banks and bank holding companies
that Hovde considered relevant; and, financial and other information
provided to Hovde by the managements of Wells Fargo and North County.
In rendering the fairness opinion, Hovde assumed and relied upon the
accuracy and completeness of the financial and other information provided to it
by North County or Wells Fargo without assuming any responsibility for
independent verification of such information and further relied upon the
assurances of the managements of Wells Fargo and North County that they were
not aware of any facts or circumstances that would make such information,
provided by them, inaccurate or misleading. With respect to financial
statements and/or projections to the extent such were provided by Wells Fargo
and North County, Hovde assumed that such financial statements and/or
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the respective managements of Wells Fargo
and North County. Hovde assumed that the merger will be accounted for using the
purchase method of accounting. In rendering the fairness opinion, Hovde did not
conduct a physical inspection of the properties and facilities of Wells Fargo
or North County and did not make or obtain any evaluations or appraisals of the
assets or liabilities of Wells Fargo or North County. In addition, Hovde noted
that it is not an expert in the evaluation of loan portfolios or allowances for
loan, lease or real estate owned losses, and it assumed that the allowances for
loan, lease and real estate owned losses (as currently stated or as adjusted
for in connection with the merger or otherwise) provided to it by North County
and used by it in its analysis and in rendering its fairness opinion were in
the aggregate adequate to cover all such losses. The fairness opinion was based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of the fairness opinion.
The following is a summary of the analyses Hovde performed in rendering its
fairness opinion. In connection with the preparation and delivery of the
fairness opinion to the board of directors of North County, Hovde performed a
variety of financial and comparative analyses, as described below. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Hovde did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Hovde believes that its analyses must be considered as a whole and
that considering any portion of such analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Hovde made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the
14
<PAGE>
control of Hovde. Any estimates contained in these analyses were not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses did not
purport to be appraisals or to reflect the prices at which businesses may
actually be sold.
Merger Value Analysis
Hovde calculated the price-to-tangible book, price-to-earnings multiple, and
deposit premium paid (defined as the merger value less the tangible book value
of North County, divided by North County's core deposits), in the merger using
June 30, 1999 financial data. This analysis yielded an aggregate merger value
of $112,000,000, a price-to-tangible book value multiple of 363.1%, a price-to-
last twelve months' earnings multiple of 23.4x and a deposit premium of 27.7%.
Comparable Company Analysis--Wells Fargo
Using publicly available information, Hovde compared the financial
performance and stock market valuation of Wells Fargo with the following
selected banking institutions with assets over $50 billion (the "Comparable
Bank Group") deemed relevant by Hovde: Bank of America (NC), Bank of New York
(NY), Bank One (IL), BankBoston (MA), Chase Manhattan (NY), Citigroup (NY),
First Union (NC), Fleet Financial (MA), J.P. Morgan (NY), KeyCorp (OH),
National City (OH), PNC (PA), Republic (NY), SunTrust (GA), U.S. Bancorp (MN)
and Wachovia (NC). Indications of such financial performance and stock market
valuation included:
. profitability (return on average assets and return on average equity for
the latest twelve month period ended June 30, 1999, of 1.21% and 11.29%,
respectively, for Wells Fargo and averages of 1.28% and 17.00%,
respectively, for the Comparable Bank Group);
. the ratio of tangible equity to tangible assets (6.31% for Wells Fargo
and an average of 5.96% for the Comparable Bank Group); the ratio of
non-performing assets to total assets (0.43% for Wells Fargo and an
average of 0.40% for the Comparable Bank Group);
. current stock price to earnings for the latest twelve month period ended
June 30, 1999, 1999 expected earnings and 2000 expected earnings (26.7x,
16.8x and 14.6x, respectively, for Wells Fargo and an average of 17.3x,
13.7x, and 12.4x, respectively, for the Comparable Bank Group); and
. current stock price to tangible book value as of June 30, 1999 (520.4%
for Wells Fargo and an average of 344.3% for the Comparable Bank Group).
Because of the inherent differences in the businesses, operations, financial
conditions and prospects of North County, Wells Fargo and the companies
included in the Comparable Bank Group, Hovde believed that a purely
quantitative comparable company analysis would not be particularly meaningful
in the context of the merger. Hovde believed that the appropriate use of a
comparable company analysis in this instance would involve qualitative
judgments concerning the differences between North County and the companies
included in the Comparable Bank Group which would affect the trading values of
the comparable companies.
Comparable Transaction Analysis
Using publicly available information, Hovde reviewed certain terms and
financial characteristics, including historical price-to-earnings ratio, the
price-to-tangible book ratio, and the deposit premium paid in prior commercial
banking institution merger or acquisition transactions. The first comparable
group ("Comparable Group One") included nationwide transactions announced since
January 1, 1999 with sellers with assets between $100 million and $1 billion
that earned between 1.00% and 1.50% on total assets. Comparable Group One
included 33 transactions. The average price-to-last twelve month earnings for
Comparable Group One was 21.1x, and ranged from 11.8x to 37.7x. The average
price-to-tangible book value for Comparable Group One was 298.6%, and ranged
from 143.0% to 476.2%. The average deposit premium for Comparable Group One was
21.1%, and ranged from 4.6% to 36.2%.
15
<PAGE>
The second comparable group ("Comparable Group Two") included transactions
announced since January 1, 1999 with sellers located in California with assets
between $100 million and $1 billion. Comparable Group Two included 17
transactions. The average price-to-last twelve month earnings for Comparable
Group Two was 20.8x, and ranged from 11.6x to 27.3x. The average price-to-
tangible book value for Comparable Group Two was 265.9%, and ranged from 145.9%
to 455.4%. The average deposit premium for Comparable Group Two was 20.4%, and
ranged from 5.0% to 48.1%.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences
in the businesses, operations, financial conditions and prospects of North
County, Wells Fargo and the companies included in the Comparable Bank
Transactions Groups, Hovde believed that a purely quantitative comparable
transaction analysis would not be particularly meaningful in the context of
rendering the fairness opinion. Hovde believed that the appropriate use of a
comparable transaction analysis in this instance would involve qualitative
judgments concerning the differences between the characteristics of these
transactions and the merger which would affect the acquisition values of the
acquired companies and North County.
Discounted Terminal Value Analysis
Hovde estimated the present value of the North County common stock by
assuming a range of discount rates from 12% to 15% and an 18% annual growth
rate in earnings through 2004, starting with earnings of $5.52 million in 1999.
In arriving at the value of North County's common stock, Hovde assumed an
earnings growth rate of 3.5% from 2005 into perpetuity. This terminal value was
then discounted, along with yearly cash flows for 1999 through 2004, to arrive
at the present value for North County's common stock. These rates and values
were chosen to reflect different assumptions regarding the required rates of
return of holders or prospective buyers of North County common stock. This
analysis and its underlying assumptions yielded a range of value for North
County's shares of approximately $15.64 to $21.52, compared to a total merger
consideration of $21.00 per share.
Hovde is a nationally recognized investment banking firm. Hovde, as part of
its investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations for corporate and other
purposes. Pursuant to a letter agreement dated June 20, 1997, between North
County and Hovde, North County engaged Hovde to advise it with respect to
various business matters, including potential sales transactions like the
proposed merger with Wells Fargo. In the event the merger is consummated with
Wells Fargo, North County will pay a fee to Hovde pursuant to the terms of the
letter agreement. The fee will be based on the aggregate merger consideration
equal to the sum of (a) the greater of the stated or market value of any cash,
securities or other forms of consideration issued to shareholders of North
County in connection with the merger, and (b) all other consideration paid or
payable by Wells Fargo under covenants not to compete, earnouts or comparable
arrangements. The fee payable to Hovde will be as follows:
. 2.0% of the first $10 million of aggregate merger consideration;
. 1.5% of the next $10 million of aggregate merger consideration; and
. 1 .0% of the merger consideration in excess of $20 million.
The agreement with Hovde also provides for North County to indemnify Hovde
and its affiliates against certain liabilities to which it may become subject
to as a result of its services to North County under the agreement, including
liabilities under securities laws, as well as other specified conditions.
An affiliate of Hovde, Financial Institution Partners, L.P., is the holder
of 581,834 shares of common stock of North County. In addition, the following
additional affiliates of Hovde are the beneficial owners of the following
shares of North County common stock: Financial Institution Partners, II, L.P.--
1,260 shares; Eric D. Hovde--12,438 shares and Steven D. Hovde--57 shares.
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Additional Interests Of North County Management
Certain members of North County's management have interests in the merger
that are in addition to their interests as shareholders of North County
generally. North County's board of directors was aware of these interests and
considered them, among other things, when it approved the merger agreement.
Accelerated Vesting Of Stock Options
As a result of the merger, currently non-vested options to acquire 297,650
shares of North County common stock granted under North County's stock option
plans will vest and become exercisable prior to the effective date of the
merger. The stock options have exercise prices ranging from $2.38 to $13.00,
depending on the date they were granted, and would have otherwise vested
periodically until February 2009. The merger agreement requires North County to
redeem for cash, in an amount equal to the fair market value per share of such
redeemed option minus the exercise price thereof, any non-qualified option not
exercised as of immediately before the merger and as to which the holder has
elected in writing, prior to the special meeting of North County shareholders,
to have redeemed by North County. See "The Merger Agreement--Basic Plan Of
Reorganization--Redemption Of Unexercised North County Stock Options." Any
options that have not been exercised or redeemed will expire as of the
effective time of the merger.
The following table sets forth the directors and executive officers of North
County who have options that will accelerate as a result of the merger if the
merger occurs before January 21, 2000, together with the number of option
shares subject to the options whose vesting dates will accelerate.
<TABLE>
<CAPTION>
Option Shares
Subject To
Accelerated
Name Vesting
---- -------------
<S> <C>
Alan P. Chamberlain............................................ 8,152
Gary T. Clem................................................... 21,210
G. Bruce Dunn.................................................. 8,151
Michael J. Gilligan............................................ 23,991
Ronald K. Goode................................................ 6,381
James M. Gregg................................................. 15,885
Rod D. Jones................................................... 52,040
Jack Port...................................................... 7,300
Clarence R. Smith.............................................. 8,152
Raymond V. Stone............................................... 7,144
Burnet F. Wohlford............................................. 8,154
-------
Total........................................................ 166,560
=======
</TABLE>
Change in Control Payments
Various executive and senior officers of North County, including Rod D.
Jones, Gary T. Clem and Michael J. Gilligan, have entered into change in
control severance compensation agreements with North County. Among other
things, these agreements generally provide for the payment of specified amounts
to the employees (12 or 18 months of base salary) if (a) they are terminated
within a certain period of time following a change of control, other than for
cause, or (b) if they resign within a certain period of time following a change
in control and following the occurrence of certain events, including a
diminishing of their base salary or a relocation of their employment.
Completion of the Wells Fargo merger transaction will be a change in control
for purposes of these agreements.
Under the terms of the merger agreement with Wells Fargo, employees of North
County will be eligible to participate in the Wells Fargo Salary Continuation
Plan upon completion of the merger unless they are participants in any
severance or salary continuation plan of North County or parties to an
employment
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agreement. In certain instances, the severance benefits available under the
Wells Fargo Salary Continuation Plan may be greater than the benefits available
to North County's executive and senior officers under their respective change
in control severance compensation agreements, and it is therefore anticipated
that certain of the executive and senior officers of North County who are
parties to change in control severance compensation agreements may elect to
terminate these agreements prior to the closing of the merger in order to
become participants in the Wells Fargo Salary Continuation Plan.
The change in control severance compensation agreement of Rod Jones, the
President of North County, provides that upon a change in control Mr. Jones
will be entitled to cash severance compensation equal to twice his average
annual salary and bonus compensation paid in 1998 and 1999, payable in 24
monthly installments. Mr. Jones would be entitled to this severance
compensation in the event Wells Fargo terminates Mr. Jones' employment, other
than for cause, within 24 months of a change in control, or if Mr. Jones
resigns his employment within 24 months following a change in control following
the occurrence of certain events, including a diminishing of base salary or a
relocation of employment. Mr. Jones would also be entitled to receive the
severance compensation under this agreement if he resigns his employment at
anytime after the later to occur of (a) January 1, 2001 and (b) six months
following the change in control and, in any case, within 24 months following
the change in control where no grounds then exist that would permit Wells Fargo
to terminate his employment for cause.
Rod Jones is also party to a salary continuation agreement which provides
that Mr. Jones will receive benefits in the amount of $70,000 per year for 15
years upon retirement at age 65, provided that he remains continuously employed
by North County until age 65. In the event of a reorganization, such as the
merger with Wells Fargo, Mr. Jones' retirement benefits under the salary
continuation agreement will become fully vested and not subject to forfeiture
for any reasons whatsoever.
Business Completion Payments
It is anticipated that, prior to the merger, certain officers and other
employees of North County will enter business completion payment agreements
with North County and Wells Fargo that will provide for cash payments upon
completion of continued employment through one or more specified milestone
dates. One version of the agreement will provide for an initial cash payment
following completion of the merger and a second cash payment following the
earliest to occur of (a) Wells Fargo's release of the employee, (b) the
completion of the conversion to Wells Fargo's systems or (c) March 31, 2001.
Approximately 10 employees, including North County executive officers Gary Clem
and Michael Gilligan, are expected to enter into this version of the agreement.
Total payments to these 10 individuals are expected to be approximately
$ , including total payments to Messrs. Clem and Gilligan of
approximately $ and $ , respectively.
A second version of the agreement will provide for a single, lump sum cash
payment following the earliest to occur of (a) Wells Fargo's release of the
employee, (b) the completion of the conversion to Wells Fargo's systems or (c)
March 31, 2001. No initial payment will be made following completion of the
merger. Approximately seven employees are expected to enter into this version
of the agreement. Total payments to these seven individuals are expected to be
approximately $ .
A third version of the agreement will provide for an initial cash payment
following the earliest to occur of (a) Wells Fargo's release of the employee,
(b) the completion of the conversion to Wells Fargo's systems or (c) March 31,
2001 and a second cash payment upon completion of continued employment for
days after the trigger date for the initial payment. Only Rod Jones, President
of North County, is expected to enter into this version of the agreement. Total
payments to Mr. Jones are expected to be approximately $ .
Indemnification and Insurance
Wells Fargo has agreed to ensure that all rights to indemnification and all
limitations of liability existing in North County's articles of incorporation
or bylaws in favor of the present and former directors and officers of
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North County with respect to claims arising from (a) facts or events that
occurred before the effective time of the merger or (b) the merger agreement or
any of the transactions contemplated thereby will survive the merger and
continue in full force and effect.
Subject to certain exceptions and limitations, Wells Fargo has agreed to use
its best efforts to cause to be maintained for a period of four years following
the merger the current policies of directors' and officers' liability insurance
maintained by North County with respect to claims arising from facts or events
that occurred before the merger becomes effective.
Dissenters' Rights
In connection with the merger, North County shareholders may be entitled to
dissenters' rights under Chapter 13 of the California General Corporation Law
(CGCL), the relevant provisions of which are attached to this proxy statement-
prospectus as Appendix C. The following description of dissenters' rights under
California law is qualified in its entirety by reference to Chapter 13 of the
CGCL.
Availability Of Dissenters' Rights
Because North County common stock is traded on the Nasdaq National Market,
North County shareholders will have dissenters' rights in connection with the
merger only if demands for cash payment are made in accordance with Section
1301 of the CGCL by the holders of 5% or more of the outstanding shares of
North County common stock. If dissenters' rights are available to you and you
properly exercise and perfect your dissenters' rights under the CGCL, then
North County will be required to purchase your shares of North County common
stock at their fair market value as of September 29, 1999, the day before the
merger was announced, excluding any appreciation or depreciation due to the
proposed merger.
Exercising Dissenters' Rights
To exercise your dissenters' rights:
(1) You must make written demand on North County for the purchase of your
shares of North County common stock and for the payment to you in cash
of the fair market value of the shares.
. The demand must state the number of shares of North County common
stock you hold of record and must contain a statement of what you
claim to be the fair market value of the shares as of September 29,
1999, the day before the announcement of the merger.
. The statement of fair value will constitute an offer by you to sell
your shares at that price.
. To be effective, your demand must be received by North County or its
transfer agent not later than the date of the special meeting to
vote on the merger.
. You may not withdraw your demand for payment unless North County
consents to the withdrawal.
(2) You must not vote your shares in favor of the merger. If you sign and
return a proxy without voting instructions, and do not revoke the
proxy, the proxy will be voted in favor of the merger. This will result
in your losing dissenters' rights as to the shares covered by the
proxy.
If sent to North County, your demand should be addressed as follows:
North County Bancorp
444 South Escondido Boulevard
Escondido, California 92025
Attention: Michael J. Gilligan
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If sent to North County's transfer agent, your demand should be addressed as
follows:
American Stock Transfer & Trust Company
Re: North County Bancorp
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Paula Caroppoli
Notification Of Merger Approval
If the holders of 5% or more of the outstanding shares of North County
common stock make demands in accordance with Section 1301 of the CGCL and the
merger is approved by North County shareholders, then North County will within
10 days after such approval mail to each North County shareholder who has
properly exercised his or her dissenters' rights a notice of approval of the
merger by North County shareholders. The notice will be accompanied by:
. copies of Sections 1300, 1301, 1302, 1303 and 1304 of the CGCL;
. a statement of the price determined by North County to represent the
dissenting shares' fair market value as of September 29, 1999, the day
before the merger was announced; and
. a brief description of the procedure to be followed if the shareholder
wants to exercise his or her dissenters' rights under
The statement of price constitutes an offer by North County to purchase at
the price stated any dissenting shares.
If the holders of less than 5% of the outstanding shares of North County
common stock make demands for cash payment, no shareholder of North County will
have dissenters' rights.
Submission Of Share Certificates
Within 30 days after the date on which North County mails the notice of
approval of the merger, you must submit to North County at its principal office
or at the office of its transfer agent the certificates representing your
shares of North County common stock. The address of North County and the name
and address of its transfer agent are set forth above.
Agreement As To Fair Market Value
If North County and you agree that your shares are dissenting shares and
agree upon the price of the shares, you will be entitled to the agreed price
plus interest thereon at the legal rate on judgments from the date of the
merger agreement. Payment of the purchase price will be made within 30 days
after you and North County agree as to the price or within 30 days after all of
the statutory or contractual conditions to the merger have been satisfied,
whichever is later, subject to surrender of the certificates representing your
shares.
If North County denies that your shares are dissenting shares or North
County and you do not agree upon the fair market value of the shares, then you
or North County may file a complaint in the superior court of the proper county
in California requesting that the court determine the issue. The complaint must
be filed within six months after the date on which notice of approval of the
merger is mailed to dissenting shareholders.
On trial of the dissenters' rights action, the court will first determine
whether the shares are dissenting shares. If so determined, the court will then
determine the fair market value of the shares or appoint one or more impartial
appraisers to determine the fair market value of the shares.
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Termination Of Dissenting Share And Shareholder Status
Your shares of North County common stock will lose their dissenting share
status and you will cease to be dissenting shareholder upon the happening of
any of the following:
. North County abandons the merger;
. You transfer the shares prior to their submission to North County;
. North County and you do not agree upon the status of the shares as
dissenting shares or upon the purchase price of the shares, and neither
you nor North County files a complaint within six months after the date
on which notice of approval of the merger is mailed to dissenting
shareholders; or
. With the consent of North County, you withdraw your demand for the
purchase price of your dissenting shares.
Beneficial Ownership
A person who has a beneficial interest in North County common stock that is
held of record in the name of another person (e.g., trustee or nominee) will
need to cause the record owner to exercise dissenters' rights on his or her
behalf in accordance with the requirements of Chapter 13 of the CGCL.
Exchange Of Certificates
After completion of the merger, Norwest Bank Minnesota, National
Association, acting as exchange agent for Wells Fargo, will mail to each holder
of record of shares of North County common stock a form of letter of
transmittal, together with instructions for the exchange of the holder's North
County stock certificates for a certificate representing Wells Fargo common
stock.
North County shareholders should not send in their certificates until they
receive the letter of transmittal form and instructions.
No dividend or other distribution declared on Wells Fargo common stock after
completion of the merger will be paid to the holder of any certificates for
shares of North County common stock until after the certificates have been
surrendered for exchange.
When the exchange agent receives a surrendered certificate or certificates
from a shareholder, together with a properly completed letter of transmittal,
it will issue and mail to the shareholder a certificate representing the number
of whole shares of Wells Fargo common stock to which the shareholder is
entitled, plus cash for the amount of any remaining fractional share and any
cash dividends that are payable with respect to the shares of Wells Fargo
common stock so issued. No interest will be paid on the fractional share amount
or amounts payable as dividends or other distributions.
A certificate for Wells Fargo common stock may be issued in a name other
than the name in which the surrendered certificate is registered if (a) the
certificate surrendered is properly endorsed and accompanied by all documents
required to transfer the shares to the new holder and (b) the person requesting
the issuance of the Wells Fargo common stock certificate either pays to the
exchange agent in advance any transfer and other taxes due or establishes to
the satisfaction of the exchange agent that such taxes have been paid or are
not due.
The exchange agent will issue stock certificates for Wells Fargo common
stock in exchange for lost, stolen or destroyed certificates for North County
common stock upon receipt of a lost certificate affidavit and a bond
indemnifying Wells Fargo for any claim that may be made against Wells Fargo as
a result of the lost, stolen or destroyed certificates.
After completion of the merger, no transfers will be permitted on the books
of North County. If, after completion of the merger, certificates for North
County common stock are presented for transfer to the exchange agent, they will
be canceled and exchanged for certificates representing Wells Fargo common
stock.
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None of Wells Fargo, North County, the exchange agent or any other person
will be liable to any former holder of North County common stock for any amount
delivered in good faith to a public official pursuant to applicable abandoned
property, escheat or similar laws.
Regulatory Approvals
The merger is subject to the prior approval of the Board of Governors of the
Federal Reserve System and the California Department of Financial Institutions.
Federal Reserve Board Approval
The approval of the Federal Reserve Board is required because Wells Fargo is
a bank holding company registered under the Bank Holding Company Act. On
November 4, 1999, Wells Fargo filed an application with the Federal Reserve
Board requesting approval of the merger. As of the date of this proxy
statement-prospectus, the Federal Reserve Board had not acted on Wells Fargo's
application.
California Department of Financial Institutions
The approval of the California Department of Financial Institutions is
required because North County Bank is a state-chartered bank and the merger
will result in Wells Fargo acquiring control of North County, the parent
holding company of North County Bank. On November 22, 1999, Wells Fargo filed
an application for approval of the merger with the California Department of
Financial Institutions. As of the date of this proxy statement-prospectus, the
California Department of Financial Institutions had not acted on Wells Fargo's
application.
The approval of an application means only that the regulatory criteria for
approval have been satisfied or waived. It does not mean that the approving
authority has determined that the consideration to be received by North County
shareholders is fair. Regulatory approval does not constitute an endorsement or
recommendation of the merger.
Wells Fargo and North County are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for the merger
to become effective other than those described above. Wells Fargo and North
County intend to seek any other approval and to take any other action that may
be required to effect the merger. There can be no assurance that any required
approval or action can be obtained or taken prior to the special meeting.
The merger cannot be completed unless all necessary regulatory approvals are
granted. In addition, Wells Fargo may elect not to complete the merger if any
condition under which any regulatory approval is granted is unreasonably
burdensome to Wells Fargo. See "The Merger Agreement--Conditions To The Merger"
and "--Termination Of The Merger Agreement."
Effect Of Merger On North County's Employee Benefit Plans
The merger agreement provides that, subject to any eligibility requirements
applicable to such plans, employees of North County will be entitled to
participate in those Wells Fargo employee benefit and welfare plans specified
in the merger agreement. Eligible employees of North County will enter each of
such plans no later than the first day of the calendar quarter which begins at
least 32 days after completion of the merger.
U.S. Federal Income Tax Consequences Of The Merger
The following is a summary of the anticipated material U.S. federal income
tax consequences of the merger to North County shareholders who are citizens or
residents of the United States and who, on the date of disposition of their
shares of North County common stock, hold such shares as capital assets. This
summary does not purport to deal with all aspects of taxation that may be
relevant to particular investors in light of their
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personal investment circumstances, or to certain types of investors, including
insurance companies, tax-exempt organizations, financial institutions, broker-
dealers, "S" corporations, limited liability corporations, foreign corporations
and taxpayers subject to alternative minimum tax.
The summary is based on the U.S. federal income tax laws as currently in
effect and as currently interpreted. It does not cover issues of state, local
or foreign taxation. Nor does it address all aspects of U.S. federal income
taxation that may be important to particular shareholders in light of their
personal circumstances or to shareholders subject to special rules under U.S.
federal income tax laws. Future legislation, regulations, administrative
rulings and court decisions may alter the tax consequences summarized below.
The summary does not address the tax consequences to the holders of North
County options who, in connection with the merger, exercise their options or
receive cash upon redemption of their options by North County.
The anticipated U.S. federal income tax consequences to North County
shareholders are as follows:
. A shareholder who receives shares of Wells Fargo common stock in
exchange for shares of North County common stock will not recognize any
gain or loss on the receipt of the shares of Wells Fargo common stock,
except for cash received in lieu of a fractional share. The
shareholder's gain or loss on the receipt of cash in lieu of a
fractional share will equal the difference between the cash received and
the basis of the fractional share exchanged.
. A shareholder's tax basis in the shares of Wells Fargo common stock
received will be the same as the shareholder's tax basis in the shares
of North County common stock exchanged in the merger, less any cash
received in lieu of fractional shares.
. The holding period of the shares of Wells Fargo common stock received by
a shareholder will include the holding period of the shareholder's
shares of North County common stock exchanged in the merger, but only if
the shares of North County common stock were held as a capital asset at
the time the merger is completed.
North County is not required to complete the merger unless it receives an
opinion of counsel or its independent accountants that these will be the U.S.
federal income tax consequences of the merger. The opinion may make certain
assumptions and may rely on representations of the parties to the merger as to
factual matters. It will reflect the opinion giver's judgment as to the tax
status of the merger under the Code and will not be binding on the Internal
Revenue Service. There is no assurance that the IRS will not take a contrary
position regarding the tax consequences of the merger, nor is there any
assurance that the IRS would not prevail in the event the tax consequences of
the merger were litigated.
The U.S. federal income tax summary set forth above is included for general
information only and may or may not be applicable depending upon a
shareholder's particular situation. Shareholders should consult their tax
advisors with respect to the tax consequences to them of the merger, including
the tax consequences under state, local, foreign and other tax laws and the
possible effects of changes in federal or other tax law. North County option
holders should consult their tax advisers as to the consequences of exercising
their options or receiving cash upon redemption of their options by North
County.
Resale Of Wells Fargo Common Stock Issued In The Merger
The Wells Fargo common stock issued in the merger will be freely
transferable under the Securities Act of 1933, except for shares issued to
North County shareholders who are considered to be "affiliates" of North County
or Wells Fargo under Rule 145 under the Securities Act or of Wells Fargo under
Rule 144 under the Securities Act. The definition of "affiliate" is complex and
depends on the specific facts, but generally includes directors, executive
officers, 10% stockholders and other persons with the power to direct the
management and policies of the company in question.
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Affiliates of North County may not sell the shares of Wells Fargo common
stock received in the merger except (a) pursuant to an effective registration
statement under the Securities Act, (b) in compliance with an exemption from
the registration requirements of the Securities Act or (c) in compliance with
Rule 144 and Rule 145 under the Securities Act. Generally, those rules permit
resales of stock received by affiliates so long as Wells Fargo has complied
with certain reporting requirements and the selling stockholder complies with
certain volume and manner of sale restrictions.
North County has agreed to use its best efforts to deliver to Wells Fargo
signed representations by each person who may be deemed to be an affiliate of
North County that the person will not sell, transfer or otherwise dispose of
the shares of Wells Fargo common stock to be received by the person in the
merger except in compliance with the applicable provisions of the Securities
Act and the rules and regulations promulgated thereunder.
This proxy statement-prospectus does not cover any resales of Wells Fargo
common stock received by affiliates of North County.
Stock Exchange Listing
The shares of Wells Fargo common stock to be issued in the merger will be
listed on the New York Stock Exchange and the Chicago Stock Exchange. The
listing of the Wells Fargo common stock to be issued in the merger is a
condition to North County's obligation to complete the merger.
Accounting Treatment
Wells Fargo will account for the merger as a purchase. Wells Fargo will
record, at fair value, the acquired assets and assumed liabilities of North
County. To the extent the total purchase price exceeds the fair value of the
assets acquired and liabilities assumed, Wells Fargo will record goodwill.
Wells Fargo will include in its results of operations the results of North
County's operations after the merger.
The unaudited pro forma data included in this proxy statement-prospectus for
the merger have been prepared using the purchase method of accounting. See
"Summary--Comparative Per Common Share Data."
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement, as
amended. Copies of the merger agreement and the amendment to the merger
agreement are attached to this proxy statement-prospectus as Appendix A and are
incorporated by reference into this proxy statement-prospectus. When used in
this document, the term "merger agreement" refers to the merger agreement, as
amended. This summary is qualified in its entirety by reference to the full
text of the merger agreement. North County shareholders are encouraged to read
the merger agreement carefully and in its entirety. Parenthetical references
are to the relevant paragraph or paragraphs of the merger agreement.
Basic Plan Of Reorganization
The merger agreement provides that a wholly-owned subsidiary of Wells Fargo
will merge by statutory merger with and into North County, with North County as
the surviving corporation. (paragraph 1(a))
Exchange Of North County Shares For Wells Fargo Shares
In the merger, each share of North County common stock outstanding
immediately before the merger, other than shares as to which dissenters' rights
are exercised, will be exchanged for the number of shares of Wells Fargo common
stock determined by dividing the Adjusted Wells Fargo Shares by the number of
shares of North County common stock then outstanding. (paragraph 1(a)(i))
. The number of Adjusted Wells Fargo Shares will equal the Aggregate Share
Amount divided by the Wells Fargo Measurement Price.
. The Aggregate Share Amount will equal $112,000,000 plus the aggregate
exercise price of all Options exercised by cash payments between the
date of the merger agreement and the day immediately before the closing
date of the merger, minus the Cash Surrender Amount.
. The Cash Surrender Amount will equal the difference between (i) the
product of (A) the Fair Market Value Per Share multiplied by (B) the
number of Redeemed Options minus (ii) the aggregate exercise price of
all Redeemed Options.
. Fair Market Value Per Share is $21.00.
. Option means any option issued under North County's 1983 Incentive Stock
Option Plan, 1991 Stock Option Plan or 1997 Stock Option Plan.
. Redeemed Option means any Option redeemed by North County pursuant to
paragraph 4(r) of the merger agreement.
. The Wells Fargo Measurement Price will equal the average of the closing
prices of a share of Wells Fargo common stock as reported on the
consolidated tape of the New York Stock Exchange during the period of 20
trading days ending on the day immediately before the special meeting of
North County shareholders.
If before the merger is completed the outstanding shares of Wells Fargo are
increased or decreased in number or changed into or exchanged for a different
number or kind of shares or securities as a result of a reorganization,
reclassification, recapitalization, stock dividend, stock split or other
similar change in capitalization, then an appropriate and proportionate
adjustment will be made to the exchange ratio. (paragraph 1(b))
The price of Wells Fargo common stock on the effective date of the merger
may be higher or lower than the Wells Fargo Measurement Price. No adjustment
will be made to the number of shares of Wells Fargo common stock you will
receive to reflect fluctuations in the price of Wells Fargo common stock
occurring after the special meeting.
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Redemption Of Unexercised North County Options
North County has also agreed to redeem for cash each non-qualified Option
that has not been exercised as of immediately before the merger and as to which
the holder has elected in writing, prior to the special meeting of North County
shareholders, to have redeemed by North County. The redemption price for each
non-qualified Option share will equal the Fair Market Value Per Share minus the
exercise price of the Option. (paragraph 4(r), as amended)
Cash In Lieu Of Fractional Shares
If the aggregate number of shares of Wells Fargo common stock you will
receive in the merger does not equal a whole number, you will receive cash
instead of the fractional share. The cash payment will be equal to the product
of the fractional part of the share of Wells Fargo common stock multiplied by
the average of the closing prices of a share of Wells Fargo common stock as
reported on the consolidated tape of the New York Stock Exchange for each of
the five trading days ending on the date immediately preceding the special
meeting. (paragraph 1(c))
Effective Date And Time Of The Merger
The effective date of the merger will be the day on which a certificate of
merger is filed with and accepted by the California Secretary of State. The
merger agreement provides that the certificate of merger will be filed within
10 business days after the satisfaction or waiver of all conditions to the
merger or such other date as Wells Fargo and North County may agree, provided
that the date will not be before January 15, 2000. The effective time of the
merger will be 11:59 p.m., Sacramento, California time, on the effective date
of the merger. (paragraph 1(d))
Representations And Warranties
The merger agreement contains various representations and warranties by
Wells Fargo and North County concerning (a) their organization and legal
authority to engage in their respective businesses; (b) their capitalization;
(c) their corporate authority to enter into the merger agreement and complete
the merger, (d) the absence of certain material changes; (e) compliance with
laws; (f) material contracts; (g) absence of certain litigation; and (h)
undisclosed liabilities. (paragraphs 2 and 3) Because the representations and
warranties do not survive completion of the merger, they function primarily as
a due diligence device and a closing condition (that is, they must continue to
be true in all material respects until the merger is completed).
Certain Covenants
The merger agreement has a number of covenants and agreements that govern
the actions of North County and Wells Fargo pending completion of the merger.
Some of the covenants and agreements are summarized below.
Termination Of North County Option Plan
North County has agreed to terminate its 1983 Incentive Stock Option Plan,
1991 Stock Option Plan and 1997 Stock Option Plan. North County has also agreed
to redeem for cash all North County non-qualified options that, as of
immediately before the merger, have not been exercised and as to which the
holders have elected, in writing and prior to the special meeting, to have
redeemed by North County. See "Basic Plan Of Reorganization--Redemption Of
Unexercised North County Options" above for more information on redemption of
outstanding North County non-qualified options.
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Conduct Of Business
North County
Except as otherwise permitted or required by the merger agreement, North
County and each North County subsidiary will:
. maintain its corporate existence in good standing;
. maintain the general character of its business;
. conduct its business in the ordinary and usual manner;
. extend credit in accordance with existing lending policies and provide
Wells Fargo access to its loan files, except that it will not, without
the prior written consent of Wells Fargo, which consent will be deemed
waived under certain specified circumstances:
. make any new loan or modify, restructure or renew any existing loan
(except pursuant to commitments made prior the merger agreement) to any
borrower if the amount of the resulting loan, when aggregated with all
other loans or extensions of credit to such person, would exceed
$750,000; or
. make any extensions of credit aggregating in excess of $500,000 to a
person who was not a borrower as of the date of the merger agreement.
(paragraph 4(a))
Except as otherwise permitted or required by the merger agreement, North
County and each North County subsidiary will not:
. amend or otherwise change its articles of incorporation or association
or bylaws;
. issue or sell or authorize for issuance or sale, or grant any options or
make other agreements with respect to the issuance or sale or conversion
of, any shares of its capital stock, phantom shares or other share
equivalents, or any other of its securities, except that North County
may issue shares of North County common stock upon exercise of
outstanding stock options;
. authorize or incur any long-term debt (other than deposit liabilities);
. mortgage, pledge or subject to a lien or other encumbrance any of its
properties, except in the ordinary course of business;
. enter into any material agreement, contract or commitment in excess of
$25,000 except banking transactions in the ordinary course of business
and in accordance with policies and procedures in effect as of the date
of the merger agreement;
. make any investments except investments made by bank subsidiaries in the
ordinary course of business for terms of up to one year and in amounts
of $100,000 or less and except for "fed funds" investments made in the
ordinary course of business;
. amend or terminate any employee benefit plans except as required by law
or the terms of the merger agreement;
. declare dividends other than any dividend declared by a subsidiary's
board of directors in accordance with applicable law and regulation;
. redeem, purchase or otherwise acquire any capital stock of North County;
. increase the compensation of any officers, directors or executive
employees, except pursuant to existing compensation plans, agreements
and practices;
. sell or otherwise dispose of any shares of capital stock of North County
or any of its subsidiaries; or
. sell or otherwise dispose of any of its assets or properties other than
in the ordinary course of business. (paragraphs 4(a) and (b))
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Wells Fargo
Wells Fargo has agreed to conduct its business and to cause its significant
subsidiaries to conduct their respective businesses in compliance with all
material obligations and duties imposed by laws, regulations, rules and
ordinances or by judicial orders, judgments and decrees applicable to them or
to their businesses or properties.
Competing Transactions
Neither North County or any North County subsidiary nor any director,
officer, representative or agent of North County or any North County subsidiary
may, directly or indirectly, solicit, authorize the solicitation of or, except
to the extent that North County's board of directors shall conclude in good
faith, after taking into account the written advice of its outside counsel,
that to fail to do so could reasonably be determined to violate its fiduciary
obligations under applicable law, enter into any discussions with any third
party concerning any offer or possible offer to
. purchase its common stock, any security convertible into its common
stock, or any other equity security of North County or any of its
subsidiaries;
. make a tender or exchange offer for any shares of its common stock or
other equity security of North County or any of its subsidiaries;
. purchase, lease or otherwise acquire the assets of North County or any
of its subsidiaries except in the ordinary course of business; or
. merge, consolidate or otherwise combine with North County or any of its
subsidiaries.
North County and each of its subsidiaries, as applicable, has also agreed to
promptly inform Wells Fargo if any third party makes an offer or inquiry
concerning any of the foregoing. (paragraph 4(h))
Year 2000 Compliance
North County will cooperate with Wells Fargo to assess the impact of the
merger on North County's continued compliance with the Year 2000 project
management process as set forth in the May 5, 1997 Federal Financial
Institutions Examination Council (FFIEC) Interagency Statement on the Year 2000
and subsequent guidance documents. North County will take such action, in
consultation with Wells Fargo, as may be necessary to amend North County's Year
2000 project assessment and remediation plan. North County will continue its
current preparations for compliance with the FFIEC requirements and will not
rely on the completion of the merger to satisfy its FFIEC requirements.
(paragraph 4(p))
Other Covenants
The merger agreement contains various other covenants, including covenants
relating to the preparation and distribution of this proxy statement-
prospectus, access to information, and the listing on the New York and Chicago
Stock Exchanges of the shares of Wells Fargo common stock to be issued in the
merger. In addition, North County has agreed to (a) establish such additional
accruals and reserves as are necessary to conform its accounting and credit
loss reserve practices and methods to those of Wells Fargo and Wells Fargo's
plans with respect to the conduct of North County's business after the merger
and (b) use its best efforts to deliver to Wells Fargo prior to completion of
the merger signed representations substantially in the form attached as Exhibit
B to the merger agreement from each executive officer, director or shareholder
of North County who may reasonably be deemed an "affiliate" of North County
within the meaning of such term as used in Rule 145 of the Securities Act.
(paragraphs 4(l) and 4(m) and Exhibit B) See "The Merger--Resale Of Wells Fargo
Common Stock Issued In The Merger."
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Conditions To The Merger
Under the merger agreement, various conditions are required to be met before
the parties are obligated to complete the merger. These conditions are
customary and include such items as the receipt of shareholder, regulatory and
listing approval, and the receipt by North County of a favorable tax opinion.
(paragraphs 6 and 7) See "The Merger--U.S. Federal Income Tax Consequences Of
The Merger."
The obligations of the parties are also subject to the continued accuracy of
the other party's representations and warranties, the performance by the other
party of its obligations under the merger agreement, and, subject to certain
exceptions, the absence of any changes that have had or might be reasonably
expected to have an adverse effect on North County. Some of the conditions to
the merger are subject to exceptions and/or a "materiality" standard. Certain
conditions to the merger may be waived by the party seeking to assert the
condition. (paragraphs 6 and 7)
Termination Of The Merger Agreement
Termination by Mutual Consent
Wells Fargo and North County can agree to terminate the merger agreement at
any time before completion of the merger. (paragraph 9(a)(i))
Termination by Either Wells Fargo or North County
Either Wells Fargo or North County can terminate the merger agreement
without the consent of the other if any of the following occurs:
. The merger has not been completed by April 30, 2000, unless the failure
to complete the merger is due to the failure of the party seeking to
terminate to perform or observe in all material respects the covenants
and agreements to be observed or performed by the party. (paragraph
9(a)(ii))
. A court or governmental authority of competent jurisdiction has issued a
final order restraining, enjoining or otherwise prohibiting the
transactions contemplated by the merger agreement. (paragraph 9(a)(iii))
Either Wells Fargo or North County also may terminate the merger agreement
if the board of directors of North County in good faith determines that a
Takeover Proposal (defined below) constitutes a Superior Proposal (defined
below), provided that North County may not terminate the merger agreement in
such event unless North County has not breached its non-solicitation covenant
in the merger agreement and North County pays a termination fee of $3,500,000
to Wells Fargo. (paragraphs 9(a)(v) and 9(d)) For purposes of this provision:
. "Takeover Proposal" means a bona fide proposal or offer by a person to
make a tender or exchange offer, or to engage in a merger, consolidation
or other business combination involving North County or to acquire in
any manner a substantial equity interest in, or all or substantially all
of the assets of, North County.
. "Superior Proposal" means a bona fide proposal or offer made by a person
to acquire North County pursuant to a tender or exchange offer, a
merger, consolidation or other business combination or an acquisition of
all or substantially all of the assets of, North County and its
subsidiaries on terms which North County's board of directors determines
in good faith, after taking into account the advice of counsel, to be
more favorable to North County and its shareholders than the
transactions contemplated by the merger agreement. (paragraph 9(a)(v))
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Termination by Wells Fargo
Wells Fargo may terminate the merger agreement if (a) North County's board
of directors fails to recommend approval of the merger agreement or withdraws
or modifies in a manner materially adverse to Wells Fargo its approval or
recommendation of approval of the merger agreement; (b) after an agreement to
engage in or the occurrence of an Acquisition Event (defined below) or after a
third party shall have made a proposal to North County or its shareholders to
engage in an Acquisition Event, the merger agreement is not approved by North
County shareholders at the special meeting; or (c) a meeting of North County
shareholders to approve the merger agreement is not held prior to March 15,
2000 and North County has failed to comply with its obligations to call and
caused to be held such meeting as provided in the merger agreement. (paragraph
9(a)(vi))
For purposes of this provision, an "Acquisition Event" means any of the
following: (a) a merger, consolidation or similar transaction involving North
County or North County Bank or any successor to North County or the bank, (b) a
purchase, lease or other acquisition in one or a series of related transactions
of assets of North County or any of its subsidiaries representing 25% or more
of the consolidated assets of North County and its subsidiaries or (c) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or any similar transaction) in one or a series of related transactions
of beneficial ownership of securities representing 25% or more of the voting
power of North County or the bank in each case with or by a person or entity
other than Wells Fargo or an affiliate of Wells Fargo.
If Wells Fargo terminates the merger agreement under this provision, North
County is required to pay Wells Fargo a termination fee of $3,500,000 if prior
to such termination or within 12 months after such termination (a) North County
or North County Bank or any successor to North County or the bank enters into
an agreement to engage in an Acquisition Event (defined above) or an
Acquisition Event occurs, or (b) North County's board of directors authorizes
or approves an Acquisition Event or publicly announces an intention to
authorize or approve or recommends that North County shareholders approve or
accept any Acquisition Event. (paragraph 9(d))
Effect Of Termination
Generally, if either party terminates the merger agreement, it becomes void
without any liability to either party other than for willful and material
breaches occurring before termination; however, the provisions of the merger
agreement governing confidential information and expenses incurred in
connection with the merger continue in effect after termination of the merger
agreement. (paragraph 9(b))
Waiver And Amendment
Either Wells Fargo or North County may waive any inaccuracies in the
representations and warranties of the other party or compliance by the other
party with any of the covenants or conditions contained in the merger
agreement. (paragraph 16)
Wells Fargo and North County can amend the merger agreement at any time
before the merger is completed; however, the merger agreement prohibits them
from amending the merger agreement after North County shareholders approve the
merger if the amendment would change in a manner adverse to North County
shareholders the consideration to be received by North County shareholders in
the merger. (paragraph 17)
Expenses
Subject to certain exceptions, Wells Fargo and North County will each pay
their own expenses in connection with the merger, including fees and expenses
of their respective independent auditors and counsel. (paragraph 10)
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COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
North County shareholders and the rights of Wells Fargo stockholders. It is not
a complete statement of the provisions affecting, and the differences between,
the rights of North County shareholders and Wells Fargo stockholders. The
summary is qualified in its entirety by reference to the California General
Corporation Law (CGCL), the Delaware General Corporation Law (DGCL), North
County's articles of incorporation and bylaws, and Wells Fargo's restated
certificate of incorporation and bylaws.
General
Upon completion of the merger, holders of North County common stock will
become stockholders of Wells Fargo. There are material differences in the
rights of North County shareholders as compared to the rights of Wells Fargo
stockholders. The rights of North County shareholders are governed by
California law and North County's articles of incorporation and bylaws and the
rights of Wells Fargo stockholders are governed by Delaware law and Wells
Fargo's restated certificate of incorporation and bylaws.
A description of Wells Fargo's common stock is contained in Wells Fargo's
current report on Form 8-K filed October 14, 1997. A description of the
preferred stock purchase rights that are attached to shares of Wells Fargo
common stock is included in Wells Fargo's registration statement on Form 8-A
dated October 21, 1998. See "Where You Can Find More Information." These
descriptions may be updated from time to time by amendments or reports filed by
Wells Fargo with the SEC.
Authorized And Outstanding Capital Stock
Wells Fargo
Wells Fargo's restated certificate of incorporation currently authorizes the
issuance of 4,000,000,000 shares of Wells Fargo common stock, par value $1-2/3
per share, 20,000,000 shares of preferred stock, without par value, and
4,000,000 shares of preference stock, without par value. At September 30, 1999,
there were 1,649,763,637 shares of Wells Fargo common stock outstanding,
6,550,197 shares of Wells Fargo preferred stock outstanding, and no shares of
Wells Fargo preference stock outstanding.
North County
North County's articles of incorporation authorize the issuance of
10,000,000 shares of common stock, without par value, and no shares of
preferred stock. An aggregate of 5,120,667 shares of common stock were issued
and outstanding as of November 10, 1999.
Rights Plan
Wells Fargo
Each share of Wells Fargo common stock (including shares that will be issued
in the merger) has attached to it one preferred share purchase right. Once
exercisable, each right allows the holder to purchase a fractional share of
Wells Fargo's Series C Junior Participating Preferred Stock. A right, by
itself, does not confer on its holder any rights of a Wells Fargo stockholder,
including the right to vote or receive dividends, until the right is exercised.
The rights trade automatically with shares of Wells Fargo common stock. The
rights are designed to protect the interests of Wells Fargo and its
stockholders against coercive takeover tactics. The rights are intended to
encourage potential acquirors to negotiate on behalf of all stockholders the
terms of any proposed takeover. Although not their purpose, the rights may
deter takeover proposals.
North County
North County has no comparable share purchase rights plan.
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Number And Election Of Directors
Wells Fargo
Wells Fargo's bylaws provide for a board of directors consisting of not less
than 10 nor more than 28 persons, each serving a term of one year or until his
or her earlier death, resignation or removal. The number of directors of Wells
Fargo is currently fixed at 25. Directors of Wells Fargo may be removed with or
without cause by the affirmative vote of the holders of a majority of the
shares of Wells Fargo capital stock entitled to vote thereon. Vacancies on
Wells Fargo's board of directors may be filled by majority vote of the
remaining directors or, in the event a vacancy is not so filled or if no
director remains, by the stockholders. Directors of Wells Fargo are elected by
plurality of the votes of shares of Wells Fargo capital stock entitled to vote
thereon present in person or by proxy at the meeting at which directors are
elected. Wells Fargo's restated certificate of incorporation does not currently
permit cumulative voting in the election of directors.
North County
North County's bylaws provide for a board of directors consisting of not
fewer than seven (7) nor more than ten (10) directors. North County's bylaws
further provide that the exact number of directors shall be fixed form time to
time, within the foregoing range, by a bylaw or amendment thereof duly adopted
by North County's shareholders, or by North County's board of directors. The
number of directors on North County's board is currently fixed at nine (9).
Each director is elected annually and serves until the next annual meeting of
shareholders and until the director's successor is elected and has qualified.
In connection with the election of directors, North County's shareholders are
entitled to vote their shares cumulatively if a candidate's or candidates'
names have been properly placed in nomination prior to the voting and a
shareholder present at the shareholders' meeting has given notice of his or her
intention to vote his or her shares cumulatively. If a shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. Cumulative voting entitles a shareholder to give one nominee as
many votes as is equal to the number of directors to be elected multiplied by
the number of shares owned by such shareholder, or to distribute his or her
votes on the same principle between two or more nominees as he or she deems
appropriate. The candidates receiving the highest number of votes, up to the
number of directors to be elected, will be elected. Vacancies on the North
County board of directors (except for a vacancy created by the removal of a
director) may be filled by a majority of the remaining directors. Any vacancy
not filled by the directors may be filled by the North County shareholders. A
vacancy in the board of directors created by the removal of a director may only
be filled by the vote of a majority of the shares at a duly called meeting or
by unanimous written consent of the holders of the outstanding shares. Any or
all of the directors of North County may be removed without cause if such
removal is approved by a majority of the outstanding shares entitled to vote;
provided, however, that unless the entire board is removed, no director may be
removed when the votes cast against removal would be sufficient to elect such
director if voted cumulatively at an election in which the same total number of
votes were cast, and the entire number of directors authorized at the time of
the directors' most recent election were then being elected.
Amendment Of Governing Documents
Wells Fargo
Wells Fargo's restated certificate of incorporation may be amended only if
the proposed amendment is approved by Wells Fargo's board of directors and
thereafter approved by a majority of the outstanding stock entitled to vote
thereon and by a majority of the outstanding stock of each class entitled to
vote thereon as a class. Wells Fargo's bylaws may be amended by a majority of
Wells Fargo's board of directors or by a majority of the outstanding stock
entitled to vote thereon. Shares of Wells Fargo preferred stock and Wells Fargo
preference stock currently authorized in Wells Fargo's restated certificate of
incorporation may be issued by Wells Fargo's board of directors without
amending Wells Fargo's restated certificate of incorporation or otherwise
obtaining the approval of Wells Fargo's Stockholders.
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North County
In general, North County's articles of incorporation may be amended only if
the proposed amendment is approved by North County's board of directors and
thereafter approved by a majority of the outstanding North County shares
entitled to vote thereon. North County's bylaws may be amended by a majority of
North County's board of directors or by a majority of the outstanding shares
entitled to vote thereon; provided, however, that the North County board may
adopt a by-law or amendment thereof changing the authorized number of directors
only for the purpose of fixing the exact number of directors within the range
specified by North County's bylaws.
Approval Of Mergers And Assets Sales
Wells Fargo
Except as described below, the affirmative vote of a majority of the
outstanding shares of Wells Fargo common stock entitled to vote thereon is
required to approve a merger or consolidation involving Wells Fargo or the
sale, lease or exchange of all or substantially all of Wells Fargo's corporate
assets. No vote of the stockholders is required, however, in connection with a
merger in which Wells Fargo is the surviving corporation and (a) the agreement
of merger for the mergers does not amend in any respect Wells Fargo's restated
certificate of incorporation, (b) each share of capital stock outstanding
immediately before the merger is to be an identical outstanding or treasury
share of Wells Fargo after the merger and (c) the number of shares of capital
stock to be issued in the merger (or to be issuable upon conversion of any
convertible instruments to be issued in the merger) does not exceed 20% of the
shares of Wells Fargo's capital stock outstanding immediately before the
merger.
North County
The CGCL generally requires a vote by the shareholders of (a) each
constituent corporation to a merger, (b) a corporation selling all or
substantially all of its assets, (c) the acquiring corporation in either a
share-for-share exchange or a sale-of-assets reorganization, and (d) a parent
corporation (even though it is not a "constituent corporation") whose equity
securities are being issued in connection with a corporate reorganization such
as a triangular merger. The CGCL does not require shareholder approval in the
case of any corporation in a merger as to which such corporation and/or its
shareholders will hold five-sixths or more of the voting power of the surviving
or acquiring corporation after consummation of the merger (unless the shares
acquired in such merger have different rights, preferences, privileges or
restrictions than those surrendered).
Preemptive Rights
Wells Fargo
Neither Wells Fargo's restated certificate of incorporation nor its bylaws
grants preemptive rights to its stockholders.
North County
North County's articles of incorporation do not grant shareholders
preemptive rights to subscribe to any or all issues of North County shares or
securities.
Appraisal Rights
Wells Fargo
Section 262 of the DGCL provides for stockholder appraisal rights in
connection with consolidations and mergers generally; however, appraisal rights
are not available to holders of any class or series of stock that, at the
record date fixed to determine stockholders entitled to receive notice of and
to vote at the meeting to act
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upon the agreement of consolidation or merger, were either (a) listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or (b) held of record by more than 2,000 stockholders, so long as
stockholders receive shares of the surviving corporation or another corporation
whose shares are so listed or designated or held by more than 2,000
stockholders. Wells Fargo common stock is listed on the New York Stock Exchange
and the Chicago Stock Exchange and currently held by more than 2,000
stockholders. As a result, assuming that the other conditions described above
are satisfied, holders of Wells Fargo common stock will not have appraisal
rights in connection with consolidations and mergers involving Wells Fargo.
North County
Under the CGCL, if the approval of the outstanding shares of a corporation
is required for a reorganization or merger, each shareholder of the corporation
entitled to vote on the transaction, by complying with the provisions of
Chapter 13 of the CGCL, may require the corporation of which the shareholder
holds shares to purchase for cash at their fair market value the shares owned
by the shareholder which qualify as dissenting shares in accordance with the
requirements of Chapter 13 of the CGCL. The fair market value of dissenting
shares is determined as of the day before the first announcement of the terms
of the proposed reorganization or merger, excluding any appreciation or
depreciation in consequence of the proposed action; however; "dissenting
shares" do not include shares which immediately prior to the reorganization or
merger are either (a) listed on any national securities exchange certified by
California's Commissioner of Corporations under subdivision (o) of Section
25100 or (b) listed on the list of OTC margin stock issued by the Board of
Governors of the Federal Reserve System unless demands for payment with respect
to such shares are filed with respect to 5% or more of the outstanding shares
of such class. See "The Merger--Dissenters' Rights."
Special Meetings
Wells Fargo
Under the DGCL, special meetings of stockholders may be called by the board
of directors or by such persons as may be authorized in the certificate of
incorporation or bylaws. Wells Fargo's bylaws provide that a special meeting of
stockholders may be called only by the chairman of the board, a vice chairman,
the president or a majority of Wells Fargo's board of directors. Holders of
Wells Fargo common stock do not have the ability to call a special meeting of
stockholders.
North County
Under the CGCL, a special meeting of shareholders of a California
corporation may be called by the board, the chairman of the board, the
president, the holders of shares entitled to cast not less than 10 percent of
the votes at the meeting or by such additional persons as may be provided in
the articles of incorporation or bylaws. North County's articles of
incorporation and North County's bylaws do not alter the manner in which a
special meeting of shareholders may be called.
Directors' Duties
Wells Fargo
The DGCL does not specifically enumerate directors' duties. In addition, the
DGCL does not contain any provision specifying what factors a director must and
may consider in determining a corporation's best interests. However, judicial
decisions in Delaware have established that, in performing their duties,
directors are bound to use that degree of care which ordinarily prudent persons
would use in similar circumstances.
North County
Pursuant to the CGCL, a director is obligated to perform his or her duties
in good faith, in a manner such director believes to be in the best interests
of the corporation and its shareholders and with such care, including
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reasonable inquiry, as an ordinarily prudent person in a like position would
use under similar circumstances. In performing the duties of a director, a
director is entitled to rely on information, opinions, reports or statements,
including financial statements and other financial data, prepared or presented
by officers or employees of the corporation, the corporation's counsel or
independent accountant or a committee of the board upon which the director does
not serve, so long as, in any such case, the director acts in good faith, after
reasonable inquiry when the need therefor is indicted by the circumstances and
without knowledge that would cause such reliance to be unwarranted.
Action Without A Meeting
Wells Fargo
As permitted by Section 228 of the DGCL and Wells Fargo's restated
certificate of incorporation, any action required or permitted to be taken at a
stockholders' meeting may be taken without a meeting pursuant to the written
consent of the holders of the number of shares that would have been required to
effect the action at an actual meeting of the stockholders.
North County
As permitted by Section 603 of the CGCL, and as provided in North County's
bylaws, any action required or permitted to be taken at a shareholders' meeting
may be taken without a meeting pursuant to the written consent of the holders
of the number of shares that would have been required to effect the action at
an actual meeting of the shareholders, provided that directors may not be
elected by written consent of shareholders unless the consent is unanimous.
Prompt notice must be given of any corporate action approved by shareholders
without a meeting by less than unanimous written consent to those shareholders
entitled to vote who have not consented in writing.
Limitations On Directors' Liability
Wells Fargo
Wells Fargo's restated certificate of incorporation provides that a director
(including an officer who is also a director) of Wells Fargo shall not be
liable personally to Wells Fargo or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability arising out of (a)
any breach of the director's duty of loyalty to Wells Fargo or its
stockholders, (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) payment of a dividend
or approval of a stock repurchase in violation of Section 174 of the DGCL or
(d) any transaction from which the director derived an improper personal
benefit. This provision protects Wells Fargo's directors against personal
liability for monetary damages from breaches of their duty of care. It does not
eliminate the director's duty of care and has no effect on the availability of
equitable remedies, such as an injunction or rescission, based upon a
director's breach of his duty of care.
North County
North County's articles of incorporation provide that the liability of the
directors of the corporation for monetary damages shall be eliminated to the
fullest extent permitted under California law. The CGCL provides that a
director who performs his duties in good faith, as discussed in more detail
above under "Directors' Duties," shall have no liability based upon any alleged
failure to discharge the person's obligations as a director.
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Indemnification Of Officers And Directors
Wells Fargo
Wells Fargo's restated certificate of incorporation provides that Wells
Fargo must indemnify, to the fullest extent authorized by the DGCL, each person
who was or is made a party to, is threatened to be made a party to, or is
involved in, any action, suit, or proceeding because he is or was a director or
officer of Wells Fargo (or was serving at the request of Wells Fargo as a
director, trustee, officer, employee, or agent of another entity) while serving
in such capacity against all expenses, liabilities, or loss incurred by such
person in connection therewith, provided that indemnification in connection
with a proceeding brought by such person will be permitted only if the
proceeding was authorized by Wells Fargo's board of directors. Wells Fargo's
restated certificate of incorporation also provides that Wells Fargo must pay
expenses incurred in defending the proceedings specified above in advance of
their final disposition, provided that if so required by the DGCL, such advance
payments for expenses incurred by a director or officer may be made only if he
undertakes to repay all amounts so advanced if it is ultimately determined that
the person receiving such payments is not entitled to be indemnified. Wells
Fargo's restated certificate of incorporation authorizes Wells Fargo to provide
similar indemnification to employees or agents of Wells Fargo.
Pursuant to Wells Fargo's restated certificate of incorporation, Wells Fargo
may maintain insurance, at its expense, to protect itself and any directors,
officers, employees or agents of Wells Fargo or another entity against any
expense, liability or loss, regardless of whether Wells Fargo has the power or
obligation to indemnify that person against such expense, liability or loss
under the DGCL.
The right to indemnification is not exclusive of any other right which any
person may have or acquire under any statute, provision of Wells Fargo's
restated certificate of incorporation or Wells Fargo bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
North County
North County's bylaws provide that North County may indemnify each of its
officers, directors, employees and agents against expenses, judgments, fines,
settlements and other amounts, actually and reasonably incurred by such person
having been made or having been threatened to be made a party to a proceeding
to the fullest extent possible by the provisions of the CGCL, and that North
County may advance the expenses reasonably expected to be incurred by such
officers, directors, employees and agents in defending any such proceeding upon
receipt of the undertaking required by the CGCL. The CGCL permits such
indemnification if such individual has acted in good faith and in a manner the
person reasonably believed to be in the best interest of the corporation, and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of the person was unlawful.
Dividends
Wells Fargo
Delaware corporations may pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which declared and for the
preceding fiscal year. Section 170 of the DGCL also provides that dividends may
not be paid out of net profits if, after the payment of the dividend, capital
is less than the capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets. Wells Fargo is also
subject to Federal Reserve Board policies regarding payment of dividends, which
generally limit dividends to operating earnings. See "Regulation And
Supervision Of Wells Fargo."
North County
The holders of North County common stock are entitled to receive dividends
when and as declared by North County's board of directors out of funds legally
available therefor. The CGCL provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal
at least the amount of
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the proposed distribution. The CGCL further provides that, in the event that
sufficient retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if it
meets two conditions, which generally are as follows: (a) the corporation's
assets equal at least 1 times its liabilities; and (b) the corporation's
current assets equal at least its current liabilities, or, if the average of
the corporation's earnings before taxes on income before interest expense for
two preceding fiscal years was less than the average of the corporation's
earnings before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of the corporation's interest
expense for such fiscal years, then the corporation's current assets must equal
at least 1 times its current liabilities. North County is also subject to
Federal Reserve Board policies regarding payment of dividends, which generally
limit dividends to operating earnings.
Corporate Governance Procedures; Nomination Of Directors
Wells Fargo
Wells Fargo's bylaws contain detailed advance notice and informational
procedures which must be complied with in order for a stockholder to nominate a
person to serve as a director. Wells Fargo's bylaws generally require a
stockholder to give notice of a proposed nominee in advance of the stockholders
meeting at which directors will be elected. In addition, Wells Fargo's bylaws
contain detailed advance notice and informational procedures which must be
followed in order for a Wells Fargo stockholder to propose an item of business
for consideration at a meeting of Wells Fargo stockholders.
North County
North County's bylaws provide that shareholder nominations of directors must
be made in accordance with certain procedures, including a requirements that
notice of intention to make any nominations be in writing and received by North
County no more than 60 days prior to any meeting of shareholders called for the
election of directors, and no more than 10 days after the date the notice of
such meeting is sent to shareholders; provided, however, that if only 10 days'
notice of the meeting is sent to shareholders, such notice of intention to
nominate must be received by North County not later than the time fixed in the
notice for the opening of the meeting. The notice of intention to nominate is
required to contain certain specified information. In addition, shareholders
entitled to cast not less than 10 percent of the votes at a shareholders
meeting may call a special meeting of shareholders.
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INFORMATION ABOUT WELLS FARGO
General
Wells Fargo is a diversified financial services company. Through its
subsidiaries and affiliates, Wells Fargo provides retail, commercial, real
estate and mortgage banking, asset management and consumer finance, as well as
a variety of other financial services, including equipment leasing,
agricultural finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust services,
mortgage-backed securities servicing, and venture capital investment.
At September 30, 1999, Wells Fargo had consolidated total assets of $207.1
billion, consolidated total deposits of $131.6 billion and stockholders' equity
of $22.2 billion. Based on assets at September 30, 1999, Wells Fargo was the
7th largest commercial banking organization in the United States.
Wells Fargo expands its business in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. Wells
Fargo continues to explore opportunities to acquire banking institutions and
other companies permitted by the Bank Holding Company Act of 1956. Discussions
are continually being carried on related to such acquisitions. It is not
presently known whether, or on what terms, such discussions will result in
further acquisitions. It is the policy of Wells Fargo not to comment on such
discussions or possible acquisitions until a definitive agreement with respect
thereto has been signed.
Wells Fargo is a legal entity separate and distinct from its banking and
nonbanking subsidiaries. As a result, the right of Wells Fargo--and thus the
right of Wells Fargo's creditors--to participate in any distribution of assets
or earnings of any subsidiary, other than in its capacity as a creditor of such
subsidiary, is subject to the prior payment of claims of creditors of such
subsidiary. The principal sources of Wells Fargo's revenues are dividends and
fees from its subsidiaries. See "Regulation And Supervision Of Wells Fargo--
Dividend Restrictions" for a discussion of the restrictions on the subsidiary
banks' ability to pay dividends to Wells Fargo.
Wells Fargo's executive offices are located at 420 Montgomery Street, San
Francisco, California 94163, and its telephone number is (800) 411-4932.
Management And Additional Information
Information concerning executive compensation, the principal holders of
voting securities, certain relationships and related transactions, and other
related matters concerning Wells Fargo is included or incorporated by reference
in its annual report on Form 10-K for the year ended December 31, 1998. Wells
Fargo's annual report on Form 10-K is incorporated by reference into this proxy
statement-prospectus. North County shareholders who want a copy of this annual
report or any document incorporated by reference into the report may contact
Wells Fargo at the address or phone number indicated below under "Where You Can
Find More Information."
Information On Wells Fargo's Web Site
Information on the Internet web site of Wells Fargo or any subsidiary of
Wells Fargo is not part of this proxy statement-prospectus, and you should not
rely on that information in deciding whether to approve the merger unless that
information is also in this document or in a document that is incorporated by
reference into this proxy statement-prospectus.
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REGULATION AND SUPERVISION OF WELLS FARGO
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the full
text of those provisions. Also, such statutes, regulations and policies are
continually under review by Congress and state legislatures and federal and
state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to Wells Fargo could have a material effect on the business
of Wells Fargo.
General
Wells Fargo, its banking subsidiaries and many of its nonbanking
subsidiaries are subject to extensive regulation by federal and state agencies.
The regulation of bank holding companies and their subsidiaries is intended
primarily for the protection of depositors, federal deposit insurance funds and
the banking system as a whole and not for the protection of security holders.
As discussed in more detail below, this regulatory environment, among other
things, may restrict Wells Fargo's ability to diversify into certain areas of
financial services, acquire depository institutions in certain states and pay
dividends on its capital stock. It may also require Wells Fargo to provide
financial support to one or more of its banking subsidiaries, maintain capital
balances in excess of those desired by management and pay higher deposit
insurance premiums as a result of the deterioration in the financial condition
of depository institutions in general.
Regulatory Agencies
Bank Holding Company
Wells Fargo & Company, as a bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956 and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956.
Subsidiary Banks
Wells Fargo's national banking subsidiaries are subject to regulation and
examination primarily by the Office of the Comptroller of the Currency (OCC)
and secondarily by the Federal Reserve Board and the Federal Deposit Insurance
Corporation (FDIC). Wells Fargo's state-chartered banking subsidiaries are
subject to primary federal regulation and examination by the FDIC or the
Federal Reserve Board and, in addition, are regulated and examined by their
respective state banking departments.
Nonbank Subsidiaries
Many of Wells Fargo's nonbank subsidiaries also are subject to regulation by
the Federal Reserve Board and other applicable federal and state agencies.
Wells Fargo's brokerage subsidiaries are regulated by the SEC, the National
Association of Securities Dealers, Inc. and state securities regulators. Wells
Fargo's insurance subsidiaries are subject to regulation by applicable state
insurance regulatory agencies. Other nonbank subsidiaries of Wells Fargo are
subject to the laws and regulations of both the federal government and the
various states in which they conduct business.
Bank Holding Company Activities
Banking-Related Requirement
Under the Bank Holding Company Act, bank holding companies generally may not
acquire the beneficial ownership or control of more than 5% of the voting
shares or substantially all of the assets of any company, including a bank,
without the Federal Reserve Board's prior approval. Also, bank holding
companies generally
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may engage, directly or indirectly, only in banking and such other activities
as the Federal Reserve Board determines to be closely related to banking.
Effective March 11, 2000, subject to certain conditions, bank holding
companies that elect to become financial holding companies may affiliate with
securities firms and insurance companies and engage in other activities that
are financial in nature. Also effective March 11, 2000, no regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board. See "Financial Modernization" below.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal
Act), a bank holding company may acquire banks in states other than its home
state, subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company not control, prior to or following
the proposed acquisition, more than 10% of the total amount of deposits of
insured depository institutions nationwide or, unless the acquisition is the
bank holding company's initial entry into the state, more than 30% of such
deposits in the state, or such lesser or greater amount set by the state.
The Riegle-Neal Act also authorizes banks to merge across state lines,
thereby creating interstate branches. States may opt out of the Interstate
Banking Act and thereby prohibit interstate mergers in the state. Wells Fargo
will be unable to consolidate its banking operations in one state with those of
another state if either state in question has opted out of the Riegle-Neal Act.
Of Wells Fargo's banking states, only Montana has opted out of the Interstate
Banking Act. Montana has opted out until at least the year 2001.
Regulatory Approval
In determining whether to approve a proposed bank acquisition, federal
banking regulators will consider, among other factors, the effect of the
acquisition on competition, the public benefits expected to be received from
the acquisition, the projected capital ratios and levels on a post-acquisition
basis, and the acquiring institution's record of addressing the credit needs of
the communities it serves, including the needs of low and moderate income
neighborhoods, consistent with the safe and sound operation of the bank, under
the Community Reinvestment Act of 1977.
Dividend Restrictions
Wells Fargo & Company is a legal entity separate and distinct from its
subsidiary banks and other subsidiaries. Its principal source of funds to pay
dividends on its common and preferred stock and debt service on its debt is
dividends from its subsidiaries. Various federal and state statutory provisions
and regulations limit the amount of dividends that Wells Fargo's bank
subsidiaries may pay without regulatory approval. Dividends payable by a
national bank without the express approval of the OCC are limited to the bank's
retained net profits for the preceding two calendar years plus retained net
profits up to the date of any dividend declaration in the current calendar
year. The OCC defines retained net profits as net income, less dividends
declared during the period, both of which are based on regulatory accounting
principles. Wells Fargo's state-chartered subsidiary banks also are subject to
state regulations that limit dividends.
Before Wells Fargo Bank, National Association can declare dividends in 1999
without the prior approval of the OCC, it must have net income of $1.5 billion
plus an amount equal to or greater than the dividends declared in 1999. Because
it is not expected to meet this requirement, Wells Fargo Bank, National
Association must obtain the prior approval of the OCC before it declares any
dividends in 1999.
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Federal bank regulatory agencies have the authority to prohibit Wells
Fargo's subsidiary banks from engaging in unsafe or unsound practices in
conducting their businesses. The payment of dividends, depending on the
financial condition of the bank in question, could be deemed an unsafe or
unsound practice. The ability of Wells Fargo's subsidiary banks to pay
dividends in the future is currently influenced, and could be further
influenced, by bank regulatory policies and capital guidelines.
Holding Company Structure
Transfer of Funds from Banking Subsidiaries
Wells Fargo's banking subsidiaries are subject to restrictions under federal
law that limit the transfer of funds or other items of value from these
subsidiaries to Wells Fargo and its nonbanking subsidiaries, including
affiliates, whether in the form of loans and other extensions of credit,
investments and asset purchases, or as other transactions involving the
transfer of value from a subsidiary to an affiliate or for the benefit of an
affiliate. Unless an exemption applies, these transactions by a banking
subsidiary with a single affiliate are limited to 10% of the subsidiary bank's
capital and surplus and, with respect to all covered transactions with
affiliates in the aggregate, to 20% of the subsidiary bank's capital and
surplus. Also, loans and extensions of credit to affiliates generally are
required to be secured in specified amounts.
Source of Strength Doctrine
The Federal Reserve Board has a policy that a bank holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and, under appropriate circumstances, to commit resources to
support each such subsidiary bank. This support may be required at times when
the bank holding company may not have the resources to provide it. Capital
loans from Wells Fargo to any of its subsidiary banks are subordinate in right
of payment to deposits and certain other indebtedness of the subsidiary bank.
In addition, in the event of Wells Fargo's bankruptcy, any commitment by Wells
Fargo to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Depositor Preference
The Federal Deposit Insurance Act (FDI Act) provides that, in the event of
the "liquidation or other resolution" of an insured depository institution, the
claims of depositors of the institution, including the claims of the FDIC as
subrogee of insured depositors, and certain claims for administrative expenses
of the FDIC as a receiver will have priority over other general unsecured
claims against the institution. If an insured depository institution fails,
insured and uninsured depositors, along with the FDIC, will have priority in
payment ahead of unsecured, nondeposit creditors, including Wells Fargo.
Liability of Commonly Controlled Institutions
Under the FDI Act, an insured depository institution is generally liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (a) the default of a commonly controlled insured depository
institution or (b) any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. "Default" means generally
the appointment of a conservator or receiver. "In danger of default" means
generally the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
Capital Requirements
Wells Fargo and each of its subsidiary banks are subject to capital adequacy
requirements and guidelines administered by the Federal Reserve Board, the OCC
and/or the FDIC.
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The Federal Deposit Insurance Corporation Act of 1991 (FDICIA) required that
the Federal Reserve Board, the OCC and the FDIC adopt regulations defining five
capital tiers for banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a material adverse effect on Wells Fargo's
business.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that Wells Fargo and each of its bank subsidiaries maintain
minimum ratios of total capital to risk-weighted assets of eight percent (8%)
and of Tier 1 capital to risk-weighted assets of four percent (4%).
There are two categories of capital under the guidelines. Tier 1 capital
includes common stockholders' equity, qualifying preferred stock and, for bank
holding companies, trust preferred securities, less goodwill and certain other
deductions, including the unrealized net gains and losses, after applicable
taxes, on available-for-sale securities carried at fair value. Tier 2 capital
includes preferred stock not qualifying as Tier 1 capital, mandatory
convertible debt, subordinated debt, certain unsecured senior debt issued by
Wells Fargo, the allowance for loans losses and net unrealized gains on
marketable securities, subject to limitations established by the guidelines. At
least half of total capital must be in the form of Tier1 capital.
Under the guidelines, capital is compared to the relative risk related to
the balance sheet. To derive the risk included in the balance sheet, one of
four risk weights (0%, 20%, 50% and 100%) is applied to different balance sheet
and off-balance sheet assets, primarily based on the relative credit risk of
the counterparty. For example, claims guaranteed by the U.S. government or one
of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan
commitments and derivative financial instruments, are also assigned one of the
above risk weights after calculating balance sheet equivalent amounts. For
example, certain loan commitments are converted at 50% and then risk-weighted
at 100%. Derivative financial instruments are converted to balance sheet
equivalents based on notional values, replacement costs and remaining
contractual terms. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. In addition, the federal banking agencies have specified minimum
"leverage ratio" (the ratio of Tier 1 capital to quarterly average total
assets) guidelines for bank holding companies and state member banks. The
minimum leverage ratio guideline is three percent (3%) for banking
organizations that meet certain specified criteria, including that they have
the highest regulatory rating. All other banking organizations and state member
banks are required to maintain a leverage ratio of three percent (3%) plus an
additional cushion of at least two percent (2%).
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. Also,
the guidelines indicate that the Federal Reserve Board will consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 capital (excluding intangibles) to total assets
(excluding intangibles).
The Federal Reserve Board, the FDIC and the OCC have adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, became effective January 1, 1998. Under the new
market risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
At September 30, 1999, Wells Fargo's ratio of total capital (the sum of Tier
1 and Tier 2 capital) to risk-weighted assets was 11.30% and its ratio of Tier
1 capital to risk-weighted assets was 8.71%. Wells Fargo's leverage ratio at
September 30, 1999 was 7.22%. Wells Fargo's management believes that each of
Wells Fargo's subsidiary banks met all capital requirements to which they are
subject.
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As an additional means to identify problems in the financial management of
depository institutions, the FDI Act requires federal bank regulatory agencies
to establish certain non-capital safety and soundness standards for
institutions for which they are the primary federal regulator. The standards
relate generally to operations and management, asset quality, interest rate
exposure and executive compensation. The agencies are authorized to take action
against institutions that fail to meet such standards.
Under FDICIA's prompt corrective action provisions applicable to banks, the
most recent regulatory notification from the OCC concerning each of Wells
Fargo's subsidiary banks categorized them as well capitalized. To be
categorized as well capitalized, the institution must maintain a risk-based
total capital ratio of at least ten percent (10%), a risk-based Tier 1 capital
ratio of at least six percent (6%) and a leverage ratio of at least five
percent (5%), and not be subject to a capital directive order. There are no
conditions or events since that notification that management believes have
changed the risk-based capital category of our subsidiary banks.
The FDI Act requires federal bank regulatory agencies to take "prompt
corrective action" with respect to FDIC-insured depository institutions that do
not meet minimum capital requirements. A depository institution's treatment for
purposes of the prompt corrective action provisions will depend upon how its
capital levels compare to various capital measures and certain other factors,
as established by regulation.
FDIC Insurance
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of
Wells Fargo's depository institution subsidiaries up to prescribed limits for
each depositor. The amount of FDIC assessments paid by each BIF member
institution is based on its relative risk of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate is based on
the institution's capitalization risk category and supervisory subgroup
category. An institution's capitalization risk category is based on the FDIC's
determination of whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. An institution's supervisory
subgroup category is based on the FDIC's assessment of the financial condition
of the institution and the probability that FDIC intervention or other
corrective action will be required.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the BIF assessment rate could
have a material adverse effect on Wells Fargo's earnings, depending on the
amount of the increase. The FDIC is authorized to terminate a depository
institution's deposit insurance upon a finding by the FDIC that the
institution's financial condition is unsafe or unsound or that the institution
has engaged in unsafe or unsound practices or has violated any applicable rule,
regulation, order or condition enacted or imposed by the institution's
regulatory agency. The termination of deposit insurance for one or more of
Wells Fargo's subsidiary depository institutions could have a material adverse
effect on Wells Fargo's earnings, depending on the collective size of the
particular institutions involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-
insured depository institutions will continue to pay approximately 1.2 cents
per $100 of BIF-assessable deposits until the earlier of December 31, 1999 or
the date the last savings and loan association ceases to exist. Thereafter,
they will pay an assessment rate equal to the rate assessed on deposits insured
by the Savings Association Insurance Fund.
Fiscal And Monetary Policies
Wells Fargo's business and earnings are affected significantly by the fiscal
and monetary policies of the federal government and its agencies. Wells Fargo
is particularly affected by the policies of the Federal Reserve
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Board, which regulates the supply of money and credit in the United States.
Among the instruments of monetary policy available to the Federal Reserve are
(a) conducting open market operations in United States government securities,
(b) changing the discount rates of borrowings of depository institutions, (c)
imposing or changing reserve requirements against depository institutions'
deposits, and (d) imposing or changing reserve requirements against certain
borrowing by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits.
For that reason alone, the policies of the Federal Reserve Board have a
material effect on the earnings of Wells Fargo.
Competition
The financial services industry is highly competitive. Wells Fargo's
subsidiaries compete with financial services providers, such as banks, savings
and loan associations, credit unions, finance companies, mortgage banking
companies, insurance companies, and money market and mutual fund companies.
They also face increased competition from non-banking institutions such as
brokerage houses and insurance companies, as well as from financial services
subsidiaries of commercial and manufacturing companies. Many of these
competitors enjoy the benefits of advanced technology, fewer regulatory
constraints and lower cost structures.
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may
significantly change the competitive environment in which the Company and its
subsidiaries conduct business. See "Financial Modernization" below. The
financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
Financial Modernization
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which will, effective March 11, 2000, permit bank holding companies
to become financial holding companies and thereby affiliate with securities
firms and insurance companies and engage in other activities that are financial
in nature. A bank holding company may become a financial holding company if
each of its subsidiary banks is well capitalized under the FDICIA prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act (CRA) by filing a declaration that
the bank holding company wishes to become a financial holding company. No
regulatory approval will be required for a financial holding company to acquire
a company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Board has determined to be closely related
to banking. A national bank also may engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment, through a financial subsidiary of the bank, if the
bank is well capitalized, well managed and has at least a satisfactory CRA
rating. Subsidiary banks of a financial holding company or national banks with
financial subsidiaries must continue to be well capitalized and well managed in
order to continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company or a bank may not acquire a company that is engaged in
activities that are financial in nature unless each of the subsidiary banks of
the financial holding company or the bank has CRA rating of satisfactory or
better.
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INFORMATION ABOUT NORTH COUNTY
General
North County is a California corporation registered as a bank holding
company under the Bank Holding Company Act of 1956. North County is the parent
holding company of North County Bank, a California state-chartered bank that
commenced operations in 1974 and currently conducts business through ten full-
service branch offices and one loan production office. Six of North County
Bank's branches are located in San Diego County, with the remaining four
branches located in Riverside County, all in Southern California. The bank's
loan production office is in Renton, Washington.
North County Bank provides a wide range of banking services to small and
medium-sized businesses, real estate construction and development companies,
professionals and individuals located in San Diego and Riverside counties, and
offers small business loans through its loan production office in the Seattle,
Washington area.
North County is a legal entity separate and distinct form North County Bank,
its banking subsidiary. North County does not have any subsidiaries which
engage in non-banking activities. The principal source of income for North
County is the dividends it receives from North County Bank.
At September 30, 1999, North County had consolidated total assets of $340
million, consolidated total deposits of $301 million and stockholders' equity
of $34 million.
North County's executive offices are located at 444 South Escondido
Boulevard, Escondido, CA 92025, and its telephone number is (760) 743-2200.
Certain Additional Information Incorporated by Reference and Delivered Herewith
Additional information concerning North County, including information
related to its business, properties, financial condition and results of
operations and market for common equity is included in its annual report on
Form 10-K for the year ended December 31, 1998, which is included in this proxy
statement-prospectus as Appendix D. Additional information concerning the
principal holders of voting securities and related shareholder matters of North
County is included in North County's definitive Proxy Statement for its 1999
annual meeting of shareholders, which is included in this proxy statement-
prospectus as Appendix E. See "Where You Can Find More Information."
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PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Wells Fargo Share Prices And Dividends
The following table shows the high and low sales prices of Wells Fargo
common stock, and the cash dividends paid per share, for the quarterly periods
indicated. Wells Fargo common stock trades on the New York and Chicago Stock
Exchanges under the symbol "WFC." Before November 3, 1998, the common stock
traded under the symbol "NOB." The information for the first three quarters of
1997 has been adjusted to reflect a 2-for-1 stock split on October 10, 1997.
Amounts are in U.S. dollars.
<TABLE>
<CAPTION>
High Low Dividend
----- ----- --------
<S> <C> <C> <C>
1997
First Quarter......................................... 26.63 21.63 0.150
Second Quarter........................................ 29.63 22.19 0.150
Third Quarter......................................... 32.16 28.13 0.150
Fourth Quarter........................................ 39.50 29.75 0.165
1998
First Quarter......................................... 43.88 34.75 0.165
Second Quarter........................................ 43.75 34.00 0.165
Third Quarter......................................... 39.75 27.50 0.185
Fourth Quarter........................................ 40.88 30.19 0.185
1999
First Quarter......................................... 40.44 32.13 0.185
Second Quarter........................................ 44.88 34.38 0.200
Third Quarter......................................... 45.31 36.44 0.200
Fourth Quarter (through December ).................. 0.200
</TABLE>
The timing and amount of future dividends will depend on earnings, cash
requirements, the financial condition of Wells Fargo and its subsidiaries,
applicable government regulations and other factors deemed relevant by Wells
Fargo's board of directors. As described in "Regulation And Supervision Of
Wells Fargo--Dividend Restrictions," various federal and state laws limit the
ability of affiliate banks to pay dividends to Wells Fargo.
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North County Share Prices And Dividends
North County common stock is traded on the Nasdaq National Market System
under the symbol NCBH. Because of the relatively limited trading volume, there
is not an active trading market for North County common stock. The following
table sets forth, in U.S. dollars, the approximate high and low bid prices for
North County common stock as reported by the National Daily Quotation Service
for the periods indicated. These quotations reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1997
First Quarter.................................................. 9.88 7.13
Second Quarter................................................. 9.25 7.50
Third Quarter.................................................. 10.38 8.00
Fourth Quarter................................................. 13.75 10.38
1998
First Quarter.................................................. 15.63 13.25
Second Quarter................................................. 14.88 13.38
Third Quarter.................................................. 13.38 10.50
Fourth Quarter................................................. 12.50 11.38
1999
First Quarter.................................................. 14.00 12.50
Second Quarter................................................. 16.63 11.50
Third Quarter.................................................. 19.75 16.63
Fourth Quarter (through December )...........................
</TABLE>
On September 29, 1999, the day immediately prior to the public announcement
of the merger, the last sale price of North County common stock was $19.625.
North County's practice has been to retain earnings to provide funds for the
operation and expansion of its business. Accordingly, North County has not paid
any cash dividends on its common stock since 1984 and has no current plans to
pay cash dividends in the foreseeable future. North County's ability to pay
dividends depends primarily on the dividends it receives form North County
Bank. There are various federal and California state laws that limit the
ability of North County Bank to pay dividends to North County. North County's
ability to pay dividends is also limited by state corporation law.
47
<PAGE>
EXPERTS
Wells Fargo's Independent Accountant
The consolidated financial statements of Wells Fargo and subsidiaries as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, incorporated by reference herein, have been
incorporated herein in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
North County's Independent Accountants
The financial statements of North County as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998 included
in this proxy statement-prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
OPINIONS
Share Issuance
Stanley S. Stroup, Executive Vice President and General Counsel of Wells
Fargo, has rendered a legal opinion that the shares of Wells Fargo common stock
offered hereby, when issued in accordance with the merger agreement, will be
validly issued, fully paid and nonassessable. Mr. Stroup beneficially owns
shares of Wells Fargo common stock and options to purchase additional shares of
Wells Fargo common stock. As of the date of this proxy statement-prospectus,
the total number of shares Mr. Stroup owns or has the right to acquire upon
exercise of his options is less than 0.1% of the outstanding shares of Wells
Fargo common stock.
Tax Matters
PricewaterhouseCoopers LLP has given an opinion regarding the material U.S.
federal income tax consequences of the merger. See "The Merger--U.S. Federal
Income Tax Consequences Of The Merger."
48
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
SEC Filings
Wells Fargo and North County file annual, quarterly and current reports,
proxy statements and other information with the SEC. Wells Fargo's and North
County's SEC filings are available to the public over the Internet at the SEC's
web site at http://www.sec.gov. You can also read and copy any document filed
by Wells Fargo or North County with the SEC at the SEC's public reference rooms
located at 450 Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. You
can also obtain copies of Wells Fargo's and North County's SEC filings at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549.
Wells Fargo's SEC filings are also available from commercial document
retrieval services and from the New York and Chicago Stock Exchanges. For
information on obtaining copies of Wells Fargo's SEC filings at the New York
Stock Exchange, call (212) 656-5060, and at the Chicago Stock Exchange, call
(312) 663-2423. North County's SEC filings are also available from commercial
document retrieval services.
Registration Statement
Wells Fargo filed a registration statement on Form S-4 to register with the
SEC the Wells Fargo common stock to be issued to North County shareholders in
the merger. This proxy statement-prospectus is part of that registration
statement. As allowed by SEC rules, this proxy statement-prospectus does not
contain all of the information you can find in the registration statement or
the exhibits to the registration statement.
Documents Incorporated By Reference
Some of the information you may want to consider in deciding how to vote on
the merger is not physically included in this proxy statement-prospectus.
Instead, the information is "incorporated by reference" to documents filed as
appendixes to this proxy statement-prospectus or to documents that have been
filed by Wells Fargo or North County with the SEC.
Wells Fargo Documents
This proxy statement-prospectus incorporates by reference the Wells Fargo
SEC documents set forth below. All of the documents were filed under SEC File
No. 001-2979. Documents filed before November 3, 1998 were filed under the name
Norwest Corporation.
. Annual Report on Form 10-K for the year ended December 31, 1998,
including information specifically incorporated by reference into the
Form 10-K from Wells Fargo's 1998 Annual Report to Stockholders and
Wells Fargo's definitive Notice and Proxy Statement for Wells Fargo's
1999 Annual Meeting of Stockholders;
. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
. Current Reports on Form 8-K filed January 29, 1999, April 21, 1999,
April 28, 1999, July 19, 1999, July 28, 1999, September 29, 1999 and
October 19, 1999;
. The description of Wells Fargo common stock contained in the Current
Report on Form 8-K filed October 14, 1997, including any amendment or
report filed to update such description;
. The description of preferred stock purchase rights contained in the
Registration Statement on Form 8-A dated October 21, 1998, including any
amendment or report filed to update such description; and
49
<PAGE>
. All reports and definitive proxy or information statements filed by
Wells Fargo pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this proxy statement-
prospectus and before completion of the merger and the exchange of Wells
Fargo common stock for North County common stock.
North County Documents
This proxy statement-prospectus incorporates by reference the North County
SEC documents set forth below. All of the documents were filed under SEC File
No. 000-10627.
. Annual Report on Form 10-K for the year ended December 31, 1998,
including information specifically incorporated by reference into the
Form 10-K from North County's definitive Notice and Proxy Statement for
its 1999 Annual Meeting of Shareholders;
. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
. Current Report on Form 8-K filed October 7, 1999.
. All reports and definitive proxy or information statements filed by
North County pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this proxy statement-
prospectus and before completion of the merger and the exchange of Wells
Fargo common stock for North County common stock.
Documents Available Without Charge
Wells Fargo and North County will provide, without charge, copies of any
report incorporated by reference into this proxy statement-prospectus,
excluding exhibits other than those that are specifically incorporated by
reference in this proxy statement-prospectus. You may obtain a copy of any
document incorporated by reference by writing or calling Wells Fargo or North
County as follows:
North County:
Wells Fargo:
Corporate Secretary
Corporate Secretary North County Bancorp
Wells Fargo & Company 444 South Escondido Boulevard
MAC N9305-173 Escondido, California 92025
Sixth and Marquette (760) 743-2200
Minneapolis, MN 55479
(612) 667-8655
To ensure delivery of the copies in time for the special meeting, your
request should be received by January 17, 2000.
In deciding how to vote on the merger, you should rely only on the
information contained or incorporated by reference in this proxy statement-
prospectus. Neither Wells Fargo nor North County has authorized any person to
provide you with any information that is different from what is contained in
this proxy statement-prospectus. This proxy statement-prospectus is dated
December 21, 1999. You should not assume that the information contained in this
proxy statement-prospectus is accurate as of any date other than such date, and
neither the mailing to you of this proxy statement-prospectus nor the issuance
to you of shares of Wells Fargo common stock will create any implication to the
contrary.
50
<PAGE>
APPENDIX A
----------------
AGREEMENT AND PLAN OF REORGANIZATION
by and between
NOTH COUNTY BANCORP
and
WELLS FARGO & COMPANY
Dated as of September 29, 1999
----------------
AMENDMENT TO AGREEMENT
by and between
NORTH COUNTY BANCORP
and
WELLS FARGO & COMPANY
Dated as of November 29, 1999
----------------
<PAGE>
AMENDMENT TO AGREEMENT
This AMENDMENT TO AGREEMENT (the "Amendment") , entered into as of the 29th
day of November, 1999, by and between NORTH COUNTY BANCORP ("Company"), a
California corporation, and WELLS FARGO & COMPANY ("Wells Fargo"), a Delaware
corporation.
WHEREAS, Company and Wells Fargo are parties to that certain agreement and
plan of reorganization dated as of the 29th day of September, 1999, pursuant to
the terms of which a wholly-owned subsidiary of Wells Fargo will merge with the
Company,
WHEREAS, the parties hereto have determined that paragraph 4(r) of the
Agreement should be amended to limit its operation to non-qualified stock
options.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
1. Paragraph 4(r) of the Agreement is amended and restated in its entirety
to read as follows:
(r) Immediately prior to the Effective Time, Company shall redeem and
shall cause its stock option committees under the Stock Option Plans to
take all action necessary to redeem any Options which are non-qualified
stock options and which the option holders have elected in writing, prior
to the meeting of shareholders required by paragraph 4(c) hereof, to have
redeemed by the Company ("Redeemed Options") in an amount for each Redeemed
Option equal to the Fair Market Value Per Share of such Redeemed Option
minus the exercise price thereof as set forth in an Option holder's option
agreement or option agreements. Company shall withhold (and timely pay) all
applicable withholding, and payroll taxes from the Cash Surrender Amount,
and shall comply with all payroll reporting requirements with respect to
such payments. In addition, Company shall, and shall cause its stock option
committees to, determine the "Fair Market Value" (as defined in the Stock
Option Plans) of a Redeemed Option to be an amount equal to the Fair Market
Value Per Share as defined in this Agreement.
2. Except as specifically amended herein, the Agreement remains in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to Agreement as
of the day and year first above written.
WELLS FARGO & COMPANY NORTH COUNTY BANCORP
/s/ John E. Ganoe /s/ James M. Gregg
By: _____________________________ By: _____________________________
Executive Vice President Chairman and CEO
Its: ____________________________ Its: ____________________________
A-1
<PAGE>
AGREEMENT
AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") entered into as of
the 29th day of September, 1999, by and between NORTH COUNTY BANCORP
("Company"), a California corporation, and WELLS FARGO & COMPANY ("Wells
Fargo"), a Delaware corporation.
WHEREAS, the parties hereto desire to effect a reorganization whereby a
wholly-owned subsidiary of Wells Fargo will merge with and into Company (the
"Merger") pursuant to an agreement and plan of merger (the "Merger Agreement")
in substantially the form attached hereto as Exhibit A, which provides, among
other things, for the exchange of the shares of Common Stock of Company, no par
value ("Company Common Stock"), outstanding immediately prior to the time the
Merger becomes effective in accordance with the provisions of the Merger
Agreement into shares of voting Common Stock of Wells Fargo of the par value of
$1 2/3 per share ("Wells Fargo Common Stock"),
NOW, THEREFORE, to effect such reorganization and in consideration of the
premises and the mutual covenants and agreements contained herein, the parties
hereto do hereby represent, warrant, covenant and agree as follows:
1. Basic Plan of Reorganization
(a) Merger. Subject to the terms and conditions contained herein, a wholly-
owned subsidiary of Wells Fargo (the "Merger Co.") will be merged by statutory
merger with and into Company pursuant to the Merger Agreement, with Company as
the surviving corporation, in which merger each share of Company Common Stock
outstanding immediately prior to the Effective Time of the Merger (as defined
below) (other than shares as to which statutory dissenters' appraisal rights
have been exercised) will be exchanged for the number of shares of Wells Fargo
Common Stock determined by dividing the Adjusted Wells Fargo Shares by the
number of shares of Company Common Stock then outstanding.
The "Adjusted Wells Fargo Shares" shall be a number equal to the Aggregate
Share Amount divided by the Wells Fargo Measurement Price. The "Wells Fargo
Measurement Price" is defined as the average of the closing prices of a share
of Wells Fargo Common Stock as reported on the consolidated tape of the New
York Stock Exchange during the period of 20 trading days ending on the day
immediately preceding the meeting of shareholders required by paragraph 4(c) of
this Agreement. The "Aggregate Share Amount" shall be $112,000,000 plus the
aggregate exercise price of all Options exercised by cash payments between the
date hereof and the day immediately prior to the Closing Date minus the Cash
Surrender Amount. The "Cash Surrender Amount" shall equal the difference
between (i) the product of (A) the "Fair Market Value Per Share" multiplied by
(B) the number of Redeemed Options, minus (ii) the aggregate exercise price of
all Redeemed Options. "Fair Market Value Per Share" shall mean $21.00. "Option"
has the meaning given it in paragraph 2(c).
(b) Wells Fargo Common Stock Adjustments. If, between the date hereof and
the Effective Time of the Merger, shares of Wells Fargo Common Stock shall be
changed into a different number of shares or a different class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or if a stock dividend thereon shall be
declared with a record date within such period (a "Common Stock Adjustment"),
then the number of shares of Wells Fargo Common Stock into which a share of
Company Common Stock shall be converted pursuant to subparagraph (a), above,
will be appropriately and proportionately adjusted so that the number of such
shares of Wells Fargo Common Stock into which a share of Company Common Stock
shall be converted will equal the number of shares of Wells Fargo Common Stock
which holders of shares of Company Common Stock would have received pursuant to
such Common Stock Adjustment had the record date therefor been immediately
following the Effective Time of the Merger.
A-2
<PAGE>
(c) Fractional Shares. No fractional shares of Wells Fargo Common Stock and
no certificates or scrip certificates therefor shall be issued to represent any
such fractional interest, and any holder thereof shall be paid an amount of
cash equal to the product obtained by multiplying the fractional share interest
to which such holder is entitled by the average of the closing prices of a
share of Wells Fargo Common Stock as reported by the consolidated tape of the
New York Stock Exchange for each of the five (5) trading days ending on the day
immediately preceding the meeting of shareholders required by paragraph 4(c) of
this Agreement.
(d) Mechanics of Closing Merger. Subject to the terms and conditions set
forth herein, the Merger Agreement shall be executed and a Certificate of
Merger shall be filed with the Secretary of State of the State of California
within ten (10) business days following the satisfaction or waiver of all
conditions precedent set forth in Sections 6 and 7 of this Agreement or on such
other date as may be agreed to by the parties (the "Closing Date"), provided
that the Closing Date shall not occur prior to January 15, 2000. Each of the
parties agrees to use its best efforts to cause the Merger to be completed as
soon as practicable after the receipt of final regulatory approval of the
Merger and the expiration of all required waiting periods. The time that the
filing referred to in the first sentence of this paragraph is made is herein
referred to as the "Time of Filing." The day on which such filing is made and
accepted is herein referred to as the "Effective Date of the Merger." The
"Effective Time of the Merger" shall be 11:59 p.m. Sacramento, California time
on the Effective Date of the Merger. At the Effective Time of the Merger on the
Effective Date of the Merger, the separate existence of Merger Co. shall cease
and Merger Co. will be merged with and into Company pursuant to the Merger
Agreement.
The closing of the transactions contemplated by this Agreement and the
Merger Agreement (the "Closing") shall take place on the Closing Date at the
offices of Wells Fargo, 420 Montgomery Street, San Francisco, California, or
such other place mutually agreed upon by Wells Fargo and Company.
(e) The terms "Schedule" and "Schedules" as used in this Agreement refer to,
collectively, the Schedules to be delivered by, respectively, the Company and
Wells Fargo, to one another. The parties acknowledge that the Schedules have
been delivered prior to the execution of this Agreement.
2. Representations and Warranties of Company. Company represents and
warrants to Wells Fargo as follows:
(a) Organization and Authority. Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and failure to be so qualified would
have a material adverse effect on Company and the Company Subsidiaries taken as
a whole and has corporate power and authority to own its properties and assets
and to carry on its business as it is now being conducted. Company is
registered as a bank holding company with the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). Company has
furnished Wells Fargo true and correct copies of its articles of incorporation
and by-laws, as amended.
(b) Company's Subsidiaries. Schedule 2(b) sets forth a complete and correct
list of all of Company's subsidiaries as of the date hereof (individually a
"Company Subsidiary" and collectively the "Company Subsidiaries"), all shares
of the outstanding capital stock of each of which, except as set forth on
Schedule 2(b), are owned directly or indirectly by Company. No equity security
of any Company Subsidiary is or may be required to be issued by reason of any
option, warrant, scrip, preemptive right, right to subscribe to, call or
commitment of any character whatsoever relating to, or security or right
convertible into, shares of any capital stock of such subsidiary, and there are
no contracts, commitments, understandings or arrangements by which any Company
Subsidiary is bound to issue additional shares of its capital stock, or any
option, warrant or right to purchase or acquire any additional shares of its
capital stock. All of such shares so owned by Company are fully paid and
nonassessable and are owned by it free and clear of any lien, claim, charge,
option, encumbrance or agreement with respect thereto. Each Company Subsidiary
is a corporation or state banking
A-3
<PAGE>
association duly organized, validly existing, duly qualified to do business and
in good standing under the laws of its jurisdiction of incorporation, and has
corporate power and authority to own or lease its properties and assets and to
carry on its business as it is now being conducted. Except as set forth on
Schedule 2(b), Company does not own beneficially, directly or indirectly, more
than 5% of any class of equity securities or similar interests of any
corporation, bank, business trust, association or similar organization, and is
not, directly or indirectly, a partner in any partnership or party to any joint
venture.
(c) Capitalization. The authorized capital stock of Company consists of
10,000,000 shares of common stock, no par value per share, of which as of the
close of business on June 30, 1999, 4,917,798 shares of common stock were
outstanding and no shares of common stock were held in the treasury. The
maximum number of shares of Company Common Stock (assuming for this purpose
that phantom shares and other share-equivalents constitute Company Common
Stock) that would be outstanding as of the Effective Date of the Merger if all
options, warrants, conversion rights and other rights with respect thereto were
exercised is 5,498,141. All of the outstanding shares of capital stock of
Company have been duly and validly authorized and issued and are fully paid and
nonassessable. Except as set forth in Schedule 2(c), there are no outstanding
subscriptions, contracts, conversion privileges, options, warrants, calls,
preemptive rights or other rights obligating Company or any Company Subsidiary
to issue, sell or otherwise dispose of, or to purchase, redeem or otherwise
acquire, any shares of capital stock of Company or any Company Subsidiary. As
of the date hereof, the total number of options ("Options") and the exercise
prices thereof issued pursuant to the Company's 1983 Incentive Stock Option
Plan, the 1991 Stock Option Plan and the 1997 Stock Option Plan (collectively,
the "Stock Option Plans") are as set forth on Schedule 2(c). Since June 30,
1999, no shares of Company capital stock have been purchased, redeemed or
otherwise acquired, directly or indirectly, by Company or any Company
Subsidiary and no cash or stock dividends or other distributions have been
declared, set aside, made or paid to the shareholders of Company.
(d) Authorization. Company has the corporate power and authority to enter
into this Agreement and the Merger Agreement and, subject to any required
approvals of its shareholders, to carry out its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and the
Merger Agreement by Company and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Company. Subject to such approvals of shareholders and of
government agencies and other governing boards having regulatory authority over
Company as may be required by statute or regulation, this Agreement and the
Merger Agreement are valid and binding obligations of Company enforceable
against Company in accordance with their respective terms.
Except as set forth on Schedule 2(d), neither the execution, delivery and
performance by Company of this Agreement or the Merger Agreement, nor the
consummation of the transactions contemplated hereby and thereby, nor
compliance by Company with any of the provisions hereof or thereof, will (i)
violate, conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration of, or result in the creation of, any lien, security interest,
charge or encumbrance upon any of the properties or assets of Company or any
Company Subsidiary under any of the terms, conditions or provisions of (x) its
articles of incorporation or by-laws or (y) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Company or any Company Subsidiary is a party or by which it
may be bound, or to which Company or any Company Subsidiary or any of the
properties or assets of Company or any Company Subsidiary may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in the
next paragraph, to the best knowledge of Company, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to
Company or any Company Subsidiary or any of their respective properties or
assets.
Other than in connection or in compliance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (the "Exchange Act"), the securities or
blue sky laws of the
A-4
<PAGE>
various states or filings, consents, reviews, authorizations, approvals or
exemptions required under the BHC Act, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR Act") or the California Financial Code, and
filings required to effect the Merger under California law, no notice to,
filing with, exemption or review by, or authorization, consent or approval of,
any public body or authority is necessary for the consummation by Company of
the transactions contemplated by this Agreement and the Merger Agreement.
(e) Company Financial Statements. The consolidated balance sheets of Company
and Company's Subsidiaries as of December 31, 1998 and 1997 and related
consolidated statements of income, stockholders' equity and cash flows for the
three years ended December 31, 1998, together with the notes thereto, certified
by PRICEWATERHOUSECOOPERS, LLP and included in Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (the "Company 10-K") as filed
with the Securities and Exchange Commission (the "SEC"), and the unaudited
consolidated statements of financial condition of Company and Company's
Subsidiaries as of June 30, 1999 and the related unaudited consolidated
statements of income, stockholders' equity and cash flows for the six (6)
months then ended included in Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999 as filed with the SEC (collectively, the
"Company Financial Statements"), have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
present fairly (subject, in the case of financial statements for interim
periods, to normal recurring adjustments) the consolidated financial position
of Company and Company's Subsidiaries at the dates and the consolidated results
of operations and cash flows of Company and Company's Subsidiaries for the
periods stated therein.
(f) Reports. Since December 31, 1993, Company and each Company Subsidiary
has filed all reports, registrations and statements, together with any required
amendments thereto, that it was required to file with (i) the SEC, including,
but not limited to, Forms 10-K, Forms 10-Q and proxy statements, (ii) the
Federal Reserve Board, (iii) the Federal Deposit Insurance Corporation (the
"FDIC"), and (iv) any applicable state securities or banking authorities. All
such reports and statements filed with any such regulatory body or authority
are collectively referred to herein as the "Company Reports." As of their
respective dates, the Company Reports complied in all material respects with
all the rules and regulations promulgated by the SEC, the Federal Reserve
Board, the FDIC, and applicable state securities or banking authorities, as the
case may be, and did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Copies of all the Company Reports have been
made available to Wells Fargo by Company.
(g) Properties and Leases. Except as may be reflected in the Company
Financial Statements and except for any lien for current taxes not yet
delinquent, Company and each Company Subsidiary have good title free and clear
of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Company's
consolidated balance sheet as of June 30, 1999 included in Company's Quarterly
Report on Form 10-Q for the period then ended, and all real and personal
property acquired since such date, except such real and personal property as
has been disposed of in the ordinary course of business. All leases of real
property and all other leases material to Company or any Company Subsidiary
pursuant to which Company or such Company Subsidiary, as lessee, leases real or
personal property, which leases are described on Schedule 2(g), are valid and
effective in accordance with their respective terms, and there is not, under
any such lease, any material existing default by Company or such Company
Subsidiary or any event which, with notice or lapse of time or both, would
constitute such a material default. Substantially all Company's and each
Company Subsidiary's buildings and equipment in regular use have been well
maintained and are in good and serviceable condition, reasonable wear and tear
excepted.
(h) Taxes. Each of Company and the Company Subsidiaries has filed all
federal, state, county, local and foreign tax returns, including information
returns, required to be filed by it, and paid all taxes owed by it, including
those with respect to income, withholding, social security, unemployment,
workers compensation, franchise, ad valorem, premium, excise and sales taxes,
and no taxes shown on such returns to be owed by it or
A-5
<PAGE>
assessments received by it are delinquent. The federal income tax returns of
Company and the Company Subsidiaries for the fiscal year ended December 31,
1995, and for all fiscal years prior thereto, are for the purposes of routine
audit by the Internal Revenue Service closed because of the statute of
limitations, and no claims for additional taxes for such fiscal years are
pending. Except only as set forth on Schedule 2(h), (i) neither Company nor any
Company Subsidiary is a party to any pending action or proceeding, nor is any
such action or proceeding threatened by any governmental authority, for the
assessment or collection of taxes, interest, penalties, assessments or
deficiencies and (ii) no issue has been raised by any federal, state, local or
foreign taxing authority in connection with an audit or examination of the tax
returns, business or properties of Company or any Company Subsidiary which has
not been settled, resolved and fully satisfied. Each of Company and the Company
Subsidiaries has paid all taxes owed or which it is required to withhold from
amounts owing to employees, creditors or other third parties. The consolidated
balance sheet as of June 30, 1999, referred to in paragraph 2(e) hereof,
includes adequate provision for all accrued but unpaid federal, state, county,
local and foreign taxes, interest, penalties, assessments or deficiencies of
Company and the Company Subsidiaries with respect to all periods through the
date thereof.
(i) Absence of Certain Changes. Since June 30, 1999 there has been no change
in the business, financial condition or results of operations of Company or any
Company Subsidiary, which has had, or may reasonably be expected to have, a
material adverse effect on the business, financial condition or results of
operations of Company and the Company Subsidiaries taken as a whole.
(j) Commitments and Contracts. Except as set forth on Schedule 2(j), neither
Company nor any Company Subsidiary is a party or subject to any of the
following (whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable at
will by Company or such Company Subsidiary);
(ii) any plan, contract or understanding providing for any bonus,
pension, option, deferred compensation, retirement payment, profit sharing
or similar arrangement with respect to any present or former officer,
director, employee or consultant;
(iii) any labor contract or agreement with any labor union;
(iv) any contract not made in the ordinary course of business containing
covenants which limit the ability of Company or any Company Subsidiary to
compete in any line of business or with any person or which involve any
restriction of the geographical area in which, or method by which, Company
or any Company Subsidiary may carry on its business (other than as may be
required by law or applicable regulatory authorities);
(v) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K;
(vi) any lease with annual rental payments aggregating $10,000 or more;
(vii) any agreement or commitment with respect to the Community
Reinvestment Act with any state or federal bank regulatory authority or any
other party; or
(viii) any current or past agreement, contract or understanding with any
current or former director, officer, employee, consultant, financial
adviser, broker, dealer, or agent providing for any rights of
indemnification in favor of such person or entity.
(k) Litigation and Other Proceedings. Company has furnished Wells Fargo
copies of (i) all attorney responses to the request of the independent auditors
for Company with respect to loss contingencies as of December 31, 1998 in
connection with the Company financial statements included in the Company 10-K,
and (ii) a written list of legal and regulatory proceedings filed against
Company or any Company Subsidiary since
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said date. Neither Company nor any Company Subsidiary is a party to any pending
or, to the best knowledge of Company, threatened, claim, action, suit,
investigation or proceeding, or is subject to any order, judgment or decree,
except for matters which, in the aggregate, will not have, or cannot reasonably
be expected to have, a material adverse effect on the business, financial
condition or results of operations of Company and the Company Subsidiaries
taken as a whole.
(l) Insurance. Company and each Company Subsidiary is presently insured, and
during each of the past five calendar years (or during such lesser period of
time as Company has owned such Company Subsidiary) has been insured, for
reasonable amounts against such risks as companies engaged in a similar
business would, in accordance with good business practice, customarily be
insured and has maintained all insurance required by applicable law and
regulation.
(m) Compliance with Laws. Company and each Company Subsidiary has all
permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to
own or lease its properties and assets and to carry on its business as
presently conducted and that are material to the business of Company or such
Company Subsidiary; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and, to the best knowledge of
Company, no suspension or cancellation of any of them is threatened; and all
such filings, applications and registrations are current. The conduct by
Company and each Company Subsidiary of its business and the condition and use
of its properties does not violate or infringe, in any respect material to any
such business, any applicable domestic (federal, state or local) or foreign
law, statute, ordinance, license or regulation. Neither Company nor any Company
Subsidiary is in default under any order, license, regulation or demand of any
federal, state, municipal or other governmental agency or with respect to any
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application and except as set forth on
Schedule 2(m), no federal, state, municipal or other governmental authority has
placed any restriction on the business or properties of Company or any Company
Subsidiary which reasonably could be expected to have a material adverse effect
on the business or properties of Company and the Company Subsidiaries taken as
a whole.
(n) Labor. No work stoppage involving Company or any Company Subsidiary is
pending or, to the best knowledge of Company, threatened. Neither Company nor
any Company Subsidiary is involved in, or threatened with or affected by, any
labor dispute, arbitration, lawsuit or administrative proceeding which could
materially and adversely affect the business of Company or such Company
Subsidiary. Employees of Company and the Company Subsidiaries are not
represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees.
(o) Material Interests of Certain Persons. Except as set forth on Schedule
2(o), to the best knowledge of Company no officer or director of Company or any
Company Subsidiary, or any "associate" (as such term is defined in Rule l4a-1
under the Exchange Act) of any such officer or director, has any interest in
any material contract or property (real or personal), tangible or intangible,
used in or pertaining to the business of Company or any Company Subsidiary.
Schedule 2(o) sets forth a correct and complete list of any outstanding loan
from Company or any Company Subsidiary to any present officer, director,
employee or any associate or related interest of any such person, which was
required under Regulation O of the Federal Reserve Board to be approved by or
reported to Company's or such Company Subsidiary's Board of Directors.
(p) Company Benefit Plans.
(i) Schedule 2(p)(i) sets forth each employee benefit plan with respect
to which Company or any Company Subsidiary contributes, sponsors or
otherwise has any obligation (the "Plans"). For purposes of this Section
2(p) and Schedule 2(p)(i), "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended, and the term "Plan" or "Plans" means all
employee benefit plans as defined in Section 3(3) of ERISA, and all other
benefit arrangements including, without limitation, any plan, program,
agreement, policy or commitment providing for insurance coverage of
employees, workers' compensation,
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disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits, severance or termination of employment benefits, life,
health, death, disability or accidental benefits.
(ii) Except as disclosed on Schedule 2(p)(ii), no Plan is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA.
(iii) Except as disclosed on Schedule 2(p)(iii), no Plan promises or
provides health or life benefits to retirees or former employees except as
required by federal continuation of coverage laws or similar state laws.
(iv) Except as disclosed on Schedule 2(p)(iv), (a) each Plan is and has
been in all material respects operated and administered in accordance with
its provisions and applicable law including, if applicable, ERISA and the
Code; (b) all reports and filings with governmental agencies (including but
not limited to the Department of Labor, Internal Revenue Service, Pension
Benefit Guaranty Corporation and the Securities and Exchange Commission)
required in connection with each Plan have been timely made; (c) all
disclosures and notices required by law or Plan provisions to be given to
participants and beneficiaries in connection with each Plan have been
properly and timely made; (d) there are no actions, suits or claims
pending, other than routine uncontested claims for benefits with respect to
each Plan; and (e) each Plan intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service stating that the Plan (including all amendments) is tax
qualified under Section 401(a) of the Code and Company knows of no reason
that any such Plan is not qualified within the meaning of Section 401(a) of
the Code and knows of no reason that each related Plan trust is not exempt
from taxation under Section 501(a) of the Code.
(v) Except as disclosed on Schedule 2(p)(v), (a) all contributions,
premium payments and other payments required to be made in connection with
the Plans as of the date of this Agreement have been made; (b) a proper
accrual has been made on the books of Company for all contributions,
premium payments and other payments due in the current fiscal year but not
made as of the date of this Agreement; (c) no contribution, premium payment
or other payment has been made in support of any Plan that is in excess of
the allowable deduction for federal income tax purposes for the year with
respect to which the contribution was made (whether under Sections 162,
280G, 404, 419, 419A of the Code or otherwise); and (d) with respect to
each Plan that is subject to Section 301 of ERISA or Section 412 of the
Code, Company is not liable for any accumulated funding deficiency as that
term is defined in Section 412 of the Code and the projected benefit
obligations determined as of the date of this Agreement do not exceed the
assets of the Plan.
(vi) Except as disclosed in Schedule 2(p)(vi) and to the best knowledge
of Company, no Plan or any trust created thereunder, nor any trustee,
fiduciary or administrator thereof, has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA or violated any of the fiduciary standards under Part
4 of Title 1 of ERISA which could subject such Plan or trust, or any
trustee, fiduciary or administrator thereof, or any party dealing with any
such Plan or trust, to a tax penalty or prohibited transactions imposed by
Section 4975 of the Code or would result in material liability to Company
and the Company Subsidiaries as a whole.
(vii) No Plan subject to Title IV of ERISA or any trust created
thereunder has been terminated, nor have there been any "reportable events"
as that term is defined in Section 4043 of ERISA, with respect to any Plan,
other than those events which may result from the transactions contemplated
by this Agreement and the Merger Agreement.
(viii) Except as disclosed in Schedule 2(p)(viii), neither the execution
and delivery of this Agreement and the Merger Agreement nor the
consummation of the transactions contemplated hereby and thereby will (a)
result in any material payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or employee or former employee of Company under any Plan or
otherwise, (b) materially increase any benefits otherwise payable under any
Plan, or (c) result in the acceleration of the time of payment or vesting
of any such benefits to any material extent.
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(q) Proxy Statement, etc. None of the information regarding Company and the
Company Subsidiaries supplied or to be supplied by Company in writing for
inclusion in (i) a Registration Statement on Form S-4 to be filed with the SEC
by Wells Fargo for the purpose of registering the shares of Wells Fargo Common
Stock to be exchanged for shares of Company Common Stock pursuant to the
provisions of the Merger Agreement (the "Registration Statement"), (ii) the
proxy statement to be mailed to Company's shareholders in connection with the
meeting to be called to consider the Merger (the "Proxy Statement") and (iii)
any other documents to be filed with the SEC or any regulatory authority in
connection with the transactions contemplated hereby or by the Merger Agreement
will, at the respective times such documents are filed with the SEC or any
regulatory authority and, in the case of the Registration Statement, when it
becomes effective and, with respect to the Proxy Statement, when mailed, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading
or, in the case of the Proxy Statement or any amendment thereof or supplement
thereto, at the time of the meeting of shareholders referred to in paragraph
4(c), be false or misleading with respect to any material fact, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for such meeting.
All documents which Company and the Company Subsidiaries are responsible for
filing with the SEC and any other regulatory authority in connection with the
Merger will comply as to form in all material respects with the provisions of
applicable law.
(r) Registration Obligations. Except as set forth on Schedule 2(r), neither
Company nor any Company Subsidiary is under any obligation, contingent or
otherwise, which will survive the Merger by reason of any agreement to register
any of its securities under the Securities Act.
(s) Brokers and Finders. Except for Hovde Financial, Inc., neither Company
nor any Company Subsidiary nor any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for Company or any Company
Subsidiary in connection with this Agreement and the Merger Agreement or the
transactions contemplated hereby and thereby.
(t) Fiduciary Activities. Neither Company nor any Company Subsidiary has
ever had any accounts for which it has acted as a fiduciary including but not
limited to accounts for which it has served as trustee, agent, custodian,
personal representative, guardian, conservator or investment advisor; provided,
however, that the Company Subsidiaries may have acted in a fiduciary capacity
with respect to individual retirement accounts and Keogh accounts.
(u) No Defaults. Except as set forth in Schedule 2(u), neither Company nor
any Company Subsidiary is in default, nor has any event occurred which, with
the passage of time or the giving of notice, or both, would constitute a
default, under any material agreement, indenture, loan agreement or other
instrument to which it is a party or by which it or any of its assets is bound
or to which any of its assets is subject, the result of which has had or could
reasonably be expected to have a material adverse effect upon Company and the
Company Subsidiaries, taken as a whole. Except as set forth in Schedule 2(u),
to the best of Company's knowledge, all parties with whom Company or any
Company Subsidiary has material leases, agreements or contracts or who owe to
Company or any Company Subsidiary material obligations other than with respect
to those arising in the ordinary course of the banking business of the Company
Subsidiaries are in compliance therewith in all material respects.
(v) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition of, on Company or any Company Subsidiary, any
liability relating to the release of hazardous substances as defined under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), pending or to
the best of Company's knowledge, threatened against Company or any Company
Subsidiary the result of which has had or could reasonably be expected to have
a material adverse effect upon Company and Company's Subsidiaries taken as a
whole; to the best of Company's knowledge there is no reasonable basis for any
such
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proceeding, claim or action; and to the best of Company's knowledge neither
Company nor any Company Subsidiary is subject to any agreement, order,
judgment, or decree by or with any court, governmental authority or third party
imposing any such environmental liability. Company has provided Wells Fargo
with copies of all environmental assessments, reports, studies and other
related information in its possession with respect to each bank facility and
each non-residential OREO property.
(w) Compliance with Year 2000 Requirements. Except as set forth in Schedule
2(w), Company is in full compliance with its Year 2000 project management
process as set forth in the May 5, 1997 Federal Financial Institutions
Examination Council ("FFIEC") Interagency Statement on the Year 2000 and
subsequent guidance documents (the "FFIEC Requirements"). Company has made its
Year 2000 project assessment and remediation plan available to Wells Fargo for
review.
(x) Required Shareholder Approval. The affirmative vote of a majority in
outstanding shares and qualified to vote of Company is sufficient to approve
the Merger, this Agreement, and the Merger Agreement, and the transactions
contemplated thereby pursuant to the California General Corporation Law and
pursuant to the articles and bylaws of Company.
3. Representations and Warranties of Wells Fargo. Wells Fargo represents and
warrants to Company as follows:
(a) Organization and Authority. Wells Fargo is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
is duly qualified to do business and is in good standing in all jurisdictions
where its ownership or leasing of property or the conduct of its business
requires it to be so qualified and failure to be so qualified would have a
material adverse effect on Wells Fargo and its subsidiaries taken as a whole
and has corporate power and authority to own its properties and assets and to
carry on its business as it is now being conducted. Wells Fargo is registered
as a bank holding company with the Federal Reserve Board under the BHC Act.
(b) Wells Fargo Subsidiaries. Schedule 3(b) sets forth a complete and
correct list as of December 31, 1998, of Wells Fargo's Significant Subsidiaries
(as defined in Regulation S-X promulgated by the SEC) (individually a "Wells
Fargo Subsidiary" and collectively the "Wells Fargo Subsidiaries"), all shares
of the outstanding capital stock of each of which, except as set forth in
Schedule 3(b), are owned directly or indirectly by Wells Fargo. No equity
security of any Wells Fargo Subsidiary is or may be required to be issued to
any person or entity other than Wells Fargo by reason of any option, warrant,
scrip, right to subscribe to, call or commitment of any character whatsoever
relating to, or security or right convertible into, shares of any capital stock
of such subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Wells Fargo Subsidiary is bound to issue additional
shares of its capital stock, or options, warrants or rights to purchase or
acquire any additional shares of its capital stock. Subject to 12 U.S.C. (S) 55
(1982), all of such shares so owned by Wells Fargo are fully paid and
nonassessable and are owned by it free and clear of any lien, claim, charge,
option, encumbrance or agreement with respect thereto. Each Wells Fargo
Subsidiary is a corporation or national banking association duly organized,
validly existing, duly qualified to do business and in good standing under the
laws of its jurisdiction of incorporation, and has corporate power and
authority to own or lease its properties and assets and to carry on its
business as it is now being conducted.
(c) Wells Fargo Capitalization. As of June 30, 1999, the authorized capital
stock of Wells Fargo consists of (i) 20,000,000 shares of Preferred Stock,
without par value, of which as of the close of business on June 30, 1999,
955,000 shares of Cumulative Tracking Preferred Stock, at $200 stated value,
9,596 shares of ESOP Cumulative Convertible Preferred Stock, at $1,000 stated
value, 19,903 shares of 1995 ESOP Cumulative Convertible Preferred Stock, at
$1,000 stated value, 21,288 shares of 1996 ESOP Cumulative Convertible
Preferred Stock, at $1,000 stated value, 18,639 shares of 1997 ESOP Cumulative
Convertible Preferred Stock, at $1,000 stated value, 8,560 shares of 1998 ESOP
Cumulative Convertible Preferred Stock, $1,000 stated value, 45,508 shares of
1999 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value,
1,500,000 shares of Adjustable-Rate Cumulative Preferred Stock, Series B, $50
stated value, and
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4,000,000 shares of 6.59% Adjustable Rate Noncumulative Preferred Stock, Series
B, $50 stated value, were outstanding; (ii) 4,000,000 shares of Preference
Stock, without par value, of which as of the close of business on June 30,
1999, no shares were outstanding; and (iii) 4,000,000,000 shares of Common
Stock, $1 2/3 par value, of which as of the close of business on June 30, 1999,
1,650,629,353 shares were outstanding and 15,465,932 shares were held in the
treasury. All of the outstanding shares of capital stock of Wells Fargo have
been duly and validly authorized and issued and are fully paid and
nonassessable.
(d) Authorization. Wells Fargo has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by Wells Fargo and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of Wells Fargo. No approval or consent by the
stockholders of Wells Fargo is necessary for the execution and delivery of this
Agreement and the Merger Agreement and the consummation of the transactions
contemplated hereby and thereby. Subject to such approvals of government
agencies and other governing boards having regulatory authority over Wells
Fargo as may be required by statute or regulation, this Agreement is a valid
and binding obligation of Wells Fargo enforceable against Wells Fargo in
accordance with its terms.
Neither the execution, delivery and performance by Wells Fargo of this
Agreement or the Merger Agreement, nor the consummation of the transactions
contemplated hereby and thereby, nor compliance by Wells Fargo with any of the
provisions hereof or thereof, will (i) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration of, or result in the creation of, any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Wells Fargo or any Wells Fargo Subsidiary under any of the terms,
conditions or provisions of (x) its certificate of incorporation or by-laws or
(y) any material note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Wells Fargo or any
Wells Fargo Subsidiary is a party or by which it may be bound, or to which
Wells Fargo or any Wells Fargo Subsidiary or any of the properties or assets of
Wells Fargo or any Wells Fargo Subsidiary may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
to the best knowledge of Wells Fargo, violate any judgment, ruling, order,
writ, injunction, decree, statute, rule or regulation applicable to Wells Fargo
or any Wells Fargo Subsidiary or any of their respective properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act, the Exchange Act, the securities or blue sky laws of the
various states or filings, consents, reviews, authorizations, approvals or
exemptions required under the BHC Act or the HSR Act, and filings required to
effect the Merger under California law, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Wells Fargo of the transactions
contemplated by this Agreement and the Merger Agreement.
(e) Wells Fargo Financial Statements. The consolidated balance sheets of
Wells Fargo and Wells Fargo's subsidiaries as of December 31, 1998 and 1997 and
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for the three years ended December 31,
1998, together with the notes thereto, certified by KPMG LLP ("KPMG") and
included in Wells Fargo's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "Wells Fargo 10-K") as filed with the SEC, and the
unaudited consolidated balance sheets of Wells Fargo and its subsidiaries as of
June 30, 1999 and the related unaudited consolidated statements of income,
changes in stockholders' equity and comprehensive income and cash flows for the
six (6) months then ended included in Wells Fargo's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1999, as filed with the SEC
(collectively, the "Wells Fargo Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis and present fairly (subject, in the case of financial
statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Wells Fargo and its subsidiaries at the
dates and the consolidated results of operations, changes in financial position
and cash flows of Wells Fargo
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and its subsidiaries for the periods stated therein. The Year 2000 disclosure
contained in Wells Fargo's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1999, as filed with the SEC and designated as the Year 2000
Readiness Disclosures related to the Year 2000 Information and Readiness
Disclosure Act, is true and correct in all material respects as of the date
hereof.
(f) Reports. Since December 31, 1993, Wells Fargo and each Wells Fargo
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with (i) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q and proxy statements,
(ii) the Federal Reserve Board, (iii) the FDIC, (iv) the United States
Comptroller of the Currency ("Comptroller"), and (v) any applicable state
securities or banking authorities. All such reports and statements filed with
any such regulatory body or authority are collectively referred to herein as
the "Wells Fargo Reports." As of their respective dates, the Wells Fargo
Reports complied in all material respects with all the rules and regulations
promulgated by the SEC, the Federal Reserve Board, the FDIC, the Comptroller
and any applicable state securities or banking authorities, as the case may be,
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(g) Properties and Leases. Except as may be reflected in the Wells Fargo
Financial Statements and except for any lien for current taxes not yet
delinquent, Wells Fargo and each Wells Fargo Subsidiary has good title free and
clear of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Wells Fargo's
consolidated balance sheet as of June 30, 1999 included in Wells Fargo's
Quarterly Report on Form 10-Q for the period then ended, and all real and
personal property acquired since such date, except such real and personal
property has been disposed of in the ordinary course of business. All leases of
real property and all other leases material to Wells Fargo or any Wells Fargo
Subsidiary pursuant to which Wells Fargo or such Wells Fargo Subsidiary, as
lessee, leases real or personal property, are valid and effective in accordance
with their respective terms, and there is not, under any such lease, any
material existing default by Wells Fargo or such Wells Fargo Subsidiary or any
event which, with notice or lapse of time or both, would constitute such a
material default. Substantially all Wells Fargo's and each Wells Fargo
Subsidiary's buildings and equipment in regular use have been well maintained
and are in good and serviceable condition, reasonable wear and tear excepted.
(h) Taxes. Each of Wells Fargo and the Wells Fargo Subsidiaries has filed
all material federal, state, county, local and foreign tax returns, including
information returns, required to be filed by it, and paid or made adequate
provision for the payment of all taxes owed by it, including those with respect
to income, withholding, social security, unemployment, workers compensation,
franchise, ad valorem, premium, excise and sales taxes, and no taxes shown on
such returns to be owed by it or assessments received by it are delinquent. The
federal income tax returns of Wells Fargo and the Wells Fargo Subsidiaries for
the fiscal year ended December 31, 1982, and for all fiscal years prior
thereto, are for the purposes of routine audit by the Internal Revenue Service
closed because of the statute of limitations, and no claims for additional
taxes for such fiscal years are pending. Except only as set forth on Schedule
3(h), (i) neither Wells Fargo nor any Wells Fargo Subsidiary is a party to any
pending action or proceeding, nor to Wells Fargo's knowledge is any such action
or proceeding threatened by any governmental authority, for the assessment or
collection of taxes, interest, penalties, assessments or deficiencies which
could reasonably be expected to have any material adverse effect on Wells Fargo
and its subsidiaries taken as a whole, and (ii) no issue has been raised by any
federal, state, local or foreign taxing authority in connection with an audit
or examination of the tax returns, business or properties of Wells Fargo or any
Wells Fargo Subsidiary which has not been settled, resolved and fully
satisfied, or adequately reserved for. Each of Wells Fargo and the Wells Fargo
Subsidiaries has paid all taxes owed or which it is required to withhold from
amounts owing to employees, creditors or other third parties.
(i) Absence of Certain Changes. Since December 31, 1998, there has been no
change in the business, financial condition or results of operations of Wells
Fargo or any Wells Fargo Subsidiary which has had, or may reasonably be
expected to have, a material adverse effect on the business, financial
condition or results of operations of Wells Fargo and its subsidiaries taken as
a whole.
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(j) Commitments and Contracts. Except as set forth on Schedule 3(j), as of
December 31, 1998, neither Wells Fargo nor any Wells Fargo Subsidiary is a
party or subject to any of the following (whether written or oral, express or
implied):
(i) any labor contract or agreement with any labor union;
(ii) any contract not made in the ordinary course of business containing
covenants which materially limit the ability of Wells Fargo or any Wells
Fargo Subsidiary to compete in any line of business or with any person or
which involve any material restriction of the geographical area in which,
or method by which, Wells Fargo or any Wells Fargo Subsidiary may carry on
its business (other than as may be required by law or applicable regulatory
authorities); or
(iii) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K.
(k) Litigation and Other Proceedings. Neither Wells Fargo nor any Wells
Fargo Subsidiary is a party to any pending or, to the best knowledge of Wells
Fargo, threatened, claim, action, suit, investigation or proceeding, or is
subject to any order, judgment or decree, except for matters which, in the
aggregate, will not have, or cannot reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
Wells Fargo and its subsidiaries taken as a whole.
(l) Insurance. Wells Fargo and each Wells Fargo Subsidiary is presently
insured or self insured, and during each of the past five calendar years (or
during such lesser period of time as Wells Fargo has owned such Wells Fargo
Subsidiary) has been insured or self-insured, for reasonable amounts against
such risks as companies engaged in a similar business would, in accordance with
good business practice, customarily be insured and has maintained all insurance
required by applicable law and regulation.
(m) Compliance with Laws. Wells Fargo and each Wells Fargo Subsidiary has
all permits, licenses, authorizations, orders and approvals of, and has made
all filings, applications and registrations with, federal, state, local or
foreign governmental or regulatory bodies that are required in order to permit
it to own or lease its properties or assets and to carry on its business as
presently conducted and that are material to the business of Wells Fargo or
such Subsidiary; all such permits, licenses, certificates of authority, orders
and approvals are in full force and effect, and to the best knowledge of Wells
Fargo, no suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current. The conduct by Wells Fargo
and each Wells Fargo Subsidiary of its business and the condition and use of
its properties does not violate or infringe, in any respect material to any
such business, any applicable domestic (federal, state or local) or foreign
law, statute, ordinance, license or regulation. Neither Wells Fargo nor any
Wells Fargo Subsidiary is in default under any order, license, regulation or
demand of any federal, state, municipal or other governmental agency or with
respect to any order, writ, injunction or decree of any court. Except for
statutory or regulatory restrictions of general application, no federal, state,
municipal or other governmental authority has placed any restrictions on the
business or properties of Wells Fargo or any Wells Fargo Subsidiary which
reasonably could be expected to have a material adverse effect on the business
or properties of Wells Fargo and its subsidiaries taken as a whole.
(n) Labor. No work stoppage involving Wells Fargo or any Wells Fargo
Subsidiary is pending or, to the best knowledge of Wells Fargo, threatened.
Neither Wells Fargo nor any Wells Fargo Subsidiary is involved in, or
threatened with or affected by, any labor dispute, arbitration, lawsuit or
administrative proceeding which could materially and adversely affect the
business of Wells Fargo or such Wells Fargo Subsidiary. Employees of Wells
Fargo and the Wells Fargo Subsidiaries are not represented by any labor union
nor are any collective bargaining agreements otherwise in effect with respect
to such employees.
(o) Wells Fargo Benefit Plans.
(i) For purposes of this Section 3(o), the term "Wells Fargo Plan" or
"Wells Fargo Plans" means all employee benefit plans as defined in Section
3(3) of ERISA, to which Wells Fargo contributes, sponsors, or otherwise has
any obligations.
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(ii) No Wells Fargo Plan is a "multiemployer plan" within the meaning of
Section 3(37) of ERISA.
(iii) Each Wells Fargo Plan is and has been in all material respects
operated and administered in accordance with its provisions and applicable
law, including, if applicable, ERISA and the Code.
(iv) Each Wells Fargo Plan intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service stating that the Wells Fargo Plan (including all
amendments) is tax qualified under Section 401(a) of the Code and Wells
Fargo knows of no reason that any such Wells Fargo Plan is not qualified
within the meaning of Section 401(a) of the Code and knows of no reason
that each related Wells Fargo Plan trust is not exempt from taxation under
Section 501(a) of the Code.
(v) All contributions, premium payments, and other payments required to
be made in connection with the Wells Fargo Plans as of the date of this
Agreement have been made.
(vi) With respect to each Wells Fargo Plan that is subject to Section
301 of ERISA or Section 412 of the Code, neither Wells Fargo nor any Wells
Fargo Subsidiary is liable for any accumulated funding deficiency as that
term is defined in Section 412 of the Code.
(vii) The present value of all benefits vested and all benefits accrued
under each Wells Fargo Plan that is subject to Title IV of ERISA does not,
in each case, exceed the value of the assets of the Wells Fargo Plans
allocable to such vested or accrued benefits as of the end of the most
recent Plan Year.
(p) Registration Statement, etc. None of the information regarding Wells
Fargo and its subsidiaries supplied or to be supplied by Wells Fargo for
inclusion in (i) the Registration Statement, (ii) the Proxy Statement, or
(iii) any other documents to be filed with the SEC or any regulatory authority
in connection with the transactions contemplated hereby or by the Merger
Agreement will, at the respective times such documents are filed with the SEC
or any regulatory authority and, in the case of the Registration Statement,
when it becomes effective and, with respect to the Proxy Statement, when
mailed, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of shareholders referred to in
paragraph 4(c), be false or misleading with respect to any material fact, or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for such
meeting. All documents which Wells Fargo and the Wells Fargo Subsidiaries are
responsible for filing with the SEC and any other regulatory authority in
connection with the Merger will comply as to form in all material respects
with the provisions of applicable law.
(q) Brokers and Finders. Neither Wells Fargo nor any Wells Fargo Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has
acted directly or indirectly for Wells Fargo or any Wells Fargo Subsidiary in
connection with this Agreement and the Merger Agreement or the transactions
contemplated hereby and thereby.
(r) No Defaults. Neither Wells Fargo nor any Wells Fargo Subsidiary is in
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default under any material
agreement, indenture, loan agreement or other instrument to which it is a
party or by which it or any of its assets is bound or to which any of its
assets is subject, the result of which has had or could reasonably be expected
to have a material adverse effect upon Wells Fargo and its subsidiaries taken
as a whole. To the best of Wells Fargo's knowledge, all parties with whom
Wells Fargo or any Wells Fargo Subsidiary has material leases, agreements or
contracts or who owe to Wells Fargo or any Wells Fargo Subsidiary material
obligations other than with respect to those arising in the ordinary course of
the banking business of the Wells Fargo Subsidiaries are in compliance
therewith in all material respects.
(s) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition, on Wells Fargo or any Wells Fargo Subsidiary of any
liability relating to the release of hazardous substances as defined under any
local, state or
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federal environmental statute, regulation or ordinance including, without
limitation, CERCLA, pending or to the best of Wells Fargo's knowledge,
threatened against Wells Fargo or any Wells Fargo Subsidiary, the result of
which has had or could reasonably be expected to have a material adverse effect
upon Wells Fargo and its subsidiaries taken as a whole; to the best of Wells
Fargo's knowledge there is no reasonable basis for any such proceeding, claim
or action; and to the best of Wells Fargo's knowledge neither Wells Fargo nor
any Wells Fargo Subsidiary is subject to any agreement, order, judgment, or
decree by or with any court, governmental authority or third party imposing any
such environmental liability.
(t) Merger Co. As of the Closing Date, Merger Co. will be a corporation duly
organized, validly existing, duly qualified to do business and in good standing
under the laws of its jurisdiction of incorporation, and will have corporate
power and authority to own or lease its properties and assets and to carry on
its business.
4. Covenants of Company. Company covenants and agrees with Wells Fargo as
follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until the Effective Time of the Merger, Company, and each Company
Subsidiary will: maintain its corporate existence in good standing; maintain
the general character of its business and conduct its business in its ordinary
and usual manner; extend credit in accordance with existing lending policies
and provide Wells Fargo access to its loan files (including credits extended
after the date hereof), except that it shall not, without the prior written
consent of Wells Fargo (which shall be deemed to be waived if Wells Fargo has
made no response by the end of the second complete business day following the
receipt (by confirmed facsimile) of the request by a Wells Fargo representative
designated in writing), (A) make any new loan or modify, restructure or renew
any existing loan (except pursuant to commitments made prior to the date of
this Agreement) to any borrower if the amount of the resulting loan, when
aggregated with all other loans or extensions of credit to such person, would
be in excess of $750,000, or (B) make any extensions of credit aggregating in
excess of $500,000 to a person or entity that is not a borrower as of the date
hereof; maintain proper business and accounting records in accordance with
generally accepted principles; maintain its properties in good repair and
condition, ordinary wear and tear excepted; maintain in all material respects
presently existing insurance coverage; use its best efforts to preserve its
business organization intact, to keep the services of its present principal
employees and to preserve its good will and the good will of its suppliers,
customers and others having business relationships with it; use its best
efforts to obtain any approvals or consents required to maintain existing
leases and other contracts in effect following the Merger; comply in all
material respects with all laws, regulations, ordinances, codes, orders,
licenses and permits applicable to the properties and operations of Company and
each Company Subsidiary the non-compliance with which reasonably could be
expected to have a material adverse effect on Company and the Company
Subsidiaries taken as a whole; and permit Wells Fargo and its representatives
(including KPMG) to examine its and its subsidiaries books, records and
properties and to interview officers, employees and agents at all reasonable
times upon reasonable prior notice when it is open for business. No such
examination by Wells Fargo or its representatives either before or after the
date of this Agreement shall in any way affect, diminish or terminate any of
the representations, warranties or covenants of Company herein expressed.
(b) Except as otherwise contemplated or required by this Agreement, from the
date hereof until the Effective Time of the Merger, Company and each Company
Subsidiary will not (without the prior written consent of Wells Fargo): amend
or otherwise change its articles of incorporation or association or by-laws;
issue or sell or authorize for issuance or sale, or grant any options or make
other agreements with respect to the issuance or sale or conversion of, any
shares of its capital stock, phantom shares or other share-equivalents, or any
other of its securities, except that Company may issue shares of Company Common
Stock upon the exercise of outstanding stock options described in Schedule
4(b); authorize or incur any long-term debt (other than deposit liabilities);
mortgage, pledge or subject to lien or other encumbrance any of its properties,
except in the ordinary course of business; enter into any material agreement,
contract or commitment in excess of $25,000 except banking transactions in the
ordinary course of business and in accordance with policies and procedures in
effect on the date hereof; make any investments except investments made by bank
subsidiaries in the ordinary course of business for terms of up to one year and
in amounts of $100,000 or less and except for "fed funds" investments made in
the ordinary course of business (which consent requirement shall be deemed
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to be waived as to any investment to which Wells Fargo has made no response by
the end of the second complete business day following the receipt of the
request by a Wells Fargo representative designated in writing); amend or
terminate any Plan except as required by law or the terms of this Agreement;
make any contributions to any Plan except as required by the terms of such Plan
in effect as of the date hereof; declare, set aside, make or pay any cash or
stock dividend or other distribution with respect to its capital stock except
any dividend declared by the Board of Directors of a Company Subsidiary in
accordance with applicable law and regulation; redeem, purchase or otherwise
acquire, directly or indirectly, any of the capital stock of Company; increase
the compensation of any officers, directors or executive employees, except
pursuant to existing compensation plans, agreements and practices; sell or
otherwise dispose of any shares of the capital stock of any Company Subsidiary;
or sell or otherwise dispose of any of its assets or properties other than in
the ordinary course of business.
(c) The Board of Directors of Company will duly call, and will cause to be
held on a date agreeable to Wells Fargo, but not later than twenty-five (25)
business days following the effective date of the Registration Statement
referred to in paragraph 5(c) hereof, a meeting of its shareholders and will
direct that this Agreement and the Merger Agreement be submitted to a vote at
such meeting. The Board of Directors of Company will (i) cause proper notice of
such meeting to be given to its shareholders in compliance with the California
General Corporation Law and other applicable law and regulation, and (ii)
except to the extent that the Board of Directors of Company shall conclude in
good faith, after taking into account the advice of its outside counsel, that
to do so would violate its fiduciary obligations under applicable law, (A)
recommend by the affirmative vote of the Board of Directors a vote in favor of
approval of this Agreement and the Merger Agreement, and (B) use its best
efforts to solicit from its shareholders proxies in favor thereof.
(d) Company will furnish or cause to be furnished to Wells Fargo all the
information concerning Company and its subsidiaries required for inclusion in
the Registration Statement referred to in paragraph 5(c) hereof, or any
statement or application made by Wells Fargo to any governmental body in
connection with the transactions contemplated by this Agreement. Any financial
statement for any fiscal year provided under this paragraph must include the
audit opinion and the consent of PRICEWATERHOUSECOOPERS, LLP to use such
opinion in such Registration Statement.
(e) Company will take all necessary corporate and other action and use its
best efforts to obtain all approvals of regulatory authorities, consents and
other approvals required of Company to carry out the transactions contemplated
by this Agreement and will cooperate with Wells Fargo to obtain all such
approvals and consents required of Wells Fargo.
(f) Company will use its best efforts to deliver to the Closing all
opinions, certificates and other documents required to be delivered by it at
the Closing.
(g) Company will hold in confidence all documents and information concerning
Wells Fargo and its subsidiaries furnished to Company and its representatives
in connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to Company's outside professional advisers in connection with
this Agreement, with the same undertaking from such professional advisers. If
the transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used in
competition with Wells Fargo (except to the extent that such information can be
shown to be previously known to Company, in the public domain, or later
acquired by Company from other legitimate sources) and, upon request, all such
documents, any copies thereof and extracts therefrom shall immediately
thereafter be returned to Wells Fargo.
(h) Neither Company, nor any Company Subsidiary, nor any director, officer,
representative or agent thereof, will, directly or indirectly, solicit,
authorize the solicitation of or except to the extent that the Board of
Directors of Company shall conclude in good faith, after taking into account
the written advice of its outside counsel, that to fail to do so could
reasonably be determined to violate its fiduciary obligations under applicable
law, enter into any discussions with any corporation, partnership, person or
other entity or group (other than
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Wells Fargo) concerning any offer or possible offer (i) to purchase any shares
of common stock, any option or warrant to purchase any shares of common stock,
any securities convertible into any shares of such common stock, or any other
equity security of Company or any Company Subsidiary, (ii) to make a tender or
exchange offer for any shares of such common stock or other equity security,
(iii) to purchase, lease or otherwise acquire the assets of Company or any
Company Subsidiary except in the ordinary course of business, or (iv) to merge,
consolidate or otherwise combine with Company or any Company Subsidiary. If any
corporation, partnership, person or other entity or group makes an offer or
inquiry to Company or any Company Subsidiary concerning any of the foregoing,
Company or such Company Subsidiary will promptly disclose such offer or
inquiry, including the terms thereof, to Wells Fargo.
(i) Company shall consult with Wells Fargo as to the form and substance of
any proposed press release or other proposed public disclosure of matters
related to this Agreement or any of the transactions contemplated hereby.
(j) Company and each Company Subsidiary will take all action necessary or
required (i) to terminate or amend, if requested by Wells Fargo, all qualified
pension and welfare benefit plans and all non-qualified benefit plans and
compensation arrangements as of the Effective Date of the Merger to facilitate
the merger of such plans with Wells Fargo plans without gaps in coverage for
participants in the plans and without duplication of costs caused by the
continuation of such plans after coverage is available under Wells Fargo plans,
and (ii) to submit application to the Internal Revenue Service for a favorable
determination letter for each of the Plans which is subject to the
qualification requirements of Section 401(a) of the Code prior to the Effective
Date of the Merger.
(k) [Intentionally omitted.]
(l) Company shall use its best efforts to obtain and deliver at least
thirty-two (32) days prior to the Effective Date of the Merger signed
representations substantially in the form attached hereto as Exhibit B to Wells
Fargo by each executive officer, director or shareholder of Company who may
reasonably be deemed an "affiliate" of Company within the meaning of such term
as used in Rule 145 under the Securities Act.
(m) Company shall establish such additional accruals and reserves as may be
necessary to conform Company's accounting and credit loss reserve practices and
methods to those of Wells Fargo and Wells Fargo's plans with respect to the
conduct of Company's business following the Merger and to provide for the costs
and expenses relating to the consummation by Company of the Merger and the
other transactions contemplated by this Agreement as set forth in writing by
Wells Fargo; provided, however, that (a) Company shall not be required to take
such actions more than three (3) business days prior to the Closing Date or
prior to the time Wells Fargo agrees that all of the conditions to their
obligation to close as set forth in paragraph 7 have been satisfied or waived
(other than the deliveries to be made on the Closing Date) and no such
adjustment shall (i) require any prior filing with any governmental agency or
regulatory authority, or (ii) violate any law, rule or regulation applicable to
Company; provided that in any event no accrual or reserve made by Company
pursuant to this paragraph 4(m), shall constitute or be deemed to be a breach,
violation of or failure to satisfy any representation, warranty, covenant,
condition or other provision of this Agreement or otherwise be considered in
determining whether any such breach, violation or failure to satisfy shall have
occurred including without limitation any determination that the Company
Financial Statements have been prepared other than in accordance with generally
accepted accounting principles.
(n) Company shall obtain, at its sole expense, Phase I environmental
assessments for each bank facility and each non-residential OREO property. Oral
reports of such environmental assessments shall be delivered to Wells Fargo no
later than four (4) weeks and written reports shall be delivered to Wells Fargo
no later than eight (8) weeks from the date of this Agreement. Company shall
obtain, at its sole expense, Phase II environmental assessments for properties
identified by Wells Fargo on the basis of the results of such Phase I
environmental assessments. Company shall obtain a survey and assessment of all
potential asbestos containing material in owned or leased properties (other
than OREO property) and a written report of the results shall be delivered to
Wells Fargo within four (4) weeks of the date of this Agreement.
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(o) Company shall obtain, at its sole expense, commitments for title
insurance and boundary surveys for each bank facility which shall be delivered
to Wells Fargo no later than four (4) weeks from the date of this Agreement.
(p) Company will comply with the FFIEC Requirements and will not rely on the
consummation of the transactions contemplated by this Agreement to satisfy its
FFIEC requirements. Company will provide Wells Fargo with complete access to
its Year 2000 project and remediation plan documentation and permit Wells Fargo
to review and investigate Company's continuing Year 2000 compliance efforts and
the results thereof.
(q) Company shall take such action as is necessary to terminate the Stock
Option Plans as of the Effective Date of the Merger. Company shall collect in
cash (and timely pay) all applicable withholding and payroll taxes with respect
to such options, awards and stock appreciation rights, and shall comply with
all payroll reporting requirements with respect thereto. All Options which
remain unexercised and which are not Redeemed Options pursuant to the
provisions of paragraph 4(q) hereof shall expire as of the Effective Time of
the Merger.
(r) [This paragraph 4(r) has been amended and restated in its entirety
pursuant to the Amendment to Agreement, dated as of November 29, 1999, by and
between North County Bancorp and Wells Fargo & Company, a copy of which appears
at the beginning of this Appendix A.] Immediately prior to the Effective Time,
Company shall redeem and shall cause its stock option committees under the
Stock Option Plans to take all action necessary to redeem any Options which the
option holders have elected in writing, prior to the meeting of shareholders
required by paragraph 4(c) hereof, to have redeemed by the Company ("Redeemed
Options") in an amount for each Redeemed Option equal to the Fair Market Value
Per Share of such Redeemed Option minus the exercise price thereof as set forth
in an Option holder's option agreement or option agreements. Company shall
withhold (and timely pay) all applicable withholding, and payroll taxes from
the Cash Surrender Amount, and shall comply with all payroll reporting
requirements with respect to such payments. In addition, Company shall, and
shall cause its stock option committees to, determine the "Fair Market Value"
(as defined in the Stock Option Plans) of a Redeemed Option to be an amount
equal to the Fair Market Value Per Share as defined in this Agreement.
5. Covenants of Wells Fargo. Wells Fargo covenants and agrees with Company
as follows:
(a) From the date hereof until the Effective Time of the Merger, Wells Fargo
will maintain its corporate existence in good standing; conduct, and cause the
Wells Fargo Subsidiaries to conduct, their respective businesses in compliance
with all material obligations and duties imposed on them by all laws,
governmental regulations, rules and ordinances, and judicial orders, judgments
and decrees applicable to Wells Fargo or the Wells Fargo Subsidiaries, their
businesses or their properties; maintain all books and records of it and the
Wells Fargo Subsidiaries, including all financial statements, in accordance
with the accounting principles and practices consistent with those used for the
Wells Fargo Financial Statements, except for changes in such principles and
practices required under generally accepted accounting principles.
(b) Wells Fargo will furnish to Company all the information concerning Wells
Fargo required for inclusion in a proxy statement or statements to be sent to
the shareholders of Company, or in any statement or application made by Company
to any governmental body in connection with the transactions contemplated by
this Agreement.
(c) As promptly as practicable after the execution of this Agreement, Wells
Fargo will file with the SEC a registration statement on Form S-4 (the
"Registration Statement") under the Securities Act and any other applicable
documents, relating to the shares of Wells Fargo Common Stock to be delivered
to the shareholders of Company pursuant to the Merger Agreement, and will use
its best efforts to cause the Registration Statement to become effective. At
the time the Registration Statement becomes effective, the Registration
Statement will comply in all material respects with the provisions of the
Securities Act and the published rules and regulations thereunder, and will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not false or misleading, and at the time of
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mailing thereof to the Company shareholders, at the time of the Company
shareholders' meeting referred to in paragraph 4(c) hereof and at the Effective
Time of the Merger the prospectus included as part of the Registration
Statement, as amended or supplemented by any amendment or supplement filed by
Wells Fargo (hereinafter the "Prospectus"), will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not false or misleading; provided, however, that
none of the provisions of this subparagraph shall apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished by Company or any Company
Subsidiary in writing for use in the Registration Statement or the Prospectus.
(d) Wells Fargo will file all documents required to be filed to list the
Wells Fargo Common Stock to be issued pursuant to the Merger Agreement on the
New York Stock Exchange and the Chicago Stock Exchange and use its best efforts
to effect said listings.
(e) The shares of Wells Fargo Common Stock to be issued by Wells Fargo to
the shareholders of Company pursuant to this Agreement and the Merger Agreement
will, upon such issuance and delivery to said shareholders pursuant to the
Merger Agreement, be duly authorized, validly issued, fully paid and
nonassessable. The shares of Wells Fargo Common Stock to be delivered to the
shareholders of Company pursuant to the Merger Agreement are and will be free
of any preemptive rights of the stockholders of Wells Fargo.
(f) Wells Fargo will file all documents required to obtain, prior to the
Effective Time of the Merger, all necessary Blue Sky permits and approvals, if
any, required to carry out the transactions contemplated by this Agreement,
will pay all expenses incident thereto and will use its best efforts to obtain
such permits and approvals.
(g) Wells Fargo will take all necessary corporate and other action and file
all documents required to obtain and will use its best efforts to obtain all
approvals of regulatory authorities, consents and approvals required of it to
carry out the transactions contemplated by this Agreement and will cooperate
with Company to obtain all such approvals and consents required by Company.
(h) Wells Fargo will hold in confidence all documents and information
concerning Company and Company's Subsidiaries furnished to it and its
representatives in connection with the transactions contemplated by this
Agreement and will not release or disclose such information to any other
person, except as required by law and except to its outside professional
advisers in connection with this Agreement, with the same undertaking from such
professional advisers. If the transactions contemplated by this Agreement shall
not be consummated, such confidence shall be maintained and such information
shall not be used in competition with Company (except to the extent that such
information can be shown to be previously known to Wells Fargo, in the public
domain, or later acquired by Wells Fargo from other legitimate sources) and,
upon request, all such documents, copies thereof or extracts therefrom shall
immediately thereafter be returned to Company.
(i) Wells Fargo will file any documents or agreements required to be filed
in connection with the Merger under the California General Corporation Law.
(j) Wells Fargo will use its best efforts to deliver to the Closing all
opinions, certificates and other documents required to be delivered by it at
the Closing.
(k) Wells Fargo shall consult with Company as to the form and substance of
any proposed press release or other proposed public disclosure of matters
related to this Agreement or any of the transactions contemplated hereby.
(l) Wells Fargo shall give Company notice of receipt of the regulatory
approvals referred to in paragraph 7(e).
(m) [Intentionally omitted.]
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(n) With respect to the indemnification of directors and officers, Wells
Fargo agrees as follows:
(i) Wells Fargo shall ensure that all rights to indemnification and all
limitations of liability existing in favor of any person who is now, or has
been at any time prior to the date hereof, or who becomes prior to the
Effective Time of the Merger, a director or officer of Company or any
Company Subsidiary (an "Indemnified Party" and, collectively, the
"Indemnified Parties"), in Company's Articles of Incorporation or Bylaws or
similar governing documents of any Company Subsidiary, as applicable in the
particular case and as in effect on the date hereof, shall, with respect to
claims arising from (A) facts or events that occurred before the Effective
Time of the Merger, or (B) this Agreement or any of the transactions
contemplated by this Agreement, whether in any case asserted or arising
before or after the Effective Time of the Merger, survive the Merger and
shall continue in full force and effect. Nothing contained in this
paragraph 5(n)(i) shall be deemed to preclude the liquidation,
consolidation, or merger of Company or any Company Subsidiary, in which
case all of such rights to indemnification and limitations on liability
shall be deemed to survive and continue as contractual rights
notwithstanding any such liquidation or consolidation or merger; provided,
however, that in the event of liquidation or sale of substantially all of
the assets of Company, Wells Fargo shall guarantee, to the extent of the
net asset value of Company or any Company Subsidiary as of the Effective
Date of the Merger, the indemnification obligations of Company or any
Company Subsidiary to the extent of indemnification obligations of Company
and the Company Subsidiaries described above. Notwithstanding anything to
the contrary contained in this paragraph 5(n)(i), nothing contained herein
shall require Wells Fargo to indemnify any person who was a director or
officer of Company or any Company Subsidiary to a greater extent than
Company or any Company Subsidiary is, as of the date of this Agreement,
required to indemnify any such person;
(ii) any Indemnified Party wishing to claim indemnification under
paragraph 5(n)(i), upon learning of any such claim, action, suit,
proceeding, or investigation, shall promptly notify Wells Fargo thereof,
but the failure to so notify shall not relieve Wells Fargo of any liability
it may have to such Indemnified Party. In the event of any such claim,
action, suit, proceeding, or investigation (whether arising before or after
the Effective Time of the Merger) (A) Wells Fargo shall have the right to
assume the defense thereof and Wells Fargo shall not be liable to any
Indemnified Party for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Party in connection with
the defense thereof, except that if Wells Fargo elects not to assume such
defense or counsel for the Indemnified Party advises that there are issues
which raise conflicts of interest between Wells Fargo and the Indemnified
Party, the Indemnified Party may retain counsel satisfactory to them, and
Wells Fargo shall pay the reasonable fees and expenses of such counsel for
the Indemnified Party promptly as statements therefor are received,
provided, however, that Wells Fargo shall be obligated pursuant to this
subparagraph (ii) to pay for only one firm of counsel for all Indemnified
Parties in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest,
and (B) such Indemnified Party shall cooperate in the defense of any such
matter;
(iii) for a period of four years after the Effective Time of the Merger,
Wells Fargo shall use its best efforts to cause to be maintained in effect
the current policies of directors' and officers' liability insurance
maintained by Company (provided that Wells Fargo may substitute therefor
policies of at least the same coverage and amount containing terms and
conditions which are substantially no less advantageous) with respect to
claims arising from facts or events which occurred before the Effective
Time of the Merger; provided, however, that Wells Fargo shall not be
required to maintain coverage for employees (other than directors and
officers) which may currently be included in the directors' and officers'
liability policies maintained by Company; and provided, further, however,
that in no event shall Wells Fargo be obligated to expend, in order to
maintain or provide insurance coverage pursuant to this paragraph
5(n)(iii), any amount per annum in excess of 125% of the amount of the
annual premiums paid as of the date hereof by Company for such insurance
(the "Maximum Amount") and provided further that, prior to the Effective
Time of the Merger, Company shall notify the appropriate directors' and
officers' liability insurers of the Merger and of all pending or threatened
claims, actions, suits, proceedings or investigations asserted or claimed
against any Indemnified Party, or circumstances likely to give rise thereto
to the extent known to
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the Company, in accordance with terms and conditions of the applicable
policies. If the amount of the annual premiums necessary to maintain or
procure such insurance coverage exceeds the Maximum Amount, Wells Fargo
shall use reasonable efforts to maintain the most advantageous policies of
directors' and officers' insurance obtainable for an annual premium equal
to the Maximum Amount;
(iv) if Wells Fargo or any of its successors or assigns (A) shall
consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger or (B) shall transfer all or substantially all of
its properties and assets to any individual, corporation or other entity,
then and in each such case, proper provision shall be made so that the
successors and assigns of Wells Fargo shall assume the obligations set
forth in this paragraph 5(n); and
(v) the provisions of this paragraph 5(n) are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
(o) For a period not exceeding fifteen (15) days prior to the meeting of
shareholders required by paragraph 4(c) of this Agreement, subject to
applicable securities laws and regulations and any obligations of
confidentiality to which Wells Fargo may be subject, Wells Fargo will permit
Company and its representatives upon prior notice to Wells Fargo to conduct
reasonable examination of its books, records and properties and interview
officers, employees and agents of Wells Fargo at all reasonable times when it
is open for business; provided, however, that such examination is conducted in
a manner designed to be least disruptive to Wells Fargo's operations. No such
examination by Company or its representatives shall in any way affect, diminish
or terminate any of the representations, warranties or covenants of Wells Fargo
herein expressed.
6. Conditions Precedent to Obligation of Company. The obligation of Company
to effect the Merger shall be subject to the satisfaction at or before the Time
of Filing of the following further conditions, which may be waived in writing
by Company:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or
transactions after the date of this Agreement made in the ordinary course of
business and not expressly prohibited by this Agreement, the representations
and warranties contained in paragraph 3 hereof shall be true and correct in all
respects material to Wells Fargo and its subsidiaries taken as a whole as if
made at the Time of Filing.
(b) Wells Fargo shall have, or shall have caused to be, performed and
observed in all material respects all covenants, agreements and conditions
hereof to be performed or observed by it and Merger Co. at or before the Time
of Filing.
(c) Company shall have received a favorable certificate, dated as of the
Effective Date of the Merger, signed by the Chairman, the President or any
Executive Vice President or Senior Vice President and by the Secretary or
Assistant Secretary of Wells Fargo, as to the matters set forth in
subparagraphs (a) and (b) of this paragraph 6.
(d) This Agreement and the Merger Agreement shall have been approved by the
affirmative vote of the holders of the percentage of the outstanding shares of
Company required for approval of a plan of merger in accordance with the
provisions of Company's Articles of Incorporation and the California General
Corporation Law.
(e) Wells Fargo shall have received approval by the Federal Reserve Board
and by such other governmental agencies as may be required by law of the
transactions contemplated by this Agreement and the Merger Agreement and all
waiting and appeal periods prescribed by applicable law or regulation shall
have expired.
(f) No court or governmental authority of competent jurisdiction shall have
issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
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(g) The shares of Wells Fargo Common Stock to be delivered to the
stockholders of Company pursuant to this Agreement and the Merger Agreement
shall have been authorized for listing on the New York Stock Exchange and the
Chicago Stock Exchange.
(h) Company shall have received an opinion, dated the Closing Date, of
counsel to Company or its independent accountants, substantially to the effect
that, for federal income tax purposes: (i) the Merger will constitute a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code; (ii) no gain or loss will be recognized by the holders of Company
Common Stock upon receipt of Wells Fargo Common Stock except for cash received
in lieu of fractional shares; (iii) the basis of the Wells Fargo Common Stock
received by the shareholders of Company will be the same as the basis of
Company Common Stock exchanged therefor; and (iv) the holding period of the
shares of Wells Fargo Common Stock received by the shareholders of Company will
include the holding period of the Company Common Stock, provided such shares of
Company Common Stock were held as a capital asset as of the Effective Time of
the Merger.
(i) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and
be continuing, or have been threatened and be unresolved. Wells Fargo shall
have received all state securities law or blue sky authorizations necessary to
carry out the transactions contemplated by this Agreement.
(j) Since June 30, 1999, no change shall have occurred and no circumstances
shall exist which has had or might reasonably be expected to have a material
adverse effect on the financial conditions, results of operations, business or
prospects of Wells Fargo and the Wells Fargo Subsidiaries taken as a whole
(other than changes in banking laws or regulations, or interpretations thereof,
that affect the banking industry generally or changes in the general level of
interest rates).
(k) Prior to the mailing of the Proxy Statement referred to in paragraph
4(c), Company and the Board of Directors of Company shall have received an
opinion of Hovde Financial, Inc. addressed to Company and the Board of
Directors of Company, and for their exclusive benefit, for inclusion in said
Proxy Statement and dated effective as of the date of mailing of such Proxy
Statement, based on such matters as Hovde Financial, Inc. deems appropriate or
necessary, to the effect that the consideration to be received by stockholders
of Company pursuant to the Merger is fair from a financial point of view.
Company shall promptly provide a copy of such opinion to Wells Fargo upon
receipt.
(l) The Business Completion Payment Agreements required by paragraph 7(q)
shall have been executed and delivered in substantially the form attached
hereto as Exhibit C and shall be in full force and effect as of the Effective
Time of the Merger.
7. Conditions Precedent to Obligation of Wells Fargo. The obligation of
Wells Fargo to effect the Merger shall be subject to the satisfaction at or
before the Time of Filing of the following conditions, which may be waived in
writing by Wells Fargo:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or
transactions or events occurring after the date of this Agreement made in the
ordinary course of business and not expressly prohibited by this Agreement, the
representations and warranties contained in paragraph 2 hereof shall be true
and correct in all respects material to Company and the Company Subsidiaries
taken as a whole as if made at the Time of Filing.
(b) Company shall have, or shall have caused to be, performed and observed
in all material respects all covenants, agreements and conditions hereof to be
performed or observed by it at or before the Time of Filing.
(c) This Agreement and the Merger Agreement shall have been approved by the
affirmative vote of the holders of the percentage of the outstanding shares of
Company required for approval of a plan of merger in accordance with the
provisions of Company's Articles of Incorporation and the California General
Corporation Law.
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(d) Wells Fargo shall have received a favorable certificate dated as of the
Effective Date of the Merger signed by the Chairman or President and by the
Secretary or Assistant Secretary of Company, as to the matters set forth in
subparagraphs (a) through (c) of this paragraph 7.
(e) Wells Fargo shall have received approval by all governmental agencies as
may be required by law of the transactions contemplated by this Agreement and
the Merger Agreement and all waiting and appeal periods prescribed by
applicable law or regulation shall have expired. No approvals, licenses or
consents granted by any regulatory authority shall contain any condition or
requirement relating to Company or any Company Subsidiary that, in the good
faith judgment of Wells Fargo, is unreasonably burdensome to Wells Fargo.
(f) Company and each Company Subsidiary shall have obtained any and all
material consents or waivers from other parties to loan agreements, leases or
other contracts material to Company's or such subsidiary's business required
for the consummation of the Merger, and Company and each Company Subsidiary
shall have obtained any and all material permits, authorizations, consents,
waivers and approvals required for the lawful consummation by it of the Merger.
(g) No court or governmental authority of competent jurisdiction shall have
issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(h) [Intentionally omitted.]
(i) At any time since the date hereof the total number of shares of Company
Common Stock outstanding and subject to issuance upon exercise (assuming for
this purpose that phantom shares and other share-equivalents constitute Company
Common Stock) of all warrants, options, conversion rights, phantom shares or
other share-equivalents, other than any option held by Wells Fargo, shall not
have exceeded 5,498,141.
(j) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and
be continuing, or have been threatened or be unresolved. Wells Fargo shall have
received all state securities law or blue sky authorizations necessary to carry
out the transactions contemplated by this Agreement.
(k) Wells Fargo shall have received from the Chief Executive Officer and
Chief Financial Officer of Company a letter, dated as of the effective date of
the Registration Statement and updated through the date of Closing, in form and
substance satisfactory to Wells Fargo, to the effect that:
(i) the interim quarterly financial statements of Company included or
incorporated by reference in the Registration Statement are prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the audited financial statements of Company;
(ii) the amounts reported in the interim quarterly financial statements
of Company agree with the general ledger of Company;
(iii) the annual and quarterly financial statements of Company and the
Company Subsidiaries included in, or incorporated by reference in, the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the published
rules and regulations thereunder;
(iv) from the date of the most recent unaudited consolidated financial
statements of Company and the Company Subsidiaries as may be included in
the Registration Statement to a date five (5) days prior to the effective
date of the Registration Statement or five (5) days prior to the Closing,
there are no increases in long-term debt, changes in the capital stock or
decreases in stockholders' equity of Company and the Company Subsidiaries,
except in each case for changes, increases or decreases which the
Registration Statement discloses have occurred or may occur or which are
described in such letters. For the same period, there have been no
decreases in consolidated net interest income, consolidated net interest
income
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after provision for credit losses, consolidated income before income taxes,
consolidated net income and net income per share amounts of Company and the
Company Subsidiaries, or in income before equity in undistributed income of
subsidiaries, in each case as compared with the comparable period of the
preceding year, except in each case for changes, increases or decreases
which the Registration Statement discloses have occurred or may occur or
which are described in such letters;
(v) they have reviewed certain amounts, percentages, numbers of shares
and financial information which are derived from the general accounting
records of Company and the Company Subsidiaries, which appear in the
Registration Statement under the certain captions to be specified by Wells
Fargo, and have compared certain of such amounts, percentages, numbers and
financial information with the accounting records of Company and the
Company Subsidiaries and have found them to be in agreement with financial
records and analyses prepared by Company included in the annual and
quarterly financial statements, except as disclosed in such letters.
(l) Company and the Company Subsidiaries considered as a whole shall not
have sustained since December 31, 1998 any material loss or interference with
their business from any civil disturbance or any fire, explosion, flood or
other calamity, whether or not covered by insurance.
(m) There shall be no reasonable basis for any proceeding, claim or action
of any nature seeking to impose, or that could result in the imposition on
Company or any Company Subsidiary of, any liability relating to the release of
hazardous substances as defined under any local, state or federal environmental
statute, regulation or ordinance including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 as
amended, which has had or could reasonably be expected to have a material
adverse effect upon Company and its subsidiaries taken as a whole.
(n) Since June 30, 1999, no change shall have occurred and no circumstances
shall exist which has had or might reasonably be expected to have a material
adverse effect on the financial condition, results of operations, business or
prospects of Company and the Company Subsidiaries taken as a whole (other than
changes in banking laws or regulations, or interpretations thereof, or the
policies of any governmental authority that affect the banking industry
generally, changes in the general level of interest rates, changes in generally
accepted accounting principles or changes due to actions taken by the Company
in compliance with paragraph 4(m) hereof).
(o) Company shall be in full compliance with current FFIEC Requirements.
There shall be no feature of Company's data processing, operating or platform
systems that would prevent those systems from continuing to run independently
after December 31, 1999 until such time as a subsequent conversion to Wells
Fargo systems can be completed. Company's computer hardware and software used
in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission, or other utilization of data or in the operation of mechanical
or electrical systems of any kind will function at least as effectively in all
material respects after December 31, 1999 as in the case of dates or time
periods occurring prior to January 1, 2000.
(p) Company shall have taken the actions required by paragraphs 4(q) and
4(r) hereof.
(q) Wells Fargo and Company propose to execute agreements in substantially
the form attached hereto as Exhibit C (the "Business Completion Payment
Agreements") with the employees of North County Bank (the "Bank") identified
and for the amounts specified on a list, which list shall have been agreed upon
between Wells Fargo and the Company after the date hereof. Company shall have
used its best efforts to ensure that Business Completion Payment Agreements
with at least 75% of the employees on said list shall have been executed and
delivered prior to the Effective Time of the Merger.
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<PAGE>
8. Employee Benefit Plans. Each person who is an employee of Company or any
Company Subsidiary as of the Effective Date of the Merger ("Company Employees")
shall be eligible for participation in the employee welfare and retirement
plans of Wells Fargo, as in effect from time to time, as follows:
(a) Employee Welfare Benefit Plans. Each Company Employee shall be eligible
for participation in the employee welfare benefit plans of Wells Fargo listed
below subject to any eligibility requirements applicable to such plans (and not
subject to pre-existing condition exclusions, except with respect to the Wells
Fargo Long Term Disability Plan and the Wells Fargo Long Term Care Plan) and
shall enter each plan no later than the first day of the calendar quarter which
begins at least thirty-two (32) days after the Effective Date of the Merger
("Benefits Conversion Date") (provided that the transition from Company's Plans
to the Wells Fargo Plans will be facilitated without gaps in coverage to the
participants and without duplication of costs to Wells Fargo and provided,
further, that the Company Employees shall be eligible for participation in the
Wells Fargo Salary Continuation Pay Plan immediately following the Effective
Time of the Merger):
Medical Plan
Dental Plan
Vision Plan
Short Term Disability Plan
Long Term Disability Plan
Long Term Care Plan
Flexible Benefits Plan
Basic Group Life Insurance Plan
Group Universal Life Insurance Plan
Dependent Group Life Insurance Plan
Business Travel Accident Insurance Plan
Accidental Death and Dismemberment Plan
Salary Continuation Pay Plan
Paid Time Off Program
For purposes of the foregoing, "Medical Plan" means any medical plan
sponsored by Wells Fargo that is available to similarly situated Wells Fargo
employees. Company Employees shall receive credit for years of service to
Company, the Company Subsidiaries and any predecessors of Company or the
Company Subsidiaries (to the extent credited under the vacation and short-term
disability programs of Company) for the purpose of determining benefits under
the Wells Fargo Paid Time Off Program, Salary Continuation Pay Plan, and Short
Term Disability Plan. Notwithstanding the foregoing, no Company Employee who is
a participant in any Company severance or salary continuation plan or who has
an employment agreement with Company or any Company Subsidiary at the Effective
Time of the Merger shall be eligible to participate in the Wells Fargo Salary
Continuation Pay Plan.
(b) Employee Retirement Benefit Plans. Each Company Employee shall be
eligible to participate in the Wells Fargo 401(k) Plan (the "401(k) Plan"),
subject to any eligibility requirements applicable to the 401(k) Plan (with
full credit for years of past service to Company and the Company Subsidiaries
for the purpose of satisfying any eligibility and vesting periods applicable to
the 401(k) Plan), and shall enter the 401(k) Plan no later than the Benefits
Conversion Date.
Each Company Employee shall be eligible to participate in the Wells Fargo
Cash Balance Plan (the "Cash Balance Plan") subject to any eligibility
requirements applicable to the Cash Balance Plan. Wells Fargo shall not
recognize a Company Employee's past service with Company or any Company
Subsidiary for any purpose under the Cash Balance Plan. Therefore, each Company
Employee shall be eligible for participation, as a new employee, in the Wells
Fargo Cash Balance Plan pursuant to the terms thereof.
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<PAGE>
9. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Time of
Filing:
(i) by mutual written consent of the parties hereto;
(ii) by either of the parties hereto upon written notice to the other
party if the Merger shall not have been consummated by April 30, 2000
unless such failure of consummation shall be due to the failure of the
party seeking to terminate to perform or observe in all material respects
the covenants and agreements hereof to be performed or observed by such
party; or
(iii) by Company or Wells Fargo upon written notice to the other party
if any court or governmental authority of competent jurisdiction shall have
issued a final order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement; or
(iv) by either Wells Fargo or Company upon written notice to the other
party if the Board of Directors of Company shall in good faith determine
that a Takeover Proposal constitutes a Superior Proposal; provided,
however, that Company shall not be permitted to terminate this Agreement
pursuant to this paragraph (a)(iv) unless (i) it has not breached any
covenant contained in paragraph 4(h) and (ii) it delivers to Wells Fargo
simultaneously with such notice of termination the fee referred to in
paragraph 9(c) below. As used in this Agreement: (i) "Takeover Proposal"
means a bona fide proposal or offer by a person to make a tender or
exchange offer, or to engage in a merger, consolidation or other business
combination involving Company or to acquire in any manner a substantial
equity interest in, or all or substantially all of the assets of, Company,
and (ii) "Superior Proposal" means a bona fide proposal or offer made by a
person to acquire Company pursuant to a tender or exchange offer, a merger,
consolidation or other business combination or an acquisition of a
substantial equity interest in or of all or substantially all of the assets
of Company and the Company Subsidiaries on terms which the Board of
Directors of Company shall determine in good faith, after taking into
account the advice of counsel, to be more favorable to Company and its
shareholders than the transactions contemplated hereby.
(v) by Wells Fargo upon written notice to Company if (A) the Board of
Directors of Company fails to recommend, withdraws, or modifies in a manner
materially adverse to Wells Fargo, its approval or recommendation of this
Agreement, or the transactions contemplated hereby, (B) after an agreement
to engage in or the occurrence of an Acquisition Event (as defined below)
or after a third party shall have made a proposal to Company or Company 's
shareholders to engage in an Acquisition Event, the transactions
contemplated hereby are not approved at the meeting of Company shareholders
contemplated by paragraph 4(c), or (C) the meeting of Company shareholders
contemplated by paragraph 4(c) is not held prior to March 15, 2000, and
Company has failed to comply with its obligations under paragraph 4(c).
"Acquisition Event" means any of the following: (i) a merger, consolidation
or similar transaction involving Company, its bank subsidiary (the "Bank")
or any successor to Company or the Bank, (ii) a purchase, lease or other
acquisition in one or a series of related transactions of assets of Company
or any of the Company Subsidiaries representing 25% or more of the
consolidated assets of Company and the Company Subsidiaries or (iii) a
purchase or other acquisition (including by way of merger, consolidation,
share exchange or any similar transaction) in one or a series of related
transactions of beneficial ownership of securities representing 25% or more
of the voting power of Company or any Company Subsidiary in each case with
or by a person or entity other than Wells Fargo or an affiliate of Wells
Fargo.
(b) Termination of this Agreement under this paragraph 9 shall not release,
or be construed as so releasing, either party hereto from any liability or
damage to the other party hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or
willful and material failure in performance of any of its covenants,
agreements, duties or obligations arising hereunder, and the obligations under
paragraphs 4(g), 5(h) and 10 shall survive such termination.
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<PAGE>
(c) If this Agreement is terminated pursuant to paragraphs 9(a)(iv) or
9(a)(v), and if terminated pursuant to paragraph 9(a)(v) and prior thereto or
within 12 months after such termination:
(i) Company or the Bank or any successor to Company or the Bank shall
have entered into an agreement to engage in an Acquisition Event (as
defined above) or an Acquisition Event shall have occurred; or
(ii) the Board of Directors of Company shall have authorized or approved
an Acquisition Event or shall have publicly announced an intention to
authorize or approve or shall have recommended that the shareholders of
Company approve or accept any Acquisition Event,
then Company shall promptly, but in no event later than five business days
after the first of such events shall have occurred, pay Wells Fargo a fee equal
to $3,500,000.
10. Expenses. All expenses in connection with this Agreement and the
transactions contemplated hereby, including without limitation legal and
accounting fees, incurred by Company and Company Subsidiaries shall be borne by
Company, and all such expenses incurred by Wells Fargo shall be borne by Wells
Fargo; provided, however, that if this Agreement is terminated by Wells Fargo,
Wells Fargo agrees to reimburse Company for its actual expenses in connection
with obtaining the boundary surveys required by paragraph 4(o) hereof.
11. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by either party hereto without the prior
written consent of the other party hereto.
12. Third Party Beneficiaries. Except as otherwise contemplated by paragraph
5(n), each party hereto intends that this Agreement shall not benefit or create
any right or cause of action in or on behalf of any person other than the
parties hereto.
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<PAGE>
13. Notices. Any notice or other communication provided for herein or given
hereunder to a party hereto shall be in writing and shall be delivered in
person or shall be mailed by first class registered or certified mail, postage
prepaid, addressed as follows:
If to Wells Fargo:
Wells Fargo & Company
MAC #N9305-173
Sixth and Marquette
Minneapolis, Minnesota 55479
Attention: Secretary
If to Company:
North County Bancorp
444 South Escondido Boulevard
PO Box 1476
Escondido, CA 92025
Attn: James M. Gregg, CEO
With copies to:
Fried, Bird & Crumpacker
1900 Avenue of the Stars--25th Floor
Los Angeles, CA 90067
Attention: Keith T. Holmes, Esq.
Hovde Financial, Inc.
1826 Jefferson Place, N.W.
Washington, DC 20036
Attn: Rick Perry, Esq.
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
14. Complete Agreement. This Agreement and the Merger Agreement contain the
complete agreement between the parties hereto with respect to the Merger and
other transactions contemplated hereby and supersede all prior agreements and
understandings between the parties hereto with respect thereto.
15. Captions. The captions contained in this Agreement are for convenience
of reference only and do not form a part of this Agreement.
16. Waiver and Other Action. Either party hereto may, by a signed writing,
give any consent, take any action pursuant to paragraph 9 hereof or otherwise,
or waive any inaccuracies in the representations and warranties by the other
party and compliance by the other party with any of the covenants and
conditions herein.
17. Amendment. At any time before the Time of Filing, the parties hereto, by
action taken by their respective Boards of Directors or pursuant to authority
delegated by their respective Boards of Directors, may amend this Agreement;
provided, however, that no amendment after approval by the shareholders of
Company shall be made which changes in a manner adverse to such shareholders
the consideration to be provided to said shareholders pursuant to this
Agreement and the Merger Agreement.
18. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
19. Non-Survival of Representations and Warranties. No representation or
warranty contained in the Agreement or the Merger Agreement shall survive the
Merger or except as set forth in paragraph 9(b), the termination of this
Agreement. Paragraph 10 shall survive the Merger.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
WELLS FARGO & COMPANY NORTH COUNTY BANCORP
/s/ John E. Ganoe /s/ James M. Gregg
By: _____________________________ By: _____________________________
Executive Vice President Chairman and CEO
Its: ____________________________ Its: ____________________________
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<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
Between
NORTH COUNTY BANCORP
a California corporation
(the surviving corporation)
and
[MERGER CO.]
a California corporation
(the merged corporation)
This Agreement and Plan of Merger dated as of , , between
NORTH COUNTY BANCORP, a California corporation (hereinafter sometimes called
"Company" and sometimes called the "surviving corporation") and [MERGER CO.], a
California corporation ("Merger Co.")(said corporations being hereinafter
sometimes referred to as the "constituent corporations"),
WHEREAS, Merger Co., a wholly-owned subsidiary of Wells Fargo & Company
("Wells Fargo"), was incorporated by Articles of Incorporation filed in the
office of the California Secretary of State on , 19 , and said
corporation is now a corporation subject to and governed by the provisions of
the California General Corporation Law. Merger Co. has authorized capital stock
of shares of common stock having a par value of $ per share
("Merger Co. Common Stock"), of which shares were outstanding as of
the date hereof; and
WHEREAS, Company was incorporated by Articles of Incorporation filed in the
office of the California Secretary of State on , 19 and said
corporation is now a corporation subject to and governed by the provisions of
the California General Corporation Law. Company has authorized capital stock of
shares of Common Stock, par value $ per share ("Company Common
Stock") of which shares were outstanding and no shares were held in the
treasury as of , 19 ; and
WHEREAS, Wells Fargo and Company are parties to an Agreement and Plan of
Reorganization dated as of , 1999 (the "Reorganization Agreement"),
setting forth certain representations, warranties and covenants in connection
with the merger provided for herein; and
WHEREAS, the directors, or a majority of them, of each of the constituent
corporations respectively deem it advisable for the welfare and advantage of
said corporations and for the best interests of the respective shareholders of
said corporations that said corporations merge and that Merger Co. be merged
with and into Company, with Company continuing as the surviving corporation, on
the terms and conditions hereinafter set forth in accordance with the
provisions of the California General Corporation Law, which statute permits
such merger; and
WHEREAS, it is the intent of the parties to effect a merger which qualifies
as a tax-free reorganization pursuant to Sections 368(a)(1)(A) and 368(a)(2)(E)
of the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, the parties hereto, subject to the approval of the
shareholders of Merger Co. and Company, in consideration of the premises and of
the mutual covenants and agreements contained herein and of the benefits to
accrue to the parties hereto, have agreed and do hereby agree that Merger Co.
shall be merged with and into Company pursuant to the laws of the State of
California, and do hereby agree upon, prescribe and set forth the terms and
conditions of the merger of Merger Co. with and into Company, the mode of
carrying said merger into effect, the manner and basis of exchanging the shares
of Company Common Stock for shares of common stock of Wells Fargo of the par
value of $1 2/3 per share ("Wells Fargo Common Stock"), and such other
provisions with respect to said merger as are deemed necessary or desirable, as
follows:
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FIRST: At the time of merger, Merger Co. shall be merged with and into
Company, one of the constituent corporations, which shall be the surviving
corporation, and the separate existence of Merger Co. shall cease and the name
of the surviving corporation shall be .
SECOND: The Articles of Incorporation of Company at the time of merger shall
be amended as set forth below and, as so amended, shall be the Articles of
Incorporation of the surviving corporation until further amended according to
law:
[Amend to change name, number of directors, etc.]
THIRD: The By-Laws of Company at the time of merger shall be and remain the
By-Laws of the surviving corporation until amended according to the provisions
of the Articles of Incorporation of the surviving corporation or of said By-
Laws.
FOURTH: The directors of Merger Co. at the time of merger shall be and
remain the directors of the surviving corporation and shall hold office from
the time of merger until their respective successors are elected and qualify.
FIFTH: The officers of Merger Co. at the time of merger shall be and remain
the officers of the surviving corporation and shall hold office from the time
of merger until their respective successors are elected or appointed and
qualify.
SIXTH: The manner and basis of converting the shares of Company Common Stock
into whole shares of Wells Fargo Common Stock (and cash in lieu of fractional
share interests) shall be as follows:
1. Each of the shares of Company Common Stock outstanding immediately
prior to the time of merger (other than shares as to which statutory
dissenters' appraisal rights have been exercised) shall at the time of
merger, by virtue of the merger and without any action on the part of the
holder or holders thereof, be converted into the right to receive the
number of shares of Wells Fargo Common Stock determined by dividing the
Adjusted Wells Fargo Shares by the number of shares of Company Common Stock
then outstanding. The "Adjusted Wells Fargo Shares" shall be a number equal
to the Aggregate Share Amount divided by the Wells Fargo Measurement Price.
The "Wells Fargo Measurement Price" is defined as the average of the
closing prices of a share of Wells Fargo Common Stock as reported on the
consolidated tape of the New York Stock Exchange during the period of 20
trading days ending on the day immediately preceding the meeting of
shareholders required by paragraph 4(c) of this Agreement. The "Aggregate
Share Amount" shall be $112,000,000 plus the aggregate exercise price of
all Options exercised by cash payments between the date hereof and the day
immediately prior to the Closing Date minus the Cash Surrender Amount. The
"Cash Surrender Amount" shall equal the difference between (i) the product
of (A) the "Fair Market Value Per Share" multiplied by (B) the number of
Redeemed Options, minus (ii) the aggregate exercise price of all Redeemed
Options. "Fair Market Value Per Share" shall mean $21.00. "Option" has the
meaning given it in paragraph 2(c) of the Reorganization Agreement.
2. As soon as practicable after the merger becomes effective, each
holder of a certificate which, prior to the effective time of the merger,
represented shares of Company Common Stock outstanding immediately prior to
the time of merger shall be entitled, upon surrender of such certificate
for cancellation to the surviving corporation or to Norwest Bank Minnesota,
National Association, as the designated agent of the surviving corporation
(the "Agent"), to receive a new certificate representing the number of
whole shares of Wells Fargo Common Stock to which such holder shall be
entitled on the basis set forth in paragraph 1 above. Until so surrendered
each certificate which, immediately prior to the time of merger,
represented shares of Company Common Stock shall not be transferable on the
books of the surviving corporation but shall be deemed to evidence only the
right to receive (except for the payment of dividends as provided below)
the number of whole shares of Wells Fargo Common Stock issuable on the
basis above set forth; provided, however, until the holder of such
certificate for Company Common Stock shall have surrendered the same as
above set forth, no dividend payable to holders of record of Wells
A-31
<PAGE>
Fargo Common Stock as of any date subsequent to the effective date of
merger shall be paid to such holder with respect to the shares of Wells
Fargo Common Stock issuable in connection with the merger, but, upon
surrender and exchange thereof as herein provided, there shall be paid by
the surviving corporation or the Agent to the record holder of such
certificate representing Wells Fargo Common Stock issued in exchange
therefor an amount with respect to such shares of Wells Fargo Common Stock
equal to all dividends that shall have been paid or become payable to
holders of record of Wells Fargo Common Stock between the effective date of
merger and the date of such exchange.
3. If between the date of the Reorganization Agreement and the time of
merger, shares of Wells Fargo Common Stock shall be changed into a
different number of shares or a different class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of
shares or readjustment, or if a stock dividend thereon shall be declared
with a record date within such period, then the number of shares of Wells
Fargo Common Stock, if any, into which a share of Company Common Stock
shall be converted on the basis above set forth, will be appropriately and
proportionately adjusted so that the number of such shares of Wells Fargo
Common Stock into which a share of Company Common Stock shall be converted
will equal the number of shares of Wells Fargo Common Stock which the
holders of shares of Company Common Stock would have received pursuant to
such reclassification, recapitalization, split-up, combination, exchange of
shares or readjustment, or stock dividend had the record date therefor been
immediately following the time of merger.
4. No fractional shares of Wells Fargo Common Stock and no certificates
or scrip certificates therefor shall be issued to represent any such
fractional interest, and any holder of a fractional interest shall be paid
an amount of cash equal to the product obtained by multiplying the
fractional share interest to which such holder is entitled by the average
of the closing prices of a share of Wells Fargo Common Stock as reported by
the consolidated tape of the New York Stock Exchange for each of the five
(5) trading days immediately preceding the meeting of shareholders of
Company held to vote on the plan of merger.
5. Each share of Merger Co. Common Stock issued and outstanding at the
time of merger shall be converted into and exchanged for one (1) share of
the surviving corporation after the time of merger.
SEVENTH: The merger provided for by this Agreement shall be effective as
follows:
1. The effective date of merger shall be the date on which Articles of
Merger (as described in subparagraph 1(b) of this Article Seventh) shall be
delivered to and filed by the California Secretary of State; provided,
however, that all of the following actions shall have been taken in the
following order:
a. This Agreement shall be approved and adopted on behalf of Merger
Co. and Company in accordance with the California General Corporation
Law; and
b. A certificate of merger or articles of merger (with this
Agreement attached as part thereof) with respect to the merger, setting
forth the information required by the California General Corporation
Law, shall be executed by the President or a Vice President of Merger
Co. and by the Secretary or an Assistant Secretary of Merger Co., and
by the President or a Vice President of Company and by the Secretary or
an Assistant Secretary of Company, and shall be filed in the office of
the California Secretary of State in accordance with the California
General Corporation Law.
2. The merger shall become effective as of 11:59 p.m. (the "time of
merger") on the effective date of merger.
EIGHTH: At the time of merger:
1. The separate existence of Merger Co. shall cease, and the corporate
existence and identity of Company shall continue as the surviving
corporation.
2. The merger shall have the other effects prescribed by Section 1107 of
the California General Corporation Law.
A-32
<PAGE>
NINTH: The following provisions shall apply with respect to the merger provided
for by this Agreement:
1. The registered office of the surviving corporation in the State of
California shall be , and the name of the registered agent of
Company at such address is Corporation Service Company.
2. If at any time the surviving corporation shall consider or be advised
that any further assignment or assurance in law or other action is necessary or
desirable to vest, perfect or confirm in the surviving corporation the title to
any property or rights of Merger Co. acquired or to be acquired as a result of
the merger provided for herein, the proper officers and directors of Company
and Merger Co. may execute and deliver such deeds, assignments and assurances
in law and take such other action as may be necessary or proper to vest,
perfect or confirm title to such property or right in the surviving corporation
and otherwise carry out the purposes of this Agreement.
3. For the convenience of the parties and to facilitate the filing of this
Agreement, any number of counterparts hereof may be executed and each such
counterpart shall be deemed to be an original instrument.
4. This Agreement and the legal relations among the parties hereto shall be
governed by and construed in accordance with the laws of the State of
California.
5. This Agreement cannot be altered or amended except pursuant to an
instrument in writing signed by both of the parties hereto.
6. At any time prior to the filing of Articles of Merger with the California
Secretary of State, subject to the provisions of the Reorganization Agreement
this Agreement may be terminated upon approval by the Boards of Directors of
either of the constituent corporations notwithstanding the approval of the
shareholders of either constituent corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Merger to be signed in their respective corporate names by the undersigned
officers and their respective corporate seals to be affixed hereto, pursuant to
authority duly given by their respective Boards of Directors, all as of the day
and year first above written.
NORTH COUNTY BANCORP
By: _________________________________
Its: ________________________________
(Corporate Seal)
Attest:
- -------------------------------------
Secretary
[MERGER CO.]
By: _________________________________
Its: ________________________________
(Corporate Seal)
Attest:
- -------------------------------------
Secretary
A-33
<PAGE>
EXHIBIT B
Wells Fargo & Company
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-1026
Attn: Secretary
Gentlemen:
I have been advised that I might be considered to be an "affiliate," as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 ("Rule 145")
promulgated by the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), of North County
Bancorp, a California corporation ("Company").
Pursuant to an Agreement and Plan of Reorganization, dated as of ,
1999, (the "Reorganization Agreement"), between Company and Wells Fargo &
Company, a Delaware corporation ("Wells Fargo"), it is contemplated that a
wholly-owned subsidiary of Wells Fargo will merge with and into Company (the
"Merger") and, as a result of such Merger, I will receive in exchange for each
share of Common Stock, no par value, of Company ("Company Common Stock") owned
by me immediately prior to the Effective Time of the Merger (as defined in the
Reorganization Agreement) a number of shares of Common Stock, par value $1
2/3 per share, of Wells Fargo ("Wells Fargo Common Stock"), as more
specifically set forth in the Reorganization Agreement.
I hereby agree as follows:
I will not offer to sell, transfer or otherwise dispose of any of the shares
of Wells Fargo Common Stock issued to me pursuant to the Merger (the "Stock")
except (a) in compliance with the applicable provisions of Rule 145, (b) in a
transaction that is otherwise exempt from the registration requirements of the
Securities Act, or (c) in an offering registered under the Securities Act.
I consent to the endorsement of the certificates representing the Stock
issued to me pursuant to the Merger with a restrictive legend which will read
substantially as follows:
"The shares represented by this certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Act"), applies, and may be sold or otherwise transferred only in
compliance with the limitations of such Rule 145, or upon receipt by Wells
Fargo & Company of an opinion of counsel reasonably satisfactory to it that
some other exemption from registration under the Act is available, or
pursuant to a registration statement under the Act."
Wells Fargo's transfer agent shall be given an appropriate stop transfer
order and shall not be required to register any attempted transfer of the
shares of the Stock unless the transfer has been effected in compliance with
the terms of this letter agreement.
It is understood and agreed that this letter agreement shall terminate and
be of no further force and effect and the restrictive legend set forth above
shall be removed by delivery of substitute certificates without such legend,
and the related stop transfer order shall be lifted forthwith, if (i) any such
shares of Stock shall have been registered under the Securities Act for sale,
transfer or other disposition by me or on my behalf and are sold, transferred
or otherwise disposed of, or (ii) any such shares of Stock are sold in
accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule 144
promulgated under the Securities Act, or (iii) I am not at the time of such
disposition an affiliate of Wells Fargo and have been the beneficial owner of
the Stock for at least one year (or such other period as may be prescribed by
the Securities Act, and the rules and regulations promulgated thereunder) and
Wells Fargo has filed with the Commission all of the reports it is required to
file
A-34
<PAGE>
under the Securities Exchange Act of 1934, as amended, during the preceding
twelve months, or (iv) I am not and have not been for at least three months an
affiliate of Wells Fargo and have been the beneficial owner of the Stock for at
least two years (or such other period as may be prescribed by the Securities
Act, and the rules and regulations promulgated thereunder), or (v) Wells Fargo
shall have received an opinion of counsel acceptable to Wells Fargo to the
effect that the stock transfer restrictions and the legend are not required.
I have carefully read this letter agreement and the Reorganization Agreement
and have discussed their requirements and other applicable limitations upon my
ability to offer to sell, transfer or otherwise dispose of shares of Company
Common Stock, Wells Fargo Common Stock or the Stock, to the extent I felt
necessary, with my counsel or counsel for Company.
Sincerely,
A-35
<PAGE>
EXHIBIT C
BUSINESS COMPLETION PAYMENT AGREEMENT
THIS AGREEMENT is made this day of , 1999, by and between
Wells Fargo & Company ("Wells Fargo"), North County Bancorp ("Company") and
("Employee").
WHEREAS, Employee is currently an employee of North County Bank ("Bank"), a
wholly owned subsidiary of Company; and
WHEREAS, Company and Wells Fargo are entering into an Agreement and Plan of
Reorganization ("the Agreement") whereby a wholly-owned subsidiary of Wells
Fargo will merge with and into Company (the "Merger") pursuant to an agreement
and plan of merger (the "Merger Agreement"); and
WHEREAS, in anticipation of the successful consummation of the Merger
Agreement, Employee has been selected to receive business completion payments
in accordance with the terms set forth herein;
NOW THEREFORE, the parties agree to the following:
1. In consideration for receipt of business completion payments, Employee
agrees to remain an employee of Bank through the Merger and to continue
employment with the Bank or another affiliate of Wells Fargo until the
completion of this assignment, at all times devoting his/her entire working
time and skill to the performance of the duties/project described in paragraphs
2 and 3 below, to the satisfaction of Bank and Wells Fargo. Employee also
agrees to abide by all Bank or Wells Fargo work rules, work policies and Code
of Ethics, as applicable, in performing such duties/project.
2. Employee agrees to perform his/her duties as (describe job title or
project), as are being performed by Employee on the date of this Agreement and
to continue working as a Bank employee on such duties/project through the
Merger in exchange for a lump sum payment (the "First Completion Payment") of
$ , less appropriate payroll deductions. The First Completion Payment
shall be made within thirty (30) days of the Merger provided Employee has fully
performed all duties described in this Agreement through the Merger.
3. Employee further agrees to perform his/her duties as assigned by the Bank
and Wells Fargo and to continue working as an employee of Wells Fargo after the
Merger on such duties/project through either a) Wells Fargo's release of the
Employee; b) the completion of the conversion to Wells Fargo systems; or
c) December 31, 2000, whichever is earlier (the "Completion Date"), in exchange
for a lump sum payment (the "Second Completion Payment") of $ ,
less appropriate payroll deductions. The Second Completion Payment shall be
made within thirty (30) days of the Completion Date provided Employee has fully
performed all duties described in this Agreement through the Completion Date.
4. If Employee terminates his/her employment with Bank for any reason,
voluntarily or involuntarily, prior to the Merger, Employee will have forfeited
the Completion Payments, and no portion or form of the Completion Payments
shall be due to Employee from Bank or Wells Fargo.
5. If Employee terminates his/her employment with Wells Fargo either
voluntarily or involuntarily for cause, after the Merger and prior to the
Completion Date, Employee will have forfeited the Second Completion Payment,
and no portion or form of the Second Completion Payment shall be due to
Employee from Wells Fargo. Notwithstanding the foregoing, Employee shall be
eligible for the Second Completion Payment in the event that Employee
voluntarily terminates his/her employment for one or more of the following
reasons after the Merger and prior to the Completion Date:
a) a reduction of the Employee's total cash compensation opportunity/1/
as in effect at the Effective Time of the Merger, or
- --------
/1/If Employee is paid salary only, total cash compensation opportunity is
defined as the same or higher actual salary; if Employee is paid salary and
incentive/variable pay, total cash compensation opportunity is defined as
salary plus target incentive opportunity.
A-36
<PAGE>
b) the reassignment of Employee to an employment location that is more
than fifty (50) miles from the Employee's principal employment location as
of the date of this Agreement.
6. If the Employee is offered and accepts a regular position at any
affiliate of Wells Fargo on or prior to the Completion Date, Employee shall
nonetheless be eligible for the First and Second Completion Payments.
7. If Employee becomes unable to perform the duties described in paragraphs
2 or 3 above as the result of death, a medically certified disability or family
leave in accordance with Bank or Wells Fargo policy, Employee or his/her estate
shall nonetheless be eligible for the First and Second Completion Payments.
8. This Agreement supersedes any other agreement between Employee, Bank,
Company and/or Wells Fargo, whether written or verbal, including but not
limited to any employment, compensation or severance agreement (other than the
Employment Contracts listed in Schedule 2(j)(i) of the Agreement and the Wells
Fargo Salary Continuation Pay Plan). The terms of this Agreement may not be
amended, except in writing where such writing is signed by the Employee,
Company and Wells Fargo if before the Merger, and by Employee and Wells Fargo
if after the Merger.
9. This Agreement is not a contract of employment. The Employee remains an
at will employee of Bank or Wells Fargo.
10. Employee understands that this Agreement is separate from and in no way
impacts or modifies Employee's participation in the Wells Fargo & Company
Salary Continuation Pay Plan, or any agreements thereunder.
11. In the event the Merger does not occur, this Agreement shall be null and
void.
Date: ________________________ ---------------------------------
Employee
Date: ________________________
WELLS FARGO & COMPANY
By: _____________________________
Its: ____________________________
Date: ________________________ NORTH COUNTY BANCORP
By: _____________________________
Its: ____________________________
A-37
<PAGE>
APPENDIX B
----------------
OPINION OF HOVDE FINANCIAL, INC.
<PAGE>
DRAFT FAIRNESS OPINION
December 21, 1999
Board of Directors
North County Bancorp
444 South Escondido Boulevard
Escondido, CA 92025
Members of the Board:
We have reviewed the Agreement and Plan of Reorganization (the "Agreement")
and related exhibits and schedules dated as of September 29, 1999 by and
between Wells Fargo & Company ("WFC") and North County Bancorp ("Bancorp"), and
as amended as of November 29, 1999, pursuant to which, among other things,
Bancorp will be merged with and into WFC (the "Merger"). As is set forth in the
Agreement, all of the issued and outstanding shares of Bancorp Common Stock,
including all shares issued with respect to the Options, shall be converted
into the right to receive $115.5 million in WFC Common Stock, subject to
adjustment as provided for in the Agreement (the "Merger Consideration").
Capitalized terms used herein shall have the same meaning as in the Agreement,
unless specifically stated otherwise.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
Pursuant to a Consulting Agreement dated June 20, 1997, between Bancorp and
Hovde, Hovde was engaged to assist Bancorp in exploring various strategic
options, including a potential affiliation of Bancorp with another financial
institution. Therefore, we are familiar with Bancorp having acted as its
financial advisor in connection with the proposed transaction, and having
participated in the negotiations leading to the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Bancorp and WFC and
material prepared in connection with the proposed transaction, including the
following: the Agreement; certain publicly available information concerning
Bancorp and WFC, including consolidated financial statements for each for the
three years ended December 31, 1998, respectively, as well as subsequent
quarterly statements for the periods ended March 31, 1999 and June 30, 1999 for
Bancorp and WFC, respectively; the nature and terms of recent sale and merger
transactions involving banks and bank holding companies that we consider
relevant; historical and current market data for the common stock of Bancorp
and WFC; and financial and other publicly available information provided to us
by the managements of Bancorp and WFC.
In addition, we have conducted meetings with members of the senior
management of Bancorp and WFC for the purpose of reviewing the future prospects
of both companies. We also took into account our assessment of general
economic, market and financial conditions and our experience in other similar
transactions, as well as our overall knowledge of the banking industry and our
general experience in securities valuations.
We have acted as financial advisor to Bancorp with respect to the proposed
Merger and have received a fee from Bancorp for our services. We will also
receive an additional fee if the proposed Merger is consummated. Please be
advised that affiliates of Hovde have a beneficial ownership interest in
595,589 shares of Bancorp Common Stock. We have no other financial advisory or
other relationships with Bancorp. In the ordinary course of their businesses,
affiliates of Hovde may actively trade the debt and equity securities of WFC
for their own account or for the accounts of customers and, accordingly, they
may at any time hold long or short positions in such securities.
B-1
<PAGE>
North County Bancorp
December 21, 1999
Page Two
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the publicly available materials
provided to us by Bancorp and WFC, and in the discussions with management of
Bancorp and WFC.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the Merger Consideration to be
received by the shareholders of Bancorp in connection with the Merger as
described in the Agreement is fair to such shareholders from a financial point
of view.
Sincerely,
B-2
<PAGE>
APPENDIX C
CALIFORNIA DISSENTERS' RIGHTS STATUTE
<PAGE>
(S) 1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation is
required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in
a short-form merger may, by complying with this chapter, require the
corporation in which the shareholder holds shares to purchase for cash at
the fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value
shall be determined as of the day before the first announcement of the
terms of the proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed action, but
adjusted for any stock split, reverse stock split, or share dividend which
becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of
meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not
apply to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization, or
which were held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph (B)
of this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
(S) 1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of reorganization, any shareholders of a corporation have a
right under Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding shares
(Section 152) within 10 days after the dare of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement
of the price determined by the corporation to represent the fair market
value of the dissenting share, and a brief description of the procedure to
be followed if the share holder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as
defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
C-1
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any
purpose unless it is received by the corporation or any transfer agent
thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price
(S) 1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are dissenting
shares and agree upon the price of the shares, the dissenting shareholder
is entitled to the agreed price with interest thereon at the legal rate on
judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in
the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
(S) 1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after
the date on which notice of the approval by the outstanding shares (Section
152) or notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the
shares are dissenting shares or the fair market value of the dissenting
shares or both or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be
consolidated.
C-2
<PAGE>
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or more
impartial appraisers to determine, the fair market value of the shares.
(S) 1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with
interest thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable, but, if the appraisal exceeds the price
offered by the corporation, the corporation shall pay the costs (including
in the discretion of the court attorneys' fees, fees of expert witnesses
and interest at the legal rate on judgments from the date of compliance
with Sections 1300, 1301 and 1302 if the value awarded by the court for the
shares is more than 125 percent of the price offered by the corporation
under subdivision (a) of Section 1301).
(S) 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
(S) 1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand of payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto
(S) 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
C-3
<PAGE>
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares
of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the status
of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation, withdraws
the shareholder's demand for purchase of the dissenting shares.
(S)1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(S) 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
(S) 1312. Right of dissenting shareholder to attack, set aside or rescindmerger
or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have
any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger
set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have been
legally voted in favor thereof; but any holder of shares of a class whose
terms and provisions specifically set forth the amount to be paid in
respect to them in the event of a reorganization or short-form merger is
entitled to payment in accordance with those terms and provisions or, if
the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with
the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, subdivision (a) shall not apply to
any shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short- form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization or short-
form merger set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior notice to the
corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short- form merger set aside or rescinded, (1) a party to
a reorganization or short- form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that
the transaction is just and reasonable as to the shareholders of the
controlled party, and (2) a person who controls two or more parties to a
reorganization shall have the burden of proving that the transaction is
just and reasonable as to the shareholders of any party so controlled.
C-4
<PAGE>
APPENDIX D
----------------
NORTH COUNTY BANCORP'S FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-10627
----------------
NORTH COUNTY BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-3669135
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification Number)
444 S. Escondido Boulevard, Escondido,
California 92025
(Address of principal executive offices) (Zip Code)
</TABLE>
(760) 743-2200
Registrant's telephone number, including area code
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
----------------
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [_] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-X contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 23, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $31,883,000.
Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of the affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of Common Stock of the registrant outstanding as of March
23, 1999 was 4,882,705.
<TABLE>
<CAPTION>
Part of Form 10-K
Documents Incorporated by Reference: into which incorporated
------------------------------------ -----------------------
<S> <C>
Proxy Statement for the Company's Annual Meeting of
Shareholders to be held June 16, 1999............. Part III
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D-1
<PAGE>
PART I
Item 1. Description of Business.
The Company
North County Bancorp (the "Company") is a California corporation registered
as a bank holding company under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"), and is headquartered in Escondido, California. The
Company was incorporated in October, 1981 and acquired all of the outstanding
shares of North County Bank (the "Bank") in July, 1982. The Company's only
subsidiary and principal asset is the Bank. The Company exists primarily for
the purpose of holding the stock of its subsidiary, the Bank, and of such other
subsidiaries as it may acquire or establish.
The Company's principal sources of income are dividends from the Bank. The
expenditures of the Company, including (but not limited to) the payment of
dividends to stockholders, if and when declared by the Board of Directors, and
the cost of servicing debt will generally be paid from such payments made to
the Company by the Bank. At December 31, 1998, the Company had consolidated
assets of $337.4 million, deposits of $303.1 million and stockholders' equity
of $30.0 million.
The Company's Administrative Offices are located at 444 South Escondido
Boulevard, Escondido, California and its telephone number is (760) 743-2200.
References herein to the "Company" include the Company and the Bank, unless the
context indicates otherwise.
The Bank
North County Bank, a California state-chartered bank that commenced
operations in June, 1974, conducts its business through nine full-service
branches and one loan production office. Five of the branches are located in
San Diego County in the cities of Escondido, Poway, San Marcos and San Diego,
with the remaining in Riverside County in the cities of Temecula, Murrieta,
Beaumont and Banning. The Bank's loan production office is in Renton,
Washington. The Bank provides a wide range of banking services to small and
medium-sized businesses, real estate construction and development companies,
professionals and individuals located in San Diego and Riverside counties, and
offers small business loans through its loan production office in the Seattle,
Washington area.
The Bank holds no material patents, trademarks, licenses (other than
licenses obtained from bank regulatory authorities), franchises or concessions,
and did not spend any amounts on research and development activities in either
of the Company's last three fiscal years. The Bank owns three subsidiaries; NCB
Joint Venture-1, Inc. and GWB Development, which participated in real estate
development, and NCB Mortgage, all of which are inactive corporations.
Retail Banking Services
Deposits Accounts
The Bank offers a wide variety of deposit products for the retail banking
market including checking, interest-bearing checking, savings, certificates of
deposit and retirement accounts. As of December 31, 1998, the Bank had
approximately 25,995 retail deposit accounts with a balance of $169.6 million
as compared to 22,706 accounts with a balance of $115.4 million at December 31,
1997. The Bank attempts to attract deposits through its product mix, pricing,
convenient locations, extended hours, and efforts to provide the highest level
of customer service. At December 31, 1998 the Bank's retail deposits consisted
of $25.3 million or 15% in noninterest-bearing demand deposits, $20.6 million
or 12% in interest-bearing demand deposits, $54.2 million or 32% in savings and
money market deposits, $6.3 million or 4% in individual retirement accounts and
$63.2 million or 37% in time certificates of deposit. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Deposits.")
D-2
<PAGE>
Loans
The Bank also offers many types of consumer loans to its customers. These
include new and used automobile, home improvement, home equity, personal lines
of credit, overdraft protection, credit cards and other secured and unsecured
installment and consumer loans. The Bank's consumer loans totaled approximately
$34.2 million and $41.0 million at December 31, 1998 and 1997, respectively.
The Bank also makes construction loans for custom built, owner-occupied homes,
but generally does not offer long term home mortgage loans. Additionally, the
Bank offers its customers FHA Title I home improvement loans and other home
equity loan products, as well as purchasing these types of loans from other
lenders. The Bank generally sells these loans in the secondary market,
generating fee income on the sale. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition--Loans.")
Other Retail Products and Services
The Bank offers other products and services to its retail customers which
complement its deposit and loan products. These include life insurance
products, including annuities, investments, travelers' checks, safe deposit
boxes, escrow, notary, and collection services. The Bank also has drive-through
facilities with extended hours, provides its customers with access to ATMs and
POS terminals throughout the world and offers a telephone voice response
service which gives customers access to account information 24 hours a day.
Business Banking Services
Deposit Accounts
The Bank offers interest-bearing and noninterest-bearing deposit accounts
designed for small to medium-sized business customers. The services offered in
conjunction with these accounts may include providing currency and coin,
armored car pick-up, courier services, payroll services, credit card merchant
services, document collection and wire transfers. The fees charged for a
business account typically vary with the amount of services provided and the
level of balances the customer keeps on deposit. The Bank relies on marketing
and promotional activities and personal contact by its officers, directors and
employees to develop these customer relationships, emphasizing the Bank's local
ownership and decision making, personal service, community ties and financial
strength. At December 31, 1998 the Bank had approximately 7,350 business
deposit accounts totaling $126.5 million as compared to approximately 7,582
accounts totaling $129.9 million at December 31, 1997. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Deposits.")
Loans
The Bank provides secured and unsecured loans and lines of credit for the
operating and expansion needs of businesses, ranging from inventory and
accounts receivable financing to equipment financing and letters of credit.
These loans are generally for terms of one year or less. Significant emphasis
is placed on the borrower's earnings history, capitalization, secondary sources
of repayment (such as accounts receivable) or highly liquid collateral (such as
certificates of deposit or publicly traded stocks or bonds). The Bank also
makes loans to local real estate developers for the construction of entry level
to middle income single family residences and fixed and variable rate loans on
commercial real estate with terms of up to ten years. For customers whose loan
demands exceed the Bank's legal lending limits, the Bank attempts to arrange
for such loans on a participation basis with correspondent banks. Commercial
loans (including commercial real estate loans) and construction loans totaled
approximately $179.8 million and $19.9 million, respectively, at December 31,
1998, compared to $154.6 million and $10.3 million at December 31, 1997,
respectively.
The Bank is also one of the largest lenders of loans guaranteed by the U.S.
Small Business Administration ("SBA") in its market area. SBA loans generally
have maturities ranging from seven to 25 years, often are secured by commercial
real estate and are currently guaranteed up to 80% by the SBA. The Bank
sometimes
D-3
<PAGE>
sells these loans for a premium as there is an active secondary market for
these loans. The Bank originated approximately $29.6 million and $35.0 million
in SBA loans in 1998 and 1997, respectively. The Bank's SBA loan servicing
portfolio, consisting of the guaranteed portion of SBA loans originated and
sold, for which the Bank earns servicing fee income, totaled approximately
$32.0 million and $42.9 million at December 31, 1998 and 1997, respectively.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition--Loans.")
Real Estate Investments
The Company has engaged in direct and indirect real estate development
activities on a selective basis. At December 31, 1996, the Company was involved
in one development project that originated in 1989. The project held one
remaining lot for sale at December 31, 1996, which was sold in January of 1997.
The Company has no plans for future involvement in real estate development
projects.
Competition
The banking business in southern California is highly competitive with
respect to virtually all products and services and has become increasingly so
in recent years. The industry continues to consolidate, and strong, unregulated
competitors have entered the banking market with focused products targeted at
highly profitable customer segments. Many largely unregulated competitors are
able to compete across geographic boundaries and provide customers increasing
access to meaningful alternatives to banking services in nearly all significant
products. These competitive trends are likely to continue.
With respect to commercial bank competitors, the business is largely
dominated by a relatively small number of major banks with many offices
operating over a wide geographical area, which banks have, among other
advantages, the ability to finance wide-ranging and effective advertising
campaigns and to allocate their investment resources to regions of highest
yield and demand.
Several mergers of large regional banks and large savings and loan
associations with major banks, acquisitions of independent banks by major
banks, and the failures of several independent banks in the Company's market
area have significantly increased the presence of large regional banks and have
reduced the number of independent banks competing in the Company's market area.
Many of the major banks operating in the area offer certain services which the
Bank does not offer directly (but some of which the Bank offers through
correspondent institutions). By virtue of their greater total capitalization,
such banks also have substantially higher lending limits than does the Bank./1/
Although major banks have some competitive advantages over small independent
banks, the Bank has actively tried to make the loss of local independent banks
a competitive advantage by soliciting customers who prefer the personal service
offered by the Bank. The Company's promotional activities emphasize the
advantages of dealing with a local bank attuned to the particular needs of the
community and relies heavily upon local promotional activities and personal
contact by its officers, directors, and employees.
In addition to other banks, competitors include savings institutions, credit
unions, and numerous non-banking institutions, such as finance companies,
brokerage firms, mortgage companies and insurance companies. In recent years,
increased competition has also developed from specialized finance and non-
finance companies that offer wholesale finance, credit card, and other consumer
finance services, including on-line banking services and personal finance
software. Strong competition for deposit and loan products affects the rates of
those products as well as the terms on which they are offered to customers.
Mergers between financial institutions have placed additional pressure on banks
within the industry to streamline their operations, reduce
- -------- D-4
<PAGE>
expenses, and increase revenues to remain competitive. Competition has also
intensified due to recently enacted federal and state interstate banking laws,
which permit banking organizations to expand geographically, and the California
market has been particularly attractive to out-of-state institutions.
Technological innovation has also resulted in increased competition in
financial services markets. Such innovation has, for example, made it possible
for non-depository institutions to offer customers automated transfer payment
services that previously have been considered traditional banking products. In
addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, ATMs, self-service
branches, and/or in-store branches. In addition to other banks, the sources of
competition for such products include savings associations, credit unions,
brokerage firms, money market and other mutual funds, asset management groups,
finance and insurance companies, and mortgage banking firms.
Regulation and Supervision
The Company and the Bank are subject to significant regulation by Federal
and state regulatory bodies. The following discussion of statutes and
regulations is only a brief summary and does not purport to be complete. This
discussion is qualified in its entirety by reference to such statutes and
regulations. No assurance can be given that such statutes or regulations will
not change in the future.
The Company
The Company is subject to the periodic reporting requirements of Section 13
of the Securities Exchange Act of 1934 (the "Exchange Act") which requires the
Company to file annual, quarterly and other current reports with the Securities
and Exchange Commission (the "Commission"). The Company is also subject to
additional regulations including, but not limited to, the proxy and tender
offer rules promulgated by the Commission under Sections 13 and 14 of the
Exchange Act; the reporting requirements of directors, executive officers and
principal stockholders regarding transactions in the Company's Common Stock and
short-swing profits rules promulgated by the Commission under Section 16 of the
Exchange Act; and certain additional reporting requirements by principal
stockholders of the Company promulgated by the Commission under Section 13 of
the Exchange Act.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act and is registered as such with the Board of Governors of the
Federal Reserve System (the "FRB"). A bank holding company is required to file
with the FRB annual reports and other information regarding its business
operations and those of its subsidiaries. It is also subject to examination by
the FRB and is required to obtain FRB approval before acquiring, directly or
indirectly, ownership or control of any voting shares of any bank if, after
such acquisition, it would directly or indirectly own or control more than 5%
of the voting stock of that bank, unless it already owns a majority of the
voting stock of that bank.
The FRB has by regulation determined certain activities in which the Company
may or may not conduct business. The Company is currently prohibited from such
activities as real estate brokerage and syndication; real estate development;
property management; underwriting of life insurance not related to credit
transactions; and, with certain exceptions, securities underwriting and equity
funding.
The Bank
The Bank joined the Federal Reserve System as a state-chartered member in
July 1997. As a California state-chartered bank and member of the Federal
Reserve System, the Bank is subject to regulation, supervision and regular
examination by the California Department of Financial Institutions (the
"Department") and by the FRB. The regulations of these agencies govern most
aspects of the Bank's business, including the making of periodic reports by the
Bank, and the Bank's activities relating to dividends, investments, loans,
borrowings, capital requirements, certain check-clearing activities, branching,
mergers and acquisitions, reserves against
D-5
<PAGE>
deposits and numerous other areas. Supervision, legal action and examination of
the Bank by the regulatory agencies are generally intended to protect
depositors and are not intended for the protection of stockholders.
The earnings and growth of the Bank are largely dependent on its ability to
maintain a favorable differential or "spread" between the yield on its
interest-earning assets and the rate paid on its deposits and other interest-
bearing liabilities. As a result, the Bank's performance is influenced by
general economic conditions, both domestic and foreign, the monetary and fiscal
policies of the federal government, and the policies of the regulatory
agencies, particularly the FRB. The FRB implements national monetary policies
(such as seeking to curb inflation and combat recession) by its open-market
operations in United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rate applicable to borrowings by banks
which are members of the Federal Reserve System. The actions of the FRB in
these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and deposits. The nature and impact
of any future changes in monetary policies cannot be predicted.
Capital Adequacy Requirements
Both the Bank and the Company are subject to the regulations of the FRB
governing capital adequacy. These regulations incorporate both risk-based and
leverage capital requirements. Risk-based capital ratios are calculated to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations. Under these guidelines, the nominal dollar
amounts of assets and credit-equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans. Total
capital requirements are defined in terms of "core capital elements," or Tier 1
capital and "supplemental capital elements," or Tier 2 capital. The minimum
ratio of qualifying total capital to total risk-weighted assets is 8.0%, at
least one-half of which must be in the form of Tier 1 capital. As of December
31, 1998, the Company's Tier 1 risk-based capital and total risk-based capital
ratios were 11.68% and 12.93%, respectively, and the Bank's Tier 1 risk-based
capital and total risk-based capital ratios were 11.58% and 12.83%,
respectively.
The federal banking agencies have revised the risk-based capital standards
to take adequate account of concentrations of credit (i.e., relatively large
proportions of loans involving one borrower, industry, location, collateral or
loan type) and the risks of "non-traditional" activities (those that have not
customarily been part of the banking business). The regulations require
institutions with high or inordinate levels of risk to operate with higher
minimum capital standards, and authorize the regulators to review an
institution's management of such risks in assessing an institution's capital
adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest rate
risk is the exposure of a bank's current and future earnings and equity capital
arising from adverse movements in interest rates. While interest risk is
inherent in a bank's role as financial intermediary, it introduces volatility
to bank earnings and to the economic value of the bank.
The FRB also requires the maintenance of a leverage capital ratio designed
to supplement the risk-based capital guidelines. Banks and Bank Holding
Companies that have received the highest regulatory ratings must maintain a
Tier 1 leverage capital ratio of at least 3.0%. All other institutions are
required to maintain a leverage ratio of at least 100 to 200 basis points above
the 3.0% minimum, for a minimum of 4.0% to 5.0%. Pursuant to federal
regulations, banks must maintain capital levels commensurate with the level of
risk to which they are exposed, including the volume and severity of problem
loans, and federal regulators may, however, set higher capital requirements
when a bank's particular circumstances warrant. As of December 31, 1998 the
Company's and the Bank's Tier 1 leverage capital ratios were 8.80% and 8.76%,
respectively, exceeding regulatory minimums. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations B Capital
Resources").
D-6
<PAGE>
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured financial institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The federal banking agencies have by regulation defined the following
five capital categories: "well capitalized" (Total Risk-Based Capital Ratio of
10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);
"adequately capitalized" (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-
Based Capital Ratio of 4%; and Leverage Ratio of 4%); "undercapitalized" (Total
Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital less than
4%; or Leverage Ratio of less than 4%) (or 3% if the institution receives the
highest rating from its primary regulator); "significantly undercapitalized"
(Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital
Ratio of less than 3%; or Leverage Ratio of less than 3%); and "critically
undercapitalized" (tangible equity to total assets less than 2%). A bank may be
treated as though it were in the next lower capital category if after notice
and the opportunity for a hearing, the appropriate federal agency finds an
unsafe or unsound condition or practice so warrants, but no bank may be treated
as"critically undercapitalized" unless its actual capital ratio warrants such
treatment.
At each successively lower capital category, an insured bank is subject to
increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from
making capital distributions if to do so would make the bank
"undercapitalized." Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital
restoration plans meeting specified requirements (including a guarantee by the
parent holding company, if any). "Significantly undercapitalized" banks are
subject to broad regulatory authority, including among other things, capital
directives, forced mergers, restrictions on the rates of interest they may pay
on deposits, restrictions on asset growth and activities, and prohibitions on
paying certain bonuses without regulatory approval. Even more severe
restrictions apply to critically undercapitalized banks. Most importantly,
except under limited circumstances, not later than 90 days after an insured
bank becomes critically undercapitalized, the appropriate federal banking
agency is required to appoint a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action provisions,
insured banks may be subject to potential actions by the federal regulators for
unsafe or unsound practices in conducting their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
issuance of cease and desist orders, termination of insurance of deposits (in
the case of a bank), the imposition of civil money penalties, the issuance of
directives to increase capital, formal and informal agreements, or removal and
prohibition orders against "institution-affiliated" parties.
Safety and Soundness Standards
The federal banking agencies have adopted final guidelines establishing
safety and soundness standards for all insured depository institutions. Those
guidelines relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan and institute enforcement proceedings
if an acceptable compliance plan is not submitted.
Premiums for Deposit Insurance
FDIC insured depository institutions are required to pay insurance premiums
depending on their risk classification. Institutions such as the Bank which are
insured by the Bank Insurance Fund ("BIF"), are categorized into one of three
capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three supervisory categories based on federal
regulatory evaluations. The three supervisory categories are: financially sound
with only a few minor weaknesses (Group A), demonstrates weaknesses that
D-7
<PAGE>
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
well capitalized, adequately capitalized and undercapitalized are the same in
the FDIC's prompt corrective action regulations. The current BIF assessment
rates are summarized as follows:
Assessment Rates Effective January 1, 1998/2/
<TABLE>
<CAPTION>
Group Group Group
A B C
----- ----- -----
<S> <C> <C> <C>
Well Capitalized.......................................... 0 3 17
Adequately Capitalized.................................... 3 10 24
Undercapitalized.......................................... 10 24 27
</TABLE>
In addition, pursuant to recent legislation, BIF member banks (such as the
Bank) began in 1997 to pay an amount which has fluctuated between approximately
1.16 and 1.30 (and is currently 1.22) basis points, or cents per $100 of
insured deposits, towards the retirement of the Financing Corporation bonds
(the "FICO Bonds") issued in the 1980's to assist in the recovery of the
savings and loan industry. Members of the Savings Association Insurance Fund
("SAIF"), in addition to their normal deposit insurance premium, currently pay
approximately 6.1 basis points. The rate paid to retire the FICO Bonds will
become equal for members of the BIF and the SAIF on either January 1, 2000, or
the date on which the BIF and SAIF insurance funds are merged, whichever occurs
first.
Community Reinvestment Act
The Bank is subject to certain requirements and reporting obligations
involving Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods. The CRA further requires the agencies to
take a financial institution's record of meeting its community credit needs
into account when evaluating applications for, among other things, domestic
branches, consummating mergers or acquisitions, or holding company formations.
In measuring a bank's compliance with its CRA obligations, the regulators now
utilize a performance-based evaluation system which bases CRA ratings on the
bank's actual lending service and investment performance, rather than on the
extent to which the institution conducts needs assessments, documents community
outreach activities or complies with other procedural requirements. In
connection with their assessment of CRA performance, the federal regulators
assign a rating of "outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance." The Bank was last examined for CRA compliance in
1998 and received a "satisfactory" CRA Assessment Rating.
Other Consumer Protection Laws and Regulations
The bank regulatory agencies are increasingly focusing attention on
compliance with consumer protection laws and regulations. Banks have been
advised by federal regulators to carefully monitor compliance with various
consumer protection laws and their implementing regulations. The federal
Interagency Task Force on Fair Lending issued a policy statement on
discrimination in home mortgage lending describing three methods that federal
agencies will use to prove discrimination: overt evidence of discrimination,
evidence of disparate treatment, and evidence of disparate impact. In addition
to CRA and fair lending requirements, the Bank is subject to numerous other
federal consumer protection statutes and regulations. Due to heightened
regulatory concern related to compliance with consumer protection laws and
regulations generally, the Bank may incur additional compliance costs or be
required to expend additional funds for investments in the local communities it
serves.
- -------- D-8
<PAGE>
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") regulates the interstate activities of banks and bank
holding companies and establishes a framework for nationwide interstate banking
and branching. Since June 1, 1997, a bank in one state has generally been
permitted to merge with a bank in another state without the need for explicit
state law authorization. However, states were given the ability to prohibit
interstate mergers with banks in their own state by "opting-out" (enacting
state legislation applying equality to all out-of-state banks prohibiting such
mergers ) prior to June 1, 1997. Limited interstate bank mergers were permitted
prior to June 1, 1997 provided the applicable states' laws met certain
requirements.
Since 1995, adequately capitalized and managed bank holding companies have
been permitted to acquire banks located in any state, subject to two
exceptions: first, any state may still prohibit bank holding companies from
acquiring a bank which is less than five years old; and second, no interstate
acquisition can be consummated by a bank holding company if the acquiror would
control more then 10% of the deposits held by insured depository institutions
nationwide or 30% percent or more of the deposits held by insured depository
institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which the
bank does not maintain a branch if that state has enacted legislation to
expressly permit all out-of-state banks to establish branches in that state.
Among other things, the Interstate Banking Act amended the Community
Reinvestment Act to require that in the event a bank has interstate branches,
the appropriate federal banking regulatory agency must prepare for such
institution a written evaluation of (i) the bank's record of performance; and
(ii) the bank's performance in each applicable state. Interstate branches are
now prohibited from being used as deposit production offices, and foreign banks
will be permitted to establish branches in any state other than its home state
to the same extent that a bank chartered by the foreign bank's home state may
establish such branches.
The Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Weggeland Act") was designed among other
things to implement important provisions of the Interstate Banking Act
discussed above and to repeal California's previous interstate banking laws,
which were largely preempted by the Interstate Banking Act. (Prior California
law prohibited, among other things, an out-of-state bank holding company from
establishing a de novo California bank except for the purpose of taking over
the deposits of a closed bank. This restriction has been eliminated.)
As indicated above, the Interstate Banking Act generally permits a bank in
one state to merge with a bank in another state without the need for explicit
state law authorization. However, the Caldera Weggeland Act expressly prohibits
a foreign (other state) bank which does not already have a California branch
office from (i) purchasing a branch office of a California bank (as opposed to
the entire bank) and thereby establishing a California branch office or (ii)
establishing a California branch office on a de novo basis.
The Interstate Banking Act also requires, among other things, approval of
the state bank supervisor of the target bank's home state for interstate
acquisitions of banks by bank holding companies. The Caldera Weggeland Act
authorizes the California Commissioner of Financial Institutions (the
"Commissioner") to approve such an interstate acquisition if the Commissioner
finds that the transaction is consistent with certain criteria specified by
law.
The changes effected by Interstate Banking Act and Caldera Weggeland Act are
expected to increase competition in the environment in which the Bank operates
to the extent that out-of-state financial institutions directly or indirectly
enter the Bank's market areas. It appears that the Interstate Banking Act has
contributed to the accelerated consolidation of the banking industry in that a
number of the largest bank holding companies are expanding into different parts
of the country that were previously restricted. While many large out-of-state
D-9
<PAGE>
banks have already entered the California market as a result of this
legislation, it is not possible to predict the precise impact of this
legislation on the Bank or the Company and the competitive environment in which
it operates.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Bank and
the banking industry in general are pending, and additional initiatives may be
proposed or introduced, before the United States Congress, the California
legislature and other governmental bodies in the future. For example, consumer
legislation has been proposed in Congress which would require banks to offer
basic, low-cost financial services to meet minimum customer needs. Other
legislation has been proposed which would reform the Glass-Steagall Act and the
Bank Holding Company Act, which restrict banks' and bank holding companies'
ability to engage in certain activities, including the underwriting of and
dealing in various securities. The latter proposal would significantly change
the makeup of the financial services industry, expand the ability of banks and
bank holding companies to offer a broader range of financial products, and
provide the opportunity for additional competitors to be able to enter the
financial services market in ways that are not currently permissible. Such
proposals, if enacted, may further alter the structure, regulation and
competitive relationship among financial institutions, and may subject the Bank
to increased regulation, disclosure and reporting requirements. In addition,
the various banking regulatory agencies often adopt new rules and regulations
to implement and enforce existing legislation. It cannot be predicted whether,
or in what form, any such legislation or regulations may be enacted or the
extent to which the business of the Bank or the Company would be affected
thereby.
Accounting Changes
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products and services, geographic areas, and major
customers. Operating segments are components of an enterprise about which
financial information is available and is evaluated regularly in deciding how
to allocate resources and assess performance. The adoption of SFAS 131 had no
material impact on the presentation of the Company's financial condition or
results of operations.
The FASB issued SFAS No. 132 "Employer's Disclosure about Pensions and Other
Postretirement Benefits," effective for fiscal years beginning after December
15, 1997. SFAS No. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable. Adoption of this
statement had no impact on the Company's financial position or results of
operations.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for all quarters of fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management does
not expect this change in accounting principle to have a material impact on the
Company's financial condition or results of operations.
Employees
As of December 31, 1998, the Company had 136 full-time employees and 111
part-time employees. The Company's Management believes that its employee
relations are satisfactory.
Selected Statistical Information
Selected statistical information relating to the Company has been included
in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
D-10
<PAGE>
Item 2. Description of Property.
The Company's administrative office and main branch location, are located at
444 South Escondido Boulevard in Escondido, California., where the Company
leases approximately 26,100 square feet of a two-story professional office
building. The terms of the lease provide for two five year extension options
upon its expiration on March 31, 2006.
Other properties either owned or leased by the Company include eight other
branches, a data processing center, and a business loan office located in San
Diego and Riverside counties, a loan production office in the Seattle,
Washington area and land (a future branch site) in Riverside county. In the
opinion of Management, the Company maintains adequate comprehensive general
liability and casualty loss insurance covering its properties and activities
conducted in or about its properties.
Item 3. Legal Proceedings
From time to time, the Company and the Bank are defendants in legal
proceedings arising in the ordinary course of business. Some of these
proceedings which relate to lending, collections, and other activities may seek
substantial sums as damages. It may take a number of years to finally resolve
some of the pending legal proceedings due to their complexity and other
reasons. At December 31, 1998, the Bank was party to certain legal actions, the
potential exposure from which is not possible to determine with any certainty
at this time. However, the Company has reviewed these matters with legal
counsel and, in management's opinion, the ultimate resolution of these actions
will not have a material effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
D-11
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
North County Bancorp's Common Stock trades on the Nasdaq National Market
System under the symbol "NCBH." Although trading in the Company's Common Stock
has increased since the stock began trading on Nasdaq in July of 1996, such
trades cannot be characterized as constituting an active trading market. Based
on information provided by Nasdaq, Management believes that approximately
640,000 and 804,000 shares were traded in each of 1998 and 1997, respectively.
As reported by the National Daily Quotation Service, bid prices for the Common
Stock ranged from a low of $10.50 to a high of $15.625 during 1998 and from a
low of $7.125 to a high of $13.75 during 1997. These quotes reflect inter-
dealer prices without retail mark-ups, mark-downs or commissions and may not
necessarily have represented actual transactions. There may have been
transactions at other prices during that time. The following table provides
information with respect to the range of high and low bid prices for the
Company's stock for each quarterly period in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
High Low High Low
------- ------- ------ ------
<S> <C> <C> <C> <C>
First Quarter.................................. $15.625 $13.250 $9.875 $7.125
Second Quarter................................. 14.875 13.375 9.250 7.500
Third Quarter.................................. 13.375 10.500 10.375 8.000
Fourth Quarter................................. 12.500 11.375 13.750 10.375
</TABLE>
(b) Holders
On February 1, 1999 there were approximately 1,200 stockholders of record of
the Common Stock.
(c) Dividends
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to pay dividends primarily depends
upon the dividends it receives from the Bank. The Bank currently has
outstanding 75,000 shares of noncumulative preferred stock with a $2.00 per
share annual dividend and 166,677 shares of noncumulative preferred stock with
a $0.72 per share annual dividend. The Bank resumed the payment of dividends in
1997 on the Bank's preferred stock. Such dividends had not been paid since
1994, pursuant to formal and informal agreements with the Bank's regulators and
a Board resolution adopted in May of 1996, the last of which was terminated in
March 1997. As with the Company, any change in the Bank's dividend practices
will depend upon the Bank's earnings, financial position, current and
anticipated cash requirements and other factors deemed relevant by the Bank's
Board of Directors at that time. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources").
The Bank's ability to pay dividends to the Company is also subject to
certain legal limitations. Under California law, the Bank may declare a cash
dividend out of the Bank's net profits up to the lesser of the Bank's retained
earnings or the Bank's net income for the last three (3) fiscal years (less any
distributions made to stockholders during such period), or, with the prior
written approval of the Commissioner, in an amount not exceeding the greatest
of (i) the retained earnings of the Bank, (ii) the net income of the Bank for
its last fiscal year, or (iii) the net income of the Bank for its current
fiscal year.
In addition, under federal law, the Bank is prohibited from paying any
dividends if after making such payment the Bank would fail to meet any of its
minimum capital requirements. (See "Item 1--Business--Regulation and
Supervision--Capital Adequacy Requirements"). The federal regulators also have
the authority to prohibit the Bank from engaging in any business practices
which are considered to be unsafe or unsound, and in some circumstances the
regulators might prohibit the payment of dividends on that basis even though
such payments would otherwise be permissible.
D-12
<PAGE>
The Company's ability to pay dividends is also limited by state corporation
law. The California General Corporation Law prohibits the Company from paying
dividends on the Common Stock unless: (1) its retained earnings, immediately
prior to the dividend payment, equals or exceeds the amount of the dividend or
(2) immediately after giving effect to the dividend the sum of the Company's
assets (exclusive of goodwill and deferred charges) would be at least equal to
125% of its liabilities (not including deferred taxes, deferred income and
other deferred liabilities) and the current assets of the Company would be at
least equal to its current liabilities, or, if the average of its earnings
before taxes on income and before interest expense for the two preceding fiscal
years was less than the average of its interest expense for the two preceding
fiscal years, at least equal to 125% of the current liabilities.
The Company's practice has been to retain earnings to provide funds for the
operation and expansion of its business. Accordingly, the Company has not paid
any cash dividends on its Common Stock since 1984. Management has no current
plans to pay cash dividends in the foreseeable future. However, the Board's
practice is to review annually the advisability of paying cash dividends based
upon the Company's earnings, financial position, current and anticipated cash
requirements and other factors deemed relevant by the Board of Directors at
that time. In making any such assessment, the Board of Directors of the Company
would have to consider among other things the capital requirements of the Bank
and other factors concerning the Bank, including the dividend guidelines and
maintenance of an adequate allowance for loan losses.
D-13
<PAGE>
Item 6. Selected Financial Data.
(Dollars in thousands, except per share data)
The table below sets forth certain selected consolidated financial data for
the Company and is qualified in its entirety by the detailed information and
financial data presented in the Company's Consolidated Financial Statements and
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
As of or for the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Summary Statement of
Income Data
Interest income....... $ 25,704 $ 22,295 $ 19,840 $ 19,286 $ 17,647
Interest expense...... 6,339 5,941 5,112 5,164 4,525
--------- --------- --------- --------- ---------
Net interest income... 19,365 16,354 14,728 14,122 13,122
Provision for loan and
lease losses......... 1,474 1,122 1,300 3,306 3,135
Noninterest income.... 7,066 6,788 6,975 6,612 6,873
Noninterest expense... 16,825 16,198 15,567 15,334 16,521
--------- --------- --------- --------- ---------
Income before
provision for income
taxes................ 8,132 5,822 4,836 2,094 339
Provision for income
taxes................ 3,363 2,313 2,092 562 254
--------- --------- --------- --------- ---------
Net income............ $ 4,769 $ 3,509 $ 2,744 $ 1,532 $ 85
========= ========= ========= ========= =========
Summary Balance Sheet
Data (Period End)
Loans net of unearned
income............... $ 237,702 $ 210,991 $ 180,410 $ 161,950 $ 166,609
Allowance for loan and
lease losses......... 3,592 3,268 3,129 2,916 2,739
Investment
securities........... 43,821 29,679 34,461 26,172 27,168
Earning assets........ 298,523 244,670 217,071 198,622 198,049
Total assets.......... 337,413 280,734 257,306 237,034 246,840
Interest-bearing
deposits............. 202,594 161,703 145,407 143,108 146,450
Total deposits........ 303,059 251,555 229,344 213,839 226,101
Long term
obligations.......... 387 415 3,513 3,640 3,669
Total stockholders'
equity............... 30,000 25,193 20,172 17,227 13,756
Per Share Data (1)
Basic EPS............. $ 0.98 $ 0.78 $ 0.63 $ 0.39 $ 0.02
Diluted EPS........... 0.94 0.72 0.58 0.37 -- (2)
Book value............ 6.16 5.17 4.57 3.96 3.65
Average common
shares............... 4,868,906 4,513,556 4,366,729 3,973,170 3,767,362
Average common shares
assuming dilution.... 5,073,371 5,004,430 4,884,121 4,428,824 --
Common shares
outstanding.......... 4,868,906 4,868,906 4,417,041 4,350,975 3,767,362
Selected Financial
Ratios (3)
Return on average
stockholders'
equity............... 17.25% 15.72% 14.73% 9.97% 0.60%
Return on average
assets............... 1.54 1.28 1.11 0.66 0.03
Net interest spread
(4).................. 6.04 5.90 6.18 6.47 5.96
Net interest margin
(5).................. 7.13 6.94 7.09 7.30 6.63
Tier 1 leverage
capital ratio........ 8.80 8.76 7.70 7.17 5.47
Nonperforming loans to
total gross loans.... 0.33 1.43 1.96 3.27 3.08
Nonperforming assets
to total gross loans
and other real estate
owned (6)............ 0.49 1.89 3.44 4.68 5.13
Net charge-offs to
average loans........ 0.52 0.50 0.63 1.89 1.54
Average stockholders'
equity to average
assets............... 8.95 8.14 7.54 6.61 5.79
Loans to deposits..... 78.4 83.9 78.7 75.7 73.7
</TABLE>
- --------
(1) Restated to reflect stock dividends.
(2) The calculation of Diluted EPS upon conversion of the Company's
subordinated debentures proved to be anti-dilutive at December 31, 1994.
(3) For purposes of calculating the financial ratios, average balances are the
consolidated average balances of the Company and the Bank. Bank average
balances are based upon daily average balances, and Company average
balances are based upon month end balances.
(4) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
(6) Nonperforming assets consist of nonaccrual loans, loans past due 90 days or
more and other real estate owned.
D-14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis of the Company's results of operations and financial
condition as of and for the three years ended December 31, 1998 should be read
in conjunction with the consolidated financial statements and the notes related
thereto, and with reference to the discussion of the operations and other
financial information presented elsewhere in this report. For purposes of
calculating the financial ratios, average balances are comprised of both
average Company and Bank balances. Bank average balances are based upon daily
average balances, and Company average balances are based upon month end
balances.
Statements contained in this Report on Form 10K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date thereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward-looking statements include general economic conditions, particularly in
the Company's market areas, changes in prevailing interest rates, competitive
products and pricing, inflation, credit and other risks of lending and
investment activities, fiscal and monetary policies of the U.S. and other
governments, regulations affecting financial institutions, and other risks and
uncertainties affecting the Company's operations and personnel.
Results of Operations
Summary
A comparison of the annual results for the two years ended December 31, 1998
(see "Item 6. Selected Financial Data") reflects net income growth of
approximately 36% and 28% in 1998 and 1997, respectively, amounting to $4.8
million in 1998 compared to $3.5 million in 1997 and $2.7 million in 1996. Net
interest income, the primary contributor to the increase in earnings, rose 18%
in 1998 to $19.4 million and 11% in 1997 to $16.4 million. Basic earnings per
share increased 26% to $0.98 in 1998 and 24% to $0.78 in 1997. Diluted earnings
per share increased 31% to $0.94 in 1998 and 24% to $0.72 in 1997. The 1998
results produced returns on average assets and average equity of 1.54% and
17.25%, respectively, compared to 1.28% and 15.72%, respectively, in 1997.
Net Interest Income
Net interest income, the principal source of income for the Company, is
interest and fees earned on loans and investments less the interest paid on
deposits and borrowings. Primary factors affecting the level of net interest
income include increases or decreases in the average balances (volume) of
interest-earning assets and interest-bearing liabilities, increases or
decreases in the average rates earned and paid on these assets and liabilities,
the Company's ability to manage its earning asset portfolio and the
availability of particular sources of funds. An analysis of the Company's
taxable-equivalent net interest income and average balance sheet levels for the
last three years is presented in Table One. The changes in net interest income
from year to year are analyzed in Table Two. Interest income and yields in the
following discussion are on a tax-equivalent basis.
Net interest income increased 18% or $3.0 million in 1998 to $19.4 million
from $16.5 million in 1997. This increase was the result of loan growth and
deposit pricing management efforts. Average loans and loan yields in 1998
increased to $222.2 million at 10.31% from $195.5 million at 10.25% in 1997,
representing a 14% growth in volume and resulting in an increase of 14% or $2.9
million in loan income. Management believes that interest rates on each
category of loans in the Bank's loan portfolio are competitively priced for
banks in its market area. The yield on average loans is also influenced by the
mix of loans in the loan portfolio. Real estate construction loans, commercial
real estate loans and commercial loans are typically offered at
D-15
<PAGE>
higher interest rates and fees than residential real estate loans, lease
financing or automobile and other consumer loans. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition--Loans"). Interest on Federal funds sold increased by 90% or $394,000
due to growth of $7.8 million or 96% in average funds sold resulting from
significant deposit growth in 1998. Net interest income in 1997 increased 11%
primarily due to an increase in average interest-earning assets partly offset
by a decrease in the net interest margin. Maturities of fixed rate higher
yielding loans combined with a decrease in total consumer loans outstanding and
a declining interest rate environment decreased the yield on the loan portfolio
to 10.25% in 1997 from 10.37% in 1996. The average tax equivalent yield on
interest-earning assets was 9.45% in 1997 compared to 9.53% in 1996.
Total interest expense increased approximately 7% or $398,000 in 1998 due to
an increase of $585,000 in interest paid on deposits partly offset by decreases
of $30,000 and $157,000, respectively, in interest paid on overnight funds and
on long term borrowings. Average interest-bearing deposits grew approximately
12% or $20.1 million to $184.2 million from $164.1 million in 1997. The
increase in interest expense due to growth was partially offset by a slight
decrease in interest expense due to the average rate paid on interest-bearing
deposits declining to 3.39% in 1998 from 3.44% the prior year. Time deposits
averaged $62.4 million at an average rate paid of 5.02% in 1998 compared to
$51.6 million at 5.11% in 1997. The decrease in rates paid on deposits in 1998
compared to 1997 is attributable to a number of factors including government
easing of short term interest rates, a short term (seven months) certificate of
deposit promotion at an above market rate (6.0%) during the first part of 1997,
and the Company generally lowering interest rates as deposit growth outpaced
loan growth in 1998. The net interest margin (net interest income as a
percentage of average earning assets) increased to 7.13% in 1998 from 6.94% in
1997. This margin, however, had narrowed during the last quarter of 1998 to
6.84%, a trend that management believes is likely to continue in 1999 based on
current rate trends. The certificate of deposit promotion was the primary
reason that average time deposits increased by 47% or $16.4 million in 1997
from $35.2 million in 1996, and contributed to the $961,000 increase in
interest expense related to time deposits that year. The Company's net interest
margin decreased to 6.94% in 1997 from 7.09% in 1996. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition--Deposits.")
D-16
<PAGE>
Table One--Analysis of Taxable-Equivalent Net Interest Income
(Dollars in Thousands)
This table presents an analysis of net interest income and average balance
sheet levels for the last three years. Tax-exempt income is presented on a
tax-equivalent basis assuming a 34% federal tax rate.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------------- ----------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Income/Expense Rate/Yield Balance Income/Expense Rate/Yield Balance Income/Expense Rate/Yield
-------- -------------- ---------- -------- -------------- ---------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning
assets:
Loans(1)......... $222,193 $22,906 10.31% $195,536 $20,050 10.25% $171,906 $17,831 10.37%
Taxable
investment
securities....... 29,624 1,753 5.92 30,289 1,713 5.65 27,570 1,592 5.78
Tax-exempt
investment
securities....... 2,840 183 6.46 2,861 182 6.37 2,261 138 6.09
Interest-bearing
deposits......... 2,110 112 5.33 277 16 5.79 -- -- --
Federal funds
sold............. 15,936 833 5.23 8,124 439 5.41 7,573 385 5.08
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning
assets........... 272,703 25,787 9.46 237,087 22,400 9.45 209,310 19,946 9.53
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest-
earning assets:
Cash and due from
banks............ 23,293 23,079 22,560
Premises and
equipment, net... 9,385 8,328 9,184
Other assets(2).. 6,945 9,055 9,028
Total
noninterest-
earning assets... 39,623 40,462 40,772
Less allowance for
loan and lease
losses............ 3,517 3,264 3,233
-------- -------- --------
Total assets..... $308,809 $274,285 $246,849
======== ======== ========
Liabilities and
Stockholders'
Equity
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand.......... $ 41,391 546 1.32 $ 36,809 525 1.43 $ 36,791 528 1.44
Savings......... 80,415 2,563 3.19 75,650 2,489 3.29 75,583 2,488 3.29
Time............ 62,359 3,128 5.02 51,621 2,638 5.11 35,166 1,677 4.77
Other short term
borrowings....... 943 44 4.71 1,410 74 5.24 1,622 74 4.43
Capital lease.... 407 58 14.17 422 61 14.57 444 65 14.59
Long term debt -- -- -- 1,624 154 9.47 3,229 280 8.67
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing
liabilities...... 185,515 6,339 3.42 167,536 5,941 3.55 152,835 5,112 3.34
------- ----- ------- ----- ------- -----
Noninterest-
bearing
liabilities:
Demand deposits.. 92,885 81,958 73,298
Other
liabilities...... 2,763 2,474 2,102
-------- -------- --------
Total
liabilities...... 281,163 251,968 228,235
Stockholders'
equity............ 27,646 22,317 18,614
-------- -------- --------
Total
liabilities and
stockholders'
equity........... $308,809 $274,285 $246,849
======== ======== ========
Net interest
income (tax
equivalent
basis)............ 19,448 16,459 14,834
Reversal of tax
equivalent
adjustment........ (83) (105) (106)
Net interest
income............ $19,365 $16,354 $14,728
======= ======= =======
Net interest
spread(3)......... 6.04% 5.90% 6.18%
----- ----- -----
Net interest
margin(4)......... 7.13% 6.94% 7.09%
===== ===== =====
</TABLE>
- ----
(1) For purposes of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2) Includes average balances of real estate owned other than Company and Bank
premises during 1998, 1997, and 1996 of $837,000, $1.0 million, and $2.8
million, respectively.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
D-17
<PAGE>
Table Two--Changes in Taxable-Equivalent Net Interest Income
(Dollars in thousands)
This table sets forth the year-to-year changes in net interest income on a
fully taxable-equivalent basis for the years shown. The changes for each major
category of interest income and interest expense are divided between the
portion of change attributable to the variance in average balances (volume) or
average rates for that category. The amount of change that cannot be separated
is allocated to each variance proportionately.
<TABLE>
<CAPTION>
1998 vs. 1997
Increase 1997 vs. 1996
(Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
------ ---- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Earning assets--Interest
income:
Loans........................ $2,748 $108 $2,856 $2,425 $(206) $2,219
Investment securities:
Taxable..................... (38) 78 40 155 (34) 121
Non-taxable................. (1) 2 1 38 6 44
Federal funds sold........... 409 (15) 394 29 25 54
Interest-bearing deposits.... 97 (1) 96 16 -- 16
Total...................... 3,215 172 3,387 2,663 (209) 2,454
------ ---- ------ ------ ----- ------
Deposits and borrowed funds--
Interest expense:
Interest-bearing demand
deposits.................... 62 (41) 21 -- (3) (3)
Savings deposits............. 152 (78) 74 2 (3) (1)
Time deposits................ 540 (50) 490 833 128 961
Other short term borrowings.. (23) (7) (30) (10) 12 2
Long term debt............... (154) -- (154) (150) 24 (126)
Capital lease................ (2) (1) (3) (4) -- (4)
------ ---- ------ ------ ----- ------
Total...................... 575 (177) 398 671 158 829
------ ---- ------ ------ ----- ------
Change in net interest
income....................... $2,640 $349 $2,989 $1,992 $(367) $1,625
====== ==== ====== ====== ===== ======
</TABLE>
Provision for Loan and Lease Losses
The Company provides for loan and lease losses by a charge to operations
based upon Management's evaluation of the loan portfolio, past loan loss
experience, general economic conditions, and other pertinent factors. The
provision for loan and lease losses increased $352,000 or 31% to $1.5 million
in 1998 and decreased $178,000 or 14% to $1.1 million in 1997 as compared to
1996. The 1998 increase was attributable to an increase of approximately 13% or
$26.7 million in outstanding loans at year-end and an increase in net loans
charged off to $1.2 million or 0.52% of average loans from $1.0 million or
0.50%, respectively, in 1997. The 1997 decrease was due to a decline in net
loans charged off from $1.1 million or 0.63% of average loans outstanding in
1996, as well as a decreased provision for loan and lease losses that in
Management's opinion reflected the improvement in the Southern California
economy and in the real estate market. During 1998, 1997 and 1996, the Company
provided $640,000, $1.2 million and $400,000, respectively, to the provision
for loan and lease losses to supplement its Title I HUD reserves. As of
December 31, 1998, 1997 and 1996, the allowance for loan and lease losses
represented 1.51%, 1.55% and 1.73%, respectively, of total loans. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Allowance for Loan and Lease Losses.")
Noninterest Income
As presented in Table Three, noninterest income increased 4% or $278,000 to
$7.1 million in 1998, consisting of increases of 19% or $244,000 in gain on
loan sales and 28% or $221,000 in other income, partly
D-18
<PAGE>
offset by a decrease of 26% or $192,000 in loan servicing fees. In 1998, an
increase in SBA loan prepayments as a consequence of declining interest rates
prompted management's decision to sell $3.0 million in SBA loans and recognize
gains on loan sales of $277,000. In addition, $4.5 million in SBA "504" loans,
a relatively new line of business for the Company, were sold for gains of
$216,000. Gains on the sale of Title 1 and other equity loans declined by
$152,000 and $97,000, respectively, due to the lower volume of sales and
premiums paid for these loans. Noninterest income decreased 3% or $187,000 to
$6.8 million in 1997 from $7.0 million in 1996, due primarily to a decrease of
9% or $124,000 in gains on loan sales. The Company sold no SBA loans in 1997
compared to sales of $8.3 million in 1996 due to Management's decision to
retain these loans in its portfolio to enhance loan yields and to offset the
slow demand for other types of loans in the Company's market area. This
resulted in a decrease in the gains on the sale of SBA loans of $687,000 which
was partly offset by an increase in gains related to the sale of Title I and
other equity loans of $563,000. During 1997, the Company sold Title I and other
equity loans of $52.7 million as compared to $18.8 million in 1996. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations B Loans").
Table Three--Noninterest Income
(Dollars in thousands)
This table presents significant categories of noninterest income for each of
the last three years and the percentage change between the years.
<TABLE>
<CAPTION>
% %
Change Change
1998 98/97 1997 97/96 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Service charges on deposits............ $3,941 0.1 $3,936 2.9 $3,827
Gain on sale of loans.................. 1,545 18.6 1,301 (8.7) 1,425
Loan servicing fees.................... 561 (25.5) 753 0.8 747
Other income........................... 1,019 27.7 798 (18.2) 976
------ ----- ------ ----- ------
Total noninterest income............. $7,066 4.1 $6,788 (2.7) $6,975
====== ===== ====== ===== ======
</TABLE>
Noninterest Expense
Noninterest expense increased 4% or $627,000 in 1998 to $16.8 million
compared to a 4% increase of $631,000 in 1997 to $16.2 million from $15.6
million in 1996. A breakdown of significant noninterest expense categories for
the three years ended December 31, 1998 is presented in Table Four. Salaries
and employee benefits increased 8% or $740,000 in 1998 and 12% or $1.0 million
in 1997. On December 31, full time equivalent employees totaled 218 in 1998,
210 in 1997 and 196 in 1996. Occupancy expense increased 8% or $245,000 and 4%
or $137,000 in 1998 and 1997, respectively, during which time the Company
opened its ninth full service office and expanded its SBA business into the
Seattle, Washington area. Expenses related to the acquisition, maintenance and
sale of other real estate owned partially offset the increases in the other
expense categories with a decrease of $375,000 to a net gain of $473,000 in
1998, of which amount $289,000 was related to the sale of one property,
compared to a net gain of $98,000 in 1997 and a net loss of $614,000 in 1996.
Collection expenses incurred to recover or mitigate loan and operating losses
decreased by $157,000 in 1998 and $88,000 in 1997. The Company currently plans
additional expansion in 1999, including the opening of a full service branch in
Vista, California, the construction of a new facility for its Murrieta branch,
and is planning the possible opening of additional SBA loan production offices.
D-19
<PAGE>
Table Four--Noninterest Expense
(Dollars in thousands)
The following table presents significant categories of noninterest expense
for each of the last three years and the percentage change between the years.
<TABLE>
<CAPTION>
% %
Change Change
1998 98/97 1997 97/96 1996
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits... $ 9,888 8.1 $ 9,148 12.4 $ 8,136
Occupancy expense................ 3,477 7.6 3,232 4.4 3,095
Telephone and postage............ 895 29.9 689 6.8 645
Advertising and public
relations....................... 692 (2.7) 711 35.7 524
Professional services............ 574 11.7 514 63.2 315
Printing, stationery and
supplies........................ 335 (3.2) 346 25.8 275
Collection expense............... 76 (67.4) 233 (27.4) 321
Other real estate owned.......... (473) (382.7) (98) (116.0) 614
Other expenses................... 1,361 (4.4) 1,423 (13.3) 1,642
------- ------ ------- ------ -------
Total noninterest expense...... $16,825 3.9 $16,198 4.1 $15,567
======= ====== ======= ====== =======
</TABLE>
Impact of Year 2000 on Computer Systems
Noninterest expense includes the cost of projects to ensure accurate date
recognition and data processing with respect to the century date change
(commonly referred to as "Y2K"). The Y2K issue confronting the Company, its
suppliers, customers, customer's suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Most computer systems
in use today were designed and developed when computer memory was limited and
expensive on early mainframes. As a consequence many programs used only two
digits for the year in the date field to conserve memory. As a result, many
computer applications could fail completely or create erroneous results by the
year 2000 unless corrective measures are taken. To the extent that the problem
is not successfully addressed, consequences, the extent of which are unknown,
could impact the Company's business, operations, customers and vendors. The
Company has identified critical systems and processes and is in the process of
testing and formulating contingency plans for replacing or repairing any non-
compliant systems. The Company expects to substantially complete the Y2K
hardware and software testing, validation and remediation of its critical
systems by the end of the first quarter of 1999. The Company is also assessing
the potential impact of this problem on its customers. The related costs, which
are expensed as incurred, are primarily included in professional services,
equipment repairs (a component of occupancy expense) and salary expense. Y2K
expenses incurred through the end of 1998 amounted to approximately $175,000
and the total cost of the project is estimated to be approximately $360,000.
The Company does not believe that the costs of addressing this problem will
have a material effect on the results of its operations.
Income Taxes
The Company's income tax expense for 1998, 1997 and 1996 was $3.4 million,
$2.3 million and $2.1 million, respectively, reflecting an effective tax rate
of 41.4%, 39.7% and 43.3%, respectively. Note Eleven to the consolidated
financial statements includes a reconciliation of federal income tax expense
computed using the federal statutory rate of 34% to actual income tax expense.
D-20
<PAGE>
Financial Condition
Summary
An analysis of the summary year-end balance sheet data for 1994 through 1998
as presented in Selected Financial Data (Item 6) illustrates an increasing rate
of growth over the last four years. From 1995 to 1998, the Company's total
assets have grown an average of over 12% per year. During the same period, loan
growth averaged 13%, deposit growth averaged 12% and stockholders' equity grew
at an average rate of 20% per year.
A review of the Company's rate of growth for year-end 1998 over 1997
reflects a 20% increase in total assets, a 13% increase in total loans, and a
21% increase in deposits. A number of factors supported the growth of assets,
loans and deposits in 1998. The Company focused on opportunities to attract new
clients which were presented by bank merger and acquisition activity in its
market areas. Loan growth, primarily in commercial, commercial real estate and
construction lending, was encouraged by the expansion of the local real estate
markets. The volatile stock market helped to promote bank deposits, primarily
certificates of deposit, as a safe short term investment. The following
discussion of the Company's financial condition is segmented into loans,
investments, deposits and capital resources.
Loans
Gross loans and leases, the Company's primary use of funds, represented 70%
of total assets at December 31, 1998 compared to 75% at year-end 1997. Gross
loans increased 13% to $237.7 million at year-end 1998 and 17% to $211.0
million in 1997 from $180.4 million in 1996. Average gross loans for 1998
increased 14% or $26.7 million to $222.2 million from $195.5 million in 1997
which represented an increase of 14% from average loans of $171.9 million in
1996. Average gross loans represented 80% and 79% of total average deposits in
1998 and 1997, respectively.
As presented in Table Five, real estate construction loans at year-end 1998
had increased 92% to $19.9 million and 197% to $10.3 million in 1997 following
declines in the previous two years due to a decline in real estate values and a
generally poor economy in Southern California. During 1996 the demand for real
estate in Southern California, and therefore, real estate values, began
improving and have continued to improve through the end of 1998, largely
accounting for the increase in real estate construction loans outstanding and
undisbursed real estate construction loan commitments. Real estate construction
loans represented 8.4% and 4.9% of total loans at December 31, 1998 and 1997,
respectively. Total undisbursed commitments for these loans were $10.9 million
at year-end 1998 compared to $18.9 million the end of 1997. The Company's real
estate construction loans are primarily for single family residences located
within San Diego and Riverside counties in the $100,000 to $400,000 range.
Based upon the current housing market in its market area, management believes
real estate demand will likely continue at its current strong levels and
believes that its level of real estate construction activities will expand over
that of 1998.
Commercial real estate loans (commercial loans secured by first trust deeds
on commercial real estate) increased 20% to $51.5 million at year-end 1998 from
$42.9 million in 1997, which represented a 23% increase over $35.0 million in
1996. These increases were the result of the Company's promotional efforts in
the commercial real estate market as well as stabilization of commercial real
estate values in Southern California.
Residential mortgages decreased 25% to $2.2 million in 1998 from $2.9
million in 1997, a decrease of 13% from $3.3 million at year-end 1996. The
Company closed its residential mortgage banking operations in early 1995,
unable to generate a sufficient volume of residential mortgage loans to support
a profitable operation. At December 31, 1998, 1997 and 1996, the amount of
mortgage loans which the Company continued to service was $35.3 million, $45.7
million and $51.6 million, respectively, with related servicing income of
$104,000, $145,000 and $149,000, respectively. Declining home mortgage rates
have increased mortgage refinancing activity, which, if continued, will
continue to reduce servicing income on these loans.
D-21
<PAGE>
Table Five--Loan Distribution
(Dollars in thousands)
The following table sets forth the amount of total loans outstanding in each
category and the percentage of total loans of each category at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial loans......... $128,298 $111,726 $ 81,692 $ 74,755 $ 75,700
Commercial real estate
loans................... 51,520 42,891 35,012 23,075 19,287
Installment and consumer
loans................... 34,171 41,024 53,815 46,748 45,022
Real estate construction
loans................... 19,881 10,334 3,481 9,212 14,211
Residential real estate
loans................... 2,192 2,912 3,340 3,795 7,454
Lease financing.......... 617 1,270 2,329 3,586 4,148
All other loans
(including overdrafts).. 1,023 834 741 779 787
-------- -------- -------- -------- --------
Total gross loans....... 237,702 210,991 180,410 161,950 166,609
Less: Allowance for loan
and lease losses........ 3,592 3,268 3,129 2,916 2,739
-------- -------- -------- -------- --------
Total net loans(1)...... $234,110 $207,723 $177,281 $159,034 $163,870
======== ======== ======== ======== ========
Percentage of Total
Loans:
Commercial loans......... 54.0% 53.0% 45.3% 46.2% 45.4%
Commercial real estate
loans................... 21.6 20.3 19.4 14.2 11.6
Installment and consumer
loans................... 14.4 19.4 29.8 28.9 27.0
Real estate construction
loans................... 8.4 4.9 1.9 5.7 8.5
Residential real estate
loans................... 0.9 1.4 1.9 2.3 4.5
Lease financing.......... 0.3 0.6 1.3 2.2 2.5
All other loans
(including overdrafts).. 0.4 0.4 0.4 0.5 0.5
-------- -------- -------- -------- --------
Total gross loans....... 100.0 100.0 100.0 100.0 100.0
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Net of participations sold of $1.5 million, $2.2 million, $2.2 million,
$2.9 million, and $4.2 million in 1998, 1997, 1996, 1995, and 1994,
respectively. Participations are sold without recourse.
Commercial loans, as illustrated in Table Five, have grown at annual rates
of 15%, 37% and 9% in 1998, 1997 and 1996, respectively, representing 54%, 53%
and 45% of year-end gross loans in 1998, 1997, and 1996, respectively.
Commercial lending is primarily to professionals and companies with sales from
$1 million to $15 million. The Company also originates loans partially
guaranteed by the SBA which are included in the commercial loan category and
were largely responsible for the growth in 1998 and 1997. SBA loans have
maturities ranging from seven to 25 years and are currently guaranteed up to
80% by the SBA. These loans increased 19% to $65.8 million in 1998 from $55.1
million in 1997, representing an increase of 87% over $29.5 million at year-end
1996. The increases were largely due to expansion of the Company's market area
in 1997 and to Management's decision during 1996 to retain these loans rather
than sell the guaranteed portions for a premium. The Company's SBA loan
originations totaled approximately $29.6 million, $35.0 million and $15.4
million in 1998, 1997 and 1996, respectively. In 1997, the Company opened two
new offices for the production of SBA lending, located in the Seattle,
Washington area and Orange County, California. The Orange County office proved
unprofitable due to strong competition in that market and was closed in January
1999. The Company intends to continue expanding its SBA lending activities
possibly entering new geographic markets in 1999. In 1996, Management's
decision to reduce the volume of SBA loan sales and retain these loans in the
portfolio was due to the low level of demand for other types of loans.
Management does not currently intend to sell a significant amount of these
loans, however, some sales are likely depending on loan demand, premium levels,
prepayment risk and the characteristics of these loans. SBA loan sales totaled
$7.5 million in 1998, $0 in 1997 and $8.3 million in 1996.
D-22
<PAGE>
Installment and consumer loans have shown a steady rate of decline in total
and as a percentage of gross loans since 1996. These loans decreased 17% and
24% in 1998 and 1997, respectively, and represented 14% and 19% of total gross
loans, respectively. As of year-end 1996, this category had increased 15% over
the prior year and constituted 30% of gross loans. The four largest sub-
categories of installment and consumer loans are automobile loans, Title I home
improvement loans, home equity lines of credit and other home equity loans. The
decreases in installment and consumer loans in 1998 and 1997 and the increase
in 1996 were due primarily to the Company's Title I loan activities. Title I
loans decreased 31% to $7.2 million in 1998 and decreased 55% to $10.4 million
in 1997 from $23.0 million in 1996, an increase of 92% from $12.0 million at
year-end 1995.
Title I loans are secured by junior liens on residential properties and
insured up to 90% by an agency of the U.S. Government. The proceeds of Title I
loans must be used for home improvements. In addition to offering these loans
to its customers, the Company also purchases Title I loans from other Title I
lenders. The amount of Title I loans that the Company originated or purchased
declined to approximately $2.5 million in 1998 and $6.8 million in 1997 from
$18.0 million in 1996, due to increased competition in the Title I market and
the the rising popularity of other home equity loans. Prior to 1997, the
Company's policy was to hold certain Title I loans in its portfolio and sell
the remaining loans often retaining the servicing rights. A higher than
acceptable loss ratio, however, prompted the Company to change its policy and
currently the Company sells all Title I loan originations immediately resulting
in a large volume of sales in 1997. The Company continues to hold $7.2 million
of Title I loans as of December 31, 1998 compared to $10.4 million in 1997.
During 1998, 1997 and 1996, the Company sold a total of $2.1 million, $18.5
million and $5.3 million, respectively, in Title I loans. The Company serviced
a total of $2.3 million, $3.6 million and $9.3 million in Title I loans at
December 31, 1998, 1997 and 1996, respectively.
Other home equity loans are secured by junior trust deeds on residential
properties and may be made to homeowners with little or no equity in the
property. Unlike Title I loans, the proceeds can be used for a variety of
purposes the most common of which are home improvement and debt consolidation.
The Company purchases and originates equity loans for immediate sale into the
secondary market. As a result of increased demand for other types of equity
loans, and to mitigate the impact of decreased premiums from the sale of
Title I loans to current income, the Bank increased its volume in other equity
loans during 1997 and 1996. The secondary market demand for these loans
decelerated in 1998 and consequently the Company's volume declined. During
1998, 1997 and 1996, the Bank originated or purchased approximately $30.4
million, $37.1 million and $13.5 million, respectively, in equity loans which
were sold in the secondary market. These loans totaled $ 3.2 million, $4.5
million, and $1.2 million at year-end 1998, 1997 and 1996, respectively.
Despite the recent decline in demand for Title I and other home equity loans,
the Company currently intends to remain active in this line of business.
Home equity lines of credit, secured primarily by second trust deeds on
single family residences, declined 7% to $6.0 million in 1998 from $6.5 million
in 1997, a decrease of 12% from $7.4 million the prior year. The Company
requires a debt-to-value ratio of not higher than 80% for home equity lines.
Automobile loans increased only 1% in 1998 to $9.5 million after decreasing 2%
to $9.4 million in 1997 from $9.6 million at year-end 1996. The decline in the
volume of automobile loans since 1996 is due to the intense competition from
other bank and non-bank lenders in this market.
The Company provides lease financing to municipalities and school districts
in its market area subject to the same underwriting considerations and criteria
as commercial loans. These leases are qualified tax-exempt lease obligations
for federal income tax purposes. Low taxable-equivalent yields as compared to
commercial, commercial real estate and SBA loans has significantly reduced the
Company's level of activity in these leases (see Table Five).
In the usual course of business, the Company makes commitments to extend
credit provided there is no violation of any conditions established in the loan
contract. Total unfunded commitments to extend credit were $68.5 million, $68.4
million and $45.1 million at December 31, 1998, 1997 and 1996, respectively,
and included standby letters of credit of $1.3 million, $1.7 million, and $1.9
million, respectively.
D-23
<PAGE>
Loan repayments and maturities represent a significant source of liquidity
for the Company. Table Six shows selected loan maturity data as of December 31,
1998 and indicates that 34% of the selected loans had contractual maturities of
one year or less.
Table Six--Selected Loan Maturity Data
(Dollars in thousands)
This table presents maturity distribution and interest sensitivity of
selected loan categories (excluding nonaccrual commercial loans of $387,000).
Maturities are presented on a contractual basis.
<TABLE>
<CAPTION>
Maturing
--------------------------------------
After One More Than
Within But Within Five
One Year Five Years Years Total
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Real estate construction loans...... $19,320 $ 561 $ -- $ 19,881
Commercial loans.................... 30,345 28,397 69,169 127,911
------- ------- ------- --------
Total............................. $49,665 $28,958 $69,169 $147,405
======= ======= ======= ========
Sensitivity of loans due after one
year
to changes in interest rates:
Fixed interest rate................ $16,320 $ 7,531 $ 23,851
Floating or adjustable interest
rate.............................. 12,638 61,638 74,276
------- ------- ------- --------
Total............................. $28,958 $69,169 $ 98,127
======= ======= ========
</TABLE>
Nonperforming Assets and Restructured Loans
Nonperforming assets consist of nonperforming loans and other real estate
owned ("OREO"). The Company considers a loan to be nonperforming when any one
of the following events occurs: (i) any installment of principal or interest is
90 days past due; (ii) the full timely collection of interest or principal
becomes uncertain; (iii) the loan is classified as "doubtful" by bank
examiners; or (iv) a portion of its principal balance has been charged-off.
OREO, which is any real estate owned other than banking premises, typically
consists of foreclosed properties.
Total nonperforming assets declined 71% to $1.2 million at December 31, 1998
from $4.0 million at year-end 1997, a decline of 36% from $6.3 million the
prior year-end. This progress was the result of the Company's continued efforts
to improve asset quality, as well as improvement in the Southern California
economy. As presented in Table Seven, nonaccrual loans decreased 74% to
$788,000 at December 31, 1998 from $3.0 million at year-end 1997, a 15%
decrease from $3.5 million at December 31, 1996. OREO at December 31, 1998
totaled $374,000, a decrease of 62% from $986,000 at the end of 1997, which
represented a decrease of 64% as compared to $2.8 million at December 31, 1996.
OREO is recorded at its net realizable value at the time the asset is
transferred to OREO. Additional writedowns in the value of the properties may
occur depending upon changes in the market, annual appraisals of the property
and the estimated length of time needed to dispose of the property. The Company
has experienced some improvement in its ability to dispose of its OREO over the
last several years, selling nine properties that totaled $1.2 million in 1998,
thirteen properties that totaled $3.3 million in 1997 and 22 properties that
totaled $2.8 million in 1996. At December 31, 1998, OREO consisted of one
single family residence totaling $306,000, five parcels of vacant land zoned
for residential use carried at $68,000 and one parcel of vacant land zoned for
commercial use carried at $0.
D-24
<PAGE>
Interest income included in net interest income relating to nonaccrual loans
was $38,000 and $123,000 for the years ended December 31, 1998 and 1997,
respectively. Additional interest income of $62,000 and $212,000 would have
been recorded during 1998 and 1997, respectively, if the loans had been paid in
accordance with their original terms.
Table Seven--Nonperforming Assets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due and
still accruing (as to principal
or interest):
Installment and consumer loans .. $ -- $ -- $ -- $ -- $ 14
------ ------ ------ ------ ------
Nonaccrual loans:
Residential real estate.......... 130 -- 150 317 622
Commercial real estate........... -- -- -- 778 565
Real estate construction......... -- -- 581 1,506 1,389
Commercial....................... 387 2,163 1,540 1,560 1,775
Installment and consumer loans... 271 858 1,270 1,129 767
Total........................... 788 3,021 3,541 5,290 5,118
------ ------ ------ ------ ------
Total nonperforming loans....... 788 3,021 3,541 5,290 5,132
Other real estate owned........... 374 986 2,756 2,402 3,607
Total nonperforming assets...... $1,162 $4,007 $6,297 $7,692 $8,739
====== ====== ====== ====== ======
Nonperforming loans to total gross
loans............................ 0.33% 1.43% 1.96% 3.27% 3.08%
====== ====== ====== ====== ======
Nonperforming assets to total
gross loans plus other real
estate owned..................... 0.49% 1.89% 3.44% 4.68% 5.13%
====== ====== ====== ====== ======
</TABLE>
Other past due loans at December 31, 1998 included $877,000 of loans past
due more than 30 days but less than 90 days.
Table Eight--Restructured Loans
(Dollars in thousands)
The following table provides information with respect to the components of
the Company's restructured loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential real estate.................. $ 151 $ 171 $ 240 $ 548 $ 646
Commercial real estate................... 4,759 3,207 3,853 4,405 2,960
Real estate construction................. -- -- 581 1,506 1,171
Commercial............................... 166 484 731 479 1,354
------ ------ ------ ------ ------
Total restructured loans............... $5,076 $3,862 $5,405 $6,938 $6,131
====== ====== ====== ====== ======
</TABLE>
Restructured loans consist of loans whose terms have been modified to
provide some relief from the scheduled interest and principal payments in light
of the customer's financial difficulties, the objective of which is to maximize
the Bank's possibility of collection. Restructured loans totaled $5.1 million
and $3.9 million at December 31, 1998 and 1997, respectively. There were no
restructured loans accounted for as nonaccrual loans at December 31, 1998.
Restructured loans includes $115,000 and $45,000 in residential real estate
loans and commercial loans, respectively, which were accounted for as
nonaccrual loans at December 31, 1997.
D-25
<PAGE>
A loan is deemed to be impaired when it is probable that a creditor may not
collect amounts due according to the original contractual terms of the original
loan agreement. Impaired loans are measured using one of the following methods:
(i) the present value of expected cash flows discounted at the loan's effective
interest rate; (ii) the observable value of the loan's market price; or (iii)
the fair value of the collateral if the loan is collateral dependent. All
impaired loans at December 31, 1998 were measured based on the fair value of
the loan collateral. Interest income on impaired loans is recognized on a cash
basis.
The Bank's recorded investments in impaired loans at December 31, 1998 and
1997, were $954,000 and $2,163,000, respectively. Reserves for loan losses of
$48,000 and $151,000 were established for impaired loans at December 31, 1998
and 1997, respectively. The average recorded investments in impaired loans
during 1998 and 1997 were $1,654,000 and $2,528,000, respectively. Interest
income on impaired loans of $16,000 and $120,000 was recognized for cash
payments received in 1998 and 1997. The Company is not committed to lend
additional funds to debtors whose loans have been modified.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses at December 31, 1998 totaled $3.6
million or 1.51% of total gross loans as compared to $3.3 million or 1.55% of
total gross loans at December 31, 1997 and $3.1 million or 1.73% of total gross
loans at December 31, 1996.
It is the Company's practice to maintain the allowance for loan and lease
losses at a level considered by Management to be adequate. Each month
Management calculates a minimum acceptable allowance for loan and lease losses
using an internal rating system based upon the risk associated with various
categories of loans. In determining the actual allowance for loan and lease
losses to be maintained, Management augments this calculation with an analysis
of the present and prospective financial condition of certain borrowers,
industry concentrations within the portfolio, trends in delinquent and
nonaccrual loans and general economic conditions. A portion of the calculation
is based upon the historical loss experience of the preceding five years and in
some risk categories the degree of collateralization. The risk assigned to each
loan is first determined when the loan is originated. It is then reviewed
quarterly and revised as appropriate. In addition, the Company maintains a
monitoring system for all credits that have been identified either internally
or externally as warranting additional Management attention. These credits are
formally reported to Management by the lending officers on a quarterly basis
and are subsequently reviewed by the Loan Committee of the Board of Directors.
Reserves against these loans are based on the credit risk assigned to the loans
as described above utilizing a schedule of percentages developed by Management
in accordance with historical loss experience, ranging from 0.5% to 50% of the
present loan balances. These percentages may be modified, based upon current or
prospective local economic conditions. The comments of bank examiners, the
Company's independent auditors and a third party loan review consultant hired
by the Company on a periodic basis are also considered in revising risk
category assignments.
The allowance for loan and lease losses is based upon estimates and ultimate
losses may vary from current estimates. The continuing evaluation of the loan
portfolio and assessment of current economic conditions will dictate future
funding levels. Management believes that the allowance for loan and lease
losses at December 31, 1998 was adequate to absorb the known and inherent risks
in the loan portfolio. However, no assurance can be given that changes in the
current economic environment in the Company's principal market area or other
circumstances will not result in increased losses in the Company's loan
portfolio in the future. Net charged-off loans as a percentage of the beginning
of the period allowance for loan and lease losses were 35.2%, 31.4% and 37.3%
in 1998, 1997 and 1996, respectively.
Table Nine summarizes, for the periods indicated, loan balances at the end
of each period and daily averages during the period, changes in the allowance
for loan and lease losses arising from loans charged off, recoveries on loans
previously charged off, and additions to the allowance which have been charged
to operating expense; and certain ratios relating to the allowance for loan
losses.
D-26
<PAGE>
Table Nine--Allowance for Loan and Lease Losses
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES:
Average loans during
period..................... $222,193 $195,536 $171,906 $165,374 $168,076
Loans at end of period...... 237,702 210,991 180,410 161,950 166,609
ALLOWANCE FOR LOAN AND LEASE
LOSSES:
Balance at beginning of
period..................... 3,268 3,129 2,916 2,739 2,195
Actual charge-offs:
Residential real estate
loans..................... -- 13 10 137 380
Commercial real estate
loans..................... -- -- 88 46 --
Real estate construction
loans..................... -- -- 263 525 71
Commercial loans........... 291 502 450 1,514 1,595
Installment and consumer
loans..................... 1,110 1,054 609 1,022 804
-------- -------- -------- -------- --------
Total..................... 1,401 1,569 1,420 3,244 2,850
Recoveries on loans
previously charged off:
Residential real estate
loans..................... -- -- -- -- --
Commercial real estate
loans..................... 35 -- -- -- --
Real estate construction
loans..................... -- 489 -- -- --
Commercial loans........... 98 33 274 47 184
Installment and consumer
loans..................... 118 64 59 68 75
-------- -------- -------- -------- --------
Total..................... 251 586 333 115 259
Net loan charge-offs........ 1,150 983 1,087 3,129 2,591
Provision for loan and lease
losses..................... 1,474 1,122 1,300 3,306 3,135
-------- -------- -------- -------- --------
Balance at end of period.... $ 3,592 $ 3,268 $ 3,129 $ 2,916 $ 2,739
======== ======== ======== ======== ========
RATIOS:
Net loan charge-offs to
average loans.............. 0.52% 0.50% 0.63% 1.89% 1.54%
Allowance for loan and lease
losses to loans at end of
period..................... 1.51 1.55 1.73 1.80 1.64
Net loan charge-offs to
beginning of the period
allowance for loan and
lease losses............... 35.2 31.4 37.3 114.2 118.0
Net loan charge-offs to
provision for loan and
lease losses............... 78.0 87.6 83.6 94.7 82.7
</TABLE>
Each type of loan made by the Company presents various types of risk of loss
to the Company. The primary risk element considered by Management with respect
to each installment, commercial real estate and residential real estate loan is
lack of timely payment and the value of the collateral. The primary risk
elements with respect to real estate construction loans are fluctuations in
real estate values in the Company's market areas, inaccurate estimates of
construction costs, fluctuations in interest rates, the availability of
conventional financing, the demand for housing in the Company's market area and
general economic conditions. The primary risk elements with respect to
commercial loans are the financial condition of the borrower, general economic
conditions in the Company's market area, the sufficiency of collateral, the
timeliness of payment and with respect to adjustable rate loans and interest
rate fluctuations. Management has a policy of requesting and reviewing annual
financial statements from its commercial loan customers and periodically
reviews the existence and value of its collateral. Management also has a
reporting system that monitors all past due loans and has adopted policies to
pursue its creditor's rights in order to preserve the Company's position.
D-27
<PAGE>
Loans are charged against the allowance when, in Management's opinion, they
are deemed uncollectible, although the Company continues to aggressively pursue
collection. Although Management believes that the allowance for loan and lease
losses is adequate to absorb losses as they arise, there can be no assurance
that (i) the Company will not sustain losses in any given period which could be
substantial in relation to the size of the allowance for loan and lease losses,
(ii) the Company's level of nonperforming loans will not increase, (iii) the
Company will not be required to make significant additional provisions to its
allowance for loan and lease losses, or (iv) the level of net charge-offs will
not increase and possibly exceed applicable reserves.
Investment Portfolio
The Company's investment strategy is to maximize portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the investment strategy are to provide adequate levels of investment income and
secondarily to maintain an appropriate level of liquidity. The decision to
purchase or sell securities is based upon the current assessment of economic
and financial conditions, including the interest rate environment and liquidity
requirements. Among other things, the Company's investment policy prohibits
investments in derivative securities.
At December 31, 1998, investment securities totaled $43.8 million or 13% of
total assets, an increase of 48% compared to $29.7 million or 11% of total
assets at December 31, 1997. The 1998 increase was funded by deposit growth
which outpaced growth in the loan portfolio, the Company's primary use of
funds. Average investment securities in 1998 actually decreased slightly by 2%
to $32.5 million from $33.2 million in 1997. Investment purchases in 1998
totaled $29.5 million, of which $21.2 million were in Federal agency
securities. The Company utilizes the services of a professional investment
advisor on a portion of its investment portfolio for which it pays a fee.
The Company's investment securities are classified into two portfolios:
available for sale and held to maturity. The Company does not maintain a
trading portfolio. Investments classified as available for sale are carried at
market value, with the unrealized gain or loss net of tax effect accumulated as
other comprehensive income, a separate component of stockholders' equity.
Unrealized gains of $71,000 in 1998 and unrealized losses of $3,000 and
$156,000 for 1997 and 1996, respectively, were recognized in the available for
sale portfolio. Held to maturity investments are carried at amortized cost.
Table Ten presents the year-end carrying value for the total portfolio for each
of the investment categories for the past three years.
Table Ten--Investment Securities
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Available for Sale:
U.S. Treasury securities............................... $ -- $ -- $ 501
Obligations of other U.S. government agencies.......... -- 1,002 9,022
Obligations of states and political sub-divisions...... 2,085 2,116 2,142
Mortgage-backed securities............................. 13,306 12,896 7,362
Equity securities(1)................................... 1,802 1,530 4,090
------- ------- -------
Total................................................ $17,193 $17,544 $23,117
======= ======= =======
Held to Maturity:
U.S. Treasury securities............................... $ 301 $ 301 $ 747
Obligations of other U.S. government agencies.......... 21,854 7,478 5,674
Obligations of states and political sub-divisions...... 1,849 1,748 1,751
Mortgage-backed securities............................. 2,041 2,608 3,172
Asset-backed securities 583 -- --
------- ------- -------
Total................................................ $26,628 $12,135 $11,344
======= ======= =======
</TABLE>
D-28
<PAGE>
- --------
(1) Equity securities in 1998, 1997 and 1996, included $687,000, $498,000 and
$3.4 million, respectively, in government securities bond and money market
funds which invest in securities guaranteed by the U.S. Government,
$877,000, $794,000 and $733,000 in Federal Home Loan Bank stock in 1998,
1997 and 1996, respectively, and $238,000 in Federal Reserve Bank stock in
1998 and 1997. Equity securities, part of the available for sale portfolio,
are carried on the books of the Company at the lower of aggregate cost or
market. In 1998, 1997 and 1996 stockholders' equity was reduced by $39,000,
$36,000 and $68,000, respectively to reflect a decline in the market value
of these securities.
The Company's available for sale portfolio consists primarily of mortgage-
backed securities, which constituted 77% and 74%, respectively, of this
portfolio at the end of 1998 and 1997. Most of these securities are comprised
of adjustable rate mortgages most commonly tied to the one, three or five year
U.S. Treasuries or the Federal Home Loan Bank Eleventh District cost of funds
index. Although market value may fluctuate, the interest rates of the
individual mortgages in these pools are periodically adjusting to current
rates, resulting in an asset with a market value that is relatively stable
compared to a fixed rate security with similar characteristics, reducing the
Company's interest rate risk. Also, due to an active secondary market,
mortgage-backed securities can offer liquidity similar to U.S. Treasury
securities at yields that are typically higher than comparable Treasury
securities.
The held to maturity portfolio consists primarily of U.S. Government and
Federal agency securities, which comprised 82% and 62%, respectively, of this
portfolio at the end of 1998 and 1997. This security category contained $5.0
million, or 19% of the portfolio total, in agency discount notes at the end of
1998, which matured within one month and offered a higher yielding alternative
for investing excess liquidity as compared to Federal funds sold.
Table Eleven--Investment Portfolio Maturities and Yields
(Dollars in thousands)
This table summarizes the maturity of the Company's investment securities
and their weighted average yields at December 31, 1998. Tax-exempt income from
investment securities is presented on a tax-equivalent basis assuming a 34%
federal income tax rate for 1998. Mortgage-backed securities are categorized
based on final maturity dates.
<TABLE>
<CAPTION>
Within One After One But After Five But After Ten
Year Within Five Years Within Ten Years Years Total
------------- ------------------- ----------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ---------- -------- --------- ------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $ 301 5.15% $ -- -- % $ -- -- % $ -- -- % $ 301 5.15%
Obligations of other
U.S. government
agencies............... 6,499 5.27 10,147 6.01 5,208 6.13 -- -- 21,854 5.82
Obligations of states
and political
subdivisions........... 2,716 6.26 619 6.43 -- -- 599 6.32 3,934 6.30
Mortgage-backed
securities............. -- -- 210 8.20 1,192 7.06 13,945 6.53 15,347 6.59
Asset-backed
securities............. 583 5.25 -- -- -- -- -- -- 583 5.25
Equity securities....... 1,802 5.50 -- -- -- -- -- -- 1,802 5.50
------- ---------- --------- ------- -------
Total investment
securities............. $11,901 5.52% $ 10,976 6.08% $ 6,400 6.31% $14,544 6.52% $43,821 6.11%
======= ========== ========= ======= =======
</TABLE>
Deposits
Total average deposits during 1998 increased 13% to $277.1 million compared
to $246.0 million in 1997, an increase of 11% from $220.8 million in 1996. The
following discussion addresses changes in average balances in 1998 and 1997
compared to the prior years. Average deposit balances and yields are presented
in Table Twelve. The largest percentage increases in 1998 were in noninterest-
bearing demand accounts which increased by 13% to $92.9 million and time
deposits which increased by 21% to $62.4 million. There were no significant
shifts in average deposit mix in 1998. As a percentage of total deposits,
noninterest-bearing demand
D-29
<PAGE>
deposits were at 34%, interest-bearing demand accounts at 15%, savings and
money market accounts at 29% and time deposits at 23%. Time deposits as a
percentage of total deposits increased to 21% in 1997 from 16% the prior year
due to a local deposit promotion during the first part of 1997 that raised
approximately $17.0 million in seven month certificates of deposit.
Noninterest-bearing demand deposits increased 12% or $8.7 million during 1997
and represented 33% of total deposits at both December 31, 1997 and 1996,
respectively.
The levels of noninterest-bearing demand deposits (including retail
accounts) are influenced by such factors as customer service, service charges
and the availability of banking services (i.e., extended hours, convenience of
location, availability of ATMs). No assurance can be given that the Company
will be able to maintain its current level of noninterest-bearing deposits. The
Company's percentage of noninterest-bearing deposits remains high compared to
similar sized institutions. Competition from other banks and thrift
institutions as well as money market funds, some of which offer interest rates
substantially higher than the Company, makes it difficult for the Company to
maintain the current level of noninterest-bearing deposits. Management
continually works to implement pricing and marketing strategies designed to
lower the average rate paid on interest-bearing deposits and to maintain a
stable deposit mix. The rapid rise in time deposits during 1998 precipitated
Management's efforts to reduce interest expense by lowering the rates paid on
time deposits which is expected to continue into 1999.
Table Twelve--Average Deposits
(Dollars in thousands)
This table summarizes the distribution of average deposits and the average
rates paid for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits.................. $ 92,885 -- $ 81,958 -- $ 73,298 --
Interest-bearing demand
deposits.................. 41,391 1.32% 36,809 1.43% 36,791 1.44%
Savings deposits........... 80,415 3.19 75,650 3.29 75,583 3.29
Time deposits.............. 62,359 5.02 51,621 5.11 35,166 4.77
-------- ---- -------- ---- -------- ----
Total deposits............. $277,050 2.25% $246,038 2.30% $220,838 2.13%
======== ==== ======== ==== ======== ====
</TABLE>
As part of its asset/liability management policy, the Company generally
limits the issuance of time deposits of $100,000 or greater primarily to
customers who have other business relationships with the Company and who reside
within the Company's market area, although the Company may offer such deposits
to others to help it meet its liquidity needs. The Company generally limits the
terms of these deposits to less than one year in order to allow it to react
quickly to changing interest rates. Table Thirteen depicts the maturity
distribution of these deposits at year-end 1998. At December 31, 1998 and 1997,
time deposits of $100,000 or more totaled $20.9 million and $9.2 million,
respectively, representing 7% and 4% of total period-end deposits,
respectively.
D-30
<PAGE>
Table Thirteen--Maturity of Time Deposit of $100,000 or More
(Dollars in thousands)
<TABLE>
<CAPTION>
Time Deposits Maturing In December 31, 1998
------------------------- -----------------
<S> <C>
Three months or less....................................... $11,062
Over three months through six months....................... 2,117
Over six months through twelve months...................... 5,537
Over twelve months......................................... 2,152
-------
Total.................................................... $20,868
=======
</TABLE>
Capital Resources
Stockholders' equity increased $4.8 million or 19% to $30.0 million at
December 31, 1998, from $25.2 million at December 31, 1997. This increase was
due to net income of $4.8 million and an increase of $41,000 in unrealized
gains on available for sale securities, net of $33,000 in income taxes.
Stockholders' equity increased $5.0 million or 25% to $25.2 million at year-end
1997 from $20.2 million the prior year-end. This increase was due to net income
of $3.5 million, the conversion of subordinated debentures, net of deferred
offering costs, of $1.4 million, and a decrease of $84,000 in unrealized losses
on available for sale securities, net of $69,000 in taxes. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations.")
Under the risk-based capital guidelines for banks and bank holding companies
adopted by the federal banking regulators in 1988 the Company and the Bank are
required to maintain a minimum ratio of total capital to total risk-weighted
assets of 8.00% (at least one-half of which must consist of Tier 1 capital).
Risk-based capital ratios are calculated to provide a measure of capital that
reflects the degree of risk associated with banking organization's operations
for both transactions reported on the balance sheet as assets, and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off-balance sheet items.
Additionally, the federal banking regulators adopted minimum Tier 1 leverage
capital ratio requirements in 1990 supplementing the risked-based capital
regulations and replacing minimum leverage ratios used prior to 1990. The rules
require a minimum ratio of Tier 1 capital to total assets of 3.00% for
institutions receiving the highest regulatory rating. All other institutions
are required to meet a minimum ratio of 4.00% to 5.00%. Tier 1 capital consists
of common equity, minority interest in equity of consolidated subsidiaries, and
qualifying perpetual preferred stock. Table Fourteen presents the risk-based
and Tier 1 leverage capital ratios for the Company and the Bank at year-end
1998 and 1997. (See "Description of Business--Regulation and Supervision--
Capital Adequacy Requirements").
Table Fourteen--Capital Ratios
<TABLE>
<CAPTION>
North County Bancorp North County Bank
---------------------- ------------------
1998 1997 1998 1997
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Risk-based Capital:
Tier 1......................... 11.68% 10.88% 11.58% 10.85%
Total.......................... 12.93% 12.14% 12.83% 12.10%
Tier 1 leverage capital.......... 8.80% 8.76% 8.72% 8.73%
</TABLE>
In May 1990, the Company issued $1.7 million in 9 1/4% convertible
subordinated debentures (the "Debentures"). In September 1997, at which time
$1.5 million in Debentures remained outstanding, the Company announced that it
was exercising its option to redeem the Debentures at a price of 102.25%
effective October 31, 1997. Most holders of the Debentures elected to convert
to common stock, receiving 267 shares per $1,000 face value of Debentures,
representing a conversion price of $3.74. The conversion of Debentures during
1997 resulted in an increase in common stock, a component of Tier 1 capital, of
$1.4 million, net of deferred offering costs of $101,000.
D-31
<PAGE>
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to meet its obligations depends
upon the dividends it receives from the Bank. The Bank resumed the payment of
dividends in 1997 on the Bank's preferred stock. Such dividends had not been
paid since 1994, pursuant to formal and informal agreements with the Bank's
regulators and a Board resolution adopted in May of 1996, the last of which was
terminated in March 1997.
As of December 31, 1995, the Bank, operating under the terms of a regulatory
order (the "Order") entered into with the FDIC in May 1995 and an informal
agreement entered into with the California Superintendent of Banks in April
1994, had agreed, among other things, not to pay cash dividends to the Company
without the prior consent of the FDIC. The Order was terminated in May of 1996,
when, at the request of the FDIC, the Board passed a resolution stating that
the Bank would: (i) maintain an adequate level of capital, (ii) continue to
reduce its overall level of classified assets, (iii) strengthen certain credit
review procedures, (iv) increase and stabilize its earnings, and (v) correct
certain deficiencies in its internal audit and regulatory compliance programs.
The FDIC lifted this restriction in March 1997.
During 1999, Management anticipates capital expenditures of approximately
$2.4 million primarily related to construction of a new office facility for its
existing Murrieta branch scheduled to open in the third quarter of 1999, and
the opening of a full service branch office located at Palomar Airport Road and
Business Park Drive in the City of Vista, California. This office, which will
be a leased facility, is scheduled to open in mid 1999.
Liquidity and Asset/Liability Management
The liquidity of a banking institution reflects its ability to provide funds
to meet customer credit needs, to accommodate possible outflows in deposits, to
provide funds for day-to-day operations, and to take advantage of interest rate
market opportunities. Funding of loan requests, providing for liability
outflows, and management of interest rate risk requires continuous analysis in
order to match the maturities of categories of loans and investments with the
maturities of deposits and bank-related borrowings. A bank's liquidity is
normally considered in terms of the nature and mix of its sources and uses of
funds. Asset liquidity is provided by cash, certificates of deposit with other
financial institutions, Federal funds sold, maturing investments, and loan
maturities and repayments. Liquid assets (consisting of cash, Federal funds
sold and investment securities) comprised 26.0% and 20.6% of the Company's
total assets at December 31, 1998 and 1997, respectively. Liquidity management
also includes the management of unfunded commitments to make loans and
undisbursed amounts under lines of credit. At December 31, 1998 these
commitments totaled $45.3 million in commercial loans, $1.3 million in letters
of credit, $10.9 million in real estate construction loans, and $11.1 million
in installment and consumer loans. At December 31, 1997 these commitments
totaled $37.5 million in commercial loans, $1.7 million in letters of credit,
$18.9 million in real estate construction loans, and $10.4 million in
installment and consumer loans. Average Federal funds sold were $15.9 million
in 1998 and $8.1 million in 1997.
The Bank also has several secondary sources of liquidity. Many of the Bank's
real estate construction, commercial real estate and SBA loans are originated
pursuant to underwriting standards which make them readily marketable to other
financial institutions or investors in the secondary market. In addition, in
order to meet liquidity needs on a temporary basis, the Bank has unsecured
lines of credit in the amount of $15.0 million for the purchase of Federal
funds with other financial institutions and may borrow funds from the Federal
Home Loan Bank and at the Federal Reserve discount window subject to the Bank's
ability to supply collateral. Average Federal funds purchased were $291,000 and
$272,000 in 1998 and 1997, respectively.
The Company regularly monitors the interest rate sensitivity of its assets
and liabilities and has established guidelines for each asset and liability
category and for its interest rate sensitivity position overall. From time to
time Management may emphasize or de-emphasize certain products, change its
product mix, product pricing, funding policies or take other actions to
maintain an acceptable level of interest rate risk. The Company attempts to
minimize the impact of interest rate changes on the Company's earnings through
the management of the amount, composition and repricing periods of rate-
sensitive assets and rate-sensitive liabilities. Emphasis
D-32
<PAGE>
is placed on maintaining a rate-sensitivity position within the Company's
policy guidelines to avoid wide swings in spreads and to minimize risk due to
changes in interest rates. At December 31, 1998 and 1997, approximately 62.6%
and 59.8%, respectively, of the Company's total loans and 62.2% and 54.8%,
respectively, of the Company's total interest-earning assets were tied to the
Company's base lending rate, national prime rate, or mature within one year.
Most of the Company's interest-bearing liabilities are immediately repriceable
or mature in one year or less (93.9% in 1998 and 97.6% in 1997). In order to
match the rate-sensitivity of its assets, the Company's policy is to offer a
significant number of variable rate deposit products and limit the level of
large dollar time deposits with maturities greater than one year.
Table Fifteen--Interest Rate Sensitivity Gap
(Dollars in thousands)
This table sets forth the rate-sensitivity of the Company's interest-earning
assets and interest-bearing liabilities as of December 31, 1998, the interest
rate-sensitivity gap (interest rate-sensitive assets less interest rate-
sensitive liabilities), cumulative interest rate-sensitivity gap, the Company's
interest rate-sensitivity gap ratio (interest rate-sensitive assets divided by
interest rate-sensitive liabilities) and the Company's cumulative interest
rate-sensitivity gap ratio. For the purposes of the following table, an asset
or liability is considered rate-sensitive within a specified period when it
matures or could be repriced within such period in accordance with its
contractual terms. Nonaccrual loans of $788,000 are excluded from the
presentation.
<TABLE>
<CAPTION>
After Three After Six After One
Within Months But Months But Year But After
Three Within Six Within One Within Five
Months Months Year Five Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings
assets:
Loans.................. $134,072 $ 5,800 $ 8,844 $60,630 $27,568 $236,914
Investment securities.. 6,802 2,903 10,149 15,502 8,465 43,821
Federal funds sold..... 17,000 --- --- --- --- 17,000
-------- ------- ------- ------- ------- --------
Total................. 157,874 8,703 18,993 76,132 36,033 297,735
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. 42,825 --- --- --- --- 42,825
Savings deposits....... 79,682 --- --- --- --- 79,682
Time deposits.......... 34,139 11,341 22,534 12,064 9 80,087
Borrowed funds......... 1,551 --- --- --- 387 1,938
---
-------- ------- ------- ------- ------- --------
Total................. 158,197 11,341 22,534 12,064 396 204,532
Interest rate-
sensitivity gap........ (323) (2,638) (3,541) 64,068 35,637 $ 93,203
Cumulative interest rate
sensitivity gap........ $ (323) $(2,961) $(6,502) $57,566 $93,203
Interest rate-
sensitivity gap ratio.. 1.00x .77x .84x 6.31x 90.99x 1.46x
Cumulative interest rate
sensitivity gap
ratio.................. 1.00x .98x .97x 1.28x 1.46x
</TABLE>
As of December 31, 1998, the Company was liability-sensitive within one year
and asset-sensitive beyond one year. Liability sensitive means that rate-
sensitive liabilities exceed rate-sensitive assets. This position will
generally result in enhanced earnings in a falling interest rate environment
and declining earnings in a rising
D-33
<PAGE>
interest rate environment. Asset sensitive means that rate-sensitive assets
exceed rate-sensitive liabilities. This position will generally result in
enhanced earnings in a rising interest rate environment and declining earnings
in a falling interest rate environment because a larger volume of assets than
liabilities will reprice. However, the foregoing table does not necessarily
indicate the impact of general interest rate movements on the Company's net
interest yield, because the repricing of various categories of assets and
liabilities is discretionary and is subject to competition and other pressures.
As a result, various assets and liabilities indicated as repricing within the
same period may in fact price at different times and at different rate levels.
Management attempts to mitigate the impact of changing interest rates in
several ways, one of which is to manage its interest rate-sensitivity gap. The
use of a base lending rate by the Company for the majority of its floating rate
loans also allows the Company more flexibility than the use of a national prime
rate in matching changes to the yield on floating rate loans to changes in its
funding costs. In addition to managing its assets/liability position, the
Company has taken steps to mitigate the impact of changing interest rates by
generating noninterest income through service charges, offering products which
are not interest rate-sensitive, such as escrow services and insurance
products, and through the sale and servicing of loans. (See AItem 7A.
Quantitative and Qualitative Disclosures About Market Risk.@)
Impact of Inflation
The impact of inflation on banks differs from its impact on non-financial
institutions. Banks, as financial intermediaries, have assets which are
primarily monetary in nature and which tend to fluctuate with inflation. This
is especially true for banks with a high percentage of rate-sensitive interest-
earning assets and interest-bearing liabilities. A bank can further reduce the
impact of inflation if it can manage its rate-sensitivity gap ( the difference
between variable rate assets and variable rate liabilities). The Company
attempts to structure its assets and liabilities and manage its gap
accordingly, thus seeking to minimize the potential effects of inflation. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Asset/Liability Management").
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The composition of the Company=s balance sheet consists of investments in
interest-earning assets (primarily loans and investment securities) which are
primarily funded by interest-bearing liabilities (primarily deposits and
borrowings). These financial instruments have varying levels of sensitivity to
changes in market interest rates resulting in market risk. In evaluating the
Company=s exposure to market risk, management relies primarily upon interest-
rate sensitivity gap analysis (See AManagement=s Discussion and Analysis of
Financial Condition and Results of Operations --- Liquidity and Asset/Liability
Management@) and interest rate shock analysis. These methods of analysis
provide information as to the maturities and timing in repricing
characteristics of interest rate sensitive instruments as well as the impact of
interest rate changes upon the fair market value of these instruments. There
are certain shortcomings inherent in these methods and the following
presentation that must be considered in evaluating market risk. Although
certain assets and liabilities may have similar maturities or periods to
reprice, they may react in different degrees to changes in market interest
rates or they may anticipate or lag behind changes in market interest rates. In
addition, certain interest rate sensitive assets may have contractual
limitations to changes in interest rates on a short-term basis and over the
life of the asset. Management considers these various factors and their
anticipated effects in managing the Company=s exposure to interest rate risk.
Table Sixteen presents additional information about the Company=s financial
instruments that are sensitive to changes in interest rates. Cash flows in this
presentation are grouped by maturity dates rather than repricing dates with
consideration given to prepayment assumptions for mortgage-backed securities
and maturity estimations for instruments without contractual maturity dates.
Loans are distinguished by variable or fixed rates and contractual principal
payments are represented in the cash flows. Loan fair values are estimated
using discounted cash flows or based on quoted market prices for Title I and
SBA loans (See ANote 9-Fair Values of Financial Instruments@ in the
accompanying financial statements). Investment securities are divided into
mortgage-backed securities and other securities. The cash flows from mortgage-
backed securities are influenced
D-34
<PAGE>
by principal prepayments, which are dependent on a number of factors,
including, the current interest rate and interest rate index on the security,
the availability of refinancing of the underlying mortgages at attractive
terms, as well as other factors in specific geographic areas which affect the
sales and price levels of residential property. Management utilizes average
prepayment speeds provided by dealers to calculate principal repayments and the
estimated maturity date for mortgage-backed securities. The cash flows for
other securities are based on the actual maturity dates of the instruments,
except for equity securities which are included in the third year, 2001. Fair
values of investment securities are based on quoted market prices or dealer
quotes. Non-maturing deposits consist of interest-bearing demand, savings and
money market accounts and have no maturity dates. Cash flow amortizations for
these deposits are based on the maximum terms allowable under regulatory
guidelines. The fair value of non-maturing deposits is estimated to be the
carrying or face value, which is the amount payable on demand. Time deposits
are grouped according to their contractual maturity dates. The fair value of
time deposits is estimated using a discounted cash flow calculation (See ANote
9-Fair Values of Financial Instruments@ in the accompanying financial
statements). Average interest rates represent the weighted average yield in
each category.
Table Sixteen--Interest-Sensitive Financial Instruments
(Dollars in thousands)
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------- ------- ------- ------- ------ ---------- -------- ----------
Financial Assets:
Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate............... $51,028 $10,587 $ 4,901 $ 4,623 $4,044 $55,091 $130,274 $132,038
Average interes rate...... 10.64% 10.47% 10.66% 10.47% 10.28% 10.53% 10.56%
Fixed rate.................. $30,348 $19,677 $15,614 $13,401 $8,384 $20,004 $107,428 $107,130
Average interest rate..... 9.53% 9.72% 9.63% 9.48% 9.63% 8.87% 9.46%
Investment securities:
Mortgage-backed securities.. $ 8,254 $ 756 $ 2,617 $ 748 $ 314 $ 2,658 $ 15,347 $ 15,383
Average interest rate..... 6.29% 6.27% 7.22% 6.60% 7.46% 6.91% 6.59%
Other investment
securities................. $11,600 $ 1,187 $ 1,197 $ 1,684 $6,999 $ 5,807 $ 28,474 $ 28,446
Average interest rate..... 5.52% 5.91% 6.23% 6.37% 5.91% 6.15% 5.84%
Federal funds sold........... $17,000 --- --- --- --- --- $ 17,000 $ 17,000
Average interest rate..... 4.47% --- --- --- --- --- 4.47%
Financial Liabilities:
Interest-bearing
deposits:
Non-maturing
deposits.................. $25,782 $34,174 $34,174 $ 7,094 $7,094 $14,189 $122,507 $115,264
Average interest rate..... 3.08% 2.22% 2.22% 1.71% 1.71% 1.71% 2.28%
Time deposits............... $67,993 $ 6,305 $ 1,180 $ 678 $3,922 $ 9 $ 80,087 $ 80,578
Average interest rate..... 4.70% 5.54% 5.68% 5.70% 5.88% 3.89% 4.84%
Federal funds purchased and
U..S. Treasury demand
note....................... $ 1,551 --- --- --- --- --- $ 1,551 $ 1,551
Average interest rate..... 4.51% --- --- --- --- --- 4.51%
</TABLE>
D-35
<PAGE>
The fair values of financial instruments may not necessarily be indicative
of the net realizable or liquidation value of these instruments. Furthermore,
management does not intend to dispose of significant portions of all of its
financial instruments and, thus, any aggregate unrealized gain or loss should
not be interpreted as a forecast of future earnings and cash flows.
Item 8. Consolidated Financial Statements and Supplementary Data.
North County Bancorp's financial statements begin on page 39 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information required by these items is contained in the Company's
definitive Proxy Statement for the Company's 1999 Annual Meeting of
Shareholders which the Company intends to file with the Commission within 120
days after the close of the Company's 1998 fiscal year in accordance with the
Commission's Regulation 14A under the Securities Exchange Act of 1934. Such
information is incorporated herein by this reference.
D-36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of documents filed as part of this report
(1) Financial Statements
The following consolidated financial statements and report of
independent accountants of North County Bancorp are included in
this report commencing on page 39.
Report of Independent Accountants
Consolidated Balance Sheet --December 31, 1998 and 1997
Consolidated Statement of Income --Three Years ended December 31,
1998
Consolidated Statement of Cash Flows--Three Years ended December
31, 1998
Consolidated Statement of Stockholders' Equity--Three Years ended
December 31, 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules to the consolidated financial statements are omitted
because the required information is inapplicable or the information
is presented in North County Bancorp's consolidated financial
statements or related notes.
(3) Exhibits
Exhibits required to be filed hereunder are indexed on sequentially
numbered pages 36 through 38 hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
Company's fiscal year ended December 31, 1998.
D-37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: March 17, 1999 NORTH COUNTY BANCORP,
a California corporation
By: /s/ Michael J. Gilligan
Michael J. Gilligan
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ------ ----
s/ Alan P. Chamberlain Director March 17, 1999
<S> <C> <C>
Alan P. Chamberlain
s/ G. Bruce Dunn Director March 17, 1999
G. Bruce Dunn
s/ Michael J. Gilligan Vice President and Chief March 17, 1999
Michael J. Gilligan Financial Officer
s/ Ronald K. Goode Director March 17, 1999
Ronald K. Goode
s/ James M. Gregg Chairman of the Board and March 17, 1999
James M. Gregg Chief Executive Officer
s/ Rodney D. Jones President and Director March 17, 1999
Rodney D. Jones
s/ Jack Port Director March 17, 1999
Jack Port
s/ Clarence R. Smith Director March 17, 1999
Clarence R. Smith
s/ Raymond V. Stone Director March 17, 1999
Raymond V. Stone
s/ Burnet F. Wohlford Director March 17, 1999
</TABLE>
Burnet F. Wohlford
D-38
<PAGE>
INDEX TO EXHIBITS
Page Number
Exhibit Table ReferenceNumber in
Sequential
- ------- Item Numbering
System
<TABLE>
<S> <C> <C>
3.1 Articles of Incorporation of North County Bancorp filed October 5, 1981 as amended
by Certificate of Amendment of Articles of Incorporation filed July 28, 1988.(2)
3.2 Amended and Restated Bylaws of North County Bancorp as adopted February 21,
1990.(2)
4.1 Specimen of Common Stock Certificate.(2)
4.2 Form of Indenture between North County Bancorp and Security Pacific National Bank,
as Trustee, for up to $3,593,000 aggregate principal amount of 9 1/4% convertible
subordinated debentures due May 15, 2002.(3)
4.3 Specimen of Debenture Certificate. (3)
10.1 Lease dated April 23, 1975 by and between Fifth Avenue Financial Group, a general
partnership, and North County Bank, including an Amendment to Lease, effective
May 1, 1980, and Assignment of Lease, effective August 1, 1985, for a portion of the
office space at the Fifth Avenue Financial Center in Escondido, California.(2)
10.2 Lease Agreement dated November 1, 1989, between Ontario Associates, a general
partnership, and North County Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(2)
10.3 Lease Agreement dated March 1, 1990, between Ontario Associates, a general
partnership, and North County Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California. (3)
</TABLE>
- --------
Footnotes on page 38
D-39
<PAGE>
<TABLE>
<CAPTION>
Page Number in
Exhibit Table Sequential
Reference Numbering
Number Item System
- ------------- ---- --------------
<S> <C> <C>
10.4 Lease Agreement dated November 1, 1986, between
Ontario Associates, a general partnership, and North
County Bancorp, relating to a portion of the office space at
the Fifth Avenue Financial Center in Escondido,
California.(2)
10.5 Assignment of Lease dated July 1, 1989, between First
National Bank and North County Bancorp, for the premises
located at 8085 Clairemont Mesa Boulevard, San Diego,
California.(2)
10.6 North County Bancorp Incentive Stock Option Plan and
Form of Stock Option Agreement.(1)
10.7 North County Bank Employee Stock Ownership Plan
Restated as of January 1, 1989.(2)
10.8 Employment Contract between James M. Gregg and North
County Bank, dated April 14, 1983.(2)
10.9 Deferred Compensation and Stock Purchase Agreement
between James M. Gregg and North County Bank, dated
February 1, 1986.(2)
10.10 Lease Agreement dated March 1, 1990, between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California. (3)
10.11 Lease Agreement dated July 15, 1991 between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California. (4)
10.12 Adoption agreement between North County Bank and The
Prudential Bank dated August 29, 1991 for the North County
Bancorp and Subsidiaries 401(k) Plan.( 4)
10.13 Lease Agreement dated August 27, 1993 between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California. (5)
10.14 Deferred Compensation and Stock Purchase Agreement
between Rodney D. Jones and North County Bank, dated
December 31, 1996. (6)
10.15 North County Bancorp 1997 Stock Option Plan. (7)
22 Subsidiaries of North County Bancorp 59
24 Consent of Price Waterhouse 61
</TABLE>
- --------
Footnotes on following page
D-40
<PAGE>
- --------
(1) Incorporated by reference to the Exhibits to the North County Bancorp S-8
Registration Statement, Registration No. 2-84173, as filed with the
Commission on May 25, 1983.
(2) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1989 File
No. 0-10627, as filed with the Commission on March 1, 1990, and amended on
April 30, 1990.
(3) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1990 File
No. 0-10627, as filed with the Commission on March 31, 1991.
(4) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1991 File
No. 0-10627, as filed with the Commission on March 30, 1992.
(5) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1993 File
No. 0-10627, as filed with the Commission on March 30, 1994.
(6) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996
File No. 0-10627, as filed with the Commission on March 28, 1997.
(7) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K405 for the fiscal year ended December 31, 1997
File No. 0-10627, as filed with the Commission on March 26, 1998.
D-41
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of North County Bancorp
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of North
County Bancorp and its subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
February 9, 1999
D-42
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents:
Cash and due from banks................................... $ 26,885 $ 24,262
Federal funds sold........................................ 17,000 4,000
-------- --------
43,885 28,262
Investment securities:
Available for sale........................................ 17,193 17,544
Held to maturity.......................................... 26,628 12,135
Loans....................................................... 237,702 210,991
Less: Allowance for loan and lease losses................. 3,592 3,268
-------- --------
234,110 207,723
Other real estate owned..................................... 374 986
Premises and equipment, net................................. 10,013 8,582
Accrued interest receivable and other assets................ 5,210 5,502
-------- --------
$337,413 $280,734
======== ========
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing....................................... $100,465 $ 89,852
Interest-bearing.......................................... 202,594 161,703
-------- --------
303,059 251,555
Accrued expenses and other liabilities...................... 2,416 2,377
Federal funds purchased and U.S. Treasury demand note....... 1,551 1,194
Capital lease obligation.................................... 387 415
-------- --------
Total liabilities......................................... 307,413 255,541
-------- --------
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares;
outstanding shares 4,868,906 in 1998 and 1997............ 19,127 16,058
Retained earnings......................................... 10,834 9,137
Accumulated other comprehensive income.................... 39 (2)
-------- --------
Total stockholders' equity.............................. 30,000 25,193
-------- --------
Commitments and contingencies (Notes 8 and 16)
-------- --------
$337,413 $280,734
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-43
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.......................... $22,885 $20,007 $17,764
Investment securities:
Taxable........................................... 1,669 1,648 1,510
Exempt from Federal income taxes.................. 121 120 98
Dividends......................................... 84 65 83
Federal funds sold.................................. 833 439 385
Deposits with other financial institutions.......... 112 16 --
------- ------- -------
Total interest income............................. 25,704 22,295 19,840
------- ------- -------
Interest expense:
Deposits............................................ 6,237 5,652 4,695
Federal funds purchased and U. S. Treasury demand
note............................................... 44 74 72
Other borrowings.................................... 58 215 345
------- ------- -------
Total interest expense............................ 6,339 5,941 5,112
------- ------- -------
Net interest income............................... 19,365 16,354 14,728
Provision for loan and lease losses................... 1,474 1,122 1,300
------- ------- -------
Net interest income after provision for loan and lease
losses............................................... 17,891 15,232 13,428
Noninterest income.................................... 7,066 6,788 6,975
Noninterest expense................................... 16,825 16,198 15,567
------- ------- -------
Income before income taxes............................ 8,132 5,822 4,836
Provision for income taxes............................ 3,363 2,313 2,092
------- ------- -------
Net income............................................ $ 4,769 $ 3,509 $ 2,744
------- ------- -------
Earnings per share:
Basic............................................... $ 0.98 $ 0.78 $ 0.63
======= ======= =======
Diluted............................................. $ 0.94 $ 0.72 $ 0.58
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
D-44
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 4,769 $ 3,509 $ 2,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of:
premises and equipment........................ 1,185 1,229 1,348
Deferred loan fees and costs, net............. (802) (464) (418)
Investment premiums and discounts, net........ 206 147 103
Other......................................... 34 140 264
(Gain) loss on sale of other real estate
owned......................................... (471) (416) (285)
Provision for loan and lease losses............ 1,474 1,122 1,300
(Increase) decrease in interest receivable..... (197) 90 (204)
Increase (decrease) in taxes payable........... 273 233 (41)
Increase in accrued expenses................... 2 492 361
Increase (decrease) in interest payable........ 41 (18) (114)
Other, net..................................... (17) 257 (1,029)
-------- -------- --------
Net cash provided by operating activities.... 6,497 6,321 4,029
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of investment
securities..................................... 15,153 9,457 11,070
Proceeds from sale of available for sale
securities..................................... -- 14,602 2,535
Purchase of investment securities............... (29,502) (19,372) (22,020)
Net increase in loans........................... (27,374) (32,970) (22,217)
Purchase of premises and equipment.............. (2,616) (1,101) (532)
Proceeds from sale of other real estate owned... 1,633 3,723 3,111
-------- -------- --------
Net cash used in investing activities........ (42,706) (25,661) (28,053)
-------- -------- --------
Cash flows from financing activities:
Cash payments on capital lease obligations...... (29) (14) (32)
Net increase in deposits........................ 51,504 21,204 15,508
Net increase (decrease) in Federal funds
purchased and U.S. Treasury demand note........ 357 (174) 1,833
Net (decrease) increase in other borrowings..... -- (1,550) 50
Cash proceeds from sale of common stock......... -- -- 68
-------- -------- --------
Net cash provided by financing activities.... 51,832 19,466 17,427
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 15,623 126 (6,597)
Cash and cash equivalents at beginning of year... 28,262 28,136 34,733
-------- -------- --------
Cash and cash equivalents at end of year......... $ 43,885 $ 28,262 $ 28,136
======== ======== ========
Supplemental disclosure of cash flow information:
Total interest paid............................. $ 6,299 $ 5,958 $ 5,226
Total income taxes paid......................... $ 3,385 $ 2,212 $ 2,374
Real estate acquired through foreclosure........ $ 316 $ 1,871 $ 3,088
Conversion of subordinated debentures into
common stock................................... $ -- $ 1,433 $ 133
</TABLE>
See accompanying notes to consolidated financial statements.
D-45
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
----------------- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
--------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,789,779 $ 9,156 $ 8,164 $(93) $17,227
Five percent stock
dividend including cash
for fractional shares.. 89,288 759 (761) (2)
Five percent stock
dividend including cash
for fractional shares.. 95,140 1,642 (1,647) (5)
Exercise of stock
options................ 10,628 68 68
Conversion of
subordinated
debentures............. 18,358 133 133
Comprehensive income:
Unrealized holding gain
on available for sale
securities, net of tax
of $5................. 7 7
Net income............. 2,744 2,744
--------- ------- ------- ---- -------
Total comprehensive
income............... 2,751
--------- ------- ------- ---- -------
Balance at December 31,
1996................... 2,003,193 11,758 8,500 (86) 20,172
Two for one stock
split.................. 2,005,956 -- --
Five percent stock
dividend including cash
for fractional shares.. 220,608 2,867 (2,872) (5)
Exercise of stock
options................ 788 -- --
Conversion of
subordinated
debentures............. 406,745 1,433 1,433
Comprehensive income:
Unrealized holding gain
on available for sale
securities, net of tax
of $69................ 84 84
Net income............. 3,509 3,509
--------- ------- ------- ---- -------
Total comprehensive
income............... 3,593
--------- ------- ------- ---- -------
Balance at December 31,
1997................... 4,637,290 16,058 9,137 (2) 25,193
Five percent stock
dividend including cash
for fractional shares
declared January 20,
1999, payable on March
10, 1999 to
stockholders of record
on February 10, 1999... 231,616 3,069 (3,072) (3)
Comprehensive income:
Unrealized holding gain
on available for sale
securities, net of tax
of $33................ 41 41
Net income............. 4,769 4,769
--------- ------- ------- ---- -------
Total comprehensive
income............... 4,810
--------- ------- ------- ---- -------
Balance at December 31,
1998................... 4,868,906 $19,127 $10,834 $ 39 $30,000
========= ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
D-46
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis Of Presentation The consolidated financial statements include the
accounts of North County Bancorp (the Company) and its wholly owned subsidiary,
North County Bank (the Bank). All significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components--interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
Cash and Cash Equivalents Cash on hand, cash items in the process of
collection, amounts due from correspondent banks and the Federal Reserve Bank
and Federal funds sold to other financial institutions are included in cash and
cash equivalents.
Investment Securities Securities held for investment purposes consist of
debt obligations, marketable equity securities and stock in the Federal Reserve
Bank and Federal Home Loan Bank. Investments are classified into the following
two categories: held to maturity or available for sale. Held to maturity
securities are carried at amortized cost while available for sale securities
are carried at market value. Unrealized gains and losses on available for sale
securities are recorded as other comprehensive income, a component of
stockholders' equity. Gains or losses on sales are based upon specific
identification of securities sold.
Loans Interest on loans is accrued based upon the principal amount
outstanding. The accrual of interest on loans is discontinued when, in
management's judgment, the interest will not be paid in accordance with its
terms. At that time interest previously recorded but not collected is reversed
and charged against current income. Loan origination fees, certain direct loan
origination costs and purchase premiums and discounts on loans are deferred and
amortized over the related life of the loan as an adjustment to the loan's
yield.
The Company may sell the guaranteed portions of Small Business
Administration (SBA) loans to a variety of secondary market investors. The Bank
retains the unguaranteed portions as well as the rights and obligations to
service the loans. The Company receives an interest rate differential from
payments made by the borrowers which is at least sufficient to provide for the
future servicing costs and an allowance for a reasonable profit. Gains are
recorded upon the sale of the loans based upon premiums paid by the purchasers
and upon the fair value of any retained interests.
The Company also sells home equity loans and Federal Home Administration
Title I loans to secondary market investors. Gains or losses on the sale of
these loans are recognized upon sale as the difference between the net sales
price and the carrying value at the time of sale. Deferred origination fees and
expenses are recognized at the time of sale.
D-47
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impaired loans are measured at the present value of expected future cash
flows discounted at the loan's effective 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. A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due (principal and interest) according to the contractual
terms.
Allowance For Loan and Lease Losses The Company provides an allowance for
loan and lease losses by a charge to current operations based on Management's
evaluation of the risks in the loan portfolio, prospective economic conditions,
past loss experience, and other pertinent factors which form a basis for
determining the adequacy of the allowance for loan and lease losses.
Other Real Estate Owned Real estate acquired in satisfaction of loans is
reported as other real estate owned. Other real estate owned is recorded at the
lower of the loan carrying value at the date of acquisition or the fair value
less expected selling costs. Subsequent operating expenses or income,
reductions in estimated value, and gains or losses upon sale are charged to
current operations.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
determined by use of the straight-line method over the estimated useful lives
of the assets, 3 to 45 years. Maintenance and repair costs are expensed as they
are incurred, while renewals and betterments are capitalized.
Income Taxes The Company files consolidated Federal and combined California
state income tax returns. The Company provides for income taxes under the
liability method. A deferred tax asset and/or liability is computed for both
the expected future impact of differences between the financial statement and
tax basis of assets and liabilities, and for the expected future tax benefit to
be derived from tax loss and tax credit carryforwards. A valuation allowance
may be established to reflect the likelihood of realization of deferred tax
assets. The effect of tax rate changes is reflected in income in the period in
which such changes are enacted.
D-48
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share Basic earnings per share (EPS) represents net income
divided by the weighted average common shares outstanding during the period
excluding any potential dilutive effects. Diluted EPS gives effect to all
potential issuances of common stock that would have caused basic EPS to be
lower as if the issuance had already occurred. A reconciliation of the income
and shares used in the basic and diluted EPS computations, giving retroactive
effect for the stock dividends and stock split, for the three years ended
December 31, 1998 is as follows (dollars in thousands, except share data):
<TABLE>
<CAPTION>
1998
--------------------------
Income Shares Per-Share
------ --------- ---------
<S> <C> <C> <C>
Basic EPS........................................ $4,769 4,868,906 $0.98
=====
Effect of Dilutive Shares:
Stock options.................................. 204,465
------ ---------
Diluted EPS...................................... $4,769 5,073,371 $0.94
====== ========= =====
<CAPTION>
1997
--------------------------
Income Shares Per-Share
------ --------- ---------
<S> <C> <C> <C>
Basic EPS........................................ $3,509 4,513,556 $0.78
=====
Effect of Dilutive Shares:
Stock options.................................. 167,722
Convertible debentures......................... 70 323,152
------ ---------
Diluted EPS...................................... $3,579 5,004,430 $0.72
====== ========= =====
<CAPTION>
1996
--------------------------
Income Shares Per-Share
------ --------- ---------
<S> <C> <C> <C>
Basic EPS........................................ $2,744 4,366,729 $0.63
=====
Effect of Dilutive Shares:
Stock options.................................. 72,520
Convertible debentures......................... 99 444,872
------ ---------
Diluted EPS...................................... $2,843 4,884,121 $0.58
====== ========= =====
</TABLE>
NOTE 2--REGULATORY CAPITAL:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by regulators that,
if undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items. The capital amounts and
classification of the Company and the Bank are also subject to qualitative
judgments by the regulators regarding components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Tier 1 and total capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes that the Company and the Bank
meet all capital adequacy requirements to which they are subject at December
31, 1998.
D-49
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, the most recent notification from the appropriate
regulatory agency categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum Tier 1 risk-based, total risk-based
and Tier 1 leverage capital ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The actual capital amounts and ratios of the Company and the Bank at
December 31, 1998 are presented in the following table (dollars in thousands).
<TABLE>
<CAPTION>
Well
Capitalized
Actual Requirement Minimum Required
------------- ------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
North County Bancorp:
Risk-based capital
Tier 1................... $29,700 11.68% -- -- $ 10,173 4.00%
Total.................... 32,884 12.93% -- -- 20,345 8.00%
Tier 1 leverage capital... 29,700 8.80% -- -- 13,502 4.00%
North County Bank:
Risk-based capital
Tier 1................... 29,392 11.58% $15,236 6.00% 10,157 4.00%
Total.................... 32,571 12.83% 25,393 10.00% 20,314 8.00%
Tier 1 leverage capital... 29,392 8.72% 16,848 5.00% 13,479 4.00%
</TABLE>
NOTE 3--INVESTMENT SECURITIES:
The amortized cost and market value of investment securities as of December
31, 1998 and 1997 are as follows (dollars in thousands):
Available for sale at December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U. S. Government and Federal
agencies......................... $ -- $ -- $ -- $ --
States and municipalities......... 2,073 13 (1) 2,085
Mortgage-backed................... 13,177 137 (8) 13,306
Equity securities................. 1,872 -- (70) 1,802
------- ----- ----- -------
$17,122 $ 150 $ (79) $17,193
======= ===== ===== =======
Held to maturity at December 31, 1998:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U. S. Government and Federal
agencies......................... $22,155 $ 27 $ (71) $22,111
States and municipalities......... 1,849 17 -- 1,866
Mortgage-backed................... 2,041 36 -- 2,077
Asset-backed...................... 583 -- (1) 582
------- ----- ----- -------
$26,628 $ 80 $ (72) $26,636
======= ===== ===== =======
</TABLE>
D-50
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available for sale at December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U. S. Government and Federal
agencies......................... $ 1,000 $ 2 $ -- $ 1,002
States and municipalities......... 2,104 13 (1) 2,116
Mortgage-backed................... 12,847 69 (20) 12,896
Equity securities................. 1,596 -- (66) 1,530
------- --- ----- -------
$17,547 $84 $ (87) $17,544
======= === ===== =======
Held to maturity at December 31, 1997:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U. S. Government and Federal
agencies......................... $ 7,779 $22 $ (18) $ 7,783
States and municipalities......... 1,748 12 -- 1,760
Mortgage-backed................... 2,608 31 -- 2,639
------- --- ----- -------
$12,135 $65 $ (18) $12,182
======= === ===== =======
</TABLE>
Investment securities with a carrying value of $7,948,000 and $7,538,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits as well as for other purposes required by law. The Company did not
sell any securities in 1998. Sales of available for sale securities during 1997
resulted in gross gains and losses of $95,000 and $42,000, respectively, and
resulted in net taxes of $21,000.
The maturity distribution of debt securities is presented in the tables
below (dollars in thousands). No maturity breakdown is presented for mortgage-
backed securities because of the unpredictability as to the timing and amount
of principal repayments on these securities.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Estimated Amortized Estimated
December 31, 1998: Cost Market Value Cost Market Value
------------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Within one year.............. $ 1,969 $ 1,977 $ 7,821 $ 7,824
After one but within five
years....................... 105 108 10,959 10,957
After five but within ten
years....................... -- -- 5,208 5,180
After ten years.............. -- -- 599 599
Mortgage-backed securities... 13,176 13,306 2,041 2,076
------- ------- ------- -------
$15,250 $15,391 $26,628 $26,636
======= ======= ======= =======
<CAPTION>
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Estimated Amortized Estimated
December 31, 1997: Cost Market Value Cost Market Value
------------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Within one year.............. $ -- $ -- $ 2,052 $ 2,048
After one but within five
years....................... 2,042 2,048 7,475 7,495
After five but within ten
years....................... -- -- -- --
After ten years.............. 1,062 1,070 -- --
Mortgage-backed securities... 12,847 12,896 2,608 2,639
------- ------- ------- -------
$15,951 $16,014 $12,135 $12,182
======= ======= ======= =======
</TABLE>
D-51
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--LOANS:
Loans at December 31 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial................................................ $128,298 $111,726
Installment and consumer.................................. 34,171 41,024
Real estate mortgage...................................... 53,712 45,803
Real estate construction.................................. 19,881 10,334
Lease financing receivables............................... 617 1,270
Other..................................................... 1,023 834
-------- --------
$237,702 $210,991
======== ========
</TABLE>
A summary of the changes in the allowance for loan and lease losses is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 3,268 $ 3,129 $ 2,916
Provision charged to operating expense............ 1,474 1,122 1,300
Recoveries on loans previously charged off........ 251 586 333
Loans charged off................................. (1,401) (1,569) (1,420)
------- ------- -------
Balance at end of year............................ $ 3,592 $ 3,268 $ 3,129
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, loans on a nonaccrual basis were $788,000
and $3,021,000, respectively. Interest income collected relating to nonaccrual
loans was $38,000 and $123,000 for the years ended December 31, 1998 and 1997.
Additional interest income of $62,000 and $212,000 would have been recorded
during 1998 and 1997, respectively, if the loans had been paid in accordance
with their original terms.
The Company's recorded investment in impaired loans at December 31, 1998
and 1997, was $954,000 and $2,163,000, respectively. Reserves for loan losses
of $48,000 and $151,000 were established for impaired loans at December 31,
1998 and 1997, respectively. The average recorded investments in impaired
loans during 1998 and 1997 were $1,654,000 and $2,528,000, respectively.
Interest income on impaired loans of $16,000 and $120,000 was recognized for
cash payments received in 1998 and 1997. The Company is not committed to lend
additional funds to debtors whose loans have been modified.
The Company in the normal course of business to meet the financing needs of
its customers is a party to financial instruments with off-balance sheet risk.
The Company's maximum potential exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit and letters of credit is represented by the contractual
amounts of those instruments.
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer
to a third party. The credit risk in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The
amount of collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation of the
borrower. Since certain of the commitments are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis.
D-52
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's off-balance sheet credit risk for undisbursed loan commitments
and letters of credit at December 31, was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Commercial loans............................................ $45,308 $37,534
Installment and consumer loans.............................. 11,087 10,370
Real estate construction loans.............................. 10,874 18,884
Letters of credit........................................... 1,280 1,652
------- -------
$68,549 $68,440
======= =======
</TABLE>
Most of the Company's business activity is with customers located within San
Diego and Riverside counties of Southern California. Accordingly, the Company's
financial performance may be significantly impacted by the economic conditions
of the area.
NOTE 5--PREMISES AND EQUIPMENT:
Premises and equipment at December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Land......................................................... $ 2,601 $2,068
Building and improvements.................................... 7,730 7,536
Furniture, fixtures and equipment............................ 10,751 9,063
------- ------
21,082 18,667
Less: Accumulated depreciation and amortization.............. 11,069 10,085
------- ------
$10,013 $8,582
======= ======
</TABLE>
Building and improvements include a capitalized lease on the main branch
premises of $580,000, less accumulated amortization of $440,000, as of December
31, 1998 (see Note 8). Amortization on this capital lease was $20,000 in both
1998 and 1997.
NOTE 6--DEPOSITS:
Deposits at December 31 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Noninterest-bearing demand................................ $100,465 $ 89,852
Interest-bearing demand................................... 42,825 36,620
Savings................................................... 79,682 78,352
Time deposits of $100,000 or more......................... 20,868 9,184
Time deposits of less than $100,000....................... 59,219 37,547
-------- --------
$303,059 $251,555
======== ========
</TABLE>
The following table summarizes the maturity distribution of time deposits of
$100,000 or more at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Three months or less......................................... $11,062 $5,181
Over three months through six months......................... 2,117 1,439
Over six months through one year............................. 5,537 2,364
Over one year through three years............................ 2,152 200
------- ------
$20,868 $9,184
======= ======
</TABLE>
D-53
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--CONVERTIBLE SUBORDINATED DEBENTURES:
In May 1990, the Company issued $1,678,000 in 9 1/4% convertible
subordinated debentures (the "Debentures"). In September 1997, at which time
$1,492,000 in Debentures were outstanding, the Company announced that it was
exercising its option to redeem the Debentures at a price of 102.25% effective
October 31, 1997. The conversion of Debentures during 1997 resulted in an
increase in common stock, a component of Tier 1 capital, of $1,433,000 which
was net of deferred offering costs of $101,000.
NOTE 8--LEASE OBLIGATIONS:
The Company leases the main office premises under a long-term capital lease
agreement which will expire in 2006 and other office space and equipment under
various operating leases. The future minimum lease payments for all lease
obligations consisted of the following at December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
------- ---------
<S> <C> <C>
1999....................................................... $ 214 $ 751
2000....................................................... 214 661
2001....................................................... 214 465
2002....................................................... 214 437
2003....................................................... 214 374
Thereafter................................................. 484 1,052
----- ------
Total minimum lease payments............................... 1,554 $3,740
======
Amounts representing interest.............................. (308)
Cost escalation............................................ (860)
-----
Present value of net minimum lease payments................ $ 386
=====
</TABLE>
The amount of future lease payments is contingent upon normal cost
escalation clauses. Rent expense on the operating leases was $704,000, $607,000
and $489,000 in 1998, 1997 and 1996, respectively.
NOTE 9--FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount and estimated fair value of the Company's financial
instruments as of December 31, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Financial assets:
Cash and due from banks................................... $ 26,885 $ 26,885
Federal funds sold........................................ 17,000 17,000
Investment securities..................................... 43,821 43,829
Loans..................................................... 237,702 239,168
Financial liabilities:
Deposits.................................................. $303,059 $296,307
Federal funds purchased and U.S. Treasury Demand Note..... 1,551 1,551
</TABLE>
D-54
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following methods and assumptions were used to estimate the fair value
of each material class of financial instruments at December 31, 1998:
Cash and due from banks and Federal funds sold The carrying amount of cash
and due from banks and Federal funds sold approximates the fair value.
Investment securities The fair value of securities held as investments is
based on quoted market prices or dealer quotes.
Loans The fair value of loans is estimated using discounted cash flows. The
discount rate used to determine the present value of these loans is equal to
current market rates at which similar loans would be made to borrowers with
similar credit ratings and for similar maturities. Where credit deterioration
has occurred, management has reduced estimated cash flows to give effect to
estimated future losses. Title I and SBA loans were valued based on quoted
market prices.
Deposits The carrying amount of demand and savings deposits is the estimated
fair value, which is the amount payable on demand. The carrying amount for
variable rate, fixed term time deposit accounts approximates fair value. The
fair value of fixed rate time deposits is estimated using a discounted cash
flow calculation. The discount rate on such deposits is based upon rates
currently offered for deposits of similar remaining maturities.
Federal funds purchased and U.S. Treasury demand note The fair value of
Federal funds purchased and U.S. Treasury demand note is estimated to
approximate carrying value.
Letters of credit and undisbursed loan funds The fair value of letters of
credit and undisbursed loan funds is estimated to be the cost to terminate or
otherwise settle such obligations with counterparties.
The fair values of financial instruments may not necessarily be indicative
of the net realizable or liquidation value of these instruments. Furthermore,
management does not intend to dispose of significant portions of all of its
financial instruments and, thus, any aggregate unrealized gain or loss should
not be interpreted as a forecast of future earnings and cash flows.
These fair value disclosures do not include certain financial instruments
such as equity investments in consolidated subsidiaries, obligations for
pension and other post retirement benefits and deferred compensation
arrangements. In addition, fair value estimates do not attempt to estimate the
value of anticipated future business which may result from existing customer
relationships, or the value of assets and liabilities that are not considered
financial instruments, such as deferred tax assets, intangible assets or
property, plant and equipment.
NOTE 10--NONINTEREST INCOME AND EXPENSE:
Noninterest income for each year consists of (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service charges on deposits............................ $3,941 $3,936 $3,827
Gain on sale of loans.................................. 1,545 1,301 1,425
Loan servicing fees.................................... 561 753 747
Other.................................................. 1,019 798 976
------ ------ ------
$7,066 $6,788 $6,975
====== ====== ======
</TABLE>
D-55
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Noninterest expense for each year consists of (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Salaries and employee benefits.................... $ 9,888 $ 9,148 $ 8,136
Occupancy expense................................. 3,477 3,232 3,095
Telephone and postage............................. 895 689 645
Advertising and public relations.................. 692 711 524
Professional services............................. 574 514 315
Printing, stationery and supplies................. 335 346 275
Branch losses..................................... 190 182 323
Collection expense................................ 76 233 321
Regulatory assessments............................ 58 91 228
Other real estate owned........................... (473) (98) 614
Other............................................. 1,113 1,150 1,091
------- ------- -------
$16,825 $16,198 $15,567
======= ======= =======
</TABLE>
NOTE 11--INCOME TAXES:
The provision for income taxes for each year consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current taxes:
Federal............................................ $2,421 $1,494 $1,393
State.............................................. 977 648 611
------ ------ ------
3,398 2,142 2,004
Deferred taxes:
Federal............................................ (14) 179 122
State.............................................. (21) (8) (34)
------ ------ ------
(35) 171 88
------ ------ ------
$3,363 $2,313 $2,092
====== ====== ======
</TABLE>
Deferred tax (assets) liabilities at December 31 are comprised of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Provision for loan and lease losses....................... $ (501) $ (471)
Deferred compensation..................................... (247) (202)
Loan fees deferred........................................ (203) (516)
Writedown of other real estate owned...................... (107) (107)
Capital lease amortization................................ (101) (105)
Securities held for sale.................................. (60) (29)
Unrealized loss on securities............................. -- (2)
Gross deferred tax assets................................. (1,219) (1,432)
------- ------
Depreciation.............................................. 247 214
Loan origination cost capitalized......................... 102 112
Unrealized gain on securities............................. 32 --
Loan servicing rights..................................... 14 16
------- ------
Gross deferred tax liabilities............................ 395 342
------- ------
Deferred tax assets valuation allowance................... 225 225
------- ------
$ (599) $ (865)
======= ======
</TABLE>
D-56
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the provision for income taxes at the statutory
Federal rate and the actual effective provision for income taxes for each year
is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rates....................... $2,765 $1,979 $1,644
State tax, net of Federal tax effect................. 631 422 381
Tax exempt income.................................... (49) (63) (83)
Other................................................ 16 (25) 150
------ ------ ------
$3,363 $2,313 $2,092
====== ====== ======
</TABLE>
Tax exempt income consists of income from investment securities and
municipal lease financing.
NOTE 12--STOCK OPTION PLAN:
The Company has granted incentive stock options and non-qualified options to
purchase up to 543,847 shares of common stock as of December 31, 1998 under
three stock option plans. No compensation cost has been recognized for its
employee stock option grants, which are fixed in nature, as the options have
been granted at a price equal to the market value of the Company=s common stock
at the date of grant. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant date
rather than market value during the three years ended December 31, 1998, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (dollars in thousands, except per share data).
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net Income:
As reported........................................... $4,769 $3,509 $2,744
Pro forma............................................. 4,713 3,489 2,724
Basic earnings per share:
As reported........................................... $ 0.98 $ 0.78 $ 0.63
Pro forma............................................. $ 0.97 $ 0.77 $ 0.62
Diluted earnings per share:
As reported........................................... $ 0.94 $ 0.72 $ 0.58
Pro forma............................................. $ 0.93 $ 0.71 $ 0.58
</TABLE>
The fair value for each option grant was estimated at the date of grant
using the following assumptions for 1998, 1997, and 1996, respectively:
volatility factors of 0.36, 0.27 and 0.20; expected option lives of five, seven
and ten years; risk-free interest rates of 5.63%, 5.83% and 6.60%; and a
dividend yield of 0.0% for the three years.
D-57
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of transactions for the three years ended December 31, 1998, after
giving retroactive effect for stock dividends declared, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 525,190 $4.17 465,353 $3.04 418,305 $2.88
Granted................. 18,297 12.38 68,364 11.79 111,825 3.50
Exercised -- -- (2,450) 2.38 (24,800) 2.76
Expired -- -- (6,077) 3.50 (39,977) 2.83
------- ----- ------- ----- ------- -----
Outstanding at end of
year................... 543,487 $4.45 525,190 $4.17 465,353 $3.04
------- ----- ------- ----- ------- -----
Options exercisable at
end of year and
weighted average
exercise price......... 261,255 $2.92 225,330 $2.91 191,884 $2.91
Weighted average fair
value per share of
options granted during
the year............... $6.56 $5.09 $2.41
</TABLE>
At December 31, 1998, the Company had outstanding options to purchase
543,487 shares of common stock at exercise prices that ranged from $2.38 to
$12.38 per share with a weighted average exercise price of $4.45 per share. The
outstanding options have a weighted average remaining contractual life of 4.45
years. Under its stock option plan the Company is authorized to grant an
additional 508,869 options for the purchase of the Company's common stock.
NOTE 13--EMPLOYEE RETIREMENT PLANS:
The Company has established an Employee Stock Ownership Plan (ESOP) to
provide an ownership interest in the Company and retirement benefits to
substantially all full-time employees. The amount of annual contributions is at
the discretion of the Board of Directors, subject to a maximum of 15 percent of
the total annual compensation of all eligible participants. The Company
contributed $150,000 in 1998, 1997 and 1996. The ESOP held 257,997 shares of
the Company=s stock at December 31, 1998.
Additionally, all permanent employees who have at least six months of
service are eligible to contribute up to 15% annually of their pretax
compensation to a retirement account under the North County Bancorp 401(k)
Plan. Employees control the investment of their funds and may elect to invest
in the Company's common stock. The Company matches 50% of an employee's
contribution up to 5% annually of the employee's covered compensation for those
who have at least six months of service and who elect to contribute under the
plan. The Company contributed $114,000, $100,000 and $94,000 to the plan in
1998, 1997 and 1996, respectively.
D-58
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--NORTH COUNTY BANCORP (PARENT CORPORATION):
Condensed financial statements presented on a parent company only basis are
as follows:
Condensed Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Assets
Cash........................................................... $ 20 $ 22
Investment securities.......................................... 338 145
Investment in subsidiary....................................... 29,696 25,068
Premises and equipment, net.................................... 140 160
Other assets................................................... 217 229
------- -------
$30,411 $25,624
======= =======
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities......................... $ 27 $ 16
Capital lease obligation....................................... 387 415
------- -------
414 431
Stockholders' equity
Common stock, no par value.................................... 19,127 16,058
Retained earnings and other................................... 10,873 9,135
------- -------
Total stockholders' equity................................... 30,000 25,193
$30,411 $25,624
======= =======
</TABLE>
Condensed Statement of Income
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Dividends from subsidiary................................. $ 270 $1,510 $ --
Interest income........................................... 10 3 4
Other income.............................................. 279 281 261
------ ------ ------
Total income............................................. 559 1,794 265
Interest expense.......................................... 58 215 345
Other operating expense................................... 361 356 282
------ ------ ------
Total expenses........................................... 419 571 627
Income (loss) before income tax........................... 140 1,223 (362)
Income tax benefit........................................ 43 107 145
Equity in undistributed income of subsidiary.............. 4,586 2,179 2,961
------ ------ ------
Net income................................................ $4,769 $3,509 $2,744
====== ====== ======
</TABLE>
D-59
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statement of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $4,769 $3,509 $2,744
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization........................ 20 131 42
Equity in undistributed income of subsidiary......... (4,586) (2,179) (2,961)
Increase (decrease) in accrued expenses.............. 11 (73) (119)
Other, net........................................... 5 2 21
------ ------ ------
Net cash flows provided by (used in) operating
activities............................................ 219 1,390 (273)
------ ------ ------
Cash flows used in investing activities:
Purchase of investment securities..................... (193) -- (145)
Net cash used in investing activities.................. (193) -- (145)
Cash flows from financing activities:
Cash payments on capital lease obligations............ (28) (14) (32)
Net (decrease) increase in notes payable.............. -- (1,550) 50
Net decrease in convertible subordinated debentures... -- (1,534) (144)
Issuance of common stock.............................. -- 1,429 195
------ ------ ------
Net cash (used in) provided by financing activities.... (28) (1,669) 69
------ ------ ------
Net decrease in cash and cash equivalents.............. (2) (279) (349)
Cash and cash equivalents at beginning of year......... 22 301 650
------ ------ ------
Cash and cash equivalents at end of year............... $ 20 $ 22 $ 301
====== ====== ======
</TABLE>
NOTE 15--RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Company and their associates
are customers of and have other transactions with the Bank in the ordinary
course of business. Loans and commitments included in such transactions are
made on substantially the same terms as those prevailing at the time for
comparable transactions with other persons. Such loans aggregated $802,000 and
$695,000 at December 31, 1998 and 1997, respectively. During 1998 new loans
(including drawdowns on revolving lines of credit and loan renewals) aggregated
$3,590,000 and repayments (including payments on revolving lines of credit and
loan renewals) aggregated $3,483,000.
NOTE 16--COMMITMENTS AND CONTINGENCIES:
At December 31, 1998, the Bank was party to certain legal actions. The
Company has reviewed these matters with legal counsel and, in management's
opinion, the ultimate resolution of these actions will not have a material
effect on the Company's financial position.
At December 31, 1998, the Company had unsecured lines of credit totaling
$15,000,000 for the purchase of Federal funds with other financial
institutions. In addition the Company may borrow from the Federal Home Loan
Bank and at the Federal Reserve discount window, subject to the Company's
ability to supply collateral.
D-60
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
Basic and diluted EPS have been retroactively restated in the following
table to give effect to the stock dividends and stock split (dollars in
thousands, except per share data).
<TABLE>
<CAPTION>
1998 Quarters Ended
-----------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income......... $6,805 $6,654 $6,342 $5,903
Interest expense........ 1,733 1,684 1,496 1,426
------ ------ ------ ------
Net interest income..... 5,072 4,970 4,846 4,477
Provision for loan and
lease losses........... (160) 594 450 590
Noninterest income...... 1,596 1,728 1,755 1,987
Noninterest expense..... 4,501 3,905 4,207 4,212
------ ------ ------ ------
Income before income
taxes.................. 2,327 2,199 1,944 1,662
Income tax expense...... 916 980 805 662
------ ------ ------ ------
Net income.............. $1,411 $1,219 $1,139 $1,000
====== ====== ====== ======
Basic EPS............... $ 0.29 $ 0.25 $ 0.23 $ 0.21
Diluted EPS............. $ 0.28 $ 0.24 $ 0.23 $ 0.20
</TABLE>
<TABLE>
<CAPTION>
1997 Quarters Ended
-----------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income......... $5,994 $5,837 $5,492 $4,972
Interest expense........ 1,454 1,580 1,549 1,358
------ ------ ------ ------
Net interest income..... 4,540 4,257 3,943 3,614
Provision for loan and
lease losses........... 400 104 283 335
Noninterest income...... 1,902 1,748 1,693 1,445
Noninterest expense..... 4,240 4,264 4,012 3,682
------ ------ ------ ------
Income before income
taxes.................. 1,802 1,637 1,341 1,042
Income tax expense...... 698 695 528 392
------ ------ ------ ------
Net income.............. $1,104 $ 942 $ 813 $ 650
====== ====== ====== ======
Basic EPS............... $ 0.23 $ 0.21 $ 0.18 $ 0.15
Diluted EPS............. $ 0.22 $ 0.19 $ 0.17 $ 0.14
</TABLE>
D-61
<PAGE>
APPENDIX E
----------------
NORTH COUNTY BANCORP'S DEFINITIVE PROXY STATEMENT
FOR ITS 1999 ANNUAL MEETING OF SHAREHOLDERS
<PAGE>
SCHEDULE 14A INFORMATION
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
NORTH COUNTY BANCORP
(Name of Registrant as Specified In Its Certificate)
MERRILL CORPORATION
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
E-1
<PAGE>
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3)Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
E-2
<PAGE>
NOTICE OF 1999 ANNUAL MEETING
AND
PROXY STATEMENT
E-3
<PAGE>
NORTH COUNTY BANCORP
444 South Escondido Boulevard
Escondido, California 92025
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 16, 1999
TO THE SHAREHOLDERS OF NORTH COUNTY BANCORP:
NOTICE IS HEREBY GIVEN that pursuant to its Bylaws and the call of its Board
of Directors, the 1999 Annual Meeting of Shareholders (the "Meeting") of North
County Bancorp (the "Company") will be held at North County Bank, 444 South
Escondido Boulevard, Escondido, California 92025 on Wednesday, June 16, 1999 at
5:30 p.m., for the purpose of considering and voting upon the following
matters:
1. Election of Directors. Electing the following nine (9) persons to the
Board of Directors to serve until the next Annual Meeting of Shareholders and
until their successors are elected and have qualified:
<TABLE>
<S> <C>
Alan P. Chamberlain Jack Port
G. Bruce Dunn Clarence R. Smith
Ronald K. Goode Raymond V. Stone
James M. Gregg Burnet F. Wohlford
Rodney D. Jones
</TABLE>
2. Other Business. Transacting such other business as may properly come
before the Meeting and at any and all adjournments thereof.
The bylaws of the Company provide for the nomination of directors in the
following manner:
"Nominations for election of members of the Board of Directors may be made
by the Board of Directors or by any shareholder of any outstanding class of
voting stock of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations, other than by the Board of
Directors, shall be made in writing and shall be received by the President of
the Corporation no more than 60 days prior to any meeting of shareholders
called for the election of directors, and no more than ten days after the date
the notice of such meeting is sent to shareholders pursuant to Section 2.2(d)
of these bylaws; provided, however, that if only 10 days' notice of the meeting
is given to shareholders, such notice of intention to nominate shall be
received by the President of the Corporation not later than the time fixed in
the notice of the meeting for the opening of the meeting. Such notification
shall contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the number of shares of
voting stock of the Corporation owned by each proposed nominee; (d) the name
and residence address of the notifying shareholder; and (e) the number of
shares of voting stock of the Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith shall be disregarded by the
chairman of the meeting, and the inspectors of election shall then disregard
all votes cast for each such nominee."
Only those shareholders of record at the close of business on April 23, 1999
will be entitled to notice of and to vote at the Meeting.
DATED: May 10, 1999
By Order of the Board of Directors
/s/ BURNET F. WOHLFORD
Burnet F. Wohlford
Secretary
E-4
<PAGE>
NORTH COUNTY BANCORP
444 South Escondido Boulevard
Escondido, California 92025
(760) 743-2200
----------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 16, 1999
----------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the 1999 Annual Meeting of Shareholders (the "Meeting") of
North County Bancorp (the "Company") to be held at North County Bank, 444 South
Escondido Boulevard, Escondido, California 92025 on Wednesday, June 16, 1999 at
5:30 p.m., and at any and all adjournments thereof. The solicitation of the
Proxy accompanying this Proxy Statement is made by the Board of Directors of
the Company, and the costs of such solicitation will be borne by the Company.
It is expected that this Proxy Statement and accompanying Notice will first
be mailed to shareholders on approximately May 10, 1999.
The matters to be considered and voted upon at the Meeting will be:
1. Election of Directors. To elect nine (9) persons to the Board of
Directors to serve until the next Annual Meeting of Shareholders and until
their successors are elected and have qualified.
2. Other Business. Transacting such other business as may properly come
before the Meeting and at any and all adjournments thereof.
A Proxy for use at the Meeting is enclosed. Any shareholder who executes and
delivers such Proxy has the right to revoke it at any time before it is
exercised by delivering to the Secretary or the Assistant Secretary of the
Company an instrument revoking it or a duly executed Proxy bearing a later
date, or by attending the Meeting and voting in person. Subject to such
revocation, all shares represented by a properly executed Proxy received in
time for the Meeting will be voted by the proxy holders whose names are set
forth in the accompanyingProxy (the A Proxy Holders@) in accordance with the
instructions on the Proxy. If no instruction is specified with respect to a
matter to be acted upon, the shares represented by the Proxy will be voted in
favor of the election of the nominees for directors set forth herein, and, if
any other business is properly presented at the Meeting, in accordance with the
recommendations of a majority of the Board of Directors.
The expense of preparing, assembling, printing and mailing this Proxy
Statement and the material used in this solicitation of Proxies will be borne
by the Company. It is contemplated that Proxies will be solicited through the
mail, but officers, directors and regular employees of the Company, or its
subsidiary, North County Bank (the "Bank") , may solicit Proxies personally. In
that event, the Company will pay such employees additional remuneration for
such services. Although there is no formal agreement to do so, the Company may
reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials
to shareholders whose stock in the Company is held of record by such entities.
In addition, the Company may use the services of individuals or companies it
does not regularly employ in connection with this solicitation of Proxies, if
Management determines it advisable.
E-5
<PAGE>
VOTING SECURITIES
There were issued and outstanding 4,868,906 shares of the Company's Common
Stock on April 23, 1999, which has been set as the Record Date for the purpose
of determining the shareholders entitled to notice of and to vote at the
Meeting.
Each holder of Common Stock will be entitled to one vote, in person or by
proxy, for each share of Common Stock standing in his or her name on the books
of the Company as of the Record Date for the Meeting on any matter submitted to
the vote of the shareholders, except that in connection with the election of
directors, the shares are entitled to be voted cumulatively if a candidate's or
candidates' name(s) have been properly placed in nomination prior to the voting
and a shareholder present at the Meeting has given notice of his or her
intention to vote his or her shares cumulatively. If a shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. Cumulative voting entitles a shareholder to give one nominee as
many votes as is equal to the number of directors to be elected multiplied by
the number of shares owned by such shareholder, or to distribute his or her
votes on the same principle between two or more nominees as he or she deems
appropriate. The nine (9) candidates receiving the highest number of votes will
be elected. If cumulative voting is declared at the Meeting, votes represented
by Proxies delivered pursuant to this Proxy Statement may be cumulated in the
discretion of the Proxy Holders, in accordance with the recommendations of the
Board of Directors.
PRINCIPAL SHAREHOLDERS
The Board of Directors knows of no person who owns beneficially more than
five percent (5%) of the outstanding Common Stock of the Company, except for
Ronald K. Goode, James M. Gregg, and Burnet F. Wohlford, each of whom is a
nominee for director (see "ELECTION OF DIRECTORS" herein), the North County
Bank Employee Stock Ownership Plan (the AESOP@), Financial Institution
Partners, L.P. and Walter D. Buchanan.
The following table provides certain information, as of April 23, 1999 with
respect to the ESOP, Financial Institution Partners, L.P. and Walter D.
Buchanan:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
-------------- ------------------------------------ -------------------- --------
<S> <C> <C> <C>
Common Stock North County Bank 270,894(1) 5.6%
Employee Stock Ownership Plan
444 South Escondido Boulevard
Escondido, California
Common Stock Financial Institution Partners, L.P. 581,838 12.0%
1110 Lake Cook Road, Suite 165
Buffalo Grove, Illinois
Common Stock Walter D. Buchanan 480,057 9.9%
4460 Century Dr., South
Salem, Oregon
</TABLE>
- --------
(1) Janice Carr, Debra Muyhamin and Lori E. Woolf, each of whom is an employee
of the Bank, are co-trustees of the North County Bank Retirement Trust
created to implement the North County Bank ESOP. The Bank and each of
these individuals may therefore be deemed to have shared voting and
investment power with respect to the shares of Common Stock held by the
ESOP. Ms. Carr, Ms. Muyhamin and Ms. Woolf disclaim beneficial ownership
of these shares.
E-6
<PAGE>
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be not
fewer than seven (7) nor more than ten (10) until changed by a bylaw amendment
duly adopted by the vote of the Board of Directors or the vote or written
consent of the Company's shareholders. The Bylaws further provide that the
exact number of directors shall be fixed from time to time, within the
foregoing range, by a bylaw or amendment thereof duly adopted by the vote or
written consent of the Company's shareholders or by the Company's Board of
Directors. The number of directors to be elected at the Meeting has been fixed
at nine (9).
The first nine (9) persons named below, all of whom are present members of
the Board of Directors of the Company, will be nominated for election to serve
until the next Annual Meeting of Shareholders and until their successors are
elected and have qualified. Votes will be cast pursuant to the enclosed Proxy
in such a way as to effect the election of said nine (9) nominees, or as many
thereof as possible under applicable voting rules. In the event that any of the
nominees should be unable to serve as a director, it is intended that the Proxy
will be voted for the election of such substitute nominee, if any, as shall be
designated by the Board of Directors. Management has no reason to believe that
any nominee will become unavailable.
The following table sets forth certain information as of April 23, 1999,
with respect to (i) each of the persons to be nominated by the Board of
Directors for election as directors, (ii) each of the Company's executive
officers, and (iii) the directors and executive officers(/1/) of the Company as
a group:
<TABLE>
<CAPTION>
Year First
Elected or Common Stock
Name and Offices Principal Occupation Appointed Beneficially Owned Percent of
Held with Company for Past Five Years Age Director on April 23, 1999(/2/) Class(/3/)
----------------- -------------------- --- ---------- ---------------------- ----------
<S> <C> <C> <C> <C> <C>
Alan P. Chamberlain..... Real Estate Investor and 69 1981 89,432(/4/) 1.7%
Director Construction Consultant
G. Bruce Dunn........... President and Owner, Mission 51 1988 92,218(/4/) 1.8%
Director Pools of Escondido, Inc.
Ronald K. Goode(/4/).... President and Owner, R&G Toyota 66 1983 311,452(/4/) 6.1%
Director --Volvo, Inc. (San Rafael, CA)
James M. Gregg(/5/)..... Chairman of the Board and Chief 67 1981 430,373(/6/) 8.4%
Chairman of the Board, Executive Officer, North County
Chief Executive Officer Bank and North County Bancorp
and Director
</TABLE>
- --------
(/1/)As used throughout this Proxy Statement the term "executive officer"
means, the Chairman of the Board and Chief Executive Officer, President
and Chief Operating Officer, Vice President and Chief Financial Officer
and Executive Vice President and Credit Administrator of the Bank.
(/2/)Shares "beneficially owned" are determined under SEC Rules, and do not
indicate ownership for any other purpose. In general, beneficial ownership
includes shares over which the individual in question has sole or shared
voting and/or investment power. Except as otherwise noted, may include
shares held by such person's spouse (except where legally separated) and
minor children; shares held by any other relative of such person who has
the same home; shares held in "street name" for the benefit of such
person; or shares held in an Individual Retirement Account as to which
such person has voting rights and investment power. In the case of
directors Gregg, Port, and Smith, includes 366,503, 39,961 and 47,386
shares, respectively, held by a family or retirement trust as to which
such director is a trustee and beneficiary and shares voting and
investment power with his spouse.
(/3/)The percentages are based on the total number of shares of the Company's
Common Stock outstanding, plus the number of option shares described in
the applicable footnote concerning the stock ownership of the relevant
individual or group.
(/4/)Includes the following number of shares which this individual has the
right to acquire upon the exercise of stock options which are vested or
will vest within 60 days of April 23, 1999 pursuant to the Company's Stock
Option Plan (see "Stock Option Plans" herein): Messrs. Chamberlain, Dunn,
Smith and Wohlford: 18,139 shares each; Mr. Goode: 13,928 shares; Mr.
Port: 18,518 shares; and Mr. Stone: 17,994 shares.
(Footnotes continue on following page)
E-7
<PAGE>
<TABLE>
<CAPTION>
Year First
Elected or Common Stock
Name and Offices Principal Occupation Appointed Beneficially Owned Percent of
Held with Company for Past Five Years Age Director on April 23, 1999(/2/) Class(/3/)
----------------- -------------------- --- ---------- ---------------------- ----------
<S> <C> <C> <C> <C> <C>
Rodney D. Jones......... President and Chief Operating 56 1988 128,181(/6/) 2.5%
President, Chief
Operating Officer, North County Bank
Officer and Director and North County Bancorp
Jack Port............... Commercial Property Manager 77 1981 103,487(/4/) 2.0%
Director and Private Investor
Clarence R. Smith....... Rancher (formerly President and 66 1988 65,525(/4/) 1.3%
Director Chief Executive Officer, ATI
Industries (aircraft parts
manufacturer) (1970-1988)
Raymond V. Stone........ Retired (formerly Civil Engineer 77 1988 36,280(/4/) --(/7/)
Director and Executive Vice President,
Neste Brudin & Stone--
Engineers and Planners)
Burnet F. Wohlford...... Self-employed Investor and 70 1981 91,373(/4/) 1.8%
Director and Corporate Rancher
Secretary
Gary T. Clem............ Executive Vice President and 58 n/a 33,480(/6/) --(/7/)
Executive Vice President Credit Administrator, North
and Credit Administrator County Bank
Michael J. Gilligan..... Executive Vice President and 42 n/a 45,687(/6/) --(/7/)
Vice President and Chief Financial Officer, North
Chief Financial Officer County Bank; Vice President
and Chief Financial Officer,
North County Bancorp
Directors and Executive
Officers as a Group
(11 Persons)............ 1,427,498(/8/) 27.9%
</TABLE>
- --------
(Certain footnotes from previous page)
(/5/)Mr. Goode's business address is 445 East Francisco Boulevard, San Rafael,
California 94901. Mr. Gregg's business address is 444 South Escondido
Boulevard, Escondido, California 92025.
(/6/)Includes 5,892, 14,192, 45,876 and 40,698 shares allocated to the accounts
of Messrs. Clem, Gilligan, Gregg and Jones, respectively, under the
Company's ESOP and 401(k); and 24,411, 24,319, 17,994 and 56,087 shares
which the same four individuals, respectively, have the right to acquire
within 60 days of April 23, 1999 pursuant to the Company's Stock Option
Plans (see "Stock Option Plans" herein).
(/7/)Less than 1%.
(/8/)Does not include 270,894 shares held by Debra Muyhamin, Janice Carr and
Lori E. Woolf as co-trustees of the North County Bank Retirement Trust
created to implement the North County Bank ESOP except to the extent that
such shares have been allocated to the accounts of Executive Officers.
(See "PRINCIPAL SHAREHOLDERS" and footnote 2 to the Summary Compensation
Table.)
E-8
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to rule 16a-3(e) during its most recent fiscal year and
Form 5 and amendments thereto furnished to the Company with respect to its most
recent fiscal year, no director, executive officer or beneficial owner of more
than ten percent (10%) of the outstanding Common Stock of the Company failed to
file any of the reports required by Section 16(a) of the Exchange Act on a
timely basis during 1998 except as follows: Form 4 filed on behalf of the
directors with respect to the stock options granted as described under
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS--Director Compensation"
herein were inadvertently filed late. None of such options have been exercised.
The Board of Directors and Committees
The Board of Directors of the Company and the Bank have, among others, a
standing Audit Committee consisting of directors Smith (Chairman), Dunn, Goode,
Port, and Wohlford. The Audit Committee met four (4) times in 1998. The Audit
Committee ensures that the Company is maintaining an adequate system of
internal controls such that here is reasonable assurance that assets are
safeguarded and that financial reports are properly prepared; that there is
consistent application of generally accepted accounting principles; and that
there is compliance with management's policies and procedures. The Audit
Committee meets periodically with the independent auditors, management and the
internal auditors to review their work and confirm they are properly
discharging their respective responsibilities. In addition, the Audit Committee
recommends the independent auditors for appointment by the Board of Directors
and makes certain that independent auditors have the necessary freedom and
independence to freely examine all Company and Bank records.
The Company has no standing nominating committee; however, the procedures
for nominating directors, other than by the Board of Directors itself, are set
forth in the Company's Bylaws and in the Notice of Annual Meeting of
Shareholders.
The Board of Directors of the Bank has a standing Compensation Committee,
consisting of directors Goode (Chairman), Chamberlain, Dunn, Gregg, and Smith,
none of whom serve as an officer of the Company or the Bank except Mr. Gregg,
who is the Company's and Bank's Chairman and Chief Executive Officer. The
Compensation Committee met once in 1998. The primary function of the
Compensation Committee is to approve the employment of officers and to
recommend the compensation for all officers of the Bank. Additionally, the
Compensation Committee recommends salary ranges for graded personnel and
approves personnel policies recommended by senior officers of the Bank. Mr.
Gregg does not participate in Committee deliberations and voting regarding his
compensation.
During the fiscal year ended December 31, 1998, the Board of Directors of
the Company held a total of twelve (12) regular meetings and one (1) special
meeting. Each of the persons who were directors of the Company during 1998
attended at least 75% of the aggregate of (i) the total number of such meetings
and (ii) the total number of meetings held by all committees of the Board on
which such directors served during 1998.
E-9
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Executive Compensation
The following information is furnished with respect to the i) the Chief
Executive Officer of the Company, and ii) the Company's other executive
officers whose total annual salary and bonus paid, accrued or distributed
exceeded $100,000 for the fiscal year ended December 31, 1998 (the "Named
Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------- -------
Other All
Annual Restricted Other
Compensa- Stock Options/ LTIP Compensa-
Name and Salary Bonus tion Award(s) SARs Payouts tion
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
------------------ ---- -------- -------- --------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. Gregg.......... 1998 $236,000(/1/) $195,750 (/6/) -- -- -- $75,254(/2/)
Chairman of the Board 1997 223,000(/1/) 156,339 (/6/) -- 4,725 -- 78,598(/2/)
Chief Executive Officer 1996 199,894(/1/) 106,600 (/6/) -- -- -- 77,556(/2/)
and Director of the
Company and the Bank
Rodney D. Jones......... 1998 188,710(/1/) 156,339 (/6/) -- 6,483 -- 57,375(/3/)
President, Chief 1997 175,710(/1/) 95,023 (/6/) -- 4,725 -- 48,606(/3/)
Operating Officer and 1996 159,532(/1/) 82,300 (/6/) -- 23,152 -- 24,830(/3/)
Director of the Company
and the Bank
Gary T. Clem............ 1998 103,700 51,580 (/6/) -- 2,416 -- 5,618(/4/)
Executive Vice 1997 100,168 39,888 (/6/) -- 3,675 -- 5,114(/4/)
President and Credit 1996 102,102 33,100 (/6/) -- 13,891 -- 4,421(/4/)
Administrator of the Bank
Michael J. Gilligan..... 1998 98,785 49,393 (/6/) -- 2,269 -- 5,189(/5/)
Vice President and 1997 93,636 37,453 (/6/) -- 3,675 -- 4,402(/5/)
Chief Financial Officer 1996 93,766 33,400 (/6/) -- 13,891 -- 4,636(/5/)
of the Company and the
Bank
</TABLE>
- --------
(1) Includes director's fees of $18,000, $17,000 and $6,750 for Mr. Gregg, and
$15,000, $14,000 and $6,750 Mr. Jones, for 1998, 1997 and 1996
respectively (see "Director Compensation" herein).
(2) Consists of (i) Company contributions to Mr. Gregg's account pursuant to
the Company's 401(k) Plan (the "401(k) Plan") in the amounts of $3,148,
$4,750 and $4,620 for the years 1998, 1997 and 1996, respectively; (ii)
Company contributions to Mr. Gregg's account pursuant to the ESOP in the
amounts of $3,825, $5,567 and $4,655 for the years 1998, 1997 and 1996,
respectively and (iii) accruals and mortality costs recognized by the Bank
on behalf of Mr. Gregg in the amounts of $68,281 for each of the years
1998, 1997 and 1996, in connection with Mr. Gregg's Deferred Compensation
Agreement (see "Salary Continuation Plan and Agreements" herein). The
401(k) Plan permits all eligible participants, after six months of service
and attainment of age 21, to contribute up to 15% of their annual salary
on a pre-tax basis (subject to a statutory maximum), which contributions
vest immediately when made. Employer contributions are made in varying
amounts at the discretion of the Board of Directors, and become vested at
the rate of 20% per year beginning after the third year of eligibility.
Participants have investment discretion within certain limitations with
respect to the contributions in their accounts. The ESOP is designed
primarily to invest the Bank's contributions in shares of the Company's
Common Stock. Employees become eligible to participate after one (1) year
of service and attainment of age 21. Employer contributions are made in
varying amounts at the discretion of the Board of Directors (up to a
maximum of 15% of total base salaries of eligible participants), are
allocated primarily based on employee compensation, and become vested over
the same period as the 401(k) Plan contributions. All assets of the ESOP
are held in trust for the exclusive benefit of participants and are
administered by a committee (consisting of three employees of the Bank)
appointed by the directors of the Company.
(3) Consists of (i) Company contributions to Mr. Jones' account pursuant to
the 401(k) Plan in the amounts of $3,148, $4,043 and $3,820 for the years
1998, 1997 and 1996, respectively; (ii) Company contributions to Mr.
Jones' account pursuant to the ESOP in the amounts of $3,825, $5,311 and
$4,655 for the years 1998, 1997 and 1996, respectively, and (iii) accruals
and mortality costs recognized by the Bank on behalf of Mr. Jones in the
amounts of $50,402, $39,252 and $16,355 in 1998, 1997 and 1996,
respectively, in connection with Mr. Jones' Salary Continuation Agreement
(See "Salary Continuation Plan and Agreements" herein).
E-10
<PAGE>
(4) Consists of (i) Company contributions to Mr. Clem's account pursuant to
the 401(k) Plan in the amounts of $2,361, $1,647 and $1,200 for the years
1998, 1997 and 1996, respectively; and (ii) Company contributions to Mr.
Clem's account pursuant to the ESOP in the amounts of $3,257, $3,467 and
$3,221 for the years 1998, 1997 and 1996, respectively.
(5) Consists of (i) Company contributions to Mr. Gilligan's account pursuant
to the 401(k) Plan in the amounts of $2,264, $1,301 and $1,610 for the
years 1998, 1997 and 1996, respectively; and (ii) Company contributions to
Mr. Gilligan's account pursuant to the ESOP in the amounts of $2,925,
$3,101 and $3,026 for the years 1998, 1997 and 1996, respectively.
(6) Aggregate amount of perquisites and other personal benefits did not exceed
the lesser of $50,000 or 10% of total salary and bonus reported in
preceding columns.
Option Grants, Exercises and Holdings
The following table is furnished with respect to stock options and SARs
granted during the last completed fiscal year to the Named Executive Officers.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
securities total options/
underlying SARs granted Exercise or base Grant date
Options/SARs to employees price Expiration present
granted(/1/)(/2/) in fiscal year ($ per share)(/2/) date value(/3/)
----------------- -------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Rodney D. Jones......... 6,483 35.4% $12.38 1/2/2008 $42,528
Gary T. Clem............ 2,416 13.2% 12.38 1/2/2008 15,849
Michael J. Gilligan..... 2,269 12.4% 12.38 1/2/2008 14,885
</TABLE>
The following table is furnished with respect to stock options held by the
Named Executive Officers at December 31, 1998 and exercised stock options for
the fiscal year then ended. The Company has no plans pursuant to which stock
appreciation rights may be granted.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised Options In-the-Money Options
on Value at 1998 Year-End at 1998 Year-End
Exercise Realized Exercisable/Unexercisable(/2/) Exercisable/Unexercisable(/4/)
-------- -------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C>
James M. Gregg.......... -- -- 17,994 / 12,677 $164,105 / $ 72,106
Rodney D. Jones......... -- -- 44,716 / 46,990 411,313 / 314,636
Gary T. Clem............ -- -- 17,314 / 25,023 162,337 / 167,255
Michael J. Gilligan..... -- -- 17,415 / 24,963 163,322 / 168,104
</TABLE>
- --------
(1) Options vest 20% per year from date of grant until fully vested after five
years. Upon exercise, option holders may surrender shares to pay the
option exercise price and satisfy tax withholding requirements.
(2) Retroactively adjusted for a stock dividends declared since the grant of
the options.
(3) The fair value of each option grant has been estimated on the date of
grant using the following assumptions: a dividend yield of 0.00%; expected
option life of five years; a risk free rate of return of 5.63%; and, a
volatility factor of 36%.
(4) Market value of underlying securities at year-end minus the exercise
price.
Stock Option Plans
The Company has adopted three stock option plans which were approved by the
Company's shareholders in 1983, 1991 and 1997(collectively, the "Plans"). The
Plans are intended to advance the interests of the Company and its subsidiaries
by encouraging stock ownership on the part of participating employees and
directors (employees only in the case of the 1983 Plan), by promoting their
interest in the success of the Company and by encouraging them to remain with
the Company and/or its subsidiaries. The Plans provide for the issuance of both
"incentive" and "non-qualified" stock options to full-time salaried officers
and employees of the Bank and of "non-qualified" stock options to non-employee
directors of the Bank (incentive options and
E-11
<PAGE>
officers and employees only in the case of the 1983 Plan). All options are
granted at an exercise price of not less than one hundred percent (100%) of the
fair market value of the stock on the date of grant(/1/). The purchase price of
any shares exercised under the Plans shall be paid in full in cash, cash
equivalents or outstanding Common Stock of the Company. Each option expires not
later than ten (10) years from the date the option was granted. Options are
exercisable in installments as provided in individual stock option agreements;
provided, however, that if an optionee fails to exercise his or her rights
under the options within the year such rights arise, the optionee may
accumulate them and exercise the same at any time thereafter during the term of
the option. In addition, in the event of a "Terminating Event," i.e., a merger
or consolidation of the Company as a result of which the Company will not be
the surviving corporation, a sale of substantially all of the Company's assets,
or a change in ownership of at least 25% of the Company's stock (subject to
certain exceptions), all outstanding options under the Plans shall become
exercisable in full (subject to certain notification requirements), and shall
terminate if not exercised within a specified period of time, unless provision
is made in connection with the Terminating Event for assumption of such
options, or substitution of new options covering stock of a successor
corporation. Although the 1983 Plan has expired certain options granted
thereunder are still outstanding. As of December 31, 1998, the Company had
options outstanding to purchase a total of 97,078, 359,748, and 86,661 shares
of its Common Stock under the 1983, 1991 and 1997 Plans, respectively, with
average exercise prices of $2.81, $3.10 and $11.91 per share, respectively
(retroactively adjusted for a stock dividend paid on February 10, 1999) with
respect to all such options. At that same date, the fair market value of the
Company's Common Stock was $12.5625.
Salary Continuation Plan and Agreement
The Bank entered into a Salary Continuation Agreement (the "Continuation
Agreement") with Rodney D. Jones effective December 31, 1997, pursuant to which
Mr. Jones will receive benefits in the amount of $70,000 per year for fifteen
(15) years upon retirement at age 65, provided that he remains continuously
employed by the Bank from the effective date of the Continuation Agreement
until age 65. In the event of death prior to retirement, the same benefits will
be paid to Mr. Jones' beneficiary for fifteen years following such death. In
the event of disability prior to retirement or in the event of termination as a
result of a merger or similar transaction, Mr. Jones will receive the same
benefits upon reaching age 65 as if he had remained employed by the Bank. In
the event of termination by the Bank without cause, Mr. Jones will receive that
portion of his benefits upon retirement as were vested at the time of
termination (20% per year of service). All benefits cease in the event of
termination for "cause" or in the event of his voluntary termination of
employment. The cost of making payments under the Continuation Agreement is
accrued for annually by the Bank in amounts determined by the utilization of
the interest method. The Bank will eventually be reimbursed, however, for
payments made under the Continuation Agreement through the proceeds of a life
insurance policy that names the Bank as beneficiary, and for which the Bank
recognizes a monthly mortality cost.
The Bank and the Company entered into a Deferred Compensation and Stock
Purchase Agreement (the "Agreement") with Mr. Gregg in 1986, which is
substantially similar to Mr. Jones' Continuation Agreement except as described
herein. The annual retirement benefits for Mr. Gregg are $70,000 per year but
for only thirteen (13) years following retirement. Mr. Gregg is fully vested in
his benefits and has already passed the retirement age specified in the
Agreement, so he will receive his full benefits regardless of the circumstances
under which he may leave the employ of the Company. The cost of making payments
under the Agreement was fully accrued for as of December 31, 1998, however,
mortality costs continue to be recognized on the life insurance policy. Upon
death, the proceeds from the insurance policy will be used by the Company to
purchase shares of the Company's stock owned by Mr. Gregg's family trust, at a
purchase price equal to the average sales price of the stock for three months
prior to the time of death. The amounts accrued by the Bank for Mr. Gregg and
Mr. Jones, as well for mortality costs recognized on the life insurance
policies for 1998, 1997 and 1996 are set forth in the Summary Compensation
Table above (see "Executive Compensation" herein).
- --------
(1) Exercise price per share is equivalent to the market price per share on
the date of grant, as determined by the Board of Directors of the Company,
based upon trades in the Common Stock known to the Company, and opening
and closing prices quoted on the Nasdaq Stock Market concerning the
Company's Common Stock.
E-12
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
Compensation Philosophy
Compensation for the Company's and the Bank's executive officers, as well as
other middle management officers and business development officers is comprised
of a competitive base salary and offers incentive compensation if established
performance measures are achieved. Incentive compensation may consist of direct
bonus payments to individuals, Company-wide profit sharing through the ESOP and
401(k), and long-term compensation in the form of stock options. The Company's
philosophy is that incentive compensation based upon individual and/or group
performance will encourage high performance, enhancing the profitability of the
Company, and thus shareholder value, by aligning the financial interests of the
Company's management with those of its shareholders.
The Compensation Committee (the "Committee") has developed compensation
programs which integrate the compensation of the executive officers with the
Company's annual and long-term performance goals. These programs are designed
to recognize achievement and to assist the Company in attracting and retaining
qualified executives. Annual base salaries are generally set at competitive
levels based upon a review of the executive compensation at similar sized
financial institutions (based upon the review of several published executive
salary survey's available) with executive incentive pay based upon the
achievement of annual goals in the areas of profitability, cost control and
productivity, loan volume and growth, credit quality and other relevant
performance criteria. Goals in these areas, tailored to individual executives
or business units, are established at the beginning of each fiscal year. For
the longer term, incentive stock options may be awarded by the Company. As a
result of the emphasis the Company places on tying the executive officers
incentive compensation to the Company's performance, in any particular year the
total compensation of the Company's executives may be more or less than that of
the Company's competitors, depending on the performance of the Company or its
individual business units.
Compensation of the Chief Executive Officer
In determining the Chief Executive Officer's compensation for 1998, the
Compensation Committee considered all of the factors discussed above. The Chief
Executive Officer's maximum bonus is determined by a sliding scale formula
which awards a maximum bonus of 100% of base salary at a return on equity of
20.0% or greater and no bonus at a return on equity of 10.0% or less.
Additionally, the Committee considered various subjective performance criteria,
such as the overall performance of the Company compared to plan, the
performance of the Chief Executive Officer in comparison to specific management
objectives and the Company's performance as compared to its peers in Southern
California.
The Committee considered the factors stated above in arriving at the award
of 1998 bonus compensation for the Chief Executive Officer as shown in the
Summary Compensation Table. The bonus compensation for 1998 and 1997 reflects
the improved profitability of the Company, improved asset quality and improved
regulatory evaluations of the Company and the Bank.
COMPENSATION COMMITTEE
Ronald K. Goode, Chairman
Alan P. Chamberlain
G. Bruce Dunn
James M. Gregg
Clarence R. Smith
E-13
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
Set forth below is a line graph depicting the yearly percentage change in
the cumulative total shareholder return on the Company's Common Stock assuming
an investment of $100 on December 31, 1993 with the cumulative total return of
the Nasdaq Stock Market Index and a compiled peer group(/1/) for the period of
five fiscal years commencing December 31, 1993 and ended December 31,
1998(/2/).
This graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to
the extent that the Company incorporates this information by reference, and
shall not otherwise be deemed filed under such acts.
Cumulative Total Shareholder Return of the Company
Compared with Performance of Selected Indexes
[LINE GRAPH APPEARS HERE DEPICTING THE DATA SET FORTH BELOW]
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
The Company 100.00 140.00 169.95 356.94 740.74 613.43
Nasdaq 100.00 97.75 138.26 170.01 208.28 293.21
Peer Group 100.00 107.90 145.61 189.07 327.00 292.84
- --------
(1) Source: SNL Securities, L.P. $250-$500 Million Bank Asset-Size Index.
(2) Assumes $100 invested on December 31, 1992 in the Company's Common Stock
assuming the reinvestment of dividends.
E-14
<PAGE>
Director Compensation
Directors of the Company were not paid any fees or other remuneration during
1998. However, all directors of the Company are also directors of the Bank.
Directors of the Bank were paid fees of $1,250 per meeting for attendance at
monthly and special Bank Board meetings during 1998. In addition, non-salaried
directors receive $100 for attendance at each meeting of a Board committee of
which they are a member except for members of the loan committee who receive
$200 for attendance at each committee meeting. Directors may also receive an
annual retainer of $3,000 or stock options provided they have attended a
minimum of 10 out of 12 regularly scheduled board meetings. In 1998, directors
Gregg, Goode, Port and Stone received $3,000 as a retainer and directors Jones,
Chamberlain, Dunn, Smith and Wohlford were granted stock options in lieu of a
retainer. Each of these directors was granted options to purchase 727 shares at
$12.38 per share which vest 20% per year until fully vested in five years.
Information concerning all stock options granted to and held by Messrs. Gregg
and Jones, who are also Named Executive Officers, are set forth in the tables
on pages 6 and 7 herein.
Certain Transactions
Some of the directors, officers and principal stockholders of the Company
and the Bank and the companies with which they are associated have financial
dealings with, are customers of, and have had banking transactions with the
Bank in the ordinary course of the Bank's business since January 1, 1998, and
the Bank expects to have such transactions in the future. All loans and
commitments to lend included in such transactions were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons of similar
creditworthiness and, in the opinion of Management of the Bank, did not involve
more than a normal risk of collectibility or present other unfavorable
features.
SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has not yet solicited proposals for an independent
accountant for the current fiscal year and consequently, none has yet been
selected. The Company's financial statements for the fiscal year ended December
31, 1998 were audited by Price Waterhouse, LLP. It is anticipated that a
representative or representatives of Price Waterhouse, LLP will be present at
the meeting, will have an opportunity to make a statement, if they desire to do
so, and will be available to respond to appropriate questions from
shareholders. All professional services rendered by Price Waterhouse, LLP
during 1998 were furnished at customary rates and terms.
PROPOSALS OF SHAREHOLDERS
Under certain circumstances, shareholders are entitled to present proposals
at shareholder meetings. Any such proposal concerning the Company's 2000 Annual
Meeting of Shareholders must be submitted by a shareholder prior to December
10, 1999 in order to qualify for inclusion in the proxy materials relating to
such meeting. The submission by a shareholder of a proposal does not guarantee
that it will be included in such materials. Shareholder proposals are subject
to certain regulations under the federal securities laws.
The persons named as proxy holders for the 2000 Annual Meeting of
Shareholders will have discretionary authority to vote on any shareholder
proposal which is not included in the Company's proxy materials for the
meeting, unless the Company receives notice of the proposal by February 24,
1999. If proper notice is received by that date, the proxy holders will not
have discretionary voting authority with respect to the proposal except as
provided in the federal regulations governing shareholder proposals.
E-15
<PAGE>
ANNUAL REPORT TO SHAREHOLDERS
Together with this Proxy Statement, the Company has distributed to each of
its shareholders the Annual Report to Shareholders for the year ended December
31, 1998, including audited consolidated financial statements, but such report
is not incorporated in this proxy and is not deemed to be a part of the proxy
solicitation material.
OTHER MATTERS
Management does not know of any matters to be presented to the Meeting other
than those set forth above. However, if other matters properly come before the
Meeting, it is the intention of the persons named in the accompanying Proxy to
vote said Proxy in accordance with the recommendations of the Board of
Directors, and authority to do so is included in the Proxy.
ANNUAL REPORT ON FORM 10-K
The Company will provide free of charge to any shareholder hereby solicited,
upon written request to Burnet F. Wohlford, Secretary of the Company, at 444
South Escondido Boulevard, Escondido, California 92025, a copy of the Company's
1998 Annual Report on Form 10-K including financial statements (but without
exhibits) filed with the Securities and Exchange Commission. If a shareholder
desires copies of the exhibits to the report, they will be provided upon
payment by the shareholder of the cost of furnishing the exhibits.
DATED: May 10, 1999
NORTH COUNTY BANCORP
/s/ JAMES M. GREGG
-------------------------------------
James M. Gregg
Chairman of the Board and
Chief Executive Officer
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU MAY THEN
WITHDRAW YOUR PROXY. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS
EXERCISE.
E-16
<PAGE>
NORTH COUNTY BANCORP
444 South Escondido Boulevard
Escondido, California 92025
APPENDIX A
NORTH COUNTY BANCORP
The undersigned shareholder(s) of North County Bancorp (the "Company")
hereby nominates, constitutes and appoints Clarence R. Smith, James M. Gregg
and Burnet F. Wohlford , and each of them, the attorney, agent and proxy of the
undersigned, with full power of substitution, to vote all stock of the Company
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Company to be held at North County Bank, 444 South Escondido Boulevard,
Escondido, California 92025 on Wednesday, June 16, 1999 at 5:30 p.m. local
time, and any and all adjournment or adjournments thereof, as fully and with
the same force and effect as the undersigned might or could do if personally
present thereat as directed on the reverse side. The proposals herein have been
proposed by the Company.
The Board of Directors recommends a vote of "Authority Given" for Proposal
1. The proxy confers authority to and shall be voted "Authority Given" for
Proposal 1 unless "Withhold Authority" or other instructions are indicated, in
which case the Proxy shall be voted in accordance with such instructions. If
matters to which the persons making this solicitation do not know, a reasonable
time before the solicitation, are presented at the meeting, this Proxy shall be
voted in accordance with the recommendations of a majority of the Board of
Directors.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
(To be signed on reverse side.)
E-17
<PAGE>
[_] Please mark your votes as in this example
Nominees: Alan P.
<TABLE> Chamberlain
<CAPTION> G. Bruce Dunn
Authority Withhold Ronald K. Goode
Given Authority James M. Gregg
<S> <C> <C> Rodney D. Jones
1. Election of Directors [_] [_] Jack Port
Authority given, except vote withheld from Clarence R.
the following nominee(s): Smith
Raymond V.
- --------------------------------------- Stone
Burnet F.
- --------------------------------------- Wohlford
- ---------------------------------------
- ---------------------------------------
</TABLE>
2. To transact such other business as may properly come before the Meeting and
any adjournment or adjournments thereof. Management at present knows of no
other business to be presented by or on behalf of the Company or its Board
of Directors at the Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE NOMINEES.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
<TABLE>
<S> <C> <C>
- --------------------------------- --------------------------------- -------------------
(Please Print Name) (Signature of Shareholder) (Date)
- --------------------------------- --------------------------------- -------------------
(Please Print Name) (Signature of Shareholder) (Date)
</TABLE>
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
E-18
<PAGE>
APPENDIX F
----------------
NORTH COUNTY BANCORP'S FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-10627
----------------
NORTH COUNTY BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-3669135
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification Number)
444 S. Escondido Boulevard, Escondido,
California 92025
(Address of principal executive offices) (Zip Code)
</TABLE>
(760) 743-2200
Registrant's telephone number, including area code
----------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 10, 1999 the Registrant had 5,120,668 shares of no par value
common stock issued and outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-1
<PAGE>
NORTH COUNTY BANCORP
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet--
September 30, 1999 and December 31, 1998...................... F-3
Consolidated Statement of Income--
Three Months Ended and Nine Months Ended September 30, 1999
and 1998...................................................... F-4
Consolidated Statement of Cash Flows--
Nine Months Ended September 30, 1999 and 1998................. F-5
Consolidated Statement of Stockholders' Equity--
Nine Months Ended September 30, 1999 and 1998................. F-6
Notes to Consolidated Financial Statements..................... F-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... F-8
Item 3. Quantitative and Qualitative Disclosure About Market Risk...... F-18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... F-19
</TABLE>
F-2
<PAGE>
NORTH COUNTY BANCORP
Part I--Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Cash and due from banks................. $ 27,441 $ 26,885
Federal funds sold...................... 3,000 17,000
-------- --------
30,441 43,885
Investment securities:
Available for sale...................... 18,458 17,193
Held to maturity........................ 17,532 26,628
Loans..................................... 261,417 237,702
Less: Allowance for loan and lease
losses................................. 3,535 3,592
-------- --------
257,882 234,110
Other real estate owned................... 94 374
Premises and equipment, net............... 10,107 10,013
Accrued interest receivable and other
assets................................... 5,754 5,210
-------- --------
$340,268 $337,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing..................... $104,801 $100,465
Interest-bearing........................ 196,383 202,594
-------- --------
301,184 303,059
Accrued expenses and other liabilities.... 2,835 2,416
Federal funds purchased and U.S. Treasury
demand note.............................. 2,130 1,551
Capital lease obligation.................. 362 387
-------- --------
Total liabilities..................... 306,511 307,413
-------- --------
Stockholders' equity:
Common stock, no par value, authorized
10,000,000 shares; outstanding shares
5,120,668 in 1999 and 4,868,906 in
1998................................... 19,897 19,127
Retained earnings....................... 13,946 10,834
Accumulated other comprehensive income.. (86) 39
-------- --------
Total stockholders' equity............ 33,757 30,000
-------- --------
$340,268 $337,413
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans........... $ 6,188 $ 5,831 $ 17,728 $ 17,016
Investment securities................ 515 458 1,645 1,306
Federal funds sold................... 164 301 671 513
Deposits with other financial
institutions........................ 15 64 31 64
--------- --------- --------- ---------
Total interest income.............. 6,882 6,654 20,075 18,899
--------- --------- --------- ---------
Interest expense:
Deposits............................. 1,473 1,655 4,594 4,528
Federal funds purchased and U.S.
Treasury demand note................ 13 15 37 35
Long term debt....................... 14 14 40 43
--------- --------- --------- ---------
Total interest expense............. 1,500 1,684 4,671 4,606
--------- --------- --------- ---------
Net interest income.............. 5,382 4,970 15,404 14,293
Provision for loan losses.............. 100 594 300 1,634
--------- --------- --------- ---------
Net interest income after provision for
loan losses........................... 5,282 4,376 15,104 12,659
Other income........................... 1,683 1,728 4,573 5,470
Other expense.......................... 5,301 3,905 14,354 12,324
--------- --------- --------- ---------
Income before income taxes............. 1,664 2,199 5,323 5,805
--------- --------- --------- ---------
Provision for income taxes............. 704 980 2,211 2,447
--------- --------- --------- ---------
Net income............................. $ 960 $ 1,219 $ 3,112 $ 3,358
========= ========= ========= =========
Basic earnings per share............... $ 0.19 $ 0.25 $ 0.64 $ 0.69
========= ========= ========= =========
Diluted earnings per share............. $ 0.19 $ 0.24 $ 0.62 $ 0.66
========= ========= ========= =========
Average common shares outstanding...... 4,930,871 4,868,906 4,897,896 4,868,906
========= ========= ========= =========
Diluted average common shares
outstanding........................... 4,979,053 5,055,005 5,053,620 5,057,495
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 3,112 $ 3,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of:
Office property and equipment.......................... 1,094 832
Deferred loan fees and costs, net...................... (542) (606)
Investment premiums and discounts, net................. 25 170
Other.................................................. 56 26
Gain on sale of other real estate owned.................. (76) (383)
Provision for loan and lease losses...................... 300 1,634
Increase in interest receivable.......................... (114) (265)
(Decrease) increase in taxes payable..................... (146) 46
Increase (decrease) in accrued expenses.................. 315 (133)
Increase in interest payable............................. 103 201
Other, net............................................... (464) 14
------- -------
Net cash provided by operating activities.............. 3,663 4,894
Cash flows from investing activities:
Proceeds from sales and maturities of investment
securities................................................ 30,582 11,280
Purchase of investment securities.......................... (22,775) (15,923)
Net increase in loans...................................... (23,556) (17,287)
Purchase of premises and equipment......................... (1,189) (1,903)
Proceeds from sale of other real estate owned.............. 381 1,322
------- -------
Net cash used in investing activities.................. (16,557) (22,511)
Cash flows from financing activities:
Cash payments on notes payable and capital lease
obligations............................................... (25) (10)
Net (decrease) increase in deposits........................ (1,875) 40,829
Net increase (decrease) in short term borrowings........... 580 (73)
Cash proceeds from exercise of stock options............... 770 --
------- -------
Net cash (used in) provided by financing activities.... (550) 40,746
------- -------
Net (decrease) increase in cash and cash equivalents......... (13,444) 23,129
Cash and cash equivalents at beginning of year............... 43,885 28,262
Cash and cash equivalents at end of period................... $30,441 $51,391
======= =======
Disclosures:
Total interest paid........................................ $ 4,568 $ 4,405
======= =======
Total taxes paid........................................... $ 2,378 $ 2,370
======= =======
Foreclosed real estate loans............................... $ 26 $ 316
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated Other Total
----------------- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
--------- ------- -------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance December 31,
1997................... 4,637,290 $16,058 $ 9,137 $ (2) $25,193
Five percent stock
dividend including cash
for fractional shares.. 231,616 3,069 (3,072) (3)
Comprehensive income:
Unrealized holding gain
on available for sale
securities, net of tax
of $70................. 87 87
Net income.............. 3,358 3,358
Total comprehensive
income............... 3,445
--------- ------- ------- ---- -------
Balance September 30,
1998................... 4,868,906 19,127 9,423 85 28,635
Comprehensive income:
Unrealized holding
gain on available for
sale securities, net
of tax of $(37)...... (46) (46)
Net income.............. 1,411 1,411
Total comprehensive
income............... 1,365
--------- ------- ------- ---- -------
Balance December 31,
1998................... 4,868,906 19,127 10,834 39 30,000
Exercise of stock
options................ 251,762 770 770
Comprehensive income:
Unrealized holding
loss on available for
sale securities, net
of tax of $101....... (125) (125)
Net income.............. 3,112 3,112
Total comprehensive
income............... 2,987
--------- ------- ------- ---- -------
Balance September 30,
1999................... 5,120,668 $19,897 $13,946 $(86) $33,757
========= ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying financial information has been prepared in accordance with
the Securities and Exchange Commission rules and regulations for quarterly
reporting and therefore does not necessarily include all information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. This information
should be read in conjunction with the Company's Annual Report on Form 10K for
the year ended December 31, 1998.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management, the
unaudited financial information for the three and Nine Months ended September
30, 1999 and 1998, reflect all adjustments, consisting only of normal recurring
accruals and provisions, necessary for a fair presentation thereof.
Note 2. Earnings Per Share
Basic earnings per share (EPS) represents net income divided by the weighted
average common shares outstanding during the period adjusted retroactively for
stock dividends. Diluted EPS gives effect to all potential issuances of common
stock that would have caused basic EPS to be lower as if the issuance had
already occurred. The calculation of diluted EPS assumes the issuance of common
stock upon the conversion of stock options of 48,182 and 186,099 shares for the
three months ended September 30, 1999 and 1998, respectively, and 155,724 and
188,589 shares for the nine months ended September 30, 1999 and 1998,
respectively.
Note 3. Acquisition
On September 29, 1999, the Company signed a definitive agreement to be
acquired by Wells Fargo & Company ("Wells Fargo") subject to customary
conditions for similar acquisitions. In the proposed transaction, Wells Fargo
will issue a total of approximately $112 million of its common stock in
exchange for all of the issued and outstanding shares of the Company. It is
expected that the acquisition will be completed in the first quarter of 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
North County Bancorp (the "Company") has one wholly owned subsidiary, North
County Bank (the "Bank"). North County Bank's operations are the only
significant operations of the Company. The accompanying financial information
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
Statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date thereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward-looking statements include general economic conditions, particularly in
the Company's market areas, changes in prevailing interest rates, competitive
products and pricing, inflation, credit and other risks of lending and
investment activities, fiscal and monetary policies of the U.S. and other
governments, regulations affecting financial institutions, and other risks and
uncertainties affecting the Company's operations and personnel.
F-7
<PAGE>
RESULTS OF OPERATIONS
Summary
The Company reported earnings of $3,112,000 or $0.62 per diluted share for
the nine months ended 1999, a decrease of $246,000 compared to net income of
$3,358,000 or $0.66 per diluted share for the same period of 1998. The
annualized return on average assets and average stockholders' equity declined
to 1.21% and 13.04%, respectively, for the first nine months of 1999, from
1.50% and 16.57%, respectively, for the corresponding 1998 period. A comparison
of third quarter results for 1999 and 1998 indicates a $259,000 decline in
earnings to $960,000 or $0.19 per diluted share from $1,219,000 or $0.24 per
diluted share last year. Third quarter earnings produced annualized return on
average assets and average stockholders' equity of 1.11% and 11.62%,
respectively, in 1999, compared to 1.53% and 17.27% respectively, in 1998.
Several factors contributed to lower earnings in 1999 compared to 1998. A
decline in the Company's net interest margin, primarily due to lower loan
yields, a lower volume of loan sales in 1999, and expenses incurred as a result
of the planned merger with Wells Fargo. These factors were partially offset by
a decrease in the provision for loan and lease losses due to several elements,
including improved asset quality, a lower net charge off ratio, as well as loan
growth this year being generated primarily by well collateralized SBA and
commercial real estate loans.
Net Interest Income
Net interest income, the principal source of income for the Company, is
interest and fees earned on loans and investments less the interest paid on
deposits and borrowings. Analysis of the Company's net interest income and
average balance sheet levels for the three and nine month periods are presented
in Tables One and Two. Primary factors affecting the level of net interest
income include increases or decreases in the average balances (volume) of
interest-earning assets and interest-bearing liabilities, increases or
decreases in the average rates earned and paid on these assets and liabilities,
the Company's ability to manage its earning asset portfolio and the
availability of particular sources of funds. The changes in net interest income
between the three months and nine months ended September 30, 1999 and 1998 are
analyzed in Table Three.
F-8
<PAGE>
Table One--Three Month Analysis of Net Interest Income
(Dollars in Thousands)
This table presents an analysis of net interest income and average balance
sheet levels for the third quarter of 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1999 1998
-------------------------- --------------------------
Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield(1) Balance Expense Yield(1)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Interest-earning assets:
Loans (2)............. $256,222 $6,188 9.58% $222,592 $5,831 10.39%
Investment securities
(3).................. 36,593 515 5.59 32,296 458 5.62
Federal funds sold.... 12,852 164 5.08 22,138 301 5.40
Interest-bearing
deposits............. 1,144 15 4.88 4,615 64 5.46
Total earning assets.. 306,811 6,882 8.90 281,641 6,654 9.37
-------- ------ ----- -------- ------ -----
Noninterest-earning
assets:
Cash and due from
banks................ 27,448 24,009
Premises and
equipment, net....... 9,877 9,749
Other assets.......... 5,790 6,992
Total noninterest-
earning assets....... 43,115 40,750
-------- --------
Less allowance for loan
and lease losses....... 3,566 3,613
-------- --------
Total assets........ $346,360 $318,778
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand............. $ 46,744 150 1.28 $ 42,461 144 1.35
Savings............. 90,069 621 2.73 81,980 667 3.23
Time................ 65,983 702 4.22 66,089 844 5.07
Other short term
borrowings........... 1,242 13 4.13 865 15 6.54
Capital lease......... 364 14 15.40 406 14 13.95
Total interest-bearing
liabilities.......... 204,402 1,500 2.91 191,801 1,684 3.48
------ ----- ------ -----
Noninterest-bearing
liabilities: 106,337 95,839
Demand deposits....... 2,566 2,920
-------- --------
Other liabilities..... 313,305 290,560
Total liabilities..... 33,055 28,218
Stockholders' equity.... $346,360 $318,778
-------- --------
Total liabilities and
stockholders' equity...
Net interest income..... $5,382 $4,970
------ ------
Net interest spread
(4).................... 5.99% 5.89%
===== =====
Net interest margin
(5).................... 6.96% 7.00%
===== =====
</TABLE>
- --------
(1) Yields are not presented on a tax equivalent basis as the effects are not
material.
(2) Nonaccrual loans are included in the daily average loan amounts
outstanding.
(3) The average balance sheet amounts and yields on available for sale debt
securities are based on the average of historical amortized cost
balances.
(4) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-
earning assets.
F-9
<PAGE>
Table Two--Nine Month Analysis of Net Interest Income
(Dollars in Thousands)
This table presents an analysis of net interest income and average balance
sheet levels for the first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------
1999 1998
------------------------- -------------------------
Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield(1) Balance Expense Yield(1)
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Interest-earning assets:
Loans (2)............. $245,075 $17,728 9.67% $219,199 $17,016 10.38%
Investment securities
(3).................. 39,342 1,645 5.59 30,463 1,306 5.73
Federal funds sold.... 18,564 671 4.83 12,668 513 5.42
Interest-bearing
deposits............. 836 31 5.00 1,538 64 5.52
-------- ------- ----- -------- ------- -----
Total earning assets.. 303,817 20,075 8.83 263,868 18,899 9.58
Noninterest-earning
assets:
Cash and due from
banks................ 26,876 22,633
Premises and
equipment, net....... 9,908 9,140
Other assets.......... 6,145 6,919
-------- --------
Total noninterest-
earning assets....... 42,929 38,692
Less allowance for loan
and lease losses....... 3,613 3,403
Total assets........ $343,133 $299,157
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ----------------------------------
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand............. $ 45,475 417 1.23 $ 40,868 413 1.35
Savings............. 87,229 1,754 2.69 79,440 1,956 3.29
Time................ 72,454 2,423 4.47 56,838 2,159 5.08
Other short term
borrowings........... 1,258 37 3.90 928 35 4.99
Capital lease......... 373 40 14.48 410 43 14.23
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities.......... 206,789 4,671 3.02 178,484 4,606 3.45
Noninterest-bearing
liabilities:
Demand deposits....... 102,063 90,963
Other liabilities..... 2,454 2,695
Total liabilities..... 311,306 272,142
Stockholders' equity.... 31,827 27,015
-------- --------
Total liabilities and
stockholders' equity... $343,133 $299,157
======== ========
Net interest income..... $15,404 $14,293
======= =======
Net interest spread
(4).................... 5.81% 6.13%
===== =====
Net interest margin
(5).................... 6.78% 7.24%
===== =====
</TABLE>
- --------
(1) Yields are not presented on a tax equivalent basis as the effects are not
material.
(2) Nonaccrual loans are included in the daily average loan amounts
outstanding.
(3) The average balance sheet amounts and yields on available for sale debt
securities are based on the average of historical amortized cost balances.
(4) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
F-10
<PAGE>
Table Three-Changes in Net Interest Income
(Dollars in thousands)
This table sets forth information regarding changes in net interest income
for the three and nine month periods ended September 30, 1999 and 1998. The
changes for each major category of interest income and interest expense are
divided between the portion of change attributable to the variance in average
balances (volume) or average rates for that category. The amount of change that
cannot be separated is allocated to each variance proportionately. Nonaccrual
loans are included in average balances for these computations. The table is not
presented on a tax equivalent basis as the effects are not material.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 vs. 1998 1999 vs. 1998
------------------------------------ -----------------------------------
Volume Rate Total Volume Rate Total
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earning assets--Interest
income:
Loans................. $ 836 $ (479) $ 357 $ 1,922 $ (1,210) $ 712
Investment
securities........... 60 (3) 57 372 (33) 339
Federal funds sold.... (120) (17) (137) 218 (60) 158
Interest-bearing
deposits............. (43) (6) (49) (27) (6) (33)
---------- ----------- ---------- ---------- ----------- ----------
Total............... 733 (505) 228 2,485 (1,309) 1,176
---------- ----------- ---------- ---------- ----------- ----------
Deposits and borrowed
funds--
Interest expense:
Interest-bearing
demand deposits...... 14 (8) 6 44 (40) 4
Savings deposits...... 62 (108) (46) 180 (382) (202)
Time deposits......... (1) (141) (142) 544 (280) 264
Other short term
borrowings........... 4 (6) (2) 11 (9) 2
Capital lease......... (1) 1 -- (4) 1 (3)
---------- ----------- ---------- ---------- ----------- ----------
Total............... 78 (262) (184) 775 (710) 65
---------- ----------- ---------- ---------- ----------- ----------
Change in net interest
income................. $ 655 $ (243) $ 412 $ 1,710 $ (599) $ 1,111
========== =========== ========== ========== =========== ==========
</TABLE>
Net interest income for the first nine months of 1999 compared to 1998
increased $1.1 million or 8% to $15.4 million from $14.3 million. An increase
of $39.9 million or 15% in average earning assets and a 12% reduction in the
average rate paid on interest-bearing liabilities (down 43 basis points) were
principal reasons for the increase in net interest income, but were partially
offset by a 8%, or 75 basis points, reduction in the yield on earning assets.
During the first nine months, interest income increased $1.2 million or 6% to
$20.1 million in 1999 from $18.9 million in 1998. The growth in average earning
assets was led by loans which increased $25.9 million or 12% to $245.1 million
for the first nine months of 1999 from $219.2 million for the same 1998 period.
Interest and fees on loans increased $712,000 or 4% to $17.7 million in 1999
from $17.0 million in 1998. The effect of the increase in loan volume on
interest income was partially countered by a decrease in the average yield on
loans to 9.67% from 10.38% primarily due to the 75 basis point decline in the
prime lending rate during the last half of 1998. The recent increases in the
prime lending rate will improve loan yields during the last quarter of 1999.
Deposit growth outpaced loan growth in the last half of 1998, constraining the
net yield on earning assets as excess funds were invested in lower yielding
short-term investments and Fed funds. Average investment securities and Fed
funds sold for the first nine months of 1999 increased $8.9 million and $5.9
million, respectively, over the corresponding period in 1998, and contributed
$339,000 and $158,000, respectively, to the increase in interest income. The
net interest margin (net interest income as a percentage of average interest-
earning assets) was 6.78% and 7.24% for the nine months ended September 30,
1999 and 1998, respectively.
Interest expense, increased only 1% or $65,000 for the first nine months of
1999 compared to the corresponding period in 1998, due to a decline in interest
paid on deposits. Average interest-bearing deposits
F-11
<PAGE>
for the first nine months of 1999 increased $28.1 million or 16% to $205.2
million at an average rate of 2.99% compared to $177.1 million at an average
rate of 3.42% for the same 1998 period. Time deposit interest expense increased
$264,000 to $2.4 million in 1999 from $2.2 million last year due to growth of
$15.6 million in average balances partially offset by a decline in the average
rate paid on these deposits to 4.47% in 1999 from 5.08% in 1998. The decrease
in rates paid on deposits is attributable to government easing of short term
interest rates and the Company generally lowering interest rates to limit time
deposit growth as well as lower the related interest expense. During this same
period the average rate paid on savings accounts (including money market
accounts) decreased to 2.69% on average balances of $87.2 million in 1999 from
an average rate of 3.29% on balances of $79.4 million last year. Interest
expense related to savings deposits decreased $202,000 to $1.8 million in the
first nine months of 1999 compared to $2.0 million for the same period last
year. The average rates paid on total interest-bearing liabilities were 3.02%
and 3.45% for the first nine months of 1999 and 1998, respectively.
Net interest income for the third quarter of 1999 increased $412,000 or 8%
to $5.4 million from $5.0 million for the third quarter of 1998. Interest
income increased $228,000 or 3% to $6.9 million in 1999 from $6.7 million last
year. Third quarter average loans increased 15% or $33.6 million to $256.2
million in 1999 from $222.6 million last year, but at significantly lower
yields, 9.58% compared to 10.39%. A recent increase in the prime lending rate
should improve the loan yield in the fourth quarter. Third quarter income on
Fed funds sold decreased $137,000 due to a decline of $9.3 million or 42% in
average balances from the third quarter of 1998, as current year loan growth
was able to absorb excess funds that were previously invested in Fed funds.
Third quarter interest expense decreased $184,000 or 11% in 1999 due to a
decrease in the average rate paid on interest-bearing deposits to 2.88% on
average balances of $202.8 million in 1999, from 3.45% on $190.5 million in
1998. The net interest margin was 6.96% and 7.00% for the three months ended
September 30, 1999 and 1998, respectively.
Provision for Loan and Lease Losses
The provision for loan and lease losses for the nine months ended September
30, 1999 was $300,000 compared to $1.6 million for the corresponding 1998
period. The amount of the provision reflects management's judgement as to the
adequacy of the reserve for loan and lease losses and is generally determined
by the periodic review and assessment of the overall risk in the loan
portfolio, the Company's loan loss experience, and current and expected
economic conditions. The lower current year provision is based on improvement
in the credit quality of the Company's loan portfolio, particularly as related
to the Title I loan portfolio, as well as loan growth this year being generated
primarily by lower risk, well collateralized SBA and commercial real estate
loans. The provision for loan and lease losses during the first nine months of
1998 reflected a provision of $640,000 compared to $0 in 1999 to supplement the
Company's Title I HUD reserve due to potential losses in the Title I portfolio
at that time. As presented in Table Four, net charge offs decreased to $357,000
in 1999 from $866,000 for the first nine months of 1998. The allowance for loan
and lease losses represented 1.35% and 1.77% of total gross loans at September
30, 1999 and 1998, respectively.
The provision for loan and lease losses for the three months ended September
30, 1999 was $100,000 compared to $594,000 for the third quarter of 1998. The
provision for loan and lease losses during the third quarter of 1998 reflected
a provision of $150,000 compared to $0 in 1999 to supplement the Company's
Title I HUD reserve.
F-12
<PAGE>
Table Four--Allowance and Provision for Loan and Lease Losses
(Dollars in thousands)
This table summarizes loan balances at the end of each period and daily
averages during the period, changes in the allowance for loan and lease losses
arising from loan charge-offs and recoveries, additions to the allowance which
have been charged to operating expense, and certain ratios relating to the
allowance for loan losses.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
BALANCES:
Average loans during the period............ $ 245,075 $ 219,199
Loans at the end of period................. 261,417 227,702
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period............. 3,592 3,268
Actual charge-offs:
Commercial loans......................... 144 283
Installment and consumer loans........... 405 911
--------------- ---------------
Total.................................. 549 1,194
Recoveries on loans previously charged off:
Residential real estate loans............ 9 --
Commercial real estate loans............. -- 135
Commercial loans......................... 68 92
Installment and consumer loans........... 115 101
--------------- ---------------
Total.................................. 192 328
Net loan charge-offs....................... 357 866
Provision for loan and lease losses........ 300 1,634
--------------- ---------------
Balance at end of period................... $ 3,535 $ 4,036
--------------- ---------------
RATIOS:
Annualized net loan charge-offs to average
loans..................................... 0.19% 0.53%
Allowance for loan and lease losses to
loans at end of period.................... 1.35% 1.77%
</TABLE>
Loans are charged against the reserve, when in management's opinion, they
are deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the reserve for loan and lease
losses is adequate to absorb losses as they arise, there can be no assurance
that the Company will not sustain losses in any given period which could be
substantial in relation to the size of the reserve.
Noninterest Income
A comparison of noninterest income for the nine months ended September 30,
1999 and 1998, indicates a decrease of approximately 16% or $897,000
essentially due to a decrease in gain on loan sales of $787,000 for the first
nine months of the year. Title I and equity loans sold in the first nine months
of 1999 totaled $10.1 million for gains of $284,000 compared to $29.9 million
sold for total gains of $964,000 for the same period last year. The secondary
market demand for these loans decelerated in the last half of 1998 and the
first half of 1999, and consequently the Company's sales volume has declined.
Premiums paid for SBA loans have declined from last year as 1999 SBA loan sales
of $6.1 million resulted in gains of $272,000 compared to $5.2 million sold for
gains of $381,000 in the first nine months of 1998. Management's decision on
whether or not to sell SBA loans depends upon, among other factors, loan
demand, premium levels and prepayment risk. The Company sold $3.7 million in
SBA loans during the third quarter of 1999 for gains of $220,000. While the
exact amount of SBA loans expected to be sold during the last quarter of 1999
is not known at this time, Management estimates approximately the same volume
of SBA sales as in the third quarter. Loan servicing
F-13
<PAGE>
income decreased $140,000 to $314,000 for the first nine months of 1999, from
$454,000 for the same 1998 period. Serviced loans during this time decreased
$19.3 million to $54.6 million in 1999 from $73.9 million in 1998 due to
increased refinancing activity prompted by the decline in interest rates during
the last half of 1998. Third quarter noninterest income decreased 3% or $45,000
in 1999 compared to 1998 primarily due to decreases in loan servicing fees and
service charges on deposits of $61,000 and $43,000, respectively, partially
offset by an increase of $40,000 in gains on loan sales.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 1999 increased
16% or $2.0 million compared to the corresponding 1998 period. This category
consists of salaries and employee benefits which increased $795,000 to $8.1
million, occupancy expense which increased $458,000 to $3.0 million, telephone
expense which increased $204,000 to $567,000, the cost of retaining
professional services which increased $$300,000 to $569,000, and advertising
and other public relations which increased $7,000 to $521,000. The cost of
maintaining and selling foreclosed properties net of gains on the sale of those
properties (OREO expense) increased $192,000 to a net gain of $110,000 in 1999.
Included in 1999 noninterest expenses are $520,000 in expenses incurred as a
result of the planned merger with Wells Fargo. Approximately $171,000 in
noninterest expense during the first nine months of 1999, resulted from testing
and remediation costs associated with the Year 2000 issue (See "Impact of Year
2000"). Branch operational losses less recoveries were down $73,000 to $22,000.
The Company opened a new full service branch in Vista, California in October of
1999 and has started the construction of a new facility for its Murrieta branch
which is scheduled to move in the first quarter of 1999. Third quarter
noninterest expense increased 36% or $1.4 million in 1999 compared to 1998 due
to salaries and employee benefits which increased $479,000 to $2.9 million,
occupancy expense which increased $164,000 to $1.0 million, OREO expense which
increased $251,000 to a net gain of $38,000 and professional services expense
which increased $367,000 to $380,000.
Impact of Year 2000
Noninterest expense includes the cost of projects to ensure accurate date
recognition and data processing with respect to the century date change
(commonly referred to as "Y2K"). The Y2K issue confronting the Company, its
suppliers, customers, customer's suppliers and competitors centers on the
potential inability of computer systems to recognize the year 2000. Some
computer systems in use today were designed and developed when computer memory
was limited and expensive on early mainframes. As a consequence many programs
used only two digits for the year in the date field to conserve memory. As a
result, these computer applications could fail completely or create erroneous
results by the year 2000 unless corrective measures are taken. To the extent
that the problem is not successfully addressed, consequences, the extent of
which are unknown, could impact the Company's business, operations, customers
and vendors.
In accordance with its Year 2000 Project Plan, the Company completed all
required testing by September 30, 1999. As of March 31, 1999, the Company had
identified critical systems and processes and had completed the testing,
validation and remediation of substantially all its critical systems. The
Company is also assessing the potential impact of this problem on its
suppliers. Vendors upon whom there is significant reliance have been identified
and inquiries made regarding their year 2000 readiness plans and status.
Appropriate measures to minimize risk will be undertaken with those that appear
to pose a significant risk. Replacements may be effected where necessary.
However, where no viable alternative for some suppliers, such as power
distribution and local telephone companies exist contingency plans are being
formulated. As with all financial institutions, a high degree of reliance is
placed on the systems of other institutions, including government agencies, to
settle transactions. Principal settlement methods associated with major payment
systems will be tested as part of their integration with the Company's
processing system.
The Company is also assessing the potential impact of this problem on its
customers. Borrowers, funding sources and large depositors with a significant
financial relationship with the Company are being reviewed to assess their Y2K
readiness preparation and the risk potential to the Company. Borrowing
relationships with credit commitments of $750,000 or more are assigned one of
three risk levels based on their level of
F-14
<PAGE>
preparation: low, medium or high. Borrowers in the high risk category will be
reassessed quarterly, while borrowers in the medium risk category will be
reassessed semiannually. The risk mitigation plan has been incorporated into
the normal credit review process. To mitigate the potential loss of large
deposits, the Company has reviewed and increased its secondary sources of
liquidity.
The Company has developed business resumption contingency plans specific to
the year 2000 that address the actions that would be taken if critical business
functions cannot be carried out in the normal manner upon entering the next
century due to system or supplier failure. These plans include but are not
limited to manual processing of information for critical information technology
systems and having increased cash on hand.
The related costs of the Year 2000 Project are expensed as incurred and
primarily included in professional services, equipment repairs (a component of
occupancy expense) and salary expense. Y2K expenses incurred to date through
the end of the first nine months of 1999 approximate $346,000 ($171,000 in the
first nine months of 1999) and the total cost of the project is estimated to be
approximately $360,000. The Company does not believe that the costs of
addressing this problem will have a material effect on the results of its
operations.
FINANCIAL CONDITION
Total assets of the Company increased $2.9 million or 1% to $340.3 million
at September 30, 1999, from $337.4 million at December 31, 1998. During the
same period loans increased 10%, Fed funds sold and investments in total
decreased 36%, deposits decreased almost 1% and stockholder's equity increased
13%. Gross loans and leases, the Company's primary use of funds, increased
$23.7 million to $261.4 million and 77% of total assets compared to $237.7
million and 70% of year end total assets. Encouraged by the expansion of the
local real estate markets, loan growth was centered in commercial and
commercial real estate loans which increased approximately 13% or $16.6 million
and 30% or $15.3 million, respectively. Refinancing activity generated
approximately $8.0 million in commercial real estate loans and is not expected
to continue at this level in the last quarter of the year. SBA loans accounted
for $12.7 million of the commercial loan growth. These increases were partially
offset by consumer loans which decreased 13% or $4.3 million and real estate
construction loans which decreased 14% or $2.7 million. The Company continues
to experience poor demand for consumer financing primarily due to increased
competition from non-bank lenders as well as other financial institutions in
its market area. The largest change in the loan portfolio mix was in commercial
real estate loans which increased to 26% from 22% and consumer loans which
decreased to 11% from 14% of total loans. The investment portfolio decreased
$7.8 million or 18% to $36.0 in 1999 from $43.8 million at the end of 1998
primarily due to the maturity of short term government agencies.
Table Five--Loan Distribution
(Dollars in thousands)
The following table sets forth the amount of total loans outstanding in each
category and the percentage of total loans of each category at the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
Balance Percent Balance Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial loans............................. $144,852 55% $128,298 54%
Commercial real estate loans................. 66,854 26 51,520 22
Consumer loans............................... 29,872 11 34,171 14
Real estate construction loans............... 17,167 7 19,881 8
All other loans.............................. 2,672 1 3,832 2
-------- --- -------- ---
Total gross loans........................ 261,417 100 237,702 100
--- ---
Less: Allowance for loan and lease losses.... 3,535 3,592
-------- --------
Total net loans.......................... $257,882 $234,110
======== ========
</TABLE>
F-15
<PAGE>
Total deposits at September 30, 1999 increased $1.9 million or 1% to $301.2
million from $303.1 million at December 31, 1998. As shown in Table Six, the
growth in deposits was predominately in noninterest-bearing accounts which
increased $4.3 million or 4%. Within the interest-bearing deposit category,
interest-bearing demand (NOW) accounts grew approximately 3% or $1.4 million to
$44.3 million, savings accounts (including money market accounts) increased 16%
or $12.7 million to $92.3 million and time deposits decreased 25% or $20.3
million to $59.8 million. The decrease in time deposits is a result of
Management's efforts to reduce interest expense by lowering the rates paid on
time deposits. The most notable shift in deposit mix was in savings accounts
which increased to 30% of total deposits during the first half of 1999 from 26%
at year end and in total time deposits which decreased to 20% from 27%.
Table Six--Deposit Distribution
(Dollars in thousands)
The following table sets forth the amount of total deposits outstanding in
each category and the percentage of total deposits of each category at the
dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
Balance Percent Balance Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits........... $104,801 35% $100,465 33%
Interest-bearing demand deposits.............. 44,269 15 42,824 14
Savings deposits.............................. 92,339 30 79,684 26
Time deposits of $100,000 or more............. 14,977 5 20,867 7
Other time deposits........................... 44,798 15 59,219 20
-------- --- -------- ---
Total deposits.............................. $301,184 100 $303,059 100
======== === ======== ===
</TABLE>
Nonperforming Assets
Table Seven--Nonperforming Assets
(Dollars in thousands)
The following table provides information with respect to the components of
the Company's nonperforming assets at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Nonaccrual loans:
Residential real estate............................ 56 130
Commercial......................................... 4,133 387
Installment and consumer........................... 446 271
------ ------
Total nonperforming loans........................ 4,635 788
====== ======
Other real estate owned............................ 94 374
Total nonperforming assets....................... $4,729 $1,162
====== ======
Nonperforming loans to total gross loans........... 1.77% 0.33%
====== ======
Nonperforming assets to total gross loans plus
other real estate owned........................... 1.81% 0.49%
====== ======
</TABLE>
Nonperforming assets increased $3.6 million in the first nine months of 1999
due to an increase of $3.9 million in nonaccrual loans of which $3.2 million
was attributable to three borrowers. Management does not expect any significant
losses due to these borrowings which are well collateralized and partially
guaranteed by the SBA. Other real estate owned decreased $280,000 to $94,000
during the first nine months of 1999 from $374,000 due to the sale of three
properties that totaled $306,000 and the addition of one property for $26,000.
F-16
<PAGE>
The Company considers a loan to be nonperforming when any one of the
following events occurs: (a) any installment of principal or interest is 90
days past due; (b) the full timely collection of interest or principal becomes
uncertain; (c) the loan is classified as "doubtful" by bank examiners; or (d) a
portion of its principal balance has been charged-off. The Company's policy is
to classify loans which are 90 days past due as nonaccrual loans unless
Management determines that the loan is adequately collateralized and in the
process of collection or other circumstances exist which would justify the
treatment of the loan as fully collectible.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The liquidity of a banking institution reflects its ability to provide funds
to meet customer credit needs, to accommodate possible outflows in deposits, to
provide funds for day-to-day operations, and to take advantage of interest rate
market opportunities. Asset liquidity is provided by cash, certificates of
deposit with other financial institutions, Federal funds sold, investment
maturities and sales and loan maturities, repayments and sales. Liquid assets
(consisting of cash, Federal funds sold and investment securities) comprised
20% and 26% of the Company's total assets at September 30, 1999 and December
31, 1998, respectively. Liquidity management also includes the management of
unfunded commitments to make loans and undisbursed amounts under lines of
credit. At September 30, 1999, these commitments totaled $50.0 million in
commercial loans, $1.9 million in letters of credit, $21.5 million in real
estate construction loans, and $12.6 million in consumer loans.
In addition to loan and investment sales and deposit growth, the Bank has
several secondary sources of liquidity. Many of the Bank's real estate
construction loans are originated pursuant to underwriting standards which make
them readily marketable to other financial institutions or investors in the
secondary market. In addition, in order to meet liquidity needs on a temporary
basis, the Bank has unsecured lines of credit in the amount of $25 million for
the purchase of Federal funds with other financial institutions, and may borrow
funds from the Federal Home Loan Bank and at the Federal Reserve discount
window subject to the Bank's ability to supply collateral.
Asset/Liability Management involves minimizing the impact of interest rate
changes on the Company's earnings through the management of the amount,
composition and repricing periods of rate sensitive assets and rate sensitive
liabilities. Emphasis is placed on maintaining a rate sensitivity position
within the Company's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. At September 30, 1999
approximately 56% of the Company's interest earning assets have interest rates
which are tied to the Bank's base lending rate or mature in one year or less.
In order to match the rate sensitivity of its assets, the Company's policy is
to offer a large number of variable rate deposit products and limit the level
of large dollar time deposits with maturities of one year or longer. In
addition to managing its asset/liability position, the Company has taken steps
to mitigate the impact of changing interest rates by generating non-interest
income through service charges, offering products which are not interest rate
sensitive, such as escrow services and insurance products, and through the
servicing of mortgage loans.
F-17
<PAGE>
CAPITAL RESOURCES
Stockholders' equity increased 13% to $33.8 million at September 30, 1999
from $30.0 million at December 31, 1998. The increase in equity consists of net
income of $3.1 million, $770,000 from the exercise of stock options, partly
offset by a decrease in net unrealized gain (loss) on available for sale
securities of $125,000. The following table provides information with respect
to the Company's and the Bank's regulatory capital ratios and regulatory
minimum requirements:
Table Eight--Capital Ratios
<TABLE>
<CAPTION>
Minimum
September 30, December 31, Required
1999 1998 Ratios
------------- ------------ --------
<S> <C> <C> <C>
North County Bancorp
Risk-based capital
Tier 1.................................. 12.05% 11.68% 4.00%
Total................................... 13.30% 12.93% 8.00%
Tier 1 leverage capital................... 9.70% 8.80% 4.00%
North County Bank
Risk-based capital
Tier 1.................................. 11.72% 11.58% 4.00%
Total................................... 12.97% 12.83% 8.00%
Tier 1 leverage capital................... 9.45% 8.72% 4.00%
</TABLE>
Management anticipates capital expenditures of approximately $1.2 million
primarily related to construction of a new facility for its existing Murrieta
branch scheduled to open early in 2000, and the opening of a full service
branch office located at Palomar Airport Road and Business Park Drive in the
City of Vista, California. This office opened in October of 1999.
Item 2. Quantitative and Qualitative Disclosure of Market Risk
There have been no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented as part of the Company's
Annual Report on Form 10K for the year ended December 31, 1998.
F-18
<PAGE>
Part II--Other Information
All items of Part II other than Item 6 below are either inapplicable or
would be responded to in the negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 29, 1999 between
North County Bancorp and Wells Fargo & Company (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
as filed with the Commission on October 7, 1999)
3.1 Certificate of Amendment of Articles of Incorporation filed March 19,
1997
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On October 7, 1999, the Company filed a Current Report on Form 8-K
announcing, under item 5, the execution of an Agreement and Plan of Merger
between North County Bancorp and Wells Fargo & Company.
F-19
<PAGE>
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.
NORTH COUNTY BANCORP
(Registrant)
<TABLE>
<S> <C>
/s/ Michael J. Gilligan Date: November 10, 1999
- --------------------------------------
Michael J. Gilligan
Vice President & Chief Financial
Officer
</TABLE>
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors and officers of a Delaware corporation under
certain circumstances against expenses, judgments and the like in connection
with an action, suit or proceeding. Article Fourteenth of the Registrant's
Restated Certificate of Incorporation provides for broad indemnification of
directors and officers.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules. Not Applicable.
(c) Report, Opinion or Appraisal. See Exhibits 5.1 and 8.1
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a posteffective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a posteffective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-1
<PAGE>
(c) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, state of
California, on December 8, 1999.
WELLS FARGO & COMPANY
/s/ Richard M. Kovacevich
By: _________________________________
Richard M. Kovacevich
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on December 8, 1999 by the following
persons in the capacities indicated:
<TABLE>
<S> <C>
/s/ Richard M. Kovacevich
__________________________________________ President and Chief Executive Officer
Richard M. Kovacevich (Principal Executive Officer)
/s/ Rodney L. Jacobs
__________________________________________ Vice Chairman and Chief Financial Officer
Rodney L. Jacobs (Principal Financial Officer)
/s/ Les L. Quock
__________________________________________ Senior Vice President and Controller
Les L. Quock (Principal Accounting Officer)
</TABLE>
LES S. BILLER ) RICHARD D. McCORMICK )
J.A. BLANCHARD III ) CYNTHIA H. MILLIGAN )
MICHAEL R. BOWLIN ) PHILIP J. QUIGLEY )
EDWARD M. CARSON ) DONALD B. RICE )
DAVID A. CHRISTENSEN ) IAN M. ROLLAND )
WILLIAM S. DAVILA ) JUDITH M. RUNSTAD ) A majority of
SUSAN E. ENGEL ) SUSAN G. SWENSON ) the Board of
PAUL HAZEN ) DANIEL M. TELLEP ) Directors*
WILLIAM A. HODDER ) CHANG-LIN TIEN )
RODNEY L. JACOBS ) MICHAEL W. WRIGHT )
REATHA CLARK KING ) JOHN A. YOUNG )
RICHARD M. KOVACEVICH )
- --------
* Richard M. Kovacevich, by signing his name hereto, does hereby sign this
document on behalf of each of the directors named above pursuant to powers
of attorney duly executed by such persons.
/s/ Richard M. Kovacevich
_____________________________________
Richard M. Kovacevich
Attorney-in-Fact
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of September 28, 1999,
and as amended as of November 29, 1999, by and between North County
Bancorp and Wells Fargo & Company, included as Appendix A to the
accompanying proxy statement-prospectus.
3.1 Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated June
28, 1993. Certificates of Amendment of Certificate of Incorporation,
incorporated by reference to Exhibit 3 to the Registrant's Current
Report on Form 8-K dated July 3, 1995 (authorizing preference stock),
and Exhibits 3(b) and 3(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (changing the
Registrant's name and increasing authorized common and preferred
stock, respectively).
3.2 Certificate of Designations for the Registrant's ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994.
3.3 Certificate of Designations for the Registrant's Cumulative Tracking
Preferred Stock, incorporated by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K dated January 9, 1995.
3.4 Certificate of Designations for the Registrant's 1995 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3.5 Certificate Eliminating the Certificate of Designations for the
Registrant's Cumulative Convertible Preferred Stock, Series B,
incorporated by reference to Exhibit 3(a) to the Registrant's Current
Report on Form 8-K dated November 1, 1995.
3.6 Certificate Eliminating the Certificate of Designations for the
Registrant's 10.24% Cumulative Preferred Stock, incorporated by
reference to Exhibit 3 to the Registrant's Current Report on Form 8-K
dated February 20, 1996.
3.7 Certificate of Designations for the Registrant's 1996 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated February 26, 1996.
3.8 Certificate of Designations for the Registrant's 1997 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated April 14, 1997.
3.9 Certificate of Designations for the Registrant's 1998 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated April 20, 1998.
3.10 Certificate of Designations for the Registrant's Adjustable Cumulative
Preferred Stock, Series B, incorporated by reference to Exhibit 3(j)
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
3.11 Certificate of Designations for the Registrant's Fixed/Adjustable Rate
Noncumulative Preferred Stock, Series H, incorporated by reference to
Exhibit 3(k) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998
3.12 Certificate of Designations for the Registrant's Series C Junior
Participating Preferred Stock, incorporated by reference to Exhibit
3(l) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.13 Certificate Eliminating the Certificate of Designations for the
Registrant's Series A Junior Participating Preferred Stock,
incorporated by reference to Exhibit 3(a) to the Registrant's Current
Report on Form 8-K dated April 21, 1999.
3.14 Certificate of Designations for the Registrant's 1999 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3(b)
to the Registrant's Current Report on Form 8-K dated April 21, 1999.
3.15 By-Laws, incorporated by reference to Exhibit 3(m) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
4.1 See Exhibits 3.1 through 3.15.
4.2 Rights Agreement, dated as of October 21, 1998, between the Registrant
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A dated October 21, 1998.
5.1 Opinion of Stanley S. Stroup as to the legality of the shares to be
issued (including consent).
8.1 Opinion of PriceWaterhouseCoopers LLP regarding the U.S. federal
income tax consequences of the merger (including consent).*
23.1 Consent of Stanley S. Stroup (included in Exhibit 5.1).
23.2 Consent of KPMG LLP relating to the audited financial statements of
Wells Fargo & Company.
23.3 Consent of PriceWaterhouseCoopers LLP relating to the audited
financial statements of North County Bancorp
23.4 Consent of PriceWaterhouseCoopers LLP regarding its tax opinion
(included in Exhibit 8.1).
24.1 Powers of Attorney .
99.1 Form of proxy for special meeting of shareholders of North County
Bancorp
99.2 Consent of Hovde Financial, Inc. relating to North County Bancorp
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF STANLEY S. STROUP
EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL OF WELLS FARGO & COMPANY]
December 8, 1999
Board of Directors
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
Ladies and Gentlemen:
In connection with the proposed registration under the Securities Act of 1933,
as amended, of a maximum of 3,850,000 shares of common stock, par value $1-2/3
per share, of Wells Fargo & Company, a Delaware corporation (the "Company"),
and associated preferred stock purchase rights (such shares and rights
collectively referred to as the "Shares"), which are proposed to be issued by
the Company in connection with the merger (the "Merger") of a wholly-owned
subsidiary of the Company with North County Bancorp, I have examined such
corporate records and other documents, including the registration statement on
Form S-4 relating to the Shares, and have reviewed such matters of law as I
have deemed necessary for this opinion, and I advise you that in my opinion:
1. The Company is a corporation duly organized and existing under the laws
of the state of Delaware.
2. All necessary corporate action on the part of the Company has been taken
to authorize the issuance of the Shares in connection with the Merger,
and when issued as described in the registration statement, the Shares
will be legally and validly issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the registration
statement.
Sincerely,
s/ Stanley S. Stroup
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
of Wells Fargo & Company
We consent to the incorporation by reference in the proxy statement-prospectus
included in this registration statement on Form S-4 of Wells Fargo & Company of
our report dated January 19, 1999, with respect to the consolidated balance
sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998, and to the reference to
our firm under the heading "Experts" in the proxy statement-prospectus.
/s/ KPMG LLP
San Francisco, California
December 8, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Wells Fargo & Company of our report dated February 9, 1999 relating to the
financial statements of North County Bancorp which report is included in such
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Diego, California
December 8, 1999
<PAGE>
Exhibit 24.1
WELLS FARGO & COMPANY
Power of Attorney
of Director and/or Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer
of WELLS FARGO & COMPANY, a Delaware corporation, does hereby make, constitute
and appoint PAUL HAZEN, RICHARD M. KOVACEVICH, LES BILLER, RODNEY L. JACOBS,
STANLEY S. STROUP, AND LAUREL A. HOLSCHUH, and each or any one of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution,
for the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of said Company to
a Registration Statement on Form S-4 or other applicable form, and all
amendments, including post-effective amendments, thereto, to be filed by said
Company with the Securities and Exchange Commission, Washington, D.C., in
connection with the registration under the Securities Act of 1933, as amended,
of up to 3,850,000 shares of Common Stock of the Company and any preferred
stock purchase rights associated with such shares, adjusted for any change in
the number of outstanding shares of Common Stock resulting from stock splits,
reverse stock splits, or stock dividends occurring after the date hereof, which
may be issued in connection with the acquisition by the Company of North County
Bancorp and its subsidiaries, and to file the same, with all exhibits thereto
and other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of
the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney this
28th day of September, 1999.
<TABLE>
<S> <C>
/s/ Les S. Biller /s/ Richard D. McCormick
/s/ J. A. Blanchard III /s/ Cynthia H. Milligan
/s/ Michael R. Bowlin
/s/ Edward M. Carson /s/ Philip J. Quigley
/s/ David A. Christensen /s/ Donald B. Rice
/s/ William S. Davila /s/ Ian M. Rolland
/s/ Susan E. Engel /s/ Judith M. Runstad
/s/ Paul Hazen /s/ Susan G. Swenson
/s/ William A. Hodder /s/ Daniel M. Tellep
/s/ Rodney L. Jacobs /s/ Chang-Lin Tien
/s/ Reatha Clark King /s/ Michael W. Wright
/s/ Richard M. Kovacevich /s/ John A. Young
</TABLE>
<PAGE>
Exhibit 99.1
Form of Proxy for Special Meeting of
Shareholders of North County Bancorp
The undersigned hereby appoints Alan P. Chamberlain and James M. Gregg, or
either of them, as proxies to vote all shares of common stock the undersigned
is entitled to vote at the special meeting of shareholders of North County
Bancorp ("North County") to be held on Tuesday, January 25, 2000, or at any
adjournment or postponement thereof, as follows, hereby revoking any proxy
previously given:
1. To approve the Agreement and Plan of Reorganization, dated as of
September 28, 1999, and as amended as of November 29, 1999 (as amended,
the "Reorganization Agreement"), by and between North County and Wells
Fargo & Company ("Wells Fargo") pursuant to which, among other things, a
wholly-owned subsidiary of Wells Fargo will merge with and into North
County (the "Merger") upon the terms and subject to the conditions set
forth in the Reorganization Agreement, a copy of which is included as
Appendix A in the accompanying Proxy Statement-Prospectus; and to
authorize such further action by the Board of Directors and officers of
North County as may be necessary or appropriate to carry out the intent
and purposes of the Merger.
FOR AGAINST ABSTAIN
2. In the discretion of the persons appointed proxies hereby to vote on
such other matters as may properly come before the special meeting.
Shares represented by this proxy will be voted as directed by the
shareholder. The Board of Directors recommends a vote "FOR" proposal 1. If no
direction is supplied, the proxy will be voted "FOR" proposal 1.
Dated:
(Please sign exactly as name appears at
left.)
(If stock is owned by more than one person,
all
owners should sign. Persons signing as
executors
administrators, trustees, or in similar
capacities
should so indicate.)
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF NORTH COUNTY BANCORP
<PAGE>
Exhibit 99.2
CONSENT OF HOVDE FINANCIAL, INC.
Board of Directors
North County Bancorp
444 South Escondido Boulevard
Escondido, California 92025
Board of Directors
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
Members of the Boards:
We hereby consent to the use of our name and to the description of our
opinion letter ("Fairness Opinion") under the caption "Opinion of North
County's Financial Advisor" in, and to the inclusion of such Fairness Opinion
as Appendix B, to the Proxy Statement of North County and Prospectus of Wells
Fargo & Company, which Proxy Statement-Prospectus is part of the Registration
Statement on Form S-4 of Wells Fargo & Company. By giving such consent, we do
not thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "expert" as used in, or
that would come within the category of persons whose consent is required under,
the Securities Act of 1933, as amended, or the rules and regulations
promulgated thereunder.
HOVDE FINANCIAL, INC.
By: /s/ Richard J. Perry, Jr_________.
Richard J. Perry, Jr.
Chief Operating Officer
& General Counsel
