SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended: December 31, 1997
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to __________
Commission File Number: 0-13528
PACIFIC CAPITAL BANCORP
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(Exact Name of registrant as specified in its charter)
California 77-0003875
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
307 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 757-4900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
Aggregate market value of common stock held by nonaffiliates of Pacific Capital
Bancorp at March 1, 1998: $138,921,000 Number of shares of Common Stock
outstanding at March 1, 1998: 4,310,155
Documents Incorporated by Reference: Location in Form 10-K
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1997 Annual Report to Shareholders Part I, Items 1 and 2
Proxy Statement for 1998 Annual Part III, Items 10, 11, 12 and 13
Meeting of Shareholders
THIS REPORT INCLUDES A TOTAL OF 142 PAGES
EXHIBIT INDEX IS ON PAGE 70
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<TABLE>
TABLE OF CONTENTS
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Page
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Form 10-K Annual Report Proxy
(1) Statement (2)
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<S> <C> <C> <C>
Part I
Item 1 Business 1
Selected Statistical Information 4
Distribution of Average Assets,
Liabilities,
Shareholders' Equity;
Interest Rates and Interest Differential 5 27-29
Investment Portfolio 5 12-13, 35-36
Loan and Lease Portfolio 5 8, 14-15, 31-32
Summary of Loan Loss Experience 6 33
Deposits 6 10-11
Financial Ratios 6 2
Competition 6-7
Supervision and Regulation 8-9
Capital Standards 9-11 40-41
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of
Securities Holders 13
Part II
Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters 13 45
Item 6 Selected Financial Data 13 1
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13 22-45
Item 7a Quantitative and Qualitative Disclosures
About Market Risk 13-14
Item 8 Financial Statements and Supplementary Data 14 2-26
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 14
Part III
Item 10 Directors and Executive Officers of the
Registrant 15 4-9
Item 11 Executive Compensation 15 9-13
Item 12 Security Ownership of Certain Beneficial
Owners and Management 15 4-5
Item 13 Certain Relationships and Related Transactions 15 15, 23 13
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16 1-26
<FN>
(1) The 1997 Annual Report to Shareholders, portions of which are incorporated
by reference into this Form 10-K.
(2) The Proxy Statement dated for the Annual Meeting of Shareholders, portions
of which are incorporated by reference into this Form 10-K.
</FN>
</TABLE>
ii
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PART I
ITEM 1 BUSINESS
GENERAL
Pacific Capital Bancorp (the "Company") is a California bank holding
company headquartered in Salinas, California and incorporated on January 26,
1983. Its principal wholly-owned subsidiaries, First National Bank of Central
California (formerly First National Bank of Monterey County) ("First National")
commenced operations on April 2, 1984, and South Valley National Bank ("South
Valley") commenced operations on April 21, 1982.
On November 20, 1996, the Company acquired South Valley Bancorporation ("SVB")
and its banking subsidiary, South Valley, headquartered in Morgan Hill,
California. Each share of SVB common stock outstanding on November 20, 1996, was
converted into 0.92 shares of the Company's common stock. The consolidated
financial statements of the Company give effect to the merger, which has been
accounted for as a pooling-of-interests. Accordingly, the accounts of SVB have
been combined with those of the Company for all periods presented. First
National and South Valley are collectively referred to herein as the "Subsidiary
Banks."
First National is a full service commercial bank serving Monterey,
Salinas, Carmel, Watsonville, and surrounding areas in Monterey and Santa Cruz
Counties in California.
South Valley is a full service commercial bank serving Morgan Hill,
Gilroy, Hollister, San Juan Bautista, and surrounding areas in Santa Clara and
San Benito Counties in California.
The Company itself does not engage in any business activities other
than the ownership of the Subsidiary Banks and the ownership of one other
wholly-owned subsidiary, Pacific Capital Services Corporation, an inactive
subsidiary.
General Banking Services
The Subsidiary Banks provides a wide range of commercial banking
services to individuals, professionals, and small- and medium-sized businesses.
The services provided include those typically offered by commercial banks, such
as: checking, interest checking and savings accounts, travelers checks, safe
deposit boxes, collection services, night depository facilities and wire and
telephone transfers. In addition to the above deposit services, the Subsidiary
Banks also provide a full array of loan products including commercial, real
estate and consumer loans as well as a variety of government assisted loan
programs such as SBA or Rural Economic Community Development Service guaranteed
loans. Professional firms, individuals and businesses form the core of the
Subsidiary Banks customer and deposit bases.
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The Subsidiary Banks maintain lobby hours between 9:00 a.m. and 5:00
p.m., Monday through Thursday and between 9:00 a.m. and 6:00 p.m. on Friday.
South Valley's Gilroy and Hollister offices are also open from 9:00 a.m. to
12:00 p.m. on Saturday. In addition to a broad range of retail products and
services, the Subsidiary Banks offer courier pick-up service, nationwide ATM
access available through the Star(R) system, Cirrus(R), Plus(R) Explore(R) and
Ca$h24(R), and point of sale transactions through Explore(R), Maestro(R) and
Discover/Novus(R), merchant bank card support with electronic ticket capture,
self directed IRA, discount brokerage services and consumer and business credit
cards. First National also offers offsite ATM access at the Prunetree Shopping
Center, Prunedale, California and at the Monterey Pennisula College, Monterey,
Calififornia. The Subsidiary Banks do not offer trust services.
Most of the Subsidiary Banks deposits are obtained from individuals,
professionals and small- and medium-sized businesses. As of December 31, 1997
the Subsidiary Banks had a total of 34,524 accounts representing 18,940 interest
bearing and non-interest bearing checking accounts with an average balance of
approximately $11,410 each; 11,434 savings and money market accounts with an
average balance of approximately $14,421 each; and 4,150 other time deposits
with an average balance of approximately $40,046 each. The Subsidiary Banks are
members of the Federal Deposit Insurance Corporation (the "FDIC") and the
deposits of each depositor of the Subsidiary Banks are insured up to $100,000.
The Subsidiary Banks engage in a full complement of lending activities,
including commercial, consumer/installment and short-term real estate loans,
with a particular emphasis on short- and medium-term commercial obligations.
Commercial lending activities are directed principally toward small- to
medium-sized businesses, such as professional firms, retail, light industry and
manufacturing to which the Subsidiary Banks make (a) loans for working capital,
(b) loans secured by receivable and inventory, (c) term loans for equipment; and
(d) real estate development loans. In addition to conventional commercial
lending, the Subsidiary Banks also offer an array of government assisted loan
products including SBA guaranteed loans, SBA 504 loans (primarily for commercial
real estate transactions), Rural Economic Community Development Services
guaranteed loans and loans guaranteed under the State of California guarantee
program. The Subsidiary Banks also work to meet the needs of the local
municipalities by providing lease financing for a wide variety of equipment
purchases including energy retrofit, fire trucks, police cars, portable
classrooms, etc. Consumer lending is oriented primarily to the needs of the
Subsidiary Banks customers, with an emphasis on automobile financing and real
estate loans. Real estate loans include home loans and equity advance loans.
In addition, the Subsidiary Banks offer construction loans, generally
for single-family residences and multi-unit projects. Real estate and
construction loans are typically secured by first deeds of trust and guarantees
from principals of the borrower. The economic viability of the project and the
borrower's credit worthiness are primary considerations in the loan underwriting
decision. The Subsidiary Banks use independent local appraisers, conservative
loan-to-value ratios and close monitoring of the projects during construction
phases, and in the absence of rapid declines in real estate values, ultimate
collectibilty of these secured loans is considered by the Subsidiary Banks
management to be better than the average mix of commercial loans. The Subsidiary
Banks do not make long-term fixed rate real estate loans and, therefore,
material sustained increases or decreases in general interest rate levels have
only a short-term effect on the Subsidiary Banks net yield on real estate loans.
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The Subsidiary Banks concentrate their lending activities in the
following areas: real estate loans, commercial loans, consumer loans to
individuals, and other loans. As of December 31, 1997, these four categories
accounted for approximately 64.2%, 26.4%, 5.9%, and 3.5% respectively, of the
Company's loan portfolio. As of December 31, 1997, the Company had total loans
outstanding of $419,293,000. No material portion of the Subsidiary Bank's loan
portfolio is concentrated within a single industry or group of related
industries.
The interest rates charged for the various loans made by the Subsidiary
Banks vary with the degree of risk, size, and maturity of the loans involved and
are generally affected by competition, governmental regulation and by current
money market rates.
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on the
loan portfolio. The Subsidiary Banks follow the policy of non-accrual of
interest on a loan when principal or interest is 90 days or more past due unless
the loan is well secured and in the process of collection. Interest income from
non-accrual loans is not accrued on the books, but rather is recorded only when
and if received. When a loan is placed on a non-accrual basis, any previously
accrued but unpaid interest is reversed and charged against current income
unless there is adequate collateral to assure recovery of the accrued interest.
Correspondent Banks
The Subsidiary Banks have correspondent relationships with Wells Fargo
Bank, N.A., Union Bank of California., Bank of America, N.T.& S.A., City
National Bank and the Federal Reserve Bank of San Francisco. These relationships
are a result of the Subsidiary Banks efforts to obtain a wide range of services
for the Subsidiary Banks and its customers and, as net sellers of federal funds
(overnight interbank loans), to minimize the risk of an undue concentration of
its resources with a few entities. The Subsidiary Banks do not currently serve,
nor do they have plans to serve, as a correspondent to other banks.
The correspondent banks perform the following services for the
Subsidiary Banks: arrange loan participations; purchase and sell federal funds;
obtain lines for letters of credit; buy and sell investment securities; safekeep
the Subsidiary Banks investment securities; send and receive foreign wire
transactions and data processing services.
Existing Locations
First National currently operates six branch offices: the Monterey
branch located at 495 Washington Street, Monterey; the Salinas branch located at
1001 South Main Street, Salinas; the Oldtown office located at 307 Main Street,
Salinas; the Carmel branch located in the Carmel Rancho Shopping Center, Carmel;
the Watsonville branch located at 655 Main Street, Watsonville: and the Soledad
branch located at 695 Front Street, Soledad. First National offers offsite
24-hour ATM services and night depository facilities at the Prunetree Shopping
Center located in Prunedale, and ATM services located at the Monterey Peninsula
College, Monterey, California. The Company's loan administration department is
located at 517 S. Main Street, Salinas. In addition to a banking office, the
Oldtown office
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located at 307 Main Street, Salinas houses all of the Company's administrative
functions as well as the Data Processing/Operations department and a
Community/Board room.
South Valley currently operates four branch offices: the Morgan Hill
branch located at 500 Tennant Station in Morgan Hill; the Gilroy branch located
at 8000 Santa Teresa Boulevard, Gilroy; the Hollister branch located at 1730
Airline Highway, Hollister; and the San Juan Bautista branch located at 301
Third Street, San Juan Bautista.
As of December 31, 1997, the Company and the Subsidiary Banks employed
280 full-time equivalent employees.
Other Information Concerning the Company and the Subsidiary Banks
The Company and its Subsidiary Banks hold no material patents,
trademarks, licenses, franchises or concessions except for the written approvals
issued by the Office of the Comptroller of the Currency (the "OCC") for the
Subsidiary Banks' banking offices.
No material expenditures were made by the Company or its Subsidiary
Banks during the last three fiscal years on research and development activities
relating to the development of services or the improvement of existing services.
Based upon present business activities, compliance with federal, state
and local provisions regulating discharge of materials into the environment will
have no material effect upon the capital expenditures, earnings and competitive
position of the Company or its Subsidiary Banks.
Pacific Capital Services Corporation
PCSC, a wholly-owned inactive subsidiary of the Company, was
incorporated on April 22, 1985, to arrange and broker residential, commercial
and construction loans and other extensions of credit.
SELECTED STATISTICAL INFORMATION
Consolidated statistical information concerning the business of the
Company and the Subsidiary Banks is set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations ("Management's
Discussion and Analysis") on pages 22 through 45 the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, (the "Annual Report")
and in Notes 1-14 to the Consolidated Financial Statements on pages 1 through 21
of the Annual Report, which pages of the Annual Report are incorporated herein
by reference. This information should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included in the Annual
Report which have been incorporated herein by reference.
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<PAGE>
Distribution of Average Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential
The Company's average consolidated balance sheet and an analysis of net
interest earnings for the years ended December 31, 1997, 1996 and 1995 is set
forth in Management's Discussion and Analysis on page 27 of the Annual Report.
A table setting forth the changes in interest income and interest
expense in 1997 and 1996 resulting from changes in volume and changes in rates
is set forth in Management's Discussion and Analysis on page 28 of the Annual
Report.
Investment Portfolio
The amortized cost and estimated fair values of each category of
investment securities at December 31, 1997, and 1996 and the maturities of
investment securities at December 31, 1997, are set forth in Note 5 of the Notes
to Consolidated Financial Statements on pages 12 and 13 of the Annual Report.
At December 31, 1997, investment securities from the following issuers
each totaled over ten percent (10%) of shareholder's equity of the Company:
Amortized Estimated
Cost Fair value
Available-for-sale securities:
U.S. Treasury and Agencies $ 87,591,000 $ 88,247,000
Agency Mortgage-Backed Securities $ 121,769,000 $ 123,095,000
Loan and Lease Portfolio
The composition of the loan and lease portfolio for the five years
ended at December 31, 1997, is set forth in Management's Discussion and Analysis
on page 32 of the Annual Report.
Maturities and sensitivity to changes in interest rates in the loan
and lease portfolio, including real estate-mortgage and consumer loans, as of
December 31, 1997, are summarized in Management's Discussion and Analysis on
page 33 of the Annual Report.
The composition of nonaccrual, past due and restructured loans and
leases for the five years ended December 31, 1997, and a discussion of the
Company's policy for placing loans on nonaccrual status is set forth in
Management's Discussion and Analysis on page 37 of the Annual Report.
5
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Summary of Loan Loss Experience
An analysis of loan loss experience for the five years ended December
31, 1997 and a description of the factors which influenced management's judgment
in determining the amount of the additions to the allowance charged to operating
expenses in each fiscal period, as well as a discussion of the risk elements in
the loan portfolio, are set forth in Management's Discussion and Analysis on
page 35of the Annual Report.
Deposits
The average amount of and the average rate paid on major deposit
categories for the years ended December 31, 1997, 1996 and 1995 is set forth in
Management's Discussion and Analysis on page 39 of the Annual Report.
The maturity of time certificates of deposit of $100,000 or more and
other time deposits of $100,000 or more at December 31, 1997, is set forth in
Management's Discussion and Analysis on page 39 of the Annual Report.
Financial Ratios
Certain ratios of profitability, liquidity and capital for the years
ended December 31, 1997, and 1996 are summarized in the Selected Financial Data
on page 1 of the Annual Report.
COMPETITION
In California and in the Subsidiary Banks primary service areas, major
banks dominate the commercial banking industry. Among the advantages which these
banks have over the Subsidiary Banks are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets, including loans,
to regions of higher yield and demand. By virtue of their larger amounts of
capital, such institutions have substantially greater lending limits than the
Subsidiary Banks and perform certain functions, including trust services and
international banking, which are not offered directly by the Subsidiary Banks
but are offered indirectly through its correspondent institutions.
First National's primary service area consists of Monterey County and
Southern Santa Cruz County and encompasses the cities of Monterey, Carmel,
Pacific Grove, Seaside, Marina, Sand City, Del Rey Oaks, Salinas, Prunedale,
Watsonville, Soledad, Gonzales, Greenfield, King City, and the unincorporated
communities of Pebble Beach, Carmel Valley and North Monterey County. Based on
data as of the most recent practicable date, June 30, 1997, there were 99
financial institutions with $4,184.2 million in deposits serving this area.
First National's market share at June 30, 1997 was as follows 1:
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<TABLE>
<CAPTION>
First National
Total Deposits Deposits First National
Service Area (in thousands) (in thousands) Market Share
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<S> <C> <C> <C>
Monterey $1,380,394 $140,859 10.2%
Salinas 1,446,156 167,983 11.6%
Carmel 522,268 58,848 11.3%
Watsonville 616,842 57,291 9.3%
Soledad 218,494 30,681 14.0%
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Total $4,184,154 $455,662 10.9%
==========================================================================================================================
</TABLE>
<TABLE>
South Valley's primary service area is Southern Santa Clara County
and San Benito County, which includes the cities of Morgan Hill, Gilroy,
Hollister and San Juan Bautista. Based upon data as of the most recent
practicable date, June 30, 1997, there were 29 financial institutions with
$1,062.2 million in deposits serving this area. South Valley's market share at
June 30, 1997 was as follows 1:
<CAPTION>
South Valley
Total Deposits Deposits South Valley
Service Area (in thousands) (in thousands) Market Share
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<S> <C> <C> <C>
Morgan Hill $336,742 $69,757 20.7%
Gilroy 343,493 74,941 21.8%
Hollister 365,930 26,840 7.3%
San Juan Bautista 16,015 11,521 71.9%
==========================================================================================================================
Total $1,062,180 $183,059 17.2%
==========================================================================================================================
<FN>
1 Sheshunoff(TM)Information Services Branches of California and Hawaii, June 1997 Data.
</FN>
</TABLE>
Other entities, both governmental and in private industry, seeking to
raise capital through the issuance and sale of debt securities, as well as other
depository institutions such as thrift and loan companies and credit unions,
also provide competition for the Subsidiary Banks in the acquisition of
deposits. The Subsidiary Banks also compete with money market funds and other
money market instruments which are not subject to interest rate ceilings.
From time to time, legislation is proposed or enacted which has the
effect of increasing the cost of doing business, limiting permissible activities
or affecting the competitive balance between banks and other financial
institutions. It is impossible to predict the competitive impact these and other
changes in legislation will have on commercial banking in general or on the
business of the Subsidiary Banks in particular.
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SUPERVISION AND REGULATION
The Effect of Governmental Policy on Banking
The earnings and growth of the Company and the Subsidiary Banks are
affected not only by local market area factors and general economic conditions,
but also by government monetary and fiscal policies. For example, the Board of
Governors of the Federal Reserve System (the "FRB") influences the supply of
money through its open market operations in U.S. Government securities, and
adjustments to the discount rates applicable to borrowings by depository
institutions and others. Such actions influence the growth of loans, investments
and deposits and also effect interest rates charged on loans and paid on
deposits. The nature and impact of future changes in such policies on the
business and earnings of the Company and the Subsidiary Banks cannot be
predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to federal and state legislation which may have the effect of
increasing or decreasing the cost of doing business, modifying permissible
activities, or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended ("BHCA"). The Company reports to, registers
with, and may be examined by the FRB. The FRB also has the authority to examine
the Company's subsidiaries.
The FRB requires the Company to maintain certain levels of capital. See
"Capital Standards" herein. The FRB also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations, or conditions imposed in
writing by the FRB.
Under the BHCA, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over, or acquires directly
or indirectly, more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. Thus, the Company is required to
obtain the prior approval of the FRB before it acquires, merges or consolidates
with any bank or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the FRB's
approval.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged, in activities that
the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
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Legislation is pending in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. Under the proposed legislation, bank holding companies would be allowed
to control both a commercial bank and a securities affiliate, which could engage
in the full range of investment banking activities, including corporate
underwriting. The likelihood of such legislative changes and the impact of such
changes might have on the Company and the Subsidiary Banks are impossible to
predict.
The FRB generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of the
Subsidiary Banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition.
Transactions between the Company and the Subsidiary Banks and any
future subsidiaries are subject to a number of other restrictions. FRB policies
forbid the payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of the services rendered
(or, if no market exists, actual costs plus a reasonable profit). Additionally,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit, sale or
lease of property, or furnishing of services. Subject to certain limitations,
depository institution subsidiaries of bank holding companies may extend credit
to, invest in the securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate, provided that the
aggregate of such transactions with affiliates may not exceed 10% of the capital
stock and surplus of the institution, and the aggregate of such transactions
with all affiliates may not exceed 20% of the capital stock and surplus of such
institution. The Company may only borrow from depository institution
subsidiaries if the loan is secured by marketable obligations with a value of a
designated amount in excess of the loan. Further, the Company may not sell a
low-quality asset to a depository institution subsidiary.
Bank Regulation and Supervision
As national banks, the Subsidiary Banks are regulated, supervised and
regularly examined by the OCC. Deposit accounts at the Subsidiary Banks are
insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, to the
maximum amount permitted by law. The Subsidiary Banks are also subject to
applicable provisions of California law, insofar as such provisions are not in
conflict with or preempted by federal banking law.
Capital Standards
The OCC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are reported as
off-balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet
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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. government
securities, to 100% for assets with relatively higher credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets and
off-balance sheet items. The federal banking agencies measure risk-adjusted
assets and off-balance sheet items against both total qualifying capital (the
sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.
Tier 1 capital consists of common stock, retained earnings, noncumulative
perpetual preferred stock and minority interests in certain subsidiaries, less
most other intangible assets. Tier 2 capital may consist of a limited amount of
the allowance for possible loan and lease losses and certain other instruments
with some characteristics of equity. The inclusion of elements of Tier 2 capital
are subject to certain other requirements and limitations of the federal banking
agencies. Since December 31, 1992, the federal banking agencies have required a
minimum ratio of qualifying total capital to risk-adjusted assets and
off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to
risk-adjusted assets and off-balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking agencies
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating since a strong capital position is a
significant part of the rating. For all banking organizations not rated in the
highest category, the minimum leverage ratio is at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, is at least 4% to 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the federal banking agencies have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
<TABLE>
The following tables present the capital ratios for the Company and the
Subsidiary Banks as of December 31, 1997.
<CAPTION>
The Company South Valley First National
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------- -------------- --------------- --------------- --------------- -------------- --------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
Risk-Based Capital Ratio:
Tier 1 Capital $68,925 13.58% $17,592 11.71% $44,601 12.81%
Minimum Requirement 20,295 4.00% 6,009 4.00% 13,929 4.00%
Excess 48,630 9.58% 11,583 7.71% 30,672 8.81%
====== ===== ====== ===== ====== =====
Total Capital 73,191 14.43% 19,337 12.87% 47,116 13.53%
Minimum Requirement 40,589 8.00% 12,017 8.00% 27,858 8.00%
Excess 32,602 6.43% 7,320 4.87% 19,258 5.53%
====== ===== ===== ===== ====== =====
Risk-Adjusted Assets $507,363 $150,216 $348,220
</TABLE>
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<TABLE>
<CAPTION>
The Company South Valley First National
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------- --------------- -------------- --------------- --------------- --------------- ---------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio:
Tier 1 Capital $68,925 9.17% $17,592 8.03% $44,601 8.49%
Minimum Requirement 30,058 4.00% 8,767 4.00% 21,014 4.00%
Excess 38,867 5.17% 8,825 4.03% 23,587 4.49%
====== ===== ===== ===== ====== =====
Total Average Quarterly Assets $751,439 $219,168 $525,357
</TABLE>
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. Federal law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibits a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend can be paid. Moreover, even if a bank's surplus exceeds its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by the Bank is
governed by the Bank's ability to maintain minimum required capital levels and
an adequate allowance for loan losses. The federal banking agencies also have
the authority to prohibit a depository institution from engaging in business
practices, which are considered to be unsafe or unsound, possibly including
payments of dividends or other payments under certain circumstances even if such
payments are not expressly prohibited by statute.
The Company has paid a stock dividend every year since 1986 and cash
dividends were paid in 1993, 1994, 1995, 1996 and 1997.
11
<PAGE>
Premiums for Deposit Insurance and Assessments for Examinations
As an insured depository institution, the Company is required to pay
premiums for FDIC deposit insurance. The FDIC has adopted a risk-based
assessment system for deposit insurance premiums. Under this system, depository
institutions were charged anywhere from 23 cents to 31 cents for every $100 in
insured deposits based on that institution's capital levels and supervisory
subgroup assignment.
In May 1995, the BIF achieved its target goal of bringing the ratio of
insurance fund reserves to $1.25 for each $100 of insured deposits. Based on
this reserve level, the FDIC in November 1995 reduced the range of insurance
assessment rates from $0.04 to $0.31 to $0 to $0.31 per $100 in insured
deposits. Due to these changes in assessment rates, the Company's FDIC
assessment expense decreased for 1995 by $316,000 or 94.6%. During 1996, a
special one-time assessment was paid by BIF-insured financial institutions to
the FDIC for the purpose of assisting in the recapitalization of the Savings
Association Insurance Fund (the "SAIF"). The SAIF is the insurance fund reserve
for savings institutions. In November 1996, the Subsidiary Banks paid $71,000
for this special assessment. During 1997, the FDIC assessment expense for the
Subsidiary Banks was $68,000.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act (the
"Act"), which was enacted in 1994, codifies the authority of banks to provide
specified interstate banking services on an agency basis to customers of
affiliate banks as of September 1995. Also, under the Act, as of September 1995,
bank holding companies may acquire banks in other states, subject to certain
deposit concentration limitations. Beginning June 1, 1997, and subject to
certain deposit concentration and other limitations, banks may merge with other
banks in states that do not "opt out" of the interstate legislation prior to
June 1, 1997. Interstate mergers may be conducted prior to June 1, 1997 in
states that specifically permit such mergers. In addition, prior to June 1,
1997, certain consolidations are possible using the "30-mile rule," which allows
national banks to relocate their headquarters up to 30 miles away, including
across state lines. Currently, several states have already "opted in" to the
interstate legislation. Effective October 2, 1996, California opted in early to
interstate branching by permitting other state's banks to acquire an entire
California bank by merger or purchase and thereby establish one or more
California branch offices, provided the acquired bank has been in existence at
least five years. The effect of these laws on the Company and the Subsidiary
Banks cannot be determined.
ITEM 2 PROPERTIES
On December 31, 1997, the Company had 11 offices, of which 4 were owned
and 7 were leased by the Company or its Subsidiary Banks. All of these offices
are considered by management to be well maintained and adequate for the purpose
intended. See page 23 of the Annual Report incorporated herein by reference for
further information on leases.
12
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
Neither the Company nor its Subsidiary Banks is a party to, nor is any
of their property the subject of, any material pending legal proceedings other
than ordinary routine litigation incidental to their respective businesses.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the Shareholders of the
Company's Common Stock during the fourth quarter of 1997.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information concerning the Company's common stock and related
security holder matters, see "Pacific Capital Bancorp Stock Activity" at Page 45
of the Annual Report, which is incorporated herein by reference. For information
regarding dividends, see "Restrictions on Dividends and other Distributions"
under Part I, Item 1 of this Form 10-K on page 13.
As of March 31, 1997, there were 1,874 holders of record of the
Company's common stock.
ITEM 6 SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Selected
Financial Information and Comparative Per Share Data" at Page 1 of the Annual
Report, which is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For management's discussion and analysis of financial condition and
results of operations, see "Management's Discussion and Analysis" at Pages 22
through 45 of the Annual Report, which pages of the Annual Report are
incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's success is largely dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates. Although
the Company manages other risks, as in credit and liquidity risk, in the normal
course of its business, management considers interest rate risk to be its most
significant market risk and could potentially have the largest material effect
on the Company's financial condition. The primary objective of the
asset/liability management process is to measure the effect of changing interest
rates on net interest income and market value and adjust the balance sheet (if
necessary) to minimize the inherent risk and maximize income. The Company's
exposure to market risk is reviewed on a regular basis by the
13
<PAGE>
Asset/Liability Committee. Tools used by management include a modified GAP
report and an asset/liability simulation model. Management believes that the
Company's market risk and interest rate risk profiles are within reasonable
tolerances at this time.
A derivative financial instrument includes futures, forward contracts,
interest rate swaps, option contracts, and other financial instruments with
similar characteristics. The Company currently does not enter into futures,
forwards, swaps, or options. The Company is however, party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statement of condition. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Company. Standby letters of credit are conditional
commitments issued by the Subsidiary Banks to guarantee the performance of a
customer to a third party up to a stipulated amount and with specified terms and
conditions. Commitments to extend credit and standby letters of credit are not
recorded on the Company's consolidated balance sheet until the instrument is
exercised.
The following table represents the change in the Company's Market Value
of Portfolio Equity (MVPE) at December 31, 1997 in the event of a sudden and
sustained change in interest rates as presented. MVPE is defined as the fair
value of assets less the fair value of liabilities on the Company's consolidated
balance sheet.
(Dollars in thousands) Market Value of
Change in interest rates Portfolio Equity $ Change % Change
- --------------------------------------------------------------------------------
200 Basis points rise $90,811 $755 0.84%
100 Basis points rise 90,434 378 0.42%
Base scenario 90,056 - 0.00%
100 Basis points decline 88,950 (1,107) (1.23%)
200 Basis points decline 87,873 (2,213) (2.46%)
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see Pages 2 through 26 of the
Annual Report and the "Independent Auditors" Report thereon at Page 49 which
pages of the Annual Report are incorporated herein by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Directors and Executive Officers
For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Shareholders (the "Proxy
Statement"), which is incorporated herein by reference.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and any persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. To the best knowledge of the Company, there are no persons who own
more than ten-percent of the Company's Common Stock.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for the fiscal year ended
December 31, 1997, all filing requirements applicable to its officers and
directors have been satisfied.
ITEM 11 EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial
owners and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS
OF THE COMPANY" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"INDEBTEDNESS OF MANAGEMENT" in the Proxy Statement, which is incorporated
herein by reference.
15
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The consolidated financial statements of Pacific Capital Bancorp and
subsidiaries, other financial information and the Independent Auditors' Report
on Consolidated Financial Statements appearing at the indicated location in the
Annual Report are incorporated by reference into this report.
2. Financial Statement Schedules.
In accordance with Regulation S-X, the financial statement schedules
have been omitted because (a) they are not applicable to or required of the
Company; or (b) the information required is included in the consolidated
financial statements or notes thereto.
With the exception of such information in the 1997 Annual Report
incorporated herein by reference, the 1997 Annual Report is not deemed "filed"
as part of this report.
3. Exhibits.
See Index to Exhibits at pages 69 - 73 of this Form 10-K.
(b) Reports on Form 8-K.
None
16
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(With Independent Auditors' Report Thereon)
17
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION AND
COMPARATIVE PER SHARE DATA
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income $ 53,215 $ 43,958 $ 38,678 $ 33,030 $ 29,346
Interest expense 17,385 13,319 10,971 8,074 7,763
Net interest income 35,830 30,639 27,707 24,956 21,583
Provision for possible loan losses 1,520 685 527 479 1,278
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 34,310 29,954 27,180 24,477 20,305
Other income 3,345 3,206 3,056 2,888 2,911
Other expense 20,884 22,727 19,352 17,345 16,445
Net gain (loss) on securities transactions 11 (46) (73) (17) 120
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,782 10,387 10,811 10,003 6,891
Income taxes 6,635 4,348 4,200 3,778 2,426
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
Accounting change 10,147 6,039 6,611 6,225 4,465
Cumulative effect of accounting change -- -- -- -- 549
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 10,147 $ 6,039 $ 6,611 $ 6,225 $ 5,014
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Income before cumulative effect of
Accounting change - diluted $ 2.28 $ 1.36 $ 1.50 $ 1.44 $ 1.03
Net income - diluted 2.28 1.36 1.50 1.44 1.15
Cash dividends 0.66 0.60 0.53 0.40 0.30
Book value 16.90 15.59 15.54 14.60 13.83
BALANCES AT YEAR END
Total assets 764,719 619,439 530,852 487,749 436,958
Total loans 419,293 388,728 300,895 290,352 265,903
Total deposits 683,398 547,182 465,508 427,870 382,475
Total shareholders' equity 72,558 63,646 60,533 55,002 50,039
AVERAGE DAILY BALANCES
Total assets 677,491 568,686 496,007 459,695 433,558
Total loans 411,546 332,421 290,265 277,263 259,131
Total deposits 604,953 501,833 431,975 404,047 382,183
Total shareholders' equity 68,353 63,106 58,183 52,719 48,205
PERFORMANCE AND CAPITAL RATIOS
Return on average assets 1.50% 1.06% 1.33% 1.35% 1.16%
Return on average shareholders' equity 14.84% 9.57% 11.36% 11.81% 10.40%
Average shareholders' equity to average assets 10.09% 11.10% 11.73% 11.47% 11.12%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
- ---------------------------------------------------------------------------------------------------
(In thousands, except share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 49,982 $ 48,126
Federal funds sold 26,405 14,910
Money market funds 2,132 13,209
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents 78,519 76,245
Investment securities:
Held-to-maturity, at amortized cost
(fair value of $7,347 and $9,741, respectively) 7,347 9,680
Available-for-sale, at fair value 220,984 116,528
- ---------------------------------------------------------------------------------------------------
Total investment securities 228,331 126,208
Loans available for sale 10,523 5,821
Loans, net of unearned income 419,293 388,728
Less allowance for possible loan losses 4,266 3,672
- ---------------------------------------------------------------------------------------------------
Net loans 415,027 385,056
Premises and equipment, net 15,331 15,300
Accrued interest receivable and other assets 16,988 10,809
- ---------------------------------------------------------------------------------------------------
Total assets $ 764,719 $ 619,439
===================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 174,649 $ 131,332
Demand, interest bearing 97,322 84,770
Savings and money market 173,151 164,890
Time certificates 238,276 166,190
- ---------------------------------------------------------------------------------------------------
Total deposits 683,398 547,182
Accrued interest payable and other liabilities 8,763 8,611
- ---------------------------------------------------------------------------------------------------
Total liabilities 692,161 555,793
- ---------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock; no par value, 20,000,000 shares authorized and unissued -- --
Common stock; no par value, 20,000,000 shares authorized: 4,294,403
and 4,083,363 shares issued and outstanding in 1997 and 1996,
respectively 58,434 49,388
Retained earnings 12,852 14,423
Net unrealized gain (loss) on available-for-sale securities 1,272 (165)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 72,558 63,646
Commitments and contingencies -- --
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 764,719 $ 619,439
===================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31,
- --------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 40,843 $ 33,845 $ 30,490
Interest on federal funds sold 2,482 1,806 1,870
Interest on investment securities:
Taxable 9,239 7,557 5,415
Non-taxable 651 750 903
- --------------------------------------------------------------------------------------------------------------
Total interest income 53,215 43,958 38,678
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 17,356 13,292 10,922
Other interest expense 29 27 49
- --------------------------------------------------------------------------------------------------------------
Total interest expense 17,385 13,319 10,971
- --------------------------------------------------------------------------------------------------------------
Net interest income 35,830 30,639 27,707
Provision for possible loan losses 1,520 685 527
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 34,310 29,954 27,180
- --------------------------------------------------------------------------------------------------------------
Other income:
Service charges 2,619 2,432 2,399
Gain on sale of loans 22 27 91
Net gains (losses) on securities transactions 11 (46) (73)
Other 704 747 566
- --------------------------------------------------------------------------------------------------------------
Total other income 3,356 3,160 2,983
- --------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 11,315 11,864 9,989
Occupancy 2,326 2,111 1,959
Equipment 1,755 2,577 1,943
Advertising and promotion 864 710 659
Stationery and supplies 767 563 508
Legal and professional fees 1,185 1,946 823
Regulatory assessments 222 147 572
Other 2,450 2,809 2,899
- --------------------------------------------------------------------------------------------------------------
Total other expenses 20,884 22,727 19,352
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 16,782 10,387 10,811
Income taxes 6,635 4,348 4,200
- --------------------------------------------------------------------------------------------------------------
Net income $ 10,147 $ 6,039 $ 6,611
==============================================================================================================
Earnings per share $ 2.36 $ 1.41 $ 1.55
==============================================================================================================
Diluted earnings per share $ 2.28 $ 1.36 $ 1.50
==============================================================================================================
Weighted average shares outstanding 4,297,832 4,297,017 4,271,445
Dilutive effect of stock options 149,456 154,581 130,467
- --------------------------------------------------------------------------------------------------------------
Total weighted average diluted shares outstanding 4,447,288 4,451,598 4,401,912
==============================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
20
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
December 31, 1997, 1996, and 1995
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Net unrealized
gain (loss) on Total
Common Stock Retained available-for- shareholders'
(In thousands, except share amounts) Shares Amount earnings sale securities Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 3,767,702 $ 41,182 $ 14,026 $ (206) $ 55,002
Net income for the year -- -- 6,611 -- 6,611
Purchase and retirement of shares (5,606) (111) -- -- (111)
Exercise of stock options 9,590 158 -- -- 158
5% stock dividend, including
payment of fractional shares 123,338 3,132 (3,147) -- (15)
Cash dividends declared -- -- (1,684) -- (1,684)
Net unrealized gain on
available-for-sale securities -- -- -- 572 572
- ---------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 3,895,024 44,361 15,806 366 60,533
Net income for the year -- -- 6,039 -- 6,039
Purchase and retirement of shares (23,646) (605) -- (605)
- ---------------------------------------------------------------------------------------------------------
Exercise of stock options 17,981 295 -- -- 295
5% stock dividend, including
payment of fractional shares 194,455 5,348 (5,372) -- (24)
Cash dividends declared -- -- (2,050) -- (2,050)
Repurchase of dissenter shares (451) (11) -- -- (11)
Net unrealized loss on
available-for-sale securities -- -- (531) (531)
- ---------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 4,083,363 49,388 14,423 (165) 63,646
Net income for the year -- -- 10,147 -- 10,147
Purchase and retirement of shares (10,000) (410) -- -- (410)
Exercise of stock options 17,436 456 -- -- 456
5% stock dividend, including
Payment of fractional shares 203,404 9,000 (9,040) -- (40)
Cash dividend declared -- -- (2,678) -- (2,678)
Net unrealized gain on
available-for-sale securities -- -- -- 1,437 1,437
- ---------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 4,294,203 $ 58,434 $ 12,852 $ 1,272 $ 72,558
=========================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
21
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,147 $ 6,039 $ 6,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,478 1,074 1,260
Provision for possible loan losses 1,520 685 527
(Gain) loss on investment securities transactions (11) 46 73
Net originations of loans available for sale (4,702) (1,945) (2,891)
Proceeds from sale of loans -- -- 924
Gain on sale of loans (22) (27) (91)
Deferral of loan origination fees 150 (64) 40
Change in accrued interest receivable and other assets (4,742) (118) (837)
Change in accrued interest payable and other liabilities 185 3,813 93
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,003 9,503 5,709
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in loans (31,858) (88,839) (11,003)
Recoveries on loans 217 347 264
Maturities of investment securities 27,146 20,445 40,818
Purchases of investment securities (129,269) (82,606) (95,070)
Proceeds from sale of available-for-sale securities -- 61,735 42,089
Capital expenditures, net (1,509) (2,867) (1,536)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (135,273) (91,785) (24,438)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 111,522 81,677 21,471
Cash received in connection with branch acquisition 24,694 -- 16,167
Cash paid for retirement of stock (410) (605) (111)
Proceeds from exercise of stock options 456 295 158
Cash paid in lieu of fractional shares (40) (24) (15)
Cash paid for dividends (2,678) (2,050) (1,684)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 133,544 79,293 35,986
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,274 (2,989) 17,257
Cash and cash equivalents at beginning of year 76,245 79,234 61,977
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 78,519 $ 76,245 $ 79,234
=====================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 18,188 $ 14,379 $ 11,827
Income taxes 6,040 4,834 4,107
=====================================================================================================================
Noncash investing and financing activities:
Transfer from retained earnings to common stock due to
Stock dividends $ 9,000 $ 5,348 $ 3,132
Transfer of securities from held-to-maturity
to available-for-sale -- -- 38,660
Transfer from loans to other real estate owned -- 352 1,940
=====================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
22
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
(1) Summary of Significant Accounting Policies
The accounting policies of Pacific Capital Bancorp and subsidiaries
(the Company) are in accordance with generally accepted accounting
principles and conform to general practices within the banking
industry.
The Company - Pacific Capital Bancorp is a California corporation and a
multi-bank holding company, which was incorporated on January 26, 1983.
The Company's subsidiaries, First National Bank of Central California
(First National), and South Valley National Bank (South Valley),
collectively (Subsidiary Banks), commenced operations in 1984 and 1983,
respectively. First National is a full service commercial bank serving
Monterey, Salinas, Carmel, Watsonville, Prunedale and surrounding areas
in Monterey and Santa Cruz Counties. South Valley is a full service
commercial bank serving Morgan Hill, Gilroy, Hollister, San Juan
Bautista and surrounding areas in Santa Clara and San Benito Counties.
Consolidation - The accompanying consolidated financial statements
include the effect of the fourth quarter 1996 acquisition of South
Valley Bancorporation which was accounted for as a
pooling-of-interests. These financial statements include the accounts
of Pacific Capital Bancorp and its subsidiaries, First National Bank of
Central California and South Valley National Bank. Accordingly, the
financial information included in the consolidated financial statements
and notes thereto, present the combined results of operations of
Pacific Capital Bancorp and South Valley Bancorporation as if the
merger had been in effect for all periods presented. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents as reported in
the consolidated statements of cash flows includes cash on hand, cash
balances due from banks, federal
23
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
funds sold, and money market mutual funds. The cash equivalents are
readily convertible to known cash within 90 days.
Investment Securities - The Company has classified its securities for
which it has the positive intent and ability to hold to maturity as
held-to-maturity securities. Such securities are reported at amortized
cost. The Company has classified certain securities for which it does
not have the intent to hold to maturity and which are not held
principally for the purpose of selling them in the near term as
available-for-sale securities. Such securities are reported at fair
value, with unrealized gains and losses, net of income taxes, reported
in a separate component of shareholders' equity. The Company does not
engage in trading activities.
Amortization of premiums and accretion of discounts arising at
acquisition of investment securities are included in income using
methods that approximate the level yield method. Gains or losses on the
sale of securities are determined based on the specific identification
method.
In November 1995, the Financial Accounting Standards Board (FASB)
issued a special report, A Guide to Implementation of Statement No.
115, on Accounting for Certain Investments in Debt and Equity
Securities Questions and Answers, (the Special Report). The Special
Report allowed companies to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications at fair value. Reclassifications from this one-time
reassessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future, provided that
reclassification was performed by December 31, 1995. The Company
adopted the reclassification provision in the Special Report during
1995 and transferred $38,660,000 of held-to-maturity securities into
available-for-sale.
Loans - Loans are stated at the principal amount outstanding. Interest
on loans is credited to income on a simple interest basis. Loan
origination fees and direct origination costs are deferred and
amortized to income by a method approximating the level yield interest
method over the estimated lives of the underlying loans. Loans
contractually past due over 90 days or considered impaired are placed
on nonaccrual status, unless they are well-secured by underlying
collateral and are in the process of collection. When a loan is placed
on nonaccrual status, the accrued interest is reversed against interest
income and the loan is accounted for on the cash or cost recovery
method thereafter until qualifying for return to accrual status.
Generally, a loan will be returned to accrual status when all
delinquent principal and interest become current in accordance with the
terms of the loan agreement and full collection of the principal
appears probable.
24
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The allowance for possible loan losses is a valuation allowance that is
maintained at a level estimated to be adequate to provide for future
loan losses through charges to current operating expense. The allowance
is based upon a continuing review of loans by management which includes
consideration of changes in the character of the loan portfolio,
current and anticipated economic conditions, past lending experience,
loan loss experience, and such other factors which, in management's
judgment, deserve recognition in estimating potential loan losses. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for possible loan
losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgment of information available to them
at the time of their examination.
Loans Available for Sale - The Subsidiary Banks originate loans that
are guaranteed in part by the Small Business Administration (SBA). The
guaranteed portion of such loans may be sold without recourse. The
Subsidiary Banks retain the servicing and credit risk in the remaining
unguaranteed portion. Loans available for sale are valued at lower of
cost or estimated market value and are comprised of the portion of
loans originated for sale, which are guaranteed by the SBA. When
participating interests in loans are sold without recourse, gains are
recognized at the time of the sale which are equal to the premium
received less estimated future loan servicing costs and profits. Any
discounts related to loan interests retained are amortized using
methods that approximate the level yield interest method over the
remaining life of the loan.
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under this approach,
after a transfer of financial assets, an entity recognizes all
financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. Upon adoption, there was not a
material impact to the Company's consolidated financial statements.
Premises and Equipment - Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and
amortization are charged to expense over the estimated useful lives of
the assets or the lease term on a straight-line basis as follows:
25
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Buildings 40 years
Furniture and equipment 2-5 years
Leasehold improvements 5 years
Property under capital lease 5 years
- --------------------------------------------------------------------------------
Other Real Estate Owned - Real estate and other assets acquired in
satisfaction of indebtedness are recorded at the lower of the recorded
loan amount or the estimated fair market value net of anticipated
selling costs, and any difference between this and the loan amount is
treated as a loan loss. Costs of maintaining other real estate owned,
subsequent declines in fair value, if any, and gains or losses on sale
are reflected in current earnings.
Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. To the extent that current available
evidence about the future raises doubt about the realization of a
deferred tax asset, a valuation allowance is established to reduce that
deferred tax asset if it is more likely than not that the related tax
benefits will not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years which those differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Net Income Per Share - In February 1997, the FASB issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 supersedes APB Opinion No. 15 Earnings
Per Share, and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. SFAS No. 128 replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS,
respectively. Upon adoption, it also requires dual presentation of
Basic EPS and Diluted EPS on the face of the Statement of Income for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS
computation to the numerator of the Diluted EPS computation.
Basic EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year
plus shares issuable assuming exercise of all employee stock options,
except where antidilutive. Weighted average shares outstanding and all
per share
26
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
amounts included in the accompanying consolidated financial statements
and notes thereto have given effect to all stock dividends.
In February 1997, the FASB issued SFAS No. 129, Disclosures of
Information about Capital Structure which establishes standards for
disclosing information about an entity's capital structure for those
entities deemed to have complex capital structures. This statement did
not have a material impact on the Company's consolidated financial
statements.
Dividends - In 1997 the Company paid four cash dividends of $0.165 per
share to shareholders of record on March 14, June 16, September 15, and
November 17, payable on March 31, June 30, September 30, and December
1, 1997, respectively. The Company also paid a five percent (5%) stock
dividend payable to shareholders of record as of December 1, 1997.
Recent Accounting Pronouncements - In June 1997, the FASB issued SFAS
No. 130, Reporting of Comprehensive Income. This statement establishes
standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. It does not,
however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income
for the period in that financial statement. The Company will adopt the
statement in 1998 but has not decided as to the presentation format.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement establishes
standards for the way the public business enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This statement is effective for fiscal years beginning after December
15, 1997.
(2) Merger
On November 20, 1996, the Company acquired South Valley Bancorporation
(SVB) and its banking subsidiary, South Valley National Bank,
headquartered in Morgan Hill, California. The consolidated financial
statements of the Company give effect to the merger, which has been
accounted for as a pooling-of-interests. Accordingly, the accounts of
SVB have been combined with those of the Company for all prior periods
presented.
27
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Cash and Due from Banks
Cash and due from banks includes approximately $3,845,000 and
$5,659,000 as of December 31, 1997 and 1996, respectively, held by the
Federal Reserve Bank of San Francisco to meet required reserve
balances.
(4) Quarterly Income Statement
<TABLE>
The consolidated statements of income for 1997 and 1996 by quarter is
as follows:
<CAPTION>
(Unaudited) 1997
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $14,547 $13,633 $13,049 $11,986
Interest expense 4,867 4,513 4,143 3,862
- -----------------------------------------------------------------------------------------------------------------
Net interest income 9,680 9,120 8,906 8,124
Provision for possible loan losses 610 340 285 285
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 9,070 8,780 8,621 7,839
Other income 939 813 799 805
Other expense 5,927 5,033 4,964 4,960
- -----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 4,082 4,560 4,456 3,684
Income taxes 1,607 1,811 1,775 1,442
- -----------------------------------------------------------------------------------------------------------------
Net income $ 2,475 $ 2,749 $ 2,681 $ 2,242
=================================================================================================================
Net income per share - basic $ 0.58 $ 0.64 $ 0.62 $ 0.52
=================================================================================================================
Net income per share - diluted $ 0.55 $ 0.62 $ 0.60 $ 0.50
=================================================================================================================
(Unaudited) 1996
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- -----------------------------------------------------------------------------------------------------------------
Interest income $11,843 $11,201 $10,626 $10,288
Interest expense 3,654 3,406 3,158 3,101
- -----------------------------------------------------------------------------------------------------------------
Net interest income 8,189 7,795 7,468 7,187
Provision for loan loss 500 6 74 105
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 7,689 7,789 7,394 7,082
Other income 781 780 817 782
Other expense 7,270 5,584 4,962 4,911
- -----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,200 2,985 3,249 2,953
Income taxes 733 1,207 1,256 1,152
- -----------------------------------------------------------------------------------------------------------------
Net income $ 467 $ 1,778 $ 1,993 $ 1,801
=================================================================================================================
Net income per share - basic $ 0.11 $ 0.41 $ 0.46 $ 0.42
=================================================================================================================
Net income per share - diluted $ 0.10 $ 0.39 $ 0.45 $ 0.41
=================================================================================================================
</TABLE>
28
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investment Securities
<TABLE>
The amortized cost and estimated fair values of investment securities
as of December 31 are as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized fair
(In thousands) cost gain loss value
- ----------------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury and agency $ 87,591 $ 698 $ 42 $ 88,247
State and municipal 9,529 115 2 9,642
Mortgage-backed securities 121,769 1,363 37 123,095
- ----------------------------------------------------------------------------------------------------------------
$218,889 $ 2,176 $ 81 $220,984
================================================================================================================
Held-to-maturity securities:
State and municipal $ 4,985 $ 32 $ 70 $ 4,947
Mortgage-backed securities
And other 2,362 43 5 2,400
- ----------------------------------------------------------------------------------------------------------------
$ 7,347 $ 75 $ 75 $ 7,347
================================================================================================================
1996
- ----------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agency $ 64,109 $ 159 $ 187 $ 64,081
State and municipal 7,233 59 21 7,271
Mortgage-backed securities 45,470 9 303 45,176
- ----------------------------------------------------------------------------------------------------------------
$116,812 $ 227 $ 511 $116,528
================================================================================================================
Held-to-maturity securities:
State and municipal $ 6,449 $ 55 $ 42 $ 6,462
Mortgage-backed securities
and other 3,231 59 11 3,279
- ----------------------------------------------------------------------------------------------------------------
$ 9,680 $ 114 $ 53 $ 9,741
================================================================================================================
</TABLE>
29
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
The amortized cost and estimated fair values of investment securities
as of December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<CAPTION>
Available-for-sale Held-to-maturity
securities securities
---------- ----------
Estimated Estimated
Amortized fair Amortized fair
(In thousands) cost value cost value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 18,847 $ 18,869 $1,733 $1,736
Due after one through five years 75,983 76,691 2,793 2,828
Due after five through ten years 17,323 18,284 529 529
Due after ten years 106,736 107,140 1,632 1,594
- -----------------------------------------------------------------------------------------------------------------
218,889 220,984 6,687 6,687
Federal Reserve Bank Stock - - 660 660
- -----------------------------------------------------------------------------------------------------------------
$218,889 $220,984 $7,347 $7,347
=================================================================================================================
</TABLE>
As of December 31, 1997 and 1996, securities with carrying values of
approximately $34,660,000 and $26,638,000, respectively, were pledged as
collateral for such items as deposits of public funds, Federal Reserve Bank
borrowings, bankruptcy court accounts, and U.S. Treasury, tax, and loan
deposits.
30
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans
A summary of loans as of December 31 is as follows:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Commercial $110,595 $113,428
Consumer 24,677 22,509
Real estate - mortgage 227,367 195,417
Real estate - construction 41,863 38,014
Other 15,595 20,349
- --------------------------------------------------------------------------------
420,097 389,717
Less deferred loan fees 804 989
- --------------------------------------------------------------------------------
$419,293 $388,728
================================================================================
The following is an analysis of the allowance for possible loan losses
for the years ended December 31:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Balance, beginning of year $3,672 $3,710 $3,769
Provision charged to expense 1,520 685 527
Loans charged off (1,143) (1,070) (850)
Recoveries on loans previously
charged off 217 347 264
- --------------------------------------------------------------------------------
Balance, end of year $4,266 $3,672 $3,710
================================================================================
Loans for which interest is no longer being accrued totaled $2,150,000,
$1,564,000, and $2,481,000 as of December 31, 1997, 1996, and 1995,
respectively. Interest that would have been recognized on nonaccrual
loans was $125,000, $149,000, and $379,000 during 1997, 1996, and 1995,
respectively.
The recorded investment in impaired loans was $2,150,000 and $1,564,000
at December 31, 1997 and 1996, respectively. The average balance of
impaired loans during 1997 and 1996 was $1,891,000 and $2,126,000. The
Company did not recognize any interest income on impaired loans during
1997 and 1996.
31
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Subsidiary Banks operate in a geographic region comprising
Monterey, San Benito, Santa Clara, and Santa Cruz Counties. The Bank's
credit risk is therefore dependent in part to the economic condition of
this region. Loans are made on the basis of a secure repayment source,
namely the cash flows generated by the borrowing entity, collateral is
generally a secondary source for loan qualification. It is the Bank's
policy to maintain the loan to value ratio on secured loans below 75%.
Management believes this practice tends to mitigate risks caused by the
local economy.
The Subsidiary Banks make loans to executive officers, directors, and
their affiliates in the ordinary course of business. Following is an
analysis of activity with respect to such loans for the years ended
December 31, 1997, and 1996:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year $ 5,711 $ 5,002
New loans funded 5,190 4,394
Repayments of loans (2,714) (3,685)
- --------------------------------------------------------------------------------
Balance, end of year $ 8,187 $ 5,711
================================================================================
(7) Premises and Equipment
Premises and equipment as of December 31 are summarized as follows:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Land $2,888 $2,752
Buildings 10,244 9,867
Furniture and equipment 9,796 8,929
Leasehold improvements 1,529 1,421
- --------------------------------------------------------------------------------
24,457 22,969
Less accumulated depreciation and amortization 9,126 7,669
- --------------------------------------------------------------------------------
Premises and equipment, net $15,331 $15,300
================================================================================
(8) Time Deposits
As of December 31, 1997 and 1996, the Company had liabilities of
$117,409,000 and $80,952,000, respectively, for time deposits in
denominations of $100,000 or more. Interest expense for these deposits
was $6,243,000 and $4,036,000 in 1997 and 1996, respectively.
32
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes
Components of income tax expense for the years ended December 31, 1997,
1996, and 1995 are as follows:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $5,295 $3,696 $3,053
State 2,003 1,457 1,240
- --------------------------------------------------------------------------------
7,298 5,153 4,293
- --------------------------------------------------------------------------------
Deferred:
Federal (535) (649) (66)
State (128) (156) (27)
- --------------------------------------------------------------------------------
(663) (805) (93)
- --------------------------------------------------------------------------------
Total $6,635 $4,348 $4,200
================================================================================
The temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
significant components of the deferred tax asset and liability amounts
relate to the following as of December 31:
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Book provision for loan losses in excess of tax provision $1,492 $1,096
State franchise taxes 466 222
Accrued interest on nonaccrual loans recognized for tax 239 182
Expenses accrued for books not currently deductible 417 355
Unrealized loss on securities available-for-sale - 118
Loan fees and other, net 363 344
- --------------------------------------------------------------------------------
Total deferred tax assets 2,977 2,317
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Tax depreciation in excess of book 196 86
Amortization related to sale/leaseback of building 126 34
Difference in recognition of organization costs and other 11 11
Unrealized gain on available-for-sale securities 941 -
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,274 131
- --------------------------------------------------------------------------------
Net deferred tax asset $1,703 $2,186
================================================================================
33
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net deferred tax asset represents recoverable taxes and is included
in other assets in the accompanying consolidated balance sheets. The
Company believes that the net deferred tax asset is realizable through
sufficient taxable income within the carryback period and the current
year taxable income.
<TABLE>
Actual income tax expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34%
to earnings before income taxes) for the years ended December 31, as
follows:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $5,706 $3,531 $3,702
Increase (reduction) in income taxes resulting from:
Franchise taxes, net of federal income tax benefit 1,270 858 802
Tax exempt income (371) (368) (335)
Merger related costs - 325 -
Other, net 30 2 31
- ------------------------------------------------------------------------------------------------------------------
$6,635 $4,348 $4,200
==================================================================================================================
</TABLE>
(10) Benefit Plans
Stock Option Plans - The Company's 1984 Stock Option Plan (the 1984
Plan) under which incentive stock options or nonqualified stock options
were granted to certain key employees or directors to purchase an
aggregate of 53,364 shares of authorized, but unissued, common stock of
the Company. Unexercised options were granted and outstanding as of
December 31, 1997, for an aggregate of 53,364 shares. Options have been
granted at an exercise price not less than the fair market value of
such stock at the date of grant. All stock options become exercisable
at the rate determined by the Company's Board of Directors and expire
no later than 10 years after the date of grant.
The Company's 1994 Stock Option Plan (the 1994 Plan) which was a
successor to the 1984 Plan, provides for incentive stock options or
nonqualified stock options for key employees or directors to purchase
an aggregate of 592,915 shares of authorized, but unissued, common
stock of the Company. Unexercised options were granted and outstanding
as of December 31, 1997, for an aggregate of 417,474 shares with an
exercise price equal to the fair market value of the Company's common
stock at the date of grant. The 1994 Plan provides that options granted
thereunder begin to vest 6 months after the date of grant ratably over
4 years and expire no later than 10 years after the date of grant.
34
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has a Directors Stock Option Plan (the 1991 Plan) under
which, nonqualified options may be granted to non-employee directors of
the Company and its subsidiaries to purchase an aggregate of 202,776
shares of authorized, but unissued, common stock of the Company
according to a formula set forth in the 1991 Plan. Unexercised options
were granted and outstanding as of December 31, 1997, for an aggregate
of 83,116 shares with an exercise price equal to the fair market value
of the Company's common stock at the date of grant. The 1991 Plan
provides that options granted thereunder begin to vest 6 months after
the date of grant and expire no later than 10 years after the date of
grant.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 established financial accounting
and reporting standards for stock-based employee compensation plans.
This statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument. Under this method,
compensation costs are measured at the grant date based on the value of
the award and are recognized over the service period, which is the
vesting period.
<TABLE>
As allowed under SFAS No. 123, the Company applies APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation costs for the
Company's three stock option plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $10,147 $6,039 $6,611
Pro forma $9,836 $5,883 $6,605
Basic earnings per share As reported $2.36 $1.41 $1.55
Pro forma $2.29 $1.37 $1.55
Diluted earnings per share As reported $2.28 $1.36 $1.50
Pro forma $2.21 $1.32 $1.50
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997, 1996 and 1995, respectively:
dividend yield of 2.1%, 2.5% and 2.1%, expected volatility of 18% for
all years, risk-free interest rates of 5.86%, 5.64% and 5.39%, and
expected lives of 6.9, 6.1 and 5.5 years, respectively.
35
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Below is a summary of stock option activity under all plans during
1997, 1996 and 1995:
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
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 388,895 $15.59 433,474 $14.57 400,967 $14.33
Granted 197,270 35.93 157,153 19.13 62,321 15.00
Exercised (17,436) 10.74 (200,106) 14.69 (22,811) 11.73
Forfeited (16,525) 13.32 (1,626) 11.32 (7,003) 13.74
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 552,204 $22.36 388,895 $16.37 433,474 $14.57
Options exercisable at end of 489,046 333,753 366,350
year
Weighted average fair value of
options granted during the year $9.40 $4.12 $3.12
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Weighted
average Weighted Weighted
Number contractual average Number average
Exercise Prices outstanding life exercise price outstanding exercise price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.83 to $15.00 293,066 5.61 $13.97 292,315 $13.97
$15.01 to $20.00 15,229 5.63 16.14 12,046 16.05
$20.01 to $30.00 66,609 8.88 24.47 16,685 24.43
$30.01 to $43.50 177,300 9.87 35.96 168,000 35.60
- --------------------------------------------------------------------------------------------------------------------
$6.83 to $43.50 552,204 7.37 $22.36 489,046 $21.81
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Employee Stock Ownership Plan - In 1986, the Company adopted an
Employee Stock Ownership Plan (ESOP) covering substantially all
employees. The Company may make annual contributions to the ESOP in an
amount determined by the Board of Directors. Contributions are not
intended to exceed an amount estimated to be an allowable deduction for
tax purposes. The Company made contributions to the ESOP of $400,000,
$275,000, and $292,000 in 1997, 1996, and 1995, respectively.
401(k) Plan - The Company also has a tax deferred profit sharing plan
and thrift plan covering all eligible employees. The Company's
contributions amounted to $70,000, $71,000, and $70,000 for the years
ended December 31, 1997, 1996, and 1995.
36
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Fair Value of Financial Instruments
<TABLE>
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------- ------------------
Carrying Estimated Carrying Estimated
(In thousands) amounts fair value amounts fair value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $78,519 $78,519 $76,245 $76,245
Investment securities 228,331 228,331 126,208 126,269
Net loans 430,620 430,582 395,538 395,796
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Demand deposits, noninterest bearing $174,649 $174,649 $131,332 $131,332
Demand deposits, interest bearing 97,322 97,322 84,770 84,770
Savings and money market 173,151 173,151 164,890 164,890
Time certificates 238,276 238,465 166,190 166,632
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and Cash Equivalents - The carrying amount approximates fair value
because of the short maturities of these instruments.
Investment Securities - The fair value of investments and
mortgage-backed securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
37
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan. The estimate of maturity is based on
the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. The fair value of performing
variable rate loans is judged to approximate book value for those loans
whose rates reprice in less than 90 days. Rate floors and rate ceilings
are not considered for fair value purposes as the number of loans with
such limitations is not significant.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit Liabilities - The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings and NOW
accounts, and money market and checking accounts, approximates the
amount payable on demand. The fair value of certificates of deposit is
judged to approximate book value for those certificates whose remaining
maturities are less than 90 days. For all other certificates, estimated
cash flows are discounted using rates currently offered for deposits of
similar remaining maturities.
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
38
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in many of the estimates.
(12) Commitments and Contingencies
Future minimum rental payments for Company premises under noncancelable
operating leases as of December 31, 1997 are as follows:
- ------------------------------------------------------------------------------
Minimum lease
payments
Year ending December 31, (In thousands)
- ------------------------------------------------------------------------------
1998 $931
1999 683
2000 461
2001 213
2002 213
Thereafter 913
- ------------------------------------------------------------------------------
3,414
Minimum rentals receivable under noncancelable subleases (868)
- ------------------------------------------------------------------------------
$2,546
==============================================================================
Rent expense under operating leases totaled $802,000, $796,000, and
$781,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. Related sublease rental income totaled $137,000,
$131,000, and $82,000, respectively.
In December 1988, the Company entered into an operating lease with a
member of its Board of Directors for rental of its administrative
headquarters. This lease required payments totaling approximately
$199,000, $192,000, and $188,000 for the years ended December 31, 1997,
1996, and 1995, respectively. The lease expires on April 30, 1999.
In the normal course of business, there are outstanding commitments,
such as commitments to extend credit, which are not reflected in the
accompanying consolidated financial statements. These commitments
involve elements of credit and interest rate risk. Management does not
anticipate any loss will result from such commitments.
39
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1997, amounts committed to extend credit under
normal lending agreements aggregated approximately $134,638,000.
Management reviews the risk associated with these credits in evaluating
the overall adequacy of the allowance for possible loan losses.
Additionally, there are approximately $4,193,000 in outstanding standby
letters of credit which, in effect, are guarantees of obligations of
customers.
The Company, through the Subsidiary Banks, has borrowing lines of
approximately $51,000,000 with primary correspondent banks. There were
no borrowings outstanding under these lines as of December 31, 1997 and
1996.
(13) Regulatory Capital
The Federal Reserve Board and the Comptroller have established a
minimum leverage ratio of 3% Tier 1 capital to total assets for bank
holding companies and national banks that have received the highest
composite regulatory rating and are not anticipating or experiencing
any significant growth. All other institutions will be required to
maintain a leverage ratio of at least 100 to 200 basis points above the
3% minimum.
<TABLE>
Following are the Company's and the Subsidiary Banks' risk-based and
leverage capital ratios as of December 31, 1997:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $68,925 13.58% $17,592 11.71% $44,601 12.81%
Tier 1 capital minimum
requirement 20,295 4.00% 6,009 4.00% 13,929 4.00%
- -------------------------------------------------------------------------------------------------------------------
Excess 48,630 9.58% 11,583 7.71% 30,672 8.81%
===================================================================================================================
Total capital 73,191 14.43% 19,337 12.87% 47,116 13.53%
Total capital minimum
requirement 40,589 8.00% 12,017 8.00% 27,858 8.00%
- -------------------------------------------------------------------------------------------------------------------
Excess 32,602 6.43% 7,320 4.87% 19,258 5.53%
===================================================================================================================
Risk-adjusted assets $507,363 $150,216 $348,220
===================================================================================================================
40
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
Tier 1 capital $63,469 13.91% $16,096 11.63% $42,034 13.40%
Tier 1 capital minimum
requirement 18,254 4.00% 5,534 4.00% 12,546 4.00%
- -------------------------------------------------------------------------------------------------------------------
Excess 45,215 9.91% 10,562 7.63% 29,488 9.40%
===================================================================================================================
Total capital 67,141 14.71% 17,409 12.58% 44,258 14.11%
Total capital minimum
requirement 36,508 8.00% 11,069 8.00% 25,092 8.00%
- -------------------------------------------------------------------------------------------------------------------
Excess 30,633 6.71% 6,340 4.58% 19,166 6.11%
===================================================================================================================
Risk-adjusted assets $456,356 $138,362 $313,644
===================================================================================================================
</TABLE>
<TABLE>
As indicated in the table above, the Company's capital ratios
significantly exceeded the minimum capital levels required by current
federal regulations. Management believes that the Company and the
Subsidiary Banks will continue to meet their respective minimum capital
requirements in the foreseeable future.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
December 31, 1997
Company South Valley First National
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to quarterly average
Total assets (Leverage Ratio) $68,925 9.17% $17,592 8.03% $44,601 8.49%
Minimum leverage requirement 22,543 to 3.00% to 6,575 to 3.00% to 15,761 to 3.00% to
37,572 5.00% 10,958 5.00% 26,268 5.00%
- --------------------------------------------------------------------------------------------------------------------
Excess 31,353 to 4.17% to 6,634 to 3.03% to 18,333 to 3.49% to
46,382 6.17% 11,017 5.03% 28,840 5.49%
====================================================================================================================
Total quarterly average assets $751,439 $219,168 $525,357
====================================================================================================================
December 31, 1996 Company South Valley First National
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
Tier 1 capital to quarterly average
Total assets (Leverage Ratio) $63,469 10.55% $16,096 8.61% $42,034 10.29%
Minimum leverage requirement 18,045 to 3.00% to 5,611 to 3.00% to 12,255 to 3.00% to
30,075 5.00% 9,351 5.00% 20,425 5.00%
- --------------------------------------------------------------------------------------------------------------------
Excess 33,394 to 5.55% to 6,745 to 3.61% to 21,609 to 5.29% to
45,424 7.55% 10,485 5.61% 29,779 7.29%
====================================================================================================================
Total quarterly average assets $601,496 $187,024 $408,502
====================================================================================================================
</TABLE>
41
<PAGE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Pacific Capital Bancorp (Parent Company Only)
The following are the financial statements of Pacific Capital Bancorp:
- --------------------------------------------------------------------------------
BALANCE SHEETS
Years ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $538 $937
Loans - 1,042
Premises and equipment, net 3,500 3,022
Investment in subsidiaries 65,826 58,178
Other assets 5,360 910
- --------------------------------------------------------------------------------
Total Assets $75,224 $64,089
================================================================================
Liabilities and Shareholders' Equity
Liabilities $2,666 $443
Shareholders' equity 72,558 63,646
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $75,224 $64,089
================================================================================
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries $6,211 $3,061 $6,010
Cash dividends received from bank subsidiaries 4,799 3,993 882
Interest income and fees on loans 36 136 214
Other expenses (899) (1,151) (495)
- --------------------------------------------------------------------------------
Net income $10,147 $6,039 $6,611
================================================================================
42
<PAGE>
<TABLE>
PACIFIC CAPITAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,147 $ 6,039 $ 6,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (11,010) (7,054) (6,892)
Dividends received from subsidiaries 4,799 3,993 882
Increase in other assets (4,450) (341) (68)
Increase (decrease) in other liabilities 2,223 140 (34)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,709 2,777 499
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in loans 1,042 107 1,931
Capital expenditures (386) (1,157) (493)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 656 (1,050) 1,438
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase and retirement of stock (456) (605) (111)
Proceeds from stock options exercised 410 284 158
Cash paid for fractional shares (40) (21) (15)
Cash paid for dividends (2,678) (2,053) (1,684)
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,764) (2,395) (1,652)
- ----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (399) (668) 285
Cash and cash equivalents at beginning of year 937 1,605 1,320
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 538 $ 937 $ 1,605
==========================================================================================================
Supplemental disclosures:
Noncash investment and financing activities:
Transfer from retained earnings to common stock
due to stock dividend $ 9,000 $ 5,348 $ 3,132
==========================================================================================================
</TABLE>
The ability of the Company to pay dividends will largely depend upon
the dividends paid to it by the Subsidiary Banks. There are legal
limitations on the ability of the Subsidiary Banks to provide funds to
the Company in the form of loans, advances, or dividends. Under the
National Bank Act, the Subsidiary Banks may not declare dividends in
any calendar year that exceeds certain legal limitations. The
approximate amount of restricted equity of the Subsidiary Banks as of
December 31, 1997 was $47,826,000.
43
<PAGE>
PACIFIC CAPITAL BANCORP
Management's Discussion and Analysis
1997
This document may contain forward-looking statements that are subject to risks
and uncertainties, including, but not limited to the local economy, the real
estate market in California, and other factors beyond the Company's control.
Such risks and uncertainties could cause actual results to differ materially
from those indicated. For a discussion of factors that could cause actual
results to differ, please see the discussion contained herein. Readers should
not place undue reliance on forward-looking statements, which reflect
management's view only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances. Readers are also encouraged to review the
Company's publicly available filings with the Securities and Exchange
Commission.
The Company
Pacific Capital Bancorp (the "Company") through its wholly owned subsidiaries,
First National Bank of Central California ("First National"), and South Valley
National Bank ("South Valley") engages in a broad range of financial service
activities. First National and South Valley are collectively referred to herein
as "Subsidiary Banks," and references to the Company include the Subsidiary
Banks.
On November 20, 1996, the Company acquired South Valley Bancorporation (SVB) in
a transaction accounted for as a pooling-of-interests. Accordingly, these
consolidated financial statements were restated on a combined basis for all
periods presented.
The following sections set forth a discussion of the significant operating
changes, business trends, financial condition, earnings, capital position, and
liquidity that have occurred in the three-year period ended December 31, 1997,
together with an assessment, when considered appropriate, of external factors
that may affect the Company in the future. This discussion should be read in
conjunction with the Company's consolidated financial statements and notes on
pages _____ of this annual report.
Summary of Financial Results
Net income for 1997 was $10,147,000 or $2.28 per share, an increase of
$4,108,000 or $0.92 per share from 1996. This increase in net income is due to
an increase in net interest income of $5,191,000 or 16.9% over 1996. In
addition, results from the year ended December 31, 1996 contained merger-related
expenses incurred relating to the merger with South Valley Bancorporation. Net
income for 1996 excluding the one-time merger-related expenses was $7,540,000 or
$1.69 per share and represented an increase of $929,000 or $0.19 per share over
results for 1995.
44
<PAGE>
In 1997 the Company paid four cash dividends of $0.165 in March, June,
September, and December. In 1996, the Company distributed three $0.15 cash
dividends in March, June, September and December. In addition, the Company
distributed a 5% stock dividend in each of the years in the three year period
ended December 31, 1997. Earnings per share amounts have been retroactively
restated to reflect these stock dividends. The return on average shareholders'
equity was 14.8% in 1997, compared to 9.6% in 1996 and 11.4% in 1995.
The Company believes that the economies in which it operates, Monterey, Santa
Cruz, Santa Clara, and San Benito Counties, have experienced strong growth and
favorable economic activity in the past three years. Signs of the strength in
these local economies include sustained quality loan demand and strong deposit
growth. On a national scale, the Company is forecasting a relatively flat
interest rate environment due to minimal inflation prospects and very modest
growth.
Certain information concerning the Company's average balances, yields and rates
on average interest-earning assets and interest-bearing liabilities is set forth
in the following table. Interest yields and amounts earned include net loan fees
of $1,312,000, $1,211,000, and $1,152,000 in 1997, 1996, and 1995, respectively.
45
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest
(Dollars in thousands) Balance Rate Amount Balance Rate Amount Balance Rate Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets
Investment securities:
Taxable $144,331 6.4% $9,239 $124,709 6.1% $7,645 $95,408 5.7% $5,455
Non-taxable 13,247 4.9% 651 14,966 5.0% 750 17,529 5.2% 903
Federal funds sold 46,211 5.4% 2,482 34,267 5.3% 1,805 35,564 5.3% 1,871
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 203,789 6.1% 12,372 173,942 5.9% 10,200 148,501 5.5% 8,229
Loans 411,546 9.9% 40,843 332,421 10.2% 33,758 290,265 10.5% 30,449
- ---------------------------------------------------------------------------------------------------------------------
Total earning assets 615,335 8.6% 53,215 506,363 8.7% 43,958 438,760 8.8% 38,678
Non-earning assets
Premises and equipment 15,270 14,769 13,201
Other 46,886 47,554 44,040
- ---------------------------------------------------------------------------------------------------------------------
Total non-earning assets 62,156 62,323 57,241
- ---------------------------------------------------------------------------------------------------------------------
Total assets $677,491 $568,686 $496,007
=====================================================================================================================
Liabilities and
Shareholders' Equity
Interest-bearing deposits:
Demand $85,769 1.0% $846 $77,306 1.1% $846 $87,916 1.7% $1,502
Savings and money market 169,577 2.9% 4,844 168,553 2.8% 4,664 140,209 2.8% 3,913
Time certificates 214,664 5.4% 11,666 146,359 5.3% 7,782 108,026 5.1% 5,507
Other interest-bearing 522 5.6% 29 716 3.8% 27 1,030 4.8% 49
liabilities
- ---------------------------------------------------------------------------------------------------------------------
Total 470,532 3.7% 17,385 392,934 3.4% 13,319 337,181 3.3% 10,971
Non interest-bearing deposits
And other liabilities:
Demand, non 134,943 109,615 95,824
interest-bearing
Other liabilities 3,663 3,031 4,819
Shareholder's equity 68,353 63,106 58,183
- ---------------------------------------------------------------------------------------------------------------------
Total 206,959 175,752 158,826
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $677,491 $568,686 $496,007
=====================================================================================================================
NET INTEREST INCOME $35,830 $30,639 $27,707
NET INTEREST MARGIN 5.8% 6.1% 6.3%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The net interest margin is expressed as the percentage of net interest income to
average total earning assets. The average balance on non-accrual loans is
immaterial as a percentage of total loans and as such has been included in total
loans. Non-taxable securities and leases have not been calculated on a tax
equivalent basis.
Net Interest Income
Net interest income, the difference between interest earned on loans and
investments and the interest paid on deposits and other sources of funds, is the
principal component of the Company's earnings. The preceding table shows the
composition of average earning assets and average interest-bearing liabilities,
average yields and rates, and the net interest margin for 1995 through 1997.
Interest income increased $9,257,000 or 21.1% from $43,958,000 in 1996 to
$53,215,000 in 1997, after increasing $5,280,000 or 13.7% from 1995 to 1996. The
increases in 1997 and 1996 are the result of higher average loan and investment
volumes partially offset by a slightly
46
<PAGE>
lower yield on the loan portfolio. Total interest and fees produced a 8.6% yield
on average earning assets in 1997, compared to 8.7% and 8.8% yields on average
earning assets in 1996 and 1995, respectively.
Total interest expense for 1997 was $17,385,000, an increase of $4,066,000 or
30.5% over 1996, compared to an increase of $2,348,000 or 21.4% from 1995 to
1996. The Company's cost of funds experienced an increase of 0.3% from 1996 to
1997 and an increase of 0.1% from 1995 to 1996. The cost of funds increase in
1997 was due primarily to a change in the mix of deposits. The increase in 1996
over 1995 was due to the prevailing rising interest rate environment.
<TABLE>
The Company's net yield on interest-earning assets is affected by changes in the
rates earned and paid and the volume of interest-earning assets and
interest-bearing liabilities. The impact of changes in volume and rate on net
interest income in 1997 and 1996 is shown in the following table. Changes
attributable to both volume and rate have been allocated to rate.
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
(In thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities
Taxable $1,203 $391 $1,594 $1,675 $515 $2,190
Non-taxable (86) (13) (99) (132) (21) (153)
Federal funds sold 629 48 677 (68) 2 (66)
Loans 8,035 (950) 7,085 4,708 (1,399) 3,309
- ---------------------------------------------------------------------------------------------------------------------
Total 9,781 (524) 9,257 6,183 (903) 5,280
- ---------------------------------------------------------------------------------------------------------------------
Demand, interest bearing 93 (93) - (181) (475) (656)
Savings 28 152 180 791 (40) 751
Time certificates 3,632 252 3,884 1,954 321 2,275
Fed funds purchased (7) 9 2 (15) (7) (22)
- ---------------------------------------------------------------------------------------------------------------------
Total 3,746 320 4,066 2,549 (201) 2,348
- ---------------------------------------------------------------------------------------------------------------------
Increase in net interest income $6,035 $(844) $5,191 $3,634 $(702) $2,932
=====================================================================================================================
</TABLE>
Earning Assets
Outstanding total loans averaged $411,546,000 in 1997 compared to $332,421,000
during 1996. This represents an increase of $79,125,000 or 23.8%, compared to an
increase of $42,156,000 or 14.5% from 1995 to 1996. The increase in total loans
outstanding during 1997 is due to increased loan demand from qualified borrowers
and is reflective of the strength of the economy in most of the primary markets
which the Company serves. The table on the following page summarizes the
composition of the loan portfolio as of December 31:
47
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $110,595 $113,428 $82,583 $77,402 $63,926
Real Estate - construction 41,863 38,014 32,409 39,352 26,799
Real Estate - mortgage 227,367 195,417 154,572 144,687 146,675
Consumer 24,677 22,509 25,604 22,907 22,185
Other 14,791 19,360 5,727 6,004 6,318
- ---------------------------------------------------------------------------------------------------------------
Total $419,293 $388,728 $300,895 $290,352 $265,903
===============================================================================================================
</TABLE>
The Company lends primarily to small- and medium-sized businesses within its
markets, which is comprised principally of Monterey, Santa Cruz, Santa Clara,
and San Benito Counties.
A majority of the Company's loan portfolio consists of loans secured by
commercial, industrial, and residential real estate. As of December 31, 1997,
real estate mortgage and construction loans represented $269,230,000 or 64.2% of
total loans, compared to $233,431,000 or 60.0% of total loans at December 31,
1996.
Real estate mortgage loans included commercial real estate loans of
approximately $175,684,000, one-to-four family home loans of approximately
$25,374,000, equity lines of credit of approximately $19,462,000, multifamily
dwelling loans of approximately $4,334,000 and farm land loans of approximately
$2,513,000. Construction loans totaled $41,863,000 or 10.0% of the loan
portfolio as of December 31, 1997, which represents an increase of $3,849,000 or
10.1% from December 31, 1996. Management believes that the Bank does not have
any significant loss exposure with respect to such loans, due to the Bank's
collateral position. In general, advances do not exceed 70% of appraised value
on commercial real estate loans and 75% on residential mortgages. Continued
emphasis is placed on this policy and, accordingly, appraisals are periodically
updated as conditions change.
The Company finances the construction of residential and commercial real estate
properties. These loans are all at variable rates, are secured by first deeds of
trust on the underlying properties, and generally have maturities of less than
24 months. Repayment is based on a pre-qualification analysis of the borrower's
ability to obtain take-out financing. The Company's construction lending has
been in areas which management believes to have favorable market conditions.
Advances on residential and commercial projects are limited in general to the
lower of approximately 75% and 70%, respectively, of cost or appraised value.
Commercial loans not secured by real estate totaled $110,595,000 or 26.4% of the
total loan portfolio at December 31, 1997 compared to $113,428,000, or 29.2% of
total loans as of December 31, 1996.
Consumer loans increased $2,168,000 or 9.6% during 1997. Consumer loans, as of
December 31, 1997, represent 5.9% of the total loan portfolio, compared to 5.8%
of the 1996 loan portfolio.
The Company had undisbursed loans totaling $134,638,000 as of December 31, 1997,
primarily representing available lines of credit and the unfunded portion of
construction loan commitments.
48
<PAGE>
<TABLE>
The following table sets forth the maturity distribution of the loan portfolio
as of December 31, 1997:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
After one
In one year year through After five
(In thousands) or less five years years Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 93,317 $14,276 $ 3,002 $110,595
Real Estate - construction 41,101 484 278 41,863
Real Estate - mortgage 108,888 63,205 55,274 227,367
Consumer 11,901 10,398 2,378 24,677
Other 3,067 4,962 6,762 14,791
- ----------------------------------------------------------------------------------------------------------
Gross loans $258,274 $93,325 $67,694 $419,293
==========================================================================================================
</TABLE>
The fixed rate loan categories discussed above mature as follows: $14,072,000 in
1998, $9,201,000 in 1999, $10,212,000 in 2000, $20,566,000 in 2001, and
$16,738,000 in 2002, with the remaining $67,694,000 maturing thereafter. The
variable loan rate categories discussed above mature as follows: $244,287,000 in
1998, $15,198,000 in 1999, $5,780,000 in 2000, $8,107,000 in 2001, and
$7,438,000 maturing in 2002.
Interest Rate Sensitivity Interest rate sensitivity is the relationship between
market interest rates and net interest income due to the repricing
characteristics of assets and liabilities. If more liabilities than assets
reprice in a given period (a liability sensitive position), market interest rate
changes will be reflected more quickly in liability rates. If interest rates
decline, a liability sensitive position will benefit net income. Alternatively,
where assets reprice more quickly than liabilities in a given period (an asset
sensitive position) a decline in market rates will have an adverse effect on net
interest income.
The table on the following page presents the interest rate sensitivity of the
Company as of December 31, 1997. For any given period, the structure is matched
when an equal amount of assets and liabilities reprice. Any excess of assets or
liabilities over these matched items results in the gap, or mismatch, shown at
the foot of the table. A negative gap indicates liability sensitivity and a
positive gap indicates asset sensitivity.
49
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity as of December 31, 1997
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Repricing Opportunity
0 - 90 91 - 180 181 - 365 Over
(In thousands) Days Days Days One Year Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal funds sold $26,405 $- $- $- $26,405
Loans 216,404 20,202 30,662 163,352 430,620
Taxable investments 14,501 5,281 18,404 177,650 215,836
Non-taxable investments 552 228 1,988 11,859 14,627
- -----------------------------------------------------------------------------------------------------------
Total Earning Assets 257,862 25,711 52,054 352,861 687,488
- -----------------------------------------------------------------------------------------------------------
Interest bearing demand 97,322 - - - 97,322
Savings deposits 161,195 - 6,082 5,874 173,151
Time certificates 88,242 63,784 82,329 3,921 238,276
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 346,759 63,784 88,411 9,795 508,749
- -----------------------------------------------------------------------------------------------------------
Gap $(88,897) $(38,073) $(37,357) $343,066 $178,739
Cumulative gap (88,897) (126,970) (164,627) 178,739
===========================================================================================================
</TABLE>
The Company has remained flexible in determining the point at which to reprice
deposits. This flexibility mitigates the Company's liability sensitive position
in the under one year category.
Quality of Loans The Company had net loan charge-offs of $926,000, $723,000 and
$586,000 in 1997, 1996 and 1995, respectively. Net charge-offs as a percent of
average loans has remained relatively constant over the last three years at
0.23%, 0.22%, and 0.20% for the years ended December 31, 1997, 1996, and 1995,
respectively. Over the last five years, the low amount of net charge-offs to
average loans is indicative of the continued emphasis placed on credit quality
standards in the loan approval process as well as close monitoring of the loan
portfolio. The Company's net charge-offs as a percent of average loans have been
below most industry averages in each year reflected in the following table.
Management anticipates the Company's charge-off experience in 1998 to be
consistent with that experienced in 1997 primarily due to the strength and
growth in the local economic areas in which the Company serves. This factor
continues to be of importance in assessing the adequacy of the allowance for
possible loan losses.
The table on the following page summarizes the actual loan losses and provision
for possible loan losses during the last five fiscal years by loan category:
50
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Summary of Loan Loss Activity
(In thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total loans outstanding, end of year $419,293 $388,728 $300,895 $290,352 $265,903
Average loans during the year 411,546 332,421 290,265 277,263 259,131
Allowance for possible loan losses:
Balance, beginning of year 3,672 3,710 3,769 3,753 3,479
Charge-off by loan category
Commercial 873 761 480 331 491
Consumer 59 188 129 148 327
Real estate 211 121 241 186 364
- --------------------------------------------------------------------------------------------
Total 1,143 1,070 850 665 1,182
- --------------------------------------------------------------------------------------------
Recoveries by loan category
Commercial 120 239 98 144 62
Consumer 24 91 42 37 54
Real estate 73 17 124 21 62
- --------------------------------------------------------------------------------------------
Total 217 347 264 202 178
- --------------------------------------------------------------------------------------------
Net charge-offs 926 723 586 463 1,004
Provision charged to expense 1,520 685 527 479 1,278
- --------------------------------------------------------------------------------------------
Balance, end of year $4,266 $3,672 $3,710 $3,769 $3,753
============================================================================================
Ratios:
Net charge-offs to
average loans 0.23% 0.22% 0.20% 0.17% 0.39%
Allowance to loans at end of year 1.02% 0.94% 1.23% 1.30% 1.41%
- --------------------------------------------------------------------------------------------
</TABLE>
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan extended
and the creditworthiness of the borrower. To reflect the estimated risks of loss
associated with its loan portfolio, provisions are made to the Company's
allowance for possible loan losses. As an integral part of this process, the
allowance for possible loan losses is subject to review and possible adjustment
as a result of regulatory examinations conducted by governmental agencies and
through management's assessment of risk. The Company's entire allowance is a
valuation allocation; that is, it has been created by direct charges against
earnings through the provision for possible loan losses.
The Company evaluates the allowance for possible loan losses based upon an
individual analysis of specific categories of loans. The adequacy of the
allowance can be determined only on an approximate basis, since estimates as to
the magnitude and timing of loan losses are not predictable because of the
impact of external events. In addition, the Company has for the last several
years contracted with an independent loan review consulting firm to evaluate
overall credit quality on an ongoing basis. Management then considers the
adequacy of the allowance for possible loan losses in relation to the total loan
portfolio.
The provision for possible loan losses charged against earnings is based upon an
analysis of the actual migration of loans to losses plus an amount for other
factors which, in management's judgment, deserve recognition in estimating
possible loan losses. These factors include: specific loan conditions as
determined by management; the historical relationship between charge-offs and
the level of the allowance; the estimated future loss in all significant loans;
known deterioration in
51
<PAGE>
concentrations of credit, certain classes of loans or pledged collateral;
historical loss experience based on volume and types of loans; the results of
any independent review or evaluation of the loan portfolio quality conducted by
or at the direction of Company management or by bank regulatory agencies; trends
in portfolio volume, maturity, and composition; off-balance sheet credit risk;
volume and trends in delinquencies and nonaccruals; lending policies and
procedures including those for charge-off, collection, and recovery; national
and local economic conditions and downturns in specific local industries; and
the experience, ability, and depth of lending management and staff. The Company
evaluates the adequacy of its allowance for possible loan losses on a quarterly
basis.
While these factors cannot be reduced to a mathematical formula, it is
management's view that the allowance for possible loan losses of $4,266,000 or
1.02% of total loans as of December 31, 1997, was adequate. This allowance is
compared to $3,672,000 or 0.94% in 1996 and $3,710,000 or 1.23% in 1995. The
increase in the allowance for loan losses as a percentage of total loans from
1996 to 1997 was due to the increased provision for loan losses charged to
expense in 1997. This increase in the provision was due to the substantial
growth in total loans during 1996 and 1997. Management believes that the quality
of the loan growth coupled with the decrease in nonperforming loans during this
same period warrants the decrease in the level of the allowance relative to the
loan portfolio. There are, however, no assurances that in any given period the
Company will not sustain charge-offs which are substantial in relation to the
size of the allowance. Loans are charged to the allowance for possible loan
losses when the loans are deemed uncollectible. It is the policy of management
to make additions to the allowance so that it remains adequate to cover
anticipated losses inherent in the Company's loan portfolio.
<TABLE>
Any allocation or breakdown in the allowance lends an appearance of an exactness
which does not exist. Thus, the allocation below should not be interpreted as an
indication of expected amounts or categories where charge-offs will occur. The
allocation of the allowance for possible loan losses as of the end of the last
five fiscal years is summarized in the table below:
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Allocation of Allowance 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
(Dollars in to total to total to total to total to total
thousands) $ loans $ loans $ loans $ loans $ loans
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
applicable to:
Commercial $1,996 26.38% $1,507 29.18% $1,395 27.45% $1,607 26.66% $1,441 24.99%
Real estate -
construction 302 9.98% 218 9.78% 306 10.77% 590 13.55% 229 4.16%
Real estate -
mortgage 1,716 54.22% 1,516 50.27% 1,708 51.37% 1,216 49.83% 1,785 57.82%
Consumer 249 5.89% 286 5.79% 272 8.51% 333 7.89% 269 7.40%
Other 3 3.53% 145 4.98% 29 1.90% 26 2.07% 28 2.88%
- ------------------------------------------------------------------------------------------------------------
Total $4,266 100.0% $3,672 100.0% $3,710 100.0% $3,769 100.0% $3,753 100.0%
============================================================================================================
</TABLE>
Nonperforming Loans Interest income on the loan portfolio is recorded on the
accrual basis. However, the Company follows the policy of discontinuing the
accrual of interest income and
52
<PAGE>
<TABLE>
reversing any accrued and unpaid interest when the payment of principal or
interest is 90 days past due unless the loan is both well secured and in the
process of collection. The Company's Lending Policy provides for strict
requirements for exempting loans from nonaccrual status. The composition of
nonperforming loans as of the end of the last three fiscal years is summarized
in the following table:
<CAPTION>
- --------------------------------------------------------------------------------------
Nonperforming Loans
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $2,150 $1,564 $2,481
Other loans contractually past due 90 days
or more 43 17 261
Restructured loans 174 279 513
- --------------------------------------------------------------------------------------
Total $2,367 $1,860 $3,255
======================================================================================
</TABLE>
Loans accounted for on a nonaccrual basis increased in 1997 due to an
Agriculture-related commercial loan of $779,000 which was placed on non-accrual
status in 1997. Management continues to focus on overall loan quality as well as
to resolve significantly past due loans.
The overall coverage of the allowance as a percent of nonperforming loans is
180.2%. The Company's ratio of nonperforming loans to average loans has been
below most industry averages in each year reflected in the table above.
The Company does not expect to sustain losses in excess of that provided for in
the allowance for possible loan losses. At December 31, 1997, the Company had
$174,000 in loans which were troubled debt restructurings and which were not
either nonaccrual loans or loans past due 90 days or more and still accruing
interest. At December 31, 1997, the Company did not have any loans other than
those disclosed as nonaccrual loans, loans past due 90 days or more and still
accruing interest and troubled debt restructurings where known information about
possible credit problems of the borrowers cause management to have serious
doubts as to the ability of such borrowers to comply with the present loan
repayment terms.
Investments The average balance of Federal Funds Sold (overnight investments
with other banks) and other short-term investments (primarily money market
mutual funds) was $58,359,000 in 1997, $43,823,000 in 1996, and $42,617,000 in
1995. These investments are maintained primarily for the short-term liquidity
needs of the Company. The major factors influencing the levels of required
liquidity are loan demand of the Company's customers and fluctuations in the
Company's level of deposits. The Company's loan to deposit ratio averaged 68.0%
in 1997, compared to 66.2% in 1996, and 67.2% in 1995.
53
<PAGE>
Average total investment securities were $145,430,000 in 1997, an increase of
$15,311,000 over the 1996 average. This increase was the result of the growth in
average deposits which exceeded the growth in average loans by $23,995,000. As
of December 31, 1997, the aggregate market value of the investment portfolio
exceeded the book value by $2,097,000. At December 31, 1996, the book value
exceeded the market value by $223,000. This increase in the market value of the
portfolio was the result of increasing prices in the bond market during the
course of 1997. It is the Company's policy not to engage in securities trading
transactions. There are no investments in the portfolio deemed to be permanently
or temporarily impaired.
- --------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized fair
(In thousands) cost gain loss value
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agency $87,591 $698 $42 $88,247
State and municipal 9,529 115 2 9,642
Mortgage-backed securities 121,769 1,363 37 123,095
- --------------------------------------------------------------------------------
$218,889 $2,176 $81 $220,984
================================================================================
Held-to-maturity securities:
State and municipal $4,985 $32 $70 $4,947
Mortgage-backed securities
and other 2,362 43 5 2,400
- --------------------------------------------------------------------------------
$7,347 $75 $75 $7,347
================================================================================
1996
- --------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agencies $64,109 $159 $187 $64,081
State and municipal 7,233 59 21 7,271
Mortgage-backed securities 45,470 9 303 45,176
- --------------------------------------------------------------------------------
$116,812 $227 $511 $116,528
================================================================================
Held-to-maturity securities:
State and municipal $6,449 $55 $42 $6,462
Mortgage-backed securities
and other 3,231 59 11 3,279
- --------------------------------------------------------------------------------
$9,680 $114 $53 $9,741
================================================================================
Funding Average total deposits increased $103,120,000 or 20.5% during 1997,
compared to an increase of $69,858,000 or 16.2% during 1996 and an increase of
$27,928,000 or 6.9% in 1995. Average non-interest bearing deposits increased in
1997 by $25,328,000 or 23.1% compared to an increase of $13,791,000 or 14.4% in
1996, and an increase of $8,908,000 or 10.3% in 1995. Average interest-bearing
deposits increased $77,792,000 or 19.8% in 1997, compared with increases of
$56,067,000 or 16.7% in 1996 and $19,020,000 or 6.0% during 1995. Total deposit
growth in 1998 is expected to continue but may not increase at the same rate or
in the same categories. The Company is able to attract deposits by providing
interest rates and services competitive with other institutions located in its
market area. The Company does not have any brokered deposits or large
concentrations with any one customer.
54
<PAGE>
- -------------------------------------------------------------------------------
Average Deposits 1997 1996 1995
- -------------------------------------------------------------------------------
Average Average Average
(Dollars in thousands) balance Rate balance Rate balance Rate
- -------------------------------------------------------------------------------
Demand, noninterest-bearing $134,943 - $109,615 - $95,824 -
Demand, interest-bearing 85,769 0.99% 77,306 1.09% 87,916 1.71%
Savings and money market 169,577 2.86% 168,553 2.77% 140,209 2.79%
Time certificates 214,664 5.43% 146,359 5.32% 108,026 5.10%
- -------------------------------------------------------------------------------
The table above sets forth information for the last three fiscal years regarding
the Company's average deposits and the average rates paid on each of the deposit
categories.
The remaining maturities of the Company's certificates of deposit, including
public funds, in amounts of $100,000 or more as of December 31, 1997, are
indicated in the table below. Interest expense on these certificates of deposit
totaled $6,244,000 in 1997.
- ------------------------------------------------------------------------------
(In thousands) 1997
- ------------------------------------------------------------------------------
Three month or less $49,733
Over three through six months 32,375
Over six through twelve months 33,432
Over twelve months 1,869
- ------------------------------------------------------------------------------
Total $117,409
==============================================================================
Branch Purchase On November 20, 1997, First National Bank purchased certain
assets and assumed certain liabilities of the Soledad branch of Bank of America,
NT & SA. As a result of this transaction, First National assumed $24,694,000 in
deposit liabilities and received $21,449,000 of cash and tangible assets of
$1,144,000. The transaction resulted in an intangible asset of $2,076,000,
representing the excess of liabilities assumed over the fair value of tangible
assets acquired.
Noninterest Income Total noninterest income increased in 1997 to $3,356,000 from
$3,160,000 in 1996. The increase was primarily due to a $187,000 increase in
service charges and an increase in gains on sales of securities of $57,000
partially offset by a decrease in other income of $43,000. Noninterest income
also increased in 1996 by $177,000 as a result of an increase in other income of
$181,000 partially offset by a decrease in gains on sales of loans of $64,000.
55
<PAGE>
Noninterest Expense In 1997, total other operating expenses decreased 8.1% to
$20,884,000, after an increase of $3,375,000 or 17.4% in 1996. Of the $3,375,000
increase in 1996, $1,972,000 was attributable to merger-related expenses. These
costs were primarily within the categories of salaries and benefits, equipment
expense, and legal and professional expenses. Salaries and benefits expense in
1997 decreased $549,000 or 4.6% compared to an increase of $1,875,000 or 18.8%
in 1996. The decrease in salaries and benefits during 1997 was mainly the result
of consolidation of all back-office operations following the merger with South
Valley Bancorporation in 1996. The increase in 1996 over 1995 was primarily due
to the severance costs related to the merger as well as normal salary increases.
As a percentage of average earning assets, salaries and benefits were 1.8% in
1997 compared to 2.3% for 1996 and 1995. The Company employed 285 full-time
equivalent employees at year-end 1997.
Occupancy expense increased $215,000 or 10.2% in 1997 compared to an increase of
$152,000 or 7.8% in 1996. The increases in 1997 and 1996 were due primarily to
the expansion of the Salinas office of First National Bank in 1996, the leasing
of additional space to house the Loan Administration center in 1997, and normal
rental rate increases.
<TABLE>
All other operating expenses totaled $7,243,000 in 1997 compared to $8,752,000
in 1996, a decrease of $1,509,000 or 17.2%. This decrease was mainly due to
merger-related expenses for data processing and legal and professional fees
which were incurred in 1996. In 1996, other operating expense increased by
$1,348,000 or 18.2% over 1995, again, the result of merger-related costs in
1996. The major components of other expenses in dollars and as a percentage of
average earning assets are as indicated in the table below.
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Other Expenses 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of average of average of average
(Dollars in thousands) Amount earning assets Amount earning assets Amount earning assets
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $11,315 1.83% $11,864 2.34% $9,989 2.29%
Occupancy 2,326 0.38% 2,111 0.42% 1,959 0.45%
Equipment 1,755 0.29% 2,577 0.51% 1,943 0.45%
Advertising and promotion 864 0.14% 710 0.14% 659 0.15%
Forms and supplies 767 0.12% 563 0.11% 508 0.12%
Legal and professional fees 1,185 0.19% 1,946 0.38% 823 0.19%
Assessments 222 0.04% 147 0.03% 572 0.13%
Other 2,450 0.40% 2,809 0.56% 2,899 0.65%
- -------------------------------------------------------------------------------------------------------------
Total $20,884 3.39% $22,727 4.49% $19,352 4.43%
=============================================================================================================
</TABLE>
Year 2000
During 1997, the Company began the implementation of its Year 2000 Plan. The
Year 2000 problem, also known as the "Millenium Bug" was created when software
engineers, in an attempt to save processing speed and hard disk storage, decided
to create a two-digit year field within a date field instead of four. This was
done to save on disk space and to maximize processing speed. The two-digit year
does not allow the software to determine if '00' is the year 1900 or 2000. The
year 2000 issue is very pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the date from 1999 to
2000.
56
<PAGE>
The Company is using both internal and external resources to identify, correct
or reprogram and test the systems for year 2000 compliance. It is anticipated
that all reprogramming efforts or system changes will be complete by December
31, 1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that their systems are
year 2000 compliant. Based on a preliminary study, the Company expects to spend
approximately $150,000 over the next two years to modify and test its computer
systems to allow for transactions in the year 2000 and beyond. The amount
expensed in 1997 was not significant.
Income Taxes
The provision for income taxes was $6,635,000 in 1997, compared to $4,348,000 in
1996 and $4,200,000 in 1995. The Company's effective tax rate for 1997 was
39.5%, compared with 41.9% for 1996, and 38.9% for 1995. The increased effective
tax rate in 1996 was due to the fact that a majority of the merger-related costs
were not tax-deductible.
Capital
Shareholders' equity increased $8,912,000 or 14.0% in 1997. The increase was
primarily a result of retention of the Company's 1997 net income and the
exercise of stock options, offset in part by a repurchase of outstanding shares
and a total cash dividend of $0.66 per share paid during 1997. The Company
regularly assesses future capital needs so that it will remain in compliance
with the capital adequacy guidelines issued by the Federal Reserve Board for
bank holding companies and by the Office of the Comptroller of the Currency (the
"OCC") for national banks. The Company's operating plan for 1998 contemplates
continued growth in shareholders' equity through the retention of net income.
The Company and the Subsidiary Banks are subject to the guidelines and
regulations of the Federal Reserve Board and the Comptroller, respectively,
governing capital adequacy. The Federal Reserve Board has established final
risk-based and leverage capital guidelines for bank holding companies which are
the same as the Comptroller's capital regulations for national banks.
57
<PAGE>
The Federal Reserve Board capital guidelines for bank holding companies and the
OCC's regulations for national banks set total capital requirements and define
capital in terms of "core capital elements" (comprising Tier 1 capital) and
"supplemental capital elements" (comprising Tier 2 capital). Tier 1 capital is
generally defined as the sum of the core capital elements less goodwill. The
following items are defined as core capital elements: common stockholders'
equity, qualifying noncumulative perpetual preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries. Supplementary
capital elements include: allowance for loan and lease losses (which cannot
exceed 1.25% of an institution's risk weighted assets), perpetual preferred
stock not qualifying as core capital, hybrid capital instruments and mandatory
convertible debt instruments, and term subordinated debt and intermediate-term
preferred stock. The maximum amount of supplemental capital elements which
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of
goodwill.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Federal Reserve Board or the OCC to those
assets. Both bank holding companies and national banks are required to maintain
a minimum ratio of qualifying total capital to risk-weighted assets of 8%, at
least one-half of which must be in the form of Tier 1 capital. There are
presently four risk-weight categories: 0% for cash and unconditionally
guaranteed government securities; 20% for conditionally guaranteed government
securities; 50% for performing residential real estate loans secured by first
liens; and 100% for commercial loans.
The federal banking agencies have issued a joint advance notice of proposed
rulemaking to solicit comments on a framework for revising their risk-based
capital guidelines to take account of interest rate risk. As required by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the
notice seeks comment on a proposed method of incorporating an interest rate risk
component into the current risk-based capital guidelines, with the goal of
ensuring that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk is a measure of
the relationship between a change in market interest rates and the resultant
change in net interest income due to the repricing and/or maturity
characteristics of the assets and liabilities of the Company. As financial
intermediaries, depository institutions accept interest rate risk as a normal
part of their business. They assume this risk whenever the interest rate
sensitivity of their assets does not match the sensitivity of their liabilities
or off balance sheet positions. Thus, when interest-sensitive assets and
liabilities reprice at mismatched intervals, an increase or decrease in interest
rates will affect net interest income. Under the proposal, interest rate risk
exposures would be quantified by weighing assets, liabilities and off-balance
sheet items by risk factors which approximate sensitivity to interest rate
fluctuations. Institutions identified as having an interest rate risk exposure
greater than a defined threshold would be required to allocate additional
capital to support this higher risk. The capital to be allocated would be a
dollar amount equal to the percentage by which the risk exceeds the defined
threshold multiplied by the institution's total assets. Higher individual
capital allocations could be required by the bank regulators based on
supervisory concerns.
Federal banking agencies have solicited comments on this proposal but have not
yet proposed regulations to implement any interest rate risk component into the
risk-based capital guidelines.
58
<PAGE>
Accordingly, the ultimate impact on the Subsidiary Banks and the Company of a
final regulation in this area cannot be predicted at this time.
Leverage Capital Guidelines
The Federal Reserve Board and the OCC have established a minimum leverage ratio
of 3% Tier 1 capital to total assets for bank holding companies and national
banks that have received the highest composite regulatory rating and are not
anticipating or experiencing any significant growth. All other institutions will
be required to maintain a leverage ratio of at least 100 to 200 basis points
above the 3% minimum.
<TABLE>
Set forth below are the Company's and the Subsidiary Banks' risk-based and
leverage capital ratios as of December 31, 1997:
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Risk Based Capital Ratio
As of December 31, 1997
- ---------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $68,925 13.58% $17,592 11.71% $44,601 12.81%
Tier 1 capital minimum
requirement 20,295 4.00% 6,009 4.00% 13,929 4.00%
- ---------------------------------------------------------------------------------------------------
Excess 48,630 9.58% 11,583 7.71% 30,672 8.81%
===================================================================================== =============
Total capital 73,191 14.43% 19,337 12.87% 47,116 13.53%
Total capital minimum
requirement 40,589 8.00% 12,017 8.00% 27,858 8.00%
- ------------------------------------------------------------------------------------- -------------
Excess 32,602 6.43% 7,320 4.87% 19,258 5.53%
===================================================================================== =============
Risk-adjusted assets $507,363 $150,216 $348,220
===================================================================================== =============
</TABLE>
<TABLE>
As indicated in the table on the previous page, the Company's capital ratios
significantly exceeded the minimum capital levels required by current federal
regulations. Management believes that the Company and the Subsidiary Banks will
continue to meet their respective minimum capital requirements in the
foreseeable future.
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Leverage Capital Ratio
As of December 31, 1997
- ----------------------------------------------------------------------------------------------------------
Company South Valley First National
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to quarterly
average total assets
(leverage ratio) $68,925 9.17% $17,592 8.03% $44,601 8.49%
Minimum leverage requirement 22,543 to 3.00% to 6,575 to 3.00% to 15,761 to 3.00% to
37,572 5.00% 10,958 5.00% 26,268 5.00%
- ----------------------------------------------------------------------------------------------------------
Excess 31,353 to 4.17% to 6,634 to 3.03% to 18,333 to 3.49% to
46,382 6.17% 11,017 5.03% 28,840 5.49%
==========================================================================================================
Total quarterly average assets $751,439 $219,168 $525,357
==========================================================================================================
</TABLE>
59
<PAGE>
Federal banking laws impose restrictions upon the amount of dividends the
Subsidiary Banks may declare to the Holding Company (see Note 14 to the
accompanying consolidated financial statements). Federal laws also impose
restrictions upon the amount of loans or advances that the Subsidiary Banks may
extend to the Holding Company. In management's opinion, these do not affect the
ability of the Company to meet its cash obligations.
Liquidity
Liquidity represents the ability of the Company to meet the requirements of
customer borrowing needs as well as fluctuations in deposit flows.
The Company's principal sources of asset liquidity are cash and due from banks,
time deposits with other financial institutions, federal funds sold, short-term
investments, and marketable investment securities. As of December 31, 1997 these
sources represented $306,850,000 or 44.9% of total deposits, compared to 37.0%
in 1996 and 44.1% in 1995. The decrease in 1996 reflects the growth within the
loan portfolio of which a small portion was funded by maturities in the
investment portfolio. Other sources of asset liquidity are maturing loans and
borrowing lines of approximately $51,000,000 with primary correspondent banks.
There were no borrowings outstanding under these lines as of December 31, 1997.
The Company guarantees the obligations or performance of its customers by
issuing standby letters of credit to a third party. These standby letters of
credit are frequently issued in support of third-party obligations, such as
retail company transactions and travel agency issuances.
The risk involved in issuing standby letters of credit is essentially the same
as the credit risk in extending loans to customers, and they are subject to the
same credit origination, maintenance, and management procedures in effect to
monitor other credit products. As of December 31, 1997 and 1996, outstanding
standby letters of credit totaled $4,193,000 and $4,994,000, respectively. The
Company does not offer or engage in any other off-balance sheet products such as
commitments to purchase and sell foreign exchange, interest rate or currency
swaps, or financial futures and options.
In the opinion of management, there are sufficient resources to meet the
liquidity needs of the Company at present and projected future levels.
60
<PAGE>
Effects of Changing Prices
The most direct effect of inflation is higher interest rates. However, the
Company's earnings are not necessarily dependent on the absolute level of
interest rates. Instead, earnings are affected by the spread between the yield
on loans and investments and the cost of deposits and borrowing money. Another
effect of inflation is upward pressure of the Company's operating expenses. It
is management's opinion that the effects of inflation on the consolidated
financial statements have not been material.
Quantitative and Qualitative Disclosures about Market Risk
The Company's success is largely dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of the Company's
net interest income to adverse movements in interest rates. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition. The primary objective of the asset/liability
management process is to measure the effect of changing interest rates on net
interest income and market value and adjust the balance sheet (if necessary) to
minimize the inherent risk and maximize income. The Company's exposure to market
risk and interest rate risk is reviewed on a regular basis by the
Asset/Liability Committee. Tools used by management include a modified GAP
report and an asset/liability simulation model. Management believes that the
Company's market risk and interest rate risk profiles are within reasonable
tolerances at this time.
A derivative financial instrument includes futures, forward contracts,
interest rate swaps, option contracts, and other financial instruments with
similar characteristics. The Company currently does not enter into futures,
forwards, swaps, or options. The Company is however, party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statement of condition. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Company. Standby letters of credit are conditional
commitments issued by the Subsidiary Banks to guarantee the performance of a
customer to a third party up to a stipulated amount and with specified terms and
conditions. Commitments to extend credit and standby letters of credit are not
recorded on the Company's consolidated balance sheet until the instrument is
exercised.
The table on the following page represents the change in the Company's
Market Value of Portfolio Equity (MVPE) at December 31, 1997 in the event of a
sudden and sustained change in interest rates as presented. MVPE is defined as
the fair value of assets less the fair value of liabilities on the Company's
consolidated balance sheet.
61
<PAGE>
(Dollars in thousands) Market value of
Change in interest rates portfolio equity $ Change % Change
- ---------------------------------------------------------------------------
200 Basis points rise $90,811 $755 0.84%
100 Basis points rise 90,434 378 0.42%
Base scenario 90,056 - 0.00%
100 Basis points decline 88,950 (1,107) (1.23%)
200 Basis points decline 87,873 (2,213) (2.46%)
62
<PAGE>
PACIFIC CAPITAL BANCORP STOCK ACTIVITY
The common stock of the Company is listed on the NASDAQ National Market under
the symbol PABN. This listing became effective on November 20, 1996. Prior to
that date, the Company's common stock was listed on the OTC Bulletin Board.
The high and low prices listed below reflect actual trades which occurred in the
specified time frames listed. Three brokerage firms effect transactions in the
Company's stock: Van Kasper & Co., Sandler O'Neill Partners, L.P.; and Hoefer &
Arnett, Inc.
According to the Company's records, there were 2,063 shareholders as of
September 10, 1996. In 1997 the Company paid four cash dividends of $0.165 per
share to holders of record on March 14, June 16, September 15, and November 17,
payable on March 31, June 30, September 30, and December 1, 1996, respectively.
The Company also paid a five percent (5%) stock dividend payable to shareholders
of record as of December 1, 1997.
For information regarding restrictions on the payment of dividends see Note 14
to the accompanying consolidated financial Statements.
- --------------------------------------------------------------------------------
Ranges of Common Stock Prices
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Quarter Low High
- -------------------------------------------------------------------------------
First $23.10 $27.62
Second 27.02 33.93
Third 30.60 33.10
Fourth 32.74 44.25
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Quarter Low High
- -------------------------------------------------------------------------------
First $24.05 $28.09
Second 25.47 27.63
Third 24.77 26.67
Fourth 25.38 27.63
- -------------------------------------------------------------------------------
63
<PAGE>
The Corporation
The Company is a California corporation and bank holding company that was
incorporated on January 26, 1983. First National and South Valley, wholly owned
subsidiaries of the Company, commenced operations in 1984 and 1983,
respectively.
<TABLE>
First National and South Valley are nationally chartered commercial banks
serving Monterey, Santa Cruz, Santa Clara and San Benito Counties and
surrounding areas in California.
<CAPTION>
Registrar & Transfer Agent Form 10-K
First National Bank of South Valley -------------------------- ----------------------------
Central California National Bank ChaseMellon Shareholder A Copy of the Company's
Banking Offices Banking Offices Services Form 10-K as filed with the
- ----------------------------- ----------------------------- Overpeck Centre Securities and Exchange
<S> <C> <C> <C>
1001 South Main Street 500 Tennant Station 85 Challenger Road Commission is available,
Salinas, California Morgan Hill, California Ridgefield Park, NJ without charge, upon
93902-1786 95037 07660 written request.
(408) 757-4900 (408) 778-1510 Please direct requests to:
495 Washington Street 8000 Santa Teresa Blvd. Market Makers Dennis A. DeCius
Monterey, California Gilroy, California Hoefer & Arnett, Inc. Executive Vice President
93942-2718 95020 353 Sacramento Street Chief Financial Officer
(408) 373-4900 (408) 848-2161 Tenth Floor Pacific Capital Bancorp
San Francisco, California P.O. Box 1786
307 Main Street 1730 Airline Highway 94111 Salinas, California
Salinas, California Hollister, California 93902-1786
93902-1786 95023 Sandler O'Neill Partners,
(408) 757-4900 (408) 636-5581 LP
2 World Trade Center Corporate Counsel
104th Floor Preston, Gates & Ellis LLP
655 Main Street 301 Third Street New York, New York One Maritime Plaza
Watsonville, California San Juan Bautista, Ca. 10048 Suite 2400
95077-1540 95045 San Francisco, California
(408) 728-2265 (408) 623-4590 Van Kasper & Co. 94111
600 California Street
26380 Carmel Rancho Lane Suite 1700 Certified Public
Carmel, California San Francisco, California Accountants
93922-2017 94108 KPMG Peat Marwick LLP
(408) 626-2900 500 East Middlefield Road
Mountain View, California
695 Front Street 94043
Soledad, California
93960
(408) 678-2609
</TABLE>
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
Date: March 25, 1998 PACIFIC CAPITAL BANCORP
-------------------------------------
By: /S/ Clayton C. Larson
CLAYTON C. LARSON
President
/S/ Charles E. Bancroft Date: March 25, 1998
- --------------------------------------------
Charles E. Bancroft,
Director
/S/ Dennis A. DeCius Date: March 25, 1998
- --------------------------------------------
Dennis A. DeCius
Executive Vice President
and Chief Financial Officer
(principal financial officer and principal accounting officer)
/S/ Gene DiCicco Date: March 25, 1998
- --------------------------------------------
Gene DiCicco,
Director
/S/ Lewis L. Fenton Date: March 25, 1998
- --------------------------------------------
Lewis L. Fenton,
Director
65
<PAGE>
/S/ James L. Gattis Date: March 25, 1998
- --------------------------------------------
James L. Gattis,
Director and Secretary
/S/ Hubert W. Hudson Date: March 25, 1998
- --------------------------------------------
Hubert W. Hudson,
Director
/S/ William H. Pope Date: March 25, 1998
- --------------------------------------------
William H. Pope,
Director
/S/ William J. Keller Date: March 25, 1998
- --------------------------------------------
William J. Keller,
Director
/S/ Eugene R.Guglielmo Date: March 25, 1998
-------------------------------------------
Eugene R. Guglielmo,
Director
/S/ Roger C. Knopf Date: March 25, 1998
- --------------------------------------------
Roger C. Knopf,
Director
/S/ Clayton C. Larson Date: March 25, 1998
- --------------------------------------------
Clayton C. Larson,
President and Director
/S/ William S. McAfee Date: March 25, 1998
- --------------------------------------------
William S. McAfee,
Director
66
<PAGE>
/S/ Robert B. Sheppard Date: March 25, 1998
- --------------------------------------------
Robert B. Sheppard,
Director
/S/ Mary Lou Rawitser Date: March 25, 1998
- --------------------------------------------
Mary Lou Rawitser,
Director
67
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
3.1 Articles of incorporation of the Company as amended. 1/ (*)
3.2 Bylaws of Company as amended. 2/ (*)
10.1 Lease -- 601 Abrego Street, Monterey, Premises. 3/ (*)
10.2 Lease for 1001 South Main Street, Salinas, Banking office. 2/ (*)
10.3 Lease dated December 15, 1988 by and between the Bank (*)
and James L. Gattis for 307 Main Street, Salinas Old
Town Office. 2/
10.4 Lease dated May 1, 1985 by and between the Bank (*)
and Pacific Capital Bancorp. 4/
10.5 Pacific Capital Bancorp Employee Stock Ownership (*)
Plan and Trust Agreement. 5/
10.6 Master Equipment Lease Agreement between Bank and (*)
Parker North American Corporation. 5/
10.7 Lease dated September 22, 1986 between (*)
Bank and The Saunders Company. 5/
*/ Not Applicable.
- ---------------------------------------------------------------------------
1/ Filed as Exhibits 3.1, 10.21 and 10.32, respectively, to the Company's
Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended
December 31, 1988, which are incorporated by reference.
2/ Filed as Exhibits 3.2 and 10.17, respectively, to the Company's Annual
Report on Form 10-K (File No. 2-87513) for the fiscal year ended
December 31, 1984, which are incorporated by reference.
3/ Filed as Exhibit to the Company's Registration Statement on Form S-18
(Registration No. 2-87513), which is incorporated by reference.
4/ Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K
(File No. 0-13528) for the fiscal year ended December 31, 1985, which
is incorporated by reference.
5/ Filed as Exhibits 10.24 through 10.26, respectively, to Company's
Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended
December 31, 1986, which are incorporated by reference.
68
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.8 Matrix Funding Corporation Master Lease Agreement. 1/ (*)
10.9 Lease dated January 24, 1989 by and between First (*)
National Bank of Monterey County and
Stanley R. Haynes. 6/
10.13 Amendment No. One to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 2/
10.14 Amendment No. Two to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 7/
10.15 Amendment No. Three to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 7/
10.16 Lease dated August 10, 1990 by and between
the (*) Trustees of the Stanley Family Trust
and Pacific Capital Bancorp for Carmel Office. 7/
10.17 Assignment of Lease dated November 1, 1990 by and (*)
between Pacific Capital Bancorp and First National
Bank of Monterey-County for Carmel Office. 7/
10.18 Lease dated November 12, 1990 by and between (*)
First National Bank of Monterey County and Carmel
Monterey Travel for Premises located at 601 Abrego
Street, Monterey, California. 7/
10.19 Prunetree Shopping Center Lease dated June 28, 1988 (*)
by and between Dennis R. Keith and Pajaro
Valley Bancorporation. 7/
- -------------
6/ Filed as Exhibits 10.20 through 10.24, respectively, to the Company's
Annual Report on Form 10-K (File No. 0-13528) for the fiscal year ended
December 31, 1989, which are incorporated by reference.
7/ Filed as Exhibits 10.25 through 10.32 to the Company's Annual Report on
Form 10-K (File No. 0-13528) for the fiscal year ended December 31,
1990, which are incorporated by reference.
69
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.20 Lease dated June 21, 1990 by and between Saucito (*)
Land Co. and First National Bank of Monterey County. 7/
10.22 Amendment No. Four to Pacific Capital Bancorp (*)
Employee Stock Ownership Plan. 8/
10.23 Amendment dated May 20, 1991 to Lease dated (*)
December 15, 1988 by and between the Bank and
James L. Gattis for 307 Main Street, Salinas
Old Town Office. 8/
10.24 Pacific Capital Bancorp Directors' Stock Option Plan (*)
and Form of Stock Option Agreement. 8/
10.26 Pacific Capital Bancorp 1984 Stock Option Plan (*)
and Forms of Agreements as amended to date. 8/
10.30 Business Recovery Services Agreement dated (*)
September 30, 1991 by and between Bank and
J.D.B. & Associates, Inc. 8/
10.31 Consolidated Agreement dated December 17, 1991 by and (*)
between Bank and Unisys with Equipment Sale Agreement,
Software License Agreement and Product License Agreement
by and between Bank and information Technology, Inc. 8/
10.32 Fidelity and Deposit Company of Maryland Directors and (*)
Officers Liability Insurance Policy including Bank
Reimbursement. 8/
10.33 Fidelity and Deposit Company of Maryland (*)
Financial Institution Bond. 8/
10.34 Lease dated January 28, 1993 by and between J.W. (*)
and R.W. McClellan, Partners, and First National
Bank of Central California. 9/
10.35 Exercise of Lease Option as of September 19, 1992 (*)
by and between First National Bank of Central
California and James L. Gattis. 9/
- -------------------
8/ Filed as Exhibits 10.23 through 10.34 to the Company's Annual Report on
Form 10-K (File No. 0-13528) for the fiscal year ended December 31,
1991, which are incorporated by reference.
9/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1993, which are
incorporated by reference.
70
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.37 Lease dated November 18, 1993 by and between (*)
Hazel Graven and Vines Stewart and First
National Bank of Central California. 10/
10.38 Software License Agreement for Platform (*)
Transfer Module and Interface dated September
15, 1993 by and between First National Bank of
Central California and Information Technology, Inc. 10/
10.39 Equipment Sale Agreement dated December 16, 1993 by and (*)
between First National Bank of Central California and
Information Technology, Inc. 10/
10.40 Asset/Liability Management Software Agreement dated (*)
December 31, 1993 by and between First National Bank of
Central California and Profitstar, Inc. 10/
10.41 Applications dated December 28, 1993 by First (*)
National Bank of Central California to become a member
of the California Bankers Clearing House Association. 10/
10.42 Consolidated Agreement for the purchase of computer (*)
hardware dated December 20, 1993 by and between
First National Bank of Central California and
Unisys Corporation. 10/
10.46 Amended Pacific Capital Bancorp 1994 Stock Option Plan (*)
and Form of Incentive and Non-Qualified Stock
Option Agreements. 9/
10.47 Amendment No. Five to Pacific Capital Bancorp Employee (*)
Stock Ownership Plan and Trust. 10/
10.48 Pacific Capital Bancorp 401(k) Profit Sharing Plan. 10/ (*)
10.49 Equipment Sale Agreement dated March 22, 1995, by and (*)
between First National Bank of Central California and
Information Technology, Inc. 11/
10.50 Equipment Sale Agreement dated February 2, 1996, by and (*)
between First National Bank of Central California and
Information Technology, Inc. 11/
- --------------
9/ Filed as Exhibits to the Company's Registration Statement on Form S-8
(File No. 33-83848) as filed on September 8, 1994, and Amendment No. 1
to Form S-8 as filed on November 15, 1994.
10/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1994, which are
incorporated by reference.
11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1995, which are
incorporated by reference.
71
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.51 Standard Form of Agreement between Owner (Pacific (*)
Capital Bancorp) and Contractor (Daniels & House
Construction Co.) for the renovation of existing
building and construction of new addition for
First National Bank of Central California at
1001 S. Main Street, Salinas, CA, 93901, dated
June 15, 1995. 11/
10.52 Employee Welfare Benefit Plan Agreement dated (*)
January 1, 1995, between Pacific Capital Bancorp and
Great-West Life & Annuity Insurance Co. 11/
10.53 Lease Agreement dated October 29, 1996 by and between (*)
James L. Gattis and Pacific Capital Bancorp for
property located at 517 S. Main Street, Salinas 12/
10.57 Employment Agreement dated November 20, 1996 between South (*)
Valley National Bank and Brad L. Smith 12/
10.58 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Clayton C. Larson 13/
10.59 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and D. Vernon Horton 13/
10.60 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Dennis A. DeCius 13/
10.61 Employment Agreement dated August 26, 1997 between Pacific (*)
Capital Bancorp and Dale R. Diederick 13/
- --------------
11/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1995, which are
incorporated by reference.
12/ Filed as exhibits to the Company's Annual Report on Form 10-K (File No.
0-13528) for the fiscal year ended December 31, 1996, which are
incorporated by reference.
13/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q (File
No. 0-13528) for the period ended September 30, 1997 which are
incorporated by reference.
72
<PAGE>
Exhibit Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
10.62 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Clayton C. Larson 13/
10.63 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
D. Vernon Horton 13/
10.64 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Dennis A. DeCius 13/
10.65 Amended and Restated Executive Salary Continuation Agreement (*)
dated September 23, 1997 between Pacific Capital Bancorp and
Dale R. Diederick 13/
10.66 Purchase and Assumption dated September 18, 1997 between First
76 National Bank of Central California and Bank of America, NT
& SA
13. Pacific Capital Bancorp 1997 Annual Report to Shareholders ---
(parts not incorporated by reference are furnished for
informational purposes only and are not filed herewith).
21. Subsidiaries of the Company 141
23. Opinion of KPMG Peat Marwick LLP 65
24. Consent of KPMG Peat Marwick LLP 66
27. Financial Data Schedule 142
- -----------
13/ Filed as exhibits to the Company's Quarterly Report on Form 10-Q (File
No. 0-13528) for the period ended September 30, 1997 which are
incorporated by reference.
73
[Soledad]
-------------------------------------
BRANCH PURCHASE AND ASSUMPTION AGREEMENT
dated as of
June 30, 1997
between
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
and
FIRST NATIONAL BANK OF CENTRAL CALIFORNIA
-------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 Definitions .................................................... 1
1.1 Definitions .................................................... 1
ARTICLE 2 Purchase and Sale .............................................. 7
2.1 Purchase and Sale .............................................. 7
2.2 Closing ........................................................ 7
2.3 Transitional Matters ........................................... 11
2.4 Employee Considerations ........................................ 14
ARTICLE 3 Price and Adjustments .......................................... 18
3.1 Price .......................................................... 18
3.2 Adjustments .................................................... 19
ARTICLE 4 Additional Covenants ........................................... 24
4.1 Seller's Covenants ............................................. 24
4.2 Buyer's Covenants .............................................. 27
4.3 Consents ....................................................... 29
4.4 Environmental Matters .......................................... 30
4.5 Valuation of the Assets ........................................ 39
4.6 Clearing Items ................................................. 39
4.7 IRA Deposits and Keogh Accounts ................................ 39
4.8 Interest Reporting and Withholding ............................. 40
4.9 Eminent Domain or Taking ....................................... 40
4.10 Damage or Destruction .......................................... 41
ARTICLE 5 Representations and Warranties ................................. 43
5.1 Seller's Representations and Warranties ........................ 43
5.2 Buyer's Representations and Warranties ......................... 44
ARTICLE 6 Understandings ................................................. 46
6.1 Depositors' Rights ............................................. 46
6.2 Unclaimed Property ............................................. 47
6.3 Head Office Accounts ........................................... 47
6.4 Limitation of Warranties ....................................... 47
ARTICLE 7 Conditions to the Closing ...................................... 48
7.1 Seller's Conditions ............................................ 48
7.2 Buyer's Conditions ............................................. 49
ARTICLE 8 Termination .................................................... 51
8.1 Events of Termination .......................................... 51
8.2 Liability for Termination ...................................... 51
i
<PAGE>
ARTICLE 9 Survival, Indemnification ..................................... 52
9.1 Survival ...................................................... 52
9.2 Seller's Indemnity ............................................ 52
9.3 Buyer's Indemnity ............................................. 53
9.4 Arbitration of Disputes ....................................... 54
9.5 Limit on Indemnities .......................................... 55
ARTICLE 10 Taxes ......................................................... 56
10.1 Obligations of the Buyer and the Seller ....................... 56
10.2 Access to Information ......................................... 56
10.3 Allocation of Consideration ................................... 56
ARTICLE 11 Miscellaneous ................................................. 57
11.1 Public Notice ................................................. 57
11.2 Assignment .................................................... 57
11.3 Notices ....................................................... 57
11.4 Time .......................................................... 59
11.5 Expenses ...................................................... 59
11.6 Communications ................................................ 59
11.7 Entire Agreement .............................................. 59
11.8 Amendment ..................................................... 59
11.9 Governing Law, Severability ................................... 59
11.10 Waiver ........................................................ 59
11.11 Confidentiality ............................................... 60
11.12 Third Party Rights ............................................ 61
11.13 Headings ...................................................... 61
11.14 Counterparts .................................................. 62
SCHEDULES
A List of Branches
1.1(a) Branch Real Estate
1.1(b) Furniture, Fixtures and Equipment
1.1(c) Other Liabilities
2.2(b)(i)(A) Form of Grant Deed
2.2(b)(i)(B) Form of Bill of Sale
2.2(b)(i)(C) Form of Assignment and Assumption
2.2(d) Contracts
2.2(e) Leases
3.1 Leasehold Improvements
4.4(c) Phase I Environmental Site Assessments and
Asbestos Surveys
5.1(e) Litigation
5.2(j) Real Estate Disclosures
6.3 Head Office Accounts
ii
<PAGE>
BRANCH PURCHASE AND ASSUMPTION AGREEMENT
THIS BRANCH PURCHASE AND ASSUMPTION AGREEMENT (Agreement) is made as of June 30,
1997, by and between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a
national banking association established under the laws of the United States
(the "Seller"), and FIRST NATIONAL BANK OF CENTRAL CALIFORNIA, a national
banking association established under the laws of the United States ("the
Buyer")
WHEREAS, the Seller maintains the branch or branches listed on Schedule
A hereto (sometimes referred to herein collectively as the Branches and
individually as a Branch)
WHEREAS, the Buyer wishes to purchase certain of the assets and assume
certain of the liabilities of the Branches and the Seller is willing to sell and
transfer the same upon the terms and subject to the conditions hereinafter set
forth; and
WHEREAS, the Buyer intends that retail and business banking services
will be offered in the geographic areas served by the Branches.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions contained
herein, the Seller and the Buyer hereby agree as follows:
ARTICLE 1
Definitions
1.1 Definitions. For purposes of this Agreement:
"Account" means, as of any date, a deposit liability of the Seller which
(i) is not represented by a certificate of deposit having a fixed maturity and
(ii) is maintained at one of the Branches.
"Accrued Expenses" means the accrued and unpaid expenses appearing as a
liability on the Financial Statements pursuant to Section 3.2(c).
-1-
<PAGE>
"Accrued Interest" on any Deposits at any date means interest which is
accrued on such Deposits to and including such date and not yet posted to such
deposit accounts.
"Affiliate" of a person means any person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person.
"Agreement" means this Branch Purchase and Assumption Agreement,
including all schedules, exhibits and addenda, as modified, amended or extended
from time to time.
"Allocation" shall have the meaning set forth in Section 10.3.
"Assets" means the Branch Real Estate, the Furniture, Fixtures and
Equipment, Improvements, Leasehold Improvements, Cash on Hand, safe deposit
boxes located at the Branches (exclusive of the contents thereof), Prepaid
Expenses, Overdrafts and all books, records, files and documentation relating to
the foregoing.
"Assumed Contracts" shall have the meaning set forth in Section 2.2(d).
"Assumed Deposits" means all Deposits existing on the Closing Date in
one or more of the Branches, together with all Accrued Interest thereon as of
the Closing Date; provided, however, that Assumed Deposits shall not include any
of the following, which shall be retained by Seller: (i) Deposits which secure
loans, (ii) Deposits not assumed pursuant to Sections 3.2(f), 3.2(g), or 6.3,
(iii) Deposits which secure Visa card accounts, and (iv) other Deposits, if any,
which the Buyer has advised the Seller, at least thirty (30) Business Days prior
to the Closing Date, it cannot legally accept.
"Branch Real Estate" means all real property owned by the Seller on
which any of the Branches is located and which is identified in the preliminary
title reports included in Schedule 1.1(a)
"Business Day" means a day on which the Seller is open for business in
California and which is not a Saturday or Sunday.
-2-
<PAGE>
"Cash on Hand" means, as of any date, all petty cash, vault cash, teller
cash, automated teller machine cash and prepaid postage maintained at the
Branches.
"Closing" and "Closing Date" refer to the closing of the sale, purchase,
transfer and assumption provided for herein to be held at the time and date
provided for in Section 2.2(a) hereof.
"Closing Financial Statement" means the estimated balance sheet of the
Branches prepared by the Seller as of the close of business at the Branches on
the Closing Date and on which are recorded as of such date, in accordance with
the Seller's normal practices and procedures, the Assets and the Liabilities
(except that such normal practices and procedures shall be modified as necessary
to implement prorations required by, or other provisions of, this Agreement).
"Continuation Coverage" shall have the meaning set forth in Section
2.4(g).
"Deposits" means, as of any date, all deposit liabilities of the Seller
that are Accounts or certificates of deposit maintained at the Branches,
including, without limitation, Time Deposits, and including all uncollected
items included in depositors' balances, as of such date.
"Direct Deposit Cut-off Date" shall have the meaning set forth in
Section 4.1(g).
"Employee" means any employee employed on the Closing Date at one of the
Branches by Seller or its subsidiaries or Affiliates, including without
limitation, those employees on medical leave, family leave, military leave or
personal leave under Sellers policies.
"Federal Funds Rate" on any day means the per annum rate of interest
(rounded upward to the nearest 1/100 of 1%) which is the weighted average of the
rates on overnight federal funds transactions arranged on such day or, if such
day is not a banking day, the previous banking day, by federal funds brokers
computed and released by the Federal Reserve Bank of New York (or any successor)
in substantially the same manner as such Federal Reserve Bank currently computes
and releases the weighted average it refers to as the Federal Funds Effective
Rate at the date of this Agreement.
-3-
<PAGE>
"Final Financial Statement" means the balance sheet of the Branches
prepared by the Seller as of the close of business at the Branches on the
Closing Date, and delivered by the Seller to the Buyer pursuant to Section
3.2(a) (ii). The Final Financial Statement is to be prepared in accordance with
the Sellers normal practices and procedures (except that such normal practices
and procedures shall be modified as necessary to implement prorations required
by, or other provisions of, this Agreement) and in a manner consistent with the
Closing Financial Statement.
"Financial Statements" shall mean collectively the Closing Financial
Statement, the Pre-Final Financial Statement and the Final Financial Statement.
"Furniture, Fixtures and Equipment" means all furniture, fixtures and
equipment that are listed on Schedule 1.1(b) under the caption Sold to Buyer.
Buyer acknowledges that there shall be excluded from this definition any and all
other items, including those listed on Schedule 1.1(b) under the caption
"Retained by Seller (Items Excluded from Sale)."
"Improvements" means all improvements to the Branch Real Estate
purchased, installed or constructed by or on behalf of, and owned by, the Seller
and used in connection with the operation or maintenance of the Branches,
including, without limitation, buildings, structures, parking facilities and
drive-up teller facilities.
"Individual Retirement Account" or "IRA" means an account created by
trust for the exclusive benefit of an individual or his or her beneficiaries in
accordance with the provisions of Section 408 of the IRC.
"Initial Base Amount" shall have the meaning set forth in Section 3.1.
"IRA Deposits" shall have the meaning set forth in Section 3.2(f).
"IRC" means the Internal Revenue Code of 1986, as amended.
"Keogh Accounts" shall have the meaning set forth in Section 3.2(g).
-4-
<PAGE>
"Lease" means any lease or sublease of a lease by which Seller has
rights to occupy and use Leased Real Estate or Leasehold Improvements or both.
"Leased Real Estate" means all real property on which any of the
Branches is located, which is occupied and used by the Seller pursuant to a
lease.
"Leasehold Improvements" means all improvements on or constituting a
portion of Leased Real Estate, purchased, installed or constructed by or on
behalf of, and owned by, Seller and used in connection with the operation or
maintenance of the Branches, including, without limitation, buildings,
structures, parking facilities and drive-up teller facilities.
"Liabilities" means (i) the Assumed Deposits, (ii) the Assumed
Contracts, if any, (iii) the Sellers obligations to provide services from and
after the Closing Date in connection with the Assets and the Assumed Deposits,
including obligations with respect to safe deposit boxes, (iv) the Leases, if
any, and (v) such other liabilities of the Seller with respect to the operations
of the Branches as may be described on Schedule 1.1(c) (the "Other
Liabilities"); excluding, however, any Leases or Assumed Contracts as to which
any consents required to transfer the same to the Buyer at Closing cannot be
obtained; and no other duty, obligation or liability whatsoever (including,
without limitation, any and all penalties, fines, compensatory or punitive
damages of any kind whatsoever) of the Seller, its Affiliates or any other
person or with respect to the Assets or Liabilities.
"Magnetic Tapes" shall mean the computer data storage tapes (which may
be in reel-to-reel or cartridge form) prepared by Seller which contain the
information to be used for an automated conversion of the Assumed Deposits.
"Market Value" shall mean, with respect to any Branch Real Estate and
any Improvements with respect thereto, the appraised market value thereof on an
"as is" basis, reflecting the highest and best use thereof in the condition
observed by the appraiser upon inspection and as such property physically and
legally exists without hypothetical conditions, assumptions or qualifications.
Market Value is the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
Buyer and the Seller each acting prudently and knowledgeably, and assuming the
price
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is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from the
Seller to the Buyer under conditions whereby: (i) the Buyer and the Seller are
typically motivated; (ii) both parties are well informed or well advised, and
acting in what they consider their own best interests; (iii) a reasonable time
is allowed for exposure in the open market; (iv) payment is made in cash in U.S.
dollars or in terms of financial arrangements comparable thereto; and (v) the
price represents the normal consideration for the property sold, unaffected by
special or creative financing or sales concessions granted by anyone associated
with the sale. The appraisal shall be set forth in a report of appraisal by an
independent appraiser to be selected by the Buyer from a list of no more than
five (5) appraisers to be provided by the Seller. The cost of such appraisal
shall be borne equally by the Buyer and the Seller.
"Overdrafts" means only overdrafts in Transaction Accounts (other than
overdrafts extended pursuant to a formal line of credit or similar arrangement)
maintained at the Branches.
"Pre-Final Financial Statement" means the balance sheet of the Branches
prepared by the Seller as of the close of business at the Branches on the
Closing Date, and delivered by the Seller to the Buyer pursuant to Section
3.2(a)(i). The Pre-Final Financial Statement is to be prepared in accordance
with the Sellers normal practices and procedures (except that such normal
practices and procedures shall be modified as necessary to implement prorations
required by, or other provisions of, this Agreement) and in a manner consistent
with the Closing Financial Statement, and shall, to the extent practicable,
reflect actual Deposits and Cash on Hand as of the Closing Date, and any
third-party invoices (such as from communication vendors) available by the time
the Seller prepares the Pre-Final Financial Statement.
"Prepaid Expenses" means the prepaid expenses appearing as an asset on
the Financial Statements pursuant to Section 3.2(c).
"Purchase Premium" shall mean the amount equal to 7.50% of the average
of Assumed Deposits for the twenty (20) Business Days immediately prior to and
including the Closing Date.
"Returned Items" shall have the meaning set forth in Section 3.2 (h).
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"Seller's Knowledge" or other similar phrases shall mean the actual
knowledge, without having conducted any independent inquiry or investigation, of
the regional manager of the Seller responsible for a Branch (but only as to
information as to such Branch) and Brian A. Dunne, Vice President of the Seller.
"Settlement Date" means the sixtieth (60th) calendar day following the
Closing Date.
"Time Deposit" means a certificate of deposit which is not transferable
or negotiable, and earns interest at a fixed rate for a specific term.
"Transaction Account" means any Account in respect of which deposits
therein are withdrawable in practice upon demand or upon which third party
drafts may be drawn by the depositor, including checking accounts, Alpha
accounts, NOW accounts and money market deposit accounts.
"Validation Run" shall have the meaning set forth in Section 2.2(b)(i)
(F).
ARTICLE 2
Purchase and Sale
2.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, the Seller agrees to sell and transfer and the Buyer agrees to
purchase and assume the Assets and the Liabilities at the Closing as provided in
Section 2.2.
2.2 Closing.
(a) Closing Date and Place. The closing of the transactions provided for
herein will be held at the offices of the Seller, 315 Montgomery Street, Suite
1300, San Francisco, California 94104; provided, that transfer of
the Branch
Real Estate shall be effected through a real estate escrow to be opened with
Chicago Title Company, 388 Market Street, San Francisco, California 94111. The
closing shall be held on a Thursday that is mutually agreeable to the Buyer and
the Seller as soon as practicable following the receipt of all government and
other approvals and consents necessary for the consummation of the transactions
contemplated hereby (including the expiration of any statutory waiting periods)
and the satisfaction (or waiver) of all other conditions to closing
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provided for herein. Notwithstanding the foregoing, the Seller may, for any
proper business reason, adjourn the date and time of the Closing, upon written
notice to the Buyer; provided, however, that the Seller shall use all reasonable
efforts to reschedule the Closing to take place at a time agreeable to the
Buyer, which agreement shall not be unreasonably withheld; provided further,
however, that the parties shall agree in any event upon a date for the Closing
which shall be on or prior to March 31, 1998, or such other date as the Seller
and the Buyer shall agree upon in writing.
(b) Conveyances; Payment.
(i) The following shall be delivered by the parties at the Closing,
subject to Sections 2.2(d), 2.2(e), 3.2(b), 4.3 and the final paragraph of
Section 7.2:
(A) The Seller shall deliver to the Buyer one or more grant deeds
for the Branch Real Estate, if any, in the form attached hereto as
Schedule 2.2(b) (i) (A) and shall cooperate with the Buyer in assisting
the Buyer to obtain (at the Buyer's expense) one or more CLTA policies
of title insurance with respect to the Branch Real Estate (or portions
thereof) if the Buyer determines to obtain such insurance;
(B) The Seller shall deliver to the Buyer one or more bills of sale
in the form attached hereto as Schedule 2.2(b)(i)(B) for the Leasehold
Improvements, if any, and the Furniture, Fixtures and Equipment;
(C) The Seller shall deliver to the Buyer one or more assignments in
the form attached hereto as Schedule 2.2(b)(i)(C) for the Leases, if
any, and the Assumed Contracts, if any;
(D) The Seller shall make the payment to the Buyer required by
Section 3.1 in immediately available funds (such payment to be made no
later than 11:00 a.m. (Pacific Time));
(E) The Seller shall use its reasonable efforts to have available
for pick-up by the
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Buyer by approximately 6:00 a.m. on the morning following the Closing
Date (I) hard copy (printed) lists of Assumed Deposits maintained at
each Branch, which lists shall identify each Assumed Deposit by type of
Account, with appropriate information regarding the depositor and the
terms of the Account and (II) Magnetic Tapes. The Buyer shall have the
responsibility of making and paying for the appropriate courier
arrangements to pick up from the Seller the items referred to in (I) and
(II) above and to deliver the items referred to in (I) to the
appropriate Branches and the items referred to in (II) to the Buyers
system vendor;
(F) The Seller shall prepare, separately for each Branch, a readable
set of the Magnetic Tapes and printed reports referred to in Section
2.2(b)(i)(E) to be used for a validation (practice) run ("Validation
Run") on a mutually agreed-upon date thirty (30) to sixty (60) calendar
days prior to the Closing Date, at no cost to the Buyer, provided that,
depending on the number and locations of the Branches, the parties may
agree to conduct more than one Validation Run. If the Buyer thereafter
requests any additional Magnetic Tapes (whether or not Buyer also
concurrently requests printed reports) for Validation Run purposes, the
Seller will provide the Magnetic Tapes (and printed reports if requested
by Buyer) at a cost to Buyer of $2,000 for each set of Magnetic Tapes
(whether or not accompanied by printed reports);
(G) The Seller shall deliver to the Buyer copies of written consents
to the assignment of any Assumed Contracts or Leases requiring such
consent;
(H) The Buyer shall pay to the Seller the amount of the interest
which would accrue at the Federal Funds Rate in effect on the Closing
Date on the cash payment by the Seller pursuant to Section 2.2(b)(i)
(D); and
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(I) The Seller shall deliver to the Buyer on the Closing Date, or as
soon thereafter as practicable, the records of information concerning
the presence, location and quantity of asbestos-containing material
("ACM") or presumed ACM, if any, in the Branch that, pursuant to 8 CCR
ss. 1529(n) (6) and 5208(j)(2)(B), is to be transferred to successive
owners.
(c) Closing Costs: Proration. The Seller and the Buyer shall each pay
one-half of any documentary, stamp, deed, sales, use or other transfer taxes,
recording fees and escrow fees relating to the sale of the Assets and assumption
of the Liabilities, including but not limited to the assignment of the Leases.
On the Closing Date, (i) all real and personal property taxes and current
installments of special assessments levied or assessed with respect to the
Branch Real Estate, the Improvements, the Leasehold Improvements and the
Furniture, Fixtures and Equipment shall be prorated between the Seller and the
Buyer on a daily basis as of the Closing Date based upon the fiscal year of the
appropriate taxing authority, and (ii) utilities and any other normal
maintenance and operating expenses relating to the Branch Real Estate, the
Leases, the Improvements, the Leasehold Improvements and the Furniture, Fixtures
and Equipment shall be prorated between the Seller and the Buyer as of the
Closing Date on a daily basis.
(d) Contracts. At the Closing, the Seller shall assign to the Buyer all
of the Seller's right, title and interest in those equipment leases and service
and maintenance contracts, if any, relating to the operations of one or more of
the Branches which are set forth in Schedule 2.2(d) and which the Buyer
indicates in writing to the Seller not later than thirty (30) Business Days
prior to Closing the Buyer wishes to assume (collectively, the "Assumed
Contracts"). The Seller shall not be required to provide Buyer with any
information regarding, or to set forth in Schedule 2.2(d), equipment leases or
service and maintenance contracts which it believes are not legally assignable
and the Seller shall have no liability to the Buyer as the result of its
inability to accomplish assignments thereof. After the date of this Agreement,
the Seller shall not enter into, except with the prior written consent of the
Buyer, any service, maintenance or other contracts, or any equipment lease,
relating to the operations of the Branches for which the Buyer shall have any
responsibility after the Closing.
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(e) Leases. At the Closing, the Seller shall assign to the Buyer all of
the Seller's right, title and interest in the Leases, if any, set forth in
Schedule 2.2(e); provided, however, that if the Seller notifies the Buyer not
later than thirty (30) Business Days prior to the Closing Date that one or more
such Leases are legally nonassignable without the consent of one or more third
parties, and that such consents have not been obtained, then (i) the Seller
shall not be required to assign such Lease or Leases at Closing, (ii) Seller
shall have no liability to the Buyer as the result of its inability to
accomplish such assignment and (iii) either (A) the Seller at its sole
discretion may elect to exercise its right under the final paragraph of Section
7.2 to exclude the affected Branch from the Closing, and the parties shall
continue to be obligated to carry out the provisions of this Agreement as to the
remaining Branch or Branches or (B) if the Lease permits the Seller to sublease
the premises and the related Leasehold Improvements to the Buyer, the Seller in
its sole discretion may elect to sublease such premises and Leasehold
Improvements to Buyer for the maximum term permitted under the Lease, on
substantially the same terms and conditions as the terms and conditions of the
Lease, in which case the consideration payable under Article 3 shall be adjusted
to reflect the Leasehold Improvements which will not be transferred to the Buyer
and the parties shall continue to be obligated to carry out the provisions of
this Agreement as to the remaining Branch or Branches.
2.3 Transitional Matters.
(a) Conduct of Business Prior to the Closing. From the date hereof until
the Closing, except as expressly permitted by this Agreement or otherwise
consented to or approved by the Buyer in writing (such consent or approval not
to be unreasonably withheld):
(i) The Seller shall not permit the Branches to incur any material
liabilities or material obligations (whether directly or by way of
guaranty, endorsement, surety contract or otherwise) including without
limitation any obligation for borrowed money or evidenced by any note,
bond, debenture or similar instrument, except for deposit liabilities
incurred in the ordinary course of business pursuant to the Sellers
customary rate schedules, and except for other
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liabilities and obligations incurred in the ordinary course of business;
(ii) The Seller shall not sell, transfer, mortgage, encumber or
otherwise dispose of any of the Assets except for the disposition of
Assets (other than the Branch Real Estate, Improvements or Leasehold
Improvements) in the ordinary course of business;
(iii) Except as provided in Article 6, the Seller will not cause the
transfer from one or more of the Branches to the Seller's other
operations (except to another Branch) of any deposits of the type
included in the Liabilities; provided, however, that the Seller may
transfer deposits to the Sellers other branches or offices upon request
of the depositors and may transfer to its other branches or offices
other deposits which are not to be transferred to Buyer pursuant to this
Agreement;
(iv) The Seller shall not make any capital commitments with respect
to the Branch Real Estate, the Improvements and the Leasehold
Improvements except aggregate capital commitments made in the ordinary
course of business not exceeding $25,000 for each Branch;
(v) The Seller shall not grant any increase in the rate of
compensation or in the benefits payable or to become payable to any
current officer or employee of the Branches, or to any current agent or
consultant thereof, over the levels in effect as of the date hereof,
other than any regularly scheduled increases, including bonuses,
contemplated under contracts, policies or programs existing on the date
hereof or under any benefit program generally applicable to the Seller's
employees; provided that the Seller shall retain the right to hire
additional branch employees at comparable rates of compensation as
necessary for the operation of the Branches;
(vi) The Seller will maintain the Branch Real Estate, Improvements,
Leasehold Improvements and Furniture, Fixtures and Equipment
substantially in accordance with its normal practices, and keep such
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property in its present condition, ordinary wear and tear excepted;
(vii) The Seller shall operate the Branches and the businesses
thereof in accordance with its normal practices and will use reasonable
efforts to preserve for the benefit of the Buyer after the Closing its
business, goodwill and relationships with customers and suppliers; and
(viii) The Seller shall provide the Buyer reasonable access during
normal business hours to and the opportunity to review and inspect the
Branch Real Estate, Improvements, Leased Real Estate, Leasehold
Improvements, Furniture, Fixtures and Equipment of the Branches, and the
books, records, files, documentation and accounts of the Branches; shall
furnish to the Buyer such reports and compilations pertaining thereto as
the Buyer shall reasonably request from time to time; and shall furnish
to the Buyer all such other information pertaining to the Assets and the
Liabilities and the business of the Branches as the Buyer may reasonably
request. In addition, the Seller shall provide the Buyer reasonable
access to the Branches during the thirty (30) calendar day period
immediately preceding the Closing Date for the purpose of installing
teller terminals and other equipment, provided that (A) Seller shall not
be required to provide such access to any Branch until after all
consents, approvals and authorizations referred to in Sections 7.1(c)
and 7.2(c) hereof have been obtained with respect to all Branches and
(B) Buyer shall give Seller at least twenty-four (24) hours advance
notice that it wishes to have such access. The Buyer agrees to cause the
installation of such teller terminals and other equipment to be effected
in a manner intended to minimize disruption to the operations of the
Branches.
(b) Buyers Access to Branch Premises. The Buyer will indemnify, defend,
and hold Seller harmless for, from and against any and all claims, damages,
costs, liabilities and losses (including mechanic's liens) arising out of any
entry by Buyer or its agents, designees or representatives on the Branch Real
Estate or Leased Real Estate for purposes of the review, inspection and
installation provided for in Section 2.3(a)(viii) or for any other purpose
(other than for the purposes set forth
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in Section 4.4(d), which shall be governed by the provisions of that Section).
Without limiting the scope of the foregoing, Buyer also will restore the Branch
Real Estate, Improvements, Leased Real Estate, Leasehold Improvements,
Furniture, Fixtures and Equipment, books, records, files, and documentation of
the Branches at its sole cost and expense if one or more of the transactions
contemplated by this Agreement do not close. Until restoration is complete,
Buyer will take all steps necessary to ensure that any conditions at the
Branches created by any testing, review, inspection, installation or other
actions performed by or for Buyer will not interfere with the normal operation
of the Branches or create any dangerous, unhealthy, unsightly or noisy
conditions at the Branches. Buyer shall comply with any requirements or
restrictions contained in the Leases regarding any actions it takes at the
Leased Real Estate, including, without limitation, any requirements of notice to
the landlord. The provisions of this Section 2.3(b) shall survive the Closing or
any earlier termination of this Agreement.
(c) Data Processing Conversion. The conversion of the data processing
with respect to the Branches and the Assets and the Liabilities to be
transferred hereunder will commence on the Closing Date and continue during the
night on the Closing Date and the following morning. The Seller shall use its
reasonable efforts to make available the required hard copy (printed) reports
(and Magnetic Tapes, if applicable) in connection therewith for pick up from the
Seller by 6:00 a.m. on such morning, subject to any production problems that are
beyond the Sellers reasonable control. The arrangements for pickup, delivery and
payment for courier services shall be as provided in Section 2.2(b)(i)(E). In
connection with the conversion of the data processing, the Seller and the Buyer
shall each cooperate with the other and shall each pay their own costs and
expenses associated with the conversion of the data processing and shall bear
equally the duties and responsibilities relating to the conversion. Seller will
not migrate (transfer) existing PINs used for ATM cards to the Buyer.
2.4 Employee Considerations.
(a) Buyer shall offer employment as of the Closing Date to all
Employees. All Employees shall be offered employment at base wages and salaries
no less favorable than the wages and salaries currently being paid by Seller to
such Employees. To
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the extent consistent with Buyers existing structure for comparable positions
and comparable officer titles and its current policies regarding officer titles,
Employees shall be offered positions with responsibilities and officer titles
comparable to those they currently have with Seller and, unless agreed upon by
any such Employee, within a reasonable geographic proximity to such Employees
work location before the Closing Date.
(b) All Employees who accept employment with Buyer as of the Closing
Date shall be eligible to participate in the employee benefit plans and other
fringe benefits of Buyer on the same basis as such plans and benefits are
offered to employees of Buyer with comparable positions with Buyer, except as
provided in the penultimate sentence of Section 2.4(e). Buyer shall credit such
Employees for their length of service with Seller or its Affiliates for all
purposes under each employee benefit plan and fringe benefit to be provided by
Buyer to such Employees, to the same extent such service was recognized under a
similar plan of Seller, based on information provided by Seller. However, such
service need not be counted for purposes of calculating accrued benefits under a
pension benefit plan, except that in determining the rate of prospective benefit
accrual, service shall be counted where such rate increases with service. For
purposes of this Section 2.4, "employee benefit plans and other fringe benefits"
includes, without limitation, pension and profit sharing plans, retirement and
post retirement welfare benefits, health insurance benefits (medical, dental and
vision), disability, life and accident insurance, sickness benefits, vacation,
employee loans and banking privileges.
(c) If Buyer offers a salary continuation or similar program for
employees unable to work for medical reasons, the Employees who accept
employment with Buyer shall be credited under any program of Buyer with at least
the number of sickness benefit days accrued under Seller's program at the
Closing Date.
(d) Seller agrees to remain responsible for the payment of all benefits
accrued during the period of employment by the Seller under the terms of the
Seller's retirement plans with respect to any Employee. Buyer shall not at any
time assume any liability for the benefits of any active or any terminated,
vested or retired participants in the Sellers retirement plans.
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(e) Seller shall be responsible for payments for accrued vacation not
taken by an Employee prior to the Closing Date and for timely payment as
required by law of all wages, salaries, bonuses, if any, and other compensation
with respect to service completed on or prior to the Closing Date. Seller shall
offer Employees who accept employment with Buyer the option to receive cash or
to transfer to Buyer their accrued vacation days or fractions thereof earned but
unused while employed by Seller. In the event any Employee elects to receive
cash upon employment by Buyer, Seller shall make a cash payment to such Employee
in accordance with applicable law. In the event any such Employee elects to have
his or her accrued vacation transferred upon employment by Buyer, Buyer shall
give such Employee credit after the Closing Date for the same number of vacation
days or fractions thereof he or she has accrued with Seller as of the Closing
Date. For purposes of this Section, personal choice days or fractions thereof
will be treated as vacation days. In the event Employees elect to have their
accrued vacation carried over to Buyer, Seller shall pay to Buyer, not later
than the date of the Final Financial Statement, an amount equal to the net cash
value of each such Employee's accrued vacation before payroll deductions. In the
calendar year in which the Closing Date occurs, Employees shall be eligible to
earn at least the prorated annual vacation amount Employees were eligible to
earn under Seller's vacation policy. In subsequent calendar years, Employees
will be eligible to earn vacation according to the schedule specified in Buyer's
policy.
(f) Seller shall retain the responsibility for payment of all medical,
dental, vision, health and disability claims incurred by any Employee prior to
the Closing Date, and Buyer shall not assume any liability with respect to such
claims. On or after the Closing Date, all medical, dental, vision, health and
disability claims incurred by Employees in Buyer's employ shall be determined
under Buyer's benefit plans. Buyer agrees that Employees and their eligible
dependents will receive credit for their periods of coverage under Seller's
health or disability plans towards satisfying any preexisting condition clause
in any of Buyers health or disability plans, provided such Employee or eligible
dependent is enrolled in Seller's plans on the Closing Date. Buyer also agrees
that Employees and their eligible dependents shall receive credit under Buyer's
health care plans for any deductibles paid by such Employee and enrolled
dependents for the current plan year under a health care plan maintained by
Seller.
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(g) Seller shall be responsible for providing any Employee whose
"qualifying event", within the meaning of Section 4980B(f) of the IRC, occurs on
or prior to the Closing Date (and such Employees "qualified beneficiaries"
within the meaning of Section 4980B(f) of the IRC) with the continuation of
group health coverage required by Section 4980B(f) of the IRC (Continuation
Coverage) under the terms of the health plan maintained by Seller. Buyer shall
be responsible for Continuation Coverage to any Employee in Buyer's employ (and
each Employee's qualified beneficiaries) whose qualifying event occurs after the
Closing Date to the extent required by law.
(h) Seller agrees that it shall retain, consistent with its normal
employment practices, all liability and obligation, if any (including, without
limitation, the liability and obligation for all wages, salary, vacation pay and
unemployment, medical, dental, vision, health and disability benefits) for those
former employees of the Branches who retired or terminated employment prior to
the Closing Date or who otherwise do not become employees of Buyer.
(i) Effective as of the Closing Date, Buyer shall assume liability for
severance pay and similar obligations payable to any Employee who accepts
employment with Buyer and who is terminated by Buyer on or after the Closing
Date. Such payment shall be made pursuant to Buyer's normal severance policy and
Buyer shall compute severance pay by giving Employees full credit for all years
of service that would have been recognized under Seller's severance policy. In
addition, for an Employee whose job with Buyer is eliminated within twelve (12)
months of the Closing Date, Buyer agrees to pay to such Employee the difference,
if any, between the amount of severance pay received by the Employee under
Buyer's severance policy and the amount such Employee would have received upon
his or her separation from the Seller under Seller's severance policy in effect
on the Closing Date.
(j) For Employees who accept employment with Buyer and who as of the
Closing Date are absent from work due to sickness or short-term disability,
Seller shall have no further liability or obligation for short-term disability
benefits, sick pay or salary continuation to the extent attributable to periods
after the Closing Date (or any medical, dental, vision and health claims
incurred after the Closing Date). Such Employees shall be eligible for such
benefits as are provided by Buyer under its policies and this Agreement.
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(k) The Buyer shall make the offers of employment as soon as possible
after all the consents, approvals and authorizations referred to in Sections
7.1(c) and 7.2(c) hereof have been obtained (and in no event more than ten (10)
Business Days after the last of such consents, approvals and authorizations has
been obtained). Such offers shall be made in person to each Employee at a
meeting at which representatives of Buyer and Seller are present. The
information provided to each Employee at such meeting shall include a discussion
of Buyer's employee benefit plans and policies, together with a written summary
thereof. Buyer shall be responsible for advising Employees of the details of any
offers and terms of employment, and answering any questions relating thereto,
but Seller shall be allowed to review and approve, prior to its distribution,
(i) any communication with Employees prior to the Closing Date, and (ii) any
communication with such Employees after the Closing Date which describes or
refers to Seller's employee benefit plans and policies. Buyer shall not at any
time have access to Employee personnel files of Seller.
(1) Prior to the Closing Date, the Buyer may train the Seller's
Employees who have accepted Buyer's offers of employment, at a time mutually
agreed upon by Buyer and Seller, and the Buyer will reimburse the Seller for
such Employees' salaries for the time they are engaged in such training and for
all of their expenses incurred in connection with such training for which they
are reimbursed by Seller.
ARTICLE 3
Price and Adjustments
3.1 Price. The Seller agrees that in the event the Initial Base Amount
(as hereinafter defined) is less than the sum of (i) the amount of the Assumed
Deposits and (ii) the amount of the Accrued Expenses, the Seller shall transfer
to the Buyer cash in the amount equal to the deficit. The Buyer agrees that in
the event the Initial Base Amount is greater than the sum of (i) the amount of
the Assumed Deposits and (ii) the amount of the Accrued Expenses, the Buyer
shall transfer to the Seller cash in an amount equal to such excess.
Calculations and payments pursuant to this Section 3.1 shall be as of the date
and time of the Closing Financial Statement. The "Initial Base Amount" shall be
equal to the sum of (i) the
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amount of Cash on Hand, (ii) the Market Value of the Branch Real Estate and the
Improvements, (iii) the amount of $0 for Leasehold Improvements, (iv) the amount
of $46,046.61 for the Furniture, Fixtures and Equipment (which amount is
allocated as listed on Schedule 1.1(b)), (v) the amount of Prepaid Expenses at
the Branches, (vi) the amount of the Overdrafts, (vii) the amount of any fees,
charges or accrued interest receivable on such Overdrafts, (viii) the amount of
the Purchase Premium, and (ix) the Seller's pro rata portion of IRA Deposit and
Keogh Account trustee fees accrued on such accounts held in the Branches through
the Closing Date, less the amount of the safe deposit key deposits referred to
in Section 3.2(e).
3.2 Adjustments. Subject to the provisions of Section 4.4 and Article 9,
the assignments, transfers, acceptances and assumptions of the Assets and the
Liabilities and the payment of the amounts due in respect thereof in accordance
with Sections 2.2 and 3.1 shall be final and without recourse and not subject to
any claim for reimbursement, repayment, rescission or avoidance; provided,
however, that:
(a) The following adjustments shall be made:
(i) As soon as practicable after the Closing Date, but in no event
later than ten (10) calendar days thereafter, the Seller shall deliver
the Pre-Final Financial Statement to the Buyer. After delivery of the
Pre-Final Financial Statement, the Seller shall pay the Buyer or the
Buyer shall pay the Seller, as appropriate, by wire transfer no later
than the next Business Day after delivery of the Pre-Final Financial
Statement, the difference between the amount paid at the Closing and the
amount calculated on the Pre-Final Financial Statement, plus interest
accrued from the Closing Date at the Federal Funds Rate in effect on the
Closing Date.
(ii) As soon as practicable after the Closing Date, but in no event
later than sixty (60) calendar days thereafter, the Seller shall deliver
the Final Financial Statement to the Buyer. Subject to the Seller's and
Buyer's rights of indemnification pursuant to Section 4.4 and Article 9,
the Final Financial Statement shall become final and binding on the
Buyer and the Seller ten (10) calendar days after its delivery to the
Buyer, unless the Buyer gives written notice to the Seller of its
disagreement with respect to any item included in such
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Final Financial Statement. The Seller and the Buyer shall use their
respective reasonable efforts to resolve the disagreement during the ten
(10) calendar day period following receipt by the Seller of the notice.
If the disagreement is not resolved during such ten (10) calendar day
period, the parties shall follow the procedures set forth in Section 9.4
to resolve such dispute and such Final Financial Statement shall be
modified by any such resolution, whereupon the Final Financial Statement
shall become final and binding. When the Final Financial Statement
becomes final and binding, and after giving effect to any payment made
based on the Pre-Final Financial Statement, the Seller shall pay the
Buyer or the Buyer shall pay the Seller, as appropriate, the difference
between the amount paid at the Closing and the amount calculated on the
Final Financial Statement, plus interest accrued from the Closing Date
at the Federal Funds Rate in effect on the Closing Date.
(b) If any non-material Asset (materiality to be determined by Seller in
good faith) shall not have been assigned to the Buyer at the Closing, then the
Seller shall use its reasonable efforts to assign such Asset to the Buyer as
soon as possible after the Closing Date but in any event no later than on the
Settlement Date. In the event the Seller for any reason is unable to assign any
such Asset to the Buyer prior to or on the Settlement Date, then the Seller
shall no longer have any obligation to assign such Asset to the Buyer and the
Seller shall refund to the Buyer the value of such Asset as reflected on the
Closing Financial Statement together with interest from the Closing Date through
the date of such refund at a rate equal to the Federal Funds Rate in effect on
the Closing Date;
(c) All operating expenses and fees accrued or prepaid prior to the
Closing Date, including, without limitation, wages, salaries, rents, Bank
Insurance Fund ("BIF") premiums, utility payments, personal property taxes,
non-delinquent real property taxes and assessments relating to the Assets and
the Liabilities transferred at the Closing, but excluding fees for use of safe
deposit boxes, shall be prorated between the parties. With respect to the BIF
premiums, the proration shall be on the basis of the amount of the Assumed
Deposits. To the extent that the Seller has paid expenses that are expenses
allocable to the Buyer pursuant to this Section 3.2(c), such expenses shall
appear as an asset on the Financial Statements.
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To the extent that expenses have been accrued and not paid by the Seller prior
to the Closing Date, they shall appear as a liability on the Financial
Statements;
(d) As soon as practicable after the Closing Date, the Seller will
provide to the Buyer a report of customer data for the Branches showing the
names, addresses, tax identification numbers (where available from the Seller's
records) and deposit balances of each and all of the customers of the Branches
as of such date; the customer data shall include the signature cards for all
Assumed Deposits and a list of Accounts and certificates of deposit subject as
of the Closing Date to annual Taxpayer Identification Number solicitation by
Seller in the normal course of its business;
(e) At the Closing Date, the Seller shall pay to the Buyer the amount of
cash deposits held by the Seller at the Closing Date received for keys issued in
connection with safe deposit box rentals at the Branches that are transferred to
the Buyer hereunder;
(f) With respect to Deposits which are Individual Retirement Accounts
("IRA Deposits") created by a trust for the exclusive benefit of an individual
or his or her beneficiaries in accordance with the provisions of Section 408 of
the IRC, the Seller will use reasonable efforts and will cooperate with the
Buyer, both before and after the Closing, in taking whatever actions are
reasonably necessary to accomplish either the appointment of the Buyer as
successor custodian or the delegation to the Buyer (or an affiliate of the
Buyer) of the Seller's authority and responsibility as custodian of all such IRA
Deposits except self-directed IRA Deposits (and, for those customers with
self-directed IRA Deposits, any other IRA Deposits), including but not limited
to, sending to the depositors thereof appropriate notices, cooperating with the
Buyer (or such affiliate) in soliciting consents from such depositors, and
filing any appropriate applications with applicable regulatory authorities. If
any such delegation is made to the Buyer (or such affiliate), the Buyer (or such
affiliate) will perform all of the duties so delegated and comply with the terms
of the Seller's agreement with the depositor of the IRA Deposits affected
thereby;
(g) With respect to Deposits which are BankAmerica Basic Retirement Plan
Accounts ("Keogh Accounts") created by a trust for the benefit of employees
(some or all of whom are
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owner-employees) and that comply with the provisions of Section 401 of the IRC,
the Seller will use reasonable efforts and cooperate with the Buyer to invite
depositors thereof to direct a transfer of each such depositor's Keogh Account
and the related Deposit to the Buyer (or an affiliate of the Buyer), as trustee
thereof, and to adopt the Buyer's (or such affiliate's) form of Keogh Master
Plan as a successor to that of the Seller. The Buyer (or such affiliate) will
assume no Deposits which are Keogh Accounts unless the Buyer (or such affiliate)
has received the documents necessary for such assumption or transfer at or
before the Closing. With respect to any depositors who do not transfer such
accounts to the Buyer's (or such affiliate's) form of Keogh Master Plan, the
Seller will use reasonable efforts in order to enable the Buyer (or such
affiliate) to retain such Keogh Accounts at the Branches at which such accounts
were maintained;
(h) Any items that were credited for deposit to or cashed against an
Assumed Deposit prior to the Closing and are returned unpaid on or within sixty
(60) calendar days after the Closing Date ("Returned Items") will be handled as
set forth herein. If the Seller's bank account is charged for the Returned Item,
the Seller shall forward such Returned Item to the Buyer. If upon the Buyer's
receipt of such Returned Item there are sufficient funds in the Assumed Deposit
to which such Returned Item was credited or any other Assumed Deposit
transferred at the Closing standing in the name of the party liable for such
Returned Item, the Buyer will debit any or all of such Assumed Deposits an
amount equal in the aggregate to the Returned Item, and shall repay that amount
to the Seller. If there are not sufficient funds in the Assumed Deposit because
of the Buyer's failure to honor holds placed on such Assumed Deposit, the Buyer
shall repay the amount of the Returned Item to the Seller. If there are not
sufficient funds in the Assumed Deposit for any other reason, the Buyer shall
repay the balance of the Assumed Deposit to the Seller and create an overdraft
for the unrecovered portion of the Returned Item. Any items that were credited
for deposit to or cashed against an Assumed Deposit at a Branch prior to the
Closing Date and are returned unpaid more than sixty (60) calendar days after
the Closing Date will be the responsibility of the Buyer, except that for a
period of eighteen (18) months after the Closing Date checks drawn on the United
States Treasury, checks issued by state governments and municipalities and
checks returned for endorsement irregularities will be the responsibility of the
Seller; and
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(i) As soon as practicable, but in any event no later than fifteen (15)
calendar days after the Closing Date, the Buyer shall mail to each depositor in
respect of a Transaction Account (included in the Assumed Deposits) a letter
approved in writing by the Seller requesting that such depositor promptly cease
writing the Sellers drafts against such Transaction Account. At such time as the
Buyer mails each such notice to each depositor, the Buyer shall also forward to
each such depositor new drafts which such depositor may draw upon the Buyer for
the purpose of effecting transactions with respect to such Transaction Accounts.
The parties hereto shall use reasonable efforts to develop procedures
which cause the Seller's form of drafts against Transaction Accounts which are
received after the Closing Date to be cleared through the Buyer's then current
clearing procedures.
During the one hundred eighty (180) calendar day period from the Closing
Date, if it is not possible to clear Transaction Account drafts through the
Buyer's then current clearing procedures after the Closing Date, the Seller
shall forward to the Buyer no later than the next Business Day after receipt
thereof all such Transaction Account drafts drawn against Transaction Accounts
domiciled at one of the Branches and transferred on the Closing Date. The Seller
shall have no obligation to pay such Transaction Account drafts. Upon the
expiration of such one hundred eighty (180) calendar day period, the Seller
shall cease forwarding drafts against Transaction Accounts transferred on the
Closing Date and shall instead return them to the originators marked "Account
Closed" The Buyer will compensate the Seller for processing of drafts as
described in this Section according to the compensation arrangement set forth in
Section 4.6.
(j) The Seller will pay the Buyer for such portion of any overdraft on
an Assumed Deposit (including interest at the Federal Funds Rate in effect on
the Closing Date) created by Returned Items received by the Seller and passed on
to the Buyer during the sixty (60) calendar days that follow the Closing Date,
which is not recovered by the Buyer within sixty (60) calendar days after the
Closing Date.
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ARTICLE 4
Additional Covenants
4.1 Seller's Covenants. The Seller (and, to the extent specifically
indicated below, the Buyer) agrees:
(a) To use reasonable efforts to sign and deliver to the Buyer such
additional agreements and other documents, and to do such other acts and things,
as may be required to complete the transactions contemplated by this Agreement;
(b) To reasonably cooperate with the Buyer in obtaining all governmental
and regulatory consents, approvals, licenses, waivers and the like required to
be fulfilled or obtained for the completion of the transactions contemplated by
this Agreement;
(c) To deliver to the Buyer those books, records, accounts and other
documents relating solely to the Assets and the Liabilities as soon as
practicable after the Closing and to store the other books, records and accounts
of the Branches relating to the Seller's former operation of the Branches for
the applicable period required by law;
(d) Until Closing or the earlier termination of this Agreement, to cause
the business of the Branches to be conducted in accordance with Section 2.3
above;
(e) To remove all signage from the Branches at the expense of the Seller
on or before the Closing Date, it being understood that the Buyer shall be
responsible for installation of its signage at its expense;
(f) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches, and no
later than thirty (30) calendar days prior to the Closing Date (unless earlier
required by law, regulation or regulatory policy), each of the Seller and the
Buyer shall provide, or join in providing where appropriate, all notices,
separately as to each Branch, to holders of Deposits and other persons that the
Seller or the Buyer, as the case may be, is required to give by any regulatory
authority having jurisdiction or under applicable law or the terms of any other
agreement between the Seller and any customer in connection with the
transactions contemplated
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hereby. A party proposing to send or publish any notice or communication
pursuant to any provision of this Section 4.1(f) or Section 4.2(f) shall furnish
to the other party a copy of the proposed form of such notice or communication
as soon as practicable in advance of the proposed date of the first mailing,
posting, or other dissemination thereof to customers, and shall not unreasonably
refuse to amend such notice to incorporate any changes that the other such party
proposes as necessary to comply with applicable statutes, rules, regulations or
requirements of any regulatory authority having jurisdiction. All costs and
expenses of any notice or communication sent or published by the Buyer or the
Seller shall be the responsibility of the party sending such notice or
communication. All out-of-pocket costs and expenses of any joint notice or
communication which Buyer or Seller pays to a third-party vendor shall be shared
equally by the Seller and the Buyer. Each party shall bear the costs and
expenses of its own employees or agents engaged in any joint notice or
communication;
(g) The Seller will use reasonable efforts to transfer to the Buyer on
the Closing Date all of those automated clearing house and fed wire direct
deposit arrangements which are tied by agreement or other standing arrangement
to Assumed Deposits. For a period of one hundred eighty (180) calendar days
after the Closing Date, in the case of automated clearing house direct deposits
to Assumed Deposits, and thirty (30) calendar days after the Closing Date, in
the case of fed wire direct deposits to Assumed Deposits (each, a "Direct
Deposit Cut-off Date"), the Seller will, no later than the next Business Day
following the date of receipt thereof, remit and transfer to the Buyer all
direct deposits intended for Accounts which are Assumed Deposits. After the
applicable Direct Deposit Cut-off Date, the Seller may discontinue accepting and
forwarding automated clearing house and fed wire entries and funds and return
such direct deposits to the originators. The Seller shall not be liable for any
account overdrafts that may thereby be created or for any other matter. The
Buyer and the Seller shall agree on a reasonable period of time prior to the
Closing during which the Seller will no longer be obligated to accept new direct
deposit arrangements. At the time of each Direct Deposit Cut-off Date, the Buyer
will provide automated clearing house originators with account numbers and
conversion tapes relating to Assumed Deposits; and
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(h) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches (except for
statutory waiting periods), and after the notice provided in Section 4.1(f)
above, the Buyer will send appropriate notice, separately as to each Branch, to
all holders of Deposits which are to be assumed by the Buyer at the Closing the
terms of which provide for direct debit of such accounts by third parties,
instructing such customers concerning transfer of customer direct debit
authorizations from the Seller to the Buyer. The Seller shall cooperate in
soliciting the transfer of such authorizations. Such notice shall be in a form
agreed to by the parties. For a period of one hundred eighty (180) calendar days
following the Closing Date, the Seller will, on the Business Day following the
date of receipt thereof, forward to the Buyer all direct debits on Accounts
which are Assumed Deposits transferred on the Closing Date and will give the
Buyer a daily accounting of such debits to its clearing account. Thereafter, the
Seller may discontinue forwarding such entries and return them to the
originators. The Buyer and the Seller shall agree on a reasonable period of time
prior to the Closing during which the Seller will no longer be obligated to
accept new direct debit arrangements. At the time of the Closing Date, the Buyer
will provide automated clearing house originators of such direct debits with
account numbers and conversion tapes.
(i) In addition to the requirements and procedures set forth in Sections
4.1 (g) and 4.1 (h), the Buyer shall, commencing on the first Business Day
following the Closing Date, deliver to the originators of the direct deposits of
Assumed Deposits and the originators of direct debits of Assumed Deposits
specified in such sections, notices of change instructing such originators to
change the routing transit number for such deposits and debits from the Seller's
routing transit number to the Buyer's routing transit number.
(j) The Seller agrees that for a period of twelve (12) months following
the Closing Date, it will not establish a "Full-Service Branch" (as defined in
the immediately following sentence) within ten (10) miles of a Branch which is
included in the Closing (the "Protected Area"). "Full-Service Branch" shall mean
a branch which includes tellers and which transacts all business related to
deposits and loans. Seller shall not be deemed to have established a
Full-Service Branch for purposes of this Section 4.1(j) solely because Seller or
any successor in interest does one or more of the following: (i) it
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exercises any rights or performs any obligations it has or may have to establish
banking facilities pursuant to any existing or future agreements with a third
party or parties for the installation, location and operation of banking
facilities in or in connection with retail stores or supermarkets owned or
operated, or both, by such third party or parties, (ii) it acquires one or more
banking facilities within the Protected Area as a result of a merger,
consolidation, purchase or sale of all or substantially all of the assets of a
party, or other reorganization to which Seller or BankAmerica Corporation
("Parent") is a party, (iii) it maintains one or more ATM facilities or conducts
courier operations within the Protected Area, (iv) it takes any action to
satisfy any obligations or commitments Seller or Parent may have arising out of
the approval by the Federal Reserve Board of the merger of Security Pacific
Corporation ("Security Pacific") into Parent on April 22, 1992, including
without limitation any commitment to maintain or enhance all existing levels of
services provided at the time of the merger by Seller or Security Pacific
branches in all service areas (for example, where branches are sold, service
levels will be maintained through placing branches in grocery stores, mobile
vans, increasing access to automated teller machines and increasing multilingual
services), or (v) it continues to maintain within the Protected Area after the
Closing Date one or more branches which it maintained therein on the Closing
Date.
(k) For a period of twelve (12) months following the Closing Date (or
such shorter period as Employees may continue to be employed by the Buyer
following the Closing Date), neither the Seller nor any Affiliate shall solicit
the employment (including the solicitation of any transfer of employment) of any
Employees; provided, however, that nothing herein shall prevent the Seller or
its Affiliates from advertising generally any employment opportunities, or from
hiring any Employees who seek employment without inducement from the Seller.
4.2 Buyer's Covenants. The Buyer agrees:
(a) To use reasonable efforts to sign and deliver to the Seller such
additional agreements and other documents, and to do such other acts and things,
as may be required to complete the transactions contemplated by this Agreement;
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(b) To use its best efforts to fulfill all governmental, regulatory and
other requirements (including, without limitation, obtaining the approval of all
California and federal bank or other financial institution regulatory agencies
and any other governmental entity having jurisdiction over the Buyer's
acquisition of the Branches or the Buyer) required to be fulfilled by the Buyer
for the completion of the transactions contemplated by this Agreement, and to
take the initial drafting responsibility therefor. The Seller shall have the
right to review and comment upon all applications to, and filings with,
governmental and regulatory agencies and entities made for the above purpose,
prior to their filing; provided that, the Seller shall have no responsibility
for any such application or filing. Without limiting the generality of the
foregoing, Buyer agrees to file all required regulatory applications within
thirty (30) calendar days after the date of this Agreement;
(c) To pay, honor, discharge and perform all liabilities and obligations
in respect of the Assets and the Liabilities and any other liabilities of the
Branches arising, accruing or subsisting after the Closing which the Buyer is
obligated to assume pursuant to this Agreement, subject to applicable
indemnification rights of the Buyer;
(d) Not to use, keep or claim any registered or unregistered trademark,
service mark or other identification commonly associated with the Seller, or any
sign, display or similar material of the Seller or any banking or other forms,
stationery, passbooks, checks, traveler's checks, cashier's checks, manager's
checks or similar banking material of the Seller or bearing the Seller's name or
other similar marks or identification (except to the extent necessary to conduct
business operations, and then only if the Seller's name, marks or identification
are obliterated from such material, and such material is clearly identified as
that of the Buyer), or any proprietary material of the Seller including, without
limitation, operating manuals, training manuals and public relations,
explanatory or advertising materials; and
(e) As of the Closing Date, to become the "holder", as that term is
defined in the California Unclaimed Property Law (Code of Civil ss. Procedure
1500, et seq.), of all Assumed Deposits and safe deposit boxes which the Buyer
assumes under this Agreement. The Buyer will be responsible for the escheat of
any property for which it becomes the holder and which
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becomes abandoned during the calendar year in which the Closing occurs.
(f) As soon as practicable after the receipt of all regulatory approvals
required by Sections 7.1(c) and 7.2(c) with respect to all Branches, and no
later than thirty (30) calendar days prior to the Closing Date (unless earlier
required by law, regulation or regulatory policy), the Buyer shall, subject to
Section 11.1 hereof, (i) send a notice to all holders of safe deposit boxes at
each Branch and (ii) notify the holders of Deposits to be transferred on the
Closing Date that, subject to Closing, the Buyer will be assuming liability for
such Deposits, and following or concurrently with such notices the Buyer may
communicate with and deliver information, brochures, bulletins and other
communications to holders of Deposits and safe deposit boxes concerning the
transactions contemplated by this Agreement and concerning the business and
operations of the Buyer.
(g) Continue to operate each of the Branches at its current location for
a period of at least ninety (90) calendar days after the Closing Date (unless
Buyer has provided Seller written confirmation from Buyer's appropriate banking
regulatory agency that any earlier change in location by Buyer would be exempt
from the notice and other requirements of 12 U.S.C. Sec. 1831r-1).
(h) To obtain approval of this Agreement and the transactions
contemplated hereby by the requisite vote or consent of the holders of
outstanding securities of the Buyer if such approval is required by applicable
law, contract, the Buyer's Articles of Incorporation or Bylaws, or otherwise.
4.3 Consents. The Seller shall use its reasonable efforts to obtain any
nongovernmental consents required for the transfer or assignment of the Assets
and Liabilities to Buyer pursuant to this Agreement, including (a) Leases, if
any, and (b) Assumed Contracts, if any; provided, however, that (a) the Seller
shall not be required to pay any additional compensation or fee to any person or
entity to obtain any such consent, (b) the Buyer agrees that it shall provide
reasonable assistance to the Seller to obtain such consents, and (c) Seller
shall be entitled to rely on the provisions of Section 2.2(e) and the final
paragraph of Section 7.2 hereof if it does not obtain one or more such consents.
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4.4 Environmental Matters.
(a) Scope. The provisions of this Section 4.4 shall exclusively govern
the rights and obligations of the Seller and Buyer with regard to Hazardous
Substances.
(b) Definitions. For purposes of this Section 4.4, the following terms
have the following meanings:
(i) "Environmental Assessments" means environmental audits,
investigations, reviews or testing of the Branch Real Estate, Improvements,
Leased Real Estate or Leasehold Improvements (sometimes referred to collectively
in this Section 4.4 as the "Subject Assets") performed by Buyer or any third
party or consultant engaged by Buyer to conduct such study.
(ii) "Environmental Due Diligence Period" means the thirty (30) Business
Day period starting on the date of this Agreement during which Buyer must
complete its due diligence as described in Section 4.4(d).
(iii) "Environmental Law" means any law, statute, ordinance or
regulation pertaining to health, industrial hygiene or the environment in effect
as of the date of this Agreement, including but not limited to Title 42 of the
United States Code, Section 6901 et seq. (commonly known as "RCRA") or Section
9601 et seq. (commonly known as "CERCLA" or "Superfund")
(iv) "Hazardous Substance" means any substance, material or waste that
is or becomes designated or regulated as "toxic", "hazardous", "pollutant", or
"contaminant" or a similar designation or regulation under any federal, state or
local law (whether under common law, statute, regulation or otherwise) or
judicial or administrative interpretation of such, including without limitation,
petroleum or natural gas.
(c) Seller's Environmental Representations and Warranties. Seller has
delivered to the Buyer copies of a Phase I Environmental Site Assessment ("Phase
I") and an Asbestos Survey ("Asbestos Survey") regarding each Branch; provided
that Seller has not delivered an Asbestos Survey regarding any Branch where
construction of all Improvements and Leasehold Improvements was completed after
December 31, 1980. The dates of such Phase I's and Asbestos Surveys and the
names of the
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persons by whom they were prepared are listed on Schedule 4.4(c). The cost of
such Phase I's and Asbestos Surveys shall be borne by the Seller. As of the date
of this Agreement, to the Seller's Knowledge and except as disclosed in the
Phase I's and Asbestos Surveys:
(i) during the time the Seller has owned the Branch Real Estate or
leased the Leased Real Estate, no Hazardous Substances are now or have
been used or stored on or within any portion of the Subject Assets
except those Hazardous Substances which are or have been used or stored
in the normal course of use and operation of the Subject Assets in
compliance with all applicable Environmental Laws;
(ii) during the time the Seller has owned the Branch Real Estate or
leased the Leased Real Estate, there are and have been no federal,
state, or local enforcement, clean-up, removal, remedial or other
governmental or regulatory actions instituted or completed pursuant to
Environmental Laws or pertaining to Hazardous Substances and affecting
the Subject Assets;
(iii) no claims have been made by any third party against Seller
relating to any Hazardous Substances on or within the Subject Assets;
and
(iv) Seller has obtained and is in compliance with all permits,
licenses and other authorizations required with respect to the operation
of its prior business at the Branch Real Estate and Leased Real Estate
under all applicable Environmental Laws.
(d) Environmental Due Diligence.
(i) Buyers Covenants. The Buyer acknowledges and agrees that:
(A) Seller is furnishing copies of the Phase I's and Asbestos
Surveys to Buyer for informational purposes only and without
representation or warranty as to the accuracy or completeness
of the contents of such materials except as otherwise provided
in this Section 4.4;
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(B) Buyer will not rely on the Phase I's or Asbestos Surveys
and will conduct its own due diligence on the matters contained
in the documents; and
(C) Buyer is not purchasing the Branch Real Estate,
Improvements and Leasehold Improvements and accepting
assignment of the Leases in reliance upon any representations
or warranties of any kind whatsoever made by the Seller (or any
representatives, agents or employees of the Seller) except
those made or contained in this Agreement.
(ii) Buyer's Environmental Due Diligence. During the Environmental
Due Diligence Period, Buyer shall have the right to conduct
Environmental Assessments of the Subject Assets, and Buyer and Buyer's
representatives, agents and designees will have the right, at reasonable
times and upon reasonable notice to Seller (which notice must describe
the scope of the planned testing and investigations) to enter upon the
Branch Real Estate and Leased Real Estate provided:
(A) Any Environmental Assessment performed by or on behalf of
Buyer shall be conducted pursuant to standard quality
control/quality assurance procedures.
(B) The persons or entities performing such tests shall be
properly licensed and qualified and will have obtained all
appropriate permits for performing such tests.
(C) Prior to any entry involving physical testing, drilling or
other physical disturbance, Buyer will obtain, maintain and
provide Seller, or shall cause any consultant, contractor or
other person entering Branch premises to obtain, maintain and
provide Seller, with proof of comprehensive general liability
insurance in the amount of at least $1,000,000 combined, single
limit coverage, naming Seller as an additional insured and with
coverages reasonably satisfactory to Seller.
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(D) Buyer shall give Seller at least five (5) Business Days'
prior notice of any physical testing or drilling.
(E) Buyer shall schedule any tests outside normal business
hours whenever feasible unless otherwise approved by Seller.
(F) Seller shall have the right of approval (which shall not be
unreasonably withheld or delayed) of any proposed physical
testing or drilling.
(G) Seller shall have the right to have a representative of
Seller accompany Buyer and Buyer's representatives, agents or
designees while they are on the Branch Real Estate or Leased
Real Estate.
(H) Any entry by Buyer, its representatives, agents or designee
shall not unreasonably interfere with Seller's or any tenant's
use of the Subject Assets.
(I) Buyer shall indemnify, defend, and hold Seller harmless
for, from and against any and all claims, damages, costs,
liabilities and losses (including mechanics' liens) arising out
of any entry by Buyer or its agents, designees or
representatives. Without limiting the scope of the foregoing,
Buyer also at its sole expense shall repair, replace or
otherwise correct any damages caused by Buyer or its agents,
designees or representatives to the Subject Assets if the
transactions contemplated by this Agreement do not close. Until
this correction is complete, Buyer will take all steps
necessary to ensure that any conditions created by Buyer's
entry will not interfere with the normal operation of the
Branches or create any dangerous, unhealthy, unsightly or noisy
conditions at the Branches. This indemnity provision shall
survive the Closing or any earlier termination of this
Agreement.
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(J) Any groundwater, soil, or other samples taken from the
Subject Assets shall be properly disposed of by Buyer at
Buyer's sole cost and in accordance with all applicable laws.
(K) Any Environmental Assessment conducted by Buyer shall be at
the Buyer's sole expense and Buyer shall provide to Seller a
copy of all results generated by any Environmental Assessment,
including without limitation, any reports or other summaries.
(L) Seller has provided to Buyer copies of the Leases and Buyer
shall comply with any requirements or restrictions contained in
the Leases regarding testing and investigations to be performed
at the Leased Real Estate, including, without limitation, any
requirements of notice to the landlord.
(iii) Notice of Objections. During the Environmental Due Diligence
Period, Buyer may notify Seller in writing of any objections relating to
any aspects of the Subject Assets relating to one or more Branches (the
"Affected Branches") pertaining to physical condition, presence of any
Hazardous Substances, compliance with all applicable Environmental Laws,
any matters disclosed in the Phase I's or Asbestos Surveys, any matters
disclosed by Seller or about which Seller provided representations or
warranties in this Section 4.4, or any matters disclosed in any
Environmental Assessments.
(A) In the event that Buyer fails to so notify Seller of any
such objections, Buyer shall be deemed to have approved such
items.
(B) In the event, however, that Buyer notifies Seller in
writing and within the Environmental Due Diligence Period of
any such objections, the parties will have a period of ten (10)
Business Days to agree upon a resolution of the objection(s).
If the parties cannot agree within such period of ten (10)
Business Days, then within five (5) Business Days after the
expiration of such period either party may
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initiate a proceeding to resolve such objections pursuant to
the procedures set forth in Section 9.4 of this Agreement;
provided, however, that within such five (5) Business Days the
Seller in its sole discretion may, in a case where Buyer has
notified Seller of objections with respect to Branch Real
Estate or Improvements, elect to remove the Branch Real Estate
and Improvements relating to the Affected Branches from the
Assets to be sold and transferred to Buyer, in which event (I)
the consideration payable under Article 3 shall automatically
be adjusted accordingly and (II) commencing on the Closing Date
Buyer shall lease the Branch Real Estate and Improvements
relating to the Affected Branches from Seller for a period of
at least six (6) months, at a rental rate and on terms to be
agreed upon by Buyer and Seller, which rate and terms shall be
commercially reasonable and comparable to those for similar
properties in the vicinities of the Affected Branches, and
provided, further, that if Buyer and Seller do not agree upon
the rental rate or one or more such terms within an additional
ten (10) Business Days after expiration of the five (5)
Business Days referred to above, then the determination of such
rate and/or term(s) shall be immediately submitted to
arbitration pursuant to the procedures set forth in Section 9.4
of this Agreement. In a case where Buyer has notified Seller of
objections with respect to Leased Real Estate or Leasehold
Improvements, then if neither party has initiated a proceeding
to resolve such objections pursuant to the procedures set forth
in Section 9.4 of this Agreement within the five (5) Business
Days referred to in the immediately preceding sentence, then
the Seller in its sole discretion may elect to exercise its
right under the final paragraph of Section 7.2 to exclude the
Affected Branch from the Closing.
(C) If this Agreement is not amended or otherwise modified
pursuant to the provisions of the foregoing Section 4.4(d)
(iii) (B), Buyer shall be deemed to have waived its objections
and this Agreement will continue in full force and effect.
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(e) Mutual Environmental Indemnifications.
(i) Subject to Subsection 4.4(e) (iv) and Article 9 below, if there are
any third party claims against Buyer that arise out of any Hazardous
Substances that became located in, on or under Branch Real Estate during
Seller's ownership of the Branch Real Estate, or in, on or under Leased
Real Estate during the term of Seller's Lease, Seller will (to the
extent the Seller is liable for such Hazardous Substances under any
federal, state or local law pertaining to or concerning Hazardous
Substances) indemnify, defend (by counsel reasonably acceptable to
Buyer), protect and hold Buyer harmless for, from and against any and
all claims, liabilities, penalties, forfeitures, losses or expenses
(including without limitation reasonable expenses of investigation and
attorney's fees and expenses in connection with any action, suit or
proceeding brought against the Buyer) arising therefrom (to the extent
that any such third party claims are attributable to the portion of the
Hazardous Substances which occurred or were in existence at the Branch
Real Estate or Leased Real Estate on or prior to the Closing Date) in an
amount which (together with any amount for which Seller may become
liable to provide indemnification pursuant to Section 9.2 or otherwise),
shall not exceed the amount of the Initial Base Amount, and provided
that notwithstanding any other provision hereof, Seller shall not be
liable under this Section 4.4(e) (i) for any losses sustained by the
Buyer unless and until the aggregate amount of all losses with respect
to a Branch sustained by the Buyer to be indemnified by the Seller under
this Agreement (including any amount for which Seller may become liable
to provide indemnification pursuant to Section 9.2 or otherwise), shall
exceed $25,000, in which event the Seller shall be liable only for such
losses in excess of $25,000 with respect to that Branch (it being the
intention of the parties that losses sustained by the Buyer with respect
to one Branch shall not be combined with losses sustained with respect
to another Branch to satisfy such minimum $25,000 amount)
(ii) Subject to Subsection 4.4(e) (iv) and Article 9 below, if there are
any third party claims against
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Seller that arise out of any Hazardous Substances that became located
in, on or under the Subject Assets at any time after the Closing, Buyer
will indemnify, defend (by counsel reasonably acceptable to Seller),
protect and hold Seller harmless for, from and against any and all
claims, liabilities, penalties, forfeitures, losses or expenses
(including without limitation reasonable expenses of investigation and
attorney's fees and expenses in connection with any action, suit or
proceeding brought against the Seller) arising therefrom, provided that
notwithstanding any other provision hereof, Buyer shall not be liable
under this Section 4.4(e) (ii) for any losses sustained by the Seller
unless and until the aggregate amount of all losses with respect to a
Branch sustained by the Seller to be indemnified by the Buyer under this
Agreement (including any amount for which Buyer may become liable to
provide indemnification pursuant to Section 9.3 or otherwise), shall
exceed $25,000, in which event the Buyer shall be liable only for such
losses in excess of $25,000 with respect to that Branch (it being the
intention of the parties that losses sustained by the Seller with
respect to one Branch shall not be combined with losses sustained with
respect to another Branch to satisfy such minimum $25,000 amount)
(iii) As used in this Subsection 4.4(e), "third party claims" are
defined as any claims or rights of recovery by any person or entity
(including governmental agencies):
(A) which result from injury, damage or loss to or of any
person or property;
(B) for cost recovery, removal or remedial action; or
(C) third party claims will also include any costs paid or
payable by either party for damage, loss, injury,
investigation, removal, remediation or other liability in
response to any third party claim or in anticipation of any
enforcement or remedial action undertaken or threatened by any
governmental agency or private party.
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(iv) Nothing in this Section 4.4(e) is meant to diminish any party's
rights or obligations under any federal, state or local law pertaining
to or concerning Hazardous Substances; but Seller will not be liable to
Buyer under this Agreement, and Buyer hereby releases Seller from any
and all liability under any such law, for any third party claims which
are attributable to any environmental condition which:
(A) was described or referred to in the Phase I's, Asbestos
Surveys or any Environmental Assessments obtained or conducted
by Buyer;
(B) was reasonably discoverable by prudent investigation during
the Environmental Due Diligence Period; or
(C) was otherwise disclosed by Seller to Buyer or discovered by
Buyer at any time prior to the Closing.
(v) The above release includes claims of which Buyer is presently
unaware or which Buyer does not presently suspect to exist which, if
known by Buyer, would materially affect Buyer's release(s) to Seller.
Buyer expressly waives and relinquishes any and all rights which it may
have under the provisions of Section 1542 of the California Civil Code,
to the extent applicable, which Section reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR".
It is understood and agreed that the purchase price has been adjusted by
prior negotiations to reflect that all of the Subject Assets and the
Furniture Fixtures and Equipment are sold by Seller and purchased by
Buyer and Buyer is accepting assignment of the Leases subject to the
foregoing. It is not contemplated that the purchase price will be
increased if costs to Buyer associated with the Subject Assets, the
Furniture Fixtures and Equipment and the Leases
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prove to be less than expected nor will the purchase price be reduced if
the Buyer's plan for the same leads to higher cost protections. The sole
remedy of the Buyer will be to exercise its rights under Section 4.4(d)
prior to the end of the Environmental Due Diligence Period.
Buyer's Initials ______________ Seller's Initials ______________
4.5 Valuation of the Assets. Buyer agrees that it is relying solely upon
its own judgment, after such investigation and inspection as it deems necessary
or appropriate, as to the quality, condition, fitness and value of the Assets
and the nature and amount of the Liabilities, and Seller hereby disclaims any
representations or warranties made by Seller as to their condition, value,
nature or amount except those made in Section 5.1 of this Agreement, and subject
to the provisions of Section 4.4 of this Agreement, which shall exclusively
govern the rights and obligations of the parties with regard to Hazardous
Substances.
4.6 Clearing Items. From the Closing Date and for one hundred eighty
(180) calendar days thereafter, items drawn on Transaction Accounts assumed by
the Buyer may continue to be presented to the Seller. The Seller will make
provisional settlement to the presenting institution and will present such items
to the Buyer within the Seller's midnight deadline. For the first ninety (90)
calendar days following the Closing Date, the Seller shall perform its
obligations under the first two sentences of this Section 4.6 at no cost to the
Buyer. For the remaining ninety (90) calendar day period, the Buyer shall pay
the Seller $0.50 for each item so processed. After one hundred eighty (180)
calendar days from the Closing Date, the Seller shall return to the sender any
items presented. Upon timely presentation to the Buyer, the Buyer will assume
all responsibility for such items (except for such items which have not been
handled by the Seller in accordance with applicable law or regulation, or with
ordinary care), including but not limited to determining whether to honor or
dishonor such items and giving any required notification for the return of large
items.
4.7 IRA Deposits and Keogh Accounts. The Seller will deliver to the
Buyer, on the Closing Date, copies of the Seller's documents for each IRA
Deposit and Keogh Account which is included in the Assumed Deposits. The Seller
will prepare and file all reports to government authorities required to be
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filed for the period ending on the Closing Date and all prior periods. The Buyer
will be responsible for all such reporting for periods commencing on the day
after the Closing.
4.8 Interest Reporting and Withholding. Unless otherwise agreed to by
the parties, the Seller will report to applicable taxing authorities and holders
of Assumed Deposits transferred on the Closing Date, with respect to the period
from January 1 of the year in which the Closing occurs through and including the
Closing Date, all interest credited to, withheld from and any early withdrawal
penalties imposed upon the Assumed Deposits. The Buyer will report to the
applicable taxing authorities and holders of Assumed Deposits, with respect to
all periods from the day after the Closing Date, all such interest credited to,
withheld from and any early withdrawal penalties imposed upon such Assumed
Deposits. Any amounts required by any governmental agencies to be withheld from
any of the Assumed Deposits through the Closing Date will be withheld by the
Seller in accordance with applicable law or appropriate notice from any
governmental agency and will be remitted by the Seller to the appropriate agency
on or prior to the applicable due date. Any such withholding required to be made
subsequent to the Closing Date shall be withheld by the Buyer in accordance with
applicable law or the appropriate notice from any governmental agency and will
be remitted by the Buyer to the appropriate agency on or prior to the applicable
due date. Promptly after the Closing Date, but in no event later than the date
the Buyer is obligated to remit such amounts to the applicable governmental
agency, the Seller will pay to the Buyer that portion of any sums theretofore
withheld by the Seller from any Assumed Deposits transferred on the Closing Date
which are or may be required to be remitted by the Buyer pursuant to the
foregoing and shall directly remit to the applicable governmental agency that
portion of any such sums which are required to be remitted by the Seller.
4.9 Eminent Domain or Taking. If proceedings under a power of eminent
domain relating to a specific Branch or any part thereof (the "Affected Branch")
are commenced prior to the Closing Date, Seller will promptly inform Buyer in
writing.
(a) If such proceedings involve the taking of all of or a material
interest in the Affected Branch, Buyer may elect to terminate this Agreement
with respect to such Affected Branch by notice in writing sent within ten (10)
calendar days of Seller's written notice to Buyer, in which case neither party
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will have any further obligation to or rights against the other with respect to
the Affected Branch except any rights or obligations of either party which are
expressly stated to survive termination of this Agreement.
(b) If the proceedings do not involve the taking of all of or a material
interest in the Affected Branch, or if Buyer does not elect to terminate this
Agreement as to the Affected Branch, this transaction will be consummated as
described herein, and, subject to the Lease, if any, or other encumbrances, if
any, relating to the Affected Branch, any award or settlement payable with
respect to such proceeding will be paid or assigned to Buyer on the Closing
Date.
(c) If the Closing contemplated by this Agreement is not consummated for
any reason, Buyer will have no claim to any condemnation award or settlement
with respect to the Affected Branch.
4.10 Damage or Destruction. Except as provided in this Section 4.10,
prior to the Closing Date, as between Seller and Buyer the entire risk of loss
or damage by earthquake, flood, landslide, fire or other casualty is borne and
assumed by Seller. If, prior to the Closing Date, any part of the Improvements
or Leasehold Improvements at a specific Branch (the "Affected Improvements") is
damaged or destroyed by earthquake, flood, landslide, fire or other casualty,
Seller will promptly inform Buyer of such fact in writing and advise Buyer as to
the extent of the damage and whether it is, in Seller's reasonable opinion,
"material".
(a) If Seller determines that such damage or destruction is "material",
Buyer has the option to terminate this Agreement with respect to such Branch
(the "Affected Branch") upon written notice to the Seller given not later than
ten (10) calendar days after receipt of Seller's written notice to Buyer
advising of such damage or destruction.
(b) For purposes of this Section 4.10, "material" shall mean any damage
or destruction to the Affected Improvements where the cost of repair or
replacement is estimated to be (i) in the case of damage or destruction to
Improvements, more than twenty-five (25) percent of the Market Value of the
Branch Real Estate and Improvements, or (ii) in the case of damage or
destruction to Leasehold Improvements' more than twenty-five (25) percent of the
amount indicated in Section 3.1 and
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Schedule 3.1 for the Leasehold Improvements at the Affected Branch ("Leasehold
Improvements Value"), and that in either case will take more than sixty (60)
calendar days to repair.
(c) If this Agreement is so terminated, neither party will have any
further obligation to or rights against the other with respect to the Affected
Branch except any rights or obligations of either party which are expressly
stated to survive termination of this Agreement.
(d) Subject to the Lease, if any, or other encumbrances, if any, if the
Buyer does not elect to terminate this Agreement as to the Affected Branch, or
if the casualty is not material, Seller shall either (i) reduce the Market Value
of the Branch Real Estate or the Leasehold Improvements Value at the Affected
Branch, as the case may be, by the value reasonably estimated by Seller to
repair or restore the damaged portion of the Affected Improvements, less any
sums expended by Seller to make emergency repairs to the Affected Improvements
or (ii) repair or restore the damaged portion of the Affected Improvements, and
in either case this transaction will close pursuant to the terms of this
Agreement, and the Buyer will accept the Affected Branch as is, where is,
without recourse, with all faults and with no warranties other than as expressly
provided in Section 5.1 of this Agreement, and subject to the provisions of
Section 4.4 of this Agreement, which shall exclusively govern the rights and
obligations of the parties with regard to Hazardous Substances.
(e) If the damage is not material, Seller's notice to Buyer of the
damage or destruction will also set forth the reduced Market Value of the Branch
Real Estate or the reduced Leasehold Improvements Value at the Affected Branch,
as the case may be, and Seller's allocation of value to the damaged portion of
the Affected Improvements. If Buyer does not accept Seller's reduced valuation,
Buyer's sole remedy will be to submit the issue to arbitration pursuant to
Section 9.4 hereof.
(f) Whether or not the sale of the Affected Branch is consummated
hereunder, Buyer shall have no rights to insurance claims or proceeds in respect
of damage or destruction to the Affected Improvements occurring prior to the
Closing Date.
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ARTICLE 5
Representations and Warranties
5.1 Seller's Representations and Warranties. The Seller represents and
warrants to the Buyer that, as of the date of this Agreement (or, as to any
information specified in a Schedule to have been compiled as of some earlier
date, as of such earlier date), and subject to Section 4.4 (a):
(a) The Seller is a national banking association, duly organized and in
good standing under the laws of the United States;
(b) The Seller has the requisite power and authority to execute, deliver
and perform this Agreement and to consummate the transactions contemplated
hereby; all corporate action necessary to be taken by or on the part of the
Seller to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby has been duly and validly taken; and this
Agreement has been duly executed and delivered by, and constitutes the valid and
binding agreement of the Seller, enforceable in accordance with its terms except
as limited by bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium and similar laws affecting creditors generally and by the
availability of equitable remedies;
(c) The execution, delivery and performance by the Seller of this
Agreement do not, and the consummation by the Seller of the transactions
contemplated hereby will not, violate or conflict with the articles of
association or bylaws of the Seller, or any law or regulation currently
applicable to the Seller, or any material agreement or instrument, or currently
applicable award, order, judgment or decree to which the Seller is a party or by
which it is bound, or require any filing by the Seller with, or authorization,
approval, consent or other action with respect to the Seller by, any
governmental or regulatory agency except such as have been made or obtained and
are in full force and effect;
(d) Schedule 2.2(d) sets forth a list of all material written contracts,
agreements and other obligations known to the Seller to which the Seller is a
signatory which relate to the operation of the Branches (other than those giving
rise to the Assets and the Liabilities), including without limitation equipment
leases and service and maintenance contracts,
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consulting contracts, agency agreements and licensing agreements; provided,
however, that equipment leases and service and maintenance contracts which the
Seller does not believe are assignable are not listed;
(e) Except as set forth in Schedule 5.1(e): (i) there is no litigation,
claim, action, suit or proceeding pending which, if adversely determined, would
adversely affect the use of the Assets or the Liabilities; and (ii) to the
Seller's knowledge, there is no litigation, claim, action, suit or proceeding
threatened by any organization, person, individual or governmental agency which,
if adversely determined, would, individually or in the aggregate, materially and
adversely affect the use of the Assets or the Liabilities;
(f) The Seller has not in any manner whatsoever paid or agreed to pay
any fee or commission to any agent, broker, finder or other person for or on
account of services rendered as a broker or finder in connection with this
Agreement or the transactions covered and contemplated hereby. All negotiations
relating to this Agreement have been conducted by the Seller directly and
without the intervention of any person in such manner as to give rise to any
valid claim against the Seller for any brokerage commission or like payment; and
(g) Schedule 2.2(e) contains an accurate and complete list of all
Leases, if any. True and correct copies of all Leases referred to in such
Schedule have been provided to Buyer.
5.2 Buyer's Representations and Warranties. The Buyer represents and
warrants to the Seller that, as of the date of this Agreement, and subject to
Section 4.4 (a):
(a) The Buyer is a national banking association, duly organized and in
good standing under the laws of the United States;
(b) Subject to the satisfaction of any applicable governmental or
regulatory requirements referred to in Section 4.2(b) and to approval of this
Agreement and the transactions contemplated hereby by the requisite vote or
consent of the holders of outstanding securities of the Buyer if such approval
is required by applicable law, contract, the Buyer's Articles of Incorporation
or Bylaws, or otherwise, the Buyer has the requisite power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated
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hereby; all acts and other proceedings required to be taken by or on the part of
the Buyer to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby have been duly and validly taken; and this
Agreement has been duly executed and delivered by, and constitutes the valid and
binding agreement of, the Buyer, enforceable in accordance with its terms except
as limited by bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium and similar laws affecting creditors generally and by the
availability of equitable remedies;
(c) Subject to the satisfaction of any applicable governmental or
regulatory requirements referred to in Section 4.2(b), the execution, delivery
and performance by the Buyer of this Agreement do not, and the consummation by
the Buyer of the transactions contemplated hereby will not, violate or conflict
with the articles of incorporation or bylaws of the Buyer, or any law or
regulation currently applicable to the Buyer, or any material agreement or
instrument, or currently applicable order, judgment or decree to which the Buyer
is a party or by which it is bound or require any prior filing by the Buyer
with, or authorization, approval, consent or other action with respect to the
Buyer by, any governmental or regulatory agency except such as have been made or
obtained and are in full force and effect or will be made or obtained and in
full force and effect as of the Closing;
(d) There are no actions, suits or proceedings pending or, to the
knowledge of the Buyer, threatened against or affecting, the Buyer, which may
cause a material adverse change in the Buyer's business or financial condition;
(e) The Buyer has not paid or agreed to pay any fee or commission to any
agent, broker, finder or other person for or on account of services rendered as
a broker or finder in connection with this Agreement or the transactions covered
and contemplated hereby. All negotiations relating to this Agreement have been
conducted by the Buyer directly and without the intervention of any person in
such manner as to give rise to any valid claim against the Seller for any
brokerage commission or like payment;
(f) The Buyer has not received written notice from any federal or
California governmental or regulatory agency indicating that it would oppose or
not grant or issue its
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consent or approval, if required, with respect to the transactions contemplated
by this Agreement;
(g) The Buyer satisfies each and all of the standards and requirements
lawfully within the control of the Buyer of which it is aware (and, as of the
Closing Date, will satisfy each and all of the standards and requirements
lawfully within the control of the Buyer) imposed as a condition to obtaining or
necessary to comply with and in order to obtain any of the governmental or
regulatory approvals referred to in Section 4.2(b) of this Agreement;
(h) At the time of the most recent regulatory evaluation of Buyer's
performance under the Community Reinvestment Act (the "CRA"), Buyer's record of
performance was deemed to be "outstanding" or "satisfactory", and no proceedings
are pending or to the knowledge of Buyer, threatened, that would result in a
change in such evaluation. Buyer has not received any adverse public comments
with respect to its compliance under the CRA since the date of its most recent
regulatory evaluation of its performance under the CRA;
(i) The Buyer has available sufficient cash or other liquid assets or
financing pursuant to binding agreements or commitments which may be used to
fund the transactions contemplated hereby and its ability to consummate such
transactions is not contingent on raising any equity capital, obtaining specific
financing therefor, consent of any lender or any other matter; and
(j) Buyer acknowledges and is aware of the disclosures made by Seller
with respect to the Branch Real Estate and set forth in Schedule 5.2(j) attached
hereto.
ARTICLE 6
Understandings
Buyer and Seller understand and agree as follows:
6.1 Depositors' Rights. The Buyer and the Seller understand and agree
that all transfers to the Buyer of Assumed Deposits are subject to the
individual depositors' continuing rights to withdraw, and the Seller makes no
representation or warranty to the Buyer concerning the continuing maintenance of
such deposits at the Branches.
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6.2 Unclaimed Property. With respect to safe deposit boxes that have
been opened by the Seller and whose contents have been inventoried and are being
held by the Seller in safekeeping in preparation for escheat to the State of
California, the Seller shall remove any and all such contents from the Branches
prior to the Closing Date.
6.3 Head Office Accounts. Schedule 6.3 sets forth certain Accounts at
the Branches which have been designated by the Seller as "Head Office Accounts."
The Buyer and the Seller understand and agree that the Seller may remove from
the Branches prior to the Closing Date any and all Head Office Accounts and
deposits of the types described in the proviso in Section 2.3(a) (iii) and any
Head Office Accounts and any such deposits so removed shall not be included in
the Assumed Deposits.
6.4 Limitation of Warranties. Except as may be expressly represented or
warranted by Seller in Section 5.1 of this Agreement, and subject to the
provisions of Section 4.4 of this Agreement which shall exclusively govern the
rights and obligations of the parties with regard to Hazardous Substances,
Seller makes no representation or warranty whatsoever with regard to any Asset,
any Liability or the business or operation of any of the Branches, it being
expressly understood that such Assets and Liabilities are being transferred AS
IS, WHERE IS, WITHOUT RECOURSE, WITH ALL FAULTS AND WITH NO WARRANTIES OTHER
THAN AS EXPRESSLY PROVIDED IN SECTION 5.1 OF THIS AGREEMENT. Buyer agrees that
it is relying solely upon its own judgment, after such investigation and
inspection as it deems necessary or appropriate, as to the quality, condition,
fitness and value of the Assets and the nature and amount of the Liabilities,
and Seller hereby disclaims any representations or warranties made by Seller as
to their condition, value, nature or amount except those made in Section 5.1 of
this Agreement, subject to Section 4.4 of this Agreement. Notwithstanding any
other provision of this Agreement, Buyer and Seller understand and agree that
Seller is making, and shall make, no representations or warranties with respect
to title to the Branch Real Estate other than those, if any, contained in the
grant deed the form of which is attached hereto as Schedule 2.2(b) (i) (A).
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ARTICLE 7
Conditions to the Closing
7.1 Seller's Conditions. The obligations of the Seller to consummate the
Closing shall be subject to the satisfaction at or prior to Closing of all of
the following conditions, any one or more of which may be waived, in whole or in
part, by the Seller:
(a) The Buyer shall have complied in all material respects with each of
its covenants and agreements contained herein to be performed at or prior to the
Closing Date, and each of the representations and warranties of the Buyer in
Section 5.2 hereof shall be true and correct in all material respects as if made
at and as of the Closing;
(b) The Buyer shall have delivered to the Seller a duly authorized and
signed officer's certificate, dated as of the Closing Date, certifying as to the
matters specified in Section 7.1(a), and further that (i) the methodology and
accounting procedures used by the Seller in preparing the Closing Financial
Statement have been reviewed and are acceptable to the Buyer, and (ii) the
Buyer, to and including the Closing Date, has performed such review of the
books, records, files, documentation and accounts of the Branches as it has
deemed appropriate;
(c) As to the Branch, there shall have been given, obtained or satisfied
in final form any notice, approval, permit or other requirement of law or any
competent governmental or regulatory authority that is necessary to proceed with
the Closing, including without limitation such approvals as may be required of
any California or federal bank or other financial institution regulatory agency
and any other entity or entities having jurisdiction over the Branch, the Buyer
or the Seller, and no such agency or entity shall, in connection therewith, have
imposed any condition or requirement that would result in a material adverse
effect on the business or prospects of the Branch or the Seller, or on the
consummation of the transactions contemplated hereby; and
(d) There shall not be in effect any nonappealable final order, decree
or judgment of any court or governmental body having competent jurisdiction that
would be violated by consummation of the transactions contemplated hereby, nor
any
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material pending or threatened action, proceeding or investigation, the adverse
determination of which would result in such order, decree or judgment; provided,
that in the case of such material pending or threatened action, proceeding or
investigation, neither party shall decline to proceed with the Closing pending
final resolution thereof without exercising its reasonable efforts promptly to
determine jointly with the other party the merit thereof and the likelihood of
an adverse determination in such proceeding; and
(e) This Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote or consent of the holders of outstanding
securities of the Buyer if such approval is required by applicable law,
contract, the Buyer's Articles of Incorporation or Bylaws, or otherwise.
7.2 Buyer's Conditions. The obligations of the Buyer to consummate the
Closing shall be subject to the satisfaction at or prior to Closing of all of
the following conditions, any one or more of which may be waived, in whole or in
part, by the Buyer:
(a) The Seller shall have complied in all material respects with each of
its covenants and agreements herein to be performed at or prior to the Closing
Date and each of the representations and warranties of the Seller contained in
this Agreement and the Schedules shall be true and correct in all material
respects as if made at and as of Closing except to the extent of changes that
have occurred prior to Closing that are consistent with the provisions of
Section 2.3(a);
(b) The Seller shall have delivered to the Buyer a duly authorized and
signed officer's certificate, dated as of the Closing Date, certifying that (i)
the representations and warranties of the Seller contained in this Agreement and
the Schedules are true and correct as of the Closing Date, and (ii) the Seller
has complied in all material respects with each of its covenants and agreements
herein to be performed at or prior to the Closing Date;
(c) As to the Branch, there shall have been given, obtained or satisfied
in final form any notice, approval, permit or other requirement of law or any
competent governmental or regulatory authority that is necessary to proceed with
the Closing, including without limitation such approvals as may be required of
any California or federal bank
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or other financial institution regulatory agency and any other entity or
entities having jurisdiction over the Branch, the Buyer or the Seller, and no
such agency or entity shall, in connection therewith, have imposed any condition
or requirement that would result in a material adverse effect on the business or
prospects of the Branch or the Buyer, or on the consummation of the transactions
contemplated hereby; and
(d) There shall not be in effect any nonappealable final order, decree
or judgment of any court or governmental body having competent jurisdiction that
would be violated by consummation of the transactions contemplated hereby, nor
any pending or threatened action, proceeding or investigation, the adverse
determination of which would result in such order, decree or judgment; provided,
that in the case of such pending or threatened action, proceeding or
investigation, neither party shall decline to proceed with the Closing pending
final resolution thereof without exercising its reasonable efforts promptly to
determine jointly with the other party the merit thereof and the likelihood of
an adverse determination in such proceeding.
Notwithstanding any other provision of this Agreement, in the event
that, at the Closing, there shall be a failure of any condition specified in
this Section 7.2 or elsewhere in this Agreement, including without limitation
any failure of condition specified in Section 2.2(d), 2.2(e), 4.3, 4.4, 4.9 or
4.10 to the obligations of the Buyer in respect of the acquisition of any
specific Branch or Branches, the Buyer nevertheless shall be obligated to
consummate the transactions contemplated by this Agreement upon the Closing
Date, and the Seller may, upon written notice to the Buyer, exclude from the
Closing the Branch or Branches in respect of which the failure of condition
shall exist, in which case, appropriate adjustment shall be made in the
consideration payable pursuant to Article 3, the Schedules hereto, the Financial
Statements and the other documents to be delivered pursuant hereto so as to duly
reflect the deletion of such Branch or Branches from the Closing.
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ARTICLE 8
Termination
8.1 Events of Termination. This Agreement may be terminated at any time
prior to Closing:
(a) By the mutual written agreement of the Seller and the Buyer;
(b) By the Seller or by the Buyer in the event that the Closing has not
occurred on or before the date indicated in the third proviso in Section 2.2(a),
or such other date as the Seller and the Buyer shall agree in writing, unless
the failure to so consummate by such time is due to a breach of this Agreement
by the party seeking to terminate;
(c) By the Seller or by the Buyer if consummation of the transactions
contemplated hereby would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction; and
(d) By the Seller or the Buyer, in the event of a material breach by the
other of any representation, warranty or agreement contained herein which is not
cured or cannot be cured within thirty (30) calendar days after written notice
of such termination has been delivered to the breaching party; provided,
however, that (i) termination pursuant to this Section 8.1(d) shall not relieve
the breaching party of liability for such breach or otherwise and (ii) this
Section 8.1 (d) shall not under any circumstances provide the Buyer with a basis
for termination due to any actual or alleged breach relating to Hazardous
Substances, Buyer's sole remedies with respect to Hazardous Substances being
contained in Section 4.4.
Any party desiring to terminate this Agreement pursuant to any of the
foregoing clauses shall give written notice of such termination to the other
party.
8.2 Liability for Termination. If this Agreement is terminated as
permitted by Section 8.1, except as provided in Section 8.1(d), such termination
shall be without liability of either party (or any shareholder, director,
officer, employee, agent, consultant or representative of such party) to the
other party to this Agreement, except that, subject to Section 4.4,
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if such termination shall result from the willful failure of a party to fulfill
a condition to the performance of the obligations of the other party or to
perform a covenant of this Agreement or from a willful misrepresentation or
breach of a warranty, covenant or agreement hereunder by either party to this
Agreement, such party shall be fully liable for any and all damages, costs and
expenses (including, but not limited to, reasonable attorney's fees) sustained
or incurred by the other party as a result of such failure or breach.
ARTICLE 9
Survival, Indemnification
9.1 Survival. The covenants, agreements, representations and warranties
of the parties hereto made, contained in or to be performed pursuant to this
Agreement, the Schedules hereto or the officers' certificates delivered pursuant
hereto or in connection herewith shall survive Closing and remain operative and
in full force and effect until the first anniversary of the Closing Date, except
for the provisions of Sections 2.4, 3.2(h), 4.4(e) (ii), 10.1 and 11.11, which
shall survive such first anniversary. Notwithstanding the preceding sentence,
any covenant, agreement, representation, warranty or claim in respect of which
indemnity may be sought under Sections 9.2 or 9.3 shall survive the time at
which it would otherwise terminate pursuant to the preceding sentence if notice
of the claim, inaccuracy or breach giving rise to such right to indemnity shall
have been given to the party against whom such indemnity may be sought prior to
such time. After Closing, the sole and exclusive remedy of the Buyer and the
Seller for any breach of any covenant or agreement or any inaccuracy of any such
representation or warranty by the Seller or the Buyer shall be the indemnities
contained in Sections 9.2 and 9.3, respectively, which shall survive Closing,
provided however, that the provisions of Section 4.4 shall exclusively govern
the rights and obligations of the Seller and Buyer with regard to Hazardous
Substances.
9.2 Seller's Indemnity. Subject to the proviso in the final sentence of
Section 9.1, the Seller hereby indemnifies the Buyer against and agrees to hold
it harmless from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and attorney's fees and
expenses in connection with any action, suit or proceeding brought against the
Buyer) demanded, claimed or
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<PAGE>
threatened in writing against the Buyer or incurred or suffered by the Buyer
arising out of (i) any action taken or omitted to be taken by the Seller prior
to the Closing relating to the ownership or operation of the Branches or their
business and properties prior to Closing, but excluding any damage, loss,
liability or expense resulting from actions taken by the Seller at the written
direction of the Buyer or resulting from defects in title to the Branch Real
Estate; (ii) any misrepresentation or breach of warranty, covenant or agreement
made, contained in or to be performed by the Seller pursuant to this Agreement,
the Schedules hereto or the Seller's officer's certificate; and (iii) any claim
or demand by any Branch employee of the Seller who shall not become an employee
of the Buyer (except as may be the result of any action or inaction of the
Buyer). Any direct claim by the Buyer against the Seller, as distinguished from
a claim against the Buyer by a third party, shall be settled by arbitration
pursuant to Section 9.4. The Seller shall not be liable under this Section 9.2
for any settlement effected without its consent (which consent shall not be
unreasonably withheld) of any claim, litigation or proceeding in respect of
which indemnity may be sought hereunder. The Buyer agrees to give prompt notice
to the Seller of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought hereunder. The
Seller may, and at the request of the Buyer shall, participate in and control
the defense of any such suit, action or proceeding at its own expense.
9.3 Buyers Indemnity. Subject to the proviso in the final sentence of
Section 9.1, the Buyer hereby indemnifies the Seller against and agrees to hold
it harmless from any and all damage, loss, liability and expense (including,
without limitation, reasonable expenses of investigation and attorney's fees and
expenses in connection with any action, suit or proceeding brought against the
Seller) demanded, claimed or threatened in writing against the Seller or
incurred or suffered by the Seller arising out of (i) ownership or operation of
the Branches or their business and properties on and after Closing (except as to
such damage, liability, loss or expense resulting from actions taken by the
Buyer at the written direction of the Seller); and (ii) any misrepresentation or
breach of warranty, covenant or agreement made, contained in or to be performed
by the Buyer pursuant to this Agreement, the Schedules hereto or the Buyer's
officers certificate. Any direct claim by the Seller against the Buyer, as
distinguished from a claim against the Seller by a third party, shall be settled
by arbitration
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pursuant to Section 9.4. The Buyer shall not be liable under this Section 9.3
for any settlement effected without its consent (which consent shall not be
unreasonably withheld) of any claim, litigation or proceeding in respect of
which indemnity may be sought hereunder. The Seller agrees to give prompt notice
to the Buyer of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought hereunder. The
Buyer may, and at the request of the Seller shall, participate in and control
the defense of any such suit, action or proceeding at its own expense.
9.4 Arbitration of Disputes. (A) ANY CONTROVERSY OR CLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY AGREEMENTS OR INSTRUMENTS RELATING HERETO
OR DELIVERED IN CONNECTION HEREWITH, INCLUDING, BUT NOT LIMITED TO A CLAIM BASED
ON OR ARISING FROM AN ALLEGED TORT WILL, AT THE REQUEST OF ANY PARTY, BE
DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (9
U.S.C. SECTION 1 ET SEQ.) UNDER THE AUSPICES AND RULES OF THE AMERICAN
ARBITRATION ASSOCIATION ("AAA"). THE AAA WILL BE INSTRUCTED BY EITHER OR BOTH
PARTIES TO PREPARE A LIST OF THREE (3) JUDGES WHO HAVE RETIRED FROM THE SUPERIOR
COURT OF THE STATE OF CALIFORNIA, A HIGHER CALIFORNIA COURT OR ANY FEDERAL
COURT. WITHIN TEN (10) CALENDAR DAYS OF RECEIPT OF THE LIST, EACH PARTY MAY
STRIKE ONE (l) NAME FROM THE LIST. THE AAA WILL THEN APPOINT THE ARBITRATOR FROM
THE NAME(S) REMAINING ON THE LIST. THE ARBITRATION WILL BE CONDUCTED IN SAN
FRANCISCO, LOS ANGELES OR SAN DIEGO, WHICHEVER IS THE CLOSEST CITY TO THE NEXUS
OF THE DISPUTE. ANY CONTROVERSY IN INTERPRETATION OR ENFORCEMENT OF THIS
PROVISION OR WHETHER A DISPUTE IS ARBITRABLE, WILL BE DETERMINED BY THE
ARBITRATOR. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN
ANY COURT HAVING JURISDICTION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR
JUDICIAL RELIEF OR IN PURSUIT OF AN ANCILLARY REMEDY DOES NOT CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE
CONTROVERSY OR CLAIM TO ARBITRATION.
(B) IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR IS AUTHORIZED TO
APPORTION COSTS AND EXPENSES, INCLUDING INVESTIGATION, LEGAL AND OTHER EXPENSES,
WHICH WILL INCLUDE, IF APPLICABLE, A REASONABLE ESTIMATE OF ALLOCATED COSTS AND
EXPENSE OF IN-HOUSE LEGAL COUNSEL AND LEGAL STAFF. SUCH COSTS AND EXPENSES ARE
TO BE AWARDED ONLY AFTER THE CONCLUSION OF THE ARBITRATION AND WILL NOT BE
ADVANCED DURING THE COURSE OF SUCH ARBITRATION.
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<PAGE>
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION" PROVISION DECIDED BY
NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY
RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BY JURY
TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO
NEUTRAL ARBITRATION.
BUYER'S INITIALS ________________ SELLER'S INITIALS _______________
9.5 Limit on Indemnities. (a) Notwithstanding any other provision
hereof, an indemnifying party shall not be liable under this Article 9 for any
losses sustained by the indemnified party with respect to a Branch unless and
until the aggregate amount of all such losses sustained by the indemnified party
with respect to that Branch (including any amount for which the indemnifying
party may become liable to provide indemnification pursuant to Section 4.4),
shall exceed $25,000, in which event the indemnifying party shall be liable only
for such losses in excess of $25,000 (it being the intention of the parties that
losses sustained by a party with respect to one Branch shall not be combined
with losses sustained with respect to another Branch to satisfy such minimum
$25,000 amount). The minimum $25,000 amount shall not apply to amounts which one
party may be required to pay to the other under Sections 2.4, 3.2, 4.1(g),
4.1(h), 4.6 and 10.1 of this Agreement or other provisions dealing with
customary and foreseeable post-closing adjustments. In no event shall the
aggregate losses for which the Seller may be liable under this Article 9 or
Section 4.4 or any other basis exceed the amount of the Initial Base Amount. IN
ADDITION, THE INDEMNIFYING PARTY SHALL HAVE NO OBLIGATIONS UNDER THIS AGREEMENT
FOR ANY CONSEQUENTIAL LIABILITY, DAMAGE OR LOSS OF THE INDEMNIFIED PARTY THAT
THE INDEMNIFIED PARTY MAY SUFFER.
(b) Each party's right to indemnification under this Article 9 shall
preclude any other monetary award (whether at
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law or in equity) and shall preclude assertion by such party of any right to any
such monetary award from the indemnifying party.
ARTICLE 10
Taxes
10.1 Obligations of the Buyer and the Seller. The Buyer and the Seller
shall each assume and pay one-half of the following: any documentary, stamp,
deed, sales, use or other transfer taxes, recording fees and escrow fees
relating to the sale of the Assets and assumption of the Liabilities, including
but not limited to the assignment of the Leases. On the Closing Date, all real
and personal property taxes and current installments of special assessments
levied or assessed with respect to the Branch Real Estate, the Improvements, the
Leasehold Improvements and the Furniture, Fixtures and Equipment shall be
prorated between the Seller and the Buyer on a daily basis as of the Closing
Date based upon the fiscal year of the appropriate taxing authority.
10.2 Access to Information. For the applicable period required by law,
the Seller and the Buyer shall have a right to have access to and to copy all of
the records of the other party relevant to the Assets and the Liabilities and
necessary for the preparation of income tax returns, employee tax returns,
employee reports, employee benefits calculations, and for customary accounting
functions and other similar bona fide purposes. Additionally, the Buyer and the
Seller each agree to make available to the other party, at reasonable times and
upon reasonable advance notice, relevant records and personnel in connection
with an investigation or the preparation of or participation in a defense,
negotiation or settlement relating to any pending, future, or threatened
litigation or government agency proceeding (including a tax audit) involving the
conduct or interest of such other party.
10.3 Allocation of Consideration. The Buyer and the Seller shall use
reasonable efforts to allocate the consideration payable hereunder at the
Closing among the Assets, tangible and intangible, on the basis of an allocation
(the "Allocation") to be agreed upon by the Buyer and the Seller prior to the
Closing.
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<PAGE>
ARTICLE 11
Miscellaneous
11.1 Public Notice. All written notices to third parties, including
customers of the Branches, all oral or written notices or general communications
to employees of the Branches, and all public announcements and press releases
concerning the transactions contemplated by this Agreement made prior to Closing
shall be jointly planned and coordinated by the Buyer and the Seller. Neither
party shall act unilaterally in this regard without the prior approval of the
other party, which shall not be unreasonably withheld or delayed; provided,
however, that in the event that a party reasonably concludes that a public
announcement or release is required by applicable law and the parties cannot
reach agreement upon a mutually acceptable release, the party releasing the
information, announcement or public statement shall not be deemed to be in
breach of this Agreement.
11.2 Assignment. Neither party shall assign this Agreement or any of its
rights, duties or obligations hereunder without the prior written consent of the
other party.
11.3 Notices. Notices and legal process to be delivered to or served
upon either party hereto shall be deemed to have been duly delivered or served
when delivered in written form by hand or by telegraph, telex or facsimile
transmission, or the day after being sent from within the continental United
States by overnight delivery or courier service, or three (3) calendar days
after posting by registered mail or certified mail with return receipt
requested, to the parties hereto at the following addresses:
If to the Seller:
BankAmerica Corporation
Corporate Development Department #13262
315 Montgomery Street, Suite 1300
San Francisco, CA 94104
Attention: Director of Corporate Development
Fax: (415) 953-0390
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<PAGE>
With copies to:
Bank of America NT&SA
Legal Department #3017
555 California Street, 8th Floor
San Francisco, CA 94104
Attention: Legal Department - Corporate Advice
Fax: (415) 622-6291
And to:
William J. Moran, Esq.
400 Davey Glen Road, Suite 4701
Belmont, CA 94002
Fax: (415) 593-0343
If to the Buyer:
First National Bank of Central California
307 Main Street
Salinas, CA 93902-1786
Attention: Dennis A. DeCius,
Executive Vice President and Chief
Financial Officer
Fax: (408) 757-5061
And to:
First National Bank of Central California
307 Main Street
Salinas, CA 93902-1786
Attention: Edward J. Czajka,
Vice President and Controller
Fax: (408) 757-5061
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<PAGE>
or to such other authorized agent or address as either party may hereafter
select by written notice to the other party.
11.4 Time. Time shall be of the essence for all purposes connected with
this Agreement.
11.5 Expenses. Except as otherwise expressly provided herein, the Buyer
and the Seller shall each bear its own out-of-pocket expenses incurred in
connection with the transactions contemplated by this Agreement.
11.6 Communications. If for any reason any payment or communication to
which one party is entitled is received by the other party hereto, the receiving
party shall promptly forward such payment or communication to the other party.
11.7 Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings, except that certain Confidentiality Agreement between the
parties hereto which was executed by the Seller as of March 24, 1997 (the
"Confidentiality Agreement"), relating to the subject matter of this Agreement.
The Confidentiality Agreement shall survive, in accordance with its own terms,
the execution, delivery and performance of this Agreement.
11.8 Amendment. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally. Any such change, waiver,
discharge or termination may be effected only by an instrument in writing signed
by the party against which enforcement of such change, waiver, discharge or
termination is sought.
11.9 Governing Law, Severability. This Agreement shall be governed by
and construed in accordance with the laws of the State of California. If any one
or more of the provisions of this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision were not contained herein.
11.10 Waiver. No delay or omission to exercise any right, power or
remedy accruing to either party upon any breach or default under this Agreement
shall impair any such right, power
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or remedy of such party, nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach of default theretofore or
thereafter occurring. Any waiver, permit, consent or approval or any kind or
character of any breach or default under this Agreement, or any waiver of any
provision or condition of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All rights
and remedies, either under this Agreement or by law or otherwise afforded to a
party, shall be cumulative and not alternative.
11.11 Confidentiality. The Buyer and its representatives, agents and
designees shall keep confidential and shall not disclose to any person or
entity, without Seller's prior written consent: the amount of the Purchase
Premium, the fact that confidential information has been made available to
Buyer, the existence of this Agreement or any of the terms or conditions hereof,
the status of the transactions contemplated hereby, all information concerning
the books, records, accounts and documents of Seller to which it has access
under this Agreement and any information developed in connection with any
Environmental Assessments that are performed by or on behalf of the Buyer
(including without limitation any reports or sampling results and analysis).
These restrictions, however, shall not apply to any such information (i) that
becomes public knowledge through no fault, act or omission of Buyer or its
representatives, agents or designees (for purposes of this Section 11.11
collectively the "Buyer"), (ii) that Buyer lawfully acquires from an entity not
under an obligation of confidentiality to Seller, (iii) that is independently
developed by Buyer, or (iv) where the Buyer is legally compelled to disclose
such information, provided that the Seller is provided with advance written
notice of the intention of Buyer to disclose to allow the Seller to contest the
proposed disclosure before any court or agency with jurisdiction unless such
notice impedes a duty or obligation of the Buyer under applicable laws,
regulations or legal requirements to timely report such information, in which
event Buyer shall concurrently advise Seller of Buyer's disclosure. In case of
any actual or purported inconsistency or conflict between the provisions of this
Agreement and the provisions of the Confidentiality Agreement with respect to
obligations of the Buyer to maintain confidentiality as to any information,
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the provisions which impose a higher standard of confidentiality on the Buyer
with respect to such information shall control and govern as to such actual or
purported inconsistency or conflict.
11.12 Third Party Rights. Other than the provisions of Section 2.4,
nothing contained in this Agreement, whether express or implied, is intended to
(i) confer any rights or remedies upon any persons other than the parties hereto
and their respective successors and assigns, (ii) relieve or discharge the
obligations or liabilities of any third person to either party to this
Agreement, or (iii) give any third person any right of subrogation or action
over either party to this Agreement.
11.13 Headings. The headings and captions used herein and in the
Schedules are included for purposes of convenience of reference only and shall
not limit or define the meaning of any provisions of this Agreement.
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<PAGE>
11.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument, but
all of which together shall consitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers or representatives as of the date
first above written.
SELLER:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/ Brian A. Dunne
---------------------------------
Brian A. Dunne
Its Vice President
BUYER:
FIRST NATIONAL BANK OF CENTRAL
CALIFORNIA
By /s/ Dennis A. DeCius
---------------------------------
Dennis A. DeCius,
Its Executive Vice President
and Chief Financial Officer
-62-
EXHIBIT 21
SUBSIDIARIES OF PACIFIC CAPITAL BANCORP
Name State of Incorporation
- --------------------------------------------------------------------------------
First National Bank of Central California California
South Valley National Bank California
Pacific Capital Services Corporation California
KPMG Peat Marwick LLP
500 E. Middlefield Road
Mountain View, CA 94043
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Capital Bancorp:
We have audited the accompanying consolidated balance sheets of Pacific Capital
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit to obtain includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Capital
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 23, 1998
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pacific Captial Bancorp:
We consent to incorporation by reference in the registration statement (No.
33-83848) on Form S-8 of Pacific Capital Bancorp of our report dated January 23,
1998, relating to the consolidated balance sheets of Pacific Capital Bancorp
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997, which appears in the December
31, 1997, annual report, which is incorporated by reference on Form 10-K of
Pacific Capital Bancorp.
KPMG Peat Marwick LLP
Mountain View, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 34,327 48,126 49,982
<INT-BEARING-DEPOSITS> 1,287 693 573
<FED-FUNDS-SOLD> 38,226 14,910 26,405
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 110,143 116,528 220,984
<INVESTMENTS-CARRYING> 15,685 9,680 7,347
<INVESTMENTS-MARKET> 15,875 9,741 7,347
<LOANS> 300,895 388,728 419,293
<ALLOWANCE> 3,710 3,672 4,266
<TOTAL-ASSETS> 530,852 619,439 764,719
<DEPOSITS> 465,508 547,182 683,398
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 4,811 8,611 8,763
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 42,566 49,388 58,434
<OTHER-SE> 17,967 14,258 14,124
<TOTAL-LIABILITIES-AND-EQUITY> 530,852 619,439 764,719
<INTEREST-LOAN> 30,490 33,845 40,843
<INTEREST-INVEST> 8,188 10,113 12,372
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 38,678 43,958 53,215
<INTEREST-DEPOSIT> 10,922 13,292 17,356
<INTEREST-EXPENSE> 10,971 13,319 17,385
<INTEREST-INCOME-NET> 27,707 30,639 35,830
<LOAN-LOSSES> 527 685 1,520
<SECURITIES-GAINS> (73) (46) 11
<EXPENSE-OTHER> 19,352 22,727 20,884
<INCOME-PRETAX> 10,811 10,387 16,782
<INCOME-PRE-EXTRAORDINARY> 10,811 10,387 16,782
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,611 6,039 10,147
<EPS-PRIMARY> 1.55 1.41 2.36
<EPS-DILUTED> 1.50 1.36 2.28
<YIELD-ACTUAL> 8.8 0 8.6
<LOANS-NON> 2,481 1,564 2,150
<LOANS-PAST> 261 17 43
<LOANS-TROUBLED> 513 279 174
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 3,769 3,710 3,672
<CHARGE-OFFS> 850 1,070 1,143
<RECOVERIES> 264 347 217
<ALLOWANCE-CLOSE> 3,710 3,672 4,266
<ALLOWANCE-DOMESTIC> 3,710 3,672 4,266
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
