<PAGE>
[COMBANCORP STATIONERY]
July __, 1996
Dear Fellow Shareholder:
A Special Meeting of Shareholders of COMBANCORP will be held at the
Wyndham Garden Hotel (Room ___), 5757 Telegraph Road, City of Commerce,
California on August __, 1996, at 10:00 a.m., Pacific Time.
At the Special Meeting, you will be asked to consider and vote on the
approval and adoption of an Agreement and Plan of Merger, dated as of May 22,
1996, which provides for the acquisition of COMBANCORP by BanPonce Corporation
("BanPonce") through a merger of a wholly-owned indirect subsidiary of BanPonce
with and into COMBANCORP. In addition, you will be asked to consider and vote
on the approval and adoption of a related Agreement of Merger which will be
executed and filed with the Secretary of State of the State of California to
effect the merger. In the proposed merger, each outstanding share of COMBANCORP
Common Stock (other than dissenters' shares) will be converted into the right to
receive $17.31 in cash.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER PROPOSAL DESCRIBED IN THE
ATTACHED PROXY STATEMENT AND HAS DETERMINED THAT IT IS FAIR TO, AND IN THE BEST
INTERESTS OF, COMBANCORP AND ITS SHAREHOLDERS. AFTER CAREFUL CONSIDERATION,
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED MERGER. THE
EXECUTIVE OFFICERS AND DIRECTORS OF COMBANCORP HAVE CONFLICTS OF INTEREST WITH
RESPECT TO THE TRANSACTION. SEE "THE MERGER -- CONFLICTS OF INTEREST OF CERTAIN
PERSONS IN THE MERGER" IN THE ENCLOSED PROXY STATEMENT.
Accompanying this letter, you will find a Notice of Special Meeting of
Shareholders, a Proxy Statement relating to the actions to be taken by
COMBANCORP shareholders at the Special Meeting and a proxy card. The Proxy
Statement more fully describes the proposed merger and includes additional
information about COMBANCORP.
All shareholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy card in the enclosed envelope. If
you attend the Special Meeting, you may vote in person if you wish, even though
you have previously returned your proxy card. It is important that your shares
be represented and voted at the Special Meeting.
Sincerely,
RICHARD F. DEMERJIAN
Chairman of the Board and President
-------------------------------------------------------------
| YOUR VOTE IS IMPORTANT. EVEN IF YOU HAVE SOLD SHARES SINCE |
| THE JULY , 1996 RECORD DATE, ONLY YOU ARE ENTITLED TO |
| VOTE SUCH SHARES. IF YOUR COMBANCORP SHARES WERE HELD BY |
| YOUR BROKER ON THE RECORD DATE, YOU MUST INSTRUCT YOUR |
| BROKER HOW TO VOTE THE SHARES. PLEASE COMPLETE, SIGN AND |
| DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE |
| ENCLOSED RETURN ENVELOPE. |
-------------------------------------------------------------
DDD097EC
<PAGE>
COMBANCORP
6001 EAST WASHINGTON BOULEVARD
CITY OF COMMERCE, CALIFORNIA 90040
____________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST __, 1996
____________________
NOTICE IS HEREBY GIVEN of a Special Meeting of Shareholders of COMBANCORP,
a California corporation, to be held on ____________, August __, 1996 at the
Wyndam Garden Hotel (Room ___), 5757 Telegraph Road, City of Commerce,
California, at 10:00 a.m., Pacific Time (the "Special Meeting"), to consider
and vote upon the following matters:
(1) The approval and adoption of an Agreement and Plan of Merger, dated as
of May 22, 1996 (the "Reorganization Agreement"), by and among BanPonce
Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Merger Corp., a
California corporation and a wholly-owned indirect subsidiary of BanPonce
("Merger Sub"), and COMBANCORP, and a related Agreement of Merger to be executed
by COMBANCORP and Merger Sub and filed with the Secretary of State of the State
of California (the "Merger Agreement") (the Reorganization Agreement and the
Merger Agreement together being referred to as the "Acquisition Agreement")
pursuant to which Merger Sub will merge with and into COMBANCORP and each share
of COMBANCORP Common Stock then outstanding (other than dissenters' shares) will
be converted without any action on the part of the holder thereof into the right
to receive $17.31 in cash. A copy of the Reorganization Agreement is attached
as Appendix A to the accompanying Proxy Statement and a copy of the Merger
Agreement is attached as Exhibit 8.1 to the Reorganization Agreement.
(2) The transaction of such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors of COMBANCORP has approved the Acquisition Agreement
and the transactions contemplated thereby and recommends that shareholders vote
"FOR" approval and adoption of the Acquisition Agreement and such transactions.
The directors and officers of COMBANCORP have certain conflicts of interest with
respect to the transactions. See "THE MERGER -- Conflicts of Interest of
Certain Persons in the Merger" in the accompanying Proxy Statement.
Only holders of record of shares of COMBANCORP Common Stock at the close of
business on July ___, 1996 are entitled to notice of and to vote at the Special
Meeting and any adjournment thereof. Under California law, the affirmative vote
of the holders of a majority of the outstanding shares of COMBANCORP Common
Stock is necessary to approve and adopt the Acquisition Agreement.
<PAGE>
Shareholders of COMBANCORP who do not vote in favor of the Acquisition
Agreement and who comply with the requirements of Chapter 13 of the California
General Corporation Law have the right to seek appraisal of the fair value of
their shares of COMBANCORP Common Stock. See "DISSENTERS' RIGHTS" in the
accompanying Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS,
Esther G. Wilson
Corporate Secretary
City of Commerce, California
July __, 1996
---------------------------------------------------------------------
| PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD |
| PROMPTLY WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. |
| YOUR PROXY WILL BE REVOCABLE, EITHER IN WRITING OR BY VOTING IN |
| PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO ITS EXERCISE AT |
| THE MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE |
| AND REQUIRES NO POSTAGE FOR MAILING IN THE UNITED STATES. |
| SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THE ENCLOSED |
| PROXY CARD. |
---------------------------------------------------------------------
A:\NOTICE-S.MTG
<PAGE>
PROXY STATEMENT
OF
COMBANCORP
This Proxy Statement is furnished by COMBANCORP, a
California corporation, to be used in soliciting proxies of
holders of Common Stock of COMBANCORP ("COMBANCORP Common Stock")
in connection with the proposed merger (the "Merger") of
COMBANCORP and BanPonce Merger Corp., a California corporation
and a wholly-owned indirect subsidiary ("Merger Sub") of BanPonce
Corporation, a Puerto Rico Corporation ("BanPonce"), pursuant to
an Agreement and Plan of Merger, dated as of May 22, 1996, by and
among BanPonce, COMBANCORP and Merger Sub and a related Agreement
of Merger by and between COMBANCORP and Merger Sub to be filed
with the Secretary of State of the State of California to effect
the Merger.
---------------------
AVAILABLE INFORMATION
COMBANCORP is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files periodic and other
reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC") relating to its
business, financial affairs and other matters.
The periodic and other reports, proxy statements and other
information filed with the SEC by COMBANCORP pursuant to the
Exchange Act may be inspected and copied at prescribed rates at
the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, Washington, D.C. 20549, and should be
available for inspection and copying at the regional offices of
the SEC located at 7 World Trade Center, 13th floor, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
---------------------
No person is authorized to give any information or to make
any representation not contained in this Proxy Statement, and if
given or made, such information or representation should not be
relied upon as having been authorized by COMBANCORP. This Proxy
Statement does not constitute the solicitation of a proxy in any
jurisdiction in which, or from any person from whom in any
jurisdiction, it is unlawful to make such proxy solicitation.
The delivery of this Proxy Statement shall not, under any
circumstances, create any implication that there has been no
change in the information set forth herein or in the affairs of
COMBANCORP since the date of this Proxy Statement.
---------------------
This Proxy Statement is dated, and the approximate date the
proxy materials were first mailed to COMBANCORP shareholders was,
July __, 1996.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY .................................................... 1
Parties to the Merger ...................................... 1
Date, Time and Place of the Special Meeting ................ 2
Purposes of the Special Meeting ............................ 2
Record Date; Shares Entitled to Vote; Vote Required ........ 2
Market Price of COMBANCORP Common Stock Prior to
Announcement of Merger .................................... 2
Dissenters' Rights ......................................... 3
Description of the Merger; Merger Consideration ............ 3
Surrender of COMBANCORP Certificates ....................... 3
Recommendation of the COMBANCORP Board of Directors;
Opinion of COMBANCORP's Financial Advisor ................. 4
Conflicts of Interest of Certain Persons in the Merger ..... 4
COMBANCORP 1993 Stock Option Plan .......................... 4
Conditions of the Merger; Waiver; Amendment ................ 5
Termination ................................................ 5
Governmental and Regulatory Approvals ...................... 5
Accounting Treatment ....................................... 6
Certain Federal Income Tax Consequences .................... 6
SELECTED FINANCIAL DATA ..................................... 6
INTRODUCTION ................................................ 8
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING ............... 8
VOTING AND PROXIES .......................................... 9
Record Date; Vote Required; Proxies ........................ 9
Solicitation ............................................... 10
Stock Ownership of Management and Certain Beneficial
Owners .................................................... 10
THE MERGER .................................................. 12
Background ................................................. 12
Reasons for the Merger ..................................... 13
Merger Consideration; Description of the Merger ............ 14
Recommendation of the COMBANCORP Board of Directors ........ 15
Opinion of COMBANCORP's Financial Advisor .................. 16
Operations of COMBANCORP After the Merger .................. 20
Conflicts of Interest of Certain Persons in the Merger ..... 20
-i-
<PAGE>
Page
----
Severance Agreements ....................................... 20
COMBANCORP 1993 Stock Option Plan .......................... 21
Surrender of Certificates Representing COMBANCORP
Common Stock .............................................. 21
Conditions of the Merger; Waiver; Amendment ................ 22
Conduct of Business; Certain Covenants ..................... 22
Deregistration of COMBANCORP Common Stock After the
Merger .................................................... 24
Termination ................................................ 24
Accounting Treatment ....................................... 25
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..................... 25
DISSENTERS' RIGHTS .......................................... 26
INFORMATION CONCERNING COMBANCORP ........................... 29
Business ................................................... 29
Statistical Disclosure ..................................... 47
Properties ................................................. 55
Legal Proceedings .......................................... 55
Market Price of Common Stock and Dividend Information ...... 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993 ...................... 57
Financial Condition ........................................ 57
Results of Operations ...................................... 60
Liquidity and Interest Rate Sensitivity .................... 63
Capital Resources .......................................... 65
Risk Elements .............................................. 65
Effects of Inflation ....................................... 65
Recent Accounting Developments ............................. 66
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 .......... 67
Financial Condition ........................................ 67
Results of Operations ...................................... 69
Liquidity and Interest Rate Sensitivity .................... 70
Capital Resources .......................................... 71
INDEPENDENT PUBLIC ACCOUNTANTS .............................. 72
OTHER MATTERS ............................................... 72
-ii-
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND IN
THE APPENDICES HERETO AND THE DOCUMENTS REFERRED TO AND
INCORPORATED BY REFERENCE HEREIN. SHAREHOLDERS ARE URGED TO READ
THIS PROXY STATEMENT AND THE APPENDICES HERETO IN THEIR ENTIRETY.
PARTIES TO THE MERGER
COMBANCORP AND COMMERCE NATIONAL BANK
COMBANCORP, a California corporation, is a registered bank
holding company that was incorporated in 1982 to acquire all of
the outstanding shares of Commerce National Bank, a national
banking association (the "Bank"). At March 31, 1996, COMBANCORP
had total consolidated assets of approximately $69.0 million and
shareholders' equity of approximately $6.2 million. The Bank is
a full-service commercial bank providing a full range of deposit,
investment and credit services for business and individual
customers. The primary service area of the Bank includes the
City of Commerce, Montebello, Downey, Pico Rivera, Santa Fe
Springs and Los Angeles, California. At March 31, 1996, the Bank
had total assets of approximately $69.0 million and total
deposits of approximately $62.5 million. COMBANCORP has no
operations other than those of the Bank and has no other
subsidiaries. The mailing address and telephone number of the
principal executive offices of COMBANCORP and the Bank are 6001
E. Washington Boulevard, City of Commerce, California 90004,
(213)724-8800.
BANPONCE CORPORATION AND BANPONCE MERGER CORP.
BanPonce Corporation, a Puerto Rico corporation organized in
1984 ("BanPonce"), is a bank holding company which provides full-
service commercial banking and other financial services through
four subsidiaries in Puerto Rico and the continental United
States. At March 31, 1996, BanPonce had total consolidated
assets of approximately $15.8 billion and stockholders' equity of
approximately $1.2 billion.
BanPonce Merger Corp., a California corporation ("Merger
Sub"), is a corporation recently organized by BanPonce for the
purpose of effecting the acquisition of COMBANCORP. It has no
material assets and has not engaged in any activities except in
connection with such proposed acquisition. The mailing address
and telephone number of the principal executive offices of
BanPonce and Merger Sub are 209 Munoz Rivera Avenue, Hato Rey,
Puerto Rico 00918, (809)765-9800.
<PAGE>
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting of Shareholders of COMBANCORP, including
any adjournment thereof (the "Special Meeting"), will be held on
___________, August __, 1996, at 10:00 a.m., Pacific Time, at the
Wyndam Garden Hotel (Room __), 5757 Telegraph Road, City of Commerce,
California. See "INTRODUCTION."
PURPOSES OF THE SPECIAL MEETING
The purposes of the Special Meeting are (a) to consider and
vote upon a proposal (the "Merger Proposal") to approve and adopt
an Agreement and Plan of Merger, dated as of May 22, 1996 (the
"Reorganization Agreement"), by and among BanPonce, COMBANCORP
and Merger Sub and a related Agreement of Merger to be executed
by and between COMBANCORP and Merger Sub and filed with the
Secretary of State of the State of California (the "Merger
Agreement") (the Reorganization Agreement and the Merger
Agreement together shall be referred to as the "Acquisition
Agreement"), pursuant to which Merger Sub will merge with and
into COMBANCORP (the "Merger"), with COMBANCORP as the surviving
corporation (the "Surviving Corporation") and each share of
common stock of COMBANCORP (the "COMBANCORP Common Stock") then
outstanding (other than dissenters' shares) will be converted
without any action on the part of the holder thereof into the
right to receive $17.31 in cash (the "Merger Consideration"); and
(b) to transact any other business that may properly come before
the Special Meeting. A copy of the Reorganization Agreement is
attached to this Proxy Statement as Appendix A and a copy of the
Merger Agreement is attached as Exhibit 8.1 to the Reorganization
Agreement and each is incorporated herein by reference.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
Only holders of record of shares of COMBANCORP Common Stock
at the close of business on July __, 1996 (the "Record Date")
will be entitled to notice of and to vote at the Special Meeting.
At the close of business on the Record Date, there were 565,789
shares of COMBANCORP Common Stock outstanding, held by
approximately 366 holders of record.
The affirmative vote of the holders of a majority of the
shares of COMBANCORP Common Stock outstanding on the Record Date
is required to approve the Merger Proposal. As of the Record
Date, COMBANCORP executive officers and directors owned an
aggregate of 163,782 shares of COMBANCORP Common Stock,
representing approximately 29.0% of the outstanding shares of
COMBANCORP Common Stock. See "VOTING and PROXIES."
MARKET PRICE OF COMBANCORP COMMON STOCK PRIOR TO ANNOUNCEMENT OF
MERGER
On April 25, 1996, the last full trading day prior to the
joint public announcement by COMBANCORP and BanPonce of the
proposed Merger, the reported bid price for COMBANCORP Common
Stock was $9.125 per share.
-2-
<PAGE>
DISSENTERS' RIGHTS
Holders of shares of COMBANCORP Common Stock who comply with
the specific legal requirements of Chapter 13 of the General
Corporation Law of the State of California (the "California GCL")
are entitled to rights of appraisal with respect to such shares.
Shareholders electing to exercise their appraisal rights under
Chapter 13 must vote against the Merger Proposal or specify a
direction to abstain. If a shareholder returns a signed proxy
but does not specify a vote against the Merger Proposal or a
direction to abstain, the proxy will be voted for the Merger
Proposal, which will have the effect of waiving that
shareholder's appraisal rights. In addition, in order for any
shareholder to perfect appraisal rights, the shareholder, after
receipt of notice of approval of the Merger Proposal by
COMBANCORP, must make written demand upon COMBANCORP for the
purchase of his or her shares and submit certificates
representing his or her shares to COMBANCORP or its transfer
agent. See "DISSENTERS' RIGHTS" and Appendix C.
DESCRIPTION OF THE MERGER; MERGER CONSIDERATION
The Acquisition Agreement provides that, if the Merger
Proposal is approved by the shareholders of COMBANCORP and all
other conditions to the consummation of the Merger have been
satisfied or waived, (a) Merger Sub will be merged with and into
COMBANCORP, (b) COMBANCORP will become a wholly-owned indirect
subsidiary of BanPonce and (c) each share of COMBANCORP Common
Stock then outstanding (other than dissenters' shares) will be
converted without any action on the part of the holder thereof
into the right to receive the Merger Consideration.
The Merger will be effective upon the filing of the Merger
Agreement, together with required officers' certificates, with
the Secretary of State of the State of California in accordance
with the California GCL, which filing will be made as promptly as
practicable after the Merger Proposal is approved at the Special
Meeting and after all other conditions to the consummation of the
Merger have been satisfied or waived (the date of such filing
being the "Effective Date" and the time of such filing being the
"Effective Time"). It is presently anticipated that, subject to
the satisfaction or waiver of the other conditions to the
consummation of the Merger, such filing will be made on the date
of the Special Meeting. See "THE MERGER -- Conditions of the
Merger; Waiver; Amendment."
SURRENDER OF COMBANCORP CERTIFICATES
Promptly after consummation of the Merger, COMBANCORP's
transfer agent, Wells Fargo, N.A., will mail a letter of
transmittal with instructions to all holders of record of
COMBANCORP Common Stock as of the Effective Time for use in
exchanging their COMBANCORP stock certificates for the Merger
Consideration. STOCK CERTIFICATES SHOULD NOT BE SURRENDERED
UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. See "THE MERGER --
Surrender of Certificates Representing COMBANCORP Common Stock."
-3-
<PAGE>
RECOMMENDATION OF THE COMBANCORP BOARD OF DIRECTORS;
OPINION OF COMBANCORP'S FINANCIAL ADVISOR
The Board of Directors of COMBANCORP believes that the terms
of the Merger are fair to, and in the best interests of,
COMBANCORP and its shareholders and recommends to shareholders of
COMBANCORP that they vote "FOR" the Merger Proposal. Certain
executive officers and directors of COMBANCORP have conflicts of
interest with respect to the transaction. See "THE MERGER --
Conflicts of Interest of Certain Persons in the Merger."
COMBANCORP has retained The Secura Group ("Secura") to act
as its financial advisor in connection with the Merger. Secura
has delivered to the COMBANCORP Board of Directors its written
opinion, dated as of July __, 1996, to the effect that, as of
such date and based upon the matters described therein, the
Merger Consideration to be received by the holders of COMBANCORP
Common Stock was fair, from a financial point of view, to such
shareholders (the "Fairness Opinion"). The opinion of Secura is
directed to the fairness of the Merger Consideration and does not
constitute a recommendation to any shareholder as to how to vote
at the Special Meeting. Reference is made to the full text of
the Fairness Opinion, a copy of which is attached as Appendix B,
for the specific assumptions made and matters considered by
Secura. This opinion should be read in its entirety by
COMBANCORP shareholders. See "THE MERGER -- Background,"
"-- Recommendation of the COMBANCORP Board of Directors" and
"-- Opinion of COMBANCORP's Financial Advisor."
CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER
On the Effective Date, the Bank will enter into severance
agreements (the "Severance Agreements") with each of Richard F.
Demerjian and Esther G. Wilson, each of whom is an executive
officer and director of COMBANCORP and the Bank. For a
discussion of the terms of the Severance Agreements, see "THE
MERGER -- Severance Agreements."
Pursuant to the Reorganization Agreement, all outstanding
stock options to acquire COMBANCORP Common Stock, including those
held by executive officers and directors of COMBANCORP, will be
cancelled and converted into the right to receive $10.31 per
share. See "THE MERGER -- COMBANCORP 1993 Stock Option Plan."
COMBANCORP 1993 STOCK OPTION PLAN
The Reorganization Agreement provides that each outstanding
option to purchase COMBANCORP Common Stock ("Stock Option")
granted under the COMBANCORP 1993 Stock Option Plan, as amended
(the "Option Plan"), whether or not exercisable, shall be
cancelled by COMBANCORP and converted into the right to receive
$10.31 per share of COMBANCORP Common Stock subject to such Stock
Options. See "THE MERGER -- COMBANCORP 1993 Stock Option Plan.
-4-
<PAGE>
CONDITIONS OF THE MERGER; WAIVER; AMENDMENT
In addition to approval by the shareholders of COMBANCORP,
the consummation of the Merger is conditioned upon (a) receipt of
required regulatory approvals by the Federal Reserve Board and
other governmental regulatory agencies; (b) the absence of any
order, decree or injunction of, or litigation or proceeding
before, any court or agency enjoining or prohibiting, or seeking
to enjoin or prohibit, the consummation of the Merger; (c) the
Bank having entered into the Severance Agreements with Mr.
Demerjian and Ms. Wilson; and (d) certain other conditions. The
Reorganization Agreement also provides that prior to the
Effective Time, any provisions of the Reorganization Agreement
may be waived by the party benefitted by the provision, or
amended or modified at any time (including a change to the
structure of the transaction) by an agreement in writing between
the parties to the Reorganization Agreement approved by their
respective Boards of Directors, except that, after the vote by
the shareholders of COMBANCORP, no amendment may be made that
would contravene California law. See "THE MERGER -- Conditions
of the Merger; Waiver; Amendment."
TERMINATION
The Reorganization Agreement provides that it may be
terminated and the Merger abandoned, prior to the Effective Time,
either before or after approval by the shareholders of COMBANCORP
and Merger Sub: (a) by mutual consent of BanPonce and COMBANCORP
duly authorized by the vote of a majority of the members of the
entire Boards of Directors of BanPonce and COMBANCORP; (b) by
either BanPonce or COMBANCORP if its Board of Directors so
determines by vote of a majority of the members of its entire
board, in the event of (i) the failure of the shareholders of
COMBANCORP to approve the Merger Proposal at the Special Meeting
or (ii) a material breach by the other party thereto of any
representation, warranty, covenant or agreement contained in the
Reorganization Agreement which is not cured or not curable within
30 days after written notice of such breach to the breaching
party; (c) by either BanPonce or COMBANCORP by written notice to
the other party of either (y) any approval, covenant or waiver
required by a governmental authority for consummation of the
Merger having been denied or (z) any governmental authority of
competent jurisdiction having issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the Merger; or
(d) by BanPonce or COMBANCORP, if its Board of Directors so
determines by vote of a majority of the members of its entire
Board of Directors, in the event that the Merger is not
consummated by January 6, 1997, unless the failure to so
consummate by such time is due to the breach of any
representation, warranty or covenant contained in the
Reorganization Agreement by the party seeking to terminate. See
"THE MERGER -- Termination."
GOVERNMENTAL AND REGULATORY APPROVALS
COMBANCORP and BanPonce are registered bank holding
companies and as such are regulated by the Federal Reserve Board.
The approval of the Federal Reserve Board of the Merger is
required in order to consummate the Merger.
-5-
<PAGE>
When the approval of the Federal Reserve Board has been
obtained, COMBANCORP and BanPonce must wait at least 30 days
prior to consummating the Merger. During this 30-day period, the
Department of Justice may object to the Merger on antitrust
grounds.
The regulatory approval sought in connection with the Merger
may be obtained or denied prior to or after the Special Meeting.
The vote on the Merger Proposal at the Special Meeting is not
dependent or conditioned upon receipt of any such approval prior
to the Special Meeting. Even if the Merger Proposal is approved
at the Special Meeting, the Merger, nevertheless, may not be
consummated thereafter. Failure to receive the requisite
regulatory approvals will result in termination of the
Acquisition Agreement.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" for
financial accounting purposes in accordance with generally
accepted accounting principles. See "THE MERGER -- Accounting
Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The exchange of shares of COMBANCORP Common Stock in the
Merger for the Merger Consideration will be a taxable transaction
to COMBANCORP shareholders and gain or loss will be recognized by
such shareholders measured by the difference between the amount
of cash received in the Merger and the tax basis of the shares of
COMBANCORP Common Stock surrendered in exchange therefor. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and the
notes thereto included elsewhere in this Proxy Statement. The
statement of operations data set forth below with respect to each
of the three years in the period ended December 31, 1995 and the
balance sheet data at December 31, 1995 and 1994 are derived from
the audited consolidated financial statements included elsewhere
in this Proxy Statement. The statement of operations data for
the years ended December 31, 1992 and 1991 and the balance sheet
data at December 31, 1993, 1992 and 1991 are derived from audited
financial statements not included herein. The statement of
operations data for the three months ended March 31, 1996 and
1995 and the balance sheet data at March 31, 1996 are derived
from unaudited consolidated financial statements included in this
Proxy Statement. The balance sheet data at March 31, 1995 is
derived from unaudited consolidated financial statements not
included herein. The unaudited financial statements include all
adjustments (consisting only of normal recurring accruals) that
COMBANCORP considers necessary for a fair presentation of the
financial information set forth therein. The results of
operations for the three months ended March 31, 1996 are not
necessarily indicative of results to be expected for the entire
year.
-6-
<PAGE>
<TABLE>
Three Months Ended
March 31, Year Ended December 31,
------------------------- ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income $ 1,210,511 $ 1,326,959 $ 5,200,048 $ 4,193,219 $ 2,877,264 $ 3,369,831 $ 3,882,298
Interest Expense 305,080 280,460 1,199,411 884,421 640,741 924,485 1,555,078
Net Interest Income 905,431 1,046,499 4,000,637 3,308,798 2,236,523 2,445,346 2,327,220
Provision forLoan Losses (130,000) (30,000) (649,000) (292,800) (651,314) (85,000) (107,000)
Net Interest Income After
Provision for Loan Losses 775,431 1,016,499 3,351,637 3,015,998 1,585,209 2,360,346 2,220,220
Other Income 150,949 177,311 609,522 619,498 558,814 517,673 416,088
Other Operating Expenses 782,117 902,074 (3,399,064) (2,814,859) (2,420,863) (2,465,206) (2,403,478)
Net Income (Loss) Before
Income Taxes & Cumulative
Effect of a Change in
Accounting Principle 144,263 291,736 562,095 820,637 (276,840) 412,813 232,830
Provision for Income Taxes (60,400) (121,100) (233,000) (352,000) 87,500 (170,400) (99,500)
Income (Loss) Before
Cumulative Effect of a
Change in Accounting Principle 83,863 170,636 329,095 468,637 (189,340) 242,413 133,330
Cumulative Effect of a Change
in Accounting Principle -- -- -- -- 55,582 -- --
Net Income (Loss) $ 83,863 $ 170,636 $ 329,095 $ 468,637 $ (133,758) $ 242,413 $ 133,330
BALANCE SHEET DATA:
Interest-bearing Deposits
in Other Banks $ 9,690,000 $ 8,699,000 $11,755,000 $ 8,102,000 $ 7,974,874 $ 6,692,734 $ 6,219,035
Securities 25,158,203 18,476,764 21,166,565 16,950,404 13,030,912 3,038,206 3,342,335
Net Loans 23,188,103 23,982,223 23,188,851 24,965,076 21,633,656 24,074,047 27,508,185
Total Assets 68,969,617 70,298,160 68,830,029 71,188,448 51,350,657 39,888,021 42,828,966
Total Deposits 62,524,042 63,800,994 62,023,797 64,899,298 45,539,681 33,863,116 36,910,549
Shareholders' Equity 6,221,627 6,086,838 6,384,910 5,946,627 5,666,825 5,778,344 5,581,194
PER SHARE DATA:
Earnings (Loss) Per Common
Share:
Earnings (Loss) Before
Cumulative Effect of a
Change in Accounting
Principle $ 0.15 $ 0.30 $ 0.58 $ 0.83 $ (0.34) $ 0.43 $ 0.24
Cumulative Effect of a
Change in Accounting
Principle -- -- -- -- $ 0.10 -- --
Earnings (Loss) Per
Common Share $ 0.15 $ 0.30 $ 0.58 $ 0.83 $ (0.24) $ 0.43 $ 0.24
Dividends Per Common Share $ -- $ 0.25 $ 0.25 -- $ 0.09 $ 0.08 $ 0.07
Book Value Per Share $ 11.00 $ 10.76 $ 11.28 $ 10.51 $ 10.02 $ 10.21 $ 9.86
KEY RATIOS:
Non-performing Loans $ 284,300 $ 577,500 $ 269,688 $ 397,100 $ 1,774,712 $ 733,768 $ 817,875
As a Percent of Gross Loans 1.2% 2.3% 1.1% 1.5% 8.0% 3.0% 3.0%
As a Percent of Total Assets 0.4% 0.8% 0.4% 0.6% 3.5% 1.8% 1.9%
Risk-based Capital Ratios:(1)
Tier 1 18.2% 17.7% 17.6% 16.7% 19.6% 19.5% 17.1%
Total 19.4% 18.9% 18.3% 17.9% 20.8% 20.9% 18.1%
Leverage Ratio 8.6% 7.9% 8.4% 7.7% 10.0% 13.7% 12.9%
</TABLE>
(1) The Company is currently exempt from the Federal Reserve
Board's risk-based guidelines because consolidated assets are
under $150 million. These ratios apply to the Bank only.
<PAGE>
INTRODUCTION
THIS PROXY STATEMENT AND THE ACCOMPANYING LETTER TO SHAREHOLDERS, NOTICE
OF SPECIAL MEETING AND PROXY CARD ARE BEING FURNISHED ON OR ABOUT JULY __, 1996
TO THE SHAREHOLDERS OF COMBANCORP, A CALIFORNIA CORPORATION, IN CONNECTION
WITH THE SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS OF COMBANCORP FROM
HOLDERS OF OUTSTANDING SHARES OF COMBANCORP COMMON STOCK TO BE VOTED AT A
SPECIAL MEETING OF SHAREHOLDERS OF COMBANCORP TO BE HELD ON _________________,
AUGUST __, 1996, AT 10:00 A.M., PACIFIC TIME, AND AT ANY ADJOURNMENT
THEREOF.
At the Special Meeting, the holders of the outstanding shares of
COMBANCORP Common Stock will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger, dated as of May 22, 1996,
by and among BanPonce Corporation, a Delaware corporation, COMBANCORP and
BanPonce Merger Sub, a California corporation and a wholly-owned indirect
subsidiary of BanPonce, and a related Agreement of Merger to be executed by
COMBANCORP and Merger Sub and filed with the Secretary of State of the State
of California pursuant to which Merger Sub will be merged with and into
COMBANCORP and each share of COMBANCORP Common Stock then outstanding (other
than dissenters' shares) will be converted without any action on the part of
the holder thereof into the right to receive $17.31 in cash. The Board of
Directors of COMBANCORP does not know of any other matters to be presented
for consideration at the Special Meeting.
This Proxy Statement contains certain information set forth more fully
in the Reorganization Agreement attached hereto as Appendix A and the Merger
Agreement attached as Exhibit 8.1 to the Reorganization Agreement, and is
qualified in its entirety by reference to such agreements. The Reorganization
Agreement and the Merger Agreement are incorporated herein by reference and
should be read carefully by each COMBANCORP shareholder in formulating his or
her decision with respect to the Merger Proposal.
The Board of Directors of COMBANCORP has approved the Acquisition
Agreement and determined that the Acquisition Agreement and the transactions
contemplated thereby are fair to, and in the best interests of, COMBANCORP
and its shareholders. THE BOARD OF DIRECTORS OF COMBANCORP RECOMMENDS THAT
SHAREHOLDERS OF COMBANCORP VOTE "FOR" THE MERGER PROPOSAL. CERTAIN EXECUTIVE
OFFICERS AND DIRECTORS OF COMBANCORP HAVE CONFLICTS OF INTEREST WITH RESPECT
TO THE TRANSACTIONS. SEE "THE MERGER -- CONFLICTS OF INTEREST OF CERTAIN
PERSONS IN THE MERGER."
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
As described in COMBANCORP's proxy statement relating to its 1995 Annual
Meeting of Shareholders, proposals to be presented by shareholders of
COMBANCORP at the 1996 Annual Meeting of Shareholders (to be held only if the
Merger is not consummated) must have been received by COMBANCORP not later
than December 18, 1995 in order that they be
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<PAGE>
considered for inclusion in the proxy statement and form of proxy relating to
that meeting. No such proposals were received by COMBANCORP's Secretary by
such date.
VOTING AND PROXIES
RECORD DATE; VOTE REQUIRED; PROXIES
Only holders of record of shares of COMBANCORP Common Stock at the close
of business on July __, 1996 (the "Record Date") will be entitled to notice
of and to vote at the Special Meeting. At the close of business on the Record
Date, there were 565,789 shares of COMBANCORP Common Stock issued and
outstanding, held by approximately 366 holders of record.
Holders of record of shares of COMBANCORP Common Stock on the Record
Date are entitled to one vote per share on the Merger Proposal and any other
matters that properly come before the Special Meeting. The presence, either
in person or by proxy, of the holders of a majority of the shares of
COMBANCORP Common Stock outstanding on the Record Date is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of the
holders of a majority of the shares of COMBANCORP Common Stock outstanding on
the Record Date is required to approve the Merger Proposal. Any shareholder
present, in person or by proxy (including broker non-votes), at the Special
Meeting, but who abstains from voting, will be counted for purposes of
determining whether a quorum exists. With respect to the Merger Proposal and
any other matters considered at the Special Meeting, abstentions (or broker
non-votes) will have the same effect as a vote against the proposal.
As of the Record Date, COMBANCORP executive officers and directors owned
an aggregate of 163,782 shares of COMBANCORP Common Stock, representing
approximately 29.0% of the outstanding shares of COMBANCORP Common Stock. All
of such persons intend to vote "FOR" the Merger Proposal.
Shares of COMBANCORP Common Stock represented by properly executed
proxies will be voted in accordance with the instructions indicated thereon,
unless such proxies have been revoked. If no contrary instructions are
indicated, such shares will be voted FOR the Merger Proposal. Such shares
will also be voted in the discretion of the persons named as proxies as to
any other matter which properly comes before the Special Meeting. COMBANCORP
is not aware of any other business to be transacted at the Special Meeting. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by delivering a written notice of revocation
or a duly executed proxy bearing a later date to Esther G. Wilson, Corporate
Secretary, COMBANCORP, 6001 E. Washington Blvd., City of Commerce, California
90040.
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<PAGE>
SOLICITATION
COMBANCORP will bear the costs of the solicitation of proxies from its
shareholders. In addition to soliciting proxies by mail, directors, officers
and employees of COMBANCORP, without receiving additional compensation
therefor, may solicit proxies by telephone, by facsimile, by written
correspondence or in person. Arrangements will also be made with brokerage
firms and other custodians, nominees and fiduciaries to forward solicitation
material to the beneficial owners of shares of COMBANCORP Common Stock held
of record by such persons, and COMBANCORP will reimburse such brokerage
firms, custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred by them in connection therewith. COMBANCORP has retained
The Herman Group to aid in the solicitation of proxies. The fees of such firm
are $2,000, plus reimbursement of out-of-pocket expenses.
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of COMBANCORP Common Stock as of July __, 1996 by (a)
each person known by COMBANCORP to be the beneficial owner of 5% or more of
the outstanding COMBANCORP Common Stock, (b) each director and (c) all
directors and executive officers as a group:
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
- ------------------------ --------------------- --------
Adelle N. Soffa (2) 45,936 8.1%
Edith Sugden (3) 44,503 7.9%
Richard F. Demerjian (4) 60,219 10.3%
Robert L. Glover (5) 43,175 7.6%
Jack Minasian (6) 21,500 3.8%
James C. Oppenheim (7) 22,291 3.9%
Phillip J. Pace (8) 48,546 8.5%
Richard J. Strayer (6) 8,850 1.6%
Esther G. Wilson (9) 15,451 2.7%
All directors and executive officers
as a group (8 persons) (10) 220,032 35.4%
_______________
(1) Unless otherwise indicated, the named individual has sole voting and
investment power with respect to all shares. For each beneficial owner,
the number of shares outstanding
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<PAGE>
and the percentage of stock ownership includes the number of shares
issuable upon exercise of stock options exercisable within 60 days.
(2) The business address of Mrs. Soffa, a 5% or more shareholder, is 5901
Corvette Street, City of Commerce, California 90040.
(3) The business address of Mrs. Sugden, a 5% or more shareholder, is 6832
Foster Bridge Road, Bell Gardens, California 90201.
(4) Includes 625 shares owned by Mr. Demerjian's wife, 4,216 shares allocated
to Mr. Demerjian's account and held in trust under COMBANCORP's Employee
Stock Ownership Plan (the "ESOP") and 18,750 shares which may be acquired
within 60 days through the exercise of outstanding options. Mr. Demerjian
disclaims any beneficial interest in the shares owned by his wife. Mr.
Demerjian's business address is the same as that of COMBANCORP.
(5) Includes 5,000 shares which may be acquired within 60 days through the
exercise of outstanding options. Mr. Glover's business address is
Bettermade Plastics, 730 South Epperson Drive, City of Industry, California
91748.
(6) Includes 5,000 shares which may be acquired within 60 days through the
exercise of outstanding options.
(7) Includes 125 shares owned by Oppenheim Insurance Agency, Inc., of which Mr.
Oppenheim is President, a director and principal shareholder, and 5,000
shares which may be acquired within 60 days through the exercise of
outstanding options.
(8) Includes 5,000 shares which may be acquired within 60 days through the
exercise of outstanding options. Mr. Pace's business address is Pace Land &
Development, 4000 North Montebello Blvd., Montebello, California 90640.
(9) Includes 2,826 shares allocated to Ms. Wilson's account and held in trust
under the ESOP, and 12,500 shares which may be acquired within 60 days
through the exercise of outstanding options.
(10) Includes an aggregate of 7,042 shares held in trust under the ESOP and
56,250 shares which may be acquired within 60 days through the exercise of
outstanding options.
-11-
<PAGE>
THE MERGER
BACKGROUND
In November 1995, COMBANCORP was approached by Secura regarding
BanPonce's interest in acquiring a community bank in the Bank's market area.
On November 15, 1995, the Board of Directors (the "Board") of COMBANCORP
considered preliminary information provided by Secura relating to a possible
acquisition of COMBANCORP by BanPonce. The Board authorized COMBANCORP to
engage Secura to evaluate COMBANCORP's strategic alternatives and to assist
in evaluating and negotiating the sale of COMBANCORP to BanPonce. BanPonce
commenced its review of COMBANCORP's and the Bank's books and records in
January 1996.
On February 28, 1996, the Board met to consider an initial acquisition
proposal submitted by BanPonce. At the meeting, Secura advised the Board
regarding COMBANCORP's strategic alternatives, the structure of the BanPonce
proposal and the merger environment in the Southern California market. Based
upon the foregoing and its analysis of the BanPonce proposal, the Board
determined that the BanPonce proposal was inadequate. The Board authorized
its Chairman to continue discussions with BanPonce and to report to the Board
on the progress of the negotiations.
During March 1996, representatives of BanPonce and COMBANCORP continued
discussions. On March 21, 1996, the Chairman met with representatives of
BanPonce in Chicago to discuss the terms of a proposed letter of intent
outlining BanPonce's revised acquisition proposal. The Board met again on
March 26, 1996 for a report on the status of negotiations and to reconsider
the BanPonce acquisition proposal. The Board carefully reviewed the BanPonce
proposal, the financial condition of COMBANCORP and the merger environment in
the Southern California market. Based upon the foregoing, the Board
determined a range of values for COMBANCORP and authorized the Chairman to
continue negotiations with BanPonce within the range of values estimated by
the Board.
The Board met again on April 17, 1996 for a briefing on the status of
negotiations with BanPonce. The Board thereafter determined to continue
negotiations with BanPonce and to authorize the Chairman to execute a letter
of intent substantially upon terms approved by the Board at the meeting. On
April 24, 1996, the Chairman and representatives of BanPonce agreed upon
terms for the sale of COMBANCORP to BanPonce and executed a letter of intent,
subject to approval by COMBANCORP's and BanPonce's respective boards of
directors and execution of a definitive agreement between the parties.
Thereafter, the Chairman and representatives of BanPonce, along with their
respective counsels, negotiated the terms of an Acquisition Agreement and
related documents, subject to approval by each party's Board of Directors.
The terms and form of the Acquisition Agreement and related documents
were then considered at a Special Meeting of the Board held on May 22, 1996.
At the meeting, a representative of Secura advised the Board regarding the
Acquisition Agreement and the
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<PAGE>
transactions contemplated thereby, and delivered a written opinion that the
consideration to be received by the shareholders of COMBANCORP was fair from
a financial point of view. Based upon the fairness opinion of Secura and its
analysis of the Acquisition Agreement and the transactions contemplated
thereby, and the factors listed below, the Board determined that the Merger
was fair to, and in the best interests of, COMBANCORP and its shareholders,
and authorized the execution and delivery of the Acquisition Agreement,
subject to such changes therein and additions thereto as the Chairman, with
the advice of counsel, shall deem necessary or advisable. The Acquisition
Agreement was executed and delivered on behalf of COMBANCORP, BanPonce and
Merger Sub later that day.
REASONS FOR THE MERGER
COMBANCORP
In reaching its decision that the Merger is in the best interests of
COMBANCORP and its shareholders, COMBANCORP's Board consulted with its
financial and other advisors, as well as with COMBANCORP'S management, and
considered a number of factors, including, without limitation, the following:
(a) The financial condition and results of operations of, and prospects
for, each of COMBANCORP and the Bank;
(b) The market for the Bank's services and the competitive pressures
existing in the Bank's market area;
(c) The additional capital available to the Bank as a result of being a
subsidiary of a large, diversified financial institution, which would
enable the Bank to expand more aggressively to serve better both its
existing and potential customers in its market area;
(d) The status of the current merger environment in the Southern California
market;
(e) The terms of comparable transactions;
(f) The illiquidity in the market for the COMBANCORP Common Stock;
(g) The amount and type of consideration to be received by COMBANCORP's
shareholders pursuant to the Acquisition Agreement; and
(h) The opinion received from Secura that the consideration to be received
by the shareholders of COMBANCORP pursuant to the Merger is fair from a
financial point of view. See "Opinion of Financial Advisor".
COMBANCORP's Board did not assign any specific or relative weight to the
foregoing factors in its deliberations.
-13-
<PAGE>
BASED UPON THE FOREGOING, COMBANCORP'S BOARD OF DIRECTORS HAS APPROVED
THE ACQUISITION AGREEMENT AND THE RELATED MERGER, BELIEVES THAT THE
ACQUISITION AGREEMENT AND THE RELATED MERGER ARE IN THE BEST INTERESTS OF ITS
SHAREHOLDERS, AND RECOMMENDS THAT ALL SHAREHOLDERS VOTE "FOR" THE MERGER
PROPOSAL.
BANPONCE
In reaching its decision to effect the Merger, BanPonce consulted with
its financial and other advisors, and considered a number of factors,
including, without limitation, the following:
(a) that the Merger would allow BanPonce to expand its current bankng
activities in California and serve a greater number of California
customers; and
(b) the opportunity for further growth of its banking activities in
California that the Merger would provide.
BanPonce did not assign any specific or relative weight to the foregoing
factors in its deliberations.
MERGER CONSIDERATION; DESCRIPTION OF THE MERGER
If the Merger Proposal is approved by the shareholders of COMBANCORP and
all other conditions to the consummation of the Merger have been satisfied or
waived, (a) Merger Sub will be merged with and into COMBANCORP, with
COMBANCORP as the surviving corporation, (b) the Surviving Corporation will
be a wholly-owned indirect subsidiary of BanPonce, (c) each share of
COMBANCORP Common Stock outstanding immediately prior to the Effective Time
will be converted without any action on the part of the holder thereof into
the right to receive $17.31 in cash, except that shares as to which
dissenters' rights are perfected in accordance with the California GCL will
be entitled only to the rights granted to dissenters by the California GCL
(see "DISSENTERS' RIGHTS"), and (d) immediately prior to the Effective Time,
each outstanding Stock Option granted under the Option Plan, whether or not
then exercisable, shall be cancelled by COMBANCORP and each holder of a
cancelled Stock Option shall receive in cancellation and full satisfaction of
all rights of such holder under the Stock Option, cash in the amount of
$10.31 per share.
As promptly as practicable after the Merger Proposal has been approved
by the shareholders of COMBANCORP and after all other conditions to the
consummation of the Merger have been satisfied or waived, the Merger will be
effected by filing the Merger Agreement together with required officers'
certificates with the Secretary of State of the State of California in
accordance with Chapter 11 of the California GCL. It is presently anticipated
that, subject to the satisfaction or waiver of the other conditions to the
consummation of the Merger, such filing will be made on the date of the
Special Meeting.
-14-
<PAGE>
RECOMMENDATION OF THE COMBANCORP BOARD OF DIRECTORS
The COMBANCORP Board carefully considered the Acquisition Agreement and
the transactions contemplated thereby, including a review of financial, legal
and market considerations with the assistance of outside financial and legal
advisors, and determined that the terms of the acquisition of COMBANCORP by
BanPonce pursuant to the Acquisition Agreement are fair to, and in the best
interests of, COMBANCORP and its shareholders. Accordingly, the Board
approved the Acquisition Agreement and related transactions, including the
Merger Consideration and recommended that all COMBANCORP shareholders vote
"FOR" the Merger Proposal. Certain executive officers of COMBANCORP have
conflicts of interest with respect to the transaction. See "THE MERGER --
Conflicts of Interest of Certain Persons in the Merger."
OPINION OF COMBANCORP'S FINANCIAL ADVISOR
Secura has acted as financial advisor to COMBANCORP in connection with
the Merger, as described under "Background." As part of its role as financial
advisor to COMBANCORP, Secura was engaged to render to the Board of
COMBANCORP an opinion as to the fairness, from a financial point of view, of
the consideration to be offered to COMBANCORP's shareholders in the Merger.
On May 22, 1996, in connection with the evaluation of the Reorganization
Agreement by the Board of COMBANCORP, Secura made a presentation to the Board
with respect to the Merger and rendered a written opinion dated May 22, 1996
that, as of the date of such opinion, and subject to certain assumptions,
factors and limitations set forth in such written opinion as described below,
the consideration to be offered to COMBANCORP's shareholders in the Merger
was fair, from a financial point of view, to such shareholders. Secura's
opinion was reconfirmed in its written opinion dated July __, 1996.
THE FULL TEXT OF THE WRITTEN OPINION OF SECURA, DATED JULY __, 1996,
WHICH SETS FORTH ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY SECURA, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT. COMBANCORP SHAREHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY
IN ITS ENTIRETY.
No limitations were imposed by COMBANCORP on the scope of Secura's
investigation or the procedures to be followed by Secura in rendering its
opinion. Secura was not requested to and did not make any recommendation to
the Board of COMBANCORP with respect to the form or amount of consideration
to be offered to COMBANCORP's shareholders in the Merger, which was
determined through arms-length negotiations between COMBANCORP and its
financial and legal advisors and BanPonce and its financial and legal
advisors. In arriving at this opinion, Secura did not ascribe a specific
range of values to COMBANCORP, but made its determination as to the fairness,
from a financial point of view, of the consideration to be offered to
COMBANCORP's shareholders on the basis of the financial and comparative
analyses described below. Secura's opinion is directed solely to the Board of
COMBANCORP and does
-15-
<PAGE>
not constitute a recommendation to any COMBANCORP shareholder as to how such
shareholder should vote with respect to the Merger Proposal at the Special
Meeting. The summary of the Fairness Opinion of Secura set forth in this
Proxy Statement is qualified in its entirety by reference to the full text of
the Fairness Opinion, a copy of which is attached as Appendix B. Secura was
not requested to opine as to, and its opinion does not in any manner address,
COMBANCORP's underlying business decision to proceed with or effect the
Merger.
OPINION OF FINANCIAL ADVISOR
In connection with rendering its opinion, Secura reviewed and analyzed
material bearing upon the financial condition and operating performance of
COMBANCORP and BanPonce and material prepared in connection with the proposed
Merger. Among other things, Secura: (a) reviewed COMBANCORP's Annual Reports
on Form 10-K and related financial information for the five fiscal years
ended December 31, 1995, and COMBANCORP's Quarterly Report on Form 10-Q and
the related unaudited financial information for the quarterly period ended
March 31, 1996; (b) reviewed BanPonce's Annual Reports on Form 10-K and
related financial information for the five fiscal years ended December 31,
1995, and BanPonce's Quarterly Report on Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1996; (c)
reviewed certain other internal information prepared by COMBANCORP including,
but not limited to, nonperforming asset reports, interest rate risk exposure
reports and financial forecasts, relating to the business, earnings, assets
and future prospects of COMBANCORP, furnished to Secura by COMBANCORP; (d)
conducted discussions with members of senior management of COMBANCORP and
BanPonce concerning their respective businesses, operations, regulatory
condition and future prospects; (e) reviewed the historical market prices and
trading activity for COMBANCORP Common Stock and compared them with those of
certain publicly traded companies Secura deemed to be relevant; (f) compared
the results of operation of COMBANCORP and BanPonce with those of certain
companies which Secura deemed to be relevant; (g) compared the proposed
financial terms of the Merger contemplated by the Acquisition Agreement with
the financial terms of certain other mergers and acquisitions which Secura
deemed to be relevant; (h) analyzed the pro forma impact of the transaction
on BanPonce's earnings and book value per share, consolidated capitalization
and certain balance sheet and profitability ratios; (i) reviewed the
Acquisition Agreement; and (j) reviewed such other financial information,
studies and analyses and performed such other investigations and took into
account such other matters as Secura deemed necessary to the rendering of its
opinion.
Secura also met with certain officers and representatives of COMBANCORP
and BanPonce to discuss the foregoing as well as other matters that Secura
believed relevant to its inquiry. Secura also considered such financial
conditions and its experience in other transactions, as well as its
experience in securities valuations and knowledge of the financial services
industries generally. Secura's opinion was necessarily based upon conditions
as they existed and could be evaluated on the dates thereof and the
information made available to Secura through the dates thereof.
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<PAGE>
In conducting its review and arriving at its opinions, Secura relied
upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available and did not attempt
independently to verify the same. Secura has relied upon the management of
COMBANCORP as to the reasonableness and achievability of the financial
forecasts provided to Secura, and the assumptions and bases therefor, and
assumed that such forecasts reflected the best currently available estimates
and judgments of COMBANCORP management and that such forecasts would be
realized in the amounts and time periods estimated by COMBANCORP management.
Secura also assumed, without independent verification, that the aggregate
allowance for loan losses for COMBANCORP is reasonable, in current economic
conditions, to cover potential losses in the loan portfolio. Secura did not
make or obtain any evaluation or appraisals of the assets or liabilities of
COMBANCORP.
In connection with rendering its opinions to COMBANCORP's Board, Secura
performed a variety of financial analyses. All material valuation
methodologies considered by Secura in connection with the preparation of its
opinion are summarized below. The summary of the analyses and the summary set
forth herein must be considered as a whole. Selecting portions of such
analyses, could create an incomplete view of the analysis and processes
underlying Secura's opinions. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary descriptions.
In performing its analyses, Secura made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond the control of COMBANCORP, BanPonce or
Secura. Such analyses were prepared solely as part of Secura's analysis of
the fairness of the Merger Consideration to COMBANCORP shareholders. No
company or transaction utilized in Secura's analyses was identical to
COMBANCORP or BanPonce or the Merger. Accordingly, such analyses are not
based solely on arithmetic calculations; rather, they involve complex
considerations and judgments concerning differences in financial and
operating characteristics of the relevant companies, the timing of the
relevant transactions, and prospective buyer and seller interest, as well as
other factors that could affect the values of the company or companies to
which they are being compared. Any estimates contained in Secura's analyses
are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. In addition, estimates of values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies or their
securities actually may be sold. Furthermore, as described previously,
Secura's opinion is just one of many factors taken into consideration by
COMBANCORP's Board.
The following is a brief summary of the analyses performed by Secura in
connection with its opinion:
FINANCIAL PEER GROUP ANALYSIS. In rendering its opinion, Secura examined
the operating performance of COMBANCORP in comparison to peer group
institutions having assets of between $65 million and $25 million that Secura
deemed to be comparable to COMBANCORP.
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These groups of companies comprised of 23 banking institutions based in the
state of California (the "California Peer Group"), 37 banking institutions
based in eight western states (the "West Peer Group") and 539 banking
institutions located throughout the United States (the "National Peer
Group"). Secura analyzed the relative performance and outlook for COMBANCORP
by comparing certain financial performance information of COMBANCORP with the
three peer groups. Secura compared COMBANCORP with the peer groups based on
selected operating ratios, including profitability, capital adequacy and
asset quality. Using the latest available financial data as of December 31,
1995, the median Return on Average Assets for the California Peer Group, West
Peer Group, and National Peer Group were 1.11%, 1.11%, and 1.21%,
respectively, compared to 0.51% for COMBANCORP. The median Equity to Assets
ratios for the California Peer Group, West Peer Group, and National Peer
Group were 9.17%, 8.92%, and 9.43%, respectively, compared to 8.92% for
COMBANCORP. The median Nonperforming Assets to Total Assets ratios for the
California Peer Group, West Peer Group, and National Peer Group were 1.19%,
0.99%, and 0.44%, respectively, compared to 0.55% for COMBANCORP.
COMPARABLE TRANSACTIONS. Secura performed an analysis of certain
comparable California Peer Group, West Peer Group and National Peer Group
acquisition transactions with a aggregate purchase price of the target bank
of between $5 and $20 million. Secura reviewed the acquisition prices
relative to stated book value, tangible book value, latest twelve months
earnings and the tangible book value premium relative to core deposits. The
analysis included all transactions announced or closed from October 1, 1995
through May 10, 1996. Secura also segregated the information by cash
transactions and compared similar information. The analysis include a total
of six transactions in California, seven in the West and 56 Nationwide.
The results of this analysis revealed that the median acquisition price
to stated book value of 126%, 122% and 188% for California Peer Group, West
Peer Group and National Peer Group acquisitions, respectively, compared to
167% for BanPonce's offer to purchase COMBANCORP. The median acquisition
price to latest twelve months earnings were 15.4 times, 15.8 times, and 16.0
times, respectively, compared to 42.8 times for BanPonce's offer to purchase
COMBANCORP. Finally, the tangible book value premium over core deposits was
4.32%, 3.30%, and 10.56%, respectively, compared to 7.47% for BanPonce's
offer to purchase COMBANCORP.
CASH FLOW ANALYSIS. Secura prepared a discounted dividend analysis for
COMBANCORP using projections internally prepared by COMBANCORP management
through the year 2000 and assumed an asset growth rate of 5% with projected
equity to assets being maintained at a constant level of 10.17% while return
on average assets grew gradually to 1.30% in year 2006. Discount rates of
12%, 13% and 14% were used in this analysis. This analysis showed a range of
present values of COMBANCORP from $9.22 to $12.02 per share or 0.84% to 1.11%
of book value as of December 31, 1995. These results have not given effect to
additional leveraging of excess capital.
Secura also prepared a discounted dividend analysis based upon a range
of terminal price to book values at the end of the year 2000. This analysis
assumed that at the end of the year
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2000, COMBANCORP could be sold for a premium price of 140% to 190% of book
value. Discount rates of 12%, 13% and 14% were also used in this analysis.
Based on this analysis, and including the assumed dividends in the preceding
paragraph, a projected range of present values for a theoretical value of
COMBANCORP could be between $13.12 to $18.25 per share.
These analyses do not purport to be indicative of actual values or
expected values of the shares of COMBANCORP before or after the Merger.
Secura noted that the discounted cash flow analysis were included because
they are widely used valuation methodology, but these methodology are highly
dependent upon the numerous assumptions that must be made.
PRO FORMA FINANCIAL ANALYSIS. Secura analyzed the relative contribution
of COMBANCORP to certain balance sheet and income statement items of
BanPonce, including total assets, deposits and net income, of the combined
company on a pro forma basis. In addition, Secura considered the impact of
the Merger on the financial condition of the combined company as well as the
evaluation of other financial data available at the time. On a pro forma
basis, COMBANCORP represents less that 0.5% of the total assets of the
combined company and less than 0.25% of the pro forma combined income of the
company.
COMPARATIVE STOCK PERFORMANCE. COMBANCORP Common Stock is traded on a
work out basis on the Electronic Bulletin Board. Because of the lack of
consistent information between COMBANCORP and other bank stocks traded on the
Electronic Bulletin Board, Secura has selected a group of listed banks stocks
that are traded on the New York Stock Exchange, American Stock Exchange or
NASDAQ to provide a benchmark for stock prices of banks in California. As
reported by COMBANCORP, the bid price reported prior to announcing the
transaction with BanPonce was $9.125 per share, or 83% of March 31, 1996 book
value, and 21.3 times the latest twelve months earnings. This compares to the
median price to book value of 120% and 12.30 times reported twelve months
earnings for the California listed banks.
Pursuant to the Acquisition Agreement, the Merger Consideration will
consist of the right to receive $17.31 in cash for each issued and
outstanding share of COMBANCORP Common Stock with each option holder having
the right to receive $10.31 as consideration for the cancellation of each
issued outstanding Stock Option. This Merger Consideration equates to 167% of
March 31, 1996 book value and 42.8 times earnings for the twelve months ended
March 31, 1996.
ENGAGEMENT OF SECURA
Secura is a nationally recognized financial advisory and consulting firm
that specializes in the financial services industry. As part of its financial
advisory and consulting services it is engaged in the valuation of securities
and companies in connection with mergers and acquisitions and other corporate
transactions. The Board of COMBANCORP selected Secura because of it
expertise, reputation and familiarity with the banking industry in general
and COMBANCORP'S business and market area.
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Pursuant to an engagement letter between COMBANCORP and Secura,
COMBANCORP paid to Secura a general advisory fee of $10,000 upon the
execution of its engagement letter and an additional $15,000 upon the signing
of the letter of intent between COMBANCORP and BanPonce. Following the
delivery of Secura's Fairness Opinion in conjunction with the execution of
the Reorganization Agreement, COMBANCORP paid Secura an advisory fee of
$51,875. In addition, upon the Effective Date of the Merger, COMBANCORP will
pay Secura an additional advisory fee of $51,875. COMBANCORP has also agreed
to reimburse Secura for reasonable expenses incurred by Secura and to
indemnify Secura for certain liabilities that may arise out of the rendering
of its opinion. Secura has not provided any investment banking services for
COMBANCORP in the past.
OPERATIONS OF COMBANCORP AFTER THE MERGER
It is presently contemplated that, after the Effective Date, the
business currently operated by COMBANCORP will be operated by the Surviving
Corporation as an indirect subsidiary of BanPonce. The Bank will continue its
operations as a wholly-owned subsidiary of the Surviving Corporation. The
officers of COMBANCORP will be the officers of the Surviving Corporation in
their present positions and the directors of Merger Sub will become the
directors of the Surviving Corporation. BanPonce and the Surviving
Corporation will continue to review the business, operation and management of
the Bank and will make such changes as it deems appropriate, subject to any
limitations under the Reorganization Agreement.
CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER
The Bank and each of Mr. Demerjian and Ms. Wilson will enter into
Severance Agreements on the Effective Date. For a discussion of the terms of
the Severance Agreements, see "THE MERGER -- Severance Agreements."
Pursuant to the Reorganization Agreement, all Stock Options held by
executive officers and directors of COMBANCORP under the Option Plan, whether
or not exercisable, will be cancelled and converted into the right to receive
$10.31 per share. See "THE MERGER -- COMBANCORP 1993 Stock Option Plan."
SEVERANCE AGREEMENTS
Pursuant to the Reorganization Agreement, the Bank and each of Mr.
Demerjian and Ms. Wilson will enter into Severance Agreements which provide
for certain severance benefits from the Bank if his or her employment with
the Bank is terminated within one year following the Effective Date, unless
such termination is (a) because of death or retirement; (b) by the Bank for
Cause or, in the case of Ms. Wilson only, Disability; or (c) by such person
without Good Reason (each of "Cause," "Disability" and "Good Reason" being
defined in the Severance Agreements). Accordingly, if the Merger is
consummated and either of Mr. Demerjian's or Ms. Wilson's employment with the
Bank is terminated (except as provided above) within one year of the
Effective Date of the Merger, the Bank will pay to such person, in addition
to accrued
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salary and benefits, an amount in cash equal to the sum of his or her annual
salary in effect immediately prior to the date of termination and $25,000 (in
the case of Mr. Demerjian) or $12,500 (in the case of Ms. Wilson), plus the
annualized amount of other employee benefits paid or accrued during the
preceding year.
COMBANCORP 1993 STOCK OPTION PLAN
The Reorganization Agreement provides that at the Effective Time, each
outstanding Stock Option to purchase COMBANCORP Common Stock granted under
the Option Plan, whether or not exercisable, shall be cancelled by COMBANCORP
and converted into the right to receive $10.31 per share of COMBANCORP Common
Stock subject to such Stock Options (the "Option Consideration"). Such
payment of the Option Consideration will not be made to a holder of Stock
Options unless such payment is in full satisfaction of all rights of such
holder under the Stock Options. The holders of Stock Options will not be
entitled to receive interest on any amounts paid with respect to such Stock
Options.
The directors and executive officers of COMBANCORP will receive the
following amounts, less applicable withholding taxes, attributable to the
cancellation of their Stock Options: Mr. Demerjian, $193,313; Mr. Glover,
$51,550; Mr. Minasian, $51,550; Mr. Oppenheim, $51,550; Mr. Pace, $51,550;
Mr. Strayer, $51,550 and Ms. Wilson, $128,875.
SURRENDER OF CERTIFICATES REPRESENTING COMBANCORP COMMON STOCK
As soon as practicable after the Effective Date, Wells Fargo, N.A.,
acting as paying agent (the "Paying Agent"), will mail to each holder of
record of outstanding shares of COMBANCORP Common Stock immediately prior to
the Effective Time a letter of transmittal for return to the Paying Agent
(which will specify that delivery will be effected, and risk of loss and
title to the certificates that immediately prior to the Effective Time
represented shares of COMBANCORP Common Stock (the "Certificates") will pass,
only upon receipt of the Certificates by the Paying Agent) and instructions
for the use thereof in effecting the surrender of the Certificates in
exchange for the Merger Consideration. SHAREHOLDERS OF COMBANCORP SHOULD NOT
SUBMIT THEIR STOCK CERTIFICATES TO COMBANCORP FOR PAYMENT OF THE MERGER
CONSIDERATION UNTIL THEY HAVE BEEN NOTIFIED THAT THE MERGER HAS BEEN
CONSUMMATED AND HAVE RECEIVED A LETTER OF TRANSMITTAL FROM THE PAYING AGENT.
Upon surrender of a Certificate for payment to the Paying Agent, together
with such letter of transmittal duly executed and properly completed, the
holder of such Certificate will be entitled to receive in exchange therefor,
a check representing the cash such holder is entitled to receive pursuant to
the Reorganization Agreement. All Certificates so surrendered will be
cancelled as of the Effective Date.
After the Effective Time, there will be no further registration of
transfers on the stock transfer books of COMBANCORP (the stock transfer books
of which will be closed) of the
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shares of COMBANCORP Common Stock that were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented
to the Paying Agent or the Surviving Corporation, they will be cancelled and
exchanged for the Merger Consideration.
CONDITIONS OF THE MERGER; WAIVER; AMENDMENT
In addition to approval by the shareholders of COMBANCORP, the
consummation of the Merger is conditioned upon (a) receipt of required
regulatory approvals by the Federal Reserve Board and other governmental
regulatory agencies without any materially burdensome conditions; (b) the
absence of any order, decree or injunction of, or litigation or proceeding
before, any court or agency enjoining or prohibiting, or seeking to enjoin or
prohibit, the consummation of the Merger; (c) the Bank having entered into
the Severance Agreements with Mr. Demerjian and Ms. Wilson; and (d) certain
other conditions. See "THE MERGER -- Conflicts of Interest of Certain Persons
in the Merger."
In addition, the obligations of BanPonce and Merger Sub to consummate
the Merger are conditioned upon, among other things, (a) the accuracy of the
representations and warranties of COMBANCORP set forth in the Reorganization
Agreement as of the Effective Date; (b) the performance by COMBANCORP of its
covenants and agreements as set forth in the Reorganization Agreement; (c)
the absence of any event or circumstances since December 31, 1995 that has
resulted in or is likely to result in a material adverse effect on COMBANCORP
or the Bank; and (d) the receipt of certain opinions of counsel for
COMBANCORP.
The obligations of COMBANCORP to consummate the Merger also are
conditioned upon, among other things, the accuracy of the representations and
warranties of BanPonce and Merger Sub set forth in the Reorganization
Agreement as of the Effective Date and the performance by BanPonce and Merger
Sub of their covenants and agreements as set forth in the Reorganization
Agreement.
The Reorganization Agreement also provides that prior to the Effective
Time, any provisions of the Reorganization Agreement may be waived by the
party benefitted by the provision, or amended or modified at any time
(including a change to the structure of the transaction) by an agreement in
writing between the parties to the Reorganization Agreement approved by their
respective Boards of Directors, except that, after the vote by the
shareholders of COMBANCORP, no amendment may be made that would contravene
California law.
CONDUCT OF BUSINESS; CERTAIN COVENANTS
Pursuant to the Reorganization Agreement, COMBANCORP has agreed that,
prior to the Effective Date, it will, and will cause the Bank, to conduct its
business only in the ordinary course and that, without the prior written
consent of BanPonce and except as otherwise provided in the Reorganization
Agreement, will not among other things:
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(a) Incur any indebtedness other than in the ordinary course of business
consistent with past practice;
(b) Declare or pay any dividend or change the number of outstanding
shares of its capital stock;
(c) Sell, encumber or dispose of any of its material properties or assets
to any person other than the Bank except in the ordinary course of
business consistent with past practice pursuant to policies in effect on
May 22, 1996;
(d) Acquire another business or entity without BanPonce's prior written
consent or make any investment in securities or purchase property or assets
of another person other than in the ordinary course of business consistent
with past practice;
(e) Execute, modify or terminate any lease or contract other than in the
ordinary course of business consistent with past practice;
(f) Increase in any manner the compensation or fringe benefits of any of
its employees, pay any pension or retirement allowance not required under
an existing plan, or amend or commit itself to any employee benefit plan
or agreement for the benefit of any employee other than general increases
in compensation in the ordinary course of business consistent with past
practice not in excess of 4% in any 12-month period, or voluntarily
accelerate vesting of any compensation or benefit, except to the extent
required by law;
(g) Settle any claim, action or proceeding if any such settlement would
have a material adverse effect on COMBANCORP, materially restrict the
business of COMBANCORP or the Bank or materially change the terms of the
Reorganization Agreement, the Merger or the transactions contemplated by
the Reorganization Agreement;
(h) Modify in any material respect the manner in which COMBANCORP and
the Bank have heretofore conducted their business except as otherwise
contemplated by the Acquisition Agreement;
(i) Amend its articles of incorporation or its by-laws;
(j) Waive or release any material right or collateral or cancel or
compromise any extension of credit or other debt or claim except in the
ordinary course of business; or
(k) Make, extend or renegotiate any loan or other extension of credit or
make any commitment of the foregoing except loans or advances as to which
COMBANCORP or the Bank has a legally binding obligation as of the date of
the Reorganization Agreement other than in the ordinary course of business
consistent with past practice and in conformity with all applicable
policies and procedures.
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In addition, COMBANCORP has agreed that none of it, the Bank or any of
their respective officers, directors or employees will initiate, solicit or
encourage inquiries or proposals with respect to, or except to the extent
required in the opinion of their counsel to discharge properly their
fiduciary duties to COMBANCORP's shareholders, engage in any negotiations
concerning a merger, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or equity securities
of, COMBANCORP or the Bank. COMBANCORP has agreed to instruct their officers,
directors, agents and affiliates to refrain from doing any of the above and
to notify BanPonce immediately if any such inquiries or proposals are
received by, any such information is requested from, or any negotiations or
discussions are sought to be initiated or continued with it.
DEREGISTRATION OF COMBANCORP COMMON STOCK AFTER THE MERGER
If the Merger is consummated, COMBANCORP Common Stock will cease to be
traded in the over-the-counter market. Upon consummation of the Merger,
COMBANCORP intends to make an appropriate filing with the SEC, so that it
will no longer be subject to the periodic reporting requirements of the
Exchange Act, and the registration of the COMBANCORP Common Stock under the
Exchange Act will terminate.
TERMINATION
The Reorganization Agreement provides that it may be terminated and the
Merger abandoned, prior to the Effective Time, either before or after
approval by the shareholders of COMBANCORP and Merger Sub: (a) by mutual
consent of BanPonce and COMBANCORP duly authorized by the vote of a majority
of the members of the entire Boards of Directors of BanPonce and COMBANCORP;
(b) by either BanPonce or COMBANCORP if its Board of Directors so determines
by vote of a majority of the members of its entire board, in the event of (i)
the failure of the shareholders of COMBANCORP to approve the Merger Proposal
at the Special Meeting or (ii) a material breach by the other party thereto
of any representation, warranty, covenant or agreement contained in the
Reorganization Agreement which is not cured or not curable within 30 days
after written notice of such breach to the breaching party; (c) by either
BanPonce or COMBANCORP by written notice to the other party of either (y) any
approval, covenant or waiver required by a governmental authority for
consummation of the Merger having been denied or (z) any governmental
authority of competent jurisdiction having issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the Merger; or (d) by
BanPonce or COMBANCORP, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event that the Merger is
not consummated by January 6, 1997, unless the failure to so consummate by
such time is due to the breach of any representation, warranty or covenant
contained in the Reorganization Agreement by the party seeking to terminate.
In the event of termination, the Acquisition Agreement becomes void, except
that certain provisions relating to confidentiality survive any such
termination.
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ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" as such term is used
under generally accepted accounting principles. For purposes of preparing the
consolidated financial statements of BanPonce, BanPonce will establish a new
accounting basis for COMBANCORP's assets and liabilities based upon the fair
values thereof and the purchase price paid by BanPonce, including the costs
of the acquisition. A final determination of required purchase accounting
adjustments and of the fair value of the assets and liabilities of COMBANCORP
has not yet been made. BanPonce will undertake a study to determine the fair
value of certain of COMBANCORP's assets and liabilities and will make
appropriate purchase accounting adjustments upon completion of that study.
For financial reporting purposes, commencing on the Effective Date, the
results of operations of COMBANCORP will be included in the BanPonce
consolidated statements of income. The financial statements of BanPonce for
prior periods will not be restated as a result of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the
"Code"), of the Merger to holders of COMBANCORP Common Stock who are citizens
or residents of the United States. This discussion does not deal with all the
federal income tax consequences that may be relevant to particular COMBANCORP
shareholders in light of their particular circumstances, such as shareholders
who are insurance companies, dealers in securities, tax exempt organizations
or foreign persons or to COMBANCORP shareholders who acquired their shares of
COMBANCORP Common Stock pursuant to the exercise of employee stock options or
in other compensatory transactions.
For federal income tax purposes: (a) the exchange of COMBANCORP Common
Stock by a COMBANCORP shareholders for cash will be a taxable transaction;
(b) gain or loss will be recognized by a COMBANCORP shareholder measured by
the difference between the Merger Consideration received by such shareholder
and the shareholder's tax basis in the shares of COMBANCORP Common Stock
exchanged therefor (however, a COMBANCORP shareholder may be required to
compute gain or loss separately with respect to each block of shares); (c)
such gain or loss will be capital gain or loss if such shares of COMBANCORP
Common Stock are held as capital assets at the Effective Time; and (d) such
gain or loss will be long-term gain or loss if the COMBANCORP shareholder
held such shares for more than one year.
Amounts received in cancellation and settlement of Stock Options will be
treated as ordinary income and will be subject to withholding.
To prevent backup federal income tax withholding equal to 31% of the
cash portion of the Merger Consideration, a COMBANCORP shareholder generally
must provide his or her
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correct taxpayer identification number and certain other information by
completing a substitute Form W-9 which will be mailed to shareholders
separately after the Effective Date.
THE DISCUSSION SET FORTH ABOVE PROVIDES GENERAL INFORMATION AS TO THE
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER BUT DOES NOT DISCUSS THE TAX
CONSEQUENCES, IF ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE AND LOCAL
LAWS OR WITH RESPECT TO TAXPAYERS WHO QUALIFY FOR SPECIAL TREATMENT UNDER THE
CODE. COMBANCORP SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
DISSENTERS' RIGHTS
THE FOLLOWING IS A SUMMARY OF THE PROVISIONS OF CHAPTER 13 OF THE
CALIFORNIA GCL, WHICH PROVIDES SHAREHOLDERS OF COMBANCORP WITH CERTAIN
DISSENTERS' RIGHTS. ALL REFERENCES TO AND SUMMARIES OF THE RIGHTS OF
DISSENTING SHAREHOLDERS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
TEXT OF CHAPTER 13 OF THE CALIFORNIA GCL, WHICH IS ATTACHED TO THIS PROXY
STATEMENT AS APPENDIX C.
Subject to certain conditions, Chapter 13 of the California GCL grants
shareholders of COMBANCORP who are entitled to vote, and who vote some or all
of their shares against the Merger or specify a direction to abstain from
such vote, the right to require COMBANCORP to purchase for cash at fair
market value on the day before the terms of the Merger were first announced
(excluding any appreciation or depreciation because of the proposed Merger)
the shares of COMBANCORP Common Stock which qualify as Dissenting Shares (as
defined below). Shareholders who do not follow the statutory procedures of
Chapter 13 of the California GCL, however, will lose their rights to dissent
from the Merger. Dissenting shareholders will have no interest in COMBANCORP
after they surrender their certificates representing the Dissenting Shares
and receive payment therefor. Surrendered shares will resume the status of
authorized but unissued shares. Under the California GCL, no shareholder who
is entitled to exercise dissenters' rights has any right at law or in equity
to attack the validity of the Merger or to have the Merger set aside or
rescinded, except in an action to test whether the number of shares required
to authorize or approve the Merger had been legally voted in favor of the
Merger.
All issued and outstanding shares of COMBANCORP Common Stock may qualify
as "dissenting shares" within the meaning of Section 1300(b) of the
California GCL ("Dissenting Shares"). Any shareholder entitled to vote at the
COMBANCORP Special Meeting who desires to exercise dissenters' rights must
vote his shares against the adoption of the Merger Proposal or specify a
direction to abstain from such vote. The shareholder may vote part of his or
her shares for the Merger without losing the right to have purchased those
shares which were voted against the Merger or as to which the shareholder has
abstained from voting. Any such shareholder who voted against the Merger or
abstained from voting and who wishes to have
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purchased his or her shares that were voted against the Merger or shares as
to which he or she abstained from voting must demand in writing that
COMBANCORP purchase such shares and pay the shareholder the fair market value
of such shares in cash. The demand for payment must state the number and
class of the shares held of record by the shareholder that the shareholder
wants COMBANCORP to purchase, and shall also state what the shareholder
claims to be the fair market value of the shares as of the day before the
announcement of the definitive terms of the Merger. The statement of fair
market value will constitute an offer by the shareholder to sell such shares
at such price. Such demand must be received by COMBANCORP at its principal
executive offices at 6001 E. Washington Blvd., City of Commerce, California
90040 or by the Paying Agent, no later than 30 days after the date on which
the Notice of Approval (as defined below) is mailed by COMBANCORP. A
shareholder may not withdraw a demand for payment unless COMBANCORP consents
thereto.
Within ten days after the date of the Special Meeting, COMBANCORP must
mail to any shareholder who could qualify as possessing Dissenting Shares a
notice of the approval of the Merger by the requisite number of outstanding
shares, along with a statement of the price determined by COMBANCORP to
represent the fair market value of Dissenting Shares on the day before the
terms of the Merger were first announced, excluding any appreciation or
depreciation because of the proposed Merger, and a brief description of the
procedure to be followed if the shareholder desires to exercise dissenters'
rights (the "Notice of Approval"). COMBANCORP's statement of price will
constitute an offer by COMBANCORP to purchase the shareholder's shares at the
price stated in the Notice of Approval, provided that such shares qualify as
Dissenting Shares and do not lose their status as Dissenting Shares, as
outlined below.
MERELY VOTING OR DELIVERING A PROXY DIRECTING A VOTE AGAINST THE
APPROVAL OF THE MERGER, OR FAILING TO DELIVER A PROXY OR VOTE AS TO APPROVAL
OF THE MERGER DOES NOT CONSTITUTE A DEMAND FOR PURCHASE. A WRITTEN DEMAND
MEETING THE REQUIREMENTS OF THE CALIFORNIA GCL IS ESSENTIAL. A SHAREHOLDER'S
WRITTEN DEMAND MUST BE DELIVERED TO COMBANCORP WITHIN 30 DAYS AFTER THE DATE
ON WHICH THE NOTICE OF APPROVAL WAS MAILED TO THE SHAREHOLDER.
Within 30 days after the date on which the Notice of Approval was
mailed, the shareholder must submit to COMBANCORP or the Paying Agent the
certificates representing any shares which the shareholder demands that
COMBANCORP purchase. Such shares will be stamped or endorsed with a statement
that the shares are Dissenting Shares or will be exchanged for share
certificates so stamped or endorsed. Upon subsequent transfer of these
shares, the new certificates will be similarly stamped, and marked with the
name of the original dissenting shareholder.
If a dissenting shareholder and COMBANCORP agree that the shares are
Dissenting Shares and agree upon the price of the shares, COMBANCORP will pay
the dissenting shareholder the agreed price with interest at the legal rate
on judgments from the date of such agreement, within 30 days after the date
of the agreement or within 30 days after any statutory or contractual
conditions to the Merger are satisfied, whichever is later, and in the case
of
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certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement. Any agreement fixing the fair market
value of Dissenting Shares as between COMBANCORP and the holders thereof must
be filed with the Secretary of COMBANCORP at the address set forth below. If
COMBANCORP denies that the shares are Dissenting Shares, or COMBANCORP and
the shareholder fail to agree upon the fair market value of the Dissenting
Shares, then the shareholder or COMBANCORP may seek a court determination of
whether the shares are Dissenting Shares, the fair market value of the
Dissenting Shares, or both. The shareholder may intervene in any action
pending on such a complaint. The shareholder or COMBANCORP must file a
complaint or intervene in a pending action in the Superior Court of the
proper county within six months after the date on which the Notice of
Approval was mailed. In determining the fair market value of the Dissenting
Shares, the court may, but is not required to, appoint one or more
appraisers. If the court appoints appraisers, it may accept the appraisers'
valuation or make its own determination of the fair market value of the
Dissenting Shares and enter judgment accordingly. Any party may appeal from
the judgment. The costs of the action, including reasonable compensation for
the appraisers, shall be assessed as the court considers equitable, but if
the judgment exceeds the amount offered by COMBANCORP, COMBANCORP shall pay
such costs (including, in the court's discretion, attorneys' fees, fees of
expert witnesses, and interest at the legal rate on judgments from the date
of the shareholder's compliance with the foregoing procedures for demanding
payment of Dissenting Shares if the value awarded by the court is more than
125% of the amount COMBANCORP states as the fair market value in the Notice
of Approval). The shareholder may recover the amount the court determines to
be the fair market value of each Dissenting Share multiplied by the number of
Dissenting Shares COMBANCORP must purchase, with interest thereon at the
legal rate from the date of judgment. The judgment is payable only upon
endorsement and delivery to COMBANCORP of the certificates for the shares
described in the judgment.
Dissenting Shares may lose their status as Dissenting Shares and the
dissenting shareholder will cease to be entitled to require COMBANCORP to
purchase such shares if (a) the parties abandon the Merger; (b) the
shareholder transfers the shares before submitting them to COMBANCORP or the
designated transfer agent; (c) the shareholder withdraws the demand that
COMBANCORP purchase the Dissenting Shares; or (d) if COMBANCORP and the
shareholder do not agree on the status of the shares as Dissenting Shares or
upon the fair market value of such shares and neither has filed a court
petition as set forth above within six months after the mailing of the Notice
of Approval.
A vote in favor of the Merger Proposal constitutes a waiver of
dissenters' rights under Chapter 13 of the California GCL. Furthermore, a
vote against approval of the Merger Proposal does not satisfy the requirement
of a written demand for payment or the other actions required by Chapter 13
to perfect dissenters' rights. Such written demand for payment must be in
addition to and separate from any proxy regarding the Merger Proposal.
FAILURE TO FOLLOW THE PROVISIONS OF CHAPTER 13 OF THE CALIFORNIA GCL WILL
RESULT IN A LOSS OF ALL DISSENTERS' RIGHTS.
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THE BOARD OF DIRECTORS OF COMBANCORP RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE MERGER PROPOSAL. SEE "THE MERGER - RECOMMENDATION OF THE BOARD OF
DIRECTORS OF COMBANCORP" ABOVE. THE DIRECTORS AND OFFICERS OF COMBANCORP HAVE
CERTAIN CONFLICTS OF INTEREST WITH RESPECT TO THE TRANSACTION. SEE "THE
MERGER - CONFLICTS OF INTEREST OF CERTAIN PERSONS IN THE MERGER."
INFORMATION CONCERNING COMBANCORP
BUSINESS
GENERAL
COMBANCORP was incorporated under the laws of the State of California on
May 25, 1982 to operate as a bank holding company for the Bank. On June 16,
1983, the Bank completed its organization and COMBANCORP acquired all of the
Bank's issued and outstanding shares of common stock. The Bank is the sole
subsidiary of COMBANCORP and its principal asset. At March 31, 1996,
COMBANCORP had total consolidated assets of approximately $69.0 million and
shareholders' equity of approximately $6.2 million. COMBANCORP's principal
executive office is located at 6001 E. Washington Blvd., City of Commerce,
California 90040, and its telephone number is (213) 724-8800
The Bank was incorporated on May 26, 1982 as a national banking
association. On June 16, 1983, the Bank received its Charter from the Office
of the Comptroller of the Currency (the "OCC") and commenced operations.
The Bank's main office is located at 6001 East Washington Boulevard,
City of Commerce, California. The Bank also has a branch office located at
420 N. Montebello Boulevard, Montebello, California, which opened on June 12,
1989, and a branch office located at 11101 La Reina Avenue, Downey,
California, which was acquired on August 26, 1994. The bank's principal
market area includes the City of Commerce, Downey, Montebello, Bell Gardens,
Pico Rivera, Whittier, Lynwood, South Gate, Santa Fe Springs, Los Angeles and
portions of Vernon, all located in California. The area is estimated to
contain in excess of 15,000 businesses engaged in various phases of commerce,
including industrial production and sales, service businesses and retail and
wholesale establishments. The area also includes residential developments and
regional and neighborhood shopping centers. At March 31, 1996, the Bank had
total assets of approximately $69.0 million and total deposits of
approximately $62.5 million.
On December 3, 1993, the Bank acquired all the branch deposits of the
Commerce, California branch of Community Bank, at a premium of $138,222. In
conjunction with this transaction, the Bank assumed $12,454,049 of deposit
liabilities. The Bank did not retain the premises or management of the
Commerce Branch of Community Bank or the majority of its employees.
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On August 26, 1994, the Bank, as part of a consortium with Landmark
Bank, entered into an Insured Deposit Purchase and Assumption Agreement with
the Federal Deposit Insurance Corporation ("FDIC") for the purchase and
assumption of certain assets and liabilities of Capital Bank. The Bank
purchase $674,000 of cash assets and assumed $22,536,000 of deposit
liabilities of the Downey Branch of Capital Bank for a premium of $185,000,
including expenses. In addition, the Bank obtained a lease on the Downey
branch facility of Capital Bank through May 1995, when an option to purchase
the building for $650,000 was exercised. The Bank hired 12 former employees
of Capital Bank, none of which were members of senior management, to staff
the existing facility. See Note 3 to Notes to the Consolidated Financial
Statements.
BANK SERVICES
The Bank is engaged primarily in the business of providing commercial
banking service to the wholesale market. The Bank offers personal and
business checking accounts and savings accounts (including interest-bearing
negotiable order of withdrawal ("NOW") accounts and/or accounts combining
checking and savings accounts with automatic transfers), and time
certificates of deposit. The Bank also offers night depository, bank-by-mail
services and MasterCard and VISA credit cards, sells travelers' checks
(issued by an independent entity) and cashier's checks, and acts as a
merchant depository for cardholder drafts under both MasterCard and VISA. In
addition, it provides note and collection services, an automatic teller
machine network and direct deposit of social security and other government
checks.
The following table sets forth the type and amount of deposits
outstanding as of the dates indicated:
DECEMBER 31, DECEMBER 31,
1995 1994
----------- -----------
Demand Deposits $21,805,536 $23,439,082
NOW Accounts 8,934,606 8,136,486
Money Market 8,553,950 10,902,747
Savings 9,203,336 9,831,453
Time Deposits of $100,000 or greater 5,381,974 4,329,934
Time Deposits of less than $100,000 8,144,395 8,259,595
----------- -----------
Total Deposits $62,023,797 $64,899,297
----------- -----------
----------- -----------
DEPOSITS. At December 31, 1995, approximately 35% of the total deposits
were non-interest bearing demand deposits, with an average account balance of
approximately $12,000. Approximately 14% of total deposits were
interest-bearing demand deposits, or "NOW" accounts. The average
interest-bearing demand account balance was approximately $6,000.
At December 31, 1995, approximately 14% of total deposits were held in
money market accounts, with an average account balance of approximately
$26,000; approximately 15% of the total deposits were held in savings
accounts, with an average account balance of
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approximately $5,000; and approximately 22% of total deposits were held in
time deposits, 83% of which were certificates of deposit and 17% were
individual retirement accounts ("IRA"). Approximately 9% of total deposits
were held in time deposits of $100,000 or greater.
LENDING ACTIVITIES. The Bank's lending activities consist primarily of
commercial loans, real estate loans and consumer/installment loans.
Commercial lending activities are directed toward small retail and wholesale
establishments, professional organizations and light industrial and
manufacturing companies. Real estate loans, which consist of interim
construction loans and medium-term mortgages, are directed toward local
developers and other wholesale banking customers. Consumer/installment
lending is targeted to the Bank's principal market area and the Bank's
commercial accounts.
The lending activities of the Bank are guided by the basic lending
policy established by the Bank's Board of Directors. Each loan must meet
various lending criteria, including character of the borrower, leverage
capacity of the borrower, capital, collateral provided for the loan and
prevailing economic conditions. The lending officer, the Loan Committee or
the Board of Directors, depending on the amount of the loan, must consider
all criteria and determine that the risks are appropriate in light of such
evaluation.
A fundamental principle of sound banking is avoiding a loan
concentration in any particular industry or market segment, which would
increase exposure to downturns in the business of such borrowers. Other than
as set forth herein, as of December 31, 1995, the Bank had no loan
concentrations in any industry.
The following table sets forth the type and amount of loans outstanding
as of the dates indicated:
DECEMBER 31, DECEMBER 31,
1994 1995
----------- -----------
Commercial $10,474,719 $11,210,049
Real Estate:
Construction 2,338,979 2,998,619
Other 8,062,827 8,541,865
Mortgage loans acquired 1,216,165 1,242,636
Consumer/Installment 1,679,274 1,815,841
----------- -----------
Total loans $23,771,964 $25,809,010
Allowance for possible loan losses 432,559 498,827
Deferred loan fees 65,731 59,280
Unearned discount on acquired loans 84,823 285,827
----------- -----------
Total net loans $23,188,851 $24,965,076
----------- -----------
----------- -----------
COMMERCIAL LOANS. At December 31, 1995, approximately 44% of the Bank's
loan portfolio was comprised of commercial loans. Loans in this category,
which amounts averaged
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approximately $77,000, included loans made to small businesses and
professionals for working capital purposes and equipment acquisitions.
Although the Bank typically looks to the borrower's cash flow as the
principal source of repayment for such loans, some of the loans within this
category were secured by real estate.
CONSTRUCTION LOANS. At December 31, 1995, approximately 10% of the
Bank's loan portfolio was comprised of construction loans. The following
table sets forth the composition of such construction loans by type of
project as of the dates indicated:
DECEMBER 31, DECEMBER 31,
1995 1994
---------- ----------
Residential:
1-4 family units $2,093,989 $1,418,048
Commercial and industrial 244,990 1,580,571
---------- ----------
Total $2,338,979 $2,998,619
---------- ----------
---------- ----------
The Bank's loans for construction of residential 1-4 family units, which
amounts averaged approximately $162,000; bear a floating rate of interest and
mature in one year or less. They are typically underwritten at no greater
than a 75% loan-to-value ratio.
As of December 31, 1995, the Bank had one commercial construction loan
for $244,990 for the construction of a multi-family unit. The Bank will
ordinarily advance up to a maximum of 65% of the value of the underlying
property on these types of loans. All loans of this type bear a floating rate
of interest.
OTHER REAL ESTATE LOANS. Approximately 34% of the Bank's commercial and
industrial loans, which ranged in amount from approximately $23 to $803,283,
and averaged approximately $169,000, are primarily secured by small office
buildings and industrial buildings that are either owner-occupied or built
for rental purposes. The Bank's commercial and industrial loans generally
have a maturity of three to five years with a 20-25 year amortization
schedule, and bear a floating rate of interest. The Bank generally applies a
maximum loan-to-value ratio of 65% to these loans.
MORTGAGE LOANS. Approximately 5% of the Bank's loan portfolio consisted
of 13 mortgage loans secured by 1-4 family units, which were acquired as part
of the Bank's acquisition of Liberty Federal Savings Bank in June 1991. These
loans averaged approximately $94,000 and ranged in amount from $61,112 to
$146,349 at December 31, 1995. The majority of these loans have a 30-year
amortization schedule and bear a fixed rate of interest.
CONSUMER/INSTALLMENT LOANS. Approximately 7% of the Bank's loan
portfolio consisted of consumer/installment loans. Excluding credit card
receivables, these loans ranged in amounts from $49 to $106,366, and averaged
approximately $10,000. These loans consist principally of automobile loans
and other personal loans and credit card receivables. Except for the credit
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card receivables, which represented 16.7% of the total consumer/installment
portfolio at December 31, 1995, these loans typically are secured by liens on
real or personal property.
SOURCE OF BUSINESS
The Bank has undertaken an aggressive marketing program which includes
advertising and direct mail to attract business in its market area. In
addition, Business Development and Lending Officers of the Bank are
responsible for making regular calls on existing and potential new customers
to solicit business and client referrals. Promotional efforts are designed to
attract personal banking relationships, small businesses, professional
organizations, and all types of consumer loans in the market area served by
the Bank.
In order to expedite decisions on lending transactions, the Bank's Loan
Committee meets on a regular basis and is available for daily telephonic
meetings when immediate lending authorization is needed.
ASSET MANAGEMENT
Consistent with the need to maintain adequate liquidity for anticipated
clearings and other cash requirements, management of the Bank seeks to invest
the largest portion of the Bank's assets in loans of the types described
above under "Business -- Bank Services." Because of low loan demand in 1995,
total loans have been less than 50% of deposits and capital. The balance of
the Bank's funds are invested in government and other investment grade
securities, short-term certificates of deposit, municipal securities and
Federal funds sold to other financial institutions. In order to maximize
yields, the Bank's investment policy provides for investment in taxable
securities only until such time as the Bank's overall profitability indicates
a higher yield by investing in tax-exempt instruments, after taking into
account the effects of taxes.
The Bank's investment policy provides for a portfolio divided among
issues purchased to meet one or more of the following goals: (a) to maintain
a solid liquidity base in order to manage deposit fluctuations; (b) to
maintain credit quality in order to reduce exposure to low-rated issues; (c)
to achieve maximum yields commensurate with relatively low risk and
appropriate maturities; and (d) to achieve maximum tax benefits. To assure
liquidity and a reasonable income, the Bank's portfolio consists of
investments which are subject to minimal credit risk. Most of the investments
will be in government securities, "A" rated or better corporate bonds and
municipal bonds "A" rated or better. The maturity composition of the
investment portfolio, including investment securities, Federal funds sold and
interest bearing deposits with other financial institutions, as of December
31, 1995, was as follows: 50.6% short term (under one year), 39.1% medium
term (one to five years), and 10.3% long term. On December 31, 1995, all of
the Bank's securities, with the exception of Federal Reserve Bank stock, were
classified as "available for sale."
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COMPETITION
The banking and financial services business in California generally, and
in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Bank competes for loans and deposits and customers for financial services
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions and other nonbank financial
service providers. Many of these competitors are much larger in total assets
and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Bank. In order to compete with
the other financial services providers, the Bank principally relies upon
local promotional activities, personal relationships established by officers,
directors and employees with its customers, and specialized services tailored
to meet its customers' needs. In those instances where the Bank is unable to
accommodate a customer's needs, the Bank will arrange for those services to
be provided by its correspondents.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio
comprise the major portion of COMBANCORP's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of COMBANCORP are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject
to its reserve requirements and by varying the discount rates applicable to
borrowing by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted.
From time-to-time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, in the
California legislature and before various bank regulatory and other
professional agencies. The Financial Services Modernization Act
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recently proposed in the House of Representatives would generally permit
banks to expand activities further into the areas of securities and
insurance, and would reduce the regulatory and paperwork burden that
currently affects banks. Additionally, the proposed legislation would force
the conversion of savings and loan holding companies into bank holding
companies, although unitary savings and loan holding companies authorized to
engage in activities as of January 1, 1995 would be exempted. Similar
legislation has also been proposed in the Senate. In addition, legislation
was recently introduced in Congress that would merge the deposit insurance
funds applicable to commercial banks and savings associations and impose a
one-time assessment on savings associations to recapitalize the deposit
insurance fund applicable to savings associations. The likelihood of any
major legislative changes and the impact such changes might have on the
COMBANCORP are impossible to predict. See "Business - Supervision and
Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain
laws which relate to the regulation of COMBANCORP and the Bank. The
description does not purport to be complete and is qualified in its entirety
by reference to the applicable laws and regulations.
COMBANCORP. COMBANCORP, as a registered bank holding company, is subject
to regulation under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). COMBANCORP is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of COMBANCORP and its subsidiaries.
The Federal Reserve Board may require that COMBANCORP terminate an
activity or terminate control of or liquidate or divest certain subsidiaries
or affiliates when the Federal Reserve Board believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances
COMBANCORP must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further,
COMBANCORP is required by the Federal Reserve Board to maintain certain
levels of capital. See "Business - Supervision and Regulation - Capital
Standards."
COMBANCORP is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares
of any class of voting securities
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<PAGE>
or substantially all of the assets of any bank or bank holding company. Prior
approval of the Federal Reserve Board is also required for the merger or
consolidation of COMBANCORP and another bank holding company.
COMBANCORP is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company not a bank or
bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, COMBANCORP, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares
of companies engaged in, activities that are deemed by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In making any such determination, the
Federal Reserve Board is required to consider whether the performance of such
activities by COMBANCORP or an affiliate can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve Board
is also empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity
and should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a violation of
the Federal Reserve Board's regulations, or both. This doctrine has become
known as the "source of strength" doctrine. Although the United States Court
of Appeals for the Fifth Circuit found the Federal Reserve Board's source of
strength doctrine invalid in 1990, stating that the Federal Reserve Board had
no authority to assert the doctrine under the BHCA, the decision, which is
not binding on federal courts outside the Fifth Circuit, was recently
reversed by the United States Supreme Court on procedural grounds. The
validity of the source of strength doctrine is likely to continue to be the
subject of litigation until definitively resolved by the courts or by
Congress.
COMBANCORP is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, COMBANCORP and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
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THE BANK. The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the OCC. If, as result of
an examination of a Bank, the OCC should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of the Bank's operations are unsatisfactory or
that the Bank or its management is violating or has violated any law or
regulation, various remedies are available to the OCC. Such remedies include
the power to enjoin "unsafe or unsound practices," to require affirmative
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of the Bank, to assess civil
monetary penalties, and to remove officers and directors. The FDIC has
similar enforcement authority, in addition to its authority to terminate a
Bank's deposit insurance in the absence of action by the OCC and upon a
finding that a Bank is in an unsafe or unsound condition, is engaging in
unsafe or unsound activities, or that its conduct poses a risk to the deposit
insurance fund or may prejudice the interest of its depositors.
The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "Business - Supervision and Regulation - Premiums
for Deposit Insurance." The Bank is also subject to certain regulations of
the Federal Reserve Board and applicable provisions of California law,
insofar as they do not conflict with or are not preempted by federal banking
law.
Various other requirements and restrictions under the laws of the United
States and State of California affect operations of the Bank. Federal and
California statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers. Further, the Bank is required to
maintain certain levels of capital. See "Business - Supervision and
Regulation - Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO COMBANCORP BY THE BANK. COMBANCORP
is a legal entity separate and distinct from the Bank. COMBANCORP's ability
to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to COMBANCORP by the Bank. California law
restricts the amount available for cash dividends by state chartered banks to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to shareholders made during such
period). Notwithstanding this restriction, a bank may, with the prior
approval of the Superintendent, pay a cash dividend in an amount not
exceeding the greater of the retained earnings of the Bank, the net income
for such bank's last preceding fiscal year, and the net income of the bank
for its current fiscal year. The prior approval of the OCC is required if the
total of all dividends declared by a national bank in any calendar year
exceeds the bank's net profits (as defined) for that year combined with its
retained net profits (as defined) for the preceding two years, less any
transfers to surplus.
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The OCC also has authority to prohibit the Bank from engaging in
activities that, in the OCC's opinion, constitute unsafe or unsound practices
in conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the OCC could
assert that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the OCC and
the Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth
in such guidelines and the restrictions that are or may be imposed under the
prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or COMBANCORP may pay. The superintendent may impose
similar limitations on the conduct of California-chartered banks. See
"Business - Supervision and Regulation - Prompt Corrective Regulatory Action
and Other Enforcement Mechanisms" and - "Capital Standards" for a discussion
of these additional restriction on capital distributions. At present,
substantially all of COMBANCORP's revenues, including funds available for the
payment of dividends and other operating expenses, is, and will continue to
be, primarily dividends paid by the Bank. At December 31, 1995, the Bank had
$2,002,105 legally available for the payment of cash dividends, subject to
regulatory approval.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, COMBANCORP or other affiliates, the purchase of or
investment in stock or other securities thereof, the taking of such
securities as collateral for loans and the purchase of assets of COMBANCORP
or other affiliates. Such restrictions prevent COMBANCORP and such other
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by the Bank to or in COMBANCORP or to or in any other affiliate
is limited to 10% of the Bank's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of the Bank's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect
to transactions involving COMBANCORP and other controlling persons of the
Bank. Additional restrictions on transactions with affiliates may be imposed
on the Bank under the prompt corrective action provisions of federal law. See
"Business - Supervision and Regulation - Prompt Corrective Action and Other
Enforcement Mechanisms."
CAPITAL STANDARDS. The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet
as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.
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A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes 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 primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank
holding companies) and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock,
long term preferred stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of
the federal banking agencies. The federal banking agencies require a minimum
ratio of qualifying total capital to risk adjusted assets of 8% and a minimum
ratio of Tier 1 capital to risk adjusted assets of 4%. COMBANCORP is
currently exempt from the application of the Federal Reserve Board's capital
guidelines under an exemption for bank holding companies with less than $150
million in consolidated assets.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing
the level of a bank's exposure to interest rate risk, which is the subject of
a proposed policy statement issued by the federal banking agencies
concurrently with the final regulations. The proposal would measure interest
rate risk in relation to the effect of a 200 basis point change in market
interest rates on the economic value of a bank. Banks with high levels of
measured exposure or weak management systems generally will be required to
hold additional capital for interest rate risk. The specific amount of
capital that may be needed would be determined on a case-by-case basis by the
examiner and the appropriate federal banking agency. Because this proposal
has only recently been issued, the Bank currently is unable to predict the
impact of the proposal on the Bank if the policy statement is adopted as
proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required
-39-
<PAGE>
to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as
important factors they will review in assessing an individual bank's capital
adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among
other things, establishes certain benchmark ratios of loan loss reserves to
classified assets. The benchmark set forth by such policy statement is the
sum of (a) assets classified loss; (b) 50 percent of assets classified
doubtful; (c) 15 percent of assets classified substandard; and (d) estimated
credit losses on other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued final rules, effective April 1,
1995, which limit the amount of deferred tax assets that are allowable in
computing an institution's regulatory capital. The standard has been in
effect on an interim basis since March 1993. Deferred tax assets that can be
realized for taxes paid in prior carryback years and from future reversals of
existing taxable temporary differences are generally not limited. Deferred
tax assets that can only be realized through future taxable earnings are
limited for regulatory capital purposes to the lesser of (a) the amount that
can be realized within one year of the quarter-end report date, or (b) 10% of
Tier 1 Capital. The amount of any deferred tax in excess of this limit would
be excluded from Tier 1 Capital and total assets and regulatory capital
calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The following table presents the amount of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1995.
At December 31, 1995
-----------------------
Minimum
Capital
Actual Requirement
------ -----------
Leverage ratio........................ 8.4% 4.0%
Tier 1 risk-based ratio............... 17.6 4.0
Total risk-based ratio................ 18.3 8.0
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. Federal law
requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate
-40-
<PAGE>
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law. An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
- ------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the
institution receives the highest
rating from its primary regulator).
"Undercapitalized" "Significantly undercapitalized"
- ------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% Leverage ratio less than 3%.
(3% if the institution
receives the highest rating
from its primary regulator).
"Critically undercapitalized"
- -----------------------------
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower capital category,
an insured depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat an institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling person or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized,
it will be closely monitored by the appropriate federal banking agency,
subject to asset growth restrictions and required to obtain prior regulatory
approval for acquisitions, branching and engaging in new lines of business.
Any undercapitalized depository institution
-41-
<PAGE>
must submit an acceptable capital restoration plan to the appropriate federal
banking agency 45 days after becoming undercapitalized. The appropriate
federal banking agency cannot accept a capital plan unless, among other
things, it determines that the plan (a) specifies the steps the institution
will take to become adequately capitalized; (b) is based on realistic
assumptions; and (c) is likely to succeed in restoring the depository
institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution
will comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the
lesser of (i) an amount equal to 5% of the depository institutions's total
assets at the time the institution became undercapitalized or (ii) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails
to comply with its capital restoration plan. Finally, the appropriate federal
banking agency may impose any of the additional restrictions or sanctions
that it may impose on significantly undercapitalized institutions if it
determines that such action will further the purpose of the prompt correction
action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a
material respect to implement, an acceptable capital restoration plan, is
subject to additional restrictions and sanctions. These include, among other
things: (a) a forced sale of voting shares to raise capital or, if grounds
exist for appointment of a receiver or conservator, a forced merger; (b)
restrictions on transactions with affiliates; (c) further limitations on
interest rates paid on deposits; (d) further restrictions on growth or
required shrinkage; (e) modification or termination of specified activities;
(f) replacement of directors or senior executive officers; (g) prohibitions
on the receipt of deposits from correspondent institutions; (h) restrictions
on capital distributions by the holding companies of such institutions; (i)
required divestiture of subsidiaries by the institution; and (j) other
restrictions as determined by the appropriate federal banking agency.
Although the appropriate federal banking agency has discretion to determine
which of the foregoing restrictions or sanctions it will seek to impose, it
is required to force a sale of voting shares or merger, impose restrictions
on affiliate transactions and impose restrictions on rates paid on deposits
unless it determines that such actions would not further the purpose of the
prompt corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated
debt beginning 60 days after becoming critically undercapitalized. Most
importantly, however, except under
-42-
<PAGE>
limited circumstances, the appropriate federal banking agency, not later than
90 days after an insured depository institution becomes critically
undercapitalized, is required to appoint a conservator or receiver for the
institution. The Board of Directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement
with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of
a depository institution), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS. In July 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness, as required by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The guidelines set forth operational and
managerial standards relating to internal controls, information systems and
internal audit systems, loan documentation credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Guidelines for
asset quality and earnings standards will be adopted in the future. The
guidelines establish the safety and soundness standards that the agencies
will use to identify and address problems at insured depository institutions
before capital becomes impaired. If an institution fails to comply with a
safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations,
which became effective on March 19, 1993, require insured depository
institutions to adopt written policies establishing standards, consistent
with such guidelines, for extensions of credit secured by real estate. The
policies must address loan portfolio management, underwriting standards and
loan to value limits that do not exceed the supervisory limits prescribed by
the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all
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<PAGE>
other appraisals. However, appraisals performed in connection with "federally
related transactions" must now comply with the agencies' appraisal standards.
Federally related transactions include the sale, lease, purchase, investment
in, or exchange of, real property or interests in real property, the
financing or refinancing of real property, and the use of real property or
interests in real property as security for a loan or investment, including
mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank
Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury; up to 90% of the
fair market value of assets of institutions acquired by the FDIC as receiver
from the Federal Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset sales are to be repaid
through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. The
result of these provisions is that the assessment rate on deposits of BIF
members could increase in the future. The FDIC also has authority to impose
special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may
not be less than the amount that would be raised if the assessment rate for
all BIF members were .023% of deposits. On August 8, 1995, the FDIC announced
that the designated reserve ratio had been achieved and, accordingly, issued
final regulations adopting an assessment rate schedule for BIF members of 4
to 31 basis points effective on June 1, 1995. On November 14, 1995, the FDIC
further reduced deposit insurance premiums to a range of 0 to 27 basis points
effective for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
the Bank is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal regulator
(in the Bank's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and
poses a substantial probability of loss (Group C). The capital ratios used by
the FDIC to define well-capitalized, adequately capitalized and
undercapitalized are the same in the FDIC's prompt corrective action
regulations. The BIF assessment rates are summarized below; assessment
figures are expressed in terms of cents per $100 in deposits.
-44-
<PAGE>
Assessment Rate Effective Through the First Half of 1995
Group A Group B Group C
------- ------- -------
Well Capitalized................... 23 26 29
Adequately Capitalized............. 26 29 30
Undercapitalized................... 29 30 31
Assessment Rates Effective Through the Second Half of 1995
Group A Group B Group C
------- ------- -------
Well Capitalized................... 4 7 21
Adequately Capitalized............. 7 14 28
Undercapitalized................... 14 28 31
Assessment Rates Effective January 1, 1996
Group A Group B Group C
------- ------- -------
Well Capitalized................... 0* 3 17
Adequately Capitalized............. 3 10 24
Undercapitalized................... 10 24 27
* Subject to a statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
At December 31, 1995, the Bank's assessment rate was 0 cents per $100 of
deposits, subject to a statutory minimum assessment of $1,000 per semi-annual
period.
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums by, among
other things, providing for a special assessment to recapitalize the Savings
Association Insurance Fund. In light of ongoing debate over the content and
fate of the different proposals currently under consideration and the
uncertainty of the Congressional budget and legislative processes in general,
management cannot predict whether any or all of the proposed legislation will
be passed, or in what form. Accordingly, the effect of any such legislation
on the Bank cannot be determined.
INTERSTATE BANKING AND BRANCHING. In September 1994, the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act") became law. Under the Interstate Act, beginning one year after the date
of enactment, a bank holding company that is adequately capitalized and
managed may obtain approval under the BHCA to acquire an existing bank
located in another state without regard to state law. A bank holding company
would not be permitted to make such an acquisition if, upon consummation, it
would control (a) more than 10% of the total amount of deposits of insured
depository institutions in the United States or (b) 30% or more of the
deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank
or bank holding company if application of such limitation does not
discriminate against out-of-state banks. An out-of-state bank holding company
may not acquire a state bank in existence for less than a
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<PAGE>
minimum length of time that may be prescribed by state law except that a
state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirements and
conditions as for a merger transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks
that satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions
and DE NOVO branching into California are not permitted. The Interstate Act
and the California branching statute will likely increase competition from
out-of-state banks in the markets in which the Company operates, although it
is difficult to assess the impact that such increased competition may have on
COMBANCORP's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. The Bank is
subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities. The CRA generally requires the federal banking agencies
to evaluate the record of a financial institution in meeting the credit needs
of their local communities, including low and moderate income neighborhoods.
In addition to substantial penalties and corrective measures that may be
required for a violation of certain fair lending laws, the federal banking
agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will
use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment and evidence of disparate impact. In December 1995, the
Bank received a satisfactory CRA rating.
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<PAGE>
EMPLOYEES
As of December 31, 1995, COMBANCORP employed 26 full-time employees and
16 part-time employees. Management believes that COMBANCORP's and the Bank's
relations with its employees are good.
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS'
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
A. AVERAGE BALANCES
The following table sets forth the COMBANCORP's consolidated condensed
daily average balances of each major category of assets, liabilities and
shareholders' equity for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 5,305,762 7.48% $ 5,628,006 9.08%
Interest-bearing deposits $ 9,913,452 13.98% 7,714,864 12.45%
Federal Reserve Bank stock 120,00 0.17% 120,000 0.19%
Investments available for sale 17,729,951 25.01% 14,224,555 22.96%
Federal funds sold 9,821,823 13.85% 9,043,958 14.60%
Loans (net of allowance for
credit losses) 23,927,123 33.74% 22,657,720 36.57%
Other assets 4,092,477 5.77% 2,569,986 4.15%
----------- ------ ----------- ------
Total assets $70,910,588 100.00% $61,959,089 100.00%
----------- ------ ----------- ------
----------- ------ ----------- ------
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
Demand deposits $23,878,416 33.67% $20,274,807 32.72%
Interest-bearing deposits 40,444,174 57.04% 35,712,238 57.64%
Other liabilities 438,038 0.62% 182,650 0.30%
----------- ------ ----------- ------
Total liabilities 64,760,628 91.33% 56,169,695 90.66%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
<S> <C> <C> <C> <C>
Shareholders' equity 6,149,960 8.67% 5,789,394 9.34%
----------- ------ ----------- ------
Total liabilities shareholders'
equity $70,910,588 100.00% $61,959,089 100.00%
----------- ------ ----------- ------
----------- ------ ----------- ------
</TABLE>
B. ANALYSIS OF NET INTEREST INCOME
The following table sets forth the average amounts outstanding for each
category of interest-earning assets and interest-bearing liabilities, the
average interest rates earned and paid thereon and the net interest margin
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
--------------------------------------- -----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield Balance Expense Yield
----------- ---------- ------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans $24,691,646 $2,904,107 11.76% $23,370,301 $2,750,210 11.77%
Interest-bearing deposits
with financial institutions 9,913,452 610,821 6.16% 7,714,864 334,074 4.33%
Federal Reserve Bank stock 120,000 7,200 6.00% 120,000 7,200 6.00%
Securities available for sale 17,729,951 1,111,063 6.27% 14,224,555 699,344 4.92%
Federal funds sold 9,821,823 566,857 5.77% 9,043,958 402,391 4.45%
----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets $62,276,872 $5,200,048 8.35% $54,473,678 $4,193,219 7.70%
----------- ---------- ----- ----------- ---------- -----
----------- ---------- ----- ----------- ---------- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Money market demand $ 9,669,341 $ 272,090 2.81% $ 8,820,983 $ 220,407 2.50%
Savings and other interest-
bearing demand 18,090,611 356,992 1.97% 15,802,130 294,018 1.86%
Time deposits 12,684,221 570,329 4.50% 11,089,125 369,996 3.34%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing
liabilities $40,444,173 $1,199,411 2.97% $35,712,238 $ 884,421 2.48%
----------- ---------- ----- ----------- ---------- -----
----------- ---------- ----- ----------- ---------- -----
Net interest income 4,000,637 3,308,798
---------- ----------
---------- ----------
Net interest margin 6.42% 6.07%
----- -----
----- -----
</TABLE>
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<PAGE>
C. NET INTEREST INCOME
Information as to the impact of changes in average rates and average
balances on interest-earning assets and interest-bearing liabilities is set
forth in the following table. The variances attributable to simultaneous
balance and rate changes have been allocated to volume.
<TABLE>
1995 over 1994 1994 over 1993
---------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
due to change in: due to change in:
Volume Net Rate Change Volume Net Rate Change
------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 155,495 $ (1,598) $ 153,897 $ 34,014 $ 486,848 $ 520,862
Interest-bearing deposits
with financial institutions 95,205 181,542 276,747 (3,007) 37,974 34,967
Securities available for sale 172,341 239,378 411,719 635,072 (179,542) 455,530
Federal funds sold 34,609 129,857 164,466 157,504 147,092 304,596
--------- --------- ----------- --------- ---------- -----------
Total $ 457,650 $ 549,179 $ 1,006,829 $ 823,583 $ 492,372 $ 1,315,955
--------- --------- ----------- --------- ---------- -----------
--------- --------- ----------- --------- ---------- -----------
INTEREST-BEARING LIABILITIES:
Money market demand $ 21,198 $ 30,485 $ 51,683 $ 48,866 $ 8,152 $ 57,018
Savings and other interest-
bearing deposits 42,580 20,394 62,974 136,009 (22,939) 113,070
Time deposits 53,221 147,112 200,333 61,613 11,979 73,592
--------- --------- ----------- --------- ---------- -----------
Total $ 116,999 $ 197,991 $ 314,990 $ 246,488 $ (2,808) $ 243,680
--------- --------- ----------- --------- ---------- -----------
--------- --------- ----------- --------- ---------- -----------
Interest Differential $ 340,651 $ 351,188 $ 691,839 $ 577,095 $ 495,180 $ 1,072,275
--------- --------- ----------- --------- ---------- -----------
--------- --------- ----------- --------- ---------- -----------
</TABLE>
II. INVESTMENT PORTFOLIO
Effective December 31, 1993, the Bank adopted FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Bank
classified substantially all of its investment portfolio as available for
sale on December 31, 1995.
At December 31, 1995, the Bank recorded an increase to shareholders'
equity of $134,960 net of income taxes of $97,200 to adjust the portfolio
classified as available for sale to its market value.
The following table sets forth the Bank's investment securities as of the
dates indicated:
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<PAGE>
December 31, 1995 December 31, 1994
----------------- -----------------
Federal Reserve Bank stock $ 120,000 $ 120,000
Securities available for sale:
U.S. Treasury securities $ 7,988,578 $ 14,024,459
U.S. Government agencies 11,842,739 2,105,067
Corporate notes 317,098 495,020
Municipal securities 898,150 205,858
----------- -------------
$21,046,565 $ 16,830,404
----------- -------------
TOTAL $21,166,565 $ 16,950,404
----------- -------------
----------- -------------
The following table sets forth the amounts, term, distribution and weighted
average yields of the Bank's investment securities as of December 31, 1995.
<TABLE>
<CAPTION>
AFTER ONE YEAR
ONE YEAR OR LESS THROUGHT FIVE YEARS AFTER FIVE YEARS
---------------- ------------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Federal Reserve Bank
stock $ - - $ - - $ 120,000 6.00%
---------- ------------ -----------
Securities available for sale:
U.S. Treasury
securities $2,968,497 6.41% $ 5,020,080 6.87% $ - -
U.S. Government
agencies 453,140 6.46% $ 8,227,779 6.78% $ 3,161,823 8.17%
Corporate notes - - $ 208,799 6.94% 108,298 7.75%
Municipal securities 100,017 3.40% $ 515,502 4.17% $ 282,630 5.03%
---------- ------------ -----------
$3,521,654 $ 13,972,160 $ 3,552,751
---------- ------------ -----------
Total $3,521,654 $ 13,972,160 $ 3,672,751
---------- ------------ -----------
---------- ------------ -----------
</TABLE>
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<PAGE>
III. LOAN PORTFOLIO
A. TYPES OF LOANS
The composition of the Company's loan portfolio (all domestic) at the dates
indicated was as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
Commercial $ 10,474,719 $ 11,210,049
Real Estate:
Construction 2,338,979 2,998,619
Other 8,062,827 8,541,865
Mortgage loans acquired 1,216,165 1,242,636
Consumer/Installment 1,679,274 1,815,841
----------------- -----------------
Total $ 23,771,964 $ 25,809,010
----------------- -----------------
----------------- -----------------
B. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table sets forth the amount of total loans outstanding
(excluding consumer/installment loans) at December 31, 1995, which are based
on remaining scheduled principal repayments due in one year or less, after
one year through five years and after five years. The amounts outstanding
which are due after one year are classified according to their sensitivity to
changes in interest rates.
One year or less $ 7,719,471
After one year through five years:
Floating interest rate 7,846,631
Fixed interest rate 3,775,596
After five years:
Floating interest rate 862,517
Fixed interest rate 1,888,475
-----------
Total $22,092,690
-----------
-----------
C. RISK ELEMENTS
The following table sets forth the Bank's loans accounted for on a
non-accrual basis and Bank's loans accruing which are contractually past due
90 days or more, as to principal or interest payments. The Bank does not have
any loans which are considered "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15 ("FASB 15"), "Accounting
by Debtors and Creditors for Troubled Debt Restructurings."
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LOANS PAST DUE OVER LOANS ON NON-
AND STILL ACCRUING ACCRUAL STATUS
------------------ ----------------
Commercial $ - $ -
Real Estate:
Construction - -
Other - 102,575
Mortgage loans acquired 146,349 -
Consumer/Installment 20,764 -
------------------ ----------------
Total $ 167,113 $ 102,575
------------------ ----------------
------------------ ----------------
The gross interest income included in net income on the impaired loans
and the gross interest income that would have been reported in the period
ending December 31, 1995 if the non-accrual loan had been current in accordance
with its original terms are as follows:
Interest income included in net income on
impaired loans $21,732
Interest income excluded from net income
on non-accrual loans $ 8,065
COMBANCORP's current policy is to cease accruing interest on loans which
are 90 days or more past due as to principal or interest, except in instances
where management believes that the loan is fully collectible. Each such loan
that is 90 days or more past due is evaluated individually to determine its
collectibility and the adequacy of its collateral.
The loan on non-accrual status is secured by a first trust deed on
commercial property; the borrower has been contacted but the Bank was unable
to obtain a promise to pay. The Bank is currently consulting with counsel
regarding a resolution. The other real estate single family dwelling secured
loan in the amount of $146,349 made a payment on January 5, 1996, and is no
longer 90 days past due. These two loans account for 92.3% of the Bank's non
performing loans. The other three represent a credit card receivable and two
loans secured by commercial vehicles; these loans total $20,763, or 7.7% of
non performing loans, of which $1,600 was charged off in February 1996. The
Bank received payoffs on the two remaining loans in February 1996. Management
believes that it has adequately reserved for those loans representing an
above normal degree of risk.
On February 16, 1996, the Bank was made aware of the Chapter 7
bankruptcy filing on two unsecured commercial loans totaling $163,333. These
loans are not included in the non performing asset totals as of December 31,
1995. The Bank has contacted counsel and will prepare a charge off to remove
the loans from its performing assets.
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On January 1, 1995, the Bank adopted FASB Statement No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." There was no effect on the Bank's financial statements from
this change. At January 1, 1995, the Bank classified $244,000 of its loans as
impaired with a specific loss reserve of $56,000.
Impairment of loans having recorded investments of $103,000 at December 31,
1995 has been recognized. The total allowance for loan losses related to
these loans was $5,200 on December 31, 1995. The average recorded investment
for all impaired loans during 1995 was $276,000. Interest income of $57,000
was recognized on impaired loans in 1995 and was recognized using a cash
basis method of accounting during the time within that period that the loans
were impaired.
Other than the loan categories disclosed herein, the Bank does not have
any material concentration of loans. Management believes that the loan portfolio
is diversified sufficiently to avoid the impact of significant adverse changes
in economic or other conditions related to any single industry.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------- ------------
Average net loans outstanding $ 23,927,123 $ 22,657,720
Balance of allowance for loan
at beginning of period 498,827 534,625
Charge-offs:
Commercial loans (768,475) (199,700)
Real Estate loans - (73,924)
Consumer loans (16,775) (59,549)
Recoveries 69,982 4,575
------------- ------------
Net charge-offs (715,268) (328,598)
------------- ------------
Provisions charged to expense 649,000 292,800
------------- ------------
Balance of allowance for loan
at end of period $ 432,559 $ 498,827
------------- ------------
Ratio of net charge-offs to
net loans outstanding 2.99% 1.45%
------------- ------------
------------- ------------
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The allowance for loan losses is established through charges to
operations in the form of provisions for loan losses. Loan losses are
charged, and recoveries credited, directly to the allowance.
COMBANCORP determines its allowance for loan losses on the basis of a
qualitative and quantitative review of all loans on a quarterly basis. In
determining the adequacy of the allowance for loan losses, management
considers such factors as known problem loans, evaluations made by bank
regulatory authorities and/or independent firms retained to perform loan
reviews, assessment of economic conditions and other appropriate data in
order to identify the risks in the portfolio. The adequacy of the allowance
is evaluated by assessing the risks inherent in each category of loans. If,
following a review of the allowance, the allowance is determined to be
inadequate or supererogatory, the amount of the allowance is adjusted
accordingly. Management believes that the allowance for loan losses was
adequate at December 31, 1995.
At December 31, 1995, the allowance was 1.8% of total outstanding loans
receivables. The allowance for loan losses should not be interpreted as an
indication of future charge-off trends.
Allocation of the Allowance for Loan Losses
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- ------------------
Commercial $ 266,487 44.06% $ 275,028 43.43%
Real Estate 139,001 48.87% 185,863 49.53%
Installment 27,071 7.06% 37,936 7.04%
---------- ------ --------- ------
$ 432,559 100.00% $ 498,827 100.00%
---------- ------ --------- ------
---------- ------ --------- ------
V. DEPOSITS
The average deposit balances are summarized for the periods indicated:
YEAR ENDED DECEMBER 31,
1995 1994
------------ ------------
Demand deposits, non-interest bearing $ 23,878,416 $ 20,274,807
Money market demand 9,669,341 8,820,983
Savings and other interest-bearing demand 18,090,612 15,802,130
Time deposits 12,684,221 11,089,125
------------ ------------
Total $ 64,322,590 $ 55,987,045
------------ ------------
------------ ------------
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The following table sets forth the maturities of the Company's time
certificates of $100,000 or more at December 31, 1995:
Maturing within:
Three months or less $ 3,112,000
Over three months to six months 707,000
Over six months to twelve months 1,436,000
Over twelve months 127,000
------------
Total $ 5,382,000
------------
------------
At December 31, 1995 the Company had no brokered deposits.
VI. RETURN ON EQUITY AND ASSETS
Year Ended December 31,
1995 1994
---- ----
Return on average assets 0.46% 0.76%
Return on average equity 5.35% 8.09%
Average equity to average assets 8.67% 9.34%
Dividend pay-out ratio 42.98% -%
PROPERTIES
COMBANCORP's executive offices and the Bank's Main Office are located at
6001 E. Washington Boulevard, City of Commerce, California, in a structure
which was completed in August 1994. This Bank-owned structure consists of
approximately 15,000 square feet of space and is located on approximately
36,000 square feet of underlying land. The Montebello Office is located on
the first floor of a three story structure at 420 N. Montebello Boulevard,
Montebello, California. This office consists of approximately 4,000 square
feet and is subject to a three year lease expiring in April, 1998. The Bank's
Downey Branch is located at 11101 La Reina Blvd., Downey, California. This
Bank-owned structure consists of a two-story building of approximately 10,816
square feet on approximately 28,990 square feet of land. The Bank has
recently received approval from the City of Downey to upgrade this facility.
LEGAL PROCEEDINGS
During the ordinary course of its business, COMBANCORP and the Bank may
be involved in various routine legal proceedings and litigation. While no
assurance can be given as to the likelihood of an unfavorable outcome of any
such litigation or the estimated amount of potential loss, if any, based upon
currently available information, management does not believe that the outcome
of any such litigation will have a material adverse effect upon the
operations or financial condition of COMBANCORP.
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MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
COMBANCORP'S Common Stock has been traded in the over-the-courter
market since COMBANCORP commenced operations in 1983. The table below sets
forth, on a per share basis for the periods indicated, the range of high and
low bid quotations for the COMBANCORP Common Stock as reported by the
National Quotations Bureau. The bid quotations represent inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
YEAR HIGH LOW
--------------- ------- ------
1994
First Quarter $ 5.50 $ 5.50
Second Quarter 6.75 5.50
Third Quarter 6.75 6.00
Fourth Quarter 7.00 6.50
1995
First Quarter $ 7.00 $ 6.50
Second Quarter 7.38 7.00
Third Quarter 8.50 7.00
Fourth Quarter 9.50 7.00
1996
First Quarter $ 9.00 $ 8.625
Second Quarter
------ -------
As of June 30, 1996, there were approximately 366 shareholders of record
of COMBANCORP's Common Stock. COMBANCORP paid a cash dividend of $0.25 per
share in 1995 (including a special dividend of $0.14 per share), and did not
declare a dividend in 1994. It is not anticipated that a cash dividend will
be declared in 1996.
Under Federal banking law, dividends declared by the Bank (and payable
to COMBANCORP) in any calendar year may not, without the approval of the OCC,
exceed its net income, as defined, for that year combined with its retained
net income for the preceding two years.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993
FINANCIAL CONDITION
COMBANCORP's principal source of growth in recent years has been a
series of deposit and loan acquisitions beginning with the acquisition of all
of the deposits of a branch of Liberty Federal Savings Bank in Montebello,
California, in 1991. In 1993, the Bank acquired all of the branch deposits of
the Commerce, California branch of Community Bank at a premium of
approximately $138,000 and assumed approximately $12.5 million in deposit
liabilities. On August 26, 1994, the Bank, as part of a consortium, entered
into an Insured Deposit Purchase and Assumption Agreement with the FDIC for
the purchase and assumption of certain assets and liabilities of the Downey
Branch of Capital Bank (the "Downey Branch"). In that transaction, the Bank
purchased $674,000 of cash assets and approximately $7,784,000 in face value
loans, net of participations sold of $2,035,000, from various pools of loans
at a discount of $203,000. The deposits purchased totaled approximately $22.5
million.
COMBANCORP's total assets at December 31, 1995 decreased by 3.3% from
December 31, 1994, due primarily to the 4.4% decrease in deposits. Gross
loans decreased 7.9%, primarily due to the continued moderate economic growth
and the resulting lack of loan demand during 1995. The Bank will continue to
maintain a conservative approach to new loan generation until the California
and local economies demonstrate definitive signs of improvement.
The components of the decrease in loans as of December 31, 1995 are
as follows:
TOTAL CHANGE FROM
DECEMBER 31, 1994
-----------------
Commercial loans (6.6)%
Real estate - construction loans (22.0)%
Real estate - primarily loans for acquisition
or improvement of owner occupied offices and
industrial property (5.6)%
Real estate - mortgage loans acquired (2.1)%
Installment loans (7.5)%
As of December 31, 1995, the Bank had approximately $4.5 million in net
loans outstanding which were initially acquired as part of the Downey Branch
acquisition. Although COMBANCORP does not regularly calculate net earnings of
each branch or department utilizing strict cost accounting methods, an
analysis of the net interest income of the Bank in the amount of $4,000,637
at December 31,1995 indicates that 23.6% of that total is attributable to the
Downey Branch acquisition. The average loans to deposits and demand deposits
to total deposits
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for the Downey Branch were 32.6% and 42.8%, respectively, compared to 38.4%
and 37.1%, respectively, for COMBANCORP as a whole.
The components of the outstanding loans attributable to the Downey
Branch acquisition are as follows:
AUGUST 26, DECEMBER 31, DECEMBER 31,
1994 1994 1995
---------- ------------ ------------
Commercial loans $3,222,676 $3,406,718 $2,421,277
Real estate - primarily loans
for acquisition or improvement
of owner occupied officers and
industrial property 2,124,541 1,702,456 1,729,700
Installment loans 401,599 457,363 389,483
---------- ---------- ----------
Total $5,748,816 $5,566,537 $4,540,460
The components of the changes in deposits of COMBANCORP as of December
31, 1995 are as follows:
TOTAL CHANGE FROM
DECEMBER 31, 1994
-----------------
Demand deposits (7.0)%
Money market demand (21.5)%
NOW accounts 9.8 %
Savings (6.4)%
Time deposits of $100,000 or 24.3 %
Time deposits of less than 100,000 (1.4)%
As part of the Downey Branch acquisition, the Bank assumed approximately
$22.5 million of deposits, including approximately $2.0 million of uninsured
deposits payable to the FDIC for a premium of $185,000, including expenses.
The Bank put back such uninsured deposits to the FDIC on June 29, 1995. As of
December 31, 1995, the Bank had approximately $13.0 million in deposits
attributable to the acquisition. Management believes that the run-off in
deposits acquired through this transaction was primarily due to the normal
deposit attrition caused by the change in bank ownership and that the Bank
will be able to maintain the current level of deposits without significant
loss of deposits.
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<PAGE>
The components of the outstanding deposits attributable to the Downey
Branch acquisition are as follows:
AUGUST 26, DECEMBER 31, DECEMBER 31,
1994 1994 1995
----------- ------------ ------------
Demand deposits $ 8,200,638 $ 6,783,201 $ 5,288,941
Interest-bearing deposits 4,915,937 4,286,138 3,664,874
Time certificates of deposit 5,667,724 2,721,154 2,378,134
Savings deposits 3,697,787 2,034,327 1,803,390
Accrued interest payable 53,476 29,327 23,302
----------- ----------- -----------
Total $22,535,562 $15,854,147 $13,158,641
COMBANCORP's loan to deposit ratio at December 31, 1995, was 38.4%,
compared to 39.8% at December 31, 1994. Total non-performing assets as of
December 31, 1995 amounted to $377,000, or 0.5% of total assets, consisting
of loans of $270,000 and other real estate owned of $107,000. This compares
favorably with total non-performing assets as of December 31, 1994, of
$768,000, or 1.1% of total assets, consisting of $397,000 of loans and other
real estate owned of $371,000. Total non-performing loans (i.e., those past
due 90 days and/or on non-accrual status) at December 31, 1995 amounted to
approximately $270,000, a 32% decrease compared to December 31, 1994. Of the
five non-performing loans, one loan in the amount of $102,575, or 38% of the
non-performing loans, is secured by commercial property. Based on the
appraisal and estimated costs associated upon an eventual sale, management
does not expect a loss to be incurred. Foreclosure proceedings will be
initiated after the Bank is granted relief from a "stay" imposed by the court
in this matter. The Bank received a payment in January on a second loan in
the amount of $146,349, which is secured by a single family dwelling.
Payments are expected to continue and no loss is anticipated. This loan
represents 54.3% of the non-performing loans. The remaining three loans total
$20,763, or 7.7% of non-performing loans, and consist of a credit card
receivable and two loans secured by commercial vehicles. The Bank will charge
off $1,600 of this amount, and anticipates payoffs on the remaining amount.
At December 31, 1995, only one loan in the amount of $102,575 was
impaired. The total allowance for loan loss related to this loan was $5,200
on December 31, 1995. The average recorded investment for all impaired loans
during 1995 was $276,000. Interest income of $57,000 was recognized on
impaired loans in 1995 and was recognized using a cash basis method of
accounting during the time within that period that the loans were impaired.
As of December 31, 1995 and 1994, the allowance for loan losses as a
percentage of non-performing loans was 160.4% and 125.6%, respectively. The
allowance for loan losses was $432,559, or 1.8% of total outstanding loans,
at December 31, 1995, as compared to $498,827, or 1.9% of total outstanding
loans, at December 31, 1994. Management believes that the allowance for loan
losses was adequate at December 31, 1995.
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On January 1, 1995, the Bank adopted FASB Statement No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures." There was no effect on the Bank's financial statements from
this change. At January 1, 1995, the Bank classified $244,000 of its loans as
impaired with a specific loss reserve of $56,000.
COMBANCORP maintains a portfolio of securities which provide income and
serve as a source of liquidity for its operations. Changes in liquidity needs
and changes in the economic climate and loan demand may necessitate
restructuring the portfolio from time to time. On December 31, 1993, the Bank
adopted FASB Statement No.115 and classified all securities except the
Federal Reserve Stock as available for sale. The types of securities held in
COMBANCORP's portfolio are influenced by several factors among which are rate
of return, maturity and risk. Under the risk based capital guidelines, the
nature of the securities held in the portfolio can affect the amount of
COMBANCORP's risk-based assets and consequently, the amount of required
capital COMBANCORP must maintain. From time to time, COMBANCORP may alter the
composition of its investment portfolio to change its capital position under
the risk-based guidelines. At December 31, 1995, COMBANCORP's excess funds
were invested in Federal funds sold, U.S. Treasury and Agency securities,
investment grade corporate notes, municipal bonds, and interest-bearing
deposits with other financial institutions. Note 4 to the consolidated
financial statements sets forth the distribution of, as well as unrealized
gains and losses in, the investment portfolio at December 31, 1995 and 1994.
Cash, unrestricted interest-bearing deposits, Federal funds sold and
investment securities totalled $41,361,328 at December 31, 1995, compared to
$42,402,760 at December 31, 1994, a 2.5% decrease, due primarily to a
decrease of $2,875,500, or 4.4%, in deposit liabilities. Federal funds
decreased 75.9% from $11,605,000 in 1994 to $2,800,000 in 1995, offset by
increases of $3,653,000, or 45.1%, and $4,216,161, or 25.1%, in interest
bearing deposits with other financial institutions and securities available
for sale, respectively, compared to 1994. Due to the Downey Branch
acquisition in August 1994, management sought to maintain excess funds in
Federal funds to provide liquidity for anticipated run-off of some deposits.
As such deposit levels stabilized, excess funds were shifted to higher
yielding securities with longer maturities.
RESULTS OF OPERATIONS
1995 VERSUS 1994
Interest income increased by 24.0% during 1995, due to a 14.3% increase
in average interest bearing assets with an increase in average yield of 0.7%
during 1995 compared to 1994. Average loans increased by only 5.7% during
1995, with the balance of the increase in average interest bearing assets in
securities, which typically have lower yields than loans. The yield on
average earning assets reflects an increase from 7.7% in 1994 to 8.4% in
1995. The yield on average earning assets at the Downey Branch was 9.1% at
December 31, 1995, reflecting the higher reference rate utilized on the loan
portfolio purchased. Interest expense increased by 35.6% during 1995, due to
a 13.3% increase in interest-bearing liabilities during the year and
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an increase in the average cost of funds to 3.0% in 1995 from 2.5% in 1994.
The cost of funds at the Downey Branch was 2.8% compared to 3.0% for the
entire Bank. Net interest income increased by $691,800, or 20.9%.
COMBANCORP's net interest margin increased slightly to 6.4% during 1995 from
6.1% during 1994. The improved totals for 1995 reflect the 7.3% interest
margin attributable to the Downey Branch acquisition in August 1994.
The provision for loan losses which is charged to operations increased
by $356,200, or 121.7%, in 1995, compared to 1994. During 1995, management
instigated a rigorous program of corrective actions to enhance loan quality.
As a result, COMBANCORP charged off three unsecured loans totaling
approximately $721,000, which management considered uncollectible. On
February 16, 1996, the Bank was made aware of the Chapter 7 bankruptcy filing
on two unsecured commercial loans totaling approximately $163,000. These
loans were not included in the non-performing asset totals as of December 31,
1995; accordingly, no specific reserves were provided at December 31, 1995.
The Bank will increase its provision to keep the allowance constant.
Management has contacted counsel and will take appropriate action to charge
off and remove these loans from its performing assets. Asset quality will
continue to receive priority attention from management. Management believes
that COMBANCORP has adequately provided an allowance for loan losses as of
December 31, 1995 to cover any potential and unanticipated loan losses within
the existing loan portfolio. At December 31, 1995, the allowance for loan
losses was 1.8% of outstanding loans as compared to 1.9% at December 31, 1994.
Other income decreased approximately 1.6% during 1995, while other
operating expenses increased by 20.8%. The following is a discussion of
certain other expense items which have had significant fluctuations during
the year. Salaries and employee benefits increased $241,832, or 19.7%, over
1994, reflecting the salaries for 12 months in 1995 compared to only four
months in 1994 of the additional employees acquired in the assumption of the
Downey Branch in August 1994. Equipment expense increased $91,111, or 66.8%,
over 1994, reflecting the growth of COMBANCORP and equipping the Bank with
computers and installing a wide-area network. Professional fees increased
$106,399, or 101.4%, over 1994, attributable to litigation involving the
Bank's other real estate owned and other problem assets, and professionals
utilized in the Bank's marketing and sales training. Stationery and supplies
increased $43,043, or 33.6%, over 1994, reflecting additional supplies
necessary for the Downey Branch for the entire year, compared to only four
months in 1994. Amortization of deposit premium associated with the various
acquisitions increased to approximately $57,000 in 1995 from approximately
$39,000 in 1994, and is included in other operating expenses. Total other
operating expenses as a percentage of total interest income decreased to
65.4% in 1995 from 67.1% in 1994.
Net income for 1995 was $329,095, or $.58 per share, compared to
$468,637, or $.83 per share, in 1994.
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1994 VERSUS 1993
Interest income reflects an increase of 45.7% during 1994, primarily due
to an increase of 42.1% in average interest bearing assets at December 31,
1994 over December 31, 1993, principally as a result of the Downey Branch
acquisition in August 1994. Average loans increased 1.5% during 1994. The
balance of the increase in average interest bearing assets is in securities
which typically have lower yields than loans. The yield on average earning
assets reflects an increase from 7.5% in 1993 to 7.7% in 1994. Interest
expense also reflects an increase of approximately 38% during 1994, due
primarily to a 42.9% increase in interest-bearing liabilities during the
year, principally as a result of the Downey Branch acquisition in August
1994. Cost of funds decreased nominally from 2.6% in 1993 to 2.5% in 1994.
Net interest income reflects an increase of approximately $1,072,275, or
47.9%. COMBANCORP's net interest margin increased slightly from 5.8% during
1993 to 6.1% during 1994. The industry-wide increase in prime rate of
interest during 1994 resulted in the increase of the yield on average earning
assets. However, the average cost of funds for COMBANCORP decreased slightly
because the depository rates continued to decline in 1994, lagging behind the
increasing prime rate of interest.
The provision for loan losses which is charged to operations decreased
by $358,514, or 55%, in 1994 compared to 1993. At December 31, 1994, the
allowance for loan losses was 1.9% of outstanding loans as compared to 2.4%
at December 31, 1993. The 1993 provision for loan losses was higher than the
Bank's experience in recent years due in part to management's action to clean
up the loan portfolio and effects of the California economy. The provision
for loan losses in 1994 declined compared to 1993 because of the improved
economy and improvements in the loan portfolio.
Other income increased approximately 10.9% during 1994 while other
operating expenses increased approximately 16.3%. The following is a
discussion of certain other income and expense items which have had
significant fluctuations during the year. Gain on the sale of securities
decreased $62,529, or 100%, over 1993. Equipment expense increased $38,357,
or 39.1%, over 1993 reflecting the growth of COMBANCORP and equipping of the
new permanent structure housing the Bank's headquarters built on the City of
Commerce property which was completed in August 1994. Data processing
expenses increased $33,313, or 30.1%, over 1993, reflecting the additional
processing needs due to the deposit acquisition of the Commerce Branch of
Community Bank in December 1993 and the acquisition of the Downey Branch in
August 1994. Other expenses increased $188,121, or 57.7%, over 1993, due
primarily to the increase in correspondent bank fees related to increased
activity because of the acquisitions, and due to the fact that the Bank
elected to outsource the proof processing function in December 1993, which
resulted in significant additional expense but improved efficiency. Total
other operating expenses as a percentage of total interest income decreased
to 67.1% in 1994 from 84.1% in 1993.
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LIQUIDITY AND INTEREST RATE SENSITIVITY
COMBANCORP manages its liquidity position to ensure that sufficient
funds are available to meet customers' needs for borrowing and deposit
withdrawals. Liquidity is derived from both the asset and liability sides of
the balance sheet. Asset liquidity arises from the ability to convert assets
to cash and self-liquidation or maturity of assets. Liquid asset balances
include cash, investment securities maturing within one year, Federal funds
sold and other short-term assets. Liability liquidity arises from a diversity
of funding sources, as well as from the ability of COMBANCORP to attract
deposits of varying maturities. If COMBANCORP were limited to one source of
funding or all its deposits had the same maturity, its liquidity position
would be adversely impacted.
As of December 31, 1995, COMBANCORP had cash, unrestricted
interest-bearing deposits, Federal funds sold and investment securities of
approximately $41.4 million, or 60.1% of total assets. As of December 31,
1995, COMBANCORP had $22.6 million in liquid assets and its liquidity ratio
(i.e., liquid assets to total deposits) was 36.5%, compared to 56.2% at
December 31, 1994. This decrease reflects the movement from the lower
yielding securities which mature within one year to the higher yielding,
longer maturity securities. Except for commitments to extend credit in the
amount of $6.6 million, COMBANCORP had no material unrecorded commitments at
December 31, 1995. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Interest-bearing deposits with financial institutions at December 31,
1995 consisted exclusively of time certificates of deposit, all of which
mature within one year. COMBANCORP's available for sale securities consisted
primarily of U.S. Treasury and Agency obligations, corporate bonds, and bank
qualified municipal bonds, which were readily marketable. Securities totaling
$1,100,000 were pledged as collateral to secure Treasury Tax and Loan
deposits and public funds. COMBANCORP's loan portfolio also was relatively
liquid with approximately 70.2% of the outstanding loans maturing within one
year and/or sensitive to changes in interest rates.
To cushion unanticipated fluctuations in its liquidity position, the
Bank, as all member commercial banks, may borrow from the regional Federal
Reserve Bank, subject to compliance with regulatory requirements. In
addition, the Bank has available a Federal funds facility with one of its
correspondent banks for $1 million. This facility is subject to customary
terms for such arrangements. As of December 31, 1995, COMBANCORP, on an
unconsolidated basis, held liquid assets of approximately $248,000. See Note
15 to Consolidated Financial Statements of COMBANCORP for COMBANCORP's
Condensed Unconsolidated Financial Statements.
Interest rate sensitivity management, the management of the risk
associated with fluctuations in interest rates, seeks to stabilize net
interest income during periods of changing interest rates. A change in
interest rates may not affect all interest-earning assets (generally, loans
that bear interest at floating or adjustable rates, interest-bearing deposits
and Federal funds
-63-
<PAGE>
sold) and interest-bearing liabilities (generally, money market savings,
interest-bearing transaction accounts and time certificates of deposit) at
the same time because of differences in the terms and maturities of such
assets and liabilities. COMBANCORP believes that its position with respect to
interest rate fluctuations is favorable, in that substantially all of
COMBANCORP's loans bear a floating rate of interest and many of its
investments have short maturities.
At December 31, 1995, COMBANCORP was in an asset sensitive position and
its 90 day gap, (i.e., the difference between assets and liabilities that
reprice in that period as a percentage of total assets) was (16)% and its
cumulative gap was 28%. Generally, an asset sensitive position will result in
enhanced earnings in a rising interest rate environment and declining
earnings in a falling interest rate environment because larger volumes of
assets than liabilities will reprice in the short term. Conversely, a
liability sensitive position will be detrimental to earnings in a rising
interest rate environment and will enhance earnings in a falling interest
rate environment.
The Asset and Liability Maturity Repricing Schedule below sets forth the
distribution of repricing opportunities for COMBANCORP's interest earning
assets and liabilities, the interest sensitivity gap and the ratio of
cumulative gap to total assets.
<TABLE>
INTEREST SENSITIVITY PERIOD
(IN THOUSANDS)
OVER OVER OVER
3 MONTHS 6 MONTHS 1 YEAR
3 MONTHS THROUGH THROUGH THROUGH OVER
OR LESS 6 MONTHS 1 YEAR 5 YEARS 5 YEARS TOTAL
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal fund sold $ 2,800 $ -- $ -- $ -- $ -- $ 2,800
Securities 749 601 2,172 13,972 3,673 21,167
Deposits with other
institutions 3,945 3,550 4,260 -- -- 11,755
Loans 15,051 1,259 385 5,002 2,075 23,772
-------- ------- ------- ------- ------- -------
Total $ 22,545 $ 5,410 $ 6,817 $18,974 $ 5,748 $59,494
Interest Bearing Liabilities:
Time Deposits:
a) TCD's less than $100M $ 3,419 $ 2,107 $ 1,872 $ 745 $ 1 $ 8,144
b) TCD's $100M and over 3,112 707 1,437 126 -- 5,382
Savings 9,203 -- -- -- -- 9,203
Money market 8,554 -- -- -- -- 8,554
NOW accounts 8,935 -- -- -- -- 8,935
-------- ------- ------- ------- ------- -------
Total $ 33,223 $ 2,814 $ 3,309 $ 871 $ 1 $40,218
Interest Sensitivity Gap:
Interval $(10,678) $ 2,596 $ 3,508 $18,103 $ 5,747
Cumulative $(10,678) $(8,082) $(4,574) $13,529 $19,976 $19,276
Ratio of cumulative gap
to total assets (16)% (12)% (7)% 20% 28% 28%
</TABLE>
-64-
<PAGE>
CAPITAL RESOURCES
Management seeks to maintain capital adequate to support anticipated
asset growth and credit risks, and to ensure that COMBANCORP is within
established regulatory guidelines and industry standards. COMBANCORP is
currently exempt from the Federal Reserve Board's risk-based guidelines
because consolidated assets are under $150 million. However, the Bank is
subject to the risk-based capital guidelines adopted by the OCC. These
guidelines require the Bank to maintain a minimum ratio of total
capital-to-risk-weighted assets of 8%, of which at least 4% must consist of
Tier 1 capital. At December 31, 1995, the Bank had a total
capital-to-risk-weighted assets ratio of 18.3%, with a Tier 1 capital ratio
of 17.6%. The Bank's leverage ratio at December 31, 1995 was 8.4%.
During the last two years, capital has been generated primarily through
the retention of earnings. Management believes that it can meet its present
regulatory capital requirements through earnings for at least the next two
years.
RISK ELEMENTS
Management believes that the California economy has continued to improve
slowly in 1995, but continues to lag behind the country, particularly in
unemployment rates. Southern California continues to feel the economic
pressures of reductions in government defense spending, overbuilt commercial
real estate, unaffordable housing and high unemployment. Many of these
economic factors are the result of long-term structural adjustments resulting
from major changes in many of the State's basic industries. However, the
index of leading economic indicators has shown signs of improvement as well
as an increase in housing starts. In addition, California's unemployment rate
is expected to improve in 1996. Management anticipates that the California
economy will continue to improve in 1996.
COMBANCORP has been able to maintain a positive interest margin even
with the decreases in loan yields through tight controls on operating
expenses. Management believes the results reflect favorably in 1995 and will
continue to focus on conservative management policies.
EFFECTS OF INFLATION
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms
of historical dollars without considering changes in the relative purchasing
power of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation.
-65-
<PAGE>
In the current interest rate environment where the Federal Reserve has
actively used the discount rate as a tool to stimulate the economy,
COMBANCORP recognizes the importance of maintaining adequate liquidity and
effectively managing the maturity structure of COMBANCORP's interest bearing
assets and liabilities.
RECENT ACCOUNTING DEVELOPMENTS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
Statement No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Statement No. 121 will first be
required for the Bank's year ending December 31, 1996. Based on its
preliminary analysis, the Bank does not anticipate that the adoption of
Statement No. 121 will have a material impact on the financial condition or
results of operations of COMBANCORP as of the date of adoption.
In 1995 the FASB issued Statement No. 123, "Accounting for Stock-based
Compensation." Statement No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans such as a
purchase plan. The Statement generally suggests stock-based compensation
transactions be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is
more reliably measurable. An enterprise may continue to follow the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does
not require compensation to be recorded if the consideration to be received
is at least equal to the fair value at the measurement date. If an enterprise
elects to follow APB Opinion No. 25, it must disclose the pro forma effects
on net income as if compensation were measured in accordance with the
suggestions of Statement No. 123. COMBANCORP has not determined if it will
continue to follow APB Opinion No. 25 or follow the guidance of Statement No.
123. However, adoption of this pronouncement in 1996 is not expected to have
a material impact on the financial condition or results of operations of
COMBANCORP.
-66-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
FINANCIAL CONDITION
COMBANCORP's consolidated balance sheet at March 31, 1996 reflected a
modest increase of .2% in total assets and .8% in deposits from December 31,
1995. As a result of continued slow loan demand, the Bank experienced a
decrease of .2% in gross loans during this period.
The components of the changes in loans are as follows:
INCREASE (DECREASE)
OVER DECEMBER 31, 1995
----------------------
Commercial loans 0.0 %
Real estate - construction 8.9 %
Real estate - primarily loans for acquisition
or improvement of owner occupied offices and
industrial property (3.1)%
Real estate - mortgage loans acquired (0.5)%
Installment loans 0.3 %
The loan to deposit ratio at March 31, 1996 was 37.9%, compared to 38.3%
at December 31, 1995. Non-performing loans (i.e., those past due 90 days
and/or on non-accrual) at March 31, 1996 amounted to approximately $284,300
as compared to approximately $269,700 at December 31, 1995, a 5.4% increase.
Impairment of loans having recorded investments of approximately $103,000 at
March 31, 1996 has been recognized. The total allowance for loan losses
related to this loan was $5,200 on March 31, 1996. The average recorded
investment for all impaired loans during the first quarter of 1996 was
$103,000. No interest income was recognized on this loan during this period.
NON-PERFORMING LOANS LOANS PAST DUE
AS OF OVER 90 DAYS LOANS ON NON-
MARCH 31, 1996 AND STILL ACCRUING ACCRUAL STATUS
------------------------------- ------------------ --------------
Commercial $ 1,916 $ --
Real Estate:
Construction -- --
Other -- 102,575
Mortgage loans acquired 144,266 --
Consumer/Installment 35,497 --
Total $181,679 $102,575
-67-
<PAGE>
Non-performing loans at March 31, 1996 consisted of the following:
-- A loan on non-accrual status in the amount of $102,575 which is
secured by a first trust deed on commercial property. The Bank has
filed for relief from a "stay" with the Bankruptcy courts so that
it can proceed with the sale of the property.
-- A mortgage loan on a secured single family dwelling loan in the amount
of $144,266, on which the Bank has not received a payment since
January 5, 1996. A demand was sent to the borrower, who has not
responded, and a notice of default is to be filed in April. This loan
has been habitually past due.
-- A loan in the amount of $29,531 secured by a second trust deed on a
single family residence. It appears that this loan will be a probable
loss.
-- The balance of the non-performing loans totals $7,881, all of which are
still accruing interest, consists of one commercial loan, two credit
card loans, and a reserve line of credit.
Other Real Estate Owned ("OREO") at March 31, 1996 remained at $106,926
as compared to December 31, 1995. Management believes that it has adequately
reserved for those loans representing an above normal degree of risk.
Asset quality ratios: MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
Non-performing loans to gross loans 1.2% 1.1%
Non-performing loans and OREO to
total assets 0.6% 0.5%
The allowance and provision for loan losses is a general reserve
established by management to absorb potential losses inherent in the entire
loan portfolio. The level and rate of additions to the allowance for loan
losses are based on a continuing analysis of the loan portfolio and at March
31, 1996, reflected an amount which in management's judgment was adequate for
known and inherent losses. In evaluating the adequacy of the allowance,
management gives consideration to economic prospects and net worth of the
individual borrowers and guarantors, collateral evaluation, the nature and
amount of loans subject to adverse classification, the total size and mix of
the loan portfolio and such other factors that deserve recognition. The
allowance for loan losses aggregated $402,433 at March 31, 1996, or 1.7% of
outstanding loans, as compared to $432,559, or 1.8% of outstanding loans, at
December 31, 1995. During the same period, the allowance for loan losses as a
percentage of non-performing loans was 141.6% and 160.4%, respectively.
Funds not required for lending activities at March 31, 1996 were
invested in U.S. Treasury and Agency securities, investment grade corporate
notes, municipal bonds, interest-bearing deposits with other financial
institutions and Federal funds sold. At March 31, 1996,
-68-
<PAGE>
Federal funds sold and interest bearing deposits with financial institutions
decreased by approximately $1.1 million and $2.1 million, respectively, when
compared to December 31, 1995, while securities available for sale increased
by approximately $4.0 million during the same period. Maturing securities
have been reinvested in the higher yielding callable U.S. Treasury and Agency
securities maturing between 1 year and 10 years to protect against loss of
income due to interest rate risk. The net unrealized gain or loss on
securities available for sale, net of deferred taxes, included in
shareholders' equity decreased from an unrealized gain of $134,960 at
December 31, 1995 to an unrealized loss of $112,186 at March 31, 1996,
reflecting the decrease in market value due to the increase in yields in the
market during the first quarter of 1996.
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1996 was $83,863, or $.15 per
share, compared to $270,636, or $.30 per share, for the quarter ended March
31, 1995.
Net interest income for the quarter ended March 31, 1996 decreased
approximately 13.5% over the comparable period in 1995 primarily due to the
decrease in yield on average interest bearing assets from 8.7% during the
first quarter of 1995 to 8.1% during the first quarter of 1996, as well as
the 2.0% decrease in average interest earning assets. Interest expense
increased approximately 8.8% over the comparable period in 1995 due to the
increase in cost of funds from 2.8% in 1995 to 3.1% in 1996 which was
somewhat offset by the 3.2% decrease in average interest-bearing liabilities.
The annualized net interest margin on average earning assets decreased to
6.0% during the first quarter of 1996, compared to 6.8% during the comparable
period in 1995.
The provision for loan loss expense increased $100,000, or 333%, during
the first quarter 1996, compared to the same period in 1995, which primarily
reflects management's recognition and charge off of certain credits that
arose in the first quarter of 1996 and management's assessment of the
potential risks in the loan portfolio.
Other income decreased approximately $26,000, or 14.9%, during the first
quarter of 1996 as compared to the same period in 1995. No individual
component is primarily responsible. Other operating expenses decreased
approximately $120,000, or 13.3%, during the first quarter of 1996 over the
comparable period of 1995. Occupancy expense decreased $34,112, or 34.2%, due
to the fact that the Bank exercised its option to purchase the Downey Branch
facility from the FDIC and was able to significantly decrease the monthly
expense on the lease by substituting it with an asset which will be
depreciated over the life of that asset. Professional expenses increased
$35,987, or 76.8%, due to the utilization of a marketing consultant to train
the Bank's employees on the various products and a sales consultant to train
the employees on how to sell those products. Other expenses decreased
$105,972, or 51.5%, due primarily to the decrease of $91,868, or 99.5%, in
FDIC fees. Total other operating expenses as a percentage of total interest
income decreased from 68.0% during the first quarter of 1995 to 64.6% during
the first quarter of 1996.
-69-
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
At March 31, 1996, total earning assets were $60.3 million, or 87.4% of
total assets. COMBANCORP's liquid assets were approximately $19 million and
consisted of cash and due from banks, interest-bearing deposits with
financial institutions, unpledged securities maturing within one year and
Federal funds sold. The liquidity ratio (i.e., liquid assets to total
deposits) was 30.4% compared to 55.2% at December 31, 1995. This reflects the
longer term securities in the Bank's available-for-sale portfolio as well as
the $1.4 million in pledged securities. The Bank has outstanding commitments
to lend in the amount of approximately $8.2 million at March 31, 1996
compared to $6.6 million at December 31, 1995. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. COMBANCORP has no
other material unrecorded commitments for funds.
Interest-bearing deposits with financial institutions at March 31, 1996
consisted exclusively of time certificates of deposit, all of which mature
within one year. COMBANCORP's securities available for sale consisted
primarily of U.S. Treasury and Agency obligations, corporate bonds, and bank
qualified municipal bonds, which were readily marketable. At March 31, 1996,
the cost of these securities exceeded their market value by approximately
$193,000. Securities totaling $1,400,000 were pledged to secure Treasury Tax
and Loan deposits and public funds. COMBANCORP's loan portfolio was also
relatively liquid with approximately 69% of the outstanding loans maturing
within one year or sensitive to changes in interest rates.
COMBANCORP believes that its position with respect to interest rate
fluctuations is favorable, in that the majority of COMBANCORP's loans bear a
floating rate of interest and the majority of its investments have short
maturities.
At March 31, 1996, COMBANCORP was in a liability sensitive position
through its one year gap and an asset sensitive position in its over one year
gap. The 90 day gap, (i.e., the difference between assets and liabilities
that reprice in that period as a percentage of total assets) was negative, or
liability sensitive, at 13%, and its cumulative gap was asset sensitive at
30%. Generally, an asset sensitive position will result in enhanced earnings
in a rising interest rate environment and declining earnings in a falling
interest rate environment because larger volumes of assets than liabilities
will reprice. Conversely, a liability sensitive position will be detrimental
to earnings in a rising interest rate environment and will enhance earnings
in a falling interest rate environment.
The Asset and Liability Maturity Repricing Schedule below sets forth the
distribution of repricing opportunities for COMBANCORP's interest earning
assets and liabilities, the interest sensitivity gap and the ratio of
cumulative gap to total assets.
-70-
<PAGE>
<TABLE>
INTEREST SENSITIVITY PERIOD
(IN THOUSANDS)
3 MONTHS 6 MONTHS 1 YEAR
3 MONTHS THROUGH THROUGH THROUGH OVER
OR LESS 6 MONTHS 1 YEAR 5 YEARS 5 YEARS TOTAL
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal fund sold $ 1,700 $ -- $ -- $ -- $ -- $ 1,700
Securities 1,100 202 2,672 15,891 5,293 25,158
Deposits with other
institutions 3,946 1,982 3,762 -- -- 9,690
Loans 15,980 81 329 5,628 1,709 23,727
------- -------- ------- ------- ------- -------
Total $22,726 $ 2,265 $ 6,763 $21,519 $ 7,002 $60,275
Interest Bearing Liabilities:
Time Deposits:
a) TCD's less than $100M $ 3,791 $ 1,912 $ 1,720 $ 862 $ 1 $ 8,286
b) TCD's $100M and over 2,421 1,810 1,050 371 -- 5,652
Savings 9,212 -- -- -- -- 9,212
Money market 8,723 -- -- -- -- 8,723
NOW accounts 7,749 -- -- -- -- 7,749
------- -------- ------- ------- ------- -------
Total $31,896 $ 3,722 $ 2,770 $ 1,233 $ 1 $39,622
Interest Sensitivity Gap:
Interval $(9,170) $ (1,457) $ 3,993 $20,286 $ 7,001
Cumulative $(9,170) $(10,627) $(6,634) $13,652 $20,653 $20,653
Ratio of cumulative gap
to total assets (13)% (15)% (10)% 20% 30% 30%
</TABLE>
At March 31, 1996, COMBANCORP was entitled to borrow on a collateralized
basis at the discount window at the Federal Reserve Bank of San Francisco. In
addition, the Bank has available a Federal funds line of credit in the amount
of $1.0 million with one of its correspondent banks.
CAPITAL RESOURCES
COMBANCORP is currently exempt from the Federal Reserve Board's
risk-based capital guidelines because consolidated assets are under $150
million. However, the Bank is subject to the risk-based capital guidelines
adopted by the OCC. These guidelines require the Bank to maintain a minimum
ratio of total capital-to-risk-weighted assets of 8% (of which at least 4%
must consist of Tier 1 capital), and a leverage ratio of at least 3%. At
March 31, 1996, the Bank had a total capital-to-risk-weighted assets ratio of
19.4% , with a Tier 1 capital ratio of 18.2%, and a leverage ratio of 8.6%.
-71-
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP have served as COMBANCORP's independent
certified public accountants since 1991. A representative of McGladrey &
Pullen, LLP is expected to be present at the Special Meeting and will have an
opportunity to make a statement if he or she so desires and to respond to
appropriate questions.
OTHER MATTERS
Management knows of no other matters to be voted upon at the Special
Meeting. If any other matter is properly brought before the Special Meeting,
it is the intention of the holders of proxies to vote in their discretion on
such matter.
YOU ARE URGED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED. No postage is required if the envelope is mailed from
within the United States. If you subsequently decide to attend the Special
Meeting and to vote your shares in person, you may do so. You cooperation in
giving this matter your prompt attention is appreciated.
By Order of the Board of Directors,
Esther G. Wilson
Corporate Secretary
City of Commerce, California
July __, 1996
DDD097F9
-72-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Independent Auditor's Report F-2
Consolidated Balance Sheets at December 31, 1994 and 1995, and
March 31, 1996 (unaudited) F-3
Consolidated Statements of Operations for the years ended December
31, 1993, 1994 and 1995, and the three months ended March 31, 1995
and 1996 (unaudited) F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995, and the three months ended March
31, 1996 (unaudited) F-7
Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1994 and 1995, and the three months ended March 31, 1995
and 1996 (unaudited) F-8
Notes to Consolidated Financial Statements F-10
- -------------------------------------------------------------------------------
F-1
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
COMBANCORP
City of Commerce, California
We have audited the accompanying consolidated balance sheets of COMBANCORP
and subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
COMBANCORP and subsidiary at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Pasadena, California McGladrey & Pullen, LLP
January 26, 1996
F-2
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
March 31, ------------------------
ASSETS 1996 1995 1994
- -------------------------------------------------------------------------------
(Unaudited)
Cash and due from banks (Note 2) $ 5,010,455 $ 5,639,763 $ 5,745,356
Federal funds sold 1,700,000 2,800,000 11,605,000
----------------------------------------
CASH AND CASH EQUIVALENTS (Note 1) 6,710,455 8,439,763 17,350,356
----------------------------------------
Interest bearing deposits in other
financial institutions 9,690,000 11,755,000 8,102,000
----------------------------------------
Federal Reserve Bank stock (Note 4) 120,000 120,000 120,000
----------------------------------------
Securities available for sale (Note 4) 25,038,203 21,046,565 16,830,404
----------------------------------------
Loans (Notes 5 and 13) 23,726,665 23,771,964 25,809,010
Less:
Deferred loan fees and costs 64,752 65,731 59,280
Unearned discount on acquired loans 71,377 84,823 285,827
Allowance for loan losses (Note 6) 402,433 432,559 498,827
----------------------------------------
NET LOANS 23,188,103 23,188,851 24,965,076
----------------------------------------
Bank premises and equipment, net
(Note 7) 3,230,626 3,291,753 2,526,677
----------------------------------------
Accrued income receivable and other
assets (Notes 3 and 9) 885,304 881,171 922,922
----------------------------------------
Other real estate owned 106,926 106,926 371,013
----------------------------------------
$68,969,617 $68,830,029 $71,188,448
----------------------------------------
----------------------------------------
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
December 31,
March 31, ------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 1994
- --------------------------------------------------------------------------------
Liabilities (Unaudited)
Deposits (Notes 3, 8 and 13):
Demand noninterest bearing $22,901,300 $21,805,536 $23,439,082
Savings and other interest bearing
accounts 25,684,349 26,691,892 28,870,686
Time 13,938,393 13,526,369 12,589,529
-------------------------------------
62,524,042 62,023,797 64,899,297
Accrued interest payable and other
liabilities (Note 9) 223,948 421,322 342,524
-------------------------------------
TOTAL LIABILITIES 62,747,990 62,445,119 65,241,821
-------------------------------------
Commitments and Contingencies (Note 11)
Shareholders' Equity (Notes 4, 10, 12
and 14)
Preferred stock, no par value,
5,000,000 shares authorized; no
shares issued -- -- --
Common stock, no par value,
20,000,000 shares authorized;
565,789 issued and outstanding 4,453,300 4,453,300 4,453,300
Retained earnings 1,880,513 1,796,650 1,609,002
Unrealized gain (loss) on securities
available for sale, net (112,186) 134,960 (115,675)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,221,627 6,384,910 5,946,627
-------------------------------------
$68,969,617 $68,830,029 $71,188,448
-------------------------------------
-------------------------------------
F-4
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $ 650,258 $ 791,817 $ 2,904,107 $ 2,750,210 $ 2,229,348
Deposits in other financial
institutions 167,092 123,172 610,821 334,074 299,107
Securities 352,429 255,150 1,118,263 706,544 251,014
Federal funds sold 40,732 156,820 566,857 402,391 97,795
----------------------------------------------------------------------------------
1,210,511 1,326,959 5,200,048 4,193,219 2,877,264
Interest expense on deposits 305,080 280,460 1,199,411 884,421 640,741
----------------------------------------------------------------------------------
Net interest income 905,431 1,046,499 4,000,637 3,308,798 2,236,523
Provision for loan losses
(Note 6) 130,000 30,000 649,000 292,800 651,314
----------------------------------------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 775,431 1,016,499 3,351,637 3,015,998 1,585,209
----------------------------------------------------------------------------------
Other income:
Gross gain on call or sale
of investment securities 3,317 - - - 62,529
Other, principally service
charges on deposit accounts 147,632 177,311 609,522 619,498 496,285
----------------------------------------------------------------------------------
150,949 177,311 609,522 619,498 558,814
----------------------------------------------------------------------------------
Other expenses:
Salaries and employee
benefits 341,039 365,902 1,469,449 1,227,617 1,142,288
Occupancy (Note 11) 57,998 93,259 316,599 282,353 249,715
Equipment 53,839 39,084 227,548 136,437 98,080
Professional fees (Note 13) 82,818 46,831 211,304 104,905 123,701
Advertising 5,815 19,005 54,447 48,959 45,287
Business promotion 16,948 14,906 69,834 78,465 68,019
Supplies and office 40,629 35,906 171,246 128,203 109,406
Insurance 49,309 48,541 167,583 149,961 147,842
Data processing 40,741 40,389 146,924 144,046 110,733
Other 92,981 198,251 564,130 513,913 325,792
----------------------------------------------------------------------------------
782,117 902,074 3,399,064 2,814,859 2,420,863
----------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income (loss) before
income taxes (benefits) $ 144,263 $ 291,736 $ 562,095 $ 820,637 $ (276,840)
Provision for income taxes
(benefits) (Note 9) 60,400 121,100 233,000 352,000 (87,500)
----------------------------------------------------------------------------
Income (loss) before
cumulative effect of a
change in accounting
principle 83,863 170,636 329,095 468,637 (189,340)
Cumulative effect of a change
in accounting principle
(Note 9) - - - - (55,582)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 83,863 $ 170,636 $ 329,095 $ 468,637 $ (133,758)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per common
share:
Income (loss) before
cumulative effect of a
change in accounting
principle $ 0.15 $ 0.30 $ 0.58 $ 0.83 $ (0.34)
Effect of a change in
accounting principle on
net income - - - - 0.10
----------------------------------------------------------------------------
Earnings (loss) per common
share $ 0.15 $ 0.30 $ 0.58 $ 0.83 $ (0.24)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Dividends per common share $ - $ 0.25 $ 0.25 $ - $ 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1996)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Number of Securities
Shares Common Retaining Available for
Outstanding Stock Earnings Sale, Net Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 565,789 $ 4,453,300 $ 1,325,044 $ - $ 5,778,344
Cash dividend ($.09 per
common share) - - (50,921) - (50,921)
Cumulative change in
unrealized gain on
securities available for
sale, net - - - 73,160 73,160
Net (loss) - - (133,758) - (133,758)
----------------------------------------------------------------------------
Balance, December 31, 1993 565,789 4,453,300 1,140,365 73,160 5,666,825
Change in unrealized (loss)
on securities available for
sale, net - - - (188,835) (188,835)
Net income - - 468,637 - 468,637
----------------------------------------------------------------------------
Balance, December 31, 1994 565,789 4,453,300 1,609,002 (115,675) 5,946,627
Cash dividend ($.25 per
common share) - - (141,447) - (141,447)
Change in unrealized gain
(loss) on securities available
for sale, net - - - 250,635 250,635
Net income - - 329,095 - 329,095
----------------------------------------------------------------------------
Balance, December 31, 1995 565,789 4,453,300 1,796,650 134,960 6,384,910
Change in unrealized (loss)
on securities available for
sale, net - - - (247,146) (247,146)
Net income - - 83,863 - 83,863
----------------------------------------------------------------------------
Balance, March 31, 1996 565,789 $ 4,453,300 $ 1,880,513 $ (112,186) $ 6,221,627
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net income (loss) $ 83,863 $170,637 $ 329,095 $ 468,637 $(133,758)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Cumulative effect on prior
years of a change in
accounting principle for
computing deferred taxes - - - - (55,582)
Loss (gain) on sale of
premises and equipment
and other real estate
owned - - 3,924 (24,253) 17,914
Valuation write-down of
other real estate owned - - 20,000 48,836 30,000
Gain on securities (3,317) - - - (62,529)
Provision for loan losses 130,000 30,000 649,000 292,800 651,314
Depreciation and
amortization 78,651 51,718 247,372 136,472 136,031
Amortization of deferred
loan fees (14,855) (20,563) (68,468) (87,478) (41,027)
Net accretion of discount
on securities (14,502) (93,015) (229,474) (337,461) (5,129)
Accretion of unearned
discount on acquired
loans (13,446) (53,866) (169,611) (341,311) (181,076)
Net (increase) decrease in
accrued income receiv-
able and other assets (18,373) 40,320 (15,209) (65,910) (122,318)
Net increase (decrease) in
accrued interest payable
and other liabilities (19,421) 67,804 (99,655) 334,429 (101,168)
--------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 208,600 193,035 666,974 424,761 132,672
--------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
--------------------------------------------------------------------------
1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Investing
Activities
Net (increase) decrease in
interest bearing deposits
with other financial
institutions $ 2,065,000 $ (597,000) $ (3,653,000) $ (127,126) $(1,282,140)
Proceeds from sales of
securities available for sale - - - - 462,064
Proceeds from maturities
and calls of securities
available for sale 3,600,106 200,400 14,500,851 23,759,907 996,587
Purchases of securities
available for sale (7,999,024) (1,444,768) (18,058,450) (27,662,866) (11,259,699)
Net (increase) decrease in
loans (100,951) 1,081,282 1,219,383 (3,566,444) 1,726,455
Purchases of premises and
equipment (3,284) (29,980) (956,782) (2,013,119) (123,188)
Proceeds from sale of other
real estate owned and
equipment - - 387,378 36,254 352,616
-------------------------------------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES (2,438,153) (790,066) (6,560,620) (9,573,394) (9,127,305)
-------------------------------------------------------------------------
Cash Flows from Financing
Activities
Net increase (decrease) in
deposits 500,245 (1,098,303) (2,875,500) 19,174,616 11,538,343
Dividends paid - (141,447) (141,447) - (50,921)
-------------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 500,245 (1,239,750) (3,016,947) 19,174,616 11,487,422
-------------------------------------------------------------------------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS (1,729,308) (1,836,781) (8,910,593) 10,025,983 2,492,789
Cash and Cash Equivalents
Beginning 8,439,763 17,350,356 17,350,356 7,324,373 4,831,584
-------------------------------------------------------------------------
End $ 6,710,455 $15,513,575 $ 8,439,763 $ 17,350,356 $ 7,324,373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS ACTIVITIES
COMBANCORP (the Company) is a bank holding company located in the City of
Commerce, California, which provides a full range of banking services to its
commercial and consumer customers through three branches located in the
cities of Commerce, Montebello, and Downey, California.
The Bank grants commercial, residential and consumer loans to customers,
substantially all of whom are middle market businesses or residents. The
Bank's business is concentrated in the cities of Commerce, Montebello, Downey
and the surrounding areas and the loan portfolio includes a significant
credit exposure to the real estate industry of this area. As of December 31,
1995, real estate related loans accounted for approximately 49% of total
loans. Substantially all of these loans are secured by first liens with an
initial loan-to-value ratio of generally no more than 75%.
The loans are expected to be repaid from cash flows or proceeds from the sale
of selected assets of the borrowers. The Bank's policy requires that
collateral be obtained on substantially all loans. Such collateral is
primarily first trust deeds on real estate and business assets.
A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES UTILIZED BY
THE COMPANY IS AS FOLLOWS:
INTERIM FINANCIAL STATEMENTS
The accounting and reporting policies of COMBANCORP and Subsidiary (the
Company) are in accordance with generally accepted accounting principles and
conform to general practices within the banking industry. The consolidated
balance sheet at March 31, 1996 and the consolidated statements of operations
and of cash flows for the three months ended March 31, 1996 and 1995, and the
statement of shareholders' equity for the three months ended March 31, 1996
are unaudited. In management's opinion, these statements reflect all material
adjustments (consisting only of normal recurring accruals) necessary for a
fair statement of the results for the interim periods presented. Operating
results for the interim periods presented are not necessarily indicative of
the results that may be expected for any other interim period or for the year
as a whole.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all the accounts of COMBANCORP
and its wholly owned subsidiary, Commerce National Bank (the Bank). All
material intercompany accounts and transactions have been eliminated in
consolidation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes cash
on hand, amounts due from banks and federal funds sold. Cash flows from loans
originated by the Bank, interest bearing deposits in other financial
institutions and deposits are reported net.
The Bank, subject to policy guidelines, maintains amounts due from banks
which, at times, may exceed federally insured limits.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are those debt securities that
the Company intends to hold for an indefinite period of time but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are carried at fair
value. Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Realized gains
or losses, determined on the basis of the cost of specific securities sold,
are included in earnings.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned
discounts and fees and the allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectible based on evaluation of the collectibility of loans and prior
loan loss experience.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrower's ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic or other conditions.
In addition, the Office of the Comptroller of the Currency (OCC), as an
integral part of their examination process, periodically reviews the Bank's
allowance for loan losses and may require the Bank to make additions to the
allowance based on their judgment about information available to them at the
time of their examinations.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. A loan is impaired
when it is probable the creditor will be unable to collect all contractual
principal and interest payments due in accordance with the terms of the loan
agreement.
INTEREST AND FEES ON LOANS
Interest on loans is recognized over the terms of the loans and is calculated
using the simple-interest method on principal amounts outstanding. Interest
is accrued daily on the outstanding balances. Accrual of interest is
discontinued on a loan when management believes, after considering collection
efforts and other factors, that the borrower's financial condition is such
that collection of interest is doubtful. When the accrual of interest is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
Unearned discounts on acquired loans are amortized to income over the
contractual life of the loans unless certain homogeneous loans have been
grouped as a pool, in which case the discount is amortized to income over the
estimated life of the loans. Management periodically reevaluates the
prepayment assumptions based upon actual payment experience. Any changes in
these estimates are accounted for prospectively.
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loan's yield. The Bank is amortizing these amounts over the
contractual life of the loan.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets,
which range from three to 30 years.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
OTHER REAL ESTATE OWNED
Other real estate owned (OREO), consisting of properties acquired as a result
of foreclosure of loans, are carried at the lower of the loan balance or
appraised value of collateral, net of selling costs. Any write-down to
estimated fair value less cost to sell at the time of transfer to OREO is
charged to the allowance for loan losses. Property is evaluated regularly by
management and reductions of the carrying amount to estimated fair value less
estimated costs to dispose are recorded as necessary.
INTANGIBLES
The premiums paid for the deposits purchased are amortized over a period of
seven years on a straight-line method. At December 31, 1995 and 1994, the
unamortized balances of $215,385 and $330,998, respectively, are included in
other assets in the accompanying consolidated balance sheets.
The Bank periodically reviews the value of its intangibles to determine if
impairment has occurred. The Bank does not believe that an impairment of its
intangibles has occurred based on an evaluation of deposit balances and
operating results.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards. Deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are
funded.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are computed by dividing applicable amounts
by the weighted average number of shares of common stock outstanding. Stock
options are considered common stock equivalents but were not included in the
earnings per share computation because the effect is immaterial or
antidilutive. The number of shares used in computing earnings per share was
565,789 for 1996, 1995, 1994 and 1993.
STATEMENT OF CASH FLOWS
The Bank paid interest and income taxes as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
------------------------------------------------------------------
1996 1995 1995 1994 1993
------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest $299,597 $280,085 $1,210,204 $862,071 $636,967
Income taxes - - 250,408 115,000 162,012
</TABLE>
During the years ended December 31, 1995, 1994 and 1993, $145,921, $444,937
and $284,725, respectively, of other real estate owned was acquired in
settlement of loans.
In 1993 the Bank acquired deposit liabilities of $12,454,049 for a premium of
$138,222. This transaction is reflected in the consolidated statement of cash
flows in the net change in deposits.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year financial data
to current reporting policies of the Bank. Such reclassifications do not
affect net income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 1995, the Company adopted FASB Statement No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, which requires
disclosure of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate
that value.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
Management uses its best judgment in estimating the fair
value of the Bank's financial instruments; however, there
are inherent weaknesses in any estimation technique.
Therefore, for substantially all financial instruments, the
fair value estimates presented herein are not necessarily
indicative of the amounts the Bank could have realized in a
sales transaction at December 31, 1995. The estimated fair
value amounts for 1995 have been measured as of December 31,
1995 and have not been reevaluated or updated for purposes
of these consolidated financial statements subsequent to
that date. As such, the estimated fair values of these
financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at December
31, 1995.
This disclosure of fair value amounts does not include the
fair values of any intangibles, including core deposit
intangibles, purchased.
Due to the wide range of valuation techniques and the degree
of subjectivity used in making the estimate, comparisons
between the Bank's disclosures and those of other banks may
not be meaningful.
The following methods and assumptions were used by the Bank
in estimating the fair value of its financial instruments:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts reported in the consolidated balance
sheet for cash and due from banks and federal funds sold
approximate their fair values.
SECURITIES
Carrying amounts approximate fair values for securities
available for sale.
INTEREST BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
The carrying amount reported in the consolidated balance
sheet for interest bearing deposits in other financial
institutions approximates the fair value.
LOANS
For variable rate loans that reprice frequently and that
have experienced no significant change in credit risk, fair
values are based on carrying values. At December 31, 1995,
variable rate loans comprised approximately 63% of the loan
portfolio. Fair values for all other loans are estimated
based on discounted cash flows using interest rates
currently being offered for loans with similar terms to
borrowers with similar credit quality. Prepayments prior to
the repricing date are not expected to be significant.
Loans are expected to be held to maturity and any unrealized
gains or losses are not expected to be realized.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for off-balance-sheet instruments (guarantees,
letters of credit and lending commitments) are based on
quoted fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
DEPOSIT LIABILITIES
Fair values disclosed for demand deposits equal their
carrying amounts, which represent the amounts payable on
demand. The carrying amounts for variable rate money market
accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregate
expected monthly maturities on time deposits. Early
withdrawals of fixed rate certificates of deposit are not
expected to be significant.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The fair values of both accrued interest receivable and
payable approximate their carrying amounts.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF
In March 1995, the FASB issued Statement No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Statement No. 121 establishes
accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be
disposed of. Statement No. 121 will first be required for
the Bank's year ending December 31, 1996. Based on its
preliminary analysis, the Bank does not anticipate that the
adoption of Statement No. 121 will have a material impact on
the financial statements as of the date of adoption.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1995 the FASB issued Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Statement No. 123 establishes
financial accounting and reporting standards for stock-based
employee compensation plans such as a purchase plan. The
Statement generally suggests stock-based compensation
transactions be accounted for based on the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
An enterprise may continue to follow the requirements of
Accounting Principles Board (APB) Opinion No. 25, which does
not require compensation to be recorded if the consideration
to be received is at least equal to the fair value at the
measurement date. If an enterprise elects to follow APB
Opinion No. 25, it must disclose the pro forma effects on
net income as if compensation were measured in accordance
with the suggestions of Statement No. 123. The Company has
not determined if it will continue to follow APB Opinion
No. 25 or follow the guidance of Statement No. 123.
However, adoption of this pronouncement in 1996 is not
expected to have a material impact on the financial
statements.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash or
on deposit with Federal Reserve Banks. The total of those
reserve balances was approximately $380,000 and $329,000 as
of December 31, 1995 and 1994, respectively.
NOTE 3. ACQUISITION OF ASSETS AND ASSUMPTION OF DEPOSITS
On August 26, 1994, the Bank, as part of a consortium with
Landmark Bank, entered into an Insured Deposit Purchase and
Assumption Agreement (Agreement) with the Federal Deposit
Insurance Corporation (FDIC) for the purchase and assumption
of certain assets and liabilities of Capital Bank. The Bank
purchased $674,000 of assets consisting of cash and assumed
$22,536,000 of deposit liabilities, principally insured and
accrued interest, of the Downey branch for a premium of
$185,000, including expenses. In addition, the Bank
obtained a lease on the Downey branch facility of Capital
Bank through May 1995 when an option to purchase the
building for $650,000 was exercised. The Bank hired 12
former employees of Capital Bank, none of which were members
of senior management, to staff the existing facility. The
initial transaction is reflected in the consolidated
statement of cash flows in the net change in deposits in
1994. The purchase of the building is reflected in the
consolidated statement of cash flows in the purchases of
premises and equipment in 1995.
The Bank purchased approximately $5,352,000 of net loans
from the FDIC. The purchase of these loans is reflected in
the consolidated statement of cash flows in the net increase
in loans.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 3. ACQUISITION OF ASSETS AND ASSUMPTIONS OF DEPOSITS,
CONTINUED
Because it views the Agreement previously described as one
in which the Bank assumed the insured deposit liabilities of
the Downey branch of Capital Bank and acquired certain of
the Downey branch assets, management believes that a
continuity of business is substantially lacking and, as a
consequence, historical and pro forma financial information
regarding this branch of Capital Bank would not be
meaningful.
NOTE 4. SECURITIES AVAILABLE FOR SALE
Effective December 31, 1993, the Bank adopted FASB Statement
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. The Bank classified substantially all of
its investment portfolio as available for sale on December
31, 1993.
Securities available for sale as of December 31, 1995 and
1994 are summarized as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,827,599 $161,197 $ 218 $ 7,988,578
U.S. Government and
agency obligations 11,795,751 53,493 6,505 11,842,739
Other 1,191,055 24,702 509 1,215,248
-------------------------------------------------------
$20,814,405 $239,392 $ 7,232 $21,046,565
-------------------------------------------------------
-------------------------------------------------------
1994
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS Losses FAIR VALUE
-------------------------------------------------------
U.S. Treasury securities $14,170,967 $122,057 $268,565 $14,024,459
U.S. Government and
agency obligations 2,140,402 1,087 36,422 2,105,067
Other 715,963 52 15,137 700,878
-------------------------------------------------------
$17,027,332 $123,196 $320,124 $16,830,404
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 4. SECURITIES AVAILABLE FOR SALE, CONTINUED
Securities available for sale as of December 31, 1995 by
contractual maturity are shown below.
Amortized
Cost Fair Value
----------------------------------
Due in one year or less $ 3,494,342 $ 3,521,654
Due after one through five years 13,793,414 13,972,160
Due after five through ten years 3,474,767 3,497,029
Due after ten years 51,882 55,722
----------------------------------
$20,814,405 $21,046,565
----------------------------------
----------------------------------
Securities available for sale with a carrying amount of
$1,100,000 and $400,000 at December 31, 1995 and 1994,
respectively, were pledged as collateral on public deposits
and for other purposes as required or permitted by law.
There were no realized gains or losses from the sales of
securities classified as available for sale for the years
ended December 31, 1995 and 1994.
Federal Reserve Bank stock is carried at cost which
approximates fair value.
NOTE 5. LOANS
Major classifications of loans at December 31 are as follows:
1995 1994
----------------------------
Commercial $10,474,719 $11,210,049
Real estate - construction 2,338,979 2,998,619
Real estate - other 8,062,827 8,541,865
Real estate mortgage loans acquired 1,216,165 1,242,636
Installment 1,679,274 1,815,841
----------------------------
$23,771,964 $25,809,010
----------------------------
----------------------------
The majority of loans have variable interest rates based on
the Bank's reference rate.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 5. LOANS, CONTINUED
On January 1, 1995, the Bank adopted FASB Statement No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended
by FASB Statement No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES.
There was no effect on the Bank's financial statements from
this change. At January 1, 1995, the Bank classified
$244,000 of its loans as impaired with a specific loss
reserve of $56,000.
Impairment of loans having recorded investments of $103,000
at December 31, 1995 has been recognized. The total
allowance for loan losses related to these loans was $5,200
on December 31, 1995. The average recorded investment for
all impaired loans during 1995 was $276,000. Interest
income of $57,000 was recognized on impaired loans in 1995
using a cash-basis method of accounting during the time
within that period that the loans were impaired.
NOTE 6. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR OTHER
REAL ESTATE OWNED
Changes in the allowance for loan losses during each of the
three years in the period ended December 31, 1995 are
summarized as follows:
1995 1994 1993
--------------------------------------
Balance, beginning $ 498,827 $ 534,625 $ 451,827
Provision charged to operating
expense 649,000 292,800 651,314
Loans charged off (785,250) (333,173) (629,986)
Recoveries on loans previously
charged off 69,982 4,575 61,470
--------------------------------------
$ 432,559 $ 498,827 $ 534,625
--------------------------------------
--------------------------------------
Changes in the reserve for other real estate owned are as
follows:
Years Ended December 31,
--------------------------------------
1995 1994 1993
--------------------------------------
Balance, beginning $ 73,924 $ 30,000 $ --
Provision charged to other real
estate expense 20,000 73,924 30,000
Disposal of other real estate owned (73,924) (30,000) --
--------------------------------------
Balance, ending $ 20,000 $ 73,924 $ 30,000
--------------------------------------
--------------------------------------
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation and amortization are as follows:
December 31,
-----------------------
1995 1994
-----------------------
Land $ 907,143 $ 417,143
Buildings 2,060,222 1,729,986
Building improvements 290,751 407,306
Furniture, fixtures and equipment 842,202 637,590
Construction in progress 24,042 -
-----------------------
4,124,360 3,192,025
Less accumulated depreciation and amortization 832,607 665,348
-----------------------
$3,291,753 $2,526,677
-----------------------
-----------------------
NOTE 8. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000 were $5,381,974 and $4,329,934 in 1995 and
1994, respectively. At December 31, 1995, the scheduled maturities of
certificates of deposits are as follows:
Year Ending December 31, Amount
- ------------------------ -----------
1996 $12,654,400
1997 672,779
1998 and thereafter 199,190
-----------
$13,526,369
-----------
-----------
NOTE 9. INCOME TAXES
On January 1, 1993, the Company changed its method of accounting for income
taxes as a result of the adoption of FASB Statement No. 109, ACCOUNTING FOR
INCOME TAXES, with a cumulative effect of a benefit of $55,582 to 1993 net
income.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES, CONTINUED
The components of income tax expenses (benefits) are as follows:
1995 1994 1993
------------------------------
Currently paid or payable (refundable):
Federal $ 84,000 $193,000 $(35,682)
State 17,000 40,000 1,600
------------------------------
101,000 233,000 (34,082)
------------------------------
Deferred:
Federal 83,000 62,000 (22,818)
State 49,000 57,000 (30,600)
------------------------------
132,000 119,000 (53,418)
------------------------------
$233,000 $352,000 $(87,500)
------------------------------
------------------------------
The Company's income tax expenses (benefits) differed from the statutory
federal rate of 35% as follows:
1995 1994 1993
------------------------------
Computed "expected" tax expenses
(benefits) $197,000 $287,000 $(97,000)
State income tax expenses (benefits),
net of federal income tax benefit 43,000 64,000 (20,000)
Other (7,000) 1,000 29,500
------------------------------
$233,000 $352,000 $(87,500)
------------------------------
------------------------------
Net deferred tax assets (liabilities) consist of the following components as
of December 31:
1995 1994
---------------------
Deferred tax assets:
Property and equipment $ 18,000 $ 27,000
Allowance for loan losses 51,000 118,000
Valuation allowance for other real estate owned 8,000 36,000
Unrealized loss on securities available for sale - 81,000
State taxes 7,000 16,000
Other 32,000 -
---------------------
116,000 278,000
---------------------
---------------------
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES, CONTINUED
Net deferred tax assets (liabilities) consist of the following components as
of December 31:
1995 1994
---------------------
Deferred tax liabilities:
Accrual to cash basis $ 217,000 $135,000
Unrealized gain on securities available for sale 96,000 -
Accumulated discount on loans purchased 56,000 54,000
Other - 5,000
---------------------
369,000 194,000
---------------------
$(253,000) $ 84,000
---------------------
---------------------
NOTE 10. STOCK OPTIONS
The Company's 1993 Stock Option Plan (the Plan) provides for the issuance of
up to 93,501 shares of common stock. The Plan provides for the granting of
nonqualified and incentive stock options to directors, officers and other key
full-time salaried employees of the Company and its subsidiary. Purchase
prices are based on the fair market value of the Company's stock at the time
the option is granted. Options are granted for a term of ten years and are
exercisable in cumulative annual increments as the Board of Directors may
determine, commencing one year after date of grant. All outstanding options
are exercisable at $7.00 per share. Unless terminated at an earlier date, the
Plan shall terminate ten years from the effective date of March 17, 1993.
Other pertinent information related to the Plan is as follows:
1995 1994 1993
------------------------------
Under option, beginning of year 56,250 57,500 60,000
Granted - 5,000 57,500
Terminated and canceled - (6,250) (60,000)
------------------------------
Under option, end of year 56,250 56,250 57,500
------------------------------
------------------------------
Options exercisable, end of year 56,250 56,250 57,500
------------------------------
------------------------------
Available for grant, end of year 37,251 37,251 36,001
------------------------------
------------------------------
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. A
summary of the Bank's commitments at December 31 is as follows:
1995 1994
-------------------------
Commitments to extend credit $5,861,829 $3,330,071
Standby letters of credit 210,000 212,000
Credit card commitments 573,886 630,732
-------------------------
$6,645,715 $4,172,803
-------------------------
-------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral
held varies, but may include accounts receivable, inventory, property and
equipment, residential real estate and income producing commercial properties.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES, CONTINUED
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. They are issued
primarily to support real estate construction projects and other business
related ventures. Collateral held varies as specified above and is required
in instances which the Bank deems necessary. At December 31, 1995, all of the
standby letters of credit were collateralized.
CREDIT CARD COMMITMENTS
Credit card commitments are commitments on credit cards and are unsecured.
LEASES AND RELATED PARTY TRANSACTIONS
The Bank leases the Montebello branch facility from a company owned by a
director of the Company under a lease agreement expiring April 1, 1998. The
lease agreement requires monthly rent of $5,191 plus normal repairs and
maintenance, property taxes and insurance. Future minimum annual lease
payments as of December 31, 1995 are as follows:
Year Ending December 31, Amount
- ------------------------ --------
1996 $ 62,000
1997 62,000
1998 16,000
--------
$140,000
--------
--------
Lease expense for all operating leases was $73,000, $164,000 and $147,000 in
1995, 1994 and 1993, respectively, substantially all of which was paid to the
related party.
NOTE 12. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan, established in 1987, which
covers substantially all employees. The Company accrued or paid a cash
contribution of $25,000 and $50,000 in 1995 and 1994, respectively. No
contribution was made for 1993. The contribution is at the discretion of the
Board of Directors.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. EMPLOYEE STOCK OWNERSHIP PLAN, CONTINUED
In the event terminated plan participants desire to sell their shares of the
Company's stock, the Company may be required to purchase the shares from the
participants at their fair market value established at the last valuation
date. At December 31, 1995, the Plan owns approximately 22,571 shares of the
Company's common stock, and the Company has a maximum contingent liability of
$208,782 to repurchase all the shares from plan participants. The Company did
not purchase any stock in 1995, 1994 or 1993.
NOTE 13. RELATED PARTY TRANSACTIONS
Shareholders of the Company and officers and directors, including their
families and companies of which they are principal owners, are considered to
be related parties. As part of its normal banking activity, the Bank has
extended credit to various executive officers, directors and companies in
which they have an interest. Loans to related parties are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons, and do not involve more than normal risk of collectibility.
The approximate aggregate dollar amounts and activity of these loans were as
follows:
1995 1994
--------------------------
Balance, beginning $1,066,000 $1,247,000
Advances 345,000 101,000
Repayments (519,000) (282,000)
--------------------------
Balance, ending $ 892,000 $1,066,000
--------------------------
--------------------------
These persons and companies had deposits at the Bank of approximately
$1,480,000 and $1,075,000 at December 31, 1995 and 1994, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company paid to
a company controlled by one of the directors approximately $60,000, $60,000
and $46,000, respectively, for insurance premiums.
It is the opinion of management that such insurance premiums were no less
favorable to the Company than those which could have been obtained from
persons not affiliated with the Company.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional discretionary
- --actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1995,
the Bank meets all capital adequacy requirements to which it is subject.
Under federal banking law, dividends declared by the Bank in any calendar
year may not, without the approval of the Comptroller of the Currency, exceed
its net income (as defined) for that year combined with its retained net
income for the preceding two years.
The Bank's actual capital amounts and ratios as of December 31, 1995 and 1994
are presented in the following table:
<TABLE>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Greater Greater Greater Greater
Total capital (to risk-weighted assets) $6,196,282 18.3% Than or $2,633,996 Than or 8.0% Than or $3,292,495 Than or 10.0%
Equal to Equal to Equal to Equal to
Greater Greater Greater Greater
Tier I capital (to risk-weighted assets) 5,786,720 17.6 Than or 1,316,998 Than or 4.0 Than or 1,975,497 Than or 6.0
Equal to Equal to Equal to Equal to
Greater Greater Greater Greater
Tier I capital (to average assets) 5,786,720 8.4 Than or 2,753,319 Than or 4.0 Than or 3,441,649 Than or 5.0
Equal to Equal to Equal to Equal to
As of December 31, 1994:
Greater Greater Greater Greater
Total capital (to risk-weighted assets) 5,868,020 17.9 Than or 2,621,893 Than or 8.0 Than or 3,277,366 Than or 10.0
Equal to Equal to Equal to Equal to
Greater Greater Greater Greater
Tier I capital (to risk-weighted assets) 5,458,350 16.7 Than or 1,310,964 Than or 4.0 Than or 1,966,419 Than or 6.0
Equal to Equal to Equal to Equal to
Greater Greater Greater Greater
Tier I capital (to average assets) 5,458,350 7.7 Than or 2,847,538 Than or 4.0 Than or 3,559,422 Than or 5.0
Equal to Equal to Equal to Equal to
</TABLE>
Federal banking law also restricts the Bank from extending credit to the
Company in excess of 10% of the Bank's capital stock and surplus, as defined.
Any such extensions of credit are subject to strict collateral requirements.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following are condensed unconsolidated financial statements of COMBANCORP:
CONDENSED BALANCE SHEETS
<TABLE>
December 31,
March 31, -----------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 241,025 $ 247,844 $ 272,956
Investment in Commerce National Bank 5,980,602 6,137,066 5,673,671
------------------------------------
$6,221,627 $6,384,910 $5,946,627
------------------------------------
------------------------------------
LIABILITIES
Shareholders' equity:
Common stock $4,453,300 $4,453,300 $4,453,300
Retained earnings 1,880,513 1,796,650 1,609,002
Unrealized gain (loss) on securities
available for sale, net (112,186) 134,960 (115,675)
------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,221,627 6,384,910 5,946,627
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,221,627 $6,384,910 $5,946,627
------------------------------------
------------------------------------
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
March 31, Year Ended December 31,
----------------------------------------------------
1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------
(Unaudited)
Equity in earnings
(loss) of subsidiary $90,682 $180,866 $354,759 $496,192 $(143,149)
Other income 1,610 2,024 7,365 6,893 57,892
Other expense (8,429) (12,254) (33,029) (34,448) (48,501)
----------------------------------------------------
NET INCOME (LOSS) $83,863 $170,636 $329,095 $468,637 $(133,758)
----------------------------------------------------
----------------------------------------------------
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
March 31, Year Ended December 31,
--------------------------------------------------------
1996 1995 1995 1994 1993
- ----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities
Net income (loss) $ 83,863 $ 170,636 $ 329,095 $ 468,637 $(133,758)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Equity in (income)
loss of subsidiary (90,682) (180,866) (354,759) (496,192) 143,149
--------------------------------------------------------
NET CASH PROVIDED
BY (USED IN)
OPERATING ACTIVITIES (6,819) (10,230) (25,664) (27,555) 9,391
--------------------------------------------------------
Cash Flows from
Investing Activities
Interest bearing deposits
in banks - - - - 99,000
Dividends received
from subsidiary - 141,999 141,999 - -
--------------------------------------------------------
NET CASH PROVIDED
BY INVESTING
ACTIVITIES - 141,999 141,999 - 99,000
--------------------------------------------------------
NET CASH (USED IN)
ACTIVITIES --
DIVIDENDS PAID - (141,447) (141,447) - (50,921)
--------------------------------------------------------
NET INCREASE
(DECREASE) IN CASH
AND DUE FROM BANK (6,819) (9,678) (25,112) (27,555) 57,470
Cash and Due from Bank
Beginning of year 247,844 272,956 272,956 300,511 243,041
--------------------------------------------------------
End of year $241,025 $ 263,278 $ 247,844 $ 272,956 $ 300,511
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Bank's financial instruments are as follows:
December 31, 1995
---------------------------
Carrying
Amount Fair Value
---------------------------
Financial assets:
Cash and short-term investments $ 8,439,763 $ 8,439,763
Interest bearing deposits in
other financial institutions 11,755,000 11,785,000
Federal Reserve Bank stock 120,000 120,000
Securities available for sale 21,046,565 21,046,565
Loans, net 23,188,851 22,598,606
Accrued interest receivable 526,998 526,998
Financial liabilities:
Deposits 62,023,797 61,965,572
Accrued interest payable 71,469 71,469
FAIR VALUE OF COMMITMENTS
The estimated fair value of fee income on letters of credit at December 31,
1995 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31,
1995.
NOTE 17. EVENT SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT (UNAUDITED)
On May 22, 1996, the Company entered into a definitive agreement to sell 100%
of its outstanding common stock to BanPonce Corporation for cash subject to
shareholder and regulatory approval.
F-30
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 22nd DAY OF MAY, 1996
BY AND AMONG
BANPONCE CORPORATION,
BANPONCE MERGER CORP.
AND
COMBANCORP
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of the 22nd day of May, 1996
(this "Plan"), by and among BanPonce Corporation, a Puerto Rico corporation (the
"Acquiror"), BanPonce Merger Corp., a California corporation ("Merger Sub"), and
COMBANCORP, a California corporation (the "Company").
RECITALS:
A. THE ACQUIROR. The Acquiror has been duly incorporated and is an
existing corporation in good standing under the laws of the Commonwealth of
Puerto Rico, with its principal executive offices located in San Juan, Puerto
Rico. The Acquiror is a bank holding company duly registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act of 1956, as amended (the "BHC Act").
B. MERGER SUB. Merger Sub has been duly incorporated and is an
existing corporation in good standing under the laws of the State of California.
All the outstanding shares of capital stock of Merger Sub are owned indirectly
by the Acquiror through its wholly owned subsidiary, BanPonce Financial Corp., a
Delaware corporation.
C. THE COMPANY. The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of California,
with its principal executive offices located in City of Commerce, California.
As of the date hereof, the Company has 25,000,000 authorized shares of Common
Stock, no par value ("Common Stock"), 565,789 shares of which were outstanding
as of the date hereof and 93,501 shares of which are reserved for issuance under
the Company's 1993 Stock Option Plan (the "1993 Plan"); and 5,000,000 authorized
shares of Preferred Stock, none of which have been issued or are outstanding.
As of the date hereof, the Company has outstanding options to acquire 56,250
shares of Common Stock under the 1993 Plan (each such option, a "Company
Option"). The Company is a bank holding company duly registered with the
Federal Reserve Board under the BHC Act.
D. BOARD APPROVALS. The respective Boards of Directors of the
Acquiror, Merger Sub and the Company have duly approved this Plan and have duly
authorized its execution, delivery and performance by the respective parties
hereto.
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto adopt and make this Plan and prescribe
the terms and conditions hereof and the manner and basis of carrying it into
effect, which shall be as follows:
ARTICLE I. THE MERGER
SECTION 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as
defined in Section 8.1), Merger Sub will merge (the "Merger") with and into the
Company, with the Company being the surviving corporation (the "Surviving
Corporation"), pursuant to the provisions of, and with the effects provided in,
the California General Corporation Law ("CGCL"). At the Effective Time (as
defined in Section 8.1), the articles of incorporation and by-laws of Merger Sub
in effect immediately prior to the Effective Time shall be the articles of
incorporation and by-laws of the Surviving Corporation.
SECTION 1.2. EFFECT ON OUTSTANDING SHARES. By virtue of the Merger,
automatically and without any action on the part of the holders thereof:
(i) each share of Common Stock issued and outstanding immediately
prior to the Effective Time (the "Outstanding Shares") (other than shares
the holder of which, pursuant to any applicable law providing for
dissenters' or appraisal rights is entitled to receive payment in
accordance with the provisions of any such law, such holder to have only
the rights provided in any such law (the "Dissenters' Shares")), shall
become and be converted into the right to receive an amount in cash,
without interest, equal to $17.31 per share (the "Merger Consideration"),
whereupon all shares of Common Stock shall be cancelled; and
(ii) each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall remain outstanding and
unchanged after the Merger and shall become one share of common stock of
the Surviving Corporation, and all of such shares shall thereafter
constitute all of the issued and outstanding shares of the capital stock of
the Surviving Corporation.
SECTION 1.3. EXCHANGE PROCEDURES. (a) At and after the Effective
Time, each certificate (each a "Certificate") representing Outstanding Shares
other than Dissenters' Shares shall represent the right to receive the
-2-
<PAGE>
Merger Consideration owed in respect of such Common Stock, without interest.
(b) As of the Effective Time, the Acquiror shall deposit, or shall
cause to be deposited, with such bank or trust company as the Acquiror shall
elect (which may be a subsidiary or other affiliate of the Acquiror) (the
"Exchange Agent"), for the benefit of the holders of Outstanding Shares other
than Dissenters' Shares, for exchange in accordance with this Section 1.3, the
Merger Consideration pursuant to an escrow agreement in form satisfactory to the
Acquiror and the Company.
(c) Promptly after the Effective Time, the Acquiror shall cause the
Exchange Agent to mail to each holder of record of a Certificate or Certificates
the following: (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as the Acquiror may determine; and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon the proper surrender of a
Certificate to the Exchange Agent, together with a properly completed and duly
executed letter of transmittal, the holder of such Certificate shall be entitled
to receive in exchange therefor a check representing the Merger Consideration,
and the Certificate so surrendered shall forthwith be cancelled. No interest
will be paid or accrued on the Merger Consideration payable to holders of
Certificates. In the event of a transfer of ownership of any Certificate, which
transfer is not registered in the transfer records of the Company, a check for
the Merger Consideration may be issued to the transferee if the Certificate is
presented to the Exchange Agent, accompanied by documents sufficient, in the
discretion of the Acquiror, (i) to evidence and effect such transfer and (ii) to
evidence that all applicable stock transfer taxes have been paid.
(d) From and after the Effective Time, there shall be no transfers on
the stock transfer records of the Company of any shares of Common Stock that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Acquiror or the Surviving
Corporation, they shall be cancelled and exchanged for the Merger Consideration
pursuant to and in accordance with the procedures set forth in this Section 1.3.
-3-
<PAGE>
(e) Any portion of the Merger Consideration that remains unclaimed
for twelve months after the Effective Time shall be repaid by the Exchange Agent
to the Acquiror. Any holders of Certificates who have not theretofore complied
with this Section 1.3 shall thereafter look only to the Acquiror for payment of
their Merger Consideration in respect of each Certificate held, in each case,
without any interest thereon. If outstanding Certificates are not surrendered
or the payment for them not claimed prior to the date on which such payments
would otherwise escheat to or become the property of any governmental unit or
agency, the unclaimed items shall, to the extent permitted by abandoned property
and any other applicable law, become the property of the Acquiror (and to the
extent not in its possession shall be paid over to it), free and clear of all
claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, none of the Acquiror, the Surviving Corporation,
Merger Sub, the Exchange Agent or any other person shall be liable to any former
holder of Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Acquiror, the posting by such person of a bond in such amount as the Acquiror
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration.
SECTION 1.4. COMPANY OPTIONS. Immediately prior to the Effective
Time, automatically and without any action on the part of the holder thereof,
each Company Option which shall have been granted prior to the date hereof and
shall be outstanding immediately prior to the Effective Time, whether or not
then exercisable, shall be cancelled and converted into the right to receive
from the Company, subject to applicable withholding taxes, an amount in cash
equal to $10.31 for each share of Common Stock subject to such Company Option
(the "Option Consideration"); PROVIDED, HOWEVER, that such payment shall not be
made to a holder of Company Options unless such payment shall be in full
satisfaction of all rights of such holder under such Company Options. The
holders of Company Options shall not be entitled to receive interest on any
amounts to be paid with respect thereto.
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ARTICLE II. REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
SECTION 2.1. REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to the Acquiror and Merger Sub that, except as specifically set
forth in the disclosure letter of the Company dated as of the date of this Plan
and that is attached hereto as Schedule 2.1 (the "Company Disclosure Letter"),
and which makes specific reference to the Section of this Plan for which an
exception is taken:
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan
with respect to the Company are true and correct.
(b) CAPITAL STOCK. All outstanding shares of capital stock of the
Company are duly authorized, validly issued and outstanding, fully paid and non-
assessable, and subject to no preemptive rights. The Company has no shares of
its capital stock reserved for issuance, any outstanding option, call or
commitment relating to shares of its capital stock or any outstanding
securities, obligations or agreements exercisable for, convertible into or
exchangeable for, or giving any person any right (including, without limitation,
preemptive rights) to subscribe for or acquire from it, any shares of its
capital stock, except as described in the Recitals of this Plan.
(c) SUBSIDIARIES. The Company owns, directly or indirectly, no
subsidiaries other than Commerce National Bank, a national banking association
("Commerce"). The Company owns all of the issued and outstanding shares of
capital stock of Commerce (except for directors' qualifying shares), free and
clear of all liens, claims, encumbrances and restrictions on transfer. Commerce
is a national banking association duly organized, validly existing and in good
standing under the laws of the United States, the deposits of which are insured
by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
(the "FDIC"). The authorized capital stock of Commerce consists of
500,000 shares of common stock, par value $5.00 per share, 400,000 of which
shares are issued and outstanding as of the date hereof. The shares of capital
stock of Commerce are duly authorized, validly issued, fully paid and (subject
to 12 U.S.C. Section 55) non-assessable and have not been issued in violation of
any preemptive rights of shareholders. No rights, options, warrants or other
rights have been granted by the Company or Commerce or any other person to
acquire any shares of capital stock of, or any security or other right that is
exercisable for, convertible into or exchangeable for any shares of capital
stock of, Commerce
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(whether or not any such security or right currently is so exercisable,
convertible or exchangeable).
(d) AUTHORITY. Each of the Company and Commerce has full power and
authority, and is duly qualified in all jurisdictions where such qualification
is required, to carry on its business as it is now being conducted and to own or
lease all its properties and assets, and it has all federal, state, local and
foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now being conducted.
(e) SHAREHOLDER APPROVALS. (i) Subject to the receipt of the
required shareholder approval of this Plan that is set forth in (ii) of this
paragraph (e), this Plan has been authorized by all necessary corporate action
of the Company. Subject to receipt of (A) such shareholder approval and (B) the
required approvals, consents or waivers of governmental authorities referred to
in Section 6.1(b), this Plan is a valid and binding agreement of the Company
enforceable against it in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(ii) The affirmative vote of a majority of the outstanding shares of
Common Stock is the only shareholder vote required for approval of this Plan and
consummation of the Merger and the other transactions contemplated hereby.
(f) NO VIOLATIONS. The execution, delivery and performance of this
Plan by the Company do not, and the consummation of the transactions
contemplated hereby by the Company will not, constitute (i) a breach or
violation of, or a default under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license of the Company or Commerce or to
which the Company or Commerce (or any of their respective properties) is
subject, (ii) a breach or violation of, or a default under, the charter or
certificate or articles of association or incorporation, or by-laws, of the
Company or Commerce, or (iii) a breach or violation of, or a default under (or
an event which with due notice or lapse of time or both would constitute a
breach or violation of, or a default under), or result in the termination of,
accelerate the performance required by or result in the creation of any lien,
pledge, security interest, charge or other encumbrance upon any of the
properties or assets of the Company or Commerce under, any of the terms,
conditions or provisions of any note, bond, indenture, deed of trust, loan
agreement or other agreement,
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instrument or obligation to which the Company or Commerce is a party, or to
which any of their respective properties or assets may be bound or affected;
and the consummation of the transactions contemplated hereby will not require
any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval,
consent or waiver of any other party to any such agreement, indenture or
instrument, other than (i) the required approvals, consents and waivers of
governmental authorities referred to in Section 6.1(b) and (ii) the approval
of the shareholders of the Company referred to in Section 2.1(e).
(g) REPORTS. (i) As of their respective dates, neither the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(the "1994 10-K"), nor any other document filed subsequent to December 31, 1994
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Securities Exchange Act"), each in the form (including
exhibits) filed with the Securities and Exchange Commission (the "SEC"), or any
of the call reports or other statements filed by the Company or Commerce
subsequent to December 31, 1994 with the Office of the Comptroller of the
Currency (the "OCC") (collectively with the above-referenced reports filed under
the Securities Exchange Act, the "Reports"), contained or will contain any
untrue statement of a material fact or omitted or will omit to state a material
fact required to be stated therein, or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Each of the balance sheets contained or incorporated by reference
in the Reports (including in each case any related notes and schedules) fairly
presented or will fairly present, as the case may be, the financial position of
the entity or entities to which it relates as of its date and each of the
statements of operations, statements of cash flows and statements of
shareholders' equity, contained or incorporated by reference in its Reports
(including in each case any related notes and schedules), fairly presented or
will fairly present, as the case may be, the results of operations,
shareholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein (subject, in the
case of unaudited interim statements, to normal year-end audit adjustments that
are not material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein.
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(ii) The Company and Commerce have each timely filed all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that they were required to file since December 31, 1991
with (i) the SEC, (ii) the Federal Reserve Board, (iii) the OCC, (iv) the FDIC,
(v) BIF, (vi) any state regulatory authority ("State Regulator") (collectively,
the "Regulatory Agencies") and (vii) the National Association of Securities
Dealers, Inc. and any other self-regulatory organization ("SRO"), and all other
material reports and statements required to be filed by them since December 31,
1991, including, without limitation, any report or statement required to be
filed pursuant to the laws, rules or regulations of the United States, the
Federal Reserve Board, the OCC, the FDIC, BIF, any State Regulator or any SRO,
and have paid all fees and assessments due and payable in connection therewith.
As of their respective dates, such reports, registrations and statements
complied in all material respects with all the laws, rules and regulations of
the applicable Regulatory Agency or SRO, as the case may be, with which they
were filed.
(h) TAXES. (i) For the purposes of this Plan, (A) the term "Tax" or
"Taxes" shall mean any tax or governmental charge, withholding obligation,
assessment, impost or levy (including, without limitation, any income, gross
receipts, deposit, license, payroll, employee withholding, foreign or domestic
withholding, backup withholding, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Section 59A of the
Internal Revenue Code of 1986, as amended (the "Code")), capital stock,
franchise, disability, real or personal property, sales, use, transfer,
registration, ad valorem, alternative or add-on minimum, estimated or other
taxes of any kind, any customs duty, unemployment insurance, social security (or
similar tax) and workers' compensation), together with any related liabilities,
penalties, fines, additions to tax or interest (including any penalties, fines
or similar amounts related to any information return or reporting obligations,
notwithstanding that no Tax is payable if such obligations are properly
discharged) whether disputed or not, imposed by the United States or any state,
territory or other possession, county, provincial, local or foreign government
or subdivision or agency thereof, and (B) the term "Return" shall mean all
reports, returns, estimates, declarations, claims for refund, information
returns and statements of any nature with respect to Taxes, including all
schedules and attachments thereto, and including any amendment thereof.
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(ii) All Returns required to be filed by or on behalf of the Company
or of Commerce have been timely filed (taking into account all extensions) and
neither the Company nor Commerce is currently the beneficiary of any extension
of time within which to file any Return (other than automatic extensions) and no
application for any such extension is currently pending. All such filed Returns
are complete in all material respects and accurate in accordance with the
governing jurisdictions' tax laws. None of the Returns have been examined by
the Internal Revenue Service (the "IRS") or the appropriate state, local or
foreign taxing authority. There are no unresolved questions, claims or disputes
asserted by any relevant taxing authority concerning the liability for Taxes of
either the Company or Commerce. All Taxes of the Company and of Commerce with
respect to the periods up to the date of this Plan have been paid in full or
adequate provision has been made for any such Taxes on its balance sheet (in
accordance with generally accepted accounting principles) and neither the
Company nor Commerce is delinquent (taking into account all extensions) in the
payment of any such Taxes.
(iii) Neither the Company nor Commerce has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to an assessment or deficiency for Taxes. Neither the Company nor
Commerce has filed a consent under Section 341(f) of the Code concerning
collapsible corporations or is subject to any closing agreement, irrevocable
election or similar agreement or decision that would restrict any of them from
claiming an otherwise permissible treatment for any item of income, deduction,
credit or allowance for a taxable period ending after the Effective Date.
Neither the Company nor Commerce has been a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Neither
the Company nor Commerce is a party to any Tax sharing agreement or similar
contract or arrangement, other than a Tax Sharing Agreement between the Company
and Commerce, a copy of which has been furnished to the Acquiror. Neither the
Company nor Commerce has been a member of any affiliated group within the
meaning of Section 1504(a) of the Code or any similar group defined under a
similar provision of state, local or foreign law (other than a group the common
parent of which was the Company) or has any liability for the Taxes of any
person under Section 1.1502-6 of the Treasury Regulations issued pursuant to the
Code (or any similar provision of state, local or foreign law), as a transferee
or successor, by contract or otherwise, and no material demand or claim has been
made against the Company or Commerce with respect to any Taxes
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arising out of membership or participation in any consolidated, affiliated,
combined or unitary group of which the Company or Commerce was at any time a
member. There are no liens or other encumbrances for any Taxes upon any
property of the Company or Commerce.
(iv) Each of the Company and Commerce has paid or will pay in a timely
manner (taking into account all extensions) and as required by law all Taxes due
and payable by it or which it is obligated to withhold from amounts owing to any
employee or third party. All Taxes which will be due and payable (taking into
account all extensions), whether now or hereafter, for any period ending on,
prior to or including the Effective Time shall have been paid by or on behalf of
the Company and Commerce or shall be reflected on the books of the Company and
Commerce as an accrued Tax liability (in accordance with generally accepted
accounting principles).
(i) ABSENCE OF CLAIMS. No litigation, proceeding or controversy
before any court or governmental agency is pending, and there is no pending
claim, action or proceeding, against the Company or Commerce, which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect or to hinder or delay consummation of the transactions contemplated
hereby, and, to the best of its knowledge after reasonable inquiry, no such
litigation, proceeding, controversy, claim or action has been threatened or is
contemplated.
(j) ABSENCE OF REGULATORY ACTIONS. Neither the Company nor Commerce
is a party to any cease and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board resolutions at
the request of, federal or state governmental authorities charged with the
supervision or regulation of banks or savings institutions or bank holding
companies or savings institution holding companies or engaged in the insurance
of deposits of banks or savings institutions (including without limitation the
Regulatory Agencies).
(k) AGREEMENTS. (i) Except for arrangements made in the ordinary
course of business, neither the Company nor Commerce is bound by any material
contract to be performed after the date hereof that has not been disclosed to
the Acquiror in the Company Disclosure Letter. Neither the Company nor Commerce
is a party to an oral or written (i) consulting agreement not terminable on 30
days or less
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notice, (ii) agreement with any executive officer or other key employee of
the Company or Commerce the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
the Company or Commerce of the nature contemplated by this Plan, (iii)
agreement with respect to any executive officer of the Company or Commerce
providing any term of employment or compensation guarantee extending for a
period longer than one year, (iv) agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting
of the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Plan or the value of any of the benefits of
which will be calculated on the basis of any of the transactions contemplated
by this Plan or (v) agreement containing covenants that limit the ability of
the Company or Commerce to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which, or
method by which, the Company or Commerce may carry on its business (other
than as may be required by law or any regulatory agency).
(ii) Neither the Company nor Commerce is in default under or in
violation of any provision of any note, bond, indenture, mortgage, deed of
trust, loan agreement or other agreement to which it is a party or by which it
is bound or to which any of its respective properties or assets is subject,
other than such defaults or violations as could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(l) LABOR MATTERS. Neither the Company nor Commerce is a party to,
or is bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is the Company or
Commerce the subject of any proceeding asserting that the Company or Commerce
has committed an unfair labor practice or seeking to compel the Company or
Commerce to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike, other labor dispute or organizational
effort involving the Company or Commerce pending or threatened.
(m) EMPLOYEE BENEFIT PLANS. The Company Disclosure Letter contains a
complete and accurate list of all existing bonus, deferred compensation, pension
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, severance and welfare
benefit plans, employment or severance agreements and all similar
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arrangements that are maintained or contributed to by the Company or Commerce
or to which the Company or Commerce are obligated to contribute for the
benefit of any employee or former employee or director or former director of
the Company or Commerce (the "Plans"). All "employee benefit plans", as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") maintained by the Company or Commerce or to which
the Company or Commerce are obligated to contribute that cover any of the
current or former employees of the Company or Commerce (hereinafter referred
to collectively as the "Employee Plans"), comply in all material respects
with all applicable requirements of ERISA, the Code and other applicable
laws; no Employee Plan is a "multiemployer plan" as defined in Section 3(37)
of ERISA; neither the Company nor Commerce has engaged in a "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code)
with respect to any Employee Plan for which no exemptions were available that
resulted in a material liability taken as a whole; no liability to the
Pension Benefit Guaranty Corporation other than the payment of premiums
pursuant to Sections 4006 and 4007 of ERISA has been or is expected by it or
them to be incurred with respect to any Employee Plan which is subject to
Title IV of ERISA ("Pension Plan"), or with respect to any "single-employer
plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly
maintained by it, them or any entity which is considered one employer with it
under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate"); no Pension Plan had an "accumulated funding deficiency" (as
defined in Section 302 of ERISA (whether or not waived)) as of the last day
of the end of the most recent plan year ending prior to the date hereof; the
actuarial present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) of each Pension Plan does not exceed the fair market
value of the assets of such Pension Plan by a material amount as of the end
of the most recent plan year with respect to the respective Pension Plan
ending prior to the date hereof, calculated on the basis of the actuarial
assumptions and methods used in the most recent actuarial valuation for such
Pension Plan as of the date hereof; no notice of a "reportable event" (as
defined in Section 4043 of ERISA) for which the 30-day reporting requirement
has not been waived has been required to be filed for any Pension Plan within
the 12-month period ending on the date hereof; neither the Company nor
Commerce has provided, or is required to provide, security to any Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code; and neither the Company nor Commerce have contributed
to any "multiemployer plan", as defined in Section 3(37) of ERISA, on or
after September 26,
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1980. Each Employee Plan which is an "employee pension benefit plan" (as
defined in Section 3(2) of ERISA) and which is intended to be qualified under
Section 401(a) of the Code (a "Qualified Plan") has received a favorable
determination letter from the IRS, and the Company and Commerce are not aware
of any circumstances likely to result in revocation of any such favorable
determination letter; each Qualified Plan which is an "employee stock
ownership plan" (as defined in Section 4975(e)(7) of the Code) has satisfied
all of the applicable requirements of Sections 409 and 4975(e)(7) of the Code
and the regulations thereunder; there is no pending or threatened litigation,
administrative action or proceeding relating to any Employee Plan other than
routine claims for benefits; there has been no announcement or legally
binding commitment by the Company or Commerce to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such Employee
Plan; and the Company and Commerce do not have any obligations for retiree
health and life benefits under any Employee Plan other than continuation
coverage pursuant to Sections 601 et seq. of ERISA, that cannot be amended or
terminated without incurring any liability thereunder. The execution and
delivery of this Plan and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by the Company or
Commerce to any person which is an "excess parachute payment" (as defined in
Section 280G of the Code) under any Plan, increase any benefits payable under
any Plan or accelerate the time of payment or vesting of any such benefit.
With respect to each Employee Plan, the Company has made available to the
Acquiror and Merger Sub a true and correct copy of (i) the most recent annual
report on the applicable form of the Form 5500 series filed with the IRS,
(ii) such Employee Plan, including amendments thereto, (iii) each trust
agreement and insurance contract relating to such Plan, including amendments
thereto, (iv) the most recent summary plan description for such Employee Plan,
including amendments thereto, if the Employee Plan is subject to Title I of
ERISA, (v) the most recent actuarial report or valuation if such Employee Plan
is a Pension Plan and (vi) the most recent determination letter issued by the
IRS if such Employee Plan is a Qualified Plan for which such letters are issued.
(n) TITLE TO ASSETS. Each of the Company and Commerce has good and
marketable title to its properties and assets (other than (i) property as to
which it is lessee, as to which either the Company or Commerce, as the case may
be, has a valid and enforceable lease for such property enforceable against the
landlord in accordance with its
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terms, and (ii) real estate owned as a result of foreclosure, transfer in
lieu of foreclosure or other transfer in satisfaction of a debtor's
obligation previously contracted), except for such defects in title which
would not, individually or in the aggregate, have a Material Adverse Effect.
(o) KNOWLEDGE AS TO CONDITIONS. None of the Company, Commerce or any
of their respective directors and officers knows of any reason why the
approvals, consents and waivers of governmental authorities referred to in
Section 6.1(b) should not be obtained without the imposition of any condition of
the type referred to in the proviso thereto.
(p) COMPLIANCE WITH LAWS. The Company and Commerce have all permits,
licenses, certificates of authority, orders and approvals of, and have made all
filings, applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies (including without limitation the Regulatory
Agencies) that are required in order to permit the Company and Commerce to carry
on their respective businesses as they are presently conducted or the absence of
which could, individually or in the aggregate, have a Material Adverse Effect;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect, and, to the best knowledge of the Company, no
suspension or cancellation of any of them is threatened.
(q) FEES. Other than services performed for the Company by The
Secura Group pursuant to agreements disclosed to the Acquiror in the Company
Disclosure Letter, neither the Company nor Commerce, nor any of their respective
officers, directors, employees or agents, has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder's fees, and no broker or finder has acted directly or
indirectly for the Company or Commerce, in connection with the Plan or the
transactions contemplated hereby. The Acquiror shall not be liable for any
financial services advisory fees incurred by the Company, which shall be paid by
the Company on or before the Effective Date.
(r) ENVIRONMENTAL MATTERS. (1) The Company and Commerce, the
Participation Facilities and the Loan/Fiduciary Properties (each as defined
below) are, and have been, in substantial compliance with all Environmental Laws
(as defined below) and neither the Company nor Commerce has any knowledge of any
circumstances that with the passage
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of time or the giving of notice would be reasonably likely to result in
noncompliance.
(2) There is no proceeding pending or, to the knowledge of the
Company, threatened before any court, governmental agency or board or other
forum in which the Company, Commerce or any Participation Facility has been, or
with respect to threatened proceedings, reasonably would be expected to be,
named as a defendant or potentially responsible party (i) for alleged
noncompliance (including by any predecessor) with any applicable Environmental
Law, or (ii) relating to the presence, release or threatened release into the
environment of any Hazardous Material (as defined below), whether or not
occurring at or on a site owned, leased or operated by the Company, Commerce or
any Participation Facility.
(3) There is no proceeding pending or, to the Company's knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or the Company or Commerce in respect of any
Loan/Fiduciary Property) has been, or with respect to threatened proceedings,
reasonably would be expected to be, named as a defendant or potentially
responsible party (i) for alleged noncompliance (including by any predecessor)
with any applicable Environmental Law, or (ii) relating to the release or
threatened release into the environment of any Hazardous Material, whether or
not occurring at or on a Loan/Fiduciary Property.
(4) To the Company's knowledge, there is no reasonable basis for any
proceeding of a type described in Section 2.1(r)(2) or (3).
(5) During the period of (i) the Company's or Commerce's ownership or
operation of any of their respective current properties, (ii) the Company's or
Commerce's participation in the management of any Participation Facility or
(iii) the Company's or Commerce's holding of a security or other interest in a
Loan/Fiduciary Property, there have been no releases or threatened releases of
any unlawful level of any Hazardous Material in, on, from, under or affecting
any such property, Participation Facility or Loan/Fiduciary Property.
(6) To the Company's knowledge, prior to the period of (i) the
Company's or Commerce's ownership or operation of any of their respective
current properties, (ii) the Company's or Commerce's participation in the
management of any Participation Facility or (iii) the Company's or Commerce's
holding of a security or other
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interest in a Loan/Fiduciary Property, there were no releases or threatened
releases of any unlawful level of any Hazardous Material in, on, under or
affecting any such property, Participation Facility or Loan/Fiduciary
Property.
(7) The following definitions apply for purposes of this Section
2.1(r): "Loan/Fiduciary Property" means any property owned or operated by the
Company or Commerce or in which the Company or Commerce holds a security or
other interest (including, without limitation, a fiduciary interest), and, where
required by the context, includes any such property where the Company or
Commerce constitutes the owner or operator of such property; "Participation
Facility" means any facility in which the Company or Commerce participates in
the management and, where required by the context, includes the owner or
operator of such property; "Environmental Law" means any law, regulation, order,
decree, opinion, common law doctrine, requirement or agency policy relating to
Hazardous Material or the protection of the environment or human health and
safety; and "Hazardous Material" means any material, waste or mixture containing
any substance that is listed, classified or regulated under any Environmental
Law, including petroleum products and regulated levels of asbestos and
polychlorinated biphenyls.
(s) ALLOWANCES. The allowance for loan losses shown on the Company's
latest audited balance sheet was, and the allowance for possible loan losses
shown on each of the unaudited balance sheets in the Company's Reports for
periods ending after the date of the latest audited balance sheet will be, in
the opinion of management, adequate as of the date thereof, under generally
accepted accounting principles applicable to banks and bank holding companies.
The Company has disclosed to the Acquiror in writing prior to the date hereof
the amounts of all loans, leases, advances, credit enhancements, other
extensions of credit, commitments and interest-bearing assets of the Company or
Commerce that have been classified by the Company, Commerce or otherwise as
"Other Loans Specially Mentioned", "Special Mention", "Substandard", "Doubtful",
"Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or
words of similar import, and the Company shall promptly after the end of any
month inform the Acquiror of any such classification arrived at any time after
the date hereof. There are no such loans, leases, advances, credit
enhancements, other extensions of credit, commitments or interest-bearing assets
which have been so classified by any Regulatory Agency that have not also been
classified in the same manner by the Company and Commerce. The Other Real
Estate Owned ("OREO") included in any non-performing assets of the Company or
Commerce is carried net of reserves at the
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lower of cost or market value based on current independent appraisals.
(t) MATERIAL INTERESTS OF CERTAIN PERSONS. No officer or director of
the Company, or any "associate" (as such term is defined in Rule 12b-2 under the
Securities Exchange Act) of any such officer or director, has any material
interest in any material contract or property (real or personal), tangible or
intangible, used in or pertaining to the business of the Company or Commerce.
(u) INSURANCE. The Company and Commerce are currently insured and,
since December 31, 1991, have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. Each of the insurance policies and bonds
maintained by the Company or Commerce is in full force and effect, neither the
Company nor Commerce is in default thereunder and all material claims thereunder
have been filed in due and timely fashion. In the best judgment of the
Company's management, such insurance coverage is adequate.
(v) INVESTMENT SECURITIES. Except for pledges to secure public and
trust deposits, and reverse repurchase agreements entered into in arm's-length
transactions pursuant to normal commercial terms and conditions and other
pledges required by law, none of the investments reflected in the Company's
latest audited balance sheet and none of the material investments made by the
Company or Commerce since the date of such balance sheet is subject to any
restriction (contractual, statutory or otherwise) that would materially impair
the ability of the entity holding such investment freely to dispose of such
investment at any time.
(w) DERIVATIVE TRANSACTIONS. Since December 31, 1991, neither the
Company nor Commerce has engaged in transactions in or involving forwards,
futures, options on futures, swaps or other derivative instruments except (i) as
agent on the order and for the account of others or (ii) as principal for
purposes of hedging interest rate risk on U.S. dollar-denominated securities and
other financial instruments. None of the counterparties to any contract or
agreement with respect to any such instrument is in default with respect to such
contract or agreement and no such contract or agreement, were it to be a loan or
other extension of credit by the Company or Commerce, would be classified as
"Other Loans Specially Mentioned", "Special Mention", "Substandard", "Doubtful",
"Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or
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words of similar import. The financial position of the Company and Commerce on
a consolidated basis under or with respect to each such instrument has been
reflected in the books and records of the Company in accordance with generally
accepted accounting principles consistently applied, and no open exposure of the
Company or Commerce with respect to any such instrument (or with respect to
multiple instruments with respect to any single counterparty) exceeds $25,000.
(x) INTELLECTUAL PROPERTY. Each of the Company and Commerce owns or
possesses valid and binding licenses and other rights to use (without payment)
all material trade secrets, trade names, trademarks, service marks, inventions
and processes used in its businesses; and neither the Company nor Commerce has
received any notice of conflict with respect thereto that asserts the right of
others. The Company and Commerce have in all material respects performed all
the obligations required to be performed by them and are not in default in any
material respect under any contract, agreement, arrangement or commitment
relating to any of the foregoing.
(y) REGISTRATION OBLIGATIONS. Neither the Company nor Commerce is
under any obligation, contingent or otherwise, that will survive the Merger by
reason of any agreement to register any of its securities under the Securities
Act of 1933, as amended, or any other applicable securities laws.
(z) BOOKS AND RECORDS. The books and records of the Company and
Commerce have been, and are being, maintained in accordance with applicable
legal and accounting requirements (including generally accepted accounting
principles, consistently applied) and reflect in all material respects the
substance of events and transactions that should be included therein.
ARTICLE III. REPRESENTATIONS AND
WARRANTIES OF THE ACQUIROR AND MERGER SUB
SECTION 3.1. REPRESENTATIONS AND WARRANTIES. Each of the Acquiror and
the Merger Sub represents and warrants to the Company that:
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan
with respect to it are true and correct.
(b) NO VIOLATIONS. The execution, delivery and performance of this
Plan by each of the Acquiror and Merger
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Sub do not, and the consummation of the transactions contemplated hereby by
each of the Acquiror and Merger Sub will not, constitute (i) a breach or
violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license of it or to which it
is subject, (ii) a breach or violation of, or a default under, the
certificate or articles of incorporation or by-laws of it or (iii) a breach
or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a breach or violation of, or a default
under), or result in the termination of, accelerate the performance required
by, or result in the creation of any lien, pledge, security interest, charge
or other encumbrance upon any of the properties or assets of it under, any of
the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which
it is a party, or to which any of its respective properties or assets may be
bound or affected, except for any of the foregoing in this clause (iii) that,
neither individually or in the aggregate, would have a Materially Adverse
Effect; and the consummation of the transactions contemplated hereby will not
require any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval,
consent or waiver of any other party to any such agreement, indenture or
instrument, other than (i) the required approvals, consents and waivers of
governmental authorities referred to in Section 6.1(b) and (ii) the approval
of BanPonce Financial Corp., a wholly owned indirect subsidiary of the
Acquiror, as sole shareholder of Merger Sub.
(c) ABSENCE OF CLAIMS. No litigation, proceeding or controversy
before any court or governmental agency is pending, and there is no pending
claim, action or proceeding against the Acquiror or the Merger Sub, which is
reasonably likely, individually or in the aggregate, to materially and adversely
hinder or delay consummation of the transactions contemplated hereby, and, to
the best of their knowledge after reasonable inquiry, no such litigation,
proceeding, controversy, claim or action has been threatened or is contemplated.
(d) ABSENCE OF REGULATORY ACTIONS. Neither the Acquiror nor Merger
Sub is a party to any cease and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board resolutions at
the request of, federal or state governmental authorities charged with
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the supervision or regulation of banks or savings institutions or bank
holding companies or engaged in the insurance of bank or saving institution
deposits (including without limitation the Regulatory Agencies).
(e) KNOWLEDGE AS TO CONDITIONS. Neither the Acquiror nor Merger Sub
knows of any reason why the approvals, consents and waivers of governmental
authorities referred to in Section 6.1(b) should not be obtained without the
imposition of any condition of the type referred to in the proviso thereto.
(f) OWNERSHIP OF COMPANY STOCK. Neither the Acquiror nor Merger Sub
is directly or indirectly the beneficial owner of more than 20 percent of the
outstanding shares of Common Stock.
ARTICLE IV. CONDUCT PENDING THE MERGER
SECTION 4.1. CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided in this Plan, during the period from the date
of this Plan to the Effective Time, the Company shall, and shall cause Commerce
to, (i) conduct its business in the usual, regular and ordinary course
consistent with past practice, (ii) use its best efforts to maintain and
preserve intact its business organization, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
maintain insurance coverage of customary risks and in customary amounts in
respect of its business and properties, (iv) perform all of its obligations
under all material contracts, leases and other commitments to which it is a
party or by which it or any of its properties or assets may be bound, (v) comply
with and perform all obligations and duties imposed upon it by applicable
federal, state and local laws, rules, regulations and ordinances, and (vi) take
no action which would adversely affect or delay the ability of the Company, the
Acquiror or Merger Sub to obtain any necessary approvals, consents or waivers of
any governmental authority required for the transactions contemplated hereby or
to perform its covenants and agreements on a timely basis under this Plan.
SECTION 4.2. COVENANTS OF THE COMPANY. During the period from the
date of this Plan to the Effective Time, the Company shall not, and shall not
permit Commerce, without the prior written consent of the Acquiror, to:
(a) other than in the ordinary course of business consistent with
past practice, incur any indebtedness
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for borrowed money, assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any person, or
make any loan or advance;
(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or grant any stock
appreciation rights or grant any person any right to acquire any shares of
its capital stock, except for dividends paid by Commerce to the Company; or
issue any additional shares of its capital stock or any securities or
obligations convertible into or exchangeable for shares of its capital
stock;
(c) other than in the ordinary course of business consistent with
past practice and pursuant to policies in effect on the date hereof, sell,
transfer, mortgage, encumber or otherwise dispose of any of its material
properties or assets to any person other than Commerce, or cancel, release
or assign any indebtedness of any such person or any claims held by any
such person, except pursuant to contracts or agreements in force at the
date of this Plan;
(d) other than in the ordinary course of business consistent with
past practice, make any investment either by purchase of stock or
securities, contributions to capital, property transfers or purchase of any
property or assets of any person; PROVIDED that the Company shall make no
acquisition of equity securities or business operations without the
Acquiror's prior consent;
(e) other than in the ordinary course of business consistent with
past practice, enter into or terminate any lease, contract or agreement, or
make any change in any of its leases, contracts or agreements;
(f) except to the extent required by law, increase in any manner the
compensation or fringe benefits of any of its employees or pay any pension
or retirement allowance not required by any existing plan or agreement to
any such employees, or become a party to, amend or commit itself to any
pension, retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any
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employee, other than general increases in compensation in the ordinary
course of business consistent with past practice not in excess of 4% in
any 12-month period, or voluntarily accelerate the vesting of any
compensation or benefit;
(g) settle any claim, action or proceeding involving any liability of
the Company or Commerce if any such settlement, individually or in the
aggregate with other such settlements, either (i) could have a Material
Adverse Effect on the Company, (ii) result in material restrictions upon
the operations of the Company or Commerce or (iii) would be reasonably
likely to change materially the terms of the Plan, the Merger or the other
transactions contemplated hereby;
(h) except as contemplated by Section 5.2, modify in any material
respect the manner in which the Company and Commerce have heretofore
conducted or accounted for their business;
(i) amend its articles of incorporation or its by-laws;
(j) except in the ordinary course of business, waive or release any
material right or collateral or cancel or compromise any extension of
credit or other debt or claim;
(k) other than in the ordinary course of business consistent with
past practice and in conformity with all applicable policies and
procedures, make, renegotiate, renew, increase, extend the term of or
purchase any loan, lease, advance, credit enhancement or other extension of
credit, or make any commitment in respect of any of the foregoing, except
loans or advances as to which the Company or Commerce has a legally binding
obligation to make such loan or advance as of the date hereof and a
description of which has been provided by the Company in writing to the
Acquiror prior to the execution of this Plan; or
(l) agree to, or make any commitment to, take any of the actions
prohibited by this Section 4.2.
ARTICLE V. COVENANTS
SECTION 5.1. ACQUISITION PROPOSALS. The Company agrees that neither
it nor Commerce nor any of the respective officers, directors and employees of
the Company
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or Commerce shall, and the Company shall direct and use its best efforts to
cause its employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or
Commerce) not to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to shareholders of the Company) with
respect to a merger, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, the Company or Commerce (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or, except to the
extent legally required for the discharge by the board of directors of its
fiduciary duties as advised by such board's outside counsel, engage in any
negotiations concerning, or provide any confidential information or data to,
or have any discussions with, any person relating to an Acquisition Proposal,
or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. The Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. The
Company will take the necessary steps to inform the appropriate individuals
or entities referred to in the first sentence hereof of the obligations
undertaken in this Section 5.1. The Company will notify the Acquiror
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with the Company.
SECTION 5.2. CERTAIN POLICIES OF THE COMPANY. At the request of the
Acquiror, the Company shall modify and change its loan, litigation and real
estate valuation policies and practices (including loan classifications and
levels of reserves including allowances for loan losses) after the date on which
the last required approval of a Regulatory Agency is received for the Merger and
prior to the Effective Time so as to be consistent on a mutually satisfactory
basis with those of the Acquiror. The Company's representations, warranties and
covenants contained in this Plan shall not be deemed to be untrue or breached in
any respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of this Section 5.2.
SECTION 5.3. EMPLOYEES. Subject to Section 6.1(e) and prior notice
to the Chief Executive Officer of the Company, the Acquiror shall have the right
(but not the obligation) to offer employment, as officers and employees
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of the Surviving Corporation or other subsidiaries of Acquiror immediately
following the Effective Time, to any and all persons who are officers and
employees of the Company or Commerce immediately before the Effective Time.
SECTION 5.4. ACCESS AND INFORMATION. Upon reasonable notice, the
Company shall (and shall cause Commerce to) afford to the Acquiror and its
representatives (including, without limitation, directors, officers and
employees of the Acquiror and its affiliates, and counsel, accountants and other
professionals retained) such access during normal business hours throughout the
period prior to the Effective Time to the books, records (including, without
limitation, tax returns and work papers of independent auditors), properties and
personnel and to such other information as the Acquiror may reasonably request;
PROVIDED, HOWEVER, that no investigation pursuant to this Section 5.4 shall
affect or be deemed to modify any representation or warranty made herein. The
Acquiror will not, and will cause its representatives not to, use any
information obtained pursuant to this Section 5.4 for any purpose unrelated to
this Plan or the consummation of the transactions contemplated by this Plan.
SECTION 5.5. CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. The
Acquiror, Merger Sub and the Company shall (a) promptly make any filings and
applications required to be made in order to obtain all approvals, consents and
waivers of governmental authorities necessary or appropriate for the
consummation of the transactions contemplated hereby and (b) cooperate with one
another (i) in promptly determining the filings that are required to be made or
the approvals, consents or waivers that are required to be obtained under any
relevant federal, state or foreign law or regulation and (ii) in promptly making
any such filings, furnishing information required in connection therewith and
seeking timely to obtain any such approvals, consents or waivers. The Acquiror
or Merger Sub shall deliver to the Company, and the Company shall deliver to the
Acquiror, copies of the publicly available portions of all such filings and
applications made by them or it, as the case may be, promptly after such filings
are made.
SECTION 5.6. ADDITIONAL AGREEMENTS. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Plan as promptly as
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practicable, including to use efforts to obtain all necessary actions or
non-actions, extensions, waivers, consents and approvals from all applicable
governmental entities, to effect all necessary registrations, applications
and filings (including, without limitation, filings under any applicable
state securities laws) and to obtain any required contractual consents and
regulatory approvals.
SECTION 5.7. PUBLICITY. The initial press release announcing this
Plan shall be a joint press release and thereafter the Company and the Acquiror
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the other or the transactions contemplated
hereby and in making any filings with any governmental authority or with any
national securities organization with respect thereto.
SECTION 5.8. COMPANY SHAREHOLDERS' MEETING. The Company shall take
all action necessary, in accordance with applicable law and its articles of
incorporation and by-laws, to convene as promptly as practicable a meeting (the
"Company Meeting") of the holders of Common Stock for the purpose of considering
the Merger and this Plan and taking action required by this Plan. Except to the
extent legally required for the discharge by the board of directors of its
fiduciary duties as advised in writing by such board's outside counsel, the
board of directors of the Company shall recommend that the holders of Common
Stock vote in favor of and approve the Merger and adopt this Plan at the Company
Meeting, and the Company shall use its reasonable efforts to solicit from
shareholders of the Company proxies to vote their shares in favor of the Merger
and this Plan and shall take all other action in its judgment necessary or
appropriate to obtain the approval of shareholders required to effect the
Merger.
SECTION 5.9. PROXY STATEMENT. As soon as practicable after the date
hereof, the Company shall prepare a proxy statement to take shareholder action
on the Merger and this Plan (the "Proxy Statement"), file the Proxy Statement
with the SEC, respond to comments of the staff of the SEC and promptly
thereafter mail the Proxy Statement to all holders of record (as of the
applicable record date) of shares of Common Stock. The Company represents and
covenants that the Proxy Statement and any amendment or supplement thereto, at
the date of mailing to shareholders of the Company and the date of the meeting
of the Company's shareholders to be held in connection with the Merger, will be
in compliance with all relevant rules and regulations of the SEC and will not
contain any untrue statement of a
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material fact or omit to state any material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the Company makes no representations or covenants with respect to
information provided to the Company in writing by the Acquiror specifically
for inclusion in the Proxy Statement. The Acquiror and the Company shall
cooperate with each other in the preparation of the Proxy Statement.
SECTION 5.10. COMPANY OPTIONS. Prior to the Effective Time, the
Company shall either (a) obtain, from each holder of Company Options, such
holder's consent to receive in the Merger, for each Company Option held by such
holder, the Option Consideration or (b) duly amend the 1993 Plan and the
agreements entered into pursuant thereto to provide that at the Effective Time
each outstanding Company Option granted prior to the date hereof shall be
converted into the right to receive the Option Consideration, in each case in
full satisfaction of the rights of such holder and subject to federal and state
tax withholding obligations.
SECTION 5.11. MERGER SUB SHAREHOLDER ACTION. The Acquiror shall
cause its indirect subsidiary, BanPonce Financial Corp., as sole shareholder of
Merger Sub, to vote in favor of the Merger and this Plan.
SECTION 5.12. BOARD OF DIRECTORS; OFFICERS. The directors and
officers of Merger Sub immediately prior to the Effective Time shall become the
directors and officers of the Surviving Corporation.
SECTION 5.13. NOTIFICATION OF CERTAIN MATTERS. (a) The Company shall
give prompt notice to the Acquiror of any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by the Company or Commerce subsequent to the
date of this Plan and prior to the Effective Time, under any contract material
to the financial condition, properties, businesses or results of operations of
the Company and Commerce taken as a whole to which the Company or Commerce is a
party or is subject.
(b) The Company shall give prompt notice to the Acquiror of any
change, or any series of changes, in the financial condition, properties,
business or results of operations of the Company and Commerce taken as a whole
which would have a Material Adverse Effect or the occurrence of any event which,
so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in any such change.
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(c) Each of the Company, the Acquiror and Merger Sub shall give
prompt notice to the other party of any notice or other communication from any
third party challenging the legality of this Plan or any of the transactions
contemplated hereby or alleging that the consent of such third party is or may
be required in connection with the transactions contemplated by this Plan.
ARTICLE VI. CONDITIONS TO CONSUMMATION
SECTION 6.1. CONDITIONS TO ALL PARTIES' OBLIGATIONS. The respective
obligations of the Acquiror, Merger Sub and the Company to effect the Merger
shall be subject to the satisfaction or waiver prior to the Effective Time of
the following conditions:
(a) The Plan and the transactions contemplated hereby shall have been
approved by the requisite vote of the shareholders of the Company and by
BanPonce Financial Corp. as the sole shareholder of Merger Sub in accordance
with applicable law.
(b) The Acquiror shall have procured the required approvals, consents
or waivers with respect to the Plan and the transactions contemplated hereby by
the Federal Reserve Board and all other Regulatory Agencies the approval,
consent or waiver of which is required with respect to the Plan and the
transactions contemplated hereby, and all applicable statutory waiting periods
shall have expired; and the parties shall have procured any other regulatory
approvals, consents or waivers of governmental authorities or other persons that
are necessary or appropriate to the consummation of the transactions
contemplated by the Plan; PROVIDED, HOWEVER, that no approval, consent or waiver
referred to in this Section 6.1(b) shall be deemed to have been received if it
shall include any condition or requirement that, individually or in the
aggregate, (i) would result in a Material Adverse Effect on the Company, the
Surviving Corporation or any of its subsidiaries (on a combined basis giving
effect to the Merger and the other transactions contemplated by this Plan),
(ii) would not permit the Acquiror to retain the Surviving Corporation as a
direct or indirect subsidiary or (iii) would, in the reasonable determination of
the Acquiror, materially reduce the benefits of the transactions contemplated by
the Plan to the Acquiror.
(c) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the
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consummation of the Merger or any other transaction contemplated by this
Plan, and no litigation or proceeding shall be pending against the Acquiror
or the Company or any of their respective subsidiaries brought by any
governmental agency seeking to prevent consummation of the transactions
contemplated hereby.
(d) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered or promulgated by any governmental authority which
prohibits, restricts or makes illegal the consummation of the Merger or any
other transaction contemplated by this Plan.
(e) Merger Sub shall have entered into severance agreements with
Richard F. Demerjian and Esther G. Wilson in the form attached hereto as Exhibit
6.1(e).
SECTION 6.2. CONDITIONS TO OBLIGATIONS OF THE ACQUIROR AND MERGER
SUB. The obligations of the Acquiror and Merger Sub to effect the Merger shall
be subject to the satisfaction or waiver prior to the Effective Time of the
following additional conditions:
(a) Each of the representations and warranties of the Company
contained in this Plan shall, in all material respects, be true on the Effective
Date as if made on such date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date); the
Company shall have performed, in all material respects, each of its covenants
and agreements contained in this Plan; and the Acquiror shall have received a
certificate signed by the Chief Executive Officer and the Chief Financial
Officer of the Company, dated the Effective Date, to the foregoing effect.
(b) There shall have been no event or circumstances since
December 31, 1995 that has resulted in, or is reasonably likely to result in, a
Material Adverse Effect on the Company or Commerce.
(c) The Acquiror and Merger Sub shall have received from McGlinchey
Stafford Lang, A Professional Limited Liability Company, as counsel for the
Company, a letter in form and substance satisfactory to the Acquiror, dated as
of the Effective Date (as defined in Section 8.1), advising the Acquiror and
Merger Sub that such counsel reviewed the Proxy Statement and participated in
conferences with the Company, its accountants and financial advisor at which the
contents of the Proxy Statement were discussed and that, on the basis of such
participation, the Proxy Statement and any amendment or supplement thereto, at
the
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date of mailing to shareholders of the Company and the date of the meeting of
the Company's shareholders to be held in connection with the Merger, complied
as to form in all material respects with all relevant rules and regulations
of the SEC and no facts came to its attention which caused it to believe that
the Proxy Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel
expresses no opinion with respect to the financial statements and other
financial data relating to the Company and the information provided to the
Company in writing by the Acquiror specifically for inclusion in the Proxy
Statement).
SECTION 6.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligation of the Company to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) Each of the representations and warranties of the Acquiror and
the Merger Sub contained in this Plan shall, in all material respects, be true
on the Effective Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically relates to an earlier
date); each of the Acquiror and the Merger Sub shall have performed, in all
material respects, each of its covenants and agreements contained in this Plan;
and the Company shall have received a certificate signed by an authorized
officer of the Acquiror, dated the Effective Date, to the foregoing effect.
(b) The Company shall have received a letter from its financial
advisor referred to in Section 2.1(q), dated on or within 5 days prior to the
date the Proxy Statement is first mailed to shareholders of the Company, in form
satisfactory to the Company, confirming such financial advisor's prior written
opinion to the Board of Directors of the Company to the effect that the Merger
Consideration is fair to the shareholders of the Company from a financial point
of view.
ARTICLE VII. TERMINATION
SECTION 7.1. TERMINATION. This Plan may be terminated, and the
Merger abandoned, prior to the Effective Time, either before or after its
approval by the shareholders of the Company and Merger Sub:
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(a) by the mutual consent of the Acquiror and the Company, if the
board of directors of each so determines by vote of a majority of the
members of its entire board; or
(b) by the Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event of (i) the failure of the shareholders of the Company to approve the
Plan at the Company Meeting called to consider such approval or (ii) a
material breach by the other party hereto of any representation, warranty,
covenant or agreement contained herein which is not cured or not curable
within 30 days after written notice of such breach is given to the party
committing such breach by the other party; or
(c) by the Acquiror or the Company by written notice to the other
party if either (i) any approval, consent or waiver of a governmental
authority required to permit consummation of the transactions contemplated
hereby shall have been denied or (ii) any governmental authority of
competent jurisdiction shall have issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the transactions
contemplated by this Plan; or
(d) by the Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event that the Merger is not consummated by January 6, 1997, unless the
failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Plan by the party
seeking to terminate.
SECTION 7.2. EFFECT OF TERMINATION. In the event of the termination
of this Plan by either the Acquiror or the Company, as provided above, this Plan
shall thereafter become void and, subject to the provisions of Section 9.2,
there shall be no liability on the part of any party hereto or their respective
officers or directors, except that any such termination shall be without
prejudice to the rights of any party hereto arising out of willful
misrepresentation by any other party or the willful breach by any other party
of any covenant contained in this Plan, and except that the agreements of the
parties in Section 9.6 shall survive such termination.
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ARTICLE VIII. EFFECTIVE DATE AND
EFFECTIVE TIME
SECTION 8.1. EFFECTIVE DATE AND EFFECTIVE TIME. On the last business
day of the month during which the expiration of all applicable waiting periods
in connection with approvals of governmental authorities shall occur and all
conditions to the consummation of this Plan are satisfied or waived, or on such
earlier or later date as may be agreed by the parties, an agreement of merger
substantially in the form attached hereto as Exhibit 8.1 shall be executed in
accordance with all appropriate legal requirements and shall be filed as
required by law, and the Merger provided for herein shall become effective upon
such filing or, if the parties shall so agree, on such date as may be specified
in such articles of merger. The date of such filing or such later effective
date is herein called the "Effective Date". The "Effective Time" of the Merger
shall be as set forth in such agreement of merger.
ARTICLE IX. OTHER MATTERS
SECTION 9.1. CERTAIN DEFINITIONS; INTERPRETATION. As used in this
Plan, the following terms shall have the meanings indicated:
(a) "material" means material to the Acquiror or the Company (as the
case may be) and its respective subsidiaries, taken as a whole.
(b) "Material Adverse Effect", with respect to a person, means any
condition, event, change or occurrence that is reasonably likely to have a
material adverse effect upon (1) the financial condition, properties,
business, results of operations or prospects of such person and its
subsidiaries, taken as a whole, without regard to costs and expenses
incurred by the Company in connection with this Plan and the consummation
of the transactions contemplated hereby, or (2) the ability of such person
to perform its obligations under, and to consummate the transactions
contemplated by, this Plan.
(c) "person" includes an individual, corporation, partnership,
association, trust, limited liability company or unincorporated
organization.
(d) "subsidiary", with respect to a person, means any other person
controlled by such person.
-31-
<PAGE>
When a reference is made in this Plan to Sections, Annexes or
Schedules, such reference shall be to a Section of, or Annex or Schedule to,
this Plan unless otherwise indicated. The headings contained in this Plan are
for ease of reference only and shall not affect the meaning or interpretation of
this Plan. Whenever the words "include", "includes", or "including" are used in
this Plan, they shall be deemed followed by the words "without limitation". Any
singular term in this Plan shall be deemed to include the plural, and any plural
term shall be deemed to include the singular.
SECTION 9.2. SURVIVAL. Only those agreements and covenants of the
parties that are by their terms applicable in whole or in part after the
Effective Time shall survive the Effective Time. All other representations,
warranties, agreements and covenants shall be deemed to be conditions of the
Plan and shall not survive the Effective Time.
SECTION 9.3. WAIVER. Prior to the Effective Time, any provision of
this Plan may be: (i) waived by the party benefitted by the provision; or
(ii) amended or modified at any time (including a change to the structure of the
transaction) by an agreement in writing between the parties hereto approved by
their respective boards of directors, except that, after the vote by the
shareholders of the Company, no amendment may be made that would contravene
California law.
SECTION 9.4. COUNTERPARTS. This Plan may be executed in counterparts
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
SECTION 9.5. GOVERNING LAW. THIS PLAN SHALL BE GOVERNED BY, AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
SECTION 9.6. EXPENSES. Each party hereto will bear all expenses
incurred by it in connection with this Plan and the transactions contemplated
hereby.
SECTION 9.7. NOTICES. All notices, requests, acknowledgements and
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
-32-
<PAGE>
If to the Company, to:
COMBANCORP
6001 East Washington Boulevard
City of Commerce, California 90040
Telecopy: (213) 724-8818
Attention: Richard F. Demerjian
Chairman of the Board, President
and Chief Executive Officer
With a copy to:
Alan Jacobs, Esq.
McGlinchey Stafford Lang,
A Professional Limited Liability Company
2777 Stemmons Freeway, Suite 925
Dallas, Texas 75207
Telecopy: (214) 638-4354
If to the Acquiror or Merger Sub, to:
BanPonce Corporation
P.O. Box 362708
San Juan, Puerto Rico 00936-2708
Telecopy: (809) 751-8645
Attention: Richard L. Carrion
Chairman of the Board, President
and Chief Executive Officer
With a copy to:
Stanley F. Farrar, Esq.
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Telecopy: (213) 683-0457
SECTION 9.8. ENTIRE AGREEMENT; ETC. This Plan represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. All terms and provisions of the Plan shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Nothing in this Plan is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this Plan.
-33-
<PAGE>
SECTION 9.9. ASSIGNMENT. This Plan may not be assigned by any party
hereto without the written consent of the other parties and any purported
assignment shall be void; PROVIDED, HOWEVER, that without the prior consent of
the Company, the Acquiror may assign its rights hereunder to any of its
subsidiaries, which assignment shall not relieve the Acquiror of any of its
obligations hereunder.
-34-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Plan to be executed
by their duly authorized officers as of the day and year first above written.
BANPONCE CORPORATION
By: /s/ Jorge A. Junquera
-----------------------------------
Name: Jorge A. Junquera
Title: Senior Executive Vice
President
BANPONCE MERGER CORP.
By: /s/ Jorge A. Junquera
-----------------------------------
Name: Jorge A. Junquera
Title: Vice President
COMBANCORP
By: /s/ Richard F. Demerjian
-----------------------------------
Name: Richard F. Demerjian
Title: Chairman, President and
Chief Executive Officer
-35-
<PAGE>
Exhibit 6.1(e)
[Commerce National Bank letterhead]
__________, 1996
[Richard F. Demerjian
1812 Paseo del Mar
Palos Verdes Estates, CA 90274
[or]
Esther G. Wilson
23035 Rolling Meadows Drive
Pervis, CA 92590]
Dear [Mr. Demerjian or Ms. Wilson]:
This letter agreement sets forth the severance benefits which
Commerce National Bank (the "Bank") agrees will be provided to you in the
event your employment with the Bank is terminated under the circumstances
described below.
1. RIGHT TO TERMINATE. Except as otherwise provided below, the
Bank or you may terminate your employment at any time.
2. TERM OF AGREEMENT. This Agreement shall commence on the
Effective Date, as defined in the Agreement and Plan of Merger (the "Plan of
Merger"), dated May 22, 1996, among BanPonce Corporation, BanPonce Merger
Corp. and COMBANCORP, and shall continue in effect for one year following the
Effective Date.
3. TERMINATION. You shall be entitled to the benefits provided
in Section 4 hereof upon the termination of your employment with the Bank at
any time during the term of this Agreement, unless such termination is (a)
because of your death or Retirement, (b) by the Bank for Cause
[DELETE FOR DEMERJIAN --or Disability] or (c) by you other than for Good
Reason (as all such capitalized terms are defined below).
(a) RETIREMENT. Termination by you or by the Bank of your employment
based on "Retirement" shall mean termination on or after your attainment of
age sixty-five (65).
(b) CAUSE. Termination by the Bank of your employment for "Cause"
shall mean termination upon
<PAGE>
(i) the willful and continued failure by you to perform substantially
your duties with the Bank (other than any such failure resulting from
your Disability) after (x) a written demand for substantial performance
is delivered to you by any authorized officer of the Bank, and (y) the
expiration of a 30 day period following the receipt of such notice in
which to cure such failure, (ii) your willful commission of an act of
fraud, embezzlement or theft, or your breach of fiduciary duty involving
personal profit in connection with your duties or in the course of your
employment with the Bank, or (iii) a material breach by you of any
provision of this Agreement and continuance of such material breach
after (x) the Bank has delivered to you written notice specifying such
material breach and (y) the expiration of a 30 day period following the
receipt of such notice in which to cure such material breach.
(c) DISABILITY. Termination by the Bank of your employment based on
"Disability" shall mean termination because of your absence from your
duties with the Bank on a full time basis for thirty (30) consecutive days
as a result of your incapacity due to physical or mental illness.
(d) GOOD REASON. Termination by you of your employment for "Good
Reason" shall mean termination based on:
(i) a substantial and adverse change in your position as
[President or Chief Financial Officer] of the Bank, including, without
limitation, any substantial diminution in your duties or
responsibilities or the assignment to you of any duties or
responsibilities which are substantially inconsistent with such
position (except in connection with the termination of your employment
for Cause, Disability or Retirement or as a result of your death or by
you other than for Good Reason);
(ii) a material breach by the Bank of any provision of this
Agreement and continuance of such material breach after (x) you shall
have provided the Bank with written notice specifying such material
breach and (y) the expiration of a 30 day period following the receipt
of such notice in which to cure such material breach;
(iii) a reduction by the Bank in your base salary or the level of
employee benefits as in effect immediately prior to the Effective
Date; or
2
<PAGE>
(iv) a change in the principal location of your work to any
location which is in excess of 25 miles from the location thereof
immediately prior to the Effective Date, or the Bank shall require you
to travel away from your office in the course of discharging your
responsibilities or duties significantly more (in terms or either
consecutive days or aggregate days in any calendar year) than is
required immediately prior to the Effective Date without, in either
case, your prior consent.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. (a) During
any period that you fail to perform your duties as a result of Disability, you
shall continue to receive your salary at the rate then in effect and any
benefits under any Plans shall continue to accrue during such period, to the
extent not inconsistent with such Plans, until your employment is terminated
pursuant to and in accordance with paragraph 3(c) hereof. [FOR DEMERJIAN --
Upon such termination, you shall be entitled to receive the payment provided in
Section 4(c)(2) below.] [FOR WILSON --Thereafter, your benefits shall be
determined in accordance with the Plans then in effect.]
(b) If your employment shall be terminated for Cause, the Bank shall
pay you your salary through the date of termination at the rate in effect just
prior to the termination plus any benefits which pursuant to the terms of any
Plans have been earned and are otherwise payable, but which have not yet been
paid to you. Thereupon, the Bank shall have no further obligations to you under
this Agreement.
(c) Subject to Sections 6 and 7 hereof, if your employment by the
Bank shall be terminated (i) by the Bank other than for Cause [DELETE FOR
DEMERJIAN --, Disability] or Retirement or (ii) by you for Good Reason, then the
Bank shall pay to you, without regard to any contrary provisions of any Plan,
the following:
(1) your salary through the date of termination at the rate in effect
just prior to the time a notice of termination is given plus any benefits
which pursuant to the terms of any Plans have been earned and are otherwise
payable, but which have not yet been paid to you; and
(2) as severance pay and in lieu of any further salary for periods
subsequent to the date of termination, an amount in cash equal to your
annual base salary in effect immediately prior to the date of termination,
plus [FOR DEMERJIAN -- $25,000 OR, FOR WILSON -- $12,500], plus the
annualized amount of other
3
<PAGE>
employee benefits paid or accrued during the preceding year.
(d) The amount of any payment provided for in this Section 4 shall
not be reduced, offset or subject to recovery by the Bank by reason of any
compensation earned by you as the result of employment by another employer after
the date of termination, or otherwise.
(e) For purposes of this Section 4, "Plan" shall mean any employee
benefit plan such as a thrift, pension, profit sharing, medical, disability,
accident, life insurance plan or a relocation plan or policy or any other plan,
program or policy of the Bank intended to benefit employees.
5. SUCCESSORS; BINDING AGREEMENT. (a) For purposes of this
Agreement, the "Bank" shall include any corporation or other entity which is the
surviving or continuing entity in respect of any merger, consolidation or form
of business combination in which the Bank ceases to exist.
(b) This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators, guardians,
successors, heirs, distributees, devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to your devisee, legatee or other designee or,
if there be no such designee, to your estate.
6. TAXES. All payments to be made to you under this Agreement will
be subject to required withholding of federal, state and local income and
employment taxes.
7. OTHER LIMITATIONS ON PAYMENTS. Any payments made to you pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
8. SURVIVAL. The respective obligations of, and benefits afforded
to, the Bank and you as provided in Sections 4, 5(b), 6, 7, 12 and 13 of this
Agreement shall survive termination of this Agreement.
9. NOTICE. For the purposes of this Agreement, notices and all other
communications shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid and addressed, in the case of the
4
<PAGE>
Bank, to 6001 E. Washington Blvd., City of Commerce, CA 90040 or, in the
case of the undersigned employee, to the address first set forth above, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
10. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in a writing signed by you and an authorized officer of the Bank. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
of compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California applied without regard to conflict of laws principles.
11. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
the County of Los Angeles, State of California by one mutually agreed upon
arbitrator in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrators' award in any court
having jurisdiction.
13. EMPLOYEE'S COMMITMENT. You agree that subsequent to your period
of employment with the Bank, you will not at any time communicate or disclose to
any unauthorized person, without the written consent of the Bank, any
confidential information concerning COMBANCORP or the Bank or their businesses,
affairs, products, suppliers or customers which, if disclosed, would have a
material adverse effect upon the business or operations of COMBANCORP or the
Bank; it being understood, however, that the obligations of this Section 13
shall not apply to the extent that the aforesaid matters (a) are disclosed in
circumstances where you are legally required to do so or (b) become generally
known to and available for use by the public otherwise than by your wrongful act
or omission.
5
<PAGE>
14. RELATED AGREEMENTS. To the extent that any provision of any
other agreement between the Bank and you shall limit, qualify or be inconsistent
with any provision of this Agreement, then for purposes of this Agreement, while
the same shall remain in force, the provision of this Agreement shall control
and such provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other agreement had been
formally amended to the extent necessary to accomplish such purpose.
15. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Bank the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
COMMERCE NATIONAL BANK
By
-------------------------------------
Name:
Title:
Agreed to this day
of , 1996.
- -------------------------
[Richard F. Demerjian or
Esther G. Wilson]
6
<PAGE>
EXHIBIT 8.1
AGREEMENT OF MERGER
This Agreement of Merger is entered into between COMBANCORP, a
California corporation, and BanPonce Merger Corp., a California corporation.
1. BanPonce Merger Corp. shall be merged into COMBANCORP, with
COMBANCORP being the surviving corporation.
2. Each share of common stock of BanPonce Merger Corp. issued and
outstanding immediately prior to the Effective Time (as defined below) of the
merger shall remain outstanding and unchanged after the merger and shall become
one share of common stock of COMBANCORP, and all of such shares shall thereafter
constitute all of the issued and outstanding shares of the capital stock of the
COMBANCORP.
3. Each share of common stock of COMBANCORP issued and outstanding
immediately prior to the Effective Time of the merger shall be canceled and
shall become and be converted into the right to receive an amount in cash,
without interest, equal to $17.31 per share; no shares of COMBANCORP shall be
issued in exchange for the shares of common stock of BanPonce Merger Corp.
4. The "Effective Time" shall mean the time this Agreement of Merger
is filed with the Secretary of State pursuant to Section 1103 of the California
Corporations Code.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Agreement this ___
day of ________, 1996.
COMBANCORP
By:
-----------------------------------
[Chairman, President or Vice
President]
By:
-----------------------------------
[Secretary or Assistant
Secretary]
BANPONCE MERGER CORP.
By:
-----------------------------------
[Chairman, President or Vice
President]
By:
-----------------------------------
[Secretary or Assistant
Secretary]
<PAGE>
APPENDIX B
[LETTERHEAD]
May 22, 1996
Board of Directors
COMBANCORP
6001 E. Washington Blvd.
City of Commerce, California 90040
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to COMBANCORP ("CNB") and its shareholders of the financial terms of
the proposed merger ("Proposed Merger") between CNB and BanPonce Corporation
("BanPonce").
The terms of the agreement and plan of merger dated as of May 22, 1996 ("the
Agreement"), by and between CNB and BanPonce indicate that the consummation
of the Proposed Merger is subject to receipt of approvals from the
shareholders of CNB and various regulatory agencies, and is further subject
to the satisfaction of certain other conditions. As provided for in the
Agreement, BanPonce Merger Corp, a wholly owned subsidiary of BanPonce (the
"Merger Corp"), will merge with and into CNB, with CNB being the surviving
corporation. Under the terms of the Agreement, each outstanding share of
common stock, no par value, of CNB will have the right to receive cash equal
to $17.31. Each issued and outstanding option to purchase shares of CNB
common stock will be canceled for a cash payment equal to $10.31.
The Secura Group ("Secura") is a financial advisory and consulting firm that
specializes in the financial services industry. As part of our financial
advisory and consulting services, we are engaged in the valuation of
securities and companies in connection with mergers, acquisitions and other
corporate transactions. Secura is familiar with CNB, having acted as
financial advisor to CNB's Board of Directors in connection with and having
participated in, the negotiations leading to the Agreement.
In arriving at our opinion described herein, we have, among other things:
a) Reviewed CNB's Annual Reports on Form 10-K and related financial
information for the five fiscal years ended December 31, 1995, and CNB's
Quarterly Report on Form 10-Q and the related unaudited financial
information for the quarterly period ended March 31, 1996;
b) Reviewed BanPonce's Annual Reports on Form 10-K and related financial
information for the five fiscal years ended December 31, 1995, and
<PAGE>
Board of Directors
COMBANCORP
May 22, 1996
Page 2 of 3
BanPonce's Quarterly Report on Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1996;
c) Reviewed certain other internal information prepared by CNB including,
but not limited to, nonperforming asset reports, interest rate risk
exposure reports and financial forecasts, relating to the business,
earnings, assets and future prospects of CNB, furnished to us by CNB;
d) Conducted discussions with members of senior management of CNB and
BanPonce concerning their respective businesses, operations, regulatory
condition and future prospects;
e) Reviewed the historical market prices and trading activity for CNB
common stock and compared them with that of certain publicly traded
companies which we deemed to be relevant;
f) Compared the results of operation of CNB and BanPonce with that of
certain companies which we deemed to be relevant;
g) Compared the proposed financial terms of the Proposed Merger
contemplated by the Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;
h) Analyzed the pro forma impact of the transaction on BanPonce's earnings
and book value per share, consolidated capitalization and certain
balance sheet and profitability ratios;
i) Reviewed the Agreement; and
j) Reviewed such other financial information, studies and analyses and
performed such other investigations and took into account such other
matters as we deemed necessary to the rendering of this opinion.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by CNB and
BanPonce, and we have not assumed any responsibility for independently
verifying such information or undertaking an independent evaluation or
appraisal of the assets or liabilities of CNB or BanPonce or any of their
subsidiaries, nor have we been furnished any such evaluation or appraisal.
We have also assumed that there has been no material change in CNB's or
BanPonce's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements made available to
us by CNB and BanPonce, respectively. We have relied on advice of counsel to
CNB as to all legal matters with respect to CNB, CNB's Board of Directors,
the Proposed Merger, and the Agreement.
We have also relied upon the management of CNB as to the reasonableness and
achievability of the financial and operating forecasts (and the assumptions
and bases therefor) provided to us. In that regard, we have assumed with
your consent that such forecasts, including, without limitations, financial
forecasts, underperforming and nonperforming assets, net charge-offs and the
adequacy of reserves, projections regarding future economic conditions and
results of operations reflect the best currently available
<PAGE>
Board of Directors
COMBANCORP
May 22, 1996
Page 3 of 3
estimates and judgments of CNB management and that such projections and
forecasts will be realized in the amounts and the time periods currently
estimated by CNB management. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made
available to us as of, the date hereof. We have not assumed any
responsibility for making an independent evaluation of the adequacy of the
allowance for loan and lease losses of CNB or BanPonce, nor have we reviewed
any individual credit files. We have also assumed that the conditions to the
Proposed Merger as set forth in the Agreement would be satisfied and that the
Proposed Merger would be consummated on a timely basis in the manner
contemplated by the Agreement.
We have been retained by the Board of Directors of CNB as an independent
contractor to act as financial advisor to CNB with respect to the Proposed
Merger and will receive a fee for our services, including providing this
opinion.
Our opinion is directed to the Board of Directors of CNB and does not
constitute a recommendation to any shareholder of CNB as to how such
shareholder should vote at any shareholder meeting of CNB held in connection
with the Proposed Merger. It is understood that this opinion may be included
by CNB's Board of Directors in the proxy statement or registration statement
to the shareholders of CNB in connection with the Proposed Merger so long as
the opinion is quoted in full.
Based upon and subject to the foregoing, and based upon such other matters as
we consider relevant, we are of the opinion on the date hereof, that the
consideration to be paid by BanPonce pursuant to the terms of the Agreement
is fair, from a financial point of view, to the shareholders of CNB.
Very truly yours,
/s/ THE SECURA GROUP
The Secura Group
<PAGE>
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
Section 1300. REORGANIZATION OR SHORT-FORM MERGER, DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b)
or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation is entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision (b). The
fair market value shall be determined as of the day before the first
announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under
subdivision (o) of Section 25100 or (B) listed on the list of OTC
margin stocks issued by the Board of Governors of the Federal Reserve
System, and the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Sections 1301, 1302, 1303
and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for payment are filed
with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph); were voted against the reorganization, or
which were held of record on the effective date of a short-form
merger, provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the
approval required by Section 1201 is sought by written consent rather
than at a meeting.
<PAGE>
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with
Section 1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
Section 1301. NOTICE OF HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes
an offer by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they lose their
status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to acquire the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand
upon the corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not effective
for any purpose unless it is received by the corporation or any transfer
agent thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other cases within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of which such shareholder claims to be
the fair market value of those shares as of the day before the announcement
of the proposed reorganization or short-form merger. The statement of the
fair market value constitutes an offer by the shareholder to sell the shares
at such price.
<PAGE>
Section 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFIED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if the shares are
uncertificated securities, written notice of the number of shares which the
shareholder demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
Section 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between the
corporation and the holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the
amount thereof has been agreed or within 30 days after any statutory or
contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of
the certificates therefor, unless provided otherwise by agreement.
Section 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court
of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
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(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or more
impartial appraisers to determine, the fair market value of the shares.
Section 1305. REPORT OF APPRAISERS; CONFIRMATIONS; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the
time fixed by the court, the appraisers, or a majority of them, shall make
and file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such
further time as may be allowed by the court or the report is not confirmed by
the court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with interest
thereon, at the legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court for the shares
is more than 125 percent of the price offered by the corporation under
subdivision (a) of Section 1301).
Section 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall
become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt
to be payable when permissible under the provisions of Chapter 5.
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Section 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
Section 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL
OF DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their
shares, until the fair market value of their shares is agreed upon or
determined. A dissenting shareholder may not withdraw demand for payment
unless the corporation consents thereto.
Section 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on demand
to any dissenting shareholder who has initiated proceedings in good
faith under this chapter all necessary expenses incurred in such
proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the
articles.
(c) The dissenting shareholder and the corporation do not agree
upon the status of the shares as dissenting shares or upon the
purchase price of the shares, and neither files a complaint or
intervenes in a pending action as provided in Section 1304, within six
months after the date on which notice of the approval by the
outstanding shares or notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of the
dissenting shares.
Section 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
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Section 1311. EXEMPT SHARES
This chapter, except 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
Section 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION;
CONDITIONS
(a) No shareholder of a corporation who has right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted
in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1302, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter, but if the
shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, the shareholder shall not
thereafter have any right to demand payment of cash for the shareholders'
shares pursuant to this chapter. The court in any action attacking the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon 10 days prior
notice to the corporation and upon a determination by the court that clearly
no other remedy will adequately protect the complaining shareholder or the
class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
DDD09760
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PROXY
COMBANCORP
SPECIAL MEETING OF SHAREHOLDERS
AUGUST ______ , 1996
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Richard F. Demerjian and Jack
Minasian, or either of them, as proxies of the undersigned, with full power
of substitution, to represent the undersigned and to vote, as designated
below, all the shares of common stock of COMBANCORP held of record by the
undersigned on July ____ , 1996, at the Special Meeting of Shareholders (the
"Special Meeting") to be held on August ____, 1996, or at any adjournments
thereof.
PLEASE SIGN AND DATE ON REVERSE SIDE.
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Please mark
your votes as /X/
indicated in
this example
1. A proposal to approve and adopt an Agreement FOR AGAINST ABSTAIN
and Plan of Merger, dated as of May 22, 1996, / / / / / /
by and among BanPonce Corporation, a Puerto
Rico corporation, BanPonce Merger Corp., a
California corporation and a wholly-owned
indirect subsidiary of BanPonce ("Merger Sub"),
and COMBANCORP, a California corporation, and
related Agreement of Merger between COMBANCORP
and Merger Sub.
2. In their discretion, to vote upon such other
business as may properly come before the Special
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1. THIS PROXY, WHEN
PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED. IF NO DIRECTIONS ARE
GIVEN, THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1 SET FORTH HEREIN.
The undersigned hereby ratifies and confirms all that said proxies, or any of
them, or their substitutes, shall lawfully do or cause to be done by virtue
hereof, and hereby revokes any and all proxies heretofore given by the
undersigned to vote at the Special Meeting. The undersigned acknowledges
receipt of the notice of the Special Meeting and the proxy statement
accompanying said notice.
I (we) expect to attend / /
the Special Meeting.
Number of Persons: ________
Signature(s)_________________________________________ Dated___________, 1996
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, give full title as such. If a corporation, please sign
in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.