<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1996.
Registration No. 33-
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SC ACQUISITION CORP.
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
Delaware 6712 Applied For
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
One Pacific Plaza, 7777 Center Avenue
Huntington Beach, California 92647
(714) 895-2929
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------
Robert P. Keller
President and Chief Executive Officer
SC Acquisition Corp.One Pacific Plaza, 7777 Center Avenue
Huntington Beach, California 92647
(714) 895-2929
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copies of communications to:
Michael K. Krebs, Esquire David M. Schachter, Esquire
Nutter, McClennen & Fish, LLP Fried, Bird & Crumpacker
One International Place 10100 Santa Monica Boulevard
Boston, Massachusetts 02110-2699 Los Angeles, California 90067
(617) 439-2000 (310) 551-7400
----------------
Approximate date of commencement of proposed sale to public: Upon the
effective date of the mergers described in this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. / /
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Proposed Proposed
maximum maximum Amount of
Title of each class of securities to be Amount being offering price per aggregate offering registration
registered registered share (2) price (2) fee (2)
<S> <C> <C> <C> <C>
Common Stock ($.01 par value)............ 8,251,410 Shares $3.96 $32,675,583 $11,268
Common Stock ($.01 par value)............ 1,696,732 Shares(1) $9.75 $16,531,417(3) $ 502
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The estimated maximum number of shares of Common Stock issuable pursuant
to the Reorganization Agreement described herein assuming the maximum
Exchange ratio. See "THE CSB ACQUISITION".
(2) The total registration fee is $11,770. The registration fee has been
computed pursuant to Rule 457(f)(2) under the Securities Act of 1933, as
amended, based on the aggregate book value of the shares of Common Stock
of SDN Bancorp, Inc. and Commerce Security Bank on March 31, 1996. The
proposed maximum offering price per share has been determined by dividing
the maximum aggregate offering price by the number of shares being
registered.
(3) Includes $15,078,000 of cash consideration being paid by the Registrant.
See "THE CSB ACQUISITION."
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
SC ACQUISITION CORP.
Cross Reference Sheet
Pursuant to Rule 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Information Statement/Prospectus
Item and Caption of Form S-4 Caption of Location
---------------------------- --------------------------------
<S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page of Registration Statement;
Cross Reference Sheet; Outside Front
Cover Page of Information
Statement/Prospectus.
2. Inside Front and Outside Back
Cover Pages of Prospectus.............. Inside Front Cover Page; Available
Information; Table of Contents.
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information............................ Summary of Information
Statement/Prospectus; Solicitation of
Written Consents of the Shareholders of
CSB; Information Regarding the Business
of SDN; Information Concerning the
Business and Properties of CSB; The CSB
Acquisition; Description of Holdco; Pro
Forma Financial Information; Selected
Consolidated Financial Data of CSB;
Selected Consolidated Financial Data of
SDN; Supervision and Regulation of
Holdco and SDN.
4. Terms of the Transaction............... Summary of Information
Statement/Prospectus; The CSB
Acquisition; Solicitation of Written
Consents of the Shareholders of CSB;
Description of Holdco Capital Stock.
5. Pro Forma Financial Information...... Summary of Information
Statement/Prospectus; Pro Forma Financial
Information.
<PAGE>
6. Material Contacts with the Company
Being Acquired...................... The CSB Acquisition.
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters............ Not Applicable.
8. Interests of Named Experts and
Counsel................................ Experts; Legal Matters.
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities........................ Not Applicable.
10. Information with Respect to
S-3 Registrants....................... Not Applicable.
11. Incorporation of Certain
Information by Reference.............. Not Applicable.
12. Information with Respect to
S-2 or S-3 Registrants............... Not Applicable.
13. Incorporation of Certain
Information by Reference........... Not Applicable.
14. Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants........................ Summary of Information
Statement/Prospectus; 1995
Recapitalization and Certain Other Recent
Developments; Information Regarding the
Business of SDN; Selected Consolidated
Financial Data of SDN; SDN's
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Market for SDN Common
Stock and Holdco Common Stock and
Dividend Policy; Pro Forma Financial
Information; Financial Statements.
<PAGE>
15. Information with Respect to
S-3 Companies....................... Not Applicable.
16. Information with Respect to
S-2 or S-3 Companies................ Not Applicable.
17. Information with Respect to
Companies Other Than S-3 or
S-2 Companies....................... Summary of Information
Statement/Prospectus; Information
Concerning the Business and Properties of
CSB; Selected Consolidated Financial Data
of CSB; Management's Discussion and
Analysis of Financial Condition and Results
of Operations of CSB; Market Price of and
Dividends on CSB Common Stock;
Financial Statements.
18. Information if Proxies, Consents
or Authorizations are to be
Solicited.............................. Summary of Information
Statement/Prospectus; Solicitation
of Written Consents of the
Shareholders of CSB; Security
Ownership of Certain Beneficial
Owners; Security Ownership of
Certain Beneficial Owners and
Management of SDN; Executive
Compensation of Management of
Holdco and SDN; Directors and
Executive Officers of Holdco and
SDN; The CSB Acquisition;
Comparison of the Rights of holders
of Holdco Common Stock and
Holders of CSB Common Stock;
CSB Director Compensation;
Executive Compensation of
Management of CSB.
19. Information if Proxies, Consents
or Authorizations are not to be
Solicited or in an Exchange Offer..... Not Applicable.
20. Indemnification of Directors and Officers Part II
21. Exhibits and Financial Statement
Schedules................................ Part II
22. Undertakings............................. Part II
</TABLE>
<PAGE>
[Commerce INFORMATION STATEMENT [Holdco
Security Bank FOR SOLICITATION OF WRITTEN Logo,
Logo] CONSENTS TO APPROVE THE if any]
SALE OF COMMERCE
SECURITY BANK
-------------------
PROSPECTUS OF
SC ACQUISITION CORP.
-------------------
This Information Statement/Prospectus is being furnished to all of the
shareholders of Commerce Security Bank ("CSB") in connection with the
solicitation by the Board of Directors of CSB of the written consents of the
shareholders of CSB to the Agreement and Plan of Reorganization (the
"Reorganization Agreement") entered into as of April 23, 1996, by and between
CSB and SDN Bancorp, Inc., a Delaware corporation ("SDN"). SDN is the bank
holding company of both San Dieguito National Bank ("San Dieguito"), a
national banking association whose principal place of business is located in
Encinitas, California, and Liberty National Bank ("Liberty"), a national
banking association whose principal place of business is located in
Huntington Beach, California. Pursuant to the terms of the Reorganization
Agreement, a new bank holding company currently known as SC Acquisition Corp.
("Holdco") will acquire CSB (the "CSB Acquisition") for a combination of
approximately $15.1 million in cash and Holdco common stock, par value $.01
("Holdco Common Stock"), with a pro forma book value at December 31, 1995 of
$6.2 million subject to certain possible reductions as described below
(collectively, the "CSB Acquisition Price").
The Reorganization Agreement provides that Holdco will, at the option of
each of the CSB shareholders (subject to certain limitations described in
this Information Statement/Prospectus and in the Reorganization Agreement),
either deliver cash or issue common stock, par value $.01 per share, of
Holdco ("Holdco Common Stock"), or a combination thereof, to each of the CSB
shareholders (with the exception of shareholders of CSB who properly exercise
their dissenters' rights) in exchange for all of the outstanding shares of
common stock, no par value, of CSB ("CSB Common Stock"). (See "THE CSB
ACQUISITION -- Terms of the Reorganization Agreement -- CSB Acquisition
Price" herein and the text of the Reorganization Agreement.) Accordingly,
this Information Statement/Prospectus also constitutes an offer to each of
the CSB shareholders to acquire Holdco Common Stock. A copy of the
Reorganization Agreement, which sets forth all of the terms and conditions of
the CSB Acquisition, is attached to this Information Statement/Prospectus as
Annex 1 and is incorporated herein by this reference and made a part hereof.
The transaction will be effected by means of two contemporaneous reverse
triangular mergers (collectively, the "Transaction"). As discussed in more
detail herein, SDN has organized Holdco under Delaware law as a subsidiary of
SDN. Holdco will form two wholly-owned interim subsidiaries, one a California
corporation ("CSB Merger Sub") and the other a Delaware corporation ("SDN
Merger Sub"). The Reorganization Agreement provides that first SDN Merger
Sub will merge with and into SDN (the "SDN Merger") and immediately
thereafter CSB Merger Sub will merge with and into CSB as part of the CSB
Acquisition. As a result of the Transaction, CSB and SDN will become
wholly-owned subsidiaries of Holdco, all of the then former SDN shareholders
will become shareholders of Holdco and some or all of the then former CSB
shareholders will become shareholders of Holdco. (See "THE CSB ACQUISITION
- -- Terms of the Reorganization Agreement -- Structure of the Transaction"
herein.)
Sixty percent (60%) of the outstanding shares of CSB Common Stock will
be exchanged for cash equal to approximately 150% of CSB's book value per
share at December 31, 1995, and forty percent (40%) of the outstanding shares
of CSB Common Stock will be exchanged for a number of shares of Holdco Common
Stock having an aggregate pro forma book value, as of December 31, 1995,
equal to CSB's book value as of that date (subject to certain possible
reductions as described below.) Each CSB shareholder (excluding those who
have properly exercised statutory dissenters' rights) will have the right to
elect whether to receive cash, Holdco Common Stock, or a combination of cash
and Holdco Common Stock, in exchange for his or her CSB Common Stock, subject
to possible proration to ensure that, in the aggregate, sixty percent (60%)
of the outstanding CSB Common Stock is exchanged for cash and forty percent
(40%) of the outstanding CSB Common Stock is exchanged for Holdco Common
Stock.
<PAGE>
The CSB Acquisition Price payable by Holdco for all of the outstanding
shares of CSB Common Stock is subject to two possible adjustments. The
first, which will be resolved prior to the consummation of the CSB
Acquisition, is intended to address the potential exposure to CSB which SDN
perceived to be inherent in certain pending litigation, recourse loan claims
and real estate assets. Those risks, and the manner in which any adjustment
to the CSB Acquisition Price will be calculated, are described on Exhibit
1.1-C to the Reorganization Agreement. The maximum effect on the CSB
shareholders as a result of this possible adjustment would be a reduction of
the CSB Acquisition Price by $400,000. (See "THE CSB ACQUISITION -- Terms of
the Reorganization Agreement -- Potential Adjustments to the CSB Acquisition
Price" herein.)
The second potential adjustment to the CSB Acquisition Price relates to
the contingency that a special assessment may be levied against Savings
Association Insurance Fund ("SAIF")-insured institutions such as CSB. CSB
and SDN expect that shares of Holdco Common Stock will be set aside in an
escrow account along with a payment obligation of Holdco to the Escrow Agent
(secured by a standby letter of credit), both as of the closing of the CSB
Acquisition to address the SAIF contingency. The escrow agreement, which
will be substantially in the form of Exhibit 2.11-A to the Reorganization
Agreement, sets forth the details regarding the manner in which any
adjustment to the CSB Acquisition Price resulting from the SAIF contingency
will be calculated. The maximum effect on the CSB shareholders as a result
of this contingency would be a reduction of the CSB Acquisition Price by
$575,000. (See "THE CSB ACQUISITION -- Terms of the Agreement --Adjustment
to the CSB Acquisition Price" herein.)
The consummation of the Transaction is subject to the receipt of the
requisite approvals of applicable regulatory agencies and the shareholders of
CSB as well as the fulfillment of certain other conditions, all as more fully
described in this Information Statement/Prospectus. (See "THE CSB
ACQUISITION -- Terms of the Reorganization Agreement -- Conditions to the
Transaction; Termination" herein.)
This Information Statement/Prospectus is being first mailed or delivered
to the shareholders of CSB on or about , 1996.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. PROXIES ARE NOT BEING SOLICITED IN CONNECTION WITH THIS WRITTEN
CONSENT SOLICITATION. (See "SOLICITATION OF WRITTEN CONSENTS OF THE
SHAREHOLDERS OF COMMERCE SECURITY BANK" herein.)
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
THE ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Information Statement/Prospectus is , 1996.
<PAGE>
AVAILABLE INFORMATION
SDN is subject to certain of the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "SEC"). Such reports and other information can
be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the SEC: 75 Park Place, New York, New York
10007 and Room 3190, Kluczynski Federal Building, 230 South Dearborn Street,
Chicago, Illinois 60604. Copies of such materials can also be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC also maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov.
CSB is not subject to the information requirements of the Exchange Act.
However, copies of each quarterly balance sheet and statement of income of
CSB filed with the Federal Deposit Insurance Corporation ("FDIC") as part of
CSB's call report, as well as audited financial statements of CSB for each of
its past five fiscal years can be obtained by contacting Mr. L. Robert
Connelly, President of CSB, at 1545 River Park Drive, Suite 200, Sacramento,
California 95815, telephone number: (916) 922-9500.
This Information Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to SDN and Holdco and the securities offered hereby, reference
is made to the Registration Statement, including the exhibits filed therewith
or incorporated by reference therein. Statements contained herein concerning
the provisions of documents filed with, or incorporated by reference in, the
Registration Statement as exhibits are necessarily summaries of such
documents and each such statement is qualified in its entirety by reference
to the copy of the applicable document filed with the SEC. Copies of the
Registration Statement, including exhibits, may be obtained from the SEC upon
payment of a prescribed fee, or may be examined without charge at the offices
of the SEC as described above.
No person has been authorized to give any information or to make any
representation not contained in or incorporated by reference in this
Information Statement/Prospectus, and, if given or made, such information or
representation not contained herein must not be relied upon as having been
authorized by CSB or Holdco. This Information Statement/Prospectus does not
constitute an offer to sell, or the solicitation of an offer to purchase, any
of the securities offered by this Information Statement/Prospectus, or the
solicitation of written consents, in any jurisdiction to or from any person
to or from whom it is unlawful to make such offer or solicitation of an
offer, or consent solicitation in such jurisdiction. Neither the delivery of
this Information Statement/Prospectus nor the issuance or sale of any
securities hereunder shall under any circumstances create any implication
that there has been no change in the affairs of CSB or Holdco. since the date
hereof or that the information herein is correct as of any time subsequent to
the date hereof.
2
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . .2
SUMMARY OF INFORMATION STATEMENT/PROSPECTUS. . . . . . . . . . .8
The Parties . . . . . . . . . . . . . . . . . . . . . . . .8
SDN and Affiliates . . . . . . . . . . . . . . . . . .8
CSB. . . . . . . . . . . . . . . . . . . . . . . . . .8
Purposes of Information Statement/Prospectus. . . . . . . .8
Vote Required . . . . . . . . . . . . . . . . . . . . . . .8
Terms of the Reorganization . . . . . . . . . . . . . . . .9
Recommendation of the CSB Board of Directors and Reasons
for the CSB Acquisition . . . . . . . . . . . . . . . . 10
Fairness Opinion of Financial Advisor . . . . . . . . . . 10
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . 10
Management and Operations of Holdco Following the
Transaction . . . . . . . . . . . . . . . . . . . . . . 10
Conditions to the Consummation of the Transaction . . . . 11
Regulatory Approvals. . . . . . . . . . . . . . . . . . . 11
Certain Federal Income Tax Consequences . . . . . . . . . 11
Accounting Treatment. . . . . . . . . . . . . . . . . . . 12
Termination of the Reorganization Agreement . . . . . . . 12
Termination Fee and Liquidated Damages. . . . . . . . . . 12
Waiver and Amendment. . . . . . . . . . . . . . . . . . . 13
Interests of Certain Persons in the Transaction . . . . . 13
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . 13
Certain Differences in the Rights of Shareholders . . . . 13
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA . . . . . . . 14
INVESTMENT CONSIDERATIONS RELATING TO
HOLDCO COMMON STOCK . . . . . . . . . . . . . . . . . . . 16
Limited Operating History . . . . . . . . . . . . . . . . 16
Certain Risks Associated with CSB Acquisition . . . . . . 16
Illiquidity of Holdco Common Stock. . . . . . . . . . . . 16
Control by Dartmouth Capital Group. . . . . . . . . . . . 17
Strategic Plan of Holdco. . . . . . . . . . . . . . . . . 17
Risks Related to Growth Strategy and Integration of
Operating Banks . . . . . . . . . . . . . . . . . . . . 17
Dependence on Keller. . . . . . . . . . . . . . . . . . . 17
Risks Related to Goodwill . . . . . . . . . . . . . . . . 18
THE CSB ACQUISITION. . . . . . . . . . . . . . . . . . . . . . 19
Background of the CSB Acquisition . . . . . . . . . . . . 19
SDN's Reasons for the CSB Acquisition . . . . . . . . . . 19
CSB's Reasons for the CSB Acquisition . . . . . . . . . . 20
Terms of the Reorganization Agreement . . . . . . . . . . 21
General. . . . . . . . . . . . . . . . . . . . . . . 21
Structure of the Transaction . . . . . . . . . . . . 21
CSB Acquisition Price. . . . . . . . . . . . . . . . 24
Conversion of the CSB Common Stock.. . . . . . . . . 26
Election and Exchange Procedure. . . . . . . . . . . 27
Allocation Procedure.. . . . . . . . . . . . . . . . 27
Fractional Shares. . . . . . . . . . . . . . . . . . 28
Interests of Certain Persons in the CSB Acquisition;
Related Agreements . . . . . . . . . . . . . . . . 28
Employee Benefits. . . . . . . . . . . . . . . . . . 28
Financing of Transaction . . . . . . . . . . . . . . 28
Conditions to the Transaction. . . . . . . . . . . . 28
3
<PAGE>
Certain Agreements . . . . . . . . . . . . . . . . . 29
Termination. . . . . . . . . . . . . . . . . . . . . 30
Expenses.. . . . . . . . . . . . . . . . . . . . . . 31
Regulatory Approvals. . . . . . . . . . . . . . . . . . . 31
Dissenting Shareholders' Rights . . . . . . . . . . . . . 31
Accounting Treatment. . . . . . . . . . . . . . . . . . . 33
Certain Federal Income Tax Consequences . . . . . . . . . 33
Exchange of CSB Common Stock Solely for Holdco
Common Stock . . . . . . . . . . . . . . . . . . . 33
Exchange of CSB Common Stock Solely for Cash . . . . 34
Exchange of CSB Common Stock for a Combination of
Holdco Common Stock and Cash . . . . . . . . . . . 34
Cash in Lieu of Fractional Shares. . . . . . . . . . 34
Federal Income Tax Considerations in Making a
Conditional Election . . . . . . . . . . . . . . . 34
Effect of Escrow . . . . . . . . . . . . . . . . . . 35
Reporting Requirements . . . . . . . . . . . . . . . 35
Tax Opinion. . . . . . . . . . . . . . . . . . . . . 35
PRO FORMA FINANCIAL INFORMATION. . . . . . . . . . . . . . . . 37
SOLICITATION OF WRITTEN CONSENTS OF
THE SHAREHOLDERS OF COMMERCE SECURITY BANK. . . . . . . . 46
Introduction. . . . . . . . . . . . . . . . . . . . . . . 46
Matter to Be Considered . . . . . . . . . . . . . . . . . 46
Record Date; Voting Information . . . . . . . . . . . . . 46
Submission of Written Consents; Revocability. . . . . . . 46
Solicitation of Written Consents. . . . . . . . . . . . . 47
Recommendation. . . . . . . . . . . . . . . . . . . . . . 47
SELECTED CONSOLIDATED FINANCIAL DATA OF CSB. . . . . . . . . . 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB. . . 49
Summary of Performance. . . . . . . . . . . . . . . . . . 49
FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . . . 50
Loans and Lease Portfolio . . . . . . . . . . . . . . . . 50
Nonperforming Assets. . . . . . . . . . . . . . . . . . . 52
Allowance for Loan and Lease Losses . . . . . . . . . . . 55
Real Estate Joint Ventures. . . . . . . . . . . . . . . . 58
Investment Portfolio. . . . . . . . . . . . . . . . . . . 59
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 60
Capital Resources . . . . . . . . . . . . . . . . . . . . 63
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 63
Net Income. . . . . . . . . . . . . . . . . . . . . . . . 63
Net Interest Income . . . . . . . . . . . . . . . . . . . 64
Provision for Loan and Lease Losses . . . . . . . . . . . 68
Noninterest Income. . . . . . . . . . . . . . . . . . . . 69
Noninterest Expense . . . . . . . . . . . . . . . . . . . 70
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . 71
Liquidity and Asset/Liability Management. . . . . . . . . 71
INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF CSB. . . 74
General . . . . . . . . . . . . . . . . . . . . . . . . . 74
Banking Services. . . . . . . . . . . . . . . . . . . . . 74
Competition . . . . . . . . . . . . . . . . . . . . . . . 76
Employees . . . . . . . . . . . . . . . . . . . . . . . . 77
4
<PAGE>
Properties. . . . . . . . . . . . . . . . . . . . . . . . 77
Legal Proceedings . . . . . . . . . . . . . . . . . . . . 80
MARKET PRICE OF AND DIVIDENDS ON CSB COMMON STOCK. . . . . . . 82
Market Information . . . . . . . . . . . . . . . . . 82
Holders. . . . . . . . . . . . . . . . . . . . . . . 82
DIRECTORS AND EXECUTIVE OFFICERS OF CSB. . . . . . . . . . . . 83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. . . . . . . . 85
EXECUTIVE COMPENSATION OF MANAGEMENT OF CSB. . . . . . . . . . 86
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS. . . . 86
DIRECTOR COMPENSATION. . . . . . . . . . . . . . . . . . . . . 87
CERTAIN RELATIONSHIPS AND RELATED TRANSACTION REGARDING CSB. . 87
DESCRIPTION OF HOLDCO. . . . . . . . . . . . . . . . . . . . . 88
General . . . . . . . . . . . . . . . . . . . . . . . . . 88
Special Considerations. . . . . . . . . . . . . . . . . . 88
1995 RECAPITALIZATION AND CERTAIN OTHER RECENT DEVELOPMENTS. . 89
Overview. . . . . . . . . . . . . . . . . . . . . . . . . 89
Acquisition of Liberty National Bank. . . . . . . . . . . 89
1995 Recapitalization . . . . . . . . . . . . . . . . . . 89
SELECTED CONSOLIDATED FINANCIAL DATA OF SDN. . . . . . . . . . 91
SDN MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . 93
Introduction. . . . . . . . . . . . . . . . . . . . . . . 93
Potential Effect of Future Acquisitions . . . . . . . . . 94
Financial Condition . . . . . . . . . . . . . . . . . . . 94
Loans. . . . . . . . . . . . . . . . . . . . . . . . 94
Deposits . . . . . . . . . . . . . . . . . . . . . . 94
Results of Operations . . . . . . . . . . . . . . . . . . 95
Net Income . . . . . . . . . . . . . . . . . . . . . 95
Net Interest Income and Net Interest Margin. . . . . 95
Allowance and Provision for Loan Losses. . . . . . . 99
Noninterest Income . . . . . . . . . . . . . . . . .100
Noninterest Expense. . . . . . . . . . . . . . . . .100
Provision for Income Taxes . . . . . . . . . . . . .100
Interest Rate Sensitivity . . . . . . . . . . . . . . . .101
Capital Resources . . . . . . . . . . . . . . . . . . . .102
Liquidity . . . . . . . . . . . . . . . . . . . . . . . .103
Inflation . . . . . . . . . . . . . . . . . . . . . . . .104
Accounting Changes. . . . . . . . . . . . . . . . . . . .104
INFORMATION REGARDING THE BUSINESS OF SDN. . . . . . . . . . .104
General . . . . . . . . . . . . . . . . . . . . . . . . .104
Strategic Plan. . . . . . . . . . . . . . . . . . . . . .104
Historical Distribution of Assets, Liabilities and
Shareholders' Equity of SDN. . . . . . . . . . . . . .105
Banking Services. . . . . . . . . . . . . . . . . . . . .106
General. . . . . . . . . . . . . . . . . . . . . . .106
5
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Deposits and Services. . . . . . . . . . . . . . . .107
Borrowings . . . . . . . . . . . . . . . . . . . . .108
Lending Business . . . . . . . . . . . . . . . . . .108
Nonaccrual Assets. . . . . . . . . . . . . . . . . .109
Allowance for Loan Losses. . . . . . . . . . . . . .110
Investment Securities. . . . . . . . . . . . . . . .112
Primary Service Area . . . . . . . . . . . . . . . .113
San Dieguito . . . . . . . . . . . . . . . . . . . .113
Liberty. . . . . . . . . . . . . . . . . . . . . . .113
Economic Conditions in the Market Area . . . . . . .114
Competition . . . . . . . . . . . . . . . . . . . . . . .114
Effect of Governmental Policies and Legislation . . . . .114
General. . . . . . . . . . . . . . . . . . . . . . .114
Reliance on SBA Programs . . . . . . . . . . . . . .115
Employees . . . . . . . . . . . . . . . . . . . . . . . .115
Properties. . . . . . . . . . . . . . . . . . . . . . . .116
San Dieguito Premises. . . . . . . . . . . . . . . .116
Liberty Premises . . . . . . . . . . . . . . . . . .116
Effects of Environmental Protection Laws . . . . . .116
Legal Proceedings. . . . . . . . . . . . . . . . . .117
SUPERVISION AND REGULATION OF HOLDCO AND SDN . . . . . . . . .117
Overview. . . . . . . . . . . . . . . . . . . . . . . . .118
Limitations on Bank Holding Company Activities. . . . . .118
Regulatory Restrictions on Distributions to Shareholders.118
Transactions with Affiliates. . . . . . . . . . . . . . .119
Restrictions on Changes of Control. . . . . . . . . . . .119
Cross-Guarantee and Holding Company Liability . . . . . .120
Capital Adequacy Requirements . . . . . . . . . . . . . .120
Prompt Corrective Action Provisions . . . . . . . . . . .121
Risk Management . . . . . . . . . . . . . . . . . . . . .122
Safety and Soundness Standards. . . . . . . . . . . . . .122
Limitations on Deposit Taking . . . . . . . . . . . . . .122
Premiums for Deposit Insurance. . . . . . . . . . . . . .123
Consumer Protection Laws and Regulations. . . . . . . . .124
Certain Other Aspects of Federal and State Law. . . . . .126
Federal Securities Laws . . . . . . . . . . . . . . . . .126
Recent and Proposed Legislation . . . . . . . . . . . . .126
TAXATION OF SDN AND HOLDCO . . . . . . . . . . . . . . . . . .129
General . . . . . . . . . . . . . . . . . . . . . . . . .129
Federal Tax Laws. . . . . . . . . . . . . . . . . . . . .129
Corporate Tax Rates; Alternative Minimum Tax . . . .129
Bad Debt Deduction.. . . . . . . . . . . . . . . . .129
Interest Incurred for Tax-Exempt Obligations . . . .129
Net Operating Losses . . . . . . . . . . . . . . . .130
Amortization of Intangible Assets Including
Bank Deposit Base . . . . . . . . . . . . . . . .130
Mark-to-Market Rules . . . . . . . . . . . . . . . .130
California Tax Laws . . . . . . . . . . . . . . . . . . .130
Corporate Tax Rates; Alternative Minimum Tax . . . .130
Bad Debt Deduction . . . . . . . . . . . . . . . . .130
Net Operating Losses . . . . . . . . . . . . . . . .130
Amortization of Intangible Assets Including Bank
Deposit Base . . . . . . . . . . . . . . . . . . .131
Market-to-Market Rules . . . . . . . . . . . . . . .131
DESCRIPTION OF HOLDCO SECURITIES . . . . . . . . . . . . . . .131
6
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General . . . . . . . . . . . . . . . . . . . . . . . . .131
Common Stock. . . . . . . . . . . . . . . . . . . . . . .131
MARKET FOR SDN COMMON STOCK AND
HOLDCO COMMON STOCK AND DIVIDEND POLICY . . . . . . . . .132
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDCO AND SDN . . . . . .133
EXECUTIVE COMPENSATION OF MANAGEMENT OF HOLDCO AND SDN . . . .134
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HOLDCO AND SDN. . . . . . . . . . . . .138
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGARDING HOLDCO AND SDN. . . . . . . . . . . . . . . . .141
Sale of SDN Common Stock to Fund Liberty Acquisition. . .141
Subscription Agreements to Fund CSB Acquisition . . . . .141
Registration Rights Agreement with Dartmouth
Capital Group . . . . . . . . . . . . . . . . . . . . .141
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDCO COMMON STOCK
AND HOLDERS OF CSB COMMON STOCK . . . . . . . . . . . . .142
Introduction. . . . . . . . . . . . . . . . . . . . . . .142
Certain Voting Rights . . . . . . . . . . . . . . . . . .142
Dividends . . . . . . . . . . . . . . . . . . . . . . . .143
Election of Directors . . . . . . . . . . . . . . . . . .143
Removal of Directors; Filling Vacancies on the
Board of Directors. . . . . . . . . . . . . . . . . . .143
Special Meetings of Shareholders; Shareholder Action by
Written Consent. . . . . . . . . . . . . . . . . . . . 143
Amendment of Bylaws . . . . . . . . . . . . . . . . . . .144
Amendment of Charter. . . . . . . . . . . . . . . . . . .144
Dissenters' Rights. . . . . . . . . . . . . . . . . . . .144
Certain Business Combinations and Reorganizations . . . .145
Relative Rights of SDN Shareholders and Holdco
Shareholders. . . . . . . . . . . . . . . . . . . . . .145
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .145
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . .146
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . .147
ANNEX 1 AGREEMENT AND PLAN OF REORGANIZATION
ANNEX 2 REPRINT OF CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE --
RIGHTS OF DISSENTING SHAREHOLDERS
7
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SUMMARY OF INFORMATION STATEMENT/PROSPECTUS
The following summary is intended to highlight certain information
contained elsewhere in this Information Statement/Prospectus or in documents
incorporated herein by reference. This summary is not intended to be a
complete statement of all material features of the Transaction and the
matters subject to approval by the CSB shareholders, and is qualified in its
entirety by the more detailed information contained herein, the Appendices
hereto and the documents incorporated by reference herein. Each CSB
shareholder is urged to read this Information Statement/Prospectus and the
Appendices hereto in their entirety and with care.
The Parties
SDN and Affiliates. SC Acquisition Corp. ("Holdco") is a Delaware
corporation recently formed by SDN Bancorp, Inc. ("SDN") to serve as a
holding company for SDN and Commerce Security Bank. SDN, through its banking
subsidiaries San Dieguito National Bank ("San Dieguito"), headquartered in
Encinitas, California, and Liberty National Bank ("Liberty"), headquartered
in Huntington Beach, California, provides banking and financial services to
customers, including individuals, corporations, and other institutions,
principally in the southern California. SDN is headquartered at 185 Saxony
Road, Encinitas, California 92024, telephone (619) 436-6888. Holdco is
headquartered at One Pacific Plaza, 7777 Center Avenue, Huntington Beach,
California 92647, telephone (714) 895-2929. SDN is, and upon consummation
of the Transaction Holdco will be, controlled by Dartmouth Capital Group,
L.P. (the "Dartmouth Partnership"). The Dartmouth Partnership and certain
related parties (together with the Dartmouth Partnership, the "Dartmouth
Capital Group") will beneficially own in the aggregate approximately 82% of
the Holdco Common Stock outstanding upon consummation of the Transaction.
CSB. Commerce Security Bank ("CSB") is a California-chartered
commercial bank. CSB provides banking and financial services to customers,
including individuals, corporations and other institutions, principally in
California and other western states. CSB is headquartered at 1545 River Park
Drive, Suite 200, Sacramento, California 95815, telephone (916) 922-9500.
Purposes of Information Statement/Prospectus
This Information Statement/Prospectus is being furnished to all holders
of common stock, no par value, of CSB ("CSB Common Stock") in connection with
the solicitation by the Board of Directors of CSB of the written consents of
the shareholders of CSB to the Agreement and Plan of Reorganization (the
"Reorganization Agreement") entered into as of April 23, 1996, by and between
CSB and SDN. Pursuant to the terms of the Reorganization Agreement, Holdco
will acquire CSB (the "CSB Acquisition") for a combination of $15.1 million
of cash and Holdco common stock, par value $.01 per share ("Holdco Common
Stock"), having a pro forma book value at December 31, 1995 of at least $6.2
million (collectively, the "CSB Acquisition Price"). (See "THE CSB
ACQUISITION -- Terms of the Reorganization Agreement -- CSB Acquisition
Price" herein.)
Vote Required
The affirmative vote of the holders of a majority of the shares of CSB
Common Stock outstanding and entitled to vote will be required to approve the
Reorganization Agreement and the CSB Acquisition. Approval of the
Reorganization Agreement by the requisite vote of the holders of CSB Common
Stock is a condition to, and required for, consummation of the CSB
Acquisition. (See "SOLICITATION OF WRITTEN CONSENTS OF THE SHAREHOLDERS OF
COMMERCE SECURITY BANK" herein.)
As of July 31, 1996 (the "Record Date"), 861,460 shares of CSB Common
Stock were outstanding and entitled to vote, of which approximately 781,500
shares, or approximately 90.72%, were held by directors and executive
officers of CSB. Each director of CSB has indicated his or her intention to
vote the CSB Common Stock beneficially owned by him or her for approval of
the Reorganization Agreement and the consummation of the transactions
contemplated thereby. (See "THE CSB ACQUISITION -- Terms of the
Reorganization Agreement -- Interests of Certain Persons; Related Agreements"
herein.)
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Terms of the Reorganization
The transaction will be effected by means of two contemporaneous reverse
triangular mergers (collectively, the "Transaction"). As discussed in more
detail herein, SDN has organized Holdco under Delaware law as a subsidiary of
SDN. The Reorganization Agreement provides that Holdco will form two
wholly-owned interim subsidiaries, one of which will merge with and into SDN
and the other of which will merge with and into CSB. As a result of the
Transaction, CSB and SDN will become wholly-owned subsidiaries of Holdco, all
of the then former SDN shareholders will become shareholders of Holdco and
some or all of the then former CSB shareholders will become shareholders of
Holdco. (See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
Structure of the Transaction" herein.)
Sixty percent (60%) of the outstanding shares of CSB Common Stock will
be exchanged for cash equal to approximately 150% of CSB's book value per
share at December 31, 1995, and forty percent (40%) of the outstanding shares
of CSB Common Stock will be exchanged for a number of shares of Holdco Common
Stock having an aggregate pro forma book value, as of December 31, 1995,
equal to CSB's book value as of that date (subject to certain possible
reductions as described below). Each CSB shareholder (excluding those who
have properly exercised statutory dissenters' rights) will have the right to
elect whether to receive cash, Holdco Common Stock, or a combination of cash
and Holdco Common Stock, in exchange for his or her CSB Common Stock, subject
to possible proration to ensure that, in the aggregate, sixty percent (60%)
of the outstanding CSB Common Stock is exchanged for cash and forty percent
(40%) of the outstanding CSB Common Stock is exchanged for Holdco Common
Stock. (See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
CSB Acquisition Price" herein.)
The CSB Acquisition Price payable by Holdco for all of the outstanding
shares of CSB Common Stock is subject to two possible adjustments. The
first, which will be resolved prior to the consummation of the CSB
Acquisition, is intended to address the potential exposure to CSB which SDN
perceived to be inherent in certain pending litigation, recourse loan claims
and real estate assets. The maximum effect on the CSB shareholders as a
result of this possible adjustment would be a reduction of the CSB
Acquisition Price by $400,000, subject to the authority of CSB's Board of
Directors to agree to a higher maximum in its sole discretion. The second
potential adjustment to the CSB Acquisition Price relates to the contingency
that a special assessment may be levied against institutions such as CSB, the
deposits of which are insured by the FDIC Savings Association Insurance Fund
("SAIF"). CSB and SDN expect that shares of Holdco Common Stock will be set
aside in an escrow account along with a payment obligation (secured by a
standby letter of credit), both as of the closing of the CSB Acquisition to
address the SAIF contingency. The maximum effect on the CSB shareholders as
a result of this contingency would be a reduction of the CSB Acquisition
Price by $345,000 of cash and shares having an aggregate pro forma book value
at December 31, 1996 of $230,000. (See "THE CSB ACQUISITION -- Terms of the
Reorganization Agreement -- Potential Adjustments to the CSB Acquisition
Price" herein.)
No fractional shares of Holdco Common Stock will be issued in the
Transaction. In lieu thereof, each holder of CSB Common Stock who otherwise
would have been entitled to a fractional share of Holdco Common Stock will
receive cash in an amount equal to the product of (I) the amount of cash
payable per share of CSB Common Stock that is exchanged for cash in the CSB
Acquisition, multiplied by (ii) the fraction of a share of CSB Common Stock
that would otherwise have been converted into a share of Holdco Common Stock.
(See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
Fractional Shares" herein.)
Provided that all of the conditions to the Transaction are met (or
waived), the Transaction will become effective on the date and time (the
"Effective Time") as set forth in the certificates of merger which will be
filed with, respectively, the Secretary of State of Delaware and the
Secretary of State of California to effect the mergers between the two
interim subsidiaries and, respectively, SDN and CSB. (See "THE CSB
ACQUISITION -- Terms of the Reorganization Agreement --Conditions to the
Transaction" and "-- Termination" herein.)
9
<PAGE>
Recommendation of the CSB Board of Directors and Reasons for the CSB Acquisition
THE CSB BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE CSB SHAREHOLDERS APPROVE AND
ADOPT THE REORGANIZATION AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE CSB ACQUISITION.
The CSB Board believes that the terms of the Reorganization Agreement
are fair and in the best interests of CSB and its shareholders. The terms of
the Reorganization Agreement were reached on the basis of arms' length
negotiations between CSB and SDN. In the course of reaching its decision to
approve the Reorganization Agreement, the CSB Board consulted with its legal
advisors regarding the legal terms of the Reorganization Agreement and the
CSB Board's obligations in consideration thereof, and with its financial
advisor, Carpenter & Company ("Carpenter"), regarding the financial terms of
the Reorganization Agreement and the fairness of the CSB Acquisition Price to
the holders of CSB Common Stock from a financial standpoint. (See "THE CSB
ACQUISITION -- Background of the CSB Acquisition" and "SOLICITATION OF
WRITTEN CONSENTS OF THE SHAREHOLDERS OF COMMERCE SECURITY BANK --
Recommendation" herein.)
Fairness Opinion of Financial Advisor
Seapower Carpenter Capital Inc dba Carpenter & Company
("Carpenter&Company"), CSB's financial advisor, has rendered its oral opinion
as of February 20, 1996, to the CSB Board that the CSB Acquisition Price,
taken as a whole, was fair from a financial point of view to the holders of
CSB Common Stock. Carpenter rendered financial advisory services to CSB
throughout the negotiation of the Transaction. CSB has agreed to pay a fee
to Carpenter for those services that is contingent upon consummation of the
CSB Acquisition. (See "THE CSB ACQUISITION -- Background of the CSB
Acquisition" herein for a further description of the opinion of Carpenter,
the fee payable to Carpenter and certain relationships between Carpenter and
SDN.)
Risk Factors
An investment in Holdco, including an investment as a consequence of
receiving Holdco Common Stock in the CSB Acquisition, entails certain risks.
The SDN Common Stock is not listed on any exchange, is not quoted on Nasdaq,
is infrequently traded on the over-the-counter market, and it is expected
that the same will be true of the Holdco Common Stock immediately following
the CSB Acquisition. Other risks include the fact that Holdco will be
substantially controlled by a single shareholder group. (See "INVESTMENT
CONSIDERATIONS RELATING TO HOLDCO COMMON STOCK" herein.)
Management and Operations of Holdco Following the Transaction
From and after the Effective Time, the Holdco Board of Directors will
consist of each of the current directors of SDN, together with Peter H.
Paulsen, the current Chairman of CSB.
The executive officers of Holdco after the Transaction will be comprised
of SDN's current senior management. Robert P. Keller, the current Chief
Executive Officer and President of SDN, will be the Chief Executive Officer
and President of Holdco following the Transaction. In addition, the other
persons listed under "DIRECTORS AND EXECUTIVE OFFICERS OF HOLDCO AND SDN"
will be executive officers of Holdco following the Transaction.
Immediately following the consummation of the Transaction, Holdco's
operations will consist of the current operations of SDN and the current
operations of CSB. The total consolidated assets of SDN at March 31, 1996
($223 million) and of CSB at that date ($216 million) are of approximately
equal size. (See "PRO FORMA FINANCIAL INFORMATION" herein.) It is
anticipated that SDN and CSB will continue to operate as separate entities in
their respective markets, but that certain products will be shared or
cross-marketed and that certain common expenses will be eliminated. (See
"THE CSB ACQUISITION -- SDN's Reasons for the CSB Acquisition" and "-- "CSB's
Reasons for the CSB Acquisition" herein.)
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Conversion of CSB Common Stock
Each CSB shareholder will have the option of conditionally electing to
convert each of his or her shares of CSB Common Stock into either Holdco
Common Stock (the "Conditional Stock Election") or cash (the "Conditional
Cash Election"). A CSB shareholder may also conditionally elect to have a
certain number of his shares of CSB Common Stock converted pursuant to a
Conditional Stock Election and a certain number converted pursuant to a
Conditional Cash Election (the "Conditional Joint Election"). A CSB
shareholder may also elect that he or she has no preference as to which type
of consideration he or she will receive in exchange for his or her CSB Common
Stock ("No Election"). The conditional elections to be made by the CSB
shareholders are subject to certain limitations. Such limitations may result
in a CSB shareholder who has made a Conditional Stock Election being required
to receive a certain portion of his or her consideration in cash or a CSB
shareholder who has made a Conditional Cash Election being required to
receive a certain portion of his or her consideration in the form of Holdco
Common Stock. Holders of 100 or fewer shares of CSB Common Stock will be
afforded certain preferential rights in the exercise of their election.
(See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
Allocation Procedure" herein.)
Conditions to the Consummation of the Transaction
Consummation of the Transaction is subject to certain conditions,
including the approval of the Reorganization Agreement by the affirmative
vote of the holders of a majority of the shares of CSB Common Stock
outstanding and entitled to vote thereon; approval of the Transaction by
certain federal and state regulatory authorities; receipt by CSB of an
opinion of counsel regarding the treatment of the Transaction for federal
income tax purposes; and certain other customary closing conditions. There
can be no assurance as to when and if such conditions will be satisfied (or,
where permissible, waived) or that the Transaction will be consummated. (See
"THE CSB ACQUISITION -- Terms of the Reorganization Agreement--Conditions to
the Transaction" and "-- Regulatory Approvals" herein).
Regulatory Approvals
The Transaction is subject to approval by the Board of Governors of the
Federal Reserve System (the "FRB") and to the approval of the Superintendent
of Banks of the State of California (the "Superintendent"). Prior to the
date of this Information Statement/Prospectus, Holdco has filed applications
with the FRB and the Superintendent with respect to the Transaction.
Assuming the FRB's, the Superintendent's and any other required
regulatory approvals for the Transaction are obtained, the Transaction may
not be consummated for at least 15 days (and possibly up to 30 days) after
such approvals are issued, during which time the United States Department of
Justice may challenge the Transaction on antitrust grounds. The Transaction
will not proceed until all regulatory approvals required to consummate the
Transaction have been obtained, such approvals are in full force and effect
and all statutory waiting periods in respect thereof have expired. There can
be no assurance that the Transaction will be approved by the appropriate
federal and state regulators of whom approval is required. If such approvals
are received, there can be no assurance as to the date of such approvals or
the absence of any litigation challenging such approvals. (See "THE CSB
ACQUISITION -- Regulatory Approvals" herein.)
Certain Federal Income Tax Consequences
CSB's obligation to consummate the Transaction is conditioned upon CSB
receiving, at the time of the Closing, an opinion (the "Tax Opinion") from
Nutter, McClennen & Fish, LLP, SDN's counsel, confirming, subject to
limitations, exclusions and qualifications contained in the Tax Opinion and
summarized in this Information Statement/Prospectus, the tax consequences of
the Transaction to the CSB shareholders. Subject to those limitations,
exclusions and qualifications, and based on the Tax Opinion, the material
aspects of those tax consequences will be as follows: (a) (I) the CSB
Acquisition will be treated as a contribution of property to Holdco pursuant
to Section 351 of the Internal Revenue Code of 1986, as amended, and (ii) the
CSB shareholders will recognize no income for federal income tax purposes as
a consequence of the Transaction except to the extent that they receive cash
in exchange for their shares of CSB Common Stock, and (b) none of CSB, SDN or
Holdco will recognize gain or loss as a consequence of the Transaction. The
Tax Opinion will be premised on, among other things, representation letters
provided by CSB, SDN, Holdco and certain other persons to SDN's counsel
containing statements relating to planned dispositions of Holdco Common Stock
by CSB shareholders, plans on the part of Holdco to undertake transactions
outside the ordinary course of business, and other requirements. The Tax
Opinion will not address the federal income tax
11
<PAGE>
implications of the escrow arrangements described herein. (See "THE CSB
ACQUISITION -- Certain Federal Income Tax Consequences" herein.)
EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN ADVISORS REGARDING THE
TAX CONSEQUENCES OF THE TRANSACTION TO HIM OR HER UNDER FEDERAL, STATE,
LOCAL OR ANY OTHER APPLICABLE LAW. (SEE "THE CSB ACQUISITION -- CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" HEREIN.)
Accounting Treatment
The Transaction will be accounted for under the purchase method of
accounting for financial reporting purposes. (See "THE CSB ACQUISITION --
Accounting Treatment" herein.)
Termination of the Reorganization Agreement
The Reorganization Agreement may be terminated by either CSB or SDN
prior to the consummation of the CSB Acquisition upon the occurrence of any
of the following events: (I) mutual written agreement between the parties;
(ii) a final determination by any regulatory agency denying an application of
Holdco, CSB or any of their respective affiliates, the granting of which
application is essential to the consummation of the CSB Acquisition; or (iii)
any final order, decree or judgment of any court of competent jurisdiction
would be violated by the consummation of the Transaction.
SDN may also unilaterally terminate the Reorganization Agreement prior
to the consummation of the CSB Acquisition upon (I) the payment to CSB of a
termination fee in the amount of $1.2 million; (ii) certain breaches of the
Reorganization Agreement by CSB; (iii) the failure of a condition precedent
to SDN's or Holdco's obligations to perform under the Reorganization
Agreement to be satisfied as of the Closing Date; (iv) the failure of CSB to
reaffirm its intent to proceed with the Transaction following receipt by CSB
of a third party acquisition proposal; (v) the imposition by a regulatory
agency of a condition to its approval of the Transaction that would require
SDN to make a capital contribution to Holdco in excess of the "Maximum
Required Capital Contribution", as defined in the Reorganization Agreement;
or (vi) the failure of the CSB Acquisition to be consummated on or before
December 31, 1996 (unless such failure results from a breach of warranty or
covenant of either SDN or Holdco).
CSB may also unilaterally terminate the Reorganization Agreement prior
to consummation of the CSB Acquisition upon the occurrence of any of the
following events: (I) the payment to SDN of a termination fee in the amount
of $1.2 million; (ii) certain breaches of the Reorganization Agreement by
SDN, (iii) the failure of a condition precedent to CSB's obligations to
perform under the Reorganization Agreement to be satisfied as of the Closing
Date; or (iv) the consummation of the CSB Acquisition has not occurred by
December 31, 1996 (unless such failure results from a breach of warranty or
covenant of CSB). (See "THE CSB ACQUISITION -- Terms of the Reorganization
Agreement-- Termination of the Reorganization Agreement" herein.)
Termination Fee and Liquidated Damages
CSB has agreed to pay to SDN, as liquidated damages, the sum of $1.2
million if CSB unilaterally terminates the Reorganization Agreement without
cause or if SDN terminates the Reorganization Agreement because CSB has
either breached a fundamental operating covenant, elected to proceed with a
third party acquisition proposal (thereby abandoning the Reorganization
Agreement) or otherwise failed to consummate the CSB Acquisition despite the
fact that all conditions precedent to CSB's obligations to perform have been
satisfied. If SDN terminates the Reorganization Agreement because of a
breach by CSB of a warranty or covenant that is not deemed a fundamental
operating covenant, CSB has agreed to pay SDN, as liquidated damages, the sum
of $300,000.
SDN and Holdco, jointly and severally, have agreed to pay to CSB, as
liquidated damages, the sum of $1.2 million if SDN unilaterally terminates
the Reorganization Agreement without cause or if CSB terminates the
Reorganization Agreement because either SDN or Holdco has breached its
warranty or covenant relating to the financing of the CSB Acquisition or SDN
or Holdco has failed to consummate the CSB Acquisition despite the fact that
all conditions precedent to their respective obligations to perform have been
satisfied. If CSB terminates the Reorganization Agreement because of a
breach by SDN or Holdco of a warranty or covenant not related to the
financing of the CSB Acquisition, SDN and Holdco have agreed to pay CSB, as
liquidated damages, the sum of $300,000. Finally, if either party terminates
the Reorganization Agreement because of SDN's failure to obtain all requisite
regulatory approvals or if SDN terminates the Reorganization
12
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Agreement because such approval is conditioned upon SDN making a capital
contribution to Holdco in excess of the Maximum Required Capital
Contribution, SDN and Holdco have agreed to pay CSB, as liquidated damages,
the sum of $150,000, provided such denial or conditioning of the regulatory
approval was not caused by any action or omission by CSB.
Waiver and Amendment
Prior to the Effective Time, CSB and SDN, by action taken or authorized
by their respective Boards of Directors, may, to the extent legally allowed,
(I) extend the time for the performance of any of the obligations or other
acts required of the other party contained in the Reorganization Agreement;
(ii) waive any inaccuracies in the representations and warranties of the
other party contained in the Reorganization Agreement or in any document
delivered pursuant to the Reorganization Agreement; (iii) waive compliance by
the other party of any of its agreements or conditions contained in the
Reorganization Agreement, or (iv) amend the Reorganization Agreement, except
that after CSB shareholder approval, no extension or waiver shall reduce the
amount or change the form of consideration to be delivered to CSB's
shareholders under the Reorganization Agreement without further approval of
CSB's shareholders other than as a result of any agreement by CSB to increase
the amount of the maximum adjustment to the CSB Acquisition Price. (See "THE
CSB ACQUISITION -- Terms of the Reorganization Agreement -- Potential
Adjustments to the CSB Acquisition Price" herein.)
Interests of Certain Persons in the Transaction
The Reorganization Agreement provides that the directors of CSB
immediately prior to the consummation of the CSB Acquisition will be
directors of CSB immediately following the consummation of the CSB
Acquisition. Peter H. Paulsen, the Chairman of the Board of Directors of
CSB, will also become a director of Holdco upon consummation of the CSB
Acquisition. Additionally, the officers and other employees of CSB
immediately prior to the consummation of the CSB Acquisition will all be
employed in substantially the same capacities by CSB immediately following
the CSB Acquisition. The CSB Board was aware of those interests and
considered them, among other matters, in approving the Reorganization
Agreement and the transactions contemplated thereby. (See "DIRECTORS AND
OFFICERS OF HOLDCO AND SDN" and "THE CSB ACQUISITION -- Terms of the
Reorganization Agreement -- Interests of Certain Persons in the
Reorganization Agreement" herein.)
Dissenters' Rights
Holders of CSB Common Stock who comply with the requirements of Section
1300 et seq. of the California Corporations Code will be entitled to
dissenters' rights in connection with the Transaction. A copy of the
applicable sections is attached to this Information Statement/Prospectus as
Annex 2. (See "THE CSB ACQUISITION -- Dissenting Shareholders' Rights"
herein and Annex 2 to this Information Statement/Prospectus.)
Certain Differences in the Rights of Shareholders
The rights of shareholders of CSB are currently governed by the
California Corporations Code, CSB's Articles of Incorporation and CSB's
bylaws. Upon consummation of the Transaction, CSB shareholders who receive
Holdco Common Stock in the CSB Acquisition will become shareholders of
Holdco, and their rights will be governed by the Delaware General Corporation
Law, Holdco's Certificate of Incorporation and Holdco's bylaws. (See
"COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDCO COMMON STOCK AND HOLDERS OF
CSB COMMON STOCK" herein.)
13
<PAGE>
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
The unaudited information set forth on the following page reflects
certain comparative per common share data related to income per share and
book value per share (I) on a historical basis for SDN and CSB; (ii) on a pro
forma combined basis per share of Holdco Common Stock assuming consummation
of SDN's acquisition of Liberty (the "Liberty Acquisition") on January 1,
1995; (iii) on a pro forma combined basis per share of Holdco Common Stock
assuming consummation of the CSB Acquisition and the Liberty Acquisition on
January 1, 1995; and (iv) on an equivalent pro forma combined basis per share
of CSB Common Stock assuming consummation of the CSB Acquisition and the
Liberty Acquisition on January 1, 1995. The pro forma per share data for the
years ended December 31, 1994 and 1993 do not take into account the effect of
the CSB Acquisition or the Liberty Acquisition, because such transactions
were or will be accounted for under the purchase method of accounting. The
Liberty Acquisition was consummated on March 31, 1996. It is anticipated
that the CSB Acquisition will be consummated in the third quarter of 1996.
The information shown below should be read in conjunction with the
consolidated historical financial statements of SDN, and CSB and the
historical financial statements of Liberty including the respective notes
thereto, which are included elsewhere in this Information
Statement/Prospectus and the unaudited pro forma condensed combined financial
information, including the notes thereto, which appear elsewhere in this
Information Statement/Prospectus. In the opinion of management, such
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (which consist solely of normal recurring adjustments) necessary
for a fair presentation of the information set forth therein. The pro forma
data is presented for comparative purposes only and is not necessarily
indicative of the combined financial position or results of operations which
would have been realized had the acquisitions been consummated during the
periods or as of the dates for which the pro forma data is presented.
(See "INDEX TO FINANCIAL STATEMENTS", "PRO FORMA FINANCIAL INFORMATION"
and "SELECTED CONSOLIDATED FINANCIAL DATA OF CSB and SDN" herein.)
14
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR
THE THREE
MONTHS ENDED
MARCH 31, 1996 YEAR ENDED DECEMBER 31,
-------------- -------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C> <C>
Holdco Common Stock:
Income (loss) per share before extraordinary item:
SDN Historical (1)............................................ $ 0.02 $ (2.35) $ (18.41) $ (36.78)
SDN Pro Forma (2)............................................. 0.05 0.02 -- --
Holdco/CSB Pro Forma (3)...................................... 0.01 0.04 -- --
Book value per share at period end:
SDN Historical (1)............................................ 3.96 3.95
SDN Pro Forma (2)............................................. 3.96 3.95 -- --
Holdco/CSB Pro Forma (3)...................................... 3.95 3.95 -- --
CSB Common Stock:
Net income (loss) per share:
Historical.................................................... $ (0.25) $ 0.83 $ 1.28 $ 2.91
Holdco/CSB Pro Forma Equivalent (4)........................... 0.05 0.21 -- --
Book value per share at period end:
Historical.................................................... 19.19 19.45 18.60 17.31
Holdco/CSB Pro Forma Equivalent (4)........................... 18.61 18.61 -- --
</TABLE>
(1) As of the date of this Information Statement/Prospectus, Holdco had no
assets. SDN historical data is derived from SDN's consolidated financial
statements included elsewhere in this Information Statement/Prospectus.
(2) Assumes completion of the Liberty Acquisition as of January 1, 1995.
Reflects the issuance of 3,392,405 shares of SDN Common Stock to Dartmouth
Capital Group to fund the Liberty Acquisition. SDN pro forma data is not
presented for the years ended December 31, 1994 and 1993, because the
Liberty Acquisition was accounted for under the purchase method of
accounting.
(3) Assumes each of the Liberty Acquisition and the CSB Acquisition was
completed as of January 1, 1995. Assumes the issuance of 1,622,278 shares of
Holdco Common Stock to CSB shareholders based upon an assumed Exchange Ratio
of 4.7079 shares of Holdco Common Stock for approximately 40% of the shares
of CSB Common Stock. Also assumes the issuance, prior to the SDN Merger, of
3,873,418 shares of SDN Common Stock to the Dartmouth Capital Group in
exchange for cash to fund the acquisition of the remaining 60% of the shares
of CSB Common Stock. Holdco/CSB pro forma data is not presented for the
years ended December 31, 1994 and 1993, because the Liberty Acquisition was,
and the CSB Acquisition will be, accounted for under the purchase method of
accounting.
(4) Holdco/CSB Pro Forma Equivalent share amounts are calculated by multiplying
the Holdco/CSB Pro Forma per share amounts by the Exchange Ratio of 4.7079.
Holdco/CSB Pro Forma Equivalent per share data do not reflect the cash
consideration payable to CSB shareholders in addition to Holdco Common
Stock. As described elsewhere in this Information Statement/ Prospectus,
approximately 60% of the CSB Acquisition Price will be payable in cash.
15
<PAGE>
INVESTMENT CONSIDERATIONS RELATING TO
HOLDCO COMMON STOCK
In considering the proposal to approve the CSB Acquisition, as well
as in considering whether to exercise dissenters' rights, CSB shareholders
should carefully consider, in addition to all other portions of this
Information Statement/Prospectus, the following factors regarding Holdco.
Limited Operating History
Holdco is a Delaware corporation formed in May 1996 as a
wholly-owned subsidiary of SDN. As of the date of this Information
Statement/Prospectus, it has conducted no business activity and has no
significant assets. Upon consummation of the Transaction, Holdco will have
two subsidiaries: SDN and CSB. SDN in turn will continue to have two
operating bank subsidiaries: San Dieguito and Liberty; CSB will itself
continue to be an operating bank. San Dieguito, Liberty and CSB may be
collectively referred to in this Information Statement/Prospectus as the
"Operating Banks".
SDN has a limited operating history under current management, and
Liberty has been part of SDN's operations only since March 31, 1996. Prior
to September 1995, SDN was operated by executive officers unaffiliated with
the current executive officers of SDN and, while Liberty's bank-level
officers remain substantially the same as those who operated Liberty prior to
March 1996, those Liberty officers have operated Liberty under the direction
of SDN's executive officers and board of directors only since March 1996.
(For detailed information regarding SDN (including San Dieguito and
Liberty) and CSB, see "INFORMATION REGARDING THE BUSINESS OF SDN" and
"INFORMATION REGARDING THE BUSINESS AND PROPERTIES OF CSB" herein.)
Certain Risks Associated with CSB Acquisition
The CSB Acquisition will produce risks typically associated with
the merger of two independent organizations, including the possibility that
the integration of the businesses of the companies after the CSB Acquisition
may cause interruptions and dislocations which may adversely affect the
business and results of operations of the combined company and that the
combined resources of the companies may not be adequate to deal successfully
with the needs of the combined company. In addition, there can be no
assurance that the synergies that the Boards of Directors of SDN and CSB
expect to result from the CSB Acquisition will in fact occur.
The closing of the CSB Acquisition is conditioned upon CSB's
receipt of an opinion from SDN's counsel that (a) the CSB shareholders will
recognize no gain or loss for federal income tax purposes as a consequence of
the CSB Acquisition except to the extent that they receive cash in exchange
for their shares of CSB Common Stock, and (b) none of SDN, CSB or Holdco will
recognize gain or loss for federal income tax purposes as a consequence of
the Transaction. There are, however, no assurances that the Internal Revenue
Service ("IRS") will not challenge such treatment and that any such challenge
would not be successful. Neither CSB no Holdco intends to seek a ruling from
the IRS as to the tax consequences of the Transaction.
The Boards of Directors of SDN and CSB considered the foregoing
possibilities. After such consideration and consideration of the factors
listed under "THE CSB ACQUISITION -- Background of the CSB Acquisition,"
"CSB's Reasons for the CSB Acquisition, and "SDN's Reasons for the CSB
Acquisition," the Boards of Directors of SDN and CSB determined that the CSB
Acquisition is in the best interests of their respective companies and
shareholders and approved the Reorganization Agreement.
Illiquidity of Holdco Common Stock
No active market currently exists for the SDN Common Stock, and it is
not anticipated that an active market will exist for the Holdco Common Stock
during the period immediately following the CSB Acquisition. While Holdco
will have over 400 shareholders of record, less than 5% of the Holdco Common
Stock will be held by persons other than (a) Dartmouth
16
<PAGE>
Capital Group, L.P. (the "Dartmouth Partnership"), SDN's current controlling
stockholder, (b) investors in the Dartmouth Partnership (collectively with
the Dartmouth Partnership, the "Dartmouth Capital Group"), or Peter H.
Paulsen, CSB's current controlling stockholder. The SDN Common Stock is not
listed on any exchange, is not quoted on Nasdaq, and is infrequently traded
on the over-the-counter market. It is expected that the same will be true of
the Holdco Common Stock during the period immediately following the CSB
Acquisition. A long-term goal of SDN's management is to increase the trading
market in its, and after the Transaction, Holdco's, Common Stock. However,
there can be no assurance that such a trading market will develop.
Control by Dartmouth Capital Group
Currently, less than 1.5% of SDN Common Stock is held by
persons other than the Dartmouth Capital Group. Following the consummation of
the CSB Acquisition, the Dartmouth Capital Group would continue to hold in
excess of 80% of the outstanding Holdco Common Stock. The Dartmouth
Partnership has advised SDN that it has no present plans to reduce its
interest in SDN or Holdco, as applicable, to less than a majority of the
outstanding common stock of the applicable entity. After the CSB
Acquisition, the Dartmouth Capital Group will have the power to elect
Holdco's Board of Directors, thereby controlling its policy decisions, and to
approve any action requiring shareholder consent, including adopting
amendments to Holdco's certificate of incorporation and approving or
disapproving mergers or sales of all or substantially all of the assets of
Holdco. (See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF HOLDCO AND SDN" herein.)
Mr. Robert P. Keller, Chief Executive Officer and President of
SDN and, following the CSB Acquisition, Chief Executive Officer and President
of Holdco, is also President and Chief Executive Officer of the general
partner of the Dartmouth Partnership. Each member of SDN's current Board of
Directors, and all but one member of Holdco's Board of Directors immediately
following the CSB Acquisition, are investors in the Dartmouth Partnership.
(See "DIRECTORS AND EXECUTIVE OFFICERS OF HOLDCO AND SDN" herein.)
Strategic Plan of Holdco
Holdco's anticipated strategic plan following the Closing
Date, like SDN's current strategic plan, involves active and substantial
efforts to acquire or enter into business combinations with other financial
institutions. (See "THE CSB ACQUISITION -- SDN's Reasons for the CSB
Acquisition" herein.) Such acquisitions entail inherent risks, certain of
which are discussed immediately below. In addition, there can be no
assurance that Holdco will in fact be able to acquire or combine with any
other institution after the Closing Date. SDN's acquisitions to date
(including the CSB Acquisition) have been completed or contracted for with
the financial support of SDN's controlling shareholder group, the Dartmouth
Capital Group. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING
HOLDCO AND SDN -- Sale of Common Stock to Fund Liberty Acquisition" and "--
Subscription Agreements to Fund CSB Acquisition" herein.) There can be no
assurance that the Dartmouth Capital Group will be able or willing to finance
any acquisition that Holdco may propose after the consummation of the
Transaction.
Risks Related to Growth Strategy and Integration of Operating Banks
Holdco is subject to various risks associated with its
acquisition growth strategy. Among those are the risks that Holdco will be
unable to integrate and manage effectively the previously disparate
operations of the Operating Banks after the completion of the Transaction, or
to integrate and manage effectively the operations of any institution that
Holdco may acquire thereafter.
Dependence on Keller
Holdco will depend heavily on the services of Robert P.
Keller, the President and Chief Executive Officer of Holdco. The loss of Mr.
Keller's services could adversely affect Holdco.
17
<PAGE>
Risks Related to Goodwill
Had Holdco completed the Transaction as of March 31, 1996,
Holdco would have had pro forma total consolidated assets of approximately
$442.2 million and pro forma total consolidated stockholders' equity of $35.3
million, of which approximately $9.3 million, or approximately 26% of
stockholders' equity, would have been goodwill. (See "PRO FORMA FINANCIAL
INFORMATION" herein.) Goodwill is the excess of cost over the fair value of
the net assets of the business acquired. Generally accepted accounting
principles require that the assets and liabilities of acquired businesses be
stated at fair value. The pro forma combined presentation does not reflect
an adjustment of the assets and liabilities of CSB to fair value. At the
time the Transaction is completed, those assets and liabilities will be
restated at fair value and, as a result, the amount of goodwill will be
adjusted to reflect the change in net assets acquired. There can be no
assurance that the value of such goodwill will ever be realized by Holdco.
The goodwill will be amortized on a straight-line basis over varying periods.
Holdco evaluates on a regular basis whether events and circumstances have
occurred that indicate all or a portion of the carrying amount of goodwill
may no longer be recoverable, in which case an additional charge to earnings
would become necessary. Although as of the date of this Information
Statement/Prospectus, the net unamortized balance of goodwill on the March
31, 1996 pro forma balance sheet of Holdco was not considered to be impaired,
any such future determination requiring the write-off of a significant
portion of unamortized goodwill may adversely affect the results of
operations of Holdco.
18
<PAGE>
THE CSB ACQUISITION
Background of the CSB Acquisition
In September 1995, CSB commenced preliminary discussions with
SDN, culminating in the execution of a letter of intent by those parties on
January 24, 1996. Since that date, substantial negotiations have taken place
among certain of the executive officers and directors of, and counsel for,
CSB and SDN as well as consultations with CSB's accountants for the purpose
of negotiating a definitive agreement for effecting the CSB Acquisition.
Negotiations were completed and the Reorganization Agreement was executed on
April 23, 1996.
CSB engaged Seapower Carpenter Capital Inc dba Carpenter &
Company ("Carpenter&Company") in October 1995 to assist CSB in evaluating
and developing proposed transaction which would provide liquidity and fair
value for CSB's shareholders. Carpenter & Company, located in Irvine,
California, is a registered broker/dealer and member of the NASD that, among
other things, provides financial advisory services. Although CSB has not
received a written fairness opinion regarding the CSB Acquisition Price, CSB
has received an oral opinion from Carpenter & Company, which has previously
reviewed CSB's financial statements and certain other materials provided by
CSB. Based on that review and in reliance thereon, it is the opinion of
Carpenter & Company that, as of the date of the Reorganization Agreement, the
terms of the CSB Acquisition, taken as a whole, are fair to the shareholders
of CSB from a financial standpoint. Assuming the Transaction is consummated,
Carpenter & Company will receive a fee for its services consisting of cash in
an amount equal to 3% of the cash payable to the CSB shareholders, plus
shares of Holdco Common Stock equal in number to 3% of the aggregate number
of shares of Holdco Common Stock delivered to the CSB shareholders. From
time to time, both before and after the date of the Reorganization Agreement,
Carpenter & Company has provided financial advisory services to SDN and the
Dartmouth Partnership, and Carpenter & Company has received customary fees
for those services. Recent services include acting as SDN's financial
advisor in connection with SDN's March 31, 1996 acquisition of Liberty, for
which Carpenter & Company received a fee of approximately $150,000 in cash
and 38,300 shares of SDN Common Stock.
CSB's Board of Directors independently determined that the CSB
Acquisition Price is a fair price to the CSB shareholders. In making its
determination, CSB's Board of Directors considered a variety of factors,
including the sales prices of comparable financial institutions; information
and advice provided by Carpenter & Company; the book value, earnings per
share and return on equity of SDN; the financial condition, results of
operations and prospects of CSB and SDN; and the opportunity for CSB
shareholders to participate in the future performance of Holdco, a company
whose consolidated assets will be substantially larger than CSB's assets.
SDN's Reasons for the CSB Acquisition
Strategic Plan of SDN. Since SDN's 1995 Recapitalization
(defined below), SDN has embarked on a strategic plan that has included
acquisitions of, or strategic combinations with, other financial
institutions. SDN consummated its 1995 Recapitalization on September 30,
1995 when it sold shares of its common stock, constituting 94% of the
outstanding SDN Common Stock on a pro forma basis, to Dartmouth Capital
Group, L.P., a Delaware limited partnership (the "Dartmouth Partnership") and
certain of the Dartmouth Partnership's limited partners (collectively, the
"Direct Holders" and, together with the Dartmouth Partnership, the "Dartmouth
Capital Group"). Such sale of common stock together with other transactions
relating to that sale are referred to herein as the "1995 Recapitalization."
(For additional information regarding the 1995 Recapitalization, see "1995
RECAPITALIZATION AND CERTAIN OTHER RECENT DEVELOPMENTS -- 1995
Recapitalization" herein.)
The Dartmouth Partnership and its sole general partner,
Dartmouth Capital Group, Inc., a Delaware corporation (the "Dartmouth General
Partner"), were organized in May 1995 to acquire or make controlling
investments in one or more financial institutions and similar businesses
located principally (although not necessarily exclusively) in California.
The Dartmouth Partnership and the Dartmouth General Partner are registered
bank holding companies under the Bank Holding Company Act of 1956, as
amended. The acquisition of its controlling interest in SDN (and,
indirectly, its operating bank subsidiary, San Dieguito) in September 1995
was the Dartmouth Capital Group's first such investment. In March 1996, SDN
more than tripled its size by acquiring Liberty with financing provided by
the Dartmouth Capital Group. (See "1995 RECAPITALIZATION AND CERTAIN OTHER
RECENT DEVELOPMENTS -- Acquisition of Liberty National Bank" herein.)
19
<PAGE>
Rationale for the CSB Acquisition. SDN has sought and
continues to seek new opportunities to acquire or invest in other financial
institutions that complement its existing operations. The CSB Acquisition
will substantially diversify SDN's geographic and product concentration.
Through San Dieguito and Liberty, SDN currently offers a full range of
commercial banking services, catering especially to small businesses. Its
products include accounts receivable financing, term loans, commercial notes
and short-term commercial real estate financing and construction financing.
SDN also generates a significant volume of Small Business
Administration-guaranteed loans. CSB's principal business divisions include
its commercial banking division, which is focused on conventional commercial
loans and deposit production as well as real estate construction lending, its
mortgage division, which originates, sells, and services residential real
estate loans, and its commercial equipment leasing division, which provides
equipment leases on a wholesale basis. CSB's experience with equipment
leasing, for example, will provide increased product diversity for both of
SDN's existing subsidiaries. In addition, CSB's residential mortgage
origination division will enhance the ability of Liberty and San Dieguito to
offer a broader array of consumer products. Geographic diversity will be
achieved by combining CSB's coverage of markets in northern California and
neighboring states with San Dieguito's and Liberty's coverage of southern
California markets. The CSB Acquisition also is expected to provide certain
operating efficiencies that typically result from such a combination. Those
efficiencies include spreading certain non-interest expenses over a larger
asset and earnings base.
Possible Future Acquisitions. SDN expects that, with
the financial support of the Dartmouth Capital Group, Holdco will continue to
seek acquisitions of, or controlling investments in, other financial
institutions following the Closing Date. In addition, while SDN is not under
a definitive agreement to acquire any financial institution other than CSB as
of the date of this Information Statement/Prospectus, it is possible that SDN
may enter into such an agreement and/or consummate such a transaction prior
to the Closing Date. The consideration paid in any such transaction may be
cash, Holdco securities (including, without limitation, Holdco Common Stock),
any other consideration agreed upon by the parties to such transaction, or
any combination of the foregoing. Such an acquisition could be either
accretive or dilutive to the per-share earnings of Holdco. If the
consideration to be paid includes cash, it is likely that Holdco will raise
such cash by selling additional shares of Holdco Common Stock or other Holdco
securities, including, without limitation, sales to the Dartmouth Capital
Group. Unless such sales are made in public offerings that are registered
with the Securities and Exchange Commission, it is not anticipated that
Holdco shareholders generally (including the CSB shareholders who acquire
Holdco Common Stock in the CSB Acquisition) will have the opportunity to
purchase the offered Holdco securities. Whether such securities are issued
directly to the financial institution being acquired or its shareholders, or
are sold to raise cash needed to fund such an acquisition, it is likely that
such issuance would dilute the ownership interest of CSB shareholders who
acquire Holdco Common Stock in the CSB Acquisition.
CSB's Reasons for the CSB Acquisition
The Board of Directors of CSB determined that it needed to
pursue a course of action which would provide increased liquidity for the CSB
shareholders and enhance the ability of CSB to compete in its existing market
areas. The CSB Acquisition achieves both of those objectives. First, upon
consummation of the CSB Acquisition, the CSB shareholders will gain liquidity
for all or a substantial portion of their investment in CSB. As discussed in
more detail herein, sixty percent (60%) of the shares of CSB Common Stock
will be converted into cash, and, to the extent that CSB shareholders receive
Holdco Common Stock, CSB and SDN expect such security will have substantially
greater potential liquidity than the CSB Common Stock currently outstanding.
(See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement" herein.)
Second, CSB will benefit from the CSB Acquisition because of
increased product and geographic diversification and achievement of certain
operating efficiencies it would not be able to achieve on its own for the
foreseeable future. Additionally, the "cross-selling" or sharing of products
among the banks to be owned directly or indirectly by Holdco will create the
opportunity to provide additional products and services to CSB's customers.
Finally, with the probable influx of major out-of-state
financial institutions due to interstate banking and branching, the
competition for deposits and qualified operating personnel will increase.
Smaller independent banks will need to expand or face far more difficult
competition in the future. After consummation of the CSB Acquisition, the
combined resources of CSB and SDN will enhance CSB's ability to provide
customers an attractive alternative to those other financial institutions and
better position itself to compete with the existing financial institutions in
CSB's service areas.
20
<PAGE>
Terms of the Reorganization Agreement
General. The Reorganization Agreement provides for the
acquisition of CSB by Holdco, a Delaware corporation formed subsequent to the
execution of the Reorganization Agreement. As a result of the CSB
Acquisition, Holdco will acquire all of the outstanding shares of CSB Common
Stock (with the exception of shares as to which dissenters' rights have been
properly exercised) in exchange for cash and Holdco Common Stock. Sixty
percent (60%) of the outstanding shares of CSB Common Stock will be exchanged
for cash of Holdco equal to approximately one hundred fifty percent (150%) of
CSB's book value per share at December 31, 1995 and forty percent (40%) of
the outstanding shares of CSB Common Stock will be exchanged for a number of
shares of Holdco Common Stock having an aggregate pro forma book value, as of
December 31, 1995, approximately equal to CSB's book value as of that date.
The aggregate purchase price payable by Holdco for all of the outstanding
shares of CSB Common Stock (the "CSB Acquisition Price") is estimated at a
value of at least $21.3 million (subject to certain possible reductions in
the CSB Acquisition Price as described herein). (See "THE CSB ACQUISITION --
Terms of the Reorganization Agreement -- CSB Acquisition Price" herein.)
Consummation of the CSB Acquisition is subject to certain
closing conditions, including, without limitation, the accuracy of the
representations and warranties contained in the Reorganization Agreement,
receipt of all requisite shareholder and regulatory approvals and a
requirement that no more than ten percent (10%) of the outstanding shares of
CSB Common Stock will dissent from the CSB Acquisition. The CSB Acquisition
requires the approval of a majority of the outstanding shares of CSB Common
Stock. (See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
Conditions to the Transaction" herein.)
Structure of the Transaction. In order that the exchange of CSB
Common Stock for Holdco Common Stock receive potentially advantageous tax
treatment (see "THE CSB ACQUISITION -- Certain Federal Income Tax
Consequences" herein), the transaction will be effected by means of two
contemporaneous reverse triangular mergers (collectively, the "Transaction").
As illustrated on Diagram No. 1 on the following page, SDN has caused Holdco
to be organized under Delaware law and to become a subsidiary of SDN (Step
1). Holdco will form two wholly-owned interim subsidiaries, one a California
corporation ("CSB Merger Sub") and the other a Delaware corporation ("SDN
Merger Sub") (Step 2). The Reorganization Agreement provides that SDN Merger
Sub will merge with and into SDN (the "SDN Merger") and immediately
thereafter CSB Merger Sub will merge with and into CSB as a part of the CSB
Acquisition (Step 3). As a result of the Transaction, SDN and CSB will
become wholly-owned subsidiaries of Holdco, and all of the then former SDN
shareholders and some or all of the then former CSB shareholders will become
shareholders of Holdco (Step 4).
21
<PAGE>
DIAGRAM NO. 1
SDN/CSB
Step 1
SDN causes Holdco, a new Delaware corporation, to be formed as a wholly-owned
subsidiary of SDN.
[flow chart]
Step 2
Holdco forms two wholly-owned interim subsidiaries in order to effect the
reverse triangular mergers.
[flow chart]
Step 3
SDN Merger Sub will merge with and into SDN, each shareholder of Holdco will
receive Holdco Common Stock and SDN will become a wholly-owned subsidiary of
Holdco. Immediately thereafter, CSB Merger Sub will merge with and into CSB,
each shareholder of CSB will receive cash and/or Holdco Common Stock and CSB
will become a wholly-owned subsidiary of Holdco.
[flow chart]
22
<PAGE>
Step 4
Assuming consummation of the CSB Acquisition and the SDN Merger, the pro
forma structure of Holdco and subsidiaries would be as follows:
[flow chart]
23
<PAGE>
CSB Acquisition Price. The CSB Acquisition Price will consist of a
combination of $15.1 million in cash and Holdco Common Stock having an
aggregate pro forma book value at December 31, 1995 of $6.2 million (each
subject to certain potential adjustments as described herein), and will be
calculated as delineated below.
Gross CSB Acquisition Price Prior to Potential Adjustments. Sixty
percent (60%) of the outstanding shares of CBS Common Stock will be exchanged
for cash from Holdco equal to approximately one hundred fifty percent (150%)
of CSB's book value per share, at December 31, 1995, and forty percent (40%)
of the outstanding shares of CSB Common Stock will be exchanged for a number
of shares of Holdco Common Stock having an aggregate pro forma book value, as
of December 31, 1995, approximately equal to CSB's book value as of that date.
Accordingly, the cash component of the gross CSB Acquisition Price
(prior to potential adjustments) equals $15,078,000 and is calculated as
follows:
(1) CSB 12/31/95 Book Value = $16,753,000
(2) 150% of $16,753,000 = $25,130,000
(3) 60% of $25,130,000 = $15,078,000
-----------
The cash purchase price per share of CSB Common Stock (prior to the
effect of the potential adjustments described herein) equals $29.17 and is
calculated as follows:
(1) Number of shares of CSB Common Stock outstanding = 861,460
(2) 60% of 861,460 = 516,876
(3) $15,078,000 divided by 516,876 = $29.17
-------
Thus, each share of CSB Common Stock which is converted into cash will be
exchanged for $29.17 (subject to certain potential adjustments as described
below).
The stock portion of the gross CSB Acquisition Price is calculated as
follows:
(1) Number of shares of CSB Common Stock outstanding = 861,460
(2) 40% of 861,460 = 344,584
(3) 344,584 multiplied by the Exchange Ratio = Number of shares of
Holdco Common Stock
issuable in the CSB
Acquisition
The Exchange Ratio will be determined in accordance with Exhibit 1.1-A of
the Reorganization Agreement, a copy of which is included herewith in Annex
1. The Exchange Ratio of shares of Holdco Common Stock to shares of CSB
Common Stock is expected to range between 4.637:1 to 4.924:1, depending upon
the outcome of certain contingencies as described below. Therefore, the
total number of shares of Holdco Common Stock issuable to the CSB
shareholders will range from 1,597,836 to 1,696,732 (i.e., 344,584 shares of
CSB Common Stock multiplied by 4.637 or 4.924). Accordingly, upon
consummation of the CSB Acquisition and resolution of the SAIF contingency
described below, the CSB shareholders will ultimately own between 16.7% and
17.1% of the outstanding shares of Holdco Common Stock.
Potential Adjustments to CSB Acquisition Price. The Reorganization
Agreement provides for two potential reductions in the CSB Acquisition Price.
The first, which will be resolved prior to the consummation of the
Transaction, is intended to address the potential exposure to CSB which SDN
perceived to be inherent in certain pending litigation, recourse loan claims
and real estate assets (collectively, the "Valuation Risks"). Those risks,
and the manner in which any adjustment to the CSB Acquisition Price will be
calculated, are described on Exhibit 1.1-C to the Reorganization Agreement, a
copy of which is included herewith in Annex 1. The possible range of the
reduction in the CSB Acquisition Price resulting from the Valuation Risks
will be between $0 and a maximum of $400,000, although the CSB Board of
Directors has agreed at least to discuss a higher maximum under certain
specifically delineated circumstances but is under no obligation to agree to
any such increase. Any such reduction will be allocated sixty percent (60%)
to the cash component of the CSB Acquisition Price and forty percent (40%) to
the stock component of the CSB Acquisition Price.
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<PAGE>
The second potential reduction in the CSB Acquisition Price relates to
the contingency that a special assessment may be levied against all
depository institutions which, like CSB, are insured by the Savings
Association Insurance Fund (the "SAIF") rather than the Bank Insurance Fund
("BIF"). Such an assessment has been discussed in Congress for over one year
as part of a potential solution to the existing under funding of the SAIF.
Subject to the maximum adjustments specified below, 57.5% of the after-tax
cost of the SAIF contingency (the "SAIF Allocation"), up to a maximum of
$575,000, generally would be allocated pro rata among the cash and Holdco
Common Stock payable to the CSB shareholders. The maximum effect of the SAIF
Allocation with respect to the cash component of the CSB Acquisition Price
would be to reduce such amount by $345,000. The maximum effect on the stock
component of the CSB Acquisition Price would be to decrease the number of
shares of Holdco Common Stock otherwise distributable to the CSB shareholders
by that number of shares which has an aggregate pro forma book value as of
December 31, 1995 equal to $230,000. If legislation resolving the SAIF
contingency is not enacted prior to the consummation of the Transaction, a
stock escrow and cash payment mechanism would be established as of the
Closing Date and would remain in existence for up to two (2) years to address
that contingency. Holdco Common Stock equal to the maximum amount of the
stock portion of the SAIF Allocation (i.e., having a value of pro forma book
value at December 31, 1995 of $230,000) (the "Stock Holdback") wouldbe
deducted from the stock otherwise payable to the CSB shareholders as of the
Closing and placed into escrow at the Closing. Similarly, the cash otherwise
payable to the CSB shareholders as of the Closing would be reduced by
$345,000, the maximum amount of the cash portion of the SAIF Allocation (the
"Cash Holdback"); however, the Cash Holdback would not go into escrow at the
Closing but would instead constitute a payment obligation of Holdco, payable
to the extent described below. Holdco's obligation to pay some or all of the
Cash Holdback to the CSB shareholders through the Escrow Agent would be
secured by a standby letter of credit issued by Liberty. Any dividends or
other distributions on the stock in the Stock Holdback would be added to the
stock otherwise available for distribution to the former CSB shareholders,
and interest would be added to the cash otherwise available for distribution
to the former CSB shareholders from the Cash Holdback, accrued from the
Closing Date to a date shortly prior to distribution at a floating rate equal
to the rate paid from time to time by Liberty on its one-year certificates of
deposit over $100,000. A CSB shareholder's contingent right to receive cash
on account of the Cash Holdback would be transferable to any person upon
delivery of a notice and certain other documentation. A CSB shareholder's
contingent right to receive Holdco Common Stock on account of the Stock
Holdback would be transferable only upon the death of the applicable
shareholder.
If the SAIF contingency is resolved during the two-year period
immediately following the consummation of the Transaction, the then-former
CSB shareholders would receive (i) Holdco Common Stock out of the escrow
equal to amount, if any, by which the then-current value of the Stock
Holdback (calculated in accordance with procedures contained in the Escrow
Agreement) exceeded the stock portion (40%) of the actual SAIF Allocation,
and (ii) cash from Holdco (payable through the escrow mechanism) equal to the
amount, if any, by which the Cash Holdback exceeded the cash portion (60%) of
the actual SAIF Allocation. If the SAIF contingency is not resolved during
the two-year period immediately following the consummation of the
Transaction, the amount of stock and cash distributable to the former CSB
shareholders would be determined in accordance with a formula contained in
the Escrow Agreement which provides, in effect, that Holdco's after-tax cost
of the SAIF contingency would be deemed to be 0.51% (0.85% pre-tax)
multiplied by the amount of CSB's deposits, and approximately 43% of that
cost would be charged against the Stock Holdback and the Cash Holdback, with
the balance, if any, of the Stock Holdback and the Cash Holdback being
released to the former CSB shareholders. The pre-tax charge of 0.85% of
deposits is approximately the same charge proposed in 1995 legislation before
Congress. (See "SUPERVISION AND REGULATION OF HOLDCO AND SDN -- Recent and
Proposed Legislation -- SAIF Recapitalization" herein.) Regardless of whether
the distributions described above are made following an actual resolution of
the SAIF contingency or are made under the formula that is to be applied if
no resolution is reached within the two-year period, each former CSB
shareholder would receive stock and/or cash in the same relative proportions
as his or her final allocation of stock and/or cash immediately following the
Closing. (See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement
- -- Allocation Procedure" herein.) Following the distributions to the former
CSB shareholders, the remainder, if any, of the stock in the escrow would be
delivered to Holdco.
In sum, the CSB Acquisition Price may be reduced up to a maximum of
$975,000 as a result of the two above-described potential adjustments to such
price, although the CSB Board of Directors has agreed at least to discuss
(but has no obligation to agree to) a higher maximum under certain
circumstances. Of that amount, up to $575,000 of the CSB Acquisition Price
may be withheld from distribution to the CSB shareholders pending resolution
of the SAIF contingency for up to two (2) years following the consummation of
the CSB Acquisition. In the event that circumstances dictate that the
maximum adjustments to the CSB Acquisition Price are required to be made, (i)
the cash purchase price per share payable to the CSB shareholders electing
cash consideration would be reduced from $29.17 to approximately $28.04 and
(ii) the number of shares
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<PAGE>
of Holdco Common Stock issuable for each share of CSB Common Stock would be
reduced by 0.287 shares, thereby creating an Exchange Ratio of 4.637 shares
of Holdco Common Stock for each share of CSB Common Stock. Management of CSB
can provide no assurance that the maximum adjustments to the CSB Acquisition
Price will not be required.
Conversion of the CSB Common Stock. Each share of CSB Common Stock
issued and outstanding immediately prior to the consummation of the CSB
Acquisition (with the exception of those shares of CSB Common Stock owned by
CSB shareholders who properly exercise their dissenters' rights) will, upon
consummation of the CSB Acquisition, be automatically canceled and converted
into the right to receive a pro rata portion of the CSB Acquisition Price,
which may be in the form of either Holdco Common Stock, cash or a combination
thereof, subject to the overall constraint that sixty percent (60%) of the
outstanding CSB Common Stock be exchanged for cash and forty percent (40%) of
the outstanding CSB Common Stock be exchanged for Holdco Common Stock, all as
explained in greater detail below. Accordingly, each CSB shareholder will
have the option of conditionally electing to convert each of his or her
shares of CSB Common Stock into either Holdco Common Stock (the "Conditional
Stock Election") or cash (the "Conditional Cash Election"). A CSB
shareholder may also conditionally elect to have a certain number of his
shares of CSB Common Stock converted pursuant to a Conditional Stock Election
and a certain number converted pursuant to a Conditional Cash Election (the
"Conditional Joint Election"). A CSB shareholder may also elect that he or
she has no preference as to which type of consideration he or she will
receive in exchange for his or her CSB Common Stock ("No Election"). The
conditional elections to be made by the CSB shareholders are subject to
certain limitations. Such limitations may result in a CSB shareholder who
has made a Conditional Stock Election being required to receive a certain
portion of his or her consideration in cash or a CSB shareholder who has made
a Conditional Cash Election being required to receive a certain portion of
his or her consideration in the form of Holdco Common Stock. Holders of 100
or fewer shares of CSB Common Stock will be afforded certain preferential
rights in the exercise of their election (See "THE CSB ACQUISITION -- Terms
of the Reorganization Agreement -- Allocation Procedure" herein.)
Conditional Stock Election. Each CSB shareholder who makes a
Conditional Stock Election will be entitled to receive a certain number of
shares of Holdco Common Stock (the "Stock Election Conversion Shares") in
exchange for each share of CSB Common Stock converted pursuant to his or her
Conditional Stock Election, subject to the Cash/Stock Conversion Requirement
(defined below). (See "THE CSB ACQUISITION -- Terms of the Reorganization
Agreement -- Allocation Procedure" herein.) The number of Stock Election
Conversion Shares to be exchanged for each share of CSB Common Stock subject
to a Conditional Stock Election will be determined by reference to the
Exchange Ratio. The Exchange Ratio of shares of Holdco Common Stock to CSB
Common Stock is expected to range between 4.637:1 to 4.924:1, depending upon
the resolution of certain contingencies. (See "THE CSB ACQUISITION -- Terms
of the Reorganization Agreement -- CSB Acquisition Price" herein.)
Accordingly, each share of CSB Common Stock subject to a Conditional Stock
Election will be exchanged for between 4.637 and 4.924 shares of Holdco
Common Stock.
Conditional Cash Election. Each CSB shareholder who makes a Conditional
Cash Election will be entitled to receive between $28.04 and $29.17 (the
"Cash Purchase Price Per Share") (depending upon the resolution of certain
contingencies) in exchange for each share of CSB Common Stock converted
pursuant to a Conditional Cash Election, subject to the limitations imposed
by the Cash/Stock Conversion Requirement. (See "THE CSB ACQUISITION -- Terms
of the Reorganization Agreement -- CSB Acquisition Price; Allocation
Procedure" herein.)
Conditional Joint Election. Each CSB shareholder who makes a
Conditional Joint Election will receive a certain number of Stock Election
Conversion Shares for each of his or her shares of CSB Common Stock converted
pursuant to a Conditional Stock Election and the Cash Purchase Price Per
Share for each such share converted pursuant to a Conditional Cash Election,
subject to the limitations imposed by the Cash/Stock Conversion Requirement.
(See "THE CSB ACQUISITION -- Terms of the Reorganization Agreement --
Allocation Procedure" herein.)
No Election. Each CSB shareholder who has no preference and accordingly
makes No Election will receive either Holdco Common Stock, cash or a
combination thereof, as determined by the allocation procedure. (See "THE
CSB ACQUISITION -- Terms of the Reorganization Agreement -- Allocation
Procedure" herein.)
Election and Exchange Procedure. To effect the conditional elections to
be made by the CSB shareholders, SDN will cause a Conditional Election
Statement to be delivered to each CSB shareholder not later that two (2)
business days following the receipt of all required regulatory approvals
necessary to consummate the Transaction (the "Final Approval Date"), or, in
SDN's discretion, prior to the Final Approval Date, but not earlier than the
date on which the CSB shareholders have
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<PAGE>
approved the CSB Acquisition. The Conditional Election Statement will
request each CSB shareholder to make either a Conditional Stock Election,
Conditional Cash Election, Conditional Joint Election or No Election. For
the Conditional Election Statement to be effective, it must be properly
completed and signed by the CSB shareholder and received by the exchange
agent of SDN (the "Exchange Agent") on or before the 21st calendar day
following the date of mailing of the Conditional Election Statement (the
"Election Deadline"). Any CSB shareholder who has submitted a Conditional
Election Statement may amend or revoke the same any time prior to the
Election Deadline. Any CSB shareholder who does not return a Conditional
Election Statement on or before the Election Deadline, or who properly
revoked his or her Conditional Election Statement but does not submit a new
statement, will be deemed to have made No Election. After the Election
Deadline, all conditional elections by the CSB shareholders will be
irrevocable.
Concurrently with the delivery of a Conditional Election Statement to
each of the CSB shareholders, SDN will cause the Exchange Agent to deliver to
each holder of record of outstanding shares of CSB Common Stock a letter of
transmittal which is to be used by each CSB shareholder to deliver to the
Exchange Agent the stock certificates representing the CSB Common Stock owned
by him or her, in accordance with instructions contained in that letter of
transmittal. As soon as practicable after receiving those stock certificates
and such other items as may be specified in the letter of transmittal, but in
no event prior to the consummation of the CSB Acquisition, the Exchange Agent
will deliver to each such CSB shareholder new certificates evidencing the
appropriate number of Stock Election Conversion Shares and/or checks for the
appropriate amount of cash, including payment of cash in lieu of fractional
shares. All risk of loss in the delivery of the certificates of CSB Common
Stock to the Exchange Agent will be borne by the CSB shareholder, and title
will pass only upon proper delivery to, and receipt of such stock
certificates by, the Exchange Agent. No interest will be paid to the CSB
shareholders on the cash or the value of the Stock Election Conversion Shares
into which their shares of CSB Common Stock will be converted.
If the Stock Election Conversion Shares and/or the cash, or any part
thereof, are to be delivered to a person other than the record holder of the
certificates of CSB Common Stock surrendered in exchange therefor, (I) the
certificate(s) so surrendered must be accompanied by certain signatures as
described in the letter of transmittal and otherwise be in proper form for
transfer, (ii) the transfer must otherwise be proper, and (iii) the person
requesting the transfer must pay to the Exchange Agent any transfer or other
taxes payable by reason of the transfer or must establish to the satisfaction
of the Exchange Agent that such taxes have been paid or are not required to
be paid.
Allocation Procedure. The conditional elections to be made by the CSB
shareholders in connection with the conversion of their shares of CSB Common
Stock will be subject to the requirement that sixty percent (60%) of the
total number of shares of CSB Common Stock outstanding (excluding all shares
held by CSB shareholders who properly exercise their dissenters' rights)
immediately prior to the consummation of the CSB Acquisition must be
converted into cash and forty percent (40%) of the total number of shares of
CSB Common Stock outstanding must be converted into Holdco Common Stock (the
"Cash/Stock Conversion Requirement"). To meet the Cash/Stock Conversion
Requirement, each of the shares of CSB Common Stock subject to No Election
will be converted into either Holdco Common Stock or cash, as necessary.
If the Cash/Stock Conversion Requirement has not been met after
allocation of such shares subject to No Election, a certain number of shares
of CSB Common Stock subject to Conditional Cash Elections may be converted to
Holdco Common Stock (with the exception of Small Holders as described below),
or a certain number of such shares subject to Conditional Stock Elections may
be converted to cash, as the case may be, on a pro rata basis, until the
Cash/Stock Conversion Requirement has been met. Thus, as a result of the
allocation procedure, a CSB shareholder who has made a Conditional Stock
Election with respect to one or more shares of his or her CSB Common Stock
may be required to receive a certain portion of his or her consideration in
cash, on a pro rata basis, with all others who have made Conditional Stock
Elections, or, in the alternative, a CSB shareholder who has made a
Conditional Cash Election with respect to one or more of his or her shares of
CSB Common Stock may be required to receive a certain portion of his or her
consideration in the form of Holdco Common Stock, on a pro rata basis, with
all others who have made Conditional Cash Elections (with the exception of
Small Holders as described below). Whether and the extent to which such
reallocation is required is wholly dependent upon the percentage of shares of
CSB Common Stock for which Conditional Stock Elections are made and the
degree of reallocation required to satisfy the Cash/Stock Conversion
Requirement. Notwithstanding the foregoing, any CSB shareholder who
beneficially owns in the aggregate 100 or fewer shares of CSB Common Stock (a
"Small Holder") and who makes a Conditional Cash Election with respect to all
or any portion of such shares will not have his or her Conditional Cash
Election reallocated to satisfy the Cash/Stock Conversion Requirement.
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<PAGE>
Fractional Shares. No fractional shares of Holdco Common Stock will be
issued in connection with the CSB Acquisition. Each holder of shares of CSB
Common Stock who would otherwise be entitled to receive a fractional share of
Holdco Common Stock will receive cash equal to the product of (I) the Cash
Purchase Price Per Share multiplied by (ii) the fraction of a share of CSB
Common Stock that would otherwise have been converted into a share of Holdco
Common Stock.
Interests of Certain Persons in the CSB Acquisition; Related Agreements.
The Reorganization Agreement provides that the directors of CSB immediately
prior to the consummation of the CSB Acquisition will be directors of CSB
upon the consummation of the CSB Acquisition. Peter Paulsen, the Chairman of
the Board of Directors of CSB, will also become a director of Holdco upon
consummation of the CSB Acquisition. Additionally, the officers and other
employees of CSB immediately prior to the consummation of the CSB Acquisition
will all be employed in substantially the same capacities by CSB immediately
following the CSB Acquisition.
Each of the directors of CSB has entered into a Voting Agreement with SDN
and CSB as of April 23, 1996, in the form of Exhibit 3.1.5 to the
Reorganization Agreement (the "Voting Agreement"), a copy of which is
included herewith in Annex 1. The Voting Agreement provides that each
director of CSB will vote all shares of CSB Common Stock owned by him or her
in favor of approval of the Reorganization Agreement and will perform other
covenants in accordance with the terms of the Voting Agreement. As of April
30, 1996, the directors of CSB owned beneficially, in the aggregate,
approximately 90.7% of the outstanding shares of CSB Common Stock.
Employee Benefits. All employee benefits and benefit plans of CSB in
effect immediately prior to the consummation of the CSB Acquisition will
continue to be the employee benefits and benefits plans of CSB immediately
following the CSB Acquisition. It is possible, however, that Holdco will
cause benefits and benefit plans to be adopted within the foreseeable future
following the CSB Acquisition that will cover employees of two or more of
CSB, San Dieguito and Liberty or that Holdco will otherwise cause CSB's
existing benefits and benefit plans to be altered.
Financing of Transaction. The cash component of the CSB Acquisition
Price will require Holdco to pay approximately $15.1 million in the aggregate
to the CSB shareholders, in addition to which Holdco will bear certain
expenses in connection with the Transaction. Funding for this cash payment
and those expenses will be provided to Holdco through the sale by SDN of
shares of SDN Common Stock to the Dartmouth Capital Group, most of the
proceeds of which sale will be contributed to the capital of Holdco (the
"Capital Contribution"). The Dartmouth Partnership has entered into two
Subscription Agreements with SDN obligating the Dartmouth Partnership to
purchase up to $16.0 million in SDN Common Stock in connection with the CSB
Acquisition. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING
HOLDCO AND SDN -- Subscription Agreements to Fund the CSB Acquisition"
herein.) SDN represented to CSB in the Reorganization Agreement that, as of
the time it executed the Reorganization Agreement, it had adequate
commitments in place to finance the Transaction, and it covenanted to
contribute the necessary portion of the proceeds thereof to the capital of
Holdco. SDN's obligations to consummate the Transaction are not conditioned
upon its receipt of this or any other financing.
The Reorganization Agreement also contemplated that, at SDN's election
(subject to any necessary regulatory approvals), up to $4.0 million of the
cash necessary to consummate the Transaction would be funded by CSB itself,
and that the amount of the Capital Contribution would be reduced by a similar
amount. However, SDN has indicated that it has elected not to utilize any
cash from CSB to fund the Transaction. Accordingly, while the exact amount
of the Capital Contribution has not yet been determined, it has been assumed
throughout this Information Statement/Prospectus that the actual Capital
Contribution will be in the amount of $15.5 million. (See "PRO FORMA
FINANCIAL INFORMATION" herein.)
Conditions to the Transaction. The obligations of each of the parties to
the Reorganization Agreement to consummate the Transaction are subject to the
satisfaction, on or before the date upon which the CSB Acquisition becomes
effective (the "Closing Date"), of the following conditions: (I) all
necessary regulatory approvals or consents will have been obtained, and no
such approval will have imposed any materially burdensome condition or
requirement which would render the consummation of the CSB Acquisition
inadvisable and (ii) no legal, administrative or other proceeding by any
governmental authority will have been instituted or threatened and, at what
would otherwise have been the Closing Date, remain pending by or before a
court or any governmental authority to restrain or prohibit the transactions
contemplated by the Reorganization Agreement.
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The obligations of SDN and Holdco to consummate the Transaction and of
SDN Merger Sub and SDN to consummate the SDN Merger are also subject to the
satisfaction, on or before the Closing Date, of the following conditions: (I)
CSB's representations and warranties contained in the Reorganization
Agreement were true and correct as of the dates made and remain true and
correct as of the Closing Date, excepting only those representations and
warranties which speak expressly as of an earlier specified date; (ii) CSB
has performed, in all material respects, all covenants required by the
Reorganization Agreement to be performed by it; (iii) the CSB Acquisition
will have been approved by the holders of a majority of the outstanding
shares of CSB Common Stock and the holders of no more than 10% of the
outstanding shares of CSB Common Stock will have perfected dissenters'
rights; (iv) the consents or approvals have been obtained from all persons
whose consents or approvals are required to permit consummation of the CSB
Acquisition (other than regulatory approvals); (v) SDN will have received a
satisfactory legal opinion from counsel to CSB; (vi) CSB will have delivered
a schedule to SDN and Holdco, dated not more than three calendar days prior
to the Closing Date, detailing CSB's nonperforming assets as of such date;
(vii) SDN and Holdco will have received from CSB an officers' certificate
certifying that all conditions in the Reorganization Agreement which are
required to be satisfied by CSB have been so satisfied; (viii) all corporate
and other proceedings in connection with the Reorganization Agreement and
documents and instruments incidental thereto will be reasonably satisfactory
to SDN and its counsel; and (ix) if the Escrow Agreement is entered into
pursuant to the Reorganization Agreement, CSB will have designated its escrow
committee.
The obligation of CSB to consummate the Transaction is also subject to
the satisfaction, on or before the Closing Date, of the following conditions:
(I) SDN's and Holdco's representations and warranties contained in the
Reorganization Agreement were true and correct as of the dates made and
remain true and correct as of the Closing Date, excepting only those
representations and warranties which speak expressly as of an earlier
specified date; (ii) SDN and Holdco have performed, in all material respects,
all covenants required by the Reorganization Agreement to be performed by
each of them; (iii) CSB will have received satisfactory legal opinions from
counsel to SDN and Holdco; (iv) SDN will have delivered a schedule to CSB,
dated not more than three calendar days prior to the Closing Date, detailing
San Dieguito's and Liberty's nonperforming assets as of such date; (v) CSB
will have received from each of SDN and Holdco an officers' certificate
certifying that all conditions in the Reorganization Agreement which were
required to be satisfied by SDN or Holdco, as the case may be, have been so
satisfied; (vi) all corporate and other proceedings in connection with the
Reorganization Agreement and documents and instruments incidental thereto
will be reasonably satisfactory to CSB and its counsel; (vii)(A) SDN will
have received the full amount of the Capital Contribution (as defined in the
Reorganization Agreement) which, in turn, will have been contributed to
Holdco as an investment therein and (B) Holdco will have provided the
Exchange Agent with the amount of cash and Holdco Common Stock necessary to
consummate the CSB Acquisition; (viii) Holdco will have executed, ratified
and joined in the Reorganization Agreement; (ix) if the Escrow Agreement is
to be entered into pursuant to the Reorganization Agreement, Holdco and the
Escrow Agent will have executed the Escrow Agreement and Holdco will have
deposited with the Escrow Agent both the Stock Escrow Deposit (as defined in
the Reorganization Agreement) and the standby letter of credit securing
Holdco's contingent obligation to pay cash on account of the Cash Holdback;
and (x) Peter Paulsen will have been appointed as a director of Holdco
immediately following the consummation of the Transaction.
Certain Agreements. The Reorganization Agreement provides that during
the period from the date of the Reorganization Agreement until the
consummation of the Transaction (the "Waiting Period"), CSB will do, among
other things, the following: (I) terminate any existing discussions with
third parties regarding the sale of CSB or any other business combination
involving CSB, and thereafter refrain from soliciting any such discussion,
and from engaging in such discussion initiated by a third party unless the
Board of Directors of CSB shall have determined that the transaction proposed
by the third party is financially superior to the Transaction and that their
fiduciary duties to the CSB shareholders require them to engage in those
discussions; (ii) solicit the written consents of its shareholders to approve
the Reorganization Agreement; (iii) prepare jointly with SDN an Information
Statement/Prospectus for delivery to the CSB shareholders; (iv) cause each of
its affiliates to sign an affiliate letter, in connection with the transfer
of Holdco Common Stock, in the form of Exhibit 4.2.6 to the Reorganization
Agreement; (v) provide all information regarding CSB reasonably necessary for
SDN to obtain any required regulatory approval; (vi) make available or
furnish certain information to SDN and provide reasonable access to such
information by SDN's representatives; (vii) keep confidential all information
regarding SDN and its affiliates made available or furnished to CSB; (viii)
confer regularly with SDN representatives regarding CSB's operations; and
(ix) conduct its business only in the normal and customary manner, consistent
with past practice.
Additionally, CSB has agreed, during the Waiting Period, not to take
certain actions without the prior consent of SDN including, among other
things: (I) declaring or paying any dividend upon, or redeeming, any shares
of CSB Common Stock;
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<PAGE>
(ii) issuing any capital stock or bonds or granting any options, warrants or
similar rights with respect thereto; (iii) acquiring a substantial equity
interest in, or a substantial portion of the assets of, any business (subject
to certain exceptions); (iv) entering into any new line of business; (v)
changing its methods of accounting; (vi) creating or modifying any contract,
or making any type of capital expenditure, in excess of $15,000 or capital
expenditures of $50,000 in the aggregate; (vii) selling, leasing or otherwise
disposing of any asset (subject to various exceptions); (viii) restructuring
or materially changing its investment portfolio; (ix) increasing compensation
levels to employees above certain levels; (x) making, renewing or purchasing
loans above certain dollar levels (subject to certain exceptions); and (xi)
incurring any indebtedness for borrowed money or guaranteeing, endorsing or
assuming the obligations of any other individual or entity except in the
ordinary course of business, consistent with past practice.
The Reorganization Agreement also provides that, during the Waiting
Period, SDN will, among other things, do the following: (I) prepare jointly
with CSB an Information Statement/Prospectus for delivery to the CSB
shareholders; (ii) file a Registration Statement with the SEC in the event it
does not receive a no-action letter from the SEC regarding reliance upon an
exemption from registration of the offer and sale of the Holdco Common Stock
to the CSB shareholders; (iii) prepare and file all necessary applications to
obtain the requisite regulatory approvals to consummate the Transaction; (iv)
make available or furnish certain information to CSB and provide reasonable
access to such information by CSB's representatives; (v) keep confidential
all information regarding CSB made available or furnished to SDN; (vi) confer
regularly with CSB representatives regarding SDN's operations; (vii) conduct
its business only in the normal and customary manner, consistent with past
practice; (ix) cause Holdco to execute, ratify and join in the Reorganization
Agreement; and (x) comply, and cause Holdco to comply, in all material
respects, with all applicable federal and state securities laws.
Termination. The Reorganization Agreement may be terminated by either
CSB or SDN prior to the consummation of the CSB Acquisition upon the
occurrence of any of the following events: (I) mutual written agreement
between the parties; (ii) a final determination by any regulatory agency
denying an application of CSB, SDN or any of their respective affiliates, the
granting of which application is essential to the consummation of the CSB
Acquisition; or (iii) any final order, decree or judgment of any court of
competent jurisdiction would be violated by the consummation of the
Transaction.
SDN may also unilaterally terminate the Reorganization Agreement prior to
the consummation of the CSB Acquisition upon the occurrence of any of the
following events: (I) the payment to CSB of a termination fee in the amount
of $1,200,000; (ii) the breach by CSB of any representation or warranty
contained in the Reorganization Agreement or the material failure of CSB to
perform any of its covenants contained in the Reorganization Agreement if
such breach or failure is not cured in a timely manner; (iii) any of the
conditions precedent to SDN's or Holdco's obligations to perform under the
Reorganization Agreement has not been satisfied as of the Closing Date; (iv)
CSB has received a third party acquisition proposal and CSB has not
reaffirmed its intent to proceed under the terms of the Reorganization
Agreement; (v) a regulatory agency has conditioned its approval on SDN making
a capital contribution to Holdco in excess of the Maximum Required Capital
Contribution (i.e., an amount equal to approximately $15,078,000 minus the
Cash Valuation Adjustment (as defined in the Reorganization Agreement) plus
the aggregate expenses incurred by SDN and CSB in connection with the
Transaction); or (vi) the consummation of the CSB Acquisition has not
occurred by December 31, 1996 (unless such failure results from a breach of
warranty or covenant of either SDN or Holdco).
CSB may also unilaterally terminate the Reorganization Agreement prior to
consummation of the CSB Acquisition upon the occurrence of any of the
following events: (I) the payment to SDN of a termination fee in the amount
of $1,200,000; (ii) the breach by SDN or Holdco of any representation or
warranty contained in the Reorganization Agreement or the material failure of
either SDN or Holdco to perform any of their respective covenants contained
in the Reorganization Agreement if such breach or failure is not cured in a
timely manner; (iii) any of the conditions precedent to CSB's obligations to
perform under the Reorganization Agreement has not been satisfied as of the
Closing Date; (iv) the consummation of the CSB Acquisition has not occurred
by December 31, 1996 (unless such failure results from a breach of warranty
or covenant of CSB).
CSB has agreed to pay to SDN, as liquidated damages, the sum of
$1,200,000 if CSB unilaterally terminates the Reorganization Agreement
without cause or if SDN terminates the Reorganization Agreement because CSB
has either breached a fundamental operating covenant, elected to proceed with
a third party acquisition proposal (thereby abandoning the Reorganization
Agreement) or otherwise failed to consummate the CSB Acquisition despite the
fact that all conditions precedent to CSB's obligations to perform have been
satisfied. If SDN terminates the Reorganization Agreement because of
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a breach by CSB of a warranty or covenant that is not deemed a fundamental
operating covenant, CSB has agreed to pay SDN, as liquidated damages, the sum
of $300,000.
SDN and Holdco, jointly and severally, have agreed to pay to CSB, as
liquidated damages, the sum of $1,200,000 if SDN unilaterally terminates the
Reorganization Agreement without cause or if CSB terminates the
Reorganization Agreement because either SDN or Holdco has breached its
warranty or covenant relating to the financing of the CSB Acquisition or SDN
or Holdco has failed to consummate the CSB Acquisition despite the fact that
all conditions precedent to their respective obligations to perform have been
satisfied. If CSB terminates the Reorganization Agreement because of a
breach by SDN or Holdco of a warranty or covenant not related to the
financing of the CSB Acquisition, SDN and Holdco have agreed to pay CSB, as
liquidated damages, the sum of $300,000. Finally, if either party terminates
the Reorganization Agreement because of SDN's failure to obtain all requisite
regulatory approvals or if SDN terminates the Reorganization Agreement
because such approval is conditioned upon SDN making a capital contribution
to Holdco in excess of the Maximum Required Capital Contribution, SDN and
Holdco have agreed to pay CSB, as liquidated damages, the sum of $150,000,
provided such denial or conditioning of the regulatory approval was not
caused by any action or omission by CSB.
Expenses. Each party will bear its own expenses in connection with the
Transaction with the exception that, if either party terminates the
Reorganization Agreement because one or more of the conditions precedent to
such party's obligations to perform has not been satisfied as of the Closing
Date, the non-terminating party will reimburse the terminating party (subject
to certain exceptions enumerated in the Reorganization Agreement) for all of
its reasonable expenses in an amount not to exceed $200,000.
Regulatory Approvals
Federal and California law and regulations provide that certain
acquisition transactions, such as the CSB Acquisition, may not be consummated
unless approved in advance by applicable regulatory authorities. The
Reorganization Agreement provides that SDN will file all applications for
approvals and consents as may be required to consummate the CSB Acquisition.
The CSB Acquisition requires the prior approval of the Board of Governors
of the Federal Reserve System (the "FRB") under Section 3(a)(1) and Section
3(a)(3) of the Bank Holding Company Act of 1956, as amended (the "BHCA"), and
Section 225.11 of Regulation Y (12 C.F.R. 225.11). (The SDN Merger also
requires the prior approval of the FRB.) Additionally, the CSB Acquisition
requires the prior approval of the Superintendent under Section 700 et seq.
of the California Financial Code and, if the Superintendent so requires, a
Stock Permit pursuant to Section 690 et seq. of the California Financial
Code. Receipt of all requisite regulatory approvals and consents is a
condition precedent to the consummation of the CSB Acquisition. (See "THE
CSB ACQUISITION -- Terms of the Reorganization Agreement -- Conditions to the
Transaction" herein.) Furthermore, federal law provides that the CSB
Acquisition may not be consummated until at least 15 days (and possibly up to
30 days) have expired following the FRB's preliminary approval in order to
provide the United States Attorney General with an opportunity to review any
antitrust implications of the CSB Acquisition.
Although neither CSB nor SDN is aware of any reason why the requisite
approvals of, and consents to, the CSB Acquisition would not be granted,
there can be no assurance of when or if such approvals and consents will be
obtained or that, if obtained, such approvals and consents would not include
conditions which would be of a type that would relieve SDN from its
obligation to consummate the CSB Acquisition. (See "THE CSB ACQUISITION --
Terms of the Reorganization Agreement -- Conditions to the Transaction"
herein.)
Dissenting Shareholders' Rights
The following discussion is not a complete statement of the law relating
to dissenting shareholders' rights, and is qualified by reference to Annex 2,
which sets forth in its entirety Chapter 13 of the California Corporations
Code, which is the applicable law relating to dissenting shareholders' rights
in this context and which is incorporated herein by reference. This
discussion and Annex 2 should be reviewed carefully by each shareholder of
CSB who wishes to exercise statutory dissenters' rights because failure to
comply with the required procedures may result in the loss of such rights.
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Any shares of CSB Common Stock for which dissenters' rights are sought
must not be voted in favor of approval of the Reorganization Agreement. Such
shares must either be voted against approval of the Reorganization Agreement
or not voted at all. Thus, any shareholder of CSB who wishes to dissent
("dissenting CSB Shareholder") and who executes and returns the enclosed
written consent form must specify that he or she does not consent to or
approve of the Reorganization Agreement or he or she abstains from voting on
the proposal to approve the Reorganization Agreement. If a shareholder of
CSB signs, dates and returns his or her written consent form but does not
indicate a choice thereon or returns the written consent form by indicating
that he or she consents to the Reorganization Agreement, his or her shares of
CSB Common Stock automatically will be voted in favor of approval of the
Reorganization Agreement and such shareholder will lose any and all
dissenters' rights with respect to those shares. However, any shareholder
who delivers a properly executed written consent has the right to revoke it
at any time prior to receipt by CSB of affirmative written consents
representing a majority of the outstanding shares of the CSB Common Stock.
(See "SOLICITATION OF WRITTEN CONSENTS OF THE SHAREHOLDERS OF COMMERCE
SECURITY BANK -- Submission of Written Consents; Revocability" herein.)
Each dissenting CSB Shareholder who has not voted his shares of Common
Stock of CSB in favor of approval of the Reorganization Agreement and who has
complied with the procedures of Chapter 13 of the California Corporations
Code, as amended (the "Corporations Code"), will be entitled to payment by
Holdco, the acquiror in the CSB Acquisition, of the fair market value of his
or her shares of CSB Common Stock. Such value will be determined as of the
last trading day prior to the first announcement of the terms of the proposed
CSB Acquisition (the "Pre-Announcement Date"), excluding any change in such
value in consequence of the proposed CSB Acquisition. The Pre-Announcement
Date was February 29, 1996 and, in the opinion of the Board of Directors and
management of CSB, the fair market value of the CSB Common Stock on the
Pre-Announcement Date was $19.07 per share.
Chapter 13 of the Corporations Code represents the exclusive statutory
remedy available to any of the CSB shareholders who elects as a dissenting
shareholder to seek payment of the fair market value of his or her shares of
CSB Common Stock. The following summary of Chapter 13 of the Corporations
Code is qualified in its entirety by reference to the text of Chapter 13, a
complete copy of which is reprinted in Annex 2 to this Information
Statement/Prospectus.
CSB is required to mail to each dissenting CSB Shareholder a notice of
the approval of the Reorganization Agreement by a majority of the outstanding
shares of CSB Common Stock (the "Approval Notice"), within ten (10) days of
the date of such approval, accompanied by a copy of Sections 1300-1304 of the
Corporations Code, a statement of the price determined by CSB to represent
the fair market value of the dissenting shares of CSB Common Stock and a
brief description of the procedures to be followed if a CSB shareholder
desires to exercise dissenters' rights. To preserve his or her dissenters'
rights, a dissenting CSB Shareholder must, within thirty (30) days after the
Approval Notice was mailed, make a written demand on CSB at its principal
office or at the office of any transfer agent thereof for the purchase of his
or her shares of CSB Common Stock and the payment in cash of their fair
market value. Such demand is required to state the number of shares of CSB
Common Stock which such shareholder demands CSB purchase and must contain a
statement of what such shareholder claims to be the fair market value of
those shares on the Pre-Announcement Date. CSB suggests that dissenting CSB
Shareholders use registered or certified mail, return receipt requested, for
this purpose and that correspondence in this regard be directed to the
attention of Mr. L. Robert Connelly, President of CSB, at 1545 River Park
Drive, Suite 200, Sacramento, California 95815. A properly executed written
consent form delivered to CSB which specifies that such shareholder does not
consent to the Reorganization Agreement will not constitute such written
demand. In addition, within thirty (30) days after the Approval Notice is
mailed to the dissenting CSB Shareholder, such shareholder must submit to CSB
at its principal office or at the office of any transfer agent thereof such
shareholder's certificates representing the shares of CSB Common Stock
subject to such demand.
If CSB and the dissenting CSB Shareholder agree that the shares of CSB
Common Stock subject to the demand are "dissenting shares" (as defined in
Section 1300(b) of the Corporations Code) and agree upon the price of such
shares, the dissenting CSB Shareholder will be entitled to the agreed upon
price with interest thereon from the date of such agreement. The purchase
price will be paid within thirty (30) days after such agreement or within
thirty (30) days after any statutory or contractual conditions to the CSB
Acquisition are satisfied, whichever is later. If CSB denies that such
shares of CSB Common Stock are "dissenting shares," or CSB and the dissenting
CSB Shareholder fail to agree upon the fair market value of such shares, then
such dissenting CSB Shareholder may, within six months after the Approval
Notice is mailed to him or her, file a complaint in the superior court of the
proper county requesting the court to determine whether the shares of CSB
Common Stock subject to such demand are "dissenting shares" or to determine
the fair market value of such shares, or both, or may intervene in any action
pending on such a complaint. The court may determine, or may appoint one or
more impartial
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appraisers to determine, the fair market value of the dissenting shares. If
the court appoints an independent appraiser or appraisers, they will promptly
make such determination. If the majority of the appraisers fail to file a
report of their findings within ten (10) days from the date of their
appointment or such further time as the court allows, or if the report is not
confirmed by the court, the court will determine the fair market value of the
dissenting shares of CSB Common Stock subject to such demand.
Once the court has determined the fair market value of each of such
dissenting shares of CSB Common Stock, the court will enter a judgment
requiring CSB (or Holdco, as the acquiror in the CSB Acquisition, in the
event the CSB Acquisition has already been consummated) to pay an amount
equal to the fair market value of each of those dissenting shares multiplied
by the number of dissenting shares that any dissenting CSB Shareholder who is
a party to, or has intervened in, the action is entitled to require CSB to
purchase, with interest from the date of entry of the judgment.
Dissenting CSB Shareholders cease to be entitled to require payment for
their shares of CSB Common Stock if (I) the CSB Acquisition is abandoned (in
which case CSB would pay any dissenting CSB Shareholder who in good faith
initiated proceedings for an appraisal all necessary expenses incurred in
such action and reasonable attorneys' fees); (ii) the dissenting CSB
Shareholder and CSB fail to agree upon the status of such shares as
"dissenting shares" or upon the purchase price therefor and neither files a
complaint and the dissenting CSB Shareholder fails to intervene in a pending
action within six months after the Approval Notice is mailed to all
dissenting CSB Shareholders; or (iii) the dissenting CSB Shareholder
withdraws the demand for the purchase of his or her shares with the consent
of CSB (or Holdco, in the event the CSB Acquisition has already been
consummated).
Accounting Treatment
The CSB Acquisition is expected to be treated using the purchase method
of accounting for financial reporting proposes. (For further details
regarding the accounting treatment of the CSB Acquisition, see "PRO FORMA
FINANCIAL INFORMATION" herein.)
Certain Federal Income Tax Consequences
None of CSB, SDN or Holdco will recognize gain or loss for federal income
tax purposes as a consequence of the Transaction. Similarly, the SDN
shareholders, who will receive solely Holdco Common Stock in the SDN Merger
portion of the Transaction (see "THE CSB ACQUISITION -- Terms of the
Reorganization Agreement -- Structure of the Transaction" herein), will
recognize no gain or loss for federal income tax purposes as a consequence of
the Transaction.
The federal income tax consequences of the Transaction to the CSB
shareholders may differ from shareholder to shareholder. The following
summary is a general discussion of certain expected federal income tax
consequences of the CSB Acquisition arising to CSB shareholders under the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the applicable treasury regulations promulgated and proposed
thereunder, judicial authority and current administrative rulings and
practice. This summary does not discuss all aspects of federal income
taxation which may be relevant to a particular CSB shareholder in light of
personal circumstances or certain types of shareholders subject to special
treatment under the federal income tax laws (for example, life insurance
companies, tax exempt organizations, foreign investors, dealers in securities
and taxpayers subject to the alternative minimum tax) and does not discuss
the consequences of the CSB Acquisition arising under state, local or foreign
tax laws. Furthermore, this summary does not discuss the tax consequences to
CSB shareholders who acquired their shares in CSB through the exercise of
employee stock options or through any other means that could be deemed
compensation for services, or who otherwise hold their shares as other than
capital assets.
The statements made herein are based on interpretations of the Code and
of applicable regulations and other authorities to the extent the same exist;
however, no rulings have been or will be requested from the Internal Revenue
Service (the "IRS") that would confirm those statements. While it is a
condition to the Closing that CSB receive at the time of the Closing an
opinion from SDN's counsel, confirming certain of the statements made herein
(see "THE CSB ACQUISITION --Certain Federal Income Tax Consequences -- Tax
Opinion" herein), neither this discussion nor that opinion is or will be
binding upon
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the IRS. There can be no assurance, therefore, that future legislation,
regulations, administrative rulings or court decisions will not adversely
affect the accuracy of the statements contained herein.
Exchange of CSB Common Stock Solely for Holdco Common Stock. Except as
discussed below under "THE CSB ACQUISITION -- Certain Federal Income Tax
Consequences -- Cash in Lieu of Fractional Shares" and "--Effect of Escrow",
a CSB shareholder who receives solely Holdco Common Stock in exchange for his
or her CSB Common Stock will not recognize gain or loss upon such exchange
for federal income tax purposes. The aggregate tax basis of the Holdco
Common Stock received by such shareholder will be equal to the aggregate tax
basis of CSB Common Stock surrendered (excluding any portion of the holder's
basis allocable to fractional shares), and the holding period of Holdco
Common Stock will include the holding period of CSB Common Stock surrendered.
A CSB shareholder who is considering making a Conditional Stock Election
should note that, because of the possibility of proration, there can be no
assurance that a shareholder who makes a Conditional Stock Election will
receive solely Holdco Common Stock and, therefore, there can be no assurance
that a shareholder who makes such an election will recognize no taxable gain
upon such CSB shareholder's exchange of CSB Common Stock. (See "THE CSB
ACQUISITION -- Certain Federal Income Tax Consequences -- Federal Income Tax
Considerations in Making a Conditional Election" herein.)
Exchange of CSB Common Stock Solely for Cash. A CSB shareholder who
receives solely cash in exchange for his or her CSB Common Stock (including
pursuant to the exercise of statutory dissenters' rights) will recognize
capital gain or loss upon such exchange equal to the difference between the
shareholder's tax basis in the CSB Common Stock surrendered and the amount of
cash received in exchange therefor. Such capital gain or loss will
constitute long-term gain or loss if the CSB Common Stock surrendered has
been held for more than one year as of the Closing Date. Gain or loss must
be calculated separately for each block of CSB Common Stock (i.e., each group
of shares acquired at the same time in a single transaction).
Exchange of CSB Common Stock for a Combination of Holdco Common Stock and
Cash. Except as discussed below under "THE CSB ACQUISITION -- Certain
Federal Income Tax Consequences -- Cash in Lieu of Fractional Shares" and
"--Effect of Escrow", a CSB shareholder who receives a combination of Holdco
Common Stock and cash in exchange for his or her CSB Common Stock (whether
because he or she made a Conditional Joint Election, or because of proration
following a Conditional Stock Election or a Conditional Cash Election, or as
a consequence of having made No Election) will recognize some or all of the
capital gain realized in the exchange, if any, but will not recognize any
loss realized in the exchange. The amount of capital gain that is recognized
will be calculated separately for each block of CSB Common Stock surrendered.
The amount of gain recognized with respect to any block will equal the
lesser of (I) the amount of gain realized with respect to such block (i.e.,
the amount by which the cash received plus the fair market value of Holdco
Common Stock received exceeds the shareholder's tax basis in CSB Common Stock
surrendered), or (ii) the amount of cash received that is allocable to such
block. For this purpose, all of the cash and Holdco Common Stock received by
the CSB shareholder will be allocated proportionately among the CSB Common
Stock surrendered by such shareholder. Any capital gain recognized upon the
exchange will constitute long-term capital gain if the applicable block of
CSB Common Stock has been held for more than one year as of the Closing Date.
The holding period of Holdco Common Stock received will include the holding
period of the block of CSB Common Stock surrendered in exchange therefor.
The tax basis of Holdco Common Stock received in the exchange will be equal
to the tax basis of the surrendered block of CSB Common Stock, decreased by
the amount of cash received in respect of such block and increased by the
amount of any gain recognized in respect of such block.
Cash in Lieu of Fractional Shares. A CSB shareholder who receives cash
in lieu of fractional shares of Holdco Common Stock will be treated as having
received such fractional shares pursuant to the Reorganization Agreement and
then as having exchanged such fractional shares for cash in a redemption by
Holdco. Any gain or loss attributable to fractional shares generally will be
capital gain or loss. The amount of such gain or loss will be equal to the
difference between the ratable portion of the shareholder's tax basis in the
CSB Common Stock surrendered that is allocated to such fractional shares, and
the cash received in lieu thereof. Any such capital gain or loss will
constitute long-term gain or loss if the CSB Common Stock has been held for
more than one year as of the Closing Date.
Federal Income Tax Considerations in Making a Conditional Election. If a
CSB shareholder makes a Conditional Stock Election (i.e., conditionally
elects to receive Holdco Common Stock in exchange for all of his or her CSB
Common Stock (see "THE CSB ACQUISITION -- Terms of the Reorganization
Agreement -- Election and Exchange Procedure" herein)), and that shareholder
nonetheless receives some cash as a result of the proration procedures, the
federal income tax consequences to that shareholder will be as described
above for a CSB shareholder who receives a combination of Holdco Common Stock
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and cash. Similarly, if a CSB shareholder makes a Conditional Cash Election
(i.e., conditionally elects to receive cash in exchange for all of his or her
CSB Common Stock), and that shareholder nonetheless receives some Holdco
Common Stock as a result of the proration procedures, the federal income tax
consequences to that shareholder will be described above for the CSB
shareholder who receives a combination of Holdco Common Stock and cash.
Thus, the actual federal income tax consequences to any particular CSB
shareholder will not be fully ascertainable at the time the election is made
because CSB shareholders will not know at that time if, and to what extent,
the proration procedures will affect the consideration that they will
actually receive in return for their CSB Common Stock.
Effect of Escrow. It is unclear whether the CSB shareholders will be
treated as owners of the Escrowed Shares for federal income tax purposes
prior to the release of such Escrowed Shares from escrow. A transaction
involving deferred payment, such as the Transaction, may be governed by the
installment sale regulations for some purposes. For example, the IRS has
taken the position that a taxpayer may use the installment method of
accounting to report the receipt of a note in circumstances such as the
Transaction. Under the installment sale regulations, a contingency may
prevent a constructive receipt of the escrowed property. By contrast, in the
tax-free reorganization context, the IRS's view is that shareholders are
considered to be the owners of escrowed shares from the date of issue to the
escrow agent if they have the right to vote and to currently receive all
dividends on those shares. However, the Transaction may be distinguishable,
since the CSB shareholders will not be entitled currently to receive the
dividends on the Escrowed Shares. In summary, it is unclear which rules
govern, and, if the tax-free reorganization rules apply, whether they are
satisfied.
If the CSB shareholders are treated as the owners of the Escrowed Shares,
then any former CSB shareholder who exchanges CSB Common Stock for a
combination of Holdco Common Stock and cash could, depending upon the
shareholder's basis in the CSB Common Stock exchanged, recognize more capital
gain than if he or she were not the owner of the Escrowed Shares. Additional
gain could result because the aggregate fair market value of the Holdco
Common Stock received would be greater. (See "THE CSB ACQUISITION -- Certain
Federal Income Tax Consequences -- Exchange of CSB Common Stock for a
Combination of Holdco Common Stock and Cash" herein.)
CSB shareholders who exchange CSB Common Stock solely for Holdco Common
Stock would realize no additional income, and would have the same aggregate
basis for their shares of Holdco Common Stock, regardless of whether they are
treated as the owners of the Escrowed Shares.
If the CSB shareholders are treated as owners of the Escrowed Shares for
federal income tax purposes prior to their release from escrow and if less
than all of the Escrowed Shares were ultimately released to them from escrow,
then they would likely recognize a capital gain or loss equal to the
difference between the fair market value of the returned shares on the return
date and their basis in those returned shares.
By contrast, if the CSB shareholders are not treated as owning the
Escrowed Shares for federal income tax purposes prior to their release from
escrow, and if any Escrowed Shares are ultimately released to them from
escrow, a portion of the value of such shares may be treated as interest, in
which case the value of that portion would be taxable as ordinary income.
The value of the balance of the Escrowed Shares released to them would be
used to recompute the gain of the CSB shareholders in connection with the
transaction as well as their basis in their shares of Holdco Common Stock.
(See "THE CSB ACQUISITION -- Certain Federal Income Tax Consequences --
Exchange of CSB Common Stock for a Combination of Holdco Common Stock and
Cash" and "-- Exchange of CSB Common Stock Solely for Holdco Common Stock"
herein.) Similar treatment would apply with respect to any cash disbursed to
the CSB shareholders by the escrow agent.
Reporting Requirements. Each CSB shareholder who receives Holdco Common
Stock will be required to retain records and file with such shareholder's
federal income tax return a statement setting forth certain facts relating to
the Transaction. Each CSB shareholder will also be asked to indicate, in the
letter of transmittal by which he or she will surrender his or her shares of
CSB Common Stock, the tax basis of that stock.
Tax Opinion. It is a condition to the Closing of the Transaction that
CSB receive at the time of the Closing an opinion (the "Tax Opinion") from
SDN's counsel, Nutter, McClennen & Fish, LLP, confirming (subject to the
exclusions noted below, and to the limitations set forth in the introductory
paragraphs to this "Certain Federal Income Tax Consequences" section) that
the CSB Acquisition will be treated as a contribution of property to Holdco
pursuant to Section 351 of the Code, that the CSB shareholders shall
recognize no income for federal income tax purposes as a consequence of the
Transaction except to the extent
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that they receive cash in exchange for their shares of CSB Common Stock, and
that none of CSB, SDN or Holdco shall recognize gain or loss as a consequence
of the Transaction. The Tax Opinion will be premised on, among other things,
representation letters provided by CSB, SDN, Holdco and certain other persons
to SDN's counsel containing statements relating to planned dispositions of
Holdco Common Stock by CSB shareholders, plans on the part of Holdco to
undertake transactions outside the ordinary course of business, and other
requirements. The Tax Opinion will not, however, address the federal income
tax implications of the escrow arrangements described herein. (See "THE CSB
ACQUISITION -- TERMS OF THE REORGANIZATION AGREEMENT -- Potential Adjustments
to CSB Acquisition Price" and "THE CSB ACQUISITION -- Certain Federal Income
Tax Consequences -- Effect of Escrow" herein.)
THE FOREGOING FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION
ONLY. IT MAY NOT APPLY TO ALL HOLDERS OF CSB COMMON STOCK, AND MAY NOT
INCLUDE CERTAIN CONSIDERATIONS THAT ARE IMPORTANT TO YOUR PARTICULAR
SITUATION, INCLUDING, TO THE EXTENT APPLICABLE, THE EFFECT OF STATE, LOCAL
AND FOREIGN TAX LAWS AND THE TAX CONSEQUENCES OF THE ESCROW.
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PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Statement of
Condition as of December 31, 1995 and as of March 31, 1996, and the Unaudited
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 and the three months ended March 31, 1996, give effect to
the Liberty acquisition and the CSB Acquisition, each of which has been or
will be accounted for using the purchase method of accounting, in each case
as if such transaction had occurred on January 1, 1995.
The pro forma information is based on the historical consolidated
financial statements of SDN, Liberty and CSB under the assumptions and
adjustments set forth in the accompanying Notes to the Unaudited Pro Forma
Condensed Combined Financial Statements. The Pro Forma Condensed Combined
Financial Statements do not reflect any cost savings in connection with
either the Liberty acquisition or the CSB Acquisition.
The information shown on the following pages should be read in
conjunction with the consolidated historical financial statements of SDN,
Liberty and CSB, including the respective notes thereto, which are included
elsewhere in this Information Statement/Prospectus. The pro forma data is
not necessarily indicative of the combined financial position or results of
operations in the future or of the combined financial position or results of
operations which would have been realized had the subject acquisitions been
consummated during the periods, or as of the dates, for which the pro forma
data is presented.
Pro forma per share amounts for the combined Liberty and SDN entity are
based upon issuance of 3,392,405 shares of SDN Common Stock, at a price of
$3.95 per common share, in connection with the acquisition of Liberty. The
pro forma per share amounts for the CSB and SDN entity (i.e., Holdco) are
based upon an exchange ratio of 4.7079 (rounded) (where the range of exchange
ratios is between 4.637:1 and 4.924:1) shares of SDN Common Stock for each
share of CSB Common Stock, which results in the issuance of 1,622,278 shares
of SDN Common Stock. In addition, the pro forma data for Holdco assumes the
issuance of 3,873,418 shares of SDN Common Stock for the CSB Acquisition to
the Dartmouth Capital Group at a price of $3.95 per common share in
connection with funding of the CSB Acquisition. (See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS REGARDING HOLDCO AND SDN -- Subscription Agreements
to Fund CSB Acquisition" herein.)
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HOLDCO(1)
Unaudited Pro Forma Condensed Combined Statement of Condition
December 31, 1995
(dollars in thousands)
Pro Forma Pro Forma Pro Forma
Combined SDN CSB Adjustments Combined
------------ -------- ----------- ---------
ASSETS
Cash and due from banks $ 12,494 $ 9,481 $ (1,419)a $ 20,556
Federal funds sold 9,450 28,000 -- 37,450
Securities 41,763 18,028 -- 59,791
Loans, Gross 127,907 135,168 -- 263,075
Less: allowance for loan loss (2,325) (2,396) -- (4,721)
Premises and equipment, net 1,823 2,431 -- 4,254
Goodwill 3,958 -- 5,626 b 9,584
Other assets 6,843 22,635 748 c 30,226
-------- -------- -------- --------
Total assets $201,913 $213,347 $ 4,955 $420,215
-------- -------- -------- --------
-------- -------- -------- --------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 35,864 $ 69,326 -- $105,190
Interest bearing 146,447 122,329 -- 268,776
-------- -------- -------- --------
Total deposits 182,311 191,655 -- 373,966
Accrued interest payable
and other liabilities 2,661 4,939 -- 7,600
-------- -------- -------- --------
Total liabilities 184,972 196,594 -- 381,566
Common stock 43 3,446 (3,391) d 98
Additional paid-in capital 20,959 1,035 20,618 d 42,612
Retained earnings (deficit) (4,061) 12,272 (12,272) d (4,061)
-------- -------- -------- --------
Total shareholders' equity 16,941 16,753 4,955 38,649
-------- -------- -------- --------
Total liabilities and
shareholders' equity $201,913 $213,347 $ 4,955 $420,215
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
38
<PAGE>
SDN BANCORP, INC.(1)
Unaudited Pro Forma Condensed Combined Statement of Condition
December 31, 1995
(dollars in thousands)
Pro Forma Pro Forma
SDN LNB Adjustments Combined SDN
------- -------- ----------- ------------
ASSETS
Cash and due from banks $ 4,629 $ 7,874 $ (9)a $ 12,494
Federal funds sold 2,300 9,350 (2,200)a 9,450
Securities 7,009 34,754 -- 41,763
Loans, net 38,977 88,930 -- 127,907
Less: allowance for loan loss (639) (1,686) -- (2,325)
Premises and equipment, net 597 1,226 -- 1,823
Goodwill -- -- 3,958 b 3,958
Other assets 3,032 3,652 159 c 6,843
------- -------- ------- --------
Total assets $55,905 $144,100 $ 1,908 $201,913
------- -------- ------- --------
------- -------- ------- --------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $13,445 $ 22,419 -- $ 35,864
Interest bearing 37,986 108,461 -- 146,447
------- -------- ------- --------
Total deposits 51,431 130,880 -- 182,311
Accrued interest payable
and other liabilities 933 1,728 -- 2,661
------- -------- ------- --------
Total liabilities 52,364 132,608 -- 184,972
Common stock 9 3,260 (3,226)d 43
Additional paid-in capital 7,593 4,062 9,304 d 20,959
Retained earnings (deficit) (4,061) 4,170 (4,170)d (4,061)
------- -------- ------- --------
Total shareholders' equity 3,541 11,492 1,908 16,941
------- -------- ------- --------
Total liabilities and
shareholders' equity $55,905 $144,100 $ 1,908 $201,913
------- -------- ------- --------
------- -------- ------- --------
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
39
<PAGE>
HOLDCO(1)
Unaudited Pro Forma Condensed Combined Statement of Condition
March 31, 1996
(dollars in thousands)
Pro Forma Pro Forma
SDN CSB Adjustments Combined
-------- -------- ----------- ---------
ASSETS
Cash and due from banks $ 13,834 $ 8,656 $ (1,419)a $ 21,071
Federal funds sold 30,800 31,500 -- 62,300
Securities 43,331 11,319 -- 54,650
Loans, net 123,287 143,934 -- 267,221
Less: allowance for loan loss (2,398) (2,453) -- (4,851)
Premises and equipment, net 1,790 2,286 -- 4,076
Goodwill 3,780 -- 5,850 b 9,630
Other assets 8,371 20,519 748 c 29,638
-------- -------- -------- --------
Total assets $222,795 $215,761 $ 5,179 $443,735
-------- -------- -------- --------
-------- -------- -------- --------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 57,236 $ 70,620 -- $127,856
Interest bearing 146,234 124,768 -- 271,002
-------- -------- -------- --------
Total deposits 203,470 195,388 -- 398,858
Accrued interest payable
and other liabilities 2,366 3,844 -- 6,210
-------- -------- -------- --------
Total liabilities 205,836 199,232 -- 405,068
Common stock 43 3,446 (3,391)d 98
Additional paid-in capital 20,959 1,035 20,618 d 42,612
Retained earnings(deficit) (4,043) 12,048 (12,048)d (4,043)
-------- -------- -------- --------
Total shareholders' equity 16,959 16,529 5,179 38,677
-------- -------- -------- --------
Total liabilities and
shareholders' equity $222,795 $215,761 $ 5,179 $443,735
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
40
<PAGE>
HOLDCO(1)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Combined SDN CSB Adjustments Combined
------------ -------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 15,027 $ 12,204 $ -- $ 27,231
Interest on investment securities 1,653 1,513 -- 3,166
Interest on Federal funds sold 581 423 (81)a 923
---------- -------- ----- ----------
Total interest income 17,261 14,140 (81) 31,320
Interest Expense
Deposits 7,147 6,502 -- 13,649
Debentures and other 187 234 -- 421
---------- -------- ----- ----------
Total interest expense 7,334 6,736 -- 14,070
---------- -------- ----- ----------
Net interest income 9,927 7,404 (81) 17,250
Provision for loan losses 445 1,196 -- 1,641
---------- -------- ----- ----------
Net income after provision for loan losses 9,482 6,208 (81) 15,609
Non-interest income 3,048 16,802 -- 19,850
Non-interest expense 12,512 21,779 563 34,854
---------- -------- ----- ----------
Income(loss) before provision for income
tax and extraordinary item 18 1,231 (644) 605
Provision(benefit) for income taxes (54) 517 (270) 193
---------- -------- ----- ----------
Income(loss) before extraordinary item 72 714 (374) 412
Extraordinary item, net of taxes 625 -- -- 625
---------- -------- ----- ----------
Net income (loss) $ 697 $ 714 $(374) $ 1,037
---------- -------- ----- ----------
---------- -------- ----- ----------
Weighted average common
shares outstanding 3,660,603 861,460 9,156,299
Net income per common share:
Income before extraordinary item $ 0.02 $ 0.83 $ 0.04
Extraordinary item 0.17 0 0.07
---------- -------- ----- ----------
Income per common share $ 0.19 $ 0.83 $ 0.11
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
41
<PAGE>
SDN BANCORP, INC.(1)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
SDN LNB Adjustments Combined SDN
-------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 4,086 $ 10,941 $ -- $ 15,027
Interest on investment securities 365 1,288 1,653
Interest on Federal funds sold 117 590 (126)a 581
-------- -------- ----- ----------
Total interest income 4,568 12,819 (126) 17,261
Interest Expense
Deposits 1,570 5,577 -- 7,147
Debentures and other 181 6 -- 187
-------- -------- ----- ----------
Total interest expense 1,751 5,583 -- 7,334
-------- -------- ----- ----------
Net interest income 2,817 7,236 (126) 9,927
Provision for loan losses 295 150 -- 445
-------- -------- ----- ----------
Net income after provision for loan losses 2,522 7,086 (126) 9,482
Non-interest income 696 2,352 -- 3,048
Non-interest expense 4,291 7,825 396 b 12,512
-------- -------- ----- ----------
Income(loss) before provision for income
tax and extraordinary item (1,073) 1,613 (522) 18
Provision(benefit) for income taxes (443) 608 (219) (54)
-------- -------- ----- ----------
Income(loss) before extraordinary item (630) 1,005 (303) 72
Extraordinary item, net of taxes 625 -- -- 625
-------- -------- ----- ----------
Net income (loss) $ (5) $ 1,005 $(303) $ 697
-------- -------- ----- ----------
-------- -------- ----- ----------
Weighted average common
shares outstanding 268,198 978,160 3,660,603
Net income (loss) per common share:
Income (loss) before extraordinary item $ (2.35) $ 1.03 $ 0.02
Extraordinary item 2.33 -- 0.17
-------- -------- ----- ----------
Income (loss) per common share $ (0.02) $ 1.03 $ 0.19
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
42
<PAGE>
HOLDCO(1)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Combined SDN CSB Adjustments Combined
------------ -------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 3,863 $ 3,059 $ -- $ 6,922
Interest on investment securities 560 207 -- 767
Interest on Federal funds sold 157 359 (22)a 494
---------- -------- ----- ----------
Total interest income 4,580 3,625 (22) 8,183
Interest Expense
Deposits 1,735 1,672 -- 3,407
Debentures and other 15 18 -- 33
---------- -------- ----- ----------
Total interest expense 1,750 1,690 -- 3,440
---------- -------- ----- ----------
Net interest income 2,830 1,935 (22) 4,743
Provision for loan losses 65 168 -- 233
---------- -------- ----- ----------
Net income after provision for loan losses 2,765 1,767 (22) 4,510
Non-interest income 282 2,702 -- 2,984
Non-interest expense 2,664 4,840 146 b 7,651
---------- -------- ----- ----------
Income(loss) before provision for
income tax 383 (372) (168) (157)
Provision(benefit) for income taxes 151 (156) (71) (76)
---------- -------- ----- ----------
Net income (loss) $ 232 $ (216) $ (97) $ (81)
---------- -------- ----- ----------
---------- -------- ----- ----------
Weighted average common
shares outstanding 4,287,872 861,460 9,783,568
Income(loss) per common share $ 0.05 $ (0.25) $ (0.01)
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
43
<PAGE>
SDN BANCORP, INC.(1)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
SDN LNB Adjustments Combined SDN
-------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 920 $2,943 $ -- $ 3,863
Interest on investment securities 97 463 -- 560
Interest on Federal funds sold 49 136 (28)a 157
-------- ------ ----- ----------
Total interest income 1,066 3,542 (28) 4,580
Interest Expense
Deposits 292 1,443 -- 1,735
Debentures and other 15 -- -- 15
-------- ------ ----- ----------
Total interest expense 307 1,443 -- 1,750
-------- ------ ----- ----------
Net interest income 759 2,099 (28) 2,830
Provision for loan losses 35 30 -- 65
-------- ------ ----- ----------
Net income after provision for loan losses 724 2,069 (28) 2,765
Non-interest income 162 120 -- 282
Non-interest expense 863 1,706 95 b 2,664
-------- ------ ----- ----------
Income (loss) before provision for
income tax 23 483 (123) 383
Provision(benefit) for income taxes 5 198 (52) 151
-------- ------ ----- ----------
Net income (loss) $ 18 $ 285 $ (71) $ 232
-------- ------ ----- ----------
-------- ------ ----- ----------
Weighted average common
shares outstanding 895,467 4,287,872
Income per common share $ 0.02 $ 0.05
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined
financial statements.
- --------------------------
(1) Acquisition of LNB was effective March 31, 1996
44
<PAGE>
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
a) The pro forma adjustments to these items include the transaction
costs incurred in conjunction with the Liberty acquisition and the CSB
Acquisition net of additional cash provided by the Dartmouth Partnership in
funding the transactions. These items assume also include the $2.2 million
redemption of Liberty's capital that was a funding component of the Liberty
acquisition. Included in the Pro Forma Condensed Combined Statements of
Operations are adjustments to interest on federal funds sold to reflect the
foregone income at the prevailing federal funds rates for each period.
b) The pro forma statements included adjustments for the excess of the
cost over the fair value of the net assets acquired in each acquisition, as
follows:
LIBERTY
------------------
12/31/95 3/31/96
-------- -------
Purchase price $14,477 $14,477
Historical net tangible assets acquired 11,428 11,655
Estimated closing adjustments (973) (973)
Estimated fair value adjustments 64 15
------- -------
Estimated fair value of net assets 10,519 10,697
------- -------
Excess cost over net assets acquired $ 3,958 $ 3,780
------- -------
------- -------
CSB
------------------
12/31/95 3/31/96
-------- -------
Purchase price $21,346 $21,346
Historical net tangible assets acquired 16,726 16,511
Estimated closing adjustments (1,033) (1,033)
Estimated fair value adjustments 27 18
------- -------
Estimated fair value of net assets 15,720 15,496
------- -------
Excess cost over net assets acquired $ 5,626 $ 5,850
------- -------
------- -------
Included in the Pro Forma Condensed Combined Statements of Operations are
adjustments to noninterest expense that reflect the amortization of the
excess cost over net assets acquired over a useful life of ten years
utilizing the straight line method.
c) The pro forma adjustment reflects the tax benefit related to the
expenses incurred in conjunction with the Liberty acquisition and the CSB
Acquisition and the establishment of a valuation reserve for the state
deferred tax asset in conjunction with the acquisition of Liberty.
d) The pro forma shareholders' equity accounts have been adjusted in the
Unaudited Pro Forma Condensed Combined Statements of Condition to reflect
elimination of the historical shareholders' equity in accordance with
purchase method of accounting. The Liberty adjustments reflect the issuance
of a total of 3,392,405 shares in connection with the Liberty acquisition.
The CSB adjustments reflect the issuance of 1,622,278 shares in exchange for
40% of the outstanding shares of CSB (assuming an exchange ratio of 4.7079
which is based upon the book value of SDN at December 31, 1995 and book value
of CSB at December 31, 1995 adjusted for the full Valuation Adjustment and
for the SAIF Stock Component assuming an approximate maximum cost of $1.0
million for the SAIF Recapitalization Legislation) and issuance of 3,873,418
shares in exchange for cash provided by the Partnership to acquire the
remaining 60% of the outstanding shares of CSB.
e) Pro Forma combined constitutes Holdco.
45
<PAGE>
SOLICITATION OF WRITTEN CONSENTS OF
THE SHAREHOLDERS OF COMMERCE SECURITY BANK
Introduction
This Information Statement/Prospectus is being furnished to the CSB
shareholders in connection with the solicitation by the Board of Directors of
CSB of the written consents of the CSB shareholders to the Reorganization
Agreement. This Information Statement/Prospectus and the enclosed form of
written consent are first being mailed to the CSB shareholders on or about
___________, 1996.
Matter to Be Considered
The shareholders of CSB will be asked to consent to and approve of the
Reorganization Agreement, entered into as of April 23, 1996, by and between
SDN and CSB, providing for the acquisition of CSB by Holdco, a Delaware
corporation, through a merger of a wholly-owned subsidiary of Holdco with and
into CSB. (See "THE CSB ACQUISITION -- Terms of the Reorganization
Agreement" herein.) The Reorganization Agreement in its entirety and all
exhibits thereto are set forth in Annex 1.
Record Date; Voting Information
The close of business on July 31, 1996 was the record date (the "Record
Date") for determining which of the CSB shareholders were entitled to receive
notice of and to submit written consents in connection with approval of the
Reorganization Agreement. On the Record Date, there were 861,460 shares of
CSB Common Stock outstanding, held by approximately ____ holders of record.
Each share of CSB Common Stock is entitled to one vote on the proposal to
approve the Reorganization Agreement. Section 1201 of the Corporations Code
requires the Reorganization Agreement to be approved by the holders of a
majority of the outstanding shares of CSB Common Stock. On the Record Date,
CSB's directors, executive officers and their affiliates owned of record, in
the aggregate, 781,500 shares of CSB Common Stock, representing approximately
90.7% of the outstanding shares of CSB Common Stock entitled to submit
written consents and thereby vote on approval of the Reorganization
Agreement. Each of the directors of CSB has entered into a Voting Agreement
with SDN and CSB providing that such director will vote all shares of CSB
Common Stock owned by him or her in favor of the approval of the
Reorganization Agreement. (See "THE CSB ACQUISITION -- Terms of the
Reorganization Agreement -- Interests of Certain Persons in the CSB
Acquisition; Related Agreements" herein.)
Submission of Written Consents; Revocability
Shareholder approval of the Reorganization Agreement may be given either
by vote of the shareholders at a shareholders' meeting or by written consent
of the shareholders. The Board of Directors of CSB has elected the latter
method of obtaining shareholder approval of the Reorganization Agreement.
The shareholders of CSB are therefore requested to complete, sign and date
the enclosed written consent form and return it to CSB in the enclosed
postage prepaid envelope as soon as possible.
Any shareholder of CSB may revoke his or her written consent at any time
prior the later of (I) the fifth business day after this Information
Statement/Prospectus is distributed, and (ii) the receipt by CSB of
affirmative written consents representing a majority of the outstanding
shares of CSB Common Stock. To effect a revocation prior to that time, CSB
must receive a written instrument filed by the CSB shareholder with the
President of CSB revoking his or her previously submitted written consent.
Any CSB shareholder who signs, dates and returns the written consent form but
does not indicate a choice thereon will be deemed to have consented to, and
approved of, the Reorganization Agreement.
46
<PAGE>
Solicitation of Written Consents
This solicitation of the CSB shareholders is being made by the Board of
Directors of CSB. The expense of preparing, assembling, printing and mailing
this Information Statement/Prospectus to the CSB shareholders and the
material used in the solicitation of their written consents will be borne by
CSB in accordance with the terms of the Reorganization Agreement. (See "THE
CSB ACQUISITION -- Terms of the Reorganization Agreement -- Expenses"
herein.) CSB contemplates that the written consents of the CSB shareholders
will be solicited principally through the use of the mail, but officers,
directors and employees of CSB may solicit written consents personally or by
telephone, without receiving any compensation therefor. Although there is no
formal agreement to do so, CSB may reimburse banks, brokerage houses and
other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding this Information Statement/Prospectus and written consent form to
shareholders whose CSB Common Stock is held of record by such entities. In
addition, CSB may use the services of individuals or companies it does not
regularly employ in connection with the solicitation of written consents if
deemed advisable by the Board of Directors.
Recommendation
The Board of Directors of CSB has carefully reviewed the terms and
conditions of the Reorganization Agreement and believes the proposed CSB
Acquisition is in the best interests of CSB and the CSB shareholders.
Accordingly, the Board of Directors of CSB has unanimously approved the
Reorganization Agreement and recommends that the CSB shareholders give their
written consents IN FAVOR of approval of the Reorganization Agreement.
SELECTED CONSOLIDATED FINANCIAL DATA OF CSB
The table on the following page sets forth certain selected consolidated
financial data for CSB as of and for the three-month periods ended March 31,
1996 and 1995 and as of and for each of the years in the five-year period
ended December 31, 1995. In the opinion of CSB's management, the unaudited
financial statements as of and for the three months ended March 31, 1996 and
1995 which are included in this Information Statement/Prospectus were
prepared on the same basis as the audited financial statements and include
all adjustments (none of which were other than normal recurring adjustments)
necessary to present fairly the information set forth therein. Interim
financial statements are not necessarily indicative of results for the entire
year. The selected consolidated financial data as of and for each of the
years in the five-year period ended December 31, 1995 have been derived from
CSB's audited financial statements. Such statements as of and for the
years ended December 31, 1995 and 1994 and for the year ended December 31,
1993 are included herein.
47
<PAGE>
<TABLE>
<CAPTION>
Unaudited
As of and for the
Three Months Ended
March 31, As of and For the Years Ended December 31,
------------------- ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Statement of Income Data
Interest income. . . . . . . . . . . . . . . $ 3,625 $ 3,081 $ 14,140 $ 12,065 $ 12,056 $ 12,906 $ 15,285
Interest expense . . . . . . . . . . . . . . 1,690 1,467 6,736 4,554 4,816 7,948 9,858
Net interest income before
provision for loan losses . . . . . . . . . 1,935 1,614 7,404 7,511 7,240 4,958 5,427
Provision for loan losses. . . . . . . . . . 168 275 1,196 1,172 910 765 1,442
Gain on sale of loans and loan servicing . . 2,232 4,122 14,341 12,148 10,929 17,832 8,748
Servicing fees and other income. . . . . . . 470 779 2,460 4,452 2,793 4,506 1,001
Non-interest expense . . . . . . . . . . . . 4,841 5,229 21,778 21,040 15,709 17,426 11,859
Earnings (loss) before income taxes. . . . . (372) 1,011 1,231 1,899 4,343 9,105 1,875
Income tax expense/benefit . . . . . . . . . (156) 425 517 798 1,841 3,810 775
Net earnings (loss) . . . . . . . . . . . . $ (216) $ 586 $ 714 $ 1,101 $ 2,502 $ 5,295 $ 1,100
Summary Balance Sheet Data (Period End)
Loans receivable, net. . . . . . . . . . . . $ 89,569 $ 76,747 $ 94,435 $ 66,081 $ 59,157 $ 59,604 $ 75,095
Allowance for loan losses . . . . . . . . . 2,453 1,750 2,396 1,471 2,203 2,280 2,050
Loans held for sale. . . . . . . . . . . . . 51,912 38,931 38,337 45,340 83,538 54,670 92,927
Real estate joint ventures, net. . . . . . . 3,811 1,754 3,744 1,705 1,784 2,137 2,111
Deferred income taxes. . . . . . . . . . . . (2,047) 248 (2,200) (51) (406) 337 (378)
U.S. Government securities . . . . . . . . . -0- 6,890 3,000 7,822 2,779 349 __._(2)
Securities of U.S. governmental agencies . . 5,493 8,486 7,996 5,495 -0- -0- __._(2)
Mortgage-backed securities . . . . . . . . . 5,826 8,361 7,032 8,547 9,051 -0- __._(2)
Federal funds sold/repurchase agreements . . 31,500 2,000 28,000 8,200 17,000 3,500 6,000
Other real estate owned. . . . . . . . . . . 1,799 3,592 1,240 4,185 3,996 5,863 6,900
Accrued interest receivable. . . . . . . . . 821 859 1,099 839 759 691 1,020
Other assets and receivables . . . . . . . . 25,030 23,858 28,464 24,506 17,809 14,795 12,826
Total interest-earning assets. . . . . . . . 185,530 142,597 180,014 145,475 172,648 119,649 175,249
Total assets . . . . . . . . . . . . . . . . 215,761 171,478 213,347 172,720 195,873 141,609 196,879
Total interest-bearing liabilities . . . . . 124,767 106,794 122,329 105,083 109,877 122,346 178,879
Total deposits . . . . . . . . . . . . . . . 195,388 150,502 191,655 151,070 175,950 126,903 185,874
Total stockholders' equity . . . . . . . . . 16,529 16,591 16,753 16,005 14,884 11,928 6,633
Per Share Data
Net earnings (loss). . . . . . . . . . . . . $ (.25) $ .68 $ .83 $ 1.28 $ 2.91 $ 6.62 $ 1.38
Book value . . . . . . . . . . . . . . . . . 19.19 19.28 19.45 18.60 17.31 14.91 8.29
Cash dividends . . . . . . . . . . . . . . . -0- -0- -0- -0- -0- -0- -0-
Weighted average common shares outstanding . 861,460 860,379 861,460 860,379 859,880 800,000 800,000
Selected Financial Ratios
Net earnings (loss) to average stockholders'
equity . . . . . . . . . . . . . . . . . . (1.30)% 3.87% 4.45% 5.82% 18.38% 57.05% 18.08%
Net earnings (loss) to average total assets. (0.11)% 0.37% 0.40% 0.62% 1.44% 3.13% 0.71%
Net interest spread. . . . . . . . . . . . . 2.40% 3.16% 2.34% 3.96% 2.60% 4.29% 3.21%
Net interest margin. . . . . . . . . . . . . 4.26% 3.90% 4.11% 4.04% 4.14% 3.50% 2.27%
Average stockholders' equity
to average total assets. . . . . . . . . . 8.41% 9.45% 8.99% 10.66% 7.85% 5.48% 3.92%
Tier 1 capital to adjusted total assets. . . 7.33% 8.99% 7.62% 8.89% 7.70% 7.40% 2.82%
Tier 1 capital to total risk-weighted assets 13.08% 13.56% 11.93% 14.72% 15.10% 11.90% 4.39%
Total capital to total risk-weighted assets. 14.33% 14.81% 13.18% 15.97% 16.40% 13.40% 5.89%
Loans and Leases
Nonperforming loans to total gross portfolio
loans. . . . . . . . . . . . . . . . . . . 6.43% 2.60% 3.67% 1.61% 3.72% __.__(2) __.__(2)
Nonperforming assets to total gross portfolio
loans and other real estate owned. . . . . 8.22% 6.86% 4.89% 7.35% 9.60% __.__(2) __.__(2)
Net charge-offs (recoveries) to average loans 0.11% (0.01)% 0.31% 2.00% 1.56% __.__(2) __.__(2)
Total interest expense to gross interest
income . . . . . . . . . . . . . . . . . . 46.62% 47.61% 47.64% 37.75% 39.95% 61.58% 64.49%
Allowance for loan losses
to net loans at period end . . . . . . . . 2.74% 2.28% 2.54% 2.23% 3.72% 3.83% 2.73%
Net loans to total deposits at period end. . 45.84 50.99% 49.27% 43.74% 33.62% 46.97% 40.40%
</TABLE>
- ------------------------------------------------------
(1)Includes leases.
(2)This data is not available.
(3)Includes FHLB stock and cash and due from banks.
(4)Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5)Represents net interest income (after provisions for loan losses) as a
percentage of average interest-earning assets. 1991 and 1992 are calculated
using actual interest-earning assets at year-end, as average balances are not
available.
(6)Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(7)Nonperforming assets consist of nonperforming loans (see Footnote no. 6
above) and other real estate owned.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB
This discussion presents management's analysis of the financial
condition and results of operations of CSB as of and for the three months
ended March 31, 1996 and 1995 and as of and for the years ended December 31,
1995, 1994 and 1993. The discussion should be read in conjunction with the
consolidated financial statements of CSB as of and for the years ended
December 31, 1995, 1994, and 1993 and the notes related thereto presented
elsewhere in this Information Statement/Prospectus. (See "CONSOLIDATED
FINANCIAL STATEMENTS OF CSB" herein.)
Summary of Performance
CSB's total assets increased by $2.5 million, or 1.2%, to $215.8
million at March 31, 1996 from $213.3 million at December 31, 1995, primarily
as the result of increases in loan balances of $8.7 million, and partially
offset by a reduction in cash and investments of $4.0 million. Total deposits
increased $3.7 million, or 1.9%, to $195.4 million at March 31, 1996 from
$191.7 million at December 31, 1995, primarily as the result of increases in
both noninterest-bearing and interest-bearing deposits. Total stockholders'
equity at March 31, 1996 was $16.5 million as compared to $16.7 million at
December 31, 1995, a decrease of $200,000 or 1.3%. CSB's Leverage Capital
Ratio, Tier 1 Risk-Based Capital Ratio and Total Risk-Based Capital Ratio
were 7.33%, 13.08% and 14.33%, respectively, at March 31, 1996, as compared
to 7.62%, 11.93%, and 13.18%, respectively, at December 31, 1995. As of
March 31, 1996, CSB was considered "Well Capitalized" under the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
Total assets increased to $213.3 million at December 31, 1995 from
$172.7 million at December 31, 1994, an increase of $40.6 million or 23.5%.
That growth was reflected in both liquidity and lending and reflects the
success of CSB in achieving growth in commercial loans and equipment
financing (leasing). Liquidity is made up of total cash and cash
equivalents, and investment securities. Total cash and cash equivalents
increased $19.0 million, or 102.7%, to $37.5 million at December 31, 1995 as
compared to $18.5 million at December 31, 1994. That increase in liquidity
was partially offset by a $3.8 million or 17.6% decrease in investment
securities.
The loan portfolio is primarily comprised of mortgage loans held for
sale, and commercial and real estate loans and equipment leases (portfolio
loans and leases). Mortgage loans held for sale decreased by $7.0 million,
or 15.5%, to $38.3 million at December 31, 1995 from $45.3 million at
December 31, 1994.
Net portfolio loans and leases increased $28.3 million, or 42.8%, to
$94.4 million at December 31, 1995 from $66.1 million at December 31, 1994.
In an effort to diversify its core business lines, CSB emphasized its
commercial lending and its leasing activities. As a result of that emphasis,
at December 31, 1995, commercial loans increased $8.5 million, or 97.1%, to
$17.3 million, and leases increased $12.0 million, or 74.4%, to $28.1 million
from $8.8 million and $16.1 million, respectively, at December 31, 1994.
That emphasis in turn resulted in the increase in net portfolio loans and
leases discussed above.
Total deposits increased $40.6 million, or 26.9%, to $191.7 million
at December 31, 1995 from $151.1 million at December 31, 1994.
Noninterest-bearing deposits increased by $23.3, or 50.8%, to $69.3 million
at December 31, 1995 from $46.0 million at December 31, 1994.
Interest-bearing deposits increased by $17.2 million, or 16.4%, to $122.3
million at December 31, 1995 from $115.1 million at December 31, 1994. Those
increases were primarily attributable to increased specialized marketing of
business services.
Total stockholders' equity at December 31, 1995 was $16.8 million,
as compared to $16.0 million at December 31, 1994, an increase of $800,000 or
4.7%. CSB's Leverage Ratio, Tier 1 Risk-Based Capital Ratio and Total
Risk-Based Capital Ratio were 7.62%, 11.93% and 13.18%, respectively, at
December 31, 1995 as compared to 8.89%, 14.72% and 15.97%, respectively, at
December 31, 1994.
CSB's earnings for 1995 were $714,000 as compared to $1.1 million
for 1994. That decrease was primarily due to the $604,000 cost related to
the closing of non-profitable loan production offices. The decrease in
earnings is also attributable to increases in other real estate owned
("OREO") and joint venture activities and legal expenses, partially offset by
decreases in salaries and employee benefits.
Total assets of CSB decreased $23.2 million, or 11.8%, to $172.7
million at December 31, 1994, from $195.9 million at December 31, 1993. The
decrease is primarily attributable to a $31.6 million or 22.1% decrease in
total loans, with mortgage loans held for sale decreasing $38.2 million, or
45.7%, to $45.3 million at December 31, 1994 from $83.5 million at December
31, 1993, and portfolio loans increasing $6.6 million, or 11.0%, to $66.1
million at December 31, 1994 from $59.5 million at December 31, 1993. Such
decrease in mortgage loans held for sale was primarily the result of
significant increases in interest rates which curtailed refinance and new
home sale activity. Total cash and cash equivalents
49
<PAGE>
decreased $7.1 million, or 27.7%, to $18.5 million at December 31, 1994 from
$25.6 million at December 31, 1993. That decrease was offset by the $10.0
million or 84.8% increase in investment securities. Loan servicing and sales
increased $2.4 million, or 50.4%, to $7.2 million at December 31, 1994 from
$4.8 million at December 31, 1993.
Total deposits decreased $24.9 million, or 14.1%, to $151.1 million
at December 31, 1994 from $176.0 million at December 31, 1993.
Noninterest-bearing deposits decreased $20.1 million, or 30.4%, to $46.0
million at December 31, 1994, from $66.1 million at December 31, 1993, and
interest-bearing deposits decreased $4.8 million, or 4.4%, to $105.1 million
at December 31, 1994 from $109.9 million at December 31, 1993.
Total stockholders' equity at December 31, 1994 was $16.0 million as
compared to $14.9 million at December 31, 1993, an increase of $1.1 million
or 7.4%. CSB's Leverage Ratio, Tier 1 Risk-Based Capital Ratio and Total
Risk-Based Capital Ratio were 8.89%, 14.72% or 15.97%, respectively, at
December 31, 1994 as compared to 7.70%, 15.10% and 16.40%, respectively, at
December 31, 1993.
FINANCIAL CONDITION
Loans and Lease Portfolio
Total mortgage loans held for sale, and loans and leases (net of the
allowance for possible loan and lease losses of $2.5 million), increased by
$8.7 million, or 6.6%, to $141.5 million at March 31, 1996 from $132.8
million at December 31, 1995. Loans comprised 65.6% of total assets at March
31, 1996, compared with 62.2% at December 31, 1995.
Mortgage loans held for sale were $51.9 million at March 31, 1996 as
compared to $38.3 million at December 31, 1995, an increase of $13.6 million
or 35.5%. That increase was a result of a decrease in interest rates which
resulted in a resurgence of mortgage loan originations. Total outstanding
"forward commitments" and "put options" at March 31, 1996 were $63.5 million.
Gross loans and leases (excluding loans held for sale) totaled $92.0
million at March 31, 1996 as compared to $96.8 million at December 31, 1995,
a decrease of $4.8 million or 5.0%. That decrease was primarily attributable
to sales in the leasing portfolio. Real estate and real estate construction
loans decreased $2.1 million or 4.0 % to $51.2 million at March 31, 1996 from
$53.3 million at December 31, 1995, as the result of increased competition
and seasonal weather conditions. Commercial loans increased $1.5 million, or
8.7%, to $18.8 million at March 31, 1996 from $17.3 million at December 31,
1995. Consumer loans and all other loans were relatively flat with a
decrease of $500,000 at March 31, 1996. Leases decreased $3.6 million, or
12.8%, to $24.5 million at March 31, 1996 from $28.1 million at December 31,
1995. CSB's Equipment Leasing Division initiated its new sales program in
1996, and, as a result, approximately $7.0 million in leases were sold to
other financial institutions during the first quarter of 1996, generating
gains of approximately $250,000. During the first quarter of 1996,
approximately $6.0 million in new leases were originated. However, with the
above-described sale and normal runoff the portfolio declined to $24.5
million, although management of CSB believes the portfolio should grow
significantly during the second quarter of 1996.
Total loans and leases (including loans held for sale and net of the
allowance for possible loan and lease losses of $2.4 million and $1.5 million
at December 31, 1995 and 1994, respectively) increased by $21.4 million, or
19.2%, to $132.8 million at December 31, 1995 as compared to $111.4 million
at December 31, 1994. The December 31, 1994 balance represented a $31.3
million or 21.9% decrease from the $142.7 million balance at December 31,
1993. At December 31, 1995, total loans comprised 62.2% of total assets
compared with 64.5% at year-end 1994. The ratio of total average loans and
leases to total average deposits was 76.6% and 76.4%, respectively, for the
years ended December 31, 1995 and 1994.
Mortgage loans held for sale were $38.3 million at December 31,
1995, a decrease of $7.0 million, or 15.5%, from the $45.3 million balance at
December 31, 1994. That decrease appears to be a trend carried over from
1994 as a result of the uncertain interest rate environment from 1993 to the
present. The decrease in 1994 was $38.2 million, or 45.7%, from $83.5
million at December 31, 1993.
Mortgage loans held for sale are stated at the lower of cost or
market value as determined by outstanding commitments from investors or
current investor yield requirements calculated on an aggregate loan basis.
CSB has mortgage origination offices in five states: California, Nevada,
Oregon, Arizona and Colorado. That diversity of market area aids in
lessening the negative impact of regional economic fluctuations. CSB
originates and sells residential mortgage loans to a variety of secondary
market investors, including the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association ("FNMA"). CSB has an
arrangement with the Government National Mortgage Association ("GNMA")
whereby loans originated by CSB are securitized by GNMA and sold to others.
It is CSB's intention to sell all of the mortgage loans that it originates.
CSB originated $879.8 million in loans during 1995 and $1.11 billion in 1994.
As part of its mortgage operation activities, CSB may sell the servicing
rights to loans that it has originated. The sale of servicing rights is
accomplished by either selling
50
<PAGE>
the servicing to the same company that purchased the loan at the time of sale
(servicing-release sale) or selling to third party investors, usually through
a broker (bulk sales). The bulk sale of servicing may be subject to recourse
and, as a result, CSB sets up reserve for those contingent liabilities. (For
a further discussion regarding the sale of CSB's servicing portfolio, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CSB RESULTS OF OPERATIONS -- Noninterest Income"
herein.)
"Forward commitments" and "put options" on mortgage-backed
securities are used to reduce interest rate risk (i.e., hedging) on a portion
of loans held for sale and on certain loans anticipated to fund. The
resulting gains or losses on forward commitments are deferred and included in
the carrying values of the loans. Premiums on "put options" are capitalized
and amortized over the option period. Gains or losses on "forward
commitments" and "put options" deferred against loans held for sale
approximately offset equivalent amounts of unrecognized gains or losses on
the related loans. Forward commitments to sell and put options on
mortgage-backed securities that hedge anticipated loan funding are
off-balance sheet items and not reflected in CSB's Consolidated Statement of
Financial Condition. The aggregate outstanding "forward commitments" and
"put options" were $46.0 million, $48.0 million and $44.0 million at December
31, 1995, 1994 and 1993, respectively.
Gross loans and leases (excluding loans held for sale) totaled $96.8
million at December 31, 1995 as compared to $67.6 million at December 31,
1994, an increase of $29.2 million or 43.1%, and, as of December 31, 1994,
had increased $5.9 million, or 9.6%, from $61.7 million at December 31, 1993.
The reasons for those increases are described below.
Loans for land, residential real estate, commercial real estate and
consumer loans were relatively unchanged in 1995 as compared to 1994. In
1995, residential real estate loans increased $1.9 million or 19.0%,
commercial real estate decreased $900,000 or 4.4% and land and consumer loans
were unchanged. More significant changes occurred in 1994 as compared to
1993. In that regard, for 1994, land loans decreased $3.2 million or 53.7%,
residential real estate loans decreased $2.5 million or 20.0%, commercial
real estate increased $900,000 or 4.9%, and consumer loans increased $300,000
or 16.4%. The decrease in land loans was due to a conscious deemphasis by
CSB on making that type of loan, and the decrease in residential real estate
loans was due to the successful sale of those loans.
Real estate construction loans were $15.9 million at December 31,
1995, an increase of $7.7 million, or 92.9%, from $8.2 million at December
31, 1994 as a result of an increased marketing emphasis on that type of loan.
That December 31, 1994 balance was a decrease of $900,000, or 9.5%, from the
December 31, 1993 balance of $9.1 million. The majority of those loans are
short-term, six-to-nine month, "Build to Suit" construction loans taken out
by individuals who are building their own homes and using their own
contractors. Those "Build to Suit" construction loans are paid off at
completion of the construction phase by a preapproved mortgage loan. CSB's
risk of loss on those loans depends largely on the accuracy of the estimated
construction costs, including interest. Funds are dispersed on a percentage
of completion method. Each construction site is inspected by a third party
inspector to monitor progress and ensure completion. The lending officer
responsible for the loan also makes visits to the site. CSB's underwriting
procedures are designed to identify what it believes to be acceptable levels
of risk and CSB constantly reviews those standards, taking current economic
conditions into consideration.
CSB has targeted its loan and lease growth in commercial lending and
direct financing leases. Its commercial loans are generally short-term,
one-to-five years, which have interest rates adjusting in accordance with the
Bank of America reference rate. Those loans were generally made to higher
net worth customers in the greater metropolitan Sacramento area and adjacent
communities. Commercial loans were $17.3 million at December 31, 1995, an
increase of $8.5 million, or 96.6%, over the balance for December 31, 1994 of
$8.8 million as a result of increased marketing efforts by CSB. The increase
was $1.6 million, or 22.6%, to $8.8 million at December 31, 1994 from $7.2
million at December 31, 1993.
CSB's direct financing leases are generally equipment leases,
including office equipment. The average lease size originated in 1995 was
approximately $23,000 and for 1994 was approximately $25,000. The leases are
generally made through a network of brokers in the mid-west and western
United States. CSB does not take all leases into its portfolio. Those
leases that are not within the yield and risk profile of CSB are sold at
origination to third party investors. The leases are originated in a wide
variety of industries including: agricultural, manufacturing, medical,
printing and transportation. Great care is taken to avoid concentrations in
any one area, and, as a result, when a concentration level is reached, a
block of those leases are sold. In 1995, lease originations were $36.4
million, an increase of $15.9 million, or 77.9%, as compared to lease
originations in 1994 of $20.4 million as a result of increased marketing
efforts by CSB. Lease originations in 1994 increased $9.4 million, or
138.7%, from 1993 lease originations. The lease portfolio balances at
December 31, 1995 and 1994 were $28.1 million and $16.1 million, respectively.
51
<PAGE>
The following table sets forth the amount of CSB's total loans and
leases outstanding in each category as of the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
AS OF MARCH 31, AS OF DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Residential real estate. . . . . . . . . . . $11,827 $10,790 $11,660 $ 9,798 $12,252
Commercial real estate . . . . . . . . . . . 25,142 26,571 25,166 26,101 25,262
Real estate construction . . . . . . . . . . 14,195 11,409 16,464 8,448 9,110
Commercial . . . . . . . . . . . . . . . . . 18,788 10,491 17,315 9,309 8,167
Consumer . . . . . . . . . . . . . . . . . . 2,155 2,154 2,321 2,325 1,997
Direct financing leases. . . . . . . . . . . 24,509 21,277 28,102 16,115 6,385
All other loans (including overdrafts) . . . 2,446 2,927 2,747 2,719 6,377
------- ------- ------- ------- -------
TOTAL. . . . . . . . . . . . . . . . . $99,062 $85,619 $103,775 $74,815 $69,550
Deferred loan fees and costs . . . . . . . . 122 227 128 207 276
Participating loans sold . . . . . . . . . . 6,918 6,895 6,816 7,056 7,914
------- ------- ------- ------- -------
Total Loans Net of Participation and Fees. . 92,022 78,497 96,831 67,522 61,360
Allowance for loan losses. . . . . . . . . . 2,453 1,750 2,396 1,471 2,203
------- ------- ------- ------- -------
TOTAL NET LOANS. . . . . . . . . . . . $89,569 $76,747 $94,435 $66,081 $59,157
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The following table shows the amounts of CSB's total loans and
leases outstanding, as of March 31, 1996, which, based on remaining scheduled
repayments of principal, are due within one year, after five years, and in
more than five years (dollars in thousands):
<TABLE>
<CAPTION>
After One
Within One But Within After
Year Five Years Five Years Totals
---------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Residential real estate. . . . . . . . . . . $ 7,501 $ 1,641 $2,685 $11,827
Commercial real estate . . . . . . . . . . . 1,327 10,992 6,634 18,953
Real estate construction . . . . . . . . . . 12,929 539 -0- 13,468
Commercial . . . . . . . . . . . . . . . . . 5,599 12,505 561 18,665
Consumer . . . . . . . . . . . . . . . . . . 366 1,702 86 2,154
Direct financing leases. . . . . . . . . . . 11,271 13,237 1 24,509
All other loans (including overdrafts) . . . 2,446 -0- -0- 2,446
------- ------- ------ -------
TOTAL. . . . . . . . . . . . . . . . . . . $41,439 $40,616 $9,967 $92,022
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans 90 days or
more past due and still accruing, restructured loans, and other real estate
owned. CSB considers a loan to be nonperforming when any one of the
following events occur: (a) an installment of principal or interest is 90
days past due; (b) the full timely collection of interest or principal
becomes uncertain; (c) the loan is classified as "doubtful" by bank
examiners; or (d) a portion of its principal balance has been charged off.
CSB's policy is to classify loans which are 90 days past due as nonaccrual
loans unless management determines that the loan is adequately collateralized
and in the process of collection or other circumstances exist which would
justify the treatment of the loan as fully collectible.
52
<PAGE>
Total nonperforming assets were $7.7 million at March 31, 1996, an
increase of $2.9 million or 60.4% from $4.8 million at December 31, 1995.
That increase was primarily the result of CSB's residential real estate
loans. The trend both locally and nationally is an increase in residential
loan delinquency, and as those delinquent loans reach 90 days they are placed
on nonaccrual. Nonaccrual residential loans were $3.2 million at March 31,
1996 as compared to $1.4 million at December 31, 1995, an increase of $1.8
million or 136.2%. Commercial nonaccrual loans increased approximately
$700,000 at March 31, 1996 as the result of one large construction loan.
Total OREO increased $600,000 during the first quarter of 1996 primarily due
to the addition of four residential OREO properties.
Total nonperforming assets were $4.8 million at December 31, 1995, a
decline of $500,000, or 19.4%, from $5.3 million at December 31, 1994. The
primary components of the changes in nonperforming assets in 1995 over 1994
were an increase in nonaccrual loans of $2.4 million, or 255.5%, to $3.4
million, and a decrease in OREO of $2.9 million, or 70.4%, to $1.2 million.
In 1994, nonperforming assets decreased by $1.0 million or 16.0% over 1993
levels. Included in the 1994 balance were in-substance foreclosures of
$700,000 which were transferred to loans effective January 1, 1995. In 1994,
nonaccrual loans decreased $1.2 million, or 56.2%, from 1993 to $1.0 million
and OREO increased $200,000, or 4.7%, to $4.2 million from 1993.
OREO is recorded at its net realizable value at the time the asset
is transferred to OREO. Additional write downs in the value of the
properties may occur depending upon changes in the market. Of the properties
held as OREO at December 31, 1994, 12 properties were sold in 1995 with a
book value (net of reserves) of $2.3 million. At December 31, 1995, three
pieces of property which were originally commercial loans and commercial real
estate loans remained in OREO with a value of $600,000, and eight residential
real estate properties remained in OREO with a value of $700,000. Management
believes that all of CSB's OREO will ultimately be sold at prices sufficient
to recover the values at which they are currently being carried on the books
of CSB. However, until each of those properties is actually sold, it is
impossible to predict whether such prices will actually recover such values.
Additionally, while management believes it has identified all of its
classified assets, it cannot guarantee that further deterioration of those
assets will not occur resulting in additional assets to be taken into other
real estate owned.
53
<PAGE>
The following table provides information with respect to the components of
CSB's nonperforming assets as of the dates indicated (dollars in thousands):
March 31, December 31,
--------------- ----------------------
1996 1995 1995 1994 1993
------- ------ ------- ------ -----
Nonaccrual loans and leases(1):
Residential real estate. . . . . . . $3,181 $630 $1,347 $470 $498
Real estate construction . . . . . . 2,390 796 1,687 298 1676
Commercial . . . . . . . . . . . . . 22 178 25 162 -0-
Consumer . . . . . . . . . . . . . . 17 1 6 -0- -0-
Direct financing leases. . . . . . . 186 217 330 25 6
Other. . . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
----- ----- ----- ---- -----
Total. . . . . . . . . . . . . . . . 5,796 1,822 3,395 955 2,180
Loans 90 days or more past
due and still accruing
(as to principal or interest):
Real estate construction . . . . . . -0- -0- -0- -0- -0-
Commercial . . . . . . . . . . . . . -0- -0- -0- -0- -0-
Consumer . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
Other. . . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
----- ----- ----- ---- -----
Total. . . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
Restructured loans and leases,(2,3):
Direct financing leases. . . . . . . 120 217 161 131 100
Other. . . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
----- ----- ----- ---- -----
Total. . . . . . . . . . . . . . . . 120 217 161 131 100
Other real estate owned. . . . . . . . 1,799 3,592 1,240 4,185 3,996
----- ----- ----- ---- -----
Total nonperforming assets . . . . . $7,715 $5,631 $4,796 $5,271 $6,276
----- ----- ----- ---- -----
----- ----- ----- ---- -----
Nonperforming loans as a percentage
of total gross portfolio
loans and leases. . . . . . . . . . 6.43% 2.60% 3.67% 1.61% 3.72%
----- ----- ----- ---- -----
----- ----- ----- ---- -----
Nonperforming assets as a percentage
of total portfolio gross loans and
leases and other real estate owned . 8.22% 6.86% 4.89% 7.35% 9.60%
----- ----- ----- ---- -----
----- ----- ----- ---- -----
- ------------------------
(1) During the periods ended March 31, 1996 and 1995, no interest income
related to these loans was included in net income. During the fiscal year
ended December 31, 1995, no interest income related to these loans was
included in net income. Additional interest income of approximately $128,000
and $68,000 respectively, would have been recorded during the periods ended
March 31, 1996 and 1995 and $125,000 would have been recorded for the year
ended December 31, 1995 if thse loans had been paid in accordance with their
original terms and had been outstanding throughout the applicable period
then ended or, if not outstanding throughout the applicable period then ended,
since origination.
(2) A "restructured loan" is open where the terms of which were
renegotiated to provide a reduction or deferral or interest or principal
because of a deterioration in the financial position of the borrower.
(3) During the periods ended March 31, 1996 and 1995, approximately $5,000
and $18,000 respectively, of interest income related to these loans included
in net income. During the fiscal year ended December 31, 1995, approximately
$29,000 of interest income related to these loans was included in net income.
No additional interest income would have been recorded during the periods
ended March 31, 1996 and 1995 and none would have been recorded in the year
ended December 31, 1995 if those loans had been paid inaccordance with their
original terms and had been outstanding throughout the applicable period
then ended or, if not outstanding throughout the applicable period then ended,
since origination.
54
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
At March 31, 1996 the allowance for loan and lease losses was $2.5
million, an increase of approximately $100,000 or 4.2% from $2.4 million at
December 31, 1995. During the three months ended March 31, 1996 CSB charged
off through reserves $122,000 in loans and leases, of which $91,000 related
to direct financing leases, and recovered $11,000 in prior charge-offs,
resulting in net charge-offs of $111,000. Previously, as a result of the
reclassification of a commercial loan, $168,000 was added to the allowance
for loan and lease losses.
At December 31, 1995 the allowance for loan and lease losses was $2.4
million, an increase of $925,000 or 61.7% from $1.5 million at December 31,
1994. Charge offs for loans and leases for 1995 were approximately $298,000
with $145,000 relating to residential real estate loans, and recoveries of
loans and leases previously charged off were approximately $27,000 for a net
charge off of $271,000. For the period ended December 31, 1995 $1.2 million
was added to the allowance for loan and lease losses primarily as the result
of the increases in classified residential real estate loans, which required
an additional $300,000 in allocated reserves, in classified real estate
construction loans which required an additional $238,000 in reserves in
classified commercial loans which required an additional $164,000, and in
classified direct financing leases which required $140,000 in additional
reserves.
At December 31, 1994 the allowance for loan and lease losses was $1.5
million, a decrease of approximately $732,000 or 33.2% from December 31, 1993
balance of $2.2 million. Charge offs for 1994 were approximately $1.9
million of which $312,000 was attributable to residential real estate loans,
$225,000 was attributable to real estate permanent loans, $645,000 for real
estate construction loans, and $718,000 for commercial loans. Total
recoveries for loans and leases charged off in prior periods were
approximately $28,000 which produced a net loan and lease charge off of $1.9
million. The large amount of charge-offs in 1994 was the result of
management's decision to deal with its portfolio of older classified assets.
During 1994 $1.2 million was added to the allowance for loan and lease losses
in order to adjust the allowance to an acceptable level after taking those
charge offs during the year.
It is CSB's policy to maintain its allowance for loan and lease losses at
a level considered by management to be adequate. Each month, management
analyzes the portfolio and calculates the amount necessary to maintain an
acceptable allowance for loan and lease losses based upon the risk associated
with the various categories of loans and leases. The balance of the various
categories are assigned a risk percentage, ranging from 1.0% to 5.0%, that
management believes represents the risk potential for each category.
Additionally, all loans of $1.0 million and greater and all loans and leases
that have been classified (internally or by Regulators (FDIC or state banking
regulators) as "watch" or "substandard") are reviewed individually and are
assigned, on a percentage basis, a high and low anticipated loss. The loan
and lease loss review is performed monthly by management's "Asset Quality
Committee" and reported in detail to the Board of Director's Loan Committee.
The comments of bank regulators and a third party loan review consultant
hired by CSB on an ongoing basis are also considered in assessing the risk
classifications. In determining the actual allowance for loan and leases
losses to be maintained, management reviews the financial condition of
certain borrowers and lessees, as well as general economic conditions. Loans
are charged against the allowance when, in management's opinion, they are
deemed uncollectible, although CSB continues to aggressively pursue
collection.
Effectively January 1, 1995, CSB adopted SFAS No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, AND SFAS NO. 118, ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURE. SFAS No. 114
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or as a practical expedient at the loan's observable market rate or the fair
value of the collateral if the loan is collateral dependent. SFAS No. 118
amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans and requires certain
information to be disclosed. The effect of adopting these standards was
immaterial.
At December 31, 1995 CSB's recorded investment in loans and leases for
which an impairment has been recognized in accordance with SFAS No. 114 was
approximately $8.4 million. The related valuation allowance was $1.1
million. For the year ended December 31, 1995, the average recorded
investment in loans and leases for which impairment has been recognized was
approximately $6.4 million. CSB uses the cash basis method of income
recognition for impaired loans and leases. For the year ended December 31,
1995, CSB recognized $320,000 of income on such loans.
55
<PAGE>
The allowance for loan and lease losses is based upon estimates given the
then current circumstances and ultimate losses may vary from those estimates.
The continuing evaluation of the loan and lease portfolio and assessment of
current economic conditions will dictate future funding levels. Management
believes that the allowance for loan and lease losses at March 31, 1996 was
adequate to absorb the known and inherent risks in the loan and lease
portfolio. However, no assurance can be given that: (I) CSB will not sustain
losses in any given period which could be substantial in relation to the size
of the allowance for loan and lease losses; (ii) CSB's level of nonperforming
loans will not increase; (iii) CSB will not be required to make significant
additional provisions to its allowance for loan and lease losses; or (iv) the
level of net charge-offs will not increase and possibly exceed applicable
reserves.
The table on the following page summarizes, for the periods indicated,
loan balances at the end of each period and the daily averages during the
period; changes in the allowance for loan losses arising from loans charged
off, recoveries on loans previously charged off, and additions to the
allowance which have been charged to operating expense; and certain ratios
relating to the allowance for loan losses (dollars in thousands).(1)
- ------------------------
(1) Data for fiscal year ended December 31, 1991 is not available.
56
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------ -------------------------------------
1996 1995 1995 1994 1993 1992
-------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCES:
Average gross portfolio loans and leases outstanding
during period. . . . . . . . . . . . . . . . . . . . . . . . . $96,768 $72,752 $87,279 $64,358 $61,794 $69,412
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Gross portfolio loans and leases outstanding at end
of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,022 $78,497 $96,831 $67,552 $61,360 $61,884
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period . . . . . . . . . . . . . . . . . $ 2,396 $ 1,471 $ 1,471 $ 2,203 $ 2,280 $ 2,050
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Actual charge-offs:
Residential real estate . . . . . . . . . . . . . . . . . . . . -0- 1 145 312 261 88
Commercial real estate . . . . . . . . . . . . . . . . . . . . -0- -0- -0- 225 -0- -0-
Real estate construction . . . . . . . . . . . . . . . . . . . 25 -0- 57 645 532 579
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . -0- -0- 80 718 174 -0-
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 16 20 50 14
Direct financing leases . . . . . . . . . . . . . . . . . . . . 91 -0- -0- 12 9 11
All other loans . . . . . . . . . . . . . . . . . . . . . . . . -0- -0- -0- -0- -0- -0-
------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4 298 1,932 1,026 692
------- ------- ------- ------- ------- -------
Recoveries on loans and leases previously charged off:
Residential real estate . . . . . . . . . . . . . . . . . . . . -0- -0- -0- 7 34 3
Real estate permanent . . . . . . . . . . . . . . . . . . . . . -0- -0- 1 -0- -0- -0-
Real estate construction . . . . . . . . . . . . . . . . . . . -0- -0- -0- -0- -0- 153
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8 22 21 5 -0-
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 -0- 4 -0- -0- 1
------- ------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8 27 28 39 157
------- ------- ------- ------- ------- -------
Net loan and lease charge-offs (recoveries) . . . . . . . . . . 111 (4) 271 1,904 987 535
------- ------- ------- ------- ------- -------
Provision charged to operating expense . . . . . . . . . . . . . 168 275 1,196 1,172 910 765
------- ------- ------- ------- ------- -------
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 2,453 $ 1,750 $ 2,396 $1,471 $ 2,203 $ 2,280
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
RATIOS:
Net loan and lease charge-offs to average loans and leases . . . 0.46% (0.02)% 0.31% 2.96% 1.60% 0.77%
Net loan and lease charge-offs to
loans and leases at end of period . . . . . . . . . . . . . . . 0.48% (0.02)% 0.28% 2.82% 1.61% 0.86%
Allowance for loan and lease losses
to average loans and leases . . . . . . . . . . . . . . . . . . 2.53% 2.41% 2.75% 2.29% 3.57% 3.28%
Allowance for loan and lease losses to
loans and leases at end of period . . . . . . . . . . . . . . . 2.67% 2.23% 2.47% 2.18% 3.59% 3.68%
Net loan and lease charge-offs to allowance for loan and
lease losses at end of period . . . . . . . . . . . . . . . . . 18.10% (0.91)% 11.31% 129.44% 44.80% 23.46%
Net loan and lease charge-offs to provision charged to
operating expense . . . . . . . . . . . . . . . . . . . . . . . 264.29% (5.82)% 22.66% 162.46% 108.46% 69.93%
</TABLE>
57
<PAGE>
The following table sets forth management's allocation of the
allowance for loan losses as of the ends of the periods indicated (1)
(dollars in thousands):
March 31,
----------------------------------
1996 1995
--------------- ---------------
% %
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
Balance at End of Period
Applicable to:
- --------------------------
Residential real estate. . . . . . . $ 618 0.67% $ 318 0.41%
Commercial real estate . . . . . . . 728 0.79 547 0.70
Real estate construction . . . . . . 357 0.39 186 0.24
Commercial . . . . . . . . . . . . . 354 0.38 335 0.43
Consumer . . . . . . . . . . . . . . 16 0.02 44 0.06
Direct financing leases. . . . . . . 380 0.41 320 0.41
------- ---- ------ ----
Total . . . . . . . . . . . . . . . $ 2,453 2.66% $1,750 2.23%
------- ---- ------ ----
------- ---- ------ ----
December 31,
----------------------------------
1996 1995
--------------- ---------------
% %
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
Balance at End of Period
Applicable to:
- --------------------------
Residential real estate. . . . . . . $ 552 0.57% $ 252 0.37%
Commercial real estate . . . . . . . 634 0.65 530 0.78
Real estate construction . . . . . . 350 0.36 112 0.17
Commercial . . . . . . . . . . . . . 468 0.48 304 0.45
Consumer . . . . . . . . . . . . . . 13 0.01 34 0.05
Direct financing leases. . . . . . . 379 0.39 239 0.35
------- ---- ------ ----
Total . . . . . . . . . . . . . . . $2,396 2.47% $1,471 2.18%
------- ---- ------ ----
------- ---- ------ ----
Real Estate Joint Ventures
CSB's investment in real estate joint ventures is comprised of its
investment in CSB Ventures, Inc., a wholly-owned subsidiary which is
consolidated for financial statement presentation. CSB Ventures has invested
in certain real estate joint ventures which it accounts for using the equity
method. CSB Ventures carries its real estate investments at the lower of
cost or estimated fair value. Direct write downs are recorded if total
actual or expected costs are in excess of estimated fair value.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") prohibits all insured state banks from engaging in activities
which are not permitted for national banks, such as real estate development
activities. (See "SUPERVISION AND REGULATION OF HOLDCO AND SDN" herein.)
Under FDICIA, CSB has until December 19, 1996 to divest itself of its
remaining investment in the real estate development properties of CSB
Ventures. As of March 31, 1996, CSB Ventures had two remaining properties in
the process of liquidation: CIP Southgate, with an investment of $806,000;
and Sierra Meadows, with an investment of $3 million. CIP Southgate is 7.5
acres of undeveloped land on Mack
- -------------------
(1) The allowance for loan losses was not allocated prior to 1994.
58
<PAGE>
Road in Sacramento, California, which is currently being marketed for sale.
The joint venture agreement on CIP Southgate calls for CSB Ventures to
receive 75% of the sales proceeds and its joint venture partner to receive
25% of the sales proceeds. If CSB is unable to divest itself of CIP
Southgate by December 19, 1996, it intends to apply to the FDIC for a
divestiture extension in order to obtain additional time to market and sell
such property.
Sierra Meadows is a commercial strip mall in Rocklin, California
that has approximately 33,000 square feet of rentable space and, at March 31,
1996, was approximately 85% occupied. The Sierra Meadows joint venture was
dissolved on May 31, 1994, with CSB Ventures acting as the servicing entity.
CSB Ventures sold such property on June 26, 1996 for $2.7 million to Sierra
Meadows Plaza LLC. CSB received cash and took back a note, secured by a
first deed of trust in the amount of $2.16 million, due in five years.
At December 31, 1993, CSB's investment in CIP Southgate was $1.08
million. During 1994, that value was written down to $1.06 million and, in
1995, the property was written down by another $249,000 to $806,000 at
December 31, 1995. At December 31, 1993, CSB's investment in Sierra Meadows
was $704,000 of cash and other assets and a third party medium-term note of
approximately $2.8 million at 9.75%. At December 31, 1994, CSB's investment
in Sierra Meadows was $650,000 of cash and other assets and a third party
medium term note of approximately $2.8 million. In 1995, the note was paid
off by CSB, and that, along with other capital expenditures, increased CSB's
investment to approximately $3.6 million. In December of 1995, the
investment in Sierra Meadows was written down by $666,000 to $2.9 million at
December 31, 1995. CSB's loss of approximately $150,000 on the sale of the
Sierra Meadow resulted from sales commissions and closing costs.
During 1995, CSB was involved in discussions with several
prospective buyers who had expressed interest in Sierra Meadows at
approximately the price this property was being carried on CSB's books.
However, none of the discussions resulted in a completed sales transaction.
During the latter part of 1995 it became apparent to CSB that this property
would require an adjustment in the sales price to stimulate more productive
sales activity. As a result, management decided to adjust the carrying value
of the property down by approximately $666,000.
Investment Portfolio
CSB's investment portfolio includes United States Treasury and other
U.S. government agency instruments, and collateralized mortgage obligations.
CSB's current investment policy is to invest in securities that have a
maturity of not more than five years and are of investment grade as reported
by one or more nationally recognized rating agencies.
In May 1993, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." That pronouncement requires that, upon acquisition, an
investment security be classified as "held to maturity", "available for sale"
or "trading". Generally, investments classified as "held to maturity" are
carried at amortized cost; investments classified as "available for sale" are
carried at market value, with the unrealized gain or loss reflected as a
separate component of stockholders' equity; and investments classified as
"trading" are carried at market value, with the unrealized gain or loss
reflected in the income statement. Specific rules control the treatment of
securities transferred between one category and another. Transfers between
the categories are recorded at fair market value. SFAS No. 115 became
effective for CSB on January 1, 1994, and, at that time, all of CSB's
securities were declared to be "held to maturity". In December 1995, FASB
allowed a window period in which companies were allowed to transfer
investments from one category to another without penalty. At December 31,
1995, CSB took that one-time opportunity to transfer $7.0 million in
investments from "held to maturity" to "available for sale". Those
securities had an unrealized gain of $45,800, which, after tax benefits,
caused stockholders' equity to increase by $26,600.
CSB's investment portfolio decreased by $6.7 million, or 37.2%, to
$11.3 million at March 31, 1996 from $18.0 million at December 31, 1995.
That decrease was primarily the result of securities maturing or being called
as a result of the decline in interest rates. The investment portfolio
activity during that time was $3.0 million matured, $3.0 million purchased,
$5.5 million called, and $1.2 million in mortgage backed securities
pay-downs. During the first quarter of 1996, the short-term fed funds rate
was at or above the one-year rate and only 25 to 40 basis points below the
two-year rate. Because of that flat yield curve, CSB was unable to purchase
securities with maturities that fit CSB's investment strategy, and, as a
result, CSB invested those funds in the short-term market (fed funds and
repurchase agreements). Of the $11.3 million in the investment securities
portfolio at March 31, 1996, $5.8 million were carried as "available for
sale" with an unrealized gain, net of taxes, of approximately $18,000.
59
<PAGE>
Investment securities totaled $18.0 million or 8.5% of total assets
at December 31, 1995, a decrease of $3.8 million, or 17.6%, compared to $21.9
million or 12.7% of total assets at December 31, 1994. At December 31, 1994,
CSB's investment portfolio increased $10.0 million, or 84.8%, compared to
$11.8 million or 6.0% of total assets for 1993. The decrease in the
investment portfolio during 1995 was due to maturities and securities being
called as the result of the declining interest rate environment. The
increase in the investment portfolio during 1994 was primarily due to the
decrease in mortgage loans held for sale resulting from a slow down in
mortgage loan origination.
The table below summarizes the book value and market value, and the
distribution of CSB's investment securities, as of the dates indicated
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------- ----------------------------------------------------
1996 1995 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
Book Market Book Market Book Market Book Market Book Market
Value Value Value Value Value Value Value Value Value Value
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities . . . . . $ -0- $ -0- $ 6,890 $ 6,907 $ 3,000 $ 2,999 $ 7,822 $ 7,807 $ 2,779 $ 2,779
Obligations of other U.S.
government agencies. . . . . . . . 5,493 5,463 8,486 8,472 7,996 8,001 5,495 5,390 -0- -0-
Mortgage-backed securities . . . . . 5,795 5,826 8,361 8,384 6,986 7,032 8,547 8,300 9,051 9,134
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total investment securities . . . $11,288 $11,289 $23,737 $23,763 $17,982 $18,032 $21,864 $21,497 $11,830 $11,913
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
The table below summarizes the maturity of CSB's investment securities and
their weighted average yields at March 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------------------------------------------------------------
After One But After Five
Within Within Five But Within After
One Year Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of other U.S.
government agencies. . . . . . . . . $ -0- 0.00% $5,493 5.83% $ -0- 0.00% $ -0- 0.00% $ 5,493 5.83%
Mortgage-backed securities . . . . . . -0- 0.00 917 5.96 -0- 0.00 4,878 7.42 5,795 7.19
----- ---- ---- ----- -----
Total investment securities. . . . . $ -0- 0.00% $6,410 5.84% $ -0- 0.00% $4,878 7.42% $11,288 6.52%
----- ---- ---- ----- -----
----- ---- ---- ----- -----
</TABLE>
Deposits
Total deposits increased by $3.7 million, or 1.9%, to $195.4 million
at March 31, 1996 from $191.7 million at December 31, 1995. That increase
was in both interest-bearing and noninterest-bearing deposits.
Noninterest-bearing deposits increased $1.3 million, or 1.87%, to $70.6
million at March 31, 1996 from $69.3 million at December 31, 1995, primarily
as the result of title deposits. With increases in mortgage lending
activity, CSB's title company deposits increase, and, consequently, such
deposits increased by $3.6 million at March 31, 1996. However, this increase
was partially offset by a decrease in commercial demand deposits of $2.7
million for the same period. It has been CSB's experience that commercial
demand deposits seasonally decrease during the first quarter of the year.
Interest-bearing deposits increased $2.4 million, or 2.0%, to $124.8 million
at March 31, 1996 from $122.3 million at December 31, 1995, as the result of
an increase in savings accounts of $2.7 million or 28.5%. Total savings
accounts were $12.0 million at March 31, 1996 as compared to $9.3 million at
December 31, 1995. That increase was primarily attributable to new
relationships with companies that facilitate property exchange transactions
and use savings accounts to enhance the yield until the property transaction
is completed.
Total average deposits remained substantially unchanged over the
last several years -- the average balance was $155.8 million for 1995, $155.1
million for 1994, and $155.3 million for 1993. While the total average
balances changed little, the components of the portfolio changed and
decreased CSB's reliance on more volatile deposits.
60
<PAGE>
There are three volatile areas in CSB's deposit portfolio --
deposits of title and escrow companies ("Title Deposits"), out-of-area
certificates of deposits ("Administrative CDs") and custodial accounts.
Title Deposits are noninterest-bearing deposits, and, while they do not earn
interest, CSB provides these depositors with certain specialized customer
services, such as data processing, accounting, and courier services. CSB
controls its customer service expenses by continuously monitoring the
earnings performance of its account relationships and, on that basis,
limiting the amount of servicing expense. Title Deposits are volatile
because they are sensitive to prevailing interest rates and other general
economic factors that affect the demand for real estate. Administrative CDs
are out-of-area deposits that are obtained by placing CSB's rates on various
rate bulletin boards available at CD investment services. Administrative CDs
are volatile because of the inherent interest rate sensitivity. CSB deals
directly with the depositor and does not pay a fee or commission for those
deposits. Custodial accounts are deposits that result from the servicing of
loans and are made up of principal and interest payments as well as tax and
insurance impound payments. Custodial accounts are volatile because they are
only temporary deposit accounts which leave CSB upon the sale of servicing.
The average balance of Title Deposits was $21.2 million in 1995 and
represented 47.6% of average noninterest-bearing deposits. The average
balance of Title Deposits was $23.8 million in 1994 and represented 52.4% of
average noninterest-bearing deposits. The average balance of Title Deposits
was $24.0 million in 1993 and represented 63.9% of average
noninterest-bearing deposits. While the average balance was fairly
consistent, the actual balance varied widely throughout each month, with the
highest balance usually occurring at the end of the month. The average
balance of Administrative CDs was $73.0 million in 1995 and represented 80.8%
of the average balance of all certificates of deposit. The average balance of
Administrative CDs was $82.5 million in 1994 and represented 90.7% of the
average balance of all certificates of deposit. The average balance of
Administrative CDs was $93.8 million in 1993 and represented 89.7% of the
average balance of all certificates of deposit.
The total of the average balances of Title Deposits, Administrative
CDs and custodial accounts as a percentage of total average deposits was
66.8% at March 31, 1996, 66.6% at December 31, 1995, 76.2% at December 31,
1994, and 79.8% at December 31, 1993. It has been management's goal to
reduce that dependency and increase CSB's core business deposits. The average
balance of money market and NOW accounts in 1995 was $14.3 million, as
compared to $12.9 million in 1994 and $11.2 million in 1993. Average savings
deposits increased to $6.7 million in 1995 from $5.9 million in 1994 and $2.1
million in 1993. While CSB's management believes that CSB has made
significant progress in attracting non-volatile deposits, CSB is still
substantially dependent upon volatile deposits for funding.
61
<PAGE>
The average balances in custodial accounts are directly related to
the amount of mortgage loan servicing CSB has retained; however the actual
balance will vary throughout the month as the mortgage payments are received
and then are paid out to the holder of the note. The average balances for
custodial accounts were $11.5 million for the three month period ending March
31, 1996, and were $9.6 million and $11.9 million for the years ending
December 31, 1995 and 1994, respectively. Upon the sale of all of CSB's
servicing portfolio, all of the custodial deposits will leave the bank. (For
a further discussion regarding the sale of its servicing portfolio, see
"MANAGEMENT DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF PERFORMANCE OF CSB -- RESULTS OF OPERATIONS -- Noninterest Income"
herein.)
The following tables summarize the distribution of average deposits
and the average rates paid for the periods indicated (dollars in thousands):
March 31,
---------------------------------------
1996 1995
------------------ ------------------
Average Average Average Average
Balance Rate Balance Rate
-------- -------- -------- -------
Demand, non-interest-bearing . . $ 56,152 n/a $ 36,277 n/a
Money market . . . . . . . . . . 12,828 3.18% 11.342 3.35%
NOW and Super NOW. . . . . . . . 2,067 1.94 1,775 2.03
Savings. . . . . . . . . . . . . 7,081 3.67 7,655 3.29
Certificates of deposit(1) . . . 97,855 6.18 82,421 6.31
------- ------- ----
Total deposits . . . . . . . $175,983 5.64% $139,470 5.69%
------- ---- ------- ----
------- ---- ------- ----
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1995 1994 1993
----------------- ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand:
Non-interest-bearing . . . . . . . . . . . $44,520 n/a $ 45,378 n/a $ 37,512 n/a
Money market . . . . . . . . . . . . . . . . 12,338 3.38% 10,932 3.28% 9,458 3.34%
NOW and Super NOW. . . . . . . . . . . . . . 1,992 2.16 1,929 2.13 1,750 2.11
Savings. . . . . . . . . . . . . . . . . . . 6,667 3.49 5,937 3.15 2,110 2.99
Certificates of deposit. . . . . . . . . . . 90,265 6.69 90,929 4.36 104,511 4.21
------- ------- -------
Total deposits . . . . . . . . . . . . . $155,782 6.05% $155,105 4.15% $155,341 4.14%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
- -------------------
(1) Information regarding the breakdown of average balances of certificates
of deposit of $100,000 or greater and certificates of deposit under $100,000 is
not available.
62
<PAGE>
The scheduled maturity of CSB's time deposits in denominations of
$100,000 or greater as of March 31, 1996 were as follows:
Deposits Maturing In March 31, 1996
-----------------------------------
(Dollars in Thousands)
Three months or less . . . . . . . . . . . $ 7,011
Over three months through six months . . . 6,021
Over six months through twelve months . . 7,229
Over twelve months . . . . . . . . . . . . 1,100
-------
Total: . . . . . . . . . . . . . . . . $21,361
-------
-------
Capital Resources
Stockholders' equity decreased $224,000, or 1.3%, to $16.5 million
at March 31, 1996 from $16.7 million at December 31, 1995, as a result of a
$216,000 net loss during the three months ended March 31, 1996, and an $8,000
decrease in unrealized gain on securities classified "available for sale".
Stockholders' equity increased $749,000, or 4.7%, in 1995 to 16.7 million
from 16.0 million at December 31, 1994. That increase resulted primarily
from net income of $714,000 and $27,000 in unrealized gain on securities
classified "available for sale". Stockholders' equity was $16.0 million at
December 31, 1994, an increase of $1.1 million or 7.5%, from $14.9 million at
December 31, 1993. That increase was primarily due to $1.1 million in net
income for the year ended December 31, 1994.
CSB's Leverage Capital Ratio at March 31, 1996 was 8.23%, and at
December 31, 1995 and 1994 was 7.62% and 8.89%, respectively. CSB's Tier 1
Risk-Based Capital Ratio at March 31, 1996 was 12.7%, and at December 31,
1995 and 1994 was 11.93% and 14.72%, respectively. CSB's Total Risk-Based
Capital Ratio at March 31, 1996 was 13.42%, and at December 31, 1995 and 1994
was 13.18% and 15.97%, respectively.
Effective February 1994, CSB entered into a Memorandum of
Understanding ("MOU") with the FDIC and the State Banking Department. The
MOU included, among other things, provisions requiring CSB to (I) reduce
classified assets to prescribed amounts by specified dates, (ii) establish a
policy for determining the adequacy of its reserve for loan losses, implement
a liquidity policy, and (iii) maintain the greater of a Leverage Ratio of
6.5% or total Tier 1 Capital of $12.5 million. Additionally, CSB was
restricted from paying cash dividends. CSB was also required to submit a
strategic business plan and furnish quarterly progress reports to the FDIC
and State Banking Department.
The MOU was removed contingent upon the Board of Directors adopting
a resolution proposed by the FDIC and the State Banking Department. The
Board adopted the State Banking Department resolution in January 1996 and the
FDIC resolution on March 27, 1996. Those resolutions require CSB to reduce
classified assets to specified amounts by specified dates, establish and
implement a loan review policy, maintain an adequate reserve for loan losses,
and maintain a Leverage Capital Ratio of at least 6.5%. CSB is also required
to submit a strategic business plan, and furnish quarterly progress reports
to the FDIC and State Banking Department. Management of CSB believes it is
in substantial compliance with all aspects of the Board resolutions.
RESULTS OF OPERATIONS
Net Income
For the three months ended March 31, 1996, CSB had a net loss of
$215,000 as compared to a net profit of $586,000 for the three months ended
March 31, 1995. That loss was primarily due to a decrease in noninterest
income of $2.2 million, an increase in provision for loan and lease losses of
$400,000 and partially offset by increases in net interest income of $300,000
and a decrease in total noninterest expenses of $400,000.
63
<PAGE>
For the year ended December 31, 1995, net income was $714,000, a
decrease of $387,000 from net income of $1.1 million for the year ended
December 31, 1994. Earnings per share decreased by $0.45 to $0.83 in 1995
from $1.28 in 1994. Return on stockholders' equity was 4.46% in 1995 and 7.40
% in 1994. The primary reasons for the decrease in earnings in 1995 were a
$452,000 increase in legal expenses, a $455,000 increase in expenses
associated with real estate activities (investment in joint ventures and
OREO) and costs associated with closing branches of $604,000, partially
offset by decreases in salaries and employee benefits of $1.2 million.
Net income for the year ended December 31, 1994 decreased to $1.1
million from $2.5 million for the year ended December 31, 1993. Earnings per
share decreased to $1.28 at December 31, 1994 from $2.97 in 1993. Return on
stockholders' equity was 7.40% in 1994 and 20.98% in 1993. The primary
reasons for the decrease in earnings in 1994 were (I) an increase in
provision for loan and lease losses; (ii) increases in salaries and employee
benefits; (iii) increases in occupancy expenses, partially offset by
increases in loan servicing income; and (iv) increased gains on sale of
mortgage loans and servicing.
Net Interest Income
Net interest income is the amount by which interest and fees earned
on interest-earning assets exceeds the interest paid on deposits and other
borrowed funds. Changes in net interest income from period to period result
from increases or decreases in the average balances of interest-earning
assets and interest-bearing liabilities, increases or decreases in the
average rates earned and paid on such assets and liabilities, CSB's ability
to manage its earning assets portfolio and the availability of particular
sources of funds.
Net interest income increased $300,000 to $1.9 million for the
three-month period ended March 31, 1996 from $1.6 million for the three-month
period ended March 31, 1995. That increase was attributable to an increase
of total interest income of $500,000 for the first quarter of 1996 as
compared to the same period for 1995, and an increase in interest expense of
$200,000 for the same comparative periods. Interest income on loans and
leases increased $400,000 for the three months ended March 31, 1996 over the
same period in 1995 as the result of higher average loan and lease balances
during the same comparative periods partially offset by lower yields. The
average loan and lease balance for the first quarter of 1996 was $126.0
million with an average yield of 9.71% as compared to an average balance of
$104.5 million and a yield of 10.04% for the first quarter of 1995. Interest
income on investment securities increased by $100,000 for the three months
ended March 31, 1996 over the same period in 1995 as the result of increases
in federal funds sold and repurchase agreements. The average balance of
securities decreased to $12.0 million with an average yield of 6.41% for the
three months ended March 31, 1996 as compared to an average balance of $22.5
million with an average yield of 5.41% for the three months ended March 31,
1995. Because of the interest rate environment, CSB invested in federal
funds and repurchase agreements, and, as a result, the average balance of
federal funds and repurchase agreements increased to $26.5 million with an
average yield of 5.41% for the three months ended March 31, 1996 as compared
to $5.7 million with an average yield of 5.56% for the three months ended
March 31, 1995.
Interest expense on deposits increased to $1.7 million for the three
months ended March 31, 1996 from $1.4 million for the same period in 1995,
primarily as the result of increased average balances between the two
comparative periods. The average balance for interest-bearing deposits was
$119.8 million with an average rate of 5.64% for the three months ended March
31, 1996 as compared to an average balance of $103.2 million and an average
rate of 5.69% for the three months ended March 31, 1995. The increase in the
average balance of certificates of deposit was the primary reason for the
increase, with average balances increasing $15.4 million to $97.9 million for
the three months ended March 31, 1996 from $82.4 million for the comparative
period in 1995. One of CSB's primary uses of certificates of deposit is as a
funding source for loans held for sale and direct financing leases. The
average balance of leases increased $9.5 million which, when coupled with the
need to increase liquidity, resulted in additional certificates of deposit
being acquired.
Net interest income decreased $107,000, or 1.4%, to $7.4 million for
the year ended December 31, 1995, from $7.5 million for the year ended
December 31, 1994. That decrease was primarily due to an increase in average
total interest-bearing liabilities, and the increased average cost of those
liabilities. Average interest-bearing liabilities increased $1.5 million and
the average cost increased 190 basis points on an average balance of $111.3
million. That resulted in total interest expense being $6.7 million at
year-end December 31, 1995 as compared to $4.6 million at December 31, 1994.
The increase in balances was primarily due to core business deposits
increasing in money market, NOW and savings accounts. The increase
64
<PAGE>
in the average rate was primarily due to certificates of deposit renewed at
higher rates. Total average interest-earning assets decreased by $5.7
million while the average yield increased by 166 basis points on an average
balance of $151.2 million in 1995 as compared to $156.8 million in 1994.
This resulted in total interest income being $14.1 million at December 31,
1995 as compared to $12.1 million at December 31, 1994. Average loans and
leases increased by $23.0 million to $86.0 million in 1995 from $63.1 million
in 1994 and the average yield increased 171 basis points to 11.50% in 1995
from 9.79% in 1994. Average loans held for sale decreased by $22.1 million to
$33.3 million in 1995 from $55.4 million in 1994, and their average yield
decreased by 89 basis points to 6.82% in 1995 from 7.71% in 1994. The
increase in average total yield for interest-earning assets was primarily due
to an increase of $14.9 million in the average lease balances to $25.1
million in 1995 from $10.2 million in 1994. Those leases were originated
with yields of 11.00% to 13.00% in 1995. CSB's net interest spread (the
average taxable equivalent rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities) decreased to 3.30% for
1995 from 3.54% in 1994, and net interest margin (net interest income after
provision for loan and lease losses as a percentage of average
interest-earning assets) increased to 4.11% in 1995 from 4.04% in 1994.
Net interest income increased by $271,000, or 3.7%, to $7.5 million
for the year ended December 31, 1994 from $7.2 million for the year ended
December 31, 1993. That increase was primarily due to a decrease in average
total interest-bearing liabilities, which decreased $8.1 million to $109.7
million in 1994 from $117.8 million in 1993. The average cost was relatively
unchanged at 4.15% in 1994 and 4.14% in 1993, and interest expense was $4.6
million at December 31, 1994 and $4.8 million at December 31, 1993. The
change in the average balance of Administrative CDs was the main reason for
that decrease, with a decrease of $11.3 million, or 12.1%, to $82.5 million
in 1994 from $93.8 in 1993. The average balance of money market and NOW
accounts increased $1.7 million, or 14.8%, to $12.9 million in 1994 from
$11.2 million in 1993. Savings account average balances increased $3.8
million, or 181.4%, to $5.9 million in 1994 from $2.1 million in 1993.
Total average interest-earning assets increased $3.9 million, or
2.5%, to $156.8 million in 1994 from $152.9 million in 1993; the average
yield decreased 19 basis points to 7.69% in 1994 from 7.88% in 1993. The
decrease in yield combined with an increase in average balance produced
interest income of $12.1 million in 1994, which was virtually unchanged from
interest income of $12.1 million in 1993. The average balance of loans and
leases increased $2.1 million to $63.1 in 1994 from $61.0 million in 1993,
and the average yield increased 73 basis points to 9.79% in 1994 from 9.76%
in 1993. The increase in both yield and average balance of loans and leases
was offset in interest income by a $15.4 million or 21.8% decrease in loans
held for sale to $55.4 million in 1994 from $70.8 million in 1993, and an
increase in the lower yielding federal funds and repurchase agreements of
$7.5 million, or 48.9%, to $23.0 million in 1994 from $15.5 million in 1993.
CSB's net interest spread decreased to 3.54% in 1994 from 3.74% in
1993, and net interest margin decreased to 4.04% in 1994 from 4.14% in 1993.
The yield on approximately 37.9% and 32.8% of CSB's loan and lease portfolio
at December 31, 1995 and 1994, respectively, moves up or down as CSB adjusts
its base lending rate with changes in the Bank of America reference rate, or
with changes in other widely used indices. An additional 28.0% and 23.5% of
the portfolio at December 31, 1995 and 1994, respectively, consisted of fixed
rate loans which mature in one year or less.
65
<PAGE>
The following two tables show CSB's consolidated average balances of
assets, liabilities and stockholders' equity; the amount of interest income
or interest expense; the average yield or rate for each category of
interest-earning assets and interest-bearing liabilities; and the net
interest spread and the net interest margin for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
As of and for the Three Months Ended March 31,
--------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
----------- ---------- ----------- --------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
- -------
Earning assets:
Loans receivable, net (1) . . . . . . . . . . . $ 94,148 $ 2,416 10.26% $ 70,990 $ 1,941 10.94%
Loans held for sale . . . . . . . . . . . . . . 31,876 642 8.06 33,496 681 8.13
Taxable investment securities:
U.S. government securities . . . . . . . . . . 66 1 6.06 7,835 121 6.18
Obligations of other
U.S. governmental agencies . . . . . . . . . 5,528 87 6.30 6,034 105 6.96
Mortgage-backed securities . . . . . . . . . . 6,449 105 6.51 8,463 121 5.72
Federal funds sold/Repurchases. . . . . . . . . 26,455 358 5.41 5,685 79 5.56
Interest-earning deposits . . . . . . . . . . . 43 1 9.30 3,671 18 1.96
FHLB stock. . . . . . . . . . . . . . . . . . . 1,178 15 5.09 1,122 15 5.35
----------- ---------- --------- -------------
Total interest-earning assets. . . . . . . . . . 165,743 3,625 8.75 137,296 3,081 8.98
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . . . 7,797 3,586
Premises and equipment, net . . . . . . . . . . 2,379 3,118
Other real estate owned . . . . . . . . . . . . 1,445 3,701
Real estate joint ventures, net . . . . . . . . 3,803 1,773
Accrued interest receivable . . . . . . . . . . 792 525
Other assets and receivables. . . . . . . . . . 15,062 10,161
----------- ---------
Total non-interest-earning assets. . . . . . . . 31,278 22,864
----------- ---------
Total assets . . . . . . . . . . . . . . . . . $197,021 $160,160
----------- ---------
----------- ---------
Liabilities and Stockholders' Equity:
- -------------------------------------
Interest-bearing liabilities:
Deposits:
Money market . . . . . . . . . . . . . . . . . 12,828 102 3.18 11,342 95 3.35
NOW and Super NOW. . . . . . . . . . . . . . . 2,067 10 1.94 1,775 9 2.03
Savings. . . . . . . . . . . . . . . . . . . . 7,081 65 3.67 7,655 63 3.29
Certificates of deposit(2) . . . . . . . . . . 97,855 1,513 6.18 82,421 1,300 6.31
----------- ---------- --------- -------------
Total interest-bearing liabilities . . . . . . 119,831 1,690 5.64 103,193 1,467 5.69
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . 56,152 36,277
Other liabilities . . . . . . . . . . . . . . . 4,477 5,560
----------- ---------
Total non-interest-bearing liabilities . . . . 60,629 41,837
Stockholders' equity . . . . . . . . . . . . . . 16,561 15,130
----------- ---------
Total liabilities and stockholders' equity . . $197,021 $160,160
----------- ---------
----------- ---------
Net interest income. . . . . . . . . . . . . . . $1,935 $1,614
---------- -------------
---------- -------------
Net interest spread(3) . . . . . . . . . . . . . 3.11% 3.29%
----------- -----------
----------- -----------
Net yield on interest earning assets (4). . . . . 4.67% 4.70%
----------- -----------
----------- -----------
</TABLE>
- -------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $19,000 and $48,000 for the periods ended March 31,
1996 and 1995, respectively. Loans are net of the allowance for loan losses,
deferred fees and related direct costs. Loans receivable includes leases.
(2) Information regarding the breakdown of average balances of certificates of
deposit of $100,000 or greater and certificates of deposit under $100,000 is
not available.
(3) Represents the average rate earned on average interest-earning assets
less the average rate paid on average interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest--
earning assets.
66
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
----------- ---------- ----------- --------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Loans receivable, net (1) . . . . . . . . . . . . $86,033 $ 9,933 11.50% $63,068 $6,174 9.79%
Loans held for sale . . . . . . . . . . . . . . . 33,297 2,271 6.82 55,357 4,268 7.71
Taxable investment securities:
U.S. government securities . . . . . . . . . . . 5,137 337 6.56 3.278 136 4.15
Obligations of other
U.S. governmental agencies. . . . . . . . . . . 8,695 586 6.74 1,656 99 5.98
Mortgage-backed securities . . . . . . . . . . . 7,988 505 6.32 9,151 429 4.69
Federal funds sold/Repurchases. . . . . . . . . . 7,510 423 5.63 23,024 897 3.90
Interest-earning deposits . . . . . . . . . . . . 1,361 31 2.28 268 8 2.99
FHLB stock. . . . . . . . . . . . . . . . . . . . 1,142 54 4.73 1,014 54 5.33
----------- ---------- ----------- --------- ------------- ----------
Total interest-earning assets. . . . . . . . . . . 151,163 14,140 9.35 156,816 12,065 7.69
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . . . . 6,077 6,871
Premises and equipment, net . . . . . . . . . . . 2,865 2,663
Other real estate owned . . . . . . . . . . . . . 2,930 2,999
Real estate joint ventures, net . . . . . . . . . 3,756 1,792
Accrued interest receivable . . . . . . . . . . . 672 454
Other assets and receivables. . . . . . . . . . . 11,138 5,822
----------- ---------
Total non-interest-earning assets. . . . . . . . . 27,438 20,601
----------- ---------
Total assets . . . . . . . . . . . . . . . . . . $178,601 $177,417
----------- ---------
----------- ---------
Liabilities and Stockholders' Equity:
- -------------------------------------
Interest-bearing liabilities:
Deposits:
Money market . . . . . . . . . . . . . . . . . . 12,338 417 3.38 10,932 359 3.28
NOW and Super NOW. . . . . . . . . . . . . . . . 1,992 43 2.16 1,929 41 2.13
Savings. . . . . . . . . . . . . . . . . . . . . 6,667 233 3.49 5,937 187 3.15
Certificates of deposit. . . . . . . . . . . . . 90,265 6,043 6.69 90,929 3,967 4.36
----------- ---------- ----------- --------- ------------- ----------
Total interest-bearing liabilities . . . . . . . 111,262 6,736 6.05 109,727 4,554 4.15
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . 44,520 45,378
Other liabilities . . . . . . . . . . . . . . . . 6,759 3,403
----------- ---------
Total non-interest-bearing liabilities . . . . . 51,279 48,781
Stockholders' equity . . . . . . . . . . . . . . . 16,060 18,909
----------- ---------
Total liabilities and stockholders' equity . . . $178,601 $177,417
----------- ---------
----------- ---------
Net interest income. . . . . . . . . . . . . . . . $7,404 $7,511
---------- -------------
---------- -------------
Net interest spread (3). . . . . . . . . . . . . . 3.30% 3.54%
----------- ----------
Net yield on interest earning assets (4) . . . . . 4.90% 4.79%
----------- ----------
----------- ----------
Years Ended December 31,
-------------------------------------
1995
-------------------------------------
Interest Average
Average Income/ Rate/
Balance Expense Yield
--------- ------------- -----------
<S>
Assets:
Earning assets:
Loans receivable, net (1) . . . . . . . . . . . . $61,014 $5,956 9.76%
Loans held for sale . . . . . . . . . . . . . . . 70,821 5,435 7.67
Taxable investment securities:
U.S. government securities . . . . . . . . . . . 1,330 47 3.53
Obligations of other
U.S. governmental agencies. . . . . . . . . . . -0- -0- n/a
Mortgage-backed securities . . . . . . . . . . . 3,032 139 4.58
Federal funds sold/Repurchases. . . . . . . . . . 15,461 444 2.87
Interest-earning deposits . . . . . . . . . . . . 457 13 2.84
FHLB stock. . . . . . . . . . . . . . . . . . . . 807 22 2.73
--------- ------------- -----------
Total interest-earning assets. . . . . . . . . . . 152,922 12,056 7.88
Non-interest-earning assets:
Cash and due from banks . . . . . . . . . . . . . 5,808
Premises and equipment, net . . . . . . . . . . . 1,985
Other real estate owned . . . . . . . . . . . . . 2,846
Real estate joint ventures, net . . . . . . . . . 2,340
Accrued interest receivable . . . . . . . . . . . 391
Other assets and receivables. . . . . . . . . . . 7,244
---------
Total non-interest-earning assets. . . . . . . . . 20,614
---------
Total assets . . . . . . . . . . . . . . . . . . $173,536
---------
---------
Liabilities and Stockholders' Equity:
- -------------------------------------
Interest-bearing liabilities:
Deposits:
Money market . . . . . . . . . . . . . . . . . . 9,458 316 3.34
NOW and Super NOW. . . . . . . . . . . . . . . . 1,750 37 2.11
Savings. . . . . . . . . . . . . . . . . . . . . 2,110 6 2.99
Certificates of deposit (2). . . . . . . . . . . 104,511 4,400 4.21
--------- ------------- -----------
Total interest-bearing liabilities . . . . . . . 117,829 4,816 4.14
Non-interest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . . . . 37,512
Other liabilities . . . . . . . . . . . . . . . . 4,581
---------
Total non-interest-bearing liabilities . . . . . 42,093
Stockholders' equity . . . . . . . . . . . . . . . 13,614
---------
Total liabilities and stockholders' equity . . . $173,536
---------
---------
Net interest income. . . . . . . . . . . . . . . . $7,240
-------------
-------------
Net interest spread (3). . . . . . . . . . . . . . 3.74%
----------
----------
Net yield on interest earning assets(4). . . . . . 4.73%
-----------
-----------
</TABLE>
- -------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $376,000 and $428,000 and $326,000 for the years
ended December 31, 1995, 1994 and 1993 respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs. Loans
receivable includes leases.
(2) Information regarding the breakdown of average balances of certificates of
deposit of $100,000 or greater and certificates of deposit under $100,000 is
not available.
(3) Represents the average rate earned on average interest-earning assets
less the average rate paid on average interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest--
earning assets.
67
<PAGE>
The following table sets forth, for the periods indicated, the dollar
amount of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes
in average balances (volume) or changes in average interest rates (rate).
<TABLE>
<CAPTION>
Three Months Ended Year Ended Year Ended
March 31, December 31, December 31,
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------ ------------------------ ----------------------
Increase (Decrease) Increases (Decreases) Increases (Decreases)
Due to Change In Due to Change In Due to Change In
------------------------ ------------------------ ----------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------ ------- ------- ------ ------- ------- ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets -- Interest income:
Loans receivable, net (1) . . . . . . . . . . $ 585 $ (110) $ 475 $2,518 $1,241 $3,759 $ 201 $ 17 $ 218
Loans held for sale . . . . . . . . . . . . . (33) (6) (39) (1,549) (448) (1,997) (1,192) 25 (1,167)
FHLB Stock. . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 7 25 32
Taxable Investment Securities:
U.S. government securities. . . . . . . . . (118) (2) (120) 99 102 201 79 10 89
Obligations of other U.S.
governmental agencies . . . . . . . . . (8) (10) (18) 473 14 487 50 49 99
Mortgage-backed securities. . . . . . . . . (38) 22 (16) (43) 119 76 287 3 290
Federal funds sold/Repurchases. . . . . . . . 281 (2) 279 (1,400) 926 (474) 262 191 453
Interest-earning deposits . . . . . . . . . . 6 (23) (17) 24 (1) 23 (6) 1 (5)
------- ------ ------- ------- ------ ------- ------- ---- -------
Total . . . . . . . . . . . . . . . . . . . $ 675 $ (131) $ 544 $ 122 $1,953 $2,075 $ (312) $321 $ 9
Deposits and borrowed funds:
Interest expense:
Money market deposits . . . . . . . . . . . . $ 11 $ (4) $ 7 $ 47$ 11 $ 58 $ 49 $ (6) $ 43
NOW and Super NOW deposits. . . . . . . . . . 1 0 1 1 1 2 4 0 4
Savings deposits . . . . . . . . . . . . . . . (4) 6 2 25 21 46 120 4 124
Certificates of deposit (2) . . . . . . . . . 238 (25) 213 (29) 2,105 2,076 (601) 168 (433)
------- ------ ------- ------- ------ ------- ------- ---- -------
Total . . . . . . . . . . . . . . . . . . . $ 246 $ (23) $ 223 $ 44 $2,138 $2,182 $ (428) $166 $ (262)
------- ------ ------- ------- ------ ------- ------- ---- -------
Change in net interest income. . . . . . . . . $ 429 $(108) $ 321 $ 78 $ (185) $ (107) $ 116 $155 $ 271
------- ------ ------- ------- ------ ------- ------- ---- -------
------- ------ ------- ------- ------ ------- ------- ---- -------
</TABLE>
Provision for Loan and Lease Losses
CSB provides for loan and lease losses by a charge to operations
based upon management's evaluation of the loan portfolio, past loan and lease
loss experience, economic conditions, and other factors. The level of CSB's
allowance for loan and lease losses as it relates to the total portfolio and
its level of classified assets determines the amount that will be added to
the provision.
The provision for loan and lease losses was $168,000 for the three
months ended March 31, 1996 as compared to $275,000 for the same three-month
period in 1995. The decline in portfolio loans and leases resulted in a
lower general reserve requirement for the unclassified loans and leases. As
such, this partially offset the need for the additional reserves required for
increases in classified assets and nonperforming assets. Management believes
that, as of March 31, 1996, CSB had an adequate allowance for its reserves
for portfolio loans and leases.
For the year ended December 31, 1995, the provision for loan and
lease losses increased $24,000, or 2.1%, to $1.2 million as compared to the
increase of $262,000, or 28.8%, for a total provision of $1.2 million for the
year ended December 31, 1994. In 1994, a provision of $1.2 million was
required to maintain the allowance for loan and lease losses at an acceptable
level as a result of a $2.6 million increase in average gross loans and
leases and net loan and lease charge-offs of $1.9 million. In 1995, net
charge-offs were $271,000, and the increase in average gross loans and leases
was $22.9 million. Consequently, a provision roughly equal to that of 1994
was required to adequately cover the larger portfolio balance that was
generated from the 1995 loan and lease production. In 1993, the provision
for loan and lease losses was $910,000, as a result of $1.0 million in net
loan and lease charge-offs. As of December 31, 1995, 1994 and 1993, CSB's
allowance for loan and lease losses represented 2.8%, 2.3% and 3.6%,
respectively, of total loans and leases.
- -------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $19,000 and $48,000 for the periods ended March 31,
1996 and 1995 and $376,000, $428,000 and $326,000 for the years ended
Decembeer 31, 1995, 1994 and 1993, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs. Loans
receivable includes leases.
(2) Information regarding the breakdown of average balances of certificates of
deposit of $100,000 or greater and certificates of deposit under $100,000 is
not available.
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Noninterest Income
Noninterest income is a material source of income for CSB, and
consists of gains on sale of mortgage loans and leases, the sale of servicing
on mortgage loans, mortgage loan servicing income, the origination of
servicing, and other income. Part of the value of each mortgage loan
originated by CSB is the income that can be derived from servicing that loan.
CSB services a portion of the loans it originates and receives income out of
each loan payment. The anticipated cash flow from servicing has a value in
the secondary market and can be sold to others who specialize in servicing
mortgage loans.
Total noninterest income decreased $2.2 million, or 44.9%, to $2.7
million for the three months ended March 31, 1996 from $4.9 million for the
three months ended March 31, 1995, primarily due to the decrease on gains on
sale of servicing. During the first quarter of 1995, CSB had sold $2.5
million in bulk servicing, and, for the first quarter of 1996, CSB had no
bulk servicing sales. Primarily for that reason, gains on sale of loans and
servicing decreased $1.9 million for the quarter ended March 31, 1996 as
compared to the first quarter of 1995. Servicing-released sales increased
$200,000 for the three-month period ended March 31, 1996, as compared the
same period in 1995, and servicing rights recognized under FAS 122 increased
$600,000 to $1.4 million at March 31, 1996 as compared to $800,000 at March
31, 1995, as the result of increased origination. Mortgage loan originations
for the first quarter of 1996 were $240.4 million as compared to $160.7
million for the first quarter of 1995. Profit margins on mortgage loans as
the result of competition continue to be reduced and, consequently, loss on
sale of mortgage loans increased by $100,000 to $1.0 million for the three
months ended March 31, 1996 as compared a loss of $900,000 for the same
quarter of 1995. Servicing fees and other income decreased $300,000 for the
three months ended March 31, 1996 as compared to $800,000 for the same period
in 1995. That decrease was the result of management's decision to out source
the servicing of its mortgage loans held for sale. Servicing income
decreased to $400,000 for the three months ended March 31, 1996 from $500,000
for the comparative period in 1995; direct servicing expense decreased
$58,000 for the first quarter of 1996 to $296,000 as compared to $238,000 for
the same period in 1995. The savings appear minor due to the cost of
conversion and sale of servicing.
Gains on sale of loans and servicing increased $2.2 million, or
18.1%, to $14.3 million for the year ended December 31, 1995 from $12.1
million for the year ended December 31, 1994. Income from servicing-released
sales increased approximately $1.8 million, or 26.5%, to $8.6 million for the
year ended December 31, 1995 from $6.8 million for the year ended December
31, 1994, partially as the result of selling a larger percentage of loans
servicing-released. Bulk sales of servicing decreased $7.1 million, or
59.1%, to approximately $5.0 million during 1995, from $12.1 million during
1994, primarily as the result of the implementation of FAS 122 which allowed
CSB to recognize the value of servicing rights without actually selling the
servicing. Virtually all of the bulk servicing sold in 1995 was on loans
that were originated in prior years. The value of originated servicing rights
was approximately $7.2 million at March 31, 1996 and $5.8 million at December
31, 1995; FAS 122 was not in effect for years prior to January 1, 1995. Loss
on sale of mortgage loans decreased by approximately $1.6 million, or 22.8%,
to $5.5 million in 1995 from $7.1 million in 1994. Servicing income and fees
decreased $1.8 million, or 42.6%, to $2.4 million for the year ended December
31, 1995, from $4.3 million for the year ended December 31, 1994. The
primary reason for the decrease in servicing income was the bulk sales of
servicing in December 1994 and March 1995; additional smaller sales took
place in May, September, and November 1995.
Gains on sales of loans and loan servicing increased $1.2 million,
or 11.2%, to $12.1 million for the year ended December 31, 1994, from $10.9
million for the year ended December 31, 1993. That increase was primarily
due to total servicing sales of approximately $18.9 million in 1994, as
compared to sales of approximately $10.1 million in 1993 (an increase of $8.8
million or 86.9%). Such increase was a conscious decision by management to
supplement net income. That increase in total servicing sales was partially
offset by loss on sale of mortgage loans of approximately $7.1 million in
1994 as compared to gains on sale of mortgage loans of approximately $600,000
in 1993. Interest rates in general were lower in 1993 than in 1994 which
caused a slowdown in mortgage origination and affected the price of mortgage
loans adversely. However, CSB's servicing portfolio benefited from that
increase in interest rates in 1994 because of the general perception that
prepayments on mortgage loans serviced would decrease, thus assuring a longer
cash flow, thereby increasing the value of servicing in general.
Servicing-released gains increased by $1.5 million, or 27.8%, to $6.8 million
in 1994, from $5.3 million in 1993. To offset the loss on sale of mortgage
loans (net of hedging gains or losses), blocks of servicing were sold
generating an increase in gains on bulk servicing sales of approximately $7.3
million, or 151.9%, to $12.1 million in 1994 from $4.8 million in 1993.
Servicing income increased by approximately $1.5 million, or 85.5%, to $3.3
million in 1994 from $1.8 million in 1993. This occurred as a result of the
build-up of CSB's servicing portfolio that began in 1993 and continued into
1994 notwithstanding bulk sales.
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In April 1996, CSB management received approval from its Board of
Directors to sell all of its servicing portfolio, and, on a go-forward basis,
sell all of its mortgage loans held for sale servicing released. It is
anticipated that the sale of the remaining servicing (both originated and
purchased servicing) will generate a gain above the current valuation carried
in the financial statements. It is impossible to estimate the gain, if any,
on the sale of servicing until the sale actually takes place.
Noninterest Expense
Total noninterest expense for the three months ended March 31, 1996
was $4.8 million as compared to $5.2 million for the same period in 1995, a
decrease of $400,000 or 7.4%. Salaries and benefits decreased $400,000, or
13.4%, to $2.5 million for the three months ended March 31, 1996 from $2.9
million for the comparative three-month period in 1995. That decrease was
primarily attributable to the cost reduction measures initiated in prior
periods. Actual salaries and commissions decreased $200,000 for the three
months ended March 31, 1996 as compared to the three-month period ended March
31, 1995, and deferred origination cost increased $200,000 to $1.1 million
for the first quarter of 1996 as compared to $900,000 for the first quarter
of 1995. Occupancy expenses decreased $100,000, or 13.4%, to $700,000 for
the three months ended March 31, 1996 from $800,000 for the three months
ended March 31, 1995, as the result of cost reduction achieved by the closing
of offices. Legal expenses were $500,000 for the three months ended March
31, 1996 as compared to $200,000 for the three months ended March 31, 1995,
as a result of ongoing litigation. (See "INFORMATION CONCERNING THE BUSINESS
AND PROPERTIES OF CSB -- Legal Proceedings" herein.)
Real estate activity (consisting of investments in joint ventures,
and OREO) had a gain of approximately $12,000 for the three months ended
March 31, 1996 as compared to an expense of $127,000 for the same period in
1995, as the result of decreases in OREO losses of $100,000 for the three
months ended March 31, 1996, as compared to the same period in 1995. Outside
service fees relate to expenses associated with Title Deposits, and, the
$64,000 increase in such fees to $167,000 for the three months ended March
31, 1996, as compared to the same period for 1995, was the result of
increased activity from the title companies. Average Title Deposits were
$26.8 million for the first quarter of 1996 as compared to $15.0 million for
the first quarter of 1995, an increase of $11.8 million or 78.7%. All other
expenses decreased $100,000, or 10.4%, to $1.0 million for the three months
ended March 31, 1996 as compared to $1.2 million for the three months ended
March 31, 1995.
Total noninterest expense increased $700,000, or 3.5%, to $21.8
million for the year ended December 31, 1995 from $21.0 million for the year
ended December 31, 1994. That increase was primarily attributable to branch
closing costs of $604,000, increases in occupancy expense of $272,000, legal
expenses of $452,000 and real estate activities of $455,000, which were
partially offset by a salaries and benefits decrease of $1.2 million in 1995.
Salaries and employee benefits decreased $1.2 million, or 10.9%, to $9.9
million for the year ended December 31, 1995 from $11.1 million at December
31, 1994, primarily because of restructuring that occurred as the result of
declining volumes and related commissions in CSB's Mortgage Division.
Certain of the mortgage lending officers of CSB have compensation packages
that are tied to production, and, as a result of the drop in mortgage loan
production, their compensation decreased as well. In addition, the general
downsizing of the back office and branch operation of CSB resulted in fewer
employees. Occupancy and equipment expenses increased $272,000, or 9.5%, to
$3.1 million for the year ended December 31, 1995, from $2.8 million for the
year ended December 31, 1994, primarily due to of the addition of two new
out-of-state offices in Colorado and Oregon, as well as the normal CPI cost
increases on existing leases. Additionally, future lease payments for the
closed offices with unexpired leases were recorded as occupancy expense for
1995. For the year ended December 31, 1995, $604,000 of closing costs were
incurred as the result of the closing of five offices. The future years
anticipated rental expense (net of anticipated sublease revenues) were
written off along with any fixed asset or equipment leases.
Legal expenses increased $452,000, or 41.5%, to $1.5 million for the
year ended December 31, 1995, from $1.1 million for the year ended December
31, 1994. That increase was primarily the result of a judgment against CSB,
which is currently under appeal, for which $425,000 was set aside as a
reserve pending the outcome of the appeal. (See "INFORMATION CONCERNING THE
BUSINESS AND PROPERTIES OF CSB -- Legal Proceedings" herein.) Real estate
activities expense increased $455,000, or 59.2%, to $1.2 million for the year
ended December 31, 1995 from $800,000 for the year ended December 31, 1994.
That increase in expense was primarily attributable to $915,000 in
write-downs of investment in real estate joint ventures held for sale, which
was partially offset by an increase in income on the joint venture, and a
decrease in OREO expense of $315,000 in 1995. In 1994, the joint venture
incurred a loss of approximately $118,000, and in 1995 the joint venture was
profitable with approximately $34,000 in net income. All lease payments or
rental expenses that were applicable to 1995 were recorded as lease or rental
expense. All other expenses increased $168,000, or 3.2%, to $5.4 million for
the year ended December 31, 1995 from $5.3 million for the year ended
December 31, 1994.
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Noninterest expense increased $5.3 million, or 33.9%, to $21.0
million for the year ended December 31, 1994 from $15.7 million for the year
ended December 31, 1993, primarily as the result of increases in salaries
and benefits of $3.6 million and occupancy expense which increased by
$800,000. Salaries and benefits increased $3.6 million, or 48.6%, to $11.1
million for the year ended December 31, 1994 from $7.4 million for the year
ended December 31, 1993. That increase was primarily due to decreases in
deferred costs, which were partially offset by lower commissions, all of
which are related to mortgage loan origination volume. Mortgage loan
origination volume decreased $1.07 billion, or 48.3%, to $1.14 billion in
1994 from $2.21 billion in 1993 as a result of rising interest rates in the
mortgage loan market. As a direct result, commissions paid to commissioned
loan officers dropped by $3.4 million, or 51.3%, to $3.3 million in 1994 from
$6.7 million in 1993. Under FAS 91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases," CSB is required to defer all fees (net of expenses) over the life
of a loan or until such loan is sold. The deferred cost must be the direct
cost associated with the individual loan originated. CSB uses a standard
cost method to arrive at the cost to be deferred, and, with respect to CSB,
the deferred employee costs are offset against compensation expense. Because
of the large drop in mortgage origination volume, deferred cost associated
with compensation decreased by $6.7 million, or 56.9%, to $5.1 million in
1994 from $11.7 million in 1993.
Occupancy expense increased $800,000, or 37.6%, to $2.8 million for
the year ended December 31, 1994 from $2.1 million for the year ended
December 31, 1993. During 1994, additional office space was added to
accommodate the Mortgage Division's expansion of loan servicing programs, as
well as expansions in the Commercial Banking Division to increase the
services in its cash management area. Legal expenses for the year ended
December 31, 1994 increased approximately $266,000 or 32.2% due to new legal
actions initiated against CSB in its normal course of business. Real estate
activities expense increased $141,000, or 22.5%, to $800,000 for the year
ended December 31, 1994 from $600,000 for the year ended December 31, 1993.
That increase was primarily attributable to increased OREO expenses of
approximately $165,000, increases in charge-off of OREO of approximately
$40,000, and offset by decreased loss in investment in real estate joint
ventures of approximately $60,000. All other expense increased $526,000, or
11.1%, for the year ended December 31, 1994 of which the largest contributor
was communication expense which increased $212,000, or 34.4%, to $800,000 for
the year ended December 31, 1994 from $600,000 for the year ended December
31, 1993.
Income Taxes
For the three months ended March 31, 1996, a tax benefit of $156,000
was recorded at an effective rate of 42.0% as compared to an expense
provision of $424,000 for the three months ended March 31, 1995. CSB
anticipates having a profit for the year ending December 1996 and, as a
result, will recover the tax benefit in future periods.
For the years ended December 31, 1995, 1994 and 1993, CSB's tax
provision was $517,000, $798,000, and $1.8 million, respectively, and the
combined effective tax rate was 42.0%, 42.0%, and 42.4%, respectively. The
expected statutory federal tax rate was 35.0% for 1995, 1994 and 1993. The
expected state franchise and other tax rate, net of federal tax rate, was
7.0%, 7.0% and 6.0% for 1995, 1994 and 1993, respectively.
At December 31, 1995, CSB had federal net operating losses of
approximately $3.4 million, which will be carried back against prior years'
taxable income, and California net operating loss carry forwards ("NOLs") of
approximately $1.2 million, which will expire in the year 2000.
State tax laws impose substantial restrictions on the use of NOLs
under section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), which restricts the use of NOLs in the event of significant changes
in ownership interests of individual shareholders and defined shareholder
groups. Consequently, if the CSB Acquisition is consummated, CSB will be
limited in the use of its NOLs to reduce future taxable income. The annual
limitations may be increased to the extent of any applicable "built-in gains"
as defined by the Code section 382. Subsequent ownership changes could
further restrict NOLs.
Liquidity and Asset/Liability Management
The liquidity of a banking institution reflects its ability to
provide funds to meet customer credit needs, to accommodate possible outflows
in deposits, to provide funds for day-to-day operations and to take advantage
of interest rate market opportunities. Funding of loan requests, providing
for liability outflows and management of interest rate risk require
continuous analysis in order to match the maturities of categories of loans
and investments with the maturities of deposits and
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bank-related borrowings. Bank liquidity is thus normally considered in terms
of the nature of the banking institution's sources and uses of funds. CSB's
asset liquidity is provided by cash, interest-bearing deposits with other
financial institutions, federal funds, repurchase agreements, maturing
investments, mortgage loans held for sale, federal funds lines of credit, a
secured line of credit with the FHLB and loan maturities and repayments.
Liquid assets (consisting of cash, federal funds repurchase agreements,
interest-bearing deposits in other banks, investment securities, and mortgage
loans held for sale) comprised 44.0%, 49.6%, and 61.7% of CSB's total assets
at December 31, 1995, 1994 and 1993, respectively. Liquidity management also
includes the management of unfunded commitments to make loans and undisbursed
amounts under lines of credit. At December 31, 1995, those commitments
totaled $24.1 million in loans and $800,000 in standby letters of credit.
CSB's average federal funds sold was $4.2 million in 1995, $4.3 million in
1994, and $7.9 million in 1993.
CSB also has several secondary sources of liquidity. Many of CSB's
real estate mortgage loans are originated pursuant to underwriting standards
which make them readily marketable to other financial institutions or
investors in the secondary market. In addition, in order to meet liquidity
needs on a temporary basis, CSB has unsecured lines of credit in the amount
of $8.0 million for the purchase of federal funds with other financial
institutions and may borrow funds at the Federal Reserve discount window,
subject to CSB's ability to supply collateral. Average federal funds and
repurchase agreements purchased were $2.4 million, $200,000, and $200,000 in
1995, 1994 and 1993, respectively.
As shown in CSB's Consolidated Statement of Cash Flows, CSB's
primary source and use of funds from financing activities is through changes
in the deposit portfolio. Total average deposits remained substantially
unchanged over the last several years. The average balances for 1995, 1994
and 1993 were $155.8 million, $155.1 million and $155.3 million,
respectively. While the total average balances changed little, the
components of the portfolio changed and decreased CSB's reliance on more
volatile deposits, Title Deposits and Administrative CDs. (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONSOLIDATED CONDITION AND RESULTS OF
OPERATIONS OF CSB -- FINANCIAL CONDITION -- Deposits" herein.)
Asset/liability management also involves minimizing the impact of
interest rate changes on CSB's earnings through the management of the amount,
composition and repricing periods of rate-sensitive assets and rate-sensitive
liabilities. Emphasis is placed on maintaining a rate-sensitivity position
within CSB's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. At March 31, 1996, December
31, 1995 and December 31, 1994, approximately 37.5%, 37.9% and 32.8%,
respectively, of CSB's total loans and 18.5%, 20.4% and 17.4% respectively,
of CSB's total interest-earning assets were tied to CSB's base lending rate
(generally 100 to 200 basis points over the Bank of America reference rate).
Nearly all (94.4%, 93.2% and 99.9%, as of March 31, 1996, December 31, 1995
and December 31, 1994, respectively) of CSB's interest-bearing liabilities
will reprice immediately or mature in one year or less.
The following table sets forth the interest rate sensitivity of
CSB's interest-earning assets and interest-bearing liabilities as of March
31, 1996, the interest rate sensitivity gap (interest rate-sensitive assets
less interest rate-sensitive liabilities), cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio (interest
rate-sensitive assets divided by interest rate-sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within such period in
accordance with its contractual terms.
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<TABLE>
<CAPTION>
After After One
Within Three Months Year But
Three But Within Within After
Months One Year Five Years Five Years Total
--------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net. . . . . . . . . . $ 88,416 $ 33,194 $ 15,750 $ 4,121 $ 141,481
Federal funds sold . . . . . . . . . . . 31,500 -0- -0- -0- 31,500
Interest-earning deposits. . . . . . . . 43 -0- -0- -0- 43
Investment securities. . . . . . . . . . 3,984 3,338 3,997 -0- 11,319
FHLB stock . . . . . . . . . . . . . . . 1,187 -0- -0- -0- 1,187
---------- ----------- ----------- --------- ---------
Total . . . . . . . . . . . . . . . 125,130 36,532 19,747 4,121 185,530
Interest-bearing liabilities:
Savings deposits . . . . . . . . . . . . 11,955 -0- -0- -0- 11,955
Money market . . . . . . . . . . . . . . 14,577 -0- -0- -0- 14,577
NOW and Super NOW. . . . . . . . . . . . 2,780 -0- -0- -0- 2,780
Certificates of deposit of
$100,000 or greater . . . . . . . . 7,011 13,250 1,100 -0- 21,361
Other certificates of deposit. . . . . . 15,587 50,243 8,264 -0- 74,094
---------- ----------- ----------- --------- ---------
Total . . . . . . . . . . . . . . . 51,910 63,493 9,364 -0- 124,767
Interest rate sensitivity gap. . . . . . . . 73,220 (26,961) 10,383 4,121 60,763
Cumulative interest rate sensitivity gap . . 73,220 46,259 56,642 60,763 60,763
Cumulative interest rate sensitivity
gap ratio based on total assets . . . . 33.94% 21.44% 26.25% 28.16% 28.16%
</TABLE>
Interest rate risk occurs due to the vulnerability of future market
conditions combined with a financial institution's interest-earning assets
and interest-bearing liabilities being mismatched in terms of the respective
repricing periods. In a declining interest rate environment a financial
institution's earnings will be enhanced by a liability sensitive portfolio
(rate-sensitive liabilities exceed rate-sensitive assets) because a larger
volume of liabilities than assets will reprice. Conversely, in a rising
interest rate environment earnings will be enhanced by an asset sensitive
portfolio (rate-sensitive assets exceed rate-sensitive liabilities).
As of March 31, 1996, CSB was asset-sensitive for all time periods
except "after three months but within one year." However, the foregoing table
does not necessarily indicate the impact of general interest rate movements
on CSB's net interest yield, because the repricing of various categories of
assets and liabilities is discretionary and is subject to competition and
other pressures. As a result, various assets and liabilities indicated as
repricing within the same period may in fact price at different times and at
different rate levels. Management attempts to minimize the impact of
interest rate changes on CSB's earnings through the management of the amount,
composition and repricing periods of rate-sensitive assets and rate-sensitive
liabilities. Emphasis is placed on maintaining a rate-sensitivity position
within CSB's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. In addition to managing its
asset/liability position, CSB has taken steps to mitigate the impact of
changing interest rates by generating non-interest income through service
charges and through the sale and servicing of mortgage loans.
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INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF CSB
General
CSB is a California-chartered commercial bank formed in 1984. As a
California state-chartered bank, CSB is subject to primary supervision,
examination and regulation by the California State Banking Department. CSB
is also subject to certain federal laws and regulations. The deposits of CSB
are insured under the FDIC's Savings Association Insurance Fund up to the
applicable limits of the Federal Deposit Insurance Act. (See "SUPERVISION
AND REGULATION OF HOLDCO AND SDN -- Deposit Insurance" herein.) CSB is not a
member of the Federal Reserve System. CSB presently has no corporate parent,
and only has one subsidiary, CSB Ventures, Inc. At March 31, 1996, CSB had
approximately $215.8 million in assets, $141.5 million in net loans and
$195.4 million in deposits.
Banking Services
Overview. CSB's current principal business units are a Commercial
Banking Division, which focuses on generating loans and raising deposits
primarily in the greater Sacramento area, a Mortgage Division, which
generates residential mortgage loans (directly and through brokers and
correspondents) and sells them in the secondary market, and a Leasing
Division, which generates equipment leases through wholesale sources,
services those leases and (beginning recently) sells blocks of leases to
other institutions.
A majority of CSB's deposits consist of Title Deposits, Administrative
CD's and custodial accounts, all of which tend to be volatile. (See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CSB -- FINANCIAL CONDITION -- Deposits" herein.)
The principal sources of CSB's revenues during recent periods have been
(i) interest and fees on loans, (ii) gain on sales of loans and leases, (iii)
interest on investments, (iv) service charges on deposit accounts and other
charges and fees, and (v) interest on Federal funds sold (funds loaned on
short-term basis to other banks).
The Mortgage Division has historically provided a substantial amount of
CSB's earnings. The Division remains an important source of earnings,
although CSB's increasing emphasis on its Commercial Banking and Leasing
Divisions has led to diversification of revenue sources over the last two
years. During 1993, the gross revenues of the Mortgage, Commercial Banking
and Leasing Divisions were $16.3 million, $4.0 million, and $1.6 million,
respectively. During 1994, revenues of the three divisions were $17.5
million, $4.1 million, and $2.2 million, respectively, and during 1995,
revenues of the three divisions were $21.3 million, $5.5 million, and $4.4
million, respectively.
There is little seasonal fluctuation in CSB's commercial banking or
equipment finance business. There are, however, normal cyclical fluctuations
in its residential mortgage business caused by changes in interest rates, job
creation in the market place and the economy in general. Furthermore, there
has been a reduction in new home construction in certain areas due to certain
recently enacted environmental laws.
Commercial Banking Division. CSB's Commercial Banking Division operates
a commercial banking business in the Greater Sacramento area. Commercial and
real estate lending and deposit gathering from business customers of CSB are
the primary focus of the Division, although the Division also engages in
substantially all of the other business operations customarily conducted by
independent commercial banks in California, including the acceptance of
checking, savings and time deposits, the provision of cash management
services, and the making of commercial, real estate, personal, home
improvement and other installment loans and term extensions of credit.
CSB's in-market deposits are attracted primarily from small and
medium-sized businesses and related sources as well as individuals. As of
March 31, 1996, CSB had approximately 2,408 deposit accounts, including
approximately 593 non-interest-bearing (demand) accounts with balances
totaling approximately $70.6 million for an average balance per account of
approximately $119,000, 836 savings, interest-bearing demand and money market
accounts with balances totaling approximately $29.3 million for an average
balance per account of approximately $35,000, and 979 time certificate of
deposit accounts with balances totaling approximately $95.5 million, for an
average balance per account of approximately $98,000. A substantial majority
of CSB's time deposits are Administrative CDs. (See "MANAGEMENT'S DISCUSSION
AND
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<PAGE>
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB
- -- FINANCIAL CONDITION -- Deposits" herein.)
A significant portion of CSB's deposits are from title companies, which
utilize CSB's specialized deposit accounting services, including cash
management and sub-accounting systems. For the three months ended March 31,
1996, Title Deposits averaged $26.8 million, or 47.6% of non-interest bearing
deposits (15.2% of total deposits). CSB's deposit gathering from title
companies is enhanced because of the Mortgage Division's activities, and CSB
has made a consistent marketing effort to those title companies that work
with the Mortgage Division to assure that reciprocal deposit business flows
to CSB. CSB's specialized deposit accounting services also enable CSB to
attract deposits from home owners' associations, property managers and
similar depositors. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- FINANCIAL CONDITION -- Deposits"
herein.)
A total of $8.5 million in deposits were held in custodial accounts as of
March 31, 1996, which also reflects CSB's Mortgage Division activities.
However, CSB will lose all or a substantial portion of these deposits shortly
after it completes the contemplated sale of its mortgage servicing portfolio.
(See "INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF CSB -- Banking
Services -- Mortgage Division" herein.)
The largest segment of the Commercial Banking Division's lending consists
of commercial real estate loans and real estate construction loans, which
together aggregated $32.4 million, or 35.2% of CSB's gross loans and leases
and 17.5% of CSB's total earning assets, at March 31, 1996. Loans of all
types held by the Commercial Banking Division totaled $55.7 million at March
31, 1996, or approximately 30.0% of CSB's total earning assets.
CSB also invested in several real estate joint ventures through a
subsidiary, CSB Ventures, Inc., prior to the adoption of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (which substantially limited
banks' authority to make such investments). CSB Ventures currently retains
two such investments, having an aggregate net value as of March 31, 1996 of
$3.8 million, both of which it was actively marketing for sale. As of June
26, 1996, the larger of those two investments was sold for a gross purchase
price of $2.7 million. Net charge-offs on real estate joint venture
investments during 1995, 1994 and 1993 were $915,000, $25,000 and $-0-,
respectively. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB -- FINANCIAL CONDITION
- --Real Estate Joint Ventures" herein.)
Mortgage Division. CSB entered the mortgage banking business in 1988.
The Mortgage Division (sometimes referred to as the Residential Division)
originates (directly and through brokers), acquires and sells first lien
mortgage loans secured by single family residences. As a matter of normal
practice the Mortgage Division sells all of the loans it originates. Loans
have historically been sold in the secondary mortgage market on both a
servicing retained basis (in which CSB would continue to service the loan
after sale) and a servicing released basis (in which CSB would transfer the
servicing of the loan to the loan buyer). The Mortgage Division has
historically from time to time also purchased servicing rights on loans it
did not originate.
The primary sources of revenue from the Mortgage Division have
historically been bulk sales of servicing, loan origination fees, net
interest income earned during the period that the loans are held for sale,
gains from the sale of loans, loan servicing fee income, brokerage fees and
gains from capitalization of loan servicing rights.
Beginning July 1, 1996, however, CSB has undertaken to sell all loans
generated by the Mortgage Division either on a servicing released basis or,
if the loans are sold on a servicing retained basis, to sell the servicing
rights to third parties. This change is motivated in part by changes in the
required accounting for retained loan servicing rights. Those accounting
changes have the potential of causing volatile fluctuations in a mortgage
lender's shareholders' equity. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS --RESULTS OF OPERATIONS --
Non-Interest Income" herein.)
The Mortgage Division originates loans through two primary sources: (a)
retail, which represents loans generated by a network of branch offices
staffed with commission based loan officers who solicit loans directly from
real estate brokers, home builders, and personal referral; and (b) wholesale,
which represents loans generated through a network of approved mortgage
brokers. All loans originated from these two sources are underwritten and
closed by CSB. These sources are located throughout the Pacific Coast and
Rocky Mountain regions of the United States.
75
<PAGE>
The Division sells the majority of conventional loans originated under
programs offered by the Federal Home Loan Mortgage Corporation (FHLMC or
"Freddie Mac") or the Federal National Mortgage Association (FNMA or "Fannie
Mae"). The Division also originates loans insured by the Federal Housing
Administration (FHA) or guaranteed by the Veterans Administration (VA).
Those loans are sold either under a private sale agreement or pooled to form
Government National Mortgage Association (GNMA) securities. These securities
are then sold to investment banking firms. In addition, CSB originates loans
that are eligible for sale to private investors. These loans are
underwritten to conform to the individual guidelines of these private
investors.
The Division's principal assets are the residential loans held in
portfolio prior to sale in the secondary market. As of March 31, 1995, those
loans totaled $51.9 million on a gross basis. Repurchase agreements, also
known as "gestation repos", are used by the CSB as a supplemental source of
financing to augment deposits generated by the Commercial Banking Division.
The Division also holds $11.8 million in residential loans held in portfolio.
Leasing Division. CSB entered the leasing market in 1990. The Leasing
Division remained small from 1990 until 1993, when the slowdown in
residential mortgage originations that prevailed throughout the industry
enabled CSB to place more emphasis on the Leasing Division. The Division's
equipment lease portfolio has grown substantially since 1993, increasing from
$9 million at December 31, 1993 to $28.1 million at December 31, 1995,
although that amount declined to $24.5 million at March 31, 1996, largely as
a result of CSB's new program of selling blocks of leases on a
servicing-retained basis. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB --
FINANCIAL CONDITION -- Loan and Lease Portfolio" herein.)
The production of new leases now comes exclusively from the wholesale
sector through a network of brokers. CSB believes that the use of its
wholesale distribution network provides both risk diversification and costs
efficiencies. As of January 1, 1995, CSB ceased to accept lease applications
directly from customers; in 1994, leases made directly to customers made up
8% of production. The wholesale sources of leases on which CSB now relies
are primarily located throughout the mid-western and western United States.
CSB makes no consumer leases and no automobile leases, either to
consumers or businesses. The average size of CSB's leases originated during
1995 was $23,000.
Competition
The banking business in California generally, and specifically in the
market area served by CSB, is highly competitive for both loans and deposits,
and is dominated by a relatively small number of major banks with many
offices operating over a wide geographical area and more than ten independent
banks in the greater Sacramento area. CSB competes for deposits and loans
primarily with other commercial banks, including many which are much larger
than CSB, as well as with non-bank financial institutions, including savings
and loan associations, credit unions, thrift and loan companies, mortgage
companies and other financial institutions. In addition, other entities
(both governmental and private industry) seeking to raise capital through the
issuance and sale of debt instruments or equity securities provide
competition for CSB in the acquisition of deposits.
Among the advantages certain of these institutions have over CSB are
their ability to finance wide-ranging and effective advertising campaigns and
to allocate their investment resources to regions of highest yield and
demand. Many of the major commercial banks operating in the area offer
certain services (such as international banking and trust and investment
services) which are not offered directly by CSB. By virtue of their greater
total capitalization, such banks have substantially higher lending limits
than does CSB.(1) In addition, as a result of recently enacted legislation,
there is increased competition among banks, savings and loan associations and
credit unions for the deposit and loan business of individuals. It cannot
presently be predicted what effect the increased competition will have on
CSB's ability to attract the banking business of its primary service areas'
residents, business persons and professionals.
- ----------
(1) Legal lending limits to each customer are restricted to a percentageof
CSB's real stockholders' equity, the exact percentage depending upon the
nature of the loan transaction.
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<PAGE>
CSB's primary service areas consist of the greater Sacramento area for
commercial loans and deposits and the western United States for residential
mortgage and the mid-western and western states for equipment leasing
transactions. In order to compete effectively with the other financial
institutions in its primary service areas, CSB relies primarily upon local
promotional activities, personal contacts by its officers, directors,
employees and shareholders, automated 24-hour banking, and the individualized
service which it can provide through its flexible policies. In competing for
loans, CSB has arranged for loans on a participation basis with correspondent
banks for customers whose loan demand exceeds CSB's lending limit, and CSB
intends to continue to do so in the future.
Employees
As of April 30, 1996, CSB had a total of 230 salary-based full time
equivalent employees and 57 commission-based only full time equivalent
employees. The management of CSB believes its employee relations are
satisfactory.
Properties
CSB does not own in fee any real property other than OREO properties.
CSB Ventures, Inc., a wholly-owned subsidiary of CSB, owns certain real
property through a real estate joint venture. (See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CSB --
FINANCIAL CONDITION -- Real Estate Joint Ventures" herein.) The table on the
following pages detail the CSB leases of its office facilities.
77
<PAGE>
<TABLE>
<CAPTION>
Use of Square Feet of Monthly Rent Term of
Location Facilities Office Space as of 5/31/96 Lease
- -------- ---------- -------------- ------------- ------
<S> <C> <C> <C> <C>
Bellevue Leasing Office 1,293 $1,350 4/1/96 to 3/31/97
515 116th Avenue, N.E.
Suite 220
Bellevue, Washington
Denver Residential 2,721 $3,345 6/1/94 to 5/31/97
8400 East Prentice Avenue Mortgage
Suite 545 Office
Englewood, Colorado
Fairfield Residential 1,500 $2,250 Month-to-Month
2420 Martin Road Mortgage
Fairfield, California Office
Fresno Leasing Office 1,084 $1,192 2/1/93 to 3/31/97
5070 N. Sixth Street
Suite 189
Fresno, California
Phoenix Residential 1,000 $ 781 5/1/96 to 10/31/96
4105 N. 20th Street Mortgage
Suite 200 Office
Phoenix, Arizona
Portland Residential 2,719 $4,305 3/15/94 to 10/31/96
10300 SW Greenburg Road Mortgage
Suite 535 Office
Portland, Oregon
Reno Residential 2,147 $3,010 9/1/91 to 8/31/96
350 South Center Street Mortgage
Suite 150 Office
Reno, Nevada
Sacramento(1) Main Office 5,157 $8,579 5/1/93 to 4/30/00
1545 River Park Drive
Suite 200, 204
Sacramento, California
Sacramento(1) Commercial Banking 5,156 $8,577 5/1/93 to 4/30/00
1545 River Park Drive
Suite 200, 204
Sacramento, California
Sacramento(1) Retail Branch 3,319 $5,521 5/1/93 to 4/30/00
1545 River Park Drive
Suite 101
Sacramento, California
</TABLE>
- ----------
(1) All of these offices are included in a single lease agreement
for 1545 River Park Drive.
78
<PAGE>
<TABLE>
<CAPTION>
Use of Square Feet of Monthly Rent Term of
Location Facilities Office Space as of 5/31/96 Lease
- -------- ---------- -------------- ------------- ------
<S> <C> <C> <C> <C>
Sacramento(1) Cash Management/ 2,500/ $4,159/ 10/1/94 to 4/30/00
1545 River Park Drive Residential Constr./ 542/ $ 902/
Suite 325 Builder Department 5,000 $8,300
Sacramento, California
Sacramento Leasing 4,343 $5,863 10/1/94 to 9/30/98
1451 River Park Drive Administration
Suite 130
Sacramento, California
Sacramento Leasing 1,386 $1,871 10/1/95 to 9/30/98
1451 River Park Drive Accounting
Suite 146
Sacramento, California
Sacramento Residential Mortgage 20,953 $29,334 4/15/94 to 3/31/99
1515 River Park Drive Administration/
Sacramento, California Operations
Sacramento(2) Residential 8,216 $10,680 8/1/94 to 12/31/99
2033 Howe Avenue Servicing
Suites 150, 160, 170
Sacramento, California
Santa Ana(3) Residential 2,821 $3,757 9/12/94 to 9/12/98
3 Hutton Center Mortgage
Suite 890 Office
Santa Ana, California
Stockton Residential 3,048 $4,877 6/1/96 to 5/31/01
1776 W. March Lane Mortgage
Suite 120 Office
Stockton, California
Walnut Creek(3) Residential 3,214 $6,126 5/1/94 to 4/30/97
500 Ygnacio Valley Road Mortgage
2nd Floor Retail
Walnut Creek, California
Walnut Creek Residential Mortgage - 4,002 $7,155 11/1/93 to 10/31/97
1981 N. Broadway Retail/Wholesale
Suite 240
Walnut Creek, California
</TABLE>
- ----------
(1) All of these offices are included in a single lease agreement for 1545
River Park Drive.
(2) This office is currently being marketed for sublease.
(3) These offices are ccurrently being subleased to third parties.
79
<PAGE>
Legal Proceedings
CSB is a party in the following litigation:
i. Commerce Security Bank v. Thomas Ruemmler (and related
cross-action).
This action, filed by CSB in January, 1994, seeks, among other things, to
restrain a former branch manager, Thomas Ruemmler ("Ruemmler") from engaging
in activities harmful to both CSB and its employees. A Temporary Restraining
Order ("Order") was obtained on January 25, 1994, preventing Ruemmler from,
among other things, entering any CSB facilities or contacting its Board
members or employees, which Order remains in full force and effect.
In June, 1994, Ruemmler filed a Cross-Complaint against CSB and certain
individual employees alleging, among other things, conspiracy, wrongful
termination, breach of contract, negligent and intentional infliction of
emotional distress, invasion of privacy, fraud, defamation and various labor
code banking violations.
In August, 1994, a mediation was conducted at which the parties attempted
settlement of the matter. However, the proceedings were eventually
terminated due to Ruemmler's settlement demands in excess of $1 million. CSB
offered to settle the matter for $50,000 to avoid the time and expense of
further litigation. Ruemmler later reduced his demand to $500,000, which
demand was also rejected.
On February 6, 1996, CSB filed a motion for summary judgment seeking
dismissal of Ruemmler's Cross-Complaint on the grounds that no genuine issue
of material fact still existed in the case. On March 28, 1996, the Court
issued its Findings and Statement of Intended Decision in which CSB was
granted summary adjudication as to the majority of claims in Ruemmler's
Cross-Complaint, including conspiracy, wrongful termination in violation of
public policy, intentional and negligent infliction of emotional distress,
invasion of privacy, conversion, fraud and deceit. Ruemmler's claims for
breach of contract, defamation and labor code violations were found to
contain triable issues of fact that must be determined by a jury. The Court
has now set a trial date of August 20, 1996.
It is CSB's position that Ruemmler was terminated as a result of gross
insubordination in failing to follow instructions regarding an employee who
complained of harassment. (See discussion below under Junco v. Commerce
Security Bank). Should the matter go to trial, CSB will have substantial
defenses it can raise as to the remaining causes of action. At present, it
is too early to determine whether the likelihood of an unfavorable outcome is
probable or remote.
ii. Martha E. Junco v. Commerce Security Bank, et al.
This action was filed on June 16, 1994 by a former employee of CSB's
Stockton branch. The Complaint named as defendants CSB and Ruemmler,
alleging sexual harassment and retaliation under the California Fair
Employment and Housing Act. Specifically, Martha E. Junco ("Junco") alleged
that she was terminated in retaliation for her having filed a sexual
harassment complaint against Ruemmler.
CSB alleged that it undertook effective and responsive remedial action
with regard to Junco's harassment complaint and that it terminated her
employment in response to prevailing economic conditions. At trial, the jury
returned a verdict against Junco on her claim of sexual harassment, but also
against Ruemmler on the claim of retaliation ($40,000) and against CSB on the
claim of retaliatory termination ($136,000). The jury also awarded punitive
damages in the amount of $176,000 against CSB.
Motions for New Trial and for Judgment Notwithstanding the Verdict, filed
on behalf of CSB of October 12, 1995, were denied and Plaintiff's motion for
attorneys' fees was granted in the amount of $100,000.
A Notice of Appeal was filed on behalf of CSB on December 18, 1995. By
this appeal, CSB seeks to overturn the jury's ruling that CSB retaliated
against Junco in terminating her from her position in 1994. A cross-appeal
was also filed by Junco, seeking to overturn the denial of her sexual
harassment claim against CSB. CSB intends to vigorously pursue the appeal,
seeking reversal of the jury's verdict. At present, it is too early to
determine whether the likelihood of an unfavorable outcome is probable or
remote.
iii. Russell, Priest, Garcia v. Commerce Security Bank, et al.
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<PAGE>
This action was served on CSB on May 12, 1995, alleging, among other
things, wrongful termination in violation of public policy for CSB's alleged
termination of former Stockton branch employees in 1994. The Complaint
alleges, among other things, that plaintiffs were terminated as a result of
their having reported alleged illegal loan activities engaged in by the
Stockton branch manager.
Discovery is presently ongoing and given the various issues in the case,
counsel for CSB is unable to estimate the potential damages sought by
plaintiffs. No trial date has been set by the Court. At present, it is too
early to determine whether the likelihood of an unfavorable outcome is
probable or remote.
iv. Kim Conti a.k.a. Kim Dusky v. Commerce Security Bank, et al.
This action, served upon CSB in March, 1996, was filed by a former loan
processor of the Sacramento branch office and alleges, among other things,
breach of contract, breach of the covenant of good faith and fair dealing,
sexual harassment, negligent and intentional infliction of emotional distress
and negligent hiring and retention of personnel. Specifically, plaintiff
alleges that co-defendant Craig Townsend, a former loan officer at CSB,
subjected her to a hostile and offensive work environment by making repeated
statements of an offensive nature. Plaintiff alleges she complained to CSB
management, and, in particular, her supervisor, co-defendant Don Starelli,
but that CSB ignored her complaints and then retaliated against her for
seeking redress through CSB's internal complaint process.
No trial or arbitration date has been set by the court. Prior to the
onset of litigation, plaintiff's counsel demanded settlement in the amount of
$350,000. CSB offered the sum of $5,000, which was not accepted.
With regard to the allegations of harassment, Mr. Townsend has denied the
majority of the claims. With regard to the issues of retaliation, Mr.
Starelli denies that plaintiff complained about sexual harassment in regard
to Mr. Townsend. Further, at the time plaintiff's concerns about Mr. Townsend
were brought to the attention of CSB'S management, CSB conducted an
investigation to the satisfaction of plaintiff and considered the matter
closed. Accordingly, CSB intends to vigorously prosecute the defense of this
action. At present, it is too early to determine whether the likelihood of
an unfavorable outcome is probable or remote.
While it is not possible to predict with certainty the outcome of the
litigation against CSB, it is the opinion of CSB's management, based in part
upon opinions of counsel, that the liability of CSB, if any, arising from
such lawsuits will not have a material adverse effect on the financial
condition of CSB.
From time to time, CSB is a party to other claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to CSB as to the current status of those
claims or proceedings to which CSB is a party, management is of the opinion
that the ultimate aggregate liability represented thereby, if any, will not
have a material adverse affect on the financial condition of CSB.
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<PAGE>
MARKET PRICE OF AND DIVIDENDS ON CSB COMMON STOCK
Market Information. The CSB Common Stock is not traded in any
established market and trading in such stock has been extremely infrequent
heretofore. Moreover, since March 1985, over ninety percent (90%) of the
outstanding shares of CSB Common Stock have been subject to substantial
restrictions on transferability as required under that certain Stock Purchase
Agreement entered into by and among CSB and certain shareholders of CSB.
Management of CSB is not aware of any trades in the CSB Common Stock in
either 1994, 1995 or the first quarter of 1996.
Holders. As of the Record Date the CSB Common Stock was held of record
by 36 shareholders.
Dividends. CSB did not pay any cash dividends during 1994, 1995 or the
first quarter of 1996 and does not intend to declare any cash dividends in
the foreseeable future.
82
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF CSB
The table on the following page sets forth certain information, as
of April 30, 1996, with respect to each of the directors and executive
officers(1) of CSB and the directors and executive officers as a group:
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
On April 30, 1996d
Year First -------------------------
Elected or Percentage
Name and Offices Appointed Number of of Shares
Held With CSB Age Director Shares(2) Outstanding
- ---------------- --- --------- ---------- -----------
<S> <C> <C> <C> <C>
David Adams 52 n/a -0- n/a
Chief Financial Officer
Kevin Cochrane 40 n/a -0- n/a
Executive Vice President/
Equipment Leasing Division
L. Robert Connelly 58 1994 -0- n/a
President, Chief Executive
Officer and Director
Frank Denby 53 1989 10,250 1.19%
Director
John Dowdell 59 1992 9,000 1.04%
Director
Peggy Grenz 59 1984 8,000 0.93%
Director
John Kay 48 n/a -0- n/a
Executive Vice President/
Banking Division
Robert Medearis 64 1992 5,500 0.64%
Director
Peter H. Paulsen(3) 62 1984 738,500 85.73%
Chairman of the
Board of Directors
Carl Shubert 59 1984 10,250 1.19%
Director
Directors and Executive 781,500 90.72%
Officers as a Group
(10 persons)(4)
</TABLE>
- ---------
(1) As used throughout this Informative Statement/Prospectus, the term
"execuive offices" means President/Chief Executive Officer, Chief Financial
Officer, Executive Vice President/Banking Division, Executive Vice
President/Equipment Leasing Division or Senior Vice President/Residential
Mortgage Division.
(2) Except as otherwise noted, may include shares held by such person's
spouse (except where legally separated) and minor children; shares held by
any other relative of such person who has the same house; shares held by a
family or retirement trust or to which such person is a beneficiary and
trustee with sole voting and investment power (or shared power with a
spouse); shares held in street name for the benefit of such person; or shares
held in an Individual Retirement Account as to which such person has
pass-through voting rights and investment power.
(3) Mr. Paulsen's business address is 114 West Magnolia, Suite 400,
Bellingham, Washington 98225.
* Does not include James Banks, the former Senior Vice President/Residential
Mortgage Division, who resigned from his office as of April 30, 1996.
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<PAGE>
All present directors of CSB serve for a term of one year and hold office
until the 1997 Annual Meeting of Shareholders of CSB or until their
successors are duly elected and qualified. The executive officers of CSB are
elected annually by the Board of Directors of CSB following the Annual
Meeting of Shareholders and serve at the pleasure of the Board of Directors.
The following provides information on the principal occupation or
employment during the past five years of each of CSB's directors and
executive officers.
David Adams has served as Senior Vice President and Chief Financial
Officer of CSB since 1994. Prior to joining CSB he served as Senior Vice
President and Chief Financial Officer for Pacific Valley National Bank from
1990 to 1993. From 1988 to 1990, Mr. Adams was the Chief Financial Officer
and a Senior Vice President of Community First Bank. From 1971 to 1988, Mr.
Adams served in various financial administration and accounting roles at
Guarantee Financial Corporation, concluding as First Vice President in
Financial Administration.
Kevin Cochrane is Executive Vice President of the Equipment Leasing
Division. He has been employed by CSB since 1990 when he joined CSB to
establish the division. From 1987 to 1990, Mr. Cochrane founded and operated
Gold River Financial Corporation, an equipment finance subsidiary of Gold
River Savings Bank and served as that subsidiary's President and Chief
Operating Officer. From 1981 to 1987, Mr. Cochrane was President and Chief
Executive Officer of Citiwest Financial, a company he founded to provide
lease financing and consulting services to business and industry. Mr.
Cochrane dissolved Citiwest to form Gold River Financial Corporation. From
1979 to 1981, Mr. Cochrane served as Assistant Vice President and Controller
of the Dowdell Corporation, a private equipment leasing company with
operations in 14 states. Mr. Cochrane holds an undergraduate degree in
economics from Whitman College and a masters degree in economics from the
University of California at Davis. He is past Chairman of the Northeast
Sacramento YMCA and a past member of Active 20/30 International.
L. Robert Connelly has served as President and CEO of CSB since April
1994 after serving as Special Assistant to the Chairman beginning in February
1994. Mr. Connelly has served as a director of CSB since June 1994. Prior
to his employment with CSB, Mr. Connelly served as the Chief Operating
Officer and Chief Financial Officer of Comerica Bank -California. Mr.
Connelly spent 27 years with Union Bank and Standard Chartered Bank serving
in several positions related to the United States and California operations
and the bank's property management. He has been active in professional and
community organizations including the American Bankers Association and the
California Bankers Association.
Frank Denby is President of Denby & Associates and has had a 25-year
career in tax and financial planning for business owners, executives and
professionals. He is a California certified public accountant who graduated
cum laude from the University of Southern California with a bachelor of
science degree in business administration. He is a California licensed real
estate broker, a certified financial planner and a registered investment
adviser. Mr. Denby is Vice Chairman of CSB and has been a director since the
commencement of operations of CSB in 1985.
John Dowdell is a President and Chief Executive Officer of Dowdell
Financial Services, a company engaged in assisting its clients in securing
tax-exempt faculties and taxable equipment financing throughout the western
United States. Mr. Dowdell is a member of the American Hospital Association,
the Healthcare Financial Management Association and the California
Association of Hospitals and Health Systems. He has served as a trustee,
officer or director of various organizations including the local Rotary and
YMCA foundations. Mr. Dowdell has been a director of CSB since 1992.
Peggy Grenz is owner-broker of Peggy Grenz Realty. Mrs. Grenz has been
active in industry organizations such as the Sacramento Board of Realtors;
the California Association of Realtors; the Sacramento Area Commerce and
Trade Organization; the Sacramento Metropolitan, Fair Oaks and Citrus Heights
Chambers of Commerce; and the Labor and Business Alliance. Mrs. Grenz has
been involved in the Building Association of Superior, the Comstock Club, the
20/30 International, the Sacramento Children's Home Guild, the Cerebral Palsy
Guild, Republican Associates, Sacramento Republican Women Federated and the
Sacramento County Republican Central Committee. Mrs. Grenz has been a
Director of CSB since its commencement of operations in 1985.
John Kay has served as Executive Vice President of the Commercial Banking
Division of CSB since 1992. From 1981 to 1992, Mr. Kay served as Senior Vice
President and Senior Credit Officer for Imperial Bank. Mr. Kay was employed
by First Interstate Bank in lending and commercial banking functions from
1971 to 1981. Mr. Kay earned his juris doctorate at the University of the
Pacific's McGeorge Law School and bachelor of arts and masters in business
administration degrees
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<PAGE>
from California State University at Fullerton. He is an active member of the
California Bar Association. Mr. Kay has served as a Trustee for the Sutter
Community Hospital Foundation and Chairman of the Corporations Fund Raising
Committee for the New Sutter General Hospital. Mr. Kay was nominated by the
Sacramento Chamber of Commerce for the Sacramento Distinguished Businessman
of the Year in 1992. Mr. Kay is Chairman of the Board of the Sutter Medical
Foundation and serves as Vice President of the Sacramento Metropolitan YMCA
and is First Vice President of C.A.R.E.S., an outpatient AIDS clinic.
Robert Medearis is a consulting professor in the School of Engineering at
Stanford University and the University of California at Davis. Mr. Medearis
has also taught entrepreneurship and the free market system to senior
managers and government officials in the former Soviet Union. He is
currently engaged in joint ventures and consulting with the Republic of
Georgia. Mr. Medearis is President of Chalice Investment, Inc. Mr. Medearis
was a founder and is a director emeritus of the Silicon Valley Bank in San
Jose, California. Mr. Medearis has been a director of CSB since 1992.
Peter H. Paulsen is the founder and has been the Chairman of the Board
and the principal stockholder of CSB since its inception in 1984. Mr.
Paulsen has been active in real estate development, first as a construction
foreman and mason contractor, then as a builder of homes and apartment
buildings. Mr. Paulsen was also a founding director of California Business
Bank in San Jose, California.
Carl Schubert is a structural engineer and is President/Chief Executive
Officer of Cole, Yee & Schubert Associates, Inc. Mr. Schubert is involved in
local professional, political, philanthropic and civic organizations
including the Sacramento City Planning Commission, the Consulting Engineers
Association, the Active 20/30 Club of Sacramento, the Sacramento Rotary Club
and the United Cerebral Palsy Telethon. Mr. Schubert has been a director of
CSB since its commencement of operations in 1985.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Management knows of no person who owned beneficially more than five
percent (5%) of the outstanding CSB Common Stock, as of April 30, 1996,
except for Peter H. Paulsen, the Chairman of the Board of Directors of CSB.
(See "DIRECTORS AND EXECUTIVE OFFICERS OF CSB" herein.)
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<PAGE>
EXECUTIVE COMPENSATION OF MANAGEMENT OF CSB
The table below sets forth certain summary compensation information for
the President/Chief Executive Officer of CSB and for CSB's four most highly
compensated other executive officers (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and All Other
Principal Position Year Salary Bonus Compensation(1)
- ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
L. Robert Connelly 1995 $175,000 $175,000 $4,620
President and 1994(2) $148,526 $ 87,500 $1,313
Chief Executive Officer
Kevin Cochrane 1995 $120,000 $129,424 $4,620
Executive Vice President/ 1994 $105,000 $ 74,771 $4,620
Equipment Leasing Division 1993 $ 94,026 $ 37,536 -0-
James Banks(3) 1995 $132,000 $ 66,000 $4,620
Senior Vice President/ 1994 $121,500 -0- $4,620
Mortgage Division 1993 $ 90,000 $92,852 -0-
John Kay 1995 $117,000 $ 51,800 -0-
Executive Vice President/ 1994 $112,000 $ 49,440 -0-
Banking Division 1993 $104,500 $ 22,083 -0-
David Adams 1995 $ 95,000 -0- -0-
Chief Financial Officer 1994(4) $ 83,856 -0- -0-
</TABLE>
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
On August 3, 1995, CSB entered into an Employment Agreement with John
Kay, an executive officer of CSB who holds the office of Executive Vice
President/Banking Division. The agreement is for approximately a two-year
term terminating on July 31, 1997. Under the agreement, Mr. Kay is paid a
base salary of $9,750 per month ($117,000 annually) plus variable
compensation of up to an additional fifty percent (50%) of annual base salary
based upon a prescribed formula which takes into account both quantitative
and qualitative factors. In the event that Mr. Kay's employment is
terminated for a reason other than for cause, disability or death, Mr. Kay
will be entitled to receive a severance payment equal to 12 months base
salary and continuation of medical benefits for 12 months following
termination.
On April 10, 1995, CSB entered into an Employment Agreement with Kevin
Cochrane, an executive officer of CSB who holds the office of Executive Vice
President/Equipment Leasing Division. The agreement is for a three-year term
terminating on April 10, 1998. Under the agreement, Mr. Cochrane is paid a
base salary of $10,417 per month ($125,000 annually) plus unlimited variable
compensation calculated in accordance with a performance-based formula tied
to the Equipment Leasing Division's pre-tax earnings. In the event that Mr.
Cochrane's employment is terminated for a reason other
- ----------
(1) Represents CSB's contributions to the amounts of these executive officers
in connection with CSB's 401(k) Plan.
(2) The compensation figures for Mr. Connelly for 1994 represent partial year
compensation. Mr. Connelly's employment with CSB commenced on February 23,
1994.
(3) Mr. Banks resigned from his office as of April 30, 1996.
(4) The compensation figures for Mr. Adams for 1954 repreent partial year
compensation. Mr. Adams' employment with CSB commenced on February 14, 1994.
Additionally, Mr. Adams received a perquisite of $13,659 from CSB in 1994 in
the form of an apartment allowance.
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<PAGE>
than for cause, disability or death, Mr. Cochrane will be entitled to receive
a severance payment equal to 12 months base salary and continuation of
medical benefits for 12 months following termination.
On April 24, 1996, CSB entered into a Transition Agreement with each of
L. Robert Connelly, President and Chief Executive Officer of CSB; David
Adams, Chief Financial Officer of CSB; and James Banks, the former Senior
Vice President/Mortgage Division of CSB. Each of such agreements provides
that in the event such executive officer is removed from his position at any
time during the six-month period following the consummation of the CSB
Acquisition, that officer will be entitled to receive a severance payment
equal to 12 months base salary and continuation of medical benefits for 12
months following termination. Mr. Banks' Transition Agreement was terminated
without payment of severance benefits when he resigned from his office on
April 30, 1996. Mr. Connelly's and Mr. Adams' Transition Agreements remain
in full force and effect.
DIRECTOR COMPENSATION
Each director of CSB (with the exception of the President and the
Chairman of the Board) is currently paid a flat fee of $1,400 per month for
attendance at Board meetings. Members of the Board (with the exception of
the President and the Chairman of the Board) are also paid fees for
attendance at meetings of committees on which they serve as follows: Audit
Committee -- $400 per meeting (chairman of committee receives $500);
Compensation Committee -- $400 per meeting (chairman of committee receives
$500); Loan Committee -- $1,600 per month; and CRA/Compliance Committee --
$400 per quarterly meeting. Additionally, the Chairman of the Board receives
a flat fee of $5,000 per month for attendance at all meetings of the Board
and committees on which the Chairman of the Board serves. The President does
not receive compensation as a director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTION REGARDING CSB
Some of the directors and executive officers of CSB and the companies
with which they are associated have been customers of, and have had banking
transactions with, CSB in the ordinary course of CSB's business and CSB
expects to continue to have such banking transactions in the future. All
loans and commitments to lend included in such transactions were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with persons of
similar creditworthiness, and, in the opinion of management of CSB, did not
involve more than the normal risk of collectibility or present other
unfavorable features.
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DESCRIPTION OF HOLDCO
Holdco is a Delaware corporation formed in May 1996 as a wholly-owned
subsidiary of SDN. As of the date of this Information Statement/Prospectus,
it has conducted no business activity and has no significant assets, and it
is not expected to conduct any business activity prior to the Closing Date
other than ministerial activity necessary to consummate the Transaction. The
address of Holdco's principal office is One Pacific Plaza, 7777 Center
Avenue, Huntington Beach, California 92647, and its telephone number is (714)
897-2929.
Upon consummation of the Transaction, Holdco will have two subsidiaries:
SDN and CSB. SDN in turn will continue to have two operating bank
subsidiaries: San Dieguito and Liberty; CSB will itself continue to be an
operating bank. San Dieguito, Liberty and CSB may be collectively referred to
in this Information Statement/Prospectus as the "Operating Banks". (For
detailed information regarding SDN (including San Dieguito and Liberty) and
CSB, see "INFORMATION REGARDING THE BUSINESS OF SDN" and "INFORMATION
REGARDING THE BUSINESS AND PROPERTIES OF CSB" herein.)
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1995 RECAPITALIZATION AND CERTAIN OTHER RECENT DEVELOPMENTS
Overview
During the 12 months preceding the date of this Information
Statement/Prospectus, SDN has undertaken a significant change in its
strategic direction, embarking on a plan of growth through acquisitions and
other business combinations. The first such transaction was SDN's
acquisition of Liberty, completed on March 31, 1996. The CSB Acquisition
will constitute the second such acquisition. SDN's ability to pursue such a
strategic plan is a consequence of the 1995 Recapitalization by Dartmouth
Capital Group, as well as subsequent capital commitments provided by the
Dartmouth Capital Group. The 1995 Recapitalization restored SDN to a "well
capitalized" level after several years of losses. The terms of the Liberty
transaction and the 1995 Recapitalization are described below and elsewhere
in this Information Statement/Prospectus. (See also "THE CSB ACQUISITION --
SDN's Reasons for the CSB Acquisition" herein.)
Acquisition of Liberty National Bank
On October 26, 1995, SDN and the Dartmouth Partnership entered into a
definitive agreement for SDN to acquire Liberty for a total of approximately
$15.1 million in cash. SDN consummated its acquisition of Liberty as of
March 31, 1996. That acquisition increases SDN's consolidated assets as of
that date (net of cash deposits that subsequently were paid to Liberty
shareholders) from $58.0 million to $208.3 million and its stockholders'
equity from $4.7 million to $17.0 million.
The acquisition of Liberty was funded largely through SDN's sale of
3,392,405 shares of its common stock to Dartmouth Capital Group in
consideration of an aggregate investment in SDN of $13.4 million. At the
Dartmouth Partnership's direction, SDN issued 1,764,000 of those shares to
certain of the Direct Holders and the remaining 1,628,405 shares of SDN
Common Stock directly to the Dartmouth Partnership. Giving effect to the
issuance of those shares, the Dartmouth Partnership owns 48.0% of the
outstanding SDN Common Stock and the Direct Holders own, in the aggregate,
50.7% of the outstanding SDN Common Stock. The balance of the consideration
paid to Liberty's shareholders was funded through the use of Liberty's excess
capital.
1995 Recapitalization
Reincorporation and Sale of Shares to Dartmouth Capital Group. On
September 30, 1995, SDN completed the 1995 Recapitalization contemplated by
the Stock Purchase Agreement dated July 21, 1995 (the "1995 Stock Purchase
Agreement") between SDN and the Dartmouth Partnership. Pursuant to the 1995
Stock Purchase Agreement, and as a condition imposed by the Dartmouth
Partnership, SDN (which was previously a California corporation)
reincorporated under Delaware law on September 28, 1995. Through that
reincorporation, SDN also effected a reduction in the number of shares of its
common stock outstanding prior to the Dartmouth Capital Group's investment,
as the exchange ratio utilized in the reincorporation resulted in each SDN
shareholder receiving one share of SDN common stock, $.01 par value per share
(the "SDN Common Stock") for each 21 shares of common stock of the
predecessor California corporation. All per-share financial data presented
in this Information Statement/Prospectus has been restated to give effect to
that 1:21 reduction in shares outstanding, which is sometimes referred to in
this Information Statement/Prospectus as the "Reverse Stock Split."
Subsequently, on September 30, 1995, SDN sold an aggregate of 841,739
shares of SDN Common Stock, representing 94% of the SDN Common Stock
outstanding immediately following the 1995 Recapitalization, to Dartmouth
Capital Group in return for an investment by the Dartmouth Capital Group of
$4.9 million. As a result of the 1995 Recapitalization, SDN became 94% owned
by the Dartmouth Capital Group. At the Dartmouth Partnership's direction,
shares representing 48% of the SDN Common Stock outstanding were issued to
the Dartmouth Partnership in its own name and shares representing 46% of the
SDN Common Stock outstanding were issued to Direct Holders. Each of the
Direct Holders was, and continues to be as of the date of this Information
Statement/Prospectus, a shareholder (or an affiliate of a shareholder) of the
Dartmouth General Partner. As a result of the infusion of the net proceeds
of that offering (together with the forgiveness of a portion of SDN's debt,
as discussed below), both SDN and San Dieguito were rendered "well
capitalized" for regulatory purposes.
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Escrowed Shares and Stock Rights. After reincorporating under Delaware
law but prior to the issuance of shares to the members of the Dartmouth
Capital Group, SDN transferred to an escrow agent additional newly issued SDN
Common Stock (the "Escrowed Shares") representing 3.0% of the total shares of
SDN Common Stock outstanding following the 1995 Recapitalization. The
Escrowed Shares are held by the escrow agent primarily for the benefit of
those persons (the "Record Date SDN Shareholders") who held SDN Common Stock
as of September 28, 1995 and their transferees, and secondarily for the
benefit of the Dartmouth Partnership and its transferees. Through an
instrument known as a Series A (Primary) Stock Right (each a "Primary Stock
Right"), each Record Date SDN Shareholder has a beneficial interest in a pro
rata portion of the Escrowed Shares. The Escrowed Shares may be distributed
out of escrow to the holders of the Primary Stock Rights based upon the
outcome of two separate sets of contingencies as of two future dates: March
31, 1997 (the "First Determination Date") and September 30, 1998 (the "Second
Determination Date"). The number of shares distributed following the First
Determination Date to holders of Primary Stock Rights will be based on the
net losses actually suffered (and an estimate of future losses still to be
suffered) by San Dieguito as of the First Determination Date with respect to
all of San Dieguito's assets that were "adversely classified" as of the date
of the 1995 Recapitalization. The number of shares distributed following the
Second Determination date to holders of Primary Stock Rights will be based on
the amount of losses and expenses, if any, that SDN has suffered (including
accruals for future losses it expects to suffer) as of the Second
Determination Date arising out of any claims asserted against SDN or San
Dieguito based on facts or circumstances that occurred prior to the 1995
Recapitalization.
Following, respectively, the First Determination Date and the Second
Determination Date and the distribution, if any, of Escrowed Shares to the
Primary Stock Right holders, any portion of the Escrowed Shares in the
applicable distribution pool that was not required to be distributed to the
Primary Stock Right holders will be distributed to the Dartmouth Partnership
pursuant to a "Series A (Residual) Stock Right" (the "Residual Stock Right")
issued to the Dartmouth Partnership at the time of the 1995 Recapitalization.
The Primary Stock Rights and the Residual Stock Right and the related
escrow agreement provide that, upon a transaction (such as the SDN
Acquisition) in which SDN Common Stock is converted into or exchanged for any
other securities, the Escrowed Shares shall be converted into or exchanged
for such securities, with the result that the securities distributable to the
holders of the Primary Stock Rights and the Residual Stock Right shall be
those new securities. Consequently, upon the completion of the SDN
Acquisition, the SDN Common Stock that currently constitutes the Escrowed
Shares will be exchanged for Holdco Common Stock, and the securities
ultimately distributed to the holders of the Primary Stock Rights and/or the
Residual Stock Right will be Holdco Common Stock.
The Primary Stock Rights are currently "attached to" and tradeable only
in conjunction with the Record Date SDN Shareholders' shares of SDN Common
Stock. The holders of the Primary Stock Rights effectively hold the voting
and dividend rights on the Escrowed Shares while those shares remain in
escrow. The Escrowed Shares constitute issued and outstanding shares for all
purposes, including for purposes of all per-share financial data presented in
this Information Statement/Prospectus.
Partial Forgiveness of Debt. Prior to entering into the 1995 Stock
Purchase Agreement, SDN had outstanding approximately $975,000 in principal
amount of senior debt (including $300,000 owed to San Dieguito) and
approximately $1.2 million in principal amount of Mandatory Convertible
Debentures (collectively, the "Debentures"). As a condition to its
investment in SDN, the Dartmouth Partnership required that a substantial
portion of the Debentures be canceled without payment and that an additional
portion be sold by the holders to the Dartmouth Partnership for a nominal sum
(which the Dartmouth Partnership then forgave). In addition, the Dartmouth
Partnership required the holders of SDN's senior debt (other than San
Dieguito) to accept payment of their senior debt at a discount of
approximately $170,000 in order to offset a portion of the interest costs
associated with the Debentures that were not canceled. That discount was
calculated to have the effect of reducing the effective interest rate on the
remaining Debentures to a rate modestly below the prime rate.
Subject to the discount noted above, all of SDN's senior debt was paid
off at the time of the 1995 Recapitalization. The principal amount of the
Debentures remaining outstanding is approximately $537,000; the interest on
those Debentures (which was previously delinquent) was brought current
shortly after the 1995 Recapitalization. The Debentures mature on May 31,
1998. At that time, unless the holder of that Debenture has taken certain
steps that would entitle him or her to receive cash equal to the face amount
of the applicable Debenture, each Debenture will be converted mandatorily
into SDN Common Stock at a conversion ratio equal to the lesser of the
then-fair market value of that SDN Common Stock or the conversion price of
$52.50, which has been adjusted to reflect the 1995 Recapitalization. SDN
expects to take appropriate action prior to the maturity of the Debentures
either to cause the Debentures to be convertible into Holdco Common Stock (in
lieu of SDN
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Common Stock) or to redeem the Debentures. The Debentures constitute "Equity
Contract Notes" and are included in Tier 2 capital for regulatory purposes.
(See "SUPERVISION AND REGULATION OF HOLDCO AND SDN -- Capital Adequacy
Requirements" and "-- Prompt Corrective Action Provisions" herein.)
SELECTED CONSOLIDATED FINANCIAL DATA OF SDN
The table on the following page sets forth certain selected consolidated
financial data for SDN as of and for the three-month periods ended March 31,
1996 and 1995 and as of and for each of the years in the five-year period
ended December 31, 1995. In the opinion of SDN's management, the unaudited
financial statements as of and for the three months ended March 31, 1996 and
1995 which are included in this Information Statement/Prospectus were
prepared on the same basis as the audited financial statements and include
all adjustments (none of which were other than normal recurring accruals)
necessary to present fairly the information set forth therein. Interim
financial statements are not necessarily indicative of results for the entire
year.
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<TABLE>
<CAPTION>
As of and for the
Quarters Ended March 31, As of and for the Years Ended December 31,
------------------------ -----------------------------------------------
(Dollars in Thousands, Except for Per Share Amounts)
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Net interest income before
provision for possible loan loss $ 759 $ 719 $ 2,817 $ 2,861 $ 2,994 $ 4,079 $ 4,094
Provision for possible loan loss 35 60 295 583 1,085 350 1,125
---------- ------- -------- ------- ------- ------- -------
Net interest income after provision
for possible loan loss 724 659 2,522 2,278 1,909 3,729 2,969
Net noninterest expense 701 789 3,595 3,267 3,885 3,960 4,318
---------- ------- -------- ------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item 23 (130) (1,073) (989) (1,976) (231) (1,349)
Income taxes (benefit) 5 -- (443) -- -- -- (274)
---------- ------- -------- ------- ------- ------- -------
Loss before extraordinary item 18 (130) (630) (989) (1,976) (231) (1,075)
Extraordinary item: forgiveness of
indebtedness net of $443,000
income taxes -- -- 625 -- -- -- --
---------- ------- -------- ------- ------- ------- -------
Net income (loss) $ 18 $ (130) $ (5) $ (989) $(1,976) $ (231) $(1,075)
---------- ------- -------- ------- ------- ------- -------
---------- ------- -------- ------- ------- ------- -------
Per share data:
Income (loss) before
extraordinary item $ .02 $ (2.42) $ (2.35) $(18.41) $(36.78) $ (0.41) $ (1.91)
Extraordinary item -- -- 2.33 -- -- -- --
Income (loss) per share $ .02 $ (2.42) $ (0.02) $(18.41) $(36.78) $ (4.30) $(20.02)
Average shares outstanding 1,005,223 53,728 268,198 53,728 53,728 53,728 53,684
Financial Position
Assets $ 222,795 $59,068 $ 55,905 $57,686 $61,916 $80,200 $91,749
Loans, net 120,889 42,935 38,338 45,492 48,179 55,789 70,473
Deposits 203,470 57,535 51,431 55,876 59,651 76,149 87,180
Shareholders' equity (deficit) 16,959 (1,078) 3,541 (948) 41 2,017 2,248
Selected Financial Ratios
Return on average equity(1) 0.79% nm nm nm (201.43)% (10.32)% (39.67)%
Return on average assets 0.06% (0.12)% (0.01)% (1.61)% (2.97)% (0.28)% (1.28)%
Average equity to average assets 7.00% (4.34)% (0.14)% (0.09)% 1.47 % 2.74 % 3.24 %
Dividend payout ratio -- -- -- -- -- -- --
</TABLE>
- -----------------------------------------
(1)Return on average equity is not meaningful at the average equity for 1994
and 1995, and for the first quarter of 1995, was negative.
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SDN MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion is intended to provide information to
facilitate the understanding and assessment of the financial condition and
results of operations of SDN, and the significant changes and trends
affecting that financial condition and those operations. This discussion and
analysis should be read in conjunction with the SDN Financial Statements, the
Pro Forma Financial Information and the respective Notes thereto included
elsewhere in this Information Statement/Prospectus.
As of the date of this Information Statement/Prospectus, SDN owns 100%
of San Dieguito and 100% of Liberty, and has no significant business
activities independent from San Dieguito and Liberty. Prior to March 31,
1996, the date on which it acquired Liberty, SDN had no significant business
activities independent from San Dieguito. Accordingly, the following
discussion relates primarily to the operating results and financial condition
of San Dieguito and Liberty.
In reading this discussion and analysis and the other information
regarding SDN contained elsewhere in this Information Statement/Prospectus,
it is important to note that, for the reasons described below and elsewhere
in this Information Statement/Prospectus, certain historical SDN financial
data presented herein, including, without limitation, information regarding
average balances, may not be indicative of the financial condition of SDN as
of the date of this Information Statement/Prospectus. Similarly, the results
of SDN's operations during the periods discussed herein may not be indicative
of the results of operations that can be expected for any subsequent period.
Effective September 30, 1995, SDN completed the 1995 Recapitalization, in
which the capital structure of SDN and the capital levels of both SDN and San
Dieguito (then SDN's sole subsidiary) were fundamentally altered. That
transaction also resulted in the Dartmouth Capital Group becoming SDN's
controlling stockholder group, in the election of a board of directors and
management affiliated with the Dartmouth Capital Group, and in a fundamental
change in SDN's strategic direction, as discussed in the following paragraph.
On March 31, 1996, SDN completed its acquisition of Liberty, thereby
increasing SDN's consolidated assets by approximately $150 million or
approximately 260%. (See "1995 RECAPITALIZATION AND CERTAIN RECENT
DEVELOPMENTS" herein.) The Liberty acquisition was accounted for as a
purchase. (See "PRO FORMA FINANCIAL INFORMATION" herein.) Accordingly, the
portions of the following discussion that relate to periods prior to March
31, 1996 relate primarily to the operating results and financial condition of
San Dieguito alone. Only those portions of the following discussion that
relate to the financial condition of SDN on March 31, 1996 include the
effects of SDN's acquisition of Liberty.
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Those risks
and uncertainties include changes in interest rates generally, changes in
real estate values and other economic conditions in Southern California,
SDN's principal market area, and changes in laws and regulations affecting
the banking industry. SDN undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. Additional information on potential
factors which could affect SDN's financial results is included elsewhere in
this Information Statement/Prospectus. (See "INFORMATION CONCERNING THE
BUSINESS OF SDN" and "SUPERVISION AND REGULATION OF HOLDCO AND SDN" herein.)
Potential Effect of Future Acquisitions
As noted elsewhere in this Information Statement/Prospectus, since
September 1995, SDN has sought, and continues to seek as of the date of this
Information Statement/Prospectus, to acquire or enter into business
combinations with other financial institutions, principally in the California
market. (See "THE CSB ACQUISITION -- SDN's Reasons for the CSB Acquisition"
and "1995 RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS" herein.) While
SDN is not, as of the date of this Information Statement/Prospectus, under a
definitive agreement to acquire or combine with any other financial
institution, discussions with a view toward such transactions are ongoing
with one or more institutions, and there can be no assurance that SDN will
not have completed or entered into a definitive agreement relating to such a
transaction (whether through SDN, through Holdco or otherwise) as of the time
of the Closing. As of the Closing Date, the Dartmouth Capital Group will be
Holdco's controlling shareholder group and will be able to elect the
directors of Holdco. The Dartmouth
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Partnership expects that those directors will cause Holdco to continue to
seek acquisitions of or business combinations with other financial
institutions after the Closing Date. Accordingly, the discussion in this
section of certain trends in SDN's financial condition, including its capital
resources and liquidity, may not be indicative of SDN's or Holdco's
prospective financial condition.
Financial Condition
Earning Assets. Average interest-earning assets of SDN for the first
three months of 1996 were approximately $48.0 million, a decrease of $3.7
million, or 7.2%, from the average for the comparable three-month period in
1995. Excluding the addition of Liberty's assets, total assets of SDN at
March 31, 1996 were $72.5 million compared to total assets of $55.9 million
at December 31, 1995 and $59.1 million at March 31, 1995. The increase in
total assets since December 31, 1995 is attributable primarily to a temporary
increase in deposits due to the escrow account established with approximately
$14.5 million related to the cash purchase of the shares of Liberty
shareholders. (See "1995 RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS --
Acquisition of Liberty National Bank" herein.) Total assets at March 31,
1996 including the effect of the Liberty acquisition were $222.8 million.
Average interest-earning assets in 1995 were approximately $50.3
million, a decrease of $3.6 million, or 6.7%, from the 1994 average. Total
assets were $55.9 at December 31, 1995 compared to total assets of $57.7 at
December 31, 1994. Total assets of $55.9 million at December 31, 1995 are
inclusive of the $3.2 million received (net of debts repaid) as a result of
the 1995 Recapitalization.
Average interest-earning assets decreased approximately $4.8 million, or
8.2% between 1993 and 1994, from $58.7 million in 1993 to $53.9 million in
1994. Total assets at December 31, 1994 represent a reduction of $4.2
million, or 6.8%, from SDN's total assets of $61.9 million at December 31,
1993.
Loans. Average loans of SDN for the first three months of 1996 were
approximately $38.3 million, a decrease of $6.9 million, or 15.2%, from the
average for the comparable three month period in 1995. Excluding the
addition of Liberty's loans, total loans of SDN at March 31, 1996 were $37.2
million compared to $39.0 million at December 31, 1995 and $43.7 million at
March 31, 1995. Total loans at March 31, 1996 including those of Liberty
were $123.3 million. SDN's four largest lending categories are: (I)
commercial real estate loans; (ii) other loans secured by real estate; (iii)
commercial loans and (iv) loans to individuals, accounting for approximately
58.0%, 17.0%, 13.0 and 12.0%, respectively, of SDN's total loan portfolio at
March 31, 1996.
Average loans for 1995 were approximately $42.3 million, a decrease of
$4.7 million, or 10.0%, from the average for 1994. Total loans at December
31, 1995 were $39.0 million compared to $46.3 million at December 31, 1994.
This $7.3 million decrease was primarily a result of a $2.7 million decrease
in commercial loans and a $2.9 million decrease in real estate and
construction loans. Average loans decreased approximately $2.2 million, or
4.5% between 1993 and 1994, from $49.2 million in 1993 to $47.0 million in
1994.
Deposits. Average deposits of SDN for the first three months of 1996
were approximately $51.4 million, a decrease of $5.9 million, or 10.2%, from
the average for the comparable three-month period in 1995. Excluding the
addition of Liberty's deposits, total deposits increased to $68.3 million at
March 31, 1996 compared to $51.4 million at December 31, 1995 and $57.5
million at March 31, 1995. The increase in total deposits since December 31,
1995 is attributable primarily to the temporary increase in deposits due to
the escrow account established at San Dieguito with approximately $14.5
million related to the cash purchase of the shares of Liberty shareholders.
Total deposits at March 31, 1996 (including those of Liberty) were $203.5
million.
Average deposits in 1995 were approximately $54.5 million (excluding
SDN's deposit account which is eliminated in consolidation), a decrease of
$4.7 million, or 7.9%, from the average for 1994. Total deposits decreased
to $51.4 million at December 31, 1995 compared to $55.9 million at December
31, 1994. This $4.5 million decrease is primarily due to a $3.1 million
decrease in savings deposits (including money market) and a $2.6 million
decrease in certificates of deposits, partially offset by a $1.3 million
increase in demand deposits.
Average deposits decreased approximately $3.8 million, or 6.0%, between
1993 and 1994, from $62.9 million in 1993 to $59.2 million in 1994. Demand
deposits decreased approximately $2.1 million, or 15.1%, between 1993 and
1994, from
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$13.9 million in 1993 to $11.8 million in 1994. Interest-bearing deposits
decreased approximately $1.7 million, or 3.4%, from $49.0 million in 1993 to
$47.3 million in 1994. Total deposits at December 31, 1994 were $55.9
million, a decrease of $3.8 million, or 6.3%, from total deposits at December
31, 1993.
Results of Operations
Net Income. For the three months ended March 31, 1996, SDN had net
income of $18,000 compared to a net loss of $130,000 for the same period in
1995. The improvement in 1996 earnings over the same period in 1995 resulted
from a combination of an improvement in net interest income of approximately
$40,000, a reduction in loan loss provision of $25,000, an improvement in
noninterest income of approximately $28,000 and a reduction in noninterest
expense of $60,000, partially offset by an increased provision for income
taxes of $5,000.
In 1995, SDN had a consolidated net loss of $5,000 for the year ended
December 31, 1995, compared to a consolidated net loss of $989,000 for the
same period in 1994. Included in the $5,000 net loss for 1995 was an
extraordinary gain of approximately $1.1 million from extinguishment of debt
in connection with the 1995 Recapitalization. SDN's loss before
extraordinary item for 1995 was $1.1 million before taxes ($625,000 after
taxes) versus the net loss of $989,000 for the same period in 1994. The
increase in the loss before extraordinary item in 1995 is due to a $358,000
increase in noninterest expense, and a $44,000 decrease in net interest
income, partially offset by a $288,000 decrease in the provision for loan
losses and a $30,000 increase in non-interest income. Net loss per share
(including the effects of the extraordinary item) was $.02 in 1995, compared
to a net loss per share of $18.41 in 1994.
The net loss before extraordinary items of $989,000 in 1994 is a
decrease of $987,000, or 49.9%, from the net loss of $2.0 million in 1993.
Loss per share was $18.41 in 1994 compared to a loss per share of $36.78 in
1993, adjusted for the Reverse Stock Split and stock dividends which occurred
on September 27, 1995 and September 28, 1995, respectively. (See "1995
RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS -- 1995 Recapitalization"
herein.)
Net Interest Income and Net Interest Margin. Net interest income was
approximately $759,000 for the three months ended March 31, 1996, an increase
of $40,000 over the same period in 1995. A reduction in interest expense of
$151,000 largely offset by reduced interest income by $111,000 contributed to
this earnings improvement.
Loans, the largest component of SDN's earning assets, declined to an
average balance of $38.3 million for the first three months of 1996 from
$45.1 million for the first three months of 1995, with average yields of 9.7%
and 9.6%, respectively. Investments in securities and federal funds sold
rose to an average of $10.3 million for the first three months of 1996 from
an average of $7.5 million for the first three months of 1995, with an
average yield of 5.7% earned during both periods. Further, loan fee income
decreased $8,000 for the first three months of 1996 compared to 1995. The
average yield on all earning assets declined to 8.8% for the first three
months of 1996 from 9.1% for the same period in 1995. The decline in yield
on earning assets can largely be attributed to a shift in the mix of earning
assets, as the amount of loans as a percent of average earning assets
declined during the first three months of 1996 to 78.7% of all earning assets
from 85.7% for the same period in 1995.
The average rate paid on interest-bearing liabilities was 3.2% for the
first three months of 1996 compared to 3.9% for the same period in 1995.
Average interest-bearing deposits decreased to $38.3 million for the three
months ended March 31, 1996 from $45.8 million for the same period in 1995.
Additionally, the average rate paid on those deposits declined to 3.1% during
the first three months in 1996 from 3.6% during the first three months in
1995. That decrease represented an overall decrease in rates paid on deposit
liabilities and a change in the mix of interest-bearing products. Further,
as a result of the 1995 Recapitalization, other borrowing declined in
September 1995 to $537,000 (consisting solely of the Debentures) with an
average rate of 11.5% from $1.9 million at an average rate of 11.3%. (See
"1995 RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS -- 1995
Recapitalization -- Partial Forgiveness of Debt" herein.) As a result of all
of the foregoing factors, SDN's net yield on earning assets increased to 6.3%
for the first three months of 1996 from 5.5% for the same period in 1995.
In 1995, SDN's net interest income decreased $44,000 from 1994 net
interest income due to an increase of $222,000 in interest expense, partially
offset by an increase of $178,000 in interest income. Interest expense
increased primarily due to an increase in the average rate paid on
interest-bearing liabilities which rose from 3.10% in 1994 to 3.88% in 1995,
partially offset by a decrease in total interest-bearing liabilities.
Interest income increased primarily due to an increase in the average yield
earned on interest-earning assets, which rose to 9.08% in 1995 from 8.15% in
1994, partially offset by a decrease in total
95
<PAGE>
interest-earning assets. In addition, loan fee income decreased by $26,000
to $104,000 in 1995 from $130,000 in 1994. This decrease reflects the
decline in real estate and construction lending,
[the principal source of loan fees,] in SDN's market area. As a result of
those factors, the net yield earned on interest-earning assets increased from
5.31% in 1994 to 5.60% in 1995.
In 1994, SDN's net interest income decreased $133,000 from 1993 net
interest income due to a $165,000 decrease in interest income partially
offset by a $32,000 decrease in interest expense. The decrease in interest
income was primarily due to a reduction in loan volume and overall earning
assets and was partially offset by higher rates earned on earning assets,
which increased from an average of 7.76% in 1993 to an average of 8.15% in
1994. Interest expense decreased primarily due to a decrease in
interest-bearing liabilities, and was partially offset by an increase in
rates paid on interest-bearing liabilities, which rose from an average of
3.07% in 1993 to an average of 3.10% in 1994. Loan fee income decreased from
$238,000 in 1993 to $130,000 in 1994; as in the 1995 period, this principally
reflected the decline in real estate and construction lending in SDN's market
area.
The tables on the following pages set forth the average amount
outstanding for each major category in the statements of condition for,
respectively, the three-month periods ended March 31, 1996 and March 31,
1995, and for each of the past two years. They also indicate the total
amount of interest earned, or paid, for the periods covered and the average
rates earned or paid during those periods for each such category. SDN has
not engaged in foreign activities in any of the periods represented.
Nonaccrual loans are included in total loans outstanding while non-accrued
interest thereon is excluded from the computation of rates earned.
96
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
----------------------------- -----------------------------
Interest Average Interest Average
Average Income or Yield Average Income or Yield
Balance Expense or Cost Balance Expense or Cost
------- --------- ------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1) . . . . . . . . . . . . $37,523 $ 920 9.86% $44,239 $1,070 9.81%
Taxable investment securities. . 5,641 86 6.12 4,494 64 5.75
Federal funds sold . . . . . . . 3,914 49 5.08 1,968 28 5.68
Interest-bearing deposits
with financial institutions. . 961 11 5.60 1,079 15 5.70
------- ------ ------- ------
Total interest-earning asset 48,039 1,066 8.96 51,780 1,177 9.22
Other assets:
Cash and demand
deposits with banks 4,218 3,904
Other assets 3,814 3,403
------- -------
Total Assets $56,071 $59,087
------- -------
------- -------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand. . . . $11,246 28 1.00% 10,382 38 1.49%
Money market . . . . . . . . . 8,745 56 2.57 10,020 64 2.56
Savings. . . . . . . . . . . . 4,754 26 2.18 5,798 32 2.22
Time . . . . . . . . . . . . . 13,513 184 5.49 19,565 271 5.62
------- -------- ------- ------
Total interest-bearing
deposits . . . . . . . . . 38,258 294 3.09 45,765 405 3.59
Fed Funds Purchased. . . . . . . . -0- -0- -0- 174 -0- -0-
Long-Term Debt . . . . . . . . . . 543 15 11.38 1,894 53 11.35
------- -------- ------- ------
Total interest-bearing
liabilities. . . . . . . . 38,801 307 3.19 47,833 458 3.88
Other liabilities:
Non interest-bearing
demand deposits. . . . . . . . 13,054 11,459
Other liabilities. . . . . . . . 431 713
------- -------
Total liabilities. . . . . . . . 52,286 60,005
Shareholders' equity . . . . . . . 3,785 (918)
------- -------
Total liabilities and
Shareholders' equity . . . $56,071 $59,087
------- -------
------- -------
Net interest income: . . . . . . . $ 759 $ 719
------ ------
------ ------
Net yield on interest-earning
assets . . . . . . . . . . . . 6.35% 5.63%
---- ----
---- ----
</TABLE>
- ----------------------------------
(1)Includes the deduction of the average balance in the allowance for loan
losses of $695,000 in 1996 and $844,000 in 1995. Loan fees on $22,000 in
1996 and $30,000 in 1995 are included in the computations.
97
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------ -----------------------------
Interest Average Interest Average
Average Income or Yield Average Income or Yield
Balance Expense or Cost Balance Expense or Cost
------- --------- ------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1) . . . . . . . . . . . . . $42,272 $4,086 9.67% $46,979 $4,044 8.61%
Taxable investment securities. . . 5,061 311 6.15 4,578 247 5.40
Federal funds sold . . . . . . . . 2,128 117 5.50 1,337 56 4.19
Interest-bearing deposits
with financial institutions. . . 868 54 6.22 979 43 4.39
------- ------ ------- ------
Total interest-earning asset 50,329 4,568 9.08 53,873 4,390 8.15
Other assets:
Cash and demand
deposits with banks 3,757 4,667
Other assets 2,909 2,772
------- -------
Total Assets $56,995 $61,312
------- -------
------- -------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand. . . . . $10,492 149 1.42% 11,333 167 1.47%
Money market . . . . . . . . . . 9,176 231 2.52 12,230 316 2.58
Savings. . . . . . . . . . . . . 5,235 115 2.20 6,049 135 2.23
Time . . . . . . . . . . . . . . 18,394 1,075 5.84 17,740 727 4.10
------- ------ ------- ------
Total interest-bearing
deposits . . . . . . . . . . 43,297 1,570 3.63 47,352 1,345 2.84
Fed Funds Purchased. . . . . . . . . -0- -0- -0- -0- -0- -0-
Long-term debt. . . . . . . . . . . 1,776 181 10.19 1,895 184 9.71
-------- ------- ------- ------
Total interest-bearing
liabilities. . . . . . . . . 45,073 1,751 3.88 49,247 1,529 3.10
Other liabilities:
Non interest-bearing
demand deposits. . . . . . . . . 11,197 11,822
Other liabilities. . . . . . . . . 806 770
-------- -------
Total liabilities. . . . . . . . . 57,076 61,839
Shareholders' equity . . . . . . . . (81) (527)
------- -------
Total liabilities and
Shareholders' equity . . . . $56,995 $61,312
-------- -------
-------- -------
Net interest income: . . . . . . . . $ 2,817 $2,861
------- ------
------- ------
Net yield on interest-earning
assets . . . . . . . . . . . . . 5.60% 5.31%
---- ----
---- ----
</TABLE>
- ----------------------------------
(1)Includes the deduction of the average balance in the allowance for loan
losses of $639,000 in 1995 and $821,000 in 1994. Loan fees on $104,000 in
1995 and $130,000 in 1994 are included in the computations.
98
<PAGE>
The following table sets forth changes in interest income and interest
expense on the basis of allocation to changes in rates and changes in volume
of the various components. Nonaccrual loans are included in total loans
outstanding while non-accrued interest thereon is excluded from the
computation of rates earned. Loan fees in the following amounts are included
in the computations: $22,000 in the first three months of 1996; $30,000 in
the first three months of 1995; $104,000 in calendar year 1995; and $130,000
in calendar year 1994.
<TABLE>
<CAPTION>
For the Three Months Ended For the Year Ended For the Year Ended
March 31, 1996 December 31, 1995 December 31, 1994
Compared to Compared to Compared to
March 31, 1995 December 31, 1994 December 31, 1993
-------------------------- ---------------------- -----------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In: Due to Change In:
(Dollars in Thousands)
Net Net Net
Change Rate Volume Change Rate Volume Change Rate Volume
------ ---- ------ ------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS
Loans $(150) $ 14 $(164) $ 42 $498 $(456) $ (65) $124 $(189)
Investment Securities 22 5 17 64 34 30 (43) (36) (7)
Federal Funds Sold 22 (3) 25 61 18 43 (31) 18 (49)
Interest-bearing deposits
with financial institutions (4) 0 (4) 11 18 (7) (26) 2 (28)
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest-earning
assets (110) 16 (126) 178 568 (390) (165) 108 (273)
INTEREST BEARING
LIABILITIES
Deposits
Interest-bearing demand 10 12 (2) (18) (6) (12) (10) (15) 5
Money Market 7 (1) 8 (85) (7) (78) (74) (12) (62)
Savings 6 0 6 (20) (2) (18) (28) (18) (10)
Time 87 5 82 348 309 39 57 28 29
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest-bearing
deposits 110 16 94 225 294 (69) (55) (17) (38)
Fed funds purchased and
securities sold under
agreements to repurchase 0 0 0 0 0 0 0 0 0
Long-term debt 37 (1) 38 (3) 9 (12) 23 18 5
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest-bearing
liabilities 147 15 132 222 303 (81) (32) 1 (33)
----- ---- ----- ----- ---- ----- ----- ---- -----
Net Interest income $(257) $ 1 $(258) $(44) $265 $(309) $(133) $107 $(240)
----- ---- ----- ----- ---- ----- ----- ---- -----
----- ---- ----- ----- ---- ----- ----- ---- -----
</TABLE>
Allowance and Provision for Loan Losses. The allowance for loan losses
represents the amounts which have been set aside for the specific purpose of
absorbing losses which may occur in a bank's loan portfolio. The provision
for loan losses is an expense charged against operating income and added to
the allowance for loan losses. Management of SDN continues to carefully
monitor the allowance for loan losses of each of its operating banks in
relation to the size of the bank's loan portfolio and known risks or problem
loans.
During the first three months of 1996, the provision for loan losses was
$25,000, loan charge-offs were $35,000 and recoveries were $12,000. During
the corresponding period of 1995, the provision for loan losses was $60,000,
loan charge-offs were $83,000 and recoveries were $4,000. Excluding
Liberty's allowance, the allowance for loan losses at SDN was approximately
$641,000 at March 31, 1996 compared to approximately $639,000 at December 31,
1995. The allowance for loan losses (excluding Liberty) represented 1.7% of
gross loans at March 31, 1996, 1.6% at December 31, 1995 and 1.8% at March
31, 1995. Including the allowance for loan losses at Liberty, the aggregate
allowance for loan losses at March 31, 1996 was approximately $2.4 million,
which represents 1.9% of gross loans of both banks.
The allowance for loan losses was $639,000, or 1.6% of gross loans, at
December 31, 1995, compared to $821,000, or 1.8%, of gross loans at December
31, 1994 and $823,000, or 1.7%, of gross loans at December 31, 1993. The
provision for loan losses for the year ended December 31, 1995 was $295,000,
compared to $583,000 for calendar year 1994 and $1,085,000 for calendar year
1993.
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<PAGE>
Nonperforming loans and other real estate owned ("OREO") at December 31,
1995 and December 31, 1994 are summarized as follows:
December 31, 1995 December 31, 1994
----------------- -----------------
(dollars in thousands)
Loans past due 90 days and $ 46 $ 826
still on accrual
Loans on nonaccrual 1,574 1,666
------ ------
Total nonperforming loans 1,620 2,492
As a percent of total loans 4.2% 5.4%
OREO 1,411 1,288
------ ------
Total nonperforming assets 3,031 3,780
As a percent of total assets 5.4% 6.5%
The $4.6 million in loans on nonaccrual at March 31, 1996 consisted of 36
loans, of which 98.9% of the total amount was secured by real estate, and the
largest of which was approximately $1.1 million. The $1.6 million in loans
on nonaccrual at December 31, 1995 consisted of 26 loans, of which 93% of the
total amount was secured by real estate, and the largest of which was
$476,000. The $1.7 million in loans on nonaccrual at December 31, 1994
consisted of 16 loans, of which 88% of the total amount was secured by real
estate, and the largest of which was $731,000.
SDN's ratio of its allowance for loan losses to nonperforming loans was
32.3% at March 31, 1996. This is a decrease from 39.4% at December 31, 1995.
The ratio of the allowance to nonperforming loans was 36.6% at March 31,
1995. As of December 31, 1995, nonperforming loans as a percentage of total
loans was 4.2%. Nonperforming loans as a percentage of total loans as of
December 31, 1994 and December 31, 1993 were 5.4% and 4.9%, respectively.
Noninterest Income. Noninterest income increased by $28,000 for the
first three months of 1996 compared to the same period in 1995. This
increase was a result of increases in deposit service charges by
approximately $5,000 and other service charges by $23,000.
Noninterest income increased by $30,000 in 1995 compared to 1994. This
was primarily due to $60,000 of legal costs reimbursed from a loan recovery.
Noninterest income increased in 1994 by $11,000, or 1.7%, from $655,000 in
1993 to $666,000 in 1994, due to an increase in gain on sale of OREO,
partially offset by a decrease in deposit service charges.
Noninterest Expense. Noninterest expense for the first three months of
1996 decreased approximately $60,000 compared to the first three months of
1995. The majority of this improvement occurred in the area of salaries and
benefits, with a $54,000 decrease for the first quarter, a function of the
reorganization of SDN. Occupancy expense also decreased $8,000 but was
partially offset by other noninterest expenses.
Noninterest expense increased $358,000 in 1995 compared to 1994. That
increase was largely comprised of a $309,000 increase in losses and carrying
costs of OREO, $86,000 of other expense recorded in June 1995 as a result of
the May 1995 OCC examination, and $50,000 of accrued operational expenses
relating to changes contemplated as a part of the 1995 Recapitalization. A
writedown of the carrying value of five OREO properties by $453,000
contributed significantly to the increase in losses on OREO. Those increases
in noninterest expense were partially offset by a $94,000 decrease in
salaries and employee benefits and a $16,000 decrease in occupancy and
equipment expenses. Noninterest expense decreased $607,000 from 1993 to
1994. A primary factor for that decrease was the closing of the La Costa
office in August 1993.
Provision for Income Taxes. As a result of the earnings for the first
three months of 1996, a provision for income taxes was made where there was
no provision for income tax made in the first three months of 1995. As a
result of a net operating loss for 1995, no provision for federal or
California income tax was made during 1995 (other than the intraperiod
allocation of taxes to the extraordinary gain). Prior to the 1995
Recapitalization, SDN had a substantial federal net operating
100
<PAGE>
loss carry forward ("NOL") available to offset income earned in future
periods. As expected, the sale of SDN Common Stock to the Dartmouth Capital
Group in September 1995 resulted in an "ownership change" for federal income
tax purposes under Section 382 of the Internal Revenue Code, which
substantially limits SDN's ability to utilize that NOL against future income
and will result in higher tax costs during future periods than would have
been incurred had the sale of that stock not taken place. Because of the
change in SDN's ownership resulting from the 1995 Recapitalization, an annual
limitation of approximately $300,000 has been placed on the amount of net
operating loss carry forward generated prior to the ownership change which
can be utilized for federal and California State taxes.
Interest Rate Sensitivity
The table on the following page analyzes the assets and liabilities of
Liberty and San Dieguito at March 31, 1996, by interest rate sensitivity,
showing the amount of each category which is subject to repricing over
specified time horizons. Floating rate categories reprice on a daily basis
except for savings accounts which require 15 days notice before a change in
rates. By definition, rate-sensitive assets less rate-sensitive liabilities
equals the gap for that time horizon. The gap is negative if liabilities
exceed the assets that are subject to repricing in a given time horizon.
SDN's policy is to control the rate sensitivities in order that the one year
cumulative gap does not exceed a positive or negative 10% of total assets.
101
<PAGE>
<TABLE>
<CAPTION>
Over 3
Months Over 1
3 Months to 12 Year to Over Zero
Floating Or Less Months 5 Years 5 Years Rate(1) Total
-------- -------- ------ ------- ------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ 13,834 $ 13,834
Interest-bearing deposits
w/financial institutions -- 1,386 497 -- -- -- 1,883
Investment securities -- 13,655 21,909 6,148 73 -- 41,785
Federal funds sold 30,800 -- -- -- -- -- 30,800
Loans 67,635 33,622 4,255 9,082 5,789 4,641 125,024
Premises and equip, net -- -- -- -- -- 1,790 1,790
Other assets (2) -- -- -- -- -- 8,844 8,844
------- ------- -------- ------- ------- -------- --------
Total assets $98,435 $48,663 $ 26,661 $15,230 $ 5,862 $ 29,109 $223,960
LIABILITIES AND
SHAREHOLDERS EQUITY
Non-interest bearing
demand deposits $ -- $ -- $ -- $ -- $ -- $ 53,550 $ 53,550
Interest-bearing demand 25,584 -- -- -- -- -- 25,584
Money market and savings 36,706 -- -- -- -- -- 36,706
Time under $100,000 -- 18,185 51,455 10,943 -- -- 80,583
Time of $100,000 or more -- 3,726 4,038 342 -- -- 8,106
Other liabilities -- -- -- -- -- 3,417 3,417
Shareholders' equity -- -- -- -- -- 16,014 16,014
------- ------- -------- ------- ------- -------- --------
Total liabilities &
shareholders' equity $62,290 $21,911 $ 55,493 $11,285 $ -- $ 72,981 $223,960
------- ------- -------- ------- ------- -------- --------
------- ------- -------- ------- ------- -------- --------
Gap $36,145 $26,752 $(28,832) $ 3,945 $ 5,862 $(43,872)
% of Total assets 16.14% 11.94% -12.87% 1.76% 2.62%
Cumulative Gap (3) 36,145 $62,897 $ 34,065 $38,010 $43,872
% of Total assets 16.14% 28.08% 15.21% 16.97% 19.59%
</TABLE>
Capital Resources
Prior to September 30, 1995, San Dieguito was considered "significantly
undercapitalized" under the prompt corrective action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and
would have been considered "critically undercapitalized" if its ratio of
tangible equity to total assets had been equal to or less than 2%. At August
31, 1995, such ratio was 2.04%. (See "SUPERVISION AND REGULATION OF HOLDCO
AND SDN --Prompt Corrective Action Provisions" herein.) As discussed
elsewhere in this Information Statement/Prospectus, SDN completed its 1995
Recapitalization as of September 30, 1995, including the raising of $4.9
million from its sale of SDN Common Stock and the forgiveness of a total of
$1.1 million in principal and accrued interest with respect to Debentures and
senior debt. Of the proceeds from that sale of stock, SDN contributed
approximately $3.2 million of capital to San Dieguito. (See "1995
RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS -- 1995 Recapitalization"
herein.) As a consequence of the completion of the 1995 Recapitalization,
San Dieguito's ratio of tangible equity to assets as of September 30, 1995
was 6.5%, and the bank was considered "well capitalized" under the prompt
corrective action provisions of FDICIA, as of that date.
As of March 27, 1996, the Dartmouth Capital Group invested approximately
$13.4 million in SDN to fund the acquisition of Liberty. In exchange for
that investment, SDN issued a total of 3,392,405 additional shares of SDN
Common Stock at a price per share of $3.95, SDN's book value per share as of
December 31, 1995.
As discussed more fully elsewhere in this Information
Statement/Prospectus, current risk-based regulatory capital standards
generally require banks and holding companies to maintain a ratio of "core"
or "Tier 1" capital (consisting principally of common equity) to adjusted
total assets (leverage ratio) of at least 4.0% to 5.0%, a ratio of Tier 1
capital to risk-weighted assets of at least 4.0%, and a ratio of total
capital (which includes Tier 1 capital plus certain forms of subordinated
debt, a portion of the allowance for loan losses and preferred stock) to
risk-weighted assets of at least 8.0%. (See "SUPERVISION
- -----------------------------------------
(1)Assets or liabilities which are not interest rate-sensitive.
(2)Allowance for possible loan losses of $2.4 million as of March 31, 1996 is
included in other assets.
(3)The cumulative gap in Floating Rate (Federal Funds sold) and Zero Rate
(noninterest-bearing demand deposits) is usually effected dur to the
significant deposits made by SDN's title and escrow customers at year end.
102
<PAGE>
AND REGULATION OF HOLDCO AND SDN -- Capital Adequacy Requirements" herein.)
Risk-weighted assets are calculated by multiplying the balance in each
category of assets according to a risk factor which ranges from zero for cash
assets and certain government obligations to 100% for some types of loans,
and adding the products together.
The following is a summary of SDN's, Liberty's and San Dieguito's capital
ratios at March 31, 1996:
March 31, 1996
---------------------------- Minimum
SDN Liberty San Dieguito Requirement
--- ------- ------------ -----------
Total Risk-Based Capital 10.8% 10.0% 9.8% 8.0%
Tier 1 Risk-Based Capital 9.2% 8.8% 8.5% 4.0%
Leverage Ratio 6.4% 6.0% 7.0% 4.0% - 5.0%
As reflected in the preceding table, as of March 31, 1996, SDN and
Liberty were "well capitalized" and San Dieguito was "adequately capitalized"
under the prompt corrective action provisions of FDICIA. San Dieguito's
classification would have been "well capitalized" at March 31, 1996 had its
assets not included the escrow account totaling $14.5 million relating to the
acquisition of Liberty. On a pro forma basis excluding that escrow account,
San Dieguito's total risk-based capital ratio, tier 1 risk-based capital
ratio and leverage ratio would have been 10.4%, 9.1% and 7.1%, respectively.
SDN has agreed to fund the CSB Acquisition in part by raising not less
than $11.1 million of additional equity through the sale of SDN Common Stock.
The Dartmouth Partnership has agreed to purchase up to $16.1 million of SDN
Common Stock at a price per share of $3.95 in connection with the CSB
Acquisition. It is expected that a portion of the shares purchased will be
issued to the Direct Holders.
Liquidity
The asset/liability management process determines the size and
composition of the balance sheet and focuses on the management of liquidity
and interest rate risk. The purpose of liquidity and balance sheet
management is to ensure that funds are available to meet customer needs, to
meet the financial commitments of the operating banks, and to reduce the
operating banks' exposure to changing interest rates.
SDN manages liquidity from both sides of the balance sheet through the
coordination of the relative maturities of their respective assets and
liabilities. Management attempts to maintain a loan-to-deposit ratio of not
greater than 80% and a liquidity ratio (liquid assets, including cash and due
from banks, federal funds sold and investment securities to deposits) of
approximately 20%. The average loan-to-deposit ratio of SDN was 73% during
the first three months of 1996 and 77% during the first three months of 1995,
and was 78% for calendar year 1995, 79% for calendar year 1994 and 76% for
calendar year 1993. The average liquidity ratio of SDN was 28% during the
first three months of 1996 and 20% during the first three months of 1995, and
was 22% for calendar year 1995, 20% for calendar year 1994, and 23% for
calendar year 1993. At March 31, 1996, SDN's liquidity ratio was 43%,
largely as a result of the cash infusion to fund the acquisition of Liberty.
At December 31, 1995, SDN's liquidity ratio was 28%, reflecting the residual
effects of the cash infused in the 1995 Recapitalization.
SDN enhances its liquidity with the ability of San Dieguito and Liberty
to raise additional funds in money markets through federal funds lines,
repurchase agreements and selling of a specified portion of their securities
(securities available for sale). Liquid assets include cash and due from
banks, federal funds sold, and securities available for sale. SDN maintains
a level of liquidity that is considered adequate to meet current needs and,
while fluctuations in the balances of a few large depositors cause temporary
increases and decreases in liquidity from time to time, SDN has not
experienced difficulty in dealing with such fluctuations from existing
liquidity sources. At March 31, 1996, liquid assets (including both San
Dieguito and Liberty) totaled approximately $80.2 million, or 36.0% of total
assets, which compares to liquid assets (including only San Dieguito) of $5.9
million, or 10.6% of total assets, at December 31, 1995 and $6.9 million, or
11.7% of total assets, at March 31, 1995. As noted above, the high
percentage of liquid assets at March 31, 1996 reflects in part the cash
infused to fund the acquisition of Liberty. Excluding cash which was due to
be paid to Liberty shareholders, liquid assets at March 31, 1996 would have
been $65.7 million, or 29.5% of total assets.
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<PAGE>
SDN's liquidity needs as a holding company are primarily limited to debt
service. SDN has sufficient funds in order meet its debt service
requirements.
Inflation
The majority of SDN's assets and liabilities are monetary items held by
San Dieguito and Liberty, the dollar value of which is not affected by
inflation. Only a small portion of total assets is in premises and
equipment. The lower inflation rate of recent years did not have the
positive impact on banks that was felt in many other industries. The small
fixed asset investment of SDN minimizes any material misstatement of asset
values and depreciation expenses which may result from fluctuating market
values due to inflation. A higher inflation rate may, however, increase
operating expenses or have other adverse effects on borrowers of San Dieguito
and Liberty, making collection more difficult for the banks. Rates of
interest paid or charged generally rise if the marketplace believes inflation
rates will increase.
Accounting Changes
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No.
114 prescribes the recognition criteria for loan impairment and the
measurement methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. SFAS No. 114 states that a loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest amounts due according to the contracted terms of the
loan agreement. A creditor is required to measure impairment by discounting
expected future cash flows at the loan's effective interest rate, or by
reference to an observable market price, or by determining that foreclosure
is probable. SFAS No. 114 also clarifies the existing accounting for
in-substance foreclosures by stating that a collateral-dependent real estate
loan would be reported as real estate owned only if the lender had taken
possession of collateral.
SFAS No. 118 amended SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. SFAS No. 118
also amends the disclosure requirements in SFAS No. 114 to require
information about the recorded investments in certain impaired loans and
about how a creditor recognizes interest income related to those impaired
loans. SFAS No. 114 is effective for financial statements issued for fiscal
years beginning after December 15, 1994. SFAS No. 118 is effective concurrent
with the effective date of SFAS No. 114. SDN adopted SFAS No. 114 and SFAS
No. 118 in 1995. The effect of adoption of SFAS 114 is not considered by
management to be significant to SDN's consolidated financial position or
results of operations.
Federally supervised banks are currently required to report deferred tax
assets in accordance with SFAS No. 109, "Accounting for Income Taxes." The
federal banking agencies issued final rules governing banks and bank holding
companies, effective April 1, 1995, which limit the amount of deferred tax
assets that may be included in Tier 1 capital for risk-based and leverage
capital purposes. This standard had been in effect on an interim basis since
March 1993. Under the final rule, deferred tax assets that can only be
realized if an institution earns taxable income in the future are limited for
regulatory capital purposes to the amount that the institution expects to
realize within one year of the quarter-end report date, based on its
projection of taxable income, or 10% of Tier 1 capital, whichever is less.
However, deferred tax assets which can be realized through carrybacks to
taxes paid on income earned in prior periods and from the reversal of
existing taxable temporary differences generally will not be limited.
In 1995, FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" effective for fiscal years beginning after December 15, 1995.
SFAS No. 123 establishes a fair value-based method for accounting for
employee stock-based compensation plans, but also allows companies to
continue to apply the intrinsic value-based method currently included in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued for
Employees."
INFORMATION REGARDING THE BUSINESS OF SDN
General
SDN's predecessor, SDN Bancorp ("SDN-CA") was incorporated under the laws
of the State of California on October 19, 1981. SDN-CA became a bank holding
company on March 22, 1983, when it acquired 100% of the outstanding shares
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of San Dieguito pursuant to a reorganization in which each outstanding share
of San Dieguito's common stock was converted into one share of SDN-CA common
stock, and all of the outstanding shares of San Dieguito's common stock were
transferred to SDN-CA.
In September 1995, SDN-CA completed the 1995 Recapitalization, in
connection with which SDN-CA reincorporated under Delaware law through its
merger with and into SDN Bancorp, Inc., a newly formed corporation under
Delaware law ("SDN"). As a consequence of the 1995 Recapitalization, SDN
also came substantially under the control of the Dartmouth Capital Group,
which collectively owns 98.7% of SDN's outstanding common stock as of the
date of this Information Statement/Prospectus. (See "1995 RECAPITALIZATION
AND CERTAIN RECENT DEVELOPMENTS" and "PRO FORMA FINANCIAL INFORMATION"
herein.)
As of March 31, 1996, SDN acquired 100% of Liberty for approximately
$15.1 million in cash. (See "1995 RECAPITALIZATION AND CERTAIN RECENT
DEVELOPMENTS -- Acquisition of Liberty National Bank" herein.)
SDN's only significant assets are the stock of San Dieguito and Liberty.
As the sole shareholder of San Dieguito and Liberty, the primary function of
SDN is to coordinate the general policies and activities of those operating
subsidiaries, and to pursue the strategic plan summarized below.
As discussed elsewhere in this Information Statement/Prospectus, the 1995
Recapitalization (which fundamentally changed SDN's capital structure and
capital levels, and brought new management) and the acquisition of Liberty
(which increased SDN's assets more than three-fold) may cause the historical
information and data provided herein not to be indicative of future facts and
results. (See "SDN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Introduction" herein.)
Strategic Plan
Since the 1995 Recapitalization, SDN has embarked upon a new strategic
plan that includes active and substantial efforts to acquire or enter into
business combinations with other financial institutions. (See "THE CSB
ACQUISITION --SDN's Reasons for the CSB Acquisition" herein.) Including the
recently completed acquisition of Liberty, the CSB Acquisition contemplated
by this Information Statement/Prospectus would be the second such
acquisition. SDN and the Dartmouth Capital Group anticipate that Holdco will
continue that strategic plan after the Closing Date. There can be no
assurance, however, that Holdco will in fact acquire or enter into any
business combination with any other institution. (See "DESCRIPTION OF HOLDCO
- -- Special Considerations" herein.)
Historical Distribution of Assets, Liabilities and Shareholders' Equity of SDN
The following schedules set forth (for SDN on a consolidated basis) the
annual average amount outstanding for each major category in the statements
of condition for the periods stated. They also indicate the total amount of
interest earned, or paid, for the periods covered and the average rates
earned or paid during those years for each such category. SDN did not engage
in foreign activities in either period. Nonaccrual loans are included in
total loans outstanding while non-accrued interest thereon is excluded from
the computation of rates earned.
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<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, For the Year Ended December 31,
------------------------------------ -------------------------------
1996 1995 1995 1994
---- ---- ---- ----
Average Percent Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,218 7.52% $3,904 6.61% $3,757 6.59% $4,667 7.61%
Federal funds sold 3,914 6.98 1,968 3.33 2,128 3.73 1,337 2.18
Time deposits with other banks 961 1.71 1,079 1.83 868 1.52 979 1.60
Securities 5,641 10.06 4,494 7.61 5,061 8.88 4,578 7.47
Loans (net of allowances for
possible loan losses) 37,523 66.93 44,239 74.86 42,272 74.17 46,979 76.62
Property and equipment 582 1.04 762 1.29 693 1.22 863 1.41
Other real estate owned 1,475 2.63 1,263 2.14 1,364 2.39 1,119 1.82
Other assets 1,757 3.13 1,378 2.33 852 1.50 790 1.29
------- ------- ------- ------- ------- ------- ------- -------
Total Assets $56,071 100.00% $59,087 100.00% $56,995 100.00% $61,312 100.00%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
LIABILITIES:
Deposits
Demand, noninterest-bearing $13,054 23.28% $11,459 19.39% $11,197 19.65% $11,822 19.28%
Demand, interest-bearing 19,991 35.65 20,402 34.53 19,668 34.51 23,563 38.43
Savings 4,753 8.48 5,798 9.81 5,235 9.18 6,049 9.87
Time certificates 13,514 24.10 19,565 33.11 18,394 32.27 17,740 28.93
------- ------- ------- ------- ------- ------- ------- -------
Total Deposits 51,312 91.51 57,224 96.84 54,494 95.61 59,174 96.51
Federal funds purchased - - 174 .29 - - - -
Long-term debt 543 .97 1,894 3.21 1,776 3.12 1,895 3.09
Other liabilities 431 0.77 713 1.21 806 1.41 770 1.26
------- ------- ------- ------- ------- ------- ------- -------
Total Liabilities 52,286 93.25 60,005 101.55 57,076 100.14 61,839 100.86
SHAREHOLDERS' EQUITY
Common Stock 11 .02 2,203 3.73 2,203 3.87 1,438 2.34
Surplus 7,871 14.4 2,510 4.25 2,510 4.40 2,511 4.10
Undivided Profits (4,097) (7.31) (5,631) (9.53) (4,794) (8.41) (4,476) (7.30)
------- ------- ------- ------- ------- ------- ------- -------
Total Shareholders' Equity 3,785 6.75 (918) (1.55) (81) (.14) (527) (.86)
------- ------- ------- ------- ------- ------- ------- -------
Total Liabilities and Equity $56,071 100.00% $59,087 100.00% $56,995 100.00% $61,312 100.00%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Banking Services
General. Through San Dieguito and Liberty, SDN offers a full range
of commercial banking services, catering especially to small businesses.
SDN's products include various types of commercial, consumer and real estate
loans, a full range of deposit products, and other non-deposit banking
services. In its marketing, it emphasizes commercial and professional
clients, but balances its loan portfolio and deposit mix by offering a full
range of consumer financial services to retail clients within its trade area
and to its business client base. While the business of SDN may vary with
local and national economic conditions, management does not believe that the
business is or may be seasonal in nature.
San Dieguito commenced operations as a national banking association
in 1980. Its main banking office and administrative offices are located at
135 Saxony Road in Encinitas, California. In December 1990, it opened its
full-service office at 675 Carlsbad Village Drive, Carlsbad, California, in
the downtown area of Carlsbad. San Dieguito has no subsidiaries.
Liberty commenced operations as a national banking association in
1982. Its main banking office and administrative offices are located at One
Pacific Plaza, 7777 Center Avenue, Huntington Beach, California. In June
1992, Liberty opened its full-service South Orange County branch office at
34206 Doheny Park Road, Dana Point, California, and in June 1996, Liberty
opened a third full-service branch office, at 17011 Beach Boulevard,
Huntington Beach California. Between 1984 and 1995, Liberty also had a
full-service Commercial Banking Center branch office at 345 South Figueroa
Street, Los Angeles, California. Liberty has no subsidiaries.
In February, 1985, Liberty also opened a limited service Loan
Production Office ("LPO") in San Francisco, at 44 Montgomery Street, Suite
500, San Francisco, California, primarily to produce and process loans
guaranteed by the U.S. Small Business Administration ("SBA loans"); that
office was relocated to 3 Altarinda Road, Suite 308, Orinda, California in
January, 1991. Current our San Francisco office is now located at 12-A
Orinda Way, Orinda, California.
As discussed in greater detail below, a substantial portion of SDN's
business consists of origination and servicing of SBA loans, and a
substantial portion of its net income is generated from that business. There
have from time to time been
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<PAGE>
proposals in the U.S. Congress to curtail or otherwise modify the SBA loan
guarantee programs. A significant reduction in SDN's ability to originate
new SBA loans as a result of such legislative changes would have a material
and adverse impact on SDN's asset generation and earnings. (See "INFORMATION
REGARDING THE BUSINESS OF SDN -- Effect of Governmental Policies and
Legislation" herein.)
Deposits and Services. Through San Dieguito and Liberty, SDN offers
a full range of deposit products, including business and personal checking,
savings, time deposits and money market accounts. It also offers a range of
business-oriented financial services, including international (through
correspondent banks) and domestic letters of credit and night deposit
facilities, as well as other services used by business and consumer customers
including safe deposit services, postage paid bank-by-mail, and transfer
services such as wire transfers, travelers' checks, cashier's checks and
money orders. It operates 24-hour automated teller machines ("ATM") at its
banking offices, and has drive-through banking at San Dieguito's main office.
In addition, SDN offers specialized services including cash
management services (i.e. payroll, remittance banking and consolidated
accounts) and courier service to qualifying clients, and appoints personal
account officers to key relationship clients in order to better support their
specific banking requirements. It also offers 24-hour banking by telephone
and banking through the use of personal computers. Its consumer services
complement its business emphasis by offering a range of personal and private
banking financial services such as interest-bearing checking, fee-based
checking, savings, money market accounts, tailored time certificates of
deposit, and personal investment referral.
SDN does not operate a trust department or provide international
banking services directly; however, it can arrange with correspondent
institutions to offer trust and international services to its customers from
time to time upon request. SDN does not issue VISA or MasterCard credit
cards, but is a merchant depository for cardholder drafts under both types of
credit cards.
The following table shows the average amount and average rate paid
on the categories of deposits for the three months ended March 31, 1996, and
for each of the past two calendar years:
<TABLE>
<CAPTION>
Quarter Ending March 31, Year Ending December 31,
----------------------------- -------------------------------
1996 1995 1995 1994
----------------------------- -------------------------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate Amount Rate
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nonint.-bearing demand $13,102 0.00% $11,460 0.00% $11,198 0.00% $11,822 0.00%
Interest-bearing demand 11,246 1.00% 10,382 1.49% 10,492 1.42% 11,333 1.47%
Money Market 8,745 2.57% 10,020 2.56% 9,176 2.52% 12,230 2.58%
Savings 4,754 2.18% 5,798 2.22% 5,235 2.20% 6,049 2.23%
Time 13,513 5.49% 19,565 5.62% 18,394 5.84% 17,740 4.10%
Total $51,360 2.30% $57,225 2.87% $54,495 2.88% $59,174 2.27%
</TABLE>
The following table shows the maturities of time certificates of deposits
of $100,000, or more, as of March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
At March 31, At December 31,
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Due in three months or less $1,205 $1,952
Due in over three months through six months 1,104 300
Due in over six months through twelve months 500 200
Due in over twelve months - 100
------ -------
Total $2,809 $2,552
------ -------
------ -------
</TABLE>
107
<PAGE>
Borrowings. While SDN has not had need in recent periods for short-term
borrowings to provide liquidity, if necessary SDN is eligible, through San
Dieguito and Liberty, to borrow at the Federal Reserve discount window. As
of March 31, 1996, it had pledged an aggregate of $1.0 million in commercial
mortgage loans to the Federal Reserve Bank of San Francisco as collateral for
such borrowings, enabling it to borrow up to $510,000.
Overnight borrowings may also be effected through purchases of federal
funds from correspondent banks. SDN has had little need of such borrowings
during recent periods. During the first three months of 1996, SDN made no
such purchases. In 1995, an average of $6,300 was borrowed at a weighted
average interest rate of 5.98%. During 1994, $200,000 was borrowed at 5.7%
for one day.
Lending Business. Through San Dieguito and Liberty, SDN offers a full
range of commercial loans specifically designed to support the banking needs
of small businesses in their market areas. Its products include accounts
receivable financing, term loans, commercial notes, short term commercial
real estate financing and construction financing, including both term and
revolving loans, which generally are secured by business assets of various
types. SDN also offers SBA loans, and a significant portion of its
originations consist of such loans. Since 1995, Liberty has qualified as a
"Preferred Lender" under the SBA's programs, allowing it to originate SBA
loans based on its own underwriting and without prior approval of the SBA.
Finally, SDN offers some types of consumer loans such as automobile loans,
overdraft lines of credit and home equity loans to retail clients within its
trade area and to its business client base.
At March 31, 1996, real estate loans and construction loans were
approximately 37.6% of the loan portfolio. Such loans (other than SBA loans)
are generally secured by a first trust deed and are for a period of five
years or less with a floating interest rate. Approximately 72% of the real
estate loans were secured by commercial properties, most of which are
owner-occupied, with a maximum loan-to-value (appraised) ratio of 75%. An
additional 19% of the real estate loans are secured by improved single family
residential properties.
SDN, like other lenders, also makes a number of unsecured loans, based
upon the cash flow, income, character and/or net worth of the borrower.
Collectibility of those loans is solely dependent upon the borrower's
financial capability at maturity. Unsecured loans, in many cases, are more
risky than secured loans. At March 31, 1996, the portfolio included $57.5
million in commercial loans and $20.5 million in installment loans which were
considered to be unsecured, for a total of $78.2 million (62.4% of the loan
portfolio). However, a majority of those loans are collateralized by junior
liens on real estate, by personal property or by governmental agency
guarantees.
As noted above, SDN conducts a substantial business originating SBA
loans. Those loans are guaranteed by the United States Government to the
extent of 75% to 90% of the principal and interest due on such loans. SDN
generally sells the government guaranteed portion of its SBA loans to
participants in the secondary market and retains servicing responsibilities
and the unguaranteed portion of the loans. Insofar as the borrower's
participation in an SBA program often indicates an inability of the borrower
to obtain credit without a partial government guarantee, and therefore
indicates a weaker credit profile, those unguaranteed portions generally bear
a higher than normal risk of loss than other commercial loans of comparable
size. SDN may in the future retain a greater portion of those loans, as more
loans may be made for construction purposes for which SDN holds the entire
loan until completion of the project and then sells the government guaranteed
portion. At March 31, 1996, SDN had approximately $35.8 million of the
retained unguaranteed portion of SBA loans.
The government guaranteed portion of the SBA loans are sold at a premium,
a portion of which is immediately recognized as income. The remaining
portion of the premium, representing estimated normal servicing fees or a
yield adjustment on the portion of the SBA loan retained by SDN, is deferred
and recognized as income over the estimated life of the loan. Deferred SBA
servicing fees were approximately $1.8 million at March 31, 1996. The total
SBA loan portfolio serviced by Liberty at March 31, 1996 was approximately
$145.3 million; included in this amount is approximately $35.8 million that
represents the portion of the SBA loans retained by SDN.
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<PAGE>
The following table sets forth the amount of domestic loans outstanding
for SDN at March 31, 1996 and March 31, 1995, and at the end of each of the
past two calendar years, according to type of loan. SDN has no foreign loans
or energy-related loans.
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------- ------------------------
1996 1995 1995 1994
-------- ------- -------- --------
% of % of % of % of
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
-------- ------- -------- ------- -------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $57,450 45.94% $18,346 41.61% $16,188 41.48% $18,936 40.84%
Real estate-construction 4,325 3.46 446 1.01 599 1.54 1,170 2.52
Real estate-other 42,751 34.18 17,623 39.98 15,710 40.26 18,060 38.95
Installment 20,541 16.42 7,671 17.40 6,525 16.72 8,201 17.69
------- ------- ------- ------- ------- ------- ------- -------
Total 125,067 100.00% 44,086 100.00% 39,022 100.00% 46,367 100.00%
Less: allowance for loan losses (2,398) ------- (802) ------- (639) ------- (821) -------
Deferred loan fees (1,781) ------- (49) ------- (45) ------- (54) ------
------- ------- ------- -------
Net Loans 120,888 $43,235 $38,338 $45,492
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The following table shows the amounts of certain categories of loans
outstanding as of March 31, 1996 and as of December 31, 1995, which, based on
remaining scheduled repayments of principal, were due in one year or less,
more than one year through five years, and more than five years. The amounts
due after one year are classified according to the sensitivity to changes in
interest rates. Demand or other loans having no stated maturity and no
stated schedule of repayments are reported as due in one year or less.
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- --------------------
Real Estate Real Estate
Commercial Construction Commercial Construction
---------- ------------ ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Aggregate maturities of loans which are due:
In one year of less (1) $17,946 $2,321 $ 4,497 $ 599
After one year through five years:
Interest rates are floating or adjustable 6,026 - 5,551 -
Interest rates are fixed or predetermined 638 - 296 -
After 5 years:
Interest rates are floating or adjustable 30,872 2,004 5,308 -
Interest rates are fixed or predetermined 1,968 - 536 -
------- ------ ------- ------
Total $57,450 $4,325 $16,188 $ 599
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
Nonaccrual Assets. SDN's current policy is to stop accruing interest on
loans which are past due as to principal or interest 90 days or more, except
in circumstances where the loan is well-secured and in the process of
collection. When a loan is placed on nonaccrual, previously accrued and
unpaid interest is generally reversed out of income unless adequate
collateral appears to be available from which to collect the amounts due.
The following table shows the total aggregate principal amount of nonaccrual
and other nonperforming loans (accruing loans on which interest or principal
is past due 90 days or more) as of March 31, 1996, and as of the end of each
of the past two years. For the three months ended March 31, 1996, additional
gross interest income of $35,000 would have been recorded on nonaccrual
loans, and for calendar year 1995
- -----------------------
(1) In certain cases, for loans with contractual maturities of one year or
less, SDN is willing to entertain requests for extension from the borrower.
Although SDN is not obligated to do so, such requests are generally honored
if there has been no deterioration in the borrower's financial condition and
current market rates are applied.
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<PAGE>
additional gross interest income of $195,000 would have been recorded on
nonaccrual loans, in each case had the loans been current. No accrued but
unpaid interest income on such loans was in fact included in SDN's net income.
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------- ------------------
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans on a nonaccrual basis, not restructured $4,641 $2,189 $1,492 $ 616
Accruing loans past due 90 days or more 155 594 46 826
Restructured loans 2,421 1,042 82 1,050
------ ------ ------ -------
Total $7,217 $3,825 $1,620 $2,492
------ ------ ------ -------
------ ------ ------ -------
As a percent of outstanding loans 5.8% 9.8% 4.2% 5.4%
------ ----- ----- ------
------ ----- ----- ------
</TABLE>
Loans aggregating $4.6 million at March 31, 1996 have been designated as
impaired in accordance with SFAS 114 as amended by SFAS 118. SDN's method
used to measure the amount of impairment on these loans is to compare the
loan amount to the fair value of collateral. The total allowance for loan
losses related to these loans was $248,000 at March 31, 1996.
As of the end of the most recent period, management was not aware of any
loans that had not been placed on nonaccrual status as to which there were
serious doubts as to the ability of the respective borrowers to comply with
present loan repayment terms.
As of December 31, 1995, in management's judgment, a concentration of
loans existed in the commercial loan area and real estate loans. At that
date, approximately 41% of SDN's loans were commercial loans, many of which
are secured by real estate collateral. At that date, approximately 42% of
SDN's loans were real estate and construction loans, and 30% of those loans
are secured by single family residential properties in San Diego County.
While management believes such concentrations to have no more than the normal
risk of collectibility, a substantial decline in real estate values could
have an adverse impact on collectibility, increase the level of real
estate-related nonperforming loans, or have other adverse impact. At December
31, 1995, SDN's operations were geographically very limited, and as a result
economic problems (such as localized unemployment, drops in personal income,
or declines in the value of real property) that caused substantial adverse
effects on the San Diego County market would likely have had an adverse
effect on SDN's loan portfolio by decreasing the ability of borrowers to meet
their debt service requirements and by reducing the value of collateral held
by SDN. While San Dieguito and Liberty remain separate banks and therefore
cannot freely transfer funds between one another, the acquisition of Liberty
on March 31, 1996 reduces SDN's reliance on the narrower San Diego County
market. Nonetheless, economic difficulties that prevail throughout the
broader Southern California market would be likely still to have an adverse
effect on SDN's loan portfolio. (See "INFORMATION REGARDING THE BUSINESS OF
SDN -- Primary Service Area -- Economic Conditions in the Market Area"
herein.)
As of March 31, 1996, 36 real estate loans totaling $4.6 million were on
nonaccrual status. Fourteen of the loans, totaling $2.4 million, were
secured by commercial property, three of the loans, totaling $1.7 million,
were secured by residential land, and 19 of the loans, totaling $515,000,
were secured by secured by single-family owner-occupied property.
At March 31, 1996, SDN had 18 OREO properties with an aggregate carrying
value of $3.1 million, of which 13 were acquired in the acquisition of
Liberty, which had a total carrying value of $1.6 million. During the first
three months of 1996, two properties with a total carrying value of $150,000
were added to OREO as a result of foreclosure and one property was written
down by $10,000. During calendar year 1995, three properties with a total
carrying value of $1.1 million were added to OREO, three properties with a
total carrying value of $476,000 were sold and five properties were written
down by $453,000. All of the OREO properties are recorded by SDN at amounts
which are equal to or less than the market value based on current independent
appraisals reduced by estimated selling costs.
Allowance for Loan Losses. SDN maintains an allowance for loan and
lease losses, intended to absorb losses that may occur in its loan portfolio.
SDN's aggregate allowance for loan losses at March 31, 1996 was
approximately $2.4
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million, or approximately 1.9% of gross loans. (See "SDN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Allowance and Provision for Loan Losses" herein.)
In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, known problem
loans, evaluations made by regulatory agencies and SDN's outside loan
reviewer, assessment of economic conditions, and other appropriate data to
identify the risks in the portfolio. In determining the amount of the
allowance, a specific allowance amount is assigned to those loans with
identified special risks, and the remaining loan portfolio is reviewed by
category and assigned a specific allowance percentage for inherent losses.
The allocation process does not necessarily measure anticipated future credit
losses; rather, it reflects management's assessment at a certain date of
perceived credit risk exposure and the impact of current and anticipated
economic conditions, which may or may not result in future credit losses.
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 (i) assets classified loss; (ii) 50% of assets classified doubtful;
(iii) 15% of assets classified substandard; and (iv) estimated credit losses
on other assets over the upcoming 12 months. At March 31, 1996, SDN's
allowance constituted 107% of the benchmark amount suggested by the federal
banking agencies' policy statement.
The table below summarizes average loans outstanding for the three-month
periods ended March 31, 1996 and March 31, 1995, and for each of the last two
calendar years, and changes in the allowance for possible loan losses arising
from loan losses and additions to the allowance from provisions charged to
operating expense:
<TABLE>
<CAPTION>
March 31 December 31,
-------- ------------
1996 1995 1995 1994
---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans outstanding $37,523 $44,239 $42,272 $46,979
------- -------- -------- ------
------- -------- -------- ------
Allowance for loan losses
Balance at beginning of period $ 639 $ 821 $ 821 $ 823
Loans charged off during period
Commercial, financial and agricultural 5 13 258 532
Real estate--mortgage 22 - 115 25
Installment 8 70 329 114
------- -------- -------- ------
Total 35 83 702 671
Recoveries during period
Commercial, financial and agricultural 3 4 121 33
Real estate--mortgage 4 - 2 -
Installment 5 - 102 53
------- -------- -------- ------
Total 12 4 225 86
------- -------- -------- ------
Net loans charged off during period 23 79 477 585
Additions charged to operations 25 60 295 583
------- -------- -------- ------
Allowance acquired from LNB acquisition 1,757 - - -
Balance at end of period $ 2,398 $ 802 $ 639 $ 821
------- -------- -------- ------
------- -------- -------- ------
Loan loss and quality ratios:
Net charge-offs to average loans (1) 0.24% 0.71% 1.13% 1.25%
Provision for loan losses to average
loans (1) 0.26% 0.54% 0.70% 1.24%
Allowance at end of period to gross loans
outstanding at end of period 1.92% 2.06% 1.64% 1.77%
Allowance as % of non-performing loans 33.23% 20.97% 39.44% 32.95%
</TABLE>
- ----------------------
(1) Charge-offs and provisions for loan losses annualized for interim period
computations.
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The following table indicates management's allocation of the
allowance for each of the past two calendar years:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
(Dollars in Thousands)
1995 1994
---- ----
Percentage Percentage
Amount of of Total Amount of of Total
Allowance Allowance Allowance Allowance
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 260 40.7% $330 40.2%
Real estate & construction 184 28.8 205 25.0
Consumer 63 9.8 89 10.8
Unallocated 132 20.7 197 24.0
----- ------- ------- ------
Total $ 639 100.0% $ 821 100.0%
----- ------- ------- ------
----- ------- ------- ------
</TABLE>
The calculation of the adequacy of the allowance for loans losses
requires the use of management estimates. These estimates are inherently
uncertain and depend on the outcome of future events. Management's estimates
are based upon previous loan loss experience and current economic conditions
as well as the volume, growth and composition of the loan portfolio, the
estimated value of collateral and other relevant factors. SDN's lending is
concentrated in southern California, which has experienced adverse economic
conditions, including declining real estate values. These factors have
adversely affected borrowers' ability to repay loans. Although management
believes the level of the allowance is adequate to absorb losses inherent in
the loan portfolio, an additional decline in the local economy may result in
increasing losses that cannot reasonably be predicted at this date. Given
the current economic conditions in SDN's market area (particularly that of
San Dieguito) and the importance of real estate values to SDN's loan
portfolio, it is possible the level of nonperforming loans may increase until
the local economy improves significantly. The possibility of increased costs
of collection, nonaccrual of interest on those which are or may be placed on
nonaccrual, and further charge-offs could have an adverse impact on SDN's
financial condition in the future. (See "INFORMATION REGARDING THE BUSINESS
OF SDN -- Primary Service Area -- Economic Conditions in the Market Area"
herein.)
Although no assurance can be given that actual losses will not exceed the
amount provided for in the allowance, management believes that the allowance
for loan losses is adequate in light of all known relevant factors. Even if
it is adequate, however, increased costs of collection on some of these
loans, nonaccrual of interest on those which are or may be placed on
nonaccrual, and the possibility of further charge-offs could have an adverse
impact on San Dieguito's profitability in the near future. (See "SDN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Allowance and Provision for Loan Losses" herein for additional
information.)
Investment Securities. SDN maintains a portion of its assets in
investment securities to balance risk and to ensure adequate liquidity. (See
"SDN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Liquidity" herein.) At March 31, 1996, approximately $5.6
million, or 7%, of SDN's investment securities were classified as
held-to-maturity and the remaining $35.6 million, or 93%, were classified as
available-for-sale. The amortized cost and estimated market value of SDN's
investments at March 31, 1996 were as follows:
<TABLE>
<CAPTION>
At March 31, 1996
-----------------
(Dollars in thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury $35,078 $ 17 $ - $35,095
U.S. Government Agencies 4,698 - (15) 4,683
Municipal Bonds 1,577 21 - 1,598
Mortgage-backed securities 73 9 - 82
------- ---- ------ -------
Total $41,426 $ 47 $ (15) $41,458
------- ---- ------ -------
------- ---- ------ -------
</TABLE>
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<PAGE>
The following tables show the maturities of investment securities at
March 31, 1996 and 1995, and at December 31, 1995 and 1994, and the weighted
average yields of such securities:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------
1996 1995
------------------------------------------------------------
Weighted Weighted
Book Market Average Book Market Average
Value Value Yield Value Value Yield
-------- -------- --------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies and Municipal Bonds
Within one year............................................ $32,286 $32,286 5.03% $1,599 $1,590 4.81%
After one year but within five years..................... 9,067 9,090 5.94 2,741 2,706 6.36
After five years (Mortgage-backed securities)............ 73 82 8.63 89 97 9.47
------- ------- ------ ------
Total.................................................... $41,426 $41,458 5.14% $4,429 $4,393 5.87-%
Federal Reserve Bank Stock:
No stated maturity....................................... $ 332 $ 332 6.00% $ 113 $ 113 6.00%
------- ------- ------ ------
Total Federal Reserve Bank stock...................... $ 332 $ 332 6.00% $ 113 $ 113 6.00%
------- ------- ------ ------
Total investment portfolio................................. $41,758 $41,790 5.24% $4,542 $4,506 5.88%
------- ------- ------ ------
------- ------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995
------------------------------------------------------------
Weighted Weighted
Book Market Average Book Market Average
Value Value Yield Value Value Yield
-------- -------- --------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies and Municipal Bonds
Within one year........................................... $3,980 $ 4,013 6.15% $1,997 $1,983 4.55%
After one year but within five years.................... 2,949 2,954 5.85 2,447 2,369 6.15
After five years (Mortgage-backed securities)........... 80 90 9.44 91 98 9.72
------ ------- ------ ------
Total................................................... $7,009 $ 7,057 6.06% $4,535 $4,450 5.61%
Federal Reserve Bank Stock:
No stated maturity...................................... $ 113 $ 113 6.00% $ 51 $ 51 6.00%
------ ------- ------ ------
Total Federal Reserve Bank stock..................... $ 113 $ 113 6.00% $ 51 $ 51 6.00%
------ ------- ------ ------
Total investment portfolio................................ $7,122 $ 7,170 6.06% $4,586 $4,501 5.52%
------ ------- ------ ------
------ ------- ------ ------
</TABLE>
PRIMARY SERVICE AREA
SAN DIEGUITO. San Dieguito's Head Office Branch is located in Encinitas,
California approximately 25 miles north of San Diego. Its Carlsbad Branch is
located in downtown Carlsbad, California, approximately 10 miles north of
Encinitas. Together, the Head Office Branch and the Carlsbad Branch provide
service primarily to the north coastal section of San Diego County.
LIBERTY. Liberty's Head Office Branch is located near the intersection
of the I-405 (San Diego) Freeway and Beach Boulevard, within Huntington
Beach, California. The primary service area of Liberty's Head Office Branch
includes the cities of Huntington Beach, Westminster, Fountain Valley, Mid
Way City, South West Santa Ana, Costa Mesa, Newport Beach, West Irvine, East
Seal Beach, and Garden Grove, California, from which Liberty attracts
approximately 40% of its business. As the result of Liberty's active direct
mail marketing, Liberty's Head Office Branch also attracts clients from the
secondary service areas of Anaheim, Santa Ana and Irvine, California.
Liberty's South Orange County Branch is located in Capistrano Beach on
Doheny Park Road close to Pacific Coast Highway. The primary service area of
the branch includes the cities of Dana Point, Capistrano Beach, San Juan
Capistrano and San Clemente. The branch attracts, through its direct mail
advertising, a strong secondary service area from the cities of Monarch
Beach, Mission Viejo and Laguna Niguel.
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Liberty maintains an LPO in the San Francisco Bay area of California to
better meet the credit needs and deliver quality customer service to
customers in that area. The LPO is located in Orinda, California and
attracts, by direct mail advertising and direct sales calls, SBA loan clients
from throughout the San Francisco Bay area.
Liberty's Business Banking and SBA Loan Departments are located at its
Head Office. Primary target areas for SBA are Orange, Los Angeles, Riverside
and San Bernardino Counties as well as Northern California. Corporate
financing primarily emphasizes the Huntington Beach and Orange County areas
for business loans.
ECONOMIC CONDITIONS IN THE MARKET AREA. The financial condition of SDN
has been, and is expected to continue to be, affected by overall general
economic conditions and the real estate market in California. As noted
above, SDN concentrates on serving the needs of small and medium-sized
businesses, professionals and individuals located principally in the San
Diego, Orange, Los Angeles, Riverside and San Bernadino Counties of
California, and to a lesser extent in the San Francisco Bay Area. During the
past several years, the general economy in this market area, and particularly
the real estate market, has been recovering from the effects of a prolonged
recession that has adversely affected the ability of certain borrowers to
perform their obligations. In addition, problems with the Mexican peso may
continue to adversely affect cross-border traffic, which also will adversely
affect the ability of certain borrowers to perform their obligations.
The future success of SDN is dependent, in large part, upon the quality
of its banks' assets. Although management has devoted substantial time and
resources to the identification, collection and workout of nonperforming
assets, the real estate markets and the overall economy in California are
likely to have a significant effect on the banks' assets in future periods
and, accordingly, on SDN's financial condition and results of operations.
COMPETITION
The banking and financial services business in California generally, and
in SDN's market area 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 market is
dominated by a relatively small number of major banks which have many offices
operating over wide geographic areas. SDN competes for loans, 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 SDN. In
order to compete with the other financial services providers, SDN principally
relies upon local promotional activities, personal relationships established
by officers, directors and employees with their respective customers, and
specialized services tailored to meet their customers' needs.
SDN has developed its business through the services it offers and through
an aggressive program of referrals, advertising and officer solicitation. In
the early years, both San Dieguito and Liberty experienced their initial
growth through director-referred business and direct officer calls on
prospective business clients. As the banks matured, their marketing emphasis
switched to newspaper advertising, direct mail promotion and aggressive
officer sales calling programs. More recently, Liberty's marketing mix has
also included telemarketing and cable television advertising. As previously
noted, SDN's key clients are assigned personal account officers who are
primarily responsible for their various client relationships.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
GENERAL. Banking is a business which depends on rate differentials. In
general, the difference between the interest rate paid by SDN on their
deposits and their other borrowings and the interest rate received by SDN on
loans extended to their customers and securities held in their respective
portfolios comprise the major portion of SDN's earnings. These rates are
highly sensitive to many factors that are beyond the control of SDN.
Accordingly, the earnings and growth of SDN is subject to the influence of
domestic and foreign economic conditions, including inflation, recession and
unemployment.
Approximately 84% of SDN's loan portfolio at March 31, 1996 consisted of
short-term leases and loans tied to a floating interest rate which changes at
least annually (54% is tied to a daily floating prime rate). This loan
portfolio mix enables SDN to adjust its yields quickly in a changing interest
rate environment. SDN's assets are more sensitive to interest rate changes
than its liabilities. This is partly because it has more noninterest-bearing
liabilities (demand deposits and capital) than noninterest earning
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<PAGE>
assets. Given these circumstances and absent other factors, declining market
rates of interest will generally have a negative impact on SDN's net interest
income, while rising interest rates will have a positive effect. (See "SDN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Interest Rate Sensitivity" herein.)
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
FRB. The FRB can and does implement national monetary policies (with
objectives such as curbing inflation and combating recession) by its
open-market operations in United States Government securities, by its control
of the discount rates applicable to borrowings by depository institutions,
and by adjusting the required level of reserves for financial institutions
subject to its reserve requirements. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. As demonstrated over
the past year by the FRB's actions regarding interest rates, its policies
have a significant effect on the operating results of commercial banks, and
are expected to continue to do so in the future. The nature and impact of any
future changes in monetary policies is not predictable.
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 frequently are made in Congress, in the
California legislature and before various bank regulatory and other
professional agencies. For example, legislation was introduced in Congress
which would repeal the current statutory restrictions on affiliations between
commercial banks and securities firms. Under the proposed legislation, bank
holding companies would be allowed to control both a commercial bank and a
securities affiliate, which could engage in the full range of investment
banking activities, including corporate underwriting. The likelihood of any
major legislative changes and the impact such changes might have on SDN are
impossible to predict. (See "SUPERVISION AND REGULATION OF HOLDCO AND SDN"
herein.)
RELIANCE ON SBA PROGRAMS. As noted above, with the acquisition of
Liberty in March 1996, a significant portion of SDN's business now consists
of originating and servicing loans under the programs of the U.S. Small
Business Administration. Significant cuts in SBA programs would likely have a
material adverse impact on SDN.
Various items of legislation were introduced in U.S. Congress in 1995
that would have curtailed or otherwise modified the SBA's programs to varying
degrees, many of which were premised on the broad goal of federal government
debt reduction. Ultimately, Congress passed and the President signed the
Small Business Lending Enhancement Act of 1995 (the "Act"). The Act reduced
the amount of the subsidy to borrowers inherent in the SBA's guaranty of
loans under its various programs, thus causing the SBA to increase the fees
it charges for its guarantee. (The actual payments by the SBA on its
guaranties plus the cost of program administration have historically exceeded
the aggregate guarantee fees collected by the SBA.) At the same time,
however, by reducing the per-loan subsidy by an amount greater than the
reduction in the SBA's budget, the Act sought to increase the total number
and dollar amount of loans that the SBA would guarantee. While management
has not discerned a material decrease in the number or quality of borrowers
seeking SBA loans as a result of the increase in the guarantee fees charged
to borrowers, it is possible that such a decrease will occur over the long
term.
In addition, while Congress' consideration of the SBA's programs and its
passage of the Act in 1995 may suggest that the SBA is not likely to be
discontinued in its entirety in the foreseeable future, to the extent that
Congress and/or present or future Presidential Administrations make deficit
reduction a priority, all federal programs, including the SBA loan programs,
may face funding reductions.
EMPLOYEES
Collectively, SDN, San Dieguito and Liberty employed 113 full-time
equivalent individuals as of May 31, 1996. SDN has no employees of its own
except its President, Robert P. Keller, who is also an employee of San
Dieguito and its Treasurer and Chief Financial Officer, Curt A.
Christianssen, who is also an employee of Liberty. Of the above-mentioned
individuals, 20 were a Vice President (or above) of either San Dieguito or
Liberty. These officers have been specifically recruited for their banking
background and experience in working with small businesses and professionals.
With the exception of a separate written employment contract entered into
with Robert P. Keller, President and Chief Executive Officer of both SDN and
San Dieguito, neither SDN nor San Dieguito is subject to a written employment
contract with any employee. (See "DIRECTORS AND EXECUTIVE OFFICERS OF
MANAGEMENT OF HOLDCO AND SDN -- Executive Compensation" herein.) The only
employees of Liberty as to whom Liberty is subject to written employment
contracts are Philip S. Inglee, President and Chief
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<PAGE>
Operating Officer; Richard I. Ganulin, Senior Executive Vice President and
Credit Administrator; Curt A. Christianssen, Executive Vice President, Chief
Financial Officer and Cashier (as well as Chief Financial Officer of SDN and
San Dieguito); and Catherine C. Clampitt, Senior Vice President. SDN
believes its and its operating banks' employee relations are excellent. None
of SDN's, San Dieguito's or Liberty's employees is represented by a union or
covered under a collective bargaining agreement.
PROPERTIES
As national banks, San Dieguito and Liberty are precluded from engaging
in real estate development activities other than as lenders. Each bank owns
and leases properties for use as bank premises and otherwise owns real estate
taken in foreclosure. In management's opinion, each bank has adequate
insurance to cover its interest in its premises and other real estate owned.
SAN DIEGUITO PREMISES. San Dieguito presently operates two full-service
banking offices in San Diego County. Its principal market area is the
northern coastal area of San Diego County. SDN maintains its office at the
same location as San Dieguito's main and administration offices in Encinitas,
California; it is possible, however, that SDN will move its headquarters
office to the location of Liberty's main and administration offices in
Huntington Beach, California in the foreseeable future.
San Dieguito's main banking office and administration offices are located
at 135 Saxony Road in Encinitas, California. This is a two-story,
freestanding building that San Dieguito occupies pursuant to a 20-year,
triple net lease which commenced March 1982, with an option to extend for an
additional 10 years. Increases in rent will occur in May of 1997 as well as
during the option period.
San Dieguito's branch banking office at 675 Carlsbad Village Drive,
Carlsbad, California, opened in December 1990. This office is a one-story,
freestanding building that San Dieguito occupies pursuant to a 15-year lease
with options to extend for two five-year periods. The rent increases 4.0%
per year for each new lease year through December 2000, at which time rent
will be adjusted to fair market rent as of that time, determined in
accordance with procedures provided in the lease. Thereafter, the rent
increases 4.0% per year from that new base through the remaining original
term of the lease.
In December 1995, San Dieguito renewed and amended the lease for its
service center at 6354 Corte del Abeto, Suite F, Carlsbad, California. San
Dieguito occupies the premises pursuant to a short-term lease expiring on
August 31, 1996.
LIBERTY PREMISES. Liberty's main banking office and administration
offices occupy substantially all of the first floor and a portion of the
fourth floor of the building located at One Pacific Plaza, 7777 Center
Avenue, Huntington Beach, California. The lease of the first floor of the
building, where Liberty's Head Office Branch and most of its administration
offices are located, is for a term of 20 years commencing on October 1, 1981,
with four consecutive renewal options of five years each. The lease for the
fourth floor of the building is on a month-to-month basis.
The base rent for the first floor of the building adjusts periodically to
the fair market rental value of such premises commencing on the tenth
anniversary of the lease. In addition, the base rent for the first floor of
this building will be increased every three years during the lease by an
amount equal to the lesser of: (i) 8.5% times the current base rent; or (ii)
and amount equal to 75% of the percentage adjustment in the Consumer Price
Index. The base rent for the fourth floor of the building is not subject to
adjustment.
Liberty owns the property at 34206 Doheny Park Road, Dana Point, at which
its South Orange County branch is located. Office space of the building is
1,488 square feet.
Liberty leases the property located at 17011 Beach Boulevard, Huntington
Beach at which its Beach Boulevard branch is located. The lease is for a
term of 62 months commencing on June 1, 1996 with two consecutive renewal
options of five years each.
Liberty also leases the office housing its Northern California LPO. That
office is located at 12 Orinda Way, Orinda, California, which is leased on a
month-to-month basis.
EFFECTS OF ENVIRONMENTAL PROTECTION LAWS. SDN, to the best of its
knowledge, is not aware of any facts relating to its properties or loan
portfolio that reasonably indicate that compliance with federal, state or
local provisions relating to the protection of the environment will have a
material adverse effect on its capital expenditures, earnings and competitive
position.
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<PAGE>
No assurance can be given, however, that future facts, circumstances and
developments relating to SDN's or its operating banks' obligations to comply
with such environmental laws will not have a material adverse effect on the
capital expenditures, earnings or competitive position of SDN.
LEGAL PROCEEDINGS
SDN is from time to time subject to various legal actions which are
deemed to be part of its normal course of business. Management, after
consultation with legal counsel, believes that the ultimate liability, if
any, arising from such actions will not have a material adverse affect on the
financial condition or results of operations of SDN.
SUPERVISION AND REGULATION OF HOLDCO AND SDN
OVERVIEW
Holdco, SDN and the Operating Banks are subject to extensive regulation
and supervision under various federal and state laws. SDN is and, upon
completion of the CSB Acquisition, Holdco will be, a bank holding company
subject to regulation and supervision by the FRB pursuant to the BHCA. Bank
holding companies must file with the FRB an annual report and such additional
reports as the FRB may require and are subject to periodic examinations by
the FRB.
Liberty and San Dieguito are national banks, having been chartered by the
Office of the Comptroller of the Currency (the "OCC") under the National Bank
Act, and therefore are subject to regulation, supervision and periodic
examination by the OCC. CSB, as a California-chartered commercial bank that
is not a member of the Federal Reserve System, is subject to regulation,
supervision and periodic examination by the California State Banking
Department (the "Banking Department") and the FDIC.
Each Operating Bank's deposits are (and, upon consummation of the
Transaction, will continue to be) insured by the FDIC to the maximum extent
permitted by law, which is currently $100,000 per depositor in most cases.
The deposits of San Dieguito and Liberty are insured under the FDIC's Bank
Insurance Fund ("BIF"), while the deposits of CSB are insured under the
FDIC's Savings Association Insurance Fund ("SAIF").
The regulations of the FRB, the OCC, the FDIC and the Banking Department
will govern most aspects of SDN's, Holdco's and the Operating Banks' business
and operations, including, but not limited to, the scope of their respective
businesses, investments, reserves against deposits, the nature and amount of
any collateral for loans, the timing of availability of deposited funds, the
issuance of securities, the payment of dividends, bank expansion and bank
activities, including real estate development and insurance activities. The
Operating Banks are also subject to requirements and restrictions of various
consumer laws and regulations.
The federal and state banking agencies have broad enforcement powers over
depository institutions, including the power to impose substantial fines and
other civil and criminal penalties, to terminate deposit insurance, and to
appoint a conservator or receiver under a variety of circumstances. The FRB
also has broad enforcement powers over bank holding companies, including the
power to impose substantial fines and other civil and criminal penalties.
At the direction of the FDIC and the Banking Department, CSB's Board of
Directors adopted a resolution in March 1996 requiring CSB to, among other
things, (i) maintain a leverage capital ratio of at least 6.5%; (ii) reduce
classified assets to prescribed amounts by specified dates; (iii) establish
policies for identifying problem assets; (iv) increase CSB's allowance for
loan losses and thereafter maintain its allowance at such levels determined
to be adequate by its Board of Directors; and (v) periodically report on
certain matters to the FDIC and the Banking Department until further notice
from those regulators. (For discussions of capital ratios and other bases
upon which banks are evaluated by banking regulators, see "SUPERVISION AND
REGULATION OF HOLDCO AND SDN -- Capital Adequacy Requirements" and "-- Safety
and Soundness Standards" herein.) Prior to the adoption of those resolutions,
CSB had operated under a Memorandum of Understanding entered into with the
FDIC and the Banking Department in 1994 that contained substantially similar
requirements. The FDIC and the Banking Department have terminated their
interests in the Memorandum of Understanding, conditioned on CSB's Board's
adoption of the resolutions described above.
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The following description of statutory and regulatory provisions and
proposals, which is not intended to be a complete description of those
provisions or their effects on Holdco, SDN or the Operating Banks, and is
qualified in its entirety by reference to the particular statutory or
regulatory provisions or proposals.
LIMITATIONS ON BANK HOLDING COMPANY ACTIVITIES
With certain limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the FRB before undertaking any of the
following activities: (i) acquiring direct or indirect ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of any class of voting
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. The FRB will not approve any acquisition, merger or consolidation
that would have a substantially anticompetitive result, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
a greater public interest in meeting the convenience and needs of the
community to be served. The FRB also considers capital adequacy and other
financial and managerial factors, as well as compliance with the Community
Reinvestment Act of 1977 (the "CRA"), in reviewing proposed acquisitions or
mergers. (See "SUPERVISION OF REGULATION OF HOLDCO AND SDN -- Consumer
Protection Laws and Regulations -- The Community Reinvestment Act" herein.)
With certain exceptions, the BHCA also prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services
for its subsidiaries. The principal exceptions to those prohibitions involve
certain non-bank activities which, by statute or by FRB regulation or order,
have been identified as activities closely related to the business of banking
or of managing or controlling banks. In making that determination, the FRB
considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency, which can be
expected to outweigh the risks of possible adverse effects such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Furthermore, under the BHCA and certain regulations of the FRB, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale
of property or furnishing of services. For example, in general, none of the
Operating Banks may condition the extension of credit to a customer upon the
customer obtaining other services from Holdco or any of its other
subsidiaries, or upon the customer promising not to obtain services from a
competitor.
REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO SHAREHOLDERS
STOCK REDEMPTIONS. Bank holding companies are required to give the FRB
notice of any purchase or redemption of their outstanding equity securities
if the gross consideration for the purchase or redemption, when combined with
the net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. The FRB may disapprove such a purchase or redemption
if it determines that the proposal would violate any law, regulation, FRB
order, directive, or any condition imposed by, or written agreement with, the
FRB. Bank holding companies whose capital ratios exceed the thresholds for
"well capitalized" banks on a consolidated basis are exempt from the
foregoing requirement if they were composite CAMEL-rated 1 or 2 in their most
recent inspection and are not the subject of any unresolved supervisory
issues.
DIVIDENDS. FRB policies declare that a bank holding company should not
pay cash dividends on its common stock unless its net income is sufficient to
fund fully each dividend, and its prospective rate of earnings retention
after the payment of such dividend appears consistent with its capital needs,
asset quality and overall financial condition. Other policies forbid the
payment by bank subsidiaries to their parent companies of management fees
which are unreasonable in amount or exceed the fair market value of the
services rendered.
One of the principal sources of revenue for Holdco and SDN will be the
dividends received from their respective subsidiary banks and other
subsidiaries, if any, and interest earned on short-term investments and
advances to subsidiaries. Federal law restricts the amount of dividends that
national banks such as Liberty and San Dieguito may lawfully pay. In general,
a national
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bank may not pay a dividend that would impair its capital. In addition, a
dividend may not be paid if the total of all dividends declared by a national
bank in any calendar year is in excess of the current year's net profits
combined with the retained net profits of the two preceding years (less any
required transfers to surplus), unless the bank obtains the prior approval of
the OCC. A dividend also may not be paid in excess of a bank's undivided
profits then on hand, after deducting bad debts in excess of the reserve for
loan losses. Under the more restrictive of those limitations, as of March
31, 1996, neither Liberty or SDN could have declared dividends.
Under California law, CSB may only declare a cash dividend out of CSB's
net profits up to the lesser of CSB's retained earnings or net income for the
last three fiscal years (less any distributions to shareholders made during
such period). In the event that CSB has no retained earnings or net income
for the prior three fiscal years, cash dividends may be paid in an amount not
exceeding the greatest of (i) net income for CSB's previous fiscal year, (ii)
net income for CSB's current fiscal year or (iii) retained earnings of CSB,
upon obtaining the prior approval of the Superintendent. Limitations on each
Operating Bank's ability to pay dividends to its corporate parent may impact
SDN's and Holdco's ability to meet obligations incurred by the respective
holding companies.
The payment of dividends on capital stock by Holdco and the Operating
Banks may also be limited by other factors, including applicable regulatory
capital requirements and broad enforcement powers of the federal regulatory
agencies. Both the federal banking agencies and, in the case of a
state-chartered bank, the Banking Department, have broad authority to
prohibit a bank (or, where applicable, a bank holding company) from engaging
in banking practices which the banking agency considers to be unsafe or
unsound. It is possible, depending upon the financial condition of the bank
or holding company in question and other factors, that the applicable
regulator may assert that the payment of dividends or other payments by the
bank or holding company is considered an unsafe or unsound banking practice
and, therefore, implement corrective action to address such a practice.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized" for regulatory purposes.
Those regulations and restrictions may limit Holdco's ability to obtain
funds from the Operating Banks for its cash needs, including funds for
payment of interest and operating expenses and dividends, if any.
TRANSACTIONS WITH AFFILIATES
The Operating Banks are subject to restrictions under federal law which
limit certain transactions by each of them with Holdco and its nonbanking
subsidiaries, including extensions of credit, investments or asset purchases.
Extensions of credit by any subsidiary bank with any one affiliate are
limited in amount to 15% of such subsidiary bank's unimpaired capital and
surplus or 25% of unimpaired capital and surplus if the extensions of credit
are fully secured in accordance with applicable regulations. Federal law also
provides that extensions of credit to affiliates must be made on
substantially the same terms as, and following credit underwriting procedures
that are no less stringent than, those prevailing at the time for comparable
transactions involving other nonaffiliates, or, in the absence of comparable
transactions, on terms and under circumstances, including credit standards,
that in good faith would be offered to, or would apply to, affiliates. The
purchase of low quality assets from affiliates is generally prohibited.
RESTRICTIONS ON CHANGES OF CONTROL
Subject to certain limited exceptions, no company (as defined in the BHC
Act) or individual can acquire control of a bank holding company, such as
Holdco, without the prior approval or non-disapproval, as the case may be, of
the FRB. Prior approval of the FRB would be required for an acquisition of
control of Holdco by a "company" as defined in the BHCA. In general, FRB
regulations provide that "control" means the power to vote 25% or more of any
class of voting stock, the power to control in any manner the election of a
majority of the board of directors, or the power to exercise, directly or
indirectly, a controlling influence over management or policies as determined
by the FRB. As part of such acquisition, the company would be required to
register as a bank holding company (if not already so registered) and have
its business activities limited to those activities which the FRB determines
to be so closely related to banking as to be a proper incident thereof. (See
"SUPERVISION AND REGULATION OF HOLDCO AND SDN -- Limitations on Bank Holding
Company Activities" herein.) FRB regulations also provide that there
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is a presumption that any company which owns less than 5% of any class of
voting securities of a bank holding company does not have control over that
company.
Any individual (or group of individuals acting in concert) who intends to
acquire control of a bank holding company, such as Holdco, generally must
give 60 days prior notice to the FRB under regulations promulgated pursuant
to the Change in Bank Control Act of 1978. Control for the purpose of those
regulations is presumed to exist if, among other things, an individual owns,
controls or has the power to vote 25% or more of a class of voting stock of
the bank or bank holding company, or an individual owns, controls or has the
power to vote 10% or more of a class of voting stock of the bank or bank
company and (i) the company's shares are registered pursuant to Section 12 of
the Exchange Act, or (ii) such person would be the largest shareholder of the
institution. The statute and underlying regulations authorize the FRB to
disapprove the proposed transaction based on the evaluation of certain
specified factors, including, without limitation, competition, management and
financial condition.
CROSS-GUARANTEE AND HOLDING COMPANY LIABILITY
Any FDIC-insured depository institution may be liable for any loss
incurred by the FDIC, or any loss which the FDIC reasonably anticipates
incurring, in connection with the default of any commonly controlled
FDIC-insured depository institution or any assistance provided by the FDIC to
any such institution in danger of default. Any obligation or liability owed
by a subsidiary depository institution to its parent company is subordinate
to the subsidiary institution's cross-guarantee liability. If any of
Holdco's direct or indirect subsidiary banks were placed into conservatorship
or receivership, because of the cross-guarantee provisions, Holdco would
likely lose its investment in all of its subsidiary banks.
The FDIC may provide federal assistance to a "troubled institution"
without placing the institution into conservatorship or receivership. In
such case, pre-existing debtholders and shareholders may be required to make
substantial concessions and the FDIC may succeed to some or all of their
interests.
FRB policy requires bank holding companies to serve as a source of
financial strength to their subsidiary banks by standing ready to use
available resources to provide adequate capital funds to subsidiary banks
during periods of financial stress or adversity.
In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
to any of the federal banking agencies to maintain the capital of an insured
depository institution, and any claim for a subsequent breach of such
obligation will generally have priority over most other unsecured claims.
(See "SUPERVISION AND REGULATION OF HOLDCO AND SDN --Prompt Corrective
Action Provisions" herein.)
CAPITAL ADEQUACY REQUIREMENTS
SDN and Holdco are subject to regulations of the FRB governing capital
adequacy. The Operating Banks are subject to similar regulations of the OCC
(in the case of San Dieguito and Liberty) and the FDIC (in the case of CSB).
In each case, those regulations incorporate both risk-based and leverage
capital requirements. As noted below, the federal banking agencies have
proposed regulations which would impose additional capital requirements on
banks and bank holding companies based on the market risk in foreign exchange
and commodity activities and in the trading of debt and equity investments.
Each of the federal regulators has established risk-based and leverage
capital guidelines for the banks or bank holding companies it regulates,
which set total capital requirements and define capital in terms of "core
capital elements," or Tier 1 capital and "supplemental capital elements," or
Tier 2 capital. Tier 1 capital is generally defined as the sum of the core
capital elements less goodwill and certain intangibles. The following items
are defined as core capital elements: (i) common shareholders' equity; (ii)
qualifying noncumulative perpetual preferred stock and related surplus; and
(iii) minority interests in the equity accounts of consolidated subsidiaries.
Supplementary capital elements include: (i) allowance for loan and lease
losses (but not more than 1.25% of an institution's risk weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus. The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
100% of Tier 1 capital, net of goodwill.
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Each of the Operating Banks is required to maintain a minimum ratio of
qualifying total capital to total risk-weighted assets of 8.0%, at least
one-half of which must be in the form of Tier 1 capital. Risk-based capital
ratios are calculated to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations 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 the risk-based capital guidelines, the
nominal dollar amounts of assets and credit-equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment percentages,
which range from 0% for assets with low credit risk, such as certain U.S.
Treasury securities, to 100% for assets with relatively high credit risk,
such as business loans.
Banks that have received the highest composite regulatory CAMEL rating
and are not anticipating or experiencing any significant growth must maintain
a ratio of Tier 1 capital to adjusted total assets ("Leverage Capital Ratio")
of at least 3.0%. All other institutions are required to maintain a leverage
ratio of at least 100 to 200 basis points above the 3.0% minimum, for a
minimum of 4.0% to 5.0%.
Recently adopted regulations by the federal banking agencies have revised
the risk-based capital standards to take adequate account of concentrations
of credit and the risks of non-traditional activities. Concentrations of
credit refers to situations where a lender has a relatively large proportion
of loans involving one borrower, industry, location, collateral or loan type.
Non-traditional activities are considered those that have not customarily
been part of the banking business but that start to be conducted as a result
of developments in, for example, technology or financial markets. The
regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal banking agencies
also are authorized to review an institution's management of concentrations
of credit risk for adequacy and consistency with safety and soundness
standards regarding internal controls, credit underwriting or other
operational and managerial areas.
Further, the banking agencies recently have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
While interest risk is inherent in a bank's role as financial intermediary,
it introduces volatility to bank earnings and to the economic value of the
bank. The banking agencies have addressed this problem by implementing
changes to the capital standards to include a bank's exposure to declines in
the economic value of its capital due to changes in interest rates as a
factor that the banking agencies will consider in evaluating an institution's
capital adequacy. Bank examiners will consider a bank's historical financial
performance and its earnings exposure to interest rate movements as well as
qualitative factors such as the adequacy of a bank's internal interest rate
risk management. The federal banking agencies recently considered adopting a
uniform supervisory framework for all institutions to measure and assess each
bank's exposure to interest rate risk and establish an explicit capital
charge based on the assessed risk, but ultimately elected not to adopt such a
uniform framework. Even without such a uniform framework, however, each
Operating Bank's interest rate risk exposure is assessed by its primary
federal regulator on an individualized basis, and it may be required by the
regulator to hold additional capital for interest rate risk if it has a
significant exposure to interest rate risk or a weak interest rate risk
management process.
In certain circumstances, a federal banking agency may determine that the
capital ratios for a regulated bank must be maintained at levels which are
higher than the minimum levels required by the guidelines or the regulations.
A bank which does not achieve and maintain the required capital levels may
be issued a capital directive by the agency to ensure the maintenance of
required capital levels. In addition, each of the Operating Banks is
required to meet guidelines of the FDIC concerning maintenance of an adequate
allowance for loan and lease losses.
PROMPT CORRECTIVE ACTION PROVISIONS
FDICIA amended the Federal Deposit Insurance Act ("FDIA") to establish a
format for closer monitoring of insured depository institutions and to enable
prompt corrective action by regulators when an institution begins to
experience difficulty. The general thrust of those provisions is to impose
greater scrutiny and more restrictions on institutions as they have
decreasing levels of capitalization. FDICIA establishes five capital
categories: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Under the regulations, a "well capitalized" institution
has a ratio of total capital to total risk-weighted assets ("Total Risk-Based
Capital Ratio") of at least 10.0%, a ratio of Tier 1 capital to total
risk-weighted assets ("Tier 1 Risk-Based Capital Ratio") of at least 6.0%, a
Leverage Capital Ratio of at least 5.0% and is not subject to any written
order, agreement, or directive; an "adequately capitalized" institution has a
Total Risk-Based Capital Ratio of at least 8.0%, a Tier 1 Risk-Based Capital
Ratio of at least 4.0% and a Leverage Capital Ratio of at least 4.0% (3.0% or
more if given the highest regulatory rating and not experiencing significant
growth), but does not otherwise qualify as "well capitalized."
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An "undercapitalized" institution fails to meet one of the three minimum
capital requirements for "adequately capitalized" banks. A "significantly
undercapitalized" institution has a Total Risk-Based Capital Ratio of less
than 6.0%, a Tier 1 Risk-Based Capital Ratio of less than 3.0% and/or a
Leverage Capital Ratio of less than 3.0%. A "critically undercapitalized"
institution has a ratio of tangible equity to assets of 2.0% or less. Under
certain circumstances, a "well capitalized," "adequately capitalized" or
"undercapitalized" institution may be required to comply with supervisory
actions as if the institution was in the next lowest capital category.
Undercapitalized depository institutions are subject to restrictions on
borrowing from the FRB. In addition, undercapitalized depository
institutions are subject to growth and activity limitations and are required
to submit "acceptable" capital restoration plans. Such a plan will not be
accepted unless, among other things, the depository institution's holding
company, if any, guarantees the capital plan, up to an amount equal to the
lesser of 5.0% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized and
ultimately may be placed into conservatorship or receivership.
Significantly undercapitalized depository institutions may be subject to
a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized; more stringent
requirements to reduce total assets; cessation of receipt of deposits from
correspondent banks; further activity restrictions; prohibitions on dividends
to the holding company; and requirements that the holding company divest its
bank subsidiary, in certain instances. Subject to certain exceptions,
critically undercapitalized depository institutions must have a conservator
or receiver appointed for them within a certain period after becoming
critically undercapitalized.
RISK MANAGEMENT
Beginning in 1996, FRB examiners are instructed to assign a formal
supervisory rating to the adequacy of an institution's risk management
processes, including its internal controls. The five ratings are strong,
satisfactory, fair, marginal and unsatisfactory. The specific rating of risk
management and internal controls will be given significant weight when
evaluating management under the bank (CAMEL) and bank holding company (BOPEC)
rating systems.
SAFETY AND SOUNDNESS STANDARDS
In February 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate
to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards,
the appropriate federal banking agency may require the institution to submit
a compliance plan. Failure to submit an acceptable compliance plan may
result in enforcement proceedings. In addition, the agencies have reissued
asset quality and earnings standards for public comment, as the Riegle
Community Development and Regulatory Improvement Act of 1994 gave the
agencies flexibility to issue broader standards and the agencies determined
that the ratios previously proposed were too restrictive. (See "SUPERVISION
AND REGULATION OF HOLDCO AND SDN -- Recent and Proposed Legislation -- Riegle
Community Development and Regulatory Improvement Act of 1994" herein.)
LIMITATIONS ON DEPOSIT TAKING
FDICIA provides that a bank may not accept, renew or roll over brokered
deposits unless (i) it is "well capitalized," or (ii) it is adequately
capitalized and receives a waiver from the FDIC permitting it to accept
brokered deposits paying an interest rate not in excess of 75 basis points
over certain prevailing market rates. FDIC regulations define brokered
deposits to include any deposit obtained, directly or indirectly, from any
person engaged in the business of placing deposits with, or selling interests
in deposits of, an insured depository institution, as well as any deposit
obtained by a depository institution that is not "well capitalized" for
regulatory purposes by offering rates significantly higher (generally more
than 75 basis points) than the prevailing interest rates offered by
depository institutions in such institution's normal market area. In
addition, FDICIA provides that
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institutions which are ineligible to accept brokered deposits are ineligible
for pass-through deposit insurance or employee benefit plan deposits.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system, as required by federal law. Under the regulations, insured
depository institutions are required to pay insurance premiums depending on
their risk classification. Under the FDIC's risk-based insurance system,
institutions insured by BIF, such as San Dieguito and Liberty, currently
subject to premiums of between 0 to 27 cents per $100 of deposits.
Institutions insured by SAIF, such as CSB, pay premiums on a risk-related
basis of 23 cents per $100 to 31 cents per $100.
To arrive at a risk-based assessment for each depository institution, the
FDIC places it in one of nine risk categories using a two-step process based
first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three capital categories: "well
capitalized," "adequately capitalized," or "undercapitalized." A well
capitalized institution is one that has a Total Risk-Based Capital Ratio of
at least 10.0%, a Tier 1 Risk-Based Capital Ratio of at least 6.0% and a
Leverage Capital Ratio of at least 5.0%. An adequately capitalized
institution has at least an Total Risk-Based Capital Ratio of at least 8.0%,
a Tier 1 Risk-Based Capital Ratio of at least 4.0% and a Leverage Capital
Ratio of at least 4.0%. An undercapitalized institution is one that does not
meet either of the above definitions. The FDIC also assigns each institution
to one of three supervisory subgroups based on an evaluation of the risk
posed by the institution (group "A" institutions being perceived to present
the least risk and group "C" institutions being perceived to present the
greatest risk). The FDIC makes this evaluation based on reviews by the
institution's primary federal or state regulator, statistical analyses of
financial statements, and other information relevant to gauging the risk
posed by the institution. Those supervisory evaluations modify premium rates
within each of the three capital groups, resulting in a matrix of nine
separate assessment categories.
The deposit assessment matrix for BIF-insured depository institutions,
such as Liberty and San Dieguito, is as follows (in cents of $100 of
deposits):
SUPERVISORY SUBGROUP
----------------------------
A B C
----- --- ---
MEETS NUMERICAL STANDARDS FOR:
Well capitalized . . . . . . . . . . 0(1) 3 17
Adequately capitalized . . . . . . . 3 10 24
Undercapitalized . . . . . . . . . . 10 24 27
The deposit assessment matrix for SAIF-insured depository institutions,
such as CSB, is as follows (in cents of $100 of deposits):
SUPERVISORY SUBGROUP
-----------------------------
A B C
----- ---- ----
MEETS NUMERICAL STANDARDS FOR:
Well capitalized . . . . . . . . . . 23 26 29
Adequately capitalized . . . . . . . 26 29 30
Undercapitalized . . . . . . . . . . 29 30 31
For purposes of the assessments of FDIC insurance premiums that will be
paid during the second half of 1996, which will be based on capital levels as
of December 31, 1995, each of San Dieguito, Liberty and CSB was "well
capitalized". FDIC regulations prohibit disclosure of the "supervisory
subgroup" to which an insured institution is assigned. The insurance
assessments paid during the three months ended March 31, 1996 (which were
based on capital levels as of June 30, 1995) were $37,000, $5,000 and
$117,000, respectively, for San Dieguito, Liberty and CSB.
- -------------------
(1) Subject to a statutory minimum annual assesment of $2,000.
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During both 1995 and 1996, various proposals have been made in Congress
that would impose a one-time charge on SAIF-insured institutions in order to
recapitalize SAIF. In general, such proposal also would reduce the disparity
between the BIF and SAIF assessment rates. (See "SUPERVISION AND REGULATION
OF HOLDCO AND SDN -- Recent Legislation and Proposals -- SAIF
Recapitalization Proposals" herein.)
Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. Each of the
Operating Banks is subject to many federal consumer protection statutes and
regulations including, but not limited to, the Community Reinvestment Act
(the "CRA"), the Truth in Lending Act (the "TILA"), the Fair Housing Act (the
"FH Act"), the Equal Credit Opportunity Act (the "ECOA"), the Real Estate
Settlement Procedures Act ("RESPA"), and the Home Mortgage Disclosure Act
(the "HMDA"). Due to heightened regulatory concern related to compliance
with the CRA, TILA, FH Act, ECOA and HMDA generally, the Operating Banks may
incur additional compliance costs or be required to expend additional funds
for investments in its local community.
The Community Reinvestment Act. The CRA, enacted into law in 1977, is
intended to encourage insured depository institutions, while operating safely
and soundly, to help meet the credit needs of their communities. The CRA
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess their record of helping to meet the credit
needs of their entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices. The CRA
further requires the agencies to take a financial institution's record of
meeting its community credit needs into account when evaluating applications
for, among other things, domestic branches, consummating mergers or
acquisitions, or holding company formations.
In April 1995, the agencies adopted new, interagency regulations
implementing CRA. The 1995 final rule changed the objective criteria for
evaluation. The final rule seeks to take into account the unique
characteristics and needs of each institution's community, as well as the
capacity and relevant constraints upon institutions for meeting the credit
needs of the assessment area. The evaluations can be completed under a small
institution performance standard for those institutions whose total assets
are $250 million or under. Large institution performance criteria covers all
institutions with assets of $250 million or more and for multiple-bank
holding companies with total bank and thrift assets in excess of $1 billion.
There are also performance criteria for wholesale, limited purpose
institutions.
The agencies use the CRA assessment factors in order to provide a rating to
the financial institution. The ratings range from a high of "outstanding" to
a low of "substantial noncompliance". Each Operating Bank was last examined
for CRA compliance by its primary regulator within the past 12 months and
received a "satisfactory" CRA Assessment Rating.
The Equal Credit Opportunity Act. The ECOA, enacted into law in 1974,
prohibits discrimination in any credit transaction, whether for consumer or
business purposes, on the basis of race, color, religion, national origin,
sex, marital status, age (except in limited circumstances), receipt of income
from public assistance programs, or good faith exercise of any rights under
the Consumer Credit Protection Act. In addition to prohibiting outright
discrimination on any of the impermissible bases listed above, an effects
test has been applied to determine whether a violation of the ECOA has
occurred. This means that if a creditor's actions have had the effect of
discriminating, the creditor may be held liable -- even when there is no
intent to discriminate. In addition to actual damages, the ECOA provides for
punitive damages of up to $10,000 in individual lawsuits and up to the lesser
of $500,000 or 1.0% of the creditor's net worth in class action suits.
Successful complainants may also be entitled to an award of court costs and
attorneys' fees.
The Fair Housing Act. The FH Act, enacted into law in 1968, regulates many
practices, including making it unlawful for any lender to discriminate in its
housing-related lending activities against any person because of race, color,
religion, national origin, sex, handicap, or familial status. The FH Act is
broadly written and has been broadly interpreted by the courts. A number of
lending practices have been found to be, or may be considered, illegal under
the FH Act, including some that are not specifically mentioned in the FH Act
itself. Among those practices that have been found to be, or may be
considered, illegal under the FH Act are: declining a loan for the purposes
of racial discrimination; making excessively low appraisals of property based
on racial considerations; pressuring, discouraging, or denying applications
for credit on a prohibited basis; using excessively burdensome qualifications
standards for the purpose or with the effect of denying housing to minority
applicants;
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imposing on minority loan applicants more onerous interest rates or other
terms, conditions, or requirements; and racial steering, or deliberately
guiding potential purchasers to or away from certain areas because of race.
The FH Act provides that aggrieved persons may sue anyone who they believe
has discriminated against them. The FH Act provides that the Attorney
General of the United States may sue for an injunction against any pattern or
practice that denies civil rights granted by the FH Act. The FH Act allows a
person to file a discrimination complaint with the Department of Housing and
Urban Development ("HUD"). Penalties for violation of the FH Act include
actual damages suffered by the aggrieved person and injunctive or other
equitable relief. The courts also may assess civil penalties.
The Truth in Lending Act. The TILA, enacted into law in 1968, is designed
to ensure that credit terms are disclosed in a meaningful way so that
consumers may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit terminology and
expressions of rates, the annual percentage rate, the finance charge, the
amount financed, the total of payments and the payment schedule.
Under certain circumstances involving extensions of credit secured by the
borrower's principal dwelling, the TILA and FRB Regulation Z provide a right
of rescission. The consumer cannot be required to pay any amount in the form
of money or property either to the creditor or to a third party as a part of
the transaction in which a consumer exercises the right of rescission. Any
amount of this nature already paid by the consumer must be refunded. Such
amounts include finance charges already accrued and paid, as well as other
charges such as application and commitment fees or fees for a title search or
appraisal.
The TILA requirements are complex, however, and even inadvertent
non-compliance could result in civil liability or the extension of the
rescission period for a mortgage loan for up to three years from the date the
loan was made. Recently, a significant number of individual claims and
purported consumer class action claims have been commenced against a number
of financial institutions, their subsidiaries, and other mortgage lending
companies, seeking civil statutory and actual damages and rescission under
the TILA, as well as remedies for alleged violations of various state unfair
trade practices acts and restitution or unjust enrichment with respect to
mortgage loan transactions.
The Home Mortgage Disclosure Act. The HMDA, enacted into law in 1975, grew
out of public concern over credit shortages in certain urban neighborhoods.
One purpose of the HMDA is to provide public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also
includes a "fair lending" aspect that requires the collection and disclosure
of data about applicant and borrower characteristics as a way of identifying
possible discriminatory lending patterns and enforcing anti-discrimination
statutes. The HMDA requires institutions to report data regarding
applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and
purchases of such types of loans. Federal bank regulators rely, in part,
upon data provided under the HMDA to determine whether depository
institutions engage in discriminatory lending practices.
Compliance with the HMDA and implementing regulations is enforced by the
appropriate federal banking agency, or in some cases, by HUD. Administrative
sanctions, including civil money penalties, may be imposed by supervisory
agencies for violations. The HMDA requires depository institutions to
compile and disclose certain information with respect to mortgage loans,
including the census tract, income level, racial characteristics and gender
of the borrower or potential borrower. In addition, the HMDA data may have a
material effect on the regulators' assessment of an institution, particularly
in connection with an institution's application to enter into a merger or to
acquire one or more branches.
The Real Estate Settlement Procedures Act. RESPA, enacted into law in
1974, requires lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements. Also, RESPA prohibits certain
abusive practices, such as kickbacks, and places limitations on the amount of
escrow accounts. Violations of RESPA may result in imposition of the
following penalties: (1) civil liability equal to three times the amount of
any charge paid for the settlement services; (2) the possibility that court
costs and attorneys' fees can be recovered; and (3) a fine of not more than
$10,000 or imprisonment for not more than one year, or both. Recently, a
significant number of individual claims and purported consumer class action
claims have been commenced against a number of financial institutions, their
subsidiaries, and other mortgage lending companies alleging violations of
RESPA's escrow account rules and seeking civil damages, court costs, and
attorneys' fees.
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Certain Other Aspects of Federal and State Law
Each Operating Bank is also subject to federal and state statutory and
regulatory provisions covering, among other things, security procedures,
currency and foreign transactions reporting, insider transactions, management
interlocks, loan interest rate limitations, electronic funds transfers, funds
availability, and truth-in-savings disclosures.
Federal Securities Laws
SDN is, and after the Transaction Holdco will be, obligated to file
periodic reports with the Securities and Exchange Commission pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Recent and Proposed Legislation
Federal and state laws applicable to financial institutions have undergone
significant changes in recent years. The most significant recent federal
legislative enactments are the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and Regulatory
Improvement Act of 1994, which are discussed below. In addition, several
items of legislation are pending before the United States Congress that
would, among other things, impose a one-time charge on depositary
institutions, such as CSB, whose deposits are insured by SAIF, and enable
some or all depository institutions to engage in businesses (such as
securities underwriting and insurance) from which such institutions are now
substantially or wholly barred. Some of those businesses entail risks that
are different from, and potentially greater than, the risks to which banks
have traditionally been subject. Other legislation which has been or may be
proposed to the Congress or the California Legislature and regulations which
may be proposed by the FRB, the OCC, the FDIC and the Banking Department may
affect the business of SDN, Holdco and one or more of the Operating Banks.
It cannot be predicted whether any pending or proposed legislation or
regulations will be adopted or the effect such legislation or regulations may
have upon the business of SDN, Holdco or one or more of the Operating Banks;
however, because of the significance of its impact on CSB and manner in which
it is addressed under the Reorganization Agreement, the proposals to impose a
one-time charge on SAIF-insured institutions are discussed collectively and
in general terms below.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"). The Interstate Banking Act regulates the interstate
activities of banks and bank holding companies and establishes a framework
for nationwide interstate banking and branching. The most salient features
of the Interstate Banking Act are set forth below.
Interstate Bank Mergers. Commencing June 1, 1997, a bank in one state
generally will be permitted to merge with a bank located in another state
without the need for explicit state law authorization. However, states can
prohibit interstate mergers involving state banks they have chartered, or
national banks having a main office in such state, if they "opt-out" of this
portion of the federal legislation (i.e., enact state legislation that
prohibits merger transactions involving out-of-state banks) prior to June 1,
1997. Such state legislation must apply equally to all out-of-state banks.
Alternatively, interstate bank mergers can be approved under the Interstate
Banking Act prior to June 1, 1997, if the home state of each bank involved in
the subject transaction has enacted legislation prior to the time of such
approval that expressly permits the interstate merger and such legislation
applies equally to all out-of-state banks.
Bank Holding Company Acquisitions. Commencing September 29, 1995, bank
holding companies were permitted to acquire banks located in any state,
provided that the bank holding company is both adequately capitalized and
adequately managed. This new law is subject to two exceptions: first, any
state may still prohibit bank holding companies from acquiring a bank which
is less than five years old; and second, no interstate acquisition can be
consummated by a bank holding company if the acquiror would control more then
10.0% of the deposits held by insured depository institutions nationwide or
30.0% percent or more of the deposits held by insured depository institutions
in any state in which the target bank has branches.
De Novo Branching. A bank may establish and operate de novo branches in
any state in which the bank does not maintain a branch if that state has
enacted legislation to expressly permit all out-of-state banks to establish
branches in that state.
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Other Provisions. Among other things, the Interstate Banking Act amends
the Community Reinvestment Act to require that in the event a bank has
interstate branches, the appropriate federal banking regulatory agency must
prepare for such institution a written evaluation of (i) the bank's record of
performance; and (ii) the bank's performance in each applicable state.
Commencing June 1, 1997, interstate branches will be prohibited from being
used as deposit production offices; foreign banks will be permitted to
establish branches in any state other than its home state to the same extent
that a bank chartered by the foreign bank's home state may establish such
branches; and certain procedural safeguards have been imposed upon the OCC
prior to preempting state laws regarding community reinvestment, consumer
production, fair lending and establishment of interstate branches, whether or
not related to interstate branching. It is impossible to ascertain at this
time with any degree of certainty what impact the Interstate Banking Act will
have on the banking industry in general or the Operating Banks in particular.
Caldera, Weggeland, and Killea California Interstate Banking and Branching
Act of 1995.
On September 28, 1995, California Governor Pete Wilson signed into law the
Caldera, Weggeland, and Killea California Interstate Banking and Branching
Act of 1995 (the "Caldera Weggeland Act"). The Caldera Weggeland Act, which
became effective on October 2, 1995, is designed to implement important
provisions of the Interstate Banking Act (see "SUPERVISION AND REGULATION OF
HOLDCO AND SDN -- Recent and Proposed Legislation -- The Riegle Neal
Interstate Banking and Branching Act of 1994" herein) and repeal or modify
provisions of the California Financial Code which are obsolete or impose
undue regulatory burdens. A summary of the most significant provisions of
the Caldera Weggeland Act is set forth below.
Repeal of the California Interstate Banking Act of 1986. The California
Interstate (National) Banking Act of 1986 (the "1986 Act"), which was adopted
to permit and regulate interstate banking in California, was largely
preempted by the Interstate Banking Act. Consequently, the Caldera Weggeland
Act repealed the 1986 Act in its entirety. Under the 1986 Act, among other
things, an out-of-state bank holding company was not permitted to establish a
de novo California bank except for the purpose of taking over the deposits of
a closed bank. The repeal of the 1986 Act eliminates this restriction.
Interstate Banking. The Interstate Banking Act provides that bank holding
companies are permitted to acquire banks located in any state so long as the
bank holding company is both adequately capitalized and adequately managed
(subject to certain minimum age requirements of the target bank) and,
provided that, if the acquisition would result in a deposit concentration in
excess of 30.0% in the state in which the target bank has branches, the
responsible federal banking agency may not approve such acquisition unless,
among other alternatives, the acquisition is approved by the state bank
supervisor of that state. The Caldera Weggeland Act authorizes the
California Superintendent of Banks (the "Superintendent") to approve such an
interstate acquisition if the Superintendent finds that the transaction is
consistent with public convenience and advantage in California.
Interstate Branching. Effective June 1, 1997, the Interstate Banking Act
permits a bank, which is located in one state (the "home state") and which
does not already have a branch office in a second state (the "host state"),
to establish a branch office in the host state through acquisition by merging
with a bank located in the host state. The Interstate Banking Act also
permits each state to either "opt-out" from this legislation, i.e., prohibit
all interstate mergers, or "opt-in-early," i.e., enact a law authorizing
interstate branching in advance of the June 1, 1997 effective date of the
Interstate Banking Act. Additionally, the Interstate Banking Act permits a
host state to authorize interstate entry by acquisition of a branch office of
a host state bank or by establishment of a de novo branch office in the host
state.
By means of the Caldera Weggeland Act, the State of California has elected
to "opt-in-early" to interstate branching by permitting a foreign (other
state) bank to acquire an entire California bank by merger or purchase and
thereby establish one or more California branch offices. The Caldera
Weggeland Act expressly prohibits a foreign (other state) bank which does not
already have a California branch office from (i) purchasing a branch office
of a California bank (as opposed to the entire bank) and thereby establishing
a California branch office or (ii) establishing a California branch office on
a de novo basis.
Agency. The Caldera Weggeland Act permits California state banks, with the
approval of the Superintendent, to establish agency relationships with
FDIC-insured banks and savings associations. While the Interstate Banking
Act authorizes agency relationships only between subsidiaries of a bank
holding company, the Caldera Weggeland Act is more expansive in that it
permits California state banks to establish agency relationships with both
affiliated and unaffiliated depository institutions. Additionally, the list
of authorized agency activities was expanded by this California statute to
include, in addition to the activities listed in the Interstate Banking Act,
evaluating loan applications and disbursing loan funds. The general law
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on agency applies to these relationships and the Superintendent is authorized
to promulgate regulations for the supervision of such activities.
The changes effected by Interstate Banking Act and Caldera Weggeland Act
may increase the competitive environment in which any of the Operating Banks
operates in the event that out-of-state financial institutions directly or
indirectly enter any of the Operating Banks' market areas. It is expected
that the Interstate Banking Act will accelerate the consolidation of the
banking industry as a number of the largest bank holding companies attempt to
expand into different parts of the country that were previously restricted.
However, at this time, it is not possible to predict what specific impact, if
any, the Interstate Banking Act and the Caldera Weggeland Act will have on
SDN, Holdco or the Operating Banks, the competitive environment in which each
of them operates, or the impact on any of them of any regulations to be
proposed under the Interstate Banking Act and Caldera Weggeland Act.
Riegle Community Development and Regulatory Improvement Act of 1994.
On September 23, 1994, President Clinton signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Regulatory
Improvement Act"). The Regulatory Improvement Act provides regulatory relief
for both large and small banks by, among other things, reducing the burden of
regulatory examinations, streamlining bank holding company procedures and
establishing a formal regulatory appeals process. The Regulatory Improvement
Act also addresses a variety of other topics, including, but not limited to,
mortgage loan settlement procedures, call reports, insider lending, money
laundering, currency transaction reports, management interlocks, foreign
accounts, mortgage servicing and credit card receivables. Although the
Regulatory Improvement Act should reduce the regulatory burden currently
imposed on banks, it is not possible to ascertain the precise effect its
various provisions will have on Holdco, SDN or the Operating Banks.
SAIF Recapitalization Proposals. The Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") established two deposit
insurance funds administered by the FDIC -- the Bank Insurance Fund ("BIF")
to replace the then-existing FDIC Permanent Insurance Fund, and the Savings
Association Insurance Fund ("SAIF") to replace the Federal Savings and Loan
Insurance Corporation Insurance Fund. With very limited exceptions,
institutions cannot transfer from one insurance fund to the other. The
deposits of Liberty and San Dieguito are insured by BIF; the deposits of CSB
are insured by SAIF.
Under FIRREA, the premium assessments made on insured institutions for
deposit insurance were increased, with rates set separately for institutions
insured under each fund, subject to statutory restrictions. FIRREA also
specified a "designated reserve ratio" of 1.25% of insured deposits for each
fund (measured independently of one another), and fixed a minimum assessment
that the FDIC must charge institutions insured by the applicable fund until
the actual reserve ratio in that fund is raised to 1.25%.
The BIF achieved the designated reserve ratio in mid-1995, and institutions
whose deposits are insured by BIF have paid dramatically reduced deposit
insurance assessments since that time. Unless steps are taken to
recapitalize SAIF, SAIF is not expected to achieve the designated reserve
ratio until approximately 2002. As a consequence, if no such
recapitalization is undertaken, SAIF-insured institutions will pay higher
insurance assessments than BIF-insured institutions until that time, placing
SAIF-insured institutions at a competitive disadvantage.
During both 1995 and 1996, various proposals have been made in Congress
that would (i) impose a one-time charge on SAIF-insured institutions in order
to recapitalize SAIF and (ii) thereafter merge BIF and SAIF into a single
fund, allowing all institutions to be subject to the same assessment
schedule. One such proposal was passed by Congress during 1995 as part of
the Balanced Budget Act of 1995 (the "Budget Act Proposal"). The Budget Act
Proposal failed to become law when the Balanced Budget Act of 1995 was vetoed
by President Clinton. In relevant part, the Budget Act Proposal would have
charged each such SAIF-insured institution a one-time assessment, estimated
to be 0.85%, on the deposits held by that institution as of March 31, 1995.
For CSB, that charge would have equaled approximately $1.2 million ($707,600
on an after-tax basis).
Similar proposals have been made during the 1996 session of Congress and,
at least in concept, appear to have bipartisan support. Other aspects of the
legislation with which those proposals have been introduced are more
controversial, however, making it uncertain whether any such recapitalization
proposal will be enacted into law within the foreseeable future, if at all.
It is anticipated that any such proposal, if passed, would impose a
significant one-time charge on CSB, but would also substantially reduce CSB's
annual assessment for deposit insurance for future periods.
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With the passage of time, the regular assessments paid into SAIF by insured
institutions tend to increase its reserve ratio. At the same time, certain
institutions have begun taking concerted efforts to move SAIF-insured
deposits into their BIF-insured affiliates, thereby reducing the deposit base
against which assessments (including any special recapitalization assessment)
are charged and reducing the total assessments collected by the FDIC for
addition to SAIF's reserves. CSB's own insured deposits have increased by
approximately 27.3% since the March 31, 1995 measurement date used in the
Budget Act Proposal. For all of these reasons, it is not possible to predict
whether the recapitalization assessment which would be levied on CSB under
any proposal that may be enacted would be more or less than the assessment
that would have been levied under the Budget Act Proposal.
TAXATION OF SDN AND HOLDCO
General
SDN files a consolidated federal income tax return and a combined
California franchise tax return with its subsidiaries. Holdco will similarly
file on a consolidated basis for federal purposes and on a combined basis for
California purposes after the Closing Date. Income taxes are provided for on
a separate-company basis. A tax-sharing policy is currently in effect for
SDN and San Dieguito setting out the basis for allocating tax benefits in the
event one or more of the companies has a tax loss. It is anticipated that,
after the Closing Date, such tax-sharing policy will be amended, or a new tax
sharing policy or agreement will be adopted, to include Holdco, SDN and each
of the Operating Banks as parties thereto.
For financial accounting purposes, income taxes are provided for on
substantially all income and expense items included in earnings, regardless
of the period in which such items are recognized for tax purposes. Under
this approach, deferred tax assets and liabilities representing the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities are recognized currently. A
valuation allowance is provided against deferred tax assets when their
realization is not considered "more likely than not."
The following are some of the more significant federal and California
income tax provisions affecting commercial banks and their holding companies.
This discussion does not purport to be complete, and there exist other
provisions that may, in light of the actual future operations and assets of
SDN, Holdco and the Operating Banks, prove to be as significant or more
significant than those summarized here.
Federal Tax Laws
Corporate Tax Rates; Alternative Minimum Tax. The federal corporate tax
rate is 34% for up to $10 million of taxable income, and 35% for taxable
income over $10 million. The 1% differential is phased out between $15
million and approximately $18.3 million so that corporations with over
approximately $18.3 million of taxable income are taxed at a flat rate of
35%. In addition, a corporation will be subject to an alternative minimum
tax ("AMT") to the extent its "tentative minimum tax" exceeds its regular tax
liability. Significantly, a corporation's ability to use net operating
losses is limited for AMT purposes, with the result that a corporation with
current year taxable income will almost always pay some tax.
Bad Debt Deduction. A bank with average adjusted bases of all assets
exceeding $500 million, or which is a member of a parent-subsidiary
controlled group which meets such test (a "large bank"), is required to
compute its bad debt deduction using the specific charge-off method. Under
the method required of large banks, a deduction is taken at the time the debt
becomes partially or wholly impaired. While none of the Operating Banks is
currently a "large bank" under the foregoing definition, and none will be a
"large bank" immediately after the Closing Date, it is possible that all of
the Operating Banks will become large banks within the foreseeable future
following the Closing Date. A bank not meeting the definition of a large
bank may use either the specific charge-off method or the "experience"
reserve method, under which the addition to bad debt reserve is based on the
bank's actual loss experience for the current year and five preceding years.
The U.S. Treasury has promulgated regulations which permit a bank to elect to
establish a conclusive presumption that a debt is worthless, based on
applying a single set of standards for both regulatory and tax accounting
purposes.
Interest Incurred for Tax-Exempt Obligations. Generally, taxpayers are not
allowed to deduct interest on indebtedness incurred to purchase or carry
tax-exempt obligations. This rule applies to a bank, to the extent of its
interest expense that is allocable to tax-exempt obligations acquired after
August 7, 1986. However, interest expense incurred to carry
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"qualified tax-exempt obligations," which include any tax-exempt obligation
that (a) is not a private activity bond and (b) is issued after August 7,
1986 by an issuer that reasonably anticipates it will issue not more than $10
million of tax-exempt obligations (other than certain private activity bonds)
during the calendar year is deductible, although it is subject to a 20%
disallowance under special rules applicable to financial institutions.
Net Operating Losses. Generally, a bank or bank holding company is
permitted to carry a net operating loss ("NOL") back to the prior three tax
years and forward to the succeeding 15 tax years. Prior to the 1995
Recapitalization, SDN had a substantial federal NOL carryforward available to
offset income earned in future periods. As expected, the sale of SDN Common
Stock in the 1995 Recapitalization resulted in an "ownership change" for
federal income tax purposes under Section 382 of the Internal Revenue Code,
which substantially limits SDN's ability to utilize that NOL against future
income and can result in higher tax costs during future periods than would
have been incurred had the sale of that stock not taken place. (See "SDN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- RESULTS OF OPERATIONS -- Provision for Income Taxes" herein.)
Amortization of Intangible Assets Including Bank Deposit Base. Prior to
the Revenue Reconciliation Act of 1993 (the "1993 Act"), there was
considerable controversy regarding the amortization (depreciation) of certain
intangible assets, such as customer lists and similar items. The 1993 Act
clarifies that certain intangible property acquired by a taxpayer must be
amortized over a 15-year period. For this purpose, acquired assets required
to be amortized include goodwill and the deposit base or any similar asset
acquired by a financial institution (such as checking and savings accounts,
escrow accounts and similar items).
Mark-to-Market Rules. The 1993 Act introduced certain "mark-to-market" tax
accounting rules for "dealers in securities." Under these rules, certain
"securities" held at the close of a taxable year must be marked to fair
market value, and the unrealized gain or loss inherent in the security must
be recognized in that year for federal income tax purposes. Under the
definition of a "dealer," a bank or financial institution that regularly
purchases and sells loans may be subject to the new rules.
Certain securities are excepted from the mark-to-market rules provided the
taxpayer timely complies with specified identification rules. The principal
exceptions affecting banks are for (i) any security held for investment and
(ii) any note, bond, or other evidence of indebtedness acquired or originated
in the ordinary course of business and which is not held for sale. If a
taxpayer timely and properly identifies loans and securities as being
excepted from the mark-to-market rules, these loans and securities will not
be subject to these rules.
California Tax Laws
Corporate Tax Rates; Alternative Minimum Tax. A commercial bank is subject
to the California franchise tax at a special bank tax rate based on the
general corporate (non-financial) rate plus 2%. The rate for calendar income
year 1995 was 11.3%. Any income allocable to a bank's holding company is
taxed at the general corporate rate, currently 9.3%. The applicable tax rate
is higher than that applied to general corporations because it includes an
amount "in lieu" of many other state and local taxes and license fees payable
by such corporations but generally not payable by banks and financial
corporations. California has also adopted an alternative minimum tax, based
on the federal AMT with certain modifications.
Bad Debt Deduction. California permits a bank to compute its deduction for
bad debt losses either under the specific charge-off method or under the
experience reserve method.
Net Operating Losses. California has incorporated the federal NOL
provisions, subject to significant modifications for most corporations.
First, NOLs arising in income years beginning before 1987 are disregarded.
Second, no carryback is permitted, and for most corporations NOLs may be
carried forward only five years. Third, in most cases, only 50% of the NOL
for any income year may be carried forward. Fourth, NOL carryover deductions
were suspended for income years beginning in calendar years 1991 and 1992,
although the carryover period was extended by one year for losses sustained
in income years beginning in 1991 and by two years for losses sustained in
income years beginning before 1991. The special federal NOL rules regarding
bad debt losses of commercial banks do not apply for California purposes.
Amortization of Intangible Assets Including Bank Deposit Base. In 1994,
California enacted legislation conforming to the federal tax treatment of
amortization of intangibles and goodwill, with certain modifications.
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Market-to-Market Rules. California has recently ruled that the federal
mark-to-market rules may be applied at the discretion of the taxpayer. If
the taxpayer chooses to apply those rules, it must do so in a manner
consistent with the manner in which those rules were applied on its federal
tax return.
The various laws discussed herein contain other provisions that could have
a significant impact on the banking industry. In addition, there are tax
proposals currently pending before Congress which could have an impact on the
banking industry. As of the date of this Information Statement/Prospectus, it
is uncertain whether these bills will be enacted and what impact those bills
will have on the Operating Banks, SDN or Holdco.
DESCRIPTION OF HOLDCO SECURITIES
General
The following summary of the terms of the Holdco Common Stock does not
purport to be complete and is subject to, and is qualified in its entirety
by, the provisions of the Holdco's Certificate of Incorporation, a copy of
which will be provided upon request. Prior to the Closing of the
Transaction, the SDN Certificate of Incorporation will be substantially
identical to the Holdco Certificate of Incorporation. Therefore, the
following summary applies equally to the SDN Common Stock.
Upon the consummation of the Transaction, Holdco's Certificate of
Incorporation will authorize, and SDN's Certificate of Incorporation
currently authorizes, the issuance of up to 12,000,000 shares of Common Stock
and 1,000,000 shares of Preferred Stock. Holdco's board of directors will
have the power to issue from time to time additional shares of Common Stock
or Preferred Stock authorized by the Certificate of Incorporation without
obtaining approval of Holdco's shareholders. The rights, qualifications,
limitations and restrictions on the Preferred Stock (or of each series of
Preferred Stock, if issued in more than one series) issued by Holdco will be
determined by Holdco's board of directors at the time of the issuance, and
may include, among other things, rights in liquidation, rights to
participating dividends, voting rights and rights to convert to Holdco Common
Stock. The capital stock of Holdco will represent, and the capital stock of
SDN now represents, withdrawable capital, is not an account of an insurable
type and is not insured by the FDIC or any other government agency.
Common Stock
Dividends. Holdco may pay dividends as declared from time to time by its
board of directors out of funds legally available therefor. With certain
exceptions, a Delaware corporation (such as Holdco) may pay dividends only
out of (i) its surplus (as defined under Delaware law), or (ii) if there is
no surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. (See "SUPERVISION AND REGULATION OF
HOLDCO AND SDN -- Regulatory Restrictions on Distributions to Shareholders --
Dividends" herein for a discussion of certain regulatory restrictions on the
payment of dividends.)
Voting Rights. Except as may be provided with respect to any Preferred
Stock that may hereafter be issued, the holders of the Holdco Common Stock
will possess exclusive voting rights. Each holder of Holdco Common Stock
will be entitled to one vote for each share held on all matters voted upon by
shareholders. Shareholders will not be permitted to cumulate votes in
elections of directors.
Liquidation. Subject to any prior rights that may be granted to the
holders of any shares of Preferred Stock that may be outstanding as of the
applicable time, in the event of any liquidation, dissolution or winding up
of Holdco, the holders of the Holdco Common Stock would be entitled to
receive, after payment of all debts and liabilities of Holdco (including all
deposit accounts and accrued interest thereon), all assets of Holdco that are
available for distribution.
Preemptive Rights. Holders of the Holdco Common Stock will not have any
preemptive rights with respect to any shares which may be issued by Holdco at
any time after the Closing. Holdco may therefore sell shares of its capital
stock without first offering them to its then shareholders.
Special Shareholders' Meetings. Special meetings of the shareholders may
be called at any time by the board of directors, the Chief Executive Officer
or the Chairman of the Board and shall be called by the Chief Executive
Officer or the Secretary upon the written request of the holders of 10.0% of
the outstanding shares of Holdco capital stock entitled to notice thereof.
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MARKET FOR SDN COMMON STOCK AND
HOLDCO COMMON STOCK AND DIVIDEND POLICY
No active market currently exists for the SDN Common Stock. While SDN has
approximately 400 shareholders of record as of the date of this Information
Statement/Prospectus, less than 1.5% of the SDN Common Stock is held by
persons other than Dartmouth Capital Group or investors in Dartmouth Capital
Group. The SDN Common Stock is not listed on any exchange, is not quoted on
NASDAQ, and is infrequently traded in the over-the-counter market. While
SDN's management has received certain inquiries regarding purchases of SDN
Common Stock by unrelated persons, the last trade in SDN Common Stock known
to management is [a transfer of 1,575 shares on December 10, 1992.] A
long-term goal of SDN's management is to increase the trading market in its,
and after the Closing Date, Holdco's, common stock. However, there can be no
assurance that such a trading market will develop.
SDN has never paid cash dividends on its capital stock. It is not expected
that Holdco will pay cash dividends at any time within the foreseeable future
following the Transaction. Holdco's legal ability to pay dividends to
shareholders is further restricted by limitations on the ability of the
Operating Banks to transfer funds to Holdco sufficient to provide Holdco cash
to pay such dividends. (See "SUPERVISION AND REGULATION OF HOLDCO AND SDN --
Regulatory Restrictions on Distributions to Shareholders -- Dividends"
herein.)
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DIRECTORS AND EXECUTIVE OFFICERS OF HOLDCO AND SDN
Directors and Executive Officers of Holdco and SDN
Each of the current directors of SDN will be a director of Holdco as of and
following the Closing. In addition, the Reorganization Agreement provides
that Peter H. Paulsen, the Chairman and principal shareholder of CSB, will
become a director of SDN immediately prior to the Transaction, and that he
will thereby become a director of Holdco upon the consummation of the SDN
Merger. As of the date of this Information Statement/Prospectus, the
directors and executive officers of SDN are:
Name Age Position
- ---- --- ---------
Edward A. Fox 60 Director
Charles E. Hugel 68 Director
Robert P. Keller 58 Director, President and
Chief Executive Officer
K. Thomas Kemp 55 Director
Jefferson W. Kirby 34 Director
Peter H. Paulsen -- Director Nominee
Curt A. Christianssen 35 Senior Vice President, Treasurer
and Chief Financial Officer
Edward A. Fox served as Dean of the Amos Tuck School of Business at
Dartmouth College in Hanover, New Hampshire from 1990 until his retirement in
September 1994. Prior to 1990, Mr. Fox was founding President and Chief
Executive Officer of the Student Loan Marketing Association (Sallie Mae) in
Washington, D.C. Mr. Fox currently serves as a director of College
Construction Loan Insurance Corp. (Connie Lee), Delphi Financial Corp.,
Greenwich Capital Management Corp., New England Mutual Life Insurance Company
and Choate Rosemary Hall. Mr. Fox has agreed to serve as the non-executive
Chairman of Holdco following the Closing if so elected by Holdco's Board of
Directors.
Charles E. Hugel served as Chairman and Chief Executive Officer of
Combustion Engineering, Inc. in Stamford, Connecticut from 1982 to 1990.
Prior to joining Combustion Engineering, Inc., he spent 30 years with AT&T,
most recently as an Executive Vice President. Mr. Hugel also served as a
director of Nabisco, Inc. and its corporate successor, RJR/Nabisco, Inc.,
from 1978 to 1986. Mr. Hugel presently serves on the boards of directors of
Eaton Corp. and Pitney-Bowes, Inc.
Robert P. Keller is the President and Chief Executive Officer of SDN and
of the Dartmouth General Partner. From 1994 to 1995, Mr. Keller was
President and Chief Executive Officer of Independent Bancorp of Arizona,
Inc., a Nasdaq-listed bank holding company with assets of $1.8 billion, which
was acquired by Norwest Corporation in February 1995. From October 1991 to
June 1994, Mr. Keller served as President and Chief Executive Officer of New
Dartmouth Bank, a privately owned financial institution with assets of $1.7
billion, located in Manchester, New Hampshire, which was acquired by Shawmut
National Corporation in 1994. From 1989 to 1991, he served as Chief
Operating Officer of Dartmouth Bancorp, Inc., also Manchester, New Hampshire.
During 1988 and 1989, Mr. Keller served as Executive Vice President and
Chief Operating Officer of American Federal Bank in Dallas, Texas, which was
created through the merger of 12 independent thrifts under the Southwest Plan
and which gave Mr. Keller extensive experience in bank consolidation. Prior
to 1988, he served for 13 years as an officer of Indian Head Banks Inc. of
New Hampshire (acquired by the Fleet/Norstar Group Inc. in 1988), most
recently as Executive Vice President and Chief Financial/Administrative
Officer. Mr. Keller also serves on the boards of directors of Centricut,
LLC, Pennichuck Corporation, Source One Mortgage Services Corporation and
White Mountain Holdings, Inc.
K. Thomas Kemp currently serves as Executive Vice President of Fund
American Enterprises Holdings, Inc. (formerly Fireman's Fund Corporation) and
President and Chief Executive Officer of White Mountain Holdings, Inc. Mr.
Kemp serves on the boards of directors of Fund American, White Mountain,
Valley Insurance Co., Financial Security Assurance, LTD., Main Street America
Holdings and Centricut, LLC.
133
<PAGE>
Jefferson W. Kirby has been employed since 1992 by Alleghany Corporation
and was appointed Vice President in 1994. From 1987 to 1990, he was an
employee of Bankers Trust Corporation, and from 1990 to 1992, he was an
employee of BT Securities Corp., both affiliates of Bankers Trust New York
Corporation. Mr. Kirby is also a director of Connecticut Surety Corporation,
The Covenant Group, Inc. and F.M. Kirby Foundation, Inc., a charitable
organization.
Peter H. Paulsen's background is described elsewhere in this Information
Statement/Prospectus. (See "DIRECTORS AND EXECUTIVE OFFICERS OF CSB"
herein.)
Curt A. Christianssen currently is the Senior Vice President, Treasurer
and Chief Financial Officer of SDN and each of its operating banks, and Chief
Financial Officer of the General Partner. Prior to its acquisition by SDN in
March 1996, Mr. Christianssen served as Chief Financial Officer of Liberty
from October 1993. From October 1991 to April 1993, Mr. Christianssen served
as an Executive Vice President and Chief Financial/Administrative Officer of
Olympic National Bank. Previously Mr. Christianssen was employed by the
Resolution Trust Company as a Vice President responsible for general
accounting and data processing for Gibraltar Savings and Loan Association, a
$15 billion institution, and as the Chief Financial Officer for the receiver
for Unity Savings and Loan Association.
Each of the current SDN directors also serves as a director of the
Dartmouth General Partner. There are no family relationships between any of
SDN's directors or executive officers or Mr. Paulsen.
Audit Committee. The current members of SDN's Audit Committee are
Jefferson W. Kirby (Chairman), Edward A. Fox and K. Thomas Kemp. The Audit
Committee functions include reviewing the financial Statement/Prospectuss of
SDN and its subsidiaries and the scope of the annual audit by SDN's
independent certified public accountants, and appointing the independent
certified public accountant on an annual basis. The Committee also monitors
SDN's internal financial and accounting controls.
Compensation Committee The current members of SDN's Compensation
Committee are K. Thomas Kemp (Chairman), Edward A. Fox and Charles E. Hugel.
The Compensation Committee reviews and makes recommendations to the Board of
Directors on matters concerning the salaries and other employee benefits for
SDN's executive officers.
Director Compensation
Since the 1995 Recapitalization, SDN directors have not received any
compensation for serving on the Board of Directors or any committee or
attending meetings thereof. All directors receive reimbursement of
reasonable expenses incurred in attending Board and committee meetings and
otherwise carrying out their duties.
Executive Compensation Summary
Mr. Keller is the only current SDN executive officer who received
compensation from SDN during the fiscal year ended December 31, 1995. Mr.
Keller commenced his employment as SDN's Chief Executive Officer on October
1, 1995. The table set forth below contains a summary of the annual and other
compensation paid to Mr. Keller during the quarter ended December 31, 1995.
As of the date of this Information Statement/Prospectus, Mr. Keller's annual
base salary is $200,000, and upon consummation of the Transaction, his base
salary will increase to $250,000. (See "DIRECTORS AND OFFICERS OF HOLDCO AND
SDN -- Keller Employment Agreement" herein.) Mr. Christianssen's current
annual base salary is $97,000. See "DIRECTORS AND OFFICERS OF HOLDCO AND SDN
- -- Christianssen Employment Agreement" herein.)
134
<PAGE>
<TABLE>
<CAPTION>
Annual Long Term Compensation
Compensation Awards
------------------------------------- ------------------------
Restricted Securities
Name and Base Other Annual Stock Underlying All Other
principal position Year Salary Bonus Compensation Awards Options Compensation
- ------------------ ---- --------- ----- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert P. Keller 1995 $37,500(1) -- -- -- -- 3,918(2)
President and Chief
Executive Officer
</TABLE>
- ----------
(1) Period from October 1, 1995 to December 31, 1995
(2) Includes reimbursement for moving expenses.
Keller Employment Agreement
Capacity and Term. In June 1996, SDN entered into an employment
agreement with Mr. Keller that was effective retroactive as of October 1,
1995. SDN has agreed to employ Mr. Keller as SDN's senior most executive
officer, to nominate Mr. Keller to serve as a director of SDN, and to cause
Mr. Keller to be elected as a director of each of SDN's subsidiaries that is
a depository institution or otherwise a "significant subsidiary," as defined
under SEC regulations. Mr. Keller's employment agreement has a three-year
term, ending on September 30, 1998, and will be renewed automatically for
successive one-year periods unless either SDN or Mr. Keller gives the other
notice at least one year prior to the end of the term or any extension
thereof. Upon consummation of SDN Merger, Holdco will assume SDN's
obligations under Mr. Keller's employment agreement.
Base Salary. Mr. Keller's base salary under the employment agreement
will depend upon SDN's (or Holdco's) consolidated assets. Mr. Keller's
annual salary currently is $200,000. If SDN's consolidated assets increase
to more than $400 million (but not greater than $800 million), Mr. Keller's
annual salary will be $250,000, and if SDN's consolidated assets increase to
more than $800 million (but not greater than $1.2 billion), Mr. Keller's
annual salary will be $300,000. If SDN's consolidated assets exceed $1.2
billion, Mr. Keller's annual salary will be $350,000.
For purposes of Mr. Keller's employment agreement, SDN's consolidated
assets are calculated as of the end of each of SDN's fiscal quarters and are
equal to the SDN's average consolidated assets for the quarter then ended and
the immediately preceding quarter calculated on a daily basis in accordance
with generally accepted accounting principles ("Average Consolidated
Assets"), except that if SDN's consolidated assets as of the end of a fiscal
quarter vary by more than 20 percent from the Average Consolidated Assets for
the two consecutive quarters ended as of that date, SDN's consolidated assets
as of that date are used for purposes of determining any adjustment to Mr.
Keller's salary. If, subsequent to an increase in Mr. Keller's salary, SDN's
Average Consolidated Assets as of the end of any fiscal quarter are less than
the most recently applied asset threshold for determining Mr. Keller's
salary, Mr. Keller's salary will be decreased, effective as of the beginning
of the quarter next following the measurement date, in accordance with the
salary schedule described above. If SDN's Average Consolidated Assets exceed
$1.8 billion, Mr. Keller may request that the Compensation Committee of SDN's
Board of Directors (the "Committee") consider and make a recommendation to
SDN's Board of Directors whether it is appropriate to increase his annual
salary. Mr. Keller's annual salary, as so determined, is hereinafter
referred to as his "Base Salary."
Restricted Stock Awards. Mr. Keller's employment agreement generally
obligates SDN (or Holdco) to issue shares of restricted SDN Common Stock (the
"Restricted Stock") to Mr. Keller whenever, during the term of the agreement,
SDN issues Common Stock or a Common Stock Equivalent (as defined in the
employment agreement), including shares of Common Stock issued in the CSB
Acquisition. Mr. Keller will not be entitled to receive any Restricted Stock
as a consequence of the sale of Common Stock or a Common Stock Equivalent to
the Dartmouth Partnership or director qualifying shares to any director of a
subsidiary of SDN or the award of employee stock options or the issuance of
Common Stock upon the exercise thereof.
The number of shares of Restricted Stock that will be issued to Mr.
Keller will be equal to 3.0 percent of the sum of (x) the number of shares of
Common Stock then issued by SDN or, in the case of the issuance of a Common
Stock Equivalent,
135
<PAGE>
the number of shares of Common Stock which such Common Stock Equivalent may
be converted into or exchanged for, and (y) the number of shares of
Restricted Stock to be issued to Mr. Keller at that time. Subject only to
restrictions on transferability and forfeiture conditions described below,
Mr. Keller will have all the rights of a shareholder with respect to the
Restricted Stock, including, without limitation, the right to vote the
Restricted Stock and to receive any dividend or other distribution with
respect thereto. Prior to the end of Restricted Period (as defined in Mr.
Keller's employment agreement), Mr. Keller may not sell, assign, transfer,
pledge, hypothecate or otherwise encumber or transfer the Restricted Stock,
except as permitted by the Committee. If Mr. Keller's employment under the
employment agreement is terminated for cause (as defined in the employment
agreement) prior to the end of the Restricted Period, or if Mr. Keller
resigns from SDN during the Restricted Period without the consent of the
Board of Directors of SDN, any Restricted Stock then outstanding will be
forfeited to SDN without any payment to Mr. Keller.
In general, the "Restricted Period" will expire upon the earliest to
occur of the following events: (a) a Change in Control (as defined in Mr.
Keller's employment agreement) of SDN; (b) Mr. Keller's retirement from SDN
after attaining age 62; (c) the effective date of Mr. Keller's resignation
from SDN with the consent of the Board of Directors; (d) the effective date
of the expiration of Mr. Keller's employment agreement pursuant to notice of
non-renewal given by SDN; (e) the effective date of Mr. Keller's termination
of his employment agreement for cause (as defined in the agreement); (f) the
effective date of the termination of Mr. Keller's employment by SDN due to a
"disability" (as defined in the employment agreement); or (g) Mr. Keller's
death. In the case of Restricted Stock that is issued to Mr. Keller as a
consequence of SDN's issuance of a Common Stock Equivalent, the restricted
period will terminate on the later of (x) the date on which such Common Stock
Equivalent first becomes convertible into or exchangeable for shares of
Common Stock and (y) the earliest to occur of the events specified in the
immediately preceding sentence. If any Common Stock Equivalent is redeemed
in whole or in part by SDN prior to the date such Common Stock Equivalent is
convertible into or exchangeable for shares of Common Stock, upon such
redemption there shall be forfeited to SDN, without any payment to Mr.
Keller, a pro rata portion of the shares of Restricted Stock issued as a
consequence of SDN's sale of such Common Stock Equivalent.
Stock Option Awards. Mr. Keller's employment agreement obligates SDN's
Board of Directors to adopt by October 1, 1996 a stock option plan (the
"Option Plan") pursuant to which the Board of Directors or the Committee may
grant stock options to Mr. Keller and other officers of SDN or any of its
subsidiaries. Mr. Keller's employment agreement specifies that the number of
shares of Common Stock reserved for issuance under the Option Plan (the
"Option Pool") will not be less than 6.0% of the sum of (x) the number of
shares of Common Stock that the Board of Directors estimates in good faith
will be outstanding on December 31, 1996, taking into account any proposed
issuance of securities then pending, and (y) the shares reserved for issuance
under the Option Plan.
Mr. Keller's employment agreement provides that promptly following the
adoption of the Option Plan, SDN will grant to Mr. Keller an option
exercisable for a number of shares of Common Stock equal to 50.0% of the
shares in the Option Pool, and that if SDN thereafter increases the number of
shares in the Option Pool, SDN will promptly grant to Mr. Keller an option
exercisable for a number of shares of Common Stock equal to 50.0% of the
amount by which SDN increases the Option Pool. Mr. Keller's employment
agreement also specifies that the exercise price, vesting schedule and other
terms of any stock option granted to him under the Option Plan will be
substantially similar to the terms of any other contemporaneously granted
stock option under the Option Plan, except that any stock option granted to
Mr. Keller will (a) not have an exercise price less than the fair market
value of the Common Stock at the time of grant; (b) to the extent the stock
option has an escalating exercise price or a fixed exercise price with a
premium over the then fair market value of the Common Stock, reflect an
annual percentage increase of not greater than the then current yield to
maturity of the most recently auctioned 5-year U.S. Treasury Notes; (c) vest
over a period of not more than four years from the date of grant; (d) provide
that if Mr. Keller's employment is terminated by SDN other than for cause (as
defined Mr. Keller's employment agreement), the stock option will continue to
be exercisable until such date as it would have expired if Mr. Keller had
continued to be employed by SDN; and (e) provide that upon a Change in
Control of SDN (as defined in Mr. Keller's employment agreement), any stock
option then outstanding will become fully exercisable.
Supplemental Retirement Program. Mr. Keller's employment agreement
obligates SDN to provide supplemental retirement benefits through a
non-qualified, unfunded arrangement equal up to 35% of Mr. Keller's Average
Base Salary after seven years of service. The supplemental retirement
benefit accrues and vests annual at the rate of 5% per year. The
supplemental retirement benefit will be paid monthly for ten years commencing
upon (a) the later of Mr. Keller's retirement date or age 65 or (b) Mr.
Keller's death. Any retirement benefits remaining unpaid at Mr. Keller's
death will be paid to his designated beneficiary.
136
<PAGE>
Benefits Upon Termination. Mr. Keller's employment agreement provides
that if his employment is terminated by SDN without cause or by him due to a
material change in the nature or scope of his responsibilities or duties, or
a material breach by SDN of the employment agreement, SDN generally will be
obligated to pay Mr. Keller his Base Salary for the remainder of the term of
his employment agreement or 18 months, whichever is greater. During such
period, SDN also would be obligated to continue certain employee benefits,
such as life, health, accident and disability insurance coverage, which Mr.
Keller was receiving immediately preceding his termination. In addition,
upon the events described above, Mr. Keller's supplemental retirement
benefits would become fully vested, and upon his attainment of age 65, SDN
would be obligated to pay him an amount sufficient to assure that he receives
the amount to which he would have been entitled under the Supplemental
Retirement Program had he been employed by SDN for three years, and all
options granted to Mr. Keller to purchase Common Stock will become fully
vested and exercisable.
If Mr. Keller's employment is terminated by SDN because Mr. Keller
becomes disabled (as defined in the employment agreement), Mr. Keller will be
entitled to receive not less than 50.0% of his then Base Salary. In
addition, all of his options to purchase SDN Common Stock will immediately
become fully vested and exercisable.
If Mr. Keller's employment agreement expires following a notice of
non-renewal given by SDN, Mr. Keller would be entitled to the continuance for
a period of six months of his Base Salary and the employee benefits which Mr.
Keller was receiving immediately prior to such termination.
Payments to which Mr. Keller would be entitled upon termination will be
reduced by amounts earned by Mr. Keller for services provided to another
party after such termination. Mr. Keller would have no duty, however, to
mitigate such payments by seeking to provide services to another party. Mr.
Keller's employment agreement also provides that under certain circumstances
involving a Change in Control, the amount of benefits provided under his
employment agreement would be reduced if, after applying the excise tax
provisions to the payments under the Internal Revenue Code of 1986, as
amended, the net economic benefit to Mr. Keller would be increased by
effecting such a reduction.
Christianssen Employment Agreement
In October 1993, Liberty entered into an employment agreement with Mr.
Christianssen to serve as Liberty's Executive Vice President and Chief
Financial Officer. The agreement provides for a base salary of $91,500 per
year, fixed bonuses of $6,700 on Mr. Christianssen's six month, first year,
second year, and third year anniversaries of his employment by Liberty.
Liberty may terminate this agreement at any time with or without cause,
provided that if terminated without cause Mr. Christianssen would be entitled
to severance pay equal to three months' salary plus any unpaid installments
of the fixed bonuses.
Stock Option Plan
As described elsewhere in this Information Statement/Prospectus, Mr.
Keller's employment agreement obligates SDN to adopt by the Option Plan by
October 1, 1996 pursuant to which the SDN Board of Directors or the Committee
may grant stock options to Mr. Keller and other officers of SDN or any of its
subsidiaries. Mr. Keller's employment agreement specifies that the number of
shares of Common Stock available in the Option Pool will not be less than
6.0% of the sum of (x) the number of shares of Common Stock that the Board of
Directors estimates in good faith will be outstanding on December 31, 1996,
taking into account any proposed issuance of securities then pending, and (y)
the shares reserved for issuance under the Option Plan. Mr. Keller's
employment agreement also provides that promptly following the adoption of
the Option Plan, SDN will grant to Mr. Keller an option exercisable for a
number of shares of Common Stock equal to 50.0% of the shares in the Option
Pool, and that if SDN thereafter increases the number of shares in the Option
Pool, SDN will promptly grant to Mr. Keller an option exercisable for a
number of shares of Common Stock equal to 50.0 percent of the amount by which
SDN increases the Option Pool. As of the date of this Information
Statement/Prospectus, the exercise price, vesting schedule and other terms of
stock options to be granted under the Option Plan have not been determined.
137
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF HOLDCO AND SDN
Security Ownership of Certain Beneficial Owners
General. The following table sets forth, in accordance with the
Securities and Exchange Commission's beneficial ownership rules, certain
information about the only persons known by SDN to be the beneficial owners
of more than 5% of the outstanding shares of SDN Common Stock as of May 31,
1996, and/or expected to be the beneficial owners of more than 5% of the
outstanding shares of Holdco Common Stock on a pro forma basis as of the
Closing. This information has been furnished by the persons listed in the
table. Unless otherwise indicated, each of the beneficial owners has sole
voting and investment power with respect to its or his shares. The number of
shares of Holdco Common Stock beneficially owned on a pro forma basis is
presented assuming that (a) SDN sells $15.5 million of shares of SDN Common
Stock to the Dartmouth Capital Group to fund the CSB Acquisition, (b) the
amount of the potential Valuation Adjustment is zero, and (c) the Stock
Escrow relating to the SAIF Allocation is utilized and the related shares of
Holdco Common Stock are issued as of the Closing. (See "THE CSB ACQUISITION
- -- CSB Acquisition Price -- Potential Adjustments; Financing of Transaction"
herein.)
<TABLE>
<CAPTION>
ACTUAL AT MAY 31, 1996 PRO FORMA AT CLOSING
(SDN COMMON STOCK) (HOLDCO COMMON STOCK)
----------------------------------------------------------------
Name and Address Number of Shares Percent Number of Shares Percent
of Beneficial Owners Beneficially Owned of Class Beneficially Owned of Class
- -------------------- ------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
Dartmouth Capital Group, L.P. 2,058,144 47.6% 4,825,195 48.0%
Dartmouth Capital Group, Inc.(1)
c/o SDN Bancorp, Inc.
135 Saxony Road
Encinitas, CA 92024-0905
Ernest J. Boch(2) 794,000 18.4% 1,184,000 11.8%
Subaru of New England, Inc.
95 Morse Street
Norwood, MA 02062
Edward A. Fox(2) 259,000 6.0% 396,000 3.9%
R.R . 67-15
Ames Cove Road
Harborside, ME 04642
Jefferson W. Kirby(2) 240,000 5.5% 396,000 3.9%
Alleghany Corporation
375 Park Avenue
New York, NY 10152
Shareholders of General Partner 2,177,185 50.3% 3,388,226 33.7%
as a Group(3)(4)
(11 shareholders)
Peter H. Paulsen -- -- 1,454,304 14.5%
2746 E. Smith Road
Bellingham, WA 98226
</TABLE>
138
<PAGE>
- ----------
(1) As the sole general partner of the Partnership, the General Partner
exercises sole control over the voting and disposition of the shares of
Common Stock held of record by the Partnership.
(2) Excludes shares beneficially owned by the General Partner. Each of
Messrs. Boch, Fox and Kirby is a principal shareholder and director of the
General Partner and, pursuant to the terms of a shareholder agreement among
such shareholders (the "DCG Shareholder Agreement") each has a right to
designate a director of the General Partner. Messrs. Boch, Fox and Kirby
disclaim beneficial ownership of shares of Common Stock beneficially owned by
the General Partner.
(3) Includes, in one case, shares held by an affiliate of the shareholder.
(4) In the case of Robert P. Keller, a shareholder of the Dartmouth General
Partner, includes 55,226 of Restricted Stock, respectively, that will be
issued to Mr. Keller pursuant to the terms of his employment agreement, but
excludes shares that will be subject to an option that SDN has agreed to
grant to Mr. Keller promptly following the adoption of the Option Plan. (See
"MANAGEMENT OF HOLDCO AND SDN -- Keller Employment Agreement" and "--Stock
Option Plan" herein.)
Dartmouth Capital Group. Dartmouth Capital Group and the Dartmouth
General Partner were organized in May 1995 to identify, evaluate and, if and
when appropriate, acquire controlling or substantial equity positions in, or
certain assets and liabilities of, one or more financial institutions located
principally in California. Both are registered bank holding companies under
the BHCA. As of the date of this Information Statement/Prospectus, Dartmouth
Capital Group's sole investment and principal asset is a controlling equity
investment in SDN, which it acquired in the 1995 Recapitalization. In
connection with SDN's March, 1996 acquisition of Liberty, Dartmouth Capital
Group invested an additional $13.4 million in SDN Common Stock. (See "1995
RECAPITALIZATION AND CERTAIN OTHER RECENT DEVELOPMENTS" herein.)
The Dartmouth General Partner has complete control of the management and
conduct of the Dartmouth Capital Group, including all actions pertaining to
its investment in SDN. Ultimate control over Dartmouth Capital Group rests
with the shareholders of the Dartmouth General Partner. The DCG Shareholder
Agreement provides that each shareholder (or, in the case of two affiliated
shareholders, the affiliates as a group) has a right to designate a director
of the Dartmouth General Partner. Rights to designate directors may from
time to time also be granted to third parties, including limited partners of
Dartmouth Capital Group who are not shareholders of the Dartmouth General
Partner. As of the date of this Information Statement/Prospectus, there are
11 shareholders of the Dartmouth General Partner, each of whom is a limited
partner (or an affiliate of a limited partner) of Dartmouth Capital Group.
As of the date of this Information Statement/Prospectus, the Dartmouth
General Partner has eight directors.
As described elsewhere in this Information Statement/Prospectus, SDN has
agreed to register with the Securities and Exchange Commission the shares of
SDN common stock held by Dartmouth Capital Group and certain related parties
on demand and under certain other circumstances. (See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS REGARDING HOLDCO AND SDN -- Registration Rights
Agreement with Dartmouth Capital Group" herein.)
Security Ownership of Management
The following table sets forth certain information as of May 31, 1996,
and on a pro forma basis as of the Closing, with respect to each executive
officer and director of SDN and Holdco, and all officers and directors as a
group. The number of shares of Holdco Common Stock beneficially owned on a
pro forma basis is presented assuming that (a) SDN sells $15.5 million of
shares of SDN Common Stock to the Dartmouth Capital Group to fund the CSB
Acquisition, (b) the amount of the potential Valuation Adjustment is zero,
and (c) the Stock Escrow relating to the SAIF Allocation is utilized and the
related shares of Holdco Common Stock are issued as of the Closing. (See
"THE CSB ACQUISITION -- CSB Acquisition Price --Potential Adjustments;
Financing of Transaction" herein.) This information has been furnished by
the persons listed in the table.
139
<PAGE>
<TABLE>
<CAPTION>
ACTUAL AT MAY 31, 1996 PRO FORMA AT CLOSING
(SDN COMMON STOCK) (HOLDCO COMMON STOCK)
----------------------------------------------------------------
Name and Address Number of Shares Percent Number of Shares Percent
of Beneficial Owners Beneficially Owned of Class Beneficially Owned of Class
- -------------------- ------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
Robert P. Keller(1)(2) 17,185 *% 79,226 *%
Director, President and
Chief Executive Officer
Edward A. Fox(1) 259,000 6.0% 396,000 3.9%
Director
Charles E. Hugel(1) 206,000 4.8% 308,000 3.1%
Director
K. Thomas Kemp(1) 18,000 *% 30,000 *%
Director
Jefferson W. Kirby(1) 240,000 5.6% 396,000 3.9%
Director
Curt A. Christianssen -- -- -- --
Senior Vice President and
Chief Financial Officer
Peter H. Paulsen -- -- 1,454,304 14.5%
Director - post-Closing only
All Directors and Officers 740,185 17.1% 2,663,530 26.5%
as a Group (1 2 3)
(6 persons pre-Closing;
7 persons post-Closing)
</TABLE>
- ------------------
* Less than 1%.
(1) Excludes shares beneficially owned by the General Partner. Each of
Messrs. Keller, Fox, Hugel, Kemp and Kirby is a principal shareholder and
director of the General Partner and, pursuant to the terms of the DCG
Shareholder Agreement each has a right to designate a director of the General
Partner. Messrs. Keller, Fox, Hugel, Kemp and Kirby disclaim beneficial
ownership of shares of Common Stock beneficially owned by the General Partner.
(2) Includes 55,226 shares of Restricted Stock that will be issued to Mr.
Keller pursuant to the terms of his employment agreement. (See "MANAGEMENT
OF HOLDCO AND SDN -- Keller Employment Agreement" herein.)
(3) Excludes shares of Common Stock that will be reserved for issuance to
SDN's executive officers in connection with the Option Plan. (See
"MANAGEMENT OF HOLDCO AND SDN -- Stock Option Plan" herein.)
140
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGARDING HOLDCO AND SDN
Sale of SDN Common Stock to Fund Liberty Acquisition
In order to fund the acquisition of Liberty, on March 27, 1996 Dartmouth
Capital Group purchased an aggregate of 3,392,405 newly-issued shares of SDN
Common Stock. (See "1995 RECAPITALIZATION AND CERTAIN RECENT DEVELOPMENTS --
Acquisition of Liberty National Bank" herein.) The price received for those
shares was $3.95 per share, SDN's per-share book value at December 31, 1995.
Of the shares purchased, 1,628,405 shares were issued in the name of
Dartmouth Capital Group and an aggregate of 1,764,000 shares were issued in
the names of Direct Holders.
Subscription Agreements to Fund CSB Acquisition
SDN has entered into two Common Stock Subscription Agreements with
Dartmouth Capital Group to provide funding for the CSB Acquisition. The
first of those agreements (the "Primary Subscription Agreement") obligates
Dartmouth Capital Group to purchase additional shares of SDN Common Stock
shortly prior to the Closing Date. Substantially all of the proceeds of such
sale will be paid to the CSB shareholders in connection with the CSB
Acquisition. The maximum amount of SDN Common Stock that Dartmouth Capital
Group is obligated to purchase under such agreement is $16.0 million. Prior
to the Closing Date, SDN will deliver to Dartmouth Capital Group a funding
notice specifying the actual number of shares to be purchased and the
aggregate purchase price therefor. The purchase price for the shares sold
under the Primary Subscription Agreement will be $3.95 per share, SDN's
per-share book value at December 31, 1995. It is anticipated that a portion
of the shares sold will be issued in the names of Direct Holders.
The second such Common Stock Subscription Agreement (the "Contingent
Subscription Agreement") obligates Dartmouth Capital Group, under certain
circumstances, to purchase shares of Holdco Common Stock after the Closing.
Holdco Common Stock would be sold under such agreement solely if one or more
CSB shareholders have exercised their statutory dissenters' rights with
regard to the CSB Acquisition, and Holdco requires, in the judgment of its
management, additional capital in order to pay those dissenting CSB
shareholders such amount as may be determined to be payable for their shares.
The maximum amount of Holdco Common Stock that Dartmouth Capital Group is
obligated to purchase under such agreement is the lesser of (i) the amount of
additional capital required to pay the dissenting CSB shareholders, and (ii)
the difference between $16.0 million and the aggregate purchase price paid
for the SDN Common Stock purchased under the Primary Subscription Agreement.
As in the Primary Subscription Agreement, the purchase price for the shares
sold under the Contingent Subscription Agreement will be $3.95 per share. It
is possible that a portion of the shares sold will be issued in the names of
Direct Holders.
Dartmouth Capital Group expects to obtain the funds to be paid under the
Primary Subscription Agreement and the Contingent Subscription Agreement from
its existing limited partners. Dartmouth Capital Group has subscription
agreements with certain of its limited partners that require those limited
partners, upon demand, to provide funds to Dartmouth Capital Group in excess
of the maximum amount that Dartmouth Capital Group could be required to fund
under the Primary Subscription Agreement and the Contingent Subscription
Agreement.
Registration Rights Agreement with Dartmouth Capital Group
As part of the terms of Dartmouth Capital Group's 1995 purchase of SDN
Common Stock in the 1995 Recapitalization, SDN entered into a Registration
Rights Agreement (the "Registration Rights Agreement") pursuant to which it
agreed to file, at Dartmouth Capital Group's request, a registration
statement with the Securities and Exchange Commission in order to permit
Dartmouth Capital Group and the Direct Holders to sell all or a portion of
their respective shares of SDN Common Stock. In addition SDN agreed, if
requested, to include some or all shares of SDN Common Stock owned by
Dartmouth Capital Group or the Direct Holders in any registration statement
it otherwise files (other than registration statements relating to employee
stock options). SDN, Dartmouth Capital Group and the Direct Holders also
agreed to indemnify each other for certain liabilities that may arise in
connection with any such registration statements.
SDN intends to take steps prior to the Closing Date to amend the
Registration Rights Agreement to provide that the registrable securities
under such agreement will include, after the Closing, Dartmouth Capital
Group's and the Direct Holders'
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Holdco Common Stock. Holdco will become a party to the Registration Rights
Agreement in connection with such amendment.
COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDCO COMMON STOCK
AND HOLDERS OF CSB COMMON STOCK
Introduction
CSB is a banking corporation incorporated under the laws of the State of
California in accordance with the provisions of the California Corporations
Code (the "California Code"). Holdco is a business corporation organized
under the Delaware General Corporation Code (the "Delaware Code"). Upon the
consummation of the CSB Acquisition, those CSB shareholders receiving Holdco
Common Stock will become shareholders of an issuer (Holdco) organized under
the Delaware Code.
Differences between the California Code and the Delaware Code, and
between the respective charters and Bylaws of CSB and Holdco, will result in
several changes in the rights of the CSB shareholders if the CSB Acquisition
is effected. Certain differences between the rights of holders of shares of
Holdco Common Stock and shares of CSB Common Stock are summarized below.
The following summary does not purport to be a complete statement of the
rights of shareholders under the California Code and CSB's charter and Bylaws
as compared with the rights of the shareholders of Holdco under the Delaware
Code and Holdco's charter and Bylaws, or a complete description of the
specific provisions referred to herein. The identification of specific
differences is not meant to indicate that other equally or more significant
differences do not exist. The summary is qualified in its entirety by
reference to the Delaware Code and the California Code and the governing
corporate instruments of Holdco and CSB, to which CSB shareholders are
referred. Copies of the charter and Bylaws of, respectively, CSB and Holdco
may be obtained from CSB upon request.
Certain Voting Rights
The California Code generally requires approval of any reorganization
(which includes a merger, certain exchange reorganizations and certain
sale-of-asset reorganizations) or sale of all or substantially all of the
assets of a corporation by the affirmative vote of the holders of a majority
(unless the charter requires a higher percentage) of the outstanding shares
of each class of capital stock of the corporation entitled to vote thereon.
The CSB charter does not require a higher percentage. Under the Delaware
Code, any merger, consolidation or sale of all or substantially all of the
assets of a corporation requires the approval of the holders of a majority
(unless the charter requires a higher percentage) of the outstanding shares
of such corporation entitled to vote thereon. The Holdco charter does not
require a higher percentage.
In general, under the California Code, no approval of a reorganization is
required by the holders of the outstanding shares in the case of any
corporation if such corporation, or its shareholders immediately before such
reorganization, or both, own, immediately after such reorganization, equity
securities (other than warrants or rights) of the surviving or acquiring
corporation, or the parent of each of the constituent corporations,
possessing more than five-sixths of the voting power of such surviving or
acquiring corporation or such parent. The CSB charter does not require
shareholder authorization for mergers of the type described in the preceding
sentence unless the level of dilution described above has occurred. The
Delaware Code provides that (unless required by the certificate of
incorporation) no authorization by shareholders of a surviving or acquiring
corporation is necessary for a merger if (i) the merger does not amend the
certificate of incorporation of the corporation, (ii) each share of stock of
the corporation outstanding prior to the merger remains identical after the
merger, and (iii) the authorized unissued shares or the treasury shares of
common stock of the corporation to be issued or delivered under the merger
plus shares issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under the merger do not exceed 20% of
the shares of common stock of the corporation outstanding prior to the
merger. The Holdco charter does not require shareholder authorization for
mergers of the type described in the preceding sentence.
Under the California Code, a parent corporation may, without shareholder
approval, merge into itself any subsidiary of which it owns at least 90%-of
the outstanding shares of each class of stock. Similarly, the Delaware Code
permits a merger of a 90%-owned subsidiary corporation into its parent
without shareholder approval so long as the resolution of the board of
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directors of the parent providing for the merger states the terms and
conditions of the merger, including the consideration to be given by the
parent in exchange for the subsidiary shares not owned by the parent.
Dividends
Generally, under California law, a bank may only declare a cash dividend
out of a bank's net profits up to the lesser of a bank's retained earnings or
a bank's net income for the last three fiscal years (less any distributions
to shareholders made during such period). In the event that a bank has no
retained earnings or net income for the prior three fiscal years, cash
dividends may be paid in an amount not exceeding the greatest of (i) net
income for such bank's last preceding fiscal year, (ii) net income for such
bank's current fiscal year or (iii) retained earnings of such bank, upon
obtaining the prior approval of the Superintendent.
Under the Delaware Code, a corporation may pay dividends out of surplus
or out of its net profits for the fiscal year in which the dividend is
declared or its net profits for the preceding fiscal year, subject to certain
limitations for the benefit of certain preference shares.
Election of Directors
Under the California Code, with limited exceptions inapplicable to CSB,
any shareholder of a corporation is entitled to cumulate his votes for the
election of directors provided that at least one shareholder has given notice
at the meeting prior to the voting of such shareholder's intention to
cumulate his or her votes. Cumulative votes may only be cast for candidates
who have been nominated before the voting. Accordingly, CSB shareholders are
entitled to cumulative votes for the election of directors.
The Delaware Code permits cumulative voting in the election of directors
of a corporation only if the charter of such corporation provides for
cumulative voting. Holdco's charter does not provide for cumulative voting.
Removal of Directors; Filling Vacancies on the Board of Directors
Under the California Code, the holders of at least 10% of the number of
outstanding shares of any class of stock may initiate a court action to
remove any director for cause. In addition, any or all of the directors of a
California corporation may be removed without cause by the affirmative vote
of a majority of the outstanding shares entitled to vote. However, no
director may be removed (unless the entire board is removed) when the votes
cast against removal would be sufficient to elect the director if voted
cumulatively at an election at which the same total number of votes were cast
and the entire number of the directors authorized at the time of the
directors' most recent election were then being elected.
Under the Delaware Code and the Holdco charter, any or all directors of a
corporation may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote at an election of directors.
Under the California Code (unless otherwise provided in the charter or
bylaws and except for a vacancy created by the removal of a director),
vacancies on the board of directors may be filled by approval of the board.
The CSB charter and Bylaws contain no provisions to the contrary. In
addition, any vacancy not filled by the directors and any vacancies on the
board resulting from the removal of directors may be filled by the vote of
the majority of shares entitled to vote.
Under the Delaware Code and Holdco's Bylaws, vacancies and newly-created
directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office.
Special Meetings of Shareholders; Shareholder Action by Written Consent
Under the California Code, a special meeting of shareholders may be
called by the board of directors, the chairman of the board, the president or
the holders of shares entitled to cast not less than 10% of the votes at the
meeting, or by such
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additional persons as may be provided in the charter or bylaws. Neither the
CSB charter nor its Bylaws permit any other person to call a special meeting.
Under the Delaware Code, a special meeting may be called by the board of
directors or such other persons as may be authorized by the charter or
bylaws. The Holdco Bylaws provide that a special meeting may also be called
by the president, and shall be called by the secretary at the request in
writing of shareholders owning at least 10% of the outstanding shares
entitled to vote at the meeting.
Under the California Code and CSB's Bylaws, any action which may be taken
at a meeting of shareholders may also be taken by the written consent of the
holders of at least the same proportion of outstanding shares as would be
necessary to take such action at a meeting at which all shares entitled to
vote were present and voted, except that the election of directors by written
consent generally requires the unanimous consent of all shares entitled to
vote.
Under Delaware Code (unless otherwise provided in the charter), any
action which is required to be taken or may be taken at a meeting of
shareholders, including the election of directors, may be taken by a written
consent signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to take such action at a
meeting. Holdco's charter contains no provisions to the contrary.
Amendment of Bylaws
Under the California Code and CSB's Bylaws, bylaws may be adopted,
amended or repealed either by the vote of a majority of the outstanding
shares entitled to vote thereon or (subject to any restrictions in the
charter or bylaws) by the approval of the board of directors, except that
amendments to the bylaws specifying or changing a fixed number of directors
or the maximum or minimum number or changing from a fixed to a variable board
or vice versa may only be adopted by approval of the outstanding shares.
Under Delaware Code, the power to adopt, amend or repeal bylaws is vested
in the shareholders unless the charter confers the power to adopt, amend or
repeal bylaws upon the directors as well. Holdco's charter confers such
powers on Holdco's board of directors except with regard to bylaws that, by
their express terms, may be altered or repealed only by the shareholders.
Amendment of Charter
Under both the California Code and the Delaware Code, unless the charter
requires a greater vote, amendments to the charter of a corporation generally
require approval by vote of the board of directors and the holders of a
majority of outstanding shares entitled to vote thereon and, where their
rights are affected, by the holders of a majority of the outstanding shares
of a class, whether or not such class is entitled to vote thereon by the
provision of the charter. CSB's charter does not require any vote greater
than that required under the California Code. Holdco's charter does not
require any vote greater than that required under the Delaware Code.
Dissenters' Rights
Under the California Code, in connection with the merger of a corporation
for which the approval of outstanding shares is required, dissenting
shareholders of such corporation who follow prescribed statutory procedures
are entitled to receive payment of the fair market value of their shares. No
such rights are available, however, if the shares are listed on a national
securities exchange certified by the California Commissioner of Corporations
or appear on the FRB list of over-the-counter margin stocks unless (i) such
shares are subject to certain restrictions on transfer or (ii) the holders of
at least 5% of such shares elect dissenters' rights.
Under the Delaware Code, appraisal rights are generally available for the
shares of any class or series of stock of a corporation in a merger or
consolidation; however, no appraisal rights are available for the shares of
any class or series of stock which, at the record date for the meeting held
to approve such transaction, were either (i) listed on a national securities
exchange or (ii) held of record by more than 2,000 shareholders.
Furthermore, no appraisal rights are available to shareholders
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of the surviving corporation (or, in limited circumstances, to shareholders
of the non-surviving corporation if the merger is between a parent and its
subsidiary) if the merger did not require shareholder approval. Appraisal
rights are, however, available for such class or series if the holders
thereof receive in the merger or consolidation anything except: (i) shares of
stock of the corporation surviving or resulting from such merger or
consolidation; (ii) shares of stock of any other corporation which at the
effective date of the merger or consolidation is either listed on a national
securities exchange or held of record by more than 2,000 shareholders; (iii)
cash in lieu of fractional shares; or (iv) any combination of the foregoing.
Certain Business Combinations and Reorganizations
Under the California Code, if a party that makes a tender offer or
proposes to acquire a corporation by a reorganization or certain sales of
assets is controlled by such corporation or an officer or director of such
corporation, or if a director or executive officer of such corporation has a
material financial interest in such party (each an "Interested Party
Proposal"), (a) an affirmative opinion in writing as to the fairness of the
consideration to the shareholders of such corporation must be delivered to
shareholders of such corporation and (b) such shareholders must be (x)
informed of certain later tender offers or written proposals for a
reorganization or sale of assets made by other persons and (y) afforded a
reasonable opportunity to withdraw any vote, consent or proxy previously
given or shares previously tendered in connection with the Interested Party
Proposal.
In addition, in connection with any merger transaction, the California
Code generally requires that, unless all shareholders of a class or series
consent, each share of such class or series must be treated equally with
respect to any distribution of cash, property, rights or securities. The
California Code also provides generally that if a corporation that is party
to a merger, or its parent, owns more than 50% but less than 90% of the
voting power of the other corporation that is party to such merger, the
nonredeemable shares of common stock of the controlled corporation may be
converted only into nonredeemable shares of the surviving corporation or a
parent party unless all of the shareholders of the class consent.
Unless otherwise provided in the corporation's charter, the Delaware Code
would prevent an "Interested Stockholder" (defined as a person beneficially
owning 15% or more of a corporation's voting stock) from engaging in a
Business Combination (as defined in Section 203 of the Delaware Code) with a
corporation for three years following the date such person became an
Interested Stockholder unless: (i) before such person became an Interested
Stockholder, the board of directors of such corporation approved the
transaction in which the Interested Stockholder became an Interested
Stockholder; (ii) upon consummation of the transaction which resulted in the
Interested Stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of such corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers and employee stock ownership plans that do
not provide for confidential voting by plan participants); or (iii) following
the transaction in which such person became an Interested Stockholder, the
Business Combination is (x) approved by the board of directors of such
corporation and (y) authorized at a meeting of shareholders by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting stock of such corporation not owned by the Interested Stockholder.
Holdco's charter provides that Holdco shall not be governed by the provisions
of Section 203 of the Delaware Code.
Relative Rights of SDN Shareholders and Holdco Shareholders
SDN and Holdco are both organized under the Delaware Law, and the
respective charters and Bylaws of each are substantially identical. The
rights of a Holdco shareholder therefore will be identical in all material
respects to the rights of an SDN shareholder.
EXPERTS
The financial statements included in this prospectus of SDN as of
December 31, 1995, have been audited by Price Waterhouse LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing. The financial statements included in
this prospectus of SDN as of December 31, 1994 and 1993, and for each of the
two years ended December 31, 1994 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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The financial statements included in this prospectus of SDN as of
December 31, 1994 and 1993 and for each of the two years ended have been
audited by Deloitte & Touceh, LLP, independent auditors, as stated in their
report appearing herein (which report disclaims an opinion on the
consolidated financial statements for 1994 and includes explanatory paragraph
referring to the inability of SDN's wholly-owned subsidiary to meet minimum
regulatory capital requirements which raises substantial doubt about SDN's
ability to continue as a going concern). Such financial statements have been
so included in reliance upon the report of such firm given upon its authority
as experts in accounting and auditing.
The financial statements included in this prospectus of Liberty as of
December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995, have been audited by Arthur Andersen LLP,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements included in this prospectus of CSB as of
December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Holdco Common Stock will be passed upon for Holdco
and SDN by Nutter, McClennen & Fish, LLP, Boston, Massachusetts. Certain
legal matters will be passed upon for CSB by Fried, Bird & Crumpacker, P.C.,
Los Angeles, California.
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INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of SDN Page
- ---------------------------------------- ----
Condensed Consolidated Statements of Condition
at March 31, 1996 and December 31, 1995. . . . . . . . . . . . . . F-1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1996 and 1995 . . . . . . . . F-3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995 . . . . . . . . F-4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-5
as of and for the three months ended March 31, 1996 and 1995
Report of Independent Accountants. . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Condition
at December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-10
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-11
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-12
Notes to Consolidated Financial Statements
as of and for the years ended December 31, 1995, 1994 and 1993 . . F-13
Report of Independent Accountants. . . . . . . . . . . . . . . . . . F-30
Consolidated Statements of Condition
at December 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . F-32
Consolidated Statements of Operations
for the years ended December 31, 1994, 1993 and 1992 . . . . . . . F-33
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1994, 1993 and 1992 . . . . . . . F-34
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1993 and 1992 . . . . . . . F-35
Notes to Consolidated Financial Statements
as of and for the years ended December 31, 1994, 1993 and 1992 . . F-36
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Financial Statements of Liberty
- -------------------------------
Report of Independent Public Accountants . . . . . . . . . . . . . . F-51
Balance Sheets at December 31, 1995 and 1994 . . . . . . . . . . . . F-52
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-53
Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-55
Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-57
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . F-58
Consolidated Financial Statements of CSB
- ----------------------------------------
Consolidated Statements of Financial Condition
at March 31, 1996 and December 31, 1995 and 1994 . . . . . . . . . F-70
Consolidated Statements of Operations
for the three months ended March 31, 1996 and 1995 . . . . . . . . F-71
Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995 . . . . . . . . F-72
Notes to Consolidated Financial Statements
as of and for the three months ended March 31, 1996 and 1995 . . . F-73
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . F-78
Consolidated Statements of Financial Condition
at December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . F-79
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-80
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-81
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-81
Notes to Consolidated Financial Statements
for the years ended December 31, 1995, 1994 and 1993 . . . . . . . F-83
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<PAGE>
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition
March 31, 1996 and December 31, 1995
March 31, December 31,
1996 1995
(Unaudited)
------------ -----------
ASSETS
Cash and due from banks $ 13,834,000 $ 3,640,000
Federal funds sold 30,800,000 2,300,000
------------ -----------
Total cash and cash equivalents 44,634,000 5,940,000
Interest bearing deposits in other
financial institutions 1,890,000 989,000
Held-to-maturity investment securities at
amortized cost approximate fair value
March 31, 1996 $5,863,000;
December 31, 1995 $7,057,000 5,858,000 7,009,000
Available-for-sale investment securities 35,583,000 -
Loans 123,287,000 38,977,000
Less allowance for loan loss 2,398,000 639,000
------------ -----------
Loans, net 120,889,000 38,338,000
Premises and equipment, net 1,790,000 597,000
Real estate acquired through foreclosure, net 3,123,000 1,411,000
Goodwill 3,780,000 -
Accrued interest receivable and other assets 5,248,000 1,621,000
------------ -----------
Total assets $222,795,000 $55,905,000
============ ===========
See notes to consolidated financial statements.
F-1
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
March 31, 1996 and December 31, 1995
March 31, December 31,
1996 1995
(Unaudited)
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing $ 57,236,000 $13,445,000
Interest bearing 20,839,000 10,582,000
Savings:
Regular 24,581,000 4,714,000
Money market 12,125,000 8,558,000
Time:
Under $100,000 80,583,000 11,580,000
$100,000 or more 8,106,000 2,552,000
------------ -----------
Total deposits 203,470,000 51,431,000
Accrued expenses and other liabilities 1,829,000 396,000
Mandatory Convertible Debentures 537,000 537,000
------------ -----------
Total liabilities 205,836,000 52,364,000
Shareholders' equity:
Common stock, $.01 par value, 12,000,000
shares authorized 4,287,872 issued and
outstanding at March 31, 1996 43,000 9,000
Additional paid-in capital 20,959,000 7,593,000
Accumulated deficit (4,043,000) (4,061,000)
------------ -----------
Total shareholders' equity 16,959,000 3,541,000
------------ -----------
Total liabilities and shareholders' equity $222,795,000 $55,905,000
============ ===========
See notes to consolidated financial statements.
F-2
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended March 31, 1996 and 1995
(Unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---------- ----------
Interest Income:
Interest and fees on loans $ 920,000 $1,070,000
Interest on Federal funds sold 49,000 28,000
Interest on deposits with financial
institutions 11,000 15,000
Interest on investment securities,
substantially all taxable 86,000 64,000
---------- ----------
Total interest income 1,066,000 1,177,000
Interest Expense:
Deposits 292,000 405,000
Other borrowed funds 15,000 53,000
---------- ----------
Total interest expense 307,000 458,000
---------- ----------
Net interest income 759,000 719,000
Provision for loan losses 35,000 60,000
---------- ----------
Net interest income after
provision for loan losses 724,000 659,000
Non-interest income 162,000 134,000
Non-interest expense 863,000 923,000
---------- ----------
Net income (loss) before taxes 23,000 (130,000)
Income tax (5,000) -
---------- ----------
Net income (loss) $ 18,000 $ (130,000)
========== ==========
Income (loss) per common and common
equivalent share $ 0.02 $ (2.42)
Average share and common stock equivalent 895,467 53,728
See notes to consolidated financial statements.
F-3
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
For three months ended
March 31,
------------------------
1996 1995
----------- ----------
Operating Activities:
Net income (loss) $ 18,000 $ (130,000)
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real
estate acquired through foreclosure 35,000 60,000
Depreciation and amortization 35,000 50,000
Increase in other assets (1,428,000) (242,000)
Increase (decrease) in other liabilities 4,000 (147,000)
----------- ----------
Net cash used by operating activities (1,336,000) (409,000)
Investing Activities:
Decrease in interest bearing deposits with
other financial institutions (304,000) -
Purchases of investment securities (2,500,000) (501,000)
Proceeds from sales and maturities of
investment securities 3,657,000 606,000
Net decrease in loans 1,773,000 2,497,000
Purchases of premises and equipment - (1,000)
Proceeds from sale of real estate acquired
through foreclosures - 213,000
Capital expenditures for other real estate owned (154,000) -
Purchase of Liberty National Bank, net of
cash received 7,283,000 -
----------- ----------
Net cash provided by investing activities 9,755,000 2,814,000
Financing Activities:
Net increase in deposits 16,875,000 1,659,000
Issuance of common stock 13,400,000 -
----------- ----------
Net cash provided by financing activities 30,275,000 1,659,000
----------- ----------
Net Increase in cash and cash equivalents 38,694,000 4,064,000
Cash and cash equivalents at beginning of period 5,940,000 2,842,000
----------- ----------
Cash and cash equivalents at end of period $44,634,000 $6,906,000
=========== ==========
See notes to consolidated financial statements.
F-4
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Noncash transactions-
Other real estate sold and financed
by the bank - $115,000
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
financial information has been prepared in accordance with the Securities and
Exchange Commission rules and regulations for quarterly reporting and
therefore does not necessarily include all information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. This information should be
read in conjunction with Bancorp's Annual Report on Form 10-K for the year
ended December 31, 1995.
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year and dilutive
common stock equivalents by using the treasury stock method. The weighted
average number of common shares used to compute earnings per share was
895,497 for the three months ended March 31, 1996 and 53,728 for the three
months ended March 31, 1995. All per share amounts for the three months
ended March 31, 1995 have been restated to give effect to the one for
twenty-one reverse stock split and the 26,864 common stock dividend declared
during September 1995.
The assumed conversion of the mandatory convertible debentures
("Debentures") is anti-dilutive for the periods ending March 31, 1996 and
1995. Therefore, primary income and loss per share and income and loss per
share assuming full dilution are the same for both periods.
NOTE 3 - MERGER
- ---------------
On March 31, 1996, SDN Bancorp, Inc. ("Bancorp" or the "registrant")
completed its acquisition (the "Liberty Acquisition") of Liberty National
Bank ("Liberty") for approximately $15.1 million in cash as contemplated by
the October 26, 1995 Agreement and Plan of Merger by and among the
registrant, Liberty, and Dartmouth Capital Group, L.P., a Delaware limited
partnership ("the Partnership") and the registrant's controlling shareholder.
Liberty is headquartered in Huntington Beach, California and had total
assets of approximately $149 million prior to the Liberty Acquisition.
As of March 27, 1996, the Partnership invested approximately $13.4
million in the registrant to fund the Liberty Acquisition. In exchange for
that investment, the registrant issued a total of 3,392,405 additional shares
of Common Stock at a price per share of $3.95, the
F-5
<PAGE>
registrant's book value per share as of December 31, 1995. At the
Partnership's direction the registrant issued 1,764,000 of those shares of
Common Stock, in the aggregate, to certain limited partners of the
Partnership (the "Direct Holders") and the remaining 1,628,405 shares of
Common Stock directly to the Partnership. Giving effect to the issuance of
those shares to fund the Liberty Acquisition, the Partnership owns 48.0% of
the Common Stock and the Direct Holders own, in the aggregate 50.75% of the
Common Stock.
The acquisition was accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed
based on their fair values as of the acquisition date. The consolidated
financial statements include the operations of Liberty from the date of
acquisition. Goodwill arising from the transaction totaled approximately
$3,780,000 and is being amortized over ten years on a straight line basis.
The following table sets forth selected unaudited pro forma combined
financial information of Bancorp and Liberty for three months ended March 31,
1996 and 1995. The pro forma operating data reflects the effect of the
acquisition of Liberty as if it was consummated at the beginning of each
period presented. The pro forma results are not necessarily indicative of
the results that would have occurred had the acquisition been in effect for
the full years presented, nor are they necessarily indicative of the results
of future operations.
Pro Forma Combined for
Three Months Ended March 31,
-----------------------------
1996 1995
(Unaudited) (Unaudited)
----------- -----------
Interest Income $4,580,000 $4,158,000
Interest Expense 1,750,000 1,653,000
---------- ----------
Net interest income 2,830,000 2,505,000
Provision for loan losses 65,000 210,000
---------- ----------
Net interest income after
provision for loan losses 2,765,000 2,295,000
Non-interest income 282,000 714,000
Non-interest expense 2,664,000 3,122,000
---------- ----------
Net income before taxes 383,000 (113,000)
Income tax(benefit) 151,000 (4,000)
---------- ----------
Net income $ 232,000 $ (109,000)
========== ==========
F-6
<PAGE>
NOTE 4 - LONG LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (FAS) No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which
Bancorp adopted as required on January 1, 1996. Pursuant to this Statement,
companies are required to investigate potential impairments of long-lived
assets, certain identifiable intangibles, and associated goodwill, on an
exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net
cash flows is less than the carrying amount of the asset. The adoption of
FAS 121 did not have a significant impact on Bancorp's financial position or
results of operations.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
SDN Bancorp, Inc. and Subsidiary
In our opinion, the accompanying consolidated statement of condition and the
related consolidated statements of operations, of shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of SDN Bancorp, Inc. (formerly known as SDN Bancorp) and
its subsidiary at December 31, 1995, and the results of their operations and
their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. The
financial statements of SDN Bancorp and subsidiary for the years ended
December 31, 1994 and 1993 were audited by other independent accountants
whose report dated February 3, 1995, did not express an opinion on the
statements for the year ended December 31, 1994 because of substantial doubt
about SDN Bancorp's subsidiary's ability to continue as a going concern and
expressed an unqualified opinion on the statements for the year ended
December 31, 1993.
/s/ Price Waterhouse LLP
San Diego, California
February 2, 1996,
except as to Note 18,
which is as of February 29, 1996
F-8
<PAGE>
SDN BANCORP, INC AND SUBIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
DECEMBER 31,
1995 1994
ASSETS
Cash and due from banks (Note 3) $ 3,640,000 $ 2,842,000
Federal funds sold 2,300,000 -
----------- -----------
Total cash and cash equivalents 5,940,000 2,842,000
Interest-bearing deposits in other
financial institutions 989,000 1,078,000
Held-to-maturity investment securities,
at amortized cost, approximate fair value:
1995 - $7,057,000; 1994 - $4,450,000; (Note 4) 7,009,000 4,535,000
Loans 38,977,000 46,313,000
Less allowance for loan losses 639,000 821,000
----------- -----------
Loans, net (Notes 5, 6 and 7) 38,338,000 45,492,000
Premises and equipment, net (Note 8) 597,000 779,000
Real estate acquired through foreclosure,
net (Note 9) 1,411,000 1,288,000
Accrued interest receivable and other assets 1,621,000 1,672,000
----------- -----------
$55,905,000 $57,686,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Deposits (Note 10):
Demand:
Non-interest-bearing $13,445,000 $12,570,000
Interest-bearing 10,582,000 10,206,000
Savings:
Regular 4,714,000 6,110,000
Money market 8,558,000 10,234,000
Time:
Under $100,000 11,580,000 12,212,000
$100,000 or more 2,552,000 4,544,000
----------- -----------
Total deposits 51,431,000 55,876,000
Accrued expenses and other liabilities 396,000 864,000
Notes payable (Note 2) - 675,000
Mandatory convertible debentures (Notes 2 and 11) 537,000 1,219,000
----------- -----------
Total liabilities 52,364,000 58,634,000
Commitments and contingencies (Note 16)
Shareholders' equity (deficit)(Note 2):
Preferred stock; $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1995 and 1994 - -
Common stock, $.01 par value; 5,000,000 shares
authorized 895,467 issued and outstanding at
December 31, 1995 9,000 -
Common stock, no par value; 10,000,000 shares
authorized; 564,145 issued and outstanding at
December 31, 1994 - -
Additional paid-in capital 7,593,000 2,951,000
Accumulated deficit (4,061,000) (3,899,000)
----------- -----------
Total shareholders' equity (deficit) 3,541,000 (948,000)
----------- -----------
$55,905,000 $57,686,000
=========== ===========
See notes to consolidated financial statements.
F-9
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Interest income:
Interest and fees on loans $4,086,000 $4,044,000 $ 4,109,000
Interest on investment securities,
substantially all taxable 311,000 247,000 290,000
Interest on Federal funds sold 117,000 56,000 87,000
Interest on deposits in financial
institutions 54,000 43,000 69,000
---------- ---------- -----------
Total interest income 4,568,000 4,390,000 4,555,000
---------- ---------- -----------
Interest expense:
Demand deposits 149,000 167,000 176,000
Savings deposits 346,000 451,000 554,000
Time deposits (Note 10) 1,075,000 727,000 670,000
Debentures and other 181,000 184,000 161,000
---------- ---------- -----------
Total interest expense 1,751,000 1,529,000 1,561,000
---------- ---------- -----------
Net interest income 2,817,000 2,861,000 2,994,000
Provision for loan losses (Note 7) 295,000 583,000 1,085,000
---------- ---------- -----------
Net interest income after provision
for loan losses 2,522,000 2,278,000 1,909,000
---------- ---------- -----------
Non-interest income:
Service charges 464,000 464,000 494,000
Other income 232,000 202,000 161,000
---------- ---------- -----------
Total non-interest income 696,000 666,000 655,000
---------- ---------- -----------
Non-interest expenses:
Salaries and employee benefits 1,811,000 1,905,000 2,052,000
Professional, regulatory and
other services 346,000 335,000 434,000
Occupancy and equipment (Note 16) 861,000 877,000 988,000
Legal 113,000 124,000 244,000
Insurance 114,000 117,000 128,000
Losses and carrying costs of real
estate acquired through foreclosure
(Note 9) 531,000 222,000 182,000
Other 515,000 353,000 512,000
---------- ---------- -----------
Total non-interest expenses 4,291,000 3,933,000 4,540,000
---------- ---------- -----------
Loss before income tax benefit and
extraordinary item (1,073,000) (989,000) (1,976,000)
Income tax benefit (Note 15) 443,000 - -
---------- ---------- -----------
Loss before extraordinary item (Note 2) (630,000) (989,000) (1,976,000)
Extraordinary Item:
Gain from forgiveness of indebtness,
net of $443,000 income taxes (Note 2) 625,000 - -
---------- ---------- -----------
Net loss $ (5,000) $ (989,000) $(1,976,000)
=========== ========== ===========
Net income (loss) per common share:
Loss before extraordinary item $ ( 2.35) $ (18.41) $ (36.78)
Extraordinary item - gain from
forgiveness of indebtness, net 2.33 - -
---------- ---------- -----------
Net loss $ (.02) $ (18.41) $ (36.78)
========== ========== ===========
See notes to consolidated financial statements.
F-10
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
<TABLE>
ADDITIONAL
NUMBER OF COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 564,145 $2,951,000 $ - $ (934,000) $ 2,017,000
Net loss - - - (1,976,000) (1,976,000)
-------- ---------- ---------- ----------- -----------
Balance at December 31, 1993 564,145 2,951,000 - (2,910,000) 41,000
Net loss - - - (989,000) (989,000)
-------- ---------- ---------- ----------- -----------
Balance at December 31, 1994 564,145 2,951,000 - (3,899,000) (948,000)
Merger and reverse stock
split (1 for 21)(Note 12) (537,281) (2,951,000) 2,951,000 - -
Stock dividend (Note 2) 26,864 1,000 156,000 (157,000) -
Issuance of common stock 841,739 8,000 4,486,000 - 4,494,000
Net loss - - - (5,000) (5,000)
-------- ---------- ---------- ----------- -----------
Balance at December 31, 1995 895,467 $ 9,000 $7,593,000 $(4,061,000) $ 3,541,000
======== ========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
SND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net loss $ (5,000) $ (989,000) $ (1,976,000)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Provision for loan losses and
real estate acquired through
foreclosure 678,000 715,000 1,171,000
Depreciation and amortization 201,000 204,000 227,000
Decrease (increase) in accrued
interest receivable 15,000 (43,000) 70,000
Increase (decrease) in accrued
interest payable (183,000) 146,000 33,000
Extraordinary item - gain on
forgiveness of indebtness, net (625,000) - -
Deferred income tax benefit (443,000) - -
Other - net 188,000 223,000 79,000
----------- ----------- ------------
Net cash (used) provided by
operating activities (174,000) 256,000 (396,000)
----------- ----------- ------------
Investing activities:
Net decrease in interest-bearing
deposits in other financial
institutions 89,000 191,000 389,000
Purchases of held-to-maturity
investment securities (5,890,000) (3,110,000) (250,000)
Proceeds from maturities of
held-to-maturity investment securities 3,416,000 2,945,000 676,000
Net decrease in loans 5,807,000 923,000 4,902,000
Net purchases of premises and equipment (19,000) (62,000) (73,000)
Proceeds from sales of real estate
acquired through foreclosure 476,000 1,277,000 844,000
----------- ----------- ------------
Net cash provided by investing
activities 3,879,000 2,164,000 6,488,000
----------- ----------- ------------
Financing activities:
Net decrease in deposits (4,445,000) (3,775,000) (16,498,000)
Repayment of notes payable (656,000) - (100,000)
Net proceeds from issuance of
notes payable - 14,000 211,000
Proceeds from issuance of common stock 4,494,000 - -
----------- ----------- ------------
Net cash used by financing
activities (607,000) (3,761,000) (16,387,000)
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents 3,098,000 (1,341,000) (10,295,000)
Cash and cash equivalents at
beginning of year 2,842,000 4,183,000 14,478,000
----------- ----------- ------------
Cash and cash equivalent at
end of year $ 5,940,000 $ 2,842,000 $ 4,183,000
=========== =========== ============
Supplemental Disclosure of Cash Flow
Activities:
Cash paid for income taxes $ 2,000 $ 2,000 $ 2,000
=========== =========== ============
Cash paid for interest $ 1,673,000 $ 1,384,000 $ 1,528,000
=========== =========== ============
Supplemental Disclosure of Non-Cash
Flow Activities:
Loans transferred to real estate
acquired through foreclosure $ 982,000 $ 1,251,000 $ 1,537,000
=========== =========== ============
Other real estate sold and financed
by Bank $ 371,000 $ 377,000 $ -
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
SDN Bancorp, Inc., a Delaware corporation, is sole owner of San Dieguito
National Bank ("Bank"), a federally-chartered commercial bank.
NATURE OF OPERATIONS
The Bank operates two branches in a suburban community of San Diego County,
California. The Bank's primary source of revenue is providing commercial
banking services to customers, who are predominately small and middle-market
businesses and individuals.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The accounting and reporting policies of SDN Bancorp, Inc. and subsidiary
("Bancorp") are in accordance with generally accepted accounting principles
and conform to prevailing practices within the banking industry. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. A summary of the
significant accounting policies used in the preparation of these financial
statements follows.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components - interest rate risk, credit risk and market risk. The Bank is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-bearing assets. Credit risk is the risk of default on the
Bank's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results
from changes in the value of assets and liabilities which may impact,
favorably or unfavorably, the realizability of those assets and liabilities.
The Bank is subject to regulations of various governmental agencies. These
regulations can and do change significantly from period to period. The Bank
also undergoes periodic examinations by the regulatory agencies, which may
subject it to changes in asset valuations, in amounts of required loss
allowances and in operating restrictions resulting from the regulators'
judgments based on information available to them at the time of their
examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the SDN Bancorp, Inc. include the
accounts of the Bank after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES
During 1994, the Bank adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), which requires investments to be classified into three
categories: held-to-maturity, trading, or available-for-sale. SFAS 115
requires that debt securities that the Bank has the positive intent and
ability to hold to maturity be classified as held to maturity. At December
31, 1995 and 1994, the Bank classified all of its investment securities as
held-to-maturity.
F-13
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
Held-to-maturity investment securities are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. Premiums and
discounts are amortized and accreted to operations using the straight-line
method which management believes approximates the interest method.
Management has the intent and the Bank has the ability to hold these assets
as long-term investments until their expected maturities. Under certain
circumstances (including the significant deterioration of the issuer's credit
worthiness or a significant change in tax-exempt status or statutory or
regulatory requirements), securities held to maturity may be sold or
transferred to another classification.
Gains and losses realized on sales of investment securities are generally
determined on the specific identification method and are included in other
income.
LOANS AND LOAN FEES
Loans are stated at the principal amount outstanding, net of unearned
discounts and fees. Loan origination fees and certain direct costs are
deferred and recognized as an element of interest income over the life of the
related loans. Net deferred loan origination fees were $45,000 and $54,000 at
December 31, 1995 and 1994, respectively.
ALLOWANCE FOR LOAN LOSSES
A provision for possible losses on loans is charged to expense when, in the
opinion of management, such losses are expected to be incurred or are
inherent in the portfolio. Losses on loans secured by real estate are
usually indicated when the fair value of the underlying security is estimated
to be less than the carrying value of the loan.
The accompanying consolidated financial statements require the use of
management estimates to calculate the allowance for loan losses. These
estimates are inherently uncertain and their accuracy dependson the outcome
of future events. Management's estimates are based upon previous loan loss
experience, current economic conditions, volume, growth and composition of
the loan portfolio, the value of collateral, and other relevant factors. The
Bank's lending is concentrated in Southern California which has recently
experienced adverse economic conditions including declining real estate
values. These factors have adversely affected borrowers' ability to repay
loans. Although management believes the level of the allowance as of
December 31, 1995 and 1994 is adequate to absorb losses inherent in the loan
portfolio, additional decline in the local economy may result in increasing
losses that cannot reasonably be predicted at this time. Such losses may
also result in unanticipated reduction of the Bank's capital.
During 1995, the Bank adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as
amended by SFAS 118, "Accounting for Loan Impairment-Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is deemed to be impaired
when, based on current information and events, it is probable that a
creditor may not collect amounts due according to the original contractual
terms of, and as scheduled in, the original loan agreement. SFAS 114
requires that impaired loans be measured using one of the following methods:
(i) the present value of expected cash flows discounted at the loan's
effective interest rate; (ii) the observable value of the loan's market
price; or (iii) the fair value of the collateral if the loan is collateral
dependent. The effect of adoption of SFAS 114 on the Bank's financial
position and results of operations was not considered by management to be
significant. Cash receipts from impaired loans placed on non-accrual status
are first applied to reduce principal.
NONPERFORMING LOANS AND PAST DUE LOANS
Included in the nonperforming loan category are loans which have been
categorized by management as nonaccrual, because collection of interest is
doubtful, and loans which have been restructured to provide a reduction in
the interest rate or a deferral of interest or principal payments.
F-14
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status,
unless the loan is in the process of collection and the underlying collateral
fully supports the carrying value of the loan. If the decision is made to
continue accruing interest on the loan, periodic reviews are made to confirm
the accruing status of the loan. When a loan is placed on nonaccrual status,
interest accrued during the current year prior to the judgment of
uncollectibility is charged to operations. Generally, any payments received
on nonaccrual loans are applied first to outstanding loan amounts and next to
the recovery of charged-off loan amounts. Any excess is treated as recovery
of lost interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture,fixtures, and equipment is computed
using the straight-line method over the estimated useful lives, which range
from two to fifteen years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or
the remaining lease term, whichever is shorter. Expenditures for betterments
and major repairs are capitalized and ordinary maintenance and repairs are
charged to operations as incurred.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The Bank records real estate acquired through foreclosure or "deed in lieu
of" as the lesser of the outstanding loan amount or fair value less estimated
costs to sell, at the time of foreclosure. Any resulting loss on foreclosure
is charged to the valuation allowance for loan losses and a new basis is
established in the property. A valuation allowance is established to reflect
declines in value subsequent to foreclosure, if any, below the new basis.
Required developmental costs associated with foreclosed property under
construction are capitalized and considered in determining the fair value of
the property. Operating expenses of such properties, net of related income,
and gains and losses on their disposition are included in other non-interest
expenses.
INCOME TAXES
The Bancorp provides for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). Under the liability method
which is prescribed by SFAS 109, a deferred tax asset and/or liability is
computed for both the expected future impact of differences between the
financial statement and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS 109 also requires the establishment of a valuation
allowance, if necessary, to reflect the likelihood of realization of deferred
tax assets. The effect of tax rate changes are to be reflected in income in
the period such changes are enacted.
Deferred income taxes are provided by applying statutory tax rates in effect
at the balance sheet date to temporary differences between the book basis and
the tax basis of assets and liabilities. The resulting deferred tax assets
and liabilities are adjusted to reflect changes in tax laws or rates. The
deferred tax assets have been fully reduced by a valuation allowance as
management believes that it is more likely than not that the deferred tax
assets will not be realized.
CASH EQUIVALENTS
Cash and cash equivalents include cash, amounts due from banks, and Federal
funds sold. Generally, Federal funds are sold for a one-day period.
F-15
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the year and dilutive common stock
equivalents. The weighted average number of common shares used to compute
earnings per share was 268,198 for the year ended December 31, 1995 and
53,728 for both the years ended 1994 and 1993. All per share amounts have
been restated to give effect to the one for twenty-one reverse stock split
and the 26,864 common stock dividend declared during September 1995.
The assumed conversion of the mandatory convertible debentures ("Debentures")
is anti-dilutive for the years ended December 31, 1995, 1994 and 1993.
Therefore, primary loss per share and loss per share assuming full dilution
are the same for those years.
NOTE 2 - MERGER AND RECAPITALIZATION
On September 27, 1995, SDN Bancorp ("Bancorp-CA"), a California corporation,
reincorporated under Delaware law through a merger ("Merger") with SDN
Bancorp, Inc. ("Bancorp"), a Delaware corporation and wholly-owned subsidiary
of Bancorp-CA, with Bancorp constituting the surviving corporation. In
connection with the Merger, each Bancorp-CA shareholder received one share of
common stock (the "Common Stock") of Bancorp for twenty-one shares of common
stock of Bancorp-CA.
On September 28, 1995, in accordance with the Stock Purchase Agreement as
defined below, Bancorp placed an additional 26,864 shares into escrow, to be
distributed, either partially or entirely, to the holders of the shares of
Common Stock outstanding as of September 28, 1995, or to the New Investors,
as defined below, depending upon the outcome of certain contingencies. The
rights to receive the additional shares in escrow are not detachable from the
shares of common stock. The placing of these shares into escrow has been
accounted for as a stock dividend.
On September 30, 1995, Bancorp issued and sold a total of 841,739 shares (the
"Shares") of Common Stock to a Partnership ("Partnership") and certain
investors in the Partnership (collectively, "New Investors") in accordance
with a Stock Purchase Agreement dated July 21, 1995 ("Stock Purchase
Agreement"). The aggregate consideration paid for the Shares was $4,900,000
in cash. After transaction costs of $406,000, Bancorp realized net proceeds
of $4,494,000. The Shares represent, in the aggregate, 94% of the shares of
Common Stock outstanding immediately after such issuance. If the New
Investors ultimately receive all of the additional shares of Common Stock
held in escrow, their interest will increase to 97% of the outstanding shares
of common stock.
As contemplated by the Stock Purchase Agreement, the purchase of the Shares
was conditioned upon, among other things, the prior consummation of the
Merger and forgiveness of indebtness of $1,068,000, net of tax of $443,000.
Debt forgiven consisted of $682,000 of debentures, $19,000 of notes payable
and $367,000 of accrued interest and advances from directors. The aggregate
amount of forgiven debt has been reflected as an extraordinary gain in the
Statement of Operations. In addition, between September 30, 1995 and October
12, 1995, $656,000 in principal plus $102,000 of accrued interest on notes
payable was repaid from the recapitalization proceeds. The forgiveness of
indebtness together with the sale of the shares to the New Investors
represents the Recapitalization ("Recapitalization").
Prior to September 30, 1995, the Bank was considered "significantly
undercapitalized" under the Prompt Corrective Action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). As
part of the Recapitalization, Bancorp contributed approximately $3.2 million
of capital to the Bank on September 30, 1995. As a result Bancorp and the
Bank were considered "well capitalized" for Federal regulatory purposes as of
that date.
F-16
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
The Bank was operating under an agreement (the "OCC Agreement") entered into
during September 1992, with the Office of the Comptroller of the Currency
("OCC") which, among other matters, required the Bank to achieve and maintain
certain capital ratios. On October 23, 1992, Bancorp signed a Memorandum of
Understanding ("MOU") with the Federal Reserve Bank ("FRB"), which confirmed
a plan to address certain concerns. Upon completion of the Recapitalization
as described above, the OCC terminated the OCC Agreement and the FRB
terminated the MOU.
NOTE 3 - CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Included in cash and due from banks in the consolidated
statements of condition are restricted amounts aggregating $468,000 at
December 31, 1995 and $490,000 at December 31, 1994.
NOTE 4 - INVESTMENT SECURITIES
All investment securities are classified as held-to-maturity by the Bank.
The amortized cost and estimated market value of investments are as follows:
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSS VALUE
U.S. Treasury $1,403,000 $16,000 $ - $1,419,000
U.S. Government agencies 4,839,000 15,000 (3,000) 4,851,000
Municipal bonds 687,000 10,000 - 697,000
Mortgage-backed securities 80,000 10,000 - 90,000
---------- ------- -------- ----------
Total $7,009,000 $51,000 $ (3,000) $7,057,000
========== ======= ======== ==========
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSS VALUE
U.S. Treasury $2,396,000 $ - $(19,000) $2,377,000
U.S. Government agencies 1,255,000 - (74,000) 1,181,000
Municipal bonds 793,000 1,000 - 794,000
Mortgage-backed securities 91,000 7,000 - 98,000
---------- ------- -------- ----------
Total $4,535,000 $ 8,000 $(93,000) $4,450,000
========== ======= ======== ==========
F-17
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
ESTIMATED
AMORTIZED FAIR
COST VALUE
Due in one year or less $3,980,000 $4,013,000
Due after one year through five years 2,949,000 2,954,000
---------- ----------
Total 6,929,000 6,967,000
Mortgage-backed securities 80,000 90,000
---------- ----------
Total $7,009,000 $7,057,000
========== ==========
Investment securities with an amortized cost of $4,522,000 and $4,535,000 and
an estimated market value of $4,560,000 and $4,450,000 at December 31, 1995
and 1994, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
NOTE 5 - LOANS
The loan portfolio consists of the various types of loans made principally to
borrowers located in San Diego County. All loans in the Bank's loan
portfolio are classified as held to maturity and are classified by major type
as follows:
DECEMBER 31,
1995 1994
Commercial $16,188,000 $18,936,000
Real estate - mortgage 15,710,000 18,060,000
Real estate - construction 599,000 1,170,000
Consumer 6,525,000 8,201,000
----------- -----------
39,022,000 46,367,000
Less:
Allowance for loan losses (639,000) (821,000)
Unearned fees (45,000) (54,000)
----------- -----------
Total $38,338,000 $45,492,000
=========== ===========
As of December 31, 1995 and 1994, loans outstanding to directors, officers
and entities with which these individuals are associated, which in aggregate
exceed $60,000 per individual, were $173,000 and $317,000, respectively. In
the opinion of management, all transactions entered into between the Bank and
such related parties have been and are in the ordinary course of business,
and made on the same terms and conditions consistent with the Bank's general
lending policies similar to transactions with unaffiliated persons.
F-18
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
An analysis of activity with respect to these related party loans is as
follows:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Beginning balance $ 317,000 $422,000 $ 453,000
New loans 61,000 56,000 74,000
Repayments/reductions (23,000) (86,000) (105,000)
Other - no longer related party (182,000) (75,000) -
--------- -------- ---------
Ending balance $ 173,000 $317,000 $ 422,000
========= ======== =========
NOTE 6 - NONPERFORMING LOANS AND PAST DUE LOANS
The following table presents information relating to nonperforming loans and
past due loans:
DECEMBER 31,
1995 1994
Nonaccrual loans, not restructured $1,492,000 $ 616,000
90 days or more past due loans, not on nonaccrual 46,000 826,000
Restructured loans 82,000 1,050,000
---------- ----------
Total $1,620,000 $2,492,000
========== ==========
Loans aggregating $1,361,000 at December 31, 1995 have been designated as
impaired in accordance with SFAS 114 as amended by SFAS 118. The total
allowance for loan losses related to these loans was $196,500 at December 31,
1995. The average balance of impaired loans during 1995 was $1,985,000.
Interest income on impaired loans of $10,000 was recognized for cash payments
received in 1995. Loans having carrying values of $982,000 were transferred
to foreclosed real estate in 1995. The Bank is not committed to lend
additional funds to debtors whose loans have been modified.
With respect to the above nonperforming loans, the following table presents
interest income actually earned and additional interest income that would
have been earned under the original terms of the loans:
YEAR ENDED
DECEMBER 31,
1995 1994
Nonaccrual loans:
Income recognized $ 10,000 $ 3,000
Foregone income 192,000 74,000
Restructured loans:
Income recognized - 16,000
Foregone income 3,000 74,000
F-19
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses is as follows:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Balance at beginning of year $ 821,000 $ 823,000 $ 771,000
Provision for loan losses 295,000 583,000 1,085,000
Loans charged off (702,000) (671,000) (1,095,000)
Loan recoveries 225,000 86,000 62,000
--------- --------- -----------
Balance at end of year $ 639,000 $ 821,000 $ 823,000
========= ========= ===========
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized as
follows:
1995 1994
Furniture, fixtures, and equipment $ 1,424,000 $ 1,423,000
Leasehold improvements 1,323,000 1,319,000
----------- -----------
2,747,000 2,742,000
Less accumulated depreciation and
amortization (2,150,000) (1,963,000)
----------- -----------
Premises and equipment, net $ 597,000 $ 779,000
=========== ===========
NOTE 9 - REAL ESTATE ACQUIRED THROUGH FORECLOSURE
An analysis of activity in the allowance for credit losses on other real
estate is as follows:
1995 1994
Balance at beginning of year $ 3,000 $ 65,000
Provision charged to expense 383,000 132,000
Charge-offs (66,000) (194,000)
-------- ---------
Balance at end of year $320,000 $ 3,000
======== =========
F-20
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 10 - DEPOSITS
Included in interest-bearing deposits are certificates of deposit in amounts
of $100,000 or more. These certificates and their remaining maturities at
December 31, 1995 and 1994 are as follows:
DECEMBER 31,
1995 1994
Three months or less $1,952,000 $2,204,000
Four through six months 300,000 1,450,000
Seven through twelve months 200,000 790,000
Thereafter 100,000 100,000
---------- ----------
Total $2,552,000 $4,544,000
========== ==========
Interest expense for certificates of deposit in amounts of $100,000 or more
was $218,000 and $155,000 for the years ended December 31, 1995 and 1994,
respectively.
NOTE 11 - MANDATORY CONVERTIBLE DEBENTURES
The mandatory convertible debentures bear interest at Wall Street Journal
prime plus 3.0%, payable quarterly. The debentures are mandatorily
convertible at May 30, 1998 into Bancorp common stock, at a rate equal to the
lower of: (i) $52.50 per share (subject to certain anti-dilutive adjustments
and the power of the Bancorp's Board of Directors to reduce the conversion
price), or (ii) the then current fair market value per share of Bancorp
common stock. Prior to May 30, 1998, the Debentures are convertible, at the
option of the holder, between April 15 and June 15 of each calendar year, or
within 60 days after the date of any Notice of Redemption by the Bancorp, at
a price of $52.50 per share (subject to anti-dilutive adjustments and the
power of the Bancorp's Board of Directors to reduce the conversion price).
The Debentures are not subject to any sinking fund requirements and are
subordinated in right of payment to the obligations of the Bancorp under any
other indebtedness. At the Bancorp's option, the Debentures are redeemable,
subject to FRB approval, on 70 days notice at 105% of par if the notice is
sent prior to March 1, 1996, and at 100% of par if the notice is sent
thereafter. The indenture does not provide for a right of acceleration of
Debentures upon a default in payment of interest or principal or in the
performance of any covenant in the Debentures or the indenture, and no
trustee is appointed under the indenture to enforce the rights of Debenture
holders. Prior to conversion of the Debentures, a Debenture holder has none
of the rights or privileges of a shareholder of the Bancorp.
NOTE 12 - INTEREST RATE RISK
The Bank is principally engaged in providing short-term commercial loans with
interest rates that fluctuate with various market indices and short-term,
variable-rate real estate loans. These loans are primarily funded through
short-term demand deposits and certificates of deposit with fixed rates. At
December 31, 1995, the Bank had interest-earning assets of $49,189,000 having
a weighted average effective yield of 8.71% and interest-bearing liabilities
of $38,080,000 with a weighted average rate of 3.19%.
F-21
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the bank adopted Statement of Financial Accounting Standard No.
107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"),
which requires disclosure of estimated fair values about financial
instruments, whether or not recognized in the statement of financial
condition, for which it is practical to estimate that value. In cases where
quoted market prices are not available, fair value estimates are based on the
present value of expected future cash flows, or other valuation techniques,
all of which are significantly affected by the assumptions used therein.
Accordingly, most fair value estimates cannot be substantiated by comparison
to independent market quotes and could not be realized from offering for sale
the Bancorp's entire holdings of a particular financial instrument at one
time. Furthermore, management does not intend to dispose of significant
portions of all of its financial instruments and, thus, any aggregate
unrealized gain or loss should not be interpreted as a forecast of future
earnings and cash flows.
SFAS 107 excludes certain financial instruments from its disclosure
requirements, such as equity investments in consolidated subsidiaries, and
obligations for pension and other postretirement benefits and deferred
compensation arrangements, among others. In addition, fair value estimates
do not attempt to estimate the value of anticipated future business, such as
trust and core deposit relationships, and the value of assets and liabilities
that are not considered financial instruments such as deferred tax assets,
intangibles, and premises and equipment.
The fair values of financial instruments are derived using numerous
subjective assumptions and may not be necessarily indicative of the net
realizable or liquidation value of these instruments. These fair value
estimates involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. The fair values are also
influenced by the estimation methods, including discount rates and cash flow
assumptions, chosen from acceptable alternatives. Comparisons of fair value
information among companies are limited by variability in estimations and
judgments in responding to the requirements of SFAS 107.
In accordance with SFAS 107, the following methods and assumptions were used
to estimate the fair value of each material class of financial instruments at
a specific point in time:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, INTEREST-BEARING DEPOSITS IN
OTHER FINANCIAL INSTITUTIONS, ACCRUED INTEREST RECEIVABLE, ACCRUED EXPENSES
AND OTHER LIABILITIES AND MANDATORILY CONVERTIBLE DEBENTURES
The carrying amount of these financial instruments reasonably approximates
fair value.
INVESTMENT SECURITIES
The fair value of investment securities is based upon quoted market prices.
LOANS
The fair value of loans is based upon the aggregate estimated fair values of
each product type, giving effect to credit quality and time to maturity. The
fair value of fixed rate loans is estimated by discounting expected future
cash flows, using risk-free rates adjusted by estimated credit risk. The
carrying amount of variable rate loans reasonably approximates fair value.
DEPOSITS
The fair value of demand and savings deposits is the amount payable on demand
at the reporting date. The carrying amount for variable rate time deposit
accounts reasonably approximates fair value. The fair value of fixed rate
time deposits is estimated using a discounted cash flow calculation. The
discount rate on such deposits is based upon rates offered as of the
reporting date for deposits with similar remaining maturities.
F-22
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit is
estimated to be the cost to terminate or otherwise settle such obligations
with counterparties. The fair value of such items at the reporting date is
not considered to be material in relation to the financial statements taken
as a whole (Note 14).
The carrying amount and fair value of the Bancorp's financial instruments at
December 31, 1995 and 1994 are as follows:
DECEMBER 31, 1995
CARRYING FAIR
AMOUNT VALUE
Financial assets:
Cash and due from banks $ 3,640,000 $ 3,640,000
Federal funds sold 2,300,000 2,300,000
Interest-bearing deposits in other
financial institutions 989,000 989,000
Held-to-maturity investment
securities held-to-maturity 7,009,000 7,057,000
Loans, net 38,338,000 38,281,000
Accrued interest receivable 391,000 391,000
Financial liabilities:
Deposits 51,431,000 51,327,000
Accrued expenses and
other liabilities 396,000 396,000
Mandatory convertible
debentures 537,000 537,000
NOTE 14 - 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 loan commitments and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those
instruments. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, and other income-producing commercial
properties.
F-23
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
The Bank's lending activities are concentrated in San Diego County,
California. The Bank's commercial loan portfolio is diverse as to the
industries represented. The real estate portfolio includes credits to many
different borrowers for a variety of projects and for residential real estate.
Undisbursed loan commitments amount to approximately $5,783,000 and
$7,098,000 at December 31, 1995 and 1994, respectively. Standby letters of
credit aggregate approximately $154,000 and $237,000 at December 31, 1995 and
1994, respectively.
NOTE 15 - INCOME TAXES
The income tax (benefit) from continuing operations is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Current
Federal $ - $ - $ -
State - - -
--------- --------- ---------
- - -
Deferred
Federal (322,000) - -
State (121,000) - -
--------- --------- ---------
(443,000) - -
--------- --------- ---------
$(443,000) $ - $ -
========== ========= =========
The income tax expense from extraordinary item is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Current
Federal $ - $ - $ -
State - - -
--------- --------- ---------
- - -
Deferred
Federal 322,000 - -
State 121,000 - -
--------- --------- ---------
443,000 - -
--------- --------- ---------
$ 443,000 $ - $ -
========= ========== =========
F-24
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
Deferred taxes are provided for the temporary differences which caused them.
Deferred tax assets at December 31, 1995 and 1994, are as follows:
DECEMBER 31,
1995 1994
Deferred tax assets:
Net operating loss carryforwards $ 1,376,000 $ 1,257,000
Differences between book and tax basis
of premises and equipment 157,000 77,000
Real estate acquired through foreclosure 133,000 -
State taxes - 120,000
Allowance for loan losses 113,000 261,000
General business credit carryforward 77,000 -
Alternative minimum tax credit 12,000 12,000
Other 86,000 81,000
----------- -----------
1,954,000 1,808,000
Less valuation allowance (1,954,000) (1,808,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
The provision (benefit) for federal income taxes differs from the amount
computed by applying the federal income tax statutory rate as follows:
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
Loss from continuing operations:
Taxes calculated at statutory rate $(365,000) $(336,000) $(672,000)
Increase (decrease) resulting from:
State tax, net of federal
tax effect (80,000) (72,000) (145,000)
Tax-exempt interest (15,000) (22,000) (23,000)
Officer's life insurance (9,000) (9,000) (9,000)
Deferred benefit write-off 12,000 - -
General business credit (77,000) - -
Other (55,000) 53,000 68,000
Valuation allowance 146,000 386,000 781,000
--------- --------- ---------
Total $(443,000) $ - $ -
========= ========= =========
At December 31, 1995, tax loss carryforwards and tax credit carryforwards of
approximately $5,289,000 and $90,000, respectively, are available to offset
future taxable income. The tax loss carryforwards expire in 2007 through
2010. As a result of the passage of the Tax Reform Act of 1986, there may be
certain limitations which could prohibit the Bank from fully utilizing the
benefits of the above credit carryforwards. Because of a substantial change
in Bancorp's ownership resulting from the Recapitalization on September 30,
1995, the annual amount of net operating loss carryforwards, generated prior
to the ownership change, that may be utilized is limited to approximately
$300,000. Subsequent significant changes in ownership could result in
additional limitations on the utilization of net operating loss carryforwards.
F-25
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEASES
A summary of noncancelable future operating lease commitments follows:
1996 $404,000
1997 399,000
1998 405,000
1999 410,000
2000 416,000
Thereafter 1,271,000
----------
Total $3,305,000
==========
It is expected that in the normal course of business, leases that expire will
be renewed or replaced by leases on other property or equipment.
Rent expense under all noncancelable operating lease obligations aggregated
$417,000, $421,000, and $474,000 for 1995, 1994 and 1993, respectively. Most
of the leases provide that the Bank pay taxes, maintenance, insurance, and
certain other operating expenses applicable to the leased premises in
addition to the monthly minimum payments.
LITIGATION
From time to time the Bank is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes that the ultimate liability, if
any, arising from such actions will not have a material effect on the Bank's
financial position.
PENDING ACQUISITION
Bancorp, the Partnership and Liberty National Bank ("Liberty") entered into
an Agreement and Plan of Merger (the "Merger Agreement"), dated as of October
26, 1995, providing for the acquisition of Liberty by Bancorp. Liberty is
based in Huntington Beach, California and at September 30, 1995 had total
assets of $146 million and total deposits of $130 million (unaudited). The
acquisition will be affected through a consolidation of Liberty and a
subsidiary of Bancorp in which Liberty's stockholders receive cash for their
shares. The Partnership intends to infuse most of the additional capital
necessary to affect the transaction for Bancorp. The Merger Agreement
provides that Liberty stockholders will receive the greater of $14.80 per
share or 130% of Liberty's book value (subject to certain adjustments)
shortly prior to the closing, calculated on a fully diluted basis, in each
case subject to possible small upward adjustments depending upon the timing
of the closing. There are currently 978,160 shares of Liberty common stock
outstanding, resulting in a minimum aggregate purchase price of approximately
$14.5 million (unaudited).
F-26
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY INFORMATION
The following are condensed financial statements of SDN Bancorp, Inc. (Parent
company only) as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995:
1995 1994
Condensed Statements of Condition
---------------------------------
ASSETS
Cash in subsidiary $ 80,000 $ 3,000
Interest bearing deposits 198,000 1,526,000
Investment in subsidiary 3,832,000 -
Receivables and other assets 88,000 -
----------- -----------
Total assets $ 4,198,000 $ 1,529,000
=========== ===========
Liabilities and Shareholders'
Equity (Deficit)
Accrued expenses $ 120,000 $ 283,000
Mandatory convertible debentures 537,000 1,219,000
Due to subsidiary - -
Notes payable to subsidiary - 300,000
Notes payable to shareholders - 675,000
----------- -----------
Total liabilities 657,000 2,477,000
----------- -----------
Shareholders' equity (deficit):
Common stock 9,000 2,951,000
Additional paid-in capital 7,593,000 -
Accumulated deficit (4,061,000) (3,899,000)
----------- -----------
Total shareholders'
equity (deficit) 3,541,000 (948,000)
----------- -----------
Total liabilities and
shareholders' equity
(deficit) $ 4,198,000 $ 1,529,000
=========== ===========
F-27
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
Condensed Statements of Operations 1995 1994 1993
----------------------------------
Interest income $ 4,000 $ - $ -
Expenses:
Interest expense 205,000 211,000 185,000
Other expense 9,000 - 7,000
----------- --------- -----------
Total expenses 214,000 211,000 192,000
----------- --------- -----------
Loss before income tax benefit,
extraordinary item and
undistributed net loss of
subsidiary (210,000) (211,000) (192,000)
Income tax benefit 91,000 - -
----------- --------- -----------
Income (loss) before extraordinary
item and undistributed net loss
of subsidiary (119,000) (211,000) (192,000)
Extraordinary item - gain on
extinguishment of debt, net 625,000 - -
----------- --------- -----------
Income (loss) before undistributed
net loss of subsidiary 506,000 (211,000) (192,000)
Undistributed net loss of subsidiary (511,000) (778,000) (1,784,000)
----------- --------- -----------
Net loss $ (5,000) $(989,000) $(1,976,000)
=========== ========= ===========
Condensed Statements of Cash Flows 1995 1994 1993
----------------------------------
Operating activities:
Net loss $ (5,000) $(989,000) $(1,976,000)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Extraordinary item - gain from
extinguishment of debt, net (625,000) - -
Undistributed net loss of
subsidiary 511,000 778,000 1,784,000
Other - net 26,000 199,000 52,000
----------- --------- -----------
Net cash used by operating
activities (93,000) (12,000) (140,000)
----------- --------- -----------
Investing activities:
Investment in subsidiary (3,170,000) - -
Net increase in interest
bearing deposits (198,000) - -
----------- --------- -----------
Net cash used by investing
activities (3,368,000) - -
----------- --------- -----------
Financing activities:
Repayment of notes payable (956,000) - (100,000)
Proceeds from issuance of notes
payable - 14,000 211,000
Proceeds from issuance of common
stock 4,494,000 - -
----------- --------- -----------
Net cash provided by financing
activities 3,538,000 14,000 111,000
----------- --------- -----------
Net increase (decrease) in cash
in subsidiary 77,000 2,000 (29,000)
Cash in subsidiary at beginning
of year 3,000 1,000 30,000
----------- --------- -----------
Cash in subsidiary at end of year $ 80,000 $ 3,000 $ 1,000
=========== ========= ===========
F-28
<PAGE>
SDN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
There are legal limitations restricting the extent to which the Bank can lend
or dividend funds to the Bancorp. Any such extensions of credit are subject
to strict collateral requirements. Dividends declared by the Bank in any
calendar year may not, without the approval of the OCC, exceed net earnings,
as defined, for that year combined with its retained net earnings for the
preceding two years, less any required transfers to surplus. Federal banking
law also prohibits the Bank from extending credit to the Parent in excess of
10% of the Bank's capital stock and surplus, as defined, or approximately
$447,000 at December 31, 1995.
NOTE 18 - SUBSEQUENT EVENT
On February 29, 1996, Bancorp executed a letter of intent for a business
combination with Commerce Security Bank ("Commerce"). Commerce is
headquartered in Sacramento, California with offices in five western states
and at December 31, 1995 had total assets of $213 million and total deposits
of $192 million (unaudited). The acquisition, if consummated, is expected to
be affected through the creation of a new holding company which would acquire
100% of the stock of Commerce and Bancorp. The letter of intent provides
that the Commerce stockholders will receive 90% (150% of 60% of Commerce's
book value) of Commerce's December 31, 1995 book value in cash, which
approximates $14.8 million, and 40% of Commerce's book value in stock. The
Partnership intends to infuse most of the additional capital necessary to
affect the transaction for Bancorp.
F-29
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SDN Bancorp and Subsidiary:
We have audited the accompanying consolidated statements of condition of SDN
Bancorp and subsidiary as of December 31, 1994 and 1993, and the related
statements of operations, shareholders' (deficit) equity, and cash flows for
each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Bancorp's management. Our
responsibility is to express (or disclaim) an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
text 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 report.
In our opinion, the accompanying 1993 and 1992 consolidated financial
statements present fairly, in all material respects, the financial position
of SDN Bancorp and subsidiary at December 31, 1993, and the results of their
operations and cash flows for each of the two years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that SDN Bancorp and its wholly-owned subsidiary, San Dieguito
National Bank, (the "Bank") will continue as going concerns. As described in
Note 2 to the consolidated financial statements, at December 31, 1994, the
Bank did not meet the minimum capital requirements prescribed by the Office
of the Comptroller of the Currency (OCC). The Bank is operating under an
agreement with the OCC that requires it to meet prescribed capital
requirements. If the Bank is unable to comply with the terms of the
agreement, one or more regulatory sanctions may result, including
restrictions as to the source of deposits and the appointment of a
conservator or receiver. These matters raise substantial doubt about the
Bank's (and, consequently, SDN Bancorp's) ability to continue as a going
concern. It is the opinion of management that the future of the Bank will
depend on its ability to obtain additional capital in a timely manner. If
F-30
<PAGE>
such additional capital is not obtained, it is likely that there will be some
form of regulatory intervention (including placing the Bank in
conservatorship) in the operations of the Bank. Management's plans concerning
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Because of the possible material effects of the uncertainty referred to in
the preceding paragraph, we are unable to express, and we do not express, an
opinion on the consolidated financial statements for 1994.
/s/ Deloitte & Touche LLP
February 3, 1995
F-31
<PAGE>
SDN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1994 AND 1993
- ------------------------------------------------------------------------------
ASSETS 1994 1993
Cash and due from banks (Note 3) $ 2,842,000 $ 2,383,000
Federal funds sold - 1,800,000
----------- -----------
Total cash and cash equivalents 2,842,000 4,183,000
Interest bearing deposits in other financial
institutions 1,078,000 1,269,000
Held to maturity investment securities, at amortized
cost, approximate fair value: 1994-$4,450,000;
1993-$4,471,000 (Note 4) 4,535,000 4,370,000
Loans 46,313,000 49,002,000
Less allowance for loan losses 821,000 823,000
----------- -----------
Loans, net (Notes 5, 6 and 7) 45,492,000 48,179,000
Premises and equipment, net (Note 8) 779,000 921,000
Real estate acquired through foreclosure,
net (Note 9) 1,288,000 1,446,000
Accrued interest receivable and other assets 1,672,000 1,548,000
----------- -----------
$57,686,000 $61,916,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Deposits (Note 10)
Demand:
Non interest-bearing $12,570,000 $12,134,000
Interest-bearing 10,206,000 10,661,000
Savings:
Regular 6,110,000 6,133,000
Money market 10,234,000 12,844,000
Time:
Under $100,000 12,212,000 14,604,000
$100,000 or more 4,544,000 3,275,000
----------- -----------
Total deposits 55,876,000 59,651,000
Accrued expenses and other liabilities 864,000 344,000
Notes payable (Note 11) 675,000 661,000
Mandatory Convertible Debentures (Note 12) 1,219,000 1,219,000
----------- -----------
Total liabilities 58,634,000 61,875,000
Commitments and contingencies (Note 17)
Shareholders' (deficit) equity (Note 16):
Preferred stock; 10,000,000 shares authorized;
none issued
Common stock, no par value; 10,000,000
shares authorized; 564,145 issued and outstanding
in 1994 and 1993 2,951,000 2,951,000
Accumulated deficit (3,899,000) (2,910,000)
----------- -----------
Total shareholders' (deficit) equity (948,000) 41,000
----------- -----------
$57,686,000 $61,916,000
----------- -----------
----------- -----------
See notes to consolidated financial statements.
F-32
<PAGE>
SDN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ------------------------------------------------------------------------------
1994 1993 1992
Interest income:
Interest and fees on loans $4,044,000 $ 4,109,000 $6,167,000
Interest on investment securities 247,000 290,000 286,000
Interest on federal funds sold 56,000 87,000 105,000
Interest on deposits in financial
institutions 43,000 69,000 89,000
---------- ----------- ----------
Total interest income 4,390,000 4,555,000 6,647,000
---------- ----------- ----------
Interest expense:
Demand deposits 167,000 176,000 242,000
Savings deposits 451,000 554,000 831,000
Time deposits (Note 10) 727,000 670,000 1,325,000
Debentures and other 184,000 161,000 170,000
---------- ----------- ----------
Total interest expense 1,529,000 1,561,000 2,568,000
---------- ----------- ----------
Net interest income 2,861,000 2,994,000 4,079,000
Provision for loan losses (Note 7) 583,000 1,085,000 350,000
---------- ----------- ----------
Net interest income after
provision for loan losses 2,278,000 1,909,000 3,729,000
---------- ----------- ----------
Non-interest income:
Service charges 464,000 494,000 448,000
Other income 202,000 161,000 132,000
---------- ----------- ----------
Total non-interest income 666,000 655,000 580,000
---------- ----------- ----------
Non-interest expenses:
Salaries and employee benefits 1,905,000 2,052,000 2,292,000
Professional, regulatory and other
services 335,000 434,000 520,000
Occupancy and equipment (Note 17) 877,000 988,000 984,000
Legal 124,000 244,000 94,000
Insurance 117,000 128,000 114,000
Losses and carrying costs of real
estate acquired through foreclosure
(Note 9) 222,000 182,000 33,000
Other 353,000 512,000 503,000
---------- ----------- ----------
Total non-interest expenses 3,933,000 4,540,000 4,540,000
---------- ----------- ----------
Loss before income taxes (989,000) (1,976,000) (231,000)
Income tax benefit (Note 15) - - -
---------- ----------- ----------
Net loss (989,000) (1,976,000) $ (231,000)
---------- ----------- ----------
---------- ----------- ----------
Net loss per share $ (1.75) $ (3.50) $ (.41)
---------- ----------- ----------
---------- ----------- ----------
See notes to consolidated financial statements.
F-33
<PAGE>
SDN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ------------------------------------------------------------------------------
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
Balance at January 1, 1992 $2,951,000 $ (703,000) $ 2,248,000
Net loss - (231,000) (231,000)
---------- ----------- -----------
Balance at December 31, 1992 2,951,000 (934,000) 2,017,000
Net loss - (1,976,000) (1,976,000)
---------- ----------- -----------
Balance at December 31, 1993 2,951,000 (2,910,000) 41,000
Net loss - (989,000) (989,000)
---------- ----------- -----------
Balance at December 31, 1994 $2,951,000 $(3,899,000) $ (948,000)
---------- ----------- -----------
---------- ----------- -----------
See notes to consolidated financial statements.
F-34
<PAGE>
SDN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Operating activities:
Net loss $ (989,000) $ (1,976,000) $ (231,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Allowance for loan losses and real estate
acquired through foreclosure 715,000 1,171,000 350,000
Depreciation and amortization 204,000 227,000 250,000
(Increase) decrease in accrued interest
receivable (43,000) 70,000 132,000
Increase (decrease) in accrued interest payable 146,000 33,000 (55,000)
Other - net 223,000 79,000 9,000
------------ ------------ ------------
Net cash provided (used) by operating
activities 256,000 (396,000) 455,000
------------ ------------ ------------
Investing activities:
Net decrease in interest bearing deposits in
other financial institutions 191,000 389,000 107,000
Purchases of held to maturity investment securities (3,110,000) (250,000) (1,298,000)
Proceeds from maturities of held to maturity
investment securities 2,945,000 676,000 393,000
Net decrease in loans 923,000 4,902,000 12,169,000
Net purchases of premises and equipment (62,000) (73,000) (167,000)
Proceeds from sales of real estate acquired through
foreclosure 1,277,000 844,000 1,412,000
------------ ------------ ------------
Net cash provided by investing activities 2,164,000 6,488,000 12,616,000
------------ ------------ ------------
Financing activities:
Net decrease in deposits (3,775,000) (16,498,000) (11,031,000)
Repayment of notes payable - (100,000) (671,000)
Net proceeds from issuance of notes payable 14,000 211,000 475,000
------------ ------------ ------------
Net cash used by financing activities (3,761,000) (16,387,000) (11,227,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,341,000) (10,295,000) 1,844,000
Cash and cash equivalents at beginning of year 4,183,000 14,478,000 12,634,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,842,000 $ 4,183,000 $ 14,478,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental Disclosure of Cash Flow Activities:
Cash paid for income taxes $ 2,000 $ 2,000 $ 2,000
------------ ------------ ------------
------------ ------------ ------------
Cash paid for interest $ 1,384,000 $ 1,528,000 $ 2,623,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental Disclosure of Non-Cash Flow Activities:
Loans transferred to real estate acquired through
foreclosure $ 1,251,000 $ 1,537,000 $ 1,806,000
------------ ------------ ------------
------------ ------------ ------------
Other real estate sold and financed by Bank $ 377,000 $ - $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
SDN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of SDN Bancorp and subsidiary (the
Bancorp) conform to generally accepted accounting principles and to
prevailing practices within the banking industry. The following is a
description of the more significant policies.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the
Bancorp include the accounts of its wholly-owned subsidiary, San Dieguito
National Bank (the Bank), after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES -- In May 1993 the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
This statement requires that only debt securities that the Bank has the
positive intent and ability to hold to maturity be classified as held to
maturity and reported at amortized cost; all other debt securities are
reported at fair value. Securities not classified as held to maturity or
trading account assets as defined below are classified as available for
sale, with the related unrealized gains and losses excluded from earnings
and reported net of tax as a separate component of shareholders' equity
until realized. The Bank adopted SFAS No. 115 effective January 1, 1994.
In accordance with the provisions of this pronouncement, prior years'
financial statements were not restated. At January 1, 1994, adopting SAFS
No. 115 resulted in no financial statement impact.
Held to maturity investment securities are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. Premiums and
discounts are amortized and accreted to operations using the straight-line
method. Management has the intent and the Bank has the ability to hold these
assets as long-term investments until their estimated maturities. Under
certain circumstances (including the significant deterioration of the
issuer's credit worthiness or a significant change in tax-exempt status or
statutory or regulatory requirements), securities held to maturity may be
sold or transferred to another portfolio.
Available for sale investment securities are carried at fair value.
Unrealized gains and losses are excluded from earnings and reported net of
tax, as a separate component of shareholders' equity until realized.
Securities within the available for sale portfolio may be used as part of
the Bank's assets/liability strategy and may be sold in response to changes
in interest rate risk, prepayment risk or other similar economic factors.
The Bank has no securities classified in this category.
Trading account securities generally comprise securities that are actively
and frequently bought and sold with the objective of generating income on
short-term differences in price. The Bank has no securities classified in
this category.
LOANS AND LOAN FEES -- Loans are stated at the principal amount outstanding,
net of unearned discount and fees. Loan origination fees and certain direct
costs are deferred and recognized as an element of interest income over the
life of the related loans. Net deferred loan origination fees were $54,000
and $82,000 at December 31, 1994 and 1993, respectively.
F-36
<PAGE>
ALLOWANCE FOR LOAN LOSSES -- A provision for possible losses on loans is
charged to expense when, in the opinion of management, such losses are
expected to be incurred or are inherent in the portfolio. Losses on loans
secured by real estate are usually indicated when the fair value of the
underlying security is estimated to be less than the carrying value of the
loan.
The accompanying consolidated financial statements require the use of
management estimates to calculate the allowance for loan losses. These
estimates are inherently uncertain and depend on the outcome of future
events. Management's estimates are based upon previous loan loss experience,
current economical conditions, volume, growth, and composition of the loan
portfolio, the value of collateral and other relevant factors. The Bank's
lending is concentrated in Southern California, which has recently
experienced adverse economic conditions, including declining real estate
values. These factors have adversely affected borrowers' ability to repay
loans. Although management believes the level of the allowance as of
December 31, 1994 is adequate to absorb losses inherent in the loan
portfolio, additional decline in the local economy may result in increasing
losses that cannot reasonably be predicted at this time. Such losses may
also result in unanticipated reduction of the Bank's capital.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan", and No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures", which address the accounting and
reporting by creditors for impairment of certain loans. The Bank has not
adopted the new standards for the current year but must adopt the new
requirements during the year ending December 31, 1995. Management has not
completed an evaluation of the impact of these statements; however, they do
anticipate a material effect on earnings or financial position in the year
of adoption.
NONPERFORMING LOANS AND PAST DUE LOANS -- Included in the nonperforming loan
category are loans which have been categorized by management as nonaccrual
because collection of interest is doubtful and loans which have been
restructured to provide a reduction in the interest rate or a deferral of
interest or principal payments.
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status,
unless the loan is in the process of collection and the underlying
collateral fully supports the carrying value of the loan. If the decision
is made to continue accruing interest on the loan, periodic reviews are
made to confirm the accruing status of the loan. When a loan is placed on a
nonaccrual status, interest accrued during the current year prior to the
judgment of uncollectibility is charged to operations. Generally, any
payments received on nonaccrual loans are applied first to outstanding loan
amounts and next to the recovery of charged-off loan amounts. Any excess is
treated as recovery of lost interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
PREMISES AND EQUIPMENT -- Furniture, fixtures, and equipment are carried at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over their estimated useful lives, which range from two
to fifteen years. Leasehold improvements are amortized using the straight-
line method over the estimated useful lives of the improvements or the
remaining lease term, whichever is shorter. Expenditures for betterments
and major repairs are capitalized and ordinary maintenance and repairs are
charged to operations as incurred.
F-37
<PAGE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE -- The Bank records real estate
acquired through foreclosure or "deed in lieu of" as the lesser of the
outstanding loan amount or fair value less estimated costs to sell, at the
time of foreclosure. Any resulting loss on foreclosure is charged to the
valuation allowance for loan losses and a new basis is established in the
property. A valuation allowance is established to reflect declines in value
subsequent to acquisition, if any, below the new basis. Required
developmental costs associated with foreclosed property under construction
are capitalized and considered in determining the fair value of the
property. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other noninterest
expenses.
INCOME TAXES -- Deferred income taxes are provided by applying statutory tax
rates in effect at the balance sheet data to temporary differences between
the book basis and the tax basis of assets and liabilities. The resulting
deferred tax assets and liabilities are adjusted to reflect changes in tax
laws or rates.
The Bancorp adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), effective January 1, 1993.
This statement supersedes Accounting Principals Board Opinion No 11,
"Accounting for Income Taxes". Adopting SFAS No. 109 resulted in no
cumulative effect on the Bancorp's financial statements for the year
ended December 31, 1993.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Bancorp's net deferred tax asset
as of January 1, 1993 are as follows:
Deferred tax assets:
Allowance for loan losses $ 162,000
Differences between book and tax basis of
premises and equipment 161,000
State taxes 91,000
Net operating loss 181,000
Other 46,000
---------
Less valuation allowance 641,000
(641,000)
---------
Net deferred tax asset $ -
----------
----------
The deferred tax assets have been reduced by a valuation allowance as
management believes that it is more likely than not that the deferred tax
assets will not be realized.
CASH EQUIVALENTS -- Cash equivalents include cash and federal funds sold;
generally, federal funds are sold for a one-day period.
EARNINGS PER SHARE -- Earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year
and dilutive common stock equivalents. The weighted average number of common
shares used to compute earnings per share was 564,145 for 1994, 1993
and 1992.
F-38
<PAGE>
Stock options, which are common stock equivalents, were not dilutive for
1994, 1993 or 1992 and have not been included in the calculation of earnings
per share for 1994, 1993 or 1992. The Mandatory Convertible Debentures (the
Debentures) are not common stock equivalents. In fiscal years 1994, 1993 and
1992, the effect of the Debentures was anti-dilutive. Therefore, primary loss
per share and loss per share assuming full dilution are the same for the
years ended December 31, 1994, 1993 and 1992.
2. Regulatory Matters
On September 21, 1992, the Bank entered into an agreement with the Office
of the Comptroller of the Currency (the "OCC Agreement") to address certain
matters arising from an examination of the Bank's condition conducted by the
OCC as of January 31, 1992.
Under the terms of the OCC Agreement, the Bank was required, among other
things, to: (1) infuse not less than $500,000 of Tier 1 capital to achieve
and maintain Tier 1 capital at least equal to 6.7% of risk-weighted assets
and Tier 1 capital at least equal to 5.1% of actual adjusted total assets
(leverage ratio) by December 31, 1992; (2) achieve and maintain Tier 1
capital at least equal to 9.5% of risk-weighted assets and a leverage ratio
of at least equal to 6% by March 31, 1993 (revised to March 31, 1994);
(3) pay no dividends without the prior written approval of the OCC;
(4) adopt and implement a strategic plan which includes a three-year capital
program and objectives for growth, earnings and reduction in nonperforming
assets; (5) revise the Bank's liquidity and funds management policy; (6)
formulate written policies and procedures governing the use of funds
obtained through a deposit broker; (7) adopt and implement a written program
to collect or strengthen criticized assets; (8) develop and implement a
written loan administration program; (9) modify the Bank's loan review
program to assure timely identification and categorization of problem loans;
and (10) modify the Bank's program to review the adequacy of the allowance
for loan losses to be in accordance with recent regulatory pronouncements.
The OCC conducted another examination of the Bank as of March 31, 1993.
The OCC conclusions in connection with this examination were that the
Bank had satisfied the requirements of above items 1 and 3 through 10
under the OCC Agreement and was in non-compliance only with item 2,
minimum capital levels; as a result certain reporting requirements were
eliminated. In January 1994, the OCC advised the Bank its growth in average
assets would be restricted. Management believes it has complied with this
requirement.
On April 18, 1994, the OCC commenced its 1994 annual examination. The OCC
concluded that the Bank continues to be in non-compliance with above item 2,
minimum capital levels, and in partial compliance with above items 7 and 8.
Management believes it is now in substantial compliance with items 7 and 8.
The following is a summary of the Bank's risk weighted capital and leverage
ratios at December 31, 1994:
MINIMUM
ACTUAL REQUIRED
Bank Only:
Total Capital vs. Risk Adjusted Assets 4.5% 9.5%
Tier 1 Capital vs. Risk Adjusted Assets 3.2% 9.5%
Tier 1 Capital vs. Adjusted Total Assets
(Leverage) 2.6% 6.0%
F-39
<PAGE>
The Bank is considered "significantly undercapitalized" under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and would be considered "critically
undercapitalized" if its ratio of Tier 1 capital to adjusted total assets
(leverage ratio) should equal or be less than 2%. Subject to certain
exceptions, in the case of critically undercapitalized depository
institutions, the appropriate Federal banking agency is required to appoint a
conservator or receiver, generally within 90 days.
As of December 31, 1994, all of the Bancorp's capital ratios are negative.
The difference in the Bank's and Bancorp's capital ratios is because Bancorp
has borrowed funds which do not qualify as Tier 1 capital and has placed
most of such funds into the Bank as additional Tier 1 Capital.
In 1992 and 1993, the Bank submitted and the OCC approved written plans to
achieve adequate capital. An updated Capital Restoration Plan and Strategic
Plan were submitted to the OCC in February 1994. In March 1994, the OCC
approved such plans. In December 1994, the Bank submitted an amendment to
its Capital Restoration Plan to update certain target dates. As of
February 3, 1995, the OCC has not approved the revised plan.
On October 23, 1992, Bancorp signed a Memorandum of Understanding ("MOU")
with the Federal Reserve Bank ("FRB") to confirm a plan to correct concerns
arising from their inspection of the condition of the Bancorp as of March 31,
1992. Bancorp agreed not to pay dividends, add or replace a director or
executive officer, and incur additional debt without the prior approval of
the FRB. In accordance with the MOU, Bancorp submitted a plan to the FRB by
December 30, 1992 which set forth its plan to increase the capital of Bancorp
and address other procedural matters. Revised plans to increase capital are
submitted to the FRB as such plans are submitted to the OCC. In addition,
Bancorp reports quarterly on its progress to correct matters contained in the
MOU. As of December 31, 1994 management of Bancorp believed it was in
compliance with the MOU, except for those items related to increased capital.
If the Bank is unable to comply with the terms of the OCC Agreement or the
MOU, one or more regulatory sanctions may result, including the possible
termination of the Bank's Federal Deposit Insurance Corporation's insured
status. Bancorp has total notes payable of $975,000 at December 31, 1994
(including $300,000 due to the Bank) all with maturities in 1995 and
Mandatory Convertible Debentures of $1,219,000 (see Notes 11 and 12).
Bancorp has not been able to make full and timely interest payments on the
notes or the Debentures during 1994 and does not have current liquidity to
repay the notes as scheduled during 1995. These uncertainties and the net
losses incurred during 1994, 1993 and 1992, among others, may indicate that
the Bancorp and the Bank will be unable to continue as a going concern. The
financial statement impact, if any, from the outcome of these uncertainties
cannot presently be determined. Accordingly, no adjustment that may result
from the resolution of these matters has been made in the accompanying
financial statements.
Management and the directors are taking a number of steps to increase the
capital of both the Bancorp and the Bank or otherwise satisfy the
requirements of the OCC Agreement and the MOU and to provide funds required
to service future debt payments on the Debentures and other Bancorp debt.
This includes many active discussions and negotiations with potential
investors or purchasers. The Bancorp is also using industry professionals for
advice and to provide assistance in locating investors or purchasers. No
assurance can be given as to the eventual outcome of these efforts.
3. Cash and Due from Banks
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. "Cash and due from banks" in the consolidated statements of
condition included amounts so restricted of $490,000 at December 31, 1994
and $543,000 at December 31, 1993.
F-40
<PAGE>
4. Investment Securities
All investment securities are classified as held to maturity by the Bank.
The amortized cost and estimated market value of investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
<S> <C> <C> <C> <C> <C>
U.S. Treasury $2,396,000 $(19,000) $2,377,000 $2,396,000
U.S. government agencies 1,255,000 (74,000) 1,181,000 1,255,000
Municipal bonds 793,000 $1,000 - 794,000 793,000
Mortgage-backed securities 91,000 7,000 - 98,000 91,000
---------- ------ -------- ---------- ----------
Total $4,535,000 $8,000 $(93,000) $4,450,000 $4,535,000
---------- ------ -------- ---------- ----------
---------- ------ -------- ---------- ----------
</TABLE>
DECEMBER 31, 1993
------------------------------------
GROSS ESTIMATED
UNRECOGNIZED MARKET
COST GAIN VALUE
U.S. Treasury $2,522,000 $ 10,000 $2,532,000
U.S. Government agencies 452,000 8,000 460,000
Municipal bonds 1,104,000 54,000 1,158,000
Mortgage-backed securities 292,000 29,000 321,000
---------- -------- ----------
Total $4,370,000 $101,000 $4,471,000
---------- -------- ----------
---------- -------- ----------
The amortized cost and estimated fair value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
ESTIMATED
AMORTIZED FAIR
COST VALUE
Due in one year or less $1,997,000 $1,983,000
Due after one year through five years 2,447,000 2,369,000
---------- ----------
Total 4,444,000 4,352,000
Mortgage-backed securities 91,000 98,000
---------- ----------
Total $4,535,000 $4,450,000
---------- ----------
---------- ----------
Investment securities with an amortized cost of $4,535,000 and $3,870,000
and an estimated market value of $4,450,000 and $3,961,000 at December 31,
1994 and 1993, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
F-41
<PAGE>
5. Loans
The loan portfolio consists of the various types of loans made principally
to borrowers located in San Diego County. All loans in the Bank's loan
portfolio are classified as held to maturity and are classified by major
type as follows:
DECEMBER 31,
--------------------------
1994 1993
Commercial $18,936,000 $19,883,000
Real estate - other 18,060,000 18,034,000
Real estate - construction 1,170,000 2,137,000
Consumer 8,201,000 9,030,000
----------- -----------
Total 46,637,000 49,084,000
Less:
Allowance for loan losses (821,000) (823,000)
Unearned fees (54,000) (82,000)
----------- -----------
Total $45,492,000 $48,179,000
----------- -----------
----------- -----------
Loan maturities and rate sensitivity of the loan portfolio, excluding
consumer and real estate - other loans before unearned income at
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
WITHIN ONE- AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial $6,872,000 $5,743,000 $6,321,000 $18,936,000
Real estate - construction 370,000 - 800,000 1,170,000
---------- ---------- ---------- -----------
Total $7,242,000 $5,743,000 $7,121,000 $20,106,000
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Loans at fixed interest rates $ 525,000 $ 187,000 $ 751,000 $ 1,463,000
Loans at variable interest rates 6,717,000 5,556,000 6,370,000 18,643,000
---------- ---------- ---------- -----------
Total $7,242,000 $5,743,000 $7,121,000 $20,106,000
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
As of December 31, 1994 and 1993, loans outstanding to directors, officers
and entities with which these individuals are associated under terms
consistent with the Bank's general lending policies, which in aggregate
exceed $60,000 per individual, were $317,000 and $422,000, respectively.
In the opinion of management, all transactions entered into between the
Bank and such related parties have been, and are, in the ordinary course of
business, made on the same terms and conditions as similar transactions
with unaffiliated persons.
F-42
<PAGE>
An analysis of activity with respect to these related party loans is as
follows:
YEAR ENDED
DECEMBER 31,
--------------------------------------
1994 1993 1992
Beginning balance $422,000 $453,000 $646,000
New loans 56,000 74,000 169,000
Repayments/reductions (86,000) (105,000) (362,000)
Other - no longer related party (75,000) - -
-------- -------- --------
Ending balance $317,000 $422,000 $453,000
-------- -------- --------
-------- -------- --------
The Bank acquired through foreclosure certain other real estate during
1994. The unpaid balance on the related defaulted loans was approximately
$1,300,000.
6. Nonperforming Loans and Past Due Loans
The following table presents information relating to nonperforming loans
and past due loans:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
<S> <C> <C>
Nonaccrual loans, not restructured $ 616,000 $ 637,000
90 days or more past due loans, not on nonaccrual 826,000 150,000
Restructured loans 1,050,000 1,605,000
---------- ----------
Total $2,492,000 $2,392,000
---------- ----------
---------- ----------
</TABLE>
With respect to the above nonperforming loans, the following table presents
interest income actually earned and additional interest income that would
have been earned under the original terms of the loans:
YEAR ENDED
DECEMBER 31,
----------------------
1994 1993
Nonaccrual loans:
Income earned $ 3,000 $16,000
Foregone income 74,000 32,000
Restructured loans:
Income earned 16,000 39,000
Foregone income 74,000 91,000
F-43
<PAGE>
7. Allowance for Loan Losses
An analysis of activity in the allowance for loan losses is as follows:
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1994 1993 1992
Balance at beginning of year $ 823,000 $ 771,000 $ 1,128,000
Provision for loan losses 583,000 1,085,000 350,000
Loans charged off (671,000) (1,095,000) (749,000)
Loan recoveries 86,000 62,000 42,000
----------- ----------- -----------
Balance at end of year $ 821,000 $ 823,000 $ 771,000
----------- ----------- -----------
----------- ----------- -----------
8. Premises and Equipment
Premises and equipment at December 31, 1994 and 1993 are summarized as
follows:
1994 1993
Furniture, fixtures, and equipment $ 1,423,000 $ 1,419,000
Leasehold improvements 1,319,000 1,288,000
----------- -----------
2,742,000 2,707,000
Less accumulated depreciation and amortization (1,963,000) (1,786,000)
----------- -----------
Premises and equipment, net $ 779,000 $ 921,000
----------- -----------
----------- -----------
9. Real Estate Acquired through Foreclosure
An analysis of activity in the allowance for credit losses on other real
estate is as follows:
1994 1993
Balance, beginning of year $ 65,000 $ -
Provision charged to expense (132,000) 86,000
Charge-offs (194,000) (21,000)
----------- -----------
Balance, end of year $ 3,000 $ 65,000
----------- -----------
----------- -----------
10. Deposits
Included in interest-bearing deposits are certificates of deposits in
amounts of $100,000 or more. These certificates and their remaining
maturities at December 31, 1994 and 1993 are as follows:
DECEMBER 31,
--------------------------
1994 1993
Three months or less $ 2,204,000 $ 1,601,000
Four through six months 1,450,000 1,202,000
Seven through twelve months 790,000 372,000
Thereafter 100,000 100,000
----------- -----------
Total $ 4,544,000 $ 3,275,000
----------- -----------
----------- -----------
F-44
<PAGE>
interest expense for certificates of deposit in amounts of $100,000 or
more was $155,000 and $123,000 for the years ended December 31, 1994 and
1993, respectively.
The Bank has no brokered deposits and there are no major concentrations of
deposits.
11. Notes Payable
At December 31, 1994, the Bancorp had a line of credit with a director in the
amount of $250,000. The interest on this line is at Wall Street Journal
prime (8.5% at December 31, 1994) plus 2.5%. At December 31, 1994, the
Bancorp had borrowed $250,000 under this line. The outstanding principal
balance, plus any accrued interest, is due on December 30, 1995. (See Note
12).
Bancorp has promissory notes payable to directors aggregating $300,000
and promissory notes payable to three shareholders totalling $125,000. The
proceeds of these notes were used to pay down a promissory note from
another bank and meet debt service requirements of Bancorp. These notes
bear interest at Wall Street Journal prime plus 2.0% and are due during the
first quarter of 1995. (See Note 12). Management is currently negotiating
the extension of these notes.
At December 31, 1994, Bancorp has two promissory notes totaling
$300,000 payable to the Bank, both of which bear interest at Wall Street
Journal prime plus 2.0%. Both of these notes are due on June 30, 1995.
The proceeds from these notes were used to pay down promissory notes
from another bank by $232,000, and $68,000 was used to pay net interest
expenses of Bancorp. The notes are collateralized by certain real
property owned by two of Bancorp's directors. In the accompanying
consolidated statements of condition, these Bancorp notes payable and
the Bank notes receivable have been eliminated.
12. Mandatory Convertible Debentures
The Bancorp's $1,219,000 aggregate principal amount Debentures bear
interest at Wall Street Journal prime (8.5% at December 31, 1994) plus
3.0%, payable quarterly. At May 30, 1998, the Debentures will be
mandatorily converted into Bancorp common stock, no par value, at a rate
equal to the lower of: (i) $5.00 per share (subject to certain
anti-dilutive adjustments and the power of the Bancorp's Board of
Directors to reduce the conversion price), or (ii) the then current fair
market value per share of Bancorp common stock. Prior to May 30, 1998,
the Debentures may be converted, at the option of the holder, between
April 15 and June 15 of each calendar year, or within 60 days after the
date of any Notice of Redemption by the Bancorp, but only at a price of
$5.00 per share (subject to the anti-dilutive adjustments and the power
of the Bancorp's Board of Directors to reduce the conversion price).
The Debentures are not subject to any sinking fund requirements and are
subordinated in right of payment to the obligations of the Bancorp under
any other indebtedness. At the Bancorp's option, the Debentures are
redeemable, subject to FRB approval, on 70 days notice at 105% of par if
the notice is sent prior to March 1, 1996, and at 100% of par if the
notice is sent thereafter. The indenture does not provide for a right of
acceleration of Debentures upon a default in payment of interest or
principal or in the performance of any covenant in the Debentures or the
indenture, and no trustee is appointed under the indenture to enforce
the rights of Debenture holders. Prior to conversion of the Debentures,
a Debenture holder has none of the rights or privileges of a shareholder
of the Bancorp.
F-45
<PAGE>
The directors agreed to waive payment of all interest and principal
due on all outstanding indebtedness payable to them through March 31,
1996. Three non-director shareholders agreed to defer payment of
interest and principal on notes payable to them, aggregating $125,000.
In January 1994, certain directors began making cash advances to Bancorp
to provide the funds necessary to pay debt service on $700,500 in
principal of Debentures owned by non-directors and on three notes
totaling $550,000, of which $300,000 is payable to the Bank under two
notes due June 30, 1995 and $250,000 is a line of credit payable to a
director due December 30, 1995. Effective April 1, 1994, the directors
continued to advance additional funds sufficient to service only the
debt requirements of these three notes totaling $550,000. The total of
all additional advances was $66,000 as of December 31, 1994. The
aggregate accrued unpaid interest on all notes and Debentures is
$217,000 as of December 31, 1994.
In July 1994, the non-director debentureholders were notified that
Bancorp no longer had the funds to continue paying interest on the
Debentures; and therefore, the quarterly interest payments due for the
second, third, and fourth quarters of 1994 were not made. This
constituted a payment default under Section 8.02 of the Indenture.
Debentureholders were asked to waive the quarterly payment defaults.
According to the Indenture, such a default in the payment of interest
can be waived by a majority of the principal amount of the Debentures
outstanding, not including the amount owed by Bancorp directors and
officers. Signed waivers have been received from a sufficient number of
debentureholders thus waiving Bancorp's default in the above mentioned
quarterly payments under the Debentures.
As of February 3, 1995, Bancorp did not have the funds available to meet
future debt service requirements of the notes and Debentures. No
assurance can be given that Bancorp ultimately will be successful in
obtaining a source of funds to meet Bancorp's debt service requirements
or that advances from the directors will continue. Failure to meet the
debt service requirements could force Bancorp to seek bankruptcy
protection which would result in a significant adverse impact to Bancorp
noteholders, debentureholders and shareholders.
13. Interest Rate Risk
The Bank is principally engaged in providing short-term commercial
loans with interest rates that fluctuate with various market indices and
short-term, variable-rate real estate loans. These loans are primarily
funded through short-term demand deposits and certificates of deposit
with fixed rates. At December 31, 1994, the Bank had interest-earning
assets of $51,926,000 having a weighted average effective yield of 8.87%
and interest-bearing liabilities of $43,306,000 with a weighted average
rate of 3.08%.
14. Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to various financial instruments with
off-balance-sheet risk in the normal course of business. These financial
instruments include standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest risk in
excess of the amounts recognized in the consolidated balance sheets. The
Bank's exposure to credit loss in the event of nonperformance by the
other party to standby letters of credit is represented by the
contractual amount of those instruments.
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
agreements. Standby letters of credit are generally written for a term
of one year. At December 31, 1994, the Bank had obligations under
standby letters of credit of $237,000.
F-46
<PAGE>
The Bank uses the same credit policies in making commitments and
conditional commitments as it does for extending loan facilities to
customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The agreements with the customers normally require
collateral. Such collateral held varies but may include accounts
receivable; inventory; property, plant and equipment; and real estate.
15. Income Taxes
Deferred taxes are provided for the temporary differences which
caused them. Deferred tax assets at December 31, 1994 and 1993, are as
follows:
DECEMBER 31,
----------------------------
1994 1993
Deferred tax assets:
Allowance for loan losses $ 261,000 $ 177,000
Differences between book and tax
basis of premises and equipment 77,000 152,000
State taxes 120,000 168,000
Net operating loss 1,257,000 861,000
Other 81,000 64,000
Alternative Minimum Tax Credit 12,000 --
----------- -----------
1,808,000 1,422,000
Less valuation allowance (1,808,000) (1,422,000)
----------- -----------
Net deferred tax asset $ -- $ --
----------- -----------
----------- -----------
For the year ended December 31, 1992, deferred income taxes resulted
from the recognition of the income tax on timing differences in
reporting transactions for financial statement and income tax reporting
purposes. The sources and tax effect of these timing differences are as
follows:
Provision for credit losses $ 179,000
Depreciation (13,000)
Effect of net operating losses
and investment tax credits (166,000)
Other --
---------
Deferred tax provision $ --
---------
---------
The provision for federal income taxes differs from the amount computed
by applying the federal income tax statutory rate on income (operations)
as follows:
YEAR ENDED
DECEMBER 31,
--------------------------------
1994 1993 1992
Taxes calculated at statutory rate $ 336,000 $ 672,000 $ 79,000
Increase (decrease) resulting from:
Tax-exempt interest (22,000) (23,000) (24,000)
Officer's life insurance (8,600) (8,700) (6,800)
Other 400 200 500
Valuation allowance (305,800) (640,500) (48,700)
--------- --------- --------
Total $ -- $ -- $ --
--------- --------- --------
--------- --------- --------
F-47
<PAGE>
At December 31, 1994 tax loss carryforwards and tax credit carryforwards
of approximately $3,700,000 and $12,000, respectively, are available to
offset future taxable income. The tax loss carryforwards expire in 2007
through 2009. As a result of the passage of the Tax Reform Act of 1986,
there may be certain limitations which could prohibit the Bank from fully
utilizing the benefits of the above credit carryforwards.
16. Stock and Stock Options
At December 31, 1994 and 1993, there were 10,000,000 shares of common
stock without par value authorized, of which 564,145 shares were issued
and outstanding. In addition, at December 31, 1994 and 1993 there were
10,000,000 shares of preferred stock authorized without par value, none
of which had been issued.
The Bancorp has granted stock options to key employees at exercise
prices not less than the fair market value of the common stock at the
date of grant. Options are exercisable for a period not to exceed ten
years from the date of the grant in installments to be determined at the
time of grant by the Board of Directors. The stock option plan expired
on February 12, 1992, and such termination does not affect any
options granted before the termination date. As of December 31, 1994 and
1993, options for 43,000 and 74,750 shares were outstanding. No stock
options were exercised during 1994, 1993 and 1992. At December 31,
1994, options for 42,400 shares were exercisable at prices ranging from
$3.00 to $5.50 per share.
17. Commitments and Contingencies
LEASES - A summary of noncancelable future operating lease
commitments follows:
1995 $ 405,000
1996 388,000
1997 402,000
1998 407,000
1999 412,000
Thereafter 1,694,000
---------
Total $3,708,000
---------
---------
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other property or equipment.
Rent expense under all noncancelable operating lease obligations
aggregated $421,000, $474,000, and $470,000 for 1994, 1993, and 1992,
respectively. Most of the leases provide that the Bank pay taxes,
maintenance, insurance, and certain other operating expenses applicable
to the leased premises in addition to the monthly minimum payments.
DEFERRED COMPENSATION PLAN - The Bancorp and Bank have also entered into
an Executive Salary Continuation Agreement with an officer of the Bank
dated June 7, 1990 (and amended on September 2, 1993), which provides
for certain additional benefits. Upon retirement at age 65, the Bank
will pay $65,000 per year for fifteen years in monthly installments. It
also provides for such benefits under certain conditions if the officer
dies prior to retirement. The monthly or optional lump sum payments to
be made in accordance with the Executive Salary Continuation Agreement
are partially funded by a life insurance policy in which the officer is
the insured and the Bank is the beneficiary and owner.
F-48
<PAGE>
LITIGATION - From time to time the Bank is a defendant in legal actions
arising from transactions conducted in the ordinary course of business.
Management, after consultation with legal counsel, believes that the
ultimate liability, if any, arising from such actions will not have an
adverse effect on the Bank's financial position. As of December 31,
1994, neither the Bank nor the Bancorp had any asserted lawsuits against
it.
18. Parent Company Information
The following are condensed financial statements of SDN Bancorp (parent
company only) as of December 31, 1994 and 1993 and for each of the three
years in the period ended December 31, 1994:
CONDENSED STATEMENTS OF CONDITION
1994 1993
ASSETS
Cash in subsidiary $ 3,000 $ 1,000
Investment in subsidiary 1,526,000 2,304,000
Receivables and other assets -- --
---------- ----------
Total assets $1,529,000 $2,305,000
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accrued expenses $ 283,000 $ 84,000
Mandatory Convertible Debentures 1,219,000 1,219,000
Due to subsidiary -- --
Notes payable to subsidiary 300,000 300,000
Notes payable to shareholders 675,000 661,000
---------- ----------
Total liabilities 2,477,000 2,264,000
---------- ----------
Shareholders' equity:
Common stock 2,951,000 2,951,000
Accumulated deficit (3,899,000) (2,910,000)
---------- ---------
Total shareholders' (deficit) equity (948,000) 41,000
---------- ---------
Total liabilities and shareholders'
(deficit) equity $ 1,529,000 $ 2,305,000
--------- ---------
--------- ---------
F-49
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS 1994 1993 1992
Interest income $ -- $ -- $ 50,000
Expenses:
Interest expense 211,000 185,000 181,000
other expense -- 7,000 3,000
--------- ---------- ---------
Total expenses 211,000 192,000 184,000
--------- ---------- ---------
Loss before income tax benefit and
undistributed net loss of subsidiary (211,000) (192,000) (134,000)
Income tax benefit -- -- --
--------- ---------- ---------
Loss before undistributed net loss
of subsidiary (211,000) (192,000) (134,000)
Undistributed net loss of subsidiary (778,000) (1,784,000) (97,000)
--------- ---------- ---------
Net loss $(989,000) $(1,976,000) $(231,000)
--------- ---------- ---------
--------- ---------- ---------
CONDENSED STATEMENTS OF CASH FLOWS 1994 1993 1992
Operating activities:
Net loss $(989,000) $(1,976,000) $(231,000)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Undistributed net loss of subsidiary 778,000 1,784,000 97,000
Other - net 199,000 52,000 28,000
--------- ---------- ---------
Net cash used by operating activities (12,000) (140,000) (106,000)
--------- ---------- ---------
Financing activities:
Repayment of notes payable -- (100,000) (671,000)
Proceeds from issuance of notes
payable 14,000 211,000 775,000
Proceeds from issuance of common stock -- -- --
--------- ---------- ---------
Net cash provided by financing
activities 14,000 111,000 104,000
--------- ---------- ---------
Net increase (decrease) in cash in
subsidiary 2,000 (29,000) (2,000)
Cash in subsidiary at beginning of
year 1,000 30,000 32,000
--------- ---------- ---------
Cash in subsidiary at end of year $ 3,000 $ 1,000 $ 30,000
--------- ---------- ---------
--------- ---------- ---------
There are legal limitations restricting the extent to which the Bank can
lend or dividend funds to the Bancorp. Any such extensions of credit are
subject to strict collateral requirements. Dividends declared by the
Bank in any calendar year may not, without the approval of the OCC,
exceed net earnings, as defined, for that year combined with its
retained net earnings for the preceding two years, less any required
transfers to surplus. As a result of losses exceeding profits during the
relevant period, at December 31, 1994, the Bank could not declare
dividends without the approval of the OCC. The agreement with the OCC
also prohibits the Bank from paying dividends without the consent of
the OCC (see Note 2). The Bancorp also has an agreement with the FRB
which prohibits the payment of dividends without its approval (see Note
2). Federal banking law also restricts the Bank from extending credit to
the Parent in excess of 10% of the Bank's capital stock and surplus, as
defined, or approximately $235,000 at December 31, 1994. When the Bank
extended the existing $300,000 in loans to its Parent in 1992, such
limit was approximately $500,000. (See Note 11).
F-50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and the
Board of Directors of
Liberty National Bank:
We have audited the accompanying balance sheets of LIBERTY NATIONAL BANK (a
national banking association) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' equity and cash
flows for the years ended December 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Bank'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 financial statements referred to above present fairly, in
all material respects, the financial position of Liberty National Bank as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
January 31, 1996
F-51
<PAGE>
LIBERTY NATIONAL BANK
---------------------
BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
-------------------------------------------
1995 1994
------------ ------------
ASSETS:
Cash and due from banks (Notes 2 and 11) $ 7,185,677 $ 7,320,487
Time deposits with other banks (Note 11) 689,000 2,077,245
Federal funds sold (Note 11) 9,350,000 1,700,000
Securities available for sale (at approximate
market value) (Notes 3 and 11) 34,753,608 15,890,316
Securities held to maturity (approximate
market value of $2,059,212 in 1994)
(Notes 3 and 11) - 2,054,845
Loans 88,929,644 95,538,560
Less--Allowance for loan losses 1,686,000 2,527,671
------------ ------------
Loans, net (Notes 4, 6 and 11) 87,243,644 93,010,889
Property and equipment, net (Note 5) 1,226,187 1,253,249
Other real estate owned 1,169,486 5,303,401
Accrued interest receivable and other
assets (Note 8) 2,482,350 3,185,968
------------ ------------
Total assets $144,099,952 $131,796,400
============ ============
LIABILITIES:
Deposits (Note 11):
Demand deposits $ 22,419,422 $ 20,659,699
Savings deposits 29,096,858 41,303,787
Time deposits, $100,000 and over 8,787,581 11,011,674
Other time deposits 70,576,077 48,281,794
------------ -----------
Total deposits 130,879,938 121,256,954
------------- -----------
Accrued interest payable and other liabilities 1,727,984 205,953
------------ ------------
Total liabilities 132,607,922 121,462,907
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Notes 1 and 7):
Common stock, $3.33-1/3 par value:
Authorized--1,750,000 shares;
Issued and outstanding--
978,160 shares in 1995 and 1994 3,260,493 3,260,493
Surplus 4,062,204 4,062,204
Undivided profits 4,105,246 3,100,460
Unrealized gains (losses) on securities
available for sale, net of taxes
(Notes 3 and 8) 64,087 (89,664)
------------ ------------
Total shareholders' equity 11,492,030 10,333,493
------------ ------------
Total liabilities and shareholders'
equity $144,099,952 $131,796,400
============ ============
The accompanying notes are an integral part of these balance sheets.
F-52
<PAGE>
LIBERTY NATIONAL BANK
---------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $10,941,005 $ 9,781,451 $11,455,556
Interest on securities (Note 3) 1,202,720 728,170 538,340
Interest on time deposits with
other banks 85,025 390,893 742,626
Interest on federal funds sold 590,340 142,748 72,237
----------- ----------- -----------
Total revenue from earning
assets 12,819,090 11,043,262 12,808,759
----------- ----------- -----------
COST OF FUNDS:
Interest on savings deposits 1,048,291 1,366,666 1,546,127
Interest on time deposits,
$100,000 and over 691,397 544,383 582,613
Interest on other time deposits 3,837,887 2,229,252 2,659,531
Interest on federal funds
purchased 322 11,387 11,249
Interest on securities sold under
agreements to repurchase 5,519 43,805 -
----------- ----------- -----------
Total cost of funds 5,583,416 4,195,493 4,799,520
----------- ----------- -----------
Net revenue from earning
assets before provision
for loan losses 7,235,674 6,847,769 8,009,239
PROVISION FOR LOAN LOSSES (Note 4) 150,000 1,315,000 4,781,500
----------- ----------- -----------
Net revenue from earning
assets 7,085,674 5,532,769 3,227,739
----------- ----------- -----------
OTHER REVENUE:
Service charges and fees 327,946 414,169 601,850
Other revenue 2,024,059 2,029,864 1,836,209
----------- ----------- -----------
Total other revenue 2,352,005 2,444,033 2,438,059
----------- ----------- -----------
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
1995 1994 1993
----------- ----------- ----------
OPERATING EXPENSES:
Salaries and related benefits $ 3,362,330 $ 3,426,346 $3,344,048
Occupancy expense (Notes 5 and 6) 1,122,420 1,227,741 992,045
Other operating expenses
(Note 9) 3,339,777 5,432,623 4,008,394
----------- ----------- -----------
Total operating expenses 7,824,527 10,086,710 8,344,487
----------- ----------- -----------
Income (loss) before provision
for (benefit from) income
taxes 1,613,152 (2,109,908) (2,678,689)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (Note 8) 608,366 (803,117) (1,161,000)
----------- ----------- ------------
Net income (loss) $ 1,004,786 $(1,306,791)$(1,517,689)
=========== ============ ============
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1): $ 1.03 $ (1.34)$ (1.55)
=========== ============ ============
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
LIBERTY NATIONAL BANK
---------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,004,786 $(1,306,791) $(1,517,689)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 216,803 215,857 253,095
(Gain) loss on sales of
equipment 19,682 (3,785) 5,902
Provision for loan losses 150,000 1,315,000 4,781,500
Provision (benefit) for deferred
taxes 607,566 532,338 (953,336)
Increase (decrease) in deferred
loan fees (93,994) 469,045 45,839
(Increase) decrease in other real
estate owned 4,133,915 (1,596,943) (1,488,086)
(Increase) decrease in accrued
interest receivable and other
assets (15,284) (120,704) 27,833
Increase (decrease) in accrued
interest payable and other
liabilities 1,522,031 (668,029) 26,518
------------ ----------- ------------
Net cash provided by
(used in) operating
activities 7,545,505 (1,164,012) 1,181,576
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in time deposits
with other banks 1,388,245 11,462,988 3,342,735
Proceeds from sales and maturities
of securities 55,130,000 13,931,983 2,075,000
Purchases of securities (71,673,360) (16,963,427) (8,290,350)
Net decrease in loans 5,711,239 13,521,157 17,143,212
Proceeds from disposition of
property and equipment 16,650 42,603 43,984
Purchases of property and equipment (226,073) (149,670) (77,021)
------------ ----------- ------------
Net cash provided by (used
in) investing activities (9,653,299) 21,845,634 14,237,560
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in demand and
savings deposits (10,447,206) (10,588,312) (2,567,101)
Decrease in time deposits,
$100,000 and over (2,224,093) (3,726,430) (8,336,307)
Increase (decrease) in other time
deposits 22,294,283 (10,053,309) (2,146,383)
------------ ----------- ------------
Net cash provided by (used
in) financing activities 9,622,984 (24,368,051) (13,049,791)
------------ ----------- ------------
F-55
<PAGE>
1995 1994 1993
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,515,190 (3,686,429) 2,369,345
CASH AND CASH EQUIVALENTS, beginning
of year 9,020,487 12,706,916 10,337,571
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $16,535,677 $ 9,020,487 $12,706,916
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 5,583,416 $ 4,195,494 $ 4,851,183
Income taxes (1,234,640) (811,871) 539,005
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
LIBERTY NATIONAL BANK
---------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
Common Stock Unrealized
--------------------- Gains (Losses)
Number on Securities
of Undivided Available
Shares Amount Surplus Profits for Sale Total
------- ---------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 978,160 $3,260,493 $4,062,204 $5,924,940 $ -- $13,247,637
Unrealized gain on
securities available for
sale, net of deferred taxes -- -- -- -- 107,339 107,339
Net loss -- -- -- (1,517,689) -- (1,517,689)
------- ---------- ---------- ---------- -------- -----------
BALANCE, December 31, 1993 978,160 3,260,493 4,062,204 4,407,251 107,339 11,837,287
Unrealized gain on
securities available for
sale, net of deferred taxes -- -- -- -- (197,003) (197,003)
Net loss -- -- -- (1,306,791) -- (1,306,791)
------- ---------- ---------- ---------- -------- -----------
BALANCE, December 31, 1994 978,160 3,260,493 4,062,204 3,100,460 (89,664) 10,333,493
Unrealized gain on
securities available for
sale, net of deferred taxes -- -- -- -- 153,751 153,751
Net loss -- -- -- 1,004,786 -- 1,004,786
------- ---------- ---------- ---------- -------- -----------
BALANCE, December 31, 1995 978,160 $3,260,493 $4,062,204 $4,105,246 $ 64,087 $11,492,030
======= ========== ========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
LIBERTY NATIONAL BANK
---------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1995
-----------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liberty National Bank (the Bank) is a nationally chartered bank. The Bank
primarily accepts deposits from and makes loans to individuals and businesses
in Orange County and Los Angeles County, California.
On October 26, 1995, the Bank signed an Agreement and Plan of Merger (the
"Agreement") under which SDN Bancorp, Inc., a Delaware corporation ("SDN"),
headquartered in Encinitas, California, will acquire the Bank through a cash
merger (the "Merger"). Also party to the transaction is Dartmouth Capital
Group, L.P., a Delaware limited partnership (the "Partnership") and SDN's
largest shareholder, which is expected to fund the transaction.
Under the terms of the Agreement, all of the outstanding shares of the Bank's
common stock (except shares as to which dissenters' rights have been
exercised and, with limited exceptions, shares beneficially owned by the
parties to the Agreement), will be converted into cash at the greater of
$14.80 per share or 130% of the Bank's book value (subject to certain
adjustments) per share at the month end next preceeding the closing,
calculated on a fully diluted basis, in each case subject to possible small
upward adjustments depending upon the timing of the closing. The Agreement
further provides that, prior to the closing, the Bank will have canceled all
outstanding stock options to acquire its common stock, in each case in return
for a payment to the holder of the stock option equal to the spread between
the exercise price of the option and the price per share to be paid by SDN.
The consummation of the Merger is subject to certain standard conditions,
including but not limited to the approval of the Agreement by the holders of
not less than two-thirds of the Bank's common stock and the receipt of all
required regulatory approvals. All of the Directors of the Bank have entered
into a Voting Agreement in which they have agreed to vote all of their
respective shares of common stock in favor of the Merger and against any
comparable transaction with a third party. The merger is expected to be
completed in March, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those statements.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and general practice within the banking
industry. The following are descriptions of the more significant of those
policies.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
During 1993, the Financial Accounting Standards Board issued
Statement of Financial Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. This
statement requires that investments in equity securities that
have readily determinable fair values and for all investments
in debt securities are to be classified as held to maturity,
F-58
<PAGE>
trading or available for sale. SFAS No. 115 had to be adopted
in 1994, but earlier adoption was permitted. The Bank adopted
this statement during 1993. During 1993, the Bank changed its
intent of holding all securities to maturity to having a
portion of the securities available for sale. Under SFAS
No. 115, securities held to maturity are reported at amortized
cost, and securities available for sale are reported at fair
value, with unrealized gains and losses reported as a separate
component of shareholders' equity, net of deferred taxes.
Securities available for sale may be held for indefinite
periods of time and may be sold in response to changes in
interest rates and/or significant prepayment risk.
The Bank's calculation of cost is increased by accretion of
discounts and decreased by amortization of premium, both
computed on the straight-line method that approximates the
effective interest method. Such amortization and accretion
are reflected in interest on securities. Gains and losses on
the sale of securities are based upon the adjusted cost and
computed on the specific identification method.
LOANS
Loans are carried at face value, less payments collected and
net of the allowance for loan losses and deferred loan fees.
Interest on loans is accrued monthly on a simple interest
basis. Net loan fees and related direct costs are deferred
and recognized as interest income over the term of the loan on
a level yield basis.
The allowance for loan losses is maintained at a level
considered adequate by management to provide for losses that
can be reasonably anticipated. Management considers current
economic conditions, historical loan loss experience, and
other factors in determining the adequacy of the allowance.
The allowance is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they
are reported in earnings in the periods in which they become
known. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs.
On January 1, 1995 the Bank adopted the FASB Statement of
Financial Account Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (FASB 114). This statement generally
requires impaired loans to be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or as an 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. The accrual of interest
is discontinued on such loans and no income is recognized
until all recorded amounts of principal have been recovered in
full. The adoption of this statement did not have a material
impact upon the results of operations or the financial
position of the Bank, taken as a whole.
The Bank excludes from their loan impairment calculations
smaller balance, homogeneous loans such as consumer
installment loans and lines of credit. In determining whether
a loan is impaired or not, the Bank applies its normal loan
review procedures in making that judgement. Loans for which an
insignificant delay, i.e., 45 days past due, or insignificant
shortfall in amount of payments is anticipated, but the Bank
expects to collect all amounts due, are not considered for
impairment. The Bank measures
F-59
<PAGE>
impairment on a loan-by-loan basis using either the present
value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral
if the loan is collateral dependent.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure or deed in lieu of
foreclosure is carried at the lower of the recorded investment
in the property or its fair value, less estimated carrying
costs and costs of disposition. At foreclosure, the value of
the underlying loan is written down to the fair value of the
real estate acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged
to other operating expenses. Operating expenses of such
properties, net of related income and gains or losses on their
disposition, are recorded in other operating expenses.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of
the assets. Amortization is computed on the straight-line
method over the useful lives of the leasehold improvements or
the term of the lease, whichever is shorter.
Income Taxes
The Bank accounts for income taxes using the liability method
for financial reporting purposes, pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) per common and common equivalent share (stock
options) were computed based on the weighted average number
of shares and common stock equivalents outstanding during
each period. If all stock options were exercised, they would
not have a material dilutive effect in 1995 and would have
been antidilutive in 1994 and 1993; therefore, stock options
have been excluded from the calculations. The weighted
average number of shares was approximately 978,160 in 1995,
1994 and 1993, respectively.
STATEMENT OF CASH FLOWS
For purposes of this statement, cash and cash equivalents
includes cash on hand, amounts due from correspondent banks
and federal funds sold.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior years to
conform to classifications followed in 1995.
2. AVERAGE FEDERAL RESERVE BALANCES
During 1995 and 1994, the Bank had average cash reserve requirements to be
maintained at the Federal Reserve Bank of approximately $172,000 and
$236,000, respectively.
3. SECURITIES
During 1995, implementation guidelines were issued with respect to SFAS No.
115. These guidelines allowed an entity to reassess the classification of its
securities held to maturity and make a one time transfer on or before
December 31, 1995 of all or a portion of these securities to available for
sale without impacting the accounting treatment for held to maturity
securities. Accordingly,
F-60
<PAGE>
the Bank transferred the remainder of its held to maturity portfolio in the
amount of $894,892 into the available for sale category. At the same time,
the Bank recorded gross unrealized gains of $12,946, relating to the
transferred securities.
The cost and estimated fair values of securities available for sale as of
December 31, 1995 are as follows:
1995
----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- -------- -----------
Securities available for sale:
U.S. Government agency
securities $ 1,000,932 $ 12,198 $ - $ 1,013,130
U.S. Treasury securities 32,747,289 85,351 - 32,832,640
State and municipal
securities 894,892 12,946 - 907,838
----------- -------- -------- -----------
$34,643,113 $110,495 $ - $34,753,608
=========== ======== ======== ===========
The cost and estimated fair values of securities available for sale and
securities held to maturity as of December 31, 1994 are as follows:
1994
----------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- -------- -----------
Securities available for sale:
U.S. Government agency
securities $ 1,003,169 $ 5,271 $ - $ 1,008,440
U.S. Treasury securities 15,041,739 1,517 161,380 14,881,876
----------- -------- -------- -----------
$16,044,908 $ 6,788 $161,380 $15,890,316
=========== ======== ======== ===========
Securities held to maturity:
State and municipal
securities $ 2,054,845 $ 12,442 $ 8,075 $ 2,059,212
=========== ======== ======== ===========
The cost and estimated fair value of securities available for sale and
securities held to maturity at December 31, 1995, by contractual maturity,
are shown below:
Securities Available Securities Held To
For Sale Maturity
------------------------- ------------------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or
less $29,811,882 $29,855,640 $ - $ -
Due after one year
through five years 4,831,231 4,897,968 - -
Due after five years
through 10 years - - - -
Due after 10 years - - 219,700 219,700
----------- ----------- ----------- -----------
$34,643,113 $34,753,608 $ 219,700 $ 219,700
=========== =========== =========== ===========
F-61
<PAGE>
At December 31, 1995 and 1994, securities with a fair value of approximately
$721,313 and $3,214,000, respectively, were pledged to secure public
deposits, as required by law.
Proceeds from sales of securities during 1995, 1994 and 1993 were $0,
$8,177,983 and $0, respectively. Proceeds from maturities or calls of
securities during 1995, 1994 and 1993 were $ 55,130,000, $5,754,000 and
$2,075,000, respectively. Gross gains and (losses) on sales and called
securities were $7,000 and $0 in 1995 and $475 and $(89,737) in 1994,
respectively. There were no gains or losses on sold or called securities in
1993.
Included in interest on securities in 1995, 1994 and 1993, is $88,657,
$119,878 and $162,037 respectively, of interest from nontaxable obligations
of states and municipalities.
4. LOANS
The loan portfolio consists of the following at December 31, 1995 and 1994:
1995 1994
------------ ------------
Commercial $ 44,439,240 $ 40,861,374
Real estate-construction 3,646,270 6,400,817
Real estate-other 28,832,975 36,486,422
Installment loans 13,799,771 13,672,554
Deferred loan fees (1,788,612) (1,882,607)
------------ ------------
88,929,644 95,538,560
Less--Allowance for loan losses 1,686,000 2,527,671
------------ ------------
Net loans $ 87,243,644 $ 93,010,889
============ ============
The Bank sells the government-guaranteed portion of Small Business
Administration (SBA) loans which it originates to participants in the
secondary market and retains servicing responsibilities. Such loans are sold
at a premium, a portion of which is immediately recognized as income. The
remaining premium, representing estimated normal servicing fees and/or a
yield adjustment on the portion of the SBA loan retained by the Bank, is
deferred and recognized as income in future periods as long as the loans are
serviced. The total SBA loan portfolio being serviced by the Bank at
December 31, 1995 and 1994, is $142,899,605 and $140,284,425, respectively.
The portion of the SBA loans retained by the Bank totaled $33,580,173 and
$31,904,579 at December 31, 1995 and 1994, respectively.
An analysis of the activity with respect to aggregate loan balances involving
related parties (officers, directors and their affiliates) is as follows:
Balance at New Loans Balance at
December 31, 1994 and Additions Repayments December 31, 1995
----------------- ------------- ---------- -----------------
$2,956,990 $ 231,199 $1,287,362 $1,900,827
All related party loans were current as to principal and interest as of
December 31, 1995 and 1994. In management's opinion, these loans were made
in the ordinary course of business at prevailing rates and terms.
At December 31, 1995, the Bank had $3,615,707 in impaired loans, all of which
have a related loss allowance, aggregating $160,103. Of the $3,615,707 of
impaired loans, all were measured using the fair value of collateral. The
average principal balance of impaired loans during 1995 was $4,908,095. The
Bank recognized $93,141 of interest income related to impaired loans during
the year ended December 31, 1995.
F-62
<PAGE>
Loans on which the accrual of interest has been discontinued amounted to
$3,710,000, $4,496,000 and $13,647,000 at December 31, 1995, 1994, and 1993,
respectively. If these loans had been current throughout their terms,
interest income would have increased approximately $363,651, $1,061,000 and
$780,000 for 1995, 1994, and 1993, respectively.
The activity in the allowance for loan losses account for the years ended
December 31, 1995, 1994 and 1993, is as follows:
1995 1994 1993
---------- ---------- ----------
Balance, beginning of period $2,527,671 $4,900,946 $2,873,380
Loans charged off (1,467,929)(4,106,588)(2,870,139)
Recoveries on loans
previously charged off 476,258 418,313 116,205
Provision for loan losses 150,000 1,315,000 4,781,500
---------- ---------- ----------
Balance, end of period $1,686,000 $2,527,671 $4,900,946
========== ========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1994:
1995 1994
---------- ----------
Land $ 204,022 $ 204,022
Bank premises 360,791 325,906
Furniture, fixtures and equipment 1,851,103 1,951,570
Leasehold improvements 787,769 903,921
---------- ----------
3,203,685 3,385,419
Less--Accumulated depreciation
and amortization 1,977,498 2,132,170
---------- ----------
$1,226,187 $1,253,249
========== ==========
The amount of depreciation and amortization included in operating expenses
was $216,803, $215,857 and $253,095 in 1995, 1994 and 1993, respectively, and
is based on the following estimated asset lives:
Bank premises 31.5 years
Furniture, fixtures and equipment 3 to 15 years
Leasehold improvements Useful life or life of lease,
whichever is shorter
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business to meet the financing needs of its
customers, the Bank is a party to financial instruments with "off-balance
sheet" risk. Financial instruments consist of commitments to extend credit
and standby letters of credit. 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. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to
a third party. The Bank does not enter into any interest rate swaps or caps
or forward or future contracts.
The nature of the off-balance sheet risk inherent in these instruments is the
possibility of accounting loss from (1) the failure of another party to
perform according to the terms of a contract that would cause a draw on a
standby letter of credit, or (2) changes in market rates of interest for
those few commitments and undisbursed loans which have fixed rates of
interest. To minimize this risk, the Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments. The decision as to
F-63
<PAGE>
whether collateral should be required is based on the circumstances of each
specific commitment or conditional obligation.
Loan commitments are not usually made for more than one year. If rates are
quoted, they are generally stated in relation to the prime rate.
These financial instruments involve, to varying degrees, exposure to credit
risk in excess of the amounts recognized in the statements of financial
condition. This exposure is represented by the contractual notional amount
of those instruments. At December 31, 1995 and 1994, the contractual
notional amount of these instruments was approximately $14,839,560 and
$11,454,817 for undisbursed loans and loan commitments and approximately
$1,186,371 and $987,300 for commitments under standby letters of credit,
respectively. There were no standby letters of credit to related parties at
December 31, 1995 and December 31, 1994.
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash requirements.
The Bank has concentrated its lending activity almost exclusively to
customers within the Los Angeles, Orange, Riverside and San Bernardino
counties of California. Commercial and real estate loans to small and medium
size companies in widely diversified industries represent the largest
component of the portfolio. The next single largest grouping of loans is
that to individuals for household, family and other personal expenditures.
The Bank has various types of real estate loans both for development and
long-term financing. As of December 31, 1995 and 1994, the Bank's real
estate loan portfolio was as follows:
1995 1994
----------- -----------
Construction and land development $ 3,646,270 $ 6,400,817
Mortgage - commercial 21,047,073 23,289,649
Mortgage - residential 7,785,902 13,196,773
----------- -----------
Total $32,479,245 $42,887,239
=========== ===========
The construction and land development sector of the loan portfolio is widely
diversified in a number of projects with an emphasis on loans for the
construction of single family residential properties in Orange County and in
the Los Angeles basin. Substantially all the real estate loans are
concentrated within a close proximity to the Bank's locations. It is judged
that none of these lending activities expose the Bank to undue credit risk;
however, economic conditions and real estate markets in Southern California
may effect the Bank's loan portfolio and underlying collateral values.
The Bank is a defendant in various pending lawsuits that arose in the
ordinary course of business. It is management's opinion that the litigation
will not result in any material adverse effect on the Bank's financial
position and results of operations.
As of December 31, 1995, minimum annual future lease commitments under
noncancellable operating leases for premises are as follows:
Year ending December 31:
1996 $ 304,284
1997 304,284
1998 304,284
1999 304,284
2000 304,284
Thereafter 228,213
-----------
$1,749,633
===========
F-64
<PAGE>
Total rent expense for premises included in occupancy expenses for 1995, 1994
and 1993, was $385,266, $424,788 and $444,785,respectively.
7. SHAREHOLDERS' EQUITY
The Bank had a stock option plan that expired on March 17, 1992, which
authorized the issuance of up to 274,144 shares of its common stock. Options
were granted at an exercise price of not less than the fair market value of
the common stock at the date of grant. Options that have been granted are
exercisable in cumulative 20 percent installments and expire 10 years after
the date of grant. Options that have been granted to directors were
exercisable at date of grant. As of December 31, 1995, 80,112 shares were
exercisable under this plan.
During 1992, the Bank adopted a new stock option plan that expires in 2002,
which authorizes the issuance of up to 189,000 additional shares of its
common stock. Options are granted at an exercise price of not less than the
fair market value of the common stock at the date of grant. Options that
have been granted vest annually in 20 percent increments and expire 5 and 10
years from the date of grant for directors and employees, respectively. As
of December 31, 1995, 19,414 shares were exercisable under this plan.
The following information is presented concerning the stock option plans as
of December 31, 1995:
Number of Number
Shares of
Subject Options
to Option Exercisable Exercise Prices Expiration Dates
--------- ----------- --------------- ----------------
121,743 99,526 $6.25 to $13.00 05/12/1996
to 06/21/2004
During 1995, no options were granted, 3,859 options were canceled at $8.13 -
$10.13 per share and no options were exercised.
Under national banking law, the Bank is limited in its ability to declare
dividends to its shareholders to the total of its net income for the year,
combined with its retained net income for the preceding two years less any
required transfers to surplus and any dividends declared during the period.
The effect of this law is such that the Bank may not declare dividends at
December 31, 1995.
8. INCOME TAXES
The current and deferred amounts of the provisions for (benefit from) income
taxes for the years ended December 31, 1995, 1994 and 1993, consisted of the
following:
1995 1994 1993
------------ ----------- -----------
Current:
Federal $ - $(1,336,255) $ (207,664)
State 800 800 -
------------ ----------- -----------
800 (1,335,455) (207,664)
------------ ----------- -----------
Deferred:
Federal 425,431 597,524 (633,532)
State 182,135 (65,186) (319,804)
------------ ----------- -----------
607,566 532,338 (953,336)
------------ ----------- -----------
$ 608,366 $ (803,117) $(1,161,000)
============ =========== ===========
F-65
<PAGE>
Total tax expense (benefit) differs from the amount computed using the
federal statutory rate as follows:
<TABLE>
1995 1994 1993
------------------- -------------------- ------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- ------ ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax expense
at federal
statutory
rate $ 548,282 34.00% $(717,358) (34.00)% $(910,090) (34.00)%
State income
taxes, net
of federal
income tax
benefit 120,737 7.49 (42,495) (2.01) (211,071) (7.89)
Interest on
state and
municipal
securities (25,130) (1.56) (35,954) (1.70) (49,482) (1.85)
Other (35,523) (2.20) (7,310) (.35) 9,643 .30
--------- ----- --------- ------ ----------- ------
$ 608,366 37.73% $(803,117) (38.06)% $(1,161,000) (43.44)%
========= ===== ========= ====== =========== ======
</TABLE>
Deferred taxes arise from temporary differences between income reported for
financial reporting purposes and that reported for federal income tax
purposes. The tax effects of the principal temporary differences resulting
in deferred taxes were:
<TABLE>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Provision for loan losses $ 394,371 $1,016,768 $(725,747)
Write-down of other real estate owned 123,502 57,387 (265,821)
Depreciation (97) (8,833) (31,821)
Net operating loss (15,411) (304,662) (24,752)
Other 105,201 (228,322) 94,805
--------- ---------- ---------
$ 607,566 $ 532,338 $(953,336)
========= ========== =========
</TABLE>
At December 31, 1995 and 1994, the components of the net deferred asset which
is included in accrued interest receivable and assets on the accompanying
balance sheets are as follows:
1995 1994
--------- ----------
Depreciation $ (59,614) $ (59,711)
Allowance for loan losses 202,402 596,773
Other real estate owned 138,253 261,755
Net operating loss 344,826 329,415
Other non-deductible accruals (12,902) 92,299
--------- ----------
Unrealized (gain) loss on securities 612,965 1,220,531
available for sale (46,408) 64,929
--------- ----------
566,557 1,285,460
Less: Valuation Allowance - -
--------- ----------
$ 566,557 $1,285,460
========= ==========
F-66
<PAGE>
9. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Legal and professional fees $ 833,138 $1,146,827 $ 856,773
Insurance and FDIC assessments 504,258 596,672 546,663
Business development and
referral expenses 530,90 562,049 446,271
Stationary and office supplies 322,42 302,396 288,507
Data processing expenses 416,271 342,076 375,268
Messenger services 114,537 111,333 139,466
Other real estate owned expenses 319,337 1,803,208 823,128
Other operating expenses 298,857 568,062 532,318
---------- ---------- ----------
$3,339,777 $5,432,623 $4,008,394
========== ========== ==========
</TABLE>
10. REGULATORY MATTERS
The Bank is subject to regulation by the Office of the Comptroller of the
Currency (OCC). Representatives of the OCC completed an examination of the
Bank in the fourth quarter of 1992. As a result of their examination, the
OCC established a formal agreement (the Agreement) dated June 7, 1993, which
among other provisions requires the Bank to maintain a ratio of Tier 1
capital to risk-weighted assets of at least 9.5 percent and a leverage ratio
of at least 6.5 percent, improve the Bank's asset quality and make various
changes in loan policies and procedures. During the fourth quarter of 1994,
the OCC completed another examination of the Bank as of June 30, 1994. Their
results indicated full compliance with most of the articles of the Agreement,
and partial compliance for the remaining articles. As a result of the OCC
examination conducted as of June 30, 1995, the Bank was released from the
Agreement effective September 18, 1995.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
that the Bank disclose estimated fair values for its financial instruments.
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Because no active market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgments regarding
current economic conditions, risk characteristics of various financial
instruments, prepayment assumptions, future expected loss experience, and
such other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, the fair value estimates are based on existing on-and
off-balance sheet financial instruments without attempting to estimate the
value of existing and anticipated future customer relationships and the value
of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets
or liabilities include the branch network, the value of core deposits,
deferred tax assets and liabilities, other real estate owned and property and
equipment.
Additionally, the Bank intends to hold the majority of all its assets and
liabilities to their stated maturities. Therefore, the Bank does not intend
to realize any significant differences between carrying value and fair value
through sale or other disposition. No attempt should be made to adjust
shareholders' equity to reflect the following fair value disclosures.
F-67
<PAGE>
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments as of December 31, 1994 and 1993:
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
For cash, due from Banks and federal funds sold (short-term
investments), the carrying amount (book value) is a reasonable
estimate of fair value.
TIME DEPOSITS WITH OTHER BANKS
The fair value of fixed maturity certificates of deposit is
estimated at the carrying amount based on the short term
maturities (within eight months) of the certificates.
SECURITIES
The fair value of securities held for sale and investment
securities equal quoted market price, if available. If a
quoted market price is not available, fair value is estimated
using quoted market prices of similar securities.
LOANS
For certain homogeneous categories of loans, such as
residential mortgages, auto loans, and other consumer loans,
fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same
remaining maturities. For loans which are immediately
repriceable, the carrying value is a reasonable estimate of
fair value. The allowance for loan losses is considered to be
a reasonable market estimate of the credit risks inherent in
the portfolio.
DEPOSITS
The fair value of demand deposits, savings deposits, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of
similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking
into account remaining terms of the agreements. For
fixed-rate loan commitments, fair value also considered the
difference between current levels of interest rates and the
committed rates. The fair value of these unrecorded financial
instruments is not material to the Bank's financial position
or fair value disclosures at December 31, 1995 and 1994 (see
Note 6, Commitments and Contingencies, for the contractual
notional amounts of these unrecorded financial instruments).
F-68
<PAGE>
The estimated fair values of the Bank's financial instruments
at December 31, 1995 and 1994, are as follows:
December 31, 1995
-------------------------
Carrying Fair
Amount Value
----------- -----------
Financial Assets:
Cash, due from banks and $16,535,677 $16,535,677
federal funds sold
Time deposits with other banks 689,000 689,000
Securities available for sale 34,643,113 34,753,608
Securities held to maturity 219,700 219,700
Loans, net 87,243,645 87,210,866
Financial Liabilities:
Deposits 130,879,938 131,214,788
December 31, 1994
-------------------------
Carrying Fair
Amount Value
----------- -----------
Financial Assets:
Cash, due from banks and $ 9,020,487 $ 9,020,487
federal funds sold
Time deposits with other banks 2,077,245 2,067,333
Securitites available for sale 15,890,316 15,890,316
Securities held to maturity 2,274,545 2,278,912
Loans 93,010,889 92,846,724
Financial Liabilities:
Deposits 121,256,954 121,253,003
F-69
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31 DECEMBER 31
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 8,613,467 $ 9,438,041
Federal funds sold 5,500,000 21,000,000
Reserve repurchase agreements 26,000,000 7,000,000
Interest bearing deposits in other banks 42,706 42,652
------------ ------------
Total cash and cash equivalents 40,156,173 37,480,693
Investment securities:
Available for sale at fair value 5,826,324 7,032,087
Held to maturity, at amortized cost
approxmiate fair value:
March 31, 1996 $5,462,917
December 31, 1995 $11,000,295 5,492,856 10,995,607
------------ ------------
Total investment securities 11,319,180 18,027,694
Mortgage loans held for sale, at the lower of cost or market 51,912,170 38,336,858
Loans and leases, net of allowance for loan and lease losses of
$2,452,873 and $2,395,775 as of March 31, 1996 and 89,569,063 94,435,087
December 31, 1995
Accrued interest receivable 821,192 1,099,365
Loan and servicing sales receivable 2,733,225 4,611,625
Mortgage servicing rights 7,380,404 6,327,677
Other real estate owned 1,799,458 1,239,707
Investment in real estate joint ventures held for sale 3,811,408 3,744,409
Premises and equipment, net 2,286,407 2,430,559
FHLB stock 1,187,000 1,171,852
Other assets as prepaid expenses 2,785,321 4,441,721
------------ ------------
TOTAL ASSETS $215,761,001 $213,347,250
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 70,620,324 $ 69,325,380
Interest bearing 124,767,264 122,329,251
Repurchase agreements -- --
Accrued expenses and other liabilities 3,843,973 4,939,162
------------ ------------
Total Liabilities 199,231,561 196,593,792
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $4 par value, 10,000,000 shares
authorized; 861,460 and 860,379 shares
outstanding in 1995 and 1994 3,445,840 3,445,840
Additional paid-in capital 1,035,560 1,035,560
Retained earnings 12,030,004 12,245,490
Net unrealized gain on avaliable-for-sale securities 18,036 26,567
------------ ------------
Total Shareholders' Equity 16,529,440 16,753,457
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $215,761,001 $213,347,250
============ ============
</TABLE>
* March 31, 1995 numbers restated in accordance with FAS 122
F-70
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Loans $2,199,525 $1,940,390
Investment securities $565,650 456,647
Leasing financing $859,850 683,795
---------- ----------
Total interest income 3,625,025 3,080,832
---------- ----------
INTEREST EXPENSE:
Deposits 1,672,295 1,415,241
Short-term borrowings $17,731 51,724
---------- ----------
Total interest expense 1,690,026 1,466,965
---------- ----------
NET INTEREST INCOME 1,934,999 1,613,867
---------- ----------
PROVISION FOR LOAN AND LEASE LOSS 168,451 275,425
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 1,766,548 1,338,442
---------- ----------
NONINTEREST INCOME:
Gain on sale of loans, leases, and loan servicing 2,231,756 4,121,525
Servicing and fee income 469,612 769,625
Other income 1,107 10,018
---------- ----------
Total noninterest income 2,702,475 4,901,168
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,465,179 2,846,171
Occupancy and equipment 678,815 783,785
Printing and communication 352,793 313,553
Legal and professional 475,262 176,143
Office supplies 108,048 118,342
Real estate activities (12,940) 127,800
Insurance 152,879 134,582
Other outside service fees 166,761 103,249
Other expense 453,752 625,012
---------- ----------
Total noninterest expense 4,840,549 5,228,637
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES (371,526) 1,010,973
---------- ----------
PROVISION FOR INCOME TAXES (156,041) 424,509
----------- ----------
NET INCOME $ (215,485) $ 586,464
========== ==========
</TABLE>
*March 31, 1995 numbers restated in accordance with FAS 122
F-71
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
FOR THE THREE MONTHS ENDED MARCH 31
-----------------------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash $ (215,485) $ 586,464
(used in) provided by operating activities:
Provision for loan and lease losses 168,451 275,425
Provision for loss on other real estate owned 0 25,000
Depreciation and amortization 587,479 288,147
Accretion of premium on investments 5,631 (69,317)
(Gain) loss on sale of real estate owned 5,507 (19,719)
Mortgage loans originated for sale (238,182,035) (161,164,184)
Mortgage servicing rights purchased and originated (1,458,988) (1,967,889)
Equity in (Income) loss of real estate joint venture (66,999) (48,874)
Proceeds from sales of loans and servicing 223,652,924 169,211,898
(Gain) loss on sale of loans and servicing 953,799 (1,638,531)
Net effect of changes in:
Deferred loan origination fees (6,793) $21,040
Accrued interest receivable 278,173 (19,268)
Loan and servicing sales receivable 1,878,400 911,224
FHLB stock (15,148) (13,800)
Other assets and prepaid expenses 1,656,400 (2,425,265)
Accrued expenses and other liabilities (1,089,009) 377,389
----------- ----------
Net cash (used in) provided by operating activities (11,847,693) 4,329,740
INVESTING ACTIVITIES:
Proceeds from sale of real estate owned 105,870 779,834
Loans originated from portfolio net of principal repayments 4,033,238 (11,153,507)
Purchase of investment securities (3,000,000) (2,990,469)
Maturities of investment securities 9,688,174 1,186,310
Purchase of premises and equipment (37,066) (116,474)
----------- ----------
Net cash used in investing activities 10,790,216 (12,294,306)
FINANCING ACTIVITIES:
Net effect of changes in:
Noninterest bearing deposits 1,294,944 (2,279,642)
Interest bearing deposits 2,438,013 1,711,378
Other borrowings 0 (1,638,000)
----------- ----------
Net cash provided (used) by financing activities 3,732,957 (2,206,264)
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,675,480 (10,170,830)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 37,480,693 18,538,492
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $40,156,173 $8,367,662
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for the year for:
Interest $1,690,026 $1,439,109
Income taxes 0 215,000
Supplemental disclosures of noncash investing
and financing activities:
Real estate acquired through foreclosure $671,128 $191,818
Net unrealized gain on securities 8,531 0
--------- ---------
</TABLE>
F-72
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Commerce Security Bank and subsidiary (the "Bank"), is a state chartered
commercial bank. The accounting and reporting policies of the Bank
conform to generally accepted accounting principles and to general
practices within the banking industry. Such principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements as of
March 31, 1996 and for the periods ended March 31, 1996 and 1995 have
been prepared by Commerce Security Bank (the "Bank") without audit.
In the opinion of management, all adjustments (which consist of normal
and recurring adjustments) have been made to present fairly the financial
position, results of operations, and cash flows for all periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these financial statements to read in conjunction with the Bank's
audited financial statements and notes thereto included elsewhere in
this Prospectus. The results of operations for the three-month periods
ended March 31, 1996 and 1995, are not necessarily indicative of the
operating results for the full fiscal years.
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Commerce Security Bank and its wholly-owned subsidiary,
CSB Ventures, which invests in real estate joint ventures. All
significant intercompany balances and transactions have been eliminated
in consolidation.
NATURE OF OPERATIONS - The Bank's primary sources of revenue are from
the origination and sale of residential mortgage loans and equipment
leases, and interest income or loans and leases. The Bank's
administrative offices and branch are located in Sacramento, California.
It also operates three loan production offices (LPOs) in California,
and one each in Nevada, Arizona, Colorado, and Oregon for the purpose of
originating residential mortgage loans. In addition, the Bank has three
leasing offices, two in California and one in Washington for the purpose
of originating and acquiring equipment leases.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
due from banks, interest-bearing deposits in financial institutions,
federal funds sold and reverse repurchase agreements. Generally,
federal funds are sold for one-day periods. Reverse repurchase
agreements are generally for one to three day periods.
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK - As a member of the Federal
Home Loan Bank (FHLB) of San Francisco, the Bank is required to invest
in stock of the FHLB in the amount of 1% of its outstanding home loans,
5% of its outstanding FHLB advances, or 0.3% of total assets, whichever
is highest. At March 31, 1996 and December 31, 1995, the Bank owned
11,720 and 11,570 shares of the FHLB $100 par value capital stock,
respectively, which is stated at cost, plus accrued dividends.
INVESTMENT SECURITIES - At January 1, 1994, the Bank adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The effect of the
adoption on the Bank's financial position and results of operations was
not material. The Bank has classified its investment securities as held
F-73
<PAGE>
to maturity or available for sale. Securities held to maturity are
carried at cost adjusted by the accretion of discounts and amortization
of premiums. The Bank has the ability and positive intent to hold these
investment securities to maturity. Securities available for sale may be
sold to implement the Bank's asset/liability management strategies and
in response to changes in interest rates, prepayment rates and similar
factors. These securities are recorded at their fair value. Unrealized
gains or losses are included in shareholders' equity, net of tax. Gain
or loss on the sale of available-for-sale securities is based on the
specific identification method.
LOANS AND LEASES - Loans are stated at the principal amount
outstanding, net of unearned income, including deferred loan fees and
costs. The net deferred fees and costs are generally amortized into
interest income over the loan term using a method which approximates the
interest method. Other credit-related fees, such as standby letter of
credit fees, loan placement fees and annual credit card fees are
recognized as noninterest income over the commitment period or over the
period the related service is performed.
Direct financing leases, which include estimated residual values of
leased equipment, are carried net of unearned income. Income from these
leases is recognized on a basis which produces a level yield on the
outstanding net investment in the lease.
Effective January 1, 1995, the Bank adopted Statements of SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and SFAS NO. 118,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION
AND DISCLOSURE. SFAS No. 114 requires that impaired loans be measured
based on the present value of expected future cash flows discounted at
the loan's effective interest rate or as a practice expedient at the
loan's observable market rate or the fair value of the collateral if the
loan is collateral dependent. SFAS No. 118 amends SFAS No. 114 to allow
a creditor to use existing methods for recognizing interest income on
impaired loans and requires certain information to be disclosed. The
effect of adopting these standards was immaterial
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease
losses is established through a provision charged to expense. Loans and
leases are charged-off against the allowance for loan and lease losses
when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and leases based on
evaluations of collectibility or prior loss experience. The evaluations
take into consideration such factors as changes in the nature and volume
of the portfolio, overall portfolio quality, loan and lease
concentrations, specific problem loans and leases, commitments, and
current and anticipated economic conditions that may affect the
borrowers' ability to pay. While management uses the best information
available to evaluate the adequacy of its allowance, future adjustments
to the allowance may be necessary if actual experience differs from the
assumptions used in making the evaluations.
The Bank's policy is to place substantially all loans and leases that
are delinquent 90 days or more as to principal or interest on a
nonaccural of interest basis (unless the loan is
F-74
<PAGE>
adequately secured and the process of collection). Cash payments
subsequently received on loans are recognized as income only where the
future as to both principal and interest is considered by management to
be probable.
MORTGAGE BANKING ACTIVITIES - The Bank originates and sells residential
mortgage loans to a variety of secondary market investors, including the
Federal Home Loan Mortgage corporation (FHLMC), the Federal National
Mortgage Association (FNMA) and others. The Bank has an arrangement with
the Government National Mortgage Association (GNMA) whereby loans
originated by the Bank are securitized by GNMA and sold to others.
Gains or losses on the sale of mortgage loans are recognized upon
delivery based on the difference between the selling price and the
carrying value of the related mortgage loans sold. Deferred origination
fees and expenses are recognized at the time of the sale in the
determination of the gain or loss. The Bank may also sell the servicing
for such loans to either the purchaser of the loans or to a third party.
The Bank recognizes the gain or loss on servicing sold when all risks
and rewards of ownership have transferred.
Mortgage loans held for sale are stated at lower of cost or market value
as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis.
Valuation adjustments are charged against noninterest income.
Forward commitments to sell, and put options on, mortgage-backed
securities are used to reduce interest rate risk on a portion of loans
held for sale and anticipated loan fundings. The resulting gains or
losses on forward commitments are deferred and included in the carrying
values of loans held for sale. Premiums on put options are capitalized
and amortized over the option period. Gains or losses on forward
commitments and put options deferred against loans held for sale
approximately offset equivalent amounts of unrecognized gains or losses
on the related loans. Forward commitments to sell and put options on
mortgage-backed securities that hedge anticipated loan fundings are not
reflected in the statement of financial condition. Gains or losses on
these instruments are not recognized until the actual sale of loans held
for sale. Loans generally fund in 10 to 30 days.
Effective January 1, 1995, the Bank adopted SFAS No. 122, ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS. The statement is required to be adopted for
fiscal years beginning after December 15, 1995. As a result of the
early adoption, originated mortgage servicing rights of $5,815,000, were
capitalized during 1995, which increased income before income taxes by a
similar amount.
The Bank capitalizes the cost of acquiring mortgage servicing rights
through either the purchase or origination of mortgage loans if it sells
or securitizes those loans, and retains the servicing. The Bank
allocates the cost of the mortgage loans to the mortgage servicing
rights and the loans (without the servicing rights) based on their
relative fair values. The fair value of the mortgage servicing rights
is estimated based on observable market prices. Capitalized mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income. The Bank evaluates and measures
F-75
<PAGE>
impairment of capitalized servicing rights at least quarterly. In
performing its impairment analysis, the Bank stratifies the servicing
portfolio based on the relevant risk characteristics of the underlying
loans; including loan type (e.g., conventional/government), loan term,
and interest rate structure (fixed/adjustable). Valuation allowances,
if any, are established for each risk stratum to carry the servicing
rights at the lower of cost or market.
Loan servicing income represents fees earned for servicing real estate
and construction loan participations owned by investors, net of
amortization expense. The fees are generally calculated on the
outstanding principal balances of the loans serviced and are recorded as
income when collected.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost
less accumulated depreciation and amortization. Depreciation expense is
computed principally on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on a
straight-line basis over the period of the lease or the estimated useful
life, whichever is shorter.
OTHER REAL ESTATE OWNED - Property acquired by the Bank through
foreclosure is initially recorded in the consolidated statements of
financial condition at the lower of estimated fair value less selling
costs ("fair value") or cost. Immediately upon foreclosure, if the fair
value is less than the loan amounts outstanding, any difference is
charged against the allowance for possible loan losses. After
acquisition, valuations are periodically performed and, if the carrying
value of the property exceeds the fair value, a valuation allowance is
established by a charge to operations. Subsequent increases in the fair
value may reduce or eliminate the allowance. Required developmental
costs associated with foreclosed property under construction are
capitalized and considered in determining the fair value of the
property. Operating expenses of such properties, net of related income,
and gains and losses on their disposition, are included in noninterest
expenses.
INVESTMENT IN REAL ESTATE JOINT VENTURES HELD FOR SALE - The Bank's
investments in real estate joint ventures is comprised of the Bank's
investment in CSB Ventures, a wholly-owned subsidiary which is
consolidated for financial statement presentation. CSB Ventures has
invested in certain real estate joint ventures (Ventures) which it
accounts for using the equity method. The Ventures each carry real
estate investments at the lower of cost or estimated fair value. Direct
writedowns are recorded if total actual or expected costs are in excess
of estimated fair value.
INCOME TAXES - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - The calculation of
primary earnings per common and common equivalent share is based on the
weighted average number of common and common equivalent shares including
the dilative effects of stock
F-76
<PAGE>
options computed under the treasury stock method. The Bank's stock is
not traded on any exchange and there is not an active market in the
Bank's stock. Accordingly, the dilative effect of outstanding stock
options is computed using the greater of the estimated closing price or
the estimated average price of the common stock for the period. Fully
diluted earnings per common and common equivalent share did not differ
significantly from primary earnings per common and common equivalent
share. The estimated price of the Bank's common stock was calculated
based on management's estimates.
FAS 121 - In March 1995, the Financial Accounting Standards Board issued
SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF", which CSB adopted as required on
January 1, 1996. Pursuant to this Statement, companies are required to
investigate potential impairments of long-lived assets, certain
identifiable intangibles, and associated good will, on an exception
basis, when there is evidence that events or changes in circumstances
have made recovery of an asset's carrying value unlikely. An impairment
loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of
FAS 121 did not have a material impact on CSB's financial position or
results of operations.
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Commerce Security Bank
Sacramento, California
We have audited the accompanying consolidated statements of financial
condition of Commerce Security Bank and subsidiary (the "Bank"), 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 Bank'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 the Bank
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank adopted
Statement of Financial Accounting Standards (SFAS) No. 122, ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS, as of January 1, 1995.
DELOITTE & TOUCHE LLP
Sacramento, California
February 27, 1996, except for Note 15,
as to which the date is March 27, 1996
F-78
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 9,438,041 $ 7,466,795
Federal funds sold 21,000,000 8,200,000
Reverse repurchase agreements 7,000,000 --
Interest bearing deposits in other banks 42,652 2,871,697
------------ ------------
Total cash and cash equivalents 37,480,693 18,538,492
Investment securities:
Available for sale at fair value 7,032,087 --
Held to maturity 10,995,607 21,863,977
------------ ------------
Total investment securities 18,027,694 21,863,977
Mortgage loans held for sale, at the lower of cost or
market 38,336,858 45,340,152
Loans and leases, net of allowance for loan and lease
losses of $2,395,775 and $1,471,443 94,435,087 66,081,297
Accrued interest receivable 1,099,365 839,297
Loan and servicing sales receivable 4,611,625 7,185,048
Mortgage servicing rights 6,327,677 1,101,200
Other real estate owned 1,239,707 4,185,200
Investment in real estate joint ventures held for sale 3,744,409 1,705,465
Premises and equipment, net 2,430,559 3,143,250
FHLB stock 1,171,852 1,118,300
Other assets and prepaid expenses 4,441,721 1,618,418
------------ ------------
TOTAL ASSETS $213,347,250 $172,720,096
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 69,325,380 $ 45,987,058
Interest bearing 122,329,251 105,083,025
Repurchase agreements -- 1,638,000
Accrued expenses and other liabilities 4,939,162 4,007,473
------------ ------------
Total liabilities 196,593,792 156,715,556
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $4 par value, 10,000,000 shares
authorized; 861,460 and 860,379 shares
outstanding in 1995 and 1994 3,445,840 3,441,516
Additional paid-in capital 1,035,560 1,031,752
Retained earnings 12,245,490 11,531,272
Net unrealized gain on available-for-sale securities 26,567 --
------------ ------------
Total shareholders' equity 16,753,457 16,004,540
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $213,347,250 $172,720,096
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-79
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 8,826,237 $ 8,795,171 $ 10,350,318
Investment securities 1,936,100 1,623,426 665,266
Lease financing 3,378,072 1,646,898 1,040,867
----------- ----------- ------------
Total interest income 14,140,409 12,065,495 12,056,451
----------- ----------- ------------
INTEREST EXPENSE:
Deposits 6,502,164 4,422,689 4,712,736
Short-term borrowings 233,701 131,594 103,311
----------- ----------- ------------
Total interest expense 6,735,865 4,554,283 4,816,047
----------- ----------- ------------
NET INTEREST INCOME 7,404,544 7,511,212 7,240,404
PROVISION FOR LOAN AND LEASE LOSSES 1,196,090 1,172,000 910,000
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES 6,208,454 6,339,212 6,330,404
----------- ----------- ------------
NONINTEREST INCOME:
Gain on sale of loans, leases, and loan servicing 14,341,386 12,147,570 10,929,213
Servicing and fee income 2,440,478 4,252,005 2,624,146
Other income 19,751 200,375 168,879
----------- ----------- ------------
Total noninterest income 16,801,615 16,599,950 13,722,238
----------- ----------- ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 9,850,516 11,059,656 7,443,276
Occupancy and equipment 3,121,520 2,849,963 2,071,678
Printing and communication 1,456,890 1,414,486 1,146,859
Legal and professional 1,544,548 1,091,939 826,234
Office supplies 446,333 526,296 585,874
Real estate activities 1,224,747 769,439 628,257
Insurance 556,170 612,984 479,627
Other outside service fees 616,889 450,310 357,486
Branch closure costs 603,881 -- --
Other expense 2,357,165 2,264,776 2,170,131
----------- ----------- ------------
Total noninterest expense 21,778,659 21,039,849 15,709,422
----------- ----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,231,410 1,899,313 4,343,220
PROVISION FOR INCOME TAXES 517,192 797,700 1,841,125
----------- ----------- ------------
NET INCOME $ 714,218 $ 1,101,613 $ 2,502,095
----------- ----------- ------------
----------- ----------- ------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $0.83 $1.28 $2.97
------ ----- -----
------ ----- -----
SHARES USED IN COMPUTATION 860,982 863,175 842,583
------- ------- -------
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
F-80
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON
AVAILABLE-
FOR-SALE
NUMBER OF ADDITIONAL SECURITIES TOTAL
SHARES COMMON PAID-IN RETAINED (NET OF SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL EARNINGS TAX) EQUITY
------- ---------- ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1993 800,000 $3,200,000 $ 800,000 $ 7,927,564 $11,927,564
Net income 2,502,095 2,502,095
Options exercised 59,880 239,520 215,040 454,560
------- ---------- ---------- ----------- ------- -----------
Balance at
December 31, 1993 859,880 3,439,520 1,015,040 10,429,659 14,884,219
Net income 1,101,613 1,101,613
Options exercised 499 1,996 79 2,075
Tax benefit of
options exercised 16,633 16,633
------- ---------- ---------- ----------- ------- -----------
Balance at
December 31, 1994 860,379 3,441,516 1,031,752 11,531,272 16,004,540
Net income 714,218 714,218
Options exercised 1,081 4,324 3,808 8,132
Net unrealized gain
on available-for
sale securities (net
of taxes of $19,240 $26,567 26,567
------- ---------- ---------- ----------- ------- -----------
Balance at
December 31, 1995 861,460 $3,445,840 $1,035,560 $12,245,490 $26,567 $16,753,457
------- ---------- ---------- ----------- ------- -----------
------- ---------- ---------- ----------- ------- -----------
</TABLE>
See notes to consolidated financial statements.
F-81
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 714,218 $ 1,101,613 $ 2,502,095
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Provision for loan and lease losses 1,196,090 1,172,000 910,000
Provision for loss on other
real estate owned 189,840 260,000 317,600
Provision for loss on real estate
joint venture 915,000 -- --
Depreciation and amortization 1,588,750 746,965 631,650
Accretion of premium on investments (169,645) 45,052 68,673
(Gain) loss on sale of premises and
equipment 17,453 273 (12,469)
(Gain) loss on sale of real estate owned (108,468) 112,857 50,438
Mortgage loans originated for sale (946,580,833) (1,142,044,286) (2,208,378,000)
Mortgage servicing rights purchased
and originated (7,680,727) (843,374) (76,150)
Distribution of income from real estate
joint venture -- -- 16,007
Equity in (income) loss of real estate
joint venture (153,012) 78,276 337,348
Proceeds from sales of loans
and servicing 969,623,956 1,192,389,213 2,190,439,573
(Gain) loss on sale of loans and servicing (14,341,386) (12,147,570) (10,929,213)
Net effect of changes in:
Deferred loan origination fees (77,937) (69,881) (47,487)
Accrued interest receivable (260,068) (80,114) (68,149)
Loan and servicing sales receivable 2,573,423 (2,407,202) 1,875,126
FHLB stock (53,555) (390,600) 403,900
Other assets and prepaid expenses (2,823,305) (312,643) 618,971
Accrued expenses and other liabilities 931,688 (1,397,267) 2,260,155
------------- --------------- ---------------
Net cash (used in) provided by
operating activities 5,501,482 36,213,312 (19,079,932)
INVESTING ACTIVITIES:
Proceeds from sale of real estate owned 4,483,829 3,315,956 2,621,115
Additions to other real estate owned -- (21,048) (15,794)
Capital contributions to real estate
joint ventures (2,800,932) -- --
Loans originated for portfolio net
of principal repayments (31,091,651) (11,517,337) (1,522,141)
Purchases of held-to-maturity
investment securities (13,494,011) (14,329,722) --
Maturities of held-to-maturity
investment securities 17,526,506 4,251,006 --
Decrease (increase) in investment
securities -- -- (11,146,340)
Purchases of premises and equipment (312,608) (1,796,124) (777,006)
Proceeds from sale of premises and
equipment 174,906 5,045 192,012
------------- --------------- ---------------
Net cash used in investing activities (25,513,961) (20,092,224) (10,648,154)
FINANCING ACTIVITIES:
Net effect of changes in:
Noninterest bearing deposits 23,338,322 (20,086,272) 61,515,864
Interest bearing deposits 17,246,226 (4,793,668) (12,468,840)
Other borrowings (1,638,000) 1,638,000 --
Proceeds from exercise of stock options 8,132 18,708 322,302
------------- --------------- ---------------
Net cash provided (used) by
financing activities 38,954,680 (23,223,232) 49,369,326
------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 18,942,201 (7,102,144) 19,641,240
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 18,538,492 25,640,636 5,999,396
------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 37,480,693 $ 18,538,492 $ 25,640,636
------------- --------------- ---------------
------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 6,725,010 $ 4,451,248 $ 4,714,593
Income taxes 341,874 700,000 1,305,595
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Real estate acquired through foreclosure 2,273,311 5,166,638 $ 3,601,949
Other real estate owned transferred
to loans 653,603 -- --
Transfer of securities from held to
maturity to available for sale 6,986,280 -- --
Loans made to finance sale of other
real estate owned -- 1,309,454 2,495,475
Tax benefit on exercise of stock options -- 16,633 132,258
</TABLE>
See notes to consolidated financial statements.
F-82
<PAGE>
COMMERCE SECURITY BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Commerce Security Bank and subsidiary (the "Bank"), is a state chartered
commercial bank. The accounting and reporting policies of the Bank conform to
generally accepted accounting principles and to general practices within the
banking industry. Such principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
summary of significant accounting policies is as follows:
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of Commerce Security Bank and its wholly-owned subsidiary, CSB
Ventures, which invests in real estate joint ventures. All significant
intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS -- The Bank's primary sources of revenue are from the
origination and sale of residential mortgage loans and equipment leases, and
interest income on loans and leases. The Bank's administrative offices and
branch are located in Sacramento, California. It also operates three loan
production offices (LPOs) in California, and one each in Nevada, Arizona,
Colorado, and Oregon for the purpose of originating residential mortgage
loans. In addition, the Bank has three leasing offices, two in California and
one in Washington for the purpose of originating and acquiring equipment
leases.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash and due
from banks, interest-bearing deposits in financial institutions, federal
funds sold and reverse repurchase agreements. Generally, federal funds are
sold for one-day periods. Reverse repurchase agreements are generally for one
to three day periods.
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK -- As a member of the Federal Home
Loan Bank (FHLB) of San Francisco, the Bank is required to invest in stock of
the FHLB in the amount of 1% of its outstanding home loans, 5% of its
outstanding FHLB advances, or 0.3% of total assets, whichever is highest. At
December 31, 1995 and 1994, the Bank owned 11,570 and 11,008 shares of the
FHLB $100 par value capital stock, respectively, which is stated at cost,
plus accrued dividends.
INVESTMENT SECURITIES -- At January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. The effect of the adoption on the
Bank's financial position and results of operations was not material. The
Bank has classified its investment securities as held to maturity or
available for sale. Securities held to maturity are carried at cost adjusted
by the accretion of discounts and amortization of premiums. The Bank has the
ability and positive intent to hold these investment securities to maturity.
Securities available for sale may be sold to implement the Bank's
asset/liability management strategies and in response to changes in
interest rates, prepayment rates and similar factors. These securities are
recorded at their fair value. Unrealized gains or losses are included in
shareholders' equity, net of tax. Gain or loss on the sale of
available-for-sale securities is based on the specific identification method.
F-83
<PAGE>
LOANS AND LEASES -- Loans are stated at the principal amount outstanding, net
of unearned income, including deferred loan fees and costs. The net deferred
fees and costs are generally amortized into interest income over the loan
term using a method which approximates the interest method. Other
credit-related fees, such as standby letter of credit fees, loan placement
fees and annual credit card fees are recognized as noninterest income over
the commitment period or over the period the related service is performed.
Direct financing leases, which include estimated residual values of leased
equipment, are carried net of unearned income. Income from these leases is
recognized on a basis which produces a level yield on the outstanding net
investment in the lease.
Effective January 1, 1995, the Bank adopted Statements of SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and SFAS No. 118,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -- INCOME RECOGNITION AND
DISCLOSURE. SFAS No. 114 requires that impaired loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or as a practical expedient at the loan's observable
market rate or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on impaired loans and
requires certain information to be disclosed. The effect of adopting these
standards was immaterial.
ALLOWANCE FOR LOAN AND LEASE LOSSES -- The allowance for loan and lease
losses is established through a provision charged to expense. Loans and
leases are charged-off against the allowance for loan and lease losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and leases based on evaluations of
collectibility and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan and lease concentrations, specific
problem loans and leases, commitments, and current and anticipated economic
conditions that may affect the borrowers' ability to pay. While management
uses the best information available to evaluate the adequacy of its
allowance, future adjustments to the allowance may be necessary if actual
experience differs from the assumptions used in making the evaluations.
The Bank's policy is to place substantially all loans and leases that are
delinquent 90 days or more as to principal or interest on a nonaccrual of
interest basis (unless the loan is adequately secured and in the process of
collection). Cash payments subsequently received on nonaccrual loans are
recognized as income only where the future collection as to both principal
and interest is considered by management to be probable.
MORTGAGE BANKING ACTIVITIES -- The Bank originates and sells residential
mortgage loans to a variety of secondary market investors, including the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA) and others. The bank has an arrangement with the
Government National Mortgage Association (GNMA) whereby loans originated
by the Bank are securitized by GNMA and sold to others. Gains or losses on
the sale of mortgage loans are recognized upon delivery based on the
difference between the selling price and the carrying value of the related
mortgage loans sold. Deferred origination fees and expenses are recognized at
the time of sale in the determination of the gain or loss. The Bank may also
sell the servicing for such loans to either the purchaser of the loans or to
a third party. The Bank recognizes the gain or loss on servicing sold when
all risks and rewards of ownership have transferred.
Mortgage loans held for sale are stated at lower of cost or market value as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation
adjustments are charged against noninterest income.
F-84
<PAGE>
Forward commitments to sell, and put options on, mortgage-backed securities
are used to reduce interest rate risk on a portion of loans held for sale and
anticipated loan fundings. The resulting gains or losses on forward
commitments are deferred and included in the carrying values of loans held
for sale. Premiums on put options are capitalized and amortized over the
option period. Gains or losses on forward commitments and put options deferred
against loans held for sale approximately offset equivalent amounts of
unrecognized gains or losses on the related loans. Forward commitments to
sell and put options on mortgage-backed securities that hedge anticipated
loan fundings are not reflected in the statement of financial condition.
Gains or losses on these instruments are not recognized until the actual sale
of loans held for sale. Loans generally fund in 10 to 30 days.
Effective January 1, 1995, the Bank adopted SFAS No. 122, ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS. The statement is required to be adopted for fiscal
years beginning after December 15, 1995. As a result of the early adoption,
originated mortgage servicing rights of $5,815,000, were capitalized during
1995, which increased income before income taxes by a similar amount.
The Bank capitalizes the cost of acquiring mortgage servicing rights through
either the purchase or origination of mortgage loans if it sells or
securitizes those loans, and retains the servicing. The Bank allocates the
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the servicing rights) based on their relative fair values. The fair
value of the mortgage servicing rights is estimated based on observable
market prices. Capitalized mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income. The
Bank evaluates and measures impairment of capitalized servicing rights at
least quarterly. In performing its impairment analysis, the Bank stratifies
the servicing portfolio based on the relevant risk characteristics of the
underlying loans; including loan type (e.g., conventional/government), loan
term, and interest rate structure (fixed/adjustable). Valuation allowances,
if any, are established for each risk stratum to carry the servicing rights
at the lower of cost or market.
Loan servicing income represents fees earned for servicing real estate and
construction loan participations owned by investors, net of amortization
expense. The fees are generally calculated on the outstanding principal
balances of the loans serviced and are recorded as income when collected.
PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation expense is computed
principally on the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on a straight-line basis
over the period of the lease or the estimated useful life, whichever is
shorter.
OTHER REAL ESTATE OWNED -- Property acquired by the Bank through foreclosure
is initially recorded in the consolidated statements of financial condition
at the lower of estimated fair value less selling costs ("fair value") or
cost. Immediately upon foreclosure, if the fair value is less than the loan
amounts outstanding, any difference is charged against the allowance for
possible loan losses. After acquisition, valuations are periodically
performed and, if the carrying value of the property exceeds the fair value,
a valuation allowance is established by a charge to operations. Subsequent
increases in the fair value may reduce or eliminate the allowance. Required
developmental costs associated with foreclosed property under construction are
capitalized and considered in determining the fair value of the property.
Operating expenses of such properties, net of related income, and gains and
losses on their disposition, are included in noninterest expenses.
F-85
<PAGE>
INVESTMENT IN REAL ESTATE JOINT VENTURES HELD FOR SALE -- The Bank's
investments in real estate joint ventures is comprised of the Bank's
investment in CSB Ventures, a wholly-owned subsidiary which is consolidated
for financial statement presentation. CSB Ventures has invested in certain
real estate joint ventures (Ventures) which it accounts for using the equity
method. The Ventures each carry real estate investments at the lower of cost
or estimated fair value. Direct writedowns are recorded if total actual or
expected costs are in excess of estimated fair value.
INCOME TAXES -- Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE -- The calculation of primary
earnings per common and common equivalent share is based on the weighted
average number of common and common equivalent shares including the dilutive
effects of stock options computed under the treasury stock method. The Bank's
stock is not traded on any exchange and there is not an active market in the
Bank's stock. Accordingly, the dilutive effect of outstanding stock options is
computed using the greater of the estimated closing price or the estimated
average price of the common stock for the period. Fully diluted earnings per
common and common equivalent share did not differ significantly from primary
earnings per common and common equivalent share. The estimated price of the
Bank's common stock was calculated based on management's estimates.
STOCK OPTIONS -- In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The new
standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income
and earnings per share as if the company had applied the new method of
accounting. The Bank's stock option plan expired during 1995. As the Bank
has no plans to develop another stock option plan this standard will have no
effect on the Bank.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform with the 1995 presentation.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Cash and due from banks in the consolidated statement of
financial condition included amounts so restricted of $1,439,000 and $863,000
at December 31, 1995 and 1994.
F-86
<PAGE>
3. INVESTMENT SECURITIES
Investment securities have been classified in the statement of financial
position in accordance with management's intent. At December 31, 1994, all
investment securities were classified as held to maturity. At December 31,
the amortized cost of securities and their approximate fair value were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
DECEMBER 31, 1995:
Mortgage-backed securities $ 6,986,280 $45,807 $ -- $ 7,032,087
----------- ------- -------- -----------
----------- ------- -------- -----------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY:
DECEMBER 31, 1995:
U.S. Treasury securities $ 3,000,000 $ 720 $ 2,999,280
U.S. Agency securities 7,995,607 $ 5,408 8,001,015
----------- ------- -------- -----------
Total $10,995,607 $ 5,408 $ 720 $11,000,295
----------- ------- -------- -----------
----------- ------- -------- -----------
DECEMBER 31, 1994:
U.S. Treasury securities $ 7,821,909 $ -- $ 15,355 $ 7,806,554
U.S. Agency securities 5,494,657 -- 104,524 5,390,133
Mortgage-backed securities 8,547,411 -- 247,719 8,299,692
----------- ------- -------- -----------
Total $21,863,977 $ -- $367,598 $21,496,379
----------- ------- -------- -----------
----------- ------- -------- -----------
</TABLE>
In November 1995, the FASB issued additional implementation guidance
regarding the previously issued SFAS No. 115. In accordance with this
guidance and prior to December 31, 1995, companies were allowed a one-time
reassessment of their classification of securities and were required to
account for any resulting transfers at fair value. Transfers from the
held-to-maturity category that resulted from this one-time reassessment did
not call into question the intent to hold other securities to maturity in the
future. Accordingly, the Bank transferred approximately $6,986,280 of
securities from held to maturity to available for sale to allow the Bank
greater flexibility in managing its interest rate risk and liquidity. The
transferred securities were adjusted to fair value and stockholders' equity
was increased by $26,567, net of income taxes of $19,240.
F-87
<PAGE>
The amortized cost and estimated fair value of debt securities available for
sale and held to maturity at December 31, 1995, by contractual maturity, are
shown below. Actual maturities may differ from contractual maturities
because borrower's may have the right to call or prepay obligations with or
without call or prepayment penalties.
AVAILABLE FOR SALE
-------------------------------
AMORTIZED
COST FAIR VALUE
After 1 year but within 5 years $ 917,559 $ 915,735
After 10 years 6,068,721 6,116,352
---------- ----------
$6,986,280 $7,032,087
---------- ----------
---------- ----------
HELD TO MATURITY
-------------------------------
AMORTIZED
COST FAIR VALUE
Within 1 year $ 3,000,000 $ 2,999,280
After 1 year but within 5 years 7,995,607 8,001,015
After 5 years but within 10 years -- --
After 10 years -- --
----------- -----------
$10,995,607 $11,000,295
----------- -----------
----------- -----------
No sales of debt securities occurred during each of the three years ended
December 31, 1995.
At December 31, 1995 and 1994, investment securities with amortized costs of
$1,329,565 and $3,502,151, respectively, and estimated market values of
$1,301,746 and $3,446,770, respectively, were pledged as collateral for
borrowings and other purposes required or permitted by law.
4. LOANS AND LEASES
The loan and lease portfolio consists of various types of loans and leases
made principally to borrowers located in Northern California. These loans and
leases are classified by major type as follows:
DECEMBER 31,
-----------------------------
1995 1994
Land $ 2,746,933 $ 2,718,897
Residential real estate 11,660,466 9,797,920
Commercial real estate 18,916,916 19,777,594
Real estate construction 15,896,907 8,241,476
Commercial 17,315,268 8,783,720
Consumer 2,320,702 2,324,551
Direct financing leases 28,102,065 16,114,914
----------- -----------
96,959,257 67,759,072
Less:
Allowance for loan and lease losses (2,395,775) (1,471,443)
Deferred loan fees and costs (128,395) (206,332)
----------- -----------
Loans and leases, net $94,435,087 $66,081,297
----------- -----------
----------- -----------
F-88
<PAGE>
At December 31, 1995 and 1994, approximately $57,400,000 or 75%, and
$38,850,000 or 57%, respectively, of outstanding loans and leases were
secured by real estate in Northern California. These loans and leases are
expected to be repaid from cash flows of the borrower's employment or from
the sale or operation of the collateral. The repayment of the loans may be
affected by the condition of the local real estate market. The Bank normally
lends funds up to a certain percentage of the collateral's value as stated
in the Bank's underwriting policies based on the type of real estate. The
types of real estate collateral securing the Bank's loan portfolio are single
family residences, apartment complexes, undeveloped land and other real
estate. The Bank's exposure to credit loss, if any, is the difference between
the fair value of the collateral and the outstanding loan balance.
At December 31, 1995, the Bank's recorded investment in loans and leases for
which an impairment has been recognized in accordance with SFAS No. 114 was
approximately $8,352,699. The related valuation allowance was $1,137,597. For
the year ended December 31, 1995, the average recorded investment in loans
and leases for which impairment has been recognized was approximately
$6,411,159. The Bank uses the cash basis method of income recognition for
impaired loans and leases. For the year ended December 31, 1995, the Bank
recognized $320,273 of income on such loans.
As of December 31, 1995 and 1994, there were $4,384,970 and $958,481,
respectively, of loans classified as nonaccrual. Interest income that would
have been recognized on nonaccrual loans if they had performed in accordance
with the terms of the loans was $173,885, $142,905, and $152,791 for the
years ended December 31, 1995, 1994 and 1993, respectively. During 1995, the
Bank received $124,458 in payments on nonaccrual loans all of which was used
to reduce principal. During 1995 and 1994, there were no leases classified as
nonaccrual.
At December 31, 1995, there were no loans or leases past due 90 days or more
and still accruing interest. At December 31, 1994, the Bank had $207,977 in
loans past due 90 days or more in interest or principal and still accruing
interest. These loans were collateralized and in process of collection.
As of December 31, 1995 and 1994, there were no loans or leases outstanding
to directors, officers and their affiliates. During the year ended December
31, 1994, $44,000 in loans to such parties were paid off in full. In the
opinion of management, all transactions entered into between the Bank and
such related parties have been and are, in the ordinary course of business
and made on the same terms and conditions as similar transactions with
unaffiliated persons.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of the activity in the allowance for loan and lease losses is as
follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
Balance, beginning of year $1,471,443 $2,202,576 $2,280,347
Provision for loan and lease
losses 1,196,090 1,172,000 910,000
Loans and leases charged off (298,806) (1,925,108) (1,026,224)
Recoveries 27,048 21,975 38,453
---------- ---------- ----------
Balance, end of year $2,395,775 $1,471,443 $2,202,576
---------- ---------- ----------
---------- ---------- ----------
F-89
<PAGE>
6. MORTGAGE BANKING ACTIVITIES
As part of its mortgage banking activities, the Bank sells a portion of its
mortgage loans to investors subject to certain recourse provisions. The Bank
had recorded a reserve of $186,837 and $146,000 in connection with such sales
at December 31, 1995 and 1994.
As part of its mortgage banking activities, the Bank may sell the servicing
rights to loans it originates and sells to third party investors. To increase
the fees received from such sales, the Bank may sell the servicing rights
subject to recourse provisions. At December 31, 1995, the Bank had sold loan
servicing rights with recourse on loans with an unpaid principal balance of
approximately $668,000,000, subject to specific limitations on its liability.
The Bank has recorded a reserve of $190,014 relating to these recourse
provisions as of December 31, 1995. At December 31, 1994, the Bank had no
sales of loan servicing rights subject to recourse.
At December 31, 1995 and 1994, the Bank serviced loans and participations for
others as follows:
DECEMBER 31,
-------------------------------
1995 1994
Mortgage loan portfolio serviced for:
FHLMC $350,553,500 $ 405,835,200
FNMA 278,975,200 276,548,300
GNMA 176,869,000 364,428,600
Other 128,395,800 104,790,500
------------- --------------
934,793,500 1,151,602,600
Less:
Loans subserviced for others pending
transfer of servicing rights 397,541,300 489,981,300
------------- --------------
Total $537,252,200 $ 661,621,300
------------- --------------
------------- --------------
The Bank services mortgage loans and participating interests in mortgage
loans owned by investors. Escrow funds held in trust for loans serviced and
included in noninterest bearing deposits were $7,915,816 and $6,424,012 at
December 31, 1995 and 1994, respectively.
The following table provides a summary of the Bank's mortgage servicing
rights portfolio:
DECEMBER 31,
-------------------------------
1995 1994
Balance at beginning of year $1,101,200 $ 289,522
Purchases 1,865,719 843,374
Originations 5,815,008 --
Sales (1,698,440) --
Amortization (755,810) (31,696)
---------- ----------
Balance at end of year $6,327,677 $1,101,200
---------- ----------
---------- ----------
F-90
<PAGE>
7. LEASES RECEIVABLE
The components of the Bank's leases receivable are summarized below:
DECEMBER 31,
-------------------------------
1995 1994
Future minimum lease payments $32,464,310 $18,355,178
Residuals 786,284 867,063
Initial direct costs 917,632 481,266
Unearned income (6,066,161) (3,588,593)
----------- -----------
$28,102,065 $16,114,914
----------- -----------
----------- -----------
Future minimum lease payments receivable are as follows:
1996 $12,655,574
1997 9,860,449
1998 6,063,785
1999 3,034,705
2000 849,797
-----------
Total $32,464,310
-----------
-----------
There are no contingent rental payments included in income for each of the
three years in the period ended December 31, 1995.
8. OTHER REAL ESTATE OWNED
The balance of other real estate owned (OREO) was $1,239,707 and $4,185,200
net of valuation allowances of $34,640 and $136,500 at December 31, 1995 and
1994, respectively. Included in this balance are in-substance foreclosures of
$653,603 at December 31, 1994, which were transferred to loans effective
January 1, 1995.
An analysis of activity in the valuation allowance for other real estate
owned is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
Balance at beginning of year $ 136,500 $ 275,272 $ 697,380
Provision charged to operations 189,840 260,000 317,600
Balances related to OREO sold (291,700) (398,772) (739,708)
--------- --------- --------
Balance at end of year $ 34,640 $ 136,500 $ 275,272
--------- --------- --------
--------- --------- --------
F-91
<PAGE>
9. INVESTMENTS IN REAL ESTATE JOINT VENTURES HELD FOR SALE
The Bank's investment in real estate is comprised of the Bank's investment
in CSB Ventures, a wholly-owned subsidiary, which is consolidated for
financial statement presentation. Subject to certain conditions under FDIC
regulations, complete divestiture of real estate investments is required by
December 19, 1996. The Bank has listed all real estate investments for sale.
The Bank is in process of filing a request to extend the mandatory time
period in which it must divest of its real estate investments.
An analysis of activity in real estate joint ventures is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $1,705,465 $1,783,741 $2,137,096
Contributions 2,800,932
Distributions (16,007)
Equity in earnings/losses and writedowns (761,988) (78,276) (337,348)
---------- ---------- ----------
Balance at end of year $3,744,409 $1,705,465 $1,783,741
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In December 1995, CSB Ventures recorded a provision of $915,000 to reflect
estimated excess costs of land and commercial real estate over the expected
future sales prices.
Contributions to real estate joint ventures included advances of $2,786,997
made by the Bank to reduce CBS Ventures debt to a third party.
10. PREMISES AND EQUIPMENT
Premises and equipment are summarized below:
DECEMBER 31,
ESTIMATED -------------------------
LIVES 1995 1994
Furniture, fixtures and equipment 3-15 years $ 5,025,883 $ 5,249,875
Leasehold improvements 5-10 years 510,191 481,616
Work-in-progress 37,088 44,065
----------- -----------
5,573,162 5,775,556
Less accumulated depreciation
and amortization (3,142,603) (2,632,306)
----------- -----------
Total $ 2,430,559 $ 3,143,250
----------- -----------
----------- -----------
F-92
<PAGE>
11. DEPOSITS
A summary of deposits is as follows:
DECEMBER 31,
-----------------------------
1995 1994
Noninterest bearing:
Checking $ 18,831,834 $ 8,169,907
Bank controlled 2,612,085 2,136,687
Title and escrow 39,698,314 27,559,672
Custodial 8,183,147 8,120,792
------------ ------------
$ 69,325,380 $ 45,987,058
------------ ------------
------------ ------------
Interest bearing:
Passbook $ 9,305,475 $ 10,289,479
NOW and Super NOW accounts 2,148,866 1,541,088
Money market accounts 13,483,236 11,273,115
Certificates $100,000 or greater 22,812,398 18,805,955
Other certificates 74,579,276 63,173,388
------------ ------------
$122,329,251 $105,083,025
------------ ------------
------------ ------------
A summary of certificate account maturities is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
Three months or less $42,203,889 $32,223,209
Four through twelve months 46,882,296 49,621,128
Thereafter 8,305,489 135,006
----------- -----------
$97,391,674 $81,979,343
----------- -----------
----------- -----------
The Bank has no brokered deposits as of December 31, 1995 and 1994.
12. OTHER BORROWINGS
The Bank has pledged real estate loans with a book value of $33,315,321 and
$2,174,168 at December 31, 1995 and 1994, respectively, as collateral for
advances from the FHLB of San Francisco. The amount of advances available to
the Bank at December 31, 1995 was approximately $16,070,031.
Securities sold under repurchase agreements at December 31, 1994 have
maturities ranging from one to seven days and are secured by U.S. government
and mortgage-backed securities.
F-93
<PAGE>
The following table represents the maximum month-end outstandings, average
daily outstanding and average rates paid during the year for the two
categories of short-term borrowings.
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
Securities sold under repurchase agreements:
Daily average balance $ 1,642,164 $ 167,405
Daily average rate 5.56% 5.56%
Maximum month-end balance $15,014,000 $4,500,000
Year-end balance $ 0 $1,638,000
Advances from other banks:
Daily average balance $ 715,890 $ 38,052
Daily average rate 6.58% 4.13%
Maximum month-end balance $ 5,000,000 $1,600,000
Year-end balance $ 0 -
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the ordinary course of business, the Bank enters into various types of
transactions which involve financial instruments with off-sheet risk. These
financial instruments include commitments to extend credit and sell loans,
standby letters of credit, forward commitments to sell mortgage-backed
securities and put options to sell mortgage-backed securities and are not
reflected in the accompanying statements of financial condition. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated statements
of financial condition. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular
classes of financial instrument.
The following is a summary of the notional amounts of various off-balance
sheet financial instruments entered into by the Bank as of December 31,
1995:
NOTIONAL AMOUNT
Commitments to extend credit $24,089,023
Standby letters of credit 770,925
Commitments to sell loans 21,281,444
Forward commitments to sell mortgage-backed securities 28,733,500
Put options to sell mortgage-backed securities 14,000,000
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 terminal clauses
and may require payment of a fee. The Bank experiences interest rate risk on
commitments to extend credit which are at fixed rates. Such commitments
total $14,527,024 at December 31, 1995. The Bank uses the same credit
policies in making commitments to extend credit as it does for originating
loans. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
F-94
<PAGE>
Standby letters of credit are written conditional commitments issued by the
Bank to guarantee the performance of a customer to a third-party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank uses the same
underwriting policies as if a loan were made.
Commitments to sell loans are agreements to sell loans originated by the
Bank to investors. These commitments may be optional or mandatory. Under an
optional commitment, a commitment fee is paid and the Bank carries no risk
in excess of the loss of such fee in the event that the Bank is unable to
deliver mortgage loans into the commitment. Mandatory commitments may entail
possible financial risk to the Bank if it is unable to deliver mortgage
loans in sufficient quantity or at sufficient rates to meet the terms of the
commitments. The Bank may also experience interest rate risk for commitments
which are at a fixed rate. Such commitments total $24,733,500 at
December 31, 1995.
The Bank's policy is to hedge a portion of loans held for sale and its
commitments to originate mortgage loans against interest rate risk with
forward commitments to sell, or put options on, mortgage-backed securities.
Forward commitments are contracts for delayed delivery of securities in
which the Bank agrees to make delivery at a specified future date of a
specified security, at a specified price or yield. Put options convey to the
Bank the right, but not the obligation, to sell the securities at a
contractual specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities values and interest rates. The Bank tries to minimize these risks
by dealing with only primary brokers and maintaining correlation with the
asset or commitment being hedged. The Bank monitors its exposure through the
use of valuation models provided by a financial advisory service. The
unrealized losses on open forward commitments to sell mortgage-backed
securities were $154,676 and $64,793 as of December 31, 1995 and 1994,
respectively. There were no unrealized losses on open put options to sell
mortgage-backed securities as of December 31, 1995 and 1994, respectively.
14. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows:
1995 1994 1993
Currently payable (benefit):
Federal $(1,461,231) $ 810,574 $ 775,110
State (170,576) 342,126 323,616
----------- ---------- ----------
Total (1,631,807) 1,152,700 1,098,726
----------- ---------- ----------
Deferred debit (credit):
Federal 1,761,056 (235,000) 622,773
State 387,943 (120,000) 119,626
----------- ---------- ----------
Total 2,148,999 (355,000) 742,399
----------- ---------- ----------
Total $ 517,192 $ 797,700 $1,841,125
----------- ---------- ----------
----------- ---------- ----------
F-95
<PAGE>
The amount of deferred tax assets (liabilities) resulting from each type of
temporary difference were as follows:
1995 1994 1993
Provision for loan losses $ 776,191 $ 258,487 $ 725,952
FHLB stock dividends (136,800) (108,075) (81,641)
Gain on excess servicing rights - 159,839 81,578
Deferred loan fees - - (996,484)
Deferred loan costs (708,413)
Real estate activities (184,532) (185,225) (216,840)
Gain on sale of loans (2,427,298) - -
California franchise tax 111,739 94,753 159,609
Hedging losses (15,855) (17,018) (42,852)
Accrued expenses 32,506 73,434 22,554
Other reserves 170,714 89,121 238,030
REO loss reserve 430,187 62,067 124,167
Depreciation (250,474) (177,161) (125,678)
California NOL carryforward 153,076 - -
Advance payments on leases 139,677
Unrealized gain on securities available
for sale (19,300)
Other 8,602 (1,903) 49,994
----------- --------- ----------
$(1,919,980) $ 248,319 $ (61,611)
----------- --------- ----------
----------- --------- ----------
1995 1994 1993
Statutory federal expected tax rate 35.0% 35.0% 35.0%
Increase in income taxes resulting from:
State franchise tax (net of federal tax benefit) 7.5 7.5 6.7
Other (0.5) (0.5) 0.7
---- ---- ----
ADJUSTED TAX RATE 42.0% 42.0% 42.4%
---- ---- ----
---- ---- ----
At December 31, 1995 the Bank had Federal net operating losses of
approximately $3,398,000 which will be carried back against prior year's
taxable income. California net operating loss carryforwards of approximately
$1,155,000 will expire in 2000.
State tax laws impose substantial restrictions on the use of NOLs under many
circumstances including Internal Revenue Code (IRC) Section 382, which
restricts the use of NOLs in the event of significant changes in ownership
interests of individual shareholders and defined shareholder groups. As a
result if such changes in the Bank's ownership interests take place as
discussed in Note 19, the Bank is limited in the use of its NOLs to reduce
future taxable income. The annual limitation may be increased to the extent
of any applicable "built-in gains" as defined by IRC Section 382. Subsequent
ownership changes could further restrict NOLs.
15. REGULATORY MATTERS
Although the Bank converted its charter to that of a commercial bank and is
insured by the FDIC, it continues to be subject to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (Act).
F-96
<PAGE>
Subject to certain conditions under FDIC regulations, the Bank must divest
its investment in real estate joint ventures which are held for sale at
December 31, 1995 by December 19, 1996. The Bank is in the process of filing
a request to extend the mandatory time period in which it must divest of its
real estate investments.
Effective February 1994, the Bank entered into a memorandum of understanding
(Memorandum) with the FDIC and the State Banking Department. The Memorandum
included provisions requiring the Bank to reduce classified assets to
specified amounts by specified dates, establish a policy for determining the
adequacy of the reserve for loan losses, implement a liquidity policy, and
maintain the greater of a leverage ratio of 6.5% or total Tier 1 capital of
$12,500,000. Additionally, the Bank was restricted from paying cash
dividends. The Bank was also required to submit a strategic business plan,
and furnish quarterly progress reports to the FDIC and State Banking
Department.
The Memorandum was removed contingent upon the Board of Directors adopting
a resolution proposed by the FDIC and the State Banking Department. The
Board adopted the State Banking Department resolution in January 1996 and
the FDIC resolution March 27, 1996. The resolution requires the Bank to
reduce classified assets to specified amounts by specified dates,
establish and implement a loan review policy, maintain an adequate reserve
for loan losses, and maintain a leverage ratio of at least 6.5%. The Bank
is also required to submit a strategic business plan, and furnish quarterly
progress reports to the FDIC and State Banking Department.
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandates and possible additional discretionary actions
by regulators that, if undertaken, could have a material direct effect on
the Bank's financial statements. Capital adequacy guidelines and the
regulatory framework for prompt corrective action require that the Bank meet
specific capital adequacy 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 weighting 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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets
(as defined). Management believes, as of December 31, 1995, the Bank meets
all capital adequacy requirements which it is subject to.
As of December 31, 1995, the most recent notification from the FDIC
categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, the
Bank must maintain minimum total and Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since
the notification that management believes have changed the institution's
category.
F-97
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL 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:
Total capital (to risk
weighted assets) $18,508,551 13.18% $11,232,600 8% $14,040,750 10%
Tier I capital (to risk
weighted assets) 16,753,457 11.93% 5,616,300 4% 8,424,450 6%
Tier I capital (to
average assets) -
leverage ratio 16,753,457 7.62% 7,792,306 4% 9,740,382 5%
AS OF DECEMBER 31, 1994:
Total capital (to risk
weighted assets) 17,363,414 15.97% 8,698,016 8% 10,872,520 10%
Tier I capital (to risk
weighted assets) 16,004,540 14.72% 4,349,060 4% 6,523,590 6%
Tier I capital (to
average assets) -
leverage ratio 16,004,540 8.89% 7,201,143 4% 9,001,429 5%
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each material class of financial instruments at December 31, 1995.
CASH AND FEDERAL FUNDS SOLD--The carrying amount of cash and due from banks
and federal funds sold approximates the fair value.
INVESTMENT SECURITIES--The fair value of securities held as investments is
based on quoted market prices or dealer quotes.
LOANS AND LEASES--The fair value of loans and leases is based upon the
aggregate estimated fair values of homogeneous loan groups, giving effect
to time and maturity. The fair value of fixed rate loans is estimated by
discounting estimated future cash flows, using a discount rate adjusted by
estimated credit risk for each loan group. The fair value of variable rate
loans is estimated to approximate carrying value. Where credit deterioration
has occurred, management has reduced estimated cash flows to give effect to
estimated future losses.
LOANS HELD FOR SALE--The fair value of loans held for sale is estimated
using current rates on outstanding commitments from investors or current
investor yield requirements.
MORTGAGE SERVICING RIGHTS--The fair value of mortgage servicing rights is
estimated using quoted market prices for similar servicing products.
F-98
<PAGE>
DEPOSITS--The carrying amount of demand and savings deposits is the amount
payable on demand which approximates fair value. The carrying amount for
variable rate, fixed term time deposit accounts approximates fair value. The
fair value of fixed rate time deposits is estimated using a discounted cash
flow calculation. The discount rate on such deposits is based upon rates
currently offered for deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT--The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. The fair value of
letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. The fair value of
commitments to extend credit and standby letters of credit is not material.
COMMITMENTS TO SELL LOANS AND FORWARD COMMITMENTS TO SELL MORTGAGE-BACKED
SECURITIES--The fair value estimated is based on quoted prices for financial
instruments with identical or similar terms.
PUT OPTIONS TO SELL MORTGAGE-BACKED SECURITIES--The estimated fair value is
derived from active exchange quotations. The fair value of options is not
material.
The estimated fair values of the Company's financial instruments at December
31, 1995 are as follows (in thousands):
CARRYING FAIR
VALUE VALUE
Financial assets:
Cash and federal funds sold $ 37,480,693 $ 37,480,693
Investments securities 18,027,694 18,032,382
Loans and leases receivable 94,435,087 94,468,502
Loans held for sale 38,336,858 38,475,974
Mortgage servicing rights 6,327,677 6,729,910
------------ ------------
$194,608,009 $195,187,461
------------ ------------
------------ ------------
Financial liabilities:
Deposits $191,654,631 $192,203,407
------------ ------------
------------ ------------
Off balance sheet assets (liabilities):
Commitments to sell loans $(21,438,293)
Forward commitments to sell mortgage-backed
securities (154,676)
17. EMPLOYEE BENEFIT
On June 7, 1985, the Bank adopted an incentive stock option plan (the Plan).
The Plan authorized the issuance of up to 110,000 shares of the Bank's
authorized, but unissued common stock. Qualified options were granted only to
full-time employees of the Bank. The exercise price of options granted under
the Plan were set to be not less than the fair market value of the Bank's
common stock on the granting date as determined by the Board of Directors. The
Plan expired June 7, 1995. All outstanding options expired at that date.
F-99
<PAGE>
Changes in options are as follows:
WEIGHTED
AVERAGE
COMMON EXERCISE PRICE OPTION
STOCK PER SHARE PRICE
Outstanding, January 1, 1993 68,160 $5.00-$11.11 $5.86
Options exercised (59,880) $5.00-$11.11 $5.38
Expired or canceled (1,520) $6.00-$11.11 $7.49
-------
Outstanding, December 31, 1993 6,760 $6.00-$11.11 $9.71
Options exercised (940) $6.00-$11.11 $9.95
Expired or canceled (635) $8.00-$11.11 $10.97
-------
Outstanding, December 31, 1994 5,185 $6.00-$11.11 $9.56
-------
Options exercised (1,081) $6.00-$11.11 $7.52
Expired or canceled (4,104) $6.00-$11.11 $10.52
-------
Outstanding, December 31, 1995 0
-------
The Bank has also established the Commerce Security Bank 401(k) Savings Plan
which qualifies under the Internal Revenue Code Section 401(k). Employee
contributions to the Plan may be matched by the Bank at the discretion of the
Board of Directors. Employee contributions to the Plan are immediately vested
while any matching contributions made by the Bank vest at different
percentages based on years of service. For the years ended December 31, 1995,
and 1994, the Bank contributed approximately $264,000 and $271,000,
respectively, to the Plan. The Bank did not make a contribution for the year
ended December 31, 1993.
18. COMMITMENTS AND CONTINGENCIES
LITIGATION--The Bank is also involved in certain legal proceedings arising in
the normal course of its business. Bank management, after reviewing these
matters with outside counsel, considers that the aggregate liabilities, if
any, will not be material to the financial statements.
LEASES--A summary of noncancellable future operating lease commitments at
December 31, 1995 follows:
1996 $1,415,056
1997 1,286,082
1998 1,130,184
1999 703,443
Thereafter 158,289
----------
$4,693,054
----------
----------
It is expected that in the normal course of business, expiring leases will be
renewed or replaced.
Rent expense under all noncancellable operating lease obligations aggregated
$1,500,446, $1,325,245 and $937,868 for the years ended December 31, 1995,
1994 and 1993, respectively.
F-100
<PAGE>
19. SUBSEQUENT EVENT
On January 24, 1996, the Bank signed a letter of intent with agreement to be
acquired by SDN Bancorp, Inc. to form a business combination and created a
Bank Holding Company subject to shareholder and regulatory approval.
F-101
<PAGE>
ANNEX 1
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
by and between
SDN BANCORP, INC.
and
COMMERCE SECURITY BANK
Dated as of April 23, 1996
ANNEX 1 - 1
<PAGE>
TABLE OF CONTENTS
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Rules of Construction. . . . . . . . . . . . . . . . . . . . . .9
ARTICLE II. Holdco, the Merger Subsidiaries and the Merger. . . . . . . 10
2.1 Holdco and the Merger Subsidiaries . . . . . . . . . . . . . . 10
2.2 Capital Contribution . . . . . . . . . . . . . . . . . . . . . 11
2.3 The SDN Merger . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3.1 Effecting the Merger . . . . . . . . . . . . . . . 11
2.3.2 Treatment of SDN Common Stock and Holdco
Common Stock . . . . . . . . . . . . . . . . . . 11
2.4 The CSB Merger . . . . . . . . . . . . . . . . . . . . . . . . 12
2.4.1 Effecting the Merger . . . . . . . . . . . . . . . 12
2.4.2 Treatment of CSB Common Stock. . . . . . . . . . . 12
2.5 Elections by CSB Shareholders. . . . . . . . . . . . . . . . . 13
2.5.1 Election Procedure . . . . . . . . . . . . . . . . 13
2.5.2 Shares Held for Third Parties. . . . . . . . . . . 14
2.5.3 Effectiveness of Election Statement. . . . . . . . 14
2.5.4 Amendment and Revocation of Election
Statement . . . . . . . . . . . . . . . . . . . 14
2.5.5 Fractional Shares. . . . . . . . . . . . . . . . . 15
2.6 Proration and Allocation of Stock Consideration and
Cash Consideration . . . . . . . . . . . . . . . . . . . . . 15
2.7 Dissenting CSB Shares. . . . . . . . . . . . . . . . . . . . . 17
2.8 Exchange of Certificates . . . . . . . . . . . . . . . . . . . 17
(i)
ANNEX 1 - 2
<PAGE>
2.8.1 CSB Common Stock Exchange Procedures . . . . . . . 17
2.8.2 SDN Common Stock Exchange Procedures . . . . . . . 18
2.8.3 Transfers; Certain Taxes . . . . . . . . . . . . . 19
2.8.4 Lost, Stolen or Destroyed Certificates . . . . . . 19
2.8.5 Unclaimed Monies . . . . . . . . . . . . . . . . . 19
2.8.6 Exchange Agent to have no Voting or
Other Rights . . . . . . . . . . . . . . . . . . 19
2.9 Closing of Transfer Books. . . . . . . . . . . . . . . . . . . 20
2.10 Securities Law Matters . . . . . . . . . . . . . . . . . . . . 20
2.11 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . 20
2.11.1 . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE III. Representations and Warranties. . . . . . . . . . . . . . 21
3.1 By CSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.1.1 Organization, Standing and Power . . . . . . . . . 21
3.1.2 Capital Structure. . . . . . . . . . . . . . . . . 22
3.1.3 Interests in Other Entities. . . . . . . . . . . . 23
3.1.4 Authority and Related Matters. . . . . . . . . . . 23
3.1.5 Certain Agreements by Shareholders . . . . . . . . 23
3.1.6 Conflicts. . . . . . . . . . . . . . . . . . . . . 24
3.1.7 Consents . . . . . . . . . . . . . . . . . . . . . 24
3.1.8 Financial Statements . . . . . . . . . . . . . . . 24
3.1.9 Regulatory Filings and Agreements. . . . . . . . . 25
3.1.10 Undisclosed Liabilities . . . . . . . . . . . . . 25
(ii)
ANNEX 1 - 3
<PAGE>
3.1.11 Classified and OLEM Assets, Reserves and
Certain Other Assets. . . . . . . . . . . . . . 25
3.1.12 Investment Securities; Derivatives. . . . . . . . 26
3.1.13 Absence of Certain Changes or Events. . . . . . . 26
3.1.14 Compliance with Applicable Laws . . . . . . . . . 27
3.1.15 Litigation and Other Disputes . . . . . . . . . . 27
3.1.16 Administration of Fiduciary Accounts. . . . . . . 27
3.1.17 Taxes . . . . . . . . . . . . . . . . . . . . . . 27
3.1.18 Certain Agreements. . . . . . . . . . . . . . . . 28
3.1.19 Employees and Employee Benefit Plans. . . . . . . 30
3.1.20 Properties. . . . . . . . . . . . . . . . . . . . 31
3.1.21 Environmental . . . . . . . . . . . . . . . . . . 32
3.1.22 Intellectual Property . . . . . . . . . . . . . . 32
3.1.23 Brokers . . . . . . . . . . . . . . . . . . . . . 32
3.1.24 Disclosure of All Material Matters. . . . . . . . 33
3.2 By SDN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.1 Organization, Standing and Power . . . . . . . . . 33
3.2.2 Capital Structure. . . . . . . . . . . . . . . . . 34
3.2.3 Interests in Other Entities. . . . . . . . . . . . 35
3.2.4 Authority and Related Matters. . . . . . . . . . . 35
3.2.5 Conflicts. . . . . . . . . . . . . . . . . . . . . 35
3.2.6 Consents . . . . . . . . . . . . . . . . . . . . . 36
3.2.7 Financial Statements . . . . . . . . . . . . . . . 36
(iii)
ANNEX 1 - 4
<PAGE>
3.2.8 Regulatory Filings and Agreements. . . . . . . . . 36
3.2.9 Undisclosed Liabilities. . . . . . . . . . . . . . 37
3.2.10 Classified and OLEM Assets, Reserves and
Certain Other Assets . . . . . . . . . . . . . . 37
3.2.11 Investment Securities; Derivatives. . . . . . . . 38
3.2.12 Absence of Certain Changes or Events. . . . . . . 38
3.2.13 Compliance with Applicable Laws . . . . . . . . . 38
3.2.14 Litigation and Other Disputes . . . . . . . . . . 39
3.2.15 Administration of Fiduciary Accounts. . . . . . . 39
3.2.16 Taxes . . . . . . . . . . . . . . . . . . . . . . 39
3.2.17 Certain Agreements. . . . . . . . . . . . . . . . 40
3.2.18 Employees and Employee Benefit Plans. . . . . . . 42
3.2.19 Properties. . . . . . . . . . . . . . . . . . . . 43
3.2.20 Environmental . . . . . . . . . . . . . . . . . . 44
3.2.21 Intellectual Property . . . . . . . . . . . . . . 45
3.2.22 Brokers . . . . . . . . . . . . . . . . . . . . . 45
3.2.23 Financing of Reorganization . . . . . . . . . . . 45
3.2.24 Disclosure of All Material Matters. . . . . . . . 46
3.3 By Holdco. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.3.1 Organization, Standing and Power . . . . . . . . . 46
3.3.2 Holdco Common Stock. . . . . . . . . . . . . . . . 46
3.3.3 Authority and Related Matters. . . . . . . . . . . 46
3.3.4 No Conflicts . . . . . . . . . . . . . . . . . . . 47
(iv)
ANNEX 1 - 5
<PAGE>
3.3.5 Consents . . . . . . . . . . . . . . . . . . . . . 47
3.3.6 Capital Resources. . . . . . . . . . . . . . . . . 47
3.3.7 Securities Law Compliance. . . . . . . . . . . . . 47
3.3.8 Litigation and Other Disputes. . . . . . . . . . . 48
ARTICLE IV. Additional Agreements. . . . . . . . . . . . . . . . . . . 48
4.1 Discussions with Third Parties . . . . . . . . . . . . . . . . 48
4.2 Shareholder Approval; Information and Registration Statements. 49
4.2.1 Shareholder Approval . . . . . . . . . . . . . . . 49
4.2.2 Information Statement. . . . . . . . . . . . . . . 50
4.2.4 Letter of CSB's Accountants. . . . . . . . . . . . 51
4.2.5 Letter of SDN's Accountants. . . . . . . . . . . . 51
4.2.6 Affiliates . . . . . . . . . . . . . . . . . . . . 51
4.2.7 Effect of Qualifying Strategic Transaction
Proposal . . . . . . . . . . . . . . . . . . . . 51
4.3 Regulatory Approvals and Related Matters . . . . . . . . . . . 52
4.3.1 Responsibility for Bank Regulatory Matters . . . . 52
4.3.2 Cooperation by CSB . . . . . . . . . . . . . . . . 52
4.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . 52
4.5 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.6 Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . 53
4.7 Advice of Changes. . . . . . . . . . . . . . . . . . . . . . . 54
4.8 Current Information. . . . . . . . . . . . . . . . . . . . . . 54
4.9 Conduct of Business. . . . . . . . . . . . . . . . . . . . . . 55
(v)
ANNEX 1 - 6
<PAGE>
4.10 Negative Covenants of CSB. . . . . . . . . . . . . . . . . . . 55
4.11 Negative Covenants of SDN. . . . . . . . . . . . . . . . . . . 59
4.12 Consultation by SDN. . . . . . . . . . . . . . . . . . . . . . 59
4.13 Ratification of Agreement by Holdco. . . . . . . . . . . . . . 60
ARTICLE V. Conditions to Closing . . . . . . . . . . . . . . . . . . . 60
5.1 Conditions to Obligations of Both Parties. . . . . . . . . . . 60
5.1.1 Regulatory Approvals . . . . . . . . . . . . . . . 60
5.1.2 No Pending or Threatened Claims. . . . . . . . . . 60
5.2 Conditions to the Obligations of SDN and Holdco. . . . . . . . 61
5.2.1 Accuracy of Representations and Warranties;
Compliance with Covenants. . . . . . . . . . . . 61
5.2.2 Bringdown of Representations and Warranties. . . . 61
5.2.3 Approval by CSB Shareholders;
Dissenting Shares. . . . . . . . . . . . . . . . 61
5.2.4 Third Party Consents . . . . . . . . . . . . . . . 61
5.2.5 Receipt of Legal Opinion . . . . . . . . . . . . . 61
5.2.6 Updated Schedule of Classified and OLEM Assets . . 62
5.2.7 Certificates and Documents . . . . . . . . . . . . 62
5.2.8 Documents and Instruments in Satisfactory Form . . 62
5.2.9 Escrow of CSB Redemption Amount. . . . . . . . . . 62
5.2.10 Appointment of Committee Under Escrow
Agreement . . . . . . . . . . . . . . . . . . . 62
5.3 Conditions to the Obligations of CSB . . . . . . . . . . . . . 62
5.3.1 Accuracy of Representations and Warranties;
Compliance with Covenants . . . . . . . . . . . . 62
(vi)
ANNEX 1 - 7
<PAGE>
5.3.2 Bringdown of Representations and Warranties. . . . 62
5.3.3 Receipt of Legal Opinions. . . . . . . . . . . . . 63
5.3.4 Updated Schedule of Classified and
OLEM Assets. . . . . . . . . . . . . . . . . . . 63
5.3.5 Receipt of SDN Closing Certificate . . . . . . . . 63
5.3.6 Receipt of Holdco Closing Certificate. . . . . . . 63
5.3.7 Documents and Instruments in Satisfactory Form . . 64
5.3.8 Receipt of Capital Contribution and
Funding of Exchange Agent. . . . . . . . . . . . 64
5.3.9 Holdco Ratification. . . . . . . . . . . . . . . . 64
5.3.10 Execution and Funding of Escrow Agreement. . . . . 64
5.3.11 Appointment of Paulsen . . . . . . . . . . . . . . 64
ARTICLE VI. Termination. . . . . . . . . . . . . . . . . . . . . . . . 64
6.1 By Mutual Agreement. . . . . . . . . . . . . . . . . . . . . . 65
6.2 Regulatory Impediment. . . . . . . . . . . . . . . . . . . . . 65
6.3 By SDN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.4 By CSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
6.5 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 66
ARTICLE VII. Termination Fee; Liquidated Damages; Expenses. . . . . . . 66
7.1 Termination Fee. . . . . . . . . . . . . . . . . . . . . . . . 67
7.2 Liquidated Damages Payable by CSB. . . . . . . . . . . . . . . 67
7.3 Liquidated Damages Payable by SDN. . . . . . . . . . . . . . . 67
7.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
7.4.1 Generally. . . . . . . . . . . . . . . . . . . . . 68
(vii)
ANNEX 1 - 8
<PAGE>
7.4.2 Payment of Expenses upon Certain
Termination Events . . . . . . . . . . . . . . . 68
ARTICLE VIII. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 69
8.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.2 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 70
8.5 Non-Survival of Representations, Warranties
and Agreements . . . . . . . . . . . . . . . . . . . . . . . 70
8.6 Benefits; Binding Effect; Assignment and Designation . . . . . 71
8.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.8 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . 71
8.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.11 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . 71
8.12 Applicable Law; Consent to Jurisdiction. . . . . . . . . . . . 72
8.13 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 72
(viii)
ANNEX 1 - 9
<PAGE>
EXHIBITS
Exhibit 1.1-A Exchange Ratio (Part E omitted)
Exhibit 1.1-B Pro Forma Balance Sheet for SDN (consolidated
with Liberty) (omitted)
Exhibit 1.1-C Valuation Adjustment
Exhibit 2.11-A Escrow Agreement
Exhibit 2.11-B Stock Escrow Deposit
Exhibit 3.1.5 Voting Agreement (omitted)
Exhibit 4.2.6 Affiliate Letter (omitted)
Exhibit 5.2.5 Form of Opinion of CSB Counsel (omitted)
Exhibit 5.3.3 Form of Opinion of SDN Counsel (omitted)
SCHEDULES (omitted)
CSB Disclosures
---------------
Schedule 3.1.3 Subsidiaries
Schedule 3.1.7 Governmental Approvals
Schedule 3.1.9 Regulatory Agreements and related matters
Schedule 3.1.10 Undisclosed Liabilities; Letters of Credit
Schedule 3.1.11 Classified Assets; Loans to Directors
Schedule 3.1.12 Investment Securities; Derivatives
Schedule 3.1.13 Adverse Changes; Increases in Executive
Compensation
Schedule 3.1.14 Compliance with Laws
Schedule 3.1.15 Litigation
Schedule 3.1.18 Certain Agreements
Schedule 3.1.19 Employee Benefits Matters
Schedule 3.1.20 Real Property
Schedule 3.1.23 Brokers
SDN Disclosures
---------------
Schedule 3.2.2 Registration Rights Agreements
Schedule 3.2.6 Governmental Approvals
Schedule 3.2.8 Regulatory Agreements and related matters
Schedule 3.2.9 Undisclosed Liabilities; Letters of Credit
Schedule 3.2.10 Classified Assets; Loans to Directors
Schedule 3.2.11 Investment Securities
Schedule 3.2.12 Adverse Changes; Increases in Executive
Compensation
Schedule 3.2.14 Litigation
Schedule 3.2.16 Tax Matters
Schedule 3.2.17 Certain Agreements
Schedule 3.2.18 Employee Benefits Matters
Schedule 3.2.19 Real Property
General
Schedule 4.10.11 Contemplated Changes in CSB Securities Portfolio
(ix)
ANNEX 1 - 10
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of April 23, 1996,
by and between SDN BANCORP, INC., a Delaware business corporation
("SDN"), and COMMERCE SECURITY BANK, a California banking corporation
("CSB").
Recitals
A. The Boards of Directors of SDN and CSB have deemed it
advisable and in the best interests of their respective companies and
shareholders to consummate the transactions contemplated herein (the
"Reorganization"), pursuant to which SDN shall cause a new corporation,
Holdco (as hereinafter defined), to be formed which will then acquire,
through the SDN Merger (as hereinafter defined), all of the shares of
SDN Common Stock in exchange for Holdco Common Stock and acquire,
through the CSB Merger (as hereinafter defined), all of the shares of
CSB Common Stock in exchange for Holdco Common Stock and/or cash.
B. For federal income tax purposes, it is intended that (i)
the SDN Merger qualify as a reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and/or as an
exchange under Section 351 of the Code, and that (ii) the CSB Merger
qualify as an exchange under Section 351 of the Code, and that as a
consequence the CSB Shareholders will not recognize income or loss for
federal income tax purposes except to the extent they receive cash in
exchange for their respective shares of CSB Common Stock in the CSB
Merger.
C. SDN and CSB desire to make certain representations,
warranties, covenants and agreements in connection with the
Reorganization, as contained herein.
Agreement
NOW THEREFORE, in consideration of the mutual undertakings and the
representations, warranties, covenants and agreements contained herein,
SDN and CSB hereby agree as follows:
ARTICLE I.
Definitions
-----------
1.1 Definitions. Capitalized terms contained in this
Agreement and not defined in the preamble or the recitals above shall
have the meanings set forth in this Section 1.1:
"Agreement" means this Agreement and Plan of Reorganization,
including all Schedules and Exhibits hereto, as the same may be
hereafter amended.
ANNEX 1 - 11
<PAGE>
"Aggregate Cash Pool" means $15,078,111 minus the Cash Valuation
Adjustment.
"Balance Sheet Date" means December 31, 1995.
"Bank Regulators" means any and all Federal or state Governmental
Entities charged with the supervision or regulation of banks or bank
holding companies or engaged in the insurance of bank deposits.
"Benefit Plan" means any employee benefit plan (including any
"employee benefit plan" as defined in Section 3(3) of ERISA) maintained
or contributed to by the applicable entity.
"Borrower Group Obligations" means all loans from CSB to, and
other obligations to CSB of, (a) the applicable borrower, (b) all
guarantors of such borrower, and (c) all affiliates and associates of
such borrower and guarantors.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday or
Friday that banks in Los Angeles, California are not required by Law to
be closed.
"Capital Contribution" means an amount which either is (a) the
arithmetic difference resulting from the Maximum Required Capital
Contribution minus the CSB Redemption Amount, if any, or (b) such amount
of capital greater than that required under clause (a) of this
subsection as SDN may determine, in its sole discretion, is desirable
under the circumstances; provided, however, that in no event shall the
amount of the Capital Contribution be less than the Minimum Required
Capital Contribution; and provided, further, that in no event shall SDN
have any obligation to raise more capital in connection with the
Reorganization than the Maximum Required Capital Contribution, subject
to the remedies of CSB set forth in Section 7.3.3.
"Cash Consideration" shall have the meaning given that term in
Section 2.4.2.
"Cash Escrow Deposit" means (a) the Cash Escrow Deposit as defined
in the Escrow Agreement, equal to $345,000, if SAIF Recapitalization
Legislation has not been enacted or adopted prior to the Closing Date,
and (b) zero, if SAIF Recapitalization Legislation has been enacted or
adopted prior to the Closing Date.
"Cash Valuation Adjustment" means a dollar amount equal to (i) the
product of the Valuation Adjustment multiplied by 60%, minus (ii) the
product of the Valuation Adjustment multiplied by a fraction consisting
of the total number of Dissenting CSB Shares over the total number of
shares of CSB Common Stock issued and outstanding immediately prior to
the Closing.
-2-
ANNEX 1 - 12
<PAGE>
"Classified Asset" means (a) any loan or lease asset that is
classified on the books and records of the applicable entity as
"Substandard", "Doubtful" or "Loss", and (b) any property classified on
the books and records of the applicable entity as OREO.
"Closing" means the closing of the Reorganization, to be held on
the Closing Date at a location fixed pursuant to Section 8.1.
"Closing Date" shall mean the date as of which the Closing of the
Reorganization occurs, as the same may be fixed pursuant to Section 8.1.
"CSB" means CSB including, unless the context clearly indicates
otherwise, all direct and indirect subsidiaries of CSB as of the
applicable time.
"CSB Common Stock" means the common stock of CSB, no par value per
share.
"CSB Governmental Approvals" means the approvals listed on
Schedule 3.1.7.
"CSB Merger" means the merger of CSB and CSB Merger Sub, as more
particularly described in Section 2.4.
"CSB Merger Sub" means a wholly-owned subsidiary of Holdco, whose
type of entity and jurisdiction of organization shall be determined by
SDN in its discretion, to be formed for the sole purpose of completing
the CSB Merger.
"CSB Merger Agreement" means an Agreement and Plan of Merger, in
a form to be mutually agreed upon by SDN and CSB, pursuant to which CSB
Merger Sub will merge with and into (or consolidate with) CSB at the
Effective Time.
"CSB Redemption Amount" means the amount of cash, if any, that CSB
contributes to the Exchange Agent, as approved by all applicable Bank
Regulators, if any, to fund a portion of the Distributable Cash Pool,
which amount shall not be greater than Four Million Dollars
($4,000,000).
"CSB Shareholder" means a holder of CSB Common Stock.
"CSB Shareholder Agreement" means that certain Stock Purchase
Agreement dated March 8, 1985 by and among CSB and certain stockholders
of CSB.
-3-
ANNEX 1 - 13
<PAGE>
"Dissenting CSB Shares" means all shares of CSB Common Stock whose
holders have perfected dissenters' rights under Section 1300 et seq. of
the California Corporations Code (as incorporated by Section 101 of the
California Financial Code).
"Distributable Cash Pool" means the arithmetic difference
resulting from Aggregate Cash Pool minus the product of the number of
Dissenting CSB Shares multiplied by $17.50 (the latter being the product
of $29.17 multiplied by 60%).
"Distributable Stock Pool" means a number of authorized but
unissued shares of Holdco Common Stock equal to the product of the
Exchange Ratio multiplied by the number of Net Stock Consideration
Shares.
"Effective Time" means the time as of which the Reorganization is
deemed to have become effective, as agreed upon by the Parties.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Agreement" shall have the meaning given that term in
Section 2.11.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" means an unaffiliated, independent banking
institution, corporate trust company or entity regularly engaged in a
stock transfer business that SDN shall appoint, after consultation with
CSB, to act as exchange agent hereunder.
"Exchange Ratio," means the number of shares of Holdco Common
Stock, rounded to the nearest thousandth, into which each of the Net
Stock Consideration Shares is to be converted in connection with the
Reorganization, such Exchange Ratio to be determined in accordance with
the methodology set forth on Exhibit 1.1-A.
"Expenses" means all legal, accounting, consulting, investment
banking and other fees and expenses incurred by the applicable Party in
connection with the Reorganization (including expenses incurred in
connection with the preparation of this Agreement and all negotiations,
due diligence and other activities conducted prior hereto, and including
all broker's, finder's and similar fees and expenses. The Expenses of
SDN shall include the Expenses, if any, of Holdco and the Merger
Subsidiaries.
"FDIC" means the Federal Deposit Insurance Corporation.
-4-
ANNEX 1 - 14
<PAGE>
"Final Approval Date" means the later of (a) the date on which the
final Regulatory Approval is received, and (b) the date on which the CSB
Shareholders approve the Reorganization.
"Final Financial Statements" means the applicable entity's audited
balance sheet, income statement, cash flow statement and statement of
shareholders' equity, with footnotes, prepared in accordance with GAAP,
as at December 31, 1995 and for the year then ended, as certified by the
applicable entity's independent auditors.
"GAAP" means Generally Accepted Accounting Principles as in effect
in the United States, consistently applied.
"Governmental Approval" means the approval of a Governmental
Entity necessary or desirable for the consummation of the Reorganization
(including the expiration of any waiting period imposed thereby),
including the CSB Governmental Approvals and the SDN Governmental
Approvals.
"Governmental Entity" means any administrative agency, commission,
court or other governmental authority or instrumentality, domestic or
foreign, including any government-sponsored corporation having
regulatory authority under law.
"Hazardous Material" means any pollutant, contaminant, waste or
hazardous or toxic substance regulated by Law as such, and petroleum or
petroleum products.
"Holdco" means a corporation formed under the Delaware General
Corporation Law which, prior to the Effective Time, shall be a wholly-owned
subsidiary of SDN and which, as of and following the Effective
Time, shall be the parent corporation and holding company of SDN and
CSB.
"Holdco Common Stock" means the common stock of Holdco, par value
$.01 per share.
"Holdco Ratification Date" means the date, which shall be no later
than two Business Days prior to the Closing Date, on which Holdco
ratifies, accepts and joins in this Agreement.
"Information Statement" means an information or proxy statement
(including any offering materials contained therein) by which CSB will
solicit either written consents to the Reorganization by the CSB
Shareholders or proxies from the CSB Shareholders to vote such CSB
Shareholders' shares in favor of the Reorganization in a meeting of CSB
Shareholders held for such purpose, and describing Holdco, the members
of the SDN Group, and the Holdco Shares.
-5-
ANNEX 1 - 15
<PAGE>
"IRS" means the United States Internal Revenue Service.
"Law" means any statute, law, ordinance, rule or regulation of any
Governmental Entity that is applicable to the referenced Person.
"Letter of Intent" means that certain letter dated as of January
24, 1996 from SDN to CSB, accepted and agreed to by CSB as of the same
date, as supplemented by that certain letter dated as of February 29,
1996 from SDN to CSB, accepted and agreed to by CSB as of the same date,
together describing certain anticipated terms of the Reorganization.
"Liberty" means Liberty National Bank, a national banking
association formed under the laws of the United States of America, or
any successor thereto.
"Major Covenant" means any of the agreements set forth in Section
4.1, Section 4.2.1, Section 4.3.2, Section 4.9, Sections 4.10.1 through
4.10.6 inclusive, Section 4.10.9, and Section 4.10.16.
"Material Adverse Effect" means, with respect to any Person, a
material adverse effect on the business, properties, assets,
liabilities, prospects, results of operations or financial condition of
such Person (including such an effect caused indirectly through any of
its Subsidiaries), or on the ability of such Person to consummate the
Reorganization on the terms hereof; provided, however, that a Material
Adverse Effect does not include a change with respect to, or effect on,
such Person resulting from a change in Law, GAAP, RAP, or a change with
respect to, or effect on, such Person resulting from any other matter
affecting financial institutions or their holding companies generally.
"Maximum Required Capital Contribution" means the sum of the
Aggregate Cash Pool plus the aggregate amount of Expenses incurred by
SDN and CSB.
"Merger Subsidiaries" means, collectively, CSB Merger Sub and SDN
Merger Sub.
"Minimum Required Capital Contribution" means Eleven Million
Ninety Thousand Dollars ($11,090,000).
"Net Cash Consideration Shares" means a number of shares of CSB
Common Stock equal to the arithmentic difference resulting from (a)
516,879 (i.e., 60% of 861,465, the maximum number of shares of CSB
Common Stock outstanding as of the date of this Agreement) minus (b) the
product of the number of Dissenting CSB Shares multiplied by 60%.
-6-
ANNEX 1 - 16
<PAGE>
"Net Stock Consideration Shares" means a number of shares of CSB
Common Stock equal to the arithmentic difference resulting from (a)
344,586 (i.e., 40% of 861,465, the maximum number of shares of CSB
Common Stock outstanding as of the date of this Agreement) minus (b) the
product of the number of Dissenting CSB Shares multiplied by 40%.
"OCC" means the Office of the Comptroller of the Currency.
"OLEM Asset" means any loan or lease asset of the applicable
entity classified on the books and records of the applicable entity as
"Other Loans Especially Mentioned", "Special Mention", "Criticized",
"Credit Risk Assets", "Concerned Loans" or by words of similar import.
"OREO" means real property (i) acquired by the applicable entity,
in the ordinary course of the applicable entity's banking business,
through purchase at a foreclosure sale conducted on a lien in favor of
the applicable entity (or a comparable sale by a trustee under a deed of
trust) or by acceptance of a deed in lieu of foreclosure or (ii) any
asset of the applicable entity classified as "in-substance foreclosure"
on the books and records of the applicable entity.
"Parties" means, collectively, CSB, SDN and, following its
acceptance and ratification of this Agreement, Holdco.
"Person" means any natural person, corporation, limited liability
company, general or limited partnership, limited liability partnership,
joint venture, joint stock company, trust, unincorporated organization,
association, sole proprietorship, governmental body, or agency or
political subdivision of any government.
"Principal Stockholder" means a holder of five percent (5%) or
more of the outstanding common stock of the referenced entity.
"Pro Forma SDN/Liberty Balance Sheet" means the pro forma balance
sheet as at December 31, 1995 for SDN and Liberty, assuming that SDN's
acquisition of Liberty had been consummated as of such date, which
balance sheet is attached as Exhibit 1.1-B.
"Qualifying Strategic Transaction Proposal" shall have the meaning
given that term in Section 4.1.2.
"RAP" means Regulatory Accounting Principles, as interpreted by
the applicable entity's principal Federal Bank Regulator.
"Record Date" shall have the meaning given that term in Section
2.8.1.
-7-
ANNEX 1 - 17
<PAGE>
"Registration Statement" shall have the meaning given that term
in Section 2.10.
"Regulatory Agreement" means any regulatory agreement, memorandum
of understanding or similar agreement with, any cease and desist or
similar order or directive entered or issued by, commitment letter or
similar undertaking to, any extraordinary supervisory letter from, any
Bank Regulator.
"Representatives" means each of the applicable Person's directors,
officers, employees, agents, representatives and advisors.
"Requested Cash Consideration" shall have the meaning given that
term in Section 2.5.2.
"San Dieguito" means San Dieguito National Bank, a national
banking association organized under the laws of the United States of
America, or any successor thereto.
"SAIF Recapitalization Legislation" means any Law enacted by the
United States Government, including any final regulation adopted by any
federal Bank Regulator, that imposes one or more special assessments on
depository institutions that have deposits insured by the Savings
Association Insurance Fund.
"SDN" means SDN including, unless the context clearly indicates
otherwise, all direct and indirect subsidiaries of SDN as of the
applicable time.
"SDN Common Stock" means the common stock of SDN, par value $.01
per share.
"SDN Governmental Approvals" means the approvals listed on
Schedule 3.2.6.
"SDN Group" means, collectively, SDN, San Dieguito and Liberty.
"SDN Merger" means the merger of SDN Merger Sub and SDN, as more
particularly described in Section 2.3.
"SDN Merger Agreement" means an Agreement and Plan of Merger, in
a form to be mutually agreed upon by SDN and CSB, pursuant to which SDN
Merger Sub will merge with and into SDN at the Effective Time.
"SDN Merger Sub" means a wholly-owned subsidiary of Holdco to be
organized under the Delaware General Corporation Law for the sole
purpose of completing the SDN Merger.
-8-
ANNEX 1 - 18
<PAGE>
"SDN Shareholder" means a holder of SDN Common Stock.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Small Holder" means a CSB Shareholder beneficially owning an
aggregate of one hundred (100) or fewer shares of CSB Common Stock.
"Stock Consideration" shall have the meaning given that term in
Section 2.4.2.
"Stock Escrow Deposit" means (a) the Stock Escrow Deposit as
defined in the Escrow Agreement, as calculated in accordance with
Exhibit 2.11-B, if SAIF Recapitalization Legislation has not been
enacted or adopted prior to the Closing Date, and (b) zero, if SAIF
Recapitalization Legislation has been enacted or adopted prior to the
Closing Date.
"Strategic Transaction" means any acquisition or purchase of all
or a significant (i.e., more than 5%) portion of the assets of, or a
significant equity interest in, CSB, or any merger or other business
combination involving CSB or any recapitalization involving CSB
resulting in an extraordinary dividend or distribution to CSB's
shareholders or a self-tender for or the redemption of some or all of
the CSB Common Stock.
"Strategic Transaction Proposal" means any proposal regarding a
Strategic Transaction.
"Tax" means, except where the context otherwise requires, all
Federal, state, local and foreign income, profits, franchise, gross
receipts, payroll, sales, employment, use, property, withholding,
excise, occupancy and other taxes, duties or assessments of any nature
whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts.
"Valuation Adjustment" means a dollar amount calculated in
accordance with Exhibit 1.1-C, which amount shall not be less than zero
and shall not be more than the maximum amount provided in such
Exhibit 1.1-C, subject to the exceptions contained therein.
1.2 Rules of Construction. The following rules of
construction shall apply to the interpretation of this Agreement:
1.2.1 Any reference to any event, change or effect being
"material" with respect to any Person means an event, change or effect which
is material in relation to the condition (financial or otherwise), properties,
assets, liabilities, businesses or operations of such entity and its
Subsidiaries taken as a whole.
-9-
ANNEX 1 - 19
<PAGE>
1.2.2 Disclosure of any matter in the Schedules hereto shall not
be deemed to imply that such matter is or is not material, and shall not
constitute an admission or raise any inference that such matter constitutes a
violation of law or an admission of liability or facts supporting liability.
1.2.3 Whenever used in this Agreement, the word "including" shall
be non-exclusive and shall mean "including without limitation."
1.2.4 All references to Sections, Articles and Schedules shall,
unless another agreement is expressly referenced, mean the applicable sections
or articles of, or schedules to, this Agreement.
1.2.5 The section titles and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of any provisions of this Agreement.
1.2.6 The terms "herein", "hereunder", and terms of similar import
refer to this Agreement as a whole and not to the specific Section or Article
in which they are used.
1.2.7 This Agreement is the joint product of SDN and CSB and each
provision hereof has been subject to the mutual consultation, negotiation and
agreement of SDN and CSB, and shall not be construed for or against any Party.
-10-
ANNEX 1 - 20
<PAGE>
ARTICLE II.
Holdco, the Merger Subsidiaries and the Merger
2.1 Holdco and the Merger Subsidiaries. Prior to the Closing, SDN
shall cause to be formed Holdco, SDN Merger Sub and CSB Merger Sub.
Subject to the other terms of this Agreement, Holdco's Certificate of
Incorporation (including the authorized capital provided thereunder) and
By-laws shall be substantially identical to the Certificate of
Incorporation and By-laws of SDN as in effect immediately prior to the
Closing. Each of the Merger Subsidiaries' charters and By-laws shall be
in such forms as SDN may reasonably determine. Subject only to the
receipt of all necessary approvals of Governmental Entities with respect
to such persons (which approvals SDN shall use all reasonable efforts to
obtain), the directors and officers of Holdco as of immediately prior to
the Effective Time shall consist of all of the directors and officers of
SDN duly elected, qualified and in office as of such time, one of whom
shall be Peter H. Paulsen. The initial directors and officers of each
of the Merger Subsidiaries shall consist of one or more persons, each of
whom shall be designated by SDN.
2.2 Capital Contribution. On or before the Closing Date, SDN
shall (a) raise through the issuance of SDN common stock (or other means
mutually agreeable to SDN and CSB) the amount of the Capital
Contribution, and (b) take all actions necessary to ensure that Holdco
has cash in Holdco not less than the amount of the Capital Contribution
less SDN's Expenses. Subject to the terms and conditions hereof,
immediately prior to the Closing, Holdco shall deliver or cause to be
delivered (and SDN agrees to cause Holdco to deliver or cause to be
delivered) to the Exchange Agent an amount of cash not less than the
Distributable Cash Pool less the CSB Redemption Amount.
2.3 The SDN Merger.
2.3.1 Effecting the Merger. Subject to the terms and conditions
of this Agreement and the terms and conditions of the SDN Merger Agreement,
at the Effective Time, SDN Merger Sub shall merge with and into SDN pursuant to
Section 251(g) of the Delaware General Corporation Law, with SDN as the
surviving entity. As a consequence of the SDN Merger, at the Effective Time,
each share of common stock of SDN Merger Sub outstanding immediately prior to
the Effective Time shall be converted into one share of SDN Common Stock, and
from and after the Effective Time, SDN shall be a wholly-owned subsidiary of
Holdco.
2.3.2 Treatment of SDN Common Stock and Holdco Common Stock. At
the Effective Time, each share of SDN Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the SDN Merger and
without any action on the part of the holder thereof, be converted into the
right to receive from Holdco one share of Holdco
-11-
ANNEX 1 - 21
<PAGE>
Common Stock. At the Effective Time, all shares of Holdco Common
Stock issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive cash in the amount of
One Dollar ($1.00) per share.
2.4 The CSB Merger.
2.4.1 Effecting the Merger. Subject to the terms and conditions
of this Agreement and the terms and conditions of the CSB Merger Agreement, at
the Effective Time, CSB Merger Sub shall merge with and into CSB pursuant to
Section 1100 et seq. of the California Corporations Code, with CSB as the
surviving entity. As a consequence of the CSB Merger, at the Effective Time
each share of common stock of CSB Merger Sub outstanding immediately prior to
the Effective Time shall be converted into one share of CSB Common Stock, and
from and after the Effective Time, CSB shall be a wholly-owned subsidiary of
Holdco. At and after the Effective Time, each of the members of the Board of
Directors and each of the officers of CSB, in each case as of immediately prior
to the Effective Time, shall continue to hold the same office of CSB following
the CSB Merger, without change until their successors have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with CSB's Articles of Incorporation and By-laws and applicable
law.
2.4.2 Treatment of CSB Common Stock. Subject to the provisions
of Section 2.5 and Section 2.6 and except as provided in Section 2.7, at the
Effective Time, each share of CSB Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted in the CSB Merger,
without any action on the part of the holder thereof, into a right to receive
either cash ("Cash Consideration") or newly-issued Holdco Common Stock ("Stock
Consideration"), as follows:
(a) the holder of each share of CSB Common Stock to be
converted into Cash Consideration shall be entitled to receive, for
each such share, cash in the amount of the arithmetic difference
resulting from (i) $29.17, minus (ii) a pro rata portion of the
Cash Valuation Adjustment, minus (iii) a pro rata portion of the
Cash Escrow Deposit (each such pro rata amount being determined in
proportion to all shares of CSB Common Stock to be exchanged for
cash pursuant to this Section 2.4.2), and
(b) each CSB shareholder who holds one or more shares of
CSB Common Stock to be converted into Stock Consideration shall be
entitled to receive a number of shares of Holdco Common Stock equal
to the arithmetic difference resulting from (i) the product of the
Exchange Ratio multiplied by the number of shares of CSB Common
Stock to be so converted, minus (ii) a pro rata portion of the
Stock Escrow Deposit (such pro rata portion being determined in
proportion to all shares of CSB
-12-
ANNEX 1 - 22
<PAGE>
Common Stock to be exchanged for Holdco Common Stock pursuant to this
Section 2.4.2).
2.5 Elections by CSB Shareholders. Each holder of record of
shares of CSB Common Stock as of the Record Date will have the right,
subject to proration in accordance with Section 2.6, the treatment of
fractional shares set forth in Section 2.5.5 and the other terms of this
Agreement, to specify such holder's election to have his or her shares
of CSB Common Stock converted in whole or in part into Holdco Common
Stock or in whole or in part into cash, or to specify that such holder
has no election, in accordance with the procedures set forth in this
Section 2.5; provided, however, that in no event shall the aggregate Cash
Consideration paid in respect of all CSB Common Stock (excluding
Dissenting CSB Shares) be greater than the Distributable Cash Pool, and
in no event shall the aggregate Stock Consideration paid in respect of
all CSB Common Stock be greater than the Distributable Stock Pool.
2.5.1 Election Procedure. Not later than two (2) Business Days
following the Final Approval Date (including, in SDN's discretion, prior to
the Final Approval Date but not earlier than the date on which the CSB
shareholders have approved the Reorganization), SDN shall cause to be
distributed the each CSB Shareholder a form of letter of transmittal and
election statement, in a form mutually agreed upon by CSB and SDN, providing
for such CSB Shareholder's specification of election to receive Cash
Consideration and/or Stock Consideration and for the tender to the Exchange
Agent of the related share certificates (an "Election Statement"). CSB will
also make such form available at its executive offices and such other places
as it deems appropriate. Each CSB Shareholder may specify, in an Election
Statement meeting the requirements of Section 2.5.3, that, as to all shares
of CSB Common Stock covered by such Election Statement:
(a) All such shares shall be converted to Stock
Consideration ("Stock Election Shares"); or
(b) All such shares shall be converted to Cash
Consideration ("Cash Election Shares"); or
(c) A designated number of such shares shall be
converted to Cash Consideration as Cash Election Shares and the
remaining shares shall be converted to Stock Consideration as Stock
Election Shares; or
(d) The CSB Shareholder has no preference and
accordingly makes no election; or
-13-
ANNEX 1 - 23
<PAGE>
(e) The CSB Shareholder has previously dissented from
the Reorganization and intends to perfect his or her dissenter's
rights under applicable law.
2.5.2 Shares Held for Third Parties. Any CSB Shareholder who is
holding such shares for a beneficial owner, or as a nominee for one or more
beneficial owners, may submit an Election Statement on behalf of each such
beneficial owner. Any beneficial owner of CSB Common Stock on whose behalf a
record owner of CSB Common Stock has submitted an Election Statement in
accordance with this Section will be considered a separate holder of CSB
Common Stock with respect to such shares.
2.5.3 Effectiveness of Election Statement. An Election Statement
will be effective only if a properly completed and signed copy thereof shall
have been actually received by the Exchange Agent no later than the deadline
(the "Election Deadline") fixed by SDN and CSB by mutual agreement and
specified in the form of letter of transmittal and Election Statement, which
deadline shall be (i) not earlier than the twenty-first (21st) calendar day
after the mailing of the Election Statements to the CSB Shareholders and (ii)
not later than the last Business Day prior to the Closing Date. An Election
Statement which meets the requirements of this Section 2.5.3 is hereinafter
referred to as an "Effective Election Statement." Holdco and CSB, acting by
agreement, will have the right to make rules governing the form, terms and
conditions of Election Statement, the validity and effectiveness of Election
State-ments and the manner and extent to which they are to be taken into
account in prorating the Stock Consideration and the Cash Consideration
pursuant to Section 2.5.5, the issuance and delivery of certificates
evidencing Holdco Common Stock and cash into which shares of CSB Common Stock
are converted in the CSB Merger pursuant to Section 2.4.2. Shares of CSB
Common Stock as to which a record holder makes no election pursuant to an
Effective Election Statement, or as to which no Effective Election Statement
is filed, are hereinafter referred to as "No Election Shares."
2.5.4 Amendment and Revocation of Election Statement. Any CSB
Shareholder who has submitted an Effective Election Statement may at any time
until the Election Deadline amend such Election Statement if the Exchange
Agent actually receives, no later than the Election Deadline, a later-dated,
properly completed and signed, amended Effective Election Statement, or may
at any time prior to the Election Deadline revoke his Election Statement by
written notice actually received by the Exchange Agent no later than the
Election Deadline. Any notice of withdrawal will be effective only if it is
executed and specifies the record holder of the shares to be withdrawn and,
if the certificates representing such shares have previously been tendered to
the Exchange Agent, if it specifies the serial numbers shown on the
certificates representing the shares to be withdrawn. If for any reason this
Agreement is terminated and the Reorganization is not consummated, any
Election Statement previously submitted shall
be
-14-
ANNEX 1 - 24
<PAGE>
deemed withdrawn and any certificate for CSB Common Stock previously
deposited with the Exchange Agent shall be returned to the applicable CSB
Shareholder.
2.5.5 Fractional Shares. The Exchange Agent shall treat each
Election Statement that requests to exchange any shares of CSB Common Stock
for Stock Consideration (including those requesting to exchange 100% of the
holder's shares for Stock Consideration) as an election to exchange the
closest number of whole or fractional shares of CSB Common Stock to the
number actually requested as will result in the number of shares of Holdco
Common Stock so issued being a whole number. Any fractional share of CSB
Common Stock remaining after giving effect to the preceding sentence
(including a fractional share so held by a CSB Shareholder requesting to
exchange 100% of his or her CSB Common Stock for Stock Consideration) shall
be deemed to be a fractional Cash Election Share and exchanged for the
applicable amount of Cash Consideration.
2.6 Proration and Allocation of Stock Consideration and Cash
Consideration. The allocation of the Stock Consideration and the Cash
Consideration among holders of CSB Common Stock (other than holders of
Dissenting CSB Shares) shall be effected as follows:
2.6.1 If the number of shares of CSB Common Stock that are Stock
Election Shares is less than the number of Net Stock Consideration Shares, an
allocation of the Distributable Stock Pool and the Distributable Cash Pool
will be made as follows:
(a) First, all Stock Election Shares shall be exchanged
for Stock Consideration;
(b) Second, the Exchange Agent shall convert all No
Election Shares to Stock Election Shares ("Additional Stock
Election Shares") and exchange the same for Stock Consideration,
provided that the aggregate number of Stock Election Shares
(including Additional Stock Election Shares) is equal to or less
than the number of Net Stock Consideration Shares; in the event
that conversion of all No Election Shares to Additional Stock
Election Shares would cause the aggregate number of Stock Election
Shares (including Additional Stock Election Shares) to exceed the
number of Net Stock Consideration Shares, the number of No Election
Shares converted to Additional Stock Election Shares and exchanged
for Stock Consideration shall be reduced so that the aggregate
number of Stock Election Shares (including Additional Stock
Election Shares) equals the number of Net Stock Consideration
Shares, with the aggregate Additional Stock Election Shares created
upon the conversion of No Election Shares being allocated pro rata
to each holder of No Election Shares in the proportion that the
total No Election Shares of such holder bear to the total number of
No Election Shares of all CSB Shareholders;
-15-
ANNEX 1 - 25
<PAGE>
(c) Third, in the event that conversion of all No
Election Shares to Additional Stock Election shares pursuant to
clause (c) of this Section 2.6.1 would cause the aggregate number
of Stock Election Shares (including Additional Stock Election
Shares) to be less than the number of Net Stock Consideration
Shares, in addition to all No Election Shares, the Exchange Agent
shall convert a number of Cash Election Shares (excluding shares
tendered by Small Holders, as provided below) to Additional Stock
Election Shares and exchange the same for Stock Consideration such
that the aggregate number of Stock Election Shares and Additional
Stock Election Shares shall equal the number of Net Stock
Consideration Shares, with the aggregate Additional Stock Election
Shares that are to be created upon the conversion of Cash Election
Shares being allocated pro rata to each holder of Cash Election
Shares in the proportion that the total Cash Election Shares of
such holder bear to the total number of Cash Election Shares of all
CSB Shareholders; provided, however, that no Small Holder who filed
an Effective Election Statement for Cash Election Shares shall have
such Cash Election Shares converted to Additional Stock Election
Shares; and
(d) Fourth, after the allocation in clauses (a) through
(d) of this Section 2.6.1 have been made, all remaining shares of
CSB Common Stock (other than Dissenting CSB Shares) shall be
converted into Cash Consideration.
2.6.2 If the number of shares of CSB Common Stock that are Stock
Election Shares is greater than the number of Net Stock Consideration Shares,
an allocation of the Distributable Stock Pool and the Distributable Cash Pool
will be made as follows:
(a) First, all Cash Election Shares will be exchanged
for Cash Consideration;
(b) Second, the Exchange Agent shall convert all No
Election Shares to Cash Election Shares ("Additional Cash Election
Shares") and exchange the same for Cash Consideration, provided
that the aggregate number of Cash Election Shares (including
Additional Cash Election Shares) is equal to or less than the
number of Net Cash Consideration Shares; in the event that
conversion of all No Election Shares to Additional Cash Election
Shares would cause the aggregate number of Cash Election Shares
(including Additional Cash Election Shares) to exceed the number of
Net Cash Consideration Shares, the number of No Election Shares
converted to Additional Cash Election Shares and exchanged for Cash
Consideration shall be reduced so that the aggregate number of Cash
Election Shares (including Additional Cash Election Shares) equals
the number of Net Cash Consideration Shares, with the aggregate
Additional Cash Election Shares created upon the conversion of No
Election shares being allocated pro rata to each holder of No
Election Shares in the proportion that the total No Election
-16-
ANNEX 1 - 26
<PAGE>
Shares of such holder bear to the total number of No Election Shares of
all CSB Shareholders;
(c) Third, in the event that conversion of all No
Election Shares to Additional Cash Election Shares pursuant to
clause (c) of this Section 2.6.2 would cause the aggregate number
of Cash Election Shares (including Additional Cash Election Shares)
to be less than the number of Net Cash Consideration Shares, in
addition to all No Election Shares, the Exchange Agent shall
convert a number of Stock Election Shares to Additional Cash
Election Shares and exchange the same for Cash Consideration such
that the aggregate number of Cash Election Shares (including Addi-
tional Cash Election Shares) shall equal the number of Net Cash
Consideration Shares, with the aggregate Additional Cash Election
Shares that are to be created upon the conversion of Stock Election
Shares being allocated pro rata to each holder of Stock Election
Shares in the proportion that the total Stock Election Shares of
such holder bear to the total number of Stock Election Shares of
all CSB Shareholders; and
(d) Fourth, any No Election Shares not converted to
Additional Cash Election Shares pursuant to clause (c) of this
Section 2.6.2 and any Stock Election Shares not converted to
Additional Cash Election Shares pursuant to clause (d) of this
Section 2.6.2 shall be converted into Stock Consideration.
2.7 Dissenting CSB Shares. Notwithstanding Section 2.4.2,
Dissenting CSB Shares shall not be converted into the right to receive,
or be exchangeable for, Cash Consideration or Stock Consideration, but
instead the holders thereof shall be entitled to payment, by Holdco on
behalf of CSB, of the value of such Dissenting CSB Shares as agreed upon
or determined in accordance with the provisions of Section 1300 et seq.
of the California Corporations Code (as incorporated by Section 101 of
the California Financial Code).
2.8 Exchange of Certificates.
2.8.1 CSB Common Stock Exchange Procedures. Immediately following
the Effective Time, each holder of a certificate or certificates theretofore
representing shares of issued and outstanding CSB Common Stock (other than
Dissenting CSB Shares) shall, upon the surrender of such certificates to the
Exchange Agent (whether such tender is made before or after the Effective
Time), be entitled to receive in exchange therefor the consideration into
which the certificate or certificates so surrendered shall have been
converted as provided under Section 2.4.2 (subject in all events to Section
2.6), without interest and subject to any required withholding of taxes. The
holder of a certificate that prior to the Reorganization represented issued
and outstanding shares of CSB Common Stock shall have no rights, after the
Effective Time, with respect to such shares except to surrender the
certificate in exchange for the
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ANNEX 1 - 27
<PAGE>
consideration provided under Section 2.4.2 without interest thereon or, if
applicable, to perfect the rights as a holder of Dissenting CSB Shares that
such holder may have pursuant to the applicable provisions of Section 1300 et
seq. of the California Corporation Code. By the date set forth in Section
2.5.1, SDN will send, or will cause the Exchange Agent to send, to each
holder of record of CSB Common Stock as of the last Business Day prior to the
date of such mailing (the "Record Date") a letter of transmittal in a form
mutually agreed upon by SDN and CSB for use in such exchange. Upon surrender
to the Exchange Agent of one or more certificates formerly representing
shares of CSB Common Stock for exchange accompanied by a duly executed letter
of transmittal in proper form, the Exchange Agent shall, promptly after the
Closing Date in the case of certificates surrendered prior to the Closing
Date, and promptly after surrender in the case of certificates surrendered
after the Closing Date, deliver to the holder of such surrendered
certificates one or more new certificates representing the appropriate number
of shares of Holdco Common Stock and/or one or more checks for the
appropriate amount of cash, as determined in accordance with Section 2.6. In
the case of the CSB Common Stock to be exchanged for Stock Consideration,
until the applicable holder surrenders for exchange his or her certificates
formerly representing such CSB Common Stock, no dividend payable to holders
of record of Holdco Common Stock shall be paid thereon; however, upon the
surrender of any such outstanding certificate there shall be paid to the
holder, without interest, the full amount of any such dividends or
distributions.
2.8.2 SDN Common Stock Exchange Procedures. After the Effective
Time, each holder of a certificate or certificates theretofore representing
shares of issued and outstanding SDN Common Stock shall, upon the surrender
of such certificates to the Exchange Agent, be entitled to receive in
exchange therefor a like number of shares of Holdco Common Stock as provided
under Section 2.3.2, without interest and subject to any required withholding
of taxes. The holder of a certificate that prior to the Reorganization
represented issued and outstanding shares of SDN Common Stock shall have no
rights, after the Effective Time, with respect to such shares except to
surrender the certificate in exchange for shares of Holdco Common stock as
provided under Section 2.3.2 without interest thereon. As soon as
practicable after the Effective Time, Holdco will send, or will cause the
Exchange Agent to send, to each Person who was a SDN Shareholder at the
Effective Time a letter of transmittal for use in such exchange. Promptly
after the surrender to the Exchange Agent of one or more certificates
formerly representing shares of SDN Common Stock for exchange, accompanied by
a duly executed letter of transmittal in proper form, the Exchange Agent
shall deliver to the holder of such surrendered certificates one or more new
certificates representing the appropriate number of shares of Holdco Common
Stock. Until a holder surrenders for exchange his or her certificate
formerly representing SDN Common Stock, no dividend payable to holders of
record of Holdco Common Stock shall be paid thereon; however, upon the
surrender of any such outstanding certificate there shall be paid to the
holder, without interest, the full amount of any such dividends or
distributions.
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ANNEX 1 - 28
<PAGE>
2.8.3 Transfers; Certain Taxes. If any Holdco Common Stock or
cash consideration to be issued or paid in exchange for shares of CSB Common
Stock or SDN Common Stock is to be issued or made in a name other than that
in which the certificate surrendered in exchange therefor is registered, it
shall be a condition of such payment and/or issuance that the certificate so
surrendered shall be properly endorsed (or accompanied by an appropriate
instrument of transfer) and otherwise in proper form for transfer, and that
the person requesting such exchange shall pay to the Exchange Agent, in
advance, any transfer or other taxes required by reason of the payment and/or
issuance to a person other than the registered holder of the certificate
surrendered, or required for any other reason, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
2.8.4 Lost, Stolen or Destroyed Certificates. 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 Holdco, the posting by such person of
a bond in such amount as Holdco 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 consideration deliverable in respect thereof pursuant to this Agreement.
2.8.5 Unclaimed Monies. Any portion of the cash or Holdco Common
Stock delivered to the Exchange Agent by or on behalf of Holdco (together
with any investment income earned thereon) that remains unclaimed by CSB
Shareholders or SDN Shareholders, as applicable, pursuant to the provisions
of Section 2.3 or Section 2.4 six months after the Closing Date shall be
returned to Holdco upon demand, and any CSB Shareholder or SDN Shareholder
who has not exchanged his, her or its shares of CSB Common Stock or SDN
Common Stock for the consideration provided therefor in accordance with
Section 2.3 or Section 2.4 prior to that time shall thereafter look solely to
Holdco for payment of cash and/or issuance of Holdco Common Stock in respect
of such shares, as applicable. Notwithstanding the foregoing, none of Holdco,
SDN or CSB shall be liable to any CSB Shareholder or SDN Shareholder for any
funds or shares (including dividends or distributions thereon) delivered to a
public official pursuant to applicable abandoned property laws. Any amounts
remaining unclaimed by CSB Shareholders or SDN Shareholders, as applicable
six years after the Closing Date (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of
any Governmental Entity) shall, to the extent permitted by applicable law,
become the property of Holdco free and clear of any claims or interest of any
Person previously entitled thereto.
2.8.6 Exchange Agent to have no Voting or Other Rights. The
Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of Holdco Common Stock, CSB Common Stock
or SDN Common Stock held by it from time to
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ANNEX 1 - 29
<PAGE>
time hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect to such shares for the
account of the persons entitled thereto.
2.9 Closing of Transfer Books. At the close of business on the Record
Date, the transfer books for CSB Common Stock shall be closed, and no
transfer of shares of CSB Common Stock shall thereafter be made on such
books. At the Effective Time, the transfer books for SDN Common Stock shall
be closed, and no transfer of shares of SDN Common Stock shall thereafter be
made on such books. If, after the CSB Record Date, certificates representing
shares of CSB Common Stock are presented for transfer to the Exchange Agent,
they shall be held until the Effective Time and thereupon cancelled and
exchanged for the consideration provided therefor in this Article II;
provided, however, such certificates shall promptly be returned if the
Closing shall not occur for any reason. If, after the Effective Time,
certificates representing shares of SDN Common Stock, are presented for
transfer to the Exchange Agent, they shall be cancelled and exchanged for the
consideration provided therefor in this Article II.
2.10 Securities Law Matters. The Parties agree that the CSB Merger
will, if permitted under applicable Law, be consummated under an exemption
from the registration requirements of the Securities Act. SDN represents and
CSB acknowledges that SDN expects to request a so-called No Action Letter
from the SEC confirming the availability of an exemption for the issuance of
the Holdco Common Stock in the CSB Merger under Section 3(a)(10) of the
Securities Act, and that failing the availability of such exemption such
stock will be registered with the Securities and Exchange Commission under
the Securities Act pursuant to registration statement (the "Registration
Statement") duly filed with the SEC. If any filing, registration or other
action under any Law relating to securities or the registration thereof is
legally required under federal or state Law to consummate the Reorganization
(including the Registration Statement, if applicable), SDN shall prepare and
file all such filings and registrations and take such other actions, and
thereafter shall use all reasonable efforts to prosecute the same.
2.11 Escrow Agreement.
2.11.1 If no SAIF Recapitalization Legislation has been enacted or
adopted prior to the Closing Date, at the Closing, Holdco and the Escrow
Agent shall enter into, and SDN shall take appropriate action prior to the
Closing to cause Holdco and the Escrow Agent to enter into, an Escrow
Agreement (the "Escrow Agreement") substantially in the form of Exhibit
2.11-A, which Escrow Agreement is intended to serve as an adjustment to the
aggregate amount of consideration payable to the CSB Shareholders in
connection with the CSB Merger. In such event, at the Closing, Holdco shall
deposit with the Escrow Agent cash in the amount of the Cash Escrow Deposit
and one or more stock certificates representing newly-issued shares of Holdco
Common Stock equal to the number of shares in the Stock Escrow Deposit, which
number of shares shall be calculated in accordance with Exhibit 2.11-B. If
the Escrow
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ANNEX 1 - 30
<PAGE>
Agreement has been entered into, from and after the Closing for so long as
the Escrow Agreement shall remain in effect, Holdco shall use all reasonable
efforts (consistent in all events with applicable Law and with good business
judgment) to cause deposits of CSB to become insured by the FDIC Bank
Insurance Fund and to cease to be insured by the FDIC Savings Association
Insurance Fund, whether by migration of such deposits to a Bank Insurance
Fund-insured subsidiary of Holdco or otherwise; provided, however, that the
foregoing shall not require Holdco to convert such deposits to the Bank
Insurance Fund if such conversion would cause Holdco or any of its
subsidiaries to incur any so-called exit fees, entrance fees or other special
assessments or cause the imposition of a higher premium rate for Bank
Insurance Fund deposit insurance, or if the aggregate administrative, legal,
accounting and other expense required to effect such conversion would be
material to Holdco.
2.11.2 SDN and CSB agree that, at SDN's request, prior to the
Closing Date the parties will modify the Escrow Agreement to provide that (a)
in lieu of a Cash Escrow Deposit delivered to the Escrow Agent, Holdco will
be obligated to deliver to the Escrow Agent prior to the Notification Date an
amount of cash equal the arithmetic difference between (x) the amount of cash
that would have been in the Cash Escrow Fund as of the Notification Date had
the Cash Escrow Deposit been delivered to the Escrow Agent as of the Closing
and (y) the amount of the SAIF Cash Allocation or SAIF Imputed Cash
Allocation, as the case may be, and (b) such obligation of Holdco would be
secured by a standby letter of credit from Liberty National Bank to the
Escrow Agent in an amount of not less than $400,000, which letter of credit
would be delivered to the Escrow Agent prior to the Closing. Notwithstanding
the immediately preceding sentence, CSB shall have no obligation to agree to
any change in the Escrow Agreement if in the reasonable opinion of Deloitte &
Touche, CSB's tax advisors, there is a potential that such a change would
result in adverse tax consequences for the CSB Shareholders. If and to the
extent that the parties change the Escrow Agreement under the circumstances
contemplated by this Section 2.11.2, SDN and CSB agree to amend the terms of
this Agreement to conform to such changes.
ARTICLE III.
Representations and Warranties
3.1 By CSB. Except where a different date is expressly specified, CSB
makes the representations and warranties set forth below as of the date of
this Agreement:
3.1.1 Organization, Standing and Power. CSB is a commercial
banking corporation duly organized, validly existing and in good standing
under the laws of the State of California. The deposit accounts of CSB are
insured by the FDIC through the Savings Association Insurance Fund, and all
premiums and assessments required in connection therewith
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ANNEX 1 - 31
<PAGE>
have been paid by CSB as the same have become due. CSB has all requisite
power and authority to own, lease and operate its properties and to carry on
its business as now being conducted, and is duly qualified and in good
standing to do business in each jurisdiction in which a failure to be so
qualified would have a Material Adverse Effect on CSB. Copies of the
Articles of Incorporation and By-Laws of CSB, including all amendments
thereto as of the date of this Agreement, have been delivered to SDN and are
complete and correct. The minute books of CSB accurately reflect in all
material respects all corporate actions held or taken by CSB's shareholders
and Board of Directors, including all committees of such Board of Directors.
3.1.2 Capital Structure.
(a) Capital Stock of CSB. As of the date hereof, the
authorized capital stock of CSB consists of 10,000,000 shares of
CSB Common Stock, no par value, of which not more than 861,465
shares are issued and outstanding, no shares are held in treasury
by CSB and no shares are reserved for future issuance. All
outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable (subject to
Section 662 of the California Financial Code) and are not subject
to preemptive rights. All of the issued and outstanding shares of
CSB Common Stock have been offered, issued and sold by CSB in
compliance with applicable federal and state securities laws and
regulations and in compliance with any preemptive right held by any
Person. There are no dividends which have accrued or been declared
but are unpaid on the CSB Common Stock. CSB has no contractual
obligation to register any shares of Common Stock under the
Securities Act except those obligations under the CSB Shareholder
Agreement, which obligations shall have been terminated at the
Effective Time. CSB has delivered to SDN a true and correct list
of all holders of CSB Common Stock as of March 31, 1996.
(b) Other Securities. There are no options, warrants,
calls, rights, commitments or agreements of any character,
including any stock option or equity incentive plan, outstanding or
in existence as of the date hereof to which CSB is a party or by
which CSB is bound obligating it to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital
stock or other securities of CSB or obligating CSB to grant, extend
or enter into any such option, warrant, call, right, commitment or
agreement. The only options previously granted by CSB were granted
pursuant CSB's 1985 incentive stock option plan, all of which
either have expired pursuant to their terms or have previously been
exercised. There are no outstanding contractual obligations of CSB
to repurchase, redeem or otherwise acquire any shares of capital
stock of CSB. There are no bonds, debentures, notes or other
instruments evidencing indebtedness of CSB issued or outstanding
that entitle the holders thereof to vote on any matters on which
CSB Shareholders may vote.
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ANNEX 1 - 32
<PAGE>
3.1.3 Interests in Other Entities. Except as set forth on Part
A of Schedule 3.1.3, CSB has no subsidiaries and does not otherwise hold more
than 1% of the outstanding equity securities of any corporation or other
entity, is not a member of any partnership, joint venture or similar entity
or collectivity, and is not a party to any partnership agreement or joint
venture agreement, however named. Except as set forth on Part B of Schedule
3.1.3, CSB does not hold any "Acquisition, Development and Construction"
("ADC") loans, as that term is used under GAAP. CSB holds no shares of SDN
Common Stock, other than shares owned in a fiduciary capacity or as a result
of debts previously contracted.
3.1.4 Authority and Related Matters. Subject only to the
approvals of the holders of the Common Stock as specified in the immediately
following sentence, CSB (a) has all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby (including the Reorganization), and (b) has duly authorized the
execution and delivery of this Agreement and the consummation of such
transactions (including the Reorganization) by all necessary corporate action
on the part of CSB (including approval by its Board of Directors). The only
vote of the holders of any class or series of CSB's securities necessary to
approve this Agreement or the consummation of the Reorganization is the
affirmative vote of the holders of a majority of the outstanding shares of
CSB Common Stock entitled to vote thereon approving the Reorganization, and
the Board of Directors has directed the officers of CSB to submit the
Reorganization and this Agreement to the CSB Shareholders for approval at a
meeting of such shareholders or by solicitation of written consents of such
shareholders. No other corporate proceedings on the part of CSB not
heretofore taken are necessary to approve this Agreement or to consummate the
Reorganization. This Agreement has been duly executed and delivered by CSB
and, subject to such approval by the CSB Shareholders and assuming due
authorization, execution and delivery by SDN, constitutes the valid and
binding obligation of CSB, enforceable in accordance with its terms subject
only to laws regarding bankruptcy, insolvency, reorganization moratorium or
otherwise affecting creditors' rights generally, and to the application of
general principles of equity (whether considered in a proceeding in law or at
equity).
3.1.5 Certain Agreements by Shareholders.
(a) Directors of CSB who (i) constitute not less than
one-half in number of the total number of CSB Directors and (ii)
own, in the aggregate, more than 50% of the outstanding shares of
CSB Common Stock, have executed and delivered to CSB, and CSB has
executed and delivered to SDN, a valid and binding agreement in the
form of Exhibit 3.1.5 (a "Voting Agreement"), whereby each such
Person has irrevocably agreed to vote all shares of CSB Common
Stock directly or beneficially owned by such Person (including
shares held as community property) or over which such Person has
voting
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ANNEX 1 - 33
<PAGE>
control, in favor of any facet of the Reorganization that
may require approval by the CSB Shareholders and against any
competing transaction.
(b) Each party to the CSB Shareholder Agreement has
entered into a valid and binding agreement, in form and substance
satisfactory to SDN, terminating the CSB Shareholder Agreement
(which termination may, in the discretion of the parties thereto,
be made effective immediately prior to the Effective Time). A
counterpart original of such termination agreement has been
delivered to SDN and remains in full force and effect.
3.1.6 Conflicts. The execution and delivery of this Agreement
does not, and the consummation of the Reorganization will not, result in any
conflict with or violation of any provision of the Articles of Incorporation
or By-laws of CSB. Subject only to obtaining or making the consents,
approvals, orders, authorizations, registrations, declarations and filings
included among the CSB Governmental Approvals, the execution and delivery of
this Agreement does not, and the consummation of the Reorganization will not
result in any violation, conflict, default, creation of a right of
termination, cancellation, acceleration, or loss of a material benefit under
any Law or under any loan or credit agreement, note, mortgage, indenture,
lease, employee benefit plan or other agreement, obligation, instrument,
permit, concession, franchise or license, or any judgment, order or decree,
applicable to CSB or its properties or assets which violation, conflict,
default, creation of a right of termination, cancellation, acceleration, or
loss of a material benefit would have a Material Adverse Effect on CSB.
3.1.7 Consents. Except as disclosed on Schedule 3.1.7
(collectively, the "CSB Governmental Approvals"), no consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity is required in connection with CSB's execution and
delivery of this Agreement or its consummation of the Reorganization, as to
which the failure to obtain the same would have a Material Adverse Effect on
CSB or materially interfere with CSB's ability to consummate the
Reorganization.
3.1.8 Financial Statements. CSB has provided to SDN the CSB Final
Financial Statements, certified by Deloitte & Touche, LLP, as well as audited
financial statements for CSB for the years ended December 31, 1994 and
December 31, 1993. The CSB Final Financial Statements and the prior two
years' audited financial statements comply, in all material respects, with
applicable accounting requirements and have been prepared in accordance with
GAAP (except as may be indicated in the notes thereto) and fairly present the
financial position of CSB (consolidated with any subsidiaries then in
existence) as of the dates thereof and the results of its (their) operations
and cash flows for the periods then ended. The books and records of CSB have
been, and are being, maintained in all material respects in accordance with
GAAP and reflect only actual transactions.
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ANNEX 1 - 34
<PAGE>
3.1.9 Regulatory Filings and Agreements. Except as disclosed on
Schedule 3.1.9, CSB has timely filed all reports, registrations and
statements, together with any amendments required to be made with respect
thereto, that it was required to file since December 31, 1992 with any Bank
Regulator as to which a failure to file the same could reasonably be expected
to have a Material Adverse Effect on CSB, including any such report or
statement required to be filed pursuant to the Laws of the United States
(including regulations of the FDIC and the Board of Governors of the Federal
Reserve) or the State of California (including the State Banking Department),
and has paid all fees and assessments due and payable in connection
therewith. Except for normal examinations conducted by a Bank Regulator in
the regular course of the business of CSB, and except as disclosed on
Schedule 3.1.9, no Bank Regulator has initiated any proceeding or
investigation or, to the best knowledge of CSB, has threatened to initiate
any proceeding or investigation, into the business or operations of CSB since
December 31, 1992. Except as disclosed on Schedule 3.1.9, CSB is not a party
to or subject to, and since December 31, 1992 has not been a party to or
subject to, any Regulatory Agreement with or from, and has not adopted any
board resolutions at the request of, any Bank Regulator that restricts the
conduct of CSB's business or in any manner relates to its capital adequacy,
credit policies, loan origination practices or management nor, to the
knowledge of CSB, is any Bank Regulator contemplating issuing or requesting
(or considering the appropriateness of issuing or requesting) any such
Regulatory Agreement. Except as disclosed on Schedule 3.1.9, there is no
material unresolved violation, criticism, or exception by any Bank Regulator
with respect to any report or statement relating to any examination of CSB.
3.1.10 Undisclosed Liabilities. Except as and to the extent
reflected in CSB's Final Financial Statements or on Part A of Schedule
3.1.10, CSB does not have any liabilities, commitments or obligations of any
nature, whether absolute, accrued, contingent or otherwise, and whether due
or to become due, including, without limitation, liabilities that may become
known or arise after the date hereof and which relate to transactions entered
into, or any state of facts existing, on or before the Balance Sheet Date and
which would be required under GAAP to be shown in such balance sheet or
referenced in the notes thereto, other than (a) obligations (including
guarantees and letters of credit) not required by GAAP to be reflected,
reserved against or disclosed in CSB's Final Financial Statements, all of
which are set forth on Part B of Schedule 3.1.10 and none of which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on CSB and (b) those incurred in the ordinary course
of business consistent with past practice since the Balance Sheet Date.
3.1.11 Classified and OLEM Assets, Reserves and Certain Other
Assets. As of the date hereof, the only assets of CSB that are (a) Classified
Assets or OLEM Assets on CSB's books and records, or (b) over 90 days
delinquent in payment of principal or interest whether or not the same are
Classified Assets or OLEM Assets, are those listed on Part A of Schedule
3.1.11 hereto (which schedule identifies the asset by loan number or other
designation
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ANNEX 1 - 35
<PAGE>
and sets forth the original principal amount, the current book balance, the
amount of any reserve (or portion of the general reserve) allocated thereto,
and the loan classification). The loan and other asset classification
procedures utilized by CSB are in accordance with RAP and prudent banking
practice, and are consistently applied. Part B of Schedule 3.1.11 hereto sets
forth all loans of CSB outstanding as of the date hereof (whether or not they
are Classified Assets, OLEM Assets or are otherwise in default) to any
director, executive officer or Principal Stockholder of CSB, or to CSB's
knowledge, any person, corporation or enterprise controlling, controlled by
or under common control with any of the foregoing.
3.1.12 Investment Securities; Derivatives. Part A of Schedule
3.1.12 describes all of the investment securities (including mortgage backed
securities, and whether actively traded, available for sale or held to
maturity) owned by CSB as of the date hereof, including identification of the
type of security, CUSIP numbers, pool face values (where applicable), book
values, market values, coupon rates, paydown speeds, book yields, durations,
weighted average life and weighted average coupons, in each case as of March
31, 1996 (or as of the date of acquisition, if later acquired). Except as
identified on Part B of Schedule 3.1.12, since December 31, 1993, CSB has not
engaged in any transaction in or involving forwards, futures, options on
futures, swaps or other derivative instruments. To the knowledge of CSB,
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 held by CSB, would be a
Classified Asset or OLEM Asset. The financial position of CSB under or with
respect to each such instrument has been reflected in the books and records
of CSB in accordance with GAAP, and each such derivative security was entered
into as a hedge against financial risks then inherent in CSB's assets,
liabilities and commitments.
3.1.13 Absence of Certain Changes or Events. Except as disclosed
on Schedule 3.1.13, since the Balance Sheet Date, (a) there has been no
material adverse change in the business, property, assets (including loan and
servicing portfolios), liabilities (whether absolute, contingent or
otherwise) prospects, operations, liquidity, income or condition (financial
or otherwise) of CSB (other than as a result of changes in banking laws or
regulations of general applicability or interpretation thereof), and (b) CSB
has carried on its business in the ordinary and usual course consistent with
its past practices. Except as disclosed on Schedule 3.1.13, between the
Balance Sheet Date and the date hereof, CSB has not increased the wages,
salaries, compensation, pension, or other fringe benefits or perquisites
payable to any executive officer, employee, or director, granted any
severance or termination pay, entered into any employment contract, salary
continuation (or similar) contract or any contract to make or grant any
severance or termination pay, or paid any bonus, in each case except for
normal increases and payments for or to persons other than directors or
senior officers of CSB in the ordinary course of business consistent with
past practice or except as required by applicable law.
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ANNEX 1 - 36
<PAGE>
3.1.14 Compliance with Applicable Laws. Except as set forth in
Schedule 3.1.14, (a) the business of CSB is, and at all times since December
31, 1992 has been, conducted in compliance with all Laws (including those
relating to equal credit, fair lending, fair housing and community
reinvestment), except where a failure to so comply would not have a Material
Adverse Effect on CSB, and (b) CSB holds all permits, licenses, variances,
exemptions, orders and approvals of all Governmental Entities that are
material to the operation of the business of CSB, and is in compliance with
the terms of the same except where the failure so to comply would not have a
Material Adverse Effect on CSB. Except as disclosed on Schedule 3.1.9 or
Schedule 3.1.14, no investigation by any Governmental Entity with respect to
CSB is pending or, to CSB's knowledge, contemplated.
3.1.15 Litigation and Other Disputes. Except as disclosed on
Schedule 3.1.15, there is no suit, action, or proceeding (including any
cross- or counter-claim) pending or, to the knowledge of CSB, threatened,
against or affecting CSB or any of its assets, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against CSB the obligations under which have not heretofore been
fully performed. Except as set forth on Schedule 3.1.15, CSB has not accrued
nor set aside any reserves relating to any suit, action, or proceeding
(including any cross- or counter-claim) pending or, to the knowledge of CSB,
threatened, against or affecting CSB or any of its assets. Except as
disclosed on Schedule 3.1.15, since December 31, 1992, CSB has not been a
defendant, either directly or as defendant-in-counterclaim or cross-claim, in
any litigation in which any "lender liability" cause of action was asserted
against CSB.
3.1.16 Administration of Fiduciary Accounts. CSB has properly
administered in all material respects all accounts for which it acts as a
fiduciary (including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor) in accordance with the terms of the governing documents
and applicable Law, including state and federal common law. To the knowledge
of CSB, neither CSB nor any of its directors, officers or employees has
committed any breach of trust with respect to any such fiduciary account
which has had or could reasonably be expected to have a Material Adverse
Effect on CSB, and the accounting for each such fiduciary account are true
and correct in all material respects and accurately reflect the assets of
such fiduciary account.
3.1.17 Taxes.
(a) CSB has filed all federal, state and, to the best of
CSB's knowledge, material local tax returns and information returns
required to be filed by it, and all such returns have been accurate
and complete. CSB has paid or has set up an adequate reserve for
the payment of all Taxes required to be paid as shown on such
returns, and CSB's Final Financial Statements reflect an adequate
reserve for all Taxes
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ANNEX 1 - 37
<PAGE>
payable by CSB accrued through the date of such financial statements.
No deficiencies for any Taxes have been proposed, asserted or assessed
against CSB that are not adequately reserved for in the reasonable
judgment of CSB's independent auditors. The federal income tax returns
of CSB have been examined by and settled with the IRS, or the statute of
limitations with respect to each such year has expired (and no waiver
extending the statute of limitations has been requested or granted), for
all years through 1991. The federal income tax returns of CSB for the
years 1992 through 1994 are currently open to IRS examination but
no audit is pending for any of such years and, to CSB's knowledge,
no challenge or deficiency is contemplated by the IRS with regard
to any of such years. CSB has not been requested to give any
currently effective waivers extending the statutory period of
limitation applicable to any Federal, state, county or local income
tax return for any period. CSB has not (i) filed any consent to
the application of Section 341(f) of the Code, (ii) filed any
election under Section 338(g) or 338(h)(10) of the Code or caused
or permitted any deemed election under Section 338(e) of the Code,
(iii) applied for any revenue ruling, private letter ruling or
other ruling relating to Taxes, (iv) entered into any closing
agreement with any Governmental Entity relating to Taxes, (v) been
required to include in income any adjustment pursuant to Section
481 of the Code by reason of a voluntary change in accounting
method initiated by CSB and the Internal Revenue Service has not
initiated or proposed any such adjustment or change in accounting
method, (vi) except as set forth on Schedule 3.1.17, entered into
a transaction which is being accounted for as an installment
obligation under Section 453 of the Code which would be reasonably
likely to have a Material Adverse Effect on CSB, or (vii) been, at
any time, a member of any affiliated group filing any consolidated
tax return except the existing affiliated group consisting of CSB
and CSB Ventures, Inc.
(b) No employee, officer or director of CSB or any of
its affiliates who is a "Disqualified Individual" (as such term is
defined in proposed Treasury Regulation Section 1.280G-1) under any
employment, severance or termination agreement, other compensation
arrangement, or CSB Benefit Plan currently in effect, would receive
as a result of the Reorganization any amount which would be
characterized as an "excess parachute payment" as such term is
defined in Section 280G(b)(1) of the Code.
3.1.18 Certain Agreements. Except as disclosed on Schedule
3.1.18, CSB is not party to (nor are any of its assets bound by) any oral or
written contract, lease or other agreement of any name or nature, in effect
as of the date hereof:
(a) that would be required to be filed as an exhibit to
an annual report on Form 10-K filed with the SEC (assuming CSB were
a reporting company under the Exchange Act),
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ANNEX 1 - 38
<PAGE>
(b) the benefits of which (to either party) will accrue
or be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of the Reorganization (either alone
or upon the occurrence of any additional acts or events), or the
value of any of the benefits of which will be calculated on the
basis of the Reorganization or any portion or aspect thereof
(including any so-called retention or similar bonuses),
(c) relating to employment, salary continuation,
severance, consulting, collective bargaining or otherwise relating
to the provision of personal services or payment therefor
(including data processing, software programming and licensing
contracts),
(d) which, upon the consummation of the Reorganization,
will result in any payment (whether of severance pay or otherwise)
becoming due from CSB, SDN or Holdco to any officer or employee of
CSB,
(e) relating to non-competition or secrecy,
(f) that materially restricts the conduct of any line
of business by CSB, or
(g) that was entered into in connection with the
consummation of a federally assisted acquisition of a depository
institution pursuant to which CSB is entitled to receive financial
assistance or indemnification from any Governmental Entity.
CSB is not materially in default under, conflict with, violation of, nor has
CSB, to its knowledge, through any act or omission created a material right
of termination under, cancellation of, acceleration of any obligation under,
loss of material benefit under, or created any material lien, pledge,
security interest or other encumbrance on its assets under any contract,
lease or other agreement described by any of the foregoing clauses (a)
through (g), and to its knowledge, no other party to any such contract, lease
or other agreement has committed (by act or omission) any such material
default or violation of the same. CSB has previously delivered to SDN true
and correct copies of all employment, consulting and deferred compensation
agreements that are in writing to which CSB is a party, and has delivered to
SDN complete and accurate summaries of all employment, consulting and
deferred compensation agreements that are not in writing to which CSB is a
party. Except as disclosed on Schedule 3.1.18, CSB is not a party to, and
since December 31, 1992 has not been a party to (nor are any of its assets
bound by), any oral or written contract, lease or other agreement of any name
or nature with a Person who was, as of or within one year prior to the date
of such agreement, a director, officer or Principal Stockholder of CSB.
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ANNEX 1 - 39
<PAGE>
3.1.19 Employees and Employee Benefit Plans.
(a) Except as disclosed on Schedule 3.1.19(a) or on
Schedule 3.1.18, no employee of or consultant retained by CSB shall
have the right to receive from CSB, Holdco or SDN any severance
payment or other payment in the nature thereof (including so-called
salary continuation payments, golden parachute payments, severance
benefits or unemployment compensation), in the event his or her
employment is terminated by CSB, Holdco or SDN at or after the
Effective Time, whether such right arises as a matter of contract,
past policy or understanding, by operation of Law, or otherwise.
(b) Schedule 3.1.19(b) sets forth a true and complete
list of each material Benefit Plan of CSB. CSB has made available
to SDN true and correct copies of (i) each such CSB Benefit Plan,
(ii) the most recent annual report (Form 5500) filed with IRS with
regard to each CSB Benefit Plan requiring such a filing, (iii) each
trust agreement relating to any CSB Benefit Plan, (iv) the most
recent summary plan description for each CSB Benefit Plan for which
a summary plan description is required, (v) the most recent
actuarial report or valuation for each CSB Benefit Plan subject to
Title IV of ERISA, (vi) the most recent determination letter issued
by the IRS in the case of CSB Benefit Plans qualified under Section
401(a) of the Code, and (vii) all personnel policies and manuals of
CSB.
(c) Except as disclosed on Schedule 3.1.19(c), (i) each
of the CSB Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified; (ii) with
respect to each CSB Benefit Plan which is subject to Title IV of
ERISA, the present value of accrued benefits under such CSB Benefit
Plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by such CSB
Benefit Plan's actuary with respect to such CSB Benefit Plan, did
not, as of its latest valuation date, exceed the then-current value
of the assets of such CSB Benefit Plan allocable to such accrued
benefits; and (iii) no CSB Benefit Plan provides benefits,
including without limitation death or medical benefits (whether or
not insured), with respect to current or former employees of CSB or
any affiliate of CSB beyond such employees' retirement or other
termination of service, other than (A) coverage mandated by
applicable law, (B) retirement benefits or death benefits under a
Benefit Plan qualified under Section 401(k) of the Code, (C) or
benefits the full cost of which is borne by the current or former
employee (or his beneficiary).
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ANNEX 1 - 40
<PAGE>
(d) With respect to the CSB Benefit Plans, individually
and in the aggregate, to the knowledge of CSB, no event has
occurred and there exists no condition or set of circumstances in
connection with which CSB could be subject to any liability that
could have a Material Adverse Effect on CSB (except liability for
benefits claims and funding obligations payable in the ordinary
course) under ERISA, the Code or any other applicable Law.
(e) Except as disclosed on Schedule 3.1.19(e), there are
no material disputes, employee grievances, or disciplinary actions
pending or, to the knowledge of CSB, threatened by or between any
of CSB's employees and CSB. CSB has complied in all material
respects with all Laws relating to the employment of labor and has
no liability for any arrears of wages or employment-related taxes,
or penalties for failure to comply with any such Law, or for any
severance or termination payments of any type. No election or
proceeding relating to CSB's labor relations is pending or, to
CSB's knowledge, contemplated. To the knowledge of CSB, CSB has
had no union activity or any material labor trouble (including any
strike, work stoppage, slow-down, or similar disturbance) of any
kind, nature or description at any time.
3.1.20 Properties. Except as disclosed on Part A of Schedule
3.1.20, CSB does not hold title to or a beneficial interest in any real
property other than OREO. Disclosed on Part B of Schedule 3.1.20 are the
only real properties leased by, otherwise occupied by, or in the possession
of CSB (excluding OREO and property occupied only as lender in possession, in
each case provided that CSB is conducting no business in such property, and
excluding the owned properties disclosed on Part A of Schedule 3.1.20).
Except for assets disposed of in the ordinary course of business consistent
with past practice since the Balance Sheet Date, CSB has good and valid title
to all of the tangible personal property and assets which are used in and
material to the operation of its business and which it owns or purports to
own, including all assets reflected as owned by CSB in its Final Financial
Statements, and has good and valid title to all of the leasehold interests in
all leases of real or personal property which it leases or purports to lease
(in each case, as lessee), including all assets reflected as leased by CSB in
its Draft Financial Statements, in each case free and clear of any liens,
encumbrances or other imperfections of title other than such liens,
encumbrances or imperfections as (a) are reflected, reserved against or
otherwise disclosed in CSB's Final Financial Statements, (b) arise out of
Taxes not yet due or payable, or (c) relate to immaterial properties or
assets or otherwise could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on CSB. CSB enjoys peaceful
and undisturbed possession of the applicable leased asset under all leases of
real or personal property under which it is operating or to which it is a
party excepting only those properties noted on Part B of Schedule 3.1.20 as
subleased to third parties, as to which CSB's sublessee enjoys peaceful and
undisturbed possession. All of such leases are valid, subsisting and in full
force and effect and there are no existing defaults or events which,
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ANNEX 1 - 41
<PAGE>
with the passage of time or the giving of notice, or both, would constitute
defaults by CSB or, to the knowledge of CSB, by any other party thereto,
except for such defaults, if any, which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on CSB.
All items of real or personal property owned or used by CSB and material to
its business have been properly maintained and, to CSB's knowledge, are in
good operating order and repair.
3.1.21 Environmental. To the knowledge of CSB, CSB and all real
property (including OREO) in the possession of CSB or over which CSB
exercises control are, and at all times while in the possession or control of
CSB each property at any time owned, possessed or controlled by CSB has been,
in compliance with all applicable Laws relating to pollution or protection of
human health or the environment (including Laws relating to emissions,
discharges, releases or threatened releases of Hazardous Material or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Material),
except for any violations of Law that, either individually or in the
aggregate, have not had and cannot reasonably be expected to have a Material
Adverse Effect on CSB. To the knowledge of CSB, there has not occurred any
release of Hazardous Material on, under or affecting any real property during
the period of CSB's ownership, possession or operation of such property
(including its participation in the management of any business located on
such property) or during any prior period. To the knowledge of CSB, neither
CSB nor any property now or heretofore in its possession is or has ever been
a defendant in or the subject of any suit, claim, action, proceeding,
investigation or notice before any Governmental Entity or other forum
relating to an alleged violation (including by any predecessor) of any
environmental Law or any Law relating to the release or threatened release
into the environment of any Hazardous Material, whether or not occurring at
or on a site owned, leased or operated by CSB.
3.1.22 Intellectual Property. CSB owns, or possesses valid and
binding licenses and other rights to use without payment, all material
trademarks, trade names, servicemarks, copyrights, trade secrets and patents
used in its businesses, and CSB has not received any challenge of the same by
any Person or any notice of alleged conflict between the same and the rights
of any other Person. CSB has, in all material respects, performed all of its
obligations under, is not materially in default under, and has not created
any right of termination under, cancellation of, acceleration of any
obligation under, or loss of a material benefit under, any contract,
agreement, arrangement or commitment relating to any of the foregoing.
3.1.23 Brokers. Except as set forth on Schedule 3.1.23, CSB has
not employed any broker, finder, investment banker or similar Person in
connection with the Reorganization, and has not incurred and will not incur
any broker's, finder's, investment banker's or similar fees, commissions or
expenses payable by CSB in connection with the Reorganization. Schedule
3.1.23 summarizes the material terms of all agreements required to be
disclosed thereon.
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ANNEX 1 - 42
<PAGE>
3.1.24 Disclosure of All Material Matters. No statement of fact set
forth in (a) this Agreement (including all information in the Schedules and
Exhibits hereto), (b) CSB's Final Financial Statements, (c) CSB's audited
financial statements as at and for the periods ended December 31, 1994 and
December 31, 1993, (d) CSB's Reports of Condition and Income filed with the
FDIC between the date hereof and the Closing Date (when the same are filed),
(e) the Information Statement (when the same is distributed to CSB
Shareholders) and (f) any application, petition or similar document filed by
CSB with any Governmental Entity in connection with the Reorganization (when
the same are filed), excepting in the case of clauses (e) and (f) statements
made in reliance upon, and in conformity with, information provided by SDN,
is or will be, as of the date delivered, false or misleading in any material
respect; nor does any of the materials referenced in this Section 3.1.24 omit
to state any material fact necessary in order to make the statements made or
information disclosed, in the light of the circumstances under which they
were made or disclosed, not misleading.
3.2 By SDN. Except where a different date is expressly specified,
SDN makes the representations and warranties set forth below regarding
itself and the other members of the SDN Group, as of the date of this
Agreement:
3.2.1 Organization, Standing and Power.
(a) SDN is a business corporation duly organized,
validly existing and in good standing under the laws of the State
of Delaware. SDN has all requisite power and authority to own,
lease and operate its properties and to carry on its business as
now being conducted, and is duly qualified and in good standing to
do business in each jurisdiction in which a failure to be so
qualified would have a Material Adverse Effect on SDN. Copies of
the Certificate of Incorporation and By-Laws of SDN, including all
amendments thereto as of the date of this Agreement, have been
delivered to CSB and are complete and correct. The minute books of
SDN accurately reflect in all material respects all corporate
actions held or taken by SDN's shareholders and Board of Directors,
including all committees of such Board of Directors.
(b) San Dieguito and Liberty are national banking
associations duly organized, validly existing and in good standing
under the laws of the United States of America. San Dieguito and
Liberty are both wholly-owned subsidiaries of SDN. The deposit
accounts of San Dieguito and Liberty are insured by the FDIC
through the Bank Insurance Fund, and all premiums and assessments
required in connection therewith have been paid by San Dieguito and
Liberty, respectively, as the same have become due. San Dieguito
and Liberty have no current or future liability (whether contingent
or fixed) to the Savings Association Insurance Fund or any
predecessor thereto for "exit fees" or otherwise, and no current or
future liability (whether contingent or fixed) to the Bank
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Insurance Fund for "entrance fees." Each of San Dieguito and
Liberty has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being
conducted and is duly qualified to do business in each jurisdiction
in which a failure to be so qualified would have a Material Adverse
Effect on it.
3.2.2 Capital Structure.
(a) Capital Stock of SDN. As of the date hereof, the
authorized capital stock of SDN consists of 12,000,000 shares of
Common Stock, $.01 par value, and 1,000,000 shares of preferred
stock, $.01 par value, of which not more than 4,287,910 shares of
SDN Common Stock are issued and outstanding, no shares of SDN
preferred stock are issued and outstanding, no shares of SDN Common
Stock are held in treasury by SDN and no shares of SDN Common Stock
are reserved for future issuance other than (A) an adequate but
indefinite number required to be issued upon the conversion of the
SDN Debentures, and (B) an undetermined number (estimated to be no
more than 40 shares) required to be issued on account of fractional
shares in connection with SDN's September 27, 1995 redomiciliation
merger. All outstanding shares of SDN Common Stock have been
validly issued and are fully paid and nonassessable and are not
subject to preemptive rights. All of the issued and outstanding
shares of SDN Common Stock have been duly offered, issued and sold
by SDN in compliance with applicable Federal and state securities
laws and regulations and in compliance with any preemptive right
held by any Person. There are no dividends which have accrued or
been declared but are unpaid on the SDN Common Stock. Except as
disclosed on Schedule 3.2.2, SDN has no contractual obligation to
register any shares of SDN Common Stock under the Securities Act.
SDN has delivered to CSB a true and correct list of all holders of
SDN Common Stock as of a date on or after January 1, 1996.
(b) Other Securities. Excepting only SDN Debentures in
the aggregate face amount of $537,451, there are no options,
warrants, calls, rights, commitments or agreements of any
character, including any stock option or equity incentive plan,
outstanding or in existence as of the date hereof to which SDN is
a party or by which SDN is bound obligating it to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares
of capital stock or other securities of SDN or obligating SDN to
grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. There are no outstanding contractual
obligations of SDN to repurchase, redeem or otherwise acquire any
shares of capital stock of SDN. There are no bonds, debentures,
notes or other instruments evidencing indebtedness of SDN issued or
outstanding that entitle the holders thereof to vote on any matters
on which SDN Shareholders may vote.
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<PAGE>
(c) Holdco Common Stock. The offer and sale of the
Holdco Common Stock to the CSB Shareholders in the CSB Merger will
not violate in any material respect any applicable federal or state
Law relating to the sale or issuance of securities.
3.2.3 Interests in Other Entities. Excepting only San Dieguito
and Liberty, SDN has no subsidiaries and does not otherwise hold more than 1%
of the outstanding equity securities of any corporation or other entity, is
not a member of any partnership, joint venture or similar entity or
collectivity, and is not a party to any partnership agreement or joint
venture agreement, however named. Neither San Dieguito nor Liberty has any
subsidiaries or otherwise holds more than 1% of the outstanding equity
securities of any corporation or other entity, is a member of any
partnership, joint venture or similar entity or collectivity, or is a party
to any partnership agreement or joint venture agreement, however named. No
member of the SDN Group holds any "Acquisition, Development and Construction"
("ADC") loans, as that term is used under GAAP. No member of the SDN Group
holds any shares of CSB Common Stock, other than shares owned in a fiduciary
capacity or as a result of debts previously contracted.
3.2.4 Authority and Related Matters. SDN has all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby (including the Reorganization), and has
duly authorized the execution and delivery of this Agreement and the
consummation of such transactions (including the Reorganization) by all
necessary corporate action on the part of SDN (including approval by its
Board of Directors). No other corporate proceedings on the part of SDN not
heretofore taken are necessary to approve this Agreement or to consummate the
Reorganization. This Agreement has been duly executed and delivered by SDN
and (assuming due authorization, execution and delivery by CSB) constitutes
the valid and binding obligation of SDN, enforceable in accordance with its
terms subject only to laws regarding bankruptcy, insolvency, reorganization
moratorium or otherwise affecting creditors' rights generally, and to the
application of general principles of equity (whether considered in a
proceeding in law or at equity).
3.2.5 Conflicts. The execution and delivery of this Agreement
does not, and the consummation of the Reorganization will not, result in any
conflict with or violation of any provision of the Certificate of
Incorporation or By-laws of SDN. Subject only to obtaining or making the
consents, approvals, orders, authorizations, registrations, declarations and
filings included among the SDN Governmental Approvals, the execution and
delivery of this Agreement does not, and the consummation of the
Reorganization will not, result in any violation, conflict, default, creation
of a right of termination, cancellation, acceleration, or loss of a material
benefit under any Law or under any loan or credit agreement, note, mortgage,
indenture, lease, employee benefit plan or other agreement, obligation,
instrument, permit, concession, franchise or license, or any judgment, order
or decree, applicable to any member of the SDN Group or any of their
properties or assets, which violation, conflict, default, creation of a right
of
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termination, cancellation, acceleration, or loss of a material benefit would
have a Material Adverse Effect on the SDN Group or any member thereof.
3.2.6 Consents. Except as disclosed on Schedule 3.2.6
(collectively, the "SDN Governmental Approvals"), no consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity is required in connection with SDN's or Holdco's
execution and delivery of this Agreement or either of their consummation of
the Reorganization, as to which the failure to obtain the same would have a
Material Adverse Effect on SDN or Holdco or materially interfere with SDN's
or Holdco's ability to consummate the Reorganization.
3.2.7 Financial Statements. SDN has provided to CSB copies of
SDN's consolidated Final Financial Statements as audited by Price Waterhouse,
LLP, Liberty's Final Financial Statements as audited by Arthur Anderson LLP,
and audited financial statements for SDN and for Liberty for the years ended
December 31, 1994 and December 31, 1993. The foregoing financial statements
comply in all material respects with applicable accounting requirements and
have been prepared in accordance with GAAP (except as may be indicated in the
notes thereto) and fairly present the financial position of SDN and Liberty,
as applicable, (consolidated in each case with any subsidiaries then in
existence) as of the dates thereof and the results of their operations and
cash flows for the periods then ended. The books and records of each of SDN
and Liberty have been, and are being, maintained in all material respects in
accordance with GAAP and reflect only actual transactions.
3.2.8 Regulatory Filings and Agreements. Each member of the
SDN Group has timely filed all reports, registrations and statements,
together with any amendments required to be made with respect thereto, that
it was required to file since December 31, 1992 with any Bank Regulator as to
which a failure to file the same could reasonably be expected to have a
Material Adverse Effect on such entity, including any report or statement
required to be filed pursuant to the Laws of the United States (including
regulations of the Board of Governors of the Federal Reserve, the OCC and the
FDIC), and has paid all fees and assessments due and payable in connection
therewith. Except for normal examinations conducted by a Bank Regulator in
the regular course of the business of SDN Group, and except as disclosed on
Schedule 3.2.8, no Bank Regulator has initiated any proceeding or
investigation or, to the best knowledge of SDN, has threatened to initiate
any proceeding or investigation, into the business or operations of any
member of the SDN Group since December 31, 1992. Except as disclosed on
Schedule 3.2.8, no member of the SDN Group is a party to or is subject to,
and since December 31, 1992 no member of the SDN Group has been a party to or
subject to, any Regulatory Agreement with or from, and has adopted any board
resolutions at the request of, any Bank Regulator that restricts the conduct
of such SDN Group member's business or in any manner relates to its capital
adequacy, credit policies, loan origination practices or management
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nor, to the knowledge of SDN, is any Bank Regulator contemplating issuing or
requesting (or considering the appropriateness of issuing or requesting) any
such Regulatory Agreement. Except as disclosed on Schedule 3.2.8, there is
no material unresolved violation, criticism, or exception by any Bank
Regulator with respect to any report or statement relating to any examination
of any member of the SDN Group.
3.2.9 Undisclosed Liabilities. Except as and to the extent
reflected in each of SDN's and Liberty's Final Financial Statements or on
Part A of Schedule 3.2.9, no member of the SDN Group has any liabilities,
commitments or obligations of any nature, whether absolute, accrued,
contingent or otherwise, and whether due or to become due, including, without
limitation, liabilities that may become known or arise after the date hereof
and which relate to transactions entered into, or any state of facts
existing, on or before the Balance Sheet Date and which would be required
under GAAP to be shown in such balance sheet or referenced in the notes
thereto, other than (a) obligations (including guarantees and letters of
credit) not required by GAAP to be reflected, reserved against or disclosed
in the applicable Final Financial Statements, all of which are set forth on
Part B of Schedule 3.2.9 and none of which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on the SDN
Group or any member thereof and (b) those incurred in the ordinary course of
business consistent with past practice since the Balance Sheet Date.
3.2.10 Classified and OLEM Assets, Reserves and Certain Other
Assets. As of the date hereof, the only assets of San Dieguito that are (a)
Classified Assets or OLEM Assets on the books and records of San Dieguito, or
(b) over 90 days delinquent in payment of principal or interest whether or
not the same are Classified Assets or OLEM Assets, are those listed on Part A
of Schedule 3.2.10 hereto (which schedule identifies the asset by loan number
or other designation and sets forth the original principal amount, the
current book balance, the amount of any reserve (or portion of the general
reserve) allocated thereto, and the loan classification). As of the date
hereof, the only assets of Liberty that are (a) Classified Assets or OLEM
Assets on the books and records of Liberty, or (b) over 90 days delinquent in
payment of principal or interest whether or not the same are Classified
Assets or OLEM Assets, are those listed on Part B of Schedule 3.2.10 hereto
(which schedule identifies the asset by loan number or other designation and
sets forth the original principal amount, the current book balance, the
amount of any reserve (or portion of the general reserve) allocated thereto,
and the loan classification). The loan and other asset classification
procedures utilized by each member of the SDN Group are in accordance with
RAP and prudent banking practice, and are consistently applied. Part C of
Schedule 3.2.10 hereto sets forth all loans of any member of the SDN Group
outstanding as of the date hereof (whether or not they are Classified Assets,
OLEM Assets or are otherwise in default) to any director, executive officer
or Principal Stockholder of that or any other member of the SDN Group, or to
SDN's knowledge, any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing.
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3.2.11 Investment Securities; Derivatives. Part A of Schedule
3.2.11 describes all of the investment securities (including mortgage backed
securities and whether actively traded, available for sale or held to
maturity) owned by SDN or San Dieguito as of the date hereof, and Part B of
Schedule 3.2.11 describes all of the investment securities (including
mortgage backed securities and whether actively traded, available for sale or
held to maturity) owned by Liberty as of the date hereof, including in each
case identification of the type of security, CUSIP numbers, pool face values
(where applicable), book values, market values, coupon rates, paydown speeds,
book yields, durations, weighted average life and weighted average coupons,
in each case as of March 31, 1996 (or as of the date of acquisition, if later
acquired). Since December 31, 1993, no member of the SDN Group has engaged
in any transaction in or involving forwards, futures, options on futures,
swaps or other derivative instruments.
3.2.12 Absence of Certain Changes or Events. Except as
disclosed on Schedule 3.2.12, since the Balance Sheet Date, (a) there has
been no material adverse change in the business, property, assets (including
loan and servicing portfolios), liabilities (whether absolute, contingent or
otherwise) prospects, operations, liquidity, income or condition (financial
or otherwise) of any member of the SDN Group (other than as a result of
changes in banking laws or regulations of general applicability or
interpretation thereof), and (b) each member of the SDN Group has carried on
its business in the ordinary and usual course consistent with its past
practices. Except as disclosed on Schedule 3.2.12, between the Balance Sheet
Date and the date hereof, no member of the SDN Group has increased the wages,
salaries, compensation, pension, or other fringe benefits or perquisites
payable to any executive officer, employee, or director, granted any
severance or termination pay, entered into any employment contract, salary
continuation (or similar) contract or any contract to make or grant any
severance or termination pay, or paid any bonus, in each case except for
normal increases and payments for or to persons other than directors or
senior officers of the applicable member of the SDN Group in the ordinary
course of business consistent with past practice or except as required by
applicable law.
3.2.13 Compliance with Applicable Laws. The business of each
member of the SDN Group is, and at all times since December 31, 1992 has
been, conducted in compliance with all Laws (including those relating to
equal credit, fair lending, fair housing and community reinvestment), except
where a failure to so comply would not have a Material Adverse Effect on the
SDN Group. Each member of the SDN Group holds all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Entities that
are material to the operation of its business, and is in compliance with the
terms of the same except where the failure so to comply would not have a
Material Adverse Effect on the SDN Group. Except as disclosed on Schedules
3.2.8, no investigation by any Governmental Entity with respect to any member
of the SDN Group is pending or, to SDN's knowledge, contemplated.
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3.2.14 Litigation and Other Disputes. Except as disclosed on
Schedule 3.2.14, there is no suit, action, or proceeding (including any
cross- or counter-claim) pending or, to the knowledge of the applicable
member of the SDN Group, threatened, against or affecting any member of the
SDN Group or any of its assets, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against any member of the SDN Group the obligations under which
have not heretofore been fully performed. Except as set forth on Schedule
3.2.14, no member of the SDN Group has accrued or set aside any reserves
relating to any suit, action, or proceeding (including any cross- or
counter-claim) pending or, to the knowledge of SDN, threatened, against or
affecting any member of the SDN Group or any of their respective assets.
Except as disclosed on Schedule 3.2.14, since December 31, 1992, no member of
the SDN Group has been a defendant, either directly or as
defendant-in-counterclaim or cross-claim, in any litigation in which any
"lender liability" cause of action was asserted against it.
3.2.15 Administration of Fiduciary Accounts. Each member of the
SDN Group has properly administered in all material respects all accounts for
which it acts as a fiduciary (including but not limited to accounts for which
it serves as a trustee, agent, custodian, personal representative, guardian,
conservator or investment advisor) in accordance with the terms of the
governing documents and applicable Law, including state and federal common
law. To the knowledge of SDN, neither any member of the SDN Group nor any of
their respective directors, officers or employees has committed any breach of
trust with respect to any such fiduciary account which has had or could
reasonably be expected to have a Material Adverse Effect on the SDN Group,
and the accounting for each such fiduciary account are true and correct in
all material respects and accurately reflect the assets of such fiduciary
account.
3.2.16 Taxes.
(a) Each member of the SDN Group has filed (either
individually or as a part of a consolidated group) all federal,
state and, to the best of SDN's knowledge, material local tax
returns and information returns required to be filed by it, and all
such returns have been accurate and complete. The applicable
entity has paid or has set up an adequate reserve for the payment
of all Taxes required to be paid as shown on such returns, and
SDN's Final Financial Statements reflect an adequate reserve for
all Taxes payable by SDN and Liberty, respectively, accrued through
the date of such financial statements. No deficiencies for any
Taxes have been proposed, asserted or assessed against any member
of the SDN Group that are not adequately reserved for in the
reasonable judgment of the applicable entity's independent
auditors. The federal income tax returns of SDN have been examined
by and settled with the IRS, or the statute of limitations with
respect to each such year has expired (and no waiver extending the
statute of limitations has been requested or granted), for all
years through 1992. The
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federal income tax returns of SDN for the years 1993 through 1994 are
currently open to IRS examination but no audit is pending for any of such
years and, to SDN's knowledge, no challenge or deficiency is contemplated
by the IRS with regard to any of such years. The federal income tax
returns of Liberty have been examined by and settled with the IRS, or the
statute of limitations with respect to each such year has expired (and no
waiver extending the statute of limitations has been requested or
granted), for all years through 1991. The federal income tax
returns of Liberty for the years 1992 through 1994 are currently
open to IRS examination but except as disclosed on Part A of
Schedule 3.2.16, no audit is pending for any of such years, and to
SDN's knowledge, no challenge or deficiency is contemplated by the
IRS with regard to any of such years. No member of the SDN Group
has not been requested to give any currently effective waivers
extending the statutory period of limitation applicable to any
Federal, state, county or local income tax return for any period.
No member of the SDN Group has (i) filed any consent to the
application of Section 341(f) of the Code, (ii) filed any election
under Section 338(g) or 338(h)(10) of the Code or caused or
permitted any deemed election under Section 338(e) of the Code,
(iii) applied for any revenue ruling, private letter ruling or
other ruling relating to Taxes, (iv) entered into any closing
agreement with any Governmental Entity relating to Taxes, (v) been
required to include in income any adjustment pursuant to Section
481 of the Code by reason of a voluntary change in accounting
method initiated by SDN and the Internal Revenue Service has not
initiated or proposed any such adjustment or change in accounting
method, (vi) except as set forth on Part B of Schedule 3.2.16,
entered into a transaction which is being accounted for as an
installment obligation under Section 453 of the Code which would be
reasonably likely to have a Material Adverse Effect on the SDN
Group or (vii) been, at any time, a member of any affiliated group
filing any consolidated tax return other than (x) the existing
group consisting of SDN and San Dieguito, and (y) as of immediately
prior to the Effective Time, the group consisting of Holdco, SDN,
San Dieguito and Liberty.
(b) No employee, officer or director of SDN or any
affiliates of SDN who is a "Disqualified Individual" (as such term
is defined in proposed Treasury Regulation Section 1.280G-1) under
any employment, severance or termination agreement, other
compensation arrangement, or SDN Benefit Plan currently in effect,
would receive as a result of the Reorganization any amount which
would be characterized as an "excess parachute payment" as such term
is defined in Section 280G(b)(1) of the Code.
3.2.17 Certain Agreements. Except as disclosed on Schedule
3.2.17, no member of the SDN Group is a party to (nor are any of their
respective assets bound by) any
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oral or written contract, lease or other agreement of any name or nature in
effect as of the date hereof:
(a) that would be required to be filed as an exhibit to
an annual report on Form 10-K filed with the SEC (assuming such
entity were a reporting company under the Exchange Act),
(b) the benefits of which (to either party) will accrue
or be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of the Reorganization (either alone
or upon the occurrence of any additional acts or events) or the
value of any of the benefits of which will be calculated on the
basis of the Reorganization or any portion or aspect thereof
(including any so-called retention or similar bonuses),
(c) relating to employment, salary continuation,
severance, consulting, collective bargaining or otherwise relating
to the provision of personal services or payment therefor
(including data processing, software programming and licensing
contracts),
(d) which, upon the consummation of the Reorganization,
will result in any payment (whether of severance pay or otherwise)
becoming due from CSB, any member of the SDN Group or Holdco to any
officer or employee of any member of the SDN Group,
(e) relating to non-competition or secrecy,
(f) that materially restricts the conduct of any line
of business by any member of the SDN Group, or
(g) that was entered into in connection with the
consummation of a federally assisted acquisition of a depository
institution pursuant to which any member of the SDN Group is
entitled to receive financial assistance or indemnification from
any Governmental Entity.
The applicable member of the SDN Group is not materially in default
under, conflict with, violation of, nor has it, to its knowledge,
through any act or omission created any material right of termination
under, cancellation of, acceleration of any obligation under, loss of
material benefit under, or created any material lien, pledge, security
interest or other encumbrance on its assets under any contract, lease or
other agreement described by any of the foregoing paragraphs (a) through
(g), and to its knowledge, no other party to any such contract, lease or
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other agreement has committed (by act or omission) any such material
default or violation of the same. SDN has previously delivered or
caused to be delivered to CSB true and correct copies of all employment,
consulting and deferred compensation agreements that are in writing and
to which any member of the SDN Group is a party, and has delivered to
CSB complete and accurate summaries of all employment, consulting and
deferred compensation agreements that are not in writing and to which
any member of the SDN Group is a party. Except as disclosed on Schedule
3.2.17, no member of the SDN Group is a party to, and since December 31,
1992 no member of the SDN Group has been a party to (nor are any of
their respective assets bound by), any oral or written contract, lease
or other agreement of any name or nature with a Person who was, as of,
or within one year prior to, the date of such agreement a director,
officer or Principal Stockholder of the applicable entity or its
corporate parent.
3.2.18 Employees and Employee Benefit Plans.
(a) Except as disclosed on Schedule 3.2.18(a) or on
Schedule 3.17, no employee of or consultant retained by any member
of the SDN Group shall have the right to receive from Holdco, CSB
or such member of the SDN Group any severance payment or other
payment in the nature thereof (including so-called salary
continuation payments, golden parachute payments, severance
benefits or unemployment compensation), in the event his or her
employment is terminated by Holdco, CSB or such member of the SDN
Group at or after the Effective Time, whether such right arises as
a matter of contract, past policy or understanding, by operation of
law, or otherwise.
(b) Schedule 3.2.18(b) sets forth a true and complete
list of each material Benefit Plan of each member of the SDN Group.
SDN has made available to CSB true and correct copies of (i) each
such SDN Group Benefit Plan, (ii) the most recent annual report
(Form 5500) filed with IRS with regard to each SDN Group Benefit
Plan requiring such a filing, (iii) each trust agreement relating
to any SDN Group Benefit Plan, (iv) the most recent summary plan
description for each SDN Group Benefit Plan for which a summary
plan description is required, (v) the most recent actuarial report
or valuation for each SDN Group Benefit Plan subject to Title IV of
ERISA, and (vi) the most recent determination letter issued by the
IRS in the case of SDN Group Benefit Plans qualified under Section
401(a) of the Code, and (vii) all personnel policies and manuals of
each member of the SDN Group.
(c) (i) Each of the SDN Group Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code is
so qualified; (ii) with respect to each SDN Group Benefit Plan
which is subject to Title IV of ERISA, the present value of accrued
benefits under such SDN Group Benefit Plan, based upon the
actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by
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such SDN Group Benefit Plan's actuary with respect to such SDN Group
Benefit Plan, did not, as of its latest valuation date, exceed the
then-current value of the assets of such SDN Group Benefit Plan allocable
to such accrued benefits; and (iii) no SDN Group Benefit Plan provides
benefits, including without limitation death or medical benefits (whether
or not insured), with respect to current or former employees of the
applicable member of the SDN Group or any affiliate of such entity
beyond such employees' retirement or other termination of service
other than (A) coverage mandated by applicable law, (B) retirement
benefits or death benefits under a Benefit Plan qualified under
Section 401(k) of the Code, or (C) benefits the full cost of which
is borne by the current or former employee (or his beneficiary).
(d) With respect to the SDN Group Benefit Plans,
individually and in the aggregate, to the knowledge of SDN, no
event has occurred and there exists no condition or set of
circumstances in connection with which the applicable member of the
SDN Group could be subject to any liability that could have a
Material Adverse Effect on the SDN Group (except liability for
benefits claims and funding obligations payable in the ordinary
course) under ERISA, the Code or any other applicable Law.
(e) There are no material disputes, employee grievances,
or disciplinary actions pending or, to the knowledge of SDN,
threatened by or between any employees of any member of the SDN
Group and such employer. Each member of the SDN Group has complied
in all material respects with all Laws relating to the employment
of labor and has no liability for any arrears of wages or
employment-related taxes, or penalties for failure to comply with
any such Law, or for any severance or termination payments of any
type. No election or proceeding relating to the labor relations of
any member of the SDN Group is pending or, to SDN's knowledge,
contemplated. To the knowledge of SDN, no member of the SDN Group
has had union activity or any material labor trouble (including any
strike, work stoppage, slow-down, or similar disturbance) of any
kind, nature or description at any time.
3.2.19 Properties. Except as disclosed on Part A of Schedule
3.2.19, no member of the SDN Group holds title to or a beneficial interest in
any real property other than OREO. Disclosed on Part B of Schedule 3.2.19
are the only real properties leased by, otherwise occupied by, or in the
possession of any member of the SDN Group (excluding OREO and property
occupied only as lender in possession, in each case provided that SDN is
conducting no business in such property, and excluding the owned properties
disclosed on Part A of Schedule 3.2.19). Except for assets disposed of in the
ordinary course of business consistent with past practice since the Balance
Sheet Date, the applicable member of the SDN Group has good and valid title
to all of the tangible personal property and assets which are used in and
material to the operation of its business and which it owns or purports to
own, including all
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assets reflected as owned by members of the SDN Group in SDN's Final
Financial Statements, and has good and valid title to all of the leasehold
interests in all leases of real or personal property which it leases or
purports to lease, including all assets reflected as leased by members of the
SDN Group in SDN's Final Financial Statements, in each case free and clear of
any liens, encumbrances or other imperfections of title other than such
liens, encumbrances or imperfections as (a) are reflected, reserved against
or otherwise disclosed in SDN's Final Financial Statements, (b) arise out of
Taxes not yet due or payable, or (c) relate to immaterial properties or
assets or otherwise could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect on the SDN Group or any member
thereof. The applicable member of the SDN Group enjoys peaceful and
undisturbed possession of the applicable leased asset under all leases of
real or personal property under which it is operating or to which it is a
party. All of such leases are valid, subsisting and in full force and effect
and there are no existing defaults or events which, with the passage of time
or the giving of notice, or both, would constitute defaults by the applicable
member of the SDN Group or, to the knowledge of SDN, by any other party
thereto, except for such defaults, if any, which could not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect on
the SDN Group or any member thereof. All items of real or personal property
owned or used by members of the SDN Group and material to their collective
business have been properly maintained and, to SDN's knowledge, are in good
operating order and repair.
3.2.20 Environmental. To the knowledge of SDN, each member of
the SDN Group and all real property (including OREO) in the possession of any
member of the SDN Group or over which any such member exercises control are,
and at all times while in the possession or control of a member of the SDN
Group each property at any time owned, possessed or controlled by a member of
the SDN Group has been, in compliance with all applicable Laws relating to
pollution or protection of human health or the environment (including Laws
relating to emissions, discharges, releases or threatened releases of
Hazardous Material or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Material), except for any violations of Law that, either
individually or in the aggregate, have not had and cannot reasonably be
expected to have a Material Adverse Effect on the SDN Group. To the
knowledge of SDN, there has not occurred any release of Hazardous Material
on, under or affecting any real property during the period of any member of
the SDN Group's ownership, possession or operation of such property
(including its participation in the management of any business located on
such property) or, to SDN's knowledge, during any prior period. To the
knowledge of SDN, neither the members of the SDN Group nor any property now
or heretofore in the possession of any of them is or has ever been a
defendant in or the subject of any suit, claim, action, proceeding,
investigation or notice before any Governmental Entity or other forum
relating to an alleged violation (including by any predecessor) of any
environmental Law, rule or regulation or relating to the
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release or threatened release into the environment of any Hazardous Material,
whether or not occurring at or on a site owned, leased or operated by a
member of the SDN Group.
3.2.21 Intellectual Property. Each member of the SDN Group
owns, or possesses valid and binding licenses and other rights to use without
payment, all material trademarks, trade names, servicemarks, copyrights,
trade secrets and patents used in its businesses, and no member of the SDN
Group has received any challenge of the same by any Person or any notice of
alleged conflict between the same and the rights of any other Person. Each
member of the SDN Group has, in all material respects, performed all of its
obligations under, and is not in material conflict with, violation of,
default under, creation of a right of termination under, cancellation of,
acceleration of any obligation under, loss of a material benefit under, any
contract, agreement, arrangement or commitment relating to any of the
foregoing.
3.2.22 Brokers. No member of the SDN Group has employed any
broker, finder, investment banker or similar Person in connection with the
Reorganization, or has incurred or will incur any broker's, finder's,
investment banker's or similar fees, commissions or expenses payable by any
member of the SDN Group in connection with the Reorganization.
3.2.23 Financing of Reorganization. SDN has received one or
more valid and binding subscription agreements providing for investments in
SDN, payable on or before the Closing Date, that, in the aggregate, will
provide SDN with the full amount of the Maximum Required Capital Contribution
(or such lesser amount as SDN may take down thereunder consistent with its
obligations under Section 2.2). SDN has also received one or more valid and
binding subscription agreements, assignable to Holdco, providing for
investments in Holdco, payable within a reasonable time following demand made
on or after the Closing Date, that, in the aggregate, will provide Holdco
with the lesser of (a) the excess of (i) such amount as may become payable to
holders of Dissenting CSB Shares in consideration of such shares over (ii)
the arithmetic difference resulting from the Aggregate Cash Pool minus the
Distributable Cash Pool, or (b) the arithmetic difference resulting from the
Maximum Required Capital Contribution minus the actual Capital Contribution,
or such amount lesser than the amount specified in clause (i) or clause (ii),
as applicable, as Holdco may take down thereunder, in consideration of which
investments Holdco shall issue to such subscriber(s) Holdco Common Stock at a
price per share calculated such that the shares issued shall equal the number
of shares of Holdco Common Stock that such subscriber(s) would have received
in the SDN Merger had such investments been part of the Capital Contribution.
Each of the foregoing subscription agreements has been executed by a Person
that, to SDN's knowledge after reasonable investigation, has the financial
capacity to perform thereunder. Notwithstanding the foregoing, the
obligations of SDN hereunder are not conditioned upon SDN's obtaining
financing.
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3.2.24 Disclosure of All Material Matters. No statement of fact
(which shall be deemed to exclude any projection, estimate or pro forma
financial statement) set forth in (a) this Agreement (including all
information in the Schedules and Exhibits hereto), (b) SDN's Final Financial
Statements, (c) the audited financial statements of SDN and Liberty as at and
for the periods ended December 31, 1994 and December 31, 1993, (d) San
Dieguito's and Liberty's Reports of Condition and Income filed with the OCC
between the date hereof and the Closing Date (when the same are filed), (e)
the Registration Statement, if applicable (when the same becomes effective),
and (f) any application, petition or similar document (excepting the
Registration Statement) filed by any member of the SDN Group with any
Governmental Entity in connection with the Reorganization (when the same are
filed), excepting in the case of clauses (e) and (f) statements made in
reliance upon, and in conformity with, information provided by CSB, is or
will be, as of the date delivered, false or misleading in any material
respect; nor does any of the materials referenced in this Section 3.2.24 omit
to state a material fact necessary in order to make the statements made or
information disclosed, in the light of the circumstances under which they
were made or disclosed, not misleading. Notwithstanding the foregoing, the
unaudited pro forma balance sheet included as Exhibit 1.1-B has been prepared
on a reasonable basis and based on SDN position that GAAP does not require
SDN to use purchase accounting to account for its 1995 recapitalization,
Exhibit 1.1-B reflects all adjustments necessary to present fairly in all
material respects the pro forma balance sheet of SDN as December 31, 1995
giving effect to SDN's acquisition of Liberty.
3.3 By Holdco. Holdco makes the following representations and
warranties as of the Holdco Ratification Date:
3.3.1 Organization, Standing and Power. Holdco is a business
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Holdco has all requisite power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties make such qualification necessary. As of the
Closing Date, Holdco will be a Bank Holding Company duly registered under the
Bank Holding Company Act.
3.3.2 Holdco Common Stock. As of the Holdco Ratification Date,
SDN is the sole holder of Holdco Common Stock. At the Effective Time, (a)
all outstanding shares of Holdco Common Stock will have been duly authorized,
validly issued, and will be fully paid and non-assessable and not subject to
preemptive rights, and (b) Holdco will be the sole holder of SDN Common Stock.
3.3.3 Authority and Related Matters. Holdco has all requisite
power and authority to enter into this Agreement and to consummate the
Reorganization. The execution
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and delivery of this Agreement and the consummation of the Reorganization
have been duly authorized by all necessary action on the part of Holdco. This
Agreement has been duly executed and delivered by Holdco and (assuming due
authorization, execution and delivery by CSB and SDN) constitutes the valid
and binding obligation of Holdco, enforceable in accordance with its terms
subject only to laws regarding bankruptcy, insolvency, reorganization
moratorium or otherwise affecting creditors' rights generally, and to the
application of general principles of equity (whether considered in a
proceeding in law or at equity).
3.3.4 No Conflicts. The execution and delivery of this
Agreement does not, and the consummation of the Reorganization will not,
result in any conflict with or violation of any provision of the Certificate
of Incorporation or By-laws of Holdco. Subject only to the receipt or
completion of the consents, approvals, orders, authorizations, registrations,
declarations and filings included among the CSB Governmental Approvals and
the SDN Governmental Approvals, the execution and delivery of this Agreement
does not, and the consummation of the Reorganization will not, result in any
violation, conflict, default, creation of a right of termination,
cancellation, acceleration, or loss of a material benefit under any Law or
under any loan or credit agreement, note, mortgage, indenture, lease,
employee benefit plan or other agreement, obligation, instrument, permit,
concession, franchise or license, or any judgment, order or decree,
applicable to Holdco or its properties or assets which violation, conflict,
default, creation of a right of termination, cancellation, acceleration, or
loss of a material benefit would have a Material Adverse Effect on Holdco.
3.3.5 Consents. No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity is
required on the part of Holdco in connection with Holdco's execution and
delivery of this Agreement or Holdco's consummation of the Reorganization,
including the offer, sale or issuance of the Holdco Common Stock upon the
consummation of the SDN Merger and the CSB Merger, respectively, as to which
the failure to obtain the same could reasonably be expected to have a
Material Adverse Effect on Holdco or materially interfere with Holdco's
ability to consummate the Reorganization (including the SDN Merger and the
CSB Merger), except (a) those matters included in the SDN Governmental
Approvals or the CSB Governmental Approvals, (b) such filings as have been
made prior to the Closing, and (c) such post-closing filings as may be
required under applicable state securities Laws, all of which shall be filed
within the applicable periods therefor.
3.3.6 Capital Resources. As of the Effective Time, Holdco will
have funds not less than the arithmetic difference between the amount of the
Capital Contribution minus the amount of SDN's Expenses.
3.3.7 Securities Law Compliance. The offer and sale of Holdco
Common Stock to the CSB Shareholders in the CSB Merger and the issuance of
Holdco Common Stock to the
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SDN Shareholders in the SDN Merger will not violate in any material respect
any applicable federal or state Law relating to the sale or issuance of
securities.
3.3.8 Litigation and Other Disputes. There is no suit, action,
or proceeding (including any cross- or counter-claim) pending or, to the
knowledge of SDN or Holdco, threatened, against or affecting Holdco or any of
its assets, nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against Holdco the
obligations under which have not heretofore been fully performed. Holdco has
not accrued or set aside any reserves relating to any suit, action, or
proceeding (including any cross- or counter-claim) pending or, to the
knowledge of SDN or Holdco, threatened, against or affecting Holdco or any of
its assets. Holdco has not at any time been a defendant, either directly or
as defendant-in-counterclaim or cross-claim, in any litigation in which any
"lender liability" cause of action was asserted against it.
ARTICLE IV.
Additional Agreements
4.1 Discussions with Third Parties.
4.1.1 CSB (a) shall not, and shall instruct and cause each of
its Representatives not to, solicit or encourage, directly or indirectly,
inquiries or proposals with respect to any Strategic Transaction Proposal,
and, (b) except as expressly permitted by Section 4.1.2, shall not, and shall
instruct and cause each of its Representatives not to, furnish any non-public
information relating to or participate in any negotiations, discussions or
other activities concerning, any Strategic Transaction with any party other
than SDN. CSB shall notify SDN promptly after any Strategic Transaction
Proposal is received by, or any negotiations or discussions regarding a
Strategic Transaction Proposal are sought to be initiated with, directly or
indirectly, CSB or any of its Representatives, and shall disclose to SDN the
identity of the third party making or seeking to make such Strategic
Transaction Proposal, the terms and conditions thereof and such other
information as SDN reasonably may request; provided, however, that if CSB
receives a Strategic Transaction Proposal and the foregoing disclosure of
such Proposal to SDN would violate a confidentiality agreement by which CSB
is bound, CSB (a) shall make the foregoing disclosure only to the maximum
extent permissible under such confidentiality agreement, (b) shall return
such Strategic Transaction Proposal to the initiating party without
substantive response, and (c) to the extent such disclosure has not been made
under clause (a), shall notify SDN that a Strategic Transaction Proposal has
been received and that the same has been returned to the initiating party
without substantive response.
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4.1.2 Notwithstanding Section 4.1.1, following receipt of a
Qualifying Strategic Transaction Proposal, neither CSB nor any of its
representatives shall be prohibited from (a) engaging in discussions or
negotiations with a third party which has made a proposal that satisfies the
requirements of a Qualifying Strategic Transaction Proposal and thereafter
providing to such third party information previously provided or made
available to SDN, provided the third party shall have entered into a
confidentiality agreement substantially similar to the confidentiality
provisions of Section 4.5, or (b) terminating this Agreement pursuant to, and
subject to the conditions contained in, Section 6.4.1. A "Qualifying
Strategic Transaction Proposal" shall mean a bona fide written Strategic
Transaction Proposal with respect to which the CSB Board of Directors shall
have determined, after consultation with CSB's counsel, that the action by
CSB contemplated under either clause (a) or clause (b), as applicable, of the
immediately preceding sentence is required under the fiduciary duties owed by
the Board of Directors to the CSB Shareholders, which determination has been
made acting in good faith and on the basis of a written opinion from a
financial advisor retained by CSB to the effect that the financial terms of
such Strategic Transaction Proposal are, from the CSB Shareholders'
perspective, financially superior to the Reorganization.
4.1.3 In the event that CSB receives a Qualifying Strategic
Transaction Proposal, it shall, within thirty (30) calendar days of its
receipt thereof, give notice to SDN either (i) reaffirming its intent to
proceed under this Agreement and to consummate the Reorganization, or (ii)
terminating this Agreement pursuant to Section 6.4.1. If CSB does not,
within the period specified above, either expressly reaffirm its intent to
proceed under this Agreement or terminate this Agreement pursuant to Section
6.4.1, SDN may at any time thereafter terminate this Agreement pursuant to
Section 6.3.4 and be entitled to liquidated damages as set forth in Section
7.2.1.
4.2 Shareholder Approval; Information and Registration Statements.
4.2.1 Shareholder Approval. CSB shall take all reasonable
steps necessary either (a) to duly call, give notice of, convene and hold a
meeting of stockholders for purposes of voting upon the approval of this
Agreement, or (b) to solicit written consents of the CSB Shareholders
approving this Agreement. Notice of such meeting shall be given and such
meeting shall be held, or such written consents shall be solicited and
approval shall be sought to be obtained, as applicable, in either event as
soon as practicable after the distribution of the Information Statement. SDN
and CSB shall coordinate and cooperate with respect to the foregoing matters.
CSB shall use all reasonable efforts to distribute the Information Statement
to CSB Shareholders in contemplation of such meeting or such written consents
as promptly as practicable after (and shall not distribute the same before)
(a) SDN and CSB have approved the definitive form thereof (with respect to
such matters as to which SDN's approval is required in accordance with
Section 4.2.2), which approval shall not be unreasonably withheld or delayed,
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and (b) in the event the Information Statement has been incorporated into a
Registration Statement, such Registration Statement shall have been declared
effective under the Securities Act.
4.2.2 Information Statement. SDN and CSB shall jointly prepare
the Information Statement as soon as practicable after the date of this
Agreement. Except as expressly provided in Section 4.2.6, the Information
Statement shall include an unqualified recommendation by the CSB Board of
Directors that the CSB Shareholders approve the Reorganization. Each of SDN
and CSB shall deliver to the other, and afford the other an opportunity to
comment on, drafts of the disclosure to be included in the Information
Statement prior to the distribution thereof to CSB's Shareholders. The
Information Statement shall not be distributed without SDN's prior approval
(which shall not be unreasonably withheld) of all portions thereof which
describe a member of the SDN Group, Holdco, or the terms of the
Reorganization. SDN shall also take any action (other than qualifying to do
business in any jurisdiction in which it is now not so qualified) required to
be taken under any applicable state securities Laws in connection with the
issuance of Holdco Common Stock, and CSB shall furnish all information
concerning CSB and the holders of CSB Common Stock as SDN may reasonably
request in connection with any such action. CSB warrants that all
information regarding CSB or the CSB Shareholders set forth in the
Information Statement or in any filing made under applicable state securities
laws (a) will comply in all material respects with all applicable Laws and
(b) will not contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading, provided, however, in no event shall CSB be liable
for any untrue statement of material fact or omission to state a material
fact in the Information Statement made in reliance upon, and in conformity
with, written information concerning any member of the SDN Group furnished by
SDN specifically for use in the Information Statement. SDN warrants that all
information regarding the SDN Group set forth in the Information Statement or
otherwise in the Registration Statement, or in any filing made under
applicable securities laws (a) will comply in all material respects with all
applicable Laws and (b) will not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading, provided, however,
in no event shall SDN be liable for any untrue statement of material fact or
omission to state a material fact in the Information Statement or otherwise
in the Registration Statement made in reliance upon, and in conformity with,
written information concerning CSB furnished by CSB specifically for use in
the Information Statement or the Registration Statement.
4.2.3 Registration Statement. In the event that, pursuant to
Section 2.10, the Holdco Common Stock to be issued as Stock Consideration is
to be issued pursuant to a Registration Statement, SDN shall use all
reasonable efforts to prepare and file with the SEC
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the Registration Statement (which Registration Statement shall include the
Information Statement) promptly following the preparation of the Information
Statement, and thereafter to cause such Registration Statement to become
effective. Without limiting the foregoing, if SDN has not received such a No
Action Letter confirming the availability of an exemption from registration
within forty-five (45) calendar days of the date of this Agreement, SDN shall
use all reasonable efforts to prepare and file the Registration Statement not
later than the fifty-fifth (55th) calendar day (or the next subsequent
Business Day) after the date of this Agreement; provided, however, SDN may in
its discretion cease preparation of the Registration Statement, or may
withdraw the Registration Statement if previously filed, if SDN shall receive
such a No Action Letter after such forty-fifth (45th) day but before SDN's
receipt of a comment letter on the Registration Statement from the SEC, or
thereafter with the consent of CSB which consent shall not be unreasonably
withheld. CSB will cooperate with SDN in all reasonable respects in the
preparation, filing and prosecution of the Registration Statement.
4.2.4 Letter of CSB'S Accountants. In the event the
Registration Statement is to be filed, CSB shall use all reasonable efforts
to cause to be delivered to SDN a letter of Deloitte & Touche LLP, CSB's
independent auditors, dated a date within two business days before the date
on which the Registration Statement is filed with the SEC and addressed to
Holdco, in form and substance reasonably satisfactory to Holdco, customary in
scope and substance for letters delivered by independent public accountants
in connection with documents similar to the Registration Statement and
similar in scope to the letter described in Section 4.2.5.
4.2.5 Letter of SDN'S Accountants. In the event the
Registration Statement is to be filed, SDN shall use all reasonable efforts
to cause to be delivered to CSB a letter of Price Waterhouse LLP, SDN's
independent auditors, dated a date within two business days before the date
on which the Registration Statement is filed with the SEC and addressed to
CSB and Holdco, in form and substance reasonably satisfactory to CSB,
customary in scope and substance for letters delivered by independent public
accountants in connection with documents similar to the Registration
Statement and similar in scope to the letter described in Section 4.2.4.
4.2.6 Affiliates. CSB shall use its best efforts to cause each
director, executive officer and other person who is, or as of the date on
which the Information Statement is distributed to CSB Shareholders, will be,
an "affiliate" of CSB for purposes of Rule 145 under the Securities Act (each
an "Affiliate") to deliver to SDN, as soon as practicable after the date of
this Agreement but not less than two business days before the date on which
the Information Statement is distributed to CSB Shareholders, a written
agreement in substantially the form of Exhibit 4.2.6.
4.2.7 Effect of Qualifying Strategic Transaction Proposal. In
the event that CSB has received a Strategic Transaction Proposal and the CSB
Board of Directors has determined,
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in accordance with Section 4.1.2, that such Strategic Transaction Proposal
constitutes a Qualifying Strategic Transaction Proposal, then the CSB Board
of Directors may (a) omit from the Information Statement an unqualified
recommendation that the CSB Shareholders approve the Reorganization, (b)
retract or qualify its recommendation, if previously given, or (c) postpone
or adjourn the meeting of CSB Shareholders called for the purpose of
approving the Reorganization.
4.3 Regulatory Approvals and Related Matters.
4.3.1 Responsibility for Bank Regulatory Matters. SDN shall
use all reasonable efforts to prepare and file all applications necessary to
obtain the Governmental Approvals needed to consummate the Reorganization as
promptly as practicable. SDN shall thereafter use all reasonable efforts to
prosecute such applications and to obtain such Governmental Approvals.
4.3.2 Cooperation by CSB. CSB shall provide such information
and shall execute such applications and other documents as are reasonably
necessary for SDN to obtain any Governmental Approval, provided that any
application or other document to be executed by CSB shall be in form and
substance reasonably acceptable to CSB and its counsel. Without the prior
written consent of SDN (which consent shall not be unreasonably withheld or
delayed), CSB shall take no action which reasonably could be expected to
adversely affect or delay, in either case to a material extent, the ability
of CSB, SDN or Holdco to obtain any Governmental Approval.
4.4 Financial Statements. Each Party shall use its best efforts
to cause its independent accountants to make its work papers relating to
its Final Financial Statements available to the other Party. As soon as
reasonably available, but in no event later than the last Business Day
of each month, CSB will deliver to SDN, and SDN shall deliver to CSB,
their respective internal financial statements for the preceding month
and for the calendar year to date, in the same form as delivered (or to
be delivered) to the members of the CSB's and SDN's respective Boards of
Directors.
4.5 Access. From the date hereof through the Closing Date, CSB
shall make available to SDN all information regarding CSB, and SDN shall
make available to CSB all information regarding the members of the SDN
Group, as SDN or CSB (as applicable) reasonably may request, and shall
authorize all reasonable visits to its premises with such staff,
consultants and experts as the other Party reasonably may request,
provided, however, that (a) in its discretion, SDN may limit to CSB's
Chairman the provision of and access to information relating to any
actual or proposed acquisition or business combination by any member of
the SDN Group that is unrelated to the Reorganization, and (b) the
foregoing provision of and access to information shall not apply to any
Strategic Transaction, the rights and duties with regard to
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which are governed solely by Section 4.1. Each Party agrees to coordinate
closely all such activities with the other Party's President or Chief
Financial Officer and to conduct any such inquiries with appropriate
discretion and sensitivity to the other Party's relationships with its
employees, customers and suppliers. The Parties acknowledge that certain of
the information made available to the Parties may be confidential,
proprietary or otherwise nonpublic, and each Party agrees, for itself and
for each of Representatives, that it (i) shall hold in confidence all
confidential information received by it from or with regard to any other
Party ("Confidential Information") subject to the terms of this Section 4.5,
(ii) shall disclose such Confidential Information only to those of its
Representatives and, in the case of SDN, its current or prospective investors
and other sources of capital, in each case having a need to know the same for
purposes of evaluating, negotiating or financing the Reorganization, and
(iii) shall inform each Representative or investor to whom Confidential
Information is disclosed that such information is confidential and direct
such Representative or investor not to disclose the same. The Parties shall
remain responsible for any disclosure of Confidential Information by any of
its Representatives or investors. Each Party further agrees that, upon the
request of the other Party given following any termination of this Agreement,
it and each of its Representatives either shall return to such other Party
all Confidential Information received by it and its Representatives
(including all compilations, analyses or other documents prepared by it that
contain Confidential Information) or shall certify that the same has been
destroyed. As used herein, Confidential Information shall not include (i)
information that is or becomes generally available to the public other than
as a result of a breach of the Letter of Intent or of this Agreement, (ii)
information that the receiving Party demonstrates was known to it on a
non-confidential basis prior to receiving such information from the other
Party hereto, (iii) information that the receiving Party develops
independently without relying on Confidential Information, and (iv)
information that becomes available to the receiving Party on a
non-confidential basis from another source if the source was not known to or
not reasonably believed by the receiving Party to be subject to any
prohibition against disclosing such information.
4.6 Cooperation. The Parties shall cooperate with each other and
use their best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and
filings, and to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and Governmental
Entities (in addition to the Governmental Approvals) which are necessary
or advisable to consummate the Reorganization. CSB shall take primary
responsibility, in consultation with SDN, for obtaining all such
consents from lessors under CSB's real property leases; provided,
however, that CSB shall not agree to modify any such lease in any
material respect without the express written consent of SDN which
consent may be granted or withheld in SDN's sole discretion. SDN shall
take sole responsibility for obtaining all such consents, if any, from
lessors under SDN's real property leases. The Parties agree that they
will consult with each other with respect to the obtaining of all
permits,
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consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the Reorganization and each
Party will keep the other apprised of the status of matters relating to
completion of the Reorganization. Each Party shall, upon request, furnish
the other Party with all information concerning itself as may be reasonably
necessary or advisable in connection with any filing or application made by
or on behalf of such Party to any Governmental Entity in connection with the
Reorganization. Each Party shall promptly advise the other Party upon
receiving any communication from any Governmental Entity whose consent or
approval is required for consummation of the Reorganization which causes such
Party to believe that there is a reasonable likelihood that any required
Governmental Approval will not be obtained or that the receipt of any such
Governmental Approval will be materially delayed.
4.7 Advice of Changes. Each Party shall promptly advise each
other Party of any change or event having a Material Adverse Effect on
it or which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations, warranties
or covenants contained herein. From time to time prior to the Closing
Date, each Party will promptly advise the other Party, in writing, of
any matter that, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in any
of the Schedules to this Agreement (excepting Schedules 3.1.11, 3.1.12,
3.2.10 and 3.2.11) or that is necessary to correct any information in
such Schedules which has been rendered inaccurate thereby, which writing
shall in each case identify the Schedule that was inaccurate or has been
rendered inaccurate. No such supplement to the information provided in
such Schedules shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Article V or the compliance
by any Party with any other provision of this Agreement.
4.8 Current Information. During the period from the date of this
Agreement to the Closing Date, each Party will cause one or more of its
designated representatives to confer on a regular and frequent basis
(not less than bi-weekly) with representatives of the other Party and to
report the general status of the its operations. Each Party will
promptly notify the other Party of any material change in the normal
course of business or in the operation of its properties of and of any
governmental complaint, investigation or hearing (or communications
indicating that the same may be contemplated), or the institution or the
threat of significant litigation involving such party, and will keep the
other Party fully informed of such events. CSB will keep SDN fully
informed of the status of, and the action proposed to be taken with
respect to, Classified Assets (including those that become Classified
Assets after the date hereof) that, individually or in combination with
one or more other loans to the same borrower thereunder, have an
aggregate carry value of $100,000 or more. CSB will advise SDN from
time to time of the interest rates offered to be paid by CSB on each of
its deposit products, such information to be provided by forwarding a
rate sheet by facsimile to SDN's Chief Financial Officer on or before
each day on which any such rate has changed. CSB will provide to SDN
copies of all materials delivered
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to members of the CSB Board of Directors simultaneously with the delivery to
such Directors and, to the extent not included in such materials, shall
provide to SDN copies of the minutes of each meeting of the CSB Board of
Directors (or consents in lieu of meeting) and of each committee thereof
(including its loan committee) promptly after the same are prepared, but in
no event later than 45 calendar days after the date of each such meeting;
provided, however, that (a) such minutes may be in draft form if final
minutes have not been approved by such 45th day, and (b) CSB may omit
therefrom any portion of such minutes that it determines, with the
concurrence of its counsel, relates to (i) the Parties' compliance or
non-compliance with the terms of this Agreement, or (ii) any Strategic
Transaction Proposal other than the Reorganization. SDN will provide to CSB
copies of all materials delivered to members of the SDN, San Dieguito and
Liberty Boards of Directors simultaneously with the delivery to such
Directors and, to the extent not included in such materials, shall provide to
CSB copies of the minutes of each meeting of the SDN, San Dieguito and
Liberty Boards of Directors (or consents in lieu of meetings) promptly after
the same are prepared, but in no event later than 45 calendar days after the
date of such meeting; provided, however, that (a) such minutes may be in
draft form if final minutes have not been approved by such 45th day, and
(b) SDN may (i) omit therefrom any portion of such minutes that it
determines, with the concurrence of its counsel, relates to the Parties'
compliance or non-compliance with the terms of this Agreement, and (ii) in
its discretion, limit to CSB's Chairman any portion of such materials and
minutes that relates to an acquisition or other business combination other
than the Reorganization.
4.9 Conduct of Business. CSB shall conduct its business, and SDN
shall cause San Dieguito and Liberty to conduct their respective
business, in the usual, regular and ordinary course of business
consistent with the past practice (except as required by applicable Law
or as required by this Agreement), and use all reasonable efforts to
maintain and preserve intact their respective business organizations,
employees and advantageous business relationships and retain the
services of their respective officers and key employees.
4.10 Negative Covenants of CSB. Without SDN's prior written
consent (which consent, in the case of Sections 4.10.8 through 4.10.16
and, to the extent specified therein, Section 4.10.3, shall not be
unreasonably withheld or delayed, and which consent, in the case of
Sections 4.10.4 through 4.10.16, shall be deemed to have been granted if
SDN does not grant or refuse its consent or reasonably request
additional information regarding the proposed action within five
(5) Business Days of SDN's receipt of CSB's request for consent or such
shorter period as is expressly specified in the applicable section), CSB
shall not:
4.10.1 declare or make any payment or distribution with respect
to the capital stock of CSB, whether by way of dividend, redemption, payment
of interest or principal or otherwise;
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4.10.2 (a) create, authorize, issue, sell or deliver any of
its capital stock, bonds or other of its securities (whether authorized and
unissued or held in treasury) or any instrument convertible into any of them;
(b) grant or otherwise issue any options, warrants or other rights with
respect thereto; or (c) split up, combine or reclassify any of its
outstanding stock;
4.10.3 acquire, by merging or consolidating with, by
purchasing a substantial equity interest in or a substantial portion of the
assets of or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof;
provided, however, that this Section 4.10.3 shall not apply to (i) any
purchase at a foreclosure sale other than a sale in which CSB is foreclosing
on the majority of the stock of or a majority of the assets of a business (in
this context, "business" being deemed to exclude any investment real estate
project), in which latter event SDN shall not unreasonably withhold its
consent provided that such foreclosure sale is being conducted by CSB in the
ordinary course of business, or (ii) any repossession of leased equipment of
which CSB is the lessor;
4.10.4 enter into any new line of business;
4.10.5 change its methods of accounting in effect at
December 31, 1995, except as required by changes in GAAP or RAP as concurred
with by CSB's independent auditors;
4.10.6 make any equity investment in any new real estate or
new real estate devleopment project, other than in connection with
foreclosures, settlements in lieu of foreclosure or troubled loan or debt
restructurings in the ordinary course of business consistent with prudent
banking practices;
4.10.7 commit any act or omission which constitutes a
violation of or default under, which conflicts with, creates a right of
termination, cancellation or acceleration of any obligation under, or which
causes any loss of a benefit under, any Regulatory Agreement, any board
resolution adopted at the request of a Bank Regulator, or any contract or
license to which CSB is a party or by which it or any of its properties is
bound, if such violation, default, conflict, termination or similar
consequence has had or could reasonably be expected to have a Material
Adverse Effect on CSB;
4.10.8 (a) create, renew, amend or terminate, or give notice
of a proposed renewal, amendment or termination of, any material contract,
agreement or lease for goods, services or office space to which CSB is a
party (excluding leases under which CSB is lessor) or by which CSB or any of
its properties is bound, excepting only contracts, agreements and leases
under which the aggregate annual payments by either party do not exceed
$15,000, (b) make any single capital expenditure exceeding $15,000 or any
capital expenditures exceeding
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$50,000 in the aggregate, or (c) relocate or terminate, or file any
application to relocate or terminate, the operations of any of its banking
offices (including loan production offices);
4.10.9 pay any pension or retirement allowance to any Person
not required by a plan or agreement disclosed on SCHEDULE 3.1.18 or SCHEDULE
3.1.19(a), or enter into any agreement with any labor union or association
representing any employee;
4.10.10 sell, lease, assign, transfer or otherwise dispose of
any property or asset, except for (a) investment portfolio transactions in
the ordinary course of business and substantially consistent with past
practice; (b) sales in the ordinary course of business of (i) individual
residential mortgage loans, (ii) pools of such loans having a par value of
less than $1,250,000, (iii) individual leases under which CSB is lessor, and
(iv) pools of such leases having a book value of less than $1,250,000; (c)
sales of property acquired at foreclosure, provided that such sale will not
result in a loss to CSB in excess of $25,000, individually, or $100,000, in
the aggregate, in each case relative to the carry value of such property on
CSB's books immediately prior to the time of sale; and (d) sales of assets
(excluding those described in clause (a), (b) or (c)) having a gross book
value not in excess of $25,000, individually, or $100,000, in the aggregate;
4.10.11 except as provided in SCHEDULE 4.10.11, restructure
or materially change its investment securities portfolio through purchases,
sales or otherwise, or the manner in which the portfolio is classified or
reported, it being understood and agreed that investment portfolio
transactions in the ordinary course of business and substantially consistent
with past practice shall be deemed to constitute a material change in CSB's
investment portfolio only if the number and/or nature of such transactions
causes a material change in the makeup of the portfolio taken as a whole;
4.10.12 (a) institute, amend or terminate any Employee
Benefit Plan, or (b) increase in any manner the compensation or fringe
benefits of, or pay any bonus to, any officer or employee other than (i)
customary annual (or less frequent) increases in the wages or salaries of
non-officer employees consistent with past practice which in the aggregate do
not increase personnel costs for all non-officer employees by more than 3%
over the levels in effect as of December 31, 1995 and which on an annualized
basis do not increase the salary or wage of any individual employee by more
than 4% (other than increases in connection with promotions of employees to a
level below vice president, which increases may, individually, exceed 4%),
and (ii) incentive compensation payments in accordance with CSB's incentive
compensation programs and schedules in effect at December 31, 1995, or (c)
otherwise increase any other direct or indirect compensation or employee
benefit for or to any of its officers, directors or employees;
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4.10.13 make, amend or compromise any loan or advance
(whether in cash or other property) to any officer, director, or Principal
Stockholder of CSB, except advances made to employees in the usual, regular
and ordinary course of business consistent with the past practice;
4.10.14 make, amend, renew or purchase, or enter into any
commitment to make, amend, renew or purchase, (a) any loan other than a loan
described in clause (b) of this Section, if, as a result of the disbursement
of the proceeds of such loan or the assignment of such loan to CSB, the total
Borrower Group Obligations (including accrued and unpaid interest) of the
borrower to CSB would exceed $300,000, or (b) any residential (excluding
multi-family) mortgage loan if, as a result of the disbursement of the
proceeds of such loan or the assignment of such loan to CSB, the total
Borrower Group Obligations (including accrued and unpaid interest) of the
borrower to CSB would exceed (i) $500,000, if the loan-to-value ratio is 80%
or less, or (ii) $300,000, if the loan-to-value ratio is greater than 80%;
PROVIDED, HOWEVER, that in the cases of both clause (a) and clause (b), if
SDN does not grant or refuse its consent within three (3) calendar days of
SDN's receipt of CSB's request for consent, then SDN shall be deemed to have
granted its consent, and PROVIDED FURTHER that this Section 4.10.14 shall not
apply to any loan meeting the loan underwriting criteria of a third Person
which loan CSB intends and reasonably expects to sell to such Person, without
recourse to CSB and consistent with past practice, promptly following the
origination thereof, pursuant to an agreement with such Person entered into
prior to the origination of such loan;
4.10.15 except in the usual, regular and ordinary course of
business consistent with the past practice, incur any indebtedness for
borrowed money, assume, guarantee, endorse or otherwise as an accommodation
become responsible for the obligations of any other individual, corporation
or other entity (other than short-term indebtedness incurred to refinance
short-term indebtedness), it being understood and agreed that incurrence of
indebtedness in the ordinary course of business shall include, without
limitation, the creation of deposit liabilities, purchases of Federal funds,
Federal Home Loan Bank advances, sales of certificates of deposit and
entering into repurchase agreements, and it being further understood and
agreed that so-called gestation repurchase agreements are not borrowings for
purposes of this Section 4.10.15;
4.10.16 take any action which would adversely affect or
delay, in either case to a material extent, the ability of CSB, SDN or Holdco
(a) to obtain any necessary approvals of any Governmental Entity required for
the Reorganization or (b) to perform its covenants and agreements under this
Agreement;
4.10.17 enter into any agreement or commitment to do any of
the foregoing.
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4.11 NEGATIVE COVENANTS OF SDN. Prior to the Effective Time, SDN
will not (i) adjust, split or otherwise reclassify the SDN Common Stock, or
(ii) make, declare or pay any dividend on the SDN Common Stock, or (iii) make
any other distribution on, or directly or indirectly redeem, purchase or
acquire any shares of, SDN Common Stock, or (iv) otherwise adopt any plan or
arrangement (other than one or more equity compensation plans for its
employees), or (v) take or cause to be taken any other action, if in any case
such action would adversely affect the CSB Shareholders receiving Stock
Consideration in a manner disproportionate to the manner in which such action
affects or would affect the then current holders of SDN Common Stock.
4.12 CONSULTATION BY SDN. SDN shall consult with the Chairman of
CSB prior to any member of the SDN Group undertaking any of the
following actions:
4.12.1 (a) creating, authorizing, issuing, selling or
delivering any of its capital stock, bonds or other of its securities
(whether authorized and unissued or held in treasury) or any instrument
convertible into any of them; (b) granting or otherwise issuing any options,
warrants or other rights with respect thereto; or (c) splitting up, combining
or reclassifying any of its outstanding stock;
4.12.2 acquiring, by merging or consolidating with, by
purchasing a substantial equity interest in or a substantial portion of the
assets of or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof;
provided, however, that this Section 4.12.2 shall not apply to any purchase
at a foreclosure sale;
4.12.3 entering into any new line of business;
4.12.4 changing its methods of accounting in effect at
December 31, 1995, except as required by changes in GAAP or RAP as concurred
with by SDN's independent auditors;
4.12.5 making any equity investment in any real estate or
real estate development project, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructurings in
the ordinary course of business consistent with prudent banking practices;
4.12.6 except in the usual, regular and ordinary course of
business consistent with the past practice, incurring any indebtedness for
borrowed money, assuming, guaranteeing, endorsing or otherwise as an
accommodation becoming responsible for the obligations of any other
individual, corporation or other entity (other than short-term indebtedness
incurred to refinance short-term indebtedness), it being understood and
agreed that incurrence of indebtedness in the ordinary course of business
shall include, without limitation, the creation of
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deposit liabilities, purchases of Federal funds, sales of certificates of
deposit and entering into repurchase agreements;
4.12.7 take any action which would adversely affect or
delay, in either case to a material extent, the ability of CSB, SDN or Holdco
(a) to obtain any necessary approvals of any Governmental Entity required for
the Reorganization or (b) to perform its covenants and agreements under this
Agreement; or
4.12.8 entering into any agreement or commitment to do any
of the foregoing.
4.13 RATIFICATION OF AGREEMENT BY HOLDCO. Subject to the receipt
of all necessary approvals of Bank Regulators, SDN agrees to cause
Holdco to execute, ratify and join in this Agreement and to take all
necessary action to complete the transactions contemplated hereby,
subject to the terms and conditions hereof.
4.14 SDN will comply, and will cause Holdco to comply, in all
material respects, with all applicable federal and state securities Laws
in connection with the Reorganization.
ARTICLE V.
CONDITIONS TO CLOSING
5.1 CONDITIONS TO OBLIGATIONS OF BOTH PARTIES. The obligations of
SDN and CSB to consummate the Reorganization are subject to the satisfaction
of each of the following conditions; PROVIDED, HOWEVER, that any failure of
such conditions shall not limit the Parties' rights and obligations under
Article VII.
5.1.1 REGULATORY APPROVALS. All Governmental Approvals
shall have been obtained and shall remain in full force and effect, all
statutory or other required waiting periods in respect thereof shall have
expired, and no Governmental Approval shall have imposed any condition or
requirement which, in the reasonable opinion of SDN acting in good faith,
would so materially adversely affect the economic or business benefits of the
Reorganization to SDN and Holdco so as to render inadvisable the consummation
thereof.
5.1.2 NO PENDING OR THREATENED CLAIMS. There shall be no
claim, action, suit, investigation or other proceeding pending or overtly
threatened before any court or other Governmental Entity that presents a
substantial risk of the restraint or prohibition of the Reorganization or the
obtaining of material damages from CSB, SDN, Holdco or their respective
officers or directors in connection therewith; and no such restraint or
prohibition shall be
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effective as of the Closing, whether or not the action in which the same was
entered shall remain pending.
5.2 CONDITIONS TO THE OBLIGATIONS OF SDN AND HOLDCO. The
obligations of SDN and Holdco to consummate the Reorganization and of SDN
Merger Sub and SDN to consummate the SDN Merger, are subject to the
satisfaction of, or SDN's written waiver of, each of the following conditions:
5.2.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES;
COMPLIANCE WITH COVENANTS. CSB's representations and warranties contained in
this Agreement were true and correct as of the dates when made. CSB shall
have performed, satisfied and complied with, in all material respects, each
of the agreements and covenants contained herein.
5.2.2 BRINGDOWN OF REPRESENTATIONS AND WARRANTIES. CSB's
representations and warranties contained in this Agreement, without taking
into consideration any amendments, supplements or updates to any Schedules
relating to such representations and warranties, remain true and correct as
of the Closing as though made at and as of the Closing, excepting only
representations and warranties which speak expressly as of an earlier
specified date.
5.2.3 APPROVAL BY CSB SHAREHOLDERS; DISSENTING SHARES. The
Reorganization shall have been approved by the affirmative vote of the
holders of a majority of all shares of CSB Common Stock entitled to vote
thereon, and the aggregate number of shares of CSB Common Stock whose holders
have perfected dissenters' rights pursuant to Section 1300 et seq. of the
California Corporations Code (as incorporated by Section 101 of the
California Financial Code) shall not constitute more than more than 10.0% of
all shares of CSB Common Stock outstanding immediately prior to the Effective
Time.
5.2.4 THIRD PARTY CONSENTS. The consent, approval or waiver
of each Person whose consent, approval or waiver shall be required in order
to permit the consummation of the Reorganization or the preservation of the
contractual rights of CSB or with respect to its business (other than the
Governmental Approvals referred to in Section 5.1.1) shall have been
obtained, except where the failure to obtain such consent, approval or waiver
would not have a Material Adverse Effect on CSB or a Material Adverse Effect
with respect to the economic or business benefits to SDN and Holdco of the
Reorganization as contemplated by this Agreement in the reasonable judgment
of SDN.
5.2.5 RECEIPT OF LEGAL OPINION. SDN shall have received a
legal opinion from Fried, Bird & Crumpacker, counsel for CSB, dated the
Closing Date and addressed to SDN, Holdco and CSB Merger Sub, in form and
substance reasonably satisfactory to SDN, opining to the matters set forth on
EXHIBIT 5.2.5, subject to customary assumptions and qualifications.
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5.2.6 UPDATED SCHEDULE OF CLASSIFIED AND OLEM ASSETS. CSB
shall have delivered to SDN and Holdco a Schedule, certified by the President
or the Chief Financial Officer of CSB and dated as of a date not more than
three calendar days prior to the Closing Date, identifying all assets of CSB
that were (a) Classified Assets or OLEM Assets on CSB's books and records as
of such date or (b) over 90 days delinquent in payment of principal or
interest as of such date.
5.2.7 CERTIFICATES AND DOCUMENTS. CSB shall have delivered
to SDN and Holdco a certificate, executed by the President and Chief
Financial Officer of CSB and dated as of the Closing Date, certifying to the
fulfillment of the conditions specified in Section 5.1 (with regard to CSB
only) and Section 5.2, including a certification that each representation or
warranty contained in Section 3.1 is true and correct as of the Closing Date,
excepting only representations and warranties which speak expressly as of an
earlier specified date.
5.2.8 DOCUMENTS AND INSTRUMENTS IN SATISFACTORY FORM. All
corporate and other proceedings in connection with this Agreement and with
the Reorganization and all documents and instruments incident to the
Reorganization shall be reasonably satisfactory in substance and form to SDN
and its counsel, and SDN and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as they
may reasonably request.
5.2.9 ESCROW OF CSB REDEMPTION AMOUNT. The Exchange Agent
shall have received from CSB the full amount of the CSB Redemption Amount, if
any; PROVIDED, HOWEVER, that only if all requisite Governmental Approvals
have been obtained shall this be a condition to SDN's and Holdco's
obligations hereunder.
5.2.10 APPOINTMENT OF COMMITTEE UNDER ESCROW AGREEMENT. If
the Escrow Agreement is to be entered into pursuant to Section 2.11, CSB
shall have designated the persons who will initially constitute the Committee
thereunder.
5.3 CONDITIONS TO THE OBLIGATIONS OF CSB. The obligations of CSB
to consummate the Reorganization are subject to the satisfaction of, or CSB's
written waiver of, each of the following conditions:
5.3.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES;
COMPLIANCE WITH COVENANTS. SDN's and Holdco's representations and warranties
contained in this Agreement were true and correct as of the dates when made.
SDN and Holdco shall have performed, satisfied and complied with, in all
material respects, each of the agreements and covenants contained herein.
5.3.2 BRINGDOWN OF REPRESENTATIONS AND WARRANTIES. SDN's
and Holdco's representations and warranties contained in this Agreement,
without taking into account any
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amendments, supplements or updates to any Schedules relating to such
representations and warranties, remain true and correct as of the Closing as
though made at and as of the Closing, excepting only representations and
warranties which speak expressly as of an earlier specified date.
5.3.3 RECEIPT OF LEGAL OPINIONS. CSB shall have received
(i) a legal opinion from Nutter, McClennen & Fish, LLP, counsel for SDN,
Holdco and CSB Merger Sub, addressed to CSB and dated the Closing Date, in
form and substance reasonably satisfactory to CSB and its counsel, opining to
the matters set forth on EXHIBIT 5.3.3, subject to customary assumptions and
qualifications, and (ii) an opinion of Nutter, McClennen & Fish, LLP, in form
and substance customary for opinions of its type and based upon reasonable
assumptions and qualifications and reasonably requested representation
letters, to the effect that the (x) CSB Merger will be treated as a
contribution of property to Holdco pursuant to Section 351 of the Code, (y)
the CSB Shareholders shall recognize no income for federal income tax
purposes as a consequence of the Reorganization except to the extent they
receive cash in exchange for their respective shares of CSB Common Stock in
the CSB Merger, and (z) none of the Parties shall recognize gain or loss for
federal income tax purposes as a consequence of the Reorganization; provided,
however, that such opinion shall not purport to address the tax consequences
to the CSB Shareholders of the Escrow Agreement or the distributions or other
transactions contemplated thereby.
5.3.4 UPDATED SCHEDULE OF CLASSIFIED AND OLEM ASSETS. SDN
shall have delivered to CSB a Schedule, certified by the President or the
Chief Financial Officer of SDN and dated as of a date not more than three
calendar days prior to the Closing Date, identifying all assets of San
Dieguito and Liberty that were (a) Classified Assets or OLEM Assets on San
Dieguito's or Liberty's books and records (as applicable) as of such date or
(b) over 90 days delinquent in payment of principal or interest as of such
date.
5.3.5 RECEIPT OF SDN CLOSING CERTIFICATE. CSB shall have
received from SDN a certificate, executed by the President and Treasurer of
SDN and dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in Section 5.1 (other than with regard to CSB) and
Section 5.3, including a certification that each representation or warranty
with respect to any member of the SDN Group that is contained in Section 3.2
is true and correct as of the Closing Date, excepting only (i)
representations and warranties which speak expressly as of an earlier
specified date and (ii) as limited by the proviso to Section 5.3.2.
5.3.6 RECEIPT OF HOLDCO CLOSING CERTIFICATE. CSB shall
have received from Holdco a certificate, executed by the President and Chief
Financial Officer of Holdco (or the persons who will hold such offices as of
the Effective Time) and dated as of the Closing Date, certifying to the
fulfillment of the conditions specified in Section 5.1 (with regard to Holdco
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only) and Section 5.3, including a certification that each representation or
warranty with respect to Holdco that is contained in Section 3.3 is true and
correct as of the Closing Date, excepting only representations and warranties
which speak expressly as of an earlier specified date.
5.3.7 DOCUMENTS AND INSTRUMENTS IN SATISFACTORY FORM. All
corporate and other proceedings in connection with this Agreement and with
the Reorganization and all documents and instruments incident to the
Reorganization shall be reasonably satisfactory in substance and form to CSB
and its counsel, and CSB and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as they
may reasonably request.
5.3.8 RECEIPT OF CAPITAL CONTRIBUTION AND FUNDING OF
EXCHANGE AGENT. (a) SDN shall have received the full amount of the Capital
Contribution, the full amount of which (net of SDN's Expenses) shall have
been contributed to Holdco as an investment therein, (b) Holdco shall have
provided to the Exchange Agent the full amount the Distributable Cash Pool
other than the CSB Redemption Amount (if any), and (c) Holdco shall have
delivered to the Exchange Agent the full number of shares of Holdco Common
Stock constituting the Distributable Stock Pool.
5.3.9 HOLDCO RATIFICATION. Holdco shall have executed,
ratified and joined in this Agreement.
5.3.10 EXECUTION AND FUNDING OF ESCROW AGREEMENT. If the
Escrow Agreement is to be entered into pursuant to Section 2.11, Holdco and
the Escrow Agent shall have executed the Escrow Agreement and Holdco shall
have deposited the Cash Escrow Deposit and the Stock Escrow Deposit with the
Escrow Agent.
5.3.11 APPOINTMENT OF PAULSEN. Provided that all necessary
approvals of Governmental Entities have been obtained, SDN shall have taken
appropriate action prior to the Effective Time to cause Peter Paulsen (a) to
become a Director of SDN not later than immediately prior to the Effective
Time, and (b) to become a Director of Holdco not later than immediately
following the Effective Time.
ARTICLE VI.
TERMINATION
This Agreement may be terminated, and the Reorganization abandoned,
prior to the Closing as follows:
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6.1 BY MUTUAL AGREEMENT. CSB and SDN may terminate this Agreement
by mutual written agreement at any time.
6.2 REGULATORY IMPEDIMENT. Either CSB or SDN may unilaterally
terminate this Agreement at any time prior to the Closing:
6.2.1 if a Bank Regulator shall have made a final determination
denying an application of CSB, SDN or any of their respective Affiliates the
granting of which is essential to the consummation of the Reorganization, or
6.2.2 if the occurrence of the Closing would violate any final
order, decree or judgment of any court having competent jurisdiction.
6.3 By SDN. SDN may unilaterally terminate this Agreement:
6.3.1 with or without cause, by written notice to CSB, such
termination to take effect upon the later of (i) the giving of such notice to
CSB and (ii) the payment of the Termination Fee to CSB by or on behalf of SDN;
6.3.2 if CSB has breached any representation or warranty
contained in this Agreement, or has failed to perform, satisfy or comply
with, in any material respect, any of its agreements and covenants contained
in this Agreement, if such breach or failure has not been cured within ten
(10) Business Days following notice from SDN to CSB identifying the same;
6.3.3 if any of the conditions to the obligations of SDN and
Holdco contained in Section 5.1 or Section 5.2 has not been satisfied as of
the Closing Date;
6.3.4 at any time on or after the thirtieth (30th) calendar day
following CSB's receipt of a Strategic Transaction Proposal from a third
party, if CSB has not reaffirmed its intent to proceed under this Agreement
pursuant to Section 4.1.3;
6.3.5 if any Bank Regulator shall have, directly or indirectly,
conditioned the granting or effectiveness of a Governmental Approval
essential to the consummation of the Reorganization on SDN making the Capital
Contribution in an amount in excess of the Maximum Required Capital
Contribution; or
6.3.6 at any time after 12:00 noon (Pacific time) on December
31, 1996, if the Closing shall not have occurred prior to such date and time,
unless such failure results primarily from SDN or Holdco breaching any
representation, warranty, covenant or agreement of such Party contained in
this Agreement.
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6.4 By CSB. CSB may unilaterally terminate this Agreement:
6.4.1 with or without cause (including because of CSB's receipt
of a Qualifying Strategic Transaction Proposal or because the CSB
Shareholders have failed to approve the Reorganization by written consent or
at a meeting called for the purpose of voting on the same), by written notice
to SDN, such termination to take effect upon the later of (i) the giving of
such notice to SDN and (ii) the payment of the Termination Fee to SDN by or
on behalf of CSB;
6.4.2 if SDN or Holdco has breached any representation or
warranty contained in this Agreement excepting those contained in Section
3.2.23 or Section 3.3.6, or has failed to perform, satisfy or comply with, in
any material respect, any of its agreements and covenants contained in this
Agreement excepting those contained in Section 2.2, if such breach or failure
has not been cured within ten (10) Business Days following notice from CSB to
SDN identifying the same;
6.4.3 if SDN or Holdco, as applicable, has breached any
representation or warranty contained in Section 3.2.23 or Section 3.3.6, or
has failed to perform, satisfy or comply with, in any material respect, any
of its agreements and covenants contained in Section 2.2, if such breach or
failure has not been cured within ten (10) Business Days following notice
from CSB to SDN identifying the same;
6.4.4 if any of the conditions to the obligations of CSB
contained in Section 5.1 or Section 5.3 has not been satisfied as of the
Closing Date; or
6.4.5 after 12:00 noon (Pacific time) on December 31, 1996, if
the Closing shall not have occurred prior to such date and time, unless the
failure results primarily from CSB itself breaching any representation,
warranty, covenant or agreement of CSB contained in this Agreement.
6.5 Effect of Termination. In the event this Agreement is
terminated pursuant to this Article VI, all rights and obligations of the
Parties hereunder shall terminate without liability of any Party to any other
Party (except for any liability of any Party then in breach) other than as
expressly provided in Article VII; PROVIDED, HOWEVER, that notwithstanding
any such termination the provisions of this Section 6.5, the confidentiality
provisions of Section 4.5, and the provisions of Article VII shall remain in
full force and effect.
ARTICLE VII.
TERMINATION FEE; LIQUIDATED DAMAGES; EXPENSES
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7.1 TERMINATION FEE. As a condition to either Party's exercise of
its right to terminate this Agreement under, respectively, Section 6.3.1 or
Section 6.4.1, the terminating Party agrees to pay to the non-terminating
Party the sum of $1,200,000 (the "Termination Fee"). No purported
termination under Section 6.3.1 or Section 6.4.1 shall be effective until the
receipt by the other Party of good funds in the amount of the Termination Fee.
7.2 LIQUIDATED DAMAGES PAYABLE BY CSB. CSB agrees to pay to SDN,
as liquidated damages:
7.2.1 the sum of $1,200,000 in the event that (a) SDN terminates
this Agreement (i) pursuant to Section 6.3.2 on account of a breach of a
Major Covenant, or (ii) pursuant to Section 6.3.4, or (b) all conditions to
closing set forth in Section 5.1 and Section 5.3 have been satisfied as of
the Closing Date, and CSB has nonetheless failed to consummate the
Reorganization;
7.2.2 the sum of $300,000 in the event that SDN terminates this
Agreement pursuant to subsection 6.3.2 other than on account of a breach of a
Major Covenant.
7.2.3 If CSB pays (or causes to be paid) to SDN the amount
provided in Section 7.2.1 or Section 7.2.2, as applicable, within ten (10)
Business Days of CSB's receipt from SDN of a notice of demand therefor, which
period shall be extended by an additional reasonable time if CSB has
reasonably disputed the propriety of SDN's termination of this Agreement,
SDN's receipt of such payment shall constitute an exclusive remedy, and
following such receipt and acceptance, SDN and Holdco shall be barred from
recovering damages from any Person for any breach of any term of this
Agreement.
7.3 Liquidated Damages Payable by SDN. SDN and (upon its
becoming a Party to this Agreement) Holdco jointly and severally agree to pay
to CSB, as liquidated damages:
7.3.1 the sum of $1,200,000 in the event that (a) CSB
terminates this Agreement pursuant to Section 6.4.3, or (b) all conditions to
closing set forth in Section 5.1 and Section 5.2 have been satisfied as of
the Closing Date, and SDN, Holdco and CSB Merger Sub have nonetheless failed
to consummate the Reorganization;
7.3.2 the sum of $300,000 in the event that CSB terminates
this Agreement pursuant to subsection 6.4.2; and
7.3.3 the sum of $150,000 in the event that (a) either CSB
or SDN terminates this Agreement pursuant to subsection 6.2.1 or (b) SDN
terminates this Agreement pursuant to subsection 6.3.5; PROVIDED that the
denial or conditioning of the Governmental Approval giving
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rise to such termination shall not have been occasioned by any action (or
failure to act) on the part of CSB or any of its Representatives.
7.3.4 If SDN pays (or causes to be paid) to CSB the amount
provided in Section 7.3.1, Section 7.3.2 or Section 7.3.3, as applicable,
within ten (10) Business Days of SDN's receipt from CSB of a notice of demand
therefor, which period shall be extended by an additional reasonable time if
SDN has reasonably disputed the propriety of CSB's termination of this
Agreement, CSB's receipt of such payment shall constitute an exclusive
remedy, and following such receipt and acceptance, CSB shall be barred from
recovering damages from any Person for any breach of any term of this
Agreement.
7.4 EXPENSES.
7.4.1 GENERALLY. Each Party shall be responsible for its
own Expenses, except as expressly provided in Section 7.4.2.
7.4.2 PAYMENT OF EXPENSES UPON CERTAIN TERMINATION EVENTS.
If this Agreement is terminated by SDN pursuant to Section 6.3.3 (other than
(i) on account of a failure of the condition set forth in Section 5.1, or
(ii) under circumstances which also permit a termination by SDN under one or
more other provisions of Section 6.3), CSB shall reimburse SDN for all of its
reasonable and actual Expenses, provided that CSB's liability hereunder for
Expenses of SDN shall not exceed $200,000. If this Agreement is terminated
by CSB pursuant to Section 6.4.4 (other than (i) on account of a failure of
the condition set forth in Section 5.1, or (ii) under circumstances which
also permit a termination by CSB under one or more other provisions of
Section 6.4), SDN shall reimburse CSB for all of its reasonable and actual
Expenses other than those relating to broker's, finder's, investment banker's
or similar fees, commissions or expenses, provided that SDN's liability
hereunder for Expenses of CSB shall not exceed $200,000. If the Party
obligated to reimburse Expenses hereunder reimburses the requested amount
within ten (10) Business Days after its receipt of an invoice therefor from
the Party to be reimbursed, which period shall be extended by an additional
reasonable time if the reimbursing Party has reasonably disputed the
existence or amount of such obligation, the terminating Party's timely
recovery of its Expenses pursuant to this Section 7.4.2 shall constitute an
exclusive remedy, and following its receipt and acceptance of the same the
terminating Party (including, in the case of SDN, Holdco and the Merger
Subsidiaries) shall be barred from recovering damages for any breach of any
term of this Agreement.
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ARTICLE VIII.
Miscellaneous
8.1 Closing. The Closing Date shall be that date (or the next
subsequent Tuesday, Wednesday or Thursday that is a Business Day) that is
five Business Days following the receipt of the final Governmental Approval,
or such other date upon which the Parties may mutually agree. Subject to the
fulfillment or waiver of the conditions precedent set forth in Article VI,
the Closing of the Reorganization shall take place at a location (within
California) to be mutually determined by the Parties, at 10:00 a.m. (local
time) on the Closing Date. Except as otherwise provided herein, all
proceedings to be taken and all documents to be executed at the Closing shall
be deemed to have been taken, delivered and executed simultaneously as of the
Effective Time, and no proceeding shall be deemed taken nor documents deemed
executed or delivered until all have been taken, delivered and executed.
8.2 Publicity. Promptly following the execution and delivery of this
Agreement, CSB and SDN shall issue a joint press release in a form mutually
to be agreed upon. CSB and SDN shall not, and shall instruct their
Representatives not to, issue or cause the publication of any press release
or other public announcement with respect to, or otherwise make any public
statement concerning, this Agreement or the Reorganization without the
consent of the other Party, which consent shall not be unreasonably withheld;
provided, however, that the foregoing shall not apply to reports and other
documents filed with the SEC or with any other Governmental Entity in
connection with the Reorganization.
8.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or by electronic facsimile transmission
(with written confirmation) or on the next business day after dispatch by an
overnight courier of national reputation to the respective Parties as follows:
If to SDN or Holdco, to it or them at:
SDN Bancorp, Inc.
135 Saxony Road
Encinitas, CA 92023-0926
Attention: Robert P. Keller, President
fax: (619) 436-2882
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with a copy to:
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110-2699
Attention: Michael K. Krebs, Esquire
Hugh A. O'Reilly, Esquire
fax: (617) 973-9748
If to CSB, to it at:
Commerce Security Bank
1545 River Park Drive, Suite 200
Sacramento, CA 95815
Attention: L.R. Connelly, President
fax: (916) 922-4472
with a copy to:
Fried, Bird & Crumpacker
10100 Santa Monica Boulevard
Los Angeles, CA 90067
Attention: David M. Schachter, Esq.
fax: (310) 556-4487
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
8.4 Entire Agreement. This Agreement constitutes the entire agreement
among the Parties and supersedes all prior agreements, understandings,
negotiations and discussions, both written and oral, among the Parties with
respect to the subject matter hereof. No knowledge gained by either Party
through any diligence review of the other Party or otherwise and which is not
currently set forth on any Schedule hereto shall be deemed to be included on
any of the Schedules to this Agreement for purposes of determining the
accuracy of such Schedules.
8.5 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements contained herein or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except (a) the confidentiality provisions of Section 4.5, and
(b) those covenants and agreements that by their express terms apply in whole
or in part to periods after the Effective Time.
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8.6 Benefits; Binding Effect; Assignment and Designation. This
Agreement shall be for the benefit of and binding upon the Parties, their
respective successors and, where applicable, assigns. No Party may assign
this Agreement or any of its rights, interests or obligations hereunder
without the prior written consent of the other Party; provided, however, that
(a) SDN shall designate the entity that shall be Holdco, and (b) CSB shall
not unreasonably withhold its consent to any assignment by SDN to any entity
controlling or controlled by SDN as of the time of assignment.
Notwithstanding such designation of Holdco by SDN or any other assignment or
delegation of any Party's rights, interests or obligations, each Party shall
nonetheless remain responsible for the performance of all of its obligations
provided hereunder.
8.7 Waiver. No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provision hereof (whether
or not similar), nor shall any such waiver constitute a continuing waiver
unless otherwise expressly so provided.
8.8 No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any
Person other than the Parties and their respective successors and permitted
assigns any rights or remedies under or by reason of this Agreement.
8.9 Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses, Sections or Articles contained in this Agreement
shall not affect the enforceability of the remaining portions of the
Agreement or any part hereof, all of which are inserted conditionally on the
assumption of their being valid under applicable Law. In the event that any
one or more of the words, phrases, sentences, clauses, sections or
subsections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, section or sections, or
subsection or subsections, had not been inserted; provided, however, that if
any provision is declared to be unenforceable because it is determined to be
overbroad, then, to the extent possible, such provision shall be modified to
the minimum extent necessary to render such provision enforceable.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts and by the several Parties in separate counterparts, each of
which shall be deemed to be one and the same instrument.
8.11 Remedies Cumulative. Except where a remedy is expressly stated to
be exclusive (including, where applicable, the Termination Fee provided under
Section 7.1, the liquidated damages provided under Section 7.2 and Section
7.3, and the Expense reimbursement provided under Section 7.4, in each case
to the extent paid in compliance with such Sections), no remedy made
available by any of the provisions of this Agreement is intended to be
exclusive
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of any other remedy, and each and every remedy shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity.
8.12 Applicable Law; Consent to Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF THE UNITED STATES AND THE INTERNAL LAW OF THE STATE
OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF) AND
ALL QUESTIONS CONCERNING THE VALIDITY AND CONSTRUCTION THEREOF SHALL BE
DETERMINED IN ACCORDANCE WITH THE LAWS OF SAID STATE. EACH PARTY HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS SITTING IN THE STATE OF CALIFORNIA IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT AND HEREBY IRREVOCABLY AGREES, ON BEHALF
OF ITSELF AND ON BEHALF OF SUCH PARTY'S SUCCESSORS AND PERMITTED ASSIGNS,
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION SUCH PERSON
MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT
FORUM.
8.13 Waiver of Jury Trial. THE PARTIES HEREBY WAIVE TRIAL BY JURY IN
ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED
TO, OR CONNECTED WITH THIS AGREEMENT, THE RELATED DOCUMENTS OR THE
RELATIONSHIP ESTABLISHED HEREUNDER.
[The rest of this page is intentionally left blank.]
-72-
ANNEX 1 - 82
<PAGE>
IN WITNESS WHEREOF, the Parties have each executed and delivered this
Agreement as of the day and year first above written.
SDN BANCORP, INC.
ATTEST:
Illegible By: /s/ Robert P. Keller
- ------------------- -------------------------------
Secretary Robert P. Keller, President &
Chief Executive Officer
COMMERCE SECURITY BANK
By: /s/ Peter H. Paulsen
-------------------------------
ATTEST: Peter H. Paulsen, Chairman
Illegible By: /s/ L.R. Connelly
-------------------------------
L.R. Connelly, President &
Chief Executive Officer
-73-
ANNEX 1 - 83
<PAGE>
ACCEPTANCE AND RATIFICATION
BY HOLDCO
The undersigned ("Holdco") has caused this Agreement to be executed
and delivered by its officers thereunto duly authorized, under seal, on
______________, 1996, and thereby ratifies, joins in and becomes a Party
to this Agreement and agrees to be bound by all the provisions hereof.
-------------------------------
Name of Holdco
By:
----------------------------
Name:
Title:
-74-
ANNEX 1 - 84
<PAGE>
Exhibit 1.1-A
The Exchange Ratio under the Agreement and Plan of Reorganization, of
which this Exhibit 1.1-A is a part, and the amount of Holdco Common Stock
into which shares CSB Common Stock will be converted under the Agreement,
shall be calculated in accordance with the following methodology (capitalized
terms not defined herein having the meanings ascribed those terms in Section
1.1):
A. CALCULATION OF AGGREGATE CSB INTEREST IN HOLDING COMPANY
The number of shares to be issued to CSB Shareholders shall be
calculated based upon the following formula, where
A = CSB's Book Value per CSB's Final Financial
Statements (i.e., without giving any effect to the
Valuation Adjustment);
B = SDN/Liberty Pro-Forma Book Value as of December 31,
1995 determined in the manner set forth on Part C of
this Exhibit 1.1-A;
C = the gross amount of the Capital Contribution;
D = Holdco Pro-Forma Book Value as of December 31, 1995,
determined in the manner set forth on Part C of this
Exhibit 1.1-A (i.e., being equal to
([A - VA] x 40%) + B + C);
VA = the Valuation Adjustment, if any; and
X = equals the aggregate amount of Holdco Common Stock
that CSB Shareholders can receive in the
Reorganization, inclusive of shares in the Stock
Escrow Deposit (if applicable), expressed as a
percentage of the pro forma shares of Holdco Common
Stock outstanding upon consummation of the
Reorganization.
(A x 40%) - (VA x 40%) = X
-----------------------
D
(A - VA) x 40% = X
------------------------
([A - VA] x 40%) + B + C
Page 1 of 3
ANNEX I - 85
<PAGE>
B. CALCULATION OF EXCHANGE RATIO
(i) The Exchange Ratio at which the agreed-upon portion of CSB Common Stock
(i.e., 344,584 shares, or 40% of the shares of CSB common stock
outstanding) will be converted into Stock Consideration shall be
calculated based upon the following formula, where
E = the "Exchange Ratio" (i.e., the number of shares of
Holdco Common Stock into which each share of CSB
Common Stock that is to be converted into Stock
Consideration is so converted), rounded to the
nearest thousandth;
X = equals the aggregate amount (determined pursuant to
subsection (i) above) of Holdco Common Stock that
CSB Shareholders can receive in the Reorganization,
inclusive of shares in the Stock Escrow Deposit (if
applicable), expressed as a percentage of the pro
forma shares of Holdco Common Stock outstanding upon
consummation of the Reorganization;
Y = equals the pro forma number of shares of SDN Common
Stock outstanding as of December 31, 1995, giving
effect to the Liberty acquisition and the Capital
Contribution (assuming a one-for-one exchange of SDN
Common Stock for Holdco Common Stock in the SDN
Merger); and
Z = 344,584 (i.e., 40%, rounded to the nearest share, of
the 861,460 shares of CSB Common Stock outstanding).
( Y )
(---------------) - Y
( 100%-X% )
------------------------ = E
Z
(ii) The foregoing formula and the variables contained therein shall be
computed and applied consistent with the illustrations contained in
Parts C, D and E of this Exhibit 1.1-A.
Page 2 of 3
ANNEX I - 86
<PAGE>
C. PRO FORMA CONDENSED STATEMENT OF CONDITION FOR HOLDCO
See attached Unaudited Pro Forma Consolidating Statement of Condition for
New Holding Company and Subsidiaries, with schedule of assumptions.
D. SUPPORTING SCHEDULES
See attached Unaudited Pro Forma Statements of Condition for Liberty and
CSB, each with schedule of assumptions, supporting Unaudited Pro Forma
Consolidating Statement of Condition for New Holding Company and
Subsidiaries.
E. ILLUSTRATION OF CSB OWNERSHIP; PRO FORMA CAPITAL RATIOS
See attached Examples of Calculation of CSB Ownership In Holding Company and
Resultant Capital Levels (Pro Forma).
Page 3 of 3
ANNEX I - 86
<PAGE>
NEW HOLDING COMPANY AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Statement of Condition
Part C of Exhibit 1.1-A
(dollars in thousands)
<TABLE>
<CAPTION>
Capital
Injection
and Adjusted
SDNB SDN Acquistion LNB Eliminating
12/31/95 12/31/95 of LNB 12/31/95 Entries
-------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,431 $ 278 $ 723 $ 6,742 $ (80)
Federal funds sold 2,300 7,150
Securities 7,009 34,754
Investment in subsidiary 3,832 8,319 (12,151)
Loans, net 38,977 88,930
Less: allowance for loan loss 639 1,841
Premises and equipment, net 597 1,226
Goodwill/intangibles 4,508
Other assets 2,944 88 3,966
------- ------ ------- -------- --------
Total assets $55,619 $4,198 $13,550 $140,927 $(12,231)
======= ====== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $13,525 $ 22,419 $ (80)
Interest bearing deposits 37,986 108,461
------- ------ ------- -------- --------
Total deposits 51,511 130,880 (80)
Accrued interest payable
and other liabilities 276 657 1,728
------- ------ ------- -------- --------
Total liabilities 51,787 657 132,608 (80)
Common stock 1,581 9 34 2,636 (4,217)
Additional paid-in capital 5,537 7,593 13,516 3,284 (8,821)
Retained earnings(deficit) (3,286) (4,061) 2,339 887
------- ------ ------- -------- --------
Total shareholders'
equity 3,832 3,541 13,550 8,319 (12,151)
------- ------ ------- -------- --------
Total liabilities and
shareholders'
equity $55,619 $4,198 $13,550 $140,927 $(12,231)
======= ====== ======= ======== ========
</TABLE>
NEW HOLDING COMPANY AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Statement of Condition
Part C of Exhibit 1.1-A
(dollars in thousands)
<TABLE>
<CAPTION>
Capital
Injection
and Adjusted
SDNB SDN Acquistion LNB Eliminting
12/31/95 12/31/95 of LNB 12/31/95 Entries
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
MEMORANDUM
Average Assets 57,155 142,860
Risk Weighted Assets 40,831 97,745
Tier 1 capital 3,832 3,541 9,042 8,100 (12,151)
Tier 2 capital 510 657 1,219
Tier 1/RWA 9.4% 8.3%
Tier 1&2/RWA 10.6% 9.5%
Leverage ratio 6.7% 5.7%
</TABLE>
NEW HOLDING COMPANY AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Statement of Condition
Part C of Exhibit 1.1-A
(dollars in thousands)
<TABLE>
<CAPTION>
LNB/SDN
Capital Post
Injection Capital SDN/LNB/
LNB/SDN Anticipation Injection Adjusted and CSB
Combined of CSB Combined CSB Acquisition Eliminating Combined
12/31/95 Acquistion 12/31/95 12/31/95 of CSB Entries 12/31/95
-------- ------------ --------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 12,094 $11,138 $ 23,232 $ 9,481 $(11,138) $ 21,575
Federal funds sold 9,450 9,450 24,000 33,450
Securities 41,763 41,763 18,028 59,791
Investment in subsidiary $(2,295) (12,295)
Loans, net 127,907 127,907 135,168 263,075
Less: allowance for loan loss 2,480 2,480 2,396 4,876
Premises and equipment, net 1,823 1,823 2,431 4,254
Goodwill/intangibles 4,508 4,508 5,384 9,892
Other assets 6,998 6.998 22,697 29,965
-------- ------- -------- -------- -------- --------
Total assets $202,063 $11,138 $213,201 $209,679 $ (5,754) $417,126
======== ======= ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Deposits:
Non-interest bearing $ 35,864 $ 35,864 $ 69,326 $105,190
Interest bearing 146,447 146,447 122,329 268,776
-------- ------- -------- -------- -------- --------
Total deposits 182,311 182,311 191,655 373,966
Accrued interest payable
and other liabilities 2,661 2,661 5,729 8,390
-------- ------- -------- -------- -------- -------- --------
Total liabilities 184,972 184,972 197,384 382,356
Common stock 43 28 71 2,623 (2,606) 88
Additional paid-in capital 21,109 11,110 32,219 788 5,736 38,743
Retained earnings(deficit) (4,061) (4,061) 8,884 (8,884) (4,061)
-------- ------- -------- -------- -------- -------- --------
Total shareholders'
equity 17,091 11,138 28,229 12,295 (5,754) 34,770
-------- ------- -------- -------- -------- -------- --------
Total liabilities and
shareholders'
equity $202,063 $11,138 $213,201 $209,679 $ (5,754) $417,126
======== ======= ======== ======== ======== ======== ========
</TABLE>
NEW HOLDING COMPANY AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Statement of Condition
Part C of Exhibit 1.1-A
(dollars in thousands)
<TABLE>
<CAPTION>
LNB/SDN
Capital Post
Injection Capital SDN/LNB/
LNB/SDN Anticipation Injection Adjusted and CSB
Combined of CSB Combined CSB Acquisition Eliminating Combined
12/31/95 Acquisition 12/31/95 12/31/95 of CSB Entries 12/31/95
-------- ------------ -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
MEMORANDUM
Average Assets 200,015 200,015 198,387 398,402
Risk Weighted Assets 138,576 138,576 139,299 277,875
Tier 1 capital 12,364 11,138 23,502 12,295 (11,138) 24,659
Tier 2 capital 2,386 2,386 1,745 4,131
Tier 1/RWA 8.9% 17.0% 8.8% 8.9%
Tier 1&2/RWA 10.6% 18.7% 10.1% 10.4%
Leverage ratio 6.2% 11.8% 6.2% 6.2%
</TABLE>
<PAGE>
LIBERTY NATIONAL BANK
Unaudited Pro Forma Statement of Condition
Part D of Exhibit 1.1-A
(dollars in thousands)
Adjusted
LNB Closing Partial LNB
12/31/95 Adjustments Redemption 12/31/95
-------- ----------- ---------- ---------
ASSETS
Cash and due from banks $ 7,874 $ (1,132) $ - $6,742
Federal funds sold 9,350 (2,200) 7,150
Securities 34,754 34,754
Loans, net 88,930 88,930
Less: allowance for loan loss (1,686) (155) (1,841)
Premises and equipment, net 1,226 1,226
Other assets 3,652 314 3,966
-------- -------- -------- ---------
Total assets $144,100 $(973) ($2,200) $140,927
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $22,419 $22,419
Interest bearing deposits 108,461 108,461
-------- -------- -------- --------
Total deposits 130,880 130,880
Accrued interest payable
and other liabilities 1,728 1,728
-------- -------- -------- --------
Total liabilities 132,608 132,608
Common stock 3,260 (624) 2,636
Additional paid-in capital 4,062 (778) 3,284
Retained earnings(deficit) 4,170 (973) (798) 2,339
-------- -------- -------- --------
Total shareholders'
equity 11,492 (973) (2,200) 8,319
-------- -------- -------- --------
Total liabilities and
shareholders'
equity $144,100 $ (973) $(2,200) $140,927
======== ======== ======== ========
MEMORANDUM
Average Assets 142,860 142,860
Risk Weighted Assets 97,871 (440) 97,745
Tier 1 capital 11,273 314 (2,220) 8,100
Tier 2 capital 1,229 (973) (10) 1,219
Tier 1/RWA 11.5% 8.3%
Tier 1&2/RWA 12.8% 9.5%
Leverage ratio 7.9% 5.7%
Annex 1 - 89
<PAGE>
LIBERTY NATIONAL BANK
Unaudited Pro Forma Balance Sheet
Assumptions
1) Closing Entries - closing expenses
Cancellation of 121,676 options,
assuming $14.80 closing price with
average exercise price at $9.4857 646,618
Management bonuses and separation pay 437,816
Termination of and mark to market of
office leases 206,710
Increase allowance for loan loss 155,100
OREO writedowns 50,000
Legal and accounting fees 48,000
Total closing expenses 1,544,244
Tax benefit at 42% (648,582)
Net effect to capital 895,662
2) Closing entries - asset writedowns
State deferred tax asset writedown
50% of $154,786 asset at 12/31/95 77,393
Annex 1 - 90
<PAGE>
COMMERCE SECURITY BANK
Unaudited Pro Forma Statement of Condition
Part D of Exhibit 1.1-A
(dollars in thousands)
Adjusted
CSB Closing Partial CSB
12/31/95 Adjustment Redemption 12/31/95
-------- ---------- ---------- ----------
ASSETS
Cash and due from banks $9,481 $ - $9,481
Federal funds sold 28,000 (4,000) 24,000
Securities 18,028 18,028
Loans, net 135,168 135,168
Less: allowance for loan loss 2,396 2,396
Premises and equipment, net 2,431 2,431
Other assets 22,635 332 22,967
-------- -------- -------- --------
Total assets $213,347 $332 ($4,000) $209,679
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $69,326 $69,326
Interest bearing deposits 122,329 122,329
-------- -------- -------- --------
Total deposits 191,655 191,655
Accrued interest payable
and other liabilities 4,939 790 5,729
-------- -------- -------- --------
Total liabilities 196,655 790 197,384
Common stock 3,446 (624) 2,623
Additional paid-in capital 1,035 (778) 788
Accumulated earnings 12,272 (458) (798) 8,884
-------- -------- -------- --------
Total shareholders'
equity 16,753 (458) (4,000) 12,295
-------- -------- -------- --------
Total liabilities and
shareholders'
equity $213,347 $332 $(4,000) $209,679
======== ======== ======== ========
MEMORANDUM
Average Assets 198,387 198,387
Risk Weighted Assets 139,767 332 (800) 139,299
Tier 1 capital 16,753 (458) (4,000) 12,295
Tier 2 capital 1,755 (10) 1,745
Tier 1/RWA 12.0% 8.8%
Tier 1&2/RWA 13.2% 10.1%
Leverage ratio 8.4% 6.2%
Annex 1 -91
<PAGE>
COMMERCE SECURITY BANK
Unaudited Pro Forma Balance Sheet
Assumptions
1) Closing Entries - closing expenses
Investment banking fees @3% of
deal value 641,370
Legal and accounting fees 150,000
Total closing expenses 791,370
Tax benefit at 42% (332,375)
Net effect to capital 458,995
ANNEX 1 - 92
<PAGE>
NEW HOLDING COMPANY AND SUBSIDIARIES
Unaudited Pro Forma Balance Sheet
Assumptions
Purchase of LNB
- -----------------------------------------------------------------------
1) Purchase price of LNB
978,160 shares at $14.80 14,477
Transaction costs capitalized 250
Investment banker fees-stock/cash 300
---------
15,027
2) Goodwill generated by transaction
LNB Equity before closing adjustments 11,492
Closing adjustments (973)
---------
LNB equity after closing 10,519
---------
Goodwill 4,508
3) Funding of transaction
Partial redemption by LNB 2,200
Capital Contribution by DCG 13,400
Stock issued to Carpenter & Co 150
---------
15,750
Purchase of CSB
- ----------------------------------------------------------------------
1) Purchase price of CSB
Book value 12/31/95 16,753
60% Cash @ 1.5x Adj BV 15,078
Valuation adjustment (400x60%) (240)
----------
14,838
40% Stock at Adj BV 6,701
Valuation adjustment(400x40%) (160)
----------
6,541
Transaction costs capitalized 300
----------
21,679
2) Goodwill generated by transaction
CSB Equity before closing adjustments 16,753
Closing adjustments (458)
----------
CSB equity after closing adjustments 16,295
----------
Goodwill 5,384
3) Funding of transaction
Partial redemption by CSB 4,000
Capital contribution by DCG 11,138
Stock issued to CSB shareholders 6,541
----------
21,679
NOTE: In accordance with GAAP, the LNB and CSB transactions will require
"push-down" accounting of the purchase price with adjustment to goodwill for
the fair value of the assets and liabilities. The pro forma statements of
condition do not reflect this accounting treatment, and
on a consolidated basis, will not have a material effect.
Annex 1 - 93
<PAGE>
PART E OF EXHIBIT 1.1A
EXAMPLES OF CALCULATION OF CSB OWNERSHIP IN HOLDING COMPANY
AND RESULTANT CAPITAL LEVELS
Annex 1 - 94
<PAGE>
SDN BANCORP, INC AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Condition
Exhibit 1.1-B
(dollars in thousands)
Combined
12/31/95
-----------
ASSETS
Cash and due from banks $12,094
Federal funds sold 9,450
Securities 41,763
Loans, net 127,907
Less: allowance for loan loss 2,480
Premises and equipment, net 1,823
Goodwill/intangibles 4,508
Other assets 6,998
-----------
Total assets $202,063
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $35,864
Interest bearing deposits 146,447
-----------
Total deposits 182,311
Accrued interest payable
and other liabilities 2,661
-----------
Total liabilities 184,972
Common stock 43
Additional paid-in capital 21,109
Retained earnings(deficit) (4,061)
-----------
Total shareholders' equity 17,091
-----------
Total liabilities and shareholders' equity $202,063
=======
Annex 1 - 95
<PAGE>
Exhibit 1.1-C
As used in this Agreement and Plan or Reorganization, of which this
Exhibit 1.1-C is a part, the Valuation Adjustment shall equal an amount
computed in accordance with the following provisions (capitalized terms not
defined herein having the meanings ascribed to those terms in Section 1.1):
(a) Definitions
(i) "Valuation Debits" shall mean each of the following:
(w) all expenses incurred by CSB during the Valuation Period in
connection with the following (each, a "Lawsuit", and
collectively, the "Specified Lawsuits"):
(1) Martha E. Junco v. Commerce Security Bank; Tom Ruemmler
(Sacramento County Superior Court Case No. 541252) (the
"Junco Lawsuit");
(2) Commerce Security Bank v. Thomas R. Ruemmler
(Sacramento County Superior Court
Case No. 538499 - T.R.O.);
(3) Commerce Security Bank vs. Thomas R. Ruemmler, et al.
(including related cross action) (San Joaquin County
Superior Court Case No. 273702) (collectively with
the Lawsuit identified in clause 2 above, the
"Ruemmler Lawsuits"); and
(4) Priest, Russell, Garcia v. Commerce Security Bank,
Crothers, et al. (San Joaquin County Superior Court
Case No. 285881) (the "Russell Lawsuit").
(x) the amount of any judgment or settlement payment (including
any adverse party's attorneys' fees and/or costs) ordered or
agreed to be paid by CSB in either the Ruemmler Lawsuits or
the Russell Lawsuit, the amount of any judgment or settlement
payment (including the plaintiff's attorneys' fees and/or
costs) actually paid by CSB in the Junco Lawsuit in excess of
the amount accrued therefor on the books of CSB as of
December 31, 1995, and the amount of any accrual made on the
books of CSB on account of any Lawsuit in excess of any
amount accrued on the books of CSB for that Lawsuit as of
December 31, 1995;
Page 1 of 5
Annex 1 - 96
<PAGE>
(y) the amount of any loss, including, for purposes of this
Exhibit 1.1-C, Out-of-Pocket Costs, incurred by CSB upon any
Resolution (as defined below) of the CIP Southgate property
prior to the Valuation Date, in excess of specific reserves,
if any, therefor on the books of CSB as of December 31, 1995,
and/or the amount of any charge-off taken with regard to such
property during the Valuation Period;
(z) any payment by CSB to the VA or any holder or servicer of any
Enumerated VA Loan (as hereinafter defined) with regard to
any Enumerated VA Loan during the Valuation Period, any
reserve established or reserve adjustment made (or required
to be established or made under GAAP) upon any repurchase of
any Enumerated VA Loan by CSB during the Valuation Period,
and any loss (including, for purposes of this Exhibit 1.1-C,
Out-of-Pocket Costs) incurred by CSB following any repurchase
of an Enumerated VA Loan in excess of reserves already
debited pursuant to the immediately preceding clause (as used
herein the "Enumerated VA Loans" shall consist of, and only
of, the Ervin, Roberson, Scott, Torres and Ramey loans
identified on the audit report dated on or about January 18,
1996 prepared by the Department of Veterans' Affairs (the
"VA")).
(ii) "Valuation Credits" shall mean each of the following that is
realized (in accordance with GAAP) during the Valuation Period:
(x) the amount of any reversal (made in accordance with GAAP) of
CSB's prior accrual for the Junco Lawsuit, as such accrual
existed on the books of CSB as of December 31, 1995;
(y) the amount of any gain (net of Out-of-Pocket Costs) on sales
during the Valuation Period of (A) Other Real Estate Owned
("OREO") that was held as such by CSB as of December 31,
1995, (B) the Sierra Meadows property and (C) the CIP
Southgate property (sale, for purposes of this Exhibit 1.1-C,
being deemed to include sale transactions in escrow as of the
Valuation Date as to which transaction there remain no
significant conditions to the buyer's obligations and the
buyer has placed in escrow a non-refundable deposit in an
amount equal to 2.5% of the purchase price or such greater
amount as SDN and CSB may mutually agree is reasonable under
the circumstances); and
(z) the amount, if any, of recoveries (net of legal and related
expenses paid to third parties and directly attributable to
seeking such recovery) realized during the Valuation Period
with regard to loans and leases fully
Page 2 of 5
Annex 1 - 97
<PAGE>
charged off by CSB on or before December 31,
1995, and with regard to the charged-off
portions of loans and leases partially charged
off by CSB on or before December 31, 1995.
(iii) "Valuation Period" shall mean the period from January 1, 1996
through the Valuation Date, inclusive.
(iv) "Valuation Date" shall mean the fifth Business Day prior
to the Closing, with all measurements being made at the
close of business on such date.
(v) "Resolved" shall mean:
(w) in the case of the CIP Southgate or Sierra Meadows properties
and all OREO, sold or otherwise disposed of in a manner such
that, as of the Valuation Date, such real property is not
recorded as an asset on CSB's balance sheet;
(x) with regard to any Lawsuit, either entry of a judgment which
has become final with no appeal perfected or the execution
and delivery of a settlement agreement binding on and
resolving all claims of all parties to such Lawsuit; and
(y) with regard to any Enumerated VA Loan, either (A) repayment
in full of such loan, (B) foreclosure on and sale of the
collateral securing such loan, or (C) receipt by CSB of
written notice from the VA that the VA no longer seeks
indemnity from CSB with regard to such loan, without any
repurchase of such loan by CSB or any undertaking by CSB to
indemnify or reimburse in any way the current holder of such
loan or any other person in connection therewith.
(vi) "Out-of-Pocket Costs" shall mean each of the following amounts
that become payable (or in the case of sales pending at the
Valuation Date, that are anticipated to become payable) to
third parties by CSB in connection with the referenced
property or the disposition thereof (except to the extent
recognized by CSB on or before December 31, 1995):
brokers' fees and expenses; property
taxes that were past-due as of January 1, 1996; recording fees,
deed stamps or similar payments; and capital expenditures
relating to repairing the property or preparing the
property for sale.
Page 3 of 5
Annex 1 - 98
<PAGE>
(b) Calculations
1. Asset/Liability Valuation Adjustment:
(i) The Asset/Liability Valuation Adjustment shall equal (x)
$400,000 minus (y) the sum of all Valuation Credits;
provided, however, that the Asset/Liability Valuation
Adjustment shall not be less than zero.
(ii) Notwithstanding the foregoing subparagraph (i), prior to the
Valuation Date CSB shall have the right, in CSB's sole
discretion, to request a reduction in the Asset/Liability
Valuation Adjustment, based on CSB's judgement that the
Asset/Liability Valuation Adjustment is overstated for the net
risk then inherent in (x) the matters described in the
definition of Valuation Debits, taking into account
Valuation Debits incurred during the Valuation Period and any
additional loss or expense that reasonably can be expected to
be incurred after the Valuation Date with respect to any
such matter that is not Resolved as of the Valuation Date,
and (y) the Sierra Meadows property (if a sale of the latter
has not been consummated as of the Valuation Date on
economic terms which are substantially the
same as, or more favorable to, CSB than those of the sale
transaction now pending). Upon such request, SDN agrees to
discuss such a reduction; provided, however, that the
decision as to whether or not to reduce the Asset/Liability
Valuation Adjustment calculated in accordance with the terms
this Exhibit 1.1-C shall be SDN's in its sole and absolute
discretion.
(iii) CSB having represented to SDN that the Sierra Meadows
property (having a carry value of approximately $2.9 million)
is in escrow and under a binding purchase and sale agreement
to be sold for a sale price that will result in no net loss
to CSB (taking into account Out-of-Pocket Costs not
recognized on or before December 31, 1995), SDN and CSB have
not sought to reflect any risk associated with Sierra Meadows
in the Asset/Liability Valuation Adjustment. In the event
that CSB is unable to complete a sale of Sierra Meadows on or
before the Valuation Date on economic terms which are
substantially the same as or more favorable to CSB than those
of the sale transaction now pending, and no agreement for
such a sale is then in effect, SDN shall have the right, in
SDN's sole discretion, to request an increase in the amount
of the Asset/Liability Valuation Adjustment as otherwise
calculated in accordance with this Exhibit 1.1-C in order to
reflect the additional risk to SDN and CSB that, as a
consequence of the failure to complete such sale, CSB may not
be able to realize its net carrying value for Sierra Meadows.
Upon any such request under this subparagraph (iii), CSB
agrees to discuss such whether or not the base
Asset/Liability Valuation Adjustment should be increased;
provided, however, that the decision as to whether or not to
increase the
Page 4 of 5
Annex 1 - 99
<PAGE>
Asset/Liability Valuation Adjustment shall be
CSB's in its sole and absolute discretion.
2. SAIF Recapitalization Adjustment
(i) If SAIF Recapitalization Legislation has been enacted or adopted
prior to the Closing, the SAIF Recapitalization Adjustment shall
be a dollar amount, not to exceed $575,000, equal to 57.5%
multiplied by the present value, as estimated by SDN in good
faith using a 10% discount rate, of the cost that CSB will incur
as a result of such SAIF Recapitalization Legislation, net of the
tax benefit, if any, related to such expense calculated in
accordance with GAAP using the effective combined Federal and
state tax rate projected for Holdco for the first full fiscal
quarter year following the Closing Date as estimated by SDN's
independent public accountants.
(ii) If SAIF Recapitalization Legislation has not been enacted or
adopted prior to the Closing, the SAIF Recapitalization
Adjustment shall equal zero.
3. Valuation Adjustment
The Valuation Adjustment shall equal the sum of the Asset/Liability
Valuation Adjustment plus the SAIF Recapitalization Adjustment.
Page 5 of 5
Annex 1 - 100
<PAGE>
Exhibit 2.11-A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of , 1996 (the
"Agreement"), is by and between , a Delaware
corporation (the "Company"), and Liberty National Bank, a national banking
association organized under the laws of the United States (the "Escrow
Agent").
WHEREAS, the Company is a party to that certain Agreement and Plan of
Reorganization, dated as of April , 1996 (the "Reorganization
Agreement"), by and among the Company, SDN Bancorp, Inc. and Commerce
Security Bank ("CSB");
WHEREAS, pursuant to the Reorganization Agreement, the Company has agreed
to acquire CSB through the merger (the "CSB Merger") of CSB Merger Sub (as
defined in the Reorganization Agreement) with and into CSB, in consideration
of which CSB Merger the shareholders of record (the "CSB Shareholders") of
the issued and outstanding shares of CSB common stock as of the effective
time of the CSB Merger (the "Effective Time") will receive either Cash
Consideration or Stock Consideration or a combination of Cash Consideration
and Stock Consideration (each as defined in the Reorganization Agreement);
WHEREAS, in order to mitigate the potential adverse effect on the
Company's consolidated financial condition and operating results that may
result from the enactment of SAIF Recapitalization Legislation (as
hereinafter defined), the Reorganization Agreement provides that $345,000
(the "Cash Escrow Deposit") of the funds that would otherwise constitute Cash
Consideration and [ ] shares of Company Common Stock (the "Stock
Escrow Deposit") shall be held in escrow by the Escrow Agent to be
distributed after the Effective Time in accordance with this Agreement; and
WHEREAS, the Escrow Agent has agreed to serve as escrow agent for such
purpose;
NOW, THEREFORE, in consideration of the mutual premises contained herein,
the Company and the Escrow Agent agree as follows:
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
1.1 Definitions. Capitalized terms contained in this Agreement shall
have the meanings set forth in this Section 1.1:
"Acceleration Event" means the occurrence of either of the following
events:
(a) the enactment of any law by the United States Congress, or the
adoption of any final regulation by a federal Governmental Entity, that would
permit the Company to cause CSB or any other subsidiary to transfer or
convert the SAIF Insured Deposits to a BIF-insured depository institution
without the Company, CSB, such other depository institution or any of
ANNEX 1 - 101
<PAGE>
their affiliates incurring any actual or contingent obligation to SAIF or BIF
in connection therewith, whether in the form of a special assessment, such as
an exit or entrance fee, the imposition of a higher premium rate for BIF
insurance or otherwise; provided, however, that in the reasonable judgment of
the Company (i) the effectiveness of such legislation or regulation is not in
doubt as a result of pending judicial or regulatory action and (ii) the
administrative, legal, accounting and other expense of effecting such a
transfer or conversion would not be material to the Company; or
(b) there is a Change in Control of the Company.
"After-Tax Cost" means the Company's good faith estimate of the present
value, calculated as of the Determination Date using a 10.0% discount rate,
of the cost that the Company will incur, solely in connection with the SAIF
Insured Deposits, as a result of SAIF Recapitalization Legislation, net of
the tax benefit, if any, related to such expense calculated in accordance
with GAAP using the Company's effective combined Federal and state tax rate
as of the end of the fiscal quarter next preceding the Determination Date.
"Agreement" means this Escrow Agreement, as amended from time to time in
accordance with Section 8.3 of this Agreement.
"Bank Regulator" means any Federal or state Governmental Entity charged
with the supervision or regulation of banks or bank holding companies or
engaged in the insurance of bank deposits.
"Book Value" means, with respect to the Common Stock, the book value per
share of the Common Stock as of the end of the fiscal quarter next preceding
the relevant measurement date, which Book Value shall be calculated in
accordance with GAAP except that the number of shares of Common Stock
outstanding as of such balance sheet date shall be deemed to include the
number of shares of Common Stock to be distributed to the Stock Right Holders
in accordance with the terms of this Agreement.
"BIF" means the Bank Insurance Fund established pursuant to the Federal
Deposit Insurance Act (12 U.S.C. sec 1811 et seq.) and administered by the FDIC
or any successor deposit insurance fund.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday or Friday
that banks in Los Angeles, California are not required by law to be closed.
"Cash Escrow Deposit" means the $345,000 deposited by the Company with
the Escrow Agent contemporaneously with the execution of this Agreement.
"Cash Escrow Fund" means the Cash Escrow Deposit and the investment
earnings thereon from the Effective Date through the Business Day next
preceding the Notification Date, inclusive.
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ANNEX 1 - 102
<PAGE>
"Cash Right Certificate" means the Certificate of Beneficial Interest in
the Cash Escrow Fund, which Cash Right Certificate shall be in the form of
Exhibit 1.1-C to this Agreement.
"Cash Right Holder" means a Holder registered on the books of the Escrow
Agent of a Cash Right Certificate.
"Certificates" means the Cash Right Certificates and the Stock Right
Certificates.
"Change in Control of the Company" means (a) a merger or consolidation,
or any similar transaction, involving the Company, (b) a purchase, lease or
other acquisition of assets of the Company and/or one or more subsidiaries of
the Company, which assets represent all or a majority of the Company's assets
on a consolidated basis, or (c) a purchase or other acquisition (including by
way of merger, consolidation, share exchange or otherwise) by a single
Person, or one or more affiliated Persons (other than Dartmouth Capital
Group, L.P. and its affiliates), of securities representing 50% or more of
the voting power of the Company; provided, however, that in no event shall any
merger, consolidation or acquisition of voting securities be deemed to
constitute a change in control of the Company if (x) the voting securities of
the Company outstanding immediately prior thereto continue to represent (by
either remaining outstanding or being converted into the voting securities of
the surviving entity of any such transaction) a majority of the combined
voting power of the voting securities of the Company or the surviving entity
outstanding immediately after the consummation of such transaction or (y) the
directors of the Company immediately prior to the time that the Company
enters into the definitive agreement providing for such transaction represent
a majority of the directors of the Company or the surviving entity
immediately after the consummation of such transaction.
"Committee" means the three persons designated by CSB prior to the
Effective Time and their respective successors, if any, designated by a
majority of the then remaining Committee members.
"Committee Representative" means the member of the Committee designated
from time to time by Committee to receive, on behalf of the Committee,
notices and other communication from the Company or the Escrow Agent, which
designation shall be made pursuant to a written instrument delivered by the
Committee to the Company and the Escrow Agent and shall be effective upon
receipt.
"Common Stock" means the common stock, $.01 par value per share, of the
Company, or any other securities into which such shares of Common Stock may
have been converted or exchanged.
"Company" means [ ], a Delaware corporation.
"CSB" means Commerce Security Bank, a party to the Reorganization
Agreement and the CSB Merger.
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ANNEX 1 - 103
<PAGE>
"CSB Merger" means the merger of CSB Merger Sub with and into CSB, as
defined in the recitals to this Agreement.
"CSB Merger Sub" means a wholly-owned subsidiary of the Company formed
for the purpose of completing the CSB Merger.
"CSB Shareholders" has the meaning set forth in the recitals to this
Agreement.
"Determination Date" means the date on which the Company sends written
notice of the Company's calculations of the SAIF Allocations or the Imputed
SAIF Allocations, as the case may be, to the Escrow Agent, with a copy to the
Committee Representative, in accordance with Section 6.1 or Section 6.2 of
this Agreement.
"Effective Date" means the date on which the Effective Time of the CSB
Merger occurs.
"Effective Time" means the effective time of the CSB Merger.
"Escrow Account" shall have the meaning set forth in Section 3.1 of this
Agreement.
"Escrow Agent" means Liberty National Bank, any successor thereto or any
successor escrow agent appointed in accordance with the terms of this
Agreement.
"Escrow Assets" means collectively the Cash Escrow Fund and the Stock
Escrow Fund.
"FDIC" means the Federal Deposit Insurance Corporation.
"GAAP" means Generally Accepted Accounting Principles as in effect in the
United States, consistently applied.
"Governmental Entity" means any administrative agency, commission, court
or other governmental authority or instrumentality, domestic or foreign,
including any government-sponsored corporation having regulatory authority
under law.
"Holder" means a Cash Right Holder or Stock Right Holder.
"Imputed SAIF Allocations" means collectively the Imputed SAIF Cash
Component and the Imputed SAIF Stock Component.
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ANNEX 1 - 104
<PAGE>
"Imputed SAIF Cash Component" means an amount calculated pursuant to the
following formula, but in no event more than the value of the Cash Escrow
Fund as of the Notification Date:
C = [(.85% * D) * 60%] * 25.556%
where
C = the Imputed SAIF Cash Component; and
D = the amount of SAIF Insured Deposits as of the end of the month
next preceding the Second Anniversary.
"Imputed SAIF Stock Component" means an amount calculated pursuant to the
following formula, but in no event more than the value of the Stock Escrow
Fund as of the Notification Date:
S = {[(.85% * D) * 60%] * 17.037%} divided by V
where
S = the Imputed SAIF Stock Component expressed as a number of shares of
Common Stock, rounded to the nearest whole share;
D = the amount of SAIF Insured Deposits as of the end of the month
next preceding the Second Anniversary; and
V = the greater of the Market Value or Book Value per share of the Common
Stock as of the Second Anniversary.
"Initial Holder" means a CSB Shareholder who receives a Certificate in
connection with the CSB Merger.
"Insured Deposits" means insured deposits within the meaning of the
Federal Deposit Insurance Act (12 U.S.C. sec 1813(m)) or any successor
provision and the applicable regulations promulgated thereunder.
"Market Value" means, as it relates to the Common Stock or any other
security or other non-cash asset in the Stock Escrow Fund on any given date,
(i) the mean of the high and low sales prices of such security for the twenty
(20) Business Days immediately preceding such date, as reported by the
National Association of Securities Dealers Automated Quotation System
("Nasdaq") and published in the Wall Street Journal (or, if not so reported or
published, as reported by the system then regarded as the most reliable
source of such quotations) or, if there are no reported sales for such
period, the mean of the closing bid and asked prices for such
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ANNEX 1 - 105
<PAGE>
period as so reported; or (ii) if such security is listed on any domestic
stock exchange, the mean of the high and low sales prices of Common Stock for
the twenty (20) consecutive Business Days immediately preceding such date as
reported by the Composite Tape of the New York Stock Exchange and published
in the Wall Street Journal (or, if not so reported or published, as reported
by the principal domestic stock exchange on which the security was traded
during that period); or (iii) if neither of the foregoing clauses (i) and
(ii) applies, the Market Value of the Common Stock shall be deemed to be the
Book Value of the Common Stock and the Market Value of any other security or
non-cash asset shall be the fair market value thereof as determined in good
faith by the Company's Board of Directors.
"Notification Date" means the date on which the Escrow Agent sends
written notice to of each Holder pursuant to Section 6.1, Section 6.2 or
Section 6.3 of this Agreement.
"Officers' Certificate" means a certificate signed jointly by the
Company's Chief Executive Officer and its Chief Financial Officer delivered
to the Escrow Agent pursuant to Section 6.1 or Section 6.2 of this Agreement,
which Officers' Certificate shall set forth the following information:
(a) the calculation of the After-Tax Cost, if applicable;
(b) the calculation of the Market Value of the Common Stock and other
non-cash assets, if any, in the Stock Escrow Fund;
(c) the calculation of the SAIF Stock Component or the Imputed SAIF Stock
Component, as the case may be; and
(d) the calculation of the SAIF Cash Component or the Imputed SAIF Cash
Component, as the case may be.
"Person" means any natural person, corporation, limited liability
company, general or limited partnership, limited liability partnership, joint
venture, joint stock company, trust, unincorporated organization,
association, sole proprietorship, Governmental Entity or political
subdivision of any government.
"Pro Rata Cash Distribution" means Cash Right Holder's share of the Cash
Escrow Fund, which Pro Rata Cash Distribution shall be equal to such Holder's
Pro Rata Cash Percentage multiplied by the amount of cash in the Cash Escrow
Fund as of the Notification Date, after giving effect to the distribution of
the SAIF Cash Allocation or Imputed SAIF Allocation, if any.
"Pro Rata Distribution" means the Pro Rata Cash Distribution and/or the
Pro Rata Stock Distribution, as the case may be.
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ANNEX 1 - 106
<PAGE>
"Pro Rata Stock Distribution" means Stock Right Holder's share of the
Stock Escrow Fund, which Pro Rata Stock Distribution shall be equal to such
Holder's Pro Rata Stock Percentage multiplied by (a) the number of shares of
Common Stock in the Stock Escrow Fund and (b) the amount of cash and non-cash
assets, if any, in the Stock Escrow Fund, in each case as of the Notification
Date and after giving effect to the distribution of the SAIF Stock Allocation
or Imputed SAIF Allocation, if any, subject in each case to the treatment of
fractional shares as provided in Section 6.6 of this Agreement.
"Pro Rata Cash Percentage" means Cash Right Holder's share of the Cash
Escrow Fund available for distribution to the Cash Right Holders, being a
percentage rounded to the nearest thousandth equal to the quotient obtained
by dividing (x) the amount of cash distributable directly to such Holder as
Cash Consideration in connection with the CSB Merger by (y) the aggregate
amount of Cash Consideration distributable to all Holders in connection with
the CSB Merger.
"Pro Rata Percentage" means the Pro Rata Cash Percentage and/or the Pro
Rata Stock Percentage as the case may be.
"Pro Rata Stock Percentage" means Stock Right Holder's share of the Stock
Escrow Fund available for distribution to the Stock Right Holders, being a
percentage rounded to the nearest thousandth equal to the quotient obtained
by dividing (x) the number of shares of Common Stock distributable directly
to such Holder as Stock Consideration in connection with the CSB Merger by
(y) the aggregate number of shares of Common Stock distributable to all
Holders as Stock Consideration in connection with the CSB Merger.
"Reorganization Agreement" shall have the meaning set forth in the
preamble to this Agreement.
"SAIF" means the Savings Association Insurance Fund established pursuant
to the Federal Deposit Insurance Act (12 U.S.C. sec 1811 et seq.) and
administered by the Federal Deposit Insurance Corporation or any successor
federal deposit insurance fund.
"SAIF Allocations" means collectively the SAIF Cash Component and the
SAIF Stock Component.
"SAIF Cash Component" means 34.50% of the After-Tax Cost of the SAIF
Recapitalization Legislation but in no event more than the amount of the Cash
Escrow Fund as of the Notification Date.
"SAIF Insured Deposits" means the Insured Deposits of CSB and the
portion, if any, of the BIF Insured Deposits of any other depository
institution controlled by the Company which are deemed to be SAIF Insured
Deposits as a consequence of either the acquisition of shares of CSB by the
Company or the Company's compliance with the last sentence of Section 2.11.1
of the Reorganization Agreement.
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ANNEX 1 - 107
<PAGE>
"SAIF Recapitalization Legislation" means any law enacted by the United
States government, or any final regulation adopted by any Federal Bank
Regulator, that imposes one or more special assessments on depository
institutions that have deposits insured by SAIF.
"SAIF Stock Component" means an amount calculated pursuant to the
following formula, but in no event more than the value of the Stock Escrow
Fund as of the Notification Date.
S = (A * 23.0%) divided by V
where
S = the SAIF Stock Component expressed as a number of shares of Common
Stock, rounded to the nearest whole share;
A = the After-Tax Cost of the SAIF Recapitalization Legislation; and
V = the greater of the Market Value or Book Value per share of the Common
Stock as of the Determination Date.
"Second Anniversary" means that date which is twenty-four (24) months
after the Effective Date.
"Stock Escrow Deposit" means the [ ] shares of Common Stock
deposited by the Company with the Escrow Agent contemporaneously with the
execution of this Agreement.
"Stock Escrow Fund" means the Stock Escrow Deposit and any other property
later deposited with the Escrow Agent pursuant to this Escrow Agreement,
including without limitation any cash or stock dividends paid on the shares
of Common Stock comprising the Stock Escrow Deposit, any stock, securities or
assets received with respect to or in exchange for such Common Stock
including, without limitation, in connection with any reorganization,
reclassification, stock split, consolidation, merger, sale, lease or other
transfer.
"Stock Right Certificate" means the Certificate of Beneficial Interest in
the Stock Escrow Fund, which Stock Right Certificate shall be in the form of
Exhibit 1.1-S to this Agreement.
"Stock Right Holder" means a Holder registered on the books of the Escrow
Agent of a Stock Right Certificate.
1.2 Rules of Construction. The following rules of construction shall
apply to the interpretation of this Agreement:
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ANNEX 1 - 108
<PAGE>
1.2.1 Any reference to any event, change or effect being
"material" with respect to any Person means an event, change or effect which
is material in relation to the condition (financial or otherwise), properties,
assets, liabilities, businesses or operations of such entity and its
Subsidiaries taken as a whole.
1.2.2. Whenever used in this Agreement, the word "including" shall be
non-exclusive and shall mean "including without limitation."
1.2.3. All references to Sections, Articles and Schedules shall,
unless another agreement is expressly referenced, mean the applicable
sections or articles of, or schedules to, this Agreement.
1.2.4. The section titles and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of any provisions of this Agreement.
1.2.5. The terms "herein", "hereunder", and terms of similar import
refer to this Agreement as a whole and not to the specific Section or Article
in which they are used.
1.2.6. This Agreement is the joint product of the Company, CSB and
the Escrow Agent and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of such parties and shall not be
construed for or against the Company, the Escrow Agent or the Holders.
ARTICLE II
DEPOSIT OF ESCROWED FUNDS;
APPOINTMENT OF ESCROW AGENT
2.1 Deposits. Substantially contemporaneously with the execution
hereof, the Company has deposited the Cash Escrow Deposit and the Stock Escrow
Deposit with the Escrow Agent.
2.2 Acceptance by Escrow Agent. The Escrow Agent hereby acknowledges
receipt of the Cash Escrow Deposit and the Stock Escrow Deposit and agrees to
act as escrow agent as set forth herein, and as such escrow agent to receive,
administer and distribute the Escrow Assets pursuant to the terms of this
Agreement.
ARTICLE III
MAINTENANCE OF AND BENEFICIAL INTEREST IN ESCROW ACCOUNT
3.1 Establishment of Escrow Account. The Escrow Agent shall hold the
Cash Escrow Fund, and the cash, if any, in the Stock Escrow Fund, in a
single, interest bearing
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ANNEX 1 - 109
<PAGE>
account (the "Escrow Account"). From the Effective Date through the Business
Day next preceding the Notification Date, inclusive, interest shall accrue
daily on the Cash Escrow Fund at an annual rate equal to the posted rate then
offered by the Escrow Agent on so-called jumbo certificates having a maturity
of one (1) year, as such posted rate may be adjusted from time to time.
3.2 Interest in Escrow Account Prior to Effective Time. Until the
Effective Time, the Escrow Agent shall hold the Escrow Assets for the benefit
of the Company. Upon receipt of written notice issued jointly by either the
Company or SDN and CSB indicating that the CSB Merger has been abandoned or
otherwise indicating that the Escrow Assets are to be returned, the Escrow
Agent shall deliver the Escrow Assets to the Company.
3.3 Interest in Escrow Account After Effective Time. Upon receipt
of a written notice, substantially in the form of Exhibit 3.3 hereto, jointly
issued by the Holding Company and CSB confirming that the CSB Merger has been
consummated, from and after the Effective Time, the Escrow Agent shall hold
the Escrow Assets for the benefit of the Holders and the Company for
distribution in accordance with the provisions of Article VI hereof. After
the Effective Time and prior to the Notification Date, the Committee
Representative shall be entitled to vote the shares of Common Stock, and any
other voting securities, in the Stock Escrow Fund.
ARTICLE IV
RIGHTS, DUTIES AND IMMUNITIES OF ESCROW AGENT
4.1 Rights and Immunities. Acceptance by the Escrow Agent of its duties
under this Agreement is subject to the following terms and conditions, which
the parties hereby agree shall exclusively govern and control the rights,
duties and immunities of the Escrow Agent:
4.1.1 The duties and obligations of the Escrow Agent shall be
determined solely by the express provisions of this Agreement; the Escrow
Agent shall not be responsible for the performance of any duties or
obligations other than the performance of such duties and obligations as are
specifically set forth in this Agreement; and the Escrow Agent shall not be
deemed to have any knowledge of or responsibility for the terms of any other
agreement or instrument other than the Certificates;
4.1.2 The Escrow Agent shall not be responsible in any manner
whatsoever for any failure or inability of any other party to honor any of
the provisions of this Agreement or any other agreement;
4.1.3 The Escrow Agent shall be entitled, but not obligated, to
request joint written instructions from the Company and the Committee
Representative, and shall have the right to refrain from acting until it has
received such written instructions. The Escrow Agent shall be fully
protected in acting on and relying upon any written notice, direction,
request, waiver, consent, receipt or other paper or document which the Escrow
Agent in good faith
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ANNEX 1 - 110
<PAGE>
believes to have been signed or presented by the proper party or parties, and
shall be entitled to rely upon any notice, instruction, waiver or other
document requested and/or received from the Company and the Committee
Representative jointly;
4.1.4 The Escrow Agent shall not be liable for any error of
judgment, or for any act done or step taken or omitted by it in good faith or
for any mistake of fact or law, or for anything which it may do or refrain
from doing in connection herewith, unless caused by or arising out of its
willful misconduct or gross negligence, and in no event shall the Escrow
Agent be held liable for special, indirect or consequential loss or damage of
any kind whatsoever (including, but not limited to, lost profits), even if it
has been advised of the likelihood of such loss or damage and regardless of
the form of action;
4.1.5 The Escrow Agent may seek the advice of legal counsel of its
own selection in the event of any dispute or question as to the construction
of any of the provisions of this Agreement or its duties hereunder, provided,
however, that such counsel may not be counsel which has represented the
Company or any of its affiliates during the preceding twelve (12) months, and
in the absence of willful misconduct or of gross negligence in its choice of
counsel, it shall incur no liability and shall be fully protected in respect
of any action taken, omitted or suffered by it in accordance with the advice
of such counsel;
4.1.6 The Escrow Agent makes no representation as to the validity,
value, genuineness or collectibility of any security, document or instrument
held by or delivered to it; and
4.1.7 No provision of this Agreement shall require the Escrow Agent
to risk or expend any of its own funds or otherwise to incur any financial
liability in the exercise or performance of any of its powers or duties
hereunder; provided that the Escrow Agent will be promptly paid or reimbursed
upon request for any and all expenses, fees, costs, disbursements and/or
advances which may be incurred or made by it in accordance with the
provisions of Section 4.4 of this Agreement (including reasonable
compensation in accordance with Exhibit 4.4 hereto, and any expenses and
disbursements of Escrow Agent's counsel, and all agents not regularly in
Escrow Agent's employ).
4.2 Duties in Event of Controversy. If a controversy arises between the
Company and the Committee or any Holder, or between any two or more Holders,
as to whether or not or to whom the Escrow Agent shall deliver any of the
Escrow Assets or as to any other matter arising out of or relating to the
Escrow Assets or this Agreement, the Escrow Agent shall not be required to
determine the same and shall not make any delivery of the Escrow Assets or
any portion thereof but shall retain the Escrow Assets until the rights of
the parties to the dispute shall have been finally determined by written
agreement among the parties in the dispute or by final order of a court of
competent jurisdiction after the time for appeal of any such final order has
expired without an appeal having been made. The Escrow Agent shall deliver
the Escrow Assets (or the applicable portion thereof) as promptly as
practicable after the Escrow Agent has received joint written notice from the
Company and the Committee Representative of any such
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ANNEX 1 - 111
<PAGE>
agreement or final order (accompanied by an affidavit that the time for
appeal has expired without an appeal having been made, and a duly executed
copy of such agreement or order, as the case may be) in accordance with the
instructions set forth in such agreement or order. The Escrow Agent shall be
entitled to assume conclusively that no such controversy has arisen unless it
receives, prior to its distribution of such Escrow Assets, a written notice
that such a controversy has arisen which refers specifically to this
Agreement, identifies by name and address the adverse claimants in the
controversy and requests that the Escrow Agent not deliver any of the Escrow
Assets. If a controversy of the type referred to in this Section 4.2 arises,
the Escrow Agent may, in its sole discretion (but shall not be obligated to),
commence interpleader or similar actions or proceedings for determination of
the controversy.
4.3 Indemnity. The Company agrees to indemnify, defend and hold
harmless the Escrow Agent against any and all losses, expenses, claims,
suits, obligations, liabilities and damages, including attorneys' fees, based
upon or arising out of or in connection with the performance or
non-performance by the Escrow Agent of its obligations hereunder, unless such
performance or non-performance constitutes willful misconduct or gross
negligence. This indemnity shall survive the resignation or termination of
the Escrow Agent and the termination of this Agreement.
4.4 Compensation. In consideration of the Escrow Agent's service
hereunder, the Company shall pay compensation to the Escrow Agent and
reimburse the Escrow Agent's out-of-pocket expenses, as set forth on Exhibit
4.4 hereto. All such compensation and expenses shall be borne by the
Company, except as otherwise provided in Section 8.7 of this Agreement.
ARTICLE V
CERTIFICATES OF BENEFICIAL INTEREST
5.1. Issuance of Certificates to Initial Holders. As promptly as
practicable following the Effective Date, but in no event more than thirty
(30) days after the Effective Date, the Escrow Agent will execute and deliver
to the Initial Holders the Certificates. The Escrow Agent shall set forth on
each Certificate the Holder's Pro Rata Cash Percentage and/or Pro Rata Stock
Percentage.
5.2 Transfer of Certificates
5.2.1 A Cash Right Certificate may be assigned or
transferred from time to time prior to the Determination Date in whole, but
not in part, only upon the books of the Escrow Agent in accordance with
Section 5.2.3.
5.2.2 A Stock Right Certificate shall not be assignable or
transferable by the Holder other than a transfer in whole which occurs by
will or by the laws of descent and distribution and thereafter is registered
on the books of the Escrow Agent in accordance with Section 5.2.3 of this
Agreement.
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ANNEX 1 - 112
<PAGE>
5.2.3 In order for a Holder to assign or transfer a
Certificate under circumstances permitted by this Agreement, such Holder must
deliver the Certificate to the Escrow Agent for transfer, accompanied by
written instructions regarding the delivery of the same and such other
documents as the Escrow Agent may reasonably request to confirm the Holder's
ownership of the Certificate and authority to cause such assignment or
transfer. Upon receipt of such documentation, the Escrow Agent promptly
shall cancel the Certificate so delivered and execute one or more new
Certificates and shall deliver the same to such transferee(s) and, if
applicable, the transferor, in each case as instructed in writing by the
Holder requesting such assignment or transfer.
5.3 Replacement of Certificates. Upon receipt by the Escrow Agent
of evidence satisfactory to it in its sole discretion of the ownership of,
and the loss, theft, destruction or mutilation of a Certificate and, in the
case of loss, theft or destruction, of indemnity satisfactory to it in its
sole discretion, and, in the case of mutilation, upon surrender and
cancellation thereof, the Escrow Agent will execute in lieu thereof a
substitute Certificate, and deliver the same to the Holder.
ARTICLE VI
DISTRIBUTION OF ESCROW ASSETS
6.1 Notice and Distribution of SAIF Allocations. If SAIF
Recapitalization Legislation is enacted prior to the Second Anniversary, the
Company shall deliver to the Escrow Agent and the Committee Representative
within ten (10) Business Days after such enactment the Officers' Certificate
which sets forth the calculation of the SAIF Allocations. The Committee
shall have ten (10) Business Days after the Determination Date within which
to deliver to the Company, with a copy to the Escrow Agent, a written
objection to the calculation of the SAIF Allocations set forth in the
Officers' Certificate. The calculation of the SAIF Allocations set forth in
the Officers' Certificate shall be deemed final if the Committee does not
deliver a written objection thereto by the close of business on the tenth
(10th) Business Day after the Determination Date or if, prior to the
expiration of such period, the Committee acknowledges in writing that it
accepts the Company's determination of the SAIF Allocations. Within five (5)
Business Days after the Escrow Agent receives notice that the SAIF
Allocations calculation is final, the Escrow Agent shall (i) distribute to
the Company from the Cash Escrow Fund an amount of cash equal to the SAIF
Cash Component, and from the Stock Escrow Fund a number of shares of Common
Stock equal to the SAIF Stock Component (and if the value of the shares of
Common Stock in the Stock Escrow Fund, calculated for purposes of this
Agreement using the greater of Market Value or Book Value, is less than the
SAIF Stock Component, the Escrow Agent also shall distribute to the Company
some or all of any additional property distributed with respect to assets in
the Stock Escrow Fund such that the sum of the value of such shares of Common
Stock and the Market Value of such other property is equal to the aggregate
value of the SAIF Stock Component), and (ii) send written notice to each
Holder with instructions for returning such Holder's Certificate(s) in
exchange for the Holder's Pro Rata Percentage of the
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ANNEX 1 - 113
<PAGE>
Cash Escrow Fund and/or Stock Escrow Fund, if any, remaining after the
distribution of the SAIF Allocations to the Company.
6.2 Notice and Distribution of Imputed SAIF Allocations. If SAIF
Recapitalization Legislation has not been enacted prior to the Second
Anniversary, within five (5) Business Days after the Second Anniversary, the
Company shall deliver to the Escrow Agent and the Committee Representative,
the Officers' Certificate setting forth the amount of the Imputed SAIF
Allocations. The Committee shall have ten (10) Business Days after the
Determination Date within which to deliver to the Company, with a copy to the
Escrow Agent, a written objection to the calculation of the Imputed SAIF
Allocations set forth in the Officers' Certificate. The calculation of the
Imputed SAIF Allocations set forth in the Officers' Certificate shall be
deemed final if the Committee does not deliver a written objection thereto by
the close of business on the tenth (10th) Business Day after the
Determination Date or if, prior to the expiration of such period, the
Committee acknowledges in writing that it accepts the Company's determination
of the Imputed SAIF Allocations. Within five (5) Business Days after the
Escrow Agent receives notice that the Imputed SAIF Allocations calculation is
final, the Escrow Agent shall (i) distribute to the Company from the Cash
Escrow Fund an amount of cash equal to the Imputed SAIF Cash Component, and
from the Stock Escrow Fund a number of shares of Common Stock equal to the
Imputed SAIF Stock Component (and if the value of the shares of Common Stock
in the Stock Escrow Fund, calculated for purposes of this Agreement using the
greater of Market Value or Book Value, is less than the Imputed SAIF Stock
Component, the Escrow Agent also shall distribute to the Company some or all
of any additional property distributed with respect to assets in the Stock
Escrow Fund such that the sum of the value of such shares of Common Stock and
the Market Value of such other property is equal to the aggregate value of
the Imputed SAIF Stock Component), and (ii) send written notice to each
Holder with instructions for returning such Holder's Certificate(s) in
exchange for the Holder's Pro Rata Percentage of the Cash Escrow Fund and/or
Stock Escrow Fund, if any, remaining after the distribution of the Imputed
SAIF Allocations to the Company.
6.3 Accelerated Disposition of Escrow Assets. If an Acceleration Event
shall occur prior to the earlier of the enactment of SAIF Recapitilization
Legislation or the Second Anniversary, the Company shall provide the Escrow
Agent and the Committee Representative with notice thereof within five (5)
Business Days after such event, and within five (5) Business Days after the
receipt of such notice, the Escrow Agent shall send written notice to each
Holder with instructions for returning such Holder's Certificate(s) in
exchange for the Holder's Pro Rata Percentage of the Cash Escrow Fund and/or
Stock Escrow Fund.
6.4 Dispute Resolution. If the Committee objects to the Company's
calculation of the SAIF Allocations or the Imputed SAIF Allocations, as the
case may be, as set forth in the Officers' Certificate, the Company's Chief
Executive Officer shall use his best efforts to meet with the Committee
Representative as soon as practicable after receipt of such objection to
negotiate in good faith to resolve the dispute. If the Company and the
Committee Representative have not agreed upon the amount of the SAIF
Allocations or the Imputed SAIF Allocations, as the case may be, within
fifteen (15) Business Days after receipt of the Committee's objection,
-14-
ANNEX 1 - 114
<PAGE>
either the Company or the Committee Representative may initiate binding
arbitration in accordance with terms of Section 8.7 of this Agreement.
6.5 Distribution to Holders. Upon return of the Holder's Certificate(s)
for cancellation following the Notification Date, the Escrow Agent shall
promptly deliver a check representing the Holder's Pro Rata Cash
Distribution, without interest after the Notification Date, and/or one or
more stock certificates and other indicia of ownership representing the
Holder's Pro Rata Stock Distribution, subject to the provisions of Section
6.6 of this Agreement. The Company agrees to cause its transfer agent to
issue one or more additional stock certificates or other instruments as
necessary to effect the distribution of the Escrow Stock Fund to the Stock
Right Holders.
6.6 Treatment of Fractional Shares. No fractional shares of Common Stock
or of any other security shall be delivered to the Stock Right Holders. In
the event that the application of the formulae contained in this Agreement
would otherwise result in a fractional share of Common Stock or of another
security being distributed to a Stock Right Holder, the Company may in its
discretion direct the Escrow Agent either to round up the number of shares of
such security to be distributed to the Stock Right Holder to the next whole
number of shares without payment by the Stock Right Holder or to round down
to the next whole number of shares with payment to the Stock Right Holder of
the then current value of such fractional share, which value shall be the
greater of Book Value or Market Value per share if the security is Common
Stock or Market Value per share if the security is not Common Stock. If the
Company elects to pay cash to Holders in lieu of fractional shares in
accordance with this Section 6.6, the Company shall instruct the Escrow Agent
to compute the aggregate amount of such payments at the time that it computes
the Holders' respective Pro Rata Stock Distribution and to provide to the
Company written notice of the aggregate amount of cash to be delivered to the
Stock Right Holders in lieu of fractional shares. Within two (2) Business
Days after receipt of such notice from the Escrow Agent, the Company shall
deliver such sum to the Escrow Agent which in turn shall (i) distribute such
cash among the applicable Stock Right Holders and (ii) deliver to the Company
any portion of the Stock Escrow Fund that remains as a result of the
Company's election to round down fractional shares and to pay cash to Stock
Right Holders in lieu thereof. If the Company elects to round up all
fractional shares to the next higher whole share in accordance with this
Section 6.6, and if as a result of such rounding the Escrow Agent determines
that the number of shares of Common Stock then held in the Stock Escrow Fund
is inadequate to permit the distribution of the required number of shares to
each applicable Stock Right Holder, the Escrow Agent shall provide the
Company with written notice of the aggregate number of additional shares of
Common Stock required to be delivered to the Stock Right Holders. Within two
(2) Business Days after receipt of such notice from the Escrow Agent, the
Company shall deliver the required number of additional shares to the Escrow
Agent which in turn shall deliver such shares to the applicable Stock Right
Holders.
6.7 Unclaimed Escrow Assets. Any portion of the Escrow Assets that
remains unclaimed by any Holder six (6) months after the Notification Date
shall be returned to the Company upon demand, and any Holder who has not
received his Pro Rata Distribution prior
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ANNEX 1 - 115
<PAGE>
to that time shall thereafter look solely to the Company for payment of such
Pro Rata Distribution without interest after the Notification Date.
Notwithstanding the foregoing, neither the Company nor the Escrow Agent shall
be liable to any Holder for any amount paid to a public official pursuant to
applicable abandoned property laws.
ARTICLE VII
TERM OF ESCROW
7.1 Term of Escrow. The term of the escrow governed hereby shall
commence on the date hereof and end upon the disbursement of all of the
Escrow Assets in accordance with the terms hereof.
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. Unless otherwise indicated, all notices, demands, requests
and other communications required or permitted to be given hereunder shall be
in writing and shall be deemed duly given on the fifth (5th) day after
personal delivery (including by professional delivery service) or delivery by
facsimile, provided that the sender receives telephonic or electronic
confirmation that the facsimile was received by the recipient, addressed as
follows (or at such other address as the addressed party may have substituted
by notice pursuant to this Section 8.1):
(a) If to the Company: [ ]
c/o Liberty National Bank
One Pacific Plaza
7777 Center Avenue
Huntington Beach, CA 92647
Attention: Chief Executive Officer
facsimile: (714) 891-8884
with a copy to: Nutter, McClennen & Fish, LLP
One International Place
Boston, Massachusetts 02110-2699
Attention: Michael K. Krebs, Esquire
Hugh A. O'Reilly, Esquire
facsimile: (617) 973-9748
-16-
ANNEX 1 - 116
<PAGE>
(b) If to the Escrow Agent: Liberty National Bank
One Pacific Plaza
7777 Center Avenue
Huntington Beach, CA 92647
Attention: Chief Financial Officer
facsimile: (714) 891-8884
(c) If to the Committee
Representative: [ ]
[ ]
[ ]
facsimile: ( ) [ ]
with a copy to: [ ]
[ ]
[ ]
facsimile: ( ) [ ]
8.2 Headings. The headings of the paragraphs of this Agreement are
inserted as a matter of convenience and for reference purposes only, are of
no binding effect and in no respect define, limit or describe the scope of
this Agreement or the intent of any paragraph.
8.3 Amendments. This Agreement may not amended, modified, supplemented,
extended, terminated, discharged or changed except by an agreement in writing
which makes specific reference to this Agreement and which is signed by the
Company and the Escrow Agent and to which the Committee Representative
consents, which consent shall not be unreasonably withheld. As soon as
practicable and in any event not more than five (5) Business Days after the
Escrow Agent receives notice that the Committee Representative has consented
to such an amendment, modification or other instrument affecting the terms of
this Agreement, the Escrow Agent shall send a copy of such instrument to each
Holder.
8.4 Binding Effect; Assignment; Third Party Beneficiaries. This
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their permitted successors and assigns and, except as otherwise
provided in this Section 8.4, shall not be enforceable by or create or
evidence any right of any third party. This Agreement cannot be assigned by
the Company without the express written consent of the Committee
Representative, which consent shall not be unreasonably withheld. This
Agreement cannot be assigned by the Escrow Agent without the consent of the
Company and Committee, which consent shall not be unreasonably withheld. The
Holders are intended third-party beneficiaries of this Agreement, and the
Committee Representative, or any Holder acting with the consent of a majority
in interest of the affected class of Certificate Holders, may initiate
binding arbitration under Section 8.7 of this Agreement to resolve any
dispute regarding the terms of this Agreement.
-17-
ANNEX 1 - 117
<PAGE>
8.5 Resignation and Termination of Escrow Agent. The Escrow Agent may
resign at any time upon sixty (60) days' written notice thereof to the
Company and the Committee Representative. With the consent of the Committee
Representative, which consent shall not be unreasonably withheld, the Company
may terminate the appointment of the Escrow Agent effective immediately upon
written notice thereof to the Escrow Agent or upon such later date as may be
stated in such notice. Upon the effective date of such resignation or
termination, as applicable, all obligations of the Escrow Agent under this
Agreement and under the Certificates shall terminate except the obligations
to (i) hold any Escrow Assets then in the possession of the Escrow Agent
until the Company and the Committee Representative provide to the Escrow
Agent joint written notice of the name and address of a successor escrow
agent who has accepted such appointment and (ii) thereupon deliver all such
Escrow Assets to such successor escrow agent; provided, however, that if a
successor escrow agent shall fail to be appointed within sixty (60) days of
a notice of resignation or the Escrow Agent's receipt of a notice of
termination, the Escrow Agent may petition a court of competent jurisdiction
to appoint a successor escrow agent hereunder.
8.6 Severability. Any provision of this Agreement which may be
determined by a court of competent jurisdiction to be prohibited or
unenforceable shall be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
8.7 Dispute Resolution. Subject only to the terms of Section 6.4 and
Section 8.4 of this Agreement, any dispute that may arise under this
Agreement between the Company and the Committee Representative or any Holder,
or between two or more Holders, and that cannot be settled following
negotiations between the Chief Executive of the Company and the Committee
Representative shall be submitted to binding arbitration pursuant to the
Commercial Arbitration Rules, as the amended and in then effect, of the
American Arbitration Association (the "Rules"), subject to the following:
(a) The arbitration shall take place in Los Angeles, California.
(b) There shall be three arbitrators, who shall be selected under
the normal procedures prescribed in the Rules, except that one such
arbitrator shall be a certified public accountant and one arbitrator (who
shall chair the arbitration panel) shall be a member of the American Board of
Trial Advocates or the American College of Trial Lawyers.
(c) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(d) At the arbitration hearing, each party may make written and
oral presentations to the arbitrator, present testimony and written evidence
and examine witnesses.
(e) The arbitrators' decision shall be in writing, shall be binding
and final and may be entered and enforced in any court of competent
jurisdiction.
-18-
ANNEX 1 - 118
<PAGE>
(f) No party shall be eligible to receive, and the arbitrators
shall not have the authority to award, exemplary or punitive damages.
(g) The Company shall bear its own expenses incurred in connection
with any such arbitration and shall pay one-half of the fees and expenses of
the arbitrators and the American Arbitration Association. The Committee's
expenses and one-half of the fees and expenses of the arbitrators and the
American Arbitration Association shall be deducted from the amount of the
Escrow Assets, if any, remaining after the SAIF Allocations are distributed
to the Company. If the amount of the Escrow Cash Fund remaining after the
distribution of the SAIF Allocations is insufficient to pay the expenses
allocable to the Escrow Assets, the Escrow Agent shall sell, in consultation
with the Committee Representative, some or all of the Escrow Stock Fund in
order to provide proceeds sufficient to pay such expenses. Neither the
Company nor the Escrow Agent shall have any liability for such expenses if
the amount of the Escrow Assets remaining after the distribution of the SAIF
Allocations to the Company is insufficient.
8.8 Notwithstanding anything to the contrary in this Agreement, the
Committee Representative, or any Holder acting with the consent of a majority
in interest of the affected class of Certificate Holders, may seek
appropriate relief in a court of competent jurisdiction for purposes of any
provisional remedy, including without limitation injunctive relief. No such
application shall be deemed a waiver of the Committee Representative's or
such Holder's rights to seek binding arbitration as provided elsewhere
herein. The parties hereto submit to the jurisdiction of the California
state courts sitting in the counties of Los Angeles and Orange for the
purpose of the Committee Representative's or a Holder's seeking such a
provisional remedy.
8.9 Intent of Escrow. The Company represents to the Escrow Agent, as
holder of record of the Escrow Assets for the benefit of the Holders and the
Company, that the Company intends the escrow created under this Agreement to
have the effect of adjusting (if and to the extent resulting from the terms
of this Agreement) the purchase price paid for CSB under the Reorganization
Agreement.
8.10 Applicable Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of California, without
regard to its principles of conflicts of law.
8.11 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures to each were upon the
same instrument.
8.12 Entire Agreement. This Agreement (including the forms of the Cash
Right Certificate and the Stock Right Certificate and the Compensation
Schedule attached respectively as Exhibits 1.1-C, 1.1-S and 3.3 hereto)
represents the entire understanding and agreement among the parties hereto
with respect to the subject matter hereof and supersedes all prior
negotiations among the parties.
* * *
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ANNEX 1 - 119
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be duly executed in its name and on its behalf, all as of the date first
above written.
[HOLDCO]
By__________________________________
Robert P. Keller, President
LIBERTY NATIONAL BANK,
as Escrow Agent
By__________________________________
Its President
-20-
ANNEX 1 - 120
<PAGE>
EXHIBIT 2.11-B
Calculation of Stock Escrow Deposit
(Variables whose derivations are not fully set forth in this Exhibit are
used as derived in Exhibit 1.1-A, the derivation of the Exchange Ratio)
Previously defined variables:
D = Holdco Pro-Forma Book Value as of December 31, 1995
X = equals the aggregate amount of Holdco Common Stock that CSB
Shareholders can receive in the Reorganization, inclusive of
the shares in the Stock Escrow Deposit, expressed as a
percentage of the pro forma shares of Holdco Common Stock
outstanding upon consummation of the Reorganization
Y = equals the pro forma number of shares of SDN Common Stock
outstanding as of December 31, 1995, giving effect to the
Liberty acquisition and the Capital Contribution (assuming a
one-for-one exchange of SDN Common Stock for Holdco Common
Stock in the SDN Merger)
Calculation of Numberof Shares Explanation
in Stock Escrow Deposit: -----------
- ------------------------------
H = $230,000 H equals the amount of shares constituting
-------- the Stock Escrow Deposit, expressed as a
D percentage of the pro forma Holdco
Common Stock outstanding upon
consummation of the Reorganization
S = 100% - X S equals the percentage of the pro forma
Holdco Common Stock outstanding upon
consummation of the Reorganization that
is represented by shares issued in
exchange for SDN Common Stock
P = Y P equals the number of shares of
----- Holdco Common Stock outstanding on a
S pro forma basis upon the consummation of the
Reorganization
N = H x P N equals the number of shares of Holdco
Common Stock constituting the Stock
Escrow Deposit
ANNEX 1 - 121
<PAGE>
ANNEX 2
REPRINT OF CHAPTER 13 OF THE CALIFORNIA
CORPORATIONS CODE - RIGHTS OF DISSENTING SHAREHOLDERS
<PAGE>
CHAPTER 13
DISSENTERS' RIGHTS
Right to require purchase -- "Dissenting shares"
and "dissenting shareholder" defined. Section 1300.
Demand for purchase. Section 1301.
Endorsement of shares. Section 1302.
Agreed price -- Time for payment. Section 1303.
Dissenter's action to enforce payment. Section 1304.
Appraisers' report -- Payment--Costs. Section 1305.
Dissenting shareholder's status as creditor. Section 1306.
Dividends paid as credit against payment. Section 1307.
Continuing rights and privileges of dissenting shareholders. Section 1308.
Termination of dissenting shareholder status. Section 1309.
Suspension of proceedings for payment pending litigation. Section 1310.
Exempt shares. Section 1311.
Attacking validity of reorganization or merger. Section 1312.
Section 1300. Right to Require Purchase -- "Dissenting Shares" and
"Dissenting Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b)
or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision (b). The,
fair market value shall be determined as of the day before the first
announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve system, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to any
class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B)
of paragraph (1) (without regard to the provisos in that paragraph), were
voted against the reorganization, or which were held of record on the
effective date of a short-form merger provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
ANNEX 2 - 1
<PAGE>
Section 1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a fight 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
statements of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes
an offer by the corporation to purchase at the price stated any dissenting
shares as defined in subdivision (b) of Section 1300, unless they lose their
status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand
upon the corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not effective
for any purpose unless it is received by the corporation or any transfer
agent thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be
the fair market value of those shares as of the day before the announcement
of the proposed reorganization or short-form merger. The statement of fair
market value constitutes an offer by the shareholder to sell the shares at
such price.
Section 1302. Endorsement of Shares.
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. Agreed Price--Time for 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.
ANNEX 2 - 2
<PAGE>
Section 1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court
of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both
or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or more
impartial appraisers to determine, the fair market value of the shares.
1305. Appraisers' Report -- Payment -- 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. Dissenting Shareholder's Status as Creditor.
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.
Section 1307. Dividends Paid as Credit Against Payment.
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.
ANNEX 2 - 3
<PAGE>
Section 1308. Continuing Rights and Privileges of Dissenting Shareholders.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their
shares, until the fair market value of their shares is agreed upon or
determined. A dissenting shareholder may not withdraw a demand for payment
unless the corporation consents thereto.
Section 1309. Termination of Dissenting 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 Proceedings for Payment Pending Litigation.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Section 1304 and 1305 shall be suspended until final determination of
such litigation.
Section 1311. Exempt Shares.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
Section 1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have
any right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted
in favor thereof: but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter, but if the
shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, the shareholder shall not
thereafter have any right to demand payment of cash for the shareholder's
shares pursuant to this chapter. The court in any action attacking the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon 10 days' prior
notice to the corporation and upon a determination by the court that clearly
no other remedy will adequately protect the complaining shareholder or the
class of shareholders of which such shareholder is a member.
ANNEX 2 - 4
<PAGE>
(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.
ANNEX 2 - 5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
Item 20. Indemnification of Directors and Officers.
SC Acquisition Corp. is a Delaware corporation. Reference is made to
Section 145 of the Delaware General Corporation Law, as amended which
provides that a corporation may indemnify any person who was or is a party to
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if be acted in good faith and in manner be reasonably believed to
be in or not opposed to be the best interests of the corporation and, with
respect to any criminal action or proceeding had no reasonable cause to
believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to be the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite and adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnify for such expenses which the Court of Chancery or such other
court shall deem proper. SC Acquisition Corp.'s Certificate of Incorporation
further provides that SC Acquisition Corp. shall indemnify its directors and
officers to the full extent permitted by the law of the State of Delaware.
SC Acquisition Corp.'s Certificate of Incorporation provides that SC
Acquisition Corp.'s Directors shall not be liable to SC Acquisition Corp. or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liabilities is not
permitted under the Delaware General Corporation Law as in effect at the time
such liability is determined.
SC Acquisition Corp. maintains an indemnification insurance policy
covering all directors and officers of SC Acquisition Corp.
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
*2. Agreement and Plan of Reorganization (included as Annex 1 to
the Information Statement/Prospectus).
*3.1 Proposed Certificate of Incorporation, as amended.
*3.2 By-laws.
+4. Specimen Stock Certificate.
+5. Opinion of Nutter, McClennen & Fish, LLP.
+8. Tax Opinion of Nutter, McClennen & Fish, LLP.
*10.1 Subscription Agreement dated as of March 22, 1996 between SDN
Bancorp, Inc. and Dartmouth Capital Group, L.P. for shares of
SDN Bancorp, Inc. common stock.
*10.2 Subscription Agreement dated as of March 22, 1996 between SDN
Bancorp, Inc. and Dartmouth Capital Group, L.P. for shares of
SC Acquisition Corp.. common stock.
*10.3 Lease Agreement for 7777 Center Avenue, Huntington Beach,
California between Alvamij Huntington Beach, Inc. as Landlord,
and Liberty National Bank, as Tenant, dated August 20, 1981 and
amended February 14, 1986.
*10.4 Lease Agreement for 17011 Beach Boulevard, Huntington Beach,
California between Liu Corp., as Landlord, and Liberty National
Bank, as Tenant, dated December 15, 1995.
*10.5 Employment Agreement between Liberty National Bank and Philip
S. Inglee dated July 20, 1995.
*10.6 Employment Agreement between Liberty National Bank and Richard
I. Ganulin dated March 1, 1995.
*10.7 Employment Agreement between Liberty National Bank and Curt A.
Christianssen dated October 22, 1993 and amended August 17, 1995.
*10.8 Employment Agreement between Liberty National Bank and
Catherine C. Clampitt dated April 1, 1995.
*10.9 Employment Agreement between SDN Bancorp, Inc. and Robert P.
Keller dated as of October 1, 1995.
*10.10 Agreement to Provide Construction Inspection Services between
Liberty National Bank and J. Donald Hartfelder.
+10.11 1996 Stock Option Plan.
*11. Statement regarding computation of per share earnings
*21. List of Subsidiaries.
*23.1 Consent of Price Waterhouse LLP as to SDN Bancorp, Inc.
*23.2 Consent of Deloitte & Touche LLP as to SDN Bancorp, Inc.
II-2
<PAGE>
*23.3 Consent of Arthur Andersen as to Liberty National Bank.
*23.4 Consent of Deloitte & Touche LLP as to Commerce Security Bank.
*23.5 Consent of Carpenter & Company.
+23.6 Consent of Nutter, McClennen & Fish, LLP (included in Exhibit 5
and Exhibit 8, respectively).
+23.7 Consent of Director nominee Peter H. Paulsen.
*24. Power of Attorney (contained on Page II-5 of the Registration
Statement).
- -----------
* Filed herewith.
+ To be filed by amendment.
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions
or are not applicable, and therefore have been omitted.
(c) Not applicable.
II-3
<PAGE>
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any person
or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(b) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act of 1933, as
amended (the "Securities Act") and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Huntington Beach, State of California, on the day of 1996.
SC ACQUISITION CORP.
By: /s/ Robert P. Keller
---------------------------------
Robert P. Keller
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below on this Registration Statement hereby constitutes and appoints
Curt A. Christianssen and Michael K. Krebs, and each of them, with full power
to act without the other, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities (until revoked
in writing) to sign any and all amendments (including post-effective
amendments and amendments thereto) to this Registration Statement on Form S-4
of the registrant, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he or she might
or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert P. Keller
- -------------------------- Director, President, Chief
Robert P. Keller Executive Officer July 1, 1996
/s/ Curt A. Christianssen Senior Vice President,
- -------------------------- Treasurer, Chief Financial July 1 , 1996
Curt A. Christianssen Officer
II-5
<PAGE>
Signature Title Date
--------- ----- ----
- -------------------------- Director , 1996
Edward A. Fox
- -------------------------- Director , 1996
Charles E. Hugel
- -------------------------- Director , 1996
K. Thomas Kemp
- -------------------------- Director , 1996
Jefferson W. Kirby
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
*2. Agreement and Plan of Merger (included as Annex 1 to the
Information Statement/Prospectus).
*3.1 Proposed Certificate of Incorporation, as amended.
*3.2 By-laws.
+4. Specimen Stock Certificate.
+5. Opinion of Nutter, McClennen & Fish, LLP.
+8. Tax Opinion of Nutter, McClennen & Fish, LLP.
*10.1 Subscription Agreement dated as of March 22, 1996 between SDN
Bancorp, Inc. and Dartmouth Capital Group, L.P. for shares of
SDN Bancorp, Inc. common stock.
*10.2 Subscription Agreement dated as of March 22, 1996 between SDN
Bancorp, Inc. and Dartmouth Capital Group, L.P. for shares of
SC Acquisition Corp.. common stock.
*10.3 Lease Agreement for 7777 Center Avenue, Huntington Beach,
California between Alvamij Huntington Beach, Inc. as Landlord,
and Liberty National Bank, as Tenant, dated August 20, 1981 and
amended February 14, 1986.
*10.4 Lease Agreement for 17011 Beach Boulevard, Huntington Beach,
California between Liu Corp., as Landlord, and Liberty National
Bank, as Tenant, dated December 15, 1995.
*10.5 Employment Agreement between Liberty National Bank and Philip
S. Inglee dated July 20, 1995.
*10.6 Employment Agreement between Liberty National Bank and Richard
I. Ganulin dated March 1, 1995.
*10.7 Employment Agreement between Liberty National Bank and Curt A.
Christianssen dated October 22, 1993 and amended August 17,
1995.
*10.8 Employment Agreement between Liberty National Bank and
Catherine C. Clampitt dated April 1, 1995.
+10.9 Employment Agreement between SDN Bancorp, Inc. and Robert P.
Keller dated as of October 1, 1995.
*10.10 Agreement to Provide Construction Inspection Services between
Liberty National Bank and J. Donald Hartfelder.
+10.11 1996 Stock Option Plan.
+11. Statement regarding computation of per share earnings
*21. List of Subsidiaries.
*23.1 Consent of Price Waterhouse LLP as to SDN Bancorp, Inc.
*23.2 Consent of Deloitte & Touche LLP as to SDN Bancorp, Inc.
*23.3 Consent of Arthur Andersen as to Liberty National Bank.
*23.4 Consent of Deloitte & Touche LLP as to Commerce Security Bank.
+23.5 Consent of Carpenter & Company.
<PAGE>
+23.6 Consent of Nutter, McClennen & Fish, LLP (included in Exhibit 5
and Exhibit 8, respectively).
23.7 Consent of Director nominee Peter H. Paulsen.
*24. Power of Attorney (contained on Page II-5 of the Registration
Statement).
- -------------
* Filed herewith.
+ To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
SC ACQUISITION CORP.
1. NAME. The name of the corporation is SC Acquisition Corp.
2. REGISTERED OFFICE AND AGENT. The address of the registered office of
the corporation in the State of Delaware is Corporation Trust Center, 1209
Orange Street, Wilmington, in the County of New Castle. The registered agent
at such address is The Corporation Trust Company.
3. PURPOSE. The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
4. CAPITALIZATION. The corporation shall be authorized to issue the
following capital stock:
<TABLE>
<CAPTION>
NUMBER
CLASS PAR VALUE AUTHORIZED
<S> <C> <C>
Common Stock $.01 1,500
Preferred Stock $.01 1,500
</TABLE>
5. PREFERRED STOCK. The Board of Directors is expressly authorized to
provide for the issuance of all or any shares of the Preferred Stock, in one
or more series, and to fix for each such series such number of shares of
stock thereof and such voting powers, full or limited, or no voting powers,
and such designations, preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions
thereof, as shall be set forth in the resolution or resolutions adopted by
the Board of Directors providing for the issue of such series and as may be
permitted by the General Corporation Law of the State of Delaware.
6. INCORPORATOR. The name and mailing address of the incorporator is:
David Shea
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110-2699
7. COMPROMISES OR ARRANGEMENTS. Whenever a compromise or arrangement is
proposed between this corporation and its creditors or any class of them
and/or between this corporation and its stockholders or any class of them,
any court of equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers
appointed for this corporation under the provisions of section 291 of Title 8
of the Delaware Code or on the application of trustees in dissolution or of
any receiver or receivers appointed for this corporation under the provisions
of section 279 of Title 8 of the Delaware Code, order a meeting
<PAGE>
of the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may
be, agree to any compromise or arrangement and to any reorganization of this
corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
8. BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. The corporation
expressly elects not to be governed by Section 203 of the Delaware General
Corporation Law.
9. BY-LAWS. The Board of Directors may adopt, amend or repeal the
By-laws of the corporation, except that any By-law adopted by the
stockholders may be altered or repealed only by the stockholders if such
By-law so provides.
10. ELECTIONS. The election of directors by the stockholders need not be
by written ballot unless the By-laws of the corporation provide otherwise.
11. PERSONAL LIABILITY OF DIRECTORS. No director shall be personally
liable to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except to the extent that such exculpation
from liability is not permitted under the Delaware General Corporation Law as
the same exists or may be hereafter amended. This provision shall not
eliminate the liability of a director for any act or omission occurring prior
to the date upon which this provision becomes effective. No amendment to or
repeal of this provision shall apply to or have any effect on the liability
or alleged liability of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, the undersigned has executed this instrument on May
10, 1996.
/s/ DAVID SHEA
----------------------------------
David Shea
Incorporator
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
SC ACQUISITION CORP.
ARTICLE I
STOCKHOLDERS
Section 1. ANNUAL MEETING. An annual meeting of the stockholders of
the corporation, for the election of the Directors to succeed those whose
terms expire and for the transaction of such other business as may properly
come before the meeting, shall be held on the first Wednesday in April of
each year (or if that be a legal holiday in the place where the meeting is to
be held, on the next succeeding full business day) at the hour stated in the
notice of the meeting. If the annual meeting of the stockholders is not held
on such date, the Directors shall cause the meeting to be held as soon
thereafter as convenient.
Section 2. SPECIAL MEETINGS. Special meetings of the stockholders may
be called by the President or by order of the Board of Directors, and shall
be called by the Secretary (or in the case of the death, absence, incapacity
or refusal of the Secretary, by any other officer) upon written application
by one or more stockholders owning shares of the capital stock of the
corporation which represent at least 10 percent of the votes entitled to be
cast at the meeting.
Section 3. PLACE AND HOUR OF MEETINGS. All meetings of stockholders
shall be held at the principal office of the corporation at 10:00 a.m., local
time unless a different place or hour is fixed by the person or persons
calling the meeting and stated in the notice of the meeting.
Section 4. NOTICES OF MEETINGS AND ADJOURNED MEETINGS. A written notice
of each annual or special meeting of the stockholders stating the place,
date, and hour thereof, shall be given by the Secretary (or the person or
persons calling the meeting), not less than 10 nor more than 60 days before
the date of the meeting, to each stockholder entitled to vote thereat, by
leaving such notice with such stockholder or at his or her residence or usual
place of business, or by depositing it postage prepaid in the United States
mail, directed to each stockholder at his or her address as it appears on the
records of the corporation. This notice of a special meeting of the
stockholders shall state the purpose or purposes for which the meeting is
called. An affidavit of the Secretary, Assistant Secretary, or transfer agent
of the corporation that the notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. No notice need be
given to any person with whom communication is unlawful or to any person who
has waived such notice (a) in writing (which writing need not specify the
business to be
1
<PAGE>
transacted at, or the purpose of, the meeting) signed by such person before
or after the time of the meeting, or (b) by attending the meeting except for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. No notice need be given to any person to whom (a) notice of two
consecutive annual meetings, and all notices of meetings or of a taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (b) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a 12 month period, have been mailed addressed to such person at his or
her address as shown on the records of the corporation, have been returned
undeliverable. If any such person shall deliver to the corporation a written
notice setting forth his or her then current address, the requirement that
notice be given to such person in accordance with this Section 4 shall be
reinstated. When a meeting is adjourned to another time and place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken except that, if
the adjournment is for more than 30 days or if, after the adjournment, a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given in the manner provided in this Section 4.
Section 5. QUORUM. At any meeting of the stockholders, a quorum for
the transaction of business shall consist of one or more individuals
appearing in person or represented by proxy and owning or representing a
majority of the shares of the corporation then outstanding and entitled to
vote, provided that less than such quorum shall have power to adjourn the
meeting from time to time.
Section 6. VOTING. Unless otherwise provided in the Certificate of
Incorporation and subject to the provisions of Section 10 of this Article I,
each stockholder shall have one vote for each share of capital stock entitled
to vote held by such stockholder according to the records of the corporation.
Persons holding stock in a fiduciary capacity shall be entitled to vote the
shares so held. Persons whose stock is pledged shall be entitled to vote
unless in the transfer by the pledgor on the books of the corporation the
pledgor has expressly empowered the pledgee to vote the pledged shares, in
which case only the pledgee or the pledgee's proxy shall be entitled to vote.
Section 7. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or
her by proxy, but no such proxy shall be voted or acted upon after eleven
months from its date, unless the proxy provides for a longer period.
Section 8. ACTION AT MEETING. When a quorum is present at any meeting,
action of the stockholders on any matter properly brought before such meeting
shall require, and may be effected by, the affirmative vote of the holders of
shares of capital stock present in person or represented by proxy, which
shares represent a majority of the votes cast on any matter, except where a
different vote is required by law, the Certificate of Incorporation or these
2
<PAGE>
By-laws. If the Certificate of Incorporation so provides, no ballot shall be
required for any election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.
Section 9. STOCKHOLDER LISTS. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least 10 days before
every meeting of stockholders, a complete list of stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected
by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by this section or the books of the corporation, or to vote
in person or by proxy at any meeting of stockholders.
Section 10. RECORD DATE.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment therefor, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any other action.
(b) If no record date is fixed:
(1) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(2) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on
which the first such written consent is expressed.
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(3) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 11. ACTION BY WRITTEN CONSENT. Any action required by law to
be taken at any annual or special meeting of stockholders of the corporation,
or any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders
who have not consented in writing; such consent shall be effective as of the
date stated therein and shall be filed with the minutes of the meeting of the
stockholders.
ARTICLE II
DIRECTORS
Section 1. POWERS. The business and affairs of the corporation shall
be managed by or under the direction of the Board of Directors.
Section 2. NUMBER OF DIRECTORS. The Board of Directors shall consist
of not less than 6 nor more than 11 persons. The number of Directors is
initially fixed at 7, and may be increased or decreased by the Board of
Directors at any time.
Section 3. ELECTION AND TENURE. Each Director shall be elected by
plurality vote of the stockholders at the annual meeting of stockholders or
as provided in Section 5 of this Article II. In the event of a failure to
elect Directors at an annual meeting of the stockholders, the Directors may
be elected at any regular or special meeting of the stockholders entitled to
vote for election of Directors, provided that notice of such meeting shall
contain mention of such purpose. Each Director shall serve until the date
fixed in these By-laws for the next annual meeting of stockholders after such
Director's election and thereafter until his or her successor is elected and
qualified, or until his or her earlier resignation or removal.
Section 4. QUALIFICATION. No Director need be a stockholder.
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Section 5. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies and
newly created Directorships resulting from any increase in the authorized
number of Directors may be filled by a majority of the Directors then in
office, although less than a quorum, or by a sole remaining Director. When
one or more Directors shall resign from the Board, effective at a future
date, a majority of Directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies by vote to take
effect when such resignation or resignations shall become effective.
Section 6. REMOVAL. Any Director or the entire Board of Directors may
be removed, with or without cause, at any time upon the affirmative vote by
the holders of a majority the shares then entitled to vote at an election of
the Directors. Any vacancy in the Board caused by any such removal may (but
need not be) filled in the manner provided in Section 5 of Article II.
Section 7. RESIGNATION. Any Director of the corporation may resign at
any time by giving written notice to the Board of Directors, to the Chairman
of the Board, if any, to the President, or to the Secretary, and any member
of a committee may resign therefrom at any time by giving notice as aforesaid
or to the chairman or secretary of such committee. Any such resignation shall
take effect at the time specified therein, or, if the time be not specified,
upon receipt thereof; and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 8. ANNUAL MEETING. Immediately after each annual meeting of
stockholders and at the place thereof, if a quorum of the Directors is
present, there shall be a meeting of the Directors without notice.
Section 9. REGULAR MEETINGS. Regular meetings of the Directors may be
held at such times and places as shall from time to time by fixed by
resolution of the Board and no notice need be given of regular meetings held
at times and places so fixed, PROVIDED, HOWEVER, that any resolution relating
to the holding of regular meetings shall remain in force only until the next
annual meeting of stockholders and that, if at any meeting of Directors at
which a resolution is adopted fixing the times or place or places for any
regular meetings any Director is absent, no meeting shall be held pursuant to
such resolution without notice to or waiver by such absent Director pursuant
to Section 11 of this Article II.
Section 10. SPECIAL MEETINGS. Special meetings of the Directors may be
called by the Chairman of the Board (if any), the President, or by any two
Directors, and shall be held at the place and on the date and hour designated
in the call thereof.
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Section 11. NOTICES. Notices of any special meeting of the Directors
shall be given by the Secretary or an Assistant Secretary to each Director,
by mailing to him, postage prepaid, and addressed to such Director at his or
her address as registered on the books of the corporation, or if not so
registered at his or her last known home or business address, a written
notice of such meeting at least four days before the meeting, or by sending
notice of such meeting to him by prepaid telegram addressed to him at such
address, or by actual delivery of such notice to him personally or by
telephone, facsimile, telex or cable at least 48 hours before the meeting. In
the absence of all such officers, such notice may be given by the officer or
one of the Directors calling the meeting. Notice need not be given to any
Director who has waived notice (a) in writing executed by him before or after
the meeting and filed with the records of the meeting, or (b) by attending
the meeting except for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. A notice or waiver of notice of a meeting of the
Directors need not specify the business to be transacted at or the purpose of
the meeting.
Section 12. QUORUM. At any meeting of the Directors a majority of the
total number of Directors fixed pursuant to Section 2 of Article II shall
constitute a quorum for the transaction of business; provided always that any
number of Directors (whether one or more and whether or not constituting a
quorum) present at any meeting or at any adjourned meeting may adjourn such
meeting, provided that all absent Directors receive or waive notice pursuant
to Section 11 of Article II of any such adjournment that exceeds four
business days.
Section 13. ACTION AT MEETING. At any meeting of the Directors at
which a quorum is present, the action of the Directors on any matter brought
before the meeting shall be decided by vote of a majority of those present,
unless a different vote is required by law, the Certificate of Incorporation,
or these By-laws.
Section 14. ACTION BY WRITTEN CONSENT. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or
committee.
Section 15. TELEPHONE MEETINGS. Members of the Board of Directors, or
any committee thereof, may participate in a meeting of such Board or
committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 15 shall
constitute presence in person at such meeting.
Section 16. PLACE OF MEETINGS. The Board of Directors may hold its
meetings, and have an office or offices, within or without the State of
Delaware.
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Section 17. COMPENSATION. The Board of Directors shall have the
authority to fix the compensation of Directors.
Section 18. COMMITTEES.
(a) The Board of Directors may, by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist
of one or more of the Directors of the corporation. The Board may designate
one or more Directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not he, she or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any
such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property or assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the By-laws of the corporation. Such
a committee may, to the extent expressly provided in the resolution of the
Board of Directors, have the power or authority to declare a dividend or to
authorize the issuance of stock.
(b) At any meeting of any committee, a majority of the whole committee
shall constitute a quorum and, except as otherwise provided by statute, by
the Certificate of Incorporation, or by these By-laws, the affirmative vote
of at least a majority of the members present at a meeting at which there is
a quorum shall be the act of the committee.
(c) Each committee, except as otherwise provided by resolution of the
Board of Directors, shall fix the time and place of its meetings within or
without the State of Delaware, shall adopt its own rules and procedures, and
shall keep a record of its acts and proceedings and report the same from time
to time to the Board of Directors.
ARTICLE III
OFFICERS
Section 1. OFFICERS AND THEIR ELECTION. The officers of the
corporation shall be a President, a Secretary, a Treasurer and such Vice
Presidents, Assistant Secretaries, Assistant
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Treasurers and other officers as the Board of Directors may from time to time
determine and elect or appoint. The Board of Directors may appoint one of its
members to the office of Chairman of the Board and another of its members to
the office of Vice-Chairman of the Board and from time to time define the
powers and duties of these offices notwithstanding any other provisions of
these By-laws. The President, the Secretary and the Treasurer shall be
elected by the Board of Directors at its annual meeting or at the first
meeting of the Board after the date fixed by these By-laws therefor and may,
but need not, be members of the Board of Directors. Two or more offices may
be held by the same person.
Section 2. TERM OF OFFICE. The President, the Treasurer and the
Secretary shall, unless sooner removed under the provisions of these By-laws,
hold office until the next annual election of officers and thereafter until
their respective successors are elected and qualified or until their earlier
resignation or removal. All other officers shall hold office for such term as
shall be determined from time to time by the Board of Directors.
Section 3. VACANCIES. Any vacancy at any time existing in any office
may be filled by the Directors.
Section 4. PRESIDENT. The President shall be the chief executive
officer of the corporation except as the Board of Directors may otherwise
provide. It shall be the President's duty and he or she shall have the power
to see that all orders and resolutions of the Board of Directors are carried
into effect. He or she shall from time to time report to the Board of
Directors all matters within his or her knowledge which the interests of the
corporation may require to be brought to its notice. The President, when
present, shall preside at all meetings of the stockholders and the Board of
Directors, unless otherwise provided by the Board of Directors. The President
shall perform such duties and have such powers additional to the foregoing as
the Board of Directors shall designate.
Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any,
shall have the powers and duties expressly designated in these By-laws and
shall perform such duties and have such powers additional thereto as the
Board of Directors shall designate.
Section 6. VICE PRESIDENTS. In the absence or disability of the
President, the President's powers and duties shall be performed by the Vice
President, if only one, or, if more than one, by the one designated for the
purpose of the Board of Directors. Each Vice President shall perform such
duties and have such powers additional to the foregoing as the Board of
Directors shall designate.
Section 7. TREASURER. The Treasurer shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation
and shall deposit all monies and other valuable effects in the name and to
the credit of the corporation in such depositories as shall be designated by
the Board of Directors or in the absence of such designation in such
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depositories as he or she shall from time to time deem proper. The Treasurer
shall disburse the funds of the corporation as shall be ordered by the Board
of Directors, taking proper vouchers for such disbursements. The Treasurer
shall promptly render to the President and to the Board of Directors such
statements of his or her transactions and accounts as the President and Board
of Directors respectively may from time to time require. The Treasurer shall
perform such duties and have such powers additional to the foregoing as the
Board of Directors may designate.
Section 8. ASSISTANT TREASURERS. In the absence or disability of the
Treasurer, the Treasurer's powers and duties shall be performed by the
Assistant Treasurer, if only one, or if more than one, by the one designated
for the purpose by the Board of Directors. Each Assistant Treasurer shall
perform such duties and have such powers additional to the foregoing as the
Board of Directors shall designate.
Section 9. SECRETARY. The Secretary shall issue notices of all
meetings of stockholders, of the Board of Directors and of committees thereof
where notices of such meetings are required by law or these By-laws. The
Secretary shall record the proceedings of the meetings of the stockholders
and of the Board of Directors and shall be responsible for the custody
thereof in a book to be kept for that purpose. The Secretary shall also
record the proceedings of the committees of the Board of Directors unless
such committees appoint their own respective secretaries. Unless the Board of
Directors shall appoint a transfer agent and/or registrar, the Secretary
shall be charged with the duty of keeping, or causing to be kept, accurate
records of all stock outstanding, stock certificates issued and stock
transfers. The Secretary shall sign such instruments as require his or her
signature. The Secretary shall have custody of the corporate seal and shall
affix and attest such seal on all documents whose execution under seal is
duly authorized. In the Secretary's absence at any meeting, an Assistant
Secretary or the Secretary pro tempore shall perform his or her duties
thereat. The Secretary shall perform such duties and have such powers
additional to the foregoing as the Board of Directors shall designate.
Section 10. ASSISTANT SECRETARIES. In the absence or disability of the
Secretary, the Secretary's powers and duties shall be performed by the
Assistant Secretary, if only one, or, if more than one, by the one designated
for the purpose by the Board of Directors. Each Assistant Secretary shall
perform such duties and have such powers additional to the foregoing as the
Board of Directors shall designate.
Section 11. SALARIES. The salaries and other compensation of officers,
agents and employees shall be fixed from time to time by or under authority
from the Board of Directors. No officer shall be prevented from receiving a
salary or other compensation by reason of the fact that such Officer is also
a Director of the corporation.
Section 12. REMOVAL. The Board of Directors may remove any officer,
either with or without cause, at any time.
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Section 13. BOND. The corporation may secure the fidelity of any or
all of its officers or agents by bond or otherwise.
Section 14. RESIGNATIONS. Any officer, agent or employee of the
corporation may resign at any time by giving written notice to the Board of
Directors, to the Chairman of the Board, if any, to the President or to the
Secretary of the corporation. Any such resignation shall take effect at the
time specified therein, or, if the time be not specified, upon receipt
thereof; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
ARTICLE IV
CAPITAL STOCK
Section 1. STOCK CERTIFICATES AND UNCERTIFICATED SHARES. The shares of
the corporation shall be represented by certificates, unless the Board of
Directors of the corporation provides by resolution or resolutions that some
or all of any or all classes or series of its stock shall be uncertificated
shares. Any such resolution shall not apply to shares represented by a
certificate until such certificate is surrendered to the corporation.
Notwithstanding the adoption of such resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every
holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the Chairman or Vice Chairman
of the Board of Directors, or the President or Vice President, and by the
Treasurer and/or Assistant Treasurer, or the Secretary or an Assistant
Secretary of the corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
Section 2. CLASSES OF STOCK. If the corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
face or back of each certificate issued by the corporation to represent such
class or series shall either (a) set forth in full or summarize the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions thereof, or (b) contain a
statement that the corporation will furnish a statement of the same without
charge to each stockholder who so requests.
Section 3. TRANSFER OF STOCK. Shares of stock shall be transferable on
the books of the corporation pursuant to applicable law and such rules and
regulations as the Board of Directors shall from time to time prescribe. The
Board of Directors may at any time or from
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time to time appoint a transfer agent or agents or a registrar or registrars
for the transfer or registration of shares of stock.
Section 4. HOLDERS OF RECORD. Prior to the due presentment for
registration of transfer the corporation may treat the holder of record of a
share of its stock as the complete owner thereof exclusively entitled to
vote, to receive notifications and otherwise entitled to all the rights and
powers of a complete owner thereof, notwithstanding notice to the contrary.
Section 5. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES. The Board of
Directors may direct a new stock certificate or certificates or
uncertificated shares to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen, or destroyed upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board
of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates or his or her legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be
made against the corporation on account of the alleged loss, theft, or
destruction, of such certificates or the issuance of such new certificate or
uncertificated shares.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation
shall indemnify, to the fullest extent permitted by the General Corporation
Law of the State of Delaware as presently in effect or as hereafter amended:
(a) Subject to the provisions of Section 9 of this Article V, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative and whether external or
internal to the corporation (other than by action by or in the right of
the corporation) by reason of the fact that he is or was a Director or
officer of the corporation or is or was serving at the request of the
corporation as a Director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such suit, action or
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner
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which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a Director or officer of the
corporation, or is or was serving at the request of the corporation as a
Director or officer of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees)
and amounts paid in settlement actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery of
the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 2. INDEMNIFICATION OF EMPLOYEES AND OTHERS. The Board of
Directors, in its discretion, may authorize the corporation to indemnify to
the fullest extent permitted by the General Corporation Law of the State of
Delaware (as presently in effect or as hereafter amended):
(a) Subject to the provisions of Section 9 of this Article V, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the corporation) by reason of the fact that he is or
was an employee or agent of the corporation, or is or was serving at the
request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such suit, action or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
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(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was an employee or agent of the corporation,
or is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) and amounts paid
in settlement actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnify for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 3. DETERMINATION TO INDEMNIFY. Any indemnification under this
Article V (unless required by law or ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in Sections 1 and 2 of this Article V. Such determination shall be made (i)
by the Board of Directors by a majority vote of a quorum consisting of
Directors who were not parties to such action, suit or proceedings or (ii)
if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders of the corporation.
Section 4. ADVANCES OF EXPENSES. Expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of the
Director or officer to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation as authorized in
this Article V. Any advance under this Section 4 shall be made promptly, and
in any event within ninety days, upon the written request of the person
seeking the advance.
Section 5. NON-EXCLUSIVE RIGHT; CONTRACTUAL NATURE. The
indemnification and advancement of expenses provided by, or granted pursuant
to, the other Sections of this Article V shall not be deemed exclusive of any
other rights to which any person, whether or not entitled to be indemnified
under this Article V, may be entitled under any statute, by-law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office. Each person who is or becomes a Director or officer as described
in Section 1 of this Article V shall be deemed to have served or to have
continued to serve in such capacity in reliance upon the indemnity
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provided for in this Article V. All rights to indemnification under this
Article V shall be deemed to be provided by a contract between the
corporation and the person who serves as a Director or officer of the
corporation at any time while these by-laws and other relevant provisions of
the General Corporation Law of the State of Delaware and other applicable
law, if any, are in effect. Any repeal or modification thereof shall not
affect any rights or obligations then existing.
Section 6. INSURANCE. The Board of Directors may at any time and from
time to time cause the corporation to purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of the General
Corporation Law of the State of Delaware (as presently in effect or hereafter
amended), the Certificate of Incorporation of the corporation or these
By-laws.
Section 7. ONE RECOVERY. The corporation's indemnification under
Sections 1 and 2 of this Article V of any person who is or was a Director,
officer, employee or agent of the corporation, or is or was serving, at the
request of the corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall be reduced by any amounts such person receives as indemnification (i)
under any policy of insurance purchased and maintained on his behalf by the
corporation, (ii) from such other corporation, partnership, joint venture,
trust or other enterprise, or (iii) under any other applicable
indemnification provision.
Section 8. CERTAIN PRESUMPTIONS. In addition to and without limiting
the foregoing provisions of this Article V and except to the extent otherwise
required by law, any person seeking indemnification under or pursuant to
Section 1 of this Article V shall be deemed and presumed to have met the
applicable standard of conduct set forth in Section 1 unless the contrary
shall be established.
Section 9. CLAIMS PROCEDURE.
(a) In addition to and without limiting the foregoing provisions of
this Article V and except to the extent otherwise required by law, (a) it
shall be a condition of the corporation's obligation to indemnify under
Sections 1(a) and 2(a) of this Article V (in addition to any other
condition in these By-laws or by law provided or imposed) that the person
asserting, or proposing to assert, the right to be indemnified, promptly
after receipt of notice of commencement of any action, suit or proceeding
in respect of which a claim for indemnification is or is to be made
against the corporation, notify the corporation of the commencement of
such action, suit or proceeding in respect of which a claim for
indemnification is or is to be made against the corporation, notify the
corporation of the commencement of such action, suit or proceeding,
including therewith a copy of all papers served and the name of counsel
retained or to be retained by such
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person in connection with such action, suit or proceeding, and
thereafter to keep the corporation timely and fully apprised of all
developments and proceedings in connection with such action, suit or
proceeding or as the corporation shall request, and (b) the fees and
expenses of any counsel retained by a person asserting, or proposing to
assert, the right to be indemnified under Section 1(a) or 2(a) of this
Article V shall be at the expense of such person unless the counsel
retained shall have been approved by the corporation in writing.
(b) If a claim for indemnification or advancement of expenses under
this Article V is not paid in full by the corporation within 90 days after
a written claim therefor has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim.
Section 10. RULES OF INTERPRETATION. For purposes of this Article V,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person
with respect to any employee benefit plan; and references to "serving at the
request of the corporation" shall include any service by a Director or
officer of the corporation which imposes duties on, or involves services by,
such person with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this Article V.
Section 11. EXPENSES. To the extent that a Director, officer, agent or
employee of the corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section 1 or in
Section 2, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 12. CONTINUING BENEFIT. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article V shall continue
as to a person who has ceased to be a Director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 13. SEVERABILITY. If any term or provision of this Article V
or the application thereof to any person, property or circumstance shall to
any extent be invalid or unenforceable, the remainder of this Article V or
the application of such term or provision to persons, property or
circumstances other than those as to which it is invalid or unenforceable
shall not be affected thereby, and each term and provision of this Article V
shall be valid and enforced to the fullest extent permitted by law.
15
<PAGE>
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. INTERESTED DIRECTORS AND OFFICERS.
(a) No contract or transaction between the corporation and one or more
of its Directors or officers, or between the corporation and any other
corporation, partnership, association or other organization in which one
or more of its Directors or officers are Directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or
solely because the Director or officer is present at or participates in
the meeting of the Board or committee thereof which authorizes the contract
or transaction, or solely because his, her or their votes are counted for
such purpose, if:
(1) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested Directors, even
though the disinterested Directors be less than a quorum; or
(2) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
shareholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the shareholders.
(b) Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
Section 2. STOCK IN OTHER CORPORATIONS. Subject to any limitations that
may be imposed by the Board of Directors, the President or any person or
persons authorized by the Board of Directors may, in the name and on behalf
of the corporation, (a) call meetings of the holders of stock or other
securities of any corporation or other organization, stock or other
securities of which are held by this corporation, (b) act, or appoint any
other person or persons (with or without powers of substitution) to act in
the name and on behalf of the corporation, or (c) express consent or dissent,
as a holder of such securities, to corporate or other action by such other
corporation or organization.
16
<PAGE>
Section 3. CHECKS, NOTES, DRAFTS AND OTHER INSTRUMENTS. Checks, notes,
drafts and other instruments for the payment of money drawn or endorsed in
the name of the corporation may be signed by any officer or officers or
person or persons authorized by the Board of Directors to sign the same,
which authorization may be general or may be confined to one or more specific
instances. No officer or person shall sign any such instrument as aforesaid
unless authorized by the Board of Directors to do so.
Section 4. CORPORATE SEAL. The seal of the corporation shall be
circular in form, bearing the name of the corporation, the word "Delaware",
and the year of incorporation, and the same may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
Section 5. FISCAL YEAR. The fiscal year of the corporation shall be
the year ending with December 31.
Section 6. BOOKS AND RECORDS. The books, accounts and records of the
corporation, except as may be otherwise required by the laws of the State of
Delaware, may be kept outside of the State of Delaware, at such place or
places as the Board of Directors may from time to time appoint. Except as may
otherwise be provided by law, the Board of Directors shall determine whether
and to what extent the books, accounts, records and documents of the
corporation, or any of them, shall be open to the inspection of the
stockholders.
Section 7. SEPARABILITY. If any term or provision of the By-laws, or
the application thereof to any person or circumstances or period of time,
shall to any extent be invalid or unenforceable, the remainder of the By-laws
shall be valid and enforced to the fullest extent permitted by law.
Section 8. AMENDMENTS. The By-laws may be amended or repealed by the
stockholders or, if such power is conferred by the Certificate of
Incorporation, by the Board of Directors, except that any By-law added or
amended by the stockholders may be altered or repealed only by the
stockholders if such By-law expressly so provides.
17
<PAGE>
SDN BANCORP, INC.
COMMON STOCK
SUBSCRIPTION AGREEMENT
March 22, 1996
SDN Bancorp, Inc.
135 Saxony Road
Encinitas, California 92023-0926
Attn: Robert P. Keller, President and Chief Executive Officer
Dear Sirs:
1. Introduction. SDN Bancorp, Inc., a Delaware corporation and bank
holding company ("SDN"), is offering to Dartmouth Capital Group, L.P., a
Delaware limited partnership ("DCG" or the "Subscriber"), shares of SDN's
Common Stock, par value $0.01 per share (the "Common Stock") (hereinafter,
the shares of Common Stock may be referred to as the "Shares").
SDN has agreed to acquire Liberty National Bank in a
transaction (the "Liberty Acquisition") anticipated to be
consummated as of on or about March 31, 1996. SDN further intends
in the near future to enter into a certain Agreement and Plan of
Reorganization with Commerce Security Bank ("CSB") (as hereafter
executed, and as may be thereafter amended, the "Reorganization
Agreement"), pursuant to which SDN will agree to acquire CSB (the
"CSB Acquisition") through a holding company to be formed
contemporaneously with such acquisition. DCG desires to commit to
purchase Shares on the terms provided hereinafter to fund SDN's
acquisition of Liberty and CSB.
DCG hereby agrees with SDN as follows:
2. Purchase, Sale, Payment and Delivery of the Shares. The
Subscriber hereby irrevocably subscribes for, and commits to purchase from
SDN (i) $13,400,100 (the "Liberty Commitment Amount") of Shares at or before
the closing of the Liberty Acquisition, and (ii) up to $16.0 million (the
"CSB Commitment Amount") of Shares at or before the closing of the CSB
Acquisition. The price per share will in both cases be $3.95 (the "Purchase
Price"), the book value per share of Common Stock at December 31, 1995.
3. Notice of Amount to be Funded. The number of Shares to be
purchased in connection with the Liberty Acquisition is a fixed amount equal
to the Liberty Commitment Amount divided by the Purchase Price. Within a
reasonable period prior to the anticipated Closing Date of the CSB
Acquisition, SDN will deliver to the Subscriber a written notice (a "CSB
Acquisition Funding Notice") indicating the number of Shares to be purchased
by the Subscriber
<PAGE>
in connection with the CSB Acquisition (the "CSB Purchase Amount"), up to the
Commitment Amount, and instructing the Subscriber to deliver the payment for
the CSB Purchase Amount into an account maintained by SDN or its agent.
4. Payment. The Subscriber agrees to transfer payment equal
to the Liberty Commitment Amount to an account specified by SDN, in
immediately available funds, not later than March 27, 1996. SDN
shall deliver to the Subscriber or the Subscriber's designee(s),
promptly following receipt of the foregoing payment, certificate(s)
evidencing the Shares purchased. Not less than three (3) business
days after the delivery of any CSB Acquisition Funding Notice (or
such longer period as SDN may specify in such CSB Acquisition
Funding Notice), the Subscriber shall transfer payment for the CSB
Purchase Amount to the account specified in such CSB Acquisition
Funding Notice, in immediately available funds. SDN shall deliver
to the Subscriber or the Subscriber's designee(s), promptly
following receipt of such funds, certificate(s) evidencing the
Shares purchased.
5. Successors. This Agreement shall inure to the benefit of and be
binding upon SDN, the Subscriber and their respective successors and
permitted assigns. Nothing expressed herein is intended or shall be
construed to give any person other than the persons referred to in the
preceding sentence any legal or equitable right, remedy or claim under or in
respect of this Agreement.
6. Termination. This Agreement shall terminate, without action by
either party, upon the earliest to occur of the following: (i) the
termination of the January 24, 1996 Letter of Intent between SDN and CSB in
accordance with it terms; provided, however, that if the Liberty Acquisition
has not been consummated as of such time, this Agreement shall not terminate
until the next business day following the consummation or earlier abandonment
of the Liberty Acquisition; or (ii) the termination of the Reorganization
Agreement in accordance with its terms.
7. APPLICABLE LAW. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO CONFLICT OF LAWS PROVISIONS THEREOF.
* * *
-2-
<PAGE>
Very truly yours,
DARTMOUTH CAPITAL GROUP, L.P.
By: Dartmouth Capital Group, Inc.
Its General Partner
By:_________________________________
Name: Robert P. Keller
Title: President
This Subscription Agreement is hereby
confirmed and accepted as of the date first
above written.
SDN BANCORP, INC.
By:_______________________________________
Name: Robert P. Keller
Title: President and Chief Executive Officer
-3-
<PAGE>
SDN BANCORP, INC.
COMMON STOCK
SUBSCRIPTION AGREEMENT
March 22, 1996
SDN Bancorp, Inc.
135 Saxony Road
Encinitas, California 92023-0926
Attn: Robert P. Keller, President and Chief Executive Officer
Dear Sirs:
1. Introduction. SDN Bancorp, Inc., a Delaware corporation and bank
holding company ("SDN"), is offering to Dartmouth Capital Group, L.P., a
Delaware limited partnership ("DCG" or the "Subscriber"), shares of Common
Stock, par value $0.01 per share (the "Holdco Common Stock"), of a corporate
successor and intended holding company to SDN, in organization ("Holdco").
Hereinafter, the shares of Common Stock offered hereunder may be referred to
as the "Holdco Shares". Capitalized terms used in this letter and not
otherwise defined shall have the respective meanings assigned to them in that
certain Agreement and Plan of Reorganization between SDN and Commerce
Security Bank ("CSB") anticipated to be executed within the near future (as
hereafter executed, and as may be thereafter amended, the "Reorganization
Agreement").
SDN intends, by its execution of the Reorganization Agreement, to agree
to form Holdco and to cause Holdco to acquire CSB. DCG has entered into
another Subscription Agreement (the "SDN Stock Subscription") substantially
simultaneously herewith pursuant to which DCG has agreed to purchase up to
$16.0 million (the "CSB Commitment Amount") of SDN common stock to provide
funds to SDN for SDN to consummate the Reorganization.
In the event of a Dissenting Share Capital Shortfall (as hereinafter
defined) arising from the contingencies described in Section 2 below, Holdco
may require funds after the Closing. DCG desires to commit, solely in the
event of such a Dissenting Share Capital Shortfall and solely to the extent
required herein, to purchase Holdco Shares on the terms provided herein.
DCG hereby agrees with SDN as follows:
2. Funding Contingencies. This Subscription Agreement is intended to
provide funds to Holdco solely in the event that Holdco requires additional
capital in order to make payments to holders of Dissenting CSB Shares in
connection with the Reorganization where, in the absence of such additional
capital, such payments would cause one or more of Holdco's
<PAGE>
capital ratios levels to fall to levels below those mandated by prudent
banking practice or by any agreement with any bank regulator that is binding
upon Holdco (a "Dissenting Share Capital Shortfall"). DCG's obligations
hereunder shall accrue only if Holdco has determined, in its reasonable
discretion, that there exists such a Dissenting Share Capital Shortfall.
3. Purchase, Sale, Payment and Delivery of the Shares. DCG hereby
irrevocably subscribes for, and commits to purchase from Holdco, an amount
(the "Purchase Amount") equal to the lesser of the Dissenting Share Capital
Shortfall or the arithmetic difference between the CSB Commitment Amount and
the amount actually funded by DCG to SDN in contemplation of the
Reorganization pursuant to the SDN Stock Subscription. The price per share
will be $3.95, the book value per share of the Common Stock at December 31,
1995.
3. Funding Notices. In the event that Holdco determines that
there exists a Dissenting Share Capital Shortfall, Holdco will deliver to the
Subscriber one or more written notices ("Funding Notices") indicating the
basis for its determination of the existence and amount the Dissenting Share
Capital Shortfall and the Purchase Amount, and instructing the Subscriber to
deliver the payment for the Purchase Amount into an account maintained by
Holdco or its agent.
4. Payment. Not less than three (3) business days after the delivery
of any Funding Notice (or such longer period as Holdco may specify in such
Funding Notice), the Subscriber shall transfer payment for the Purchase
Amount to the account specified therein in immediately available funds.
Holdco shall deliver to the Subscriber and/or the Subscriber's designee(s),
promptly following receipt of the Subscriber's payment for Shares,
certificate(s) evidencing the Shares purchased.
5. Successors. This Agreement shall inure to the benefit of and be
binding upon SDN, Holdco (upon its formation), the Subscriber and their
respective successors and permitted assigns. SDN agrees to cause Holdco to
execute a counterpart of this Agreement promptly following upon Holdco's
formation, whereupon Holdco will be deemed to have ratified this Agreement
and agree to be bound by this Agreement in all respects. Nothing expressed
herein is intended or shall be construed to give any person other than the
persons referred to in the two preceding sentences any legal or equitable
right, remedy or claim under or in respect of this Agreement.
7. Termination. This Agreement shall terminate, without action by
either party, upon the earliest to occur of the following: (i) upon the last
date for CSB Shareholders to perfect their respective rights to dissent to
the Reorganization pursuant to Section 1300 et seq. of the California
Corporations Code, in the event that no CSB Shareholder so perfects his or
her rights; (ii) upon the payment of all amounts to which holders of
Dissenting CSB Shares are hereafter determined (by agreement, by order of a
court of competent jurisdiction or otherwise) to be entitled; (iii) upon the
termination of the January 24, 1996 Letter of Intent between SDN and CSB in
accordance with it terms; or (iv) upon the termination of the Reorganization
Agreement in accordance with its terms.
-2-
<PAGE>
6. APPLICABLE LAW. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO CONFLICT OF LAWS PROVISIONS THEREOF.
Very truly yours,
DARTMOUTH CAPITAL GROUP, L.P.
By: Dartmouth Capital Group, Inc.
Its: General Partner
By:___________________________________
Name: Robert P. Keller
Title: President
This Subscription Agreement is hereby
confirmed and accepted as of the date first
above written.
SDN BANCORP, INC.
By:________________________________________
Name: Robert P. Keller
Title: President and Chief Executive Officer
RATIFICATION BY HOLDCO:
Holdco hereby ratifies, joins in and agrees to be
bound by this Subscription Agreement in all respects.
______________________________
[Holdco Name]
By:________________________________________
Name: Robert P. Keller
Title: President and Chief Executive Officer
-3-
<PAGE>
FIRST ADDENDUM TO OFFICE LEASE
BY AND BETWEEN
ALVAMIJ HUNTINGTON BEACH, INC.
AND
LIBERTY NATIONAL BANK
THIS IS A FIRST ADDENDUM to that certain Office Lease
consisting of "Basic Lease Provisions" and "Additional Lease
Provisions"), dated as of August 20, 1981, by and between ALVAMIJ
HUNTINGTON BEACH, INC., a California corporation, as successor to
One Pacific Plaza, a joint venture ("Landlord"), and LIBERTY
NATIONAL BANK, a national banking association ("Tenant"), with
respect to the following facts:
I
RECITALS
A. Tenant presently occupies Suites 100, 205, 206 and
560 of that certain office building (the "Building") known as One
Pacific Plaza, located at 7777 Center Drive, Huntington Beach,
California. Tenant occupies Suite 100 pursuant to the terms of the
above-referenced Lease. Said premises consist of an aggregate
rentable square footage of 8,386 square feet.
B. Tenant occupies Suites 205 and 206, which consist of
1,823 and 1,044 rentable square feet, respectively, pursuant to
those certain Office Leases, dated December 30, 1982, and January
6, 1984, respectively (hereinafter the second Floor Leases").
C. Tenant occupies Suite 560, which consists of 1,282
rentable square feet, pursuant to that certain Office Lease, dated
March 22, 1984 (hereinafter fifth Floor Lease").
D. Suite 102 is located on the first floor of the
Building, consists of 5,172 rentable square feet, and constitutes
the entire remaining portion of the first floor not presently
occupied by Tenant, excluding therefrom approximately 720 rentable
square feet presently occupied by Coffee Plus. The current tenant
of Suite 102 has recently vacated said premises and Tenant desires
to lease said Suite 102 on the terms and conditions contained
herein.
E. Effective upon the commencement date of Tenant's
lease of said Suite 102, Tenant desires to cancel its Second Floor
Leases (consisting of an aggregate of 2,867 rentable square feet)
and its Fifth Floor Lease, and Landlord is willing to permit said
cancellation in accordance with the provisions of paragraph 8
hereof.
<PAGE>
II
TERMS AND CONDITIONS
NOW, THEREFORE, the parties hereto hereby agree as
follows:
1. Addition of Expansion Space. Effective as of February
1, 1986 (or such earlier date as Tenant occupies Suite 102), the
Premises (as that term is defined at the first paragraph of that
certain Office Lease "Ground Floor Premises", dated August 20,
1981, by and between One Pacific Plaza, a joint venture, as
landlord, and Liberty National Bank, a national building
association, in organization, hereinafter referred to as the
"Lease") is hereby expanded to include Suite 102 consisting of
5,172 rentable square feet. Attached hereto as Exhibit "A" is a
drawing of the Premises, including both Suite 100 and Suite 102.
2. Modification of Basic Lease Provisions. Effective as
of February 1, 1986 (or such earlier date as Tenant occupies Suite
102), the Basic Lease Provisions are hereby amended as follows:
(a) Paragraph 2 is hereby amended to provide as
follows:
"2. Total Net Rentable Area of the Premises:
13,558 square feet, consisting of the following:
Suite 100: 8,386 square feet
Suite 102: 5,172 square feet
Total: 13,558 square feet
Total Net Rentable Area of the
Building: 93,228 square feet."
(b) Paragraph 3 is hereby amended to provide as
follows:
"3. Initial Basic Annual Rent:
Suite 100: $176,106.00 (1.75 per square foot) as of
October 1, 1981.
Suite 102: $99,302.40 ($1.60 per square foot) as of
February 1, 1986 or such earlier date as Tenant
occupies Suite 102).
2
<PAGE>
Notwithstanding anything to the contrary
contained herein, Landlord agrees that Tenant
shall be obligated to pay to Landlord Basic
Annual Rent for Suite 102 equal to only fifty
percent (50%) of the rate set forth
hereinabove until the earlier of (i) the
cancellation of the Fifth Floor Lease and the
Second Floor Leases or (ii) March 16, 1986."
(c) Paragraph 4 is hereby amended to provide as
follows:
"4. Initial Monthly Rental Installments:
Suite 100: $14,675.50 as of October 1, 1981.
Suite 102: $8,275.20 as of February 1, 1986 (or such
earlier date as Tenant occupies Suite 102).
Notwithstanding anything to the contrary
contained herein, Landlord agrees that Tenant
shall be obligated to pay to Landlord Initial
Monthly Rental Installments for Suite 102
equal to only fifty percent 50%) of the rate
set forth hereinabove until the earlier of (i)
the cancellation of the Fifth Floor Lease and
the Second Floor Leases or (ii) March 16,
1986."
3. Additional Rent. Landlord and Tenant hereby acknowledge and
agree that, pursuant to the provisions of paragraph 3.3 of Article 3 of the
Lease, for the 1986 calendar year Tenant shall pay to Landlord as Tenant's
Proportionate Share (which is agreed to be 14.83%) of the Estimated Total
Operating Expenses for 1986 the following monthly sums:
3
<PAGE>
Premise Monthly Installment
------- -------------------
Suite 100 $ 2,479.18
Suite 102 $ 1,486.00
----------
Total Monthly
Installment $ 3,965.18
Tenant's Proportionate Share in the amount of 14.83% was
computed by comparing the square footage of Suite 100 to 100% of
the square footage of the Building and by comparing the square
footage of Suite 102 to 95% of the square footage of the Building,
as follows: Suite 100 = 8,386 square feet - 93,228 square feet =
8.99% and Suite 102 = 5,172 square feet - 93,228 square feet x 95%
= 5.84%, and 8.99% + 5.84% = 14.83%.
4. Earthquake Insurance Limitation. The second
paragraph of paragraph 3.5 of the Lease, located on page 10(a)
thereof, is hereby amended to provide in full as follows:
"Notwithstanding anything contained in Section
3.5(e) to the contrary, that portion of Total
Operating Expenses to be paid by Tenant
allocable to insurance premiums for earthquake
coverage with respect to Suite 100 shall not
exceed EIGHT HUNDRED DOLLARS ($800.00) per
year through the end of 1982, and the sum of
EIGHT HUNDRED DOLLARS ($800.00) per year
increased by any increase in the Consumer
Price Index between October 1981 and October
of the calendar year preceding the calendar
year for which such computation is being made,
such adjustment to be made in the manner
provided in Section 2.2.2 above, but without
the seventy-five percent (75%) limitation
provided for in said Section. There shall be
no limitation on Tenant's share of earthquake
insurance premiums as to Suite 102, as to
which Tenant shall pay its entire 5.84%
Tenant's Proportionate Share. In addition,
Tenant shall not be required to pay any
portion of said earthquake insurance premiums
at such time, if ever, as any other tenant in
the Building is not responsible, directly or
indirectly, for a portion of said earthquake
insurance premiums".
4
<PAGE>
5. Additional Space Needs. The fourth (4th) line of
paragraph 7.3 of the Lease, located on page 17(a) thereof, is
hereby amended to provide as follows: "Floors 2, 3, 4 and/or 5 in
the Building, specifying in such notice. . ."
6. Parking. Landlord agrees to provide adequate surface
parking of the Project, on a non-exclusive basis, for customer and
invitees of Tenant.
7. Signs.
(a) Notwithstanding anything to the contrary
contained at paragraph 43.1 of the Lease, Landlord hereby agrees
that Tenant may relocate its existing sign on the northeasterly
side of the Building to the northwesterly side of the Building, as
indicated on Exhibit "B" attached hereto, provided that said
relocation shall be at Tenant's sole cost and expense (including
the repair of the area to be vacated by the existing sign) and
further subject to Tenant complying with all applicable laws,
regulations and ordinances, including permit requirements of the
City of Huntington Beach and subject to approval of the
Architectural Committee of One Pacific Plaza Association.
(b) The last sentence of footnote 2 to paragraph
43.1 of the Lease is hereby amended to provide as follows:
"If Tenant vacates or does not operate within
the Building as a bank or other financial
institution (a temporary vacation due to
casualty damage, remodeling and similar
circumstances excepted), Tenant shall remove
its signs from the roof of the Building and
its right to use the roof of the Building for
signs under this section shall terminate".
8. Cancellation of Second Floor Leases and Fifth Floor
Lease. Provided that Tenant is not then in material default of
either this Lease, the Second Floor Leases or the Fifth Floor
Lease, Landlord and Tenant hereby agrees as follows:
(a ) Tenant shall vacate the Fifth Floor Lease
space no later than February 14, 1986. At such time as Tenant
vacates said Fifth Floor Lease space, said Fifth Floor Lease shall
be cancelled and of no further force or effect whatsoever.
(b) Tenant shall vacate the Second Floor Leases
space no later than March 15, 1986. At such time as Tenant vacates
said Second
5
<PAGE>
Floor Leases space, said Second Floor Leases shall be canceled and of no
further force or effect whatsoever.
9. Agreement of Non-Disturbance. Landlord hereby agrees
that it shall deliver to Tenant, on or before May 1, 1986, fully
executed copies of the Agreements of Non-Disturbance attached
hereto as Exhibits "B-1" and "B-2", without any change or
alteration whatsoever. Landlord represents that except for the
Trust Deeds referred to in Recitals B to said Agreements of
Non-Disturbance, there are no other liens or encumbrances against
the Building and the Premises as of the date hereof other than real
property taxes and assessments.
10. No Other Changes. Except as expressly amended hereby,
the Lease shall remain in full force and effect without any change
or alteration of any nature whatsoever.
Dated: February 14, 1986
"Landlord" "Tenant"
ALVAMIJ HUNTINGTON BEACH, INC., LIBERTY NATIONAL BANK,
a California Corporation a National Banking Association
By: /s/ illegible signature By: /s/ James Ott
----------------------------- -----------------------------
Its: Agent Its: EVP
By: /s/ James P. Dazo By: Robert Lavallee
----------------------------- -----------------------------
Its: Asst Treasurer Its: Senior V.P.
6
<PAGE>
[MAP]
EXHIBIT A
<PAGE>
O F F I C E L E A S E
"GROUND FLOOR PREMISES"
BY AND BETWEEN
ONE PACIFIC PLAZA, A JOINT VENTURE
AS LANDLORD
AND
LIBERTY NATIONAL BANK
A National Banking Association (In Organization)
AS TENANT
One Pacific Plaza Building
Huntington Beach, California
<PAGE>
OFFICE LEASE
THIS LEASE is made this 20 day of August, 1981, between
ONE PACIFIC PLAZA, a joint venture, hereinafter called "Landlord"
and LIBERTY NATIONAL BANK, a National Banking Association (In
Organization), hereinafter called "Tenant."
LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord, subject to all of the terms and conditions
hereinafter set forth, that certain office space consisting of a
portion of the ground floor (the "Premises") as shown in the
drawings attached hereto as Exhibit "A" and located in that certain
office structure being constructed on a portion of that certain
real property legally described as Parcel 1 shown on Parcel Map
79-585, in the City of Huntington Beach, County of Orange, State of
California, per Map filed in Book 144, pages 31-33 of Parcel Maps
in and for said County. Tenant shall have the right to construct
a vault adjacent to the Southeast corner of the Building on
foundations being installed by Landlord and, in such event, such
vault,shall be deemed to be a portion of the Premises. The
location of the said office structure (hereinafter called the
"Building") is shown on the first phase site plan attached hereto
as Exhibit "B". The commercial center of which the Building is a
part is hereinafter called the "Project" and is defined in paragraph
10 of the Basic Lease Provisions.
BASIC LEASE PROVISIONS
1. Building Name: One Pacific Plaza
Address: 7777 Center Drive,
Huntington Beach, California 92647
2. Total Net Rentable Area of the Premises: 8,386 square feet.
Total Net Rentable Area of the Building: 92,730 square feet.
3. Initial Basic Annual Rent: $180,600.00 ($1.75 per square
foot per month.)
4. Initial Monthly Rental Installments: $14,675.50
5. [Deleted]
6. Estimated Total Operating Expenses for each of calendar
year 1981 and calendar year for 1982: $347,737.50
7. Term: Twenty (20) years plus four subsequent options of
five years each
<PAGE>
[MAP]
<PAGE>
[MAP]
<PAGE>
8. Target Commencement Date: October 1, 1981
9. Security Deposit: $18,800 (See Article 4 of Additional
Lease Provision)
10. Declaration: That certain Declaration of Covenants,
conditions, Easements and Restrictions dated March 25, 1980,
encumbering the real property legally described as parcels 1
through 8 inclusive, as per the above described Parcel Map
(the "Project"), which Declaration was recorded March 26, 1980
in Book 13550, page 1015, Official Records of said County.
11. Broker: Grubb & Ellis
12. Address for Payment and Notices:
LANDLORD: TENANT:
ONE PACIFIC PLAZA LIBERTY NATIONAL BANK
7777 Center Drive At the Premises
Huntington Beach, CA 92647
With Copy To:
P. O. Box 8825
Fountain Valley, CA 92708
Attn: Guy Belcore
13. Lease Execution: In witness whereof, the parties hereto have
executed this Lease, consisting of the foregoing provisions
and of the Additional Lease Provisions which follow, as of the
date first above written.
THIS LEASE SHALL NOT BECOME ONE PACIFIC PLAZA,
EFFECTIVE UNTIL EXECUTED BY a joint venture
LANDLORD AND DELIVERED TO
TENANT AND THE SUBMISSION By JERWEL ENTERPRISES,
OF THIS FORM OF LEASE TO a partnership
TENANT BY LANDLORD, OR
LANDLORD'S AGENT, DOES NOT By:/s/ Gerald Klein
CONSTITUTE AN OFFER TO -------------------
LEASE. NO EMPLOYEE OR AGENT General Parter
OF LANDLORD OR ANY PERSON By BREDERO HUNTINGTON BEACH,
WITH WHOM TENANT MAY HAVE INC., a California corporation
NEGOTIATED THIS LEASE HAS By: /s/
ANY AUTHORITY TO MODIFY THE ---------------------------
TERMS HEREOF OR TO MAKE ANY Its:
AGREEMENTS, REPRESENTATIONS, -------------------------
OR PROMISES UNLESS THE SAME "Landlord"
ARE CONTAINED HEREIN OR ADDED
HERETO IN WRITING.
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<PAGE>
LIBERTY NATIONAL BANK, a
national banking association
(In Organization)
By: /s/ Richard M. Wilbur
-----------------------
Richard M. Wilbur,
An Organizer
By: /s/ Gaetano L. Belcore
------------------------
Gaetano L. Belcore,
An Organizer
By: /s/ Robert R. Rigby
-----------------------
Robert R. Rigby,
An Organizer
"Tenant"
MEMORANDUM OF ACTUAL COMMENCEMENT AND EXPIRATION DATES
COMMENCEMENT DATE: OCTOBER 1, 1981 EXPIRATION DATE: SEPTEMBER 30, 2001
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<PAGE>
ADDITIONAL LEASE PROVISIONS
TERM
Article 1.
1.1 The term of this Lease shall be as shown in item
7 of the Basic Lease Provisions and shall commence on the Target
Commencement Date as shown in Item 8 of the Basic Lease
Provisions or such later date as the Premises shall be tendered
to Tenant as set forth in Section 1.2 below. The date of
commencement as defined above, hereinafter called the
"Commencement Date," shall be confirmed in writing by the parties
promptly upon such commencement.
1.2 Landlord may tender the Premises to Tenant on or
after the Target Commencement date upon not less than thirty (30)
days prior written notice stating that the Premises will be ready
for Tenant's construction work on the date specified in such
notice. (Tenant acknowledges the receipt of said notice
specifying the date of October 1, 1981 as the date the Premises
will be ready for Tenant's construction work and agrees said
notice shall be deemed to have been given, as required by this
lease, more than thirty (30) days prior to October 1, 1981.) In
the event that Landlord does not tender the Premises to Tenant as
aforesaid by December 31, 1981, Tenant shall have the right to
erect a temporary banking facility at Tenant's expense and in
accordance with all applicable laws and regulations, on a portion
of the project agreeable to Landlord and Tenant. (Said location
shall be Building Pad E as shown on exhibit "B" and shall be
erected, if at all, in a good and workmanlike manner consistent
with applicable laws and the Declaration.) Such facility shall
be removed by Tenant no later than four (4) months after the
actual Lease Commencement Date, subject to extension by that
amount of time during which Tenant's construction work has been
delayed by labor trouble, events beyond the reasonable control of
Tenant, and acts of Landlord, but in any event no later than
thirty (30) days after Tenant opens for business from the
Premises and Tenant shall repair any damage resulting from the
erection and/or removal thereof. (Such removal shall include
the removal of all paving, landscaping, utility lines and other
improvements in connection therewith.) Subject to Paragraph 2.1
hereof, no rent shall be payable for the operation of such
temporary facility, but the insurance indemnity and hold harmless
and mechanic's lien provisions of this Lease shall apply from and
after the erection of said temporary facility to said facility
just as though said facility were the Premises. Tenant shall pay
all utility charges and taxes resulting therefrom and shall
maintain the same in good condition and repair. In the event
that Landlord does not tender the Premises in such manner to
Tenant by March 31, 1982, this Lease, at Tenant's option, shall
become null and void. The Premises shall be deemed ready for
Tenant's construction work upon the expiration of thirty (30)
days from the date said notice is sent, and when utilities to the
Premises necessary for Tenant's construction are operative and
Landlord has substantially completed the construction work to the
Building and the adjacent parking areas to be completed by
Landlord under Paragraph 1 of that certain Work Letter, of even
date herewith, executed by Landlord and Tenant (the "Work
Letter"), as evidenced by the issuance of a certificate of
occupancy or temporary certificate of occupancy for the Building
by the City of Huntington Beach. The term "substantial
completion" shall have the meaning set forth in the Work Letter.
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<PAGE>
1.3 Landlord hereby grants to Tenant four options to
extend the term of this Lease, each for a five year period
commencing when the prior term expires. Each option to extend
shall be exercised by Tenant giving Landlord written notice of
such exercise no later than six (6) months prior to the time that
the subject option period would commence. All of the terms and
provisions of this Lease shall apply during each such option
period, and rent shall be adjusted in the same manner, and at the
same time intervals, as during the initial term of this Lease. A
subsequent option may not be exercised unless all prior options
have been exercised.
RENT
Article 2.
2.1 Basic Annual Rent. Tenant agrees to pay as Basic
Annual Rent for the Premises the initial sum shown in Item 3 of
the Basic Lease Provisions, increased in the manner provided
below. The Basic Annual Rent shall be payable in equal monthly
installments as shown in Item 4 of the Basic Lease Provisions,
payable in advance commencing upon the expiration of the first
four (4) months of the term of this Lease, subject to extension
by that amount of time during which Tenant's construction work
has been delayed by acts of Landlord, and continuing on the first
day of each calendar month thereafter. If the term of this Lease
commences on a date other than the first day of a calendar month,
then the rent for the-partial calendar month during which Basic
Annual Rent is first payable shall be prorated in the proportion
that the number of days in such month following the expiration of
such four (4) month period bears to the number of days in that
calendar month, and such rent shall be paid upon the expiration
of said four (4) month period.
The term "Lease Year" shall mean each succeeding period
of twelve full calendar months after the Commencement Date during
the term except that the first such period shall include any
partial month at the commencement of the Lease Term. In addition
to said Basic Annual Rent, Tenant agrees to pay additional rent
as and when hereinafter provided in this Lease. Said Basic
Annual Rent and additional rent are hereinafter sometimes
referred to collectively as the "rent." The rent shall be
payable to Landlord, without deduction or offset or abatement
(except as specifically provided in this Lease), in lawful money
of the United States of America at the address for Landlord as
shown in Item 12 of the Basic Lease Provisions, or to such other
person or at such other place as Landlord may from time to time
designate in writing.
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<PAGE>
2.2 Rental Adjustments
2.2.1 Adjustment to Fair Market Value. The Basic
Annual Rent shall be adjusted to one hundred percent (100%) of
the fair market value as hereinafter set forth on the tenth
(l0th), twentieth (20th), twenty-fifth (25th), thirthieth (30th)
and thirty-fifth (35th) anniversary of the Commencement Date.
Each said dates for adjustment of the Basic Annual Rent are
hereinafter referred to as a "Rental Adjustment Date.") In no
event shall the Basic Annual Rent for the Premises be decreased
below the amount set forth in Item 3 of the Basic Lease
Provisions.
If the parties are unable to agree in writing on the amount
of the Basic Annual Rent pursuant to this Section 2.2.1 on or
before the date four (4) months preceding the Rental Adjustment
Date, then within ten (10) days after said date each party, at
its cost and by giving written notice to the other party, shall
appoint a real estate appraiser with at least five (5) years'
full-time commercial appraisal experience in Orange County to
appraise and set the fair market value of the Basic Annual Rent
for the Premises. If a party does not appoint an appraiser
within ten (10) days after the other party has given notice of
the name of its appraiser, the single appraiser appointed shall
be the sole appraiser and shall set such fair market value. If
the two appraisers are appointed by the parties as stated in this
paragraph, they shall meet promptly and attempt to set such fair
market value. If they are unable to agree within thirty (30)
days after the second appraiser has been appointed, they shall
jointly select a third appraiser meeting the qualifications
stated in this paragraph within ten (10) days after the last day
the two appraisers are given to set such fair market value. If
they are unable to agree on the third appraiser within such ten
(10) day period, either party, by giving ten (10) days' written
notice to the other, may apply to the American Arbitration
Association, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Provided that if said
American Arbitration Association fails to so select such third
appraiser within thirty (30) days of request, either party, by
giving ten (10) days prior written notice to the other, may apply
to the Presiding Judge of te Superior Court of Orange County or
to the President of the Orange County Real Estate Association for
the selection of a third appraiser who meets the qualifications
stated in this paragraph. Each of the parties shall bear
one-half of the cost of appointing the third appraiser and of
paying the third appraiser's fee.
Within thirty (30) days after the selection of the
third appraiser, a majority of the appraisers shall set the
fair-market value of the Basic Annual Rent for the Premises. If
a majority of the appraisers are unable to set such fair market
value within the stipulated period of time, the twoappraisals
closest together shall be added together and their total divided
by two; the resulting quotient shall be multiplied by, 100% and
the result shall be the Basic Annual Rent for the Premises
commencing on the Rental Adjustment Date.
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<PAGE>
The appraiser or appraisers so selected shall be
instructed to appraise the Premises, taking the age of the
Building and this Lease and all of the terms hereof (including
term, expenses and rent escalation provisions, and further based
upon the fact that this is a triple net Lease wherein Tenant pays
separately for taxes, insurance, maintenance and other operating
expenses) into account, without value being added by reason of
any leasehold improvements, trade fixtures or equipment installed
by Tenant, (but including the right to use adjacent Common Area
for drive-through facilities once the "Drive-Through Facilities",
as defined in Section 8.3 below, have been constructed) based, to
the extent feasible, upon rents then being charged to banks in
comparable locations for comparable space in multi tenant
buildings with similar features under comparable leases executed
within one (1) year of the subject Rental Adjustment Date (which
rent shall be adjusted to the then current value).
2.2.2 Additional Adjustments. In addition to all
other rental adjustments provided for in this Lease, the Basic
Annual Rent, as same may be adjusted pursuant to Section 2.2.1
hereof, shall be further adjusted as of the first day of the
fifth month of the third, sixth, ninth, twelfth, fifteenth and
eighteenth Lease Years and on the third anniversary date of each
subsequent Rent Adjustment Date thereafter (each such date
referred to as an "Adjustment Date"), to an amount equaling the
sum total of the current Basic Annual Rent plus the lesser of the
following two amounts.
A. That amount equal to the Basic Annual
Rent payable prior to the subject Adjustment Date during the
subject Lease Year multiplied by 8.5% for each Lease Year since
the next preceding Adjustment Date, Rent Adjustment Date, or the
Commencement Date through the subject Adjustment Date compounded
on an annual basis (i.e., 27.773% for three (3) years).
B. That amount equal to 75% of the
percentage adjustment in the "C.P.I.", as that term is
hereinafter defined, multiplied by the Basic Annual Rent payable
prior to the subject Adjustment Date as follows:
(1) As used in this Lease, the term
"C.P.I." shall be defined as the Consumer Price Index of the
Bureau of Labor Statistics of the U.S. Department of Labor for
All Urban Consumers, Los Angeles-Long Beach-Anaheim, California,
All-Items (1967=100). In the event the compilation and/or
publication of the C.P.I. shall be transferred to any other
governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that
Landlord and Tenant cannot agree on such alternative index, then
the matter shall be submitted for decision to the American
Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding
upon the parties. The
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<PAGE>
cost of said arbitrators shall be paid equally by Landlord
and Tenant.
(2) The current Basic Annual Rent shall
be multiplied by a fraction, the numerator of which is the C.P.I.
of the month, three months preceding the subject Adjustment Date
and the denominator of which shall be the C.P.I. of the calendar
month, three months preceding the immediate prior Adjustment
Date, Rent Adjustment Date or the Commencement Date. The product
of such calculation shall be multiplied by 75%.
For example: Assume that the current Basic Annual
Rent immediately prior to the subject Adjustment Date is $10,000.
Assume further that three Lease Years will have elapsed by the
time of the subject Adjustment Date since the last rental
adjustment, and 75% of the percentage of C.P.I. adjustment for
those three Lease Year totals 22.8, using the above formula.
Since 22.8% is less than 27.773%, the new Basic Annual Rental (to
be divided by 12 for the monthly rent) effective as of the
subject Adjustment Date, would be as follows:
Current Basic Annual Rent = $10,000 x 1.228 = $12,280.
If any rental adjustment contemplated by Section 2.2
has not been determined by the subject Rent Adjustment Date or
Adjustment Date, Tenant shall continue to pay the rent
theretofore payable until such adjustment is completed, at which
time Tenant shall pay to Landlord an amount sufficient to
compensate Landlord for any underpayment of rent, plus, if such
delay is due to factors beyond Landlord's control, interest on
such payment at the prime rate of interest then charged by the
Bank of America per annum from the date such underpayment would
have been due.
ADDITIONAL RENT
Article 3.
3.1 With respect to each calendar year during the
Lease, the Tenant shall pay in the installments provided below in
Section 3.3 and 3.4, as ADDITIONAL rent, in addition to the Basic
Annual Rent specified in Article 2 above, a sum equal to the
product of Tenant's Proportionate Share (as hereinafter defined)
and the amount of Total Operating Expenses (as hereinafter
defined), prorated for any partial calendar year.
3.2 "Tenant's Proportionate Share" shall be computed
by dividing the net rentable area of the Premises identified in
Item 2 of the Basic Lease Provisions by the total net rentable
area of the Building identified in said Item 2.
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<PAGE>
The term "net rentable area" as used herein shall be
computed by measuring from the inside surface of the outer
building walls. Specifically included in such area shall be all
area within the outside walls, air conditioning shafts and ducts
where a central air conditioning system eliminates floor fan
rooms, private stairs, private elevators, toilets, air
conditioning rooms, fan rooms, air ducts, janitor's closets, slop
sinks, electrical closets, telephone closets, and all enclosing
walls for the above items, all of which exclusively serve the
floor in which they are located, and columns and projections
necessary to the Building. The area of air conditioning and fan
rooms located on a rental floor serving more than the floor in
which located, together with their enclosing walls, shall be
apportioned and included as rental area of the floors which they
serve. Except as provided above, there shall be excluded
building stairs, fire towers, elevator shafts, flues, vents,
stacks, pipe shafts and vertical ducts, with their enclosing
walls serving more than one floor, all parking decks and lobby,
public vestibules, public telephone booths, ramps, loading docks
and other public areas on the first floor of the Building. Net
rentable area for divided floors shall include a proportionate
share of public corridors, public toilets, air conditioning
rooms, fan rooms, air ducts, janitor's closets, electrical
closets, telephone equipment closets and their enclosing walls.
3.3 Landlord shall provide to Tenant a written
estimate of Total Operating Expenses at least thirty (30) days
prior to the start of each calendar year of the Lease Term. With
respect to each such calendar year during the Lease Term, the
Tenant shall pay to Landlord, monthly in advance, one-twelfth
(l/12th) of Tenants Proportionate Share of the estimated Total
Operating Expenses for such year. For 1981 and 1982, said
payment shall be based on the Estimated Total Operating Expenses
set forth in Item 6 of the Basic Lease Provisions.
3.4 With1n one hundred twenty (120) days after the end
of every calendar year during the Lease Term, commencing with the
calendar year 1981 Landlord shall provide Tenant with a written
statement certified as true and correct of the actual Total
Operating Expenses and Tenant's Proportionate Share thereof for
that year broken down in reasonable detail by expense category.
If the amount payable by Tenant under Paragraph 3.1 hereof should
exceed the amount previously paid by Tenant with respect to such
year, then Tenant shall pay to the Landlord the additional amount
due to Landlord within ten (10) days, and, if the amount payable
by Tenant under Paragraph 3.1 should be less than the estimated
amount paid by Tenant with respect to such year, then Landlord
shall credit against future additional rent the amount of
overpayment by Tenant.
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<PAGE>
3.5 Total Operating Expenses are defined a those
expenses necessary to operate and maintain the Building,
including appurtenances, in a manner deemed reasonable and
appropriate and for the best interest of the Tenants in the
Building, limited, however, to such items accountable as expenses
pursuant to generally accepted accounting principles, including
the following:
(a) Wages, salaries and fringe benefits of all
employees of Landlord engaged in the operation and maintenance of
the Building; employer's Social Security taxes, unemployment,
taxes or insurance, and any other taxes which may be levied on
such wages and salaries; the cost of disability and
hospitalization insurance and pension or retirement benefits for
such employees; all of the foregoing limited, however, to costs
customarily charged to Tenants in comparably sized office
buildings in projects similar to the Project in Orange County
and/or Los Angeles County;
(b) All supplies and materials used in operation
and maintenance of the Building;
(c) Cost of water, sewer, and trash pick up for the
Building, including water heating and condensing and the cost of
power, gas, heating, lighting, air conditioning and ventilating
for the public and common areas of the Building, it being
understood and agreed that Tenant, at Tenant's expense, shall
separately meter the Premises for electricity and gas and pay the
cost of such utilities as separately metered;
(d) Cost of replacement of equipment and all
reasonably necessary maintenance and service agreements on
equipment, including alarm service, building mechanical
equipment, window cleaning and elevator maintenance and water,
heating and cooling systems;
(e) Cost of casualty and liability insurance in
customary amounts applicable to the Building and Landlord's
personal property used in connection therewith, including rental
loss and/or other endorsements from time to time deemed
appropriate by Landlord, also including earthquake coverage.
(Liability insurance with limits of up to $10,000,000 for any one
occurrence and $1,000,000 property damage shall be deemed
customary as of the date of this lease.) See the attached page
10(a).
(f) Cost of repairs and general maintenance;
(g) Any capital improvement made or installed
after the calendar year 1981 for purposes of saving labor or
otherwise reducing applicable operating costs, not to exceed the
aggregate estimated costs savings annualized on a straight-line
basis over the useful life of the capital improvements as
determined by Landlord in accordance with generally accepted
accounting principles and practices in effect at the time of
acquisition of the capital item.
Notwithstanding anything contained in Section
3.5(e) to the contrary, that portion of Total Operating Expenses
to be paid by Tenant allocable to insurance premiums for
earthquake coverage shall not exceed EIGHT HUNDRED DOLLARS
($800.00) per year through the end of 1982 and the sum of EIGHT
HUNDRED DOLLARS ($800.00) per year increased by any increase in
the Consumer Price Index between October 1981 and October of the
calendar year preceding the calendar year for which such
computation is being made, such adjustment to be made in the
manner provided in Section 2.2.2 above, but without the
seventy-five percent (75%) limitation provided for in said
Section.
(h) A pro rata share of all costs and charges
paid by Landlord as the owner of Parcel 1 as per the above
described Parcel Map 79-585 relating to the common and parking
areas within the Project pursuant to Section 4.2 or 4.5 of the
Declaration, which pro rata share shall be a fraction of the
numerator of which is the total building area within the
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<PAGE>
Building and the denominator of which is the total building area
within said Parcel 1, as the term building area is defined in
the Declaration;
(i) All taxes and assessments and governmental
charges whether federal, state, county or municipal, and whether
they be taxing districts or authorities presently taxing the
Building or by others, subsequently created or otherwise,
including license, permit and inspection fees and any other taxes
and assessments attributable to the Building or its operation,
including the land underlying the Building, and any tax or other
levy, however denominated, on or measured by the rental collected
by the Landlord with respect to the Building, or on the
Landlord's business of leasing the Building, but excluding taxes
on income. If Tenant, together with other tenants occupying in
excess of fifty percent (50%) of the net rentable area in the
Building, requests it to do so, Landlord will either exercise
any rights it may have to contest any increase in any tax
assessments or will pay any such tax under protest and permit
tenant and other Tenants of the Building to contest the same in
Landlord's name, but without cost or expense to Landlord. If
Landlord elects to contest any such assessment, which Landlord
may do whether or not Tenant or any other tenants request
Landlord to do so, all reasonable costs incurred by Landlord in
connection therewith shall be included within Total Operating
Expenses.
(j) The cost of all accounting and other
professional fees incurred in connection with the operation of
the Building, other than those incurred for (1) correction of
latent or patent construction defects of the Building, (2) the
delivery of services to specific tenants rather than the Building
in general, and (3) the enforcement of Landlord's right with
respect to other tenants of the Building.
(k) A management fee, not to exceed current market
rated, which may be payable to Landlord. (Any sums added to
Total Operating Expenses by this subparagraph (k) shall be
reducted by 14% before calculating Tenant's Proportionate Share.
3.6 Notwithstanding the foregoing, Total Operating
Expenses shall not include expenses for which the Landlord has
rights of reimbursement or indemnification (either by an insurer,
condemnor, tenant or otherwise); expenses incurred in leasing or
procuring tenants (including, without limitation, lease
commissions, advertising expenses, legal expenses, and expenses
of renovating space for tenants); legal expenses arising out of
disputes with tenants or the enforcement of the provisions of
any lease of space in the Building; interest or amortization
payments on any mortgage or mortgages, and rental under any
ground or underlying lease or leases; wages, salaries or other
compensation paid to any executive employees above the grade of
building manager; the cost of any work or service performed for
or facilities furnished to a tenant at the tenant's cost; the
cost of correcting defects
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<PAGE>
(latent or otherwise) in the construction of the Building or in
the building equipment, except that conditions (not occasioned
by construction defects) resulting from ordinary wear and tear
shall not be deemed defects; cost of capital improvements and
depreciation or amortization, (except as provided in Section
3.5(g) or otherwise above). To the extent that any of the
expenses described in Section 3.5 are partially excluded from
Total Operating Expenses due to reimbursement or payment of a
portion thereof by a tenant of the Building, Tenant's
Proportionate Share of the balance of such expense shall be
appropriately adjusted by excluding the net rentable area
leased to such tenant for purposes of the computation required
by Section 3.2.
3.7 Any operating expense increase for any calendar
year during the term of this Lease shall be apportioned so that
the Tenant shall pay its proportionate share of only that portion
of the increase for such year as falls within the term. This
provision shall survive the expiration or earlier termination of
the term of this Lease.
3.8 If any special assessments are included as part of
the real estate taxes and such assessment may be paid in
installments, the Tenant shall be obligated to pay only the
Tenant's proportionate share of the installment falling within
the term whether or not the Landlord pays such assessment in
installments.
3.9 In the event that at any time during the term of
this Lease, any governmental law, rule or regulation prohibits or
postpones in whole or in part any increase in the rent or other
sums payable by Tenant hereunder, then such increases under this
Lease shall be made to the maximum extent permissible by law at
the time provided in this Lease and/or at any time or times
thereafter such increase, or any portion thereof, may lawfully be
made and any such incrase in rent, or any portion thereof, or
other sums payable hereunder, or portions thereof, the payment of
which has been so prohibited or postponed, shall thereafter
become due and payable to the maximum extent and at the earliest
time or times permited by law.
.
3.10 Operating expenses for any year in which
occupancy of the Building is less than one hundred percent (100%)
shall be adjusted for the purposes of computing the amount
payable by Tenant under Section 3.1 above, to reflect at least
one hundred percent (100%) occupancy of the building.
SECURITY DEPOSIT
Article 4.
Tenant has deposited with Landlord the sum set forth in
Item 9 of the Basic Lease Provisions as security for the full and
faithful performance of every provision of this
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Lease to be performed by Tenant. If Tenant defaults with
respect to any provision of this Lease, including but not
limited to the provisions relating to the payment of rent or
the repair of damage to the Premises caused by Tenant, Landlord
may use, apply or retain all or any part of this security
deposit for the payment of any rent or any other sum in
default, the repair of such damage to the Premises, or for the
payment of any other amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to
compensate Landlord for any other loss or damage which Landlord
may suffer by reason of Tenant's default to the full extent
permitted by law. If any portion of said deposit is so used or
applied, Tenant shall within ten (10) days after written demand
therefor deposit cash with Landlord in an amount sufficient to
restore the security deposit to its original amount and
Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep this security
deposit separate from its general funds, and Tenant shall not
be entitled to interest on such deposit. If Tenant shall fully
and faithfully perform every provision of this Lease to be
performed by it, the security deposit or any balance thereof
shall be returned to Tenant upon the last to occur of (i) the
date two (2) years from and after the Commencement Date of the
lease term, or (ii) the date of Tenant's substantial completion
of the Tenant improvements within the Premises to be
constructed by Tenant pursuant to the Work Letter, or (iii)
upon condensed water for HVAC system installed by Tenant's
written notice to Landlord that Tenant has substantially
completed Tenant improvements within the Premises. If Landlord
fails to return said security deposit or any balance thereof
within ten (10) days of the last to occur of said dates, said
security deposit shall bear interest, for the benefit of
Tenant, at the "prime rate" of Bank of America NT & SA, plus
three percent, but not to exceed the maximum rate allowable by
law.
UTILITIES AND SERVICES
Article 5.
5.1 Landlord shall furnish to the Premises between the
hours of 7:00 a.m., and 7:00 p.m. Monday through Friday, and
between the hours of 8:00 a.m. and 1:00 p.m. Saturday, except
legal holidays, such amounts of air conditioning, as Landlord
furnishes for normal office purposes in other portions of the
Building taking into consideration at any given time the
availability of energy resources and prudent energy conservation
practices. During other hours Landlord will provide such air
conditioning, heating and ventilation upon not less than 24 hours
advance notice from Tenant to Landlord, and Tenant, upon
presentation of a bill therefor, shall pay Landlord for such
services on an hourly basis at the then prevailing rates
therefore as reasonably established by Landlord. If such service
is not a continuation of that
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furnished during regular business hours, Tenant shall pay for a
minimum of three (3) hours of such service. Subject to
provisions set forth below, Landlord shall at all times furnish
the Premises with elevator service, and water for kitchen,
lavatory and drinking purposes. Tenant shall separately meter
the Premises pursuant to Paragraph 3.5(c). Landlord shall
provide janitor service; provided, however, that Tenant shall
pay for any unusual janitorial services required by reason of
any non-Building Standard improvements in the Premises,
including without limitation wall coverings and floor
coverings, installed by or for Tenant under the Work Letter or
otherwise, provided further that Landlord shall deliver to
Tenant, prior to the Commencement Date, detailed
specifications describing the scope and frequency of such
janitorial services. Tenant shall have the option to provide
its own janitorial service to the Premises in lieu of the
services provided by Landlord, in which case the Estimated
Total Operating Expenses shall be reduced by $4,300. Such
janitorial service shall include the replacement of fluorescent
fixtures as required. Tenant shall pay for replacement of all
other bulbs as required. Landlord shall not be liable for any
failure to furnish any of such services or utilities when such
failure is caused by accidents, strikes, lockouts, other labor
troubles, governmental action, shortages or other conditions
beyond Landlord's reasonable control, and Tenant shall not be
entitled to any damages nor shall any such failure relieve
Tenant of the obligation to pay the full rent reserved herein
or constitute or be construed as a constructive or other
eviction of Tenant. Notwithstanding the foregoing, Tenant
shall, at Landlord's option, upon not less than thirty (30)
days prior written notice, provide its own janitorial service
to the Premises, in lieu of the above services to be provided
by Landlord and, in such event, the said Estimated Total
Operating Expenses shall be reduced by $4,300.
5.2 Tenant will not without the written consent of
Landlord use any apparatus or device in the Premises, including
without limitation electronic data processing machines, punch
card machines and machines using current in excess of 110 volts,
which will in any way increase the amount of water usually
furnished or supplied for use of the Premises as general office
space or that would overload the electrical capacity of the
Premises or require the installation of new electrical lines; nor
connect any apparatus, machine or device with water pipes or
electric current (except through existing electrical outlets in
the Premises) for the purpose of
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using electric current or water, except as provided in the Work
Letter. Landlord agrees to grant such consent when required
for Tenant's installation of photo reproduction machines and
other equipment commonly used in the banking business, provided
that the installation of any additional utility lines required
for such use shall be the responsibility of Tenant. If Tenant
shall require electric current in excess of that and for all
other electrical current metered to the Premises. Tenant shall
first obtain the consent of Landlord, which Landlord may
reasonably refuse, to the use thereof and Landlord may cause an
electric current meter to be installed in the Premises to
measure the amount of electric current consumed for any such
other use. Tenant, however, may connect to the hot water line
and the condensed water line in the ceiling above the Premises
for heating and air conditioning purposes. The cost of any
such meter and of installation, maintenance and repair thereof
shall be paid for by Tenant and Tenant agrees to pay Landlord
promptly upon demand by Landlord for all such electric current
consumed for any such other use as shown by said meter provided
by the Building system installed by Landlord pursuant to the
Work Letter, at the rates charged for such services by the
local public utility furnishing the same, plus any additional
expense incurred in keeping account of the electric current so
consumed. If any lights, machines or equipment (including, but
not limited to computers) are used by Tenant in the Premises
which materially affect the temperature otherwise maintained by
the air conditioning system, or generates substantially more
heat in the Premises than would be generated by the Building
Standard lights and usual fractional horsepower office
equipment, Landlord shall have the right to install any
machinery and equipment which Landlord reasonably deems
necessary to restore temperature balance, including, but not
limited to modifications to the standard air conditioning
equipment, and the cost thereof, including the cost of
installation and any additional cost of operation and
maintenance occasioned thereby, shall be paid by Tenant to
Landlord upon demand by Landlord.
USE OF PREMISES
Article 6.
Tenant shall use and occupy the Premises for the
conduct of a banking facility and purposes incidental thereto or
for any other general office purpose and for no other use or
purpose provided that such general office purpose is in
connection with the conduct and operation of a business commonly
conducted and operated from the ground floors of comparable
office buildings in the Orange and Los Angeles County areas and
provided further in no event may Tenant permit the occupancy and
use of the Premises by any governmental agency. In respect
thereto, Landlord shall not during the first ten (10) years of
the term of this Lease, lease any other space on the ground floor
of the Building to any other banking business (excluding thrift
and savings institutions), so long as the Premises are being used
for banking purposes. Tenant shall not use or occupy the Premises
for the purpose of any medical or dental office, clinic,
laboratory or similar business, without the prior written consent
of Landlord. Tenant shall not use or occupy the Premises in
violation of law and shall, upon five (5) days written notice
from Landlord, discontinue any use of Premises which is declared
by any governmental authority having jurisdiction to be a
violation of law. Tenant, at its sole cost and expense, shall
comply with any direction of any governmental
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authority having jurisdiction which shall impose any duty upon
Tenant or Landlord with respect to the Premises or the use or
occupation thereof, by reason of the nature of Tenant's use or
occupancy of the Premises. Tenant shall not do or permit to be
done anything which will invalidate or increase the cost of any
fire and extended coverage insurance policy covering the
Building and/or property located therein Tenant shall promptly
upon demand reimburse Landlord for any additional premium
charged for such policy by reason of Tenant's failure to comply
with the provisions of this Article.
ACCEPTANCE OF PREMISES; RIGHT OF FIRST REFUSAL
Article 7.
7.1 Landlord hereby makes the following covenants,
warranties and representations to Tenant:
A. Landlord shall operate and maintain the
Building, other than portions leased to third parties, in a
clean, orderly and first class manner.
B. Landlord shall deliver to Tenant, prior to the
Commencement Date, a certificate of the architect/designer of the
Building certifying as to the Net Rentable Area of the Premises
and of the Building. If said areas are different than those set
forth in Item 2 of the Basic Lease Provisions, Landlord and
Tenant shall appropriately modify Tenant's Proportionate Share,
as defined in Section 3.1, the Initial Basic Annual Rent and
Monthly Rental Installments, as set forth in Items 3 and 4 of the
Basic Lease Provisions and the Estimated Total Operating
Expenses, as set forth in Item 6 of the Basic Lease Provisions.
C. Any and all patent and latent defects in the
Building, other than improvements installed by individual tenants
(including Tenant), shall be promptly repaired or reasonably
corrected by Landlord, at Landlord's expense, as soon as
reasonably possible after Landlord receives notice thereof and
other than patent defects in the Premises or which Tenant fails
to give Landlord written notice within the ninety (90) day period
specified in Section 7.2 below, which shall be repaired and
reasonably corrected by Tenant.
D. Landlord shall deliver to Tenant, prior to
the Commencement Date, a non-disturbance agreement from all
lenders having liens against the real property upon which the
Building is located, having priority to this Lease, which
non-disturbance agreement shall state that Tenant's quiet
possession of the Premises shall not be disturbed so long as
Tenant is not in "material breach", as defined in Section 21.1
below, of any of the terms of this Lease.
7.2 Except as otherwise set forth in this Lease,
Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty with respect to
the Premises or the Building or with respect to the suitability
or fitness of either for the conduct of Tenant's business or for
any other purpose. The taking of possession
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or use of the Premises by Tenant for any purpose other than
construction shall conclusively establish that the Premises and
the Building were at such time in satisfactory condition
(except for latent defects) and in conformity with the
provisions of this Lease in all respects, except as to any
items as to which Tenant shall give Landlord written notice in
reasonable detail within ninety (90) days after Tenant takes
such possession or commences such use of the Premises or the
term of this Lease otherwise commences as provided in Article 1
above. Nothing contained in this Article 7 shall affect the
commencement of the term of this Lease or the obligation of
Tenant to pay rent hereunder as provided in Article 2 above.
Landlord shall promptly take such action as may reasonably be
required to remedy any actual defects of which it is notified
as provided above.
7.3 Following the expiration of the second year of the
term of this Lease, Tenant may, from time to time, notify
Landlord in writing that it desires to lease additional space on
Floors 2, 3 and/or 4 in the Building, specifying in such notice
the minimum and maximum size of the space Tenant desires to
lease. In the event that space on said floors, or any of them, in
the Building thereafter is available for lease, or will within
six (6) months become available for lease, satisfying the space
requirements set forth in the most recent notice from Tenant,
Landlord agrees to notify Tenant of such space and to give
to Tenant a first opportunity to negotiate with Landlord to lease
such space and not to offer such space to or negotiate a lease
for such space with any third party while negotiations with
Tenant are proceeding. Landlord reserves the right to
discontinue negotiations with Tenant, at any time, by giving
written notice to Tenant, if Landlord determines, in its sole
discretion, that such negotiations are not likely to produce a
lease agreement on terms then satisfactory to Landlord, or if a
lease satisfactory to Landlord has not been executed within
thirty (30) days of Landlord's notice to Tenant of such space.
Space shall not be deemed to be available for lease for the
purposes of this Section so long as Landlord is negotiating with
the then occupant of such space to re-lease such space and
Tenant's rights under this Section shall be subject to any and
all rights of first refusal, options to renew or extend and/or
expansion options either heretofore or hereafter granted to other
occupants of the Building or of the Project. Unless Tenant
notifies Landlord in writing within ten (10) days of its receipt
of any notice from Landlord of the availability of space in the
Building that it does not desire such space (upon Landlord's
receipt of such notice any rights of Tenant to negotiate for such
space under this Section shall terminate), Tenant's rights under
this Section 7.3 shall automatically terminate in the event that
Tenant refuses to lease such space on terms offered by Landlord
to Tenant upon Landlord's leasing such space to a third party for
a rent and upon terms not substantially less favorable to the
lessee than those rejected by Tenant. Nothing contained in this
Section shall be construed as obligating Landlord to divide space
becoming available for lease in order to satisfy Tenant's space
requirements. Tenant's sole remedy in the event of a default by
Landlord under this Section shall be to recover damages, it being
understood that Tenant hereby waives any right to specifically
enforce the provisions of this Section 7.3. (Provided such
notice includes the following statement in capital letters: "A
FAILURE TO RESPOND TO THIS NOTICE WITHIN TEN (10) DAYS OF RECEIPT
MAY RESULT IN A LOSS OF RIGHTS UNDER SECTION 7.3 OF YOUR LEASE
FOR GROUND FLOOR SPACE IN THE ONE PACIFIC PLAZA BUILDING,
HUNTINGTON BEACH, CALIFORNIA.")
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ALTERATIONS AND EQUIPMENT
Article 8.
8.1 Tenant shall make no alterations, additions or
improvements to the Premises, other than usual decorating
work, without the prior written consent of Landlord, which
consent shall not be unreasonably withheld, and Landlord may
impose as a condition to such consent the right to approve and
to require a bond, in form and amount satisfactory to
Landlord, from the contractor selected by Tenant to perform
such work, the right to approve the contractor selected by
Tenant to perform such work and the requirements applicable to
alterations, additions or improvements in the Work Letter.
All such alterations, additions or improvements including,
without limitation, those constructed or installed by or under
Tenant pursuant to the Work Letter, shall become the property
of Landlord and shall be surrendered with the Premises, as a
part thereof, at the end of the tern hereof except those
described on the attached Exhibit "E".
8.2 All articles of personal property and all trade
fixtures, machinery and equipment, furniture and movable
partitions owned by Tenant or installed by Tenant at its expense
in the Premises shall be and remain the property of Tenant and
may be removed by Tenant at any time during the Lease Term when
Tenant is not in material default hereunder, provided that Tenant
repairs any damage to the Premises or the Building caused by such
removal. On the expiration of the term of this Lease, or on any
earlier termination of this Lease, Tenant shall remove all such
personal property, etc., in accordance with the provisions of
Article 22 below.
8.3 Subject to obtaining all requisite governmental
approvals and Tenant's compliance with all applicable laws and
the Declaration, Tenant shall have the right, at Tenant's sole
cost and expense, to install two (2) exterior drive through
banking lanes with appropriate electronic banking equipment
adjacent to the Ground Floor Premises as depicted on Exhibit "A,"
with the prior written consent of Landlord of the plans and
specifications for such work, which consent shall not
unreasonably be withheld. All construction of said drive-through
banking lanes shall comply with the provisions of Section 8.1 and
8.2 above and shall be performed in a manner so as to minimize,
to the extent reasonably possible, interference with the use and
operation of the Common Areas adjacent to the work site. Tenant
shall maintain the Drive-Through Facilities in good condition and
repair and promptly correct and/or restore any defects in or
damage resulting from casualty or condemnation to the
Drive-Through Facilities, at its sole cost and expense. All
utilities used in connection with the Drive-Through Facilities
shall be separately metered, at Tenant's expense, and Tenant
shall pay all utility costs incurred in connection therewith.
The Drive-Through Facilities shall be deemed to be a portion of
the Premises for the purposes of Articles 4, 6 through 15 and 22
of this Lease.
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From and after the date that Tenant commences the
construction or the Drive-Through Facilities, the Basic Annual
Rent shall be increased by an amount equal to the product of nine
(9) (being the number of parking spaces or potential parking
spaces in any underground or multi-level parking garage or
structure within the Project to Tenant and other occupants of the
Building or, in the absence of any such garage or structure,
$360.00 and Monthly Rental Installments shall be proportionately
increased; provided that if Tenant elects to construct only one
drive-through lane, said increase shall be equal to the product
of nine times the then annual charge for unassigned parking
spaces in any such underground or multi-level parking garage or
structure or, in the absence of any such garage or structure,
$240.00 per year per space and Monthly Rental Installments shall
be proportionately increased.
LIENS
Article 9.
Tenant shall keep the Premises and the Building free
from any mechanics liens arising out of any work performed by or
under the materials furnished to or obligations incurred by or
under Tenant. Tenant agrees to defend, indemnify and hold
harmless Landlord from and against any such lien or claim or
action thereon, together with costs of suit and reasonable
attorneys' fees incurred by Landlord in connection with any such
claim or actions.
TAX ON TENANT'S PROPERTY
Article 10.
10.1 Tenant shall be liable for and shall pay prior to
delinquency all taxes levied against any personal property or
trade fixtures placed by Tenant in or about the Premises. If any
such taxes on Tenant's personal property or trade fixtures are
levied against Landlord or Landlord's property and if Landlord,
after a minimum of thirty (30) days prior written notice to
Tenant, pays the same, which Landlord shall have the right to do
regardless of the validity of such levy, but only under proper
protest if requested by Tenant, or if the assessed value of
Landlord's property is increased by the inclusion therein of a
value placed upon such personal property or trade fixtures of
Tenant and if Landlord, after written notice to Tenant, pays the
taxes based upon such increased assessment, which Landlord shall
have the right to do regardless of the validity thereof, but only
under proper protest if requested by Tenant, Tenant shall, upon
demand, as the case may be, repay to Landlord the taxes so levied
against Landlord, or the proportion of such taxes resulting from
such increase in the assessment; provided that, in any such
event, Tenant shall have the right, in the name of Landlord and
with Landlord's full cooperation, but at no cost to Landlord, to
bring suit in any court of competent jurisdiction to recover the
amount of any such taxes so paid under protest, any amount so
recovered to belong to Tenant.
10.2 If the Tenant improvements in the Premises,
whether installed and/or paid for by Landlord or Tenant and
whether
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or not affixed to the real property so as to become a part
thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which Tenant
improvements conforming to Landlord's "Building Standard" in
other space in the Building are assessed, then the real
property taxes and assessments levie against Landlord or
Landlord property by reason of such excess assessed valuation
shall be deemed to be taxes levied against personal property of
Tenant and shall be governed by the provisions of Section 10.1
above.
MAINTENANCE AND REPAIR
Article 11.
11.1 Subject to the provisions of Section 11.2 below
Tenant shall maintain the Premises and fixtures therein in good
condition and repair, and subject to the provisions of Article 17
below, shall reimburse Landlord for all repair thereto or to the
Building which are made necessary as a result of any misuse or
neglect by Tenant, or any of its officers, agents, employees,
contractors, licensees, visitors, guests or invitees, except to
the extent that such repairs are covered by insurance maintained
by Landlord. Tenant shall also maintain the HVAC system
installed by Tenant in the Premises.
11.2 Subject to the provisions of Article 5.1 and
Article 17 hereof Landlord shall repair and maintain the Building
structure and public areas, and the plumbing, elevator and
electrical systems servicing the Premises, the exterior sides of
demising walls, and exterior parking and landscaping (other than
those areas that are expressly the responsibility of Tenant).
Landlord shall not be liable for any failure to make any repairs
or to perform any maintenance unless such failure shall persist
for an unreasonable time after written notice (or telephone
notice in the case of emergency endangering life or property of
the need for such repairs or maintenance is given to Landlord by
Tenant. In any event, Tenant shall have the right to make such
repair upon Landlord's failure to do so in a reasonable time
following notice and to recover Tenant's reasonable costs of
making such repairs from Landlord. Except as provided in Article
1, hereof, there shall be no abatement of rent and no liability
of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs,
alterations or improvements in or to any portion of the Building
or the adjacent parking and common areas; provided, however, that
in making such repairs, alterations or improvements to the
Building, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the
Premises.
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ENTRY AND INSPECTION
Article 12.
Tenant will permit Landlord and its agents at any time
in case of emergency, and otherwise upon 24 hours prior written
notice to Tenant, in such manner as to cause as little
disturbance to Tenant as reasonably practicable, to take all
required materials and equipment into the Premises, and perform
all required work therein, including the erection of scaffolding,
props, or other mechanical devices, for the purpose of making
alterations, repairs or additions to the Premises or to any other
portion of the Building as may be provided for by this Lease or
as may be mutually agreed upon by the parties or as Landlord may
be required to make by law or for maintaining any service
provided by Landlord to Tenant hereunder, without any rebate of
rent to Tenant for any loss of occupancy or damage, injury or
inconvenience thereby occasioned, unless resulting from the
negligence or improper behavior on the part of Landlord or its
agents or contractors. Tenant shall also permit Landlord and its
agent, upon 24 hour prior written request, to enter and/or pass
through the Premises or any part thereof, at reasonable times
during normal business hours and accompanied at all times by an
authorized agent of Tenant to inspect the Premises and/or to show
the Premises to holders of encumbrances of the interest of
Landlord under the Lease, or prospective purchasers, mortgagees
or lessees of the Building as an entirety, and during the period
of six (6) months prior to the expiration date of this Lease,
Landlord may exhibit the Premises to prospective tenants in the
same manner. Landlord shall also have the right to enter or
and/or pass through the Premises, or any part thereof, at such
times as such entry shall be required by circumstances of
emergency affecting the Premises or any other portion of the
Building. If during the last thirty (30) days of the term hereof
Tenant shall have removed substantially all of Tenant's property
and personnel from the Premises, Landlord may enter the Premises
and repair, alter and redecorate the same, without abatement of
rent and without liability to Tenant, and such acts shall have no
effect on this Lease.
HOLD HARMLESS AND NON-LIABILITY
Article 13.
Tenant agrees to hold harmless and to indemnify
Landlord, Landlord's partners and/or joint venturers and the
officers and/or partners of such partners and/or join venturers,
from and against any and all claims arising from
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injury of persons, loss of life or damage to property occurring
in or about the Premises and from and against any and all
costs, expenses and liabilities (including without limitation
reasonable attorney's fees) incurred by Landlord, and/or said
other indemnitees, or any of them, and/or inconnection with any
such claim or any proceeding based thereon, to the extent such
injury, loss of life or damage arises out of the negligent or
willful act or failure to act of Tenant, or any of its
officers, employees, agents, con-tractors, licensees, visitors,
guests or invitees, or out of Tenant's breach of this Lease, or
out of Tenant's use of the Premises or the conduct of its
business from the Premises, and not arising out of the
negligent or wilful act or failure to act of Landlord or
Landlords agents, contractors or invitees, nor by patent or
latent defects in the construction of the Building. Except in
the case of Landlord or Landlord's agents' or contractors'
negligence or wilful act, neither Landlord nor its agents shall
be liable for any damage to property entrusted to employees of
the Building, nor for loss or damage to any property by theft
or otherwise, nor for any injury to or damage to persons or
property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water or rain which may leak from any
part of the Building or from pipes, appliances or plumbing
works therein or from the roof, street or subsurface or from
any other place resulting from dampness or any other cause
whatsoever, unless caused by or due to the negligence of
Landlord, its agents, servants or employees. Neither Landlord
nor its agents shall be liable for interference with the light
or other incorporeal hereditaments, loss of business by Tenant.
Tenant shall give prompt notice to Landlord in case of fire or
accidents in the Premises or in the Building or defects
therein. Notwithstanding anything contained herein to the
contrary, Landlord shall not be required to reimburse Tenant
for loss or damage resulting from Landlord's or Landlord's
agents' or contractors' willful or negligent acts if and to the
extent that Tenant is reimbursed by insurance proceeds covering
such acts.
Throughout the term of this Lease Tenant shall
maintain in effect comprehensive public liability and property
damage insurance with limits of liability of not less than ONE
MILLION DOLLARS ($1,000,000.00) combined single limit, naming
Landlord as an additional named insured under the policy. The
cost of naming Landlord as an additional insured on said policy
shall be borne by Tenant to the extent of the first $100.00
with any excess in cost for so naming Landlord to be paid by
Landlord. Tenant agrees to furnish and to maintain with
Landlord at all times during the term of this Lease, a current
certificate evidencing the insurance required by this Article,
which certificate shall contain an
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agreement by the insurer that said policy shall not be canceled
or materially changed without at least ten (10) days prior
written notice to such additional named insureds. Any such
policy of insurance shall be primary and not contributing with
any insurance provided by Landlord. Any such policy of public
liability and property damage insurance shall provide that any
loss shall be payable to Landlord notwithstanding any act or
negligence of Tenant which might otherwise result in the
forfeiture of such insurance, if available, but any additional
charge for such provision shall be paid by Landlord, unless
Landlord waives the provisions of this sentence.
WAIVER OF SUBROGATION
Article 14.
Landlord and Tenant hereby release the other from any
and all liability from or to the other party of every kind and
nature which may result from the perils of fire, lightning or
extended coverage perils which causes damage on or to the
Premises, the Building and/or property within the Building owned
by it, such waiver to include situations where the negligence of
one of the parties hereto or his agent, servant or representative
causes or contributes to the occurrence or the result of damage.
Each party agrees to furnish appropriate subrogation waiver
endorsements of their respective fire insurance companies.
ASSIGNMENT AND SUBLETTING
Article 15.
15.1. Tenant shall not, either voluntarily or by
operation of law, assign, pledge or otherwise transfer al1 or any
part of Tenant's leasehold or permit the Premises to be occupied
by anyone other than Tenant or Tenant's employees or sublet the
Premises or any portion thereof, without Landlord's prior written
consent in each instance. Landlord agrees not to unreasonably
withhold its consent to any proposed assignment or sublease,
provided that such assignment or sublease is to a financially
responsible party with a good business reputation. Landlord's
consent given pursuant to this Section in one or more instances
shall not operate to exhaust Landlord's rights under this
Section. A voluntary or other surrender of this Lease by Tenant
or a mutual cancellation hereof shall not work a merger, and
shall, at the option of Landlord, terminate all or any existing
subleases or subtenancies or shall operate as an assignment to
Landlord of such subleases or subtenancies. If Tenant is a
corporation which, under the current guidelines published by the
Commissioner of Corporations of the State of California, is not
deemed a public corporation, or is an unincorporated association
or partnership the transfer, assignment or hypothecation of any
stock or interest in such corporation, association or partnership
in the aggregate in excess of twenty-five percent (25%) shall be
deemed an assignment within the meaning and provisions of this
Section, provided that this sentence shall not be applicable to
the transfer of shares in any corporation operating a bank from
the Premises, unless such transfer is in connection with a
transaction that includes or contemplates the use of the Premises
for a purpose other than as a bank, Tenant agress to reimburse
Landlord for Landlord's reasonable oasts and attorneys' fees
incurred in connection with the processing and documentation of
any such requested assignment, subletting, transfer, change of
cwrership or hypothecation of this Lease or Tenant's interest in
and to the Premises, not to exceed, however, $250.00 per request.
15.2. No subletting or assignment shall relieve Tenant
of its obligations to pay the rent and to perform all of the
other obligations to be performed by Tenant hereunder. The
acceptance by Landlord of any payment due hereunder from any
person, other than Tenant, shall not be deemed to be a waiver by
Landlord of any provision of this Lease or to be a consent to any
assignment, subletting or other transfer or interest.
TRANSFER OF LANDLORD'S INTEREST
Article 16.
In the event of any transfer or transfers of Landlord's
interest in the Premises or in the real property of which the
Premises are a part, other than a transfer for security purposes
only, the transferor shall be automatically relieved of any and
all obligations and liabilities on the part of Landlord accruing
from and after the date of such transfer, provided such
obligations and liabilities are assumed in writing by the
transferee.
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DAMAGE OR DESTRUCTION
Article 17.
17.1 In the event that the Premises or the Building,
or any portion or portions thereof, shall be damaged by fire,
explosion, windstorm or any other casualty, then Landlord shall
repair such damage as rapidly as reasonably possible, allowing
sufficient time for Landlord to settle with any applicable
insurer, and Tenant shall be entitled to an equitable abatement
of the Basic Annual Rent and all additional rent payable at such
time, based upon the extent to which the damage and Landlord's
making of such repairs shall interfere with the business carried
on by Tenant in the Premises. Notwithstanding the foregoing, if
the Premises and/or the Building shall be damaged by any casualty
which Landlord is otherwise obligated to repair, and such damage
shall be to the extent of more than twenty-five percent (25%) of
the value of the Building at the time of such damage, or should
such damage occur during the last twelve (12) months of the term
of this Lease, or should such damage be caused by a casualty not
covered by standard fire and extended coverage insurance or any
other insurance carried by Landlord and exceeds twenty percent
(20%) of the value of the Building at the time of such damage,
then Landlord may in any of such events, at its election upon
notice to Tenant given within thirty (30) days after such damage,
terminate this Lease effective as of the date of the casualty.
Notwithstanding the foregoing, there shall be no abatement of
rent by reason of any portion of the Premises being unusable for
a period equal to one (1) day or less. Unless this Lease is
terminated by Landlord pursuant to this section, Tenant may
terminate this Lease unless Landlord commences the restoration
and repair of such casualty damage required by this Section and,
subject to force majeure, substantially completes the work of
such restoration and repair and repair within eight (8) months of
the date of such casualty.
If the Premises cannot be occupied and used for banking
purposes as a result of casualty damage to the Premises or the
Building and if this Lease is not terminated under this Section
17.1 by reason of such casualty to the point tht the Premises can
be reoccupied for banking purposes, Landlord agrees to cooperate
reasonably with Tenant to permit Tenant's temporary use and
occupancy of such space until Tenant reasonably can reopen the
Premises for the conduct of its banking business. In such event,
Tenant shall execute a lease for such space on Landlord's then
standard form applicable to such space, modified to conform to
this Section, and pay the lesser of (i) the then market rate for
such space or (ii) a pro rata portion of the rent payabe under
this Lease prior to such casualty increased by the Additional
Rent payable under Article 3 for the preceding calendar year,
based on the ratio between the net rentable area in the Premises
and the net rentable area in such space to be leased by Tenant.
Any and all leasehold improvements required for the use and
occupancy of such space shall be constructed by Tenant, at
Tenant's sole cost and expense, shall be approved by Landlord,
which approval shall not unreasonably be withheld, and shall be
removed by Tenant promptly upon the expiration of the term of such
lease and any damage resulting from such removal shall be
repaired by Tenant. A default by Tenant under any such lease
shall constitute a default under this Lease and any default under
this Lease by Tenant shall constitute a default by Tenant under
such new lease. Space previously leased and occupied by lessee
shall not be deemed available for lease so long as Landlord is
negotiating with the occupant of such space for a new lease
and/or an extension or renewal of an existing lease. Nothing
contained herein shall be construed as obligating Landlord to
divide any space available for lease so as to permit Tenant's
occupancy of less than all of the said space. Tenant agrees to
promptly repair and/or replace its leasehold improvements,
fixtures and equipment upon Landlord's completion of its repairs
to the Premises and/or the Building required for Tenant's work
and the use and occupancy of the Premises. If such suitable
space in the Building is not available following any such
casualty, if this Lease is not terminated under Section 17.1
above and if there is an unleased vacant building pad in any
portion of the Project, then owned by Landlord, free of option
and/or purchase agreements, Landlord agrees to rent space upon
such building pad, or upon any portion of the common area in the
Project, to Tenant for the erection and operation of a temporary
banking facility, pursuant to plans for such work approved by
Landlord (such approval shall not unreasonably be withheld) for
the temporary term contemplated above. Tenant shall pay as
rental for such use a proportionate share of the rental then
payable hereunder, based upon the net rentable area occupied by
Tenant in such temporary facility to the net rentable area of the
Premises, together with a pro rata share of the expenses
described in Section 35(h) allocable to the parcel upon which
Tenant's temporary facilities are situated under the Declaration
based upon the ratio between the building area (as defined in the
Declaration) in such temporary facility to the total building
area allowed to be constructed on such parcel under the
Declaration. Except for term, location of the leased premises and
rental, such rental agreement shall be upon the terms
contemplated in Section 1.2 above; provided that if such
temporary facility is located on a building pad, Tenant's tax
liability shall include the land tax allocable to the land area
occupied by such temporary facility.
17.2 No damages, compensation or claim shall be
payable by Landlord for inconvenience, loss of business or
annoyance arising from any repair or restoration of any portion
of the Premises or other portion of the Building. Landlord shall
use its best efforts to effect such repair or restoration
promptly and in such manner as not unreasonably to interfere with
Tenant's use and occupancy.
17.3 Landlord shall not be required to carry insurance
of any kind on Tenant's property and, except by reason of the
breach by Landlord of any of its obligations hereunder
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(subject to the provisions of Article 14), shall not be obligated to repair
any damage thereto or to replace the same.
17.4 A total destruction of the Building shall
automatically terminate this Lease, provided, however, that
Tenant may thereafter for a period of not to exceed sixty (60)
days, enter the Premises for the purpose of salvaging personal
property and conducting investigations.
EMINENT DOMAIN
Article 18.
18.1 If the whole of the Premises or so much thereof as
to render the balance unusable by Tenant shall be taken under
power of eminent domain, this Lease shall automatically terminate
as of the date of such condemnation, or as of the date possession
is taken by the condemning authority, whichever is earlier. No
taking of the Drive-Through Facilities shall be deemed to render
the balance of the Premises unusable by Tenant. No award for any
partial or entire taking shall be apportioned, and Tenant hereby
assigns to Landlord any award which may be made in any taking or
condemnation affecting the Premises or any portion of the
Project, together with any and all rights of Tenant now or
hereafter arising in or to the same or any part thereof,
provided, however, that nothing contained herein shall be deemed
to give Landlord any interest in or to require Tenant to assign
to Landlord any award made to Tenant for the taking of the
unamortized value of improvements installed by or under Tenant,
amortized on a straight-line basis over the last twenty-five (25)
years of the term of this Lease, including any unexercised
extension options.)
18.2 In the event of a partial taking which does not
result in a termination of this Lease, rent shall be abated in
proportion to the part of the Premises so made unusable by
Tenant.
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EXHIBIT C
RULES AND REGULATIONS ATTACHED
TO AND MADE A PART OF OFFICE LEASE
1. The sidewalks, entrances, passages, courts, elevators,
vestibules, stairways, corridors or halls of the Building shall not be
obstructed or used for any purpose other than ingress and egress. The halls,
passages, entrances, stairways, balconies and roof are not for the use of the
general public, and Landlord shall in all cases retain the right to control
and prevent access thereto by all persons whose presence in the judgment of
the Landlord shall be prejudicial to the safety, character, reputation or
interests of the Building and its tenants, provided that nothing herein
contained shall be construed to prevent such access by persons with whom
Tenant normally deals in the ordinary course of its business unless such
persons are engaged in illegal activities or violate Landlord's applicable
rules and regulations. No tenant and no employees of any tenant shall go upon
the roof of the Building without the writing consent of Landlord.
2. No awnings or other projections shall be attached to the
outside walls of the Building without the prior written consent of Landlord.
No hanging planters, television sets or other objects shall be attached to or
suspended from ceilings without the prior written consent of Landlord. No
curtains, blinds, shades or screens shall be attached to or hung in, or used
in connection with, any window or door of the Building, without the prior
written consent of Landlord. Except as otherwise specifically approved by
Landlord, all electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Building must be fluorescent, of a quality, type, design and
bulb color approved by Landlord.
3. No signs, advertisement or notice shall be exhibited, painted
or affixed by any tenant on any part of, or so as to be seen from the outside
of, his premises or the Building without the prior written consent of the
Landlord. In the event of the violation of the foregoing by any tenant,
Landlord may remove same without any liability, and may charge the expense
incurred in such removal to the tenant violating this rule. The Building
lobby directory tablet shall be inscribed, painted or affixed for each tenant
by Landlord and shall be of a size, color and style acceptable to Landlord.
4. The wash room partitions, mirrors, wash basins and other
plumbing fixtures shall not be used for any purpose
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other than those for which they were constructed, and no sweepings, rubbish,
rags or other substances shall be thrown therein. All costs incurred to
correct damage resulting from any misuse of the fixtures by a tenant or such
tenant's servants, employees, agents, visitors or licensees shall be promptly
reimbursed Landlord by such tenant upon demand.
5. No tenant shall mark, paint, drill into, or in any way deface
any part of his premises or the Building without the prior written consent of
Landlord. No boring, cutting or stringing of wires or laying of linoleum or
other similar floor coverings shall be permitted except with the prior
written consent of Landlord and as Landlord may direct.
6. No bicycles, vehicles, vending machines or animals of any kind
shall be brought into or kept in or about the Building and no cooking shall
be done or permitted by any tenant on his premises except that the
preparation of coffee, tea, hot chocolate and similar items for the tenant
and its employees and business visitors shall be permitted. No tenant shall
cause or permit any unusual or objectionable odors to escape from his
premises. Landlord acknowledges that Tenant's premises will include an
employee's kitchen with stove and microwave for use by employees and caterers
catering Board of Director's meetings and other bank related meetings and
bank related activities and agrees that nothing contained in this Paragraph 6
shall be construed as prohibiting such use of the premises, provided that
offensive cooking odors do not escape from the premises.
7. No premises within the Building shall be used for manufacturing
or for the storage of merchandise without Landlord's prior written consent,
except as such storage may be incidental to the use of such premises for
general office purposes. No tenant shall occupy or permit any portion of his
premises to be occupied as an office for a public stenographer or typist, or
for the manufacture or sale of liquor, narcotics, or tobacco in any form, or
as a medical office, or as a barber shop, manicure shop or employment agent,
except with Landlord's prior written consent. No tenant shall engage or pay
any employees on his premises except those actually working for such tenant
on his premises nor advertise for laborers giving an address at his premises.
No portion of the Building shall be used for lodging or sleeping without
Landlord's prior written consent nor for any immoral or illegal purpose.
8. No tenant shall make, or permit to be made any unseemly or
disturbing noises, sounds or vibrations or disturb or interfere with
occupants of this or neighboring buildings or premises or those having
business with them whether by the use of any musical instrument, radio,
phonograph, unusual noise, or in any other way.
9. No tenant shall throw or permit to be thrown anything
out of doors or down the passageways.
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10. No tenant shall at any time bring or keep or permit to be
brought or kept upon his premises any inflammable, combustible or explosive
fluid, chemical or substance. No tenant shall do or permit anything to be
done in his premises, or bring or keep anything therein, which shall in any
way increase the rate of fire insurance on the Building or on the property
kept therein, or obstruct or interfere with the rights of other tenants, or
in any way injure or annoy them, or conflict with the regulations of the Fire
Department or the fire laws, or with any insurance policy upon the Building
or any part thereof, or with any rules and ordinances established by the
local health authority or other governmental authority.
11. All removals, or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the
hours which the Landlord may determine from time to time. The moving of safes
or other fixtures or bulky matter of any kind must be made upon previous
notice to the manager of the Building and under his supervision and the
persons employed by any tenant for such work must be acceptable to the
Landlord. The Landlord reserves the right to inspect all safes, freight or
other bulky articles to be brought into the Building. The Landlord reserves
the right to prohibit or impose conditions upon the installation in the
Premises of heavy objects which might overload the Building floors.
12. No tenant shall purchase or otherwise obtain for use in his
premises, water, ice, towel, vending machine, janitorial, maintenance or
other services of any kind except from persons authorized by Landlord, and at
hours and under regulations fixed by Landlord.
13. Landlord shall have the right to prohibit any advertising by
any tenant which, in Landlord's opinion, tends to impair the reputation of
the Building or its desirability as an office building and upon written
notice
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from Landlord any tenant shall refrain from or discontinue such advertising.
14. Landlord reserves the right to exclude from the Building
between the hours of 7 p.m. and 7 a.m. and at all hours of Sundays and legal
holidays all persons who do not present a pass to the Building signed by the
Landlord. The Landlord shall furnish passes to persons for whom any tenant
requests the same in writing. Each tenant shall be responsible for all
persons for whom he requests passes and shall be liable to the Landlord for
all acts of such persons.
15. Any persons employed by any tenant to do janitor work, shall,
while in the Building and outside of his premises, be subject to and under
the control and direction of the manager of the Building (but not as an agent
or servant of said manager or of the Landlord, and tenant shall be
responsible for all acts of such persons). Except with Landlord's prior
written permission, no tenant shall permit janitorial services to be
performed during the hours of 7:00 a.m. to 6:00 p.m. Mondays through Fridays.
16. All doors opening into public corridors shall be kept closed,
except when in use for ingress and egress.
17. The requirements of tenants will be attended to only upon
application to the building manager's office of the Building.
18. Canvassing, soliciting and peddling in the Building are
prohibited and each tenant shall cooperate to prevent the same.
19. All office equipment of any electrical or mechanical nature
shall be placed by tenants in their premises in settings approved by
Landlord, to absorb or prevent any vibration, noise or annoyance.
20. No air conditioning unit or other similar apparatus shall be
installed or used by any tenant without the written consent of Landlord.
21. There shall not be used, in any space, or the public halls of
the Building, either by any tenant or others, any hand trucks except those
equipped with rubber tires and side guards.
22. Landlord will direct electricians as to where and how
telephone or telegraph wires are to be introduced. No boring or cutting for
wires or stringing of wire will be
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allowed without written consent of Landlord. The location of telephones,
call boxes and other office equipment affixed to the premises shall be
subject to the approval of Landlord.
23. Tenants shall cooperate with Landlord in obtaining maximum
effectiveness of the cooling system when outside temperatures are in excess
of 65 by closing drapes when the sun's rays fall directly on windows of the
Premises. Tenant shall not obstruct, alter or in any way impair the
efficient operation of Landlord's heating, ventilating and air conditioning
system and shall not place bottles, machines, parcels or any other articles
on the induction unit enclosure so as to interfere with air flow. Tenant
shall not tamper with or change the setting of any thermostats or temperature
control valves.
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SIGN CRITERIA
"None "
Exhibit "D"
<PAGE>
EXHIBIT "E"
1. Vault door.
2. Safety deposit boxes, including frames.
3. Chandeliers.
4. Teller counters and booth.
5. Telephone and other communication systems, including
cables for service, business and printing.
6. Computer and computer cable systems.
7. Decorator items, such as wood carvings attached to ceilings or walls
(other than wall coverings such as fabrics and/or paneling and
molding), provided that any damage to ceilings and/or walls resulting
from such removal is repaired by Tenant.
EXHIBIT "E"
<PAGE>
CONDITION SUBSEQUENT
Article 19.
Tenant shall use its best efforts and diligently pursue
obtaining the approval of this Lease by the Comptroller of the
Currency of the United States Government. In the event Tenant
does not obtain such approval within 45 days after mutual
execution hereof, Landlord may terminate this Lease by giving
written notice of such termination to Tenant at any time prior to
the date such approval is obtained by Tenant. In the event that
the Comptroller of the Currency disapproves of this Lease by
giving written notice of such disapproval to Tenant and in the
further event that Landlord is unwilling to make modifications to
this Lease required to obtain such approval within thirty (30)
days of Landlord's receipt of a copy of said notice of
disapproval, Tenant may terminate this Lease by giving written
notice of such disapproval to Landlord. Tenant agrees to promptly
deliver a copy of any such notice of disapproval received by
Tenant to Landlord. In the event of such termination, each of
the parties shall be excused from all covenants and obligations
to be performed or observed after the date of such termination,
and all deposits, moneys, plans and drawings delivered to
Landlord by Tenant shall be returned to Tenant.
PARKING
Article 20.
20.1 Subject to Section 20.4 and 20.5 below, Landlord shall
maintain at all times, and without fee to Tenant, Tenant's employees or
invitees, and with free validation2, for use as a visitor and temporary
parking area, the portion or portions of the parking area cross-hatched on
Exhibit "B", which shall provide for 20 parking spaces immediately adjacent
to the Premises for the exclusive use of Tenant's invitees. Said
cross-hatched portion of the parking area shall not be relocated or altered
in any material way without Tenant's approval, which approval shall not
unreasonably be withheld, and no specific parking spaces shall be assigned to
any person within such cross-hatched portion of the parking area, provided,
however, that Tenant may erect parking identification and limitation signs in
this area with Landlord's prior written consent, which shall not be
unreasonably withheld. Landlord hereby designates Tenant as the agent of
Landlord to enforce the exclusivity of said parking area, and Tenant may take
all reasonable action necessary to so enforce such exclusivity, provided that
Tenant indemnify Landlord from and against any liability or loss by reason of
such action. Landlord shall not be responsible for the improper use of said
parking area by unauthorized persons.
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No monthly charges or parking charges shall be payable with
respect to said twenty parking spaces during the first ten (10)
years of the term of this Lease and if a system of validated
parking is instituted, Tenant shall be entitled to free
validated parking for said twenty spaces.
20.2 Except as otherwise provided in paragraph 20.5
hereof, and in addition to the parking described in Paragraph
20.1 hereof, Tenant and Tenant's employees and invitees shall be
entitled, at no cost, fee, or expense whatsoever to Tenant or
Tenant's employees or invitees, (the monthly charges and
validated parking charges described in Section 20.3 below
excepted), to the nonexclusive use in common with Landlord and
others designated by Landlord of such parking facilities as may
from time to time be constructed and maintained for such purposes
by Landlord upon or adjacent to the real property of which
Building is a portion. Tenant agrees to comply with and to cause
its employees and invitees to comply with such reasonable rules
and regulations with respect thereto as Landlord may from time to
time establish. Such rules and regulations may include, but
shall not be limited to the restriction of designated areas for
drive-through banking, restaurant or other drive-through
facilities, periodic and/or seasonal sales activities and the
designation of specific parking spaces and/or areas for parking
by Tenant and/or other occupants of the Building or Project and
their respective employees. Landlord shall not be liable to
Tenant by reason of the failure of any other occupant of the
Building and/or Project to comply with such rules and
regulations, provided that Landlord takes reasonable action to
enforce such rules and regulations. Notwithstanding footnote 1
in this Section 20.2 and Section 20.3 to the contrary no monthly
charge or parking charge shall be payable for surface parking
during the first five (5) years of the term of this Lease and if
a validated parking system is instituted, Tenant shall be
entitled to free validated parking for the use of such surface
parking spaces.
20.3 Landlord reserves the right, but shall not be
obligated, to (i) construct underground or multi-level parking
garages and/or structures, subject, however, to such monthly
rates and other charges that may be established or allowed by
Landlord, or by the operator of such parking areas, at any time
or from time to time during the term of this lease including
monthly rates as permitted by (i) above, (such monthly rates for
Tenant and its employees), shall not exceed monthly rates charged
other tenants in the Building, nor shall such rates exceed, in
any event, the sum of $30.00 per assigned space per month during
the first year such garage and/or structure is operated and the
sum of $20.00 per unassigned space per month during the first
such year of operation, not shall such rates exceed those charged
for assigned and unassigned parking spaces in comparable parking
garages in the County of Orange, State of California, (ii) to set
aside and reserve parking garages and/or structures or areas for
use by certain occupants of the Project, their employees and/or
invitees and/or to institute systems of pay or validated parking
therein, and/or to limit parking in such areas to temporary
parking or temporary parking for use by certain occupants of the
Project, their employees and/or invitees, (iii) to institute
valet parking areas and systems on the Project, or portions
thereof, (iv) subject to Section 20.2 above, to alter and/or
modify the layout and design of the parking and driveway areas
from time to time constructed within or proposed to be
constructed within the Project; provided that Landlord shall at
all times, subject only to condemnation and/or other governmental
restriction, provide or cause to be provided sufficient parking
spaces for the Building to satisfy the
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parking requirements of the City of Huntington Beach then
applicable to the Building.
20.4 Tenant agrees that parking spaces designated for
use by Tenant, its employees, subtenants and the employees of its
subtenants may be either on the surface or within a parking
garage and Tenant agrees to park and to cause its employees,
subtenants and the employees of its subtenants to park within
parking spaces or areas from time to time designated by Landlord
for such purpose, provided that Tenant shall have the
preferential right to select the location of not more than 35
spaces for standard sedan type automobiles during the term of
this Lease for the exclusive use of Tenant, its employees and
invitees on the first or second floor of the parking structure.
In the event that such a parking structure is constructed within
the Project, provided that Tenant makes such selection within
thirty (30) days of Tenant's receipt of written request from
Landlord to make such selection, together with a floor plan of
the structure showing entrances, exits and parking spaces.
Landlord agrees not to make such a request of Tenant prior to the
commencement of construction of said structure. Tenant shall
further have the right to reduce the number of spaces used by
Tenant or Tenant's employees upon not less than thirty (30)days
written notice to Landlord and the operator of the parking
structure.
20.5 In the event that any parking surcharge or
regulatory fee, however designated, should be imposed upon or
levied or assessed against the Project, or any portion thereof,
on or on account of the parking spaces thereon, by any
governmental agency or authority pursuant to the "Clean Air Act",
or any plan implemented pursuant to such Act or any enactment
amendatory or in substitution thereof, or pursuant to any other
governmental act or decree, Tenant acknowledges that Landlord and
the other owners of the Project may elect to impose a parking
charge or additional parking charge upon the users of the parking
areas within the Project in order to recover any such surcharge
or fee from the users of such parking spaces. In the event that
Landlord and said other owners do not elect to collect any such
surcharge or fee from the users of the parking areas within the
Project by instituting such a parking charge, that portion of any
such surcharge or fee payable by Landlord, as the owner of Parcel
1, as per the above described Parcel Map, pursuant to law or
under any agreement for allocation with other owners of the
Project, shall be included within Total Operating Expenses as
defined in Section 3.5.
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DEFAULTS AND REMEDIES
Article 21.
21.1 The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant:
(i) Any failure by Tenant to pay the rental or
to make any other payment required to be made by Tenant
hereunder, where such failure continues for five (5) days after
written notice thereof by Landlord to Tenant.
(ii) The abandonment or vacation of the Premises
by Tenant.
(iii) Any failure by Tenant to observe and
perform any other provision of this Lease to be observed or
performed by Tenant, where such failure continues for thirty (30)
days (except where a different period of time is specified in
this Lease) after written notice by Landlord to Tenant. If the
nature of such default is such that the same cannot reasonably be
cured within such thirty-day period, financial inability
excepted, Tenant shall not be deemed to be in default if Tenant
shall within such period commence such cure and thereafter
diligently prosecute the same to completion.
21.2 In the event of any such default by Tenant, then,
in addition to any other remedies available to Landlord at law or
in equity, Landlord shall have the immediate option to terminate
this Lease and all rights of Tenant hereunder by giving Tenant
written notice of such election to terminate. In the event that
Landlord shall elect to so terminate this Lease then Landlord may
recover from Tenant:
(i) the worth at the time of award of any unpaid
rent which had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount
by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such
rental loss Tenant proves could have been reasonably avoided;
plus
(iii) the worth at the time of award of the amount
by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of such rental loss the Tenant
proves could be reasonably avoided; plus
(iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's
failure to perform his obligation under this Lease or which in
the
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ordinary course of things would be likely to result there from,
and
(v) at Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from
time to time by applicable law.
The term "rent" as used herein shall be deemed to be
and to mean the Basic Annual Rent and all other sums required to
be paid by Tenant pursuant to the terms of this Lease.
As used in subparagraphs (i) and (ii) above, the "worth at the time
of award" is computed by allowing interest at the rate charged by Bank of
America NT&SA on commercial loans to its most creditworthy customers (prime
rate) as of the date thirty (30) days preceding the date of the award. As
used in subparagraph (iii) above, the "worth at the time of award" is
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award, but not greater than ten
percent (10%).
21.3 In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating
this Lease, to reenter the Premises and remove all persons and
property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for
the account of Tenant.
21.4 In the event of the vacation or abandonment of
the Premises by Tenant or in the event that Landlord shall elect
to re-enter as provided above or shall take possession of the
Premises pursuant to legal proceeding or pursuant to any notice
provided by law then if Landlord does not elect to terminate this
Lease as provided in this Article 21, then Landlord may from time
to time, without terminating this Lease, either recover all
rental as it becomes due or relet the Premises or any part
thereof for such term or terms and at such rental or rentals and
upon such other terms and conditions as Landlord in its sole
discretion may deem advisable with the right to make alterations
and repairs to the Premises.
21.5 In the event that Landlord shall elect to so
relet, then rentals received by Landlord from such reletting
shall be applied: First, to the payment of any indebtedness other
than rent due hereunder from Tenant to Landlord; second, to the
payment of any cost of such reletting; third, to the payment of
the cost of any alterations and repairs to the Premises; fourth,
to the payment of rent due and unpaid hereunder; and the residue,
if any, shall be held by Landlord and applied in payment of
future rent as the same may become due and payable hereunder.
Should that portion of such rentals received from such reletting,
during any month which
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is applied by the payment of rent hereunder, be less than the
rent payable during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord immediately upon demand
therefor by Landlord. Such deficiency shall be calculated and
paid monthly. Tenant shall also pay to Landlord as soon as
ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not
covered by the rentals received from such reletting.
21.6 No re-entry or taking possession of the Premises
by Landlord pursuant to this Article 21 shall be construed as an
election to terminate this Lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any
reletting without termination by Landlord because of any default
by Tenant, Landlord may at any time after such reletting elect to
terminate this Lease for any such default.
21.7 In the event of the material and undisputed
default of Tenant hereunder, Landlord shall have the right at
Landlord's option, to suspend or discontinue the services
specified in Article 5, above, or any part thereof, during the
continuance of any such default and any such suspension or
discontinuance shall not be deemed or construed to be an eviction
or ejection of Tenant.
SURRENDER OF PREMISES; REMOVAL OF PROPERTY
Article 22.
22.1 Upon the expiration of the term of this Lease, or
upon any earlier termination of this Lease, Tenant shall quit and
surrender possession of the Premises to Landlord in as good order
and state of repair as the same are now or hereafter may be
improved by Landlord or Tenant, reasonable wear and tear and
repairs which are Landlord's obligation excepted, and shall,
without expense to Landlord, remove or cause to be removed from
the Premises all debris and rubbish, all furniture, equipment and
trade fixtures, free-standing cabinet work, moveable partitioning
and other articles of personal property owned by Tenant or
installed or placed by Tenant at its expense in the Premises and
all similar articles of any other persons claiming under Tenant,
and Tenant shall repair all damages to the Premises resulting
from such removal.
22.2 Whenever Landlord shall re-enter the Premises as
Article 21 hereof, or as otherwise provided in any property of
Tenant not removed by Tenant
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upon the expiration of the term of this Lease (or within
forty-eight (48) hours after a termination by reason of
Tenant's default), as provided in this Lease, shall be
considered abandoned and Landlord may remove any or all of such
items and dispose of the same in any manner or store the same
in a public warehouse or elsewhere for the account and at the
expense and risk of Tenant, and if Tenant shall fail to pay the
cost of storing any such property after it has been stored for
a period of ninety (90) days or more, Landlord may sell any or
all of such property at public or private sale, in such manner
and at such times and places as Landlord, in its sole
discretion, may deem proper, without notice to or demand upon
Tenant, for the payment of all or any part of such charges or
the removal of any such property, and shall apply the proceeds
of such sale: First, to the cost and expenses of such sale,
including reasonable attorneys' fees actually incurred;
second, to the payment of the cost of or charges for storing
any such property; third, to the payment of any other sums of
money which may then or thereafter be due to Landlord from
Tenant under any of the terms hereof; and fourth, the balance,
if any, to Tenant.
22.3 All fixtures, equipment, alterations, additions,
improvements and/or appurtenances attached to or built into the
Premises prior to or during the Term, whether by Landlord at its
expense or at the expense of Tenant or both, shall, be and remain
part of the Premises and shall not be removed by Tenant at the
end of the term the fixtures itemized on the attached Exhibit
"E", excepted such fixtures, equipment, alterations, additions,
improvements and/or appurtenances shall include but not be
limited to: All floor coverings, drapes, panelings, molding,
doors, vaults, plumbing systems, HVAC ducts, fans and other
equipment, lighting systems, silencing equipment communication
systems, all fixtures and outlets for the systems mentioned above
and for all telephone, radio, telegraph and television purposes,
and any special flooring or ceiling installations, except those,
if any, itemized on the attached Exhibit "E".
COSTS OF SUIT
Article 23.
23.1 If Tenant or Landlord shall bring any action for
any relief against the other, declaratory or otherwise, arising
out of or under this Lease, including any suit by Landlord for
the recovery of rent or possession of the Premises, the losing
party shall pay the successful party a reasonable sum for
attorney's fees in such suit and such attorney's fees shall be
deemed to have accrued on the commencement of such action and
shall be paid whether or not such action is prosecuted to
judgment.
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23.2. Should Landlord, or Tenant, without fault on its
part, be made party to any litigation instituted by the other or
by any third party against the other, or by or against any person
holding under or using the Premises or the Building by license of
the other, or for the foreclosure of any lien for labor or
material furnished to or for Tenant or Landlord or any such other
person or otherwise arising out of or resulting from any act or
transaction of Tenant or Landlord or of any such other person,
each party covenants to save and hold the other harmless from any
judgment rendered against them or the Premises or any part
thereof, and all costs and expenses, including reasonable
attorneys' fees, incurred by either party in or in connection
with such litigation.
WAIVER
Article 24.
The waiver by Landlord or Tenant of any breach of any
term, covenant or condition herein contained shall not be deemed
to be a waiver of such term, covenant or condition as to any
subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any term, covenant or condition of
this Lease, other than the failure of Tenant to pay the
particular rental so accepted, regardless of Landlord's knowledge
of such preceding breach at the time of acceptance of such rent.
HOLDING OVER
Article 25.
If Tenant holds over after the term hereof, with or
without the express or implied consent of Landlord, such tenancy
shall be from month to month only, and not a renewal hereof or
any extension for any further term, and in such case Basic Annual
Rent shall be payable in the monthly amount payable immediately
preceding the expiration of the lease term and at the time
specified in Articles 2 and 3 hereof, and such month to month
tenancy shall be subject to every other term, covenant and
agreement contained herein, including the payment of additional
rent under Article 3. Nothing contained in this Article 25 shall
be construed as consent by Landlord to any holding over by Tenant
and Landlord expressly reserves the right to require Tenant to
surrender possession of the Premises to Landlord as provided in
Article 22
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above forthwith upon the expiration of the term of this Lease
or other termination of this Lease.
SUBORDINATION
Article 26.
Tenant agrees that this Lease shall be subject and
subordinate to any first mortgage, or first trust deed heretofore
or hereafter placed by Landlord or its successors in interest
upon its interest in said Premises to secure the payment of
monies loaned, interest thereon, and other obligation, in whole
or in part, at the option of the holder of such first mortgage or
first deed of trust, provided that such first trust deed lender
first delivers to Tenant a nondisturbance agreement in a form
satisfactory to Tenant, Tenant agrees to execute and deliver,
upon demand of Landlord, any and all instruments desired by
Landlord subordinating in the manner requested by Landlord this
lease to such mortgage, trust deed or like encumbrance. The
subordination of this Lease to any such mortgage, deed of trust
or other encumbrance shall, however, be subject to the condition
that in the event of the sale of the real property of which the
Premises are a part upon foreclosure or upon the exercise of a
power of sale, Tenant will attorn to the purchaser and recognize
the purchaser as the Landlord under this Lease.
.
RULES AND REGULATIONS
Article 27.
The Rules and Regulations attached hereto as Exhibit
"C" by this reference are hereby incorporated herein and made a
part hereof. Tenant agrees to abide by and comply with said Rules
and Regulations and any reasonable and nondiscriminatory
amendments, modifications and/or additions thereto as may
hereafter te adopted and published by written notice to tenants
by Landlord for the safety, care, security, good order, and/or
cleanliness of the Premises and/or the Building. Landlord shall
not be liable to Tenant for any violation of such rules and
regulations by any other tenant, provided that Landlord takes
reasonable actions to enforce the terms of such rules and
regulations, including any reguired legal action, required to
either (i) prevent interference with Tenant's use of the Premises
arising from such violation, or (ii) insure that the Building is
operated and used in a manner consistent with other first-class
office buildings in the Southern California area. This Section
shall not require Landlord to institute legal action to enforce
Paragraph 24 of Exhibit "C".
DEFINED TERMS
Article 28.
The words "Landlord" and "Tenant", as used herein shall
include the plural as well as the singular. Words used in
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neuter gender include the masculine and feminine and words used
in the masculine or feminine gender include the neuter. If there
be more than one Tenant, the obligations hereunder imposed upon
Tenant shall be joint and several. The headings or titles to the
Articles of this Lease are not a part of this Lease and shall
have no effect upon the construction or interpretation of any
part thereof.
HEIRS AND ASSIGNS
Article 29.
Subject to the provisions of Article 15 hereof relating
to assignment and subletting, this Lease is intended to and does
bind the heirs, executors, administrators, personal
representatives, successors and assigns of any and all of the
parties hereto.
TIME OF ESSENCE
Article 30.
Time is of the essence of this Lease.
SEPARABILITY
Article 31.
If any term or provision of this Lease shall be held
invalid or unenforceable to any extent, the remainder of this
Lease shall not be affected thereby and each term and provision
of this Lease shall be valid and enforceable to the fullest
extent permitted by law.
ENTIRE AGREEMENT
Article 32.
This instrument along with any exhibits and attachments
or other documents affixed hereto or referred to herein
(including without limitation the Work Letter) constitutes the
entire and exclusive agreement between Landlord and Tenant
relative to the Premises herein described, and this agreement and
said exhibits and attachments may be altered, amended or revoked
only by an instrument in writing signed by both-Landlord and
Tenant. Landlord and Tenant hereby agree that all prior or
contemporaneous oral agreements,
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understandings, and/or practices relative to the leasing of the
Premises are merged in or revoked by this agreement.
WORK LETTER
Article 33.
The Premises shall be finished in accordance with the
Work Letter.
RIGHT OF LANDLORD TO PERFORM
Article 34.
All covenants and agreements to be performed by Tenant
under any of the terms of this Lease shall be performed by Tenant
at Tenant's sole cost and expense and without any abatement of
rent. If Tenant shall fail to pay any sum of money, other than
rent, required to be paid by it hereunder or shall fail to
perform any other act on its part to be performed hereunder,
including without limitation providing or evidencing the
provision of any insurance and/or the payment or any lien, and
such failure shall continue beyond any applicable grace period
set forth in Article 21, Landlord may, but shall not be obligated
so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment, obtain any such
insurance, pay any such lien or perform any such other act on
Tenant's part to be made or performed as in this Lease provided.
All sums so paid by Landlord and all necessary incidental costs,
together with interest thereon at the maximum rate permitted by
law per annum but not to exceed the prime rate charged from time
to time by Bank of America NT & SA plus 5% from the date of such
payment by Landlord, shall be payable to Landlord on demand and
Tenant covenants to pay any such sums, and Landlord shall have
(in addition to any other right or remedy of Landlord) the same
rights and remedies in the event of the nonpayment thereof by
Tenant as in the case of default by Tenant in the payment of the
rent.
INTEREST ON TENANT'S OBLIGATIONS
Article 35.
Any amount due from Tenant to Landlord (other than
interest) which is not paid when due shall bear interest at the
"prime rate" of Bank of America NT & SA or the maximum rate
permitted by law per annum, whichever is less, until
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paid (to the extent enforceable by law), but the payment of
such interest shall not excuse or cure the default.
NOTICES
Article 36.
All notices which Landlord or Tenant may be required,
or may desire, to serve on the other may be served, as an
alternative to personal service, by mailing the same by
registered or certified mail, postage prepaid, addressed as set
forth in Item 12 of the Basic Lease Provisions and if so mailed
shall be deemed to have been served or given twenty-four (24)
hours after deposit in the U.S. Mails. Either party may change
the address for notices set forth in Item 12 by giving written
notice of such change of address to the other.
QUIET ENJOYMENT
Article 37.
Landlord covenants and agrees that Tenant, upon paying
the basic annual rent, additional rent and all other charges
herein provided for and observing and keeping the covenants,
agreements and conditions of this Lease on its part to be kept,
shall have the right to lawfully and quietly have, occupy and
enjoy the Premises during the term of this Lease without
hindrance or molestation of anyone lawfully claiming by, through
or under Landlord, subject, however, to the matters herein set
forth.
ESTOPPEL CERTIFICATES
Article 38.
38.1 Tenant agrees at any time and from time to time
upon not less than ten (10) days prior notice by Landlord to
execute, acknowledge and deliver to Landlord a statement in
writing certifying that this Lease is unmodified and in full
force and effect (or if there have been modifications, that the
same is in full force and effect as modified and stating the
modifications), and the dates to which the basic rent, additional
rent and other charges have been paid in advance, if any, and
stating whether or not to the best knowledge of the signer of
such certificate, Landlord is in default in performance of any
covenant, agreement or condition contained in this Lease and, if
so, specifying each such default of which the signer may have
knowledge, it
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being intended that any such statement delivered pursuant to
this section may be relied upon by any prospective purchaser of
the fee of the Building or any mortgages thereof or any
assignee of any mortgage upon the fee of the Building.
38.2 Landlord agrees at any time and from time to time
upon not less than twenty (20) days prior notice by Tenant to
execute, acknowledge and deliver to Tenant a statement in writing
certifying that this Lease is unmodified and in full force and
effect (or if there shall have been modifications that the same
is in full force and effect as modified and stating the
modifications) and the dates to which the basic rent, additional
rent and other charges have been paid in advance, if any, and
stating whether or not to the best knowledge of the signer of
such certificate Tenant is in default in the performance of any
covenant, agreement or condition contained in this Lease and, if
so, specifying each such default of which the signer may have
knowledge, it being intended that any such statement delivered
pursuant to this Section may be relied upon by any prospective
assignee of the Tenant's interest in this Lease.
ACCESS, CHANGES IN BUILDING
FACILITIES, NAME
Article 39.
39.1 The surfaces of all walls and doors bounding the
Premises (including exterior building walls, core corridor walls
and doors and any core corridor entrance), but excluding inside
surfaces of walls and doors bounding the Premises and any space
in or adjacent to the Premises used for shafts, stacks, pipes,
conduits, fan rooms, ducts, electric or other utilities, sinks or
other building facilities, and the use thereof, as well as access
thereto through the Premises with prior written notice to Tenant
during normal business hours or otherwise accompanied by an
officer of Tenant as to time of desired access for the purposes
of operation, maintenance, decoration and repair, are reserved to
Landlord. Notwithstanding the foregoing, Tenant may install
building signs on the exterior of the Building as permitted by
Article 43 below.
39.2 Tenant shall permit Landlord to install, use and
maintain pipes, ducts and conduits within the demising walls,
bearing columns and ceilings of the Premises.
39.3 Subject to the terms and conditions of Article 3
of the Work Letter, Landlord reserves the right, at any time
before or after completion of the Building, without incurring any
liability to Tenant therefor, to make such changes in or
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to the Building and the fixtures and equipment thereof, as well
as in or to the street entrances, halls, passages, concourse,
elevators, escalators, stairways and other improvements
thereof, as it may deem necessary or desirable, so long as such
changes do not affect the size of the Premises in an adverse
manner and so long as Tenant operates a bank from the Premises,
Landlord agrees to describe the Building by Tenant's bank name
on Building directories.
NONDISCRIMINATION
Article 40.
Tenant herein covenants by and for himself, his heirs,
executors, administrators, personal representatives, successors
and assigns, and all persons claiming under or through him, and
this Lease is made and accepted upon and subject to the following
conditions: That there shall be no discrimination against or
segregation of any person or group of persons, on account of
race, color, creed, sex, national origin, or ancestry, in the
leasing, sub-leasing, transferring, use, occupancy, tenure or
enjoyment of the Premises herein leased nor shall Tenant himself,
or any person claiming under or through him, establish or permit
any such practice or practices of discrimination or segregation
with reference to the selection, location, number, use or
occupancy of tenants, lessees, subtenants, sublessees or vendees
of the Premises.
BROKERS
Article 41.
The parties recognize as the broker who procured this
Lease the firm specified in Item ll of the Basic Lease
Provisions, and agree that Landlord shall be solely responsible
for the payment of brokerage commissions to said broker and that
Tenant shall have no responsibility therefor unless written
provision to the contrary has been made a part of this Lease. If
Tenant has dealt with any other person or real estate broker in
respect to leasing or renting space in the Building, Tenant shall
be solely responsible
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for the payment of any fee due said person or firm and Tenant
shall hold Landlord free and harmless against any liability in
respect thereto.
PROJECT - NO WARRANTY
Article 42.
Nothing contained herein, including without limitation
the first phase site plan attached hereto as Exhibit "B" and/or
in the Declaration shall be construed as obligating Landlord to
construct any improvements within the Project, except for the
Building and the adjacent parking and common areas required by
applicable governmental authorities, nor as a representation or
warranty by Landlord that any portion of the Building or of other
buildings which may be constructed within the Project will be
devoted to any particular use or occupied by any particular
tenant or type of tenant. Landlord reserves the right from time
to time to add or to delete property from the Project and to
amend or terminate, in whole or in part, the covenants,
restrictions and easements established by the Declaration without
Tenant's approval or consent, provided that following any such
addition or deletion continues to be reasonable ingress and
egress to and from the Building and adjacent public streets and
sufficient parking spaces to satisfy the then applicable parking
code requirements of the City of Huntington Beach and provided
further that no such amendment or termination of the said
Declaration that is consistent with Tenant's rights hereunder
shall be binding upon Tenant.
SIGNS
Article 43.
43.1 Subject to approval of all appropriate
governmental authorities, and complying with all applicable laws,
Tenant shall have the exclusive right to install and affix, at
Tenant's sole cost and expense, exterior building signs on the
northeasterly and southwesterly sides of the Building, as
permitted by the regulating municipal authority, p rovided such
signs consist of the name of a bank then operating from the
Premises. Tenant may also install canopy signs on any canopy
constructed as a part of the Drive-Through Facilities, as
permitted by the regulating municipal authority. So long as
Tenant does not use the Premises for a purpose other than as a
bank, Landlord shall not allow any signs on the sides of the roof
to the building, other than the two (2) signs permitted Tenant by
this Section. If Tenant vacates or uses the Premises for a
purpose other than as a bank (a temporary vacation due to
casualty damage, remodeling, etc., excepted) Tenant shall remove
its signs from the roof of the building and its rights to use the
roof of the building for signs under this Section shall
terminate. Landlord reserves the right for other occupants of
the Building to install signs on the exterior sides of the
Building, except those portions of the exterior sides of the
Building enclosing the Premises on or below the first
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floor and/or first floor canopy. Except for signs consistent
with the sign criteria set forth on the attached Exhibit "D",
if any, the size, location and design of any exterior roof
signs to be installed by Tenant shall be subject to the prior
approval of Landlord, which approval shall not unreasonably be
withheld. Tenant shall maintain and repair in a good and
sightly condition and pay any and all utility costs for its
exterior signs. Nothing contained herein shall be construed as
a representation by Landlord that governmental permits and
approvals for either of said signs may be obtained.
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OFFICE LEASE
BETWEEN
LIU CORP.,
A CALIFORNIA CORPORATION
AND
LIBERTY NATIONAL BANK,
A NATIONAL BANKING ASSOCIATION
<PAGE>
TABLE OF CONTENTS
Paragraph Page
- --------- ----
1. Basic Lease Provisions. . . . . . . . . . . . . . . . . . . . . .1
2. Premises, Parking and Common Areas. . . . . . . . . . . . . . . .2
3. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . .4
6. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7. Maintenance, Repairs, Alterations and Common Area Service . . . 5
8. Insurance; Indemnity. . . . . . . . . . . . . . . . . . . . . . 7
9. Damage or Destruction . . . . . . . . . . . . . . . . . . . . . .8
10. Real Property Taxes . . . . . . . . . . . . . . . . . . . . . . .9
11. Utilities and Services. . . . . . . . . . . . . . . . . . . . . .9
12. Assignment and Subletting . . . . . . . . . . . . . . . . . . . 10
13. Default; Remedies . . . . . . . . . . . . . . . . . . . . . . . 11
14. Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . 12
15. Estoppel Certificate. . . . . . . . . . . . . . . . . . . . . . 12
16. Landlord's Liability. . . . . . . . . . . . . . . . . . . . . . 13
17. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 13
18. Interest on Past-due Obligations. . . . . . . . . . . . . . . . 13
19. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . 13
20. Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . 13
21. Incorporation of Prior Agreements; Amendments . . . . . . . . . 13
22. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
23. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
24. Recording . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
25. Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . . 14
26. Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . 14
27. Covenants and Conditions. . . . . . . . . . . . . . . . . . . . 14
28. Binding Effect; Choice of Law . . . . . . . . . . . . . . . . . 14
29. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . 14
30. Attorneys Fees. . . . . . . . . . . . . . . . . . . . . . . . . 14
31. Landlord's Access . . . . . . . . . . . . . . . . . . . . . . . 14
32. Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
33. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
34. Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
35. Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
36. Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
37. Quiet Possession. . . . . . . . . . . . . . . . . . . . . . . . 15
38. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . 15
39. Security Measures-Landlord's Reservations . . . . . . . . . . . 15
40. Easements . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
41. Performance Under Protest . . . . . . . . . . . . . . . . . . . 16
42. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
43. Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
44. No Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
45. Lender Modification . . . . . . . . . . . . . . . . . . . . . . 16
46. Multiple Parties. . . . . . . . . . . . . . . . . . . . . . . . 16
47. Defined Terms and Marginal Headings . . . . . . . . . . . . . . 16
48. Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
49. Substituted Premises. . . . . . . . . . . . . . . . . . . . . . 16
50. Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . 16
51. Addendum . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit "A-1" Floor Plans
Exhibit "A-2" Plot Plan of Building
Exhibit "B" Rules and Regulations
Exhibit "C" Conference Center Reservation/Rental Agreement
Exhibit "D" Exterior Signage
Exhibit "E" Work Letter
<PAGE>
OFFICE LEASE
This OFFICE LEASE (the "Lease") is made this 15th day of December, 1995,
by and between LIU CORP., a California corporation with its office and place
of business located at 17011 Beach Blvd, Suite 826, Huntington Beach,
California 92647 ("Landlord"), and Liberty National Bank, a National Banking
Association, (hereinafter called "Tenant"). With offices and place of
business located at 17011 Beach Blvd., Huntington Beach, CA 92647.
LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord,
subject to all of the terms and conditions hereinafter set forth, those
certain premises (hereinafter called the "Premises") described in Section 1.1
below, and shown attached hereto as Exhibit "A-1". Said Premises are located
in the that certain multi-story Office Tower "Office Tower" situated in the
"Building Project" located on land situated in the City of Huntington Beach,
County of Orange, State of California, all as set forth in paragraph 1.2 of
the Basic Lease Provisions. The following Basic Lease Provisions are an
integral part of this Lease. In the event of any conflict between any Basic
Lease Provision and the balance of this Lease, the latter shall control.
1. Basic Lease Provisions
1.1 Leased Premises: Suites 100 & 120, of the Office Tower, consisting
of approximately 4,216 useable square feet and 4,722 rentable square feet.
The parties agree that 4,216 shall be the figure used for any calculations
based on useable square feet, and 4,722 shall be the figure used for any
calculations based on rentable square feet.
1.2 Office Tower and Building Project: The Building Project is
commonly described as being located at the Southwest corner of Beach Blvd.
and Warner Avenue, with the Office Tower address being 17011 Beach Boulevard,
in the City of Huntington Beach, County of Orange, State of California.
1.3 Use of Premises: Retail Banking and General Offices, subject to
paragraph 6.
1.4 Lease Term: Approximately five (5) years and two (2) months,
commencing upon Tender of Possession, ("Commencement Date") and ending on the
last day of the second month following the fifth anniversary of the
Commencement Date, ("Expiration Date").
The parties shall designate the exact Commencement Date in a letter
or amendment to be attached to this Lease at the time such actual
Commencement Date is ascertained.
Since the Base Rent schedule under this Lease is set forth by month
number, in the event the Commencement Date is other than the first day of a
month, then that first partial month of this lease shall be at the same rate
as scheduled for month 1, with the first full month of this lease being
considered month 1 for purposes of the rent schedule.
1.5 Base Rent: $1.40 per rentable square foot, $6,610.80 per month,
payable in advance on the first day of each month, per paragraph 4.1.
1.6 Base Rent Increases: Fixed for the initial lease term.
1.7 Total Paid Upon Lease Execution: $13,882.68, which represents the
first month's Base Rent and the Security Deposit.
1.8 Security Deposit: $7,271.88
1.9 Tenant's Share of Operating Expenses: ("Additional Rents") as
defined in paragraph 4.2. Expense stop: 1996 Base Year.
a) Office Tower:
(1) Premises Area: 4,722 rentable sq. ft.
(2) Total Building Area: 205,833 Sq.Ft.
(3) Tenant's Pro-Rate Share: 2.29%
b) Building Project Common Areas:
(1) Premises Area: 4,722 rentable sq. ft.
(2) Total Project Rentable Square Footage: 307,811 Sq.Ft.
(3) Tenant's Pro-Rata Share: 1.53%
1.10 Address for Notices:
LANDLORD: TENANT:
LIU CORP. LIBERTY NATIONAL BANK
c/o Birtcher Properties Attention: Philip S. Inglee,
17011 Beach Blvd., Suite 826 President & CEO
Huntington Beach, CA 92647 7777 Center Avenue
Huntington Beach, CA 92647
1
<PAGE>
1.11 Brokers: CB Commercial and Travers Realty Corporation
2. Premises, Parking and Common Areas.
2.1 Premises: The Premises as set forth in paragraph 1.1 located
within the Office Tower identified in paragraph 1.2 of the Basic Lease
Provisions. The Premises, the Office Tower, the Common Areas (as hereinafter
defined), the land upon which the same are located, along with all other
buildings, parking structures, and improvements thereon, are hereinafter
collectively referred to as the "Building Project".
2.2 Vehicle Parking: (a) So long as Tenant is not in default, and
subject to the rules and regulations attached hereto as Exhibit "B", and as
may be modified by Landlord from time to time, Tenant shall be entitled to
use parking spaces within the parking structure in the Building Project.
Tenant and Tenant's employees will be required to park their vehicles in the
parking structure. If however, Tenant commits, permits or allows any of the
prohibited activities described in the Lease or the rules and regulations
then in effect, then Landlord shall have the right to terminate Tenant's use
of the parking structure or other parking area. Upon receipt of such notice,
Tenant shall be prohibited from using the parking structure or other parking
area and said vehicle involved will be subject to removal at the vehicle
owner's sole cost and expense.
(b) If Landlord elects or is required to limit or control parking by
customers or invitees of the Building Project or any other method of
assessment, or any program for free or reduced cost transportation, Tenant
agrees to participate in such validation, assessment or transportation
program under such reasonable rules and regulations as are from time to time
established by Landlord with respect thereto. In the event Landlord
undertakes a voluntary reduction in the number of parking spaces without
consent of Tenant, and such reduction creates an unreasonable negative impact
on Tenant's business, the parties agree to meet in good faith to attempt to
resolve the issue after written demand to Landlord from Tenant. If such
issue is not resolved by the parties within fifteen days from Tenant's notice
date, then provided Tenant gives Landlord further written notice within said
fifteen days, Tenant, as its sole remedy, shall be permitted to terminate
this Lease, effective in thirty days from termination notice date.
2.3 Common Areas - Definition: The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary
line of the Building Project that are provided and designated by the Landlord
from time to time for the general non-exclusive use of Landlord, and of other
tenants of the Building Project and their respective employees, suppliers,
shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited
by this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas - Rules and Regulations: Tenant agrees to abide by and
to conform to the rules and regulations attached hereto with respect to the
Building Project, and to cause its employees, suppliers, shippers, customers
and invitees to so abide and conform. Landlord or such other person(s) as
Landlord may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to modify, to amend
and to enforce said rules and regulations as to Tenant, their agents,
employees and invitees of the Building Project.
2.5 Common Areas - Changes: Landlord shall have the right, in Landlord's
sole discretion, from time to time:
a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, decorative walls, landscaped areas and
walkways;
b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
c) To designate other land and improvements outside the boundaries
of the Building Project to be a part of the Common Areas, provided that such
other land and improvements have a reasonable and functional relationship to
the Building Project;
d) To add additional buildings and improvements to the Common Areas;
e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Building Project, or any
portion(s) thereof;
f) To do and perform such other acts and make such other changes
in, to or with respect to the Building Project as Landlord may, in the
exercise of its reasonable business judgment, deem appropriate.
3. Term.
3.1 Term: The term and Commencement Date of this Lease shall be as
specified in paragraph 1.4 of the Basic Lease Provisions.
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3.2 Delay in Possession: (a) Notwithstanding the Commencement Date, if
for any reason Landlord cannot deliver possession of the Premises to Tenant,
and subject to paragraph 3.2.2, Landlord shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease
or the obligations of Tenant hereunder nor extend the term hereof; but in
such case, Tenant shall not be obligated to pay rent or perform any other
obligation(s) of Tenant under the terms of this Lease, except as may be
otherwise provided in this Lease, until possession of the Premises is
tendered to Tenant, as hereinafter defined.
(b) In the event, through no acts or omissions of Tenant, its
agents, employees and/or contractors, Landlord is unable to make a Tender of
Possession of the Premises to Tenant by July 1, 1996, then Tenant, as
Tenant's sole remedy, shall be permitted to terminate this lease, receive a
refund of any prepaid rent and any security deposit paid to Landlord.
3.2.1 Possession Tendered - Defined: Possession of the Premises shall
be deemed tendered to Tenant ("Tender of Possession") upon the occurrence of
the following events: (i) the Office Tower utilities are ready for use in
the Premises, and (ii) upon substantial completion of Tenant Improvements to
be constructed by Landlord per Exhibit "E", attached hereto, and (iii) Tenant
has been provided access to the Premises.
3.2.2 Delays Caused by Lessee: Tenant shall be liable for all of the
terms and conditions of this Lease immediately upon Landlord's Tender of
Possession. There shall be no abatement of rent, for any delays in
possession of the Premises by Tenant following Tender of Possession caused by
any acts or omissions of Tenant, its agents, employees and or contractors.
3.3 Early Possession: If Tenant occupies the Premises prior to the
Commencement Date, with Landlord's consent, such occupancy shall be subject
to all provisions of this Lease, such occupancy shall not change the
Expiration Date and Tenant shall pay rent in accordance with the Lease for
such occupancy.
4. Rent.
4.1 Base Rent: Subject to adjustment as hereinafter provided in
paragraph 4.2 and except as may be otherwise expressly provided in this
Lease, Tenant shall pay to Landlord the Base Rent for the Premises set forth
in paragraph 1.5 of the Basic Lease Provisions, without offset or deduction.
Tenant shall pay Landlord upon execution hereof the Base Rent described in
paragraph 1.7 and Additional Rents payable under paragraph 1.9 of the Basic
Lease Provisions. If the Commencement Date occurs on a day other than the
first day of a calendar month, Base Rent and Additional Rents as defined in
4.2 shall be paid as if for a full month and Base Rent and Additional Rent
for the second month shall be prorated on a daily basis, which proration
shall be calculated in accordance with Landlord's general accounting
practices. All Rents due under this Lease shall be paid in lawful money of
the United States of America at Landlord's address as stated herein. If any
check of Tenant should for any reason fail to clear the bank and the proceeds
are not credited to Landlord's account, Tenant shall be assessed a fee of
fifty dollars ($50.00) for such check, and shall thereafter tender such Rents
by Cashier's Check which shall also include any other applicable charges
including, but not limited to, a late charge and an interest charge as
provided herein. Rent shall be payable in lawful money of the United States
to Landlord at the address stated herein or to such other persons or at such
other places as Landlord may designate in writing.
4.2 Operating Expenses: If Operating Expenses (as defined below) for any
calendar year commencing with 1997 exceed the Operating Expenses for the Base
Year, Tenant shall pay to Landlord "Additional Rent", Tenant's Share of such
increase in Operating Expenses. Tenant shall pay monthly to Landlord as
"Additional Rents" during the term hereof, in addition to the Base Rent,
Tenant's Share, as hereinafter defined, of all Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions:
a) "Tenant's Share" is defined, for purposes of this Lease, as the
percentages set forth in paragraph 1.9 of the Basic Lease Provisions, which
percentages have been determined by dividing the approximate square footage
of the Premises by the total approximate square footage of the rentable space
contained in the Office Tower and the Building Project. It is understood and
agreed that the square footage figures set forth in the Basic Lease
Provisions are approximations which Landlord and Tenant agree are reasonable
and shall not be subject to revision except in connection with an actual
change in the size of the Premises or a change in the rentable space in the
Office Tower and/or the Building Project.
b) "Operating Expenses" is defined, for purposes of this Lease, to
include all costs, if any, incurred by Landlord in the exercise of its
reasonable discretion, for:
(i) The administration, management, operations, repair,
maintenance, and replacement, in neat, clean, safe, good order and condition,
of the Office Tower and the Building Project, including but not limited to,
the following:
(aa) The Common Areas, including surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, stairways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting facilities, building
exteriors and roofs, fences and gates, pool and/or fountain.
(bb) All heating, air conditioning, plumbing, electrical
systems, life safety equipment, telecommunication systems and other equipment
used in common by, or for the benefit of tenants or occupants of the Office
Tower and the Building Project, including elevators and escalators, tenant
directories, doors, locks and related hardware, fire detection systems,
including sprinkler system maintenance and repair.
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(ii) Trash disposal, janitorial and security services, pest
control;
(iii) Any other service to be provided by Landlord that is
elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and
property insurance policies to be maintained by Landlord under paragraph 8
hereof;
(v) The amount of the real property taxes to be paid by
Landlord under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Building Project;
(vii) Labor, salaries and applicable fringe benefits and costs,
materials, supplies and tools, used in maintaining and/or cleaning the
Building Project and accounting and a management fee attributable to the
operation of the Building Project;
(viii) Replacing and/or adding improvements that might be
mandated by any governmental agency.
(c) Any management fee charged (in Tenant's Share) to the Tenant as
provided in 4.2(b)(i) and 4.2(b)(vii) as part of the Operating Expenses shall
be fifteen percent (15%) of all Operating Expenses (exclusive of said
management fee), or the actual management fee incurred by Landlord (provided
such is consistent with customary fees being charged by management companies
in the area for similar Office Building Projects), whichever is greater. The
"management fee" is separate from labor costs for on-site management and
maintenance personnel. Landlord shall be entitled to a 15% management and
administration fee which reasonably represents the estimated costs and
expenses incurred by Landlord in performing these services.
(d) Operating Expenses shall not include any expenses paid by any
Tenant directly to third parties, or as to which Landlord is otherwise
reimbursed by any third party, other tenant, or by insurance proceeds.
(e) Tenant's Share of Operating Expenses shall be payable by Tenant
within ten (10) days after a reasonably detailed statement of actual expenses
is presented to Tenant by Landlord. At Landlord's option, however, an amount
may be estimated by Landlord from time to time of Tenant's Share of annual
Operating Expenses and the same shall be payable monthly or quarterly, as
Landlord shall designate, during each calendar year of the Lease Term, on the
same day as the Base Rent is due hereunder. In the event that Tenant pays
Landlord's estimate of Tenant's share of Operating Expenses as aforesaid,
Landlord shall deliver to Tenant within ninety (90) days after the expiration
of each calendar year a reasonably detailed statement showing Tenant's share
of the actual Operating Expenses incurred during the preceding year. Failure
to issue said statement within the ninety (90) days does not release Tenant
of liability. If Tenant's payments under this paragraph 4.2(e) during said
preceding calendar year exceeded Tenant's Share as indicated on said
statement, Tenant shall be entitled to a credit in the amount of the
overpayment against Tenant's Share of Operating Expenses next falling due.
If Tenant's payments under this paragraph during said preceding calendar year
were less than Tenant's Share as indicated on said statement, Tenant shall
pay to Landlord the amount of the deficiency within ten (10) days after
delivery by Landlord to Tenant of said statement. Failure of Landlord to
issue said statement during the prescribed time shall not relieve Tenant of
liability for any amounts due.
(f) With respect to any calendar year or partial calendar year during
the term of this Lease in which the Office Tower is not occupied to the
extent of ninety-five percent (95%) of the rentable area thereof, the annual
Operating Expenses for such period shall, for the purposes hereof, be
increased to the amount which would have been incurred had the Office Tower
been occupied to the extent of ninety-five percent (95%) of the rentable area
thereof at the same rate of Operating Expenses per square foot of rentable
area as that actually incurred during such calendar year or partial calendar
year.
4.3 Annual Rent Increases: If applicable to this Lease pursuant to
paragraph 1.6 of the Basic Lease Provisions, during the term of this Lease,
or any extension hereof, the Base Rent payable herein shall not be increased.
5. Security Deposit: Tenant shall deposit with Landlord upon execution
hereof the security deposit set forth in paragraph 1.8 of the Basic Lease
Provisions as security for Tenant's faithful performance of Tenant's
obligations hereunder. If Tenant fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Landlord may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default for the payment of any other
sum to which Tenant may become obligated by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may suffer thereby.
If Landlord so uses or applies all or any portion of said deposit, Tenant
shall within ten (10) days after written demand therefore deposit certified
funds with Landlord in an amount sufficient to restore said deposit to the
full amount of the then Security Deposit of Tenant plus an administrative fee
of $100.00. If the monthly Base Rent and/or Additional Rents hereunder shall,
from time to time, increase during the term of this Lease, Tenant shall, at
the time of such increase, deposit with Landlord additional money as a
security deposit so that the total amount of the security deposit held by
Landlord shall at all times bear the same proportion to the then current Base
Rent and Additional Rents as the initial security deposit bears to the
initial Base Rent and Additional Rents set forth in paragraphs 1.5, 1.8 and
1.9 of the Basic Lease Provisions. Landlord shall not be
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required to keep said security deposit separate from its general accounts.
If Tenant performs all of Tenant's obligations hereunder, said deposit, or so
much thereof as has not heretofore been applied by Landlord, shall be
returned, without payment of interest or other increment for its use, to
Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's
interest hereunder) at the expiration of the term hereof, but only after
Tenant has vacated the Premises. No trust relationship is created herein
between Landlord and Tenant with respect to said security deposit. In no
event shall Tenant request nor attempt to apply, any portion of said security
deposit, for any period of this Lease, towards any unpaid or future rents due
hereunder.
6. Use.
6.1 Use: The Premises shall be used and occupied only for the purpose
set forth in paragraph 1.3 of the Basic Lease Provision and Tenant shall not
otherwise use or permit any unauthorized uses without the prior written
consent of Landlord. Landlord does not warrant that the Building Project is
appropriately zoned for Tenant's proposed or intended uses of this leased
space. Tenant assumes all responsibility and risk therefore. Notwithstanding
the above, Landlord warrants that, as of the date of execution of this Lease,
the property's municipal zoning permits a retail bank branch and general
office use.
6.2 Compliance with Law: Tenant shall, at Tenant's sole cost and expense,
promptly comply with all applicable statutes, ordinances, rules, regulations,
orders, covenants and restrictions of record, and requirements of any fire
insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy
from that now existing, during the term or any part of the term hereof,
relating in any manner to the Premises and the occupation and use by Tenant
of the Premises. Tenant shall conduct its business in a lawful manner and
shall not use or permit the use of the Premises or the Common Areas in any
manner that will tend to create waste or a nuisance or shall tend to
unreasonably disturb other occupants of the Building Project.
6.3 Condition of Premises: (a) Landlord shall deliver the Premises to
Tenant in a clean condition on the Commencement Date unless Tenant is already
in possession. Tenant acknowledges that Landlord nor any of its agents has
not made any representations or warranty with respect to the Premises or the
Building Project. Possession of the Premises by Tenant shall conclusively
establish that the Premises and the Building Project were at such time of
Tenant's initial possession, in good and sanitary order, condition and repair.
(b) Except as otherwise provided in this Lease, Tenant hereby
accepts the Premises and the Building Project in their condition existing as
of the Commencement Date or the date that Tenant takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating
the use of the Premises, and any easements, covenants, or restrictions of
record, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Tenant acknowledges that it has
satisfied itself by its own independent investigation that the Premises are
suitable for its intended use, and that neither Landlord nor Landlord's agent
or agents have made any representation or warranty as to the present or
future suitability of the Premises, Common Areas, or Building Project for the
conduct of Tenant's business. Subject to Section 2.2(b), Landlord expressly
reserves the right to change the configuration and location of the parking
facilities and Common Areas within the boundaries of the Building Project and
such changes shall not effect Tenant's obligations under this Lease.
7. Maintenance, Repairs, Alterations and Common Area
Service.
7.1 Landlord's Obligations: Landlord shall, and subject to Section 4.2,
keep in good condition and repair the foundations, bearing walls (excluding
surface maintenance such as painting) and structural portions of the roof
(excluding the roof membrane) of the Premises unless the cause for such
maintenance and repairs are caused in part or in whole by any act, neglect,
fault or omission by Tenant, its agents, servants, employees, invitees, or
caused by breaking and entering, in which case Tenant shall pay Landlord the
actual cost of such maintenance and repairs concurrently with the next
payment of Base Rent plus a 20% administration charge of such actual costs.
Except as provided in paragraph 9.5, there shall be no abatement of rent or
liability of Tenant on account of any injury or interference with Tenant's
business with respect to any improvements, alterations or repairs made by
Landlord to the Building Project or any part thereof. Tenant waives the
right to make repairs at Landlord's expense under Section 1942 of the
California Civil Code, or under any law, statute or ordinance now or
hereinafter in effect, or to terminate this Lease because of Landlord's
failure to keep the Premises in good order, condition and repair.
7.2 Tenant's Obligations: a) Notwithstanding Landlord's obligation to
deliver the Premises in good condition and repair, Tenant shall be
responsible for payment of the cost to Landlord as Additional Rent for that
portion of the cost of any maintenance and repair of the Premises, or any
equipment (wherever located) that serves only Tenant or the Premises, to the
extent such cost is attributable to causes beyond normal wear and tear.
Tenant shall be responsible for the cost of painting, cleaning, repairing and
or replacing wall coverings, carpets and to repair or replace any Premises
improvements that are not ordinarily a part of the Building or that are above
then Building standards. Landlord may, at its option, upon reasonable
notice, elect to have Tenant perform any particular such maintenance or
repairs the cost of which is otherwise Tenant's responsibility hereunder.
b) On the last day of the term hereof, or on any sooner termination,
Tenant shall surrender the Premises to Landlord in the same condition as
received, ordinary wear and tear excepted, clear and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have
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been prevented by good maintenance practices by Tenant. Tenant shall repair
any damage to the Premises occasioned by the installation or removal of
Tenant's trade fixtures, alterations, furnishings and equipment. Except as
otherwise stated in this Lease, Tenant shall leave the air lines, power
panels, electrical distribution systems, lighting fixtures, air conditioning,
window coverings, wall coverings, carpets, wall paneling, ceilings and
plumbing on the premises and in good and operating condition.
7.3 Alterations and Additions:
a) Tenant shall not, without Landlord's prior written consent, make
any alterations, improvements, additions, Utility Installations or repairs
in, on or about the Premises or the Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall include carpeting, window
and wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Landlord may require
the removal of any or all of said alterations, improvements, additions or
Utility Installations, and the restoration of the Premises and the Building
Project to their prior condition, at Tenant's expense. Should Landlord
permit Tenant to make its own alterations, improvements, additions or Utility
Installations, Tenant shall use only such contractor as has been expressly
approved by Landlord in writing, and Landlord may require Tenant to provide
Landlord, at Tenant's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such
improvements, to insure Landlord against any liability for mechanic's and/or
materialmen's liens and to insure completion of the work. Should Tenant make
any alterations, improvements, additions, or Utility Installations without
the prior written approval of Landlord, or use a contractor not expressly
approved by Landlord, Landlord may at any time during the term of this Lease,
require Tenant to remove any part or all of the same.
b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Building Project that Tenant
shall desire to make shall be presented to Landlord in written form, with
proposed detailed plans. Tenant agrees to reimburse Landlord upon written
demand to Tenant for all costs and expenses (including, without limitation,
any architects' and/or engineers' fees) incurred by Landlord in approving or
disapproving Tenant's plans for such alteration, improvement, addition or
Utility Installation. If Landlord shall give its consent to Tenant's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Tenant acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Landlord prior
to the commencement of the work, and compliance by Tenant with all conditions
of said permit in a prompt and expeditious manner.
c) Tenant shall pay, when due, all claims for labor or materials
furnished to or for Tenant at or for use in the Premises, which claims are or
may be secured by any mechanic's or materialmen's lien against the Premises,
the Building or the Building Project, or any interest therein.
d) Tenant shall give Landlord no less than ten (10) days' notice
prior to the commencement of any work in the Premises by Tenant, and Landlord
shall have the right to post notices of non-responsibility in or about the
Premises or the Office Tower as provided by law. If Tenant shall, in good
faith, contest the validity of any such lien, claim or demand, then Tenant
shall, at its sole cost and expense defend itself and Landlord against the
same and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Landlord or the Premises,
the Office Tower or the Building Project, upon the condition that if Landlord
shall require, Tenant shall furnish to Landlord a surety bond satisfactory to
Landlord in an amount equal to such contested lien claim or demand
indemnifying Landlord against liability for the same and holding the
Premises, the Building and the Building Project free from the effect of such
lien or claim. In addition, Landlord may require Tenant to pay Landlord's
reasonable attorneys' fees and costs in participating in such action if
Landlord shall decide it is to Landlord's best interest so to do.
e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Tenant) which may be made to the Premises by Tenant, including
but not limited to, floor coverings, panelings, doors, drapes, built-ins,
moldings, sound attenuation, lighting and telephone or communication systems,
conduit, wiring and outlets, shall be made and done in a good and workmanlike
manner and of good and sufficient quality and materials and shall be the
property of Landlord and remain upon and be surrendered with the Premises at
the expiration of the Lease term, unless Landlord requires their removal
pursuant to paragraph 7.2(b), in which case Tenant shall bear all cost and
expense for such removal and repair of the Premises. Provided Tenant is not
in default, notwithstanding the provisions of this paragraph 7.3(e), Tenant's
personal property and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises
or the Office Tower, and other than Utility Installations, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
paragraph 7.2(b). Tenant shall make any repairs necessary as a result of such
removal.
f) Tenant shall at its sole expense, provide Landlord with as-built
plans and specifications for any alterations, improvements, additions or
Utility Installations.
7.4 Utility Additions: Landlord reserves the right to install new or
additional utility facilities throughout the Building Project for the benefit
of Landlord or Tenant, or any other tenant of the Building Project,
including, but not limited to such utilities as plumbing, electrical systems,
security systems, communication systems, fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Tenant's use of the Premises.
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8. Insurance; Indemnity.
8.1 Liability Insurance - Tenant: Tenant shall, at Tenant's
expense, obtain and keep in force during the term, or any extension of this
Lease, a policy of Comprehensive General Liability insurance utilizing an
Insurance Services Office standard form with Broad Form General Liability
Endorsement (GL0404), or equivalent, in an amount of not less than $1,000,000
per occurrence of bodily injury and property damage combined or in a greater
amount as reasonably determined by Landlord. Said policy of insurance shall
insure Tenant with Landlord as an additional insured against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with this requirement of insurance shall not, however, limit the liability of
Tenant hereunder.
8.2 Liability Insurance - Landlord: Landlord shall obtain and keep in
force during the term or any extension of this Lease, a policy of Combined
Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus
coverage against such other risks Landlord deems advisable from time to time,
insuring Landlord, but not Tenant, against liability arising out of the
ownership, use, occupancy or maintenance of the Building Project in an amount
not less than $5,000,000.00 per occurrence.
8.3 Property Insurance - Tenant: Tenant shall, at Tenant's expense,
obtain and keep in force during the term of this Lease for the benefit of
Tenant, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount equal to not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Tenant's
personal property, fixtures, equipment and tenant improvements.
8.4 Property Insurance - Landlord: Landlord shall obtain and keep in
force during the term of this Lease a policy or policies of insurance
covering loss or damage to the Building Project improvements, but not
Tenant's personal property, fixtures, equipment or tenant improvements, in
the amount of the full replacement cost thereof, as the same may exist from
time to time, utilizing Insurance Services Office standard form, or
equivalent, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
plate glass, and such other perils as Landlord deems advisable or may be
required by a lender having a lien on the Building Project. In addition,
Landlord shall obtain and keep in force, during the term of this Lease, a
policy of rental value insurance covering a period of one year, with loss
payable to Landlord, which insurance shall also cover all Operating Expenses
for said period. Tenant will not be named in any such policies carried by
Landlord and shall have no right to any proceeds therefrom. The policies
required by these paragraphs 8.2 and 8.4 shall contain such deductibles as
Landlord or the aforesaid lender may determine. In the event that the
Premises shall suffer damage as defined in paragraph 9.1 hereof, the
deductible amounts under the applicable insurance policies shall be deemed an
Operating Expense. Tenant shall not do or permit to be done anything which
shall invalidate the insurance policies carried by Landlord. Tenant shall
pay the entirety of any increase in the property insurance premium for the
Building Project over what it was immediately prior to the commencement of
the term of this Lease if the increase is specified by Landlord's insurance
carrier as being caused by the nature of Tenant's occupancy or any act or
omission of Tenant.
8.5 Insurance Policies: Tenant shall deliver to landlord copies of
liability insurance policies required under paragraphs 8.1 and 8.3 or
certificates evidencing the existence and amounts of such insurance within
seven (7) days after the Commencement Date of this Lease. No such policy
shall be cancelable or subject to reduction of coverage or other modification
except after thirty (30) days prior written notice to Landlord. Tenant
shall, at least (30) days prior to the expiration of such policies, furnish
Landlord with renewals thereof.
8.6 Waiver of Subrogation: Tenant and Landlord each hereby release and
relieve the other, and waive their entire right of recovery against the
other, for direct or consequential loss or damage arising out of or incident
to the perils covered by property insurance carrier by such party, whether
due to the negligence of Landlord or Tenant or their agents, employees,
contractors and/or invitees. If necessary all property insurance policies
required under this Lease shall be endorsed to so provide.
8.7 Indemnity: Subject to the provisions of paragraph 8.9, Tenant shall
indemnify and hold harmless Landlord and its agents, employees, licensees and
contractors, Landlord's master or ground lessor, partners and lenders, from
and against any and all claims for damage to the person or property of anyone
or any entity arising from Tenant's use of the Building Project, or from the
conduct of Tenant's business or from any activity, work or things done,
permitted or suffered by Tenant in or about the Premises or elsewhere and
shall further indemnify and hold harmless Landlord from and against any and
all claims, costs and expenses arising from any breach or default in the
performance of any obligation on Tenant's part to be performed under the
terms of this Lease, or arising from any act or omission of Tenant, or any of
Tenant's agents, contractors, employees or invitees and from and against all
costs, attorney's fees, expenses and liabilities incurred by Landlord as the
result of any such use, conduct, activity, work, things done, permitted or
suffered, breach, default or negligence, and in dealing reasonably therewith,
including but not limited to the defense or pursuit of any claim or any
action or proceeding involved therein, and in case an action or proceeding be
brought against Landlord by reason of any such matter, Tenant upon notice
from Landlord shall defend the same at Tenant's expense by counsel reasonably
satisfactory to Landlord and Landlord shall cooperate with Tenant in such
defense. Landlord need not have first paid any such claim in order to be so
indemnified.
8.8 Exemption of Landlord from Liability: Subject to the provisions of
paragraph 8.9, Tenant hereby agrees that Landlord shall not be liable for
injury to Tenant's business or any loss of income therefrom or for loss of or
damage to the goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers, or any other person in or about the Premises
or the Building Project. Landlord shall not be liable for injury to the
person of Tenant, Tenant's employees, agents, invitees, customers or
contractors, whether such
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damage or injury is caused by or results from theft, fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction
or other defects of pipe, sprinklers, wires, telecommunication wiring and
equipment, appliances, plumbing, air conditioning or lighting fixtures, or
from any other cause, whether said damage or injury results from conditions
arising upon the Premises or upon other portions of the Building Project, or
from other sources or places, or from new construction of the repair,
alteration or improvement of any part of the Building Project, or of the
equipment, fixtures or appurtenances applicable thereto, and regardless of
whether the cause of such damage or injury or the means of repairing the same
is inaccessible. Landlord shall not be liable for any damages arising from
any act or neglect of any other tenant, occupant or user of the Building
Project, nor from the failure of Landlord to enforce the provisions of any
other lease of any other tenant of the Building Project. Notwithstanding the
foregoing, Landlord will not be exempt from liability for its own gross
negligence or wilful misconduct.
8.9 No Representation of Adequate Coverage: Landlord makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Tenant's property or obligations under
this Lease.
9. Damage or Destruction
9.1 Definitions:
a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
b) "Office Tower Partial Damage" shall mean if the Building of which
the Premises are a part is damaged or destroyed to the extent that the cost
to is less than fifty percent (50%) of the then Replacement Cost of the
Building.
c) "Office Tower Total Destruction" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
d) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in Paragraph 8.
The fact than an Insured Loss has a deductible amount shall not make the
loss an uninsured loss.
e) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by tenants.
9.2 Premises Damage; Office Tower Partial Damage.
a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term or any extension of this Lease, there is
damage which is an Insured Loss and which falls into the classification of
either Premises Damage or Office Tower Partial Damage, then Landlord shall,
as soon as reasonably possible and to the extent the required materials and
labor are readily available through usual commercial channels, at Landlord's
expense, repair such damage (but not Tenant's fixtures, equipment, personal
property or Tenant improvements, which Tenant shall restore at Tenant's
expense), to its condition existing immediately prior to damage, and this
Lease shall continue in full force and effect without set off or abatement of
any rents.
b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term or any extension of this Lease, there is
damage which is not an Insured Loss and which falls within the classification
of Premises Damage or Office Tower Partial Damage, unless caused by a
negligent or willful act of Tenant (in which event Tenant shall make the
repairs at Tenant's expense), which damage prevents Tenant from making any
substantial use of the Premises, Landlord may at Landlord's option either (i)
repair such damage as soon as reasonably possible at Landlord's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Tenant within thirty (30) days after the date of the
occurrence of such damage of Landlord's intention to cancel and terminate
this Lease as of the date of the occurrence of such damage, in which event
this Lease shall terminate as of the date of the occurrence of such damage.
9.3 Office Tower Total Destruction: Subject to the provisions of
paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is
damage, whether or not it is an Insured Loss, which falls into the
classification of Office Tower Total Destruction then Landlord may at
Landlord's option either (i) repair such damage or destruction as soon as
reasonably possible at Landlord's expense (to the extent the required
materials are readily available through usual commercial channels) to its
condition existing immediately prior to the damage, (but not Tenant's
fixtures, equipment or tenant improvements, which Tenant shall restore at
Tenant's expense), and this Lease shall continue in full force and effect, or
(ii) give written notice to Tenant within thirty (30) days after the date of
occurrence of such damage of Landlord's intention to cancel and terminate
this Lease, in which case this Lease shall terminate as of the date of the
occurrence of such damage.
9.4 Damage Near End of Term: If at any time during the last twelve (12)
months of the term of this Lease there is damage which prevents Tenant from
making substantial use of the Premises, either party may cancel and terminate
this Lease as of the date of occurrence of such damage by giving written
notice to the other party within 30 days after the date of occurrence of such
damage.
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9.5 Abatement of Rent; Tenant's Remedies. In the event Landlord repairs
or restores the Building or Premises pursuant to the provisions of this
Paragraph 9, and any part of the Premises are not usable (including loss of
use due to loss of access or essential services), the rent payable hereunder
(including Lessee's Share of Operating Expenses) for the period during which
such damage, repair or restoration continues shall be abated, provided (1)
the damage was not the result of the negligence of Tenant, and (2) such
abatement shall be equal to that proportion which the floor area rendered
unusable bears to the gross floor area of the Premises. Except for said
abatement of rent, if any, Tenant shall have no claim against Landlord for
any damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Landlord shall be obligated to repair or restore the Premises
or the Building under the provisions of this Paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Landlord shall not complete the restoration and repair
within six (6) months after such occurrence, Tenant may at Tenant's option
cancel and terminate this Lease by giving Landlord written notice of Tenant's
election to do so at any time prior to the commencement or completion,
respectively, of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.
(c) Tenant agrees to cooperate with Landlord in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Tenant to Landlord.
Landlord shall, in addition, return to Tenant so much of Tenant's security
deposit as has not theretofore been applied by Landlord.
9.7 Waiver: Landlord and Tenant waive the provisions of any statute
which relate to termination of leases when leased property is destroyed and
agree that such an event shall be governed by the terms of this Lease.
10. Real Property Taxes:
10.1 Payment of Taxes: Landlord shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Building Project subject to
reimbursement by Tenant of Tenant's share of such taxes in accordance with
the provisions of paragraph 4.2 herein.
10.2 Additional Improvements: Tenant shall pay to Landlord at the time
that Operating Expenses are payable under paragraph 4.2 the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Tenant or at Tenant's request.
10.3 Definition of "Real Property Tax:" As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Building Project or any
portion thereof by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Landlord in the
Building Project or in any portion thereof, as against Landlord's right to
rent or other income therefrom, and as against Landlord's business of leasing
the Building Project. The term "real property tax" shall also include any
tax, fee, levy, assessment or charge (a) in substitution of, partially or
totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax", or (b) the nature of which was
hereinbefore included within the definition of "real property tax," or (c)
which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (d)
which is imposed as a result of a change in ownership, as defined by
applicable local statutes for property tax purposes, of the Building Project
or which is added to a tax or charge hereinbefore included within the
definition of real property tax by reason of such change of ownership, or (e)
which is imposed by reason of this transaction, any modification or changes
hereto, or any transfers hereof.
10.4 Joint Assessment: If the improvements or property, the taxes for
which are to be paid separately by Tenant under paragraph 10.2 or 10.5 are
not separately assessed, Tenant's portion of that tax shall be equitably
determined by Landlord from the respective valuations assigned in the
assessor's work sheets or such other information (which may include the cost
of construction) as may be reasonably available. Landlord's reasonable
determination thereof, in good faith, shall be conclusive.
10.5 Personal Property Taxes:
a) Tenant shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Premises or elsewhere.
b) If any of Tenant's said personal property shall be assessed with
Landlord's real property, Tenant shall pay to Landlord the taxes attributable
to Tenant's personal property within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Tenant's property.
11. Utilities and Services.
11.1 Services Provided by Landlord: Provided that Tenant is not in
default hereunder, Landlord agrees
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to furnish or cause to be furnished to the Premises the utilities and
services described, subject to the conditions and in accordance with the
standards set forth below:
(a) Landlord shall provide automatic elevator facilities Monday
through Friday, excepting therefrom all holidays recognized by Landlord,
hereinafter collectively referred to as "generally accepted business days,"
from 8:00 a.m. to 6:00 p.m., and on Saturdays from 8:00 a.m. to 12:00 noon,
and have at least one elevator available for use at all other times.
(b) On generally accepted business days from 8:00 a.m. to 6:00 p.m.
and on Saturdays from 8:00 a.m. to 12:00 noon (and at all other times for a
reasonable additional charge to be fixed by Landlord), Landlord shall
ventilate the Premises and furnish air conditioning when required for the
reasonable and comfortable occupancy of the Premises during such days and
hours, subject to any requirements or standards relating to, among other
things, energy conservation, imposed or established by governmental or
cooperative organizations. Landlord shall make available at Tenant's expense
after-hours power, including light and air conditioning to each floor of the
Building which shall be controlled by digital control or other central
control system selected by Landlord. Any charges for after-hours power and
air conditioning and the cost thereof shall be determined by Landlord and
confirmed in writing to Tenant.
(c) Landlord shall furnish to the Premises at all times, subject to
interruptions beyond Landlord's control, electric current as required by the
Building standard office lighting (approximately 40 to 55 candles per square
foot) and receptacles (approximately one (1) watt per square foot). At all
times Tenant's use of electric current shall never exceed the capacity of the
feeders to the Building or the risers or wiring installation. Tenant shall
not install nor use nor permit the installation or use of any computer or
electronic data processing equipment in the Premises without the prior
written consent of Landlord.
(d) Landlord shall provide janitorial services to the Premises
comparable to those provided to other first class Office Towers in the
vicinity provided the same are used exclusively as offices and are kept
reasonably in order by Tenant. Tenant shall pay Landlord the cost of removal
of any of Tenant's refuse and rubbish, to the extent that the same exceeds
the refuse and rubbish usually attendant upon the use of premises as offices.
(e) Landlord shall replace, as necessary, the fluorescent tubes in
the Office Tower standard lighting fixtures installed by Landlord. If Tenant
fails to make any replacement of Tenant's light bulbs within five (5) days
after written notice from Landlord, Landlord may make such replacement within
five (5) days after written notice from Landlord and charge the cost of labor
and materials involved therein to Tenant, as Additional Rent.
(f) Area thermostats are provided for the comfort of tenants.
However, the misuse and damage to any such thermostat by Tenant will result
in the Tenant incurring the entire cost of replacement and reinstallation,
plus a 20% servicing fee based on the actual cost of such repair.
12. Assignment and Subletting.
12.1 Terms and Conditions Applicable to Assignment and Subletting: Tenant
may not (a) sell, assign, sublease, transfer, or hypothecate the whole or any
part of its interest under this Lease, (b) sublet the whole or any part of
the Premises, or (c) allow the occupancy of the whole or any part of the
Premises by another without in each case obtaining the prior written consent
of Landlord, which shall not be unreasonably withheld. Notwithstanding any
permitted assignment or subletting, Tenant shall at all times remain
directly, primarily and fully responsible and liable for the payment of rent
and for compliance with all obligations under the terms, provisions and
covenants of this Lease. Upon the occurrence of an "Event of Default" (as
defined in Article 13, below) if the Premises or any part thereof are then
sublet, Landlord, in addition to any other remedies herein provided or
provided by law, may at its option collect directly from such sublessee all
rents becoming due to Tenant under such sublease and apply such rents against
any sums due to Landlord from Tenant hereunder, and no such collection shall
be construed to constitute a novation or release of Tenant from the further
performance of Lessee's obligations under this Lease. Any sale, assignment,
transfer of hypothecation of Tenant's interest under this Lease, and any
proposed subletting or occupancy of the Premises not in compliance with this
Article 12 shall be void and shall, at the option of Landlord exercisable by
Notice to Tenant, terminate this Lease. This Lease shall not be assignable
by operation of law, except that if Tenant is a natural person, this Lease
shall be binding upon and inure to the benefit of the estate of Tenant.
12.2 Subletting: In the event Tenant desires to sublet all or any portion
of the Premises, Tenant shall give not less than thirty (30) days' prior
written notice thereof to Landlord setting forth the name of the proposed
subtenant, the term, rental rate and any other relevant particulars to the
proposed subletting, including without limitation, evidence satisfactory to
Landlord that the proposed subtenant will immediately occupy and thereafter
use the sublet portion of the Premises for the entire time of the sublease, a
description of the proposed use of the Premises and financial statements of
the proposed subtenant. Upon such subletting the subtenant shall furnish a
certificate to Landlord verifying the total consideration that it will pay
for the sublease.
12.3 Assignment: Tenant shall in no event assign less than its entire
interest in this Lease. In the event Tenant desires to assign all (but not
less than all) of its interest under this Lease, Tenant shall give not less
than thirty (30) days' prior written notice thereof to Landlord setting forth
the name of the proposed assignee, the terms of the assignment, and any other
relevant particulars of the proposed assignment, including without
limitation, evidence satisfactory to Landlord that the proposed assignee will
immediately occupy and thereafter use the entire premises for the remaining
term of the Lease, a description of the proposed use of the Premises
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and financial statements of the proposed assignee. Upon such assignment the
assignee shall furnish a certificate to landlord verifying the total
consideration paid the Tenant of the assignment.
12.4 Landlord's Consent: Upon receipt of written notice from Tenant of
Tenant's desire to either sublet all or any portion of the Premises or to
assign its entire interest under the Lease, Landlord shall have a period of
thirty (30) days to notify Tenant of the exercise of any one of the following
two options:
(a) Landlord's approval of the sublease or assignment. In such event
Landlord shall have the right to collect the excess rental, if any, resulting
from the new lease or sublease, as set forth in Section 51.7, or;
(b) Disapprove of the proposed sublease or assignment, provided that
such disapproval will be based upon reasonable grounds
In the event Landlord fails to notify Tenant within thirty (30) days, as
aforesaid, it shall be deemed as approval of the proposed sublease or
assignment.
12.5 Landlord's Expenses: Any requests for the consent of Landlord to an
assignment or subletting of this Lease shall be accompanied by a payment in
the amount of Five Hundred Dollars ($500.00) representing Landlord's cost of
administration in reviewing Tenant's request and the information pertaining
thereto. Landlord shall not be required to respond to any such request
without payment, as aforesaid.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default under the terms of this Lease by Tenant:
a) Notwithstanding the foregoing, vacation or abandonment of the
Premises for a period of not to exceed one-hundred-eighty days (180) shall
not be a default under this lease so long as Tenant is actively marketing the
space to procure replacement tenants for all or a portion of the Premises.
b) Any breach by Tenant of any of the covenants, conditions or
provisions of paragraphs 7.3(a),(b), or (d) (alternations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency),
13.1(f) (false statement), 15(a) (estoppel certificate), 29(b)
(subordination), 32 (auctions), or 40(a) (easements), all of which are hereby
deemed to be material, non-curable defaults without the necessity of any
notice by Lessor to Lessee thereof.
c) The failure by Tenant to make any payment of rent or any other
payment required to be made by Tenant hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Landlord to Tenant. In the event that Landlord serves Tenant
with a Notice to Pay Rent or Quit pursuant to Section 1161 of the California
Code of Civil Procedure such Notice to Pay Rent or Quit shall also constitute
the notice required by this subparagraph.
d) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Tenant other than those referenced in subparagraphs (b) and (c), above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Landlord to Tenant; provided, however, that if
the nature of Tenant's noncompliance is such that more than thirty (30) days
are reasonably required for its cure, then Tenant shall not be deemed to be
in default if Tenant commenced such cure within said thirty (30) day period
and thereafter diligently pursues such cure to completion. To the extent
permitted by law, such thirty (30) day notice shall constitute the sole and
exclusive notice required to be given to Tenant under Section 1161 of the
California Code of Civil Procedure.
e) (i) The making by Tenant of any general arrangement or general
assignment for the benefit of creditors; (ii) Tenant becoming a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Tenant, the same is dismissed within
sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the Premises or
of Tenant's of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within thirty (30) days.
f) The discovery by Landlord that any financial statement given to
Landlord by Tenant, or its successor in interest or by any guarantor of
Tenant's obligation hereunder, was materially false.
13.2 Remedies. In the event of any material default or breach of the
terms of this Lease by Tenant, Landlord may at any time thereafter, with or
without notice or demand and without limiting Landlord in the exercise of any
right or remedy which Landlord may have by reason of such default:
a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Tenant shall immediately surrender possession of the Premises to
Landlord. In such event Landlord shall be entitled to recover from Tenant:
i) the worth at the time of award of any unpaid rent which has
been earned at the time of such termination, plus
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ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonable avoided, plus
iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided, plus
iv) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform under this
Lease or which in the ordinary course of things would be likely to result
therefrom.
As used in subsections i) and ii) the "worth at the time of award" is
computed by allowing interest at the rate of ten percent (10%) per annum. As
used in subsection iii) the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%). For the purposes
of this paragraph the term "rent" shall include the monthly rent and all
other sums required to be paid by Lessee under this Lease.
b) Maintain Tenant's right to possession in which case this Lease
shall continue in effect whether or not Tenant shall have vacated or
abandoned the Premises. In such event Landlord shall be entitled to enforce
all of the Landlord's rights and remedies under this Lease, including the
right to recover the Rents as they become due hereunder.
c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the State of California. Unpaid
installments of Rents and other unpaid monetary obligations of Tenant under
the terms of this Lease shall bear interest from the date due at 12% per
annum or the maximum rate then allowed by law, whichever is greater.
13.3 Default by Landlord. Landlord shall not be in default under the
terms of this lease unless Landlord fails to perform obligations required of
Landlord within a reasonable time, but in no event later than thirty (30)
days after Landlord's receipt of written notice from Tenant specifying
wherein Landlord has failed to perform such obligation; provided, however,
that if the nature of Landlord's obligation is such that more than thirty
(30) days are required for performance, then Landlord shall not be in default
if Landlord commences performance within such 30 day period and thereafter
diligently pursues the same to completion.
13.4 Late Charges. Tenant hereby acknowledges that late payment by Tenant
to Landlord of Base Rent, Tenant's Share of Operating Expenses or other sums
due hereunder will cause Landlord to incur costs not otherwise contemplated
by this Lease, the exact amount of which will be extremely difficult to
ascertain. Such costs include, but are not limited to, processing and
accounting charges, and late charges which may be imposed on Landlord by the
terms of any mortgage or trust deed covering the Building Project.
Accordingly, if any installment of Base Rent, Operating Expenses or any other
sum due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) days after such amount shall be due, then without any
requirement for notice to Tenant, Tenant shall pay to Landlord a late charge
equal to five percent (5%) of such overdue amount. The parties hereby agree
that such late charge represents a fair and reasonable estimate of the costs
Landlord will incur by reason of late payment by Tenant. Acceptance of such
late charge by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Building
Project are taken under the power of eminent domain, or sold under the threat
of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first
occurs; provided that if so much of the Premises or the Building Project are
taken by such condemnation as would in Landlord's opinion substantially and
adversely affect the operation and profitability of Tenant's business
conducted from the Premises, Landlord shall have the option, upon written
notice to Tenant within thirty (30) days after Landlord shall have given
Tenant written notice of such taking (or in the absence of such notice,
within thirty (30) days after the condemning authority shall have taken
possession), to terminate this Lease as of the date of condemning authority
takes such possession or may move Tenant to a substituted premises in
accordance with the provisions of paragraph 15. Common Areas taken shall be
excluded from the Common Areas usable by Tenant and no reduction of rent
shall occur with respect thereof. Landlord shall have the option, in its sole
discretion, to terminate this Lease as of the taking of possession by the
condemning authority, by giving written notice to Tenant of such election
within thirty (30) days after receipt of notice of a taking by condemnation
of any part of the Premises or the Building Project. Any award for the
taking of all or any part of the Premises or the Building Project under the
power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Landlord. In the event that this Lease
is not terminated by reasons of such condemnation, Landlord shall to the
extent of severance damages received by Landlord in connection with such
condemnation, repair any damage to the Premises caused by such condemnation.
Tenant shall pay any amount in excess of such severance damages required to
complete such repair for its improvements. Tenant shall have the right to
pursue its own claims against a condemning authority for its own damages, if
any.
15. Estoppel Certificate.
a) Each party (as "responding party") shall at any time upon ten (10)
days prior written notice from the other party ("requesting party") execute,
acknowledge, and deliver to the requesting party a statement in
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writing: (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to the responding party's knowledge,
any uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Building Project or
of the business of Tenant.
b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it
shall be conclusive upon such party that (i) this Lease is in full force and
effect, without modification except as may be represented by the requesting
party, (ii) there are no incurred defaults in the requesting party's
performance, and (iii) if Landlord is the requesting party, not more than one
month's rent has been paid in advance.
c) If Landlord desires to finance, refinance, or sell the Building
Project, or any part thereof, Tenant hereby agrees to deliver to any lender
or purchaser designated by Landlord such financial statements of Tenant as
may be reasonably required by such lender or purchaser. Such statements
shall include the past three (3) years' financial statements of Tenant. All
such financial statements shall be received by Landlord and such lender or
purchaser in confidence and shall be used only for the purposes herein set
forth.
16. Landlord's Liability. The term "Landlord" as used herein shall mean
only the owner or owners, at the time in question, of the fee title or a
lessee's interest in a ground lease of the Building Project and in the event
of any transfer of such title or interest, Landlord herein named shall be
relieved from any and all liability thereafter to be performed. The
obligations contained in this Lease to be performed by Landlord shall be
binding on Landlord's successors and assigns, only during their respective
periods of ownership.
17. Severability. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
18. Interest on Past-due Obligations. Except as expressly herein
provided, any amount due to Landlord not paid when due shall bear interest at
12% per annum or the maximum rate then allowable by law, whichever is
greater, on judgments and any other amount due but not yet paid by the
prescribed time, from the date due. Payment of such interest shall not
excuse nor cure any default by Tenant under this Lease.
19. Time of Essence. Time is of the essence with respect to the
obligations to be performed under this Lease.
20. Additional Rent. All monetary obligations of Tenant to Landlord
under the terms of this Lease including but not limited to Tenant's Share of
Operating Expense increase any other expenses payable by Tenant hereunder
shall be deemed to be Rent.
21. Incorporation of Prior Agreement; Amendments. This Lease
contains all agreements of the parties with respect to any matter mentioned
herein. No prior or contemporaneous agreement or understanding pertaining to
any such matter contained in this Lease shall be effective. This Lease may be
modified in writing only, signed by the parties in interest at the time of
the modification. Except as otherwise stated in this Lease, Tenant hereby
acknowledges that neither Landlord nor any employee nor agents of any of said
persons has made any oral or written warranties or representations to Tenant
relative to the condition or use by Tenant of the Premises or the Building
Project and Tenant acknowledges that Tenant assumes all responsibility
regarding the Occupational Safety Health Act, the legal use and adaptability
laws and regulations in effect during the term of this Lease.
22. Notices. Any notice required or permitted to be given hereunder shall
be in writing and shall be given by certified or registered mail to Tenant or
to Landlord at the address noted in paragraph 1.10 of the Basic Lease
Provisions or as otherwise provided in writing. Mailed notices shall be
deemed given upon actual receipt thereof at the address required. Either
party may, by giving notice to the other, specify a different address for
notice purposes except that upon Tenant's taking possession of the Premises,
the Premises shall constitute Tenant's address for notice purposes. A copy
of all notices required or permitted to be given to Landlord hereunder shall
be concurrently transmitted to such party or parties at such addresses as
Landlord may from time to time hereafter designate by notice to Tenant.
23. Waivers. No waiver by Landlord or any provision hereof shall be
deemed a waiver of any other provision hereof of any subsequent breach by
Tenant of the same or any other provision. Landlord's consent to, or
approval, of, any act shall not be deemed to render unnecessary the obtaining
of Landlord's consent to or approval of any subsequent act by Tenant. The
acceptance of rent hereunder by Landlord shall not be a waiver of any
preceding breach of Tenant of any provision hereof, other than the failure of
Tenant to pay the particular rent so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such rent.
24. Recording. Either Landlord or Tenant shall, upon request of the
other, execute, acknowledge and deliver to the other a "short form"
memorandum of this Lease for recording purposes. At termination of this
Lease, Tenant shall execute, acknowledge and deliver to Landlord, within five
(5) days after written demand from Landlord to Tenant, any quitclaim deed or
other document as may be reasonably requested by any reputable title
insurance company to remove this Lease as a matter affecting title to the
Premises.
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25. Holding Over. If Tenant, with Landlord's written consent, remains in
possession of the Premises or any part thereof after the Expiration Date or
sooner termination of the lease term hereof, such occupancy shall be a
tenancy from month to month upon all the provisions of this Lease pertaining
to the obligations of Tenant, except that the Rents payable shall be one
hundred twenty-five percent (125%) of the Rents payable immediately preceding
the Expiration Date of this Lease. Acceptance by Landlord of rent after
expiration or earlier termination of this Lease shall not constitute a
consent to a holdover hereunder or result in a renewal hereof. The foregoing
provisions of this paragraph are in addition to and do not affect Landlord's
right of re-entry or any other rights of Landlord hereunder or as otherwise
provided by law.
26. Cumulative Remedies. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
27. Covenants and Conditions. Each provision of this Lease to be
performed by Tenant shall be deemed both a covenant and a condition.
28. Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Tenant, this Lease shall bind the
parties, their personal representatives, successors and assigns. This Lease
shall be governed by the laws of the State of California and any litigation
concerning this Lease between the parties hereto shall be initiated in the
County of Orange, California.
29. Subordination; Non-Disturbance.
a) This Lease, at Landlord's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the Building Project and to any and all
advances made on the security thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof. If any mortgagee,
trustee or ground lessor shall elect to have this Lease prior to the lien of
its mortgage, deed of trust or ground lease, and shall give written notice
thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of
trust or ground lease, whether this Lease is dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
b) Tenant agrees to execute any documents required to effectuate
any attornment, a subordination, or to make this Lease prior to the lien of
any mortgage, deed of trust or ground lease, as the case may be. Tenant's
failure to execute such documents within ten (10) days after written demand
shall constitute a material default by tenant hereunder without further
notice to Tenant or at Landlord's option. Landlord shall execute such
documents on behalf of Tenant as Tenant's attorney-in-fact. Tenant does
hereby make, constitute and irrevocable appoint Landlord as Tenant's
attorney-in-fact and in Tenant's name, place and stead, to execute such
documents in accordance with this paragraph 29(b).
c) In the event Tenant wishes to obtain a non-disturbance agreement
from any existing trust deed holder(s) on the subject property, Landlord
agrees to present such agreement, furnished by Tenant, to said trust deed
holder(s) for execution. Landlord makes no guarantees, however, as to
whether or not a lender will execute same.
30. Attorney's Fees.
a) If either party herein brings an action to enforce the terms
hereof or declares rights hereunder, the prevailing party in any such action,
trial or appeal thereon, shall be entitled to his reasonable attorneys' fees
to be paid by the losing party as fixed by the court in the same or a
separate suit.
b) Landlord shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notices
of default and consultations in connection therewith, whether or not a legal
action is subsequently commenced in connection with such default.
31. Landlord's Access.
a) Landlord and Landlord's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same,
performing any services required of Landlord, showing the same to prospective
purchasers, lenders, or lessees, taking such safety measures, erecting such
scaffolding or other necessary structures, making such alterations, repairs,
improvements or additions to the Premises or to the Building Project as
Landlord may reasonably deem necessary or desirable and the erecting, using
and maintaining of utilities, services, pipe and conduits through the
Premises and/or other premises as long as there is no material adverse effect
to Tenant's use of the Premises. Landlord may at any time, place in or about
the Premises or the Office Tower any ordinary "For Sale" signs and Landlord
may at any time during the last 180 days of the term hereof place on or about
the Premises any ordinary "For Lease" signs.
b) All activities of Landlord pursuant to this paragraph shall be
without abatement of rent, nor shall Landlord have any liability to Tenant
for the same.
c) Landlord shall have the right to retain keys to the Premises and
to unlock all doors in or upon the Premises other than to files, vaults and
safes, and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forcible or
unlawful entry or detainer of the Premises or any eviction. Tenant waives
any charges for damages or injuries for interference with Tenant's property
or business in connection therewith.
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32. Auctions. Tenant shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises or the
Building Project without first having obtained Landlord's prior written
consent. Notwithstanding anything to the contrary in this Lease, Landlord
shall not be obligated to exercise any standard or reasonableness in
determining whether to grant such consent. The holding of any auction on the
Premises or common areas in violation of this paragraph shall constitute a
material default of this Lease.
33. Signs. Tenant shall not place any sign upon the Premises or the
Building Project without Landlord's prior written consent. Under no
circumstances shall Tenant place a sign on any roof of the Building Project.
34. Merger. The voluntary or other surrender of this Lease by Tenant,
or mutual cancellation thereof, or a termination by Landlord, shall not work
a merger, and shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
35. Consents. Except for paragraphs 33 (Auctions) and 34 (Signs)
herein, wherever in this Lease the consent of one party is required to an act
of the other party such consent shall not be unreasonably withheld or delayed.
36. Guarantor. In the event that there is a guarantor of this Lease,
said guarantor shall have the same obligations as Tenant under this Lease.
37. Quiet Possession. Upon Tenant paying the Rents for the Premises and
observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Landlord represent and warrant to Tenant that they are fully authorized and
legally capable of executing this Lease on behalf of Landlord and that such
execution is binding upon all parties holding an ownership interest in the
Building Project.
38. Force Majeure. If the performance by Landlord of any of its obligations
or undertakings under this Lease is interrupted or delayed by any occurrence
not occasioned by the conduct of Landlord or its agents, whether that
occurrence is an act of God or public enemy, or whether that occurrence is
caused by war, riot, storm, earthquake, or other natural forces, or by the
acts, omissions, requests or conduct of Tenant or anyone not a party to this
Lease, then Landlord shall be excused from any further performance for
whatever period of time after the occurrence is reasonable necessary, in the
Landlord's sole discretion, to remedy the effects of that occurrence. In
such an event, Tenant shall be entitled to equitable rental abatement during
the period of delay caused by such Force Majeure.
39. Security Measures-Landlord's Reservations.
39.1 Tenant hereby acknowledges that Landlord shall have no obligation
whatsoever to provide guard service or other security measures for the
benefit of the Building Project or Tenant's Premises. Tenant shall assume
all responsibility for the protection of Tenant, its agents, customers, and
invitees and the personal property thereof. Nothing herein contained shall
prevent Landlord, at Landlord's sole option, from providing security
protection for the Building Project, or any part thereof, in which event the
cost thereof shall be included within the definition of Operating Expenses,
as set forth in paragraph 4.2.
39.2 Landlord shall have the following rights:
a) To change the name, address or title of the entire Building
Project and/or the Office Tower in which the Premises are located;
b) To, at Tenant's expense, provide and install Office Tower
standard graphics on the door of the Premises and such portions of the Common
Areas as Landlord shall deems appropriate;
c) To permit any Tenant the exclusive right to conduct any
business as long as such exclusive use does not conflict with any rights
expressly given herein;
d) To place such signs, notices or displays as Landlord reasonably
deems necessary or advisable upon the roof, exterior of the Office Tower or
the Building Project or on pole signs in the Common Area.
39.3 Tenant shall not:
a) Use a representation (photographic or otherwise) of the Office
Tower or the Building Project or its name(s) in connection with Tenant's
business without the prior written consent of Landlord;
b) Suffer or permit anyone, except in an emergency, to go upon the
roof of the Office Tower.
40. Easements.
a) Landlord reserves to itself the right, from time to time, to
grant such easements, rights and dedications as Landlord deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Tenant. Tenant shall
sign any of the aforementioned documents upon request of Landlord or failure
to do so shall constitute a material default of this Lease by Tenant without
the need for
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further notice to Tenant.
b) The obstruction of Tenant's view, air or light by any structure
erected in the vicinity of the Office Tower, whether by Landlord or third
parties, shall in no way affect this Lease nor impose any liability upon
Landlord.
41. Performance Under Protest. If at any time a dispute shall arise as
to any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
42. Authority. If Tenant is a corporation, trust or general or limited
partnership, Tenant, and each individual executing this Lease on behalf of
such entity, represents and warrants that such individual is duly authorized
to execute and deliver this Lease on behalf of said entity. If Tenant is a
corporation, trust or partnership, Tenant shall deliver to Landlord evidence
of such authority satisfactory to Landlord prior to execution of this Lease.
43. Conflict. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
44. No Offer. Preparation of this Lease by Landlord's agent and
submission of same to Tenant shall not be deemed an offer to Tenant to lease.
This Lease shall become binding upon Landlord and Tenant only when fully
executed by both parties.
45. Lender Modification. Tenant agrees to make such reasonable
modifications to this Lease as may be reasonably required by an institutional
lender in connection with the obtaining of normal financing or refinancing of
the Building Project.
46. Multiple Parties. If more than one person or entity is named as
either Landlord or Tenant herein, except as otherwise expressly provided
herein, the obligations of the Landlord or Tenant herein shall be the joint
and several responsibility of all persons or entities named herein as such
Landlord or Tenant, respectively.
47. Defined Terms and Marginal Headings. The words "Landlord" and
"Tenant" as used herein shall each include the plural as well as the
singular. If more than one person is named as Tenant the obligations of each
person are joint and several. The headings to the paragraphs of this Lease
are for convenience only and are not a part of this Lease and shall have no
effect upon the construction or interpretation of any part hereof.
48. Broker. The parties recognize as the broker(s) who negotiated this
Lease the party or parties whose name or names are stated in Section 1.11 of
the Basic Lease Provisions, and agree that Landlord shall be solely
responsible for the payment of brokerage commissions to said broker(s) and
that Lessee shall have no responsibility therefore unless written provision
to the contrary has been made.
Tenant represents and warrants that it has not dealt with or employed
any broker or agent as its representative in the negotiation for or the
obtaining of this Lease other than the broker, if any, listed in said Section
1.11 as its sole and exclusive agent (if any), and agrees to indemnify and
hold harmless Landlord against all costs or liability for compensation
claimed by any broker or agent (other than the broker, if any, listed in said
Section 1.11 as its sole and exclusive agent (if any) and all attorneys' fees
expended in connection therewith.
49. Substituted Premises. Paragraph deleted.
50. Hazardous Materials. Tenant agrees that Tenant, its agents and
contractors, licensees, or invitees shall not handle, use, manufacture, store
or dispose of any flammables, explosives, radioactive materials, hazardous
wastes or materials, toxic wastes or materials, or other similar substances,
petroleum products or derivatives (collectively "Hazardous Materials") on,
under, or about the Premises, without Landlord's prior written consent (which
consent may be given or withheld in Landlord's sole discretion), provided
that Tenant may handled, store, use or dispose of products containing small
quantities of Hazardous Materials, which products are of a type customarily
found in offices and households (such as aerosol cans containing
insecticides, toner for copies, paints, paint remover, and the like),
provided further that Tenant shall handle, store, use and dispose of any such
Hazardous Materials in a safe and lawful manner and shall not allow such
Hazardous Materials to contaminate the Premises or the environment.
(a) Without limiting the above, Tenant shall reimburse, defend,
indemnify and hold Landlord harmless from and against any and all claims,
losses, liabilities, damages, costs and expenses, including without
limitation, loss of rental income, loss due to business interruption, and
attorneys fees and costs, arising out of or in any way connected with the
use, manufacture, storage, or disposal of Hazardous Materials by Tenant, its
agents or contractors on, under or about the premises including, without
limitation, the costs of any required or necessary investigation, repair,
cleanup or detoxification and the preparation of any closure or other
required plans in connection herewith, whether voluntary or compelled by
governmental authority. The indemnity obligations of Tenant under this
clause shall survive any termination of the Lease.
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(b) Notwithstanding anything set forth in this Lease, Tenant shall
only be responsible for contamination of Hazardous Materials or any cleanup
resulting directly therefrom, resulting directly from matters occurring or
Hazardous Materials deposited (other than by contractors, agents or
representatives controlled by Landlord) during the Lease term, and any other
period of time during which Tenant is in actual or constructive occupancy of
the Premises. Tenant shall take reasonable precautions to prevent the
contamination of the Premises with Hazardous Materials by third parties.
Landlord warrants that, to the best of Landlord's actual knowledge, at the
time of lease execution there are no Hazardous Materials, as defined herein,
except ordinary janitorial and other products customarily used in connection
with maintenance of the property and stored at the Premises in the proper
manner and in compliance with all laws, and in quantities or applications
that do not present a danger to the health or safety of Tenant. As used
herein, the term "Hazardous Material(s)" means any chemical, substance,
material, object, condition or waste, or combination thereof, which (i) is
defined as a hazardous substance, hazardous material, hazardous waste,
pollutant, toxic material, or contaminant under any Environmental Law; (ii)
is a petroleum hydrocarbon, including crude oil or any fraction thereof;
(iii) may be hazardous to human health or safety or the environment due to
its harmful or potentially harmful properties or effects, including toxicity,
corrosivity, flammability, explosivity, infectiousness, radioactivity,
carcinogenicity, or reproductive toxicity; or (iv) is regulated pursuant to
any Environmental Law.
(c) It shall not be unreasonable for Landlord to withhold its
consent to any proposed Assignment or Sublease if (i) the proposed Assignee's
or Subtenant's anticipated use of the Premisses involves the generation,
storage, use, treatment or disposal of Hazardous Materials; (ii) the proposed
Assignee or Subtenant has been required by any prior landlord, lender, or
governmental authority to take remedial action in connection with Hazardous
Materials contaminating a property if the contamination resulted from such
Assignee's or Subtenant's actions or use of the property in question; or
(iii) the proposed Assignee or Subtenant is subject to an enforcement order
issued by any governmental authority in connection with the use, disposal, or
storage of a hazardous material.
(d) Notwithstanding any statement to the contrary in this paragraph
50, Landlord warrants that as of the Commencement Date, to the best of
Landlord's knowledge, the Premises are free of asbestos.
51. Addendum. The provisions in this Section 51 shall
supersede and override any other provisions in this Lease to the
extent the same are inconsistent.
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ADDENDUM
51.1 Tenant Improvements. a) Landlord, at Landlord's sole cost and
expense, shall provide Tenant with a tenant improvement allowance, which
shall not exceed Ten dollars ($10.00) per usable square foot (4,216 usable
square feet x $10.00 = $42,160.00), and shall utilize building standard
materials in accordance with a mutually agreed upon space plan and
specifications and as outlined in the Work Letter attached hereto as Exhibit
"E". Landlord will, at Tenant's option, amortize additional tenant
improvement dollars, up to and not to exceed an additional two dollars
($2.00) per useable square foot, (for a total of $12.00 per sq. ft.), at an
interest rate of ten percent (10%) per annum, payable with the monthly Base
Rent over the initial term of the Lease.
b) Notwithstanding any provision in the Lease to the contrary,
including Sections 7.2 and 7.3, upon vacating of the Premises by Tenant,
Tenant shall not be required to remove any interior improvements that were
part of the initial tenant improvements installed prior to occupancy, nor any
improvements subsequently installed or made, unless, as a condition to
Landlord's consent to allow such additional improvements, Landlord specified,
in writing, the need to remove same at the end of the lease term.
51.2 Space Planning and Construction Drawings: Landlord shall pay to
Tenant's space planner up to $0.09 per usable square foot for preliminary
space planning and $0.45 per usable square foot for Construction Drawings.
Landlord reserves the right to have its architect review all plans associated
with the Space Plans and Construction Drawings. These amounts shall be
included in the overall tenant improvement allowance of $10.00 per usable
square foot.
51.3 Free Base Rent. Provided Tenant is not in default of the terms
and conditions of the Lease during months two (2) and three (3) of the
initial lease term, Landlord shall abate the Base Rent for month two (2) and
three (3) of the initial Lease Term.
51.4 Conference Center. Provided Tenant is not in default and the
Conference Center on the 2nd Level of the Office Tower is available, for
general use of the Office Tower Tenants, Tenant shall receive free usage for
up to four (4) hours per month for the term of the Lease. Tenant shall be
responsible for cleaning and any other costs associated with the use of the
Conference Center in accordance with the Reservation/Rental Agreement
attached as Exhibit C.
51.5 Option to Extend. Subject to all the terms of this paragraph and
provided that Tenant is not in default under the terms and conditions of the
Lease, Tenant shall have and is hereby granted the option to extend the term
of the Lease for Two (2) additional period of Five (5) years ("the Option
Period"). The Option Period shall commence immediately upon the expiration of
the initial Term of the Lease.
a) Tenant may exercise the option only by written notice to
Landlord giving at least 180, but not more than 365 days prior to the
expiration of the then current Term. If this option is not so exercised by
such date it shall automatically expire. Time is of the essence in exercising
this option. This option can be exercised only with respect to the area
constituting the Premises.
b) The Base Rent for the option period shall be the then
prevailing Fair Market Rental rate for like space in comparable Office Towers.
c) The term "Fair Market Rental" shall mean and refer to the
annual amount per square foot that a willing, comparable, non-renewal tenant
would pay, and a willing, comparable, landlord in the area would accept at
arms length (excluding any special concessions being given or made).
(i) Procedure for Determination of Fair Market Rental.
Within fifteen (15) days ("outside Agreement Date"), following the date
Tenant exercises its Option (but in no event more than 180 days prior to
expiration of the then current term), Tenant and Landlord shall use their
reasonable best efforts in good faith and with due diligence to agree upon
the Fair Market Rental. If Landlord and Tenant are unable to reach agreement
on the Fair Market Rental within thirty (30) days, then within ten (10) days
after said period, Landlord and Tenant shall simultaneously each submit to
the other in a sealed envelope their good faith estimate of the Fair Market
Rental at the end of said ten (10) day period (the "Estimated Fair Market
Rental"). If the higher of the said estimates is not more than one hundred
five percent (105%) of the lower of such estimates, the Fair Market Rental
shall be the average of the Estimated Fair Market Rentals. If otherwise,
then, within five (5) business days after submission of the estimates, either
party may submit the question to appraisal in accordance with the following
procedure:
(ii) Within twenty (20) days after either party request
appraisal, the parties shall select a mutually acceptable MAI appraiser with
experience in appraising comparable space in the area. If the parties cannot
agree on an appraiser within said twenty (20) day period, then within five
(5) business days thereafter, each party shall select an independent MAI
appraiser meeting the above criteria, and within ten (10) days thereafter the
two appointed appraisers shall select a third appraiser meeting the above
criteria, and the third appraiser shall determine the Fair Market Rental. If
the two appraisers selected by Landlord and Tenant cannot agree on thee third
appraiser, the third appraiser shall be selected by the then sitting
presiding judge of the Superior Court of California in and for Orange County.
(iii) Once the appraiser or appraisers have been selected
as provided herein, then as soon thereafter practicable, the appraisers shall
determine, in their opinion, the Fair Market Rental. The appraiser or
appraisers shall render a decision pursuant thereto within thirty (30) days.
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(iv) Each party shall be responsible for costs, charges and
fees of its respective appointee, and shall share equally in the costs,
charges and fees of the third appraiser.
51.6 Parking. Landlord shall provide Tenant with three (3) designated
twenty (20) minute parking spaces in the surface parking lot ("L" section)
adjacent to the Office Tower, for the term of the Lease and any extensions
thereof. Bank employees shall be entitled to park in the parking structure
without payment of a parking fee to Landlord. The number of parking spaces
for the Premises shall be on the basis of 3.4 spaces per 1,000 rentable
square feet of Tenant's rentable space, rounded down to a whole number.
51.7 Right to Sublease or Assign. In the event Tenant receives any
excess rental consideration in conjunction with an agreement providing for
the assignment or sublease of the Leased Premises, (excluding the payments
due to Landlord under this Lease), Tenant shall share fifty percent (50%) of
said excess rental consideration with Landlord less direct costs of
subleasing, such as reasonable brokerage commissions and tenant improvement
costs, if any. Notwithstanding anything to the contrary that may be
contained in the Lease, including Section 12, an assignment or subletting to
a parent or subsidiary shall not require Landlord's consent.
51.8 Monument Signage. Provided Landlord maintains monument signs at
the corner of Beach Boulevard and Warner Avenue and Ash Street and Warner
Avenue, Tenant shall, subject to city approval, be authorized to install two
(2) sign placards at each location as described in Exhibit "D" attached
hereto, on said monument sign.
51.9 Directory Signage. Landlord, at Landlord's sole cost and expense,
shall provide Tenant with one (1) directory signs to be located on the
directory board on the Plaza Level.
51.10 Office Tower Signage. Tenant shall be authorized to install
one eyebrow sign to be located approximately four (4) horizontal bands (above
the palm tree level) above the main entrance of the Office Tower on the north
east side, subject to a mutually agreed upon location, at no additional
rental rate increase. Additionally, Landlord shall allow Tenant to have
eyebrow ATM signage on the lowest spandrel of the Office Tower, located on
the west side. Said signage is personal to tenant and not transferrable.
Said authorization shall expire if Tenant does not install the sign within
twelve (12) months of Tenant's occupancy. Tenant shall be responsible for
all costs associated with the installation, maintenance, insurance and
ultimate removal of the sign. Said sign is subject to City and Landlord
approval based upon the project sign criteria mandated by the City of
Huntington Beach, attached hereto as Exhibit "D". A likeness of said signage
is encompassed within Exhibit "D", attached hereto. Tenant shall remove sign
at the end of the Lease Term or upon vacating the Premises, whichever occurs
first. In the event Tenant fails to do so, Landlord may after providing
written notice to Tenant remove sign at Tenant's expense.
51.11 Building Project Name. Landlord shall change the name of the
Building Project prior to the occupancy of Tenant, so that the name being
promoted by Landlord is no longer "Guardian Center".
51.12 Office of the Comptroller of the Currency ("OCC") Approval.
Landlord shall allow ninety (90) days, from the date of full Lease execution,
for Tenant to obtain OCC approval to use the Premises as a retail banking
location. Until Tenant receives OCC approval, Landlord shall be permitted to
continue marketing the space and accept back-up offers. In the event Tenant
does not obtain final written OCC approval within said ninety (90) days, then
Tenant may terminate this lease by providing Landlord with written notice of
such termination within said ninety (90) day period, and Landlord shall
refund all monies paid by Tenant less any costs incurred for Space Planning
and Construction Documents.
51.13 Arbitration. The parties agree that certain specific
disputes arising out of this Lease shall be resolved by arbitration under the
rules of the American Arbitration Association, and not by court. These
disputes shall be limited to the following: Disputes over square footage,
Commencement or Expiration dates, classification of any expense as "Operating
Expenses", parking, exercise of options, and any Landlord obligations,
including refunds of security deposits at lease termination.
Unless specifically mentioned above, all other disputes shall be
excluded from the obligation to arbitrate. Non-payment of rents and/or
non-performance by Tenant of any covenant to provide insurance coverage shall
be specifically excluded from any obligation to arbitrate and may be pursued
through an unlawful detainer action by Landlord. Any matter within the
jurisdiction of the probate court shall also be excluded from arbitration.
In the event any dispute covered by arbitration is believed to affect the
rent amount owing, rent as established by the Landlord shall continue to be
paid in full pending final determination through the arbitration process, at
which time the parties shall make the necessary reimbursements to comply with
the award.
51.14 Structural Defect. Notwithstanding any other provision of
this Lease, Landlord, without passing through the costs to Tenant, shall be
responsible for repairs of all latent defects in the structural components or
mechanical systems of the Office Tower and Building Project, other than
routine maintenance and minor repairs in the normal course of operations.
51.15 Exclusions from Operating Expenses. The following items
shall not be passed through to Tenant as part of the "Operating Expenses":
a) Capital improvements or replacements, other than costs which,
in accordance with general accounting and management principles, would be
considered an expense of maintaining, operating, managing or repairing the
Office Building Project.
b) Repairs or other work occasioned by fire, windstorm, or other
casualty or by the exercise of eminent domain, or any expenditure for which
the Landlord is reimbursed from any source.
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c) Attorney's fees, costs and disbursements and other expenses
incurred in connection with negotiations or disputes with tenants, other
occupants, prospective tenants or occupants of the building.
d) Renovating or decorating space for other tenants or occupants
of the building.
e) Costs incurred due to violation by Landlord or any tenant of
the terms and conditions of any lease; any costs, fines, or penalties
incurred due to violations by Landlord of any governmental rule or authority.
f) Overhead of Landlord for services on or to the real property
or the Office Building, to the extent that the costs of such services exceed
competitive costs of such services were they not rendered by a subsidiary or
affiliate; any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord.
g) Interest on debt or amortization payments on any mortgage, and
rental under any ground lease.
h) Advertising and promotional expenses for the purposes of
securing tenants for the property.
i) Costs for sculpture, paintings, or other objects of art.
j) Rentals and other related expenses incurred in leasing air
conditioning equipment or systems, elevators, or other permanent equipment
ordinarily considered to be of a capital nature, except equipment which is
used in providing janitorial services and which is not affixed to the Office
Building; the value of lost income to the Landlord of any office space in the
Office Building which is utilized for the management of the Office Building
Project.
k) Financing costs, including but not limited to points,
commitment fees and legal fees.
l) Costs incurred by Landlord to remedy and defects in the design
of or materials used in, or the defective installation of the structural
steel or other framing, roof, foundations, and underground utilities forming
part of or servicing the Office Building or the real property.
m) Landlord's costs in removing substances considered detrimental
to the environment or to the health of building occupants, including the cost
of removal and/or disposition of cooling system or other chemicals used in
the operation of the Office Building, unless such substances are placed on
the Office Building Project by Tenant.
n) Any fines, penalties, or interest paid by Landlord as a result
of late payment of real estate taxes.
o) Leasing or other brokerage commissions.
p) Depreciation.
q) Franchise, estate, succession, inheritance, profit, capital
gains, capital stock, transfer and personal or corporate income taxes
(excluding any rental tax), imposed upon any part of the Office Tower or
Building Project including the related common areas;
r) The cost of any repairs, alterations, additions, changes,
improvements, replacements or other items, which, under generally accepted
accounting principals, are classified as capital improvements or capital
expenditures (including without limitation any items amortized or
depreciated), except for items of a relatively minor and reasonable costs
incurred in the daily maintenance of the property.
s) Overhead and profit increments paid to the Landlord or to
subsidiaries or affiliates of the Landlord, for services in the Building
Project to the extent the same exceeds the costs of such services if rendered
by qualified, first class, unaffiliated third parties on a competitive basis.
51.15 American Disability Act ("ADA"): To the best of Landlord's
knowledge, the Premises and common areas, in their existing use, comply with,
and Landlord is not in violation of, any applicable federal, state, county or
local statutes, laws, regulations rules, ordinances, codes, licenses, and
permits (other than some ADA improvements that Landlord is in the process of
making pursuant to the City of Huntington Beach Building Permit number
086376).
Tenant shall not have any responsibility (either to act or pay for any
cost) to correct any existing violations. Any such cost incurred by the
Landlord to correct any of the violations listed above shall not be a party
of the building's operating expenses, or deducted from any tenant improvement
allowance.
LANDLORD AND TENANT HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN. THE PARTIES HAVE ALSO HAD AMPLE OPPORTUNITY
TO HAVE THEIR RESPECTIVE ATTORNEYS REVIEW THE CONTENTS HEREIN AND, BY
EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO.
THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS
OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND
PURPOSE OF LANDLORD AND TENANT WITH RESPECT TO THE PREMISES.
IN WITNESS WHEREOF, the parties hereto have executed this Lease, consisting
of the foregoing provisions and paragraphs 1 through 51, together with
Exhibits "A-1" through "E", incorporated herein by this reference, as of the
date first above written.
"LANDLORD" "TENANT"
LIU CORP., Liberty National Bank,
a California corporation a National Banking Association
By: /s/ Mimi Liu By: /s/ Philip S. Inglee
--------------------- ------------------------------
Mimi Liu Philip S. Inglee
Secretary/Treasurer President and Chief Executive Officer
Date: 2/23/96 Date: 2/2/96
------------------ --------------------------
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EXHIBIT "A-1"
FLOOR PLANS
[MAP]
GUARDIAN CENTER
Suites 100 & 130
Approximately 4,722 Rentable Sq. Ft.
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EXHIBIT "A-2"
PLOT PLAN OF BUILDING
[MAP]
22
<PAGE>
EXHIBIT "B"
RULES AND REGULATIONS FOR GUARDIAN CENTER TENANTS
1. Tenant shall not obstruct or interfere with the rights of other
tenants of the Office Tower, or of persons having business in the Building
Project ("OBP"), or in any way injure or annoy such tenants or persons.
2. Tenant shall only use Premises for the purpose stated in Section 1.3.
Tenant shall not use the Premises for lodging, sleeping, cooking, or for any
immoral or illegal purpose or for any purpose that will damage the Premises
or the OBP, or the reputation thereof, or for any purposes other than those
specified in the Lease.
3. Canvassing, soliciting and peddling in the OBP prohibited without the
prior written approval of Landlord. Tenant shall not disturb, solicit, or
canvass any occupant of the Center without the prior written approval of
Landlord.
4. Tenant shall not bring or keep within the Premises any animal, bicycle
or motorcycle.
5. Tenant shall not conduct mechanical or manufacturing operations, cook
or prepare food, or place or use any inflammable, or hazardous fluid,
substance, or device in or about the Premises without the prior written
consent of Landlord. Tenant shall comply with all rules, orders, regulations
of the applicable Fire Rating Bureau, or any other similar body, and Tenant
shall not commit any act or permit any object to be brought or kept in the
Premises which shall increase the rate of fire insurance on the Premises or
on property located therein.
6. Tenant shall not use the Premises for manufacturing or for the storage
of goods, wares or merchandise, except as such storage may be incidental to
the use of the Premises for general retail purposes and except in such
portions of the Premises as may be specifically designated by Landlord for
such storage. Tenant shall not occupy the Premises or permit any portion of
the Premises to be occupied for the manufacture or direct sale of liquor,
narcotics, or tobacco in any form, or as a medical office, music or dance
studio or employment agency. Tenant shall not conduct in or about the
Premises any auction, public or private, without the prior written approval
of Landlord, except, provided Tenant is a Bank, reasonable foreclosure sales
of personal and real property conducted in the Bank's normal course of
business.
7. Tenant shall not install or use in the Premises any additional air
conditioning unit, engine, boiler, generator, machinery, heating unit, stove,
water cooler, ventilator, radiator or any other similar apparatus without the
prior written consent of Landlord, and then only as Landlord may direct.
8. Tenant shall not use in the Premises any machines, other than standard
office machines such as typewriters, calculators, personal computers, copying
machines and similar machines, without the prior written approval of
Landlord. All office equipment and any other device of any electrical or
mechanical nature shall be placed by Tenant in the Premises in settings
approved by Landlord, so as to absorb or prevent any vibration, noise, or
annoyance. Tenant shall not cause improper noises, vibrations or odors
within the OBP.
9. Tenant shall move all freight, supplies, furniture, fixtures and other
personal property into, within and out of the OBP at such times and through
such entrances as may be designated by Landlord, and such movement of such
items shall be under the supervision of Landlord. Landlord reserves the
right to inspect all such freight, supplies, furniture, fixtures and other
personal property to be brought into the OBP and to exclude from the OBP, all
such objects which violate any of these rules and regulations of the
provisions of the Lease. Tenant shall not move or install such objects in or
about the Premises in such a fashion as to unreasonably obstruct the
activities of other Tenants, and all such moving shall be at the sole
expense, risk and responsibility of Tenant. Tenant shall not use any hand
trucks other than those equipped with rubber tires and side guards in the
delivery, receipt or other movement of freight, supplies, furniture, fixtures
and other personal property to, from, or within the OBP.
10. Tenant shall not place within the Premises any safes, copying
machines, computer equipment other than desktop personal computers or other
objects of unusual size or weight, nor shall Tenant place within the Premises
any objects which exceed the floor weight specifications of the Premises
without the prior written consent of Landlord. The placement and positioning
of all such objects within the Premises shall be prescribed by Landlord and
such objects shall, in all cases, be placed upon plates or footings of such
size as shall be prescribed by Landlord.
11. Tenant shall not deposit any trash, refuse, cigarettes, or other
substances of any kind within or outside of the Premises, except in the
refuse containers provided therefore. Tenant shall not introduce into the
Premises any substance which might add an undue burden to the cleaning or
maintenance of the Premises or the OBP. Tenant shall exercise its best
efforts to keep the sidewalks, entrances, passages, courts, lobby areas,
garages or parking areas, elevators, escalators, stairways, vestibules,
public corridors and halls in and about the OBP (hereinafter "Common Areas")
clean and free from rubbish.
12. Tenant shall use the Common Areas only as a means of ingress and
egress, and Tenant shall permit no loitering by any persons upon Common Areas
or elsewhere within the OBP. The Common Areas and roof of the OBP are not
for the use of the general public, and Landlord shall in all cases retain the
right to control or prevent access thereto by all persons whose presence, in
the judgment of Landlord, shall be prejudicial to the safety, character,
reputation or interests of the OBP and its tenants. Tenant shall not enter
the mechanical rooms, air conditioning rooms, electrical closets, janitorial
closets, or similar areas or go upon the roof of the Center without the prior
written consent of Landlord.
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13. Tenant shall not use the washrooms, restrooms and plumbing fixtures of
the Premises and appurtenances thereto for any other purpose than the
purposes for which they were constructed, and Tenant shall not deposit any
sweepings, rubbish, rags or other improper substances therein. Tenant shall
not waste water by interfering or tampering with the faucets or otherwise.
In the event Tenant or Tenant's servants, employees, agents, contractors,
licenses, invitees, guests or visitors cause any damage to such washrooms,
restrooms, plumbing fixtures or appurtenances, Tenant shall pay to Landlord
the costs of repair or replacement plus a 20% administrative charge.
14. Tenant shall not hang any banners, signs and/or posters (hereinafter
collectively referred to as "Signs") of any kind whatsoever in any exterior
portion of the "Main Building Structure" of the Leased Premises (the exterior
portion of the Main Building Structure as used herein, shall include but not
be limited to, the exterior side of all walls, windows and any and all
portions of patio areas of the Leased Premises), without the prior written
approval from Landlord and the City of Huntington Beach, as specifically
required by Article 961, Sections 9610.4(i) and 9610.9(a) of the City of
Huntington Beach Sign Code. In the event Tenant fails to obtain the prior
written approval of both Landlord and the City of Huntington Beach, Landlord
shall notify Tenant of its non-compliance with the City Sign Code and these
Rules and Regulations. Tenant shall immediately comply with Landlord's demand
to remove such Sign. If Tenant should fail or refuse to remove such Sign,
Tenant shall thereafter be assessed a $200 per day fine by Landlord and shall
also be subject to any and all prosecution, penalties and fines which the
City of Huntington Beach may thereafter impose. Upon removal of any wall
decorations, banners, signs, or installations or floor coverings by Tenant,
any damage to the walls or floors shall be repaired by Tenant at Tenant's
sole cost and expense.
a. This Paragraph 14 shall apply to all work performed in the Premises
including without limitation, installation of telephones, telegraph
equipment, electrical devices and attachments and installations of any nature
affecting floors, walls, woodwork, trim, windows, ceiling, equipment or any
other portion of the Premises.
b. Tenant shall refer all contractors' representatives, installation
technicians, janitorial workers and other mechanics, artisans and laborers
rendering any service in connection with the repair, maintenance or
improvement of the Premises to Landlord for Landlord's approval and/or
supervision before performance of any such service.
c. The means by which telephone, telegraph and similar wires are to be
introduced to the Premises and the location of telephones, call boxes, and
other office equipment affixed to the Premises shall be subject to the prior
written approval of Landlord. Plans and specifications for such work,
prepared at Tenant's sole expense, shall be submitted to Landlord and shall
be subject to Landlord's prior written approval in each instance before the
commencement of work. Work done without said approval shall be restored upon
the termination of the Lease at Landlord's option at Tenant's expense. All
installations, alterations and additions shall be constructed by Tenant in a
good and workmanlike manner and only good grades of materials shall be used
in connection therewith.
15. Landlord shall have the right to prohibit any publicity, advertising
or use of the name of the Office Tower or the OBP by Tenant which, in
Landlord's opinion, tends to impair the reputation of the Office Tower, or
the OBP, or its desirability for offices and retail operations and upon
written notice from Landlord, Tenant shall refrain from or discontinue any
such publicity, advertising or use of the OBP name.
16. The sashes, sash doors, skylights, windows and doors that reflect or
admit light or air into the Common Areas shall not be covered or obstructed
by Tenant through placement of objects upon windowsills or otherwise. Tenant
shall cooperate with Landlord in obtaining maximum effectiveness of the
cooling system of the Premises by closing blinds and other window coverings
when the sun's rays fall upon windows of the Premises. Tenant shall not
obstruct, alter or in any way impair the efficient operation of Landlord's
heating, ventilation, air conditioning, electrical wire, safety or light
systems, nor shall Tenant tamper with or change the setting of any thermostat
or temperature control valves in the Premises. Tenant shall give Landlord
prompt notice of all accidents to or defects in air-conditioning equipment,
plumbing, electric facilities, or any part of the appurtenances of the
Premises.
17. Subject to applicable fire or other safety regulations, all doors
opening onto Common Areas and all doors upon the perimeter of the Premises
shall be kept closed and, during non-business hours, locked, except when in
use for ingress or egress. If Tenant uses the Premises after regular business
hours or on non-business days Tenant shall lock any entrance doors to the
Premises used by Tenant immediately after using such doors. Tenant shall
exercise reasonable precaution in the protection of their personal property
from loss or damage by keeping doors to unattended areas locked. Tenant
shall also report any thefts or losses to the Landlord or security personnel
as soon as reasonably possible after discovery and shall also notify the
Landlord and security personnel of the presence of any persons whose conduct
is suspicious or causes a disturbance.
18. Employees of Landlord shall not receive or carry messages for or to
Tenant or any other person, nor contract with nor render free or paid
services to Tenant or Tenant's servants, employees, contractors, jobbers,
agents, invitees, licensees, guests or visitors. In the event that any
of Landlord's employees perform any such services, such employees shall be
deemed to be the agents of Tenant regardless of whether or how payment is
arranged for such services and Tenant thereby indemnifies and holds Landlord
harmless from any and all liability in connection with any such services and
any associated injury or damage to property or injury or death to persons
resulting therefrom.
19. All keys to the exterior of the Premises shall be obtained by Tenant
from Landlord, and Tenant shall pay to Landlord a reasonable deposit
determined by Landlord from time to time for such keys. Tenant shall not
make duplicate copies of such keys. Tenant shall not install additional locks
or bolts of any kind upon any of the
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doors or windows of, or within, the Premises without written prior consent of
Landlord, nor shall Tenant make any changes in existing locks or the
mechanisms thereof. Tenant shall, upon the termination of its tenancy,
provide Landlord with the combinations to all combination locks on safes,
safe cabinets and vaults and deliver to Landlord all keys to the Premises and
all interior doors, cabinets, and other key-controlled mechanisms therein,
whether or not such keys were furnished to Tenant by Landlord. In the event
of the loss of any key furnished to Tenant by Landlord, Tenant shall pay to
Landlord the cost of replacing the same or of changing the lock or locks
opened by such lost key if Landlord shall deem it necessary to make such a
change, plus a 20% administrative charge.
20. For purposes hereof, the terms "Landlord", "Tenant", and "Premises"
are defined as those terms as defined in the Lease to which these Rules and
regulations are attached. Wherever Tenant is obligated under these Rules and
Regulations to do or refrain from doing an act or things, such obligation
shall include the exercise by Tenant of its best efforts to secure compliance
with such obligation by the servants, employees, contractors, jobbers,
agents, invitees, licensees, guests and visitors of Tenant.
21. No person shall disturb the occupants of the OBP by the use of any
musical instruments, the making of unseemly noises, or other unreasonable use.
22. Tenant, its employees, agents, customers, and invitees shall have the
right to use parking space provided by Landlord but not so as to unreasonably
interfere with the similar parking rights of other tenants.
23. No vending machines or machines of any description shall be installed,
maintained, or operated upon the Premises without the prior written consent
of Landlord.
24. Temporary inconvenience occasioned by construction in or near the OBP
shall not be deemed to disturb Tenant as a part of the covenant of quiet
enjoyment and possession.
25. Landlord is not responsible to any Tenant for the nonobservance or
violation of the Rules and Regulations by any other Tenant.
26. Storage of vehicles or equipment in the parking area is prohibited.
Landlord has the right to enforce this restriction by removal and storage of
vehicles or equipment and such cost of storage and removal shall be borne by
Tenant. Tenant shall observe designated restricted parking areas, such as
visitor parking, fire lanes, handicap parking, and loading zones. Landlord
has the right to enforce this parking rule by removal and storage of Tenant's
vehicles at the expense of Tenant.
27. Tenant shall not be permitted to use any area of the Office Tower
outside of Tenant's Premises for storage of supplies, furnishings, equipment,
or personal property without prior written consent of Landlord.
28. Landlord shall not be responsible to the Tenant, their agents,
employees, customers, or invitees for any loss of money, jewelry, or other
personal property from the Premises or Common Areas. Landlord shall not be
responsible to Tenant for any damages to any property therein from any cause
whatsoever whether such loss or damage occurs when an area is locked against
entry or not.
29. Tenant will not be permitted to locate furnishings or cabinets
adjacent to mechanical or electrical access panels or over air conditioning
outlets so as to prevent operating personnel from servicing such units as
routine or emergency access may require. Cost of moving such furnishings for
Landlord's access will be borne by Tenant.
30. Tenant will be responsible for any damage to carpeting and flooring as
a result of rust or corrosion of file cabinets, pot holders, roller chairs,
and metal objects and plants.
31. Tenant shall permit Landlord six (6) months prior to the termination
of this Lease to show Premises during business or nonbusiness hours to
prospective tenants however, Landlord shall not unreasonably disturb Tenant's
business.
32. Tenant valet parking, if applicable, shall be conducted in accordance
with the following current guidelines (which may be modified at Landlord's
discretion upon 15 days prior written notice to Tenant). 1. Parking for valet
vehicles shall be permitted in allocated marked stalls only (which stalls may
be relocated at Landlords discretion upon 15 days prior written notice to
Tenant). 2. Valet service and parking shall be conducted only between the
hours of 5 p.m. and 1 a.m., seven days a week. 3. The valet drop-off area
and key station may be located within the green canopy adjacent to the Office
Tower. 4. Only a single lane of valet vehicles will be permitted in the
drop-off area. 5. Keys are required to remain in the ignition of valet
vehicles left at the drop-off area. 6. Tenant shall keep fire lanes clear of
valet vehicles at all times. 7. Tenant shall be responsible for conducting
and maintaining its valet service in full compliance with all federal, state
and municipal laws and regulations affecting such activity. 8. Tenant shall
be solely responsible for (a) policing the area to be used for valet drop-off
and parking; (b) all costs associated with the valet service and incidents
thereto; and (c) all liabilities arising from the operation of the valet
service. 9. Tenant and/or its designated agent, at its sole cost and expense,
shall provide proof of, and maintain in full force and effect, comprehensive
liability insurance with respect to the Premises and operations of its valet
service in an amount not less than one million dollars ($1,000,000) combined
single limit bodily injury, personal injury, death and property damage
liability per occurrence, subject to such increases in an amount as Landlord
may reasonably require from time to time. Policy or policies to include a
provision that (a) coverage shall be primary with respect to any loss or
claim arising directly or indirectly out of the operations of Tenant and/or
its designated agent, any policies carried by Landlord
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shall be excess and non-contributing with such polity or policies, and (b)
that Landlord and Landlord's Agent shall be additional named insured under
such policy or policies, and (3) a provision that insurer will not cancel, or
materially change the coverage provided by such policy without first giving
Landlord thirty (30) days prior written notice.
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PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than
full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as
"Oversized Vehicles."
2. Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers, customers,
or invitees to be loaded, unloaded, or parked in areas other than those
designated by Landlord for such activities.
3. Parking stickers or identification devices shall be the property of
Landlord and shall be returned to Landlord by the holder thereof upon
termination of the holder's parking privileges. Tenant will pay such
replacement charge as is reasonably established by Landlord for the loss of
such devices.
4. Landlord reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws, and/or agreements as set forth by the
Landlord.
5. Landlord reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard
size spaces, as long as the same complies with applicable laws, ordinances,
and regulations.
6. Users of the parking area will obey all posted signs and park only in the
areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Landlord will not be responsible
for any damage to vehicles, injury to persons, or loss of property, all of
which risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method or
methods as Landlord and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing, or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Tenant shall be responsible for seeing that all of its employees,
agents, and invitees comply with the applicable parking rules, regulations,
laws, and agreements.
11. Landlord reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use, as is herein provided, is intended merely as a
license only, and no bailment is intended or shall be created hereby.
13. Any vehicle not parked in a marked stall shall be towed at vehicle
owner's expense.
14. No overnight parking shall be permitted without prior consent of
Landlord.
15. If Tenant or its' employees park in any non-designated parking area,
Landlord may charge Tenant, as an additional charge, twenty-five dollars
($25.00) per day for each day or partial day such vehicle is parked in any
part of the common areas other than that designated.
16. Landlord reserves the right to designate reserved parking spaces in
the parking areas.
17. Landlord reserves the right to require Tenant and its employees to
park vehicles on designated levels of the parking structure.
18. Tenant acknowledges that it is responsible and agrees to comply with
existing and future South Coast Air Quality Management District (SCAQMD)
mandates and requirements imposed on major employers in Southern California.
By execution below, I acknowledge that I understand and agree to abide by all
the Rules and Regulations stated above.
"TENANT"
Liberty National Bank,
a National Banking Association
By: /s/ Philip S. Inglee
----------------------------
Philip S. Inglee
President and Chief Executive Officer
Date: 2/2/96
------------------------
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EXHIBIT "C"
CONFERENCE CENTER RESERVATION/RENTAL AGREEMENT
Date___________________________
Tenant's Tenant's
Name___________________________ Suite_______________________
Reservation Date/Time:
Date________________________ Time____________________
_____ Hourly (Minimum 2 hours)
_____ _ Day
_____ One (1) Day
Floor Plan Set-UP......No. 1 _____ No. 2 _____ No. 3 _____ No. 4 _____
Coffee Supplies Required..............................Yes _____ No _____
10 persons...$15.00 _____ 25 persons...$20.00_____
50 persons...$50.00 _____ 75 persons...$75.00_____
Acknowledgment and Agreement:
I hereby agree and acknowledge that the terms and conditions of the Lease by
and between LIU CORP. and _____________________________________________ will
be applicable when leasing and utilizing the Conference Center, Suite 210, as
stated above.
In addition, the security deposit may be retained in part or in whole as
payment for any damage to the carpet, walls, furniture, fixtures and
equipment as a result of our usage.
_______________________________ ___________________________
Tenant Signature Date
(Authorized Agent)
*******************************************************************************
(To be completed by Property Management)
Security Deposit:
Date Received _________________ Check No. _______________ Amount $________
Held on Account _______________ Check No. _______________ Amount $________
Check Returned __________________________________________ ________________
Tenant Signature Date
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EXHIBIT "D"
EXTERIOR SIGNAGE
1. Monument Signage: Tenant shall be entitled to install, at
Tenant's sole cost and expense, four (4) monument placards at the
Center; two (2) placards on the monument sign at the corner of
Beach Blvd. & Warner Avenue and two (2) placards on the monument
sign at the corner of Ash Street & Warner Avenue. These sign
placards shall be submitted to the Landlord for approval and
installed by Landlord's sign contractor.
The locations of the tenant placards, as depicted below, do not
necessarily reflect the exact location of specified tenant
placards.
Tenant will be granted:
Sign A - Two (2) large placards;
[GRAPHICS]
Sign B - Two (2) small placards.
[GRAPHICS]
7
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2. Exterior Signage: Planned Sign Program No. 84-2 as Approved by the City
of Huntington Beach:
A. GENERAL PROVISIONS:
l. No sign shall be installed, erected, altered, or reconstructed without
prior City approval and issuance of appropriate Building Division permits.
a) Prior to submittal for plan check and issuance of permits, the
sign plans must be approved by the owner or owner's representative.
b) UL listed housing or sleeving shall be required for all wall
signage.
2. Copy shall be limited to the establishment's name and/or product name.
a) Box-type or can signs are prohibited.
b) Exposed raceway signs are prohibited.
c) Each letter, numeral or unit, shall comply with the following
color specifications:
(1) Approved letter colors are #72358 red and #899 turquoise.
(2) Approved letter return and trim cap color shall be #899
turquoise.
(3) Transparent sign faces are prohibited.
3. No tenant shall affix or maintain upon the exterior walls of the
premises or the buildings or in the parking lot and landscape areas any signs
other than as permitted herein except with the City's and landlord's
approvals.
a) Temporary signs, such as banners, can only be permitted in
accordance with Section 976C.16 of the Huntington Beach Ordinance Code.
b) Each retail or restaurant tenant may place on their service or
delivery door one sign indicating the name of their business name in white
lettering not to exceed 3" in height nor more that 100 square inches. This
sign shall be located at a height of 5'6".
B. WALL SIGNAGE:
1. Each tenant in the retail/restaurant buildings adjacent to the Office
Tower establishment shall be permitted one illuminated reverse aluminum pan
channel letter sign:
a) To be located only on the space and on the surface specially
provided for same of the building exterior.
b) No other signage is permitted on the exterior of the premises.
c) Tenants with a corner unit will be permitted two signs providing
the sign area does not exceed the maximum allowed by City codes or as
designated in this sign criteria.
2. Maximum letter height for the retail establishments shall be
twenty-four (24) inches.
3. Minimum letter size shall be ten (10) inches.
4. Sign length shall not exceed 75% of leasehold width. Signage area
shall be centered on facia vertically.
5. Upper and lower case letters from the top of the ascender to the
bottom of the descender shall not exceed thirty-six (36) inches in overall
height.
6. Maximum letter height for Holiday Health Spa and the Edwards Cinemas
shall be thirty (30) inches.
7. Signage for the retail establishments shall not exceed the provisions
of Section 9760.10 of the Huntington Beach Ordinance Code.
8. Signs shall be illuminated in such a way to create a back-lit effect.
8
<PAGE>
LEASE SPECIFICATIONS
BY AND BETWEEN
LIU CORP., A CALIFORNIA CORPORATION AND
LIBERTY NATIONAL BANK
FOR SIGNS AT GUARDIAN CENTER
3. Exterior Signage (Likeness):
[GRAPHICS]
9
<PAGE>
A. GENERAL PROVISIONS:
1. The design and construction of Tenant's exterior sign must receive
written approval by Landlord prior to fabrication and installation.
2. Tenant shall not hang any banners, signs and/or posters (hereinafter
collectively referred to as "Signs") of any kind whatsoever in any exterior
portion of the leased premises without the prior written approval from
Landlord and the City of Huntington Beach. (Please refer to the Rules and
Regulations attached to and made a part of the Lease.)
3. All signs shall be in accordance with Section 976C.16 and/or Section
9760.10 of the Huntington Beach Ordinance Code.
4. Tenant shall pay for all signs, their installation (including final
connection, transformers and all other labor and materials) and maintenance.
Tenant's sign contractor must file, pay for and obtain any licenses, permits
and variances as required for sign installation.
5. Tenant will notify Landlord of the installation schedule no less than
twenty four (24) hours prior to the scheduled installation.
B. BLUE PRINTS/DRAWINGS:
1. In order to obtain the Landlord's written approval for each sign two
(2) blue prints/drawings, which will depict size, color, material, location,
etc., will be submitted with a written request for approval. One (1) blue
print/drawing will be retained for Landlord's records. Upon the written
approval (denoted on the blue print) one original blue print will be returned
to the Tenant or Tenant's sign contractor. A plot plan indicating location
of Tenant sign must be included.
2. Neon tubing sizes, colors, wattage and intensity must be depicted on
blue prints.
3. Tenant should allow three (3) to five (5) working days for Landlord's
written approval.
C. FABRICATION AND INSTALLATION:
The fabrication and installation of all signs shall be subject to the
following restrictions:
1. All Channel letters are to be fabricated with .060 aluminum sheet.
Seams on letter returns to be welded sanded and buffed prior to painting.
Channelume, Channel Classic and Channel LET-R-edge will not be permitted.
2. Three and one-half inch (3 1/2") deep letter returns.
3. Neon tubing will be 13 millimeters.
4. 30 MA high power factor transformers must be used. No exposed lamps
will be permitted.
5. All penetrations of the building structure required for sign
installation shall be sealed in a watertight condition and be patched to
match adjacent finish.
6. No sign company labels will be permitted on the exposed surfaces of
the signs except those required by Underwriters Laboratories (UL) which
shall be placed in an inconspicuous location.
7. The Landlord shall provide primary electrical service terminations to
the signage area on the rear side of the parapet wall.
8. All signs shall conceal all necessary wiring, ballasts, transformers,
starters and other necessary equipment within their individual letters or
behind storefront construction.
9. It will be the responsibility of the Tenant's sign contractor to
verify all conduit and transformer locations and service prior to fabrication.
10. The contractor who installs the signage will provide a Certificate of
Insurance for property and liability insurance in the amount of $1,000,000
naming Landlord and Landlord's agent as additional insureds prior to the
installation of any signs.
11. The contractor who installs the signage will comply with all City and
State building codes.
12. Further information regarding contractors and signage can be
obtained in the Lease.
D. NON-CONFORMANCE
1. Any sign that is installed by Tenant which is not in conformance with
the approved drawings shall be corrected by Tenant within fifteen (15) days
after written notice by Landlord. In the event Tenant's sign is not brought
into conformance within said fifteen (15) day period, then Landlord shall
have the option to correct said sign at Tenant's sole cost and expense.
10
<PAGE>
EXHIBIT "E"
WORK LETTER
This Exhibit "E" is attached to and made a part of that certain Lease dated
October 30th, 1995, by and between LIU CORP., a California corporation
("Landlord"), and Liberty National Bank, hereinafter called "Tenant") for the
Premises known as 17011 Beach Blvd., Suites 100 and 120, Huntington Beach,
California 92647.
1. APPLICATION OF EXHIBIT
Capitalized terms used and not otherwise defined herein shall have the
same definitions as set forth in the Lease. The provisions of this Work
Letter shall apply to the planning and completion of leasehold improvements
requested by Tenant (the "Tenant Improvements") for the fitting out of the
initial Premises, as more fully set forth herein.
2. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS
a) Preliminary Space Plans. Pursuant to paragraph 51.2 Tenant's space
planner will develop preliminary space plans for the Tenant Improvements
("the Preliminary Space Plans"), which include, without limitation, sketches
and/or drawings showing locations of doors, partitioning, electrical
fixtures, outlets and switches, plumbing fixtures and other requirements,
which are subject to mutual agreement by Landlord and Tenant and determined
by Tenant as required for its use of the Premises. Landlord and Landlord's
Architect shall be entitled, in all respects, to rely upon all information
supplied by Tenant regarding the Tenant Improvements.
b) Working Drawings. Within twenty-one (21) days following OCC
approval of this Lease Tenant's Architect shall prepare working drawings
("the Working Drawings") for the Tenant Improvements based upon the approved
Preliminary Space Plans. The Working Drawings shall include architectural
drawings for the Tenant Improvements based on the Preliminary Space Plans.
Notwithstanding the Preliminary Space Plans, in all cases the Working
Drawings (i) shall be subject to Landlord's final approval, which approval
shall not be unreasonably withheld, (ii) shall not be in conflict with
building codes for the City or County or with insurance requirements for a
fire resistive Class A Office Tower, and (iii) shall be in a form
satisfactory to appropriate governmental authorities responsible for issuing
permits and licenses required for construction.
c) Approval of Working Drawings. Tenant or Tenant's Architect shall
submit the Working Drawings to Landlord for Landlord's and Landlord's
Architects review to confirm compliance with the Preliminary Space Plan, and
Tenant shall notify Landlord and Tenant's Architect within five (5) business
days after delivery thereof of any requested revisions. Within five (5) days
after receipt of Landlord's notice, Tenant's Architect shall make all
approved revisions to the Working Drawings and submit two (2) copies thereof
to Tenant and Landlord for its final review and approval, which approval
shall be given within three (3) business days thereafter. Concurrently with
the above review and approval process, Tenant's Architect may submit all
plans and specifications to City and other applicable governmental agencies
in an attempt to expedite City approval and issuance of all necessary permits
and Licenses to construct the Tenant Improvements as shown on the Working
Drawings. Any changes which are required by City or other governmental
agencies shall be immediately submitted to Landlord and Tenant for review and
reasonable approval.
d) Schedule of Critical Dates. Set forth below is a schedule of certain
critical dates relating to Landlord's and Tenant's respective obligations for
the design and construction of the Tenant Improvements. Such dates and the
respective obligations of Landlord and Tenant are more fully described
elsewhere in this Work Letter. The purpose of the following schedule is to
provide a reference for Landlord and Tenant and to make certain the Final
Approval Date occurs as set forth herein. Following the Final Approval Date,
Tenant shall be deemed to have released Landlord to commence construction of
the Tenant Improvements as set forth in Section 4 below.
Reference Date Due Responsible Party
A. "Preliminary Space Plan Thirty (30) days after Tenant & Landlord
Approval" Board Approval
B. "Working Drawings Completion" Twenty-one (21) days Tenant & Landlord
after OCC Approval
C. "Working Drawings Review" Five (5) business days Tenant & Landlord
after Tenant's Architect
submits the Working
Drawings to Landlord &
Tenant
D. "Working Drawings Revisions" Five (5) business days Tenant & Landlord
after Tenant & Landlord
return the Working Drawings
to Tenant's Architect
E. "Final Approval Date" Three (3) business days Tenant & Landlord
after Tenant's Architect
submits the revised Working
Drawings to Landlord &
Tenant
3. BUILDING PERMIT
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<PAGE>
After the Final Approval Date has occurred, Tenant's Architect shall, if
Tenant's Architect has not already done so, submit the Working Drawings to
the appropriate governmental body or bodies for final plan checking and a
building permit. Tenant's Architect, with Landlord's and Tenant's
cooperation, shall cause to be made any change in the Working Drawings
necessary to obtain the building permit; provided, however, after the Final
Approval Date, no changes shall be made to the Working Drawings without the
prior written approval of both Landlord and Tenant, and then only after
agreement by Tenant to pay any excess costs resulting from such changes.
4. CONSTRUCTION OF TENANT IMPROVEMENTS
After the Final Approval Date has occurred and a building permit for the
work has been issued, Landlord shall, through a construction contract
("Construction Contract") with a reputable, licensed contractor selected by
Landlord ("Contractor"), cause the construction of the Tenant Improvements to
be carried out in substantial conformance with the Working Drawings in a good
and workmanlike manner using first-class materials. The costs associated
with the construction of the Tenant Improvements shall be paid as set forth
in Section 5 and 6 of this Work Letter. Landlord shall see that the
construction complies with all applicable building, fire, health, and
sanitary codes and regulations, the satisfaction of which shall be evidenced
by a certificate of occupancy for the Premises.
5. TENANT IMPROVEMENT ALLOWANCE
Landlord shall provide Tenant with a Tenant Improvement Allowance as set
forth in Section 51.1 of the Lease towards the cost of the design, purchase
and construction of the Tenant Improvements, including without limitation
design, engineering and consulting fees (collectively, the "Tenant
Improvement Costs"). The Tenant Improvement Allowance shall be used for
payment of the following Tenant Improvements Costs:
(i) Preparation by Tenant's Architect of the Preliminary Space Plans
and the Working Drawings as provided in Section 2 of this Work Letter,
including without limitation all fees charged by City (including without
limitation fees for building permits and plan checks) in connection with the
Tenant Improvements work in the Premises;
(ii) Construction work for completion of the Tenant Improvements as
reflected in the Construction Contract;
(iii) All contractors' charges, general conditions, performance
bond premiums and construction fees; and
(iv) Tenant Improvements which shall be depicted on the approved
Preliminary Space Plans.
In the event that Tenant does request modifications, changes or
alterations of the Tenant Improvements from what is shown on said approved
Preliminary Space Plans, or causes any Tenant Delays as defined in Section 7
of this Work Letter, then all associated costs that exceed the Tenant
Improvement Allowance shall be borne by Tenant. If Tenant does seek to
modify, change or alter the Tenant Improvements from the approved Preliminary
Space Plans, or does cause a Tenant Delay, Tenant shall pay to Landlord any
excess costs resulting therefrom in accordance with Section 6 of this Work
Letter.
6. CHANGE ORDERS
Tenant may from time to time request and obtain change orders before or
during the course of construction provided that: (i) each such request shall
be reasonable, shall be in writing and signed by or on behalf of tenant, and
shall not result in any structural change in the Building, as reasonably
determined by Landlord, (ii) all additional charges and costs, including
without limitation architectural and engineering costs, construction and
material costs, and processing costs of any governmental entity shall be the
sole and exclusive obligation of Tenant, and (iii) any resulting delay in the
completion of the Tenant Improvements shall be deemed a Tenant Delay and in
no event shall extend the Commencement Date of the Lease. Upon Tenant's
request for a change order, Landlord shall as soon as reasonably possible
submit to Tenant a written estimate of the increased or decreased cost and
anticipated delay, if any, attributable to such requested change. Within
three (3) business days of the date such estimated costs adjustment and delay
are delivered to Tenant, Tenant shall advise Landlord whether it wishes to
proceed with the change order, and if Tenant elects to proceed with the
change order, Tenant shall remit, concurrently with Tenant's notice to
proceed, the amount of the increased costs that exceed the Tenant Improvement
Allowance, if any, attributable to such change order. Unless Tenant includes
in its initial change order request that the work in process at the time such
request is made be halted pending approval and execution of a change order,
Landlord shall not be obligated to stop construction of the Tenant
Improvements, whether or not the change order relates to the work then in
process or about to be started.
7. TENANT DELAYS
In no event shall the Commencement Date of the Lease be extended or
delayed due or attributable to delays due to the fault of Tenant ("Tenant
Delays"). Tenant Delays shall include, but are not limited to, delays caused
by or resulting from any one or more of the following:
a) Tenant's failure to timely review and reasonably approve the Working
Drawings or to furnish information to Landlord or Landlord's Architect for
the preparation by Landlord or Landlord's Architect of the Working Drawings;
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<PAGE>
b) Tenant's request for or use of special materials, finishes or
installations which are not readily available, provided that Landlord shall
notify Tenant in writing that the particular material, finish, or
installation is not readily available promptly upon Landlord's discovery of
same;
c) Change orders requested by Tenant;
d) Interference by Tenant or by Tenant's Agents with Landlord's
construction activities;
e) Tenant's failure to approve any other item or perform any other
obligation in accordance with and by the dates specified herein or in the
Construction Contract;
f) Tenant's requested changes in the Preliminary Space Plans, Working
Drawings or any other plans and specifications after the approval thereof by
Tenant or submission thereof by Tenant to Landlord;
g) Tenant's failure to approve written estimates of costs in accordance
with this Work Letter; and
h) Tenant's obtaining or failure to obtain any necessary governmental
approvals or permits for Tenant's intended use of the Premises, other than
building permits that Landlord shall obtain.
If the Commencement Date of the Lease is delayed by any Tenant delays,
whether or not within the control of Tenant, then the Commencement Date of
the Lease and the payment of Rent shall be accelerated by the number of days
of such delay. Landlord shall give Tenant written notice within a reasonable
time of any circumstance that Landlord believes constitutes a Tenant Delay.
8. TRADE FIXTURES AND EQUIPMENT
Tenant acknowledges and agrees that Tenant is solely responsible for
obtaining, delivering and installing in the Premises all necessary and
desired furniture, trade fixtures, equipment and other similar items, and
that Landlord shall have no responsibility whatsoever with regard thereto.
Tenant further acknowledges and agrees that neither the Commencement Date of
the Lease nor the payment of Rent shall be delayed for any period of time
whatsoever due to any delay in the furnishing of the Premises with such items.
9. FAILURE OF TENANT TO COMPLY
Any failure of Tenant to comply with any of the provisions contained in
this Work Letter within the times for compliance herein set forth shall be
deemed a default under the Lease. In addition to the remedies provided to
Landlord in this Work Letter upon the occurrence of such a default by Tenant,
Landlord shall have all remedies available at law or equity to a landlord
against a defaulting tenant pursuant to a written lease, including but not
limited to those set forth in the Lease.
"TENANT"
Liberty National Bank,
a National Banking Association
By: /s/ Philip S. Inglee
----------------------------
Philip S. Inglee
President and Chief Executive Officer
Date: 2/2/96
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made on this 20th day of July, 1995, between
LIBERTY NATIONAL BANK ("Bank"), having a principal place of
business at One Pacific Plaza, 7777 Center Avenue, Huntington
Beach, California 92647, and PHILIP S. INGLEE ("Executive"), whose
residence is 3692 Aquarius Drive, Huntington Beach, California
92749.
W I T N E S S E T H
WHEREAS, Bank is a national banking association duly organized,
validly existing, and in good standing under the laws of the
United States of America, with power to own property and carry on
its business as it is now being conducted;
WHEREAS, Bank desires to continue to avail itself of the skill,
knowledge and experience of Executive in order to insure the
successful management of its business; and
WHEREAS, the parties hereto desire to specify the terms of
Executive's continued employment by Bank;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth, it is agreed that from and after July 15,
1995 (the "Effective Date"), the following terms and conditions
shall apply to Executive's said employment:
A G R E E M E N T
A. TERM OF EMPLOYMENT
1. Term. Bank hereby employs Executive and Executive
hereby accepts employment with Bank for the period commencing on
the Effective Date and running through and including December 31,
1997 (the "Term"), subject, however, to prior termination of this
1
<PAGE>
Agreement as hereinafter provided. Where used herein, "Term"
shall refer to the entire period of employment of Executive by
Bank hereunder, whether for the period provided above, or whether
terminated earlier as hereinafter provided.
B. DUTIES OF EXECUTIVE
1. Duties. Subject to the powers by law vested in the
Board of Directors of Bank and in Bank's shareholders, Executive
shall perform the duties of President and Chief Executive Officer
of Bank, which includes, but are not limited to those duties
specified on Bank's Job Description for the position of President
and Chief Executive Officer, and includes the following:
(a) Executive shall assume overall responsibility for
planning, directing, coordinating and evaluating all Bank
activities;
(b) Executive shall assume overall responsibility for
formulating and administering Bank-wide policies and procedures
subject only to approval of the Board of Directors, intended to
meet the goals and objectives of Bank;
(c) Executive shall manage Bank's stockholder
relationships;
(d) In light of the Bank's CRA Policy, Executive shall
represent Bank and provide leadership in key community
activities to maintain a responsible citizen stature for Bank;
(e) Executive shall provide guidance of personnel
activities that effect the key management team to ensure the
acquisition and retention of quality Bank officers who will work
together toward the attainment of Bank goals;
(f) To the best of his ability, Executive shall ensure
Bank's adherence to all governmental rules and regulations; and
2
<PAGE>
(g) Executive shall promote a favorable image of Bank as
being business-oriented, aggressive, community oriented,
responsible and service minded.
However, in the event of a "Corporate Reorganization," as
hereinafter defined, the duties of Executive may be changed by the
mutual consent of Executive and the Board of Directors of Bank
from Chief Executive Officer to Chief Operating Officer without
resulting in a rescission of this Agreement. Notwithstanding any
such change from the duties originally assigned and specified
above, or hereafter assigned, the employment of Executive shall be
construed as continuing under this Agreement as modified. During
the Term, Executive shall perform exclusively the services herein
contemplated to be performed by Executive faithfully, diligently
and to the best of Executive's ability, consistent with the
highest standards of the banking industry and in compliance with
all applicable laws and Bank's Articles of Association and Bylaws.
2. Conflicts of Interests. Except as permitted by the
prior written consent of the Board of Directors of Bank, Executive
shall devote Executive's entire productive time, ability and
attention to the business of Bank during the Term and Executive
shall not directly or indirectly render any services of a
business, commercial or professional nature, to any other person,
firm or corporation whether for compensation or otherwise, which
are in conflict with Bank's interests.
C. COMPENSATION
1. Base Salary. For Executive's services hereunder, Bank
shall pay or cause to be paid as base salary to Executive the
amount of Fourteen Thousand Five Hundred Eighty-Three Dollars and
Thirty-Three Cents ($14,583.33) per month during the Term,
beginning
3
<PAGE>
with the Effective Date. Said salary shall be payable in equal
installments in conformity with Bank's normal payroll period.
Executive's base salary shall be reviewed by the Board of Directors
during the first calendar quarter of each year and Executive shall
receive such base salary increases, if any, as the Board of
Directors, in its sole discretion, shall determine.
2. Bonus Program. Executive shall be entitled to
participate in the Bank's Pay for Performance bonus program or
such other programs which may be approved by the Board of
Directors from time to time to replace the Bank's Pay for
Performance bonus program.
3. Additional Bonuses. In addition, Executive may
receive such additional bonuses, if any, as the Board of
Directors, in its sole discretion, shall determine.
4. Incentive Compensation.
(a) As an incentive to Executive to maximize shareholder
value and to continue his employment with Bank in the event of a
"Corporate Reorganization," as hereinafter defined, Executive
shall be entitled to incentive compensation equal to 2.4% times
the amount by which the "Value Attributed to Bank" in the
Corporate Reorganization exceeds Eleven Million Five Hundred
Thousand Dollars ($11,500,000), payable within thirty (30) days
after the Corporate Reorganization.
(b) For purposes of this Agreement, a "Corporate
Reorganization" shall be deemed to have occurred: (i) in the
event of a merger or consolidation where Bank is not the
surviving corporation, except where Bank's shareholders exchange
their interests in Bank for more than fifty percent (50%)
control of the surviving corporation; (ii) in the event
4
<PAGE>
of a transfer of all or substantially all of the assets of Bank; or
(iii) in the event of any other corporate reorganization where
there is a change in ownership of more than fifty percent (50%),
except as may result from a transfer of shares to another
corporation in exchange for more than fifty percent (50%)
control of that corporation. Thus, for example, a Corporate
Reorganization will not be deemed to have occurred if one
hundred percent (100%) ownership of Bank is transferred to a
holding company, so long as those individuals who were
shareholders of Bank prior to the transfer own more than fifty
percent (50%) of the holding company after the transfer.
(c) For purposes of this Paragraph C.4, "the Value
Attributed to Bank" shall be determined by reference to the
value assigned pursuant to the Corporate Reorganization;
provided, however, in the event Bank's Common Stock is converted
into another security pursuant to the Corporate Reorganization,
Executive shall be entitled to receive the value so determined,
in cash.
(d) Executive shall be entitled to incentive compensation
pursuant to this Paragraph C.4 even in the event the Corporate
Reorganization occurs after the Term hereof, provided a letter
of intent for the Corporate Reorganization has been executed by
all parties to the Corporate Reorganization during the Term; and
provided further, in the event Executive dies after the signing
of the letter of intent, Executive's spouse, or if his spouse
does not survive him, Executive's estate, shall receive
5
<PAGE>
fifty percent (50%) of the incentive compensation Executive would
have been entitled to receive.
D. EXECUTIVE BENEFITS
1. Vacation and Sick Pay. Executive shall be entitled to
five (5) weeks vacation each calendar year during the Term,
provided, however, that at least two (2) weeks of said vacation
(the "Mandatory Vacation") shall be taken consecutively.
Executive shall not be entitled to vacation pay in lieu of
vacation, and any vacation time not used in excess of the
Mandatory Vacation shall be deemed waived, unless otherwise
approved in advance by the Board of Directors or accumulated in
accordance with Bank's Personnel Policy. Executive shall also be
entitled to sick pay in accordance with Bank's Personnel Policy.
2. Automobile. During the Term hereunder Bank shall
provide Executive with use of a Bank-furnished automobile
consistent with Bank's Personnel Policy. Bank shall pay all
operating expenses of any nature whatsoever with regard to the
automobile, provided that Executive furnishes to the Bank adequate
records and other documentary evidence required by federal and
state statutes and regulations issued by the appropriate taxing
authorities for the substantiation of such expenditures as
deductible expenses of Bank and not as deductible compensation to
Executive. Bank shall procure and maintain in force an automobile
liability insurance policy on such automobile, with coverage
including Executive, for comprehensive with extended coverage,
collision for actual cash value of the vehicle with no more than
Two Hundred Fifty Dollars ($250) deductible, and for bodily
injury, death or property damage, in limits no less than Five
Hundred Thousand Dollars ($500,000) for any one person, Five Hundred
Thousand Dollars ($500,000) for any one
6
<PAGE>
accident, and Five Hundred Thousand Dollars ($500,000) for property
damage.
3. Group Medical and Life Insurance Benefits. Bank shall
provide for Executive, at Bank's expense, participation in
medical, accident, disability, and health and life insurance
benefits equivalent to the normal and customary benefits currently
available under the California Banker's Association Group
Insurance Program for an employee of Executive's salary level;
provided, however, Executive's life insurance benefits shall equal
at least Four Hundred Twenty Thousand Dollars ($420,000), of which
Bank shall be named as beneficiary for Fifty Thousand Dollars
($50,000) of the policy proceeds. Upon termination of this
Agreement, at its expiration, or upon a voluntary termination of
Executive in accordance with the terms hereof, Executive shall
retain the conversion rights of the life insurance policy. Should
Executive elect to convert the policy, Bank shall retain no rights
in said policy. Executive's disability insurance coverage shall
provide for annual disability benefits of not less than sixty-six
and two-thirds percent (66 2/3%) of the amount of Executive's
annualized base salary, payable monthly and commencing with the
first month of disability. Said insurance coverages shall be in
existence or shall take effect as of the Effective Date hereof and
shall continue throughout the Term. Bank's liability to Executive
for any breach of this Paragraph D.3 shall be limited to the
amount of premiums payable by Bank to obtain the coverages
contemplated herein.
4. Annual Physical. Bank shall arrange for and pay all
fees, charges and expenses in connection with a mandatory, annual
executive physical of Executive, to be scheduled within thirty
(30) days of Executive's birthday.
7
<PAGE>
5. Country Club Membership. During the Term, Bank shall
pay all monthly costs associated with Executive's membership at
such county club(s) as deemed appropriate by the Board of
Directors of Bank.
6. Financial Planning. During the Term, Bank shall pay
to or for the benefit of Executive up to the sum of One Thousand
Dollars ($1,000.00) per year for the purposes of personal
financial planning services, tax planning and preparation,
investment planning and/or estate planning of Executive.
E. BUSINESS EXPENSE REIMBURSEMENT
1. Business Expenses. Executive shall be entitled to
reimbursement by Bank for any ordinary and necessary business
expenses incurred by Executive in the performance of Executive's
duties and in acting for Bank during the Term, which types of
expenditures shall be determined by the Board of Directors,
provided that:
(a) Each such expenditure is of a nature qualifying it as
a proper deduction on the federal and state income tax returns
of Bank as a business expense and not as deductible compensation
to Executive; and
(b) Executive furnishes to Bank adequate records and other
documentary evidence required by federal and state statutes and
regulations issued by the appropriate taxing authorities for the
substantiation of such expenditures as deductible business
expenses of Bank and not as deductible compensation to
Executive.
F. TERMINATION
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<PAGE>
1. Termination. Bank may terminate this Agreement at any
time without further obligation or liability to Executive, by
action of the Board of Directors:
(a) If Executive fails to perform or habitually neglects
Executive's duties;
(b) If Executive engages in illegal activity which
materially adversely affects Bank's reputation in the community
or which evidences the lack of Executive's fitness or ability to
perform Executive's duties as determined by the Board of
Directors in good faith;
(c) If Executive has committed any act which would cause
termination of coverage under Bank's Bankers Blanket Bond as to
Employee, as distinguished from termination of coverage as to
Bank as a whole;
(d) If Executive is deceased; or
(e) If Executive is found to be physically or mentally
incapable of performing Executive's duties for a period of
ninety (90) days or greater by the Board of Directors, in good
faith. Such termination shall not prejudice any remedy which
Bank may have at law, in equity, or under this Agreement.
Termination pursuant to this Paragraph F.1 shall become
effective two (2) days after notice of termination.
2. Action by Supervisory Authority. This Agreement shall
terminate immediately without further liability or obligation to
Executive or Bank:
(a) If Bank is closed or taken over by the Comptroller of
the Currency or other supervisory authority, including the
Federal Deposit Insurance Corporation; or
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(b) If such supervisory authority should exercise its
cease and desist powers to remove Executive from office.
3. Merger or Transfer of Assets. This Agreement shall
not be terminated due to: (a) a merger where Bank is not the
surviving corporation; (b) a consolidation; or (c) a transfer of
all or substantially all of the assets of Bank. Bank shall take
all actions necessary to insure that the surviving or resulting
corporation, if other than Bank, or transferee of Bank's assets is
bound by and shall have the benefit of the provisions of this
Agreement. In the case of dissolution, this Agreement shall be
terminated.
4. Termination Without Cause. Notwithstanding
anything to the contrary herein, this Agreement may be terminated
at any time without cause by Bank upon five (5) days' written
notice of termination to Executive and by Executive upon ninety
(90) days' written notice of termination to Bank. In the event
Bank elects to terminate this Agreement pursuant to this Paragraph
F.4, Executive shall be entitled to compensation equal to twelve
(12) months' base salary, all due and payable within thirty (30)
days after termination; provided, however, in the event Bank
elects to terminate this Agreement pursuant to the provisions
hereof and there has been a "Corporate Reorganization," as defined
herein, Executive shall be entitled to compensation equal to
twenty-four (24) months' base salary, all due and payable within
thirty (30) days after termination. In addition, Bank shall pay
premiums for Executive's major medical, dental, disability and
life insurance coverages for a period of twelve (12) months;
Executive shall be entitled to continue to use the Bank-furnished
vehicle for a period of twelve (12) months; and Bank shall pay to
Executive, within thirty (30)
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days after termination, an amount equal to the total automobile
expenses paid by Bank for the previous twelve (12) month period on
behalf of Executive. In the event Executive elects to terminate this
Agreement pursuant to the provisions hereof, Bank and Executive shall
not be entitled to any compensation.
5. Effect of Termination. In the event of the
termination of this Agreement prior to the completion of the Term
for any of the reasons specified in Paragraphs F.1, F.2, or F.4,
Executive shall also be entitled to the salary earned by Executive
prior to the date of termination as provided for in this
Agreement, computed pro rata up to and including that date, and
accrued but unused vacation time (to the extent accumulated in
accordance with Paragraph D.1); but Executive shall be entitled to
no further compensation for services rendered after the date of
termination.
G. GENERAL PROVISIONS
1. Trade Secrets. During the Term, Executive will have
access to and become acquainted with what Executive and Bank
acknowledge are trade secrets, to wit, knowledge or data
concerning Bank, including its operations and business, and the
identity of customers of Bank, including knowledge of their
financial condition, their financial needs, as well as their
methods of doing business. Executive shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them
in any way, either during the Term or for a period of one (1) year
after the termination of this Agreement, except as required in the
course of Executive's employment with Bank.
2. Covenant Not to Interfere. Executive hereby covenants
and agrees that he will not now, or for a period of one (1) year
after termination and for any period during which Executive
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receives any compensation from Bank, whether pursuant to Paragraph
F.4 or otherwise, Executive shall not disrupt, damage, impair or
interfere with the business of the Bank, whether by way of
interfering with or raiding its employees, disrupting its
relationships with customers and their agents, representatives or
vendors, or otherwise. After termination of employment, Executive
is not, however, restricted from being employed by or engaged in a
competing business.
3. Return of Documents. Executive expressly agrees that
all manuals, documents, files, reports, studies, instruments or
other materials used and/or developed by Executive during his
employment with Bank are solely the property of Bank, and that
Executive has no right, title or interest therein. Upon
termination of Executive's employment, Executive or Executive's
representative shall promptly deliver possession of all of said
property to Bank in good condition.
4. Notices. Any notice, request, demand or other
communication required or permitted hereunder shall be deemed to
be properly given when personally served in writing, when
deposited in the United States mail, postage prepaid, or when
communicated to a public telegraph company for transmittal,
addressed to the party at the address appearing at the beginning
of this Agreement. Either party may change its address by written
notice in accordance with this paragraph.
5. Benefit of Agreement. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their
respective executors, administrators, successors and assigns.
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6. Applicable Law. Except to the extent governed by the
Laws of the United States, this Agreement is to be governed by and
construed under the laws of the State of California.
7. Captions and Paragraph Headings. Captions and
paragraph headings used herein are for convenience only and are
not a part of this Agreement and shall not be used in construing
it.
8. Invalid Provisions. Should any provisions of this
Agreement for any reason be declared invalid, void, or
unenforceable by a court of competent jurisdiction, the validity
and binding effect of any remaining portion shall not be affected,
and the remaining portions of this Agreement shall remain in full
force and effect as if this Agreement had been executed with said
provision eliminated.
9. Entire Agreement. This Agreement contains the entire
agreement of the parties. It supersedes any and all other
agreements, either oral or in writing, between the parties hereto
with respect to the employment of Executive by Bank except any
Stock Option Agreements between Executive and Bank. Each party to
this Agreement acknowledges that no representations, inducements,
promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement, or
promise not contained in this Agreement shall be valid or binding.
This Agreement may not be modified or amended by oral agreement,
but only by an agreement in writing signed by Executive and by
Bank, through a duly authorized officer.
10. Arbitration. In the event that any dispute shall
arise between the parties concerning the provisions of this
Agreement or the performance of any part of the obligations
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hereunder, or in the event of an alleged breach of this Agreement
by any of the parties hereto, and the parties are unable to
mutually adjust and settle same, such dispute or disputes shall be
submitted to binding arbitration pursuant to the applicable rules
of the American Arbitration Association, and the decision and
determination of the arbitrators shall be final and conclusive.
The prevailing party shall be entitled to attorneys' fees and
costs.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
LIBERTY NATIONAL BANK
By /s/ Richard M. Wilbur
------------------------------
By
------------------------------
/s/ Philip S. Inglee
------------------------------
Philip S. Inglee
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EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made effective March 1, 1995,
between LIBERTY NATIONAL BANK ("Bank"), having a principal place of
business at One Pacific Plaza, 7777 Center Avenue, Huntington Beach,
California 92647, and RICHARD I. GANULIN ("Executive"), whose
residence is 9532 Zetland Drive, Huntington Beach, California 92646.
W I T N E S S E T H
WHEREAS, Bank is a national banking association duly organized,
validly existing, and in good standing under the laws of the United
States of America, with power to own property and carry on its
business as it is now being conducted;
WHEREAS, Bank desires to continue to avail itself of the skill,
knowledge and experience of Executive in order to insure the
successful management of its business; and
WHEREAS, the parties hereto desire to specify the terms of
Executive's continued employment by Bank:
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth, it is agreed that from and after March 1,
1995, (the "Effective Date"), the following terms and conditions
shall apply to Executive's employment:
A G R E E M E N T
A. TERM OF EMPLOYMENT
1. Term. Bank hereby employs Executive and Executive hereby
accepts employment with Bank for the period commencing on the
Effective Date and running through and including the last day of
February 1997 (the "Term"), subject, however, to prior termination
of this Agreement as permitted by law or as hereinafter
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provided. Where used herein, "Term" shall refer to the entire period
of employment of Executive by Bank hereunder, whether for the period
provided above, or whether terminated earlier.
B. DUTIES OF EXECUTIVE
1. Duties. Subject to the powers by law vested in the Board
of Directors of Bank and in Bank's shareholders, Executive shall
perform the duties of Senior Executive Vice President and Credit
Administrator of Bank. In that capacity, Executive is primarily
responsible for the successful acquisition and management of the
Bank's loan portfolio. Executive is also responsible for the
supervision and training of personnel in the following departments:
Real Estate Finance, Business Banking Group, SBA Loan Group, Credit
Adjustment and Centralized Loan Servicing and Credit Analysis.
Executive's duties include, but are not limited to, those duties
specified on Bank's Job Description for the position of Credit
Administrator/Senior Executive Vice President, a copy of which is
attached as Exhibit "A" hereto.
The duties and position of Executive may be changed from time to
time by the Board of Directors of Bank without resulting in a
rescission of this Agreement. Notwithstanding any such change from
the duties originally assigned and specified above, or hereafter
assigned, the employment of Executive shall be construed as
continuing under this Agreement as modified. During the Term,
Executive shall perform exclusively the services herein contemplated
to be performed by Executive faithfully, diligently and to the best
of Executive's ability, consistent with the highest standards of the
banking industry and in compliance with all applicable laws, Bank's
Articles of Association and Bylaws and Bank's policies, as modified
from time to time.
2. Conflicts of Interests. Except as permitted by the prior
written consent of the Board of Directors of Bank, Executive shall
devote Executive's entire productive time, ability and attention to
the business of Bank during the Term and Executive shall not directly
or indirectly render any services of a business, commercial or
professional nature to any other person, firm or corporation whether
for compensation or otherwise, which are in conflict with Bank's
interest.
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C. COMPENSATION
1. Base Salary. For Executive's services hereunder, Bank
shall pay or cause to be paid as base salary to Executive the amount
of Eight Thousand Three Hundred Thirty-Three Dollars and Thirty-Three
Cents ($8,333.33) per month during the Term, beginning with the
Effective Date. Said salary shall be paid in equal pro rata, bi-monthly
installments in conformity with Bank's normal payroll period.
Executive's base salary shall be reviewed by the Board of Directors,
during the first calendar quarter of each year and Executive shall
receive such base salary increases, if any, as the Board of
Directors, in its sole discretion, shall determine.
2. Incentive Program. Executive shall be eligible to
participate in any Bank Incentive programs which may be approved by
the Board of Directors from time to time.
3. Year End Bonuses. In addition, Executive may receive
such additional bonuses, if any, as the Board of Directors, in its
sole discretion, shall determine.
D. EXECUTIVE BENEFITS
1. Vacation and Sick Pay. Executive shall accrue five (5)
weeks vacation during each calendar year of employment. Executive
is encouraged to use all accrued vacation pay each calendar year.
In each calendar year, Executive shall take at least two (2) weeks
of said vacation (the "Mandatory Vacation") consecutively. Unused
vacation, if any, may be carried forward from one year to the next.
The maximum vacation that Executive may have at any time shall be
seven (7) weeks vacation pay, at Executive's current annual vacation
accrual rate. If Executive's earned, but unused vacation pay reached
the maximum, Executive shall not accrue any additional vacation
benefits. If Executive later uses enough vacation pay to fall below
the maximum, Executive will resume earning vacation pay from that day
forward. Executive shall also be entitled to sick pay in accordance
with Bank's Personnel Policy.
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2. Automobile. Except as hereafter provided, during the
Term hereunder Bank shall provide Executive with use of a Bank-furnished
automobile (the "Automobile"). Bank shall pay all
operating expenses of any nature whatsoever with regard to the
Automobile, provided that Executive furnishes to the Bank adequate
records and other documentary evidence required by federal and state
statutes and regulations issued by the appropriate taxing authorities
for the substantiation of such expenditures as deductible expenses
of Bank and not as deductible compensation to Executive. Bank shall
procure and maintain in force an automobile liability insurance
policy on the Automobile, with coverage including Executive, for
comprehensive with extended coverage, collision for actual cash value
of the vehicle with no more than Two Hundred Fifty Dollars ($250)
deductible, and for bodily injury, death or property damage, in
limits no less than Five Hundred Thousand Dollars ($500,000) for any
one person, Five Hundred Thousand Dollars ($500,000) for any one
accident, and Five Hundred Thousand Dollars ($500,000) for property
damage.
(a) Bank reserves, in its sole discretion, the right to
determine, at any time, and after thirty (30) days notice, the
Automobile shall no longer be made available to Executive. Upon
notice to Executive that Bank has elected to exercise such
discretion, Executive shall have the option of purchasing the
Automobile at fair market value, but not less than the value as to
which the Automobile is carried on the Bank's books. Alternatively,
Executive shall promptly surrender the Automobile to Bank.
(b) If Bank elects to exercise its discretion to no
longer make the Automobile available to Executive, Executive shall
thereafter receive a monthly automobile allowance in an amount to
be determined by the Board of Directors at such time.
3. Group Medical and Life Insurance Benefits. Bank shall
provide, at Bank's expense, participation in medical, accident,
disability, and health and life insurance benefits equivalent to the
normal and customary benefits currently available under the
California Bankers' Association Group Insurance Program for an
employee of Executive's salary level; provided, however, Executive's
life insurance benefits shall equal at least Two Hundred Fifty
Thousand Dollars ($250,000), of which Bank shall be named
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<PAGE>
as beneficiary for Twenty-Five Thousand Dollars ($25,000) of the
policy proceeds. Upon termination of this Agreement, at its
expiration, or upon a voluntary termination of Executive, in
accordance with the terms hereof, Executive shall retain the
conversion rights of the life insurance policy. Should Executive
elect to convert the policy, Bank shall retain no rights in said
policy. Executive's disability insurance coverage shall provide for
annual disability benefits of not less than sixty-six and two-thirds
percent (66 2/3%) of the amount of Executive's annualized base
salary, payable monthly and commencing with the ninety-first day of
disability. Said insurance coverage shall be in existence or shall
take effect as of the Effective date hereof and shall continue
throughout the Term. Bank's liability to Executive for any breach of
this Paragraph D.3 shall be limited to an amount equal to one (1)
year of premiums payable by Bank to obtain the applicable coverage(s)
contemplated herein.
4. Financial Planning. During the term of this Agreement,
Bank shall pay to or for the benefit of Executive, an amount not to
exceed One Thousand Dollars ($1,000) annually for the purpose of
personal financial planning services, tax planning and preparation,
investment planning and/or estate planning of Executive.
E. BUSINESS EXPENSE REIMBURSEMENT
1. Business Expense. Executive shall be entitled to
reimbursement by Bank for any ordinary and necessary business
expenses incurred by Executive in the performance of Executive's
duties and in acting for Bank during the Term, which types of
expenditures shall be determined by the Board of Directors, provided
that:
(a) Each such expenditure is of a nature qualifying it
as a proper deduction on the federal and state income tax returns of
Bank as a business expense and not as deductible compensation to
Executive; and
(b) Executive furnishes to Bank adequate records and
other documentary evidence required by federal and state statutes and
regulations issued by the appropriate taxing authorities for the
substantiation of such expenditures as deductible business expenses
of Bank and not as deductible compensation to Executive.
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<PAGE>
F. TERMINATION
1. Termination by the Board of Directors. Executive is an
officer of Bank, appointed by the Board of Directors. Under the
National Bank Act and this Agreement, Executive serves at the
pleasure of the Board of Directors and is subject to dismissal by the
Board at any time, without further obligation or liability to
Executive. In the event Bank elects to dismiss Executive and
terminate this Agreement, upon Executive's execution and delivery to
Bank of an original Separation Agreement and General Release in a
form and with content acceptable to the Board of Directors, Executive
shall be entitled to compensation equal to six (6) months' base
salary, to be paid in six (6) equal monthly installments, beginning
on the first day of the month after termination and continuing
thereafter on the first day of the five (5) subsequent months.
However, if there has been a "Corporate Reorganization" and the Bank
elects to terminate this Agreement pursuant to the provisions hereof,
Executive, if terminated within twelve (12) months of said
"Corporate Reorganization," shall be entitled to compensation equal
to twelve (12) months' base salary, to be paid in six (6) equal
monthly installments, beginning on the first day of the month after
termination and continuing thereafter on the first day of the five
(5) subsequent months. For purposes of this paragraph F.1., a
Corporate Reorganization shall be deemed to have occurred upon the
occurrence of any of the following: (i) the sale of substantially all
of the assets of the Bank; (ii) the sale, exchange or other
disposition, in one transaction, of more than 50% of the Bank's
outstanding common stock; (iii) the termination of the Bank's
business and distribution of its assets in liquidation; (iv) the
merger or consolidation of the Bank in a transaction in which the
Bank's shareholders receive less than 50% of the outstanding shares
of the new or continuing entity.
2. Action by Supervisory Authority. This Agreement shall
terminate immediately without further liability or obligation to
Executive or Bank:
(a) If Bank is closed or taken over by the Comptroller
of the Currency or other supervisory authority, including the Federal
Deposit Insurance Corporation; or
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(b) If such supervisory authority should exercise its
cease and desist powers to remove Executive from office.
3. Merger or Transfer of Assets. This Agreement shall not
be terminated due to: (a) the sale or transfer of substantially all
of the assets of the Bank; (b) the sale, exchange or other
disposition, in one transaction, of more than 50% of the Bank's
outstanding common stock; (c) the merger or consolidation of the Bank
in a transaction in which the Bank's shareholders receive less than
50% of the outstanding shares of the new or continuing entity. In
the case of dissolution and distribution of the Bank's assets, this
Agreement shall be terminated.
4. Termination by Executive. Executive may terminate his
employment with Bank, and this Agreement, upon sixty (60) days'
written notice of termination to Bank.
5. Effect of Termination. In the event of the termination of
Executive or this Agreement prior to the completion of the Term for
any of the reasons specified in this Paragraph F, Bank reserves the
right to relieve Executive of duties at any time after receiving
notice of termination. Executive shall be entitled to the salary
earned by Executive prior to the Effective Date of Termination, as
determined by the Board of Directors, computed pro rata up to and
including that date, and accrued but unused vacation time (to the
extent accumulated in accordance with Paragraph D.1); but Executive
shall be entitled to no further compensation for services rendered
after the Effective Date of Termination.
G. GENERAL PROVISIONS
1. Trade Secrets. During the Term, Executive will have
access to and become acquainted with what Executive and Bank
acknowledge are trade secrets, to wit, knowledge or data concerning
Bank, including its operations and business, and its customers'
financial condition, their financial needs and methods of doing
business. Executive shall not disclose any of the aforesaid trade
secrets,directly or indirectly, or use them in any way, except as
required in the course of Executive's employment with Bank.
7
<PAGE>
2. Covenant Not to Interfere. Executive hereby covenants
and agrees that he will not now, or for a period of one (1) year
after termination, disrupt, damage, impair or interfere with the
business of Bank, whether by way of interfering with or raiding its
employees, disrupting its relationships with customers and their
identities, agents, representatives or vendors, or otherwise. After
termination of employment, Executive is not, however, restricted
from being employed by or engaged in a competing business.
3. Return of Documents. Executive expressly agrees that all
manuals, documents, files, reports, studies, instruments or other
materials used and/or developed by Executive during his employment
with Bank are solely the property of Bank, and that Executive has no
right, title or interest therein. Upon termination of Executive's
employment, Executive or Executive's representative shall promptly
deliver possession of all of said property to Bank in good condition.
4. Notices. Any notice, request, demand or other
communication required or permitted hereunder shall be deemed to be
properly given when personally served in writing, when deposited in
the United States mail, postage prepaid, or when communicated to a
public telegraph company for transmittal, addressed to the party at
the address appearing at the beginning of this Agreement. Either
party may change its/his address by written notice in accordance with
this paragraph.
5. Benefit of Agreement. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective executors, administrators, successors and assigns.
6. Applicable Law. Except to the extent governed by the
laws of the United States, this Agreement is to be governed by and
construed under the laws of the State of California.
7. Captions and Paragraph Headings. Captions and paragraph
headings used herein are for convenience only and are not a part of
this Agreement and shall not be used in construing it.
8
<PAGE>
8. Invalid Provisions. Should any provision of this
Agreement for any reason be declared invalid, void, or unenforceable
by a court of competent jurisdiction, the validity and binding effect
of any remaining portion shall not be affected, and the remaining
portions of this Agreement shall remain in full force and effect as
if this Agreement had been executed with said provision eliminated.
9. Entire Agreement. This Agreement contains the entire
agreement of the parties. It supersedes any and all other
agreements, either oral or in writing, between the parties hereto
with respect to the employment of Executive by Bank, except any Stock
Option Agreements between Executive and Bank. Each party to this
Agreement acknowledges that no representations, inducements,
promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. This
Agreement may not be modified or amended by oral agreement, but only
by an agreement in writing signed by Chairman of the Board and
Executive.
10. Arbitration.
(a) If any dispute, controversy or claim arises out of
or relates to this contract, the parties agree first to try to settle
the dispute by mediation under the Rules of Judicial Arbitration &
Mediation Services (JAMS) before resorting to arbitration.
Thereafter, any dispute, controversy or claim not resolved by
mediation shall be settled by binding arbitration in accordance with
the Rules of JAMS, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction
thereof.
(b) The arbitrator shall determine which is the
prevailing party and shall include in the award that party's actual
attorneys' fees and costs.
(c) As soon as practicable after selection of the
arbitrator, the arbitrator or his or her designated representative
shall determine a reasonable estimate of anticipated fees and costs
of the arbitrator, and render a statement to each party setting forth
that party's pro rata share of said fees and costs. Thereafter, each
party shall, within ten (10) days of receipt of said statement,
deposit said sum with the
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arbitrator. Failure of any party to make such a deposit shall result
in a forfeiture by the non-depositing party of the right to prosecute
or defend the claim which is the subject of the arbitration, but
shall not otherwise serve to abate, stay or suspend the arbitration
proceedings.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
LIBERTY NATIONAL BANK Date
By /s/ Richard M. Wilbur 7-13-95
---------------------------------- -------
Chairman of the Board of Directors
RICHARD I. GANULIN Date
By /s/ Richard I. Ganulin 7-12-95
---------------------------------- -------
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EMPLOYMENT AGREEMENT
THIS AGREEMENT is made on this 22nd day of October, 1993,
between LIBERTY NATIONAL BANK ("Bank"), having a principal place
of business at One Pacific Plaza, 7777 Center Avenue, Huntington
Beach, California 92647, and CURT A. CHRISTIANSSEN ("Executive"),
whose residence is 2716 Cheryl Court, Simi Valley, California
93063.
W I T N E S S E T H
WHEREAS, Bank is a national banking association duly organized,
validly existing, and in good standing under the laws of the
United States of America, with power to own property and carry on
its business as it is now being conducted;
WHEREAS, Bank desires to avail itself of the skill, knowledge
and experience of Executive in order to insure the successful
management of its business; and
WHEREAS, the parties hereto desire to specify the terms of
Executive's employment by Bank;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth, it is agreed that from and after October
22, 1993, (the "Effective Date"), the following terms and
conditions shall apply to Executive's said employment:
A. TERM OF EMPLOYMENT
1. Term. Bank hereby employs Executive and Executive
hereby accepts employment with Bank for the period commencing with
the Effective Date and terminating on December 31, 1996 (the
"Term"), subject, however, to prior termination of this Agreement
as hereinafter provided. Where used herein, "Term" shall refer to
the
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entire period of employment of Executive by Bank hereunder, whether
for the period provided above, or whether terminated earlier as
hereinafter provided.
B. DUTIES OF EXECUTIVE
1. Duties. Executive shall perform the duties of Chief
Financial Officer of Bank, which includes, but are not limited to
those duties specified on the Bank's Job Description for the
position of Chief Financial Officer, subject to the powers by law
vested in the Board of Directors of Bank and in Bank's
shareholders. However, the duties of Executive may be changed
from time to time by the mutual consent of Executive and Bank
without resulting in a rescission of this Agreement.
Notwithstanding any such change from the duties originally
assigned and specified above, or hereafter assigned, the
employment of Executive shall be construed as continuing under
this Agreement as modified. During the Term, Executive shall
perform exclusively the services herein contemplated to be
performed by Executive faithfully, diligently and to the best of
Executive's ability, consistent with the highest and best
standards of the banking industry and in compliance with all
applicable laws and Bank's Articles of Association and Bylaws.
2. Conflicts of Interests. Except as permitted by the
prior written consent of the Board of Directors of Bank, Executive
shall devote Executive's entire productive time, ability and
attention to the business of Bank during the Term and Executive
shall not directly or indirectly render any services of a
business, commercial or professional nature, to any other person,
firm or corporation whether for compensation or otherwise, which
are in conflict with Bank's interests.
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C. COMPENSATION
1. Base Salary. For Executive's services hereunder, Bank
shall pay or cause to be paid as base salary to Executive the
amount of Seven Thousand Six Hundred Twenty-five Dollars ($7,625)
per month during the Term, beginning with the Effective Date. The
month of October, 1993, and any month during which Executive's
employment may be terminated shall be prorated accordingly.
2. Bonus Program. Executive shall be entitled to
participate in the Higgins bonus program or any bonus program
which may be approved by the Board of Directors from time to time
to replace the Higgins program.
3. Performance Bonus. Executive may receive additional
performance bonuses, if any, as the Board of Directors, in its
sole discretion, shall determine.
4. Fixed Bonuses. Executive shall receive bonuses in the
following amounts and at the following times: (i) $6,700 six
months after commencement of employment; (ii) $6,700 on the first
anniversary after commencement of employment; (iii) $6,700 on the
second anniversary after commencement of employment; and (iv)
$6,700 on the third anniversary after commencement of employment;
provided, however, Executive shall not be entitled to receive any
bonus payment(s) due after Executive's employment is terminated if
terminated pursuant to Paragraphs F.1., F.2. or F.3., or if
terminated by Executive pursuant to Paragraph F.4., except if
Executive terminates his employment for "Good Cause," as
hereinafter defined, in which case Executive shall be entitled to
receive the bonus payment(s) due after termination of his
employment.
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5. Good Cause.
(a) In the event there has been a "Change in Control"
of Bank, as hereinafter defined, Executive may terminate his
employment for "Good Cause," as hereinafter defined. Termination
pursuant to this Paragraph C.5. shall be effective thirty (30)
days after notice of termination.
(b) For purposes of this Paragraph C.5., a "Change in
Control" shall be deemed to have occurred: (i) in the event of a
merger or consolidation where Bank is not the surviving
corporation, except where Bank's shareholders exchange their
interests in Bank for more than fifty percent (50%) control of the
surviving corporation; (ii) in the event of a transfer of all or
substantially all of the assets of Bank; (iii) in the event of any
other corporate reorganization where there is a change in
ownership of more than fifty percent (50%), except as may result
from a transfer of shares to another corporation in exchange for
more than fifty percent (50%) control of that corporation; or (iv)
in the event of a change or changes in the composition of the
Board of Directors of Bank resulting in a majority of the present
directors not constituting a majority of the Board of Directors;
provided that in making such determination directors who were
elected by, or on the recommendation of, such present majority,
shall be included as a present director.
(c) For purposes of this Paragraph C.5., the
following shall constitute "Good Cause": (i) subsequent to a
Change in Control of Bank, and without Executive's express written
consent, the assignment to Executive of any duties substantially
inconsistent with Executive's positions, duties, responsibilities
and status with
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Bank immediately prior to the Change in Control, or a substantial
change in Executive's reporting responsibilities, titles or offices
as in effect immediately prior to the Change in Control, or any
removal of Executive from or any failure to re-elect Executive to any
of such positions, except in connection with the termination of
Executive's employment pursuant to Paragraphs F.1. or F.2., or as a
result of Executive's retirement, or by Executive other than for
"Good Cause"; (ii) subsequent to a Change in Control of Bank, a
twenty percent (20%) or greater reduction by Bank in Executive's base
salary as in effect on the Effective Date or as the same may be
increased from time to time; (iii) subsequent to a Change in Control
of Bank and without Executive's express written consent, Bank's
requiring Executive to be based anywhere other than within fifteen
(15) miles of Bank's present head office location, exclusive of
required travel on Bank business; or (iv) subsequent to a Change in
Control of Bank, the failure by Bank to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated
in Paragraph G.5. hereof.
D. EXECUTIVE BENEFITS
1. Vacation and Sick Pay. Executive shall be entitled to
a reasonable vacation during the Term, in accordance with Bank's
Personnel Policy; provided, however, that at least two (2) weeks
of said vacation (the "Mandatory Vacation"), shall be taken
consecutively. Executive shall also be entitled to sick pay in
accordance with Bank's Personnel Policy.
2. Group Medical and Life Insurance Benefits. During the
Term Bank shall provide for medical and life insurance benefits to
Executive in accordance with Bank's standard employee benefits.
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E. BUSINESS EXPENSES AND REIMBURSEMENT
1. Business Expenses. Executive shall be entitled to
reimbursement by Bank for any ordinary and necessary business
expenses incurred by Executive in the performance of Executive's
duties and in acting for Bank during the Term, which types of
expenditures shall be determined by the Board of Directors,
provided that:
(a) Each such expenditure is of a nature qualifying
it as a proper deduction on the federal and state income tax
returns of Bank as a business expense and not as deductible
compensation to Executive; and
(b) Executive furnishes to Bank adequate records and
other documentary evidence required by federal and state statutes
and regulations issued by the appropriate taxing authorities for
the substantiation of such expenditures as deductible business
expenses of Bank and not as deductible compensation to Executive.
2. Reimbursement. Executive agrees that, if at any time
payment made to Executive by Bank, whether for salary or whether
as business expense reimbursement, shall be disallowed in whole or
in part as a deductible business expense by the appropriate taxing
authorities, Executive shall reimburse Bank to the full extent of
such disallowance, with interest thereon at the rate of six
percent (6%) per annum, from the date of disallowance.
F. TERMINATION
1. Termination. Bank may terminate this Agreement at any
time without further obligation or liability to Executive, by
action of the Board of Directors:
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(a) If Executive fails to perform or habitually
neglects Executive's duties;
(b) If Executive engages in illegal activity which
materially adversely affects Bank's reputation in the community or
which evidences the lack of Executive's fitness or ability to
perform Executive's duties as determined by the Board of Directors
in good faith;
(c) If Executive has committed any act which would
cause termination of coverage under Bank's Bankers Blanket Bond as
to Employee, as distinguished from termination of coverage as to
Bank as a whole;
(d) If Executive is deceased; or
(e) If Executive is found to be physically or
mentally incapable of performing Executive's duties for a period
of sixty (60) days or greater by the Board of Directors, in good
faith. Such termination shall not prejudice any remedy which Bank
may have at law, in equity, or under this Agreement. Termination
pursuant to this Paragraph F.1 shall become effective two (2) days
after notice of termination.
2. Action by Supervisory Authority. This Agreement shall
terminate immediately without further liability or obligation to
Executive:
(a) If Bank is closed or taken over by the
Comptroller of the Currency or other supervisory authority,
including the Federal Deposit Insurance Corporation; or
(b) If such supervisory authority should exercise its
cease and desist powers to remove Executive from office.
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3. Merger or Corporate Dissolution. In the event of a
merger where Bank is not the surviving corporation, in the event
of a consolidation, in the event of a transfer of all or
substantially all of the assets of Bank, or in the event of any
other corporate reorganization this Agreement shall not be
terminated. Bank shall take all actions necessary to insure that
the surviving or resulting corporation, if other than the Bank, or
the transferee of Bank's assets, is bound by and shall have the
benefit of the provisions of this Agreement. In the case of the
Bank's dissolution, this Agreement shall be terminated.
4. Termination Without Cause. Notwithstanding anything
to the contrary herein, Executive's employment may be terminated
at any time, without cause by Bank, upon five (5) days' written
notice of termination to Executive, and Executive's employment may
be terminated at any time by Executive upon ninety (90) days'
written notice of termination to Bank. In the event Bank elects
to terminate Executive's employment pursuant to the provisions
hereof, Executive shall be entitled to compensation equal to
three (3) months' base salary, payable in equal installments
over a three (3) month period in conformity with Bank's normal
payroll periods. In the event Executive elects to terminate his
employment pursuant to the provisions hereof, including Paragraph
C.5., Bank shall not be entitled to any compensation.
5. Effect of Termination. In the event of the
termination of this Agreement prior to the completion of the Term
for any of the reasons specified in Paragraphs F.1 through F.4,
Executive shall be entitled to the salary earned by Executive
prior to the date of termination as provided for in this
Agreement,
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computed pro rata up to and including that date and accrued but
unused vacation time; but Executive shall be entitled to no further
compensation for services rendered after the date of termination.
G. GENERAL PROVISIONS
1. Trade Secrets. During the Term, Executive will have
access to and become acquainted with what Executive and Bank
acknowledge are trade secrets, to wit, knowledge or data
concerning Bank, including its operations and business, and the
identity of customers of Bank, including knowledge of their
financial condition, their financial needs, as well as their
methods of doing business. Executive shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them
in any way, either during the Term or for a period of one (1) year
after the termination of this Agreement, except as required in the
course of Executive's employment with Bank.
2. Covenant Not to Compete. Executive hereby covenants
and agrees that for a period of one (1) year after termination of
Executive's employment and for any period during which Executive
receives any compensation from Bank, whether pursuant to Paragraph
F.4 or otherwise, Executive shall not engage in the business of
banking within a ten (10) mile radius of Bank's head office,
whether as employee, agent, consultant, principal, partner, 10%
shareholder, director, or otherwise; provided, however, this
covenant shall not apply if Bank terminates Executive's employment
pursuant to Paragraph F.4. or if Executive terminates his
employment pursuant to Paragraph F.4. for other than Good Cause.
3. Return of Documents. Executive expressly agrees that
all manuals, documents, files, reports, studies, instruments or
9
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other materials used and/or developed by Executive during his
employment with Bank are solely the property of Bank, and that
Executive has no right, title or interest therein. Upon
termination of Executive's employment, Executive or Executive's
representative shall promptly deliver possession of all of said
property to Bank in good condition.
4. Notices. Any notice, request, demand or other
communication required or permitted hereunder shall be deemed to
be properly given when personally served in writing, when
deposited in the United States mail, postage prepaid, or when
communicated to a public telegraph company for transmittal,
addressed to the party at the address appearing at the beginning
of this Agreement. Either party may change its address by written
notice in accordance with this paragraph.
5. Benefit of Agreement. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their
respective executors, administrators, successors and assigns.
6. Applicable Law. Except to the extent governed by the
Laws of the United States, this Agreement is to be governed by and
construed under the laws of the State of California.
7. Captions and Paragraph Headings. Captions and
paragraph headings used herein are for convenience only and are
not a part of this Agreement and shall not be used in construing
it.
8. Invalid Provisions. Should any provisions of this
Agreement for any reason be declared invalid, void, or
unenforceable by a court of competent jurisdiction, the validity
and binding effect of any remaining portion shall not be affected,
and the remaining portions of this Agreement shall remain in full
force and
10
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effect as if this Agreement had been executed with said provision
eliminated.
9. Entire Agreement. This Agreement contains the entire
agreement of the parties. It supersedes any and all other
agreements, either oral or in writing, between the parties hereto
with respect to the employment of Executive by Bank except any
Stock Option Agreements between Executive and Bank. Each party to
this Agreement acknowledges that no representations, inducements,
promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement, or
promise not contained in this Agreement shall be valid or binding.
This Agreement may not be modified or amended by oral agreement,
but only by an agreement in writing signed by Bank and Executive.
10. Arbitration. In the event that any dispute shall
arise between the parties concerning the provisions of this
Agreement or the performance of any part of the obligations
hereunder, or in the event of an alleged breach of this Agreement
by any of the parties hereto, and the parties are unable to
mutually adjust and settle same, such dispute or disputes shall be
submitted to binding arbitration pursuant to the applicable rules
of the American Arbitration Association, and the decision and
determination of the arbitrators shall be final and conclusive.
The prevailing party shall be entitled to attorneys' fees and
costs.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
LIBERTY NATIONAL BANK
By /s/ Philip S. Inglee
---------------------------
Philip S. Inglee, President
& Chief Executive Officer
By /s/ Curt A. Christianssen
---------------------------
CURT A. CHRISTIANSSEN
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SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement between Liberty
National Bank, a national banking association ("Bank"), and Curt A.
Christianssen ("Executive") is made effective on the 17th day of
August, 1995 (the "Effective Date"), with reference to the
following:
RECITALS
WHEREAS, Bank and Executive have previously entered into an
Employment Agreement dated October 22, 1993, which was amended on
July 20, 1995 (the "Employment Agreement");
WHEREAS, the Board of Directors of Bank has determined that it
is in the best interest of Bank to negotiate with various entities
in order to effect a reorganization and recapitalization of Bank
which would involve an acquisition by or merger with another
entity; and
WHEREAS, Executive's effors will play an instrumental role in
the success of the negotiations and ultimately the consummation of
the acquisition or merger;
AGREEMENT
NOW, THEREFORE, in consideration of the covenants contained
herein, it is agreed that from and after the Effective Date:
1. Amendement
Paragraph C.6 of the Employment Agreement shall be amended as
set forth below:
<PAGE>
"6. Bonus. Executive shall be entitled to and shall receive a
bonus in the amount of $25,000 within ten (10) days of the
date that an acquisition or merger of the Bank is effected.
This bonus shall be effective only upon the closing of a
merger or acquisition during the Term."
2. First Amendment
The First Amendment dated July 20, 1995, is hereby superseded.
3. Continued Effect
All other terms and conditions of the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, this Second Amendment to Employment
Agreement has been duly executed and delivered as of the Effective
Date.
LIBERTY NATIONAL BANK
By: /s/ Philip S. Inglee
----------------------------
Philip S. Inglee
President and CEO
/s/ Curt A. Christianssen
----------------------------
Curt A. Christianssen
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made effective April 1, 1995,
between LIBERTY NATIONAL BANK ("Bank"), having a principal place of
business at One Pacific Plaza, 7777 Center Avenue, Huntington Beach,
California 92647, and CATHERINE C. CLAMPITT ("Senior Vice
President"), whose residence is 200 Paris Lane, #316, Newport Beach,
California 92663.
W I T N E S S E T H
WHEREAS, Bank is a national banking association duly organized,
validly existing, and in good standing under the laws of the United
States of America, with power to own property and carry on its
business as it is now being conducted;
WHEREAS, Bank desires to continue to avail itself of the skill,
knowledge and experience of Senior Vice President in order to insure
the successful management of its business; and
WHEREAS, the parties hereto desire to specify the terms of Senior
Vice President's continued employment by Bank:
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth, it is agreed that from and after April 1,
1995, (the "Effective Date"), the following terms and conditions
shall apply to Senior Vice President's employment:
A G R E E M E N T
A. TERM OF EMPLOYMENT
1. Term. Bank hereby employs Senior Vice President and
Senior Vice President hereby accepts employment with Bank for the
period commencing on the Effective Date and running through and
including March 31, 1997 (the "Term"), subject, however, to prior
termination of this Agreement as permitted by law or as hereinafter
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provided. Where used herein, "Term" shall refer to the entire period
of employment of Senior Vice President by Bank hereunder, whether for
the period provided above, or whether terminated earlier.
B. DUTIES OF SENIOR VICE PRESIDENT
1. Duties. Subject to the powers by law vested in the Board
of Directors of Bank and in Bank's shareholders, Senior Vice
President shall perform the duties of Senior Vice President and SBA
Department Manager of Bank. In that capacity, Senior Vice President
is primarily responsible for managing all facets of the SBA Loan
Department. Senior Vice President is also responsible for SBA loan
marketing, packaging, underwriting, documentation and disbursement.
Senior Vice President's duties include, but are not limited to,
those duties specified on Bank's Job Description for the position of
SBA Department Manager/Senior Vice President, a copy of which is
attached as Exhibit "A" hereto.
The duties and position of Senior Vice President may be
changed from time to time by the Board of Directors of Bank without
resulting in a rescission of this Agreement. Notwithstanding any
such change from the duties originally assigned and specified above,
or hereafter assigned, the employment of Senior Vice President shall
be construed as continuing under this Agreement as modified. During
the Term, Senior Vice President shall perform exclusively the
services herein contemplated to be performed by Senior Vice President
faithfully, diligently and to the best of Senior Vice President's
ability, consistent with the highest standards of the banking
industry and in compliance with all applicable laws, Bank's Articles
of Association and Bylaws and Bank's policies, as modified from time
to time.
2. Conflicts of Interests. Except as permitted by the prior
written consent of the Board of Directors of Bank, Senior Vice
President shall devote Senior Vice President's entire productive
time, ability and attention to the business of Bank during the Term
and Senior Vice President shall not directly or indirectly render any
services of a business, commercial or professional nature to any
other person, firm or corporation whether for compensation or
otherwise, which are in conflict with Bank's interest.
2
<PAGE>
C. COMPENSATION
1. Base Salary. For Senior Vice President's services
hereunder, Bank shall pay or cause to be paid as base salary to
Senior Vice President the amount of Four Thousand One Hundred
Sixty-Six Dollars and Sixty-Seven Cents ($4,166.67) per month during
the Term, beginning with the Effective Date. Said salary shall be
paid in equal pro rata, bi-monthly installments in conformity with
Bank's normal payroll period. Senior Vice President's base salary
shall be subject to review and adjustment by the Board of Directors
at any time, and no less often than concurrently with her annual
review.
2. Commissions. Senior Vice President shall receive
commissions for SBA and Piggyback 7a 504 (a non-SBA guaranteed
first trust deed on commercial property, combined and backed by an
SBA guaranteed second deed of trust) Loans submitted by her to the
SBA for approval, based upon the premium Bank receives from the sale
of the loan on the secondary market. Senior Vice President shall be
paid 11% of the premium on Broker SBA and Piggyback transactions on
SBA and Piggyback Loans, 15% of the premium on Non-Broker SBA and
Piggyback transactions and 13% of the premium on Bank employee
referred SBA and Piggyback transactions submitted by her.
Commissions are subject to penalties applied against earned
commissions for documentation deficiency resulting in a repair during
the first year of a loan limited to 10% of paid commission
3. Year End Bonus. Senior Vice President shall be eligible
for a bonus equivalent to 1.5% of SBA department premiums, as of
December 31 of each year, provided, however, that Senior Vice
President shall not be eligible or qualified to receive a Year End
Bonus unless she continues to be employed by the Bank at the
conclusion of the annual audit by which the department premium is
verified. If, for any reason, Senior Vice President is not employed
by the Bank at the end of a calendar year and at the end of the
subsequent annual audit, Senior Vice President shall not be eligible
or qualified for any Year End Bonus, or any part thereof.
4. Automobile Allowance. Senior Vice President shall
receive an automobile allowance of $750.00 per month. Said allowance
shall be paid in equal pro rata, bi-monthly installments in
conformity with Bank's normal payroll period.
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5. Automobile Telephone Reimbursement. Senior Vice
President shall be reimbursed for automobile telephone charges
directly related to Bank business up to a maximum of $350.00 per
month.
D. BENEFITS
1. Vacation and Sick Pay. Senior Vice President shall be
entitled to vacation during the Term, in accordance with Bank's
Personnel Policy; provided, however, that at least two (2) weeks of
said vacation (the "Mandatory Vacation"), shall be taken
consecutively. Senior Vice President shall also be entitled to sick
pay in accordance with Bank's Personnel Policy.
2. Group Medical and Life Insurance Benefits. During the
Term, Bank shall provide for medical, accident, disability and life
insurance benefits to Senior Vice President in accordance with Bank's
standard employee benefits.
E. TERMINATION
1. Termination by the Board of Directors. Senior Vice
President is an officer of Bank, appointed by the Board of Directors.
Under the National Bank Act and this Agreement, Senior Vice President
serves at the pleasure of the Board of Directors and is subject to
dismissal by the Board at any time, without further obligation or
liability to Senior Vice President. In the event Bank elects to
dismiss Senior Vice President and terminate this Agreement, upon
Senior Vice President's execution and delivery to Bank of an original
Separation Agreement and General Release in a form and with content
acceptable to the Board of Directors, Senior Vice President shall be
entitled to compensation equal to four (4) months' base salary, to
be paid in four (4) equal monthly installments, beginning on the
first day of the month following expiration of the Revocation Period
provided for in the Separation Agreement and General Release and
continuing thereafter on the first day of the three (3) subsequent
months.
2. Action by Supervisory Authority. This Agreement shall
terminate immediately without further liability or obligation to
Senior Vice President or Bank:
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(a) If Bank is closed or taken over by the Comptroller
of the Currency or other supervisory authority, including the Federal
Deposit Insurance Corporation; or
(b) If such supervisory authority should exercise its
cease and desist powers to remove Senior Vice President from office.
3. Merger or Transfer of Assets. This Agreement shall not
be terminated due to: (a) a merger where Bank is not the surviving
corporation; (b) a consolidation; or (c) a transfer of all or
substantially all of the assets of Bank. In the case of dissolution,
this Agreement shall be terminated.
4. Termination by Senior Vice President. Senior Vice
President may terminate her employment with Bank, and this Agreement,
upon sixty (60) days written notice of termination to Bank.
5. Effect of Termination. In the event of the termination
of Senior Vice President or this Agreement prior to the completion
of the Term for any of the reasons specified in this Paragraph E,
Senior Vice President shall be entitled to the salary earned by
Senior Vice President prior to the Effective Date of Termination, as
determined by the Board of Directors, computed pro rata up to and
including that date, and accrued but unused vacation time (to the
extent accumulated in accordance with Paragraph D.1); but Senior Vice
President shall be entitled to no further compensation for services
rendered after the Effective Date of Termination. Senior Vice
President shall receive commissions for SBA loans submitted by her
to the SBA and/or approved by the Bank for submission to the SBA
prior to the Effective Date of Termination. Such commissions will
be paid as previously outlined in Paragraph C, Sub-paragraph 2.
F. GENERAL PROVISIONS
1. Trade Secrets. During the Term, Senior Vice President
will have access to and become acquainted with what Senior Vice
President and Bank acknowledge are trade secrets, to wit, knowledge
or data concerning Bank, including its operations and business, and
its customers' financial condition, their financial needs, and
methods of doing business. Senior Vice President shall not disclose
any of the
5
<PAGE>
aforesaid trade secrets, directly or indirectly, or use them in any
way, except as required in the course of Senior Vice President's
employment with Bank.
2. Covenant Not to Interfere. Senior Vice President hereby
covenants and agrees that she will not now, or for a period of one
(1) year after termination, disrupt, damage, impair or interfere with
the business of Bank, whether by way of interfering with or raiding
its employees, disrupting its relationships with customers, , loan
packagers, representatives, vendors, or otherwise. Senior Vice
President furthers covenants and agrees that she will not now, or for
a period of four (4) months after termination, disrupt, damage,
impair or interfere with the business of Bank by way of disrupting
its relationships with brokers. After termination of employment,
Senior Vice President is not, however, restricted from being employed
by or engaged in a competing business.
3. Return of Documents. Senior Vice President expressly
agrees that all manuals, documents, files, reports, studies,
instruments or other materials used and/or developed by Senior Vice
President during her employment with Bank are solely the property of
Bank, and that Senior Vice President has no right, title or interest
therein. Upon termination of Senior Vice President's employment,
Senior Vice President or Senior Vice President's representative shall
promptly deliver possession of all of said property to Bank in good
condition.
4. Notices. Any notice, request, demand or other
communication required or permitted hereunder shall be deemed to be
properly given when personally served in writing, when deposited in
the United States mail, postage prepaid, or when communicated to a
public telegraph company for transmittal, addressed to the party at
the address appearing at the beginning of this Agreement. Either
party may change its/her address by written notice in accordance with
this paragraph.
5. Benefit of Agreement. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective executors, administrators, successors and assigns.
6. Applicable Law. Except to the extent governed by the
laws of the United States, this Agreement is to be governed by and
construed under the laws of the State of California.
6
<PAGE>
7. Captions and Paragraph Headings. Captions and paragraph
headings used herein are for convenience only and are not a part of
this Agreement and shall not be used in construing it.
8. Invalid Provisions. Should any provision of this
Agreement for any reason be declared invalid, void, or unenforceable
by a court of competent jurisdiction, the validity and binding effect
of any remaining portion shall not be affected, and the remaining
portions of this Agreement shall remain in full force and effect as
if this Agreement had been executed with said provision eliminated.
9. Entire Agreement. This Agreement contains the entire
agreement of the parties. It supersedes any and all other
agreements, either oral or in writing, between the parties hereto
with respect to the employment of Senior Vice President by Bank,
except any Stock Option Agreements between Senior Vice President and
Bank. Each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, oral or
otherwise, have been made by any party, or anyone acting on behalf
of any party, which are not embodied herein, and that no other
agreement, statement or promise not contained in this Agreement shall
be valid or binding. This Agreement may not be modified or amended
by oral agreement, but only by an agreement in writing signed by the
Chairman of the Board and Senior Vice President.
10. Arbitration. If any dispute, controversy or claim arises
out of or relates to this contract, the parties agree first to try
to settle the dispute by mediation under the Rules of Judicial
Arbitration & Mediation Services (JAMS) before resorting to
arbitration. Thereafter, any dispute, controversy or claim not
resolved by mediation shall be settled by binding arbitration in
accordance with the Rules of JAMS, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
(a) The arbitrator shall determine which is the
prevailing party and shall include in the award that party's actual
attorneys' fees and costs.
(b) As soon as practicable after selection of the
arbitrator, the arbitrator or his or her designated representative
shall determine a reasonable estimate of anticipated fees and costs
of the arbitrator, and render a statement to each party
7
<PAGE>
setting forth that party's prorata share of said fees and costs.
Thereafter, each party shall, within ten (10) days of receipt of said
statement, deposit said sum with the arbitrator. Failure of any
party to make such a deposit shall result in a forfeiture by the
non-depositing party of the right to prosecute or defend the claim
which is the subject of the arbitration, but shall not otherwise
serve to abate, stay or suspend the arbitration proceedings.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
LIBERTY NATIONAL BANK
By /s/ Richard M. Wilbur
----------------------------
CATHERINE C. CLAMPITT
By /s/ Catherine C. Clampitt
----------------------------
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AGREEMENT
THIS AGREEMENT is made this 31st day of January, 1996, by and
between LIBERTY NATIONAL BANK, a national banking association,
with offices at One Pacific Plaza, 7777 Center Avenue, Huntington
Beach, California 92647 ("Bank") and J. DON HARTFELDER, an
individual residing at 3906 Humboldt Drive, Huntington Beach,
California 92649 ("Hartfelder") hereby agree as follows:
RECITALS:
A. Bank wishes to obtain professional, cost effective
inspections for its construction loan projects.
B. Hartfelder, a director of the Bank, is willing to provide
such inspection services to Bank on an independent
contractor basis.
C. As a licensed architect, Hartfelder can provide a high
Level of expertise not generally available to independent
banks. As a director of the Bank, Hartfelder is a known,
stable entity with a major vested interest in the total
success of Bank's construction loan projects.
AGREEMENT
1. Services To Be Provided. Hartfelder shall provide the
Bank with construction loan inspection services.
Hartfelder's duties shall conform to the standard
duties generally required from construction inspectors
by the banking industry, including but not limited to
field inspections, office consultations, professional
evaluations, and preparation of reports. In addition,
Hartfelder shall spend an estimated average of two and
a half (2 1/2 ) days as needed, per week reviewing and
approving vouchers.
2. Independent Contractor Status. Hartfelder's
relationship to Bank shall be that of an independent
contractor. Hartfelder shall not be considered as
having an employee status and shall not, by virtue of
this Agreement, participate in any plan, arrangements
or distributions by Bank pertaining to or in
connection with its employees, including, but not
limited to, any health insurance, workman's
compensation, pension, stock, bonus, profit sharing or
similar benefits, but not including benefits resulting
from his relationship as a director of the Bank.
Hartfelder shall be responsible for all reports and
obligations with respect to his own Social Security,
income tax withholding, unemployment compensation, and
similar matters.
-1-
<PAGE>
As an independent contractor, Hartfelder shall have the
sole authority to control and direct the performance of his
services, subject to the performance criteria outlined by
Bank. All services shall be subject to Bank's general
right of review to assure their satisfactory completion.
Hartfelder shall have no authority to enter into written or
oral contracts on behalf of Bank.
Nothing in this Agreement shall be construed as creating a
partnership, joint venture or agency relationship between
Hartfelder and Bank.
3. All Services Are To Be Performed At Bank's Discretion.
All work performed by Hartfelder shall be performed
upon Bank's request and at Bank's sole discretion.
Bank may hired additional construction inspectors from
time to time, and nothing in this Agreement shall be
construed as guaranteeing a minimum work assignment to
Hartfelder. Although it is estimated that Hartfelder
will perform an average of sixty (60) inspections per
month, together with two (2) half days per week
reviewing and approving vouchers, the actual work
performed by Hartfelder may increase or decrease at
Bank's discretion.
4. Hartfelder May Perform Inspection Services For Others.
It is specifically understood and agreed that
Hartfelder may perform construction inspection
services for clients other than Bank, and that the
performance of such services shall not be subject to
the terms of this Agreement, but shall instead be
subject only to the terms of the Agreement between
Hartfelder and such other clients.
5. Compensation For Services. The first ten (10) inspections
per calendar month shall be compensated at $100 per
inspection. The following thirty (30) inspections shall be
compensated at $75 per inspection. Any additional
inspections per calendar month shall be compensated at $50
per inspection.
For inspection of a project located outside a 60 mile
radius of Liberty National Bank, Mr. Hartfelder shall be
paid $.28 per mile for travel to and from the project
beyond the 60 mile radius.
Hartfelder shall be compensated for his services in
reviewing and approving vouchers on the basis of an
equivalent of one (1) inspection for every four hours spent
in performing such administrative work.
Compensation shall be payable to Hartfelder on a monthly
basis, upon receipt of invoice.
-2-
<PAGE>
6. Express Limitation On Compensation. Notwithstanding
anything to the contrary in paragraph 5 above, it is hereby
expressly agreed that in no event shall Hartfelder's
monthly compensation, divided by the total number of
inspections allocated to Hartfelder, exceed the average
expenses per inspection experienced by other similar
independent banks in Bank's trade areas, as researched and
updated from time to time. Bank's mode of computing such
"average expense", including its selection of at least
three (3) "similar independent banks" for sampling
purposes, shall be at the Bank's sole discretion.
7. Indemnification. Hartfelder agrees to indemnify, defend
and hold Bank harmless from and against any and all claims,
demands, actions, suits, losses and/or damages arising out
of (a) Hartfelder's unlawful or negligent acts or omissions
in connection with this Agreement; (b) Hartfelder's
performance of services for clients other than Bank' and
injuries allegedly suffered by Hartfelder while performing
the services contemplated by this Agreement.
Bank agrees to indemnify, defend and hold Hartfelder
harmless from and against any and all claims, demands,
suits, losses and/or damages arising out of (a) Bank's
unlawful or negligent acts or omissions in connection with
this Agreement; (b) the negligence or unlawful conduct of
Bank, its employees, representatives or agents; and
injuries allegedly suffered by Bank, its employees,
representatives, agents and/or subcontractors.
This indemnification provision shall be independent of any
other indemnification agreement between Hartfelder and
Bank.
8. Insurance. Hartfelder shall maintain the following
insurance in amounts satisfactory to Bank:
Errors & Omissions Insurance Policy in the minimum amount
of $250,000 to be maintained.
9. Term. Unless terminated earlier as set forth below in
paragraph 10, the initial term of this Agreement shall be
one year. At the end of the initial term, the parties may
negotiate an additional term or terms, on such terms and
conditions as the parties may mutually agree upon at that
time.
10. Termination By Either Party. This Agreement may be
canceled with or without cause, by either party
hereto. Said cancellation shall be effective 30 days
after written notice of such intent to cancel is
delivered to the other party.
-3-
<PAGE>
11. Compliance With The Law. Hartfelder and Bank agree to
comply with all applicable laws and government
regulations. No instruction by either party shall be
construed in a way that would require the other party
to violate any law or regulation.
12. No Assignment. Neither Hartfelder nor Bank may assign
or subcontract any right or duty associated with this
Agreement without the prior written consent of the
other.
13. Waivers. Either party may delay enforcing its rights
under this Agreement without losing them. Any waiver
of a right by either party must be in writing and
shall not be deemed to be a waiver of other rights or
of the same right at another time.
14. Arbitration. Any controversy or claim arising out of or
related to this agreement, or the breach thereof, shall be
settled by arbitration in accordance with the Rules of the
American Arbitration, and judgement upon the award rendered
by the arbitrator may be entered in any court having
jurisdiction thereof. Provisional relief may, but need
not, be sought in a court of law while arbitration
proceedings are pending, and any relief granted by such
court shall remain effective until the matter is finally
resolved through arbitration. Final resolution through
arbitration may include any remedy or relief that the
arbitrator deems just and equitable, including permanent
injunctive relief or specific performance relief, or both,
and the arbitrator is specifically empowered to award such
relief, which shall then become a court judgement. Venue
and jurisdiction for any arbitration or legal action
regarding this Agreement shall be the State of California.
15. Amendment. This Agreement may be amended only by a written
document signed by both parties.
16. California Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
California.
17. Entire Agreement. This Agreement contains all of the
promises, covenants, undertakings and obligations of the
parties concerning the subject of this Agreement and
neither party is relying upon any statement, promise or
agreement, except as set forth in this Agreement. All work
in progress at the time this Agreement is executed shall be
governed by the terms of this Agreement.
-4-
<PAGE>
18. Notices. Any notices required by this Agreement shall be
sent to the other party at the address set forth above, or
at such other address as the party may request in writing
from time to time.
Dated: 2/8 , 1996
------------------------------
/s/ J. Don Hartfelder
--------------------------------
J. Don Hartfelder, an individual
LIBERTY NATIONAL BANK
By: /s/ Philip S. Inglee
---------------------------
Philip S. Inglee
Title: President & Chief Executive Officer
- 5 -
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
As of the consummation of the Transaction (as defined elsewhere in this
Registration Statement), Registrant will have the following direct and
indirect subsidiaries:
DIRECT SUBSIDIARIES
SDN Bancorp, Inc. (Delaware business corporation)
Commerce Security Bank (California commercial banking corporation)
INDIRECT SUBSIDIARIES
Liberty National Bank (national banking association; subsidiary of SDN
Bancorp, Inc.)
San Diegulto National Bank (national banking association; subsidiary of SDN
Bancorp, Inc.)
CSB Ventures, Inc. (California business corporation)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of SC Acquisition Corp. of our report
dated February 2, 1996, except as to Note 18, which is as of February 29,
1996, relating to the financial statements of SDN Bancorp, Inc., which
appears in such Prospectus. We also consent to the references to us under
the headings "Experts" which appears in such Prospectus.
Price Waterhouse LLP
Los Angeles, CA
July 1, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Information Statement/Prospectus of SC
Acquisition Corp. of our report dated February 3, 1995 on the financial
statements of SDN Bancorp and subsidiary for the year ended December 31, 1994
which did not express an opinion on the financial statements because of the
substantial doubt about SDN Bancorp's ability to continue as a going concern,
and the statement of operations, shareholders' equity and cash flows for the
year ended December 31, 1993 which expressed an unqualified opinion on the
financial statements and included an explanatory paragraph relating to
substantial doubt about SDN Bancorp's ability to continue as a going concern,
appearing in this Information Statement/Prospectus.
We also consent to the reference to us under the heading "Independent
Auditors" in such Information Statement/Prospectus.
Deloitte & Touche LLP
San Diego, CA
July 1, 1996
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all reference to our Firm included in the Registration Statement on
Form S-4 which contains the audited financial statements of Liberty National
Bank for the years ended December 31, 1995, 1994 and 1993.
Arthur Andersen LLP
Orange County, CA
July 1, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SDN Bancorp, Inc. on
Form S-4 of our report on the financial statements of Commerce Security Bank
as of December 31, 1995 and 1994 and for each of the three years in the
period ended December 31, 1995 dated February 27, 1996, except for Note 15,
as to which the date is March 27, 1996, appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche, LLP
Sacramento, CA
July 1, 1996
