SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. __)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
MCB Financial Corporation
----------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid:
$5,966.68
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Registration on Form S-4 of Business Bancorp (File No. 333-70080)
--------------------------------------------------------------------------------
(3) Filing party:
Business Bancorp
--------------------------------------------------------------------------------
(4) Date filed:
September 25, 2001
--------------------------------------------------------------------------------
Business Bancorp MCB Financial Corporation
140 South Arrowhead Avenue 1248 Fifth Avenue
San Bernardino, California 92408 San Rafael, California 94901
November 8, 2001
Business Bancorp and MCB Financial Corporation Shareholders:
The boards of directors of Business Bancorp and MCB Financial Corporation
have agreed on a merger which would result in MCB Financial merging into
Business Bancorp, with Business Bancorp being the surviving entity.
Simultaneously, Metro Commerce Bank, the principal subsidiary of MCB Financial,
will merge into Business Bank of California, the principal subsidiary of
Business Bancorp. Each of us will hold special shareholders meetings to
consider and vote on the merger proposal. In addition, Business Bancorp
shareholders will be asked to approve amendments to the company's Articles of
Incorporation to increase the number of authorized shares and to increase the
number of board classes from two to three, and amendments to the company's
Bylaws to eliminate cumulative voting, change the minimum and maximum number of
directors, and delete the reference to the classified board as no longer
necessary given that the provision appears in the Articles.
These proposals are described in the accompanying joint proxy
statement/prospectus. The agreement and plan of reorganization relating to the
merger, also referred to as the "merger agreement," is attached to this joint
proxy statement/prospectus as Annex A.
In the merger, each share of MCB Financial common stock outstanding at the
effective time of the merger will be converted into a number of shares of
Business Bancorp common stock based upon a conversion ratio of 1.1763 shares of
Business Bancorp for each MCB Financial share.
The places, dates and times of the special meetings are described in the
accompanying notices of the respective special meetings of shareholders of
Business Bancorp and MCB Financial. Whether or not you plan to attend your
respective special meeting, please sign, date and promptly return the enclosed
proxy card.
We believe the merger is in your best interests as shareholders, and we
hope you will support it. Information about the proposed merger is included in
the enclosed document. Please give these materials your careful attention. The
boards of directors of Business Bancorp and MCB Financial have both unanimously
approved the merger and recommend that you vote to approve it as well.
/s/ Alan J. Lane /s/ Charles O. Hall
-------------------------------------- -------------------------------------
Alan J. Lane Charles O. Hall
President and Chief Executive Officer President and Chief Executive Officer
Business Bancorp MCB Financial
Business Bancorp common stock is traded on the Nasdaq SmallCap Market
under the symbol "BZBC." On October 19, 2001, Business Bancorp common stock
closed at $13.00 per share. Based on that closing price, an MCB Financial
shareholder would receive Business Bancorp common stock with a value of $15.29
for each share of MCB Financial common stock. Completion of the merger involves
certain risks and uncertainties described in the section of the document
entitled "Risk Factors" on page 22.
Neither this transaction nor the securities of Business Bancorp have been
approved or disapproved by the Securities and Exchange Commission or any state
securities commission nor has the Securities and Exchange Commission or any
state securities commission passed upon the accuracy or adequacy of this
document. Any representation to the contrary is a criminal offense.
The shares of Business Bancorp common stock offered by this joint proxy
statement/prospectus are not savings accounts, deposits or other obligations of
Business Bancorp or MCB Financial or any subsidiary of any of the parties and
are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
The date of this document is November 8, 2001, and it is first being
mailed to shareholders of Business Bancorp and MCB Financial on or about
November 8, 2001.
MCB FINANCIAL CORPORATION
1248 Fifth Avenue
San Rafael, CA 94901
------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held December 10, 2001
------------
TO THE SHAREHOLDERS OF MCB FINANCIAL CORPORATION:
NOTICE IS HEREBY GIVEN that pursuant to its Bylaws and the call of its
board of directors, a Special Meeting of Shareholders of MCB Financial
Corporation will be held at MCB Financial Corporation, 1248 Fifth Avenue, San
Rafael, California 94901, on Monday, December 10, 2001 at 5:30 p.m., for the
purpose of considering and voting on the following matters:
1. Approving the merger agreement between Business Bancorp and MCB
Financial Corporation; and
2. Other Business. To transact such other business as may properly come
before the meeting and any adjournment or adjournments thereof.
Only those shareholders of record at the close of business on October 18,
2001 will be entitled to notice of and to vote at the meeting.
It is very important that every shareholder vote. We urge you to sign and
return the enclosed proxy as soon as possible, whether or not you plan to
attend the meeting in person. If you do attend the meeting and wish to vote in
person, you may then withdraw your proxy. If you do not attend the meeting, you
may revoke the proxy prior to the time it is voted by notifying the Corporate
Secretary in writing to that effect or by filing a later dated proxy.
In order to facilitate the provision of adequate accommodations, please
indicate on the proxy whether or not you expect to attend the meeting.
MCB Financial shareholders may have dissenters' rights of appraisal under
Chapter 13 of the California Corporations Code if they vote against the merger
and send a written demand for purchase of their shares to the company before
the meeting is held, but only if holders of at least 5% of the outstanding
shares of common stock of MCB Financial make such demand. See page 48 of the
joint proxy statement/prospectus for more information. A copy of Chapter 13 is
included as Annex C to the joint proxy statement/prospectus.
Dated: November 8, 2001 By Order of the Board of Directors
/s/ Nancy R. Boatright
----------------------------------------
Nancy R. Boatright
Corporate Secretary
--------------------------------------------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF YOU MAIL THE PROXY CARD IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
--------------------------------------------------------------------------------
Important Notice Regarding Information Incorporated
Into This Document by Reference to Other Documents
This document incorporates by reference important business and financial
information relating to MCB Financial which is not presented in this document
or delivered with it.
This information is available without charge, excluding all exhibits
unless specifically incorporated by reference in this document, by oral or
written request to:
Business Bancorp
140 South Arrowhead Avenue
San Bernardino, California 92408
Attention: Travis Kawelmacher
(909) 888-2265
or
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, California 94901
Attention: Patrick E. Phelan
(415) 721-2286
If you would like to request documents, please do so by December 3, 2001
to receive them before the meeting.
TABLE OF CONTENTS
Page
----
INFORMATION REGARDING FORWARD LOOKING STATEMENTS ......................................... 1
QUESTIONS AND ANSWERS ABOUT THE MATTERS DISCUSSED IN THIS DOCUMENT ....................... 2
SUMMARY .................................................................................. 5
MCB Financial shareholders will receive 1.1763 shares of Business Bancorp common stock in
the merger .............................................................................. 5
Operations following the merger .......................................................... 5
Comparative market price and dividend data ............................................... 5
Reasons for the merger ................................................................... 7
The merger is intended to be a tax-free transaction in which Business Bancorp shareholders
and MCB Financial shareholders will not recognize gain or loss .......................... 7
Business Bancorp and MCB Financial boards recommend shareholder approval ................. 7
Financial advisors have given opinions that consideration is fair to Business Bancorp and
MCB Financial shareholders .............................................................. 8
Business Bancorp shareholders' meeting to be held on December 10, 2001 ................... 8
MCB Financial shareholders' meeting to be held on December 10, 2001 ...................... 8
Record date set at October 18, 2001 for Business Bancorp shareholders' meeting; vote
required for approval of merger ......................................................... 8
Record date set at October 18, 2001 for MCB Financial shareholders' meeting; vote required
for approval of merger .................................................................. 8
Dissenters' rights of appraisal .......................................................... 9
Information regarding Business Bancorp and MCB Financial ................................. 9
Business Bancorp to use purchase accounting treatment .................................... 9
Benefits to certain officers and directors in the merger ................................. 10
Conditions that must be satisfied for the merger to occur ................................ 10
Stock option agreements .................................................................. 10
Regulatory approvals we must obtain for the merger to occur .............................. 10
Termination of the merger agreement ...................................................... 11
Expenses; liquidated damages ............................................................. 11
RECENT DEVELOPMENTS ...................................................................... 12
SELECTED FINANCIAL DATA .................................................................. 16
General .................................................................................. 16
Historical Data .......................................................................... 16
Selected Unaudited Pro Forma Combined Consolidated Financial Data ........................ 19
Comparative Per Common Share Data ........................................................ 20
RISK FACTORS ............................................................................. 22
We may have difficulty integrating MCB Financial and Business Bancorp and in achieving any
cost savings ............................................................................ 22
Certain provisions in Business Bancorp's articles of incorporation and bylaws will have
antitakeover effects .................................................................... 22
No assurance can be given as to the future returns of the merged entity .................. 22
The historical market performance of MCB Financial's stock has been somewhat more
favorable than that of Business Bancorp. No assurance can be given as to the future
performance of the merged entity. ....................................................... 22
Business Bancorp and MCB Financial's combined operations will be concentrated
geographically in California, and poor economic conditions may cause us to incur losses . 23
The California energy crisis may adversely impact our customers and may worsen the
downturn in the California economy ...................................................... 23
Changes in interest rates could reduce our net earnings .................................. 23
i
Page
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Business Bancorp's loan portfolio could be insufficiently diversified .................... 23
The markets in which Business Bancorp will operate after the merger are subject to the
risk of earthquakes and other natural disasters ......................................... 24
The success of the merger depends on retaining and recruiting certain key management ..... 24
The merged entity may not be able to control and manage its future growth opportunities,
which could adversely affect its operations ............................................. 24
Business Bancorp's loan loss reserves may not cover actual loan losses ................... 25
The merger could trigger the change of control provisions in the employment contracts of
certain MCB Financial executive officers ................................................ 25
Additional shares of Business Bancorp common stock could be issued which could result in a
decline in the market price of the stock ................................................ 26
There has been a limited prior market for Business Bancorp's common stock, so its stock
price may be volatile ................................................................... 26
Business Bank will operate in a highly competitive market for banking services ........... 26
Business Bancorp's income depends on monetary policy and economic conditions ............. 27
Business Bancorp and Business Bank are subject to extensive government regulation and
legislation ............................................................................. 27
The directors and executive officers of the merged entity will continue to control a
substantial portion of its stock ........................................................ 27
MCB FINANCIAL AND BUSINESS BANCORP SHAREHOLDER MEETINGS .................................. 28
Date, Time and Place of Meetings ......................................................... 28
The Meetings ............................................................................. 28
Record Dates and Voting Rights ........................................................... 28
Vote Required ............................................................................ 28
Voting By Proxy .......................................................................... 29
Revocability of Proxies .................................................................. 29
Quorum and Adjournments .................................................................. 29
Solicitation of Proxies .................................................................. 29
Other Matters ............................................................................ 30
THE MERGER ............................................................................... 31
General .................................................................................. 31
Background of the Merger ................................................................. 31
Reasons for the Merger; Recommendations of Boards of Directors ........................... 32
Opinion of Financial Advisors ............................................................ 34
Regulatory Approvals We Must Obtain for the Merger to Occur .............................. 43
Nasdaq National Market Listing ........................................................... 44
Interests of Certain Officers and Directors in the Merger ................................ 45
Employee Benefit Plans ................................................................... 46
Shareholder Rights Plan .................................................................. 46
Accounting Treatment ..................................................................... 46
Certain Federal Income Tax Consequences .................................................. 47
Dissenters' Rights of Appraisal .......................................................... 48
Resales of Business Bancorp Common Stock ................................................. 50
THE MERGER AGREEMENT ..................................................................... 51
Structure of the Merger; Effective Time .................................................. 51
Conversion of MCB Financial Common Stock ................................................. 51
Stock Options ............................................................................ 51
Exchange Agent; Exchange Procedure ....................................................... 52
Representations and Warranties ........................................................... 52
ii
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Conduct of Business Pending the Merger and Other Covenants ................................. 53
Conditions to Completion of the Merger ..................................................... 55
Additional Agreements ...................................................................... 56
Extension; Waiver .......................................................................... 56
Termination ................................................................................ 56
Expenses; Liquidated Damages ............................................................... 56
Amendment .................................................................................. 57
STOCK OPTION AGREEMENTS BETWEEN BUSINESS BANCORP AND MCB FINANCIAL ......................... 57
Exercise of Stock Options .................................................................. 57
Termination of Stock Options ............................................................... 58
Adjustment of Number of Shares Subject to Options .......................................... 58
Repurchase of Options and Option Shares .................................................... 59
Registration Rights ........................................................................ 59
Effect of Stock Option Agreements .......................................................... 59
OPERATIONS FOLLOWING THE MERGER ............................................................ 60
Board of Directors ......................................................................... 60
Classified Board ........................................................................... 60
Nominating Committees ...................................................................... 60
Director Vacancies ......................................................................... 61
Director Voting--Supermajority Vote Requirements ........................................... 61
Officers ................................................................................... 62
Offices .................................................................................... 62
BUSINESS BANCORP AND MCB FINANCIAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION ................................................................................ 63
REGULATION AND SUPERVISION ................................................................. 71
General .................................................................................... 71
Holding Company Regulation ................................................................. 71
Bank Regulation ............................................................................ 71
Capital Adequacy Requirements .............................................................. 72
Prompt Corrective Action Provisions ........................................................ 73
Safety and Soundness Standards ............................................................. 74
Premiums for Deposit Insurance ............................................................. 74
Dividends .................................................................................. 75
CRA ........................................................................................ 76
Other Consumer Protection Laws and Regulations ............................................. 76
Interstate Banking and Branching ........................................................... 77
Financial Modernization Act ................................................................ 77
Impact of Monetary Policies ................................................................ 79
Environmental Regulation ................................................................... 79
Other Pending and Proposed Legislation ..................................................... 80
INFORMATION ABOUT BUSINESS BANCORP ......................................................... 81
General .................................................................................... 81
Business Bank .............................................................................. 81
Competition ................................................................................ 82
Employees .................................................................................. 83
Description of Property .................................................................... 83
Legal Proceedings .......................................................................... 84
iii
Page
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
BUSINESS BANCORP ......................................................................... 85
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS OF BUSINESS BANCORP ............. 118
Principal Shareholders ................................................................... 118
Indentification and Stock Ownership of Directors and Executive Officers .................. 119
Executive Compensation ................................................................... 121
Compensation of Directors ................................................................ 123
Certain Transactions ..................................................................... 123
DESCRIPTION OF BUSINESS BANCORP STOCK .................................................... 124
MARKET PRICE AND DIVIDEND INFORMATION FOR BUSINESS BANCORP ............................... 125
INFORMATION ABOUT MCB FINANCIAL .......................................................... 127
General .................................................................................. 127
Competition .............................................................................. 128
Insurance ................................................................................ 128
Employees ................................................................................ 128
Description of Property .................................................................. 128
Legal Proceedings ........................................................................ 129
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MCB FINANCIAL .................................................. 130
DESCRIPTION OF MCB FINANCIAL STOCK ....................................................... 154
MARKET PRICE AND DIVIDEND INFORMATION FOR MCB FINANCIAL .................................. 155
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS ............................................ 157
Classified Board ......................................................................... 157
Cumulative Voting ........................................................................ 157
Dissenters' Rights in Mergers and Other Reorganizations .................................. 157
Notice of Nominations .................................................................... 158
ADDITIONAL PROPOSALS SUBMITTED TO BUSINESS BANCORP SPECIAL MEETING ....................... 159
Proposal 2: Amendment to Articles of Incorporation of Business Bancorp to Increase
Number of Authorized Shares of Common and Preferred Stock .................... 159
Proposal 3: Amendment to Bylaws of Business Bancorp to Eliminate Cumulative Voting ....... 160
Proposal 4: Amendment to Bylaws of Business Bancorp to Increase Number of Authorized
Directors .................................................................... 161
Proposal 5: Amendment to Articles of Incorporation of Business Bancorp to Increase Board
Classes from Two to Three and Amendment to Bylaws to Delete Classification
Provision .................................................................... 162
OTHER MATTERS ............................................................................ 164
EXPERTS .................................................................................. 164
LEGAL MATTERS ............................................................................ 164
INFORMATION CONCERNING MCB FINANCIAL'S MANAGEMENT ........................................ 164
WHERE YOU CAN FIND MORE INFORMATION ...................................................... 165
Business Bancorp
Financial Statements and Supplementary Data .............................................. F-1
MCB Financial
Financial Statements and Supplementary Data .............................................. F-36
iv
Page
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ANNEXES
Annex A
Agreement and Plan of Reorganization Among MCB Financial Corporation, Metro
Commerce Bank and Business Bancorp, Business Bank of California, dated as of
August 15, 2001 ............................................................................ A-1
Exhibit A MCB Financial Stock Option Agreement ......................................... A-32
Exhibit B Business Bancorp Stock Option Agreement ...................................... A-42
SCHEDULES
Schedule 2.3(c) Directors of the Resulting Institution (BB Bank) .................... A-51
Schedule 2.3(d) Offices of the Resulting Institution (BB Bank) ...................... A-52
Schedule 3.3 Effects of the Merger ............................................... A-53
Schedule 3.10 Board of Directors (BB) ............................................. A-54
Schedule 7.7(c) Support Agreements .................................................. A-55
Schedule 8.1(a) Amendment of Bylaws--Cumulative Voting and Number of Directors A-63
Schedule 8.1(b) Amendment of Bylaws--Nominating Committees and Supermajority
Board Voting ........................................................ A-65
Schedule 8.1(d) Certificate of Amendment of Articles of Incorporation of BB ......... A-69
Schedule 8.4 Officers Receiving Replacement Employment and/or Severance
Agreements .......................................................... A-71
Schedule 8.5 Management Structure Following Reorganization ....................... A-72
Annex B-1
Opinion of Baxter Fentriss & Company ....................................................... B-1-1
Annex B-2
Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated .............................. B-2-1
Annex C
Chapter 13 of California Corporations Code ................................................. C-1
Annex D
Text of Proposed Amendments to the Articles of Incorporation of Business Bancorp ........... D-1
Annex E
Text of Proposed Amendment to Bylaws of Business Bancorp ................................... E-1
v
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements with respect to
the financial condition, results of operations and business of Business Bancorp
and MCB Financial in the future, including statements relating to the cost
savings which we expect to realize from the merger, the expected impact of the
merger on Business Bancorp's financial performance and the market value of
Business Bancorp common stock in the future (see "The Merger--Reasons for the
merger; recommendations of the boards of directors" on page 32). These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the following
possibilities:
* expected cost savings from the merger cannot be fully realized;
* deposit attrition, customer loss or revenue loss following the merger
is greater than expected;
* competitive pressure in the banking industry increases significantly;
* completion of the merger may occur later than expected;
* costs or difficulties related to the integration of the business of
Business Bancorp and MCB Financial are greater than expected;
* changes in the interest rate environment reduce margins;
* general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality; and
* changes in the regulatory environment, business conditions, inflation
and changes in the securities markets may adversely affect any benefits
to be expected from the merger.
1
QUESTIONS AND ANSWERS ABOUT THE MATTERS DISCUSSED IN THIS DOCUMENT
Q: Whom should I contact with questions or to obtain additional copies of this
joint proxy statement/ prospectus or information incorporated by reference into
this joint proxy statement/prospectus?
A: You may contact either:
Business Bancorp
140 South Arrowhead Avenue
San Bernardino, California 92408
Attention: Travis Kawelmacher
(909) 888-2265
or
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, California 94901
Attention: Patrick E. Phelan
(415) 721-2286
See also "Where Can You Find More Information" on page 165.
Q: Why is this merger proposed?
A: Business Bancorp and MCB Financial are proposing this transaction because
their boards of directors have concluded that a combination of the two
organizations is in the best interests of the shareholders of both companies
and that the combined companies can offer customers of Business Bank and Metro
Commerce Bank a broader array of services and products than each could offer on
its own.
Q: What risks should I consider?
A: You should carefully read the information set forth in this joint proxy
statement/prospectus and also consider other specified risk factors. See "Risk
Factors" on page 22.
Q: How do I vote?
A: Simply indicate on your proxy card how you want to vote and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not vote your shares for you unless you provide
instructions to your broker on how to vote. It is important therefore that you
follow the directions provided by your broker regarding how to instruct your
broker to vote your shares. If you fail to instruct your broker how to vote
your shares, the effect will be the same as a vote against the merger
agreement.
Q. How many votes are needed to approve the merger?
A: The affirmative vote of at least 1,017,035 of the issued and outstanding
shares of Business Bancorp and the affirmative vote of at least 796,299 of the
issued and outstanding shares of MCB Financial (which represents in each case a
majority of the outstanding shares) is required to approve the merger.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting. If your shares are held in your name you may do this in one of
three ways. First, you may send a written notice stating that you would like to
revoke your proxy. Second, you may complete and submit a new proxy card. If you
choose either of these two methods, you must submit your notice of revocation
or your new proxy card to MCB Financial if you are an MCB Financial shareholder
or Business Bancorp if you are a Business Bancorp shareholder at the address at
the top of the Notice of Special Meeting of Shareholders in time so that it is
received before the vote at the special meeting. Third, you may attend the
meeting and vote in person if you tell the Secretary of the company whose
shares you are voting that you want to
2
cancel your proxy and vote in person. Simply attending the special meeting,
however, will not revoke your proxy. If you have instructed a broker to vote
your shares, you must follow directions received from your broker to change
your vote or to vote at the meeting.
Q: Should I send in my certificates now?
A: No. After the merger is completed, we will send MCB Financial shareholders
written instructions for exchanging your stock certificates. Business Bancorp
shareholders will not need to exchange their stock certificates.
Q: When do you expect this merger to be completed?
A: We are working toward completing this merger as quickly as possible. We
currently expect to complete this merger by the end of the fourth quarter of
2001.
Q: Why are you proposing to increase the number of authorized shares of
Business Bancorp?
A: We are doing so primarily because of the fact that the number of shares to
be issued in the merger will reduce the number available for future corporate
purposes.
Q: Why are you proposing to eliminate cumulative voting for election of
Business Bancorp directors?
A: The Business Bancorp board of directors believes that every director of a
publicly-held corporation should represent the interests of a majority of
shareholders. It believes that directors elected by a minority shareholder or
group of shareholders through cumulative voting are likely to be partisans of
the particular interest group that elected them rather than representatives of
a majority of shareholders. California law mandates cumulative voting, except
for companies whose stock meets certain listing requirements. As a condition to
completion of the merger, Business Bancorp has applied to list its common stock
on the Nasdaq National Market, which would qualify under the listing
requirements of California law and enable Business Bancorp to eliminate
cumulative voting.
Q: Why are you proposing to change the minimum and maximum number of Business
Bancorp directors?
A: This is necessary to accommodate the directors who will be joining the
Business Bancorp board of directors after the merger and who currently serve on
the MCB Financial board of directors.
Q: Why are you proposing to increase Business Bancorp's board classes from two
to three?
A: Business Bancorp's Bylaws now provide that the board will be split into two
classes effective whenever Business Bancorp becomes a "listed corporation."
This will occur if Business Bancorp's common stock becomes listed on the Nasdaq
National Market, which is expected to occur as a condition of the merger
effectiveness. The board of directors believes that a third class will make it
more difficult for an outside investor who acquires Business Bancorp stock to
quickly replace incumbent directors with his or her own board representatives
to the possible disadvantage of the shareholders as a whole. So long as the
board is classified into three classes, a minimum of three annual meetings of
shareholders would generally be required to replace the entire board instead of
two (absent intervening vacancies). By providing additional time to the board
of directors and eliminating the possibility of rapid removal of the board,
directors will have the necessary time to evaluate any proposal and to assess
and develop alternatives without the pressure created by the threat of imminent
removal. In addition, having three classes will make it administratively easier
to ensure that the former directors of MCB Financial and their successors will
be adequately represented in each board class and to ensure equal
representation by the continuing Business Bancorp directors and their
successors.
Q: Why have you sent me this document?
A: This joint proxy statement/prospectus contains important information
regarding the proposed merger and related proposals to be voted on by Business
Bancorp shareholders, as well as important information about Business Bancorp
and MCB Financial. It also contains important information about what the
Business Bancorp and MCB Financial boards of directors and management
considered in evaluating this proposed merger. We urge you to read this
document carefully, including its exhibits and attachments. You may also want
to review the documents listed under "Where You Can Find More Information" on
page 165.
3
Q: When can I sell the shares of Business Bancorp common stock that I receive
in the merger?
A: You may sell the shares of Business Bancorp common stock you receive in the
merger without restriction unless you are considered an "affiliate" of MCB
Financial or Business Bancorp.
4
--------------------------------------------------------------------------------
SUMMARY
This Summary, together with the "Questions and Answers" on the preceding
pages, highlight important selected information from this document. To
understand the merger and the other proposals fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the other information available to you. See "Where You Can
Find More Information" on page 165. We have included page references in
parentheses to direct you to a more complete description of the topics
presented in this summary.
MCB Financial shareholders will receive 1.1763 shares of Business Bancorp
common stock in the merger (page 31)
When the merger is completed, you will receive 1.1763 shares of Business
Bancorp common stock for each share of MCB Financial common stock that you
hold. For example, if you hold 1,000 shares of MCB Financial common stock, you
will have the right to receive 1,1763 shares of Business Bancorp common stock
in the merger. You will receive cash instead of fractional shares. Therefore,
you would only receive 1,176 shares of Business Bancorp common stock. You would
also receive a check in an amount equal to 0.3 of a share multiplied by the
average of the closing sale prices of Business Bancorp common stock on the
Nasdaq SmallCap Market as reported for the five trading days immediately
preceding the effective time of the merger.
Operations following the merger (page 60)
After the merger is completed, the Business Bancorp board of directors
will consist of 14 persons, of whom seven will be existing directors of
Business Bancorp and seven will be the current members of the MCB Financial
board of directors. If the shareholders of Business Bancorp approve certain
proposed amendments to Business Bancorp's Bylaws and Articles of Incorporation,
the board will be split into three classes commencing with the first annual
meeting of shareholders following the merger, with the directors in each class
serving staggered terms of three years.
For a period of two years after the merger Business Bancorp will have two
nominating committees, each of which will be equal in number, with specific
duties and succession rights specified in the Bylaws of Business Bancorp. We
will also make certain other changes in the Bylaws to alter the filling of
vacancies and the vote requirements for the board to take certain actions.
Comparative market price and dividend data (pages 125 and 155)
Business Bancorp common stock is quoted on the Nasdaq SmallCap Market. MCB
Financial common stock is traded on the American Stock Exchange.
The following table sets forth historical per share market values for
Business Bancorp common stock and MCB Financial common stock on August 14, 2001
for both companies and on October 19 and 22, 2001, respectively, for Business
Bancorp and MCB Financial. It also shows the equivalent pro forma market value
for MCB Financial on August 14, 2001, the last trading day prior to public
announcement of the merger. The historical values represent the last sale
prices on or before the dates indicated. The values for Business Bancorp after
the effective time of the merger may be higher or lower than the closing prices
of Business Bancorp common stock on the dates shown in the table.
Historical Market Price
----------------------------
Business MCB Financial Equivalent
Bancorp MCB Financial Pro Forma Market Value
---------- --------------- -------------------------
August 14, 2001 ................ $ 14.48 $ 13.35 $ 17.03
October 19, 2001 ............... $ 13.00
October 22, 2001 ............... $ 14.00
--------------------------------------------------------------------------------
5
--------------------------------------------------------------------------------
Business Bancorp's common stock has been traded on the Nasdaq SmallCap
Market since February 27, 2001. Trading in Business Bancorp's stock has not
been extensive and such trades cannot be characterized as an active public
trading market. Management is aware of the following securities dealers which
make a market in Business Bancorp's stock: Sutro & Co., Los Angeles,
California, Western Financial Corporation, San Diego, California and Gorian
Investment Group, Inc., San Bernardino, California. The market makers have no
obligation to continue to make such a market and may discontinue making a
market at any time. Business Bancorp has filed an application to list its
common stock on the Nasdaq National Market which is expected to be approved
subject to and effective as of the closing of the merger, although there can be
no assurance that will be the case.
The information in the following table indicates the high and low "bid"
and "asked" quotations and approximate volume of trading for the common stock
for each quarterly period since January 1, 1999 and on October 19, 2001 and is
based upon information provided by the ADP Quotation Services, Historical Data
Base. Since Business Bancorp did not acquire the outstanding shares of Business
Bank until January, 2000, 1999 information is for the stock of Business Bank.
As of the effective date of the holding company reorganization (January 21,
2000), each outstanding share of common stock of Business Bank was converted
into one outstanding share of common stock of Business Bancorp. Figures have
been retroactively adjusted where appropriate to give effect to the 25% stock
distribution declared by Business Bank in July, 1999. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, do not
reflect actual transactions and do not include nominal amounts traded directly
by shareholders or through other dealers and not through the market makers.
Sale Price of
Business Bancorp's Cash Approximate Approximate
Common Stock
------------------------- Dividend Trading Number of
Calendar Quarter Ended High Low Declared Volume Transactions
---------------------------- ----------- ----------- ---------- ------------- -------------
March 31, 1999 ............. $ 12.40 $ 10.20 $ 0.00 25,500 34
June 30, 1999 .............. 11.00 9.60 $ 0.00 97,200 27
September 30, 1999 ......... 13.50 10.00 $ 0.00 26,960 14
December 31, 1999 .......... 11.00 8.00 $ 0.00 20,400 17
March 31, 2000 ............. 9.50 8.62 $ 0.00 49,500 25
June 30, 2000 .............. 9.75 8.00 $ 0.00 48,600 18
September 30, 2000 ......... 10.25 8.75 $ 0.00 116,200 17
December 31, 2000 .......... 10.25 8.25 $ 0.00 85,000 28
March 31, 2001 ............. 11.75 9.00 $ 0.00 147,208 34
June 30, 2001 .............. 12.63 11.00 $ 0.00 78,302 58
September 30, 2001 ......... 14.75 11.75 $ 0.01 113,012 150
October 19, 2001 ........... 13.00 13.00 300
--------------------------------------------------------------------------------
6
--------------------------------------------------------------------------------
During most of 1999, MCB Financial's common stock traded on the OTC
Bulletin Board under the symbol MCBF. On December 28, 1999, MCB Financial's
common stock began trading on the American Stock Exchange under the symbol MCB.
MCB Financial's stock transfer agent is U.S. Stock Transfer Corporation. There
were approximately 340 shareholders of record as of July 31, 2001. The
following are the high and low sales prices (for 2000 and 2001) and high and
low bid prices (for 1999) as reported by the markets on which the stock was
traded for those respective periods and on October 22, 2001. Over-the-counter
prices reflect inter-dealer prices which may not include retail markups,
markdowns, or commissions. Prices are adjusted to reflect stock dividends and
stock splits.
Sale Price of
MCB Financial's Cash Approximate Approximate
Common Stock
----------------------- Dividend Trading Number of
Calendar Quarter Ended High Low Declared Volume Transactions
---------------------------- ---------- ---------- ---------- ------------- -------------
March 31, 1999 ............. $ 9.05 $ 7.14 $ 0.00 111,800 18
June 30, 1999 .............. 7.98 6.55 $ 0.00 79,900 26
September 30, 1999 ......... 9.25 6.67 $ 0.01 99,200 31
December 31, 1999 .......... 11.75 8.50 $ 0.01 134,400 38
March 31, 2000 ............. 11.50 7.38 $ 0.01 138,900 239
June 30, 2000 .............. 8.75 7.56 $ 0.01 142,600 184
September 30, 2000 ......... 8.69 7.75 $ 0.01 118,400 136
December 31, 2000 .......... 10.50 8.06 $ 0.01 65,300 99
March 31, 2001 ............. 13.70 10.25 $ 0.01 84,000 178
June 30, 2001 .............. 13.25 11.00 $ 0.01 41,900 75
September 30, 2001 ......... 15.50 12.28 $ 0.01 110,100 146
October 22, 2001 ........... 14.00 14.00 100
Business Bancorp cannot assure you that the price of its stock will be the
same or greater than the prices shown in the table at the time of the merger,
or at any time after the completion of the merger. Once MCB Financial is
acquired by Business Bancorp, there will be no further public market for MCB
Financial common stock. However, Business Bancorp has filed an application to
list its common stock on the Nasdaq National Market and approval for such
listing is a condition to the completion of the merger, unless waived by the
parties. There can be no assurance that the liquidity of the market for
Business Bancorp stock after the merger will be the same or better than the
liquidity which currently exists for either Business Bancorp stock or MCB
Financial stock.
Reasons for the merger (page 32)
Business Bancorp and MCB Financial have entered into the merger agreement
because their boards of directors believe that the combined companies will have
several advantages over their existing independent operations and that their
shareholders will benefit from such advantages.
The Merger is intended to be a tax-free transaction in which Business Bancorp
shareholders and MCB Financial shareholders will not recognize gain or loss
(page 47)
The merger is intended to be a tax-free reorganization so that neither
Business Bancorp nor MCB Financial nor their respective shareholders will
recognize any gain or loes for federal income tax purposes, except for the cash
that MCB Financial shareholders will receive instead of fractional shares and
except on account of dissenter's rights exercised by shareholders of either
company.
Business Bancorp and MCB Financial boards recommend shareholder approval (page
32)
Both Business Bancorp's board of directors and MCB Financial's board of
directors believe that the merger is in the best interests of their respective
companies and shareholders. Each has unanimously approved the merger agreement
and recommends that their shareholders vote "FOR" approval of the merger
agreement.
--------------------------------------------------------------------------------
7
--------------------------------------------------------------------------------
Financial advisors have given opinions that consideration is fair to Business
Bancorp and MCB Financial shareholders (page 34)
Business Bancorp. In deciding to approve the merger, the Business Bancorp
board of directors considered the opinion of its financial advisor, Baxter
Fentriss & Company about the fairness of the merger to Business Bancorp's
shareholders from a financial point of view. This opinion is attached as Annex
B-1 to this document. We encourage you to read it carefully. Under an agreement
with Business Bancorp, Baxter Fentriss & Company will receive a fee of $20,000,
which is not contingent upon closing.
MCB Financial. MCB Financial retained two financial advisors in connection
with its review of the merger, Merrill Lynch, Pierce, Fenner & Smith
Incorporated to render an opinion to the MCB Financial board of directors as to
the fairness, from a financial point of view, of the exchange ratio in the
merger to the holders of MCB Financial common stock, and Fox-Pitt, Kelton Inc.
to assist in the review and negotiations. In deciding to approve the merger,
the MCB Financial board of directors considered the opinion of Merrill Lynch,
dated as of August 15, 2001, to the MCB Financial board of directors as to the
fairness, from a financial point of view, of the exchange ratio in the merger
to the holders MCB Financial common stock. This opinion is attached as Annex
B-2 to this document. We encourage you to read it carefully. MCB Financial
agreed to pay Merrill Lynch a fee of approximately $500,000 to be paid $15,000
at the beginning of Merrill Lynch's engagement, $35,000 upon signing of the
merger agreement and $450,000 upon closing of the merger. Subsequent to
performance of its review and analysis and the rendering of Merrill Lynch's
opinion, the investment banking team involved in the transaction left Merrill
Lynch and joined the firm of Fox-Pitt, Kelton Inc. MCB Financial retained
Fox-Pitt, Kelton Inc. to secure the services of these individuals in the future
review and negotiation of the merger. Upon closing of the merger Fox-Pitt,
Kelton Inc. will receive $350,000 of the $500,000 in fees originally to be paid
to Merrill Lynch.
Business Bancorp shareholders' meeting to be held on December 10, 2001 (page
28)
Business Bancorp will hold the special meeting of Business Bancorp
shareholders at 8:00 a.m. on December 10, 2001, at the Main Office of Business
Bank, 505 West Second Street, San Bernardino, California. At the special
meeting, Business Bancorp shareholders will be asked to approve the merger
agreement. Business Bancorp shareholders will also be asked to approve certain
amendments to the Articles of Incorporation and Bylaws of Business Bancorp
which are explained in this joint proxy statement/prospectus.
MCB Financial shareholders' meeting to be held on December 10, 2001 (page 28)
MCB Financial will hold the special meeting of MCB Financial shareholders
at 5:30 p.m. on December 10, 2001, at the Main Office of MCB Financial, 1248
Fifth Avenue, San Rafael, California. At the special meeting, MCB Financial
shareholders will be asked to approve the merger agreement.
Record date set at October 18, 2001, for Business Bancorp shareholders'
meeting; vote required for approval of merger (page 28)
You can vote at the Business Bancorp special meeting if you owned Business
Bancorp common stock at the close of business on October 18, 2001. A majority
of the outstanding shares of Business Bancorp common stock must vote to approve
the merger agreement in order for the merger to occur.
Record date set at October 18, 2001 for MCB Financial shareholders' meeting;
vote required for approval of merger (page 28)
You can vote at the MCB Financial special meeting if you owned MCB
Financial common stock at the close of business on October 18, 2001. A majority
of the outstanding shares of MCB Financial common stock must vote to approve
the merger agreement in order for the merger to occur.
--------------------------------------------------------------------------------
8
--------------------------------------------------------------------------------
Dissenters' rights of appraisal (page 48 and Annex C)
Business Bancorp. If you hold Business Bancorp common stock you may be
entitled to cash equal to the fair value of your Business Bancorp shares before
announcement of the merger if you perfect your dissenters' rights in accordance
with Chapter 13 of the California Corporations Code.
MCB Financial. If you hold MCB Financial common stock you will be entitled
to dissenters' rights only if you vote against the merger, you submit an
appropriate demand before the meeting is held and holders of at least 5% of the
outstanding shares of MCB Financial common stock have perfected their
dissenters' rights in accordance with Chapter 13 of the California Corporations
Code.
Information Regarding Business Bancorp and MCB Financial (pages 81 and 127)
Business Bancorp
140 South Arrowhead Avenue
San Bernardino, California 92408
(909) 888-2265
http://www.businessbank.com
Business Bancorp is a California corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended, and is
headquartered in San Bernardino, California. Business Bancorp was incorporated
in October, 1999 and acquired all of the outstanding shares of Business Bank in
January, 2000.
Business Bancorp exists primarily for the purpose of holding the stock of
this subsidiary and of such other subsidiaries as it may acquire or establish.
Business Bancorp's principal source of income is currently dividends from
Business Bank, but Business Bancorp intends to explore alternative sources of
income in the future. The expenditures of Business Bancorp, including (but not
limited to) the payment of dividends to shareholders, if and when declared by
the board of directors, and the cost of servicing debt, are generally paid from
such payments made to Business Bancorp by Business Bank. At June 30, 2001,
Business Bancorp had consolidated assets of $340.1 million, deposits of $282.2
million and shareholders' equity of $25.4 million.
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, California 94901
(415) 459-2265
http://www.mcbf.com
MCB Financial is a bank holding company registered under the Bank Holding
Company Act. MCB Financial was incorporated under the laws of the State of
California on January 20, 1993.
On October 1, 1993, MCB Financial began operations as a bank holding
company with Metro Commerce Bank as its wholly-owned bank subsidiary. The
principal business and activity of MCB Financial is to serve as the bank
holding company for Metro Commerce Bank and its principal source of income is
dividends paid by Metro Commerce Bank. At June 30, 2001, MCB Financial had
consolidated assets of $226.3 million, deposits of $207.1 million and
shareholders' equity of $13.9 million.
Business Bancorp to use purchase accounting treatment (page 46)
Business Bancorp expects to account for the merger as a purchase.
--------------------------------------------------------------------------------
9
--------------------------------------------------------------------------------
Benefits to certain officers and directors in the merger (page 45)
In considering the recommendation of the board of directors of MCB
Financial to approve the merger agreement, you should be aware that certain
officers and directors of MCB Financial have certain interests in, and will
receive benefits as a consequence of, the merger that are different from the
benefits to MCB Financial shareholders generally. These interests include:
* Certain officers, employee-directors and other directors of MCB
Financial will receive options to acquire Business Bancorp common stock
in place of existing options to acquire MCB Financial common stock;
* Charles O. Hall and Patrick E. Phelan, each an executive officer of MCB
Financial, are parties to existing agreements that would result in
substantial payments to them in case the merger is completed and their
employment with MCB Financial is terminated. The parties anticipate
that Business Bancorp and each of these individuals will enter into new
employment agreements prior to the effective time of the merger that
will supersede the existing agreements and eliminate the right to these
substantial payments regarding this merger. However, the merger
agreement provides that if any of these officers is terminated without
cause within 12 months following the closing of the merger, upon
termination that officer will be entitled to receive any severance
and/or change of control payments provided for under his prior
agreement. Such termination would require the approval of seventy
percent of the authorized number of directors under Business Bancorp's
Bylaws to be in effect following the merger. See "Operations Following
the Merger--Director Voting--Supermajority Vote Requirements" on page
61.
Conditions that must be satisfied for the merger to occur (page 55)
We will not complete the merger unless a number of conditions are met.
These include:
* approval of the merger agreement by MCB Financial and Business Bancorp
shareholders,
* receipt of all required regulatory approvals,
* approval for listing on the Nasdaq National Market of the shares to be
issued to MCB Financial shareholders or waiver of this condition by the
parties,
* absence of material adverse changes in the parties unless and only to
the extent that this condition has been waived by the parties, and
* absence of any orders suspending the effectiveness of the registration
statement filed by Business Bancorp to register the shares to be issued
to MCB Financial shareholders.
Stock option agreements (page 57)
When we signed the merger agreement, we also signed two stock option
agreements. Under these agreements, Business Bancorp and MCB Financial each
have an option to purchase common stock of the other equal to approximately
19.9% of the outstanding shares of common stock of the other under certain
circumstances. The options are exercisable at prices based on the market prices
of Business Bancorp's stock and MCB Financial's stock on August 14, 2001, the
day preceding execution of the merger agreement.
Business Bancorp and MCB Financial agreed to grant these options to induce
each other to enter into the merger agreement. The options could have the
effect of discouraging other companies from trying to acquire either of them.
The stock option agreements are attached as Exhibits A and B to the merger
agreement (pages A-32 and A-42) which appears as Annex A to this document.
Regulatory approvals we must obtain for the merger to occur (page 43)
On September 21, 2001, Business Bank filed an application with the Federal
Reserve Board and the California Commissioner of Financial Institutions
("California Commissioner") to approve the merger of Metro Commerce Bank with
and into Business Bank. On October 25, 2001 the Federal Reserve Board approved
the merger. The approval of the California Commissioner must be received before
the merger can be completed.
--------------------------------------------------------------------------------
10
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Termination of the merger agreement (page 56)
One or both of the parties may terminate the merger agreement before
completion, before or after the shareholders of Business Bancorp and/or MCB
Financial have approved the merger, as follows:
* if th e boards of Directors of Business Bancorp and MCB Financial
mutually agree to do so;
* if any required regulatory application is denied;
* if we fail to gain the approval of Business Bancorp and MCB Financial
shareholders;
* if a party breaches any provision of the agreement and fails to cure
the breach within 45 days after written notice from the other party; or
* after March 31, 2002, if the merger has not been consummated by then,
unless the failure to consummate the merger was due to the failure of
the party requesting termination to perform an obligation under the
Agreement.
Expenses; liquidated damages (page 56)
Business Bancorp and MCB Financial will each bear its respective expenses
incurred in connection with the merger agreement and the transactions related
to the merger. However, legal fees in connection with drafting the merger
agreement, certain fees owing to Merrill Lynch, printing expenses and SEC
filing and registration fees will be shared equally between MCB Financial and
Busines Bancorp.
A party to the merger agreement may terminate the agreement and seek $2.0
million in liquidated damages from the other party under the following
circumstances:
* if the other party abandons the transaction for reasons other than
those permitted in the merger agreement; or
* if a party breaches any provision of the agreement and fails to cure
the breach within 45 days after written notice from the other party.
--------------------------------------------------------------------------------
11
RECENT DEVELOPMENTS
The following section contains information regarding the operating results
and financial condition for Business Bancorp and MCB at September 30, 2001 and
2000 and for the nine month periods then ended.
Business Bancorp
For the nine months ended September 30, 2001, Business Bancorp reported
net income of $1.9 million, or $.90 per diluted share, compared to $1.7
million, or $.83 per diluted share, for the year earlier period, due to growth
in loans partially offset by lower yields, combined with profits from
securities sales. For the first nine months of 2001, cash earnings totaled $2.2
million, or $1.05 per diluted share, compared to $1.8 million, or $.91 per
diluted share. Revenues grew 23.7% to $15.0 million from $12.1 million in the
like period a year ago. Net interest income after provision for loan losses
increased 19.0% to $11.9 million from $10.0 million for the first nine months
of 2000. Non-interest income increased 45.9% to $2.9 million, compared to $2.0
million in the first nine months of 2000, primarily as a result of gains
generated from sales of investment securities of $652,000.
At September 30, 2001, total assets increased 14.4% to $364.6 million
compared with total assets of $318.7 million one year earlier. Loans increased
to $195.0 million, a 9.6% increase over the $178.0 million in the loan
portfolio a year earlier, due to increases in commercial and construction
loans. Total deposits as of September 30, 2001 stood at $296.0 million,
representing an increase of 11.9% over deposits of $264.4 million reported at
of September 30, 2000. Shareholder's equity increased 19.7% to $26.3 million,
or $12.90 per share at September 30, 2001, compared to $21.9 million, or $10.82
per share, a year earlier. Total non-performing assets assets were $2.1 million
or 0.57% of total assets, compared to $1.4 million or 0.43% of assets at
September 30, 2000. The increase in non-performing assets is due primarily to
one real estate loan that was placed on nonaccrual status during the second
quarter. This loan is secured by a first trust deed on a commercial real estate
building. The allowance for loan losses totaled $2.0 million, or 1.02% of gross
loans and 113% of non-performing loans at September 30, 2001, compared to $1.7
million or 0.96% of gross loans and 213% of non-performing loans a year ago.
12
CONSOLIDATED INCOME STATEMENTS
9 Months Ended September 30,
(Dollars in Thousands, except per share data) ----------------------------
(Unaudited) 2001 2000
------------ ------------
Interest Income ........................................... $ 18,693 $ 15,038
Interest Expense .......................................... 6,638 4,934
-------- --------
Net Interest Income ..................................... 12,055 10,104
Provision for Loan Losses ................................. 200 130
-------- --------
Net Interest Income After Provision ..................... 11,855 9,974
Non-Interest Income ....................................... 2,942 2,016
Amortization of Goodwill/Identifiable Intangibles ......... 491 237
Other Non-Interest Expense ................................ 11,388 9,348
-------- --------
Income Before Income Taxes .............................. 2,918 2,405
Income Taxes .............................................. 1,046 745
-------- --------
Net Income .............................................. $ 1,872 $ 1,660
======== ========
-- --
-------- --------
Cash Earnings(A) ........................................ $ 2,187 $ 1,820
======== ========
Earnings per share:
GAAP--Basic ............................................. $ 0.92 $ 0.84
GAAP--Diluted ........................................... $ 0.90 $ 0.83
Cash Earnings(A)--Basic ................................. $ 1.08 $ 0.92
Cash Earnings(A)--Diluted ............................... $ 1.05 $ 0.91
Weighted Avg of Shares Outstanding (000's) ................ 2,027 1,985
Diluted Shares Outstanding (000's) ........................ 2,086 2,006
<FN>
(A) Net income before amortization of goodwill and identifiable intangibles, net of taxes.
</FN>
CONDENSED BALANCE SHEET INFORMATION
(Dollars in Thousands) Sept. 30, Sept. 30,
(Unaudited) 2001 2000
----------- ------------
Balances:
Total Assets ............................. $ 364,639 $ 318,666
Gross Loans .............................. 194,986 177,980
Securities ............................... 129,442 92,320
Interest Earning Assets .................. 324,973 274,664
Deposits ................................. 295,998 264,426
Shareholders' Equity ..................... 26,245 21,928
Allowance for Loan Losses .......... 1,986 1,718
YTD Net Charge-Offs ................ 57 118
Non Performing Assets
Nonaccrual Loans ......................... $ 1,754 $ 805
Other Real Estate Owned .................. 313 558
--------- ---------
Total Non Performing Assets .............. $ 2,067 $ 1,363
========= =========
MCB Financial
For the nine months ended September 30, 2001, MCB earned $2.3 million, or
$1.29 per diluted share, compared to $2.3 million, or $1.05 per diluted share.
The 23% increase in earnings per diluted share was due to MCB Financial's
common stock repurchases during the twelve months ended September 30, 2001.
Revenues increased 4% to $10.4 million compared to $10.0 million in the like
period of 2000. Net interest income after provision totaled $9.1 million
compared to $9.0 million in the first nine months a year ago. Non-interest
income year-to-date increased 55% to $929,000, compared to $601,000 in the like
period of 2000 primarily due to gains on sale of investment securities.
13
At September 30, 2001, total assets were $227 million, up 10% from $206
million at September 30, 2000. Total loans increased 12% to $174 million from
$155 million a year ago. Deposits increased 12% to $207 million from $184
million a year ago. Shareholders equity was $14.6 million compared to $16.4
million a year ago. Non-performing assets were zero. Allowances for credit
losses totaled $2.2 million or 1.27% of total loans, compared to $1.8 million
or 1.18% of loans a year ago. As of September 30, 2001, MCB Financial had
reacquired a total of 554,000 shares of stock over the past twelve months for a
total cost of $6.3 million, bringing total shares outstanding to 1.6 million.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months ended Sept. 30,
(Dollars in thousands, except per share data) ------------------------------
(Unaudited) 2001 2000
------------- --------------
Interest Income:
Loans, including fees ..................................... $ 12,002 $11,554
Federal funds sold ........................................ 258 473
Investment securities ..................................... 1,217 1,331
--------- --------
Total ................................................... 13,477 13,358
--------- --------
Interest Expense:
Transaction, savings & time deposits ...................... 2,945 3,364
Time certificates, $100,000 and over ...................... 1,058 611
Other interest ............................................ 35 25
--------- --------
Total ................................................... 4,038 4,000
Net Interest Income .......................................... 9,439 9,358
Provision for Loan Losses .................................... 300 320
Net Interest Income After Provision for
Loan Losses ................................................ 9,139 9,038
--------- --------
Other Income:
Gain on sale of loans ..................................... 64 47
Service fees on deposit accounts .......................... 391 356
Loan servicing fees ....................................... 47 41
Gain (loss) on sale of investment securities--net ......... 228 (2)
Other ..................................................... 199 159
--------- ---------
Total ................................................... 929 601
Other Expenses:
Salaries and employee benefits ............................ 3,422 3,283
Occupancy expense ......................................... 800 800
Furniture and equipment expense ........................... 362 343
Professional services ..................................... 252 233
Supplies .................................................. 171 177
Promotional expenses ...................................... 247 217
Data processing service fees .............................. 294 270
Regulatory assessments .................................... 46 46
Other ..................................................... 403 417
--------- ---------
Total ................................................... 5,997 5,786
--------- ---------
Income Before Income Taxes ................................... 4,071 3,853
Provision for Income Taxes ................................... 1,566 1,579
Dividends paid on trust preferred securities ................. 238 21
--------- ---------
Net Income ................................................... $ 2,267 $ 2,253
========= =========
Net Income Per Share:
Basic ..................................................... $ 1.36 $ 1.10
Diluted ................................................... $ 1.29 $ 1.05
14
CONSOLIDATED BALANCE SHEETS
Sept. 30 Sept. 30
2001 2000
(Dollar amounts in thousands) ------------- ------------
(unaudited) (unaudited)
Assets
Cash and due from banks ............................................. $ 20,414 $ 12,476
Federal funds sold .................................................. 0 6,350
-------- --------
Total cash and cash equivalents ................................ 20,414 18,826
Interest-bearing deposits with banks ................................ 286 286
Investment securities available for sale at fair value .............. 25,963 24,515
Investment securities held to maturity .............................. 0 2,000
Loans held for investment (net of allowance for loan losses of $2,236
in 2001 and $1,849 in 2000) ........................................ 173,739 154,570
Premises and equipment - net ........................................ 3,490 3,097
Accrued interest receivable ......................................... 1,104 1,155
Deferred income taxes ............................................... 644 916
Other assets ........................................................ 938 844
-------- --------
Total assets ........................................................ $226,578 $206,209
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing ............................................. $ 52,612 $ 53,092
Interest-bearing:
Transaction accounts ........................................... 118,074 101,230
Time certificates, $100,000 and over ........................... 24,235 19,133
Savings and other time deposits ................................ 11,581 10,972
-------- --------
Total interest-bearing deposits ............................. 153,890 131,335
-------- --------
Total deposits .............................................. 206,502 184,427
Other borrowings ............................................... 750 750
Accrued interest payable and other liabilities ................. 1,695 1,619
-------- --------
Total liabilities ........................................... 208,947 186,796
-------- --------
Trust preferred securities .......................................... 3,000 3,000
Shareholders' equity:
Preferred stock, no par value
Common stock, no par value ....................................... 8,252 10,587
Accumulated other comprehensive income ........................... 575 (303)
Retained earnings ................................................ 5,804 6,129
-------- --------
Total shareholders' equity .................................. 14,631 16,413
-------- --------
Total liabilities and shareholders' equity .......................... $226,578 $206,209
======== ========
15
SELECTED FINANCIAL DATA
General
The following tables show summarized historical financial data for each of
the companies and also show similar pro forma information reflecting the
merger.
Historical Data
The selected historical financial data show the financial results actually
achieved by Business Bancorp and MCB Financial for the periods indicated. The
selected historical financial data should be read in conjunction with the
financial statements for Business Bancorp and MCB Financial and the notes
thereto appearing elsewhere in this document and, with respect to MCB
Financial, incorporated into this document by reference. The selected
historical financial data as of and for the six months ended June 30, 2001 and
2000 is unaudited. The selected historical financial data as of and for each of
the years in the five years ended December 31, 2000, are derived from Business
Bancorp's and MCB Financial's respective audited financial statements for the
years then ended. You should read all of the selected financial information we
provide in the following tables together with the historical financial
information and related notes and together with the more detailed pro forma
financial information and related notes we provide in this document, which you
can find beginning at page 63. See "Where You Can Find More Information" on
page 165 for a description of where you can find this historical information
and "Business Bancorp and MCB Financial Unaudited Pro Forma Condensed Combined
Financial Information" on page 63.
Selected Consolidated Historical Financial Data of Business Bancorp
As of and for the
Six Months Ended
June 30,
---------------------------
2001 2000
(In thousands, except per share data) ------------- -------------
CONSOLIDATED SUMMARIES OF
INCOME
Interest income ............................ $ 12,763 $ 9,551
Interest expense ........................... 4,516 2,996
----------- -----------
Net interest income ........................ 8,247 6,555
Provision for loan losses .................. 175 80
----------- -----------
Net interest income after provision for loan
losses .................................... 8,072 6,475
Noninterest income ......................... 1,751 1,447
Noninterest expense ........................ 7,889 6,411
----------- -----------
Income before income taxes ................. 1,934 1,511
Income taxes ............................... 693 433
----------- -----------
Net income ................................. $ 1,241 $ 1,078
=========== ===========
PER SHARE DATA
Net income--basic .......................... $ 0.61 $ 0.55
Net income--diluted ........................ 0.60 0.53
Cash dividends ............................. -- --
Book value ................................. 12.55 10.11
Weighted average number of shares
outstanding--basic ........................ 2,026,869 1,977,274
Weighted average number of shares
outstanding--diluted ...................... 2,072,473 2,019,302
Shares outstanding at period end ........... 2,026,869 1,985,679
As of and for the
Years Ended December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
(In thousands, except per share data) ------------- ------------- ------------- ------------- -------------
CONSOLIDATED SUMMARIES OF
INCOME
Interest income ............................ $ 21,408 $ 14,771 $ 13,333 $ 9,541 $ 8,091
Interest expense ........................... 7,027 3,577 3,178 2,057 1,689
----------- ----------- ----------- ----------- -----------
Net interest income ........................ 14,381 11,194 10,155 7,484 6,402
Provision for loan losses .................. 255 180 150 487 917
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses .................................... 14,126 11,014 10,005 6,997 5,485
Noninterest income ......................... 2,816 2,356 2,770 1,583 1,961
Noninterest expense ........................ 13,577 10,589 9,663 7,336 6,240
----------- ----------- ----------- ----------- -----------
Income before income taxes ................. 3,365 2,781 3,112 1,244 1,206
Income taxes ............................... 1,095 841 1,255 402 373
----------- ----------- ----------- ----------- -----------
Net income ................................. $ 2,270 $ 1,940 $ 1,857 $ 842 $ 833
=========== =========== =========== =========== ===========
PER SHARE DATA
Net income--basic .......................... $ 1.14 $ 0.99 $ 0.97 $ 0.46 $ 0.47
Net income--diluted ........................ 1.13 0.97 0.93 0.44 0.45
Cash dividends ............................. -- -- -- -- --
Book value ................................. 11.62 9.63 8.77 8.06 7.55
Weighted average number of shares
outstanding--basic ........................ 1,995,552 1,955,674 1,923,599 1,824,571 1,786,601
Weighted average number of shares
outstanding--diluted ...................... 2,015,645 1,997,266 2,002,407 1,917,398 1,867,258
Shares outstanding at period end ........... 2,026,869 1,975,961 1,948,969 1,824,571 1,824,571
16
Selected Consolidated Historical Financial Data of Business Bancorp
As of and for the
Six Months Ended
June 30,
-----------------------------
2001 2000
(In thousands, except per share data) ------------- ---------------
CONSOLIDATED PERIOD-END
BALANCE SHEET ITEMS
Assets .......................................... $ 340,113 $ 255,443
Loans, net of unearned income ................... 181,135 134,251
Deposits ........................................ 282,217 192,554
Borrowed funds .................................. 19,825 31,000
Trust preferred securities ...................... 10,000 10,000
Shareholders' equity ............................ $ 25,430 $ 19,987
CONSOLIDATED PERCENTAGES
Return on average assets(1) ..................... 0.75% 0.90%
Return on average shareholders' equity(1) ....... 10.16 11.11
Dividend payout ratio ........................... 0.00 0.00
Net interest margin(1)(2) ....................... 5.60 6.24
Average equity to average assets ................ 7.40 8.11
Nonperforming loans to total loans .............. 0.97 0.19
Nonperforming assets to total loans and other
real estate owned .............................. 1.14 0.58
Allowance for loan losses to loans, net ......... 1.08 0.91
Net charge-offs to average loans, net(1) ........ 0.05 0.14
Capital ratios Tier 1 capital to total
risk-weighted assets ........................... 11.00 15.25(3)
Total capital to total risk-weighted assets ..... 12.90 17.84(3)
Tier 1 capital to adjusted total assets ......... 7.40 10.35(3)
As of and for the
Years Ended December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
(In thousands, except per share data) ------------- ------------- ------------- ------------- -------------
CONSOLIDATED PERIOD-END
BALANCE SHEET ITEMS
Assets .......................................... $ 311,541 $ 225,443 $ 182,805 $ 152,818 $ 102,458
Loans, net of unearned income ................... 178,525 115,141 104,465 99,554 57,226
Deposits ........................................ 264,927 186,808 163,843 136,685 87,783
Borrowed funds .................................. 10,125 18,200 0 0 0
Trust preferred securities ...................... 10,000 -- -- -- --
Shareholders' equity ............................ $ 23,543 $ 19,031 $ 17,443 $ 15,047 $ 14,131
CONSOLIDATED PERCENTAGES
Return on average assets(1) ..................... 0.85% 0.98% 1.11% 0.50% 0.50%
Return on average shareholders' equity(1) ....... 11.17 11.37 12.32 5.59 5.53
Dividend payout ratio ........................... 0.00 0.00 0.00 0.00 0.00
Net interest margin(1)(2) ....................... 6.29 6.64 7.18 7.69 7.51
Average equity to average assets ................ 7.63 8.58 8.97 12.40 12.96
Nonperforming loans to total loans .............. 0.95 1.03 2.24 1.68 3.74
Nonperforming assets to total loans and other
real estate owned .............................. 1.22 1.90 3.21 2.97 6.95
Allowance for loan losses to loans, net ......... 1.02 1.06 1.35 1.74 2.20
Net charge-offs to average loans, net(1) ........ 0.08 036 0.50 0.81 1.64
Capital ratios Tier 1 capital to total
risk-weighted assets ........................... 9.70 11.40 11.10 9.90 17.90
Total capital to total risk-weighted assets ..... 11.80 12.20 12.20 11.20 19.10
Tier 1 capital to adjusted total assets ......... 7.80 7.80 8.30 9.10 12.90
<FN>
------------
(1) Annualized for the six months ended June 30, 2001 and 2000.
(2) Represents net interest income as a percentage of average interest-earning
assets.
(3) The capital ratios at June 30, 2000 reflect the issuance of $10 million of
Trust Preferred Securities and were temporarily inflated due to the fact
that the assets of Valley Merchants Bank, N.A. were not acquired until
August 2000.
</FN>
17
Selected Consolidated Historical Financial Data of MCB Financial
As of and for the
Six Months Ended
June 30,
---------------------------
2001 2000
(In thousands, except per share data) ------------- -------------
CONSOLIDATED SUMMARIES
OF INCOME
Interest income ........................ $ 8,956 $ 8,621
Interest expense ....................... 2,763 2,584
----------- -----------
Net interest income .................... 6,193 6,037
Provision for loan losses .............. 100 220
----------- -----------
Net interest income after provision
for loan losses ....................... 6,093 5,817
Noninterest income ..................... 487 419
Noninterest expense .................... 3,899 3,823
----------- -----------
Income before income taxes and
dividends paid on trust preferred
securities ............................ 2,681 2,413
Income taxes ........................... 1,034 999
----------- -----------
Income before dividends paid on
trust preferred securities ............ 1,647 1,414
Dividends paid on trust preferred
securities ............................ 158 --
----------- -----------
Net income ............................. $ 1,489 $ 1,414
=========== ===========
PER SHARE DATA
Net income--basic ...................... $ 0.87 $ 0.69
Net income--diluted .................... 0.83 0.66
Cash dividends ......................... 0.02 0.02
Book value ............................. 8.48 7.56
Weighted average number of shares
outstanding--basic .................... 1,704,243 2,042,158
Weighted average number of shares
outstanding--diluted .................. 1,789,346 2,146,664
Shares outstanding at period end ....... 1,633,516 2,030,181
CONSOLIDATED PERIOD-END
BALANCE SHEET ITEMS
Assets ................................. $ 226,280 $ 202,508
Loans, net of unearned income .......... 165,606 145,885
Deposits ............................... 207,051 184,793
Borrowed funds ......................... 750 750
Trust preferred securities ............. 3,000 --
Shareholders' equity ................... $ 13,855 $ 15,343
CONSOLIDATED
PERCENTAGES
Return on average assets(1) ............ 1.39% 1.42%
Return on average shareholders'
equity(1) ............................. 20.81 19.00
Dividend payout ratio .................. 2.41 3.03
Net interest margin(1) ................. 6.28 6.57
Average equity to average assets ....... 6.70 7.48
Nonperforming loans to total loans ..... 0.02 0.11
Nonperforming assets to total loans
and other real estate owned ........... 0.02 0.11
Allowance for loan losses to loans,
net ................................... 1.22 1.18
Net charge-offs to average loans,
net(1) ................................ 0.00 -0.04
Capital ratios Tier 1 capital .......... 9.40 9.86
Total capital .......................... 10.56 10.96
Leverage ............................... 7.50 7.69
As of and for the
Years Ended December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
(In thousands, except per share data) ------------- ------------- ------------- ------------- -------------
CONSOLIDATED SUMMARIES
OF INCOME
Interest income ........................ $ 18,245 $ 15,026 $ 13,205 $ 11,500 $ 10,385
Interest expense ....................... 5,515 4,510 4,610 4,253 4,018
----------- ----------- ----------- ----------- -----------
Net interest income .................... 12,730 10,516 8,595 7,247 6,367
Provision for loan losses .............. 420 365 153 120 220
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses ....................... 12,310 10,151 8,442 7,127 6,147
Noninterest income ..................... 869 988 1,009 839 2,768
Noninterest expense .................... 7,863 7,169 6,703 5,673 5,565
----------- ----------- ----------- ----------- -----------
Income before income taxes and
dividends paid on trust preferred
securities ............................ 5,316 3,970 2,748 2,293 3,350
Income taxes ........................... 2,145 1,637 1,127 943 1,379
----------- ----------- ----------- ----------- -----------
Income before dividends paid on
trust preferred securities ............ 3,171 2,333 1,621 1,350 1,971
Dividends paid on trust preferred
securities ............................ 101 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income ............................. $ 3,070 $ 2,333 $ 1,621 $ 1,350 $ 1,971
=========== =========== =========== =========== ===========
PER SHARE DATA
Net income--basic ...................... $ 1.52 $ 1.12 $ 0.75 $ 0.64 $ 0.95
Net income--diluted .................... 1.45 1.07 0.70 0.61 0.94
Cash dividends ......................... 0.04 0.02 -- -- --
Book value ............................. 8.23 6.93 6.26 5.56 4.91
Weighted average number of shares
outstanding--basic .................... 2,022,496 2,074,895 2,158,270 2,113,514 2,078,966
Weighted average number of shares
outstanding--diluted .................. 2,120,695 2,182,062 2,304,040 2,208,986 2,088,841
Shares outstanding at period end ....... 1,834,877 2,078,501 2,088,466 2,152,439 2,073,769
CONSOLIDATED PERIOD-END
BALANCE SHEET ITEMS
Assets ................................. $ 209,254 $ 196,119 $ 169,496 $ 139,877 $ 131,504
Loans, net of unearned income .......... 162,884 136,474 109,958 87,179 80,121
Deposits ............................... 188,585 179,784 154,904 126,132 119,858
Borrowed funds ......................... 750 750 356 750 447
Trust preferred securities ............. 3,000 -- -- -- --
Shareholders' equity ................... $ 15,106 $ 14,397 $ 13,082 $ 11,967 $ 10,185
CONSOLIDATED
PERCENTAGES
Return on average assets(1) ............ 1.51% 1.30% 1.03% 0.97% 1.56%
Return on average shareholders'
equity(1) ............................. 19.78 17.12 12.61 12.22 20.97
Dividend payout ratio .................. 2.76 1.87 0.00 0.00 0.00
Net interest margin(1) ................. 6.69 6.28 5.89 5.68 5.52
Average equity to average assets ....... 7.62 7.58 8.20 7.96 7.44
Nonperforming loans to total loans ..... 0.02 1.27 0.87 0.12 0.10
Nonperforming assets to total loans
and other real estate owned ........... 0.02 1.27 0.87 0.12 0.10
Allowance for loan losses to loans,
net ................................... 1.18 1.08 1.01 1.14 1.16
Net charge-offs to average loans,
net(1) ................................ -0.02 -0.01 0.04 0.07 0.04
Capital ratios Tier 1 capital .......... 10.37 9.91 10.17 11.50 10.70
Total capital .......................... 11.50 10.92 11.07 12.40 11.70
Leverage ............................... 8.34 7.37 7.34 8.10 7.60
<FN>
------------
(1) Annualized for the six months ended June 30, 2001 and 2000.
</FN>
18
Selected Unaudited Pro Forma Combined Consolidated Financial Data
The pro forma information reflects the pro forma effect of accounting for
the merger under the purchase method of accounting. Share information was
calculated using a pro forma exchange ratio of 1.1763. The pro forma income
statement data for the six months ended June 30, 2001 assumes a merger
completion date of January 1, 2001. The pro forma income statement data for the
year ended December 31, 2000 assumes a merger completion date of January 1,
2000. The pro forma balance sheet data assumes a merger completion date of June
30, 2001.
The pro forma financial information includes estimated adjustments to
record certain assets and liabilities of MCB Financial at their respective fair
values. The adjustments are subject to updates as additional information
becomes available and as additional analyses are performed. Certain other
assets and liabilities of MCB Financial, principally loans and borrowings, will
also be subject to adjustment to their respective fair values. Pending more
detailed analyses, no pro forma adjustments are included herein for these
assets and liabilities. We also anticipate that the merger will provide the
combined company with financial benefits that include reduced operating
expenses. The pro forma information, while helpful in illustrating the
financial characteristics of the combined company under one set of assumptions,
does not reflect these charges, expenses or benefits and, accordingly, does not
attempt to predict or suggest future results. It also does not necessarily
reflect what the historical results of the new company would have been had our
companies been combined during the periods presented.
This selected unaudited pro forma combined consolidated financial data
should be read in conjunction with the historical financial statements and the
related notes of Business Bancorp and MCB Financial included or incorporated by
reference in this document and the unaudited pro forma condensed combined
financial statements of Business Bancorp and MCB Financial, beginning on page
63. The unaudited pro forma income statement data is not necessarily indicative
of operating results which would have been achieved had the merger been
consummated as of the beginning of the first period presented and should not be
construed as representative of future operations.
19
Selected Pro Forma Condensed Combined Financial Data of
Business Bancorp and MCB Financial
Six Months Year
Ended Ended
June 30, December 31,
2001 2000
(In thousands, except per share data) ------------- -------------
CONSOLIDATED SUMMARIES OF INCOME
Interest income ................................................................ $ 21,719 $ 39,653
Interest expense ............................................................... 6,732 11,684
---------- ----------
Net interest income ............................................................ 14,987 27,969
Provision for loan losses ...................................................... 275 675
---------- ----------
Net interest income after provision for loan losses ............................ 14,712 27,294
Noninterest income ............................................................. 2,238 3,685
Noninterest expense ............................................................ 11,995 21,854
---------- ----------
Income before income taxes and dividends paid on trust preferred securities .... 4,955 9,125
Income taxes ................................................................... 1,642 3,070
---------- ----------
Income before dividends paid on trust preferred securities ..................... 3,313 6,055
Dividends paid on trust preferred securities ................................... 705 959
---------- ----------
Net income ..................................................................... $ 2,608 $ 5,096
========== ==========
PER SHARE DATA
Net income--basic .............................................................. $ 0.65 $ 1.16
Net income--diluted ............................................................ 0.62 1.13
Book value ..................................................................... $ 14.00 13.05
Weighted average number of shares outstanding--basic ........................... 4,031,570 4,374,614
Weighted average number of shares outstanding--diluted ......................... 4,177,281 4,510,219
Shares outstanding at period end ............................................... 3,948,373 4,185,235
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets ......................................................................... $ 584,339 --
Loans, net of unearned income .................................................. 350,753 --
Deposits ....................................................................... 489,268 --
Borrowed funds ................................................................. 20,575 --
Trust preferred securities ..................................................... 13,000 --
Shareholders' equity ........................................................... 55,621 --
CONSOLIDATED PERCENTAGES
Return on average assets(1) .................................................... 0.92% 1.04%
Return on average shareholders' equity(1) ...................................... 9.50% 9.83%
Nonperforming loans to total loans ............................................. 0.52% 0.51%
Nonperforming assets to total loans and other real estate owned ................ 0.61% 0.65%
Allowance for loan losses to loans, net ........................................ 1.14% 1.10%
Net charge-offs to average loans, net(1) ....................................... 0.03% 0.03%
<FN>
------------
(1) Annualized for the six months ended June 30, 2001
</FN>
Comparative Per Common Share Data
We have summarized below the historical per share information for Business
Bancorp and MCB Financial and additional information as if the companies had
been combined for the periods shown ("pro forma") calculated based on an
exchange ratio of 1.1763 shares of Business Bancorp common stock per share of
MCB Financial common stock.
You should read this information with the historical financial statements
and related notes contained in this document for Business Bancorp and, in the
case of MCB Financial, contained and incorporated by reference in this
document. See "Where You Can Find More Information" on page 165.
20
MCB Financial equivalent pro forma share amounts are calculated by
multiplying the pro forma combined book value per share and net income per
share by the exchange ratio so that the per share amounts equate to the
respective values for one share of MCB Financial common stock. You should not
rely on the pro forma information as being indicative of the historical results
that we would have had or the future results that will occur after the merger.
The equivalent pro forma data reflects the purchase method of accounting and
does not reflect potential cost savings or revenue enhancements that may be
achieved.
Six Months
Ended Year Ended
June 30, December 31,
2001 2000
----------- -------------
Business Bancorp
Basic earnings per common share:
Historical ................................ $ 0.61 $ 1.14
Pro forma ................................. 0.65 1.16
Diluted earnings per common share:
Historical ................................ 0.60 1.13
Pro forma ................................. 0.62 1.13
Dividends declared on common stock:
Historical ................................ 0.00 0.00
Pro forma ................................. 0.00 0.00
Book value per common share:
Historical ................................ 12.55 11.62
Pro forma ................................. 14.00 13.05
Tangible book value per common share:
Historical ................................ 8.96 7.89
Pro forma ................................. 7.61 6.96
MCB Financial
Basic earnings per common share:
Historical ................................ $ 0.87 $ 1.52
Equivalent pro forma ...................... 0.76 1.36
Diluted earnings per common share:
Historical ................................ 0.83 1.45
Equivalent pro forma ...................... 0.73 1.33
Dividends declared on common stock:
Historical ................................ 0.02 0.04
Equivalent pro forma ...................... 0.00 0.00
Book value per common share:
Historical ................................ 8.48 8.23
Equivalent pro forma ...................... 16.47 15.35
Tangible book value per common share:
Historical ................................ 8.48 8.23
Equivalent pro forma ...................... 8.95 8.19
21
RISK FACTORS
In deciding whether to vote in favor of the merger, shareholders of
Business Bancorp and MCB Financial should consider the following risks in
addition to the other matters discussed herein:
We may have difficulty integrating MCB Financial and Business Bancorp and in
achieving any cost-savings.
An integration in connection with a merger of equals is difficult. The
necessary integration relies on a combination of the management teams of both
Business Bancorp and MCB Financial, which may not be able to combine
effectively. The merger involves the integration of two banks that have
previously operated independently, in two completely different geographic
areas. We cannot assure you that Business Bancorp will be able to integrate the
operations of Metro Commerce Bank and Business Bank without encountering
difficulties. Such difficulties could include interruptions and dislocations
associated with the integration of business strategies and disparate business
backgrounds and operating cultures of the two banks. Business Bancorp's ability
to achieve savings after the merger will depend on successfully integrating
information systems and personnel while preserving the benefit of Metro
Commerce Bank's goodwill in the community subsequent to the bank merger, when
Metro Commerce Bank will cease to exist as a separate institution. We cannot
give any assurance that the combined companies will be able to accomplish the
integration in a timely manner or in a manner that will result in any
significant savings, or that the integration will not cause some disruption to
customer relationships.
Certain provisions in Business Bancorp's articles of incorporation and bylaws
will have anti-takeover effects.
These provisions will make it more difficult for another company to
acquire Business Bancorp, which could reduce the market price of its common
stock and the price that you receive if you sell your shares in the future.
These provisions are different from comparable provisions in MCB Financial's
Articles of Incorporation and Bylaws and include the following:
* staggered terms of office for members of the board of directors; and
* the elimination of cumulative voting in the election of directors.
See "Certain Differences in Rights of Shareholders" and the discussions under
Proposal 2, Proposal 3 and Proposal 5 on pages 157, 159, 160 and 162,
respectively.
No assurance can be given as to the future returns of the merged entity.
Business Bancorp's returns on average assets for the six months ended June
30, 2001 and for the years ended December 31, 2000 and 1999 were 0.75%, 0.85%
and 0.98%, respectively, while MCB Financial's returns on average assets for
those same periods were 1.39%, 1.51% and 1.30%, respectively. Business
Bancorp's returns on average equity for the six months ended June 30, 2001 and
for the years ended December 31, 2000 and 1999 were 10.16%, 11.17% and 11.37%,
respectively, while MCB Financial's returns on average equity for those same
periods were 20.81%, 19.78% and 17.12%, respectively. There can be no assurance
as to the future business performance and returns of Business Bancorp after the
merger. See "Selected Financial Data--Historical Data" on page 16. See also the
financial information regarding Business Bancorp and MCB Financial included or
incorporated by reference in this document.
The historical market performance of MCB Financial's stock has been somewhat
more favorable than that of Business Bancorp. No assurance can be given as to
the future performance of the merged entity.
The stock of MCB Financial has historically performed somewhat more
favorably than that of Business Bancorp in terms of the relationship between
market price and book value. There can be no assurance as to the future
performance of the stock of Business Bancorp after the merger. See
"Summary--Comparative market price and dividend data" on page 5, "Market price
and dividend information for Business Bancorp" on page 125 and "Market price and
dividend information for MCB Financial" on page 155.
22
Business Bancorp and MCB Financial's combined operations will be concentrated
geographically in California, and poor economic conditions may cause us to
incur losses.
Substantially all of Business Bancorp's business is located in California,
with a particular concentration in Southern California. Likewise, substantially
all of MCB Financial's business is located in California, with a particular
concentration in Northern California. After the merger, Business Bancorp's
financial condition and operating results will be subject to changes in
economic conditions in California. In the early to mid-1990s, California
experienced a significant and prolonged downturn in its economy, which
adversely affected financial institutions, including Business Bancorp. Business
Bancorp will be subject to changes in economic conditions, including the
current economic downturn. We can provide no assurance that conditions in the
California economy will not deteriorate in the future and that such
deterioration will not adversely effect Business Bancorp.
The California energy crisis may adversely impact our customers and may worsen
the downturn in the California economy.
California has recently experienced severe energy shortages which have
resulted in "rolling blackouts" in certain instances in portions of the state.
Rolling blackouts could cause substantial disruptions and significant losses to
Business Bancorp's businesses customers who are dependent on timely receipt of
sufficient energy in connection with their businesses. Poor economic conditions
as a result of energy shortages in industries in the areas where such customers
are located could adversely affect Business Bancorp's borrower base, and
consequently, may negatively impact Business Bancorp's business. In order to
ensure future sources of energy for California, it is anticipated that the
prices paid by consumers for energy could increase significantly. Significant
increases in energy prices could cause Business Bancorp's customers to
experience losses or go out of business, which could result in delinquencies
and losses on loans made to such customers and in turn have a material adverse
effect on Business Bancorp's business. In addition, increases in the price of
energy as well as rolling blackouts could cause a general economic downturn in
the California economy, which could have a material adverse effect on Business
Bancorp's financial condition and results of operations.
Changes in interest rates could reduce our net earnings.
Business Bancorp's profitability after the merger will continue to be
significantly dependent on its net interest income. Net interest income is the
difference between its interest income on interest-earning assets, such as
loans and leases, and its interest expense on interest-bearing liabilities,
such as deposits. Therefore, changes in general market interest rates, whether
as a result of changes in the monetary policies of the Federal Reserve or
otherwise, can have a significant effect on Business Bancorp's net interest
income. Business Bancorp's assets and liabilities may react differently to
changes in overall market rates or conditions because of mismatches between the
repricing or maturity characteristics of its assets and liabilities. As a
result, changes in interest rates can affect Business Bancorp's net interest
income in either a positive or a negative way.
Business Bancorp's loan portfolio could be insufficiently diversified.
Business Bancorp's and MCB Financial's loan portfolios are both heavily
concentrated in loans secured by real estate, both commercial and residential.
At June 30, 2001, approximately 74% of Business Bancorp's loan portfolio and
84% of MCB Financial's loan portfolio was secured by real estate in California,
so that on a pro forma basis the concentration of real estate secured loans in
the combined portfolios would have been approximately 79%. Conditions in the
California real estate market can and historically have strongly influenced the
level of Business Bancorp's non-performing loans and results of operations. In
the early 1990's, the California economy experienced an economic recession that
resulted in increases in the level of delinquencies and losses for Business
Bancorp as well as for many of the state's
23
other financial institutions. Another recession in California, particularly
with respect to real estate prices, could have a material adverse effect on the
operations of Business Bancorp following the merger. The concentration of real
estate secured loans could also make Business Bancorp vulnerable in the event
of certain natural disasters. See "--The markets in which Business Bancorp will
operate after the merger are subject to the risk of earthquakes and other
natural disasters."
The markets in which Business Bancorp will operate after the merger are subject
to the risk of earthquakes and other natural disasters
Most of the properties of Business Bancorp after the merger will continue
to be located in California. Most of the real and personal properties which
currently secure Business Bank's and Metro Commerce Bank's loans are located in
California. California is a state which is prone to earthquakes, brush fires,
flooding and other natural disasters. In addition to possibly sustaining damage
to its own properties, if there is a major earthquake, flood or other natural
disaster, Business Bancorp faces the risk that many of its borrowers may
experience uninsured property losses, or sustained job interruption and/or loss
which may materially impair their ability to meet the terms of their loan
obligations. A major earthquake, flood or other natural disaster in California
could have a material adverse effect on Business Bancorp's business, financial
condition, results of operations and cash flows. Business Bank and Metro
Commerce Bank do not currently require their secured loan customers to obtain
earthquake insurance on the real property securing such loans as such insurance
is often unavailable or prohibitively expensive. Business Bank does not expect
to change this practice after the merger.
The success of the merger depends on retaining and recruiting certain key
management.
Business Bancorp's future success depends, in large part, upon the
continuing contributions of the key management personnel of Business Bancorp
and MCB Financial. If Business Bancorp loses the services of one or more key
employees after the merger, Business Bancorp could be adversely affected. The
integration challenges in a merger of equals could make it difficult for
Business Bancorp to retain the key employees of Business Bancorp and MCB
Financial after the merger. Business Bancorp's future success is also dependent
upon its continuing ability to attract and retain other highly qualified
personnel. Competition for such employees among financial institutions in
California is intense. Business Bancorp's inability to attract and retain
additional key personnel could adversely affect Business Bancorp. We can
provide no assurance that Business Bancorp will be able to retain any of its
key officers and employees or attract and retain qualified personnel in the
future.
Mr. Lane, Business Bancorp's President and Chief Executive Officer, has an
employment agreement which expires on March 31, 2004. Prior to the effective
time of the merger, Business Bancorp expects to enter into new employment
agreements with Mr. Lane, as Chief Executive Officer of Business Bancorp; with
Charles O. Hall, the President and Chief Executive Officer of MCB Financial,
who is expected to become President & Chief Operating Officer of Business
Bancorp; and with Patrick E. Phelan, currently the Chief Financial Officer of
MCB Financial, who is expected to become the Chief Financial Officer of
Business Bancorp.
The merged entity may not be able to control and manage its future growth
opportunities, which could adversely affect its operations.
Business Bancorp completed the acquisition of another bank on August 31,
2000 which increased Business Bancorp's total assets by approximately 23%. The
acquisition of MCB Financial will increase Business Bancorp's total assets by
approximately 72%. Further, Business Bancorp intends to investigate other
opportunities to acquire or combine with additional financial institutions in
the future that would complement Business Bancorp's existing business as such
opportunities may arise. No assurance can be provided, however, that Business
Bancorp will be able to identify additional suitable acquisition targets or
consummate any such acquisition.
Business Bancorp's ability to manage its rapid growth will depend
primarily on its ability to:
* monitor operations;
24
* control costs;
* maintain positive customer relations;
* attract, assimilate and retain additional qualified personnel; and
* successfully integrate operations of other financial institutions
acquired.
If Business Bancorp fails to achieve those objectives in an efficient and
timely manner, it may experience interruptions and dislocations in its
business. Any such problems could adversely affect Business Bancorp's existing
operations, as well as its ability to retain the customers of the acquired
businesses or operate any such businesses profitably. In addition, such
concerns may cause Business Bancorp's federal and state banking regulators to
require Business Bancorp to delay or forgo any proposed acquisition until such
problems have been addressed to the satisfaction of those regulators. Business
Bancorp's failure to manage its growth effectively would adversely affect
Business Bancorp.
Business Bancorp's loan loss reserves may not cover actual loan losses.
Business Bancorp and MCB Financial believe that the allowances for loan
losses maintained by their subsidiary banks right now are at levels adequate to
absorb any inherent losses in their respective loan portfolios, and that
Business Bancorp's allowance for loan losses immediately after the merger will
be at an adequate level. However, changes in economic, operating and other
conditions, including changes in interest rates, that are beyond our control,
may cause Business Bancorp's actual loan losses to exceed current allowance
estimates. If the actual loan losses exceed the amount reserved, it could hurt
Business Bancorp's business after the merger. Business Bancorp can provide no
assurance that the allowance is sufficient to cover actual loan losses should
such losses be realized.
In addition, the Federal Reserve Board and the California Commissioner, as
an integral part of their respective supervisory functions, will periodically
review Business Bank's allowance for loan losses. Such regulatory agencies may
require Business Bank to increase its provision for loan losses or to recognize
further loan charge-offs, based upon judgments different from those of
management. Any increase in Business Bank's allowance required by the Federal
Reserve Board or the California Commissioner could adversely affect Business
Bancorp. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Business Bancorp--Allowance for Loan Losses" on page
93.
The merger could trigger the change of control provisions in the employment
contracts of certain MCB financial executive officers.
MCB Financial has entered into employment agreements with Charles Hall and
Patrick Phelan, which agreements contain change of control provisions that
would be triggered by this merger. Business Bancorp expects to execute
employment agreements with these executive officers as a condition to closing
of the merger, which would avoid triggering the change of control provisions of
their existing agreements. However, the merger agreement provides that if any
of these officers is terminated without cause within 12 months following the
closing of the merger (which would require the approval of seventy percent of
the authorized number of directors under Business Bancorp's Bylaws to be in
effect following the merger), upon termination that officer will be entitled to
receive any severance and/or change of control payments provided for under his
prior agreement. We cannot provide assurances that these executive officers
will remain even if they sign new employment agreements.
Business Bancorp has entered into employment agreements with Alan J. Lane
and certain of Business Bancorp's executive officers, and severance agreements
with certain other officers of Business Bancorp and Business Bank, which
agreements provide for severance payments if their respective employment
arrangements are terminated in connection with a change in control of Business
Bancorp or Business Bank. Those provisions may have the effect of increasing
the cost of acquiring Business Bancorp, thereby discouraging future attempts to
take over Business Bancorp or Business Bank. See "The Merger--Interests of
certain officers and directors in the merger" on page 45 and "Directors,
Executive Officers and Principal Shareholders of Business Bancorp--Employment
agreements" on page 121.
25
Additional shares of Business Bancorp common stock could be issued which could
result in a decline in the market price of the stock.
Shares of Business Bancorp common stock eligible for future sale could
have a dilutive effect on the market for Business Bancorp common stock and
could adversely affect the market price. The Articles of Incorporation of
Business Bancorp authorize the issuance of 10,000,000 shares of common stock,
of which 2,026,869 shares were outstanding at July 31, 2001 and 2,000,000
shares of preferred stock, of which no shares were outstanding on that date. In
addition, under Proposal 2, shareholders of Business Bancorp are being
requested to approve an amendment to the Articles of Incorporation of Business
Bancorp to increase the number of authorized common and preferred shares to
20,000,000 common shares and 20,000,000 preferred shares. As of July 31, 2001,
Business Bancorp also had outstanding options to purchase an aggregate of
346,490 shares of Business Bancorp common stock and 201,070 shares of Business
Bancorp common stock available for option grants under Business Bancorp's stock
option plan. The merger agreement does not restrict Business Bancorp's ability
to grant additional options under Business Bancorp's stock option plans or with
respect to a takeover proposal to which Business Bancorp is a party. Sales of
substantial amounts of Business Bancorp common stock in the public market
following the merger could adversely affect the market price of Business
Bancorp common stock. There are no restrictions in the merger agreement
preventing Business Bancorp from issuing additional shares of Business Bancorp
common stock after the merger. There can be no assurance given as to the market
value of Business Bancorp common stock after the merger.
Sales of substantial amounts of common stock in the public market pursuant
to Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"),
or otherwise, or the perception that such sales could occur, may adversely
affect prevailing market prices of the common stock. If the prevailing market
prices are affected, such sales could impair the future ability of Business
Bancorp to raise capital through an offering of its equity securities or to
effect acquisitions using shares of common stock.
There has been a limited prior market for Business Bancorp's common stock, so
its stock price may be volatile.
Trading in Business Bancorp's common stock has been limited and cannot be
characterized as amounting to an established public trading market. Although
Business Bancorp began trading its common stock on Nasdaq's Small Cap Market on
February 27, 2001, and intends to change to the Nasdaq National Market System
effective as of the completion of the merger, no assurance can be given that an
active public market for the common stock will develop or continue if such a
market develops. If such a public market develops, the market price of the
common stock may be subject to significant fluctuation in response to numerous
factors, including variations in the annual or quarterly financial results of
Business Bancorp or its competitors, changes by financial research analysts in
their financial estimates of Business Bancorp or its competitors, or the
failure of Business Bancorp or its competitors to meet such estimates,
conditions in the economy in general or the banking industry in particular, or
unfavorable publicity affecting Business Bancorp or the banking industry. In
addition, the equity markets have, on occasion, experienced significant price
and volume fluctuations that have affected the market prices for many
companies' securities and have been unrelated to the operating performance of
those companies. Any such fluctuations may adversely affect the prevailing
market price of Business Bancorp's common stock. If the trading market for our
common stock remains limited, that may exaggerate changes in market value,
leading to more price volatility than would occur in a more active trading
market. As a result, if you want to sell your Business Bancorp common stock,
you may encounter delay or have to accept a reduced price.
Business Bank will operate in a highly competitive market for banking services.
The banking business in Business Bank's and Metro Commerce Bank's market
areas is highly competitive with respect to virtually all products and
services. In California generally, major banks dominate the commercial banking
industry. By virtue of their larger capital bases, such institutions have
substantially greater lending limits than Business Bank and Metro Commerce Bank
have and perform certain functions for their customers, including trust
services, investment services and international banking, which the merged
Business Bank will not be equipped to offer directly, although Business Bank
and
26
Metro Commerce Bank do offer certain of these services through correspondent
banks. In Business Bank's and Metro Commerce Bank's primary service areas,
major banks and other larger independent banks dominate the commercial banking
business. In addition to commercial banks, Business Bank will compete with
other financial companies, as well as offerors of money market accounts and
other institutions offering financial services, in obtaining lendable funds and
in making loans. See "Description of Business--Competition."
Business Bancorp's income depends on monetary policy and economic conditions.
Business Bancorp's net income depends to a large extent on Business Bank's
ability to maintain a favorable differential or "spread" between the rates
earned on its loans and other interest-earning assets and the rates paid on its
deposits and other interest-bearing liabilities. These rates are highly
sensitive to many factors that are beyond Business Bank's control, including
general economic conditions and the policies of various governmental and
regulatory agencies, in particular the Board of Governors of the Federal
Reserve System. In addition, future adverse economic conditions or changes in
regulatory policies or procedures could make a higher provision for loan losses
prudent and could cause higher loan charge-offs for Business Bank thus
adversely affecting Business Bank's net earnings.
Business Bancorp and Business Bank are subject to extensive government
regulation and legislation.
Business Bancorp and Business Bank are subject to extensive state and
federal regulation, supervision and legislation, and the laws that govern
Business Bancorp and Business Bank and their respective operations are subject
to change from time to time. These laws and regulations increase the cost of
doing business and have an adverse impact on Business Bancorp's ability to
compete efficiently with other financial services providers that are not
similarly regulated. Changes in regulatory policies or procedures could result
in Business Bancorp determining that a higher provision for loan losses was
necessary and could cause higher loan charge-offs, thus adversely affecting
Business Bank's net earnings. There can be no assurance that future regulation
or legislation will not impose additional requirements and restrictions on
Business Bancorp and Business Bank in a manner that could adversely affect
their results of operations, cash flows, financial condition and prospects. See
"Regulation and Supervision" on page 71.
The directors and executive officers of the merged entity will continue to
control a substantial portion of its stock.
As of July 31, 2001, Business Bancorp's directors and executive officers
together with their affiliates beneficially owned approximately 48.5% of the
shares of Business Bancorp's voting Common Stock then outstanding. After the
merger, the directors and executive officers of the merged entity together with
their affiliates will beneficially own at least 34.4% of the shares of voting
Common Stock including vested stock options and 28.8% excluding vested stock
options. As a result, if such shareholders take a common position, they could
control or at least strongly influence the outcome of corporate actions
requiring shareholder approval, including the election of directors and the
approval of significant corporate transactions, such as a merger or sale of all
or substantially all of Business Bancorp's assets. We can provide no assurance
that the investment objectives of such shareholders will be the same as
Business Bancorp's other shareholders.
27
MCB FINANCIAL AND BUSINESS BANCORP SHAREHOLDER MEETINGS
Date, Time and Place of Meetings
The special meeting of shareholders of MCB Financial will be held on
December 10, 2001 at 5:30 p.m. local time at MCB Financial, 1248 Fifth Avenue,
San Rafael, California. The special meeting of shareholders of Business Bancorp
will be held on December 10, 2001 at the Main Office of Business Bank, 505 West
Second Street, San Bernardino, California at 8:00 a.m.
The Meetings
At the meetings, the shareholders of both companies will be asked to
consider and vote on the merger agreement. The merger agreement is included as
Annex A to this document and is incorporated in this document by reference.
Under the merger agreement:
* MCB Financial will merge with Business Bancorp;
* each share of MCB Financial common stock will be converted into the
right to receive 1.1763 shares of common stock of Business Bancorp; and
* Business Bancorp shareholders will be asked to vote on an amendment to
the Articles of Incorporation of Business Bancorp to increase the
number of authorized shares and to increase the number of director
classes from two to three, and on amendments to the Bylaws of Business
Bancorp to eliminate cumulative voting, change the minimum and maximum
number of directors, and eliminate the reference to classes in the
Bylaws as no longer necessary.
The boards of directors of MCB Financial and Business Bancorp, each by
unanimous vote, approved the merger agreement and recommend a vote FOR approval
of the merger agreement. The board of directors of Business Bancorp, by
unanimous vote, approved the amendments to the Articles of Incorporation and
Bylaws of Business Bancorp and recommends a vote FOR approval of these
proposals by the shareholders of Business Bancorp.
Record Dates and Voting Rights
Only holders of record of MCB Financial common stock at the close of
business on October 18, 2001, and of Business Bancorp common stock at the close
of business on October 18, 2001 are entitled to notice of and to vote at the
meeting.
At its record date, MCB Financial had approximately 340 shareholders of
record and 1,592,596 shares of common stock outstanding and entitled to vote.
Directors and executive officers of MCB Financial and their affiliates owned
beneficially as of the record date an aggregate of 263,526 shares of MCB
Financial common stock (excluding exercisable stock options), or approximately
16.55% of the outstanding MCB Financial common stock. MCB Financial directors
holding 262,526 shares, or approximately 16.48% of the outstanding MCB
Financial common stock, have agreed to vote their shares in favor of the
merger.
At its record date, Business Bancorp had approximately 283 shareholders of
record and 2,034,069 shares of common stock outstanding and entitled to vote.
Directors and executive officers of Business Bancorp and their affiliates owned
beneficially as of the record date an aggregate of 881,949 shares of Business
Bancorp common stock (excluding exercisable stock options), or approximately
43.36% of the outstanding Business Bancorp common stock. Business Bancorp
directors holding 870,886 shares, or approximately 42.81% of the outstanding
Business Bancorp common stock, have agreed to vote their shares in favor of the
merger.
Each shareholder is entitled to one vote for each share of common stock he
or she owns.
Vote Required
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of MCB Financial common stock and a majority
of the outstanding shares of Business Bancorp
28
common stock. Approval of the amendments to the Articles of Incorporation and
Bylaws of Business Bancorp to be submitted to shareholders of Business Bancorp
requires the affirmative vote of a majority of the outstanding shares of
Business Bancorp.
Voting by Proxy
Shareholders may use the enclosed proxy if they are unable to attend the
meeting in person or wish to have their shares voted by proxy even if they
attend the meeting. All proxies that are properly executed and returned, unless
revoked, will be voted at the meeting in accordance with the instructions
indicated or, if no instruction is indicated, in favor of the merger. The
execution of a proxy will not affect the right of a shareholder to attend the
meeting and vote in person.
Revocability of Proxies
A person who has given a proxy may revoke it any time before it is
exercised at the meeting by filing with the Secretary of the appropriate
company a written notice of revocation or a proxy bearing a later date or by
attendance at the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
Quorum and Adjournments
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares is necessary to constitute a quorum at each
of Business Bancorp's special meeting and MCB Financial's special meeting.
Abstentions and broker non-votes (as described below) will be counted solely
for the purpose of determining whether a quorum is present. Under the
applicable rules of the National Association of Securities Dealers, Inc.,
brokers or members who hold shares in street name for customers who are the
beneficial owners of the shares are prohibited from giving a proxy to vote
those shares with respect to the approval of the transactions contemplated by
the merger agreement in the absence of specific instructions from the
customers. We refer to these as "broker non-votes." Abstentions and broker
non-votes will not be counted as a vote "FOR" or "AGAINST" any proposal at
either the Business Bancorp special meeting or the MCB Financial special
meeting but will have the same effect as a vote "AGAINST" any proposal.
Abstentions and broker non-votes will not have the effect of establishing
dissenters' rights of MCB Financial shareholders, but may have this effect for
Business Bancorp shareholders. See "The Merger--Dissenters' Rights of
Appraisal" on page 48.
The meeting may be adjourned, even if a quorum is not present, by the vote
of the holders of a majority of the shares represented at the meeting in person
or by proxy. In the absence of a quorum at the meeting, no other business may
be transacted at the meeting.
Notice of the adjournment of a meeting need not be given if the time and
place thereof are announced at the meeting at which the adjournment is taken,
provided that if the adjournment is for more than 45 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 to each shareholder of record entitled to
vote at the meeting. At an adjourned meeting, any business may be transacted
which might have been transacted at the original meeting.
Solicitation of Proxies
The board of directors of MCB Financial is soliciting proxies for the MCB
Financial meeting, and the board of directors of Business Bancorp is soliciting
proxies for the Business Bancorp meeting. The companies will bear the cost of
printing and distributing the proxy materials relating to the meeting. MCB
Financial and Business Bancorp will make arrangements with brokerage firms and
other custodians, nominees and fiduciaries to forward these proxy solicitation
materials to shareholders whose Business Bancorp or MCB Financial common stock
is held of record by such entities, and will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith. Solicitation of proxies by mail may
be supplemented by telephone, telegram or personal solicitation by directors,
officers or other regular employees of MCB Financial and Business Bancorp, who
will not receive any additional compensation for such efforts.
29
Other Matters
The boards of directors of MCB Financial and Business Bancorp are not
aware of any matters to come before the special meetings other than as stated
above. If any other matters should be brought before the meeting, or any
adjournment thereof, upon which a vote properly may be taken, the proxy holders
will vote in their discretion unless otherwise provided in the proxies.
30
THE MERGER
General
The boards of directors of MCB Financial and Business Bancorp have each
unanimously approved the merger agreement, which provides for the merger of MCB
Financial with and into Business Bancorp. This section of the document
describes certain aspects of the merger, including the background of the merger
and the parties' reasons for the merger.
In the merger, each outstanding share of MCB Financial common stock, other
than shares as to which dissenters' rights have been perfected, will be
converted into the right to receive 1.1763 shares of Business Bancorp common
stock. MCB Financial and has no plans to issue additional shares or grant
additional options pending completion of the merger, except to new employees in
the ordinary course of business consistent with past practice.
Subject to the terms and conditions of the merger agreement,
simultaneously with the effective time of the merger, Metro Commerce Bank will
be merged with and into Business Bank with Business Bank as the surviving
corporation. Thereafter, Business Bank will continue its corporate existence
under the laws of the State of California and the separate corporate existence
of Metro Commerce Bank will terminate. Based on the number of shares of MCB
Financial common stock outstanding on the record date, Business Bancorp will
issue approximately 1,873,370 shares of Business Bancorp common stock in the
merger (excluding options), representing approximately 47.94% of the number of
shares of Business Bancorp common stock that will be outstanding immediately
after the merger.
Background of the Merger
The managements and boards of directors of each of Business Bancorp and
MCB Financial have, over time, considered the possibility of acquisitions and
strategic combinations with other California financial institutions. Business
Bancorp and MCB Financial, through their respective subsidiary banks, conduct
general banking operations in the counties of Riverside and San Bernardino, in
the case of Business Bancorp, and the cities of San Rafael, San Francisco,
South San Francisco, Hayward, Petaluma and Upland, California, in the case of
MCB Financial. Business Bancorp and MCB Financial have complimentary business
strategies, serving small businesses, mid-market corporations, professionals
and individuals. Additionally, each historically has focused on a
community-based approach to banking, and each considers itself a
California-wide small business bank, yet each wanted to explore growth
opportunities. Management of Business Bancorp and MCB Financial have been
cognizant of the rapidly changing marketplace in the geographic area that each
serves and the impact of rapid consolidation of other independent banks within
the region. Business Bancorp has concentrated its internal efforts on achieving
growth in asset size and market share while MCB Financial has focused primarily
on earnings. Yet each institution believed that it could achieve better balance
by finding a strategic partner.
MCB Financial and Business Bancorp had initially discussed the possibility
of a merger of equals with each other in early 1999, but those conversations
terminated after preliminary discussions. Meanwhile each chose to pursue its
own path while continuing to consider other possible combinations. In March
2001, directors and management of each of MCB Financial and Business Bancorp
attended the same bank directors educational conference. During this
conference, directors and managements of the parties had discussions indicating
a rekindled interest in a possible merger of equals. Following the conference,
MCB Financial requested that Merrill Lynch explore whether a combination with
Business Bancorp was possible. Merrill Lynch met with Business Bancorp to
discuss the idea. On March 21, 2001, MCB Financial and Business Bancorp entered
into a confidentiality agreement and the parties exchanged non-public
information with each other. At this time Business Bancorp was also holding
unrelated discussions with other parties concerning an alternative merger with
such parties.
As the initial exploration of interest progressed, Merrill Lynch brought
together representatives of MCB Financial and Business Bancorp to begin
examining business terms that would appropriately balance the interests of the
parties. Based on these negotiations, Merrill Lynch developed a term sheet in
mid-June 2001 that included the organizational structure for the transaction.
The term sheet also established an exchange ratio which provided no material
premium to either party in light of the merger of
31
equals structure. The respective boards of directors of MCB Financial and
Business Bancorp reviewed these terms and negotiated adjustments. From mid-June
to early July, representatives of MCB Financial and Business Bancorp met
several times to discuss proceeding consistent with this term sheet. By the end
of June 2001, Business Bancorp ceased discussions with all other parties.
In early July 2001, the MCB Financial and Business Bancorp boards voted to
authorize their respective managements to commence the process of negotiating a
definitive agreement. The companies entered into an exclusivity and
cost-sharing agreement on July 9, 2001. The two companies conducted mutual due
diligence and on July 20, the parties exchanged the first draft of the merger
agreement and the stock option agreements. The companies and their respective
legal counsel negotiated the terms of these agreements. In particular, the
companies have negotiated the structure of the board and management following
closing, composition and powers of dual nominating committees and corporate
governance matters, and are negotiating new employment agreements for certain
officers and a new stock option plan and an employee stock ownership plan, all
to be adopted by the successor.
At the meeting of MCB Financial's board of directors on August 15, 2001,
Merrill Lynch reviewed with the board of directors its financial presentation
concerning the proposed merger, and also delivered its opinion to the MCB
Financial board of directors to the effect that, as of that date and based upon
and subject to the factors and assumptions set forth in its opinion, the
exchange ratio was fair, from a financial point of view, to the holders of MCB
Financial common stock. Business Bancorp retained Baxter Fentriss as its
investment banker, which likewise delivered a fairness opinion to Business
Bancorp's board at its meeting on August 15, 2001. At those board meetings, the
board of directors of each of MCB Financial and Business Bancorp approved the
definitive agreement.
Following the board meetings on August 15, 2001, the parties each executed
the merger agreement and the stock option agreements and issued a joint press
release publicly announcing the proposed merger.
Reasons for the Merger; Recommendations of Boards of Directors
Business Bancorp
Business Bancorp believes that the merger will provide it with an
attractive opportunity to become part of a larger operation. Business Bancorp
believes that MCB Financial's location and business mix complement those of
Business Bancorp and will enable the combined company to offer a broader array
of products and services to customers.
The Business Bancorp board believes that the terms of the merger are fair
and are in the best interests of Business Bancorp and its shareholders and
recommends that the shareholders of Business Bancorp vote FOR approval of the
merger.
In reaching its conclusion, the Business Bancorp board considered
information provided at its meetings in June, July and August 2001, including,
among other things:
* information concerning the financial performance and condition,
business operations, capital levels, asset quality, loan portfolio
breakdown, and prospects of MCB Financial;
* the terms of the merger agreement and other documents to be executed in
connection with the merger;
* the presentation of Baxter Fentriss & Company and the opinion of Baxter
Fentriss & Company that the merger is fair to the shareholders of
Business Bancorp from a financial point of view;
* the pro forma financial statements of the combined companies and the
capitalization of the combined companies;
* the complementary nature of MCB Financial's offices and the effect of
the combination on Business Bancorp's strategic plan;
* the advantages of being part of a larger entity, including the
potential for operating efficiencies, the heightened ability of a
larger institution to compete in the banking environment and to
leverage overhead costs, and the effect of a higher lending limit on
Business Bancorp's customers and prospective customers;
32
* the business strategies, the strength and depth of management of the
combined entity;
* the ability to retain the Business Bank identity and name;
* the board's review with its legal and financial advisors of
alternatives to the merger, the range of possible values to
shareholders obtainable through implementation of alternatives and the
timing and likelihood of the same;
* the current and prospective economic environment and increasing
regulatory and competitive burdens and constraints facing community
banks;
* the anticipated positive effect of the merger on existing shareholders,
employees, officers and customers;
* the consolidation currently underway in the banking industry and
increased competition from larger independent banks in California;
* the anticipated liquidity of Business Bancorp common stock after the
merger in trading on the Nasdaq National Market versus trading of
Business Bancorp stock on the Nasdaq SmallCap Market prior to the
merger (although there can be no assurance that there will be increased
liquidity after the merger);
* the prospects for enhanced value of the combined entity in the future;
* the tax-free nature of the merger;
* the prospects for Business Bancorp on a stand alone basis and on the
basis of alternative stand alone strategies; and
* the anticipated impact on the communities served by Business Bancorp
and MCB Financial in the merger, and the increased ability to serve the
communities through a larger banking network.
The board of Business Bancorp did not assign any relative weight to any of the
foregoing factors.
For reasons stated above, the Business Bancorp board of directors has
unanimously approved the merger agreement as in the best interest of Business
Bancorp and its shareholders and unanimously recommends that the Business
Bancorp shareholders approve the merger.
MCB Financial
MCB Financial believes that the merger will provide it with an attractive
opportunity to become part of a larger operation. MCB Financial believes that
Business Bancorp's location and business mix complement those of MCB Financial
and will enable the combined company to offer a broader array of products and
services to customers.
The MCB Financial board believes that the terms of the merger are fair and
are in the best interests of MCB Financial and its shareholders and recommends
that the shareholders of MCB Financial vote FOR approval of the merger.
In reaching its conclusion, the MCB Financial board considered information
provided at its meetings in April, May, June, July and August, 2001, including,
among other things:
* info rmation concerning the financial performance and condition,
business operations, capital levels, asset quality, loan portfolio
breakdown, and prospects of Business Bancorp;
* the structure of the transaction, including the fact that the MCB
Financial shareholders would hold approximately 48% of the outstanding
common stock of Business Bancorp outstanding upon completion of the
merger;
* the terms of the merger agreement and other documents to be executed in
connection with the merger;
* the presentation of Merrill Lynch to the board of directors of MCB
Financial on August 15, 2001 and the written opinion of Merrill Lynch,
dated August 15, 2001, to the board of directors of MCB Financial to
the effect that, as of that date and based upon and subject to the
factors and assumptions set forth therein, the exchange ratio was fair,
from a financial point of view, to the holders of MCB common stock;
33
* the pro forma financial statements of the combined companies and the
capitalization of the combined companies;
* the geographic distribution of Business Bancorp's offices in relation
to MCB Financial's offices and strategic plan;
* the advantages of being part of a larger entity, including the
potential for operating efficiencies, the heightened ability of a
larger institution to compete in the banking environment and to
leverage overhead costs, and the effect of a higher lending limit on
MCB Financial's customers and prospective customers;
* the business strategies, the strength and depth of management of the
combined entity;
* the ability of Metro Commerce Bank to continue operations as part of
Business Bancorp with the same executive officers, which was perceived
to be a significant advantage to the shareholders, employees and
customers of MCB Financial;
* the anticipated positive effect of the merger on existing shareholders,
employees, officers and customers;
* the anticipated impact on the communities served by MCB Financial and
Business Bancorp in the merger, and the increased ability to serve the
communities through a larger banking network;
* the consolidation currently underway in the banking industry and
increased competition from larger independent banks in California;
* the prospects for enhanced value of the combined entity in the future;
* the tax-free nature of the merger;
* the anticipated liquidity of Business Bancorp common stock after the
merger in trading on the Nasdaq National Market versus trading of
Business Bancorp stock on the Nasdaq SmallCap Market prior to the
merger and versus the trading of MCB Financial stock on the American
Stock Exchange prior to the merger (although there can be no assurance
that there will be increased liquidity after the merger); and
* the prospects for MCB Financial on a stand alone basis and on the basis
of alternative stand alone strategies.
The board of MCB Financial did not assign any relative weight to any of
the foregoing factors.
For reasons stated above, the MCB Financial board of directors has
unanimously approved the merger agreement as in the best interest of MCB
Financial and its shareholders and unanimously recommends that the MCB
Financial shareholders approve the merger.
Opinion of Financial Advisors
Opinion of Business Bancorp's financial advisor
Baxter Fentriss has acted as financial advisor to Business Bancorp in
connection with the Merger. On August 15, 2001, Baxter Fentriss delivered to
Business Bancorp its opinion that as of such date, and on the basis of matters
referred to herein, the exchange ratio is fair, from a financial point of view,
to the holders of Business Bancorp common stock. In rendering its opinion,
Baxter Fentriss consulted with the management of Business Bancorp and MCB
Financial; reviewed the merger agreement and certain publicly-available
information on the parties; and reviewed certain additional materials made
available by the management of the respective banks.
In addition, Baxter Fentriss discussed with the management of Business
Bancorp and MCB Financial their respective businesses and outlook. No
limitations were imposed by Business Bancorp's or MCB Financial's boards of
directors upon Baxter Fentriss with respect to the investigation made or
procedures followed by it in rendering its opinion. The full text of Baxter
Fentriss' written opinion is attached as Annex B-1 to this joint proxy
statement/prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered, and qualifications
and limitations on the review undertaken by Baxter Fentriss in connection
therewith.
34
Baxter Fentriss' opinion is directed to the Business Bancorp's board of
directors and is directed only to the fairness, from a financial point of view,
of the merger to the shareholders of Business Bancorp. It does not address
Business Bancorp's or MCB Financial's underlying business decision to effect
the proposed merger, nor does it constitute a recommendation to any Business
Bancorp shareholder as to how such shareholder should vote with respect to the
merger at the meeting or as to any other matter.
Baxter Fentriss' opinion was one of many factors taken into consideration
by Business Bancorp's board of directors in making its determination to approve
the merger agreement, and the receipt of Baxter Fentriss' opinion is a
condition precedent to Business Bancorp consummating the merger. The opinion of
Baxter Fentriss does not address the relative merits of the merger as compared
to any alternative business strategies that might exist for Business Bancorp or
the effect of any other business combination in which Business Bancorp might
engage.
Baxter Fentriss, as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter Fentriss is a nationally
recognized advisor to firms in the financial services industry on mergers and
acquisitions. Business Bancorp's board of directors selected Baxter Fentriss as
its financial advisor because Baxter Fentriss is an investment banking firm
focusing on bank and thrift transactions, and because of the firm's extensive
experience and expertise in transactions similar to the merger. Baxter Fentriss
is not affiliated with Business Bancorp or MCB Financial.
In connection with rendering its opinion to Business Bancorp, Baxter
Fentriss performed a variety of financial analyses. In conducting its analyses
and arriving at its opinion as expressed herein, Baxter Fentriss considered
such financial and other factors as it deemed appropriate under the
circumstances including the following:
* the historical and current financial condition and results of
operations of Business Bancorp and MCB Financial including interest
income, interest expense, noninterest income, noninterest expense,
earnings, book value, returns on assets and equity, capitalization, the
reserve for loan losses and possible tax consequences resulting from
the transaction;
* the business prospects of Business Bancorp and MCB Financial;
* the economies of Business Bancorp's and MCB Financial's respective
market areas;
* the historical and current market for Business Bancorp's common stock;
and,
* the nature and terms of certain other merger transactions that it
believed to be relevant.
Baxter Fentriss also considered its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its
knowledge of the financial institutions industry, its experience in connection
with similar transactions, its knowledge of securities valuation generally, and
its knowledge of merger transactions in California and throughout the United
States.
In connection with rendering its opinion, Baxter Fentriss reviewed:
* the merger agreement;
* the Annual Reports to shareholders of Business Bancorp including the
audited financial statements for the years ended December 31, 1998,
1999 and 2000, Business Bancorp's 2000 Form 10-KSB and March 31, 2001
Form 10-QSB, as well as certain interim reports to shareholders and
regulatory agencies;
* the Annual Reports to shareholders of MCB Financial including the
audited financial statements for the years ended December 31, 1998,
1999 and 2000, MCB Financial's 2000 Form 10-KSB and March 31, 2001 Form
10-QSB, as well as certain interim reports to shareholders and
regulatory agencies;
* proforma combined unaudited balance sheets and income statements as of
March 31, 2001; and
* certain additional financial and operating information with respect to
the business, operations and prospects of Business Bancorp and MCB
Financial as it deemed appropriate.
35
Baxter Fentriss also:
* held discussions with members of the senior management of Business
Bancorp and MCB Financial regarding the historical and current business
operation, financial condition and future prospects of their respective
companies;
* compared the results of operations of Business Bancorp and MCB
Financial with those of certain banking companies that it deemed to be
relevant;
* analyzed the pro-forma financial impact of the merger on Business
Bancorp,
* analyzed the pro forma financial impact of the merger on MCB Financial;
and
* conducted such other studies, analyses, inquiries and examinations as
Baxter Fentriss deemed appropriate.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the merger to holders of Business Bancorp common stock was to some
extent a subjective one based on the experience and judgment of Baxter Fentriss
and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors summarized below, Baxter
Fentriss believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Baxter
Fentriss' view of the actual value of Business Bancorp or MCB Financial.
In performing its analyses, Baxter Fentriss made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Business Bancorp or MCB
Financial. The analyses performed by Baxter Fentriss are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. Additionally, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold. In rendering its
opinion, Baxter Fentriss assumed that, in the course of obtaining the necessary
regulatory approvals for the merger, no conditions will be imposed that will
have a material adverse effect on the contemplated benefits of the merger, on a
pro-forma basis, to Business Bancorp or MCB Financial.
The following is a summary of selected analyses performed by Baxter
Fentriss in connection with its opinion.
1. Actual Relative Contribution Analysis. Based on the proposed Exchange
Ratio of 1.1763, Business Bancorp would own approximately 52% of the combined
institution while MCB Financial would own the remaining 48%. Baxter Fentriss
compared these ownership levels to the projected relative equity, tangible
equity, earnings, cash earnings and customer base to be contributed by each
institution to the combined entity. Business Bancorp is projected to contribute
62.44% of the equity, 53.76% of the tangible equity, 43.00% of the latest
twelve months earnings, 47.74% of the latest twelve months cash earnings, and
57.55% of the customer base.
2. Pro Forma Merger Analysis. Baxter Fentriss used long term forecasts for
each institution to evaluate the proforma impact on book value and earnings
within a range of relative ownership levels. Baxter Fentriss considered a range
of potential costs savings, and growth rates that might be reasonably achieved
in the merger. Based on this analysis, Baxter Fentriss concluded that the
transaction should have a positive long term impact to the shareholders of
Business Bancorp. The actual results achieved by Business Bancorp, MCB
Financial and the combined entity following the merger may vary from the
estimated results and the variations may be material based on events beyond the
control of both Business Bancorp and MCB Financial.
3. Discounted Cash Flow - Net Present Value Analysis. Baxter Fentriss
performed a discounted cash flow analysis to determine hypothetical relative
present values for each institution as a long term
36
investment. A long term forecast for each institution was developed. From this
forecast appropriate cash flows, dividends and terminal values were extracted.
These cash flows were then discounted using a range of appropriate discount
rates and the present value of these cash flows were added together to
determine the net present value of each institution.
4. Liquidation Analysis. Baxter Fentriss estimated values based upon the
liquidation of the assets and liabilities of each institution. In this analysis
it was assumed that fixed assets and loans could be liquidated at stated book
value and that there were no extraordinary off-balance sheet items that would
cause a significant change in the overall valuation, that securities were
liquidated at market value while core deposits were sold at a premium (both of
which were impacted for taxes). No adjustments were made for illiquidity.
5. Comparable Transaction Analysis. Baxter Fentriss analyzed other
merger-of-equals transactions to determine average pricing statistics base upon
the relative contribution of each institution. Baxter Fentriss reviewed the
financial terms of comparable merger-of-equals transactions to determine the
average ownership distribution received in the transactions relative to the
contribution of earnings and equity made by each institution. Such statistical
analysis was then applied to this transaction. Baxter Fentriss concluded that
the ownership to be received by Business Bancorp as a result of the merger was
within the parameters of the comparable transactions.
Using publicly available information on Business Bancorp and MCB Financial
and applying the capital guidelines of banking regulators, Baxter Fentriss'
analysis indicated that the merger would not materially dilute the capital and
earnings capacity of Business Bancorp and would, therefore, likely not be
opposed by the banking regulatory agencies from a capital perspective.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that any and all estimates made by management were
reasonably prepared and reflect their best current judgments. Baxter Fentriss
did not make an independent appraisal of the assets or liabilities of either
Business Bancorp or MCB Financial, and has not been furnished such an
appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Business Bancorp, MCB Financial, or the merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies used for comparison in the above analysis.
Baxter Fentriss has been, or will be, paid a fairness opinion fee of
$20,000, and reasonable out-of-pocket expenses for its services. Business
Bancorp has agreed to indemnify Baxter Fentriss against certain liabilities,
including certain liabilities under federal securities laws.
Opinion of MCB Financial's financial advisor
MCB Financial retained Merrill Lynch to act as its financial advisor in
connection with the merger. On August 15, 2001, MCB Financial's board of
directors held meetings, in which Merrill Lynch participated, to evaluate the
proposed merger. At the meeting on August 15, 2001, Merrill Lynch rendered its
oral opinion, which was subsequently confirmed in writing, to the effect that,
as of that date and based upon and subject to the factors and assumptions set
forth in its opinion, the exchange ratio was fair, from a financial point of
view, to the holders of MCB common stock.
The full text of Merrill Lynch's opinion dated August 15, 2001 that
describes, among other things, the assumptions made, matters considered, and
qualifications and limitations on the review undertaken by Merrill Lynch, is
attached as Annex B-2 to this document. MCB Financial shareholders are urged
to, and should, read Merrill Lynch's opinion carefully and in its entirety.
Merrill Lynch's opinion is directed to MCB Financial's board and addresses
only the fairness, from a financial point of view, of the exchange ratio to the
holders of MCB common stock. The opinion does not address any other aspect of
the merger or any related transaction, nor does it constitute a recommendation
to any shareholder as to how to vote at the meeting on the merger or any
related matter. The summary of the fairness opinion set forth in this document
is qualified in its entirety by reference to the full text of the opinion.
37
In arriving at its opinion, Merrill Lynch, among other things:
* reviewed certain publicly available business and financial information
relating to MCB Financial and Business Bancorp that Merrill Lynch
deemed to be relevant;
* reviewed certain information including financial forecasts relating to
the respective businesses, earnings, assets, liabilities and prospects
of MCB Financial and Business Bancorp furnished to Merrill Lynch by MCB
Financial's senior management, as well as the amount and timing of the
cost savings, revenue enhancements and related expenses expected to
result from the merger furnished to Merrill Lynch by MCB Financial's
senior management;
* conducted discussions with members of senior management and
representatives of MCB Financial and Business Bancorp concerning the
matters described in the bullet points set forth above, as well as
their respective businesses and prospects before and after giving
effect to the merger and the expected cost savings, revenue
enhancements and related expenses;
* reviewed the market prices and valuation multiples for MCB Financial
common stock and Business Bancorp common stock and compared them with
those of certain publicly traded companies;
* reviewed the respective publicly reported financial condition and
results of operations of MCB Financial and Business Bancorp and
compared them with those of certain publicly traded companies;
* participated in certain discussions and negotiations among
representatives of MCB Financial and Business Bancorp and their
respective financial and legal advisors with respect to the merger;
* reviewed the potential pro forma impact of the merger;
* reviewed a draft of the merger agreement and a draft of the related
stock option agreements provided to Merrill Lynch; and
* reviewed such other financial studies and analyses and took into
account such other matters that Merrill Lynch deemed necessary,
including Merrill Lynch's assessment of general economic, market and
monetary conditions.
In rendering its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, or that was discussed with, or reviewed by or for Merrill Lynch,
or that was publicly available. Merrill Lynch also did not assume any
responsibility for independently verifying this information or undertake an
independent evaluation or appraisal of the assets or liabilities of MCB
Financial or Business Bancorp, and Merrill Lynch has not been furnished any
evaluation or appraisal on these matters. Merrill Lynch has also assumed the
final form of the Agreement and the final form of the related stock option
agreement will be substantially similar to the last drafts reviewed by it.
Merrill Lynch is not an expert in the evaluation of allowances for loan
losses, and neither made an independent evaluation of the adequacy of the
allowances for loan losses of MCB Financial or Business Bancorp, nor reviewed
any individual credit files of MCB Financial or Business Bancorp nor been
requested to conduct such a review. As a result, Merrill Lynch has assumed that
the aggregate allowances for loan losses for both MCB Financial and Business
Bancorp are adequate to cover such losses and will be adequate on a pro forma
basis for the combined company. In addition, Merrill Lynch did not assume any
obligation to conduct, and Merrill Lynch did not conduct, any physical
inspection of the properties or facilities of MCB Financial or Business
Bancorp. With respect to the financial and operating information, including,
without limitation, valuations of contingencies and projections regarding
under-performing or non-performing assets, net charge-offs, adequacy of
reserves, future economic conditions and information on the cost savings,
revenue enhancements and related expenses expected to result from the merger,
in each case furnished to or discussed with Merrill Lynch by MCB Financial or
Business Bancorp, Merrill Lynch assumed that the information was reasonably
prepared and reflects the best currently available estimates and judgments of
the senior management of MCB Financial and Business Bancorp as to the future
financial and operating performance of MCB Financial, Business Bancorp or the
combined entity, as the case may be, and the expected cost savings, revenue
enhancements and related
38
expenses. Merrill Lynch's opinion is based upon market, economic and other
conditions as in effect on, and on the information made available to Merrill
Lynch as of, the date of its opinion.
For purposes of rendering its opinion, Merrill Lynch assumed that, in all
respects material to its analysis:
* the merger will be completed substantially in accordance with the terms
set forth in the merger agreement;
* the representations and warranties of each party in the merger
agreement and in all related documents and instruments referred to in
the merger agreement are true and correct;
* MCB Financial and Business Bancorp will perform all of the covenants
and agreements required to be performed by them under the merger
agreement and any related documents;
* all conditions to completing the merger will be satisfied without any
waivers; and
* in the course of obtaining any necessary regulatory or other consents
or approvals (contractual or otherwise) for the merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect
on the future results of operations or financial condition of MCB
Financial, Business Bancorp or the combined entity, or on the
contemplated benefits of the merger, including the cost savings,
revenue enhancements and related expenses expected to result from the
merger.
Merrill Lynch also assumed that the merger will be accounted for as a
purchase under U.S. generally accepted accounting principles, which we refer to
in this document as GAAP, and that it will qualify as a tax-free reorganization
for U.S. federal income tax purposes. Merrill Lynch's opinion is not an
expression of an opinion as to the prices at which shares of MCB Financial
common stock or shares of Business Bancorp common stock will trade following
the announcement of the merger, or the prices at which the shares of common
stock of the combined entity will trade following the completion of the merger.
Analyses of Merrill Lynch
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Merrill Lynch, MCB Financial and Business Bancorp. Any estimates contained in
the analyses performed by Merrill Lynch are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by these analyses. Additionally, estimates of the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which those businesses or securities might actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial
uncertainty. The Merrill Lynch opinion was among several factors taken into
consideration by MCB Financial's board in making its determination to adopt the
plan of merger contained in the merger agreement and the merger. In addition,
MCB Financial's board did not rely on any single analysis in making its
determination. Consequently, the analyses described below should not be viewed
as determinative of the decision of MCB Financial's board or management with
respect to the fairness of the exchange ratio.
The summary that follows is not a complete description of the analyses
underlying the Merrill Lynch opinion or the presentation made by Merrill Lynch
to MCB Financial's board but summarizes the material analyses performed and
presented in connection with its opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Therefore, a fairness opinion is
not readily susceptible to partial analysis or summary description.
In arriving at its opinion, Merrill Lynch did not attribute any particular
weight to any analysis or factor that it considered, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. The financial analyses summarized below include information presented
in tabular format. Accordingly, Merrill Lynch believes that its analyses and
the summary of its analyses must be considered as a whole and that selecting
portions of its analyses and factors or focusing on the information presented
below in tabular format, without considering all analyses and factors or the
full narrative description of the financial analyses, including the
methodologies and assumptions underlying
39
the analyses, could create a misleading or incomplete view of the process
underlying its analyses and opinion. The tables alone do not constitute a
complete description of the financial analyses.
The following is a summary of the material financial analyses presented by
Merrill Lynch to MCB Financial's board at its meeting on August 15, 2001. At
the time of this presentation, the exchange ratio proposed by MCB Financial was
1.1763, and Merrill Lynch's analyses were based on that exchange ratio. Merrill
Lynch rendered its fairness opinion to MCB Financial's board on August 15, 2001
based on the 1.1763-for-1 exchange ratio.
Calculation of Transaction Value. Merrill Lynch reviewed the terms of the
merger. It noted that the exchange ratio of 1.1763 shares of Business Bancorp
common stock for each share of MCB Financial common stock meant that the
transaction had a per share value of $15.29 for each share of MCB Financial
common stock based upon the closing price of Business Bancorp of $13.00 on
August 10, 2001. Merrill Lynch also noted that, based on the exchange ratio,
the transaction also had an implied aggregate value of approximately $25
million as of August 10, 2001.
Contribution/Implied Exchange Ratio Analysis. Merrill Lynch also analyzed
selected balance sheet, income statement, and stock market data of MCB
Financial and Business Bancorp to determine the estimated pro forma ownership
of the combined entity based on each company's contributions. Merrill Lynch
then used this data to determine the exchange ratio that would be required to
equate pro forma ownership in a combined MCB Financial/Business Bancorp with
each institution's contribution of the specified criteria and against which the
exchange ratio of 1.1763 could be compared. Merrill Lynch's analysis
illustrated that the exchange ratio approximated the implied exchange ratio
derived from the analysis for each of the specified criteria. The results of
Merrill Lynch's analysis are set forth in the following table.
Pro Forma Ownership Implied
Factor MCB Financial Business Bancorp Exchange Ratio
------------------------------------------ --------------------- ------------------ ---------------
Total Equity ............................. 34.3% 65.7% 0.6469
Tangible Equity .......................... 42.3 57.7 0.9094
Current Market Capitalization ............ 44.7 55.3 0.9982
90 Day Average Market Capitalization ..... 45.7 54.3 1.0469
2000 Estimated Cash Income ............... 57.5 42.5 1.6755
2001 Estimated Cash Income ............... 54.5 45.5 1.4828
2002 Estimated Cash Income ............... 50.8 49.2 1.2756
Historical Market-for-Market Exchange Ratio Analysis. Merrill Lynch also
analyzed the exchange ratio that existed between MCB Financial common stock and
Business Bancorp common stock for certain selected periods during the past year
to illustrate the exchange ratio that existed between the companies' common
stock for those periods and against which the exchange ratio of 1.1763 could be
compared. Merrill Lynch's analysis illustrated that the exchange ratio
approximated the historical implied exchange ratio derived from the analysis
for the selected periods. The results of Merrill Lynch's analysis are set forth
in the following table.
Historical Implied Exchange Ratio
Current (August 10, 2001) ......... 1.0031x
Last 5 Days Average ............... 0.9791x
Last 10 Days Average .............. 0.9976x
Last 30 Days Average .............. 1.0361x
Last 60 Days Average .............. 1.0705x
Last 3 Months Average ............. 1.0442x
Last 6 Months Average ............. 1.0757x
Last Year Average ................. 0.9698x
40
Peer Group Stock Trading Multiple Analysis. Merrill Lynch also reviewed
and compared selected financial and stock market information of MCB Financial
and Business Bancorp to the publicly available corresponding data for the
following publicly traded commercial banking organizations located throughout
California that Merrill Lynch determined were comparable to MCB Financial and
Business Bancorp: * American River Holdings
* BWC Financial Corp. * Foothill Independent Bancorp
* Capital Corp of the West * North Valley Bancorp
* Central Coast Bancorp * Redwood Empire Bancorp
* Civic Bancorp * Wilshire State Bank
The following table compares the information for MCB Financial and
Business Bancorp with corresponding mean data for the companies listed above
for the purpose of evaluating MCB Financial's and Business Bancorp's
performance against those companies in the categories listed. The information
is based on financial data at June 30, 2001, earnings per share estimates from
I/B/E/S Earnings Estimate, and market prices as of August 10, 2001. The
calculations of price-to-2001 and price-to-2002 estimated GAAP earnings per
share are based on I/B/E/S estimated earnings per share calculated in
accordance with GAAP. The calculations of price-to-2001 and price-to-2002
estimated cash earnings per share are based on I/B/E/S estimated earnings per
share. I/B/E/S is a recognized data service that monitors and publishes
compilations of earnings estimates by selected research analysts regarding
companies of interest to institutional investors. Merrill Lynch's analysis
illustrated that, when considering the stock market and financial data
selected, both MCB Financial and Business Bancorp were trading at multiples and
values, or had other financial characteristics, approximating the comparable
companies.
Stock Stock
Price/2001 Price/2002 Stock
Stock Estimated Estimated Stock Price/
Price/ LTM GAAP GAAP Price/ Tangible
GAAP EPS EPS EPS Book Value Book
------------ ------------ ------------ ------------ ---------
MCB Financial ................ 8.05x 7.28x 6.36x 1.54x 1.54x
Business Bancorp ............. 10.92x 10.83x 8.07x 1.06x 1.52x
Merrill Lynch Selected Company
Average ..................... 12.67 11.36x 9.78x 1.74x 1.85x
No company used in the analyses described above is identical to MCB
Financial, Business Bancorp, or the pro forma combined company. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the merger, public trading, or other values
of the companies to which they are being compared. In addition, mathematical
analyses, such as determining the average or median, are not of themselves
meaningful methods of using comparable company data.
Discounted Dividend Analysis--MCB Financial. Merrill Lynch performed a
discounted dividend analysis to estimate a range of present values per share of
MCB Financial common stock assuming MCB Financial continued to operate as a
stand-alone entity. This range was determined by adding (1) the present value,
which is a representation of the current value of a sum that is to be received
some time in the future, of the estimated future dividends that MCB Financial
could generate through December 31, 2005, and (2) the present value of the
terminal value, which is a representation of the ongoing value of an entity at
a specified time in the future, of MCB Financial common stock.
In calculating a terminal value of MCB Financial common stock, Merrill
Lynch applied multiples of 7.0x, 8.0x and 9.0x to year 2005 forecasted cash
earnings. These multiples were used to approximate current stock market trading
multiples for MCB Financial. In performing this analysis, Merrill Lynch used
senior management's earnings per share estimates for 2001 and 2002. For periods
after 2002, earnings per share were assumed to increase at a projected average
growth rate of 14.0%. The combined dividend stream and terminal value were also
then discounted back to June 30, 2001 using a range of discount rates between
13.5% and 15.5%.
In performing this analysis, Merrill Lynch also assumed an annual asset
growth rate for MCB Financial of 12.0%, and further assumed that earnings in
excess of those necessary to maintain MCB
41
Financial's tangible common equity ratio at 6.5% could be paid out as
dividends. Based on the foregoing criteria and assumptions, Merrill Lynch
determined that the stand-alone present value of the MCB Financial common stock
ranged from $16.20 to $20.71 per share. The results of Merrill Lynch's analysis
are set forth in the following table.
Terminal Year Price/Cash Earnings
Multiple
---------------------------------------
Discounted Dividend Rates 7.0X 8.0X 9.0X
--------------------------- ----------- ----------- -----------
13.5% $ 17.27 $ 18.99 $ 20.71
14.5% 16.72 18.38 20.03
15.5% 16.20 17.79 19.38
Discounted Dividend Analysis--Business Bancorp. Merrill Lynch also
performed a discounted dividend analysis to estimate a range of present values
per share of Business Bancorp common stock assuming Business Bancorp continued
to operate as a stand-alone entity. As was the analysis performed with regard
to MCB Financial, this range was determined by adding (1) the present value of
the estimated future dividend stream that Business Bancorp could generate
through December 31, 2005, and (2) the present value of the terminal value of
Business Bancorp common stock.
In calculating a terminal value of Business Bancorp common stock, Merrill
Lynch applied multiples of 10.0x, 11.0x and 12.0x to year 2005 forecasted cash
earnings. These multiples were used to approximate current stock market trading
multiples for Business Bancorp. In performing this analysis, Merrill Lynch used
senior management's cash earnings per share estimates for 2001 and 2002. For
the periods after 2002, cash earnings per share were assumed to growth at
average rate of 15.5%. The combined dividend stream and terminal value were
also then discounted back to June 30, 2001 using a range of discount rates
between 13.5% and 15.5%.
In performing this analysis, Merrill Lynch also assumed an annual asset
growth rate for Business Bancorp of 10.0%, and further assumed that earnings in
excess of those necessary to maintain Business Bancorp's tangible common equity
ratio at 6.5% could be paid out as dividends. Based on the foregoing criteria
and assumptions, Merrill Lynch determined that the stand-alone present value of
the Business Bancorp common stock ranged from $14.02 to $17.86 per share. The
results of Merrill Lynch's analysis are set forth in the following table.
Terminal Year Price/Cash Earnings
Multiple
---------------------------------------
Discounted Dividend Rates 10.0X 11.0X 12.0X
--------------------------- ----------- ----------- -----------
13.5% $ 15.13 $ 16.50 $ 17.86
14.5% 14.56 15.88 17.19
15.5% 14.02 15.28 16.54
The discounted dividend analyses of MCB Financial and Business Bancorp do
not necessarily indicate actual values or actual future results and do not
purport to reflect the prices at which any securities may trade at the present
or at any time in the future. The discount rates applied to MCB Financial and
Business Bancorp referred to in these paragraphs above were based on several
factors, including the financial advisor's knowledge of each of MCB Financial
and Business Bancorp and the industry in which they operate, the business risk
of each company and the overall interest rate environment as of August 10,
2001. The asset growth rates applied for MCB Financial and Business Bancorp
took into consideration several factors, including the historical asset growth
rate of each of MCB Financial and Business Bancorp as well as projected
long-term growth rates. Dividend discount analysis is a widely used valuation
methodology, but the results of this methodology are highly dependent upon the
numerous assumptions that must be made, including earnings growth rates,
dividend payout rates, terminal values and discount rates.
Pro Forma Financial Impact. Based on the 1.1763-for-1 exchange ratio,
Merrill Lynch also analyzed the pro forma per share financial impact of the
merger on MCB Financial's and Business Bancorp's cash earnings per share.
Merrill Lynch further analyzed the pro forma per share financial impact of the
merger on MCB Financial's and Business Bancorp's tangible book value. The
analysis indicated that the impact of the merger would be accretive, or
additive, for both MCB Financial and Business Bancorp on a cash
42
basis. The analysis further indicated that the merger would be accretive, or
additive to MCB Financial's tangible book value per share and dilutive to, or
decrease, Business Bancorp's tangible book value per share. The following table
sets forth the results of Merrill Lynch's analyses.
2002 Cash EPS Impact MCB Financial Business Bancorp
------------------------------ --------------- -----------------
+6.1% +15.3%
Per Share Impact At Closing MCB Financial Business Bancorp
------------------------------- --------------- -----------------
Tangible Book Value per Share +11.9% -13.4%
The analysis was based on I/B/E/S earnings estimates for MCB Financial and
Business Bancorp, and estimated pre-tax cost savings of $1.2 million realized
approximately 100% in 2002. In analyzing the pro forma financial impact of the
merger, Merrill Lynch also assumed that there would be an estimated one time,
pre-tax restructuring charge of $850,000.
MCB Financial retained Merrill Lynch based upon its experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm. As part of its investment banking business, Merrill Lynch is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
In addition, in the ordinary course of its business, Merrill Lynch and its
affiliates may actively trade the equity securities of MCB Financial and its
affiliates and Business Bancorp and its affiliates for their own account and/or
the accounts of their respective customers, and, accordingly, may at any time
hold long or short positions in these securities. Merrill Lynch does not hold
any of these shares as principal, which means that the voting and disposition
power generally is held by the retail owner of the shares.
Pursuant to a letter agreement between MCB Financial and Merrill Lynch,
dated as of August 15, 2001, MCB Financial agreed to pay Merrill Lynch for
financial advisory services rendered through the closing of the merger (1) a
fee of $15,000 upon the execution of the letter agreement, (2) a fee of $35,000
upon the execution of the merger agreement and (3) a fee of $450,000 payable in
cash upon the closing of the merger. MCB Financial also agreed, among other
things, to reimburse Merrill Lynch for certain expenses incurred in connection
with the services provided by Merrill Lynch, and to indemnify Merrill Lynch and
its affiliates from and against certain liabilities and expenses, which may
include certain liabilities under federal securities laws, in connection with
its engagement. MCB Financial also retained another financial advisor in
connection with its review of the merger, Fox-Pitt, Kelton Inc. to assist in
the negotiations. Subsequent to performance of its review and analysis and the
rendering of Merrill Lynch's opinion, the investment banking team involved in
the transaction left Merrill Lynch and joined the firm of Fox-Pitt, Kelton Inc.
MCB Financial retained Fox-Pitt, Kelton Inc. to secure the services of these
individuals in the future review and negotiation of the merger. Upon closing of
the merger Fox-Pitt, Kelton Inc. will receive $350,000 of the $500,000 in fees
originally to be paid to Merrill Lynch.
Regulatory Approvals We Must Obtain For The Merger To Occur
The merger and the bank merger are subject to receipt of the following
regulatory approvals:
* the bank merger requires the approval of the Federal Reserve Board
under the Bank Merger Act which we received on October 25, 2001; and
* the California Commissioner must approve the merger.
The merger and the bank merger of Metro Commerce Bank and Business Bank
are subject to the approval of (a) the Federal Reserve Board under the Bank
Merger Act; and (b) the California Commissioner under the California Financial
Code.
Under the Bank Merger Act, the Federal Reserve Board must withhold
approval of the merger or the bank merger, as the case may be, if it finds that
the transaction would tend to create a monopoly or would in any other manner be
in restraint of trade, unless it finds that any such anti-competitive effects
43
of the merger or the bank merger are clearly outweighed in the public interest
by the probable effects of the merger or the bank merger in meeting the
convenience and needs of the communities to be served. Also, the merger and the
bank merger may not be consummated for 30 days from the date of approval,
during which time it could be challenged by the United States Department of
Justice on antitrust grounds. With the approval of the Department of Justice,
however, this waiting period may be reduced to no less than 15 days. The
commencement of an antitrust action by the Department of Justice would stay the
effectiveness of Federal Reserve Board approval of the merger or the bank
merger unless a court specifically ordered otherwise.
In deciding whether to approve the merger and the bank merger, the Federal
Reserve Board will also take into consideration the financial and managerial
resources and future prospects of the banking subsidiaries following the
transactions. The Federal Reserve Board has indicated that it will not approve
a significant acquisition unless the resulting institution has sufficient
capitalization, taking into account, among other things, asset quality.
In addition, under the Community Reinvestment Act of 1977 ("CRA"), the
Federal Reserve Board must take into account the record of performance of each
insured depository institution subsidiary of Business Bancorp, including
Business Bank, in meeting the credit needs of the entire community, including
low- and moderate-income neighborhoods, served by each company. As part of the
review process for the merger and the bank merger, the Federal Reserve Board
will solicit public comments regarding the applications. The Federal Reserve
Board frequently receives, in merger transactions, protests from community
groups and others regarding various aspects of the proposal and, in particular,
the extent to which the applicants are complying with CRA and fair lending
laws. Business Bank and Metro Commerce Bank have received, respectively, CRA
ratings of "outstanding" and "satisfactory" in their most recent CRA
examinations by their respective federal regulators.
The Federal Reserve Board is also authorized (but generally not required)
to hold a public hearing or meeting in connection with an application for
approval of a merger under the Bank Merger Act if it determines that such a
hearing or meeting would be appropriate. A decision by the Federal Reserve
Board to hold a public hearing or meeting regarding any such application could
prolong the period during which that application is subject to review by the
Federal Reserve Board.
Business Bancorp and Business Bank filed an application seeking approval
of the merger and the bank merger with the Federal Reserve Board on September
21, 2001. The Federal Reserve Board approved the application on October 25,
2001.
The merger and bank merger will also be subject to the prior approval of
the California Commissioner. The factors that the California Commissioner will
consider in determining whether to grant his approval include the competitive
effects of the merger and the bank merger, the principles of sound banking and
the public interest and the needs of the communities served by the banks.
Business Bancorp and Business Bank filed an application seeking approval
of the merger and the bank merger with the California Commissioner on September
21, 2001. The parties anticipate that the California Commissioner will act on
and approve the application by the end of the fourth quarter of 2001.
Based on current precedents, MCB Financial and Business Bancorp believe
that the merger will be approved by the appropriate regulatory agencies and
will not be subject to challenge by the Department of Justice under the
antitrust laws. However, no assurance can be provided that the regulatory
agencies or the Department of Justice will concur in this assessment or that
any approval by the regulatory agencies will not contain conditions which are
materially burdensome to MCB Financial or Business Bancorp.
Also, there can be no assurance as to whether or when any of the
above-described regulatory approvals required for consummation of the merger
and the bank merger will be obtained or as to any conditions that may be
imposed in connection with the granting of such approvals. See "The Merger
Agreement--Conditions to the Completion of Merger" on page 55.
Nasdaq National Market Listing
Business Bancorp has filed an application for listing of its common stock
on the Nasdaq National Market which is expected to become effective on the
closing date of the merger. There can be no
44
assurance that Business Bancorp's application for listing on the Nasdaq
National Market will be granted by Nasdaq or that, if granted, Business Bancorp
will continue to meet the requirements for maintaining that listing. Business
Bancorp's common stock is currently traded on the Nasdaq SmallCap Market.
Interests of Certain Officers and Directors in the Merger
Certain directors and officers of MCB Financial may receive benefits from
the merger that are different from or in addition to the benefits received by
other shareholders. These benefits include the following:
Executive officers/employee-directors/other directors of MCB Financial
hold options to acquire 95,549 shares of MCB Financial common stock. In the
merger, these options will be replaced by options to acquire Business Bancorp
common stock, with the number of shares and exercise price adjusted to reflect
the exchange ratio.
As of October 18, 2001, the directors and executive officers of MCB
Financial owned an aggregate of 263,526 shares of MCB Financial common stock
(not including 95,549 shares subject to options exercisable currently or within
60 days of October 18, 2001) which, if owned by them at the effective date,
will be converted into shares of Business Bancorp common stock with an
approximate aggregate market value of $4,029,813 (based on the $13 per share
closing price of Business Bancorp common stock on the Nasdaq SmallCap Market on
October 19, 2001).
Under the merger agreement, Business Bancorp has agreed to appoint the
seven current directors of MCB Financial to the Business Bancorp and Business
Bank boards of directors. These appointees will be entitled to receive the
directors' fees and benefits that Business Bancorp and Business Bank extend to
their respective directors. Currently, Business Bancorp does not pay fees to
its directors and Business Bank pays certain cash fees. See "Directors,
Executive Officers and Principal Shareholders of Business Bancorp--Compensation
of Directors" on page 123.
After the merger, the officers of Business Bancorp will be:
Chairman: Timothy J. Jorstad
Vice Chairman: John E. Duckworth
Chief Executive Officer: Alan J. Lane
President & Chief Operating Officer: Charles O. Hall
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
After the merger, the officers of Business Bank will be:
Chairman: John E. Duckworth
Vice Chairman: Timothy J. Jorstad
Chief Executive Officer: Charles O. Hall
President: Alan J. Lane
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
Under Mr. Hall's current employment agreement with MCB Financial, in the
event his employment is terminated for any reason other than death, disability,
voluntary retirement or cause he will be entitled to receive a severance
payment in an amount equal to his then base salary for 36 months in one lump
sum. If Mr. Hall's employment is terminated for reasons of death, voluntary
retirement or cause he will not be entitled to any severance payment. Under Mr.
Phelan's severance agreement with MCB Financial and Metro Commerce Bank in the
event Mr. Phelan's employment is terminated for any reason other than death,
disability, voluntary retirement or cause he will be entitled to receive a
severance benefit equal to eighteen months of pay and an added benefit of two
weeks of pay for each full year of service, provided that the total benefit
payable to Mr. Phelan shall not exceed two years of pay. Although the
employment agreements of Mr. Lane and certain other officers of Business
Bancorp provide for severance payments in the event of a change in control of
Business Bancorp or Business Bank, these provisions will not be triggered by
the merger. However, those provisions may have the effect of increasing the
cost of acquiring Business Bancorp, thereby discouraging future attempts to
take over Business Bancorp or Business Bank.
45
Business Bancorp intends to offer employment contracts to Alan J. Lane,
Charles O. Hall and Patrick E. Phelan which would supersede the existing
agreements and eliminate the payments described in the preceding paragraphs.
Execution of these agreements is a condition to completion of the merger.
However, these officers would again be entitled to similar payments if Business
Bancorp were to experience a change in control after the merger is completed.
In addition, the merger agreement provides that if any of these officers is
terminated without cause within 12 months following the closing of the merger,
upon termination that officer will be entitled to receive any severance and/or
change of control payments provided for under his prior agreement. Such
termination would require the approval of seventy percent of the authorized
number of directors under Business Bancorp's Bylaws to be in effect following
the merger. See "Operations Following the Merger--Director
Voting--Supermajority Vote Requirements" on page 61.
In addition, the merger agreement provides MCB Financial directors and
officers with certain rights to indemnification by Business Bancorp.
Employee Benefit Plans
MCB Financial employees will be eligible to participate in Business
Bancorp's employee benefit plans. Business Bancorp may require MCB Financial to
terminate one or more of its employee benefits plans immediately before the
closing.
Business Bancorp intends to adopt a new stock option plan and a new
employee stock ownership plan as of the effective time of the merger. Business
Bancorp expects to submit the stock option plan for shareholder approval at the
first annual meeting of the merged entity. The stock ownership plan may be
viewed as having the effect of discouraging an unsolicited attempt by another
person or entity to acquire control of Business Bancorp since it may result in
the employees of Business Bancorp acquiring ownership of additional shares of
Business Bancorp after the merger.
Shareholder Rights Plan
Business Bancorp intends to adopt a shareholder rights plan to be
effective as of the effective time of the merger. The plan will entitle
shareholders to acquire a certain number of shares of Business Bancorp common
stock at a discounted price in the event a third party acquires a substantial
block. In the event that Business Bancorp is acquired in a merger or other
business combination transaction or a large percentage of its consolidated
assets or earning power are sold, the rights will entitle shareholders to
purchase shares of the acquiring company at a discounted price. Business
Bancorp will provide shareholders with more specific information regarding the
plan after its adoption.
Accounting Treatment
It is anticipated that the merger will be accounted for as a purchase
transaction under generally accepted accounting principles. The unaudited
pro-forma financial information contained in this proxy statement/prospectus
has been prepared using the purchase method of accounting.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 addresses financial accounting and reporting for business combinations
and is effective for all business combinations after June 30, 2001. SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
is effective for fiscal years beginning after December 15, 2001. With the
adoption of SFAS No. 142, goodwill is no longer subject to amortization over
its estimated useful life, rather goodwill will be subject to at least an
annual assessment for impairment. The merger will be accounted for in
accordance with SFAS No. 141. Any related goodwill or other intangible assets
generated through the transaction will be accounted for in accordance with SFAS
No. 142.
46
Certain Federal Income Tax Consequences
MCB Financial and Business Bancorp expect that the merger will have the
following consequences for federal income tax purposes:
* the merger will not result in any recognized gain or loss to MCB
Financial or Business Bancorp, and Business Bancorp will succeed to the
basis and the holding period of the assets of MCB Financial;
* any cash received in lieu of any fractional share or on account of
dissenting shares of MCB Financial or Business Bancorp generally will
constitute a capital gain or loss, but may constitute ordinary income
if the MCB Financial shares were not held as a capital asset or if the
dissenting shareholder is deemed to own shares held by others;
* neither shareholders of Business Bancorp, nor holders of MCB Financial
common stock who receive solely Business Bancorp common stock in
exchange for their shares of MCB Financial common stock in the merger,
will recognize any gain or loss;
* the holding period of Business Bancorp common stock issued in exchange
for MCB Financial common stock for federal income tax purposes will
include the holding period of the MCB Financial common stock for which
it is exchanged, assuming that the shares of MCB Financial common stock
are capital assets in the hands of the holder at the effective date;
and
* the basis of the Business Bancorp common stock received in the exchange
will be the same as the basis of the MCB Financial common stock for
which it was exchanged, less any basis attributable to fractional
shares for which cash is received.
A shareholder who perfects dissenter's rights and receives payment for his
or her shares will be treated as if the shares were redeemed. In general, if
the shares are held as a capital asset at the time of the merger, the
dissenting shareholder will recognize a capital gain or loss measured by the
difference between the amount of cash received and the basis of the shares in
the hands of the dissenting shareholder. However, if the dissenting shareholder
owns, directly or indirectly through the application of Section 318 of the
Internal Revenue Code, any shares of common stock as to which dissenters'
rights are not exercised and perfected and which are therefore exchanged for
Business Bancorp common stock in the merger, the shareholder may be treated as
having received a dividend in the amount of cash paid to the shareholder in
exchange for the shares as to which dissenter's rights were perfected. Under
Section 318 of the Code, an individual is deemed to own stock that is actually
owned (or deemed to be owned) by certain members of his or her family (spouse,
children, grandchildren and parents, with certain exceptions) and other related
parties, including, for example, certain entities in which the individual has a
direct or indirect interest (including partnerships, estates, trusts and
corporations), as well as stock that such individual (or a related person) has
the right to acquire upon exercise of an option or conversion right held by
such individual (or a related person). Each shareholder who intends to dissent
from the merger (see "The Merger--Dissenters' rights of appraisal" on page 48)
should consult his or her own tax advisor with respect to the application of
the constructive ownership rules to the shareholder's particular circumstances.
For federal tax purposes, the highest marginal tax rate for individuals on
ordinary income is 38.6%, compared to 20% for capital gain, and the highest
marginal tax rate for corporations is 35% on ordinary income and capital gain.
Capital losses are treated differently than ordinary losses. Essentially, a
capital loss for any taxable year may be deducted by a corporation in that year
only to the extent of capital gain, and by an individual in that year only to
the extent of capital gain plus up to $3,000 of ordinary income. Capital losses
not deductible in the year they occur may be carried forward indefinitely by
individuals and may be carried back up to three years and forward up to five
years by corporations.
Neither MCB Financial nor Business Bancorp has requested a ruling from the
IRS in connection with the merger. It is a condition to the consummation of the
merger that MCB Financial and Business Bancorp each receive opinions from their
respective counsel that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Code for federal income tax purposes. The tax
opinions
47
neither bind the IRS nor preclude the IRS from adopting a contrary position.
The tax opinions are subject to certain assumptions and qualifications and are
based in part on the truth and accuracy of certain representations of MCB
Financial and Business Bancorp.
This document does not address the consequences of the merger under state,
local or foreign law. This document does not address all aspects of federal
income taxation that may be relevant to an MCB Financial shareholder in light
of its particular circumstances or if the shareholder is subject to special
rules. Accordingly, each MCB Financial shareholder is urged and expect to
consult with such shareholder's own tax advisor or to determine the particular
United States federal, state, local or foreign income or other tax consequences
of the merger. MCB Financial and Business Bancorp will not bear any expenses
incurred by any shareholder arising from disputes with the IRS or any state or
foreign tax agency over the tax consequences of the merger.
Dissenters' Rights of Appraisal
Shareholders of MCB Financial and Business Bancorp may be entitled to
certain dissenters' appraisal rights if they perfect their rights in accordance
with Chapter 13 of the California Corporations Code. Relevant excerpts of
Chapter 13 are included as Annex C. The following discussion is not a complete
statement of the law relating to dissenters' rights and is qualified in its
entirety by reference to Annex C. This discussion and Annex C should be
reviewed carefully by any shareholder who wishes to exercise dissenters' rights
or who wishes to preserve the right to do so, since failure to comply with the
procedures prescribed in Chapter 13 will result in the loss of dissenters'
rights.
Business Bancorp
If the merger is consummated, those shareholders of Business Bancorp who
elect to exercise their dissenters' rights and who in a timely and proper
fashion perfect such rights will be entitled to receive the "fair market value"
of their shares in cash. "Fair market value" would be determined as of August
14, 2001, the day before the first announcement of the terms of the merger, and
therefore would not include any appreciation or depreciation caused by the
merger. The board of directors of Business Bancorp has determined that the fair
market value of Business Bancorp common stock for this purpose is $14.48 per
share. See "Summary--comparative market price and dividend data" on page 5.
In order to qualify for dissenters' rights, a Business Bancorp shareholder
must not vote in favor of the merger and must make a written demand on Business
Bancorp within 30 days after Business Bancorp mails to shareholders the notice
of approval of the merger. Abstentions and broker non-votes will not be
considered votes in favor of the merger and the affected shares may still
perfect dissenter's rights.
If the merger is approved, Business Bancorp will, within ten days after
the meeting, mail to any shareholder who did not vote for the merger a notice
that the required shareholder approval of the merger was obtained. This notice
of approval will state the price determined by Business Bancorp to represent
the "fair market value" of any dissenting shares and a brief description of the
procedures to be followed by dissenting shareholders who wish to pursue further
their statutory rights. The dissenting shareholder must deliver his or her
share certificate for receipt by Business Bancorp within 30 days after the date
on which the notice of approval was mailed to the shareholder. Business Bancorp
will stamp or endorse the certificate with a statement that the shares are
dissenting shares and return it to the dissenting shareholder. The statements
in the notice of approval will constitute an offer by Business Bancorp to
purchase from its shareholders any dissenting shares at the price stated, but
only if the merger is consummated. However, the determination by Business
Bancorp of fair market value is not binding on its shareholders.
A Business Bancorp shareholder who does not accept Business Bancorp's
determination of fair market value must send a written demand to Business
Bancorp, 140 South Arrowhead Avenue, San Bernardino, California 92408,
Attention: Corporate Secretary. The written demand must state the number and
class of shares held of record by such shareholder which the shareholder
demands that Business Bancorp purchase for cash, and it must contain a
statement of the amount which the shareholder claims to be the fair market
value of the dissenting shares as of the day before announcement of the
proposed merger. That statement will constitute an offer by the shareholder to
sell his or her dissenting shares to Business Bancorp at that price.
48
If Business Bancorp and a dissenting shareholder do not agree on the
other's proposed purchase price, the shareholder has the right for six months
following the mailing of the notice of approval to file a lawsuit to have the
fair market value determined by a court. The fair market value of dissenting
shares as determined by the court in those circumstances could be higher or
lower than the amount offered by Business Bancorp in the notice of approval or
the consideration provided for in the merger agreement, and any such
determination would be binding on the dissenting shareholder or shareholders
involved in the lawsuit and on Business Bancorp. Any party may appeal from the
judgment. However, the court action to determine the fair market value of
shares will be suspended if litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing the merger. No
shareholder who has appraisal rights under Chapter 13 will have any right to
attack the validity of the merger except in an action to test whether the
number of shares required to authorize the merger has been legally voted in
favor of the merger.
Dissenting Business Bancorp shares may lose their status as such if any of
the following events occurs:
* the merger is abandoned (in which case Business Bancorp must pay on
demand to dissenting shareholders who have initiated proceedings in
good faith as provided under Chapter 13 all necessary expenses and
reasonable attorneys' fees incurred in such proceedings);
* the dissenting shares are transferred before being submitted to
Business Bancorp for endorsement;
* the dissenting shareholder withdraws his or her demand with the consent
of Business Bancorp; or,
* in the absence of agreement between the dissenting shareholder and
Business Bancorp as to the price of his or her shares, the Business
Bancorp shareholder fails to file suit or otherwise fails to become a
party to such suit within six months following the mailing of the
notice of approval.
The receipt of a cash payment for dissenting shares will result in
recognition of gain or loss for federal and California state income tax
purposes by dissenting shareholders. See "The Merger--Certain Federal Income
Tax Consequences" on page 47.
MCB Financial
Dissenters' rights will be available to the shareholders of MCB Financial
only if the conditions described below are satisfied. Dissenters' rights
entitle shareholders to receive an amount equal to the fair market value of
their shares as of August 14, 2001, the last business day before the public
announcement of the merger. The closing sales price for MCB Financial common
stock on that day was $13.35.
In order to be entitled to exercise dissenters' rights, a shareholder of
MCB Financial must vote against the merger. If the shareholder returns a proxy
without voting instructions or with instructions to abstain or vote for the
merger, his or her shares will automatically be voted in favor of the merger
and the shareholder will lose any dissenters' rights. In the event of a broker
non-vote of his or her shares held in street name, the shareholder will also
lose any dissenters' rights.
To preserve dissenters' rights, a MCB Financial shareholder must also make
a written demand on MCB Financial for the purchase of dissenting shares and
payment to the shareholder of their fair market value, specifying the number of
shares held by the shareholder and a statement of what the shareholder claims
to be the fair market value of those shares as of August 14, 2001. The demand
must be addressed to MCB Financial, 1248 Fifth Avenue, San Rafael, California
94901 Attention: Corporate Secretary, and must be received by MCB Financial not
later than the date of MCB Financial's special meeting. A vote against the
merger does not constitute the written demand.
No dissenters' rights will be available unless holders of at least five
percent of MCB Financial common stock vote against the merger and submit the
required demand before the meeting. If holders of five percent or more of the
outstanding shares submit the required demand and the merger is approved by the
shareholders, MCB Financial will have 10 days after the approval to send to
those shareholders who have voted against the merger written notice of the
approval accompanied by a copy of Chapter 13, a statement of the price
determined by MCB Financial to represent the fair market value of the
dissenting shares as of August 14, 2001, and a brief description of the
procedure to be followed if a shareholder
49
desires to exercise dissenters' rights. Within 30 days after the date on which
the notice of the approval is mailed, the dissenting shareholder must surrender
to MCB Financial, at the office designated in the notice of approval, the
certificates representing the dissenting shares. MCB Financial will stamp or
endorse them with a statement that they are dissenting shares or exchange them
for certificates of appropriate denomination so stamped or endorsed. Any shares
of MCB Financial common stock that are transferred prior to their submission
for endorsement lose their status as dissenting shares.
If MCB Financial and the dissenting shareholder agree that the surrendered
shares are dissenting shares and agree on the purchase price, the dissenting
shareholder will be entitled to the agreed price with interest at the legal
rate on judgments from the date of the agreement. MCB Financial will pay the
fair market value of the dissenting shares within 30 days after the price has
been agreed upon or 30 days after any statutory or contractual conditions to
the merger have been satisfied, whichever is later, subject to the surrender of
the certificates, unless provided otherwise by agreement.
If MCB Financial denies that the shares surrendered are dissenting shares,
or MCB Financial and the dissenting shareholder fail to agree on a fair market
value, then the dissenting shareholder must, within six months after the notice
of approval is mailed, file a complaint in the Superior Court of the proper
county requesting the court to make the determinations or intervene in any
pending action brought by any other dissenting shareholder. If the shareholder
does not file a complaint or intervene in a pending action within the specified
six-month period, the dissenters' rights are lost. If the fair market value of
the dissenting shares is at issue, the court will determine, or will appoint
one or more impartial appraisers to determine, the fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless MCB Financial consents to the withdrawal.
The receipt of a cash payment for dissenting shares will result in
recognition of gain or loss for federal and California state income tax
purposes by dissenting shareholders. See "The Merger--Certain Federal Income
Tax Consequences" on page 47.
Resales of Business Bancorp Common Stock
The shares of Business Bancorp common stock to be issued to shareholders
of MCB Financial under the merger agreement have been registered under the
Securities Act of 1933 so these shares may be freely traded without restriction
by people who will not be affiliates of Business Bancorp after the merger and
who were not affiliates of MCB Financial on the date of the special meeting.
All directors and executive officers of MCB Financial are affiliates of
MCB Financial for this purpose. Those people may resell shares of Business
Bancorp common stock to be received by them in the merger only if the shares
are registered for resale under the Securities Act or an exemption from such
registration under the Securities Act is available. Those people may be
permitted to resell the Business Bancorp shares under the safe harbor
provisions of Rule 145 under the Securities Act (or Rule 144 in the case of
such persons who become affiliates of Business Bancorp) or as otherwise
permitted under the Securities Act. Each MCB Financial director and each other
person deemed to be an affiliate has entered into an agreement with Business
Bancorp providing that the person will not transfer any shares of Business
Bancorp common stock received in the merger, except in compliance with the
Securities Act. We encourage any such person to obtain advice of securities
counsel before reselling any Business Bancorp shares.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the agreement and
plan of reorganization relating to the merger, also referred to as the "merger
agreement," a copy of which is attached to this document as Annex A. The merger
agreement is incorporated by reference into this document. We urge you to read
the merger agreement in its entirety.
Structure of the Merger; Effective Time
The merger agreement contemplates the merger of MCB Financial with and
into Business Bancorp. Business Bancorp will be the surviving corporation in
the merger and will continue its corporate existence under California law.
Simultaneously, Metro Commerce Bank will be merged with and into Business Bank
with Business Bank as the surviving corporation in the bank merger. Business
Bank will continue to operate as a commercial bank and wholly owned subsidiary
of Business Bancorp. The merger will become effective upon the filing of an
agreement of merger with the Secretary of State of the State of California, or
at such time thereafter as is provided in the agreement of merger. The closing
of the merger and the bank merger will take place on a date to be specified by
the parties, which will be the earliest practicable day after satisfaction of
all of the conditions stated in the merger agreement, unless Business Bancorp
and MCB Financial agree to another time or date. See "--Conditions to
completion of the merger" on page 55.
Conversion of MCB Financial Common Stock
If you are a shareholder of MCB Financial common stock as of the effective
time of the merger, each of your shares of MCB Financial common stock will be
converted into the right to receive 1.1763 shares of Business Bancorp common
stock. Your shares of MCB Financial common stock will no longer be outstanding
and will be automatically canceled and retired and will cease to exist. Your
stock certificate previously representing shares of MCB Financial common stock
will be exchanged for a certificate representing whole shares of Business
Bancorp common stock.
You will not receive any fractional shares of Business Bancorp common
stock. If you are entitled to a fraction of a share of Business Bancorp common
stock you will, instead, receive an amount in cash. The cash amount will be
equal to the average of the closing sale prices of Business Bancorp common
stock on the Nasdaq SmallCap Market as reported for the five trading days
immediately preceding the effective time of the merger multiplied by the
fraction of a share of Business Bancorp common stock to which you would
otherwise have been entitled. You will not be entitled to dividends, voting
rights, interest on the value of, or any other rights in respect of a
fractional share. In the event Business Bancorp pays, declares or otherwise
effects a stock split, reverse stock split, reclassification or stock dividend
or stock distribution with respect to Business Bancorp common stock between the
date of the merger agreement and the effective time of the merger, appropriate
adjustments will be made to the number of shares of Business Bancorp common
stock into which your shares of MCB Financial common stock will be converted.
Stock Options
At the effective time of the merger, each option to acquire MCB Financial
common stock which is outstanding and unexercised will be converted
automatically into an option to purchase shares of Business Bancorp common
stock. The number of shares to be subject to the new option will be equal to
the product of the number of shares of MCB Financial common stock subject to
the original option immediately prior to the effective time of the merger and
the exchange ratio, rounded down to the nearest share. The exercise price per
share of Business Bancorp common stock under the new option will be equal to
the exercise price per share of MCB Financial common stock under the original
option immediately prior to the effective time of the merger divided by the
exchange ratio of 1.1763. The exercise price will be rounded up to the nearest
cent. In the case of any options which are "incentive stock options," as
defined in Section 422 of the Internal Revenue Code, the exercise price, the
number of shares purchasable pursuant to such options and the terms and
conditions of such options will be determined in order to comply with Section
424(a) of the Internal Revenue Code. The duration and other terms of the new
options will be the same as those of the original option.
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Exchange Agent; Exchange Procedure
Under the merger agreement, Business Bancorp and MCB Financial have agreed
to appoint a bank or trust company mutually acceptable to MCB Financial and
Business Bancorp, as exchange agent for the purpose of exchanging certificates
representing the Business Bancorp common stock which are to be issued pursuant
to the merger agreement. As soon as practicable after the effective time of the
merger, upon the surrender of your MCB Financial shares certificate for
cancellation, you will be entitled to receive a certificate representing the
number of shares of Business Bancorp common stock determined in accordance with
the merger agreement and a payment in cash with respect to any fractional
shares. Do not send in your certificates at this time. Please wait until you
receive a transmittal letter with more specific instructions on exchanging your
certificates.
You will not receive any dividends or other distributions of any kind
which are declared payable to shareholders of record of the shares of Business
Bancorp common stock after the effective time of the merger until you surrender
your certificate for shares of MCB Financial common stock. Upon such surrender
of your MCB Financial certificate, you will be paid, without interest, any
dividends or other distributions with respect to the shares of Business Bancorp
common stock as to which the record date and payment date occurred on or after
the effective time of the merger and on or before the date on which you
surrendered your certificate for shares of MCB Financial common stock.
If you would like your certificate for shares of Business Bancorp common
stock to be issued in a name other than the name or names in which your
exchanged MCB Financial certificate is registered, you will have to pay to the
exchange agent any transfer costs, taxes or other expenses required by reason
of the issuance of certificates for such shares of Business Bancorp common
stock in a name other than the registered holder of the exchanged MCB Financial
certificate.
All dividends or distributions, and any cash to be paid instead of
fractional shares, if held by the exchange agent for payment or delivery to the
holders of unsurrendered MCB Financial certificates representing shares of MCB
Financial common stock and unclaimed at the end of one year from the effective
time of the merger, shall (together with any interest earned thereon) at such
time be paid or redelivered by the exchange agent to Business Bancorp. After
such time, if you still have not surrendered your MCB Financial certificate,
you must look as a general creditor only to Business Bancorp for payment or
delivery of such dividends or distributions of cash, as the case may be.
Neither MCB Financial nor Business Bancorp shall be liable to you for such
shares (or dividends or distributions thereon) or cash payable instead of
fractional shares delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
Representations and Warranties
In the merger agreement, each of Business Bancorp and MCB Financial make
certain customary representations, including those related to the following:
* Incorporation, valid existence and authority to conduct business;
* Authorization to enter into the merger agreement, and the absence of
any material conflict between the merger agreement and other agreements
to which each is a party;
* Capital structure;
* The accuracy of information in regulatory filings;
* The accuracy of representations in the merger agreement, financial
statements and this document;
* Compliance with applicable laws, including ERISA;
* Necessary licenses and permits;
* The absence of material litigation involving it;
* The adequacy of its allowance for loan losses;
* The status of its insurance coverage and claims;
* The filing of tax returns and payment of taxes;
* The performance of contractual obligations;
* Receipt of a fairness opinion from its financial adviser;
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* Whether any claims or any basis for claims of indemnification by
directors and officers exists;
* The absence of hazardous materials on any its properties;
* Responsibility for broker's fees;
* The absence of any regulatory agreements affecting it; and
* The absence of any material adverse change or undisclosed liabilities.
MCB Financial makes the additional representation that it has taken action
so that the merger agreement will not trigger the exercisability of rights
under its existing shareholder rights plan.
Conduct of Business Pending the Merger and Other Covenants
Prior to the effective time of the merger, except as expressly
contemplated by the merger agreement, (i) without the prior written consent of
Business Bancorp (which consent will not be unreasonably withheld or delayed),
MCB Financial will not, and will cause each of its subsidiaries not to, and
(ii) without the prior written consent of MCB Financial (which consent will not
be unreasonably withheld or delayed), Business Bancorp will not, and will cause
each of its subsidiaries not to:
* conduct the business of it and its subsidiaries other than in the
ordinary and usual course or, to the extent consistent therewith, fail
to use reasonable efforts to preserve intact their business
organizations and assets and maintain their rights, franchises and
existing relations with customers, suppliers, employees and business
associates, or take any action that would (1) adversely affect the
ability of any party to obtain any necessary approvals of any
regulatory authorities required for the transactions contemplated by
the merger agreement or (2) adversely affect its ability to perform any
of its material obligations under the merger agreement;
* other than (i) pursuant to securities or obligations convertible into
or exchangeable into capital stock, or any options, calls or other
similar commitments or as previously disclosed to the other ("Rights"),
(ii) pursuant to the stock option the parties have issued to each other
in connection with the merger, (iii) pursuant to the MCB Financial
Shareholder Rights Agreement, (iv) pursuant to trust preferred
securities issued in the ordinary course of business or (v) as
otherwise disclosed between the parties prior to signing of the merger
agreement, (1) issue, sell or otherwise permit to become outstanding,
or authorize the creation of, any additional shares of capital stock,
any stock appreciation rights or any Rights, (2) enter into any
agreement with respect to the foregoing, or (3) permit any additional
shares of capital stock to become subject to new grants of employee
stock options, stock appreciation rights, or similar stock-based
employee rights;
* (i) adjust, split, combine or reclassify any capital stock, (ii) make,
declare or pay any dividend on or in respect of, or declare or make any
distribution on any shares of its capital stock (other than (A) in the
case of MCB Financial, (1) quarterly one cent per share cash dividends
on MCB Financial common stock and (2) dividends from greater than
95%-owned subsidiaries to MCB Financial or to another greater than
95%-owned subsidiary of MCB Financial, as applicable, and (B) in the
case of Business Bancorp, (1) quarterly one cent per share cash
dividends on Business Bancorp common stock and (2) dividends from
greater than 95%-owned subsidiaries to Business Bancorp or to another
greater than 95%-owned subsidiary of Business Bancorp, as applicable),
or (iii) other than (A) as otherwise disclosed between the parties
prior to signing of the merger agreement, or (B) in the ordinary course
pursuant to employee benefit plans, directly or indirectly combine,
redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock. After the date of the merger agreement, each of Business
Bancorp and MCB Financial will coordinate with the other the
declaration of any dividends in respect of Business Bancorp common
stock and MCB Financial common stock and the record dates and payment
dates relating thereto, so that shareholders of Business Bancorp or MCB
Financial will not receive two dividends, or fail to receive one
dividend, for any single calendar quarter with respect to their
Business Bancorp and/or MCB Financial shares and any shares of Business
Bancorp any such holder receives in exchange therefor in the merger;
* except as disclosed to the other, (i) enter into or amend any written
employment, severance or similar agreements or arrangements with any of
its directors or executive officers, (ii) enter into or
53
amend any written employment, severance or similar agreements or
arrangements with any of its officers or employees, or (iii) grant any
salary or wage increase or increase any employee benefit (including
incentive or bonus payments), except for (A) normal individual
increases in compensation to employees in the ordinary course of
business consistent with past practice or (B) other changes as are
provided for herein or as may be required by law or to satisfy
contractual obligations existing as of the date hereof or additional
grants of awards to newly hired employees consistent with past
practice;
* except as disclosed to the other, or as otherwise contemplated by the
merger agreement, enter into or amend (except as may be required by
applicable law, to satisfy contractual obligations existing as of the
date hereof or amendments which, either individually or in the
aggregate, would not reasonably be expected to result in a material
liability to MCB Financial, Business Bancorp or their respective
subsidiaries) any pension, retirement, stock option, stock purchase,
savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees,
including, without limitation, taking any action that accelerates the
vesting or exercise of any benefits payable thereunder;
* except as disclosed to the other, dispose of or discontinue any portion
of its assets, business or properties, which is material to it and its
subsidiaries taken as a whole, or acquire (other than by way of
foreclosures or acquisitions of control in a bona fide fiduciary
capacity or in satisfaction of debts previously contracted in good
faith, in each case, in the ordinary and usual course of business
consistent with past practice) all or any portion of, the business or
property of any other entity which is material to it and its
subsidiaries taken as a whole;
* except as contemplated by the merger agreement and set forth in the
notice of meeting for the Business Bancorp special meeting, amend its
Articles of Incorporation or Bylaws or amend or waive any rights under
the MCB Financial Shareholder Rights Agreement;
* implement or adopt any change in its accounting principles, practices
or methods, other than as may be required by generally accepted
accounting principles;
* (i) knowingly take any action that would, or would be reasonably likely
to, prevent or impede the merger from qualifying as a "reorganization"
within the meaning of Section 368(a) of the Code; or (ii) knowingly
take any action that is intended or is reasonably likely to result in
(A) any of its representations and warranties set forth in the merger
agreement being or becoming untrue in any material respect at any time
prior to the effective time of the merger, (B) any of the conditions to
the merger set forth in Article IX of the merger agreement not being
satisfied or (C) a material violation of any provision of the merger
agreement except, in each case, as may be required by applicable law;
and
* settle any material claim, action or proceeding, except in the ordinary
course of business consistent with past practice.
The merger agreement also contains certain other agreements relating to
the conduct of the parties prior to the effective time, including those
requiring the parties (i) to use their reasonable best efforts in good faith to
take the necessary actions to effect the merger; (ii) to take all actions
necessary to obtain all necessary shareholder approvals; (iii) to cooperate in
the preparation of the registration statement of which this joint proxy
statement/prospectus is a part; (iv) to cooperate in preparing, filing and
obtaining all necessary regulatory approvals; (v) to refrain from issuing press
releases regarding the merger without the other party's prior approval (except
as otherwise required by applicable law, regulation or rules of the American
Stock Exchange or Nasdaq); (vi) to provide the other party with reasonable
access to information regarding such party (except insofar as such access would
violate or prejudice the rights of customers, jeopardize the attorney-client
privilege or contravene certain legal, fiduciary or contractual obligations)
under the condition that no such confidential information be shared with any
third party except as required by applicable law; (vii) to refrain from
soliciting or encouraging any alternative business combination transactions;
and (viii) to take steps necessary to ensure that the merger agreement
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and the merger will not trigger any special shareholder rights contained in the
corporate governance documents of such party and will not trigger the
anti-takeover laws of the State of California.
Business Bancorp has agreed to provide indemnification to the officers,
directors and employees of Business Bank and MCB Financial for six years after
the effective time against certain liabilities in connection with such
individual's status. Business Bancorp has also agreed that all rights to
indemnification provided in MCB Financial's and Business Bancorp's governing
documents shall continue in effect for six years following the effective time
with respect to events occurring before the effective time of the merger.
Conditions to Completion of the Merger
Completion of the merger is subject to satisfaction of certain conditions.
The obligations of both parties to proceed are subject to the following
conditions:
* The absence of any injunction or other legal proceeding restraining the
merger;
* Receipt of required regulatory approvals and third party consents;
* Receipt of an order from the SEC declaring the registration statement
of Business Bancorp effective;
* Receipt of an opinion that the merger will qualify as a tax-free
reorganization under the Internal Revenue Code;
* The Business Bancorp common stock shall have been approved for listing
on the Nasdaq National Market;
* Receipt of approval by the shareholders of MCB Financial and Business
Bancorp; and
* Receipt of customary legal opinions.
In addition, Business Bancorp's obligation to complete the merger is
subject to satisfaction of the following conditions:
* The representations of MCB Financial shall be accurate;
* MCB Financial will have performed its obligations under the merger
agreement;
* No government action shall have been taken that would prevent the
parties from completing the merger or require Business Bancorp to
divest any material portion of MCB Financial's assets;
* MCB Financial will not have suffered any material adverse change;
* No regulatory authority will have imposed any unduly burdensome
condition on its approval of the completion of the merger;
* Business Bancorp will have received customary closing certificates of
officers of MCB Financial;
* Business Bancorp will have received voting agreements and affiliate
agreements from the directors of MCB Financial; and
* Certain employees of MCB Financial will have signed employment
agreements acceptable to Business Bancorp.
The obligation of MCB Financial to complete the merger is subject to
satisfaction of the following conditions:
* The representations of Business Bancorp shall be accurate;
* Business Bancorp shall have performed its obligations under the merger
agreement;
* Business Bancorp shall not have suffered any material adverse change;
* MCB Financial will have received customary closing certificates of
officers of Business Bancorp; and
* Business Bancorp shall have appointed to its board of directors all of
the current members of MCB Financial's board and two existing directors
of Business Bancorp shall have resigned.
55
Additional Agreements
As discussed elsewhere in this joint proxy statement/prospectus, the
merger agreement requires Business Bancorp to take the following additional
actions in connection with the merger: amend its Bylaws in certain respects;
provide employment agreements to certain officers of MCB Financial; and adopt
an employee stock ownership plan, a shareholder rights plan and a stock option
plan. See "The Merger--Interests of certain officers and directors in the
merger" on page 45, "--Employee benefit plans" on page 46 and "--Shareholder
rights plan" on page 46; and "Operations Following the Merger" on page 60.
Extension; Waiver
At any time before the closing of the merger, the parties may, to the
extent legally allowed, extend the time for the performance of any of the
obligations or other acts of the other party, waive any inaccuracies in the
representations and warranties contained in the merger agreement or in any
document delivered under it, and waive compliance with any of the agreements or
conditions contained in the merger agreement. To "waive" means to give up
rights.
Any agreement on the part of a party to the merger agreement to any
extension or waiver will be valid only if included in a written instrument
signed on behalf of the party.
Termination
Business Bancorp and MCB Financial can mutually agree at any time to
terminate the merger agreement without completing the merger, even if the
shareholders of both Business Bancorp and MCB Financial have approved it. Also,
the merger agreement can be terminated by one of us if specified events occur.
If the merger agreement is terminated, the merger will not occur.
Either Business Bancorp or MCB Financial can terminate the merger
agreement if any of the following events occurs:
* if there has been a final judicial or regulatory determination that any
material provision of the merger agreement is illegal, invalid or
unenforceable or denying any required regulatory application;
* if the shareholders of Business Bancorp or MCB Financial fail to
approve the merger agreement at their respective shareholders meeting;
* if the other party breaches any representation, warranty, covenant or
agreement and fails to cure the breach within 45 days after written
notice from the other party; or
* after March 31, 2002, if the merger has not been consummated by then,
unless the failure to consummate the merger was due to the failure of
the party requesting termination to perform an obligation under the
Agreement.
Even if the merger agreement is terminated, the provisions regarding
payment of expenses, confidentiality, payment of any termination fees if
applicable or any relevant general provisions of the merger agreement will
continue in effect. Also, if the merger agreement is terminated due to a
party's breach, the termination will not relieve the breaching party from its
liability and the non-breaching party will retain all of its legal rights and
remedies against the breaching party for its breach.
Expenses; Liquidated Damages
Generally, each party has agreed to bear its own expenses in this
transaction. Business Bancorp and MCB Financial will bear equally the costs of
distributing these proxy materials and of conducting a meeting of its
shareholders and the legal fees in connection with drafting the merger
agreement and certain fees owing to Merrill Lynch, financial advisor for MCB
Financial. Business Bancorp will pay the fees and costs related to the listing
of the shares of Business Bancorp common stock for trading on the Nasdaq
National Market.
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A party to the merger agreement may terminate the agreement and seek $2.0
million in liquidated damages from the other party under the following
circumstances:
* if the other party abandons the transaction for reasons other than
those permitted in the merger agreement; or
* if a party breaches any provision of the agreement and fails to cure
the breach within 45 days after written notice from the other party.
Amendment
The parties may amend the merger agreement at any time before or after
approval of the merger agreement by the shareholders of Business Bancorp and
MCB Financial. However, after the approval by the shareholders of Business
Bancorp and MCB Financial, no amendment may change the form of consideration or
the value of the consideration to be received by the shareholders of MCB
Financial or any other provision of the agreement which by law requires further
approval by the shareholders. The merger agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties.
STOCK OPTION AGREEMENTS BETWEEN BUSINESS BANCORP AND MCB FINANCIAL
When we signed the merger agreement we also signed two stock option
agreements. Under the stock option agreements, MCB Financial and Business
Bancorp (each an "Option Issuer") each gave the other (each an "Option Holder")
an option to purchase common stock representing approximately 19.9% of the
outstanding shares of the party granting the option, exercisable only under
certain circumstances specified in the option. Business Bancorp has the right
to purchase up to 316,510 shares of MCB Financial at an exercise price equal to
the closing price quoted on the American Stock Exchange on the day preceding
(or, if there have been no trades on such date, the closing price on the next
preceding date on which trades occurred) the execution of the merger agreement.
MCB Financial has the right to purchase up to 403,347 shares of Business
Bancorp for a per share price equal to the closing price quoted on the Nasdaq
SmallCap Market on the day preceding (or, if there have been no trades on such
date, the closing price on the next preceding date on which trades occurred)
the execution of the merger agreement. The exercise prices are subject to
adjustment in certain circumstances. MCB Financial and Business Bancorp each
agreed to grant these options in order to induce the other to enter into the
merger agreement. The options could have the effect of discouraging other
companies from trying to acquire MCB Financial or Business Bancorp before
completion of the merger. The following is a summary of the material provisions
of the stock option agreements, which are attached as Exhibits A and B to the
merger agreement. We urge you to read them.
Exercise of Stock Options
Except as otherwise noted below, the terms and conditions of the two stock
options are identical in all material respects. An Option Issuer is not
required to issue shares upon exercise of an option until all legal
requirements have been fulfilled.
Each stock option provides that the Option Holder may elect to exercise
its option in whole or in part only after the occurrence of any of the
following "Purchase Events:"
* an Option Issuer or any of its subsidiaries, without prior written
consent of the Option Holder, recommends, publicly announces an
intention to recommend, or enters into an agreement with any person
(other than the Option Holder or any of its subsidiaries) to effect any
of the following acquisition transactions:
* a merger, consolidation or similar transaction involving the Option
Issuer or any of its subsidiaries;
* a purchase, lease or other acquisition of all or substantially all
of the assets of the Option Issuer; or
57
* a purchase or other acquisition (by merger, consolidation, share
exchange or any similar transaction) of securities representing 10%
or more of the voting shares of the Option Issuer, (each an
"Acquisition Transaction");
* any person or group of persons acting in concert (other than the Option
Issuer or any of its subsidiaries) acquires the beneficial ownership of
or the right to acquire securities representing 24.99% or more of the
voting shares of the Option Issuer;
* the shareholders of the Option Issuer fail to approve the merger at a
shareholders meeting held for that purpose, such a shareholders meeting
fails to occur prior to termination of the merger agreement, or the
Option issuer's board of directors withdraws or modifies (in a manner
adverse to an Option Holder) its recommendation to shareholders that
they approve the merger, in each case after there has been a public
announcement that any person (other than the Option Holder or any of
its subsidiaries), has
* made, or publicly disclosed an intention to make, a proposal to
engage in an Acquisition Transaction;
* commenced a tender offer or filed a registration statement under the
Securities Act of 1933 with respect to an exchange offer; or
* filed an application or notice with the California Commissioner or
other federal or state bank regulatory authority, which has been
accepted for processing, for approval to engage in an Acquisition
Transaction;
* any person (other than the Option Holder or other than in connection
with a transaction to which the Option Holder has given its prior
written consent) has filed an application or notice with the California
Commissioner or other federal or state bank regulatory authority, which
is accepted for processing, for approval to engage in an Acquisition
Transaction, exchange offer or tender offer;
* the Option Issuer has willfully breached any covenant or obligation in
the merger agreement in anticipation of engaging in a Purchase Event
entitling the Option Holder to terminate the merger agreement; or
* the Option Issuer makes a public announcement of its proposed or actual
authorization, recommendation or endorsement of an Acquisition
Transaction, exchange offer or tender offer.
"Exchange offer" and "tender offer" mean the commencement by any person of, or
the filing by any person of a registration statement or a tender offer schedule
with the SEC with respect to a tender offer or exchange offer to acquire or
control 10% or more of the Option Issuer's stock (other than filings by the
Option Holder or any of its subsidiaries).
Termination of Stock Options
Each Option Holder's stock option will terminate to the extent not
previously exercised upon the earliest to occur of:
* the effective time of the merger;
* termination of the merger agreement in accordance with its terms before
a Purchase Event occurs (except a termination due to a breach of the
merger agreement by the Option Issuer); or
* 12 months after the termination of the merger agreement or after the
occurrence of a purchase event, whichever is earlier.
Adjustment of Number of Shares Subject to Options
The number and type of securities subject to the option and the purchase
price of shares will be adjusted for any stock split, reverse split, dividend,
exchange of shares or similar transaction relating to the common stock of the
Option Issuer, so that the Option Holder will receive upon exercise the same
number and type of securities as if the option had been exercised immediately
before the change. The number of shares subject to an option will also be
adjusted if the Option Issuer issues additional common
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stock, so that the number of shares of common stock subject to the option
represents 19.9% of issued and outstanding common stock of the Option Issuer
prior to exercise of the option.
In the event of a capital reorganization, merger or consolidation of the
Option Issuer with or into another corporation, or the sale of all or
substantially all of its assets to any other person, then, as a part of any
such transaction, provision will be made so that the Option Holder will be
entitled to receive an option of the succeeding corporation or any person that
controls the succeeding corporation having a comparable value to the previous
option.
Repurchase of Options and Option Shares
A party can require the Option Issuer to repurchase the option or the
shares of common stock received upon exercise of the option for one year after
a repurchase event occurs. A repurchase event occurs whenever an Option Issuer
enters into an agreement:
* to consolidate with or merge into any person (other than the Option
Holder or one of its subsidiaries), and is not the surviving
corporation;
* to permit any person (other than the Option Holder or one of its
subsidiaries), to merge into the Option Issuer and the Option Issuer
shall be the surviving corporation and, as a result, the Option
Issuer's outstanding shares are changed into or exchanged for stock or
other securities of itself or another person, or cash or any other
property, or its outstanding shares immediately prior to the merger
represent less than 50% of the outstanding shares and share equivalents
of the merged company; or
* to sell or otherwise transfer all or substantially all of its assets to
any person, (other than the Option Holder or one of its subsidiaries).
The one-year period may be extended for any period during which the Option
Issuer is legally prohibited from making the repurchase. The repurchase price
for the repurchase of shares is the highest of:
* 100% of the option exercise price;
* the highest price paid or agreed to be paid for the Option Issuer's
stock by the acquiror in any tender offer, exchange offer or other
transaction or series of related transactions involving the acquisition
of 10% or more of the Option Issuer's common stock for the prior
one-year period; and
* in the event of a sale of all or substantially all of the Option
Issuer's assets, the sum of the sale price and the current market value
of the Option Issuer's remaining assets, divided by the Option Issuer's
outstanding shares.
Subject to applicable regulatory restrictions, from and after a repurchase
event or after an Option Issuer receives official notice that an approval of
the California Commissioner, or any other regulatory authority, required for
the exercise of the option and purchase of the option shares will not be issued
or granted, an Option Holder shall have the right to require the Option Issuer
to purchase some or all of the options. The Option Holder is entitled to
receive the foregoing purchase price less the option exercise price for each
share.
Registration Rights
The Option Holder has certain rights to require the Option Issuer to
register with the SEC the sale of the Option Issuer's common stock purchased
pursuant to option exercise.
Effect of Stock Option Agreements
The stock options are intended to increase the likelihood that the merger
will be completed under the merger agreement. As a result, certain aspects of
the options may have the effect of discouraging
59
persons who might now or before completion of the merger be interested in
acquiring all of or a significant interest in Business Bancorp or MCB
Financial, even if they were prepared to offer higher consideration for MCB
Financial than that provided in the merger agreement.
OPERATIONS FOLLOWING THE MERGER
Metro Commerce Bank will merge into Business Bank simultaneously with the
effective time of the merger. Although we cannot assure you that any specific
level of cost savings will be achieved or as to the timing of any savings, the
parties currently expect to achieve cost savings through consolidation of
certain back-office operations of Metro Commerce Bank following completion of
the merger. All branches of Metro Commerce Bank are presently expected to
continue to operate as branches of Business Bank.
Board of Directors
The merger agreement provides that at the effective time of the merger,
the Business Bancorp board of directors will be increased to 14 persons, and
Business Bancorp will appoint the seven current members of the MCB Financial
board of directors or, in the event of one or more vacancies on the MCB
Financial board, the designees of the current MCB Financial board, as directors
of Business Bancorp and Business Bank. Also, two current Business Bancorp
directors must have resigned from the boards of directors of Business Bancorp
and Business Bank. The board of directors of Busness Bancorp anticipates that
William Cozzo and Robert L. Nottingham will resign to fulfill this obligation.
Also, Business Bancorp is required to amend its Bylaws to increase the size of
its board to accommodate the additional directors. Under Proposal 4, Business
Bancorp shareholders are being asked to approve this amendment. After the
merger, the board of directors of Business Bancorp and Business Bank will each
consist of the following 14 persons:
Current Business Bancorp Directors Current MCB Financial Directors
---------------------------------- -------------------------------
Neal T. Baker Charles O. Hall
D. William Bader Timothy J. Jorstad
John E. Duckworth Catherine H. Munson
Alan J. Lane Patrick E. Phelan
John L. Riddell Gary T. Ragghianti
Arnold H. Stubblefield Edward P. Tarrant
John L. Stubblefield Randall J. Verrue
Classified Board
As noted below under "Certain Differences in Rights of Shareholders," the
Articles of Incorporation and Bylaws of Business Bancorp provide that at such
time as Business Bancorp becomes a listed corporation within the meaning of
Section 301.5 of the California Corporations Code the board will be divided
into two classes, effective with the first annual meeting of shareholders
occurring after Business Bancorp becomes a listed corporation. Under Proposal
5, the board of directors of Business Bancorp is recommending that Business
Bancorp shareholders approve an amendment to the Articles of Incorporation to
increase the number of classes to three. If this proposal is adopted, then upon
Business Bancorp becoming a listed corporation, which is expected to occur on
the effective date of the merger, the three classes will be composed of two
classes with four directors each and one class of six directors, with such
classification to take effect upon the election of directors at the first
annual meeting of shareholders following the merger.
Nominating Committees
As of the effective time of the merger, the Bylaws of Business Bancorp
will be amended to provide that, for a period of two years after the merger,
Business Bancorp will have two nominating committees, each of which will be
equal in number, and each of which will nominate one half of each class of the
future Business Bancorp board to be reelected at each shareholders meeting.
Initially, those individuals who served as directors of Business Bancorp prior
to the merger will serve on one nominating committee, and
60
those individuals who served as directors of MCB Financial prior to the merger
will serve on the other. Thereafter, each committee will submit separate
recommendations to the board of directors of Business Bancorp as to nominees
for director. Each newly elected or appointed director will automatically serve
on the nominating committee which nominated that person. The term of office of
each member of the nominating committees commences on the day of appointment to
the committee or election to the board of directors, as appropriate, and
continues until death, resignation or removal from the board of directors.
Director Vacancies
As of the effective time of the merger, the Bylaws of Business Bancorp
will be amended to change the manner in which vacancies on the board of
directors are filled.
If a board vacancy is created by death, resignation, or removal of a
director, then the nominating committee of which that director was a member has
the sole right to nominate a replacement once twenty business days have elapsed
since the vacancy occurred. If a member of the other nominating committee
resigns during the twenty business days, the board of directors may then
eliminate the vacancies in both committees by reducing the number of authorized
directors by two. If a vacancy is created due to an increase in the authorized
number of directors, then half the vacancies will be filled by persons
nominated by each nominating committee. If a vacancy is created because the
shareholders failed to elect the full authorized number of directors to be
voted for, and a) the committees are of unequal size, the committee with the
smaller number of members shall have the right to nominate candidates to fill
the vacancy until the two committees are of equal size; or b) the two
committees are of equal size, then each committee will have the right to
nominate candidates until its candidates have been elected to fill one-half of
such vacancies.
In nominating directors for election by the shareholders, if the
committees are of unequal size, the committee with the smaller number of
members shall have the right to nominate candidates until the sum of its
candidates plus the number of its members is equal to the number of members of
the other committee. Thereafter, each committee has the right to nominate
candidates for one-half of the remaining board positions for which the election
is to be held. If the committees are of equal size, each will nominate
candidates for one-half of the board positions for which the election is to be
held.
If a vacancy in another board committee besides a nominating committee was
created by the death, resignation, or removal of a member of that committee,
then the nominating committee of which such person was a member will nominate a
replacement. If the vacancy was created due to an increase in the authorized
number of members of the committee, then each nominating committee will
nominate candidates until its candidates have been appointed to fill one-half
of the vacancies so created. Otherwise, at any board meeting at which any
members of a board Committee are to be appointed upon expiration of a member'
term, each nominating committee will propose successors until the committee
contains an equal number of members nominated by each.
Director Voting--Supermajority Vote Requirements
As of the effective time of the merger, the Bylaws of Business Bancorp
will be amended to change the vote required for the board of directors to take
certain actions.
Generally, following the merger the affirmative vote of a majority of the
directors of business Bancorp will be required for the board of directors to
take an action. However, for a period of two years following the merger, the
board may take no action with regard to the following matters unless such
approved by at least seventy percent of the authorized number of directors:
* amend the Articles of Incorporation;
* adopt an agreement of merger or consolidation;
* recommend to the shareholders, or adopt any agreement for, the sale,
lease, assignment, encumbrance or other disposition of all or
substantially all of Business Bancorp's property or assets;
61
* recommend to the shareholders, or adopt any agreement for, the sale,
lease, assignment, encumbrance for other disposition of all or
substantially all of the property or assets of a subsidiary of Business
Bancorp;
* recommend to the shareholders a dissolution of Business Bancorp or a
revocation of dissolution;
* close or enter into an agreement with another depository institution
for the purchase and assumption of the assets and liabilities of one or
more branches;
* dismiss senior executives, other than for cause under any applicable
employment agreement;
* change the responsibilities or structure of Business Bancorp's
executive management;
* cancel, limit or in any way revoke the authority of the nominating
committees; or
* remove any member of a board committee or any member of either of the
nominating committees.
Officers
Following the merger, the following individuals will fill the indicated
officer positions of Business Bancorp and Business Bank:
Business Bancorp Management Structure
Chairman: Timothy J. Jorstad
Vice Chairman: John E. Duckworth
Chief Executive Officer: Alan J. Lane
President & Chief Operating Officer: Charles O. Hall
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
Business Bank Management Structure
Chairman: John E. Duckworth
Vice Chairman: Timothy J. Jorstad
Chief Executive Officer: Charles O. Hall
President: Alan J. Lane
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
Business Bancorp and MCB Financial have agreed that the duties of Mr. Lane
as Chief Executive Officer of Business Bancorp and of Mr. Hall as President of
Business Bancorp will be as follows:
Alan Lane Charles Hall
--------- ------------
M&A/Corporate Strategy Lending Activities
Investor Relations Credit Administration
Marketing/Training Legal/Regulatory Compliance
Branch System Efficiency Program
Offices
After the merger, the headquarters of Business Bancorp will be located at
1248 Fifth Avenue, San Rafael, CA 94901, the current headquarters of MCB
Financial. Business Bancorp will also maintain administrative offices at 321 E.
Sixth Street, Corona, CA 92879, the current location of the Corona branch
office of Business Bank. The headquarters of Business Bank will be located at
321 E. Sixth Street, Corona, CA 92879, with administrative offices at 1248
Fifth Avenue, San Rafael, CA 94901.
62
BUSINESS BANCORP AND MCB FINANCIAL
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
and explanatory notes are presented to show the impact of the merger on our
companies' historical financial positions and results of operations under the
purchase method of accounting. Under this method of accounting, the assets and
liabilities of the company not surviving the merger are, as of the effective
date of the merger, recorded at their respective fair values and added to those
of the surviving corporation and the amount of merger consideration in excess
of the acquired company's net fair value is recorded as goodwill or other
intangible assets. The unaudited pro forma condensed combined financial
information combines the historical financial information of Business Bancorp
and MCB Financial as of and for the six months ended June 30, 2001, and for the
year ended December 31, 2000. The unaudited pro forma condensed combined
balance sheet as of June 30, 2001 assumes the merger was consummated on that
date. The unaudited pro forma condensed combined statements of income give
effect to the merger as if the merger had been consummated as of January 1,
2001 in the case of the unaudited pro forma condensed combined income statement
for the six months ended June 30, 2001, and as of January 1, 2000, in the case
of the unaudited pro forma condensed combined income statement for the year
ended December 31, 2000.
The merger provides for the exchange of 1.1763 shares of Business Bancorp
common stock for each outstanding share of MCB Financial common stock. The
unaudited pro forma condensed combined financial information is based on, and
derived from, and should be read in conjunction with the historical
consolidated financial statements and the related notes of both Business
Bancorp and MCB Financial, which are, with respect to Business Bancorp,
included in this document, and with respect to MCB Financial, included and
incorporated in this document by reference. See "Where You Can Find More
Information" on page 165.
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been consummated during the period or as of the date for which the
pro forma data are presented, nor is it necessarily indicative of future
operating results or financial position of the combined company.
63
PRO FORMA COMBINED CONDENSED BALANCE SHEET
BUSINESS BANCORP AND MCB FINANCIAL
June 30, 2001
(Unaudited)
June 30, 2001
-----------------------------------------------------------
Business MCB Pro Forma Pro Forma
(In thousands except share amounts) Bancorp Financial Adjustments Combined
----------------------------------- ------------ ------------- ------------- ------------
ASSETS
Cash and due from banks ...................................... $ 21,504 $ 18,264 $ 39,768
Federal funds sold ........................................... 2,000 -- 2,000
--------- --------- -------- ---------
Total cash and cash equivalents .......................... 23,504 18,264 $ 41,768
Interest-bearing deposits with banks ......................... 941 286 1,227
Investment securities ........................................ 114,407 35,468 149,875
Loans, net of unearned income ................................ 183,108 167,645 350,753
Allowance for loan losses .................................... (1,973) (2,039) (4,012)
--------- --------- -------- ---------
Net loans ................................................. 181,135 165,606 346,741
Premises and equipment, net .................................. 5,707 3,620 9,327
Goodwill and other intangible assets
(Notes 3 and 4) ............................................. 7,276 -- $ 17,946 25,222
Other assets ................................................. 7,143 3,036 10,179
--------- --------- -------- ---------
Total assets ............................................. $ 340,113 $ 226,280 17,946 $ 584,339
========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits .....................................................
Noninterest-bearing deposits ................................ $ 100,410 $ 50,716 $ 151,126
Interest-bearing deposits ................................... 181,807 156,335 338,142
--------- --------- -------- ---------
Total deposits ........................................... 282,217 207,051 489,268
Other borrowings ............................................. 19,825 750 20,575
Other liabilities (Note 4) ................................... 2,641 1,624 1,970 6,235
--------- --------- -------- ---------
Total liabilities ........................................ 304,683 209,425 1,970 516,078
Trust preferred securities ................................... 10,000 3,000 -- 13,000
SHAREHOLDERS' EQUITY
Preferred stock, no par value ................................ -- -- -- --
Common stock, no par value (Notes 2 and 4) ................... 6,647 8,431 21,400 36,478
Accumulated other comprehensive income, net (Note 4) ......... 1,620 189 (189) 1,620
Retained earnings ............................................ 17,163 5,235 (5,235) 17,163
--------- --------- -------- ---------
Total shareholders' equity ............................... 25,430 13,855 15,976 55,261
--------- --------- -------- ---------
Total liabilities and shareholders' equity ............... $ 340,113 $ 226,280 $ 17,946 $ 584,339
========= ========= ======== =========
<FN>
See accompanying notes to pro forma financial information.
</FN>
64
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
BUSINESS BANCORP AND MCB FINANCIAL
Six Months Ended June 30, 2001
(Unaudited)
Six Months Ended June 30, 2001
-------------------------------------------------------------
Business MCB Pro Forma Pro Forma
(In thousands) Bancorp Financial Adjustments Combined
-------------- ------------- ------------- ------------- -------------
Interest income ............................................. $ 12,763 $ 8,956 -- $ 21,719
Interest expense ............................................ 3,969 2,763 -- 6,732
---------- ---------- ------- ---------
Net interest income ......................................... 8,794 6,193 -- 14,987
---------- ---------- ------- ---------
Provision for loan losses ................................... 175 100 -- 275
---------- ---------- ------- ---------
Net interest income after provision for loan losses ......... 8,619 6,093 -- 14,712
Noninterest income .......................................... 1,751 487 -- 2,238
Noninterest expense (Note 5) ................................ 7,889 3,899 207 11,995
---------- ---------- ------- ---------
Income before income taxes and dividends
paid on trust preferred securities ......................... 2,481 2,681 (207) 4,955
Income tax provision (Note 5) ............................... 693 1,034 (85) 1,642
---------- ---------- ------- ---------
Income before dividends paid on trust
preferred securities ....................................... 1,788 1,647 (122) 3,313
Dividends paid on trust preferred securities ................ 547 158 -- 705
---------- ---------- ------- ---------
Net income .................................................. $ 1,241 $ 1,489 (122) $ 2,608
========== ========== ======= =========
PER COMMON SHARE DATA
Net income-basic ............................................ $ 0.61 $ 0.87 -- $ 0.65
Net income-diluted .......................................... $ 0.60 $ 0.83 -- $ 0.62
Weighted average common shares outstanding ..................
Basic .................................................... 2,026,869 1,704,243 300,458 4,031,570
Diluted .................................................. 2,072,473 1,789,346 315,462 4,177,281
<FN>
See accompanying notes to pro forma financial information.
</FN>
65
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
BUSINESS BANCORP AND MCB FINANCIAL
Year Ended December 31, 2000
(Unaudited)
Year Ended December 31, 2000
-------------------------------------------------------------
Business MCB Pro Forma Pro Forma
(In thousands) Bancorp Financial Adjustments Combined
-------------- ------------- ------------- ------------- -------------
Interest income ............................................. $ 21,408 $ 18,245 -- $ 39,653
Interest expense ............................................ 6,169 5,515 -- 11,684
---------- ---------- ------- ----------
Net interest income ......................................... 15,239 12,730 -- 27,969
Provision for loan losses ................................... 255 420 -- 675
Net interest income after provision for loan losses ......... 14,984 12,310 -- 27,294
Noninterest income .......................................... 2,816 869 -- 3,685
Noninterest expense (Note 5) ................................ 13,577 7,863 414 21,854
---------- ---------- ------- ----------
Income before income taxes and dividends
paid on trust preferred securities ......................... 4,223 5,316 (414) 9,125
Income tax provision (Note 5) ............................... 1,095 2,145 (170) 3,070
---------- ---------- ------- ----------
Income before dividends paid on
trust preferred securities ................................. 3,128 3,171 (244) 6,055
Dividends paid on trust preferred securities ................ 858 101 -- 959
---------- ---------- ------- ----------
Net income .................................................. $ 2,270 $ 3,070 (244) $ 5,096
========== ========== ======= ==========
PER COMMON SHARE DATA .......................................
Net income-basic ............................................ $ 1.14 $ 1.52 -- $ 1.16
Net income-diluted .......................................... $ 1.13 $ 1.45 -- $ 1.13
Weighted average common shares outstanding ..................
Basic .................................................... 1,995,552 2,022,496 356,566 4,374,614
Diluted .................................................. 2,015,645 2,120,695 373,879 4,510,219
<FN>
See accompanying notes to pro forma financial information.
</FN>
66
NOTES TO BUSINESS BANCORP AND MCB FINANCIAL
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
Six Months Ended June 30, 2001
Year Ended December 31, 2000
(Unaudited)
(1) The merger will be accounted for using the purchase method of accounting,
and accordingly, the assets and liabilities of MCB Financial will be recorded
at their respective fair values on the date the merger is completed. The shares
of Business Bancorp common stock issued to effect the merger will be recorded
at $14.35 per share which is the average price of the shares over a four-day
period surrounding the date the merger was announced.
The pro forma financial information includes estimated adjustments to record
certain assets and liabilities of MCB Financial at their respective fair
values. The pro forma adjustments included herein are subject to updates as
additional information becomes available and as additional analyses are
performed. Certain other assets and liabilities of MCB Financial, principally
loans and borrowings, will also be subject to adjustment to their respective
fair values. Pending more detailed analyses, no pro forma adjustments are
included herein for these assets and liabilities.
We expect to realize significant revenue enhancements and cost savings
following the merger which also are not reflected in this pro forma financial
information. No assurance can be given with respect to the ultimate level of
such revenue enhancements or cost savings.
The final allocation of the purchase price will be determined after the merger
is completed and after completion of thorough analyses to determine the fair
values of MCB Financial's tangible and identifiable intangible assets and
liabilities as of the date the merger is completed. Any change in the fair
value of the net assets of MCB Financial will change the amount of the purchase
price allocable to goodwill. Additionally, changes to MCB Financial's
shareholders' equity including net income from July 1, 2001, through the date
the merger is completed, will also change the amount of goodwill recorded. In
addition, the final adjustments may be different from the unaudited pro forma
adjustments presented herein.
(2) The pro forma financial information for the merger is included only as of
and for the six months ended June 30, 2001, and for the year ended December 31,
2000. The pro forma adjustments in the pro forma financial statements reflect
an exchange ratio of 1.1763 shares of Business Bancorp common stock for each of
the 1,633,516 shares of MCB Financial common stock that were outstanding at
June 30, 2001. The unaudited pro forma information presented in the pro forma
financial statements is not necessarily indicative of the results of operations
or the combined financial position that would have resulted had the merger been
completed at the beginning of the applicable periods presented, nor is it
necessarily indicative of the results of operations in future periods or the
future financial position of the combined company.
The pro forma financial information reflects the addition of 1,921,504 shares
of Business Bancorp common stock with an aggregate fair value of $29.8 million
and goodwill and deposit base premiums of $13.8 million and $4.1 million,
respectively.
Upon completion of the merger, MCB Financial stock options will be exchanged
for stock options of the combined company with the number of options and option
price adjusted for the 1.1763-for-1 exchange ratio. The MCB Financial stock
options will otherwise be subject to the terms of the MCB Financial stock
option plans under which they were issued and the agreements evidencing grants
thereunder. Stock options issued by the combined company in exchange for stock
options held by directors and employees of MCB Financial are considered part of
the purchase price, and accordingly, the purchase price includes the fair value
of director and employee stock options of $2.3 million.
The fair value of the combined company options that will be issued in exchange
for the MCB Financial options was estimated using the Black-Scholes option
pricing model. Option pricing models require the use of highly subjective
assumptions, including expected stock price volatility, which when changed can
materially affect fair value estimates. Accordingly, the model does not
necessarily provide a reliable single measure of the fair value of employee
stock options. The more significant assumptions used in estimating
67
NOTES TO BUSINESS BANCORP AND MCB FINANCIAL
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION --(Continued)
the fair value of the Business Bancorp stock options to be issued in exchange
for MCB Financial stock options include a risk-free interest rate of 4.5
percent, a dividend yield of 0.3 percent, weighted average expected life of 6.4
years, and volatility of the combined company stock of 40 percent.
(3) The computation of the purchase price, the allocation of the purchase price
to the net assets of MCB Financial based on fair values estimated at June 30,
2001, the basis for determining the amount of deposit base premium allocated to
the purchase price and the resulting amount of goodwill are presented below.
(In thousands) June 30, 2001
------------- ----------------------------
Purchase price
MCB Financial common stock outstanding ..................... 1,633,516
Exchange ratio ............................................. 1.1763
----------
Total ................................................. 1,921,504
Purchase price per MCB Financial common share .............. $ 14.35 $ 27,574
============
Fair value of outstanding stock options .................... 2,257
---------
Total purchase price .................................. 29,831
Net assets acquired .........................................
MCB Financial shareholders' equity ......................... $ 13,855
MCB Financial goodwill and other intangible assets ......... $ -- (13,855)
============
Excess of purchase price over carrying value
of net assets acquired .................................. 15,976
Estimated amounts allocated to liabilities assumed
in the purchase business combination Contract
cancellations ........................................... 462
Deferred income taxes
Estimated deposit base intangible ........................ $ 4,141
Estimated purchase accounting adjustments ................ (462)
------------
Total ................................................. $ 3,679
Income tax rate .......................................... 0.41 1,508
============
Deduct ......................................................
Estimated deposit base intangible ..........................
MCB Financial deposits ................................... $ 207,051
Premium rate ............................................. 0.02 (4,141)
============ ---------
Goodwill ................................................ $ 13,805
=========
68
NOTES TO BUSINESS BANCORP AND MCB FINANCIAL
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION --(Continued)
(4) The pro forma adjustments related to the pro forma balance sheet at June
30, 2001, are presented below.
(In thousands, except share amounts) June 30, 2001
------------------------------------ ----------------------------
Goodwill and other intangible assets--adjustment ................
Goodwill ....................................................... 13,805
Deposit base intangible ........................................ 4,141
---------
Goodwill and other intangible assets adjustment .............. 17,946
=========
Total .....................................................
Other liabilities ...............................................
Contract cancellations ......................................... 462
Deferred income taxes ..........................................
Purchase accounting adjustments (Note 3) ..................... 1,508
Total other liabilities adjustment ........................ 1,970
Shareholders' equity ............................................
Common stock adjustment ........................................
Shares of common stock to be issued .......................... 1,921,504
Purchase price--MCB Financial common shares .................. $ 14.35 27,574
Fair value of outstanding stock options ...................... 2,257
MCB Financial retained earnings .............................. 5,235
MCB Financial accumulated other comprehensive income ......... 189
MCB Financial shareholders' equity ........................... (13,855)
---------
Common stock adjustment ..................................... 21,400
Elimination of MCB Financial accumulated other
comprehensive income ........................................ (189)
Elimination of MCB Financial retained earnings ............... (5,235)
Shareholders' equity adjustment ............................. 15,976
---------
Total ..................................................... $ 17,946
=========
69
NOTES TO BUSINESS BANCORP AND MCB FINANCIAL
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION --(Continued)
(5) The following pro forma adjustments related to the unaudited pro forma
combined condensed statements of income reflect amortization on a ten-year
straight-line method for the deposit base intangible.
Six Months Ended Year Ended
(In thousands) June 30, 2001 December 31, 2000
-------------- ------------- -----------------
Noninterest expense adjustments
Deposit base intangible amortization ......... $ 207 $ 414
------- -------
Reduction in income before income taxes ......... (207) (414)
------- -------
Income tax adjustment
Income tax rate .............................. 0.41 0.41
------- -------
Total income tax adjustment .................. (85) (170)
------- -------
Reduction in net income ......................... $ (122) $ (244)
======= =======
(6) In June 2001, SFAS No. 142, "Accounting for Goodwill and Other Intangible
Assets," was issued. This standard is effective starting with fiscal years
beginning after December 15, 2001. This standard establishes new accounting
standards for goodwill and continues to require the recognition of goodwill as
an asset but does not permit amortization of goodwill as previously required by
the Accounting Principles Board Opinion ("APB") Opinion No. 17. The standard
also establishes a new method of testing goodwill for impairment. It requires
goodwill to be separately tested for impairment at a reporting unit level. The
amount of goodwill determined to be impaired would be expensed to current
operations. Under the new standard, the deposit base intangible will continue
to be subject to amortization.
70
REGULATION AND SUPERVISION
General
Business Bancorp, MCB Financial, Business Bank and Metro Commerce Bank are
subject to significant regulation and restrictions by federal and state
regulatory agencies. The following discussion of statutes and regulations is
only a brief summary and does not purport to be complete. This discussion is
qualified in its entirety by reference to the statutes and regulations referred
to. No assurance can be given that these statutes and regulations will not
change in the future.
Holding Company Regulation
Business Bancorp and MCB Financial are bank holding companies within the
meaning of the Bank Holding Company Act and are registered as such with the
Federal Reserve Board. A bank holding company is required to file with the
Federal Reserve Board annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to
examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval before acquiring, directly or indirectly, ownership or
control of any voting shares of any bank if it would thereby directly or
indirectly own or control more than 5% of the voting stock of that bank, unless
it already owns a majority of the voting stock. In 1997, the Federal Reserve
Board adopted a policy for risk-focused supervision of small bank holding
companies that do not engage in significant non-banking activities. Under this
policy, examinations focus on whether a bank holding company has systems in
place to manage the risks inherent in its business. In analyzing risk, the
Federal Reserve Board looks at the financial condition of the holding company
and its subsidiary banks, management, compliance with laws and regulations,
inter-company transactions and any new or contemplated activities. The Federal
Reserve Board has by regulation determined certain activities in which a bank
holding company may or may not engage. With certain exceptions, a bank holding
company must engage in the business of banking or managing or controlling banks
or furnishing services to or performing services for its subsidiary banks. The
permissible activities and affiliations of certain bank holding companies have
recently been expanded. See "--Financial Modernization Act" on page 77.
A holding company for a member bank of the Federal Reserve System and any
subsidiary which it may acquire or organize are deemed to be affiliates of the
member bank within the meaning set forth in the Federal Reserve Act and are
subject to the Federal Reserve Act . This means, for example, that there are
limitations on loans by the member bank to affiliates, on investments by the
member bank in any affiliate's stock and on the member bank's taking any
affiliate's stock as collateral for loans to any borrower. All affiliate
transactions must satisfy certain limitations and otherwise be on terms and
conditions that are consistent with safe and sound banking practices. In this
regard, member banks generally may not purchase from any affiliate a
low-quality asset (as that term is defined in the Federal Reserve Act). Also,
transactions by the member bank with an affiliate must be on substantially the
same terms as would be available for non-affiliates. As holding companies for
member banks, Business Bancorp, Business Bank, MCB Financial and Metro Commerce
Bank are currently subject to these restrictions and Business Bancorp and
Business Bank will continue to be after the merger is completed.
Business Bancorp and Business Bank, and MCB Financial and Metro Commerce
Bank, are also subject to certain restrictions with respect to underwriting,
public sale and distribution of securities. They are also prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit. For example, generally neither bank may extend credit on the condition
that the customer obtain some additional service from the bank or its parent
company, or refrain from obtaining such service from a competitor.
Bank Regulation
Federal law mandates frequent examinations of all banks, with the costs of
examinations to be assessed against the bank. In the case of both Business Bank
and Metro Commerce Bank, their primary Federal regulator is the Federal Reserve
Board. Business Bank became a member of the Federal Reserve System only
recently, effective September 20, 2001; previously, its primary federal
regulator was the
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FDIC. The federal banking regulatory agencies have substantial enforcement
powers over the depository institutions that they regulate. Civil and criminal
penalties may be imposed on such institutions and persons associated with those
institutions for violations of laws or regulation.
As California state-chartered banks whose accounts are insured by the FDIC
up to a maximum of $100,000 per depositor and as members of the Federal Reserve
System, Business Bank and Metro Commerce Bank are subject to regulation,
supervision and regular examination by the California Commissioner and the
Federal Reserve Board. The regulations of these agencies govern most aspects of
the banks' business, including the making of periodic reports, their activities
relating to dividends, investments, loans, borrowings, capital requirements,
certain check-clearing activities, branching, mergers and acquisitions,
reserves against deposits and numerous other areas. Supervision, legal action
and examination by these agencies is generally intended to protect depositors
and is not intended for the protection of shareholders.
The activities of Business Bank and Metro Commerce Bank are also regulated
by state law. State law, for example, regulates certain loans to any officer of
Business Bank or Metro Commerce Bank, directly or indirectly, or to any related
corporation in which such officer is a shareholder, director, officer or
employee.
Subject to certain limitations, California law permits California
state-chartered banks to invest in the stock and equity securities of other
corporations, to engage directly in or invest directly in subsidiaries which
conduct real estate related activities (including property management and real
estate appraisal), and to participate in management consulting and data
processing services for third parties. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") limits the powers, including
investment authority and subsidiaries, of state banks to those activities that
are either permitted to national banks, or activities that the FDIC finds do
not pose a significant risk to the deposit insurance fund. In November 1998,
the FDIC announced it would make it easier for well run state banks to engage
in real estate and securities underwriting, if permitted by state law. State
banks are now required to file notice of intention to engage in such
activities.
FDICIA places limits on brokered deposits and extends the limits to any
bank that is not "well capitalized" or has been notified that it is in
"troubled condition." A well-capitalized institution (which generally includes
an institution that is considered well capitalized for purposes of the prompt
corrective action regulations discussed below) may still accept brokered
deposits without restriction, unless it has been informed by its appropriate
Federal regulatory agency that it is in "troubled condition." All other insured
depository institutions are prohibited from accepting brokered deposits unless
a waiver is obtained from the FDIC. If a waiver is obtained, the interest paid
on deposits may not exceed the rate paid for deposits in the bank's normal
market area, or the national rate as determined in the FDIC's regulation.
Capital Adequacy Requirements
Business Bancorp and MCB Financial are subject to the capital adequacy
regulations of the Federal Reserve Board and Business Bank and Metro Commerce
Bank are subject to the capital adequacy regulations of FDICIA. Those
regulations incorporate both risk-based and leverage capital requirements. Each
of the federal regulators has established risk-based and leverage capital
guidelines for 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 other deductions, notably the unrealized net gains or
losses (after tax adjustments) on available for sale investment securities
carried at fair market value. 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. Trust preferred securities
may also constitute up to 25% of Tier 1 capital. 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
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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.
The minimum required ratio of qualifying total capital to total
risk-weighted assets ("Total Risk-Based Capital Ratio") is 8.0%, at least
one-half of which must be in the form of Tier 1 capital, and the minimum
required ratio of Tier 1 capital to total risk-weighted assets ("Tier 1
Risk-Based Capital Ratio") is 4.0%. 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. As of June 30, 2001 and
December 31, 2000, Business Bank's Total Risk-Based Capital Ratios were 12.7%
and 11.7%, and its Tier 1 Risk-Based Capital Ratios were 11.8% and 10.9%. As of
June 30, 2001 and December 31, 2000, Business Bancorp's Total Risk-Based
Capital ratios were 12.9% and 11.8% and its Tier 1 Risk-Based Capital Ratios
were 11.0% and 9.7%. As of June 30, 2001 and December 31, 2000, Metro Commerce
Bank's Total Risk-Based Capital Ratios were 10.1% and 10.5%, and its Tier 1
Risk-Based Capital Ratios were 8.9% and 9.4%. As of June 30, 2001 and December
31, 2000, MCB Financial's Total Risk-Based Capital ratios were 10.6% and 11.5%
and its Tier 1 Risk-Based Capital Ratios were 9.4% and 10.4%.
The risk-based capital requirements also take into account concentrations
of credit (i.e., relatively large proportions of loans involving one borrower,
industry, location, collateral or loan type) and the risks of "non-traditional"
activities (those that have not customarily been part of the banking business).
The regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards, and authorize the regulators to
review an institution's management of such risks in assessing an institution's
capital adequacy.
The risk-based capital regulations also include exposure to interest rate
risk as a factor that the regulators will consider in evaluating a bank's
capital adequacy. Interest rate risk is the exposure of a bank's current and
future earnings and equity capital arising from adverse movements in interest
rates. While interest risk is inherent in a bank's role as financial
intermediary, it introduces volatility to bank earnings and to the economic
value of Business Bank.
The FDIC and the Federal Reserve Board also require the maintenance of a
leverage capital ratio designed to supplement the risk-based capital
guidelines. Banks and bank holding companies that have received the highest
rating of the five categories used by regulators to rate banks and are not
anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets of at least
3%. All other institutions are required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%.
Pursuant to federal regulations, banks must maintain capital levels
commensurate with the level of risk to which they are exposed, including the
volume and severity of problem loans, and federal regulators may, however, set
higher capital requirements when a bank's particular circumstances warrant. As
of June 30, 2001 and December 31, 2000, Business Bank's leverage capital ratios
were 7.8% and 7.9%. As of June 30, 2001 and December 31, 2000, Business
Bancorp's leverage capital ratios were 7.4% and 7.8%, exceeding regulatory
minimums. As of June 30, 2001 and December 31, 2000, Metro Commerce Bank's
leverage capital ratios were 7.1% and 7.5%. As of June 30, 2001 and December
31, 2000, MCB Financial's leverage capital ratios were 7.5% and 8.3%, exceeding
regulatory minimums. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation of Business Bancorp--Capital" on page 94 and
"--Capital Resources" on page 117 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of MCB Financial--Risk Based
Capital" on pages 142 and 154.
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured financial institutions, including but
not limited to those that fall below one or more
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prescribed minimum capital ratios. The federal banking agencies have by
regulation defined the following five capital categories: "well capitalized"
(Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%;
and leverage ratio of 5%); "adequately capitalized" (Total Risk-Based Capital
Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and leverage ratio of 4%)
(or 3% if the institution receives the highest rating from its primary
regulator); "undercapitalized" (Total Risk-Based Capital Ratio of less than 8%;
Tier 1 Risk-Based Capital Ratio of less than 4%; or leverage ratio of less than
4%) (or 3% if the institution receives the highest rating from its primary
regulator); "significantly undercapitalized" (Total Risk-Based Capital Ratio of
less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or leverage
ratio less than 3%); and "critically undercapitalized" (tangible equity to
total assets less than 2%). A bank may be treated as though it were in the next
lower capital category if after notice and the opportunity for a hearing, the
appropriate federal agency finds an unsafe or unsound condition or practice so
warrants, but no bank may be treated as "critically undercapitalized" unless
its actual capital ratio warrants such treatment.
At each successively lower capital category, an insured bank is subject to
increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from
making capital distributions if to do so would make the bank
"undercapitalized." Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital
restoration plans meeting specified requirements (including a guarantee by the
parent holding company, if any). "Significantly undercapitalized" banks are
subject to broad regulatory authority, including among other things, capital
directives, forced mergers, restrictions on the rates of interest they may pay
on deposits, restrictions on asset growth and activities, and prohibitions on
paying certain bonuses without FDIC approval. Even more severe restrictions
apply to critically undercapitalized banks. Most importantly, except under
limited circumstances, not later than 90 days after an insured bank becomes
critically undercapitalized, the appropriate federal banking agency is required
to appoint a conservator or receiver for it.
In addition to measures taken under the prompt corrective action
provisions, insured banks may be subject to potential actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions may
include the issuance of cease and desist orders, termination of insurance of
deposits (in the case of a bank), the imposition of civil money penalties, the
issuance of directives to increase capital, formal and informal agreements, or
removal and prohibition orders against "institution-affiliated" parties.
Safety And Soundness Standards
The federal banking agencies have also adopted guidelines establishing
safety and soundness standards for all insured depository institutions. Those
guidelines relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan and institute enforcement proceedings
if an acceptable compliance plan is not submitted.
Premiums For Deposit Insurance
The FDIC regulations also implement a risk-based premium system, whereby
insured depository institutions are required to pay insurance premiums
depending on their risk classification. Under this system, institutions such as
Business Bank and Metro Commerce Bank which are insured by the Bank Insurance
Fund are categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three supervisory
categories based on federal regulatory evaluations. The three supervisory
categories are:
* financially sound with only a few minor weaknesses (Group A),
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* demonstrates weaknesses that could result in significant eterioration
(Group B), and
* poses a substantial probability of loss (Group C).
The capital ratios used by the FDIC to define well capitalized, adequately
capitalized and undercapitalized are the same in the FDIC's prompt corrective
action regulations. The current Bank Insurance Fund base assessment rates
(expressed as cents per $100 of deposits) are summarized as follows:
Group A Group B Group C
--------- --------- --------
Well Capitalized ................ 0 3 17
Adequately Capitalized .......... 3 10 24
Undercapitalized ................ 10 24 27
In addition, banks must pay a fluctuating amount (1.88 basis points, or
cents per $100 of insured deposits, for the third quarter of 2001 and 1.84
basis points for the fourth quarter of 2001) towards the retirement of the
Financing Corporation bonds issued in the 1980's to assist in the recovery of
the savings and loan industry.
Dividends
Holders of common stock of Business Bancorp and MCB Financial are entitled
to receive dividends as and when declared by the boards of directors of these
companies out of funds legally available therefor under the laws of the State
of California.
California corporations such as Business Bancorp and MCB Financial may
make a distribution to their shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. In the event
sufficient retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if, after
giving effect to the distribution, the corporation's assets equal at least 125
percent of its liabilities and certain other conditions are met. Since the 125
percent ratio translates into a minimum capital ratio of 25 percent, most bank
holding companies, including MCB Financial and Business Bancorp based on its
current capital ratios, are unable to meet this last test and so must have
sufficient retained earnings to fund the proposed distribution.
The Federal Reserve Board has advised bank holding companies that it
believes that payment of cash dividends in excess of current earnings from
operations is inappropriate and may be cause for supervisory action. As a
result of this policy, banks and their holding companies may find it difficult
to pay dividends out of retained earnings from historical periods prior to the
most recent fiscal year or to take advantage of earnings generated by
extraordinary items such as sales of buildings or other large assets in order
to generate profits to enable payment of future dividends. Further, the Federal
Reserve Board's position that holding companies are expected to provide a
source of managerial and financial strength to their subsidiary banks
potentially restricts a bank holding company's ability to pay dividends.
Business Bank and Metro Commerce Bank are legal entities which are
separate and distinct from their holding companies. Aside from raising capital
on their own, the exercise of stock options or borrowing funds for operating
capital, Business Bancorp and MCB Financial receive additional income through
dividends paid by their respective bank subsidiaries. Subject to the regulatory
restrictions described below, future cash dividends by Business Bank after the
merger and the bank merger will depend upon management's assessment of future
capital requirements, contractual restrictions and other factors.
The powers of the respective boards of directors of Business Bank and
Metro Commerce Bank to declare a cash dividend to their holding companies are
subject to California law, which restricts the amount available for cash
dividends to the lesser of the retained earnings or the respective bank's net
income for its last three fiscal years (less any distributions to shareholders
made during such period). Where the above test is not met, cash dividends may
still be paid, with the prior approval of the California Commissioner in an
amount not exceeding the greatest of (1) retained earnings of the bank; (2) the
net income of the bank for its last fiscal year; or (3) the net income of the
bank for its current fiscal year. See the Notes to Consolidated Financial
Statements included under "Financial Statements and Supplementary Data" on
pages F-8 (for Business Bancorp) and F-42 (for MCB Financial) for the amount of
funds these two companies had available for the payment of dividends at
December 31, 2000.
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Under the Federal Deposit Insurance Act, bank regulators also have
authority to prohibit a bank from engaging in business practices which are
considered to be unsafe or unsound. It is possible, depending upon the
financial condition of the banks and other factors, that such regulators could
assert that the payment of dividends or other payments might, under certain
circumstances, be an unsafe or unsound practice, even if technically
permissible.
CRA
Business Bank and Metro Commerce Bank are subject to certain requirements
and reporting obligations involving CRA activities. The CRA generally requires
the federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low and
moderate income neighborhoods. The CRA further requires the agencies to take
into account a financial institution's record of meeting its community credit
needs when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations. In
measuring a bank's compliance with its CRA obligations, the regulators utilize
a performance-based evaluation system which bases CRA ratings on the bank's
actual lending service and investment performance, rather than on the extent to
which the institution conducts needs assessments, documents community outreach
activities or complies with other procedural requirements. In connection with
its assessment of CRA performance, the FDIC assigns a rating of "outstanding,"
"satisfactory," "needs to improve" or "substantial noncompliance." Business
Bank was last examined for CRA compliance in October, 1999, and received an
"outstanding" CRA Assessment Rating. Metro Commerce Bank was last examined for
CRA compliance in December 1997 and received a satisfactory CRA rating.
Other Consumer Protection Laws and Regulations
Examination and enforcement have become intense, and banks have been
advised to carefully monitor compliance with various consumer protection laws
and their implementing regulations. The federal Interagency Task Force on Fair
Lending issued a policy statement on discrimination in home mortgage lending
describing three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment, and evidence of disparate impact. Due to heightened regulatory
concern related to compliance with consumer protection laws and regulations
generally, Business Bank and Metro Commerce Bank may incur additional
compliance costs or be required to expend additional funds for investments in
the local communities they serve.
In addition to the other laws and regulations discussed herein, the banks
are subject to certain consumer and public interest laws and regulations that
are designed to protect customers in transactions with banks. While the list
set forth below is not exhaustive, these laws and regulations include the Truth
in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act,
the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act and the Right to Financial Privacy Act. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits,
making loans, collecting loans and providing other services. The banks must
comply with the applicable provisions of these laws and regulations as part of
its ongoing customer relations. Failure to comply with these laws and
regulations can subject them to various penalties, including but not limited to
enforcement actions, injunctions, fines or criminal penalties, punitive damages
to consumers and the loss of certain contractual rights.
The Americans with Disabilities Act, in conjunction with similar
California legislation, has increased the cost of doing business for banks. The
legislation requires employers with 15 or more employees and all businesses
operating "commercial facilities" or "public accommodations" to accommodate
disabled employees and customers. The Americans with Disabilities Act has two
major objectives: (1) to prevent discrimination against disabled job
applicants, job candidates and employees, and (2) to provide disabled persons
with ready access to commercial facilities and public accommodations.
Commercial facilities, such as Business Bank and Metro Commerce Bank, must
ensure that all new facilities are accessible to disabled persons, and in some
instances may be required to adapt existing facilities to make them accessible.
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Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") regulates the interstate activities of banks and
bank holding companies and establishes a framework for nationwide interstate
banking and branching. Since June 1, 1997, a bank in one state has generally
been permitted to merge with a bank in another state without the need for
explicit state law authorization. However, states were given the ability to
prohibit interstate mergers with banks in their own state by "opting-out"
(enacting state legislation applying equality to all out-of-state banks
prohibiting such mergers ) prior to June 1, 1997.
Since 1995, adequately capitalized and managed bank holding companies have
been permitted to acquire banks located in any state, subject to two
exceptions: first, any state may still prohibit bank holding companies from
acquiring a bank which is less than five years old; and second, no interstate
acquisition can be consummated by a bank holding company if the acquiror would
control more than 10% of the deposits held by insured depository institutions
nationwide or 30% percent or more of the deposits held by insured depository
institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which
that 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.
In 1995 California enacted legislation to implement important provisions
of the Interstate Banking Act discussed above and to repeal California's
previous interstate banking laws, which were largely preempted by the
Interstate Banking Act.
The changes effected by Interstate Banking Act and California laws have
increased competition in the environment in which Business Bank and Metro
Commerce Bank operate to the extent that out-of-state financial institutions
directly or indirectly enter the banks' respective market areas. It appears
that the Interstate Banking Act has contributed to the accelerated
consolidation of the banking industry. While many large out-of-state banks have
already entered the California market as a result of this legislation, it is
not possible to predict the precise impact of this legislation on Business
Bancorp, Business Bank, MCB Financial and Metro Commerce Bank and the
competitive environment in which they operate.
Financial Modernization Act
The Financial Modernization Act became effective March 11, 2000. It
repealed two provisions of the Glass-Steagall Act: Section 20, which restricted
the affiliation of Federal Reserve Member Banks with firms "engaged
principally" in specified securities activities; and Section 32, which
restricted officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged" in specified securities activities.
In addition, it also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the Bank Holding Company Act framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a financial holding company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Generally, the Financial Modernization Act:
* Repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
* Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
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* Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
* Provides an enhanced framework for protecting the privacy of consumer
information;
* Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
* Modifies the laws governing the implementation of the CRA; and
* Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
In order for either Business Bancorp or MCB Financial to take advantage of
the ability to affiliate with other financial services providers, it must
become a "financial holding company" as permitted under an amendment to the
Bank Holding Company Act effected by the Financial Modernization Act. To do so,
Business Bancorp or MCB Financial would file a declaration with the Federal
Reserve Board electing to engage in activities permissible for financial
holding companies and certifying that it is eligible to do so because all of
its insured depository institution subsidiaries are well-capitalized and
well-managed. In addition, the Federal Reserve must also determine that each
insured depository institution subsidiary has at least a "satisfactory" CRA
rating. Both Business Bancorp and MCB Financial currently meet the requirements
to make an election to become a financial holding company but their respective
managements have not determined to become financial holding companies. In
addition, Business Bancorp is examining its strategic business plan to
determine whether, based on market conditions, the relative financial
conditions of Business Bancorp and its subsidiaries, regulatory capital
requirements, general economic conditions, the effect of the pending merger
with MCB Financial and other factors, Business Bancorp desires to utilize any
of its expanded powers provided in the Financial Modernization Act after the
merger is completed.
The Financial Modernization Act provides that designated federal
regulatory agencies, including the FDIC, the Federal Reserve Board, the
Comptroller of the Currency and the SEC, are to publish regulations to
implement certain provisions of the Act. These agencies have cooperated in the
release of rules that establish minimum requirements to be followed by
financial institutions for protecting the privacy of financial information
provided by consumers. The agencies' rule, which establishes privacy standards
to be followed by state banks such as Business Bancorp and Metro Commerce Bank,
requires a financial institution to (i) provide notice to customers about its
privacy policies and practices, (ii) describe the conditions under which the
institution may disclose nonpublic personal information about consumers to
nonaffiliated third parties, and (iii) provide a method for consumers to
prevent the financial institution from disclosing that information to
nonaffiliated third parties by "opting out" of that disclosure.
The Financial Modernization Act also includes a new section of the Federal
Deposit Insurance Act governing subsidiaries of state banks that engage in
"activities as principal that would only be permissible" for a national bank to
conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, Business Bank and Metro Commerce Bank are permitted to form
subsidiaries to engage in the activities authorized by the Financial
Modernization Act, to the same extent as a national bank. In order to form a
financial subsidiary, a bank must be well-capitalized and would be subject to
the same capital deduction, risk management and affiliate transaction rules as
applicable to national banks.
Business Bancorp and MCB Financial do not believe that the Financial
Modernization Act will have a material adverse effect on Business Bancorp's
operations in the near-term period after the merger. However, to the extent
that it permits banks, securities firms, and insurance companies to affiliate,
the financial services industry may experience further consolidation. The
Financial Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, this act may have the result of increasing the amount
of competition that Business Bancorp and MCB Financial and their respective
bank subsidiaries face from larger institutions and other types of companies
offering financial products, many of which may have substantially more
financial resources.
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Impact of Monetary Policies
The earnings and growth of the banks are largely dependent on their
ability to maintain a favorable differential or "spread" between the yield on
their interest-earning assets and the rate paid on their deposits and other
interest-bearing liabilities. As a result, the banks' performance is influenced
by general economic conditions, both domestic and foreign, the monetary and
fiscal policies of the federal government, and the policies of the regulatory
agencies. The Federal Reserve Board implements national monetary policies (such
as seeking to curb inflation and combat recession) by its open-market
operations in United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rate applicable to borrowings by banks
which are members of the Federal Reserve System. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments
and deposits and also affect interest rates charged on loans and deposits. The
nature and impact of any future changes in monetary policies cannot be
predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of materials
into the environment may have an impact on banks and their holding companies.
Under federal law, liability for environmental damage and the cost of cleanup
may be imposed upon any person or entity who owns or operates contaminated
property. State law provisions, which were modeled after Federal law, impose
substantially similar requirements. Both federal and state laws were amended in
1996 to provide generally that a lender who is not actively involved in
operating the contaminated property will not be liable to clean up the
property, even if the lender has a security interest in the property or becomes
an owner of the property through foreclosure.
The Economic Growth Act includes protection for lenders from liability
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 by adding a new section which specifies the actions a lender may take
with respect to lending and foreclosure activities without incurring
environmental clean-up liability or responsibility. Under the new section
typical contractual provisions regarding environmental issues in the loan
documentation and due diligence inspections conducted in connection with
lending transactions will not lead to lender liability for clean-up, and a
lender may foreclose on contaminated property, so long as the lender merely
maintains the property and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the State
for the cost associated with cleaning up contaminated property unless the
lender realized some benefit from the property, failed to divest the property
promptly, caused or contributed to the release of the hazardous materials, or
made the loan primarily for investment purposes. This amendment to California
law became effective with respect to judicial proceedings filed and orders
issued after January 1, 1997.
The extent of the protection provided by both the federal and state lender
protection statutes will depend on the interpretation of those statutes by
administrative agencies and courts, and Business Bancorp and MCB Financial
cannot predict whether it will be adequately protected for the types of loans
made by their respective banks.
In addition, MCB Financial and Metro Commerce Bank remain subject to the
risk that a borrower's financial position will be impaired by liability under
the environmental laws and that property securing a loan made by Metro Commerce
Bank may be environmentally impaired and therefore not provide adequate
security for Metro Commerce Bank. California law provides some protection
against the second risk by establishing certain additional, alternative
remedies for a lender in circumstances where the property securing a loan is
later found to be environmentally impaired, permitting the lender to pursue
remedies against the borrower other than foreclosure under the deed of trust.
Business Bank and Metro Commerce Bank attempt to protect their positions
against the remaining environmental risks by performing prudent due diligence.
Environmental questionnaires and information on use of toxic substances are
requested as part of the banks' underwriting procedures. The banks make lending
decisions based upon its evaluation of the collateral, the net worth of the
borrower and the borrower's capacity for unforeseen business interruptions or
risks.
79
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect Business
Bancorp, Business Bank, MCB Financial and Metro Commerce Bank and the banking
industry in general are pending, and additional initiatives may be proposed or
introduced, before the United States Congress, the California legislature and
other governmental bodies in the future. Such proposals, if enacted, may
further alter the structure, regulation and competitive relationship among
financial institutions, and may subject Business Bancorp and Business Bank to
increased regulation, disclosure and reporting requirements following the
merger. In addition, the various banking regulatory agencies often adopt new
rules and regulations to implement and enforce existing legislation. It cannot
be predicted whether, or in what form, any such legislation or regulations may
be enacted or the extent to which the business of Business Bancorp or Business
Bank would be affected thereby.
80
INFORMATION ABOUT BUSINESS BANCORP
General
Business Bancorp is a California corporation registered as a bank holding
company under the Bank Holding Company Act, and is headquartered in San
Bernardino, California. Business Bancorp was incorporated in October, 1999 and
acquired all of the outstanding shares of Business Bank in January, 2000.
Business Bancorp's principal subsidiary is Business Bank. Business Bancorp
exists primarily for the purpose of holding the stock of this subsidiary and of
such other subsidiaries as it may acquire or establish.
Business Bancorp's principal source of income is currently dividends from
Business Bank, but Business Bancorp intends to explore alternative sources of
income in the future. The expenditures of Business Bancorp, including (but not
limited to) the payment of dividends to shareholders, if and when declared by
the board of directors, and the cost of servicing debt, are generally paid from
such payments made to Business Bancorp by Business Bank. At June 30, 2001,
Business Bancorp had consolidated assets of $340.1 million, deposits of $282.2
million and shareholders' equity of $25.4 million.
Going forward after the merger, Business Bancorp's strategic goal is to
increase shareholder and franchise value by continuing to grow Business Bank's
business through the opening of de novo branches or the acquisition of other
existing institutions or branches. As of the date hereof, Business Bancorp has
not identified any additional branches to be acquired or other acquisition
opportunities other than MCB Financial, and there can be no assurance that
Business Bancorp will be able to identify any suitable acquisition candidates
in the future or, should suitable acquisition candidates be identified, there
can be no assurance that Business Bancorp will be able to consummate such
acquisitions. See "Risk Factors-- the merged entity may not be able to control
and manage its future growth opportunities, which could adversely affect its
operations" on page 24.
On August 31, 2000, Business Bank completed the acquisition of Valley
Merchants Bank, N.A. for an aggregate purchase price of $12.2 million, pursuant
to a two-step transaction in which Valley Merchants Bank was ultimately merged
with and into Business Bank. Upon acquisition, Valley Merchants Bank had total
assets of $56.8 million and total deposits of $49.6 million. Valley Merchants
Bank's sole office, in Hemet, in the San Jacinto Valley of Southern California,
is operated as a branch of Business Bank. The acquisition of Valley Merchants
Bank by Business Bank increased Business Bancorp's assets by approximately 23%.
In order to fund a substantial portion of the acquisition price of Valley
Merchants Bank, on March 23, 2000, Business Capital Trust I (the "Trust")
issued an aggregate of $10,000,000 of principal amount of 107|M/8% Fixed Rate
Capital Trust Pass-through Securities of the Trust. The securities are fully
guaranteed by Business Bancorp with respect to distributions and amounts
payable upon liquidation, redemption or repayment. The entire proceeds to the
Trust from the sale of the Trust Preferred Securities were used by the Trust in
order to purchase $10,000,000 in principal amount of Fixed Rate Junior
Subordinated Deferrable Interest Debentures due 2030 issued by Business
Bancorp. Business Bancorp contributed to Business Bank $8.7 million of the
approximately $9.7 million in net proceeds. The balance of the purchase price
for the acquisition of Valley Merchants Bank was paid out of the working
capital of Business Bank.
On February 27, 2001, Business Bancorp commenced trading its common stock
on the Nasdaq Small Cap Market. In conjunction with the merger, Business
Bancorp has filed an application to list its common stock on the Nasdaq
National Market. See "Risk Factors--There has been a limited prior market for
Business Bancorp's common stock, so its stock price may be volatile" on page
26.
Business Bank
Business Bank is a California state-chartered commercial bank which was
incorporated under the laws of the State of California in 1983, and opened for
business in April, 1984. Business Bank's Administrative Office is located at
140 South Arrowhead Avenue, San Bernardino, California 92408. Business Bank is
insured under the Federal Deposit Insurance Act up to the applicable limits.
Business Bank became a member of the Federal Reserve System effective September
20, 2001. At June 30, 2001, Business Bank had approximately $339.8 million in
assets, $181.1 million in loans and $283.0 million in deposits. Business Bank
was originally incorporated under the name Bank of San Bernardino and changed
its name to Business Bank in August, 1996.
81
Business Bank currently operates its main office in San Bernardino, and
eight additional branch offices in the following communities: City of San
Bernardino (opened December 1986), Corona (opened August 1994), Redlands
(opened October 1996), Hesperia (acquired December 1997), Phelan (acquired
December 1997), Ontario (opened August 1999), Hemet (acquired August 2000) and
Riverside (opened August 2001). All of Business Bank's offices are located in
the counties of Riverside and San Bernardino, in an area of Southern California
commonly known as the "Inland Empire."
As indicated above, in August, 2000 Business Bank completed the
acquisition of Valley Merchants Bank (Business Bank's current Hemet branch
office) for a purchase price of approximately $12.2 million in cash.
Business Bank has experienced significant balance sheet growth in the past
several years, including growth in total assets from $182.8 million at December
31, 1998 to $311.5 million at December 31, 2000, an increase of approximately
70.4%. Deposits increased from $163.8 million at December 31, 1998 to $264.9
million at December 31, 2000, an increase of approximately 61.7%. This growth
in Business Bank's balance sheet has been generated both internally, primarily
through increased deposits and loans as a result of increased marketing and
focus on sales training, and through the acquisition and opening of new branch
offices. Business Bancorp's and Business Bank's earnings increased from $1.86
million or $.97 per share in 1998 to $2.27 million or $ 1.14 per share in 2000.
Business Bank is a community bank conducting a general commercial banking
business. Each of its branch offices is a full service office offering a wide
range of commercial banking services. Business Bank provides numerous deposit
products, including demand deposit accounts, Money Market accounts, savings and
Super Now accounts, time certificates of deposit and fixed rate, fixed maturity
installment savings. Business Bank makes various types of commercial,
installment and real estate loans, including the origination of
government-guaranteed Small Business Administration loans. In addition,
Business Bank provides safe deposit, collection, travelers checks, notary
public and other customary non-deposit banking services. Business Bank also
offers electronic "home banking" through its "EZ Banker" program and maintains
an Internet web site (www.businessbank.com) for its customers. Other services
offered include ATM machines located at branch offices, customer access to an
ATM network, and armored carrier and courier services. Business Bank does not
offer trust services.
Competition
The banking business in California generally, and specifically in Business
Bank's market areas, is highly competitive with respect to virtually all
products and services and has become increasingly so in recent years. The
industry continues to consolidate, and strong, unregulated competitors have
entered banking markets with focused products targeted at highly profitable
customer segments. Many largely unregulated competitors are able to compete
across geographic boundaries and provide customers increasing access to
meaningful alternatives to banking services in nearly all significant products.
These competitive trends are likely to continue.
With respect to commercial bank competitors, the business is largely
dominated by a relatively small number of major banks with many offices
operating over a wide geographical area, which banks have, among other
advantages, the ability to finance wide-ranging and effective advertising
campaigns and to allocate their investment resources to regions of highest
yield and demand. Many of the major banks operating in the area offer certain
services which Business Bank does not offer directly (but some of which
Business Bank offers through correspondent institutions). By virtue of their
greater total capitalization, such banks also have substantially higher lending
limits than does Business Bank.
In addition to other banks, competitors include savings institutions,
credit unions, and numerous non-banking institutions, such as finance
companies, leasing companies, insurance companies, brokerage firms, and
investment banking firms. In recent years, increased competition has also
developed from specialized finance and non-finance companies that offer money
market and mutual funds, wholesale finance, credit card, and other consumer
finance services, including on-line banking services and personal finance
software. Strong competition for deposit and loan products affects the rates of
those products as well as the terms on which they are offered to customers.
Mergers between financial institutions have
82
placed additional pressure on banks within the industry to streamline their
operations, reduce expenses, and increase revenues to remain competitive.
Competition has also intensified due to federal and state interstate banking
laws, which permit banking organizations to expand geographically, and the
California market has been particularly attractive to out-of-state
institutions.
Technological innovations have also resulted in increased competition in
the financial services market. Such innovations have, for example, made it
possible for non-depository institutions to offer customers automated transfer
payment services that previously have been considered traditional banking
products. In addition, many customers now expect a choice of several delivery
systems and channels, including telephone, mail, home computer, ATM's,
self-service branches, and/or in-store branches. In addition to other banks,
the sources of competition for such products include savings associations,
credit unions, brokerage firms, money market and other mutual funds, asset
management groups, finance and insurance companies, and mortgage banking firms.
In order to compete effectively, Business Bank provides quality,
personalized service and fast, local decision making which its major bank
competitors are generally unable to offer. For customers whose loan demands
exceed Business Bank's lending limit, Business Bank attempts to arrange for
such loans on a participation basis with other financial institutions. Business
Bank also assists customers requiring services not offered by Business Bank in
obtaining such services from its correspondent banks.
The market for the origination of Small Business Administration loans is
highly competitive. With respect to its origination of Small Business
Administration loans, Business Bank competes with other small, mid-size and
major banks which originate these loans in the geographic areas in which
Business Bank's branches are located, see "Business Bank". In addition, because
these loans are largely broker-driven, Business Bank also competes to a large
extent with banks which originate Small Business Administration loans outside
of Business Bank's immediate geographic area. Further, because these loans may
be written out of loan production offices specifically set up to write Small
Business Administration loans rather than out of full service branches, the
barriers to entry in this area, after approval of a bank as an Small Business
Administration lender, are relatively low.
Employees
As of June 30, 2001 Business Bancorp(1) had a total of 143 full-time and
38 part-time employees. None of Business Bancorp's employees are currently
represented by a union or covered by a collective bargaining agreement.
Management of Business Bancorp believes that its employee relations are
satisfactory.
Description of Property
The following properties (real properties and/or improvements thereon) are
owned by Business Bancorp(1) and are unencumbered. In the opinion of management
of Business Bancorp, all properties are adequately covered by insurance.
Square Feet of Land and
Location Use of Facilities Office Space Building Cost
------------------------------------ ----------------------- ---------------- --------------
140 South Arrowhead Avenue ......... Administrative Office 9,800 $275,000
San Bernardino, California 92408
1380 Highland Avenue ............... Branch Office 2,280 $250,000
San Bernardino, California 92404
321 East Sixth Street .............. Branch Office 9,449 n/a(2)
Corona, California 91719
4022 Phelan Road ................... Branch Office 5,281 n/a(3)
Phelan, California 92371
800 East Florida Ave. .............. Branch Office 16,092 n/a(4)
Hemet, CA 92543
<FN>
------------
(1) As used in these sections, the term "Business Bancorp" includes, where
appropriate, both Business Bancorp and its consolidated subsidiary
Business Bank.
(2) Acquired in connection with acquisition of Western Community Bank in
Corona, California in 1994.
(3) Acquired in connection with acquisition of High Desert National Bank in
Hesperia, California in 1997.
(4) Acquired in connection with acquisition of Valley Merchants Bank in Hemet,
California in 2000.
</FN>
83
The following facilities are leased by Business Bancorp:
Use of Sq. Ft. of Monthly Rent Term of
Location Facilities Office Space as of 08/31/01 Lease
-------------------------------------- ----------------------- -------------- ---------------- ---------------
505 West 2nd Street .................. Main Office 10,247 $ 5,655 1/26/13
San Bernardino, California 92401
173 Orange Street .................... Branch Office 4,624 $ 6,494 12/31/06
Redlands, California 92374
16869 Main Street .................... Branch Office 5,152 $ 7,058 08/01/06
Hesperia, California 92345
136 S. Arrowhead Ave ................. Administrative Office 3,000 $ 2,250 Month-to-month
San Bernardino, CA 92408
4141 Inland Empire Boulevard ......... Branch Office 1,912 $ 3,305 6/14/04
Ontario, California 917641(5)
391 Main Street ...................... Branch Office 7,146 $11,434 5/30/2011
Corona, California 91719
3400 Central Ave, Suite 245 .......... Branch Office 2,234 $ 4,133 07/01/2004
Riverside, CA 92506
<FN>
------------
(5) This location is the temporary site of the Ontario de novo. The Bank has
purchased a parcel of land in Ontario on which to build a permanent
branch.
</FN>
Currently Business Bank's Ontario office is operated out of the second
floor of a professional office suite. On January 13, 2000 Business Bank
purchased a one acre parcel of land for a price of $608,000, located in
Ontario, which will be the site of the branch's permanent facility. On August
1, 2001, Business Bank's management renegotiated the Hesperia lease for an
additional term of five years with two five year options to renew. Recently
Business Bank signed a lease for a new Corona branch site. The current Corona
facilities will serve as both a drive up teller branch and an administration
building, allowing for the possible termination of the lease at 136 S.
Arrowhead Ave. Business Bank opened its Riverside branch on August 1, 2001.
This opening along with the second Corona branch brings the total number of
branch offices to ten. Outside of the aforementioned properties, Management
believes that the existing facilities are adequate to accommodate Business
Bank's and Business Bancorp's operations for the immediately foreseeable
future.
Legal Proceedings
From time to time, Business Bancorp and Business Bank are defendants in
legal proceedings arising in the ordinary course of business. After taking into
consideration information furnished by counsel to Business Bancorp as to the
current status of these claims or proceedings to which Business Bank or
Business Bancorp are parties, 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 Business Bancorp.
84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BUSINESS BANCORP
This discussion presents Management's analysis of the results of
operations and financial condition of Business Bancorp as of and for the six
months ended June 30, 2001 and 2000 and the years ended December 31, 2000, 1999
and 1998. As of the date of this discussion, Business Bancorp's principal
subsidiary is Business Bank. The discussion should be read in conjunction with
the consolidated financial statements of Business Bancorp and the notes related
thereto beginning on page F-1 of this joint proxy statement/prospectus. As used
throughout this section, the term "Business Bancorp" includes, where
appropriate, both Business Bancorp and its consolidated subsidiary Business
Bank. As the holding company reorganization pursuant to which Business Bancorp
became the sole shareholder of Business Bank was effective in January, 2000,
all financial information as of and for the years ended December 31, 1999 and
any earlier years or periods relates to Business Bank rather than Business
Bancorp. Information as of and for the six months ended June 30, 2001 and 2000
and as of and for the year ended December 31, 2000 is provided for Business
Bank and Business Bancorp on a consolidated basis.
Six Months Ended June 30, 2001 and 2000
Results of Operations
Net Income
Business Bancorp's net income for the six months ended June 30, 2001 was
$1.24 million, an increase of 15.1% over the $1.08 million for the same six
months of 2000. Basic earnings per share were $0.61 and $0.55 for the six
months ended June 30, 2001 and 2000, respectively. Diluted earnings per share
were $0.60 and $0.53 for the six months ended June 30, 2001 and 2000,
respectively. The increase was due primarily to strong growth in earning
assets, which increase was partially offset by the decline in rates by 275
basis points since December 31, 2000. See - Net Interest Income, following.
Business Bancorp's return on average equity was 10.16% and 11.11% for the six
months ended June 30, 2001 and 2000, respectively, and the return on average
assets for the same periods was 0.75% and 0.90%, respectively. These decreases
were primarily due to goodwill amortization related to the acquisition of
Valley Merchants Bank, N.A. in August, 2000 and the decline in interest rates
experienced in the first six months of 2001.
Net Interest Income
Net interest income is the most significant component of Business
Bancorp's income from operations. Net interest income is the difference
("interest rate spread") between the gross interest and fees earned on the loan
and investment portfolios and the interest paid on deposits and other
borrowings. Net interest income depends on the volume of and interest rate
earned on interest earning assets and the volume of and interest rate paid on
interest bearing liabilities.
During the first six months of 2001 the Federal Reserve lowered rates by
275 basis points. These declines had negative rate variance impacts to net
interest income of $963,000 the six months ended June 30, 2001, as compared to
the same period in 2000. See Rate/Volume Analysis of Net Interest Income table
on page 88. While Business Bancorp has been able to continue to grow net
interest income through consistent growth in deposits, loans and securities,
further declines in interest rates will impact the margin negatively. The net
interest margin decreased from 6.24% to 5.60% or 64 basis points between June
30, 2000 and June 30, 2001. Primarily, this compression of the net interest
margin was a result of the aforementioned decline in rates.
Interest income for the six months ended June 30, 2001 increased to $12.8
million compared to $9.6 million for the six months ended June 30, 2000. This
increase represents growth of $3.2 million or 33.6%. This increase was composed
of $4.1 million of interest income due to volume variances and $(933,000) due
to rate variances. See Rate/Volume Analysis of Net Interest Income table on
page 88.
Interest expense for the six months ended June 30, 2001 increased to $4.5
million compared to $3.0 million for the six months ended June 30, 2001. This
represents an increase of $1.5 million or 50.7%. Volume variances contributed
$1.49 million while rate variances contributed $30,000. The declines in
85
interest rates did not immediately impact Business Bancorp's funding sources as
the repricing characteristics of time deposits and other borrowings lag behind
those of the earning asset portfolio.
Net interest income before provision for loan losses for the six months
ended June 30, 2001 was $8.2 million, compared to $6.6 million for the six
months ended June 30, 2000. While strong balance sheet growth has allowed for
increased net interest income, this increase was substantially offset due to
the decline in interest rates during the first half of 2001. This change in net
interest income is highlighted within the Rate/Volume Analysis of Net Interest
Income table, following.
The following table shows Business Bancorp's average balances of assets,
liabilities and shareholders' 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:
86
Distribution, Yield and Rate Analysis of Net Interest Income
As of and for the Six Months Ended June 30,
---------------------------------------------------------------------
2001 2000
----------------------------------- ---------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate/Yield Balance Expense Rate/Yield
----------- ---------- ------------ ----------- --------- -----------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans, net(1) ..................................... $183,818 $ 9,505 10.34% $122,310 $6,843 11.19%
Taxable investment securities:
U. S. government securities ..................... 1,004 28 5.58 1,011 28 5.61
Mortgage backed securities ...................... 75,280 2,292 6.09 65,410 2,059 6.26
Other securities .................................. 5,798 183 6.33 2,816 105 7.45
Tax-exempt investment securities:(2) ..............
Obligations of state and political
subdivisions ................................... 22,974 584 5.09 16,410 452 5.51
Federal funds sold ................................ 1,927 55 5.74 787 24 6.21
FHLB Stock ........................................ 1,554 50 6.43 1,524 40 5.25
Interest-earning deposits ......................... 1,965 66 6.72 0 0 0.00
-------- ------- ----- -------- ------ -----
Total interest-earning assets .................. 294,320 12,763 8.67 210,268 9,551 9.08
Non-interest earning assets:
Cash and due from banks ........................... 19,748 17,695
Premises and equipment, net ....................... 5,744 4,291
Other real estate owned ........................... 413 826
Accrued interest receivable ....................... 1,828 1,334
Other assets ...................................... 10,835 6,158
Total non-interest earning assets .................. 38,568 30,304
-------- --------
Total assets ................................... $332,888 $240,572
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market .................................... 37,948 625 3.30 30,613 546 3.57
NOW ............................................. 38,284 374 1.95 26,480 253 1.91
Savings ......................................... 26,211 349 2.66 19,398 259 2.67
Other time deposits ............................. 33,100 865 5.23 20,485 478 4.67
Time certificates of deposit in
denominations of $100,000 or more .............. 43,443 1,161 5.34 17,212 444 5.16
Other borrowings ................................ 21,060 595 5.65 23,066 714 6.19
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Junior Subordinated Debentures ................. 10,000 547 10.94 5,525 302 10.93
-------- ------- ----- -------- ------ -----
Total interest-bearing liabilities ............. 210,046 4,516 4.30 142,779 2,996 4.20
Non-interest-bearing liabilities:
Demand deposits ................................... 95,221 76,454
Other liabilities ................................. 2,997 1,829
Total non-interest-bearing liabilities ......... 98,218 78,283
Stockholders' equity ............................... 24,624 19,510
Total liabilities and Stockholders'
equity ........................................ $332,888 $240,572
======== ========
Net interest income ................................ $ 8,247 $6,555
======= ======
Net interest spread(3) ............................. 4.37% 4.89%
===== =====
Net interest margin(4) ............................. 5.60% 6.24%
===== =====
<FN>
------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $746,000 and $513,000 for the six months ended
June 30, 2001 and 2000, respectively. Loans are net of the allowance for
loan losses and unearned income.
(Footnotes continued on following page).
87
(Footnotes continued from previous page).
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis. Approximately 90% of said income is exempt from Federal taxes.
(3) Represents the annualized average rate earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
</FN>
The following table shows Business Bancorp's average balances of assets,
liabilities and shareholders' 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:
Rate/Volume Analysis of Net Interest Income
Six Months Ended June 30, 2001 vs. 2000
Increases (Decreases) due to change in
---------------------------------------
Volume Rate Total
---------- ------------ -----------
(Dollars in Thousands)
Interest Income:
Loans, net(1) ........................................ $ 3,442 $ (780) $ 2,662
Taxable investment securities:
U. S. government securities ......................... 0 0 0
Mortgage backed securities .......................... 310 (77) 233
Other securities ..................................... 110 (32) 78
Tax-exempt securities:(2) ............................
Obligations of state and political subdivisions ..... 181 (49) 132
Federal funds sold ................................... 35 (4) 31
FHLB Stock ........................................... 1 9 10
Interest-earning deposits ............................ 66 0 66
Total ............................................ $ 4,145 $ (933) $ 3,212
------- ------ -------
Interest Expense:
Money market deposits ................................ $ 130 $ (51) $ 79
NOW deposits ......................................... 113 8 121
Savings deposits ..................................... 91 (1) 90
Other time deposits .................................. 295 92 387
Time certificates of deposit in denominations of
$100,000 or more .................................... 678 39 717
Other borrowings ..................................... (62) (57) (119)
Solely junior subordinated debt ...................... 245 0 245
Total ............................................ $ 1,490 $ 30 $ 1,520
------- ------ -------
Change in net interest income ........................... $ 2,655 $ (963) $ 1,692
======= ====== =======
<FN>
------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $746,000 and $513,000 for the six months ended
June 30, 2001 and 2000. Loans are net of the allowance for loan losses,
deferred fees and related direct costs.
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis. Approximately 90% of said income is exempt from Federal taxes.
</FN>
Provision for Loan Losses
Net charge-offs totaled approximately $45,000 for the six months ended
June 30, 2001 compared to approximate net charge-offs of $88,000 for the six
months ended June 30, 2000. Due to the historical loss experience associated
with the various loan types, the provision for loan losses totaled $175,000 for
the six months ended June 30, 2001 compared to $80,000 for the six months ended
June 30, 2000. The allowance for loan losses totaled $2.0 million for the
quarter ended June 30, 2001 compared to $1.2 million as of June 30, 2000. This
increase was primarily attributable to the acquisition of Valley Merchants
Bank's reserves of approximately $465,000 in August of 2000 (see "Analysis of
the Changes in the Allowance for Loan Losses" on page F-34 of the notes to the
unaudited financial statements) and additional reserves booked in the interim
of $350,000.
88
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual
impaired loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, non-accrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Business Bancorp's allowance for loan losses. Such agencies
may require Business Bancorp to make additional provisions for loan losses
based upon judgments, which differ from those of management.
Other Operating Income
Other operating income represents non-interest types of revenue and is
comprised primarily of other fee income, loan servicing fees and service
charges on deposit accounts. Other operating income was $1.8 million for the
six months ended June 30, 2001 compared to $1.4 million for the six months
ended June 30, 2000. This represents an increase of approximately $304,000, or
21.0%.
Service fee income totaled $1.5 million for the six months ended June 30,
2001 compared to $1.3 for the six months ended June 30, 2000. This increase was
mainly due to a larger customer base which is the driving force of fee income.
As interest rates declined over the first half of 2001, Business Bancorp
experienced additional unrealized gains on its investment portfolio, net of
taxes, of approximately $646,000, since December 31, 2000. This increased the
aggregate unrealized gain to $1.6 million as of June 30, 2001. To partially
offset the negative impact the declining rates had on net interest income
management sold select securities at a gain throughout the first half of 2001
for realized gains of $209,000. Management may continue to hedge against the
declining rate environment through this practice during the second half of
2001.
For the six months ended June 30, 2001 gains on sale of OREO were $41,000
compared to $173,000 for the six months ended June 30, 2000. As Business
Bancorp continues to shrink its OREO portfolio (see "Nonperforming Assets" on
page 93) these gains will continue to decline as there will be fewer properties
to sell.
Non-Interest Expense
Non-interest expense is incurred by Business Bancorp in its normal course
of business. Salaries and employee benefits, occupancy, advertising, insurance,
data processing, stationery and supplies, professional services and office are
the major categories of non-interest expense.
The following table compares each of the components of non-interest
expense for the six months ended June 30, 2001 and 2000 respectively:
For the Six Months Ended June 30,
----------------------------------------------------
Change in
2001 2000 Dollars
---------- ----------------------- -------------
(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits ......... $ 4,145 $ 3,147 $ 998
Occupancy and equipment ................ 919 774 145
Advertising and promotion .............. 216 213 3
Insurance and assessments .............. 127 81 46
Data Processing ........................ 582 426 156
Stationary and supplies ................ 184 136 48
Professional ........................... 269 271 (2)
Office ................................. 274 199 75
Other .................................. 1,173 1,164 9
------- ------- -------
Total Non-interest Expense .......... $ 7,889 $ 6,411 $ 1,478
======= ======= =======
89
Non-interest expense increased to $7.9 million for the six months ended
June 30, 2001 compared to $6.4 million for the six months ended June 30, 2000,
an increase of $1.5 million or 23.1%. This increase in Business Bancorp's
overhead cost is primarily a function of Business Bancorp's growth, including
increased staffing, the purchase of Valley Merchants Bank, as well as leasing
additional administrative space during the period.
Salaries and employee benefits increased $998,000 or 31.7% for the six
months ended June 30, 2001 as compared to the same period in 2000 due to (1)
the addition of 32 employees associated with the purchase of Valley Merchants
Bank; (2) increased staffing in the branches and administration; and (3)
periodic merit and promotional increases for employees.
Occupancy costs increased $145,000 or 18.7% for the six months ended June
30, 2001 as compared to the same period in 2000 primarily due to leasing
additional administrative space and the additional occupancy costs associated
with the purchase of Valley Merchants Bank.
Data processing costs increased $156,000 or 36.6%. This increase is mainly
attributable to the acquisition of Valley Merchants Bank.
Provision For Income Taxes
The effective income tax rate was 35.8% for the six months ended June 30,
2001 compared to 28.7% for the six months ended June 30, 2000. Provision for
income taxes totaled $693,000 and $433,000 for the six months ended June 30,
2001 and 2000 respectively.
Miscellaneous
Regarding the potential California energy crisis, the impact to Business
Bancorp will possibly include: (1) material increases in expenses relating to
electrical consumption that could have a negative impact on Business Bancorp's
future operating results; (2) electricity brownouts and blackouts, which could
lead to a slowing of operations. Business Bancorp currently has in place
business resumption plans, in the normal course of operations, which provide
for normal disruptions in electricity and information systems. While Business
Bancorp maintains battery back-up for its key computer systems, it does not
maintain electrical generators at any of its branch or administrative sites.
Financial Condition
General
Total assets of Business Bancorp increased to $340.1 million as of June
30, 2001 compared to $311.5 million as of December 31, 2000. Total loans were
$183.1 million as of June 30, 2001. This represents an increase of $2.7 million
or 1.5% over the December 31, 2000 balance of $180.4 million.
Deposits grew to $282.2 million as of June 30, 2001 compared to $264.9
million as of December 31, 2000, an increase of $17.3 million or 6.5%. At June
30, 2001, Business Bank had $27.7 million in deposits from the State of
California and other government agencies. These deposits require that Business
Bank pledge securities with values equal to 110% of the deposit amounts as
collateral.
Stockholders' equity increased to $25.4 million as of June 30, 2001
compared to $23.5 million as of December 31, 2000.
The aforementioned increases in Business Bancorp's balance sheet between
December 31, 2000 and June 30, 2001 were from internal growth through
operations.
Investments
Business Bancorp's investment portfolio consists primarily of obligations
of mortgage-backed securities, obligations of state and political subdivisions,
commercial paper, and interest bearing deposits in other financial
institutions. Mortgage-backed securities totaled $84.5 million as of June 30,
2001 as compared to $62.3 million as of December 31, 2000. Securities issued by
state and political subdivisions totaled $23.0 million for both June 30, 2001
and December 31, 2000. Commercial paper totaled $5.9 million on June 30, 2001,
compared totals of $5.8 million for December 31, 2000. Certificate of deposits
held at other banks decreased to $941,000 at June 30, 2001 from $3.4 million at
December 31, 2000. This decrease was fully attributable to maturities. Many of
the securities are held as collateral at the Federal
90
Home Loan Bank and through public agencies to secure borrowings, public funds,
and treasury, tax, and loan deposits. Detailed information concerning Business
Bancorp's investment securities is contained in Note 2 to the unaudited
financial statements, on page F-32.
Loans
Loan balances, net of the allowance for loan losses, increased to $181.1
million as of June 30, 2001 compared to $178.5 million as of December 31, 2000.
This increase was due to internal growth through operations. As a percentage of
assets, net loans decreased from approximately 57.3% on December 31, 2000 to
53.2% at June 30, 2001.
The following table sets forth Business Bancorp's amount of total loans
outstanding in each category and the percentage of total loans in each category
as of the dates indicated:
Loan Portfolio Composition
June 30, 2001 December 31, 2000
----------------------- ------------------------
Percent Percent
Amount of Total Amount of Total
---------- ---------- ---------- -----------
Real estate:
Construction ..................... $ 33,272 18.07% $ 34,044 18.76%
Mortgage ......................... 99,641 54.11% 95,885 52.85%
Commercial .......................... 38,724 21.03% 39,358 21.69%
Installment/All other loans ......... 12,510 6.79% 12,160 6.70%
------ ------
Total gross loans ............. 184,147 100.00% 181,447 100.00%
====== ======
Unearned income ..................... 1,039 1,079
Allowance for loan losses ........... 1,973 1,843
-------- --------
Total net loans ............... 181,135 $178,525
======== ========
As of June 30, 2001, Business Bancorp had commitments to extend credit of
$76.1 million, obligations under standby letters of credit of $48,000, and
obligations under commercial letters of credit of $3.2 million.
The following table shows the maturity distribution and repricing
intervals Business Bancorp's outstanding loans as of June 30, 2001. In
addition, the table shows the distribution of such loans as between those with
variable or floating interest rates and those with fixed or predetermined
interest rates.
Loan Maturities and Repricing Intervals
At June 30, 2001
----------------------------------------------------------
After One But
Within One Within After Five
Year Five Years Years Total
------------ --------------- ------------ ----------
Real estate:
Construction ....................... $ 27,809 $ 3,699 $ 1,764 $ 33,272
Mortgage ........................... 47,502 21,931 30,208 99,641
Commercial ............................ 32,769 5,127 828 38,724
Installment/All other loans ........... 4,818 6,605 1,087 12,510
-------- ------- ------- --------
Total ........................... $112,898 $37,362 $33,887 $184,147
======== ======= ======= ========
Loans with variable (floating) interest
rates ................................ $105,607 $ 640 $ 1,703 $107,950
Loans with predetermined (fixed)
interest rates ....................... $ 7,291 $36,722 $32,184 $ 76,197
91
Deposits
Deposits increased to $282.2 million as of June 30, 2001 compared to
$264.9 million as of December 31, 2000. This increase of $17.3 million or 6.5%
was due to internal growth through operations. This growth was composed of $2.9
million in Demand and NOW deposits, $1.7 million in Money Market and Savings,
$3.4 million in Time deposits under $100,000 and $9.3 million in Time deposits
over $100,000. Of the $9.2 million in Time deposits over $100,000, $8.0 million
was acquired through the State of California. While the growth was realized
throughout the deposit portfolio with the exception of NOW accounts, the
majority of the growth was realized in time deposits.
The following table summarizes the changes in the mix of the deposit
portfolio:
Deposit Portfolio Mix
June 30, 2001 December 31, 2000
------------------------------- ------------------------------
Ending Balance % of Total Ending Balance % of Total
---------------- ------------ ---------------- -----------
Demand .................................. $100,410 35.58% $ 95,435 36.02%
NOW ..................................... 37,450 13.27% 39,521 14.92%
Money market and savings ................ 65,099 23.07% 63,365 23.92%
Time deposits under $100,000 ............ 34,234 12.13% 30,814 11.63%
Time deposits $100,000 and over ......... 45,024 15.95% 35,792 13.51%
-------- ------ -------- ------
Total deposits ....................... $282,217 100.00% $264,927 100.00%
======== ====== ======== ======
The following tables summarize the distribution of average daily deposits
and the average daily rates paid for the periods indicated:
Average Deposits & Other Borrowings
June 30, 2001 December 31, 2000
----------------------- ------------------------
Average Average Average Average
Balance Rate Balance Rate
----------- --------- ----------- ----------
Demand, Noninterest-bearing .............. $ 95,221 0.00% $ 82,041 0.00%
Money market ............................. 37,948 3.30% 47,685 2.89%
NOW ...................................... 38,284 1.95% 15,875 2.28%
Savings .................................. 26,211 2.66% 22,575 2.69%
Time certificates of deposit in
denominations of $100,000 or more ....... 43,443 5.34% 24,173 5.01%
Other time deposits ...................... 33,100 5.23% 23,939 5.67%
-------- ----- -------- -----
Total deposits ........................ 274,207 2.29% 216,288 2.27%
Other borrowings ......................... 21,060 5.67% 19,659 6.39%
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely
Junior Subordinated Debentures .......... 10,000 10.88% 7,889 10.88%
-------- ----- -------- -----
Total deposits and borrowed funds ..... $305,267 2.77% $243,836 2.88%
======== ===== ======== =====
The scheduled maturities of Business Bancorp's time deposits in
denominations of $100,000 or greater at June 30, 2001 were as follows:
Maturities of Time Deposits of $100,000 or More
June 30, 2001
-----------------------
(Dollars in Thousands)
Three months or less .......................... $36,615
Over three months through six months .......... 5,504
Over six months through twelve months ......... 2,785
Over twelve months ............................ 120
-------
Total ...................................... $45,024
=======
92
Nonperforming Assets
Nonperforming assets consist of nonperforming loans and other real estate
owned (OREO). Nonperforming loans are those loans which have (1) been placed on
non- accrual status, (2) been subject to troubled debt restructuring, or (3)
become contractually past due 90 days or more with respect to principal or
interest and have not been restructured or placed on non-accrual status.
Non-accrual loans are loans where the original contractual amount may not
be fully collectible. Business Bancorp measures its impaired loans by using the
fair value of the collateral if the loan is collateral dependent and the
present value of the expected future cash flows discounted at the loan's
effective interest rate if the loan is not collateral dependent. Business
Bancorp places loans on non-accrual status that are delinquent 90 days or more
or when a reasonable doubt exists as to the collectibility of interest and
principal. Loans on non- accrual status totaled $1.8 million as of June 30,
2001 compared to $999,000 at December 31, 2000. This increase of approximately
$801,000 was due primarily to one real estate loan that was placed on
non-accrual during the second quarter. This loan is secured by a first trust
deed on a commercial real estate building. Interest income that would have been
recognized on non-accrual loans if they had performed in accordance with the
terms of the loans was approximately $69,400 and $107,892 for the six months
ended June 30, 2001 and for the year ended December 31, 2000, respectively.
The following table sets forth Business Bancorp's nonperforming assets at
the dates indicated:
June 30, December 31,
Nonperforming Assets 2001 2000
--------------------- ---------- -------------
Non-Accrual Loans
Real estate
Construction ....................................................... $ 0 $ 0
Mortgage ........................................................... 1,653 864
Commercial ............................................................ 125 135
Installment ........................................................... 0 0
All other (including overdraft) ....................................... 0 0
------- -------
Total non-accrual loans ......................................... 1,778 999
Loans 90 days or more past due and still accruing
Real estate
Construction ....................................................... 0 0
Mortgage ........................................................... 0 0
Commercial ............................................................ 0 0
Installment ........................................................... 0 0
All other (including overdraft) ....................................... 0 0
------- -------
Total loans 90 days or more past due and still accruing ......... 0 0
Total nonperforming loans ............................................. 1,778 999
Other real estate owned ............................................... 313 505
------- -------
Total nonperforming assets ...................................... 2,091 1,504
======= =======
Nonperforming loans as a percentage of total gross loans .............. 0.97% 0.55%
======= =======
Nonperforming assets as a percentage of total assets .................. 0.61% 0.48%
======= =======
Nonperforming assets as a percentage of total gross loans and
OREO ................................................................. 1.14% 0.83%
======= =======
The increases in the percentages of nonperforming loans and assets at the
end of the above table were caused entirely by the $801,000 real estate loan
discussed above, and slightly offset by decreases in OREO and commercial
non-accruals from December 31, 2000 to June 30, 2001.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance is increased by provisions
charged against earnings and reduced by net loan charge-offs. Loans are charged
off when they are deemed to be uncollectible, or partially charged off when
portions of a loan are deemed to be uncollectible. Recoveries are generally
recorded only when cash payments are received.
93
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual
impaired loans, and next considers the level of general loss allowance deemed
appropriate for the balance of the loan portfolio based on factors including
the levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, non-accrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Business Bancorp's allowance for loan losses. Such agencies
may require Business Bancorp to make additional provisions for loan losses
based upon judgments, which differ from those of management.
As of June 30, 2001 the balance of the allowance for loan losses was $2.0
million compared to $1.8 million as of December 31, 2000. As a percentage of
total loans the allowance was 1.1% as of June 30, 2001 and 1.0% as of December
31, 2000. Management believes the allowance at June 30, 2001 is adequate based
on its ongoing analysis of the loan portfolio, historical loss trends and other
factors. However, no assurance can be given that changes in the current
economic environment in Business Bancorp's principal market area or other
circumstances will not result in increased losses in the loan portfolio in the
future. Detailed information concerning activity in the allowance for loan
losses is contained in Note 3 to the unaudited financial statements, on page
F-33.
Other Real Estate Owned
Other real estate owned (OREO) was $313,000 as of June 30, 2001 compared
to $505,000 as of December 31, 2000. Other real estate owned properties are
real estate properties acquired through or in lieu of loan foreclosure.
Business Bank sold one OREO property since December 31, 2000 and realized
principal proceeds of $192,000 and net gains of $41,000.
Capital
Shareholders' equity increased to $25.4 million as of June 30, 2001
compared to $23.5 million as of December 31, 2000. Year-to-date earnings of
$1.2 million and an additional $646,000 in net unrealized gains on
available-for-sale securities comprised the net change of $1.9 million.
At June 30, 2001 and December 31, 2000, all capital ratios were above all
current federal capital guidelines for a "well capitalized" bank or bank
holding company. As of June 30, 2001 Business Bank's regulatory total capital
to risk-weighted assets ratio was 12.7% compared to 11.7% as of December 31,
2000. Business Bank's regulatory tier 1 capital to risk-weighted assets ratio
was 11.8% as of June 30, 2001 compared to 10.9% as of December 31, 2000.
Business Bank's regulatory tier 1 capital to average assets ratio was 7.8% as
of June 30, 2001 compared to 7.9% as of December 31, 2000.
As of June 30, 2001 Business Bancorp's regulatory total capital to
risk-weighted assets ratio was 12.9% compared to 11.8% as of December 31, 2000.
Business Bancorp's regulatory tier 1 capital to risk-weighted assets ratio was
11.0% as of June 30, 2001 compared to 9.7% as of December 31, 2000. Business
Bancorp's regulatory tier 1 capital to average assets ratio was 7.4% as of June
30, 2001 compared to 7.8% as of December 31, 2000.
Liquidity and Interest Rate Risk Management
Business Bancorp closely monitors its liquidity so that the cash
requirements for loans and deposit withdrawals are met in an economical manner.
Management monitors liquidity in relation to trends of loans and deposits for
short term and long term requirements. Liquidity sources are cash and due from
banks, deposits with other banks, overnight Federal Funds investments, interest
bearing deposits in other financial institutions, unpledged available-for-sale
investment securities and loans held-for-sale. As of June 30, 2001 liquid
assets as a percentage of deposits were 37.3% compared to 32.9% as of December
31, 2000.
Effective planning of asset and liability maturities and the matching of
interest rates to correspond with this maturity matching is an integral part of
the active management of an institution's net yield. To the extent maturities
of assets and liabilities do not match in a changing interest rate environment,
net yields may be affected. Even with accurately matched repricing of assets
and liabilities, risk remains in the form of prepayment of assets, timing lags
in adjusting certain assets and liabilities that have varying
94
sensitivities to market interest rates and basis risk. In its overall attempt
to match assets and liabilities, management takes into account rates and
maturities to be offered in connection with its certificate of deposit program
and offers variable rate loans. Business Bancorp has generally been able to
control its exposure to changing interest rates by managing the mix of floating
rate to fixed rate instruments within its portfolio.
The sensitivity to interest rate fluctuations is measured in several time
frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the ALCO process. The monitoring process includes the use of
periodic simulated business forecast, which incorporate various interest rate
environments. Financial modeling is utilized to assist management in
maintaining consistent earnings in an environment of changing interest rates.
At June 30, 2001, Business Bancorp had approximately $102.5 million of
interest-bearing liabilities (NOW's, Savings, and Money Market accounts)
maturing in zero to three months. Although this short maturity indicates that
these interest-bearing liabilities are sensitive to adjustments in interest
rates, Business Bancorp believes this sensitivity is significantly lessened due
to the fact that these interest bearing liabilities mainly consist of low
cost/low turnover demand deposits. In addition, Business Bancorp's pays
competitive rates on its time certificates of deposit, and, accordingly, even
though some are shown as maturing in zero to three months, Management believes
the substantial majority of these accounts should continue to roll-over at
maturity.
At June 30, 2001 approximately 48.4% of Business Bancorp's
interest-earning assets were subject to repricing after 5 years. The majority
of these assets are Collateralized Mortgage Obligations (CMO's). Business
Bancorp's interest rate sensitivity analysis with respect to CMOs takes into
account the contractual maturity of these obligations, but does not take into
account mandatory payments on the underlying mortgage payment obligations,
which pay primarily interest in early years, or prepayments of the underlying
mortgages, which significantly reduce the maturity, and therefore the risks, of
these obligations. Similarly, Business Bancorp's other loans which reprice
after 5 years also only take into account only stated maturities of these loans
and not prepayments of these loans or monthly required payments which are
primarily interest in early years. Business Bancorp anticipates that a
significant portion of the 48.4% of its interest-earning assets which
contractually reprice after five years will actually reprice sooner than five
years.
At any given time, the market value of Business Bancorp's securities
portfolio may be above, at, or below market value. While there is a possibility
that there will be an impact on net income should Business Bancorp need to sell
securities whose fair value is less than the amortized cost, Business Bancorp
is able to mitigate this risk by borrowing against the securities to raise
liquidity versus having to sell the securities. Since Business Bancorp does a
monthly mark-to-market on the available-for-sale securities portfolio, there
would be minimal impact on the Balance Sheet if Business Bancorp was forced to
sell securities whose fair value is less than the amortized cost.
95
The following table presents the interest rate sensitivity of Business
Bancorp's interest-earning assets and interest-bearing liabilities as of June
30, 2001 using the 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 its contractual
terms. Actual payment patterns may differ from contractual payment patterns.
At June 30, 2001
Amounts Subject to Repricing Within
--------------------------------------------------------------------------
0-3 Months 3-12 Months 1-5 Years After 5 Years Total
-------------- --------------- -------------- --------------- ------------
(Dollars in Thousands)
Interest-earning assets:
Loans(1) .................................. $ 93,162 $ 19,736 $ 37,362 $ 33,887 $ 184,147
Investment securities ..................... 1,002 202 1,110 112,093 114,407
Federal funds sold ........................ 2,000 0 0 0 2,000
Interest-bearing deposits at other
banks .................................... 941 0 0 0 941
--------- --------- --------- ---------- ---------
Total .................................. 97,105 19,938 38,472 145,980 301,495
Interest-bearing liabilities:
Interest-bearing demand (NOW) ............. 37,450 0 0 0 37,450
Savings deposits .......................... 26,352 0 0 0 26,352
Money market .............................. 38,747 0 0 0 38,747
Time deposits of $100,000 or more ......... 36,615 5,504 2,785 120 45,024
Other time deposits ....................... 15,117 16,514 2,603 0 34,234
Other borrowings .......................... 7,000 3,400 9,425 0 19,825
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures ..................... 0 0 0 10,000 10,000
--------- --------- --------- ---------- ---------
Total .................................. $ 161,281 $ 25,418 $ 14,813 $ 10,120 $ 211,632
Interest rate sensitivity gap ................ $ (64,176) $ (5,480) $ 23,659 $ 135,860
Cumulative interest rate sensitivity gap ..... $ (64,176) $ (69,656) $ (45,997) $ 89,863
Cumulative interest rate sensitivity gap
ratio based on total earning assets ......... (21.29)% (23.10)% (15.26)% 29.81%
<FN>
------------
(1) Includes deferred fees and unearned income of $1,038,676
</FN>
96
Three years ended December 31, 2000
Overview
General
Throughout the reporting periods covered Business Bancorp has experienced
steady growth in assets and deposits and has accordingly achieved increased net
income. Return on average assets was .85% and .98% for years ending December
31, 2000 and 1999, respectively. Return on average equity was 1.12% and 1.14%
for the years ending December 31, 2000 and 1999, respectively. These decreases
were due primarily to a combination of the opening of the Ontario, California
de novo branch in August, 1999; Business Bank's investment in Financial Data
Solutions, Inc.; and goodwill amortization related to the acquisition of Valley
Merchants Bank in August, 2000. Total net loans increased to $178.5 million at
December 31, 2000 from $115.1 million and $104.5 million, at December 31, 1999
and 1998, respectively. Investments including Fed Funds sold, interest bearing
deposits at banks, and investment securities increased to $95.5 million at
December 31, 2000 from $83.3 million and $51.0 million at December 31, 1999 and
1998, respectively. The primary source of funds, deposits from customers, were
$264.9 million as of December 31, 2000, compared to $186.8 million and $163.8
million at December 31, 1999 and 1998, respectively.
Net income was $2,270,000, $1,940,000 and $1,857,000 for 2000, 1999 and
1998, respectively.
The most significant occurrence impacting Business Bancorp's operations
during these time frames was the acquisition of Valley Merchants Bank in August
of 2000, which accounted for a portion of the increases in assets, liabilities
and net income from 1999 to 2000. The increase in net income is primarily
attributable to (i) growth in net interest income (the difference between
interest and fees derived from earning assets and interest paid on liabilities
carried to provide for those assets) as a result of the aforementioned growth
in assets and liabilities; and (ii) reductions in required provisions for loan
losses per Business Bank's analysis of its loan portfolio.
On November 27, 1998 Business Bank acquired a forty-nine percent equity
investment in Financial Data Solutions, Inc., which provides a variety of data
processing services to the financial services industry. Financial Data
Solutions, Inc. is co-owned by Business Bank (49%) and by Southwest Community
Bank (51%). Business Bank and Southwestern Community Bank made contributions to
Financial Data Solutions, Inc. aggregating $500,000 in January 2000, $300,000
in August 2000 and $200,000 in January 2001. The additional contributions were
made to accommodate the rapid growth associated with Financial Data Solutions,
Inc.. Additional contributions were made to acquire, among other things; a
second location in El Monte, California, additional machinery and equipment as
well as licenses associated with adding additional customers. All contributions
were made based on the respective ownership percentages of each of the
institutions. Business Bank's portions of such contributions were $245,000
$147,000, and $98,000 in January 2000, August 2000 and January 2001,
respectively.
On August 31, 2000, Business Bank consummated its acquisition of Valley
Merchants Bank. In order to fund a substantial portion of the approximately
$12.2 million acquisition price of Valley Merchants Bank, on March 23, 2000,
Business Capital Trust I issued an aggregate of $10,000,000 of principal amount
of 10-7/8% Fixed Rate Capital Trust Pass-through Securities which in turn were
used to purchase the same principal amount of Subordinate Debt Securities
issued by Business Bancorp. In the third quarter of 2000, Business Bancorp
contributed to Business Bank approximately $8.7 million of the approximately
$9.7 million in net proceeds which it received from the sale of the
Subordinated Debt Securities in order to fund the acquisition of Valley
Merchants Bank. The balance of the purchase price for the acquisition of Valley
Merchants Bank was paid out of the working capital of Business Bank. See
"Information About Business Bancorp--General" on page 81.
Results of Operations
Net Interest Income
Business Bancorp's earnings depend significantly upon the difference or
spread between the income received from its loans and other interest-earning
assets and the interest paid on interest-bearing liabilities. This computed
difference is net interest income. The net interest income, when expressed as a
97
percentage of average total interest-earning assets, is referred to as the net
interest margin. The net interest income is affected by the change in the level
and the mix of interest-earning assets and interest-bearing liabilities,
referred to as volume changes. The net interest margin is also affected by
changes in the yield earned on assets and rates paid on liabilities, referred
to as rate changes. Interest rates charged on loans are affected principally by
the demand for such loans, the supply of money available for lending purposes
and competitive factors. These factors are in turn affected by general economic
conditions and other factors frequently beyond Business Bancorp's control, such
as governmental economic policies, money supply, governmental tax policies and
actions of the Federal Reserve Board.
Net interest income was $14.4 million for the year ended December 31,
2000, an increase of $3.2 million or 28.6% over 1999. Net interest income in
1999 increased $1.0 million or 9.8% from $10.2 million for 1998. The increase
in 2000 was due to a combination of internal growth through operations and the
Valley Merchants Bank acquisition, consummated August 31, 2000. The increase
during 1999 was due to internal growth through operations.
During 2000 average interest-earning assets increased $63.3 million or
36.8% to $234.5 million compared to 1999, while average interest-bearing
liabilities for the same period increased $54.7 million or 51.0% to $161.8
million. Said growth is attributable to internal growth through operations and
the acquisition of Valley Merchants Bank. While this acquisition grew the
deposit base by approximately $49.6 million it did not have a material impact
on the overall mix (see following table). Time deposits $100,000 and over grew
by $15.9 million and its contribution to the deposit mix increased by 2.46%.
This increase was primarily due to Business Bancorp acquiring a $12.0 million,
six month certificate with the state of California on August 9, 2000. Average
loans, Business Bancorp's highest yielding asset, grew by $37.1 million or 8.5%
to $143.0 million for the same period. The average yield on interest-earning
assets was 9.29%, up 56 basis points from 8.73% in 1999. This increase was
mainly due to the higher level of the national prime rate, on average, in 2000
compared to 1999. The average rates paid on interest-bearing liabilities
increased 100 basis points from 3.34% to 4.34% during the aforementioned
period. This increase is mainly attributable to the issuance of $10.0 million
in 10-7/8% Subordinated Debt Securities. Accordingly, the net interest spread
(the difference between the yield on interest-earning assets versus the rates
paid on interest-bearing deposits) decreased to 4.95% in 2000 from 5.39% in
1999.
The following table summarizes the changes in the mix of the deposit
portfolio:
Deposit Portfolio Mix
------------------------------------------------------
December 31, 2000 December 31, 1999
-------------------------- -------------------------
Ending Ending
Balance % of Total Balance % of Total
----------- ------------ ----------- -----------
Demand .................................. $ 95,435 36.02% $ 74,534 39.90%
NOW ..................................... 39,521 14.92% 27,285 14.61%
Money market and savings ................ 63,365 23.92% 49,841 26.68%
Time deposits under $100,000 ............ 30,814 11.63% 15,275 8.18%
Time deposits $100,000 and over ......... 35,792 13.51% 19,874 10.64%
-------- ------ -------- ------
Total deposits ....................... $264,927 100.00% $186,809 100.00%
During 1999 average interest-earning assets increased $28.2 million or
19.7% to $171.3 million compared to 1998, while average interest-bearing
liabilities for the same period increased $17.3 million or 19.3% to $107.1
million. Average loans grew by $8.3 million or 8.5% to $105.9 million for the
same period. The average yield on interest-earning assets was 8.63%, down 69
basis points from 9.32% in 1998. This decline was mainly due to the lower level
of the national prime rate, on average, in 1999 compared to 1998. The average
rates paid on interest-bearing liabilities decreased 20 basis points from 3.54%
to 3.34% during the aforementioned period. Accordingly, the net interest spread
(the difference between the yield on interest-earning assets versus the rates
paid on interest-bearing deposits) decreased to 5.29% in 1999 from 5.78% in
1998.
98
The following table shows Business Bancorp's average balances of assets,
liabilities and shareholders' 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:
Distribution,
Yield and Rate Analysis of Net Interest Income
for the Years Ended December 31,
-----------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate/Yield Balance Expense Rate/Yield
----------- ---------- ------------ ----------- ---------- ------------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans, net(1) ...................... $142,970 $15,702 10.98% $105,922 $11,227 10.60%
Taxable investment securities
U.S. government securities ........ 1,009 57 5.65 799 44 5.51
Obligations of other U.S.
governmental agencies ............. 59 3 5.73 556 36 6.53
Mortgage backed securities ......... 64,742 4,161 6.43 40,382 2,273 5.63
Other Securities ................... 4,602 318 6.92 1,238 71 5.76
Tax-exempt investment securi-
ties(2) ...........................
Obligations of state and po-
litical subdivisions .............. 19,236 1,037 7.35 9,685 502 7.06
Federal funds sold ................. 545 35 6.40 12,668 618 4.88
Interest earning deposits .......... 1,337 95 7.09 0 0 0.00
-------- ------- ----- -------- ------- -----
Total interest earning assets ...... 234,500 21,408 9.29 171,250 14,771 8.73
Non-interest earning assets: .......
Cash and due from banks ............ 18,590 17,695
Premises and equipment, net ........ 4,784 3,795
Other real estate owned ............ 683 1,057
Accounts receivable ................ 0 0
Accrued interest receivable ........ 1,520 938
Other Assets ....................... 6,357 4,070
Total non-interest earning
assets ............................ 31,934 27,555
Total assets ....................... $266,434 $198,805
Liabilities and Shareholders'
Equity
Interest-bearing liabilities .......
Deposits:
Money market ....................... 47,685 1,377 2.89 28,720 817 2.85
NOW ................................ 15,875 362 2.28 21,612 489 2.26
Savings ............................ 22,575 606 2.69 19,610 529 2.70
Time certificates of deposit in
denominations of $100,000
or more ........................... 24,173 1,211 5.01 12,825 604 4.71
Other time deposits ................ 23,939 1,357 5.67 20,611 925 4.49
Other borrowings ................... 19,659 1,257 6.39 3,756 213 5.67
Company Obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust Holding
Solely Junior Subordinated
Debentures ........................ 7,889 858 10.88 0 0 0.00
Total interest-bearing liabili-
ties .............................. 161,795 7,028 4.34 107,134 3,577 3.34
Non-interest-bearing liabilities
Demand deposits .................... 82,041 71,726
Other liabilities .................. 2,270 2,881
Total non-interest-bearing li-
abilities ......................... 84,311 74,607
Shareholders' equity ............... 20,328 17,064
Total liabilities and
shareholders' equity .............. $266,434 $198,805
Net interest income ................ $14,380 $11,194
Net interest spread(3) ............. 4.95% 5.39%
Net interest margin(4) ............. 6.29% 6.64%
Distribution,
Yield and Rate Analysis of Net
Interest Income
for the Years Ended December 31,
----------------------------------
1998
----------------------------------
Interest
Average Income/ Average
Balance Expense Rate/Yield
----------- ---------- -----------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans, net(1) ...................... $ 97,660 $10,798 11.06%
Taxable investment securities
U.S. government securities ........ 824 54 6.57
Obligations of other U.S.
governmental agencies ............. 10,409 631 6.06
Mortgage backed securities ......... 1,122 61 5.40
Other Securities ................... 339 23 6.86
Tax-exempt investment securi-
ties(2) ...........................
Obligations of state and po-
litical subdivisions .............. 5,782 333 7.85
Federal funds sold ................. 26,959 1,433 5.32
Interest earning deposits .......... 0 0 0.00
-------- ------- -----
Total interest earning assets ...... 143,095 13,333 9.40
Non-interest earning assets: .......
Cash and due from banks ............ 14,748
Premises and equipment, net ........ 3,919
Other real estate owned ............ 1,298
Accounts receivable ................ 0
Accrued interest receivable ........ 768
Other Assets ....................... 4,122
Total non-interest earning
assets ............................ 24,855
Total assets ....................... $167,950
Liabilities and Shareholders'
Equity
Interest-bearing liabilities .......
Deposits:
Money market ....................... 20,719 607 2.93
NOW ................................ 20,862 491 2.35
Savings ............................ 17,663 508 2.87
Time certificates of deposit in
denominations of $100,000
or more ........................... 9,903 528 5.33
Other time deposits ................ 20,658 1,044 5.05
Other borrowings ................... 0 0 0.00
Company Obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust Holding
Solely Junior Subordinated
Debentures ........................ 0 0 0.00
Total interest-bearing liabili-
ties .............................. 89,805 3,178 3.54
Non-interest-bearing liabilities
Demand deposits .................... 60,398
Other liabilities .................. 2,676
Total non-interest-bearing li-
abilities ......................... 63,074
Shareholders' equity ............... 15,071
Total liabilities and
shareholders' equity .............. $167,950
Net interest income ................ $10,155
Net interest spread(3) ............. 5.86%
Net interest margin(4) ............. 7.18%
------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,058,170, $1,092,075 and $953,258 for the years
ended December 31, 2000, 1999 and 1998, respectively. Loans are net of the
allowance for loan losses and unearned income.
(2) Yields on tax-exempt income have been computed on a tax equivalent basis.
Approximately 90% of said income is exempt from Federal taxes.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities adjusted to reflect tax
benefit of tax-exempt income.
(4) Represents net interest income as a percentage of average interest-earning
assets adjusted to reflect tax benefit of tax-exempt income.
99
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 daily balances (volume) or changes in average daily interest rates
(rate). The variances attributable to both the volume and rate changes have
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amount of the changes in each:
Rate/Volume Analysis of Net Interest Income
Year Ended
December 31,
2000 vs. 1999
-------------------------------------
Increases (Decreases)
Due to Change in
-------------------------------------
Volume Rate Total
----------- ------------- -----------
(Dollars in Thousands)
Interest Income:
Loans, net(1) ...................................... $ 3,927 $ 548 $ 4,475
Taxable investment securities: .....................
U.S. government securities ......................... 12 1 13
Obligations of other U.S. governmental
agencies .......................................... (33) 0 (33)
Mortgage backed securities ......................... 1,370 518 1,888
Other securities ................................... 194 53 247
Tax-exempt securities:(2) ..........................
Obligations of state and political subdivisions .... 494 41 535
Federal funds sold ................................. (59) 8 (583
Interest earning deposits .......................... 0 95 95
Total .............................................. $ 5,373 $1,264 $ 6,637
------- ------- -------
Interest Expense:
Money market deposits .............................. $ 540 $ 20 $ 560
NOW deposits ....................................... (130) 3 (127)
Savings deposits ................................... 79 (2) 77
Time certificates of deposit denominations
$100,000 or more .................................. 535 72 607
Other time deposit ................................. 149 283 432
Other borrowings ................................... 901 143 1,044
Solely junior subordinated debt .................... 858 0 858
Total .............................................. $ 2,932 $ 519 $ 3,451
------- ------ -------
Change in net interest income ...................... $ 2,441 $ 745 $ 3,186
======= ====== =======
Year Ended
December 31,
1999 vs. 1998
------------------------------------------
Increases (Decreases)
Due to Change in
------------------------------------------
Volume Rate Total
-------------- ------------- -------------
(Dollars in Thousands)
Interest Income:
Loans, net(1) ...................................... $ 914 $ (485) $ 429
Taxable investment securities: .....................
U.S. government securities ......................... (2) (8) (10)
Obligations of other U.S. governmental
agencies .......................................... (597) 2 (595)
Mortgage backed securities ......................... 2,121 91 2,212
Other securities ................................... 62 (14) 48
Tax-exempt securities:(2) ..........................
Obligations of state and political subdivisions .... 225 (56) 169
Federal funds sold ................................. (760) (55) (815)
Interest earning deposits .......................... 0 0 0
Total .............................................. $1,963 $ (525) $1,438
------ ------ ------
Interest Expense:
Money market deposits .............................. $ 234 $ (24) $ 210
NOW deposits ....................................... 18 (20) (2)
Savings deposits ................................... 56 (35) 21
Time certificates of deposit denominations
$100,000 or more .................................. 156 (80) 76
Other time deposit ................................. (2) (117) (119)
Other borrowings ................................... 213 0 213
Solely junior subordinated debt .................... 0 0 0
Total .............................................. $ 675 $ (276) $ 399
------ ------ ------
Change in net interest income ...................... $1,288 $ (249) $1,039
====== ====== ======
<FN>
------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,058,170, $1,092,075 and $953,258 for the years
ended December 31, 2000, 1999 and 1998, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
(2) Yields on tax-exempt income have been computed on a tax equivalent basis.
Approximately 90% of said income is exempt from Federal taxes.
</FN>
Provision for Loan Losses
Credit risk is inherent in the business of making loans. Business Bancorp
sets aside an allowance for loan and lease losses ("ALLL") through charges to
earnings, which charges are reflected in the income statement as the provision
for loan losses. The provision for loan losses represents the amount charged
against current period earnings to achieve an allowance for loan losses that in
Management's judgment is adequate to absorb losses inherent in the loan
portfolio.
Business Bancorp formally assesses the ALLL in a multi-step process on a
quarterly basis. See "--Financial Condition--Allowance for Loan Losses," on
page 110.
The provision for loan losses was $255,000 for the year ended December 31,
2000, compared to $180,000 for the year ended December 31, 1999. Business
Bancorp increased the provision primarily to compensate for the growth in the
loan portfolio. The ratio of the allowance for loan losses to total loans at
the end of period was 1.02% and 1.06% as of December 31, 2000 and 1999,
respectively.
100
During 1999 the provision for loan losses increased to $180,000 from
$150,000 in 1998. This increase was primarily attributable growth within the
loan portfolio. The ratio of the allowance for loan losses to total loans at
the end of the period was 1.06% and 1.35% as of December 31, 1999 and 1998,
respectively. See "--Financial Condition--Allowance for Loan Losses" on page
110.
Noninterest Income
The following table sets forth the various components of Business
Bancorp's noninterest income for the periods indicated:
For the Years
Ended December 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(Dollars in Thousands)
Service charges on deposits .......... $2,146 $1,872 $1,581
Gain on sale of SBA loans ............ 12 154 331
Gain on sale of OREO ................. 198 38 136
All other noninterest income ......... 460 292 722
------ ------ ------
Total ......................... $2,816 $2,356 $2,770
====== ====== ======
As denoted in the previous table, Business Bancorp has few primary areas
of noninterest income. Service charges on deposits represent amounts charged to
customers in the form of transactional fees and other charges imposed for
providing services normally associated with account services. Gains from the
sale of Small Business Administration loans are premiums recognized on sales of
loans generated by Business Bancorp and sold in the secondary market. Gains on
the sale of Other Real Estate Owned (real estate acquired through foreclosure
or similar means) ("OREO") represent gains recognized when Business Bancorp
sells OREO property.
Noninterest income increased $460,000 or 16.7% over 1999 to $2.8 million
in 2000. This increase was mainly due to the gain on sale of one OREO of
$144,000 and the acquisition of Valley Merchants Bank. Service charges on
deposits increased $274,000 or 14.6%. Gain on sale of Small Business
Administration loans decreased $142,000 or 92.2%, primarily as a result of
lower premiums being offered by the secondary market. As a result, Business
Bancorp (i) realized less income on the loans it sold; and (ii) chose to sell
fewer loans because of the aforementioned diminished premiums. Gain on sale of
OREO increased $160,000 or 421.1% to $198,000, due primarily to the sale of one
large OREO property, which accounted for $144,000 of the overall gain.
On November 27, 1998 Business Bank acquired a 49% equity investment in
Financial Data Solutions, Inc., an affiliate which provides a variety of data
processing services to the financial services industry. The gain (loss) on this
investment is included in "all other noninterest income." All other noninterest
income increased by $168,000 in 2000 compared to 1999; $146,000 of this amount
consisted of decreased losses on the investment in Financial Data Solutions,
Inc. for the year 2000.
Noninterest income was $2.4 million for the year ended December 31, 1999,
a decrease of $414,000 or 15.0% from 1998. Service charges on deposits
increased $291,000 or 18.41%, which closely mirrored the average growth in
total deposits of 16.58% or $24.9 million. Gain on the sale of Small Business
Administration loans decreased $177,000 or 53.4%, primarily as a result of
lower premiums being offered by the secondary market. Gain on the sale of OREO
decreased $98,000 or 72.1% from $136,000 to $38,000. This decrease was
primarily attributable to the reduction in the OREO portfolio from December 31,
1997 to December 31, 1998 of $291,000 or 21.4%, which provided for fewer
properties to be sold in 1999. This reduction has improved the overall asset
quality of Business Bancorp. See "--Financial Condition--Nonperforming Assets"
on page 108. All other noninterest income decreased by $430,000 in 1999
compared to 1998 as Business Bank realized higher losses on investment in
Financial Data Solutions (see discussion in previous paragraph) in the amount
of $308,000 over 1998.
101
Noninterest Expense
The following table sets forth the break-down of Business Bancorp's
noninterest expense for the periods indicated:
For the Years
Ended December 31,
-----------------------------------
2000 1999 1998
---------- ---------- ---------
(Dollars in Thousands)
Advertising and promotion .............. $ 490 $ 286 $ 242
Insurance assessments .................. 187 124 118
Data processing ........................ 947 683 407
Stationery and supplies ................ 401 291 266
Professional ........................... 597 440 353
Office ................................. 437 427 420
Administrative ......................... 964 783 722
Other real estate owned ................ 130 109 195
Salary and employee benefits ........... 6,797 5,291 4,852
Occupancy and F.F.&E ................... 1,751 1,522 1,485
Goodwill and other intangibles ......... 401 287 296
All other noninterest expense .......... 571 345 307
------- ------- ------
Total ............................ $13,577 $10,589 $9,663
======= ======= ======
Noninterest expense consists of salary and employee benefits, occupancy
and furniture and equipment, advertising, insurance assessments, data
processing, stationery and supplies, professional service fees, office
supplies, administrative, OREO expenses and "all other noninterest expenses."
Noninterest expense for 2000 was $13.6 million compared to $10.6 million and
$9.7 million for 1999 and 1998, respectively.
During 2000 noninterest expense increased $3.0 million or 28.3% over 1999.
This was mainly attributable to the acquisition of Valley Merchants Bank, and a
full year of operations for the de novo branch located in Ontario, CA,
contributing $770,000 and $161,000 respectively to the overall increase in
noninterest expense. Advertising and promotion increased $204,000 or 71.3% due
in part to Business Bancorp heavily promoting the acquisition of Valley
Merchants Bank through a Grand Opening celebration and other marketing
campaigns. Data processing increased $264,000 or 38.7% as Business Bancorp
incurred additional volume charges on work relating to Valley Merchants Bank
and normal growth through operations. Salary and employee benefits increased by
$1.5 million or 28.4% due to approximate increases related to the following;
Valley Merchants Bank acquisition - $265,000; de novo branches - $113,000;
financial reporting - $93,000; operations - $448,000; loan production -
$195,000 and loan processing - $158,000 and the residual through general growth
within Business Bancorp.
The increase in 1999 of $926,000 over 1998 consisted mainly of increases
in the following categories: $439,000 in salaries and benefits, $276,000 in
data processing, $87,000 in professional expenses and $61,000 in administrative
expenses. As Business Bancorp's average assets grew by 18.4%, salaries and
benefits increased by 9.1%. The increase in data processing was a result of
outsourcing Business Bancorp's item processing, which was previously in-house,
to Business Bancorp's affiliate, Financial Data Solutions, (see "--Noninterest
Income" on page 101). On November 27, 1998 Business Bancorp acquired a
forty-nine percent equity investment in Financial Data Solutions. The
subsidiary provides a variety of data processing services to the financial
services industry. In May, 1999 Business Bancorp began to incur expenses
related to the opening of its de novo branch located in Ontario California. The
noninterest expense associated with this venture for 1999 was $268,000. The
remaining increases were due to general growth in assets and their associated
cost levels.
Provision for Income Taxes
Income tax expense was $1,095,000 for 2000, $841,000 for 1999 as compared
to $1,255,000 for 1998. Accordingly, Business Bancorp accrued taxes at an
approximate 32.6% rate for 2000 as opposed to an
102
approximate 30.2% and 40.3% rate for 1999 and 1998, respectively. The decrease
in the effective tax rate in years 2000 and 1999 compared to 1998 is primarily
the result of (i) increasing tax benefits from tax exempt securities in the
investment portfolio; and (ii) recognition of additional net deferred tax
assets due to a $100,000 decrease in the valuation reserve against such assets.
The valuation reserve on deferred tax assets is an amount that has been
established due to the unprojected turn-around of certain timing differences
between book expense and tax deductions. As of December 31, 2000 no valuation
allowance has been established because, in management's judgment, no amount of
deferred tax assets are less than likely of realization.
Financial Condition
Loan Portfolio
Overview. Business Bancorp has realized steady growth in the loan
portfolio throughout the periods discussed in this joint proxy
statement/prospectus. Total gross loans were $181.4 million as of December 31,
2000 compared to $117.2 million as of December 31, 1999, which represents an
increase of 54.8%. Prior to the acquisition of Valley Merchants Bank, in August
of 2000, Business Bancorp had realized an approximate growth rate of
approximately 19% through internal operations. Total gross loans increased by
$10.6 million or 9.9% in 1999 and by $4.6 million or 4.5% in 1998. Throughout
the aforementioned periods the increases have been reflected in basically all
categories of loans in the portfolio. Limits on loans to one borrower are
imposed by regulation and at December 31, 2000 stood at $8.6 million secured
and $5.2 million unsecured; however, Business Bancorp generally will not lend
to one borrower the maximum under either category, choosing instead to
self-impose a more stringent margin of safety.
Business Bancorp's real estate mortgage loans consist primarily of loans
made based on the borrower's cash flow and which are secured by deeds of trust
on commercial and residential property to provide another source of repayment
in the event of default. These loans are the largest single component of
Business Bank's loan portfolio accounting for approximately $95.9 million of
the total loan portfolio or approximately 52.9% of its loan portfolio at
December 31, 2000. It is Business Bancorp's general policy to restrict real
estate loans to no more than 75% of the value of the property, depending on the
type of property and its utilization. Business Bancorp offers both floating and
fixed rate loans. Maturities on such loans are generally limited to five to
seven years, although applicable amortization periods may range significantly
longer. All real estate loans are collateralized by deeds of trust on
properties located in California, primarily in San Bernardino and Riverside
counties.
Business Bancorp's commercial loans are made for the purpose of providing
working capital, financing the purchase of equipment or for other business
purposes. Approximately $39.4 million of the loan portfolio, or 21.7% at
December 31, 2000 was made up of commercial loans. Such loans include short
term loans with maturities ranging from thirty days to one year and term loans
which are loans with maturities normally ranging from one to several years.
Short term business loans are generally intended to finance current
transactions and typically provide for periodic principal payments, with
interest payable monthly. Term loans normally provide for floating interest
rates, with monthly payments of both principal and interest.
Business Bancorp's real estate construction loans are primarily interim
loans made to finance the construction of commercial and single family
residential property. Approximately $34.0 million or 18.8% of the loan
portfolio at December 31, 2000 was made up of real estate construction loans.
These loans are typically short term.
Installment loans are consumer loans made for the purpose of financing
automobiles, various types of consumer goods, and other personal purposes
including overdrafts. Consumer loans generally provide for the monthly payment
of principal and interest. Most of these loans are secured by the personal
property being purchased.
Business Bancorp identifies its lending marketplace in terms of a primary
and secondary marketplace. Business Bancorp's primary marketplace is that which
is commonly referred to as the "Inland Empire" and which Business Bancorp
defines as San Bernardino and Riverside counties. Its secondary
103
marketplace is that which is commonly referred to as Southern California which
Business Bancorp defines as that area south of the merging lines of Los Angeles
and San Bernardino counties.
By policy, Business Bancorp tracks its loan categories to ensure a balance
to the portfolio both by type (e.g., real estate construction, commercial real
estate, consumer loans, commercial loans, etc.) as well as by interest rate
(variable versus fixed rate). At December 31, 2000, of Business Bancorp's total
loan portfolio (including consumer loans), 44.01% was in fixed rate product
producing an average gross yield of 9.05%. The total loan portfolio gross yield
at December 31, 2000 was 10.98% and the net interest margin was 6.13%.
Loan Approval Policies. Loan approval authority is delegated by the board
of directors of Business Bank to the Chief Executive Officer and Chief Credit
Officer under board resolution that is reviewed and approved annually. Only the
CEO, with recommendations from the CCO, is empowered to delegate lending
authority to Bank officers. That delegated authority is documented under a
specific written credit authority provided to each lending officer and
maintained and monitored by the CCO. Because unsecured loans present greater
risk, unsecured lending authorities are tightly controlled and kept to a
practical minimum. The highest level of unsecured lending authority outside of
the Loan Committee is $200,000 which is delegated to both the CEO and CCO.
Regional Vice Presidents and Branch Managers generally operate at unsecured
lending levels of $100,000 or less. Secured lending activity meets the
regulatory definition of "secured" requiring as collateral either cash,
marketable securities or a first trust deed. Maximum secured lending authority
is $750,000 and rests with the CEO and CCO, with lesser amounts of secured
lending authority delegated to each lending officer. All new loans which exceed
$100,000, or which would make the aggregate of any loans to one borrower in
excess of $100,000, are reviewed by Business Bank's Loan Committee.
The following table sets forth Business Bancorp's amount of total loans
outstanding in each category and the percentage of total loans in each category
as of the dates indicated:
Loan Portfolio Composition
Outstanding as of December 31,
------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------- --------------------- -------------------- ---------------------- --------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------- ---------- ---------- ---------- ---------- --------- ----------- ---------- ---------- ---------
(Dollars in Thousands) (Dollars in Thousands)
Real estate:
Construction .......... $ 34,044 18.76% $ 25,102 21.42% $ 20,888 19.60% $ 17,930 17.59% $ 4,043 6.85%
Mortgage .............. 95,885 52.85% 53,344 45.52% 46,190 43.34% 46,753 45.87% 28,532 48.36%
Commercial ............ 39,358 21.69% 30,456 25.99% 30,810 28.91% 28,825 28.28% 21,331 36.15%
Installment/All
other loans .......... 12,160 6.70% 8,275 7.07% 8,691 8.15% 8,426 8.26% 5,094 8.64%
------ ------ ------ ------ ------
Total gross loans ..... 181,447 100.00% 117,177 100.00% 106,579 100.00% 101,934 100.00% 59,000 100.00%
====== ====== ====== ====== ======
Unearned income ....... 1,079 794 675 607 476
Allowance for
loan losses .......... 1,843 1,242 1,439 1,773 1,298
-------- -------- -------- -------
Total net loans ....... $178,525 $115,141 $104,465 $ 99,554 $57,226
======== ======== ======== ======== =======
As of December 31, 2000, Business Bancorp had commitments to extend credit
of $34.3 million, obligations under standby letters of credit of $19,000, and
obligations under commercial letters of credit of $1.3 million.
The following table shows the maturity distribution and repricing
intervals of Business Bancorp's outstanding loans as of December 31, 2000. In
addition, the table shows the distribution of such loans as between those with
variable or floating interest rates and those with fixed or predetermined
interest rates. The table includes unearned income and deferred fees totaling
$1,078,892 at December 31, 2000.
104
Loan Maturities and Repricing Intervals
At December 31, 2000
--------------------------------------------------------
After One
Within One But Within After Five
Year Five Years Years Total
------------ ------------ ------------ -----------
Real estate: ..........................
Construction ....................... $ 31,003 $ 2,839 $ 202 $ 34,044
Mortgage ........................... 45,098 30,336 20,451 95,885
Commercial ............................ 31,434 2,327 5,597 39,358
Installment/All other loans ........... 4,863 6,862 435 12,160
-------- -------- -------- --------
Total .............................. $112,398 $ 42,364 $ 26,685 $181,447
======== ======== ======== ========
Loans with variable (floating) interest
rates ................................ $ 98,126 $ 14,272 $ 10,802 $101,596
Loans with predetermined (fixed)
interest rates ....................... $ 14,272 $ 28,092 $ 37,487 $ 79,851
Loans Secured by Real Estate--General. At December 31, 2000, $82.6
million, or approximately 61.5% of Business Bancorp's loans were secured by
first deeds of trust on real estate. Loans which are secured by real estate are
included within all of the various loan categories discussed above other than
installment loans. All of Business Bancorp's loans which are secured by real
estate are monitored and taken into account in the quarterly computation of the
adequacy of the allowance for loan and lease losses. Historical loan losses are
tracked by loan category on a rolling, eight-quarter loss experience and used
to determine the adequacy of Business Bancorp's allowance for loan and lease
losses.
Business Bancorp requires title insurance insuring the status of the lien
on all of the real estate secured loans. Business Bancorp also requires that
fire and extended coverage casualty insurance (and, if the property is located
in a designated flood zone, flood insurance) is maintained in an amount equal
to the outstanding loan balance, subject to applicable law that in some
instances may limit the required amount of hazard insurance to the cost to
replace the insured improvements.
Real Estate Mortgage Loans. The value of real estate collateral for
commercial mortgage loans is supported by formal appraisals performed by
Bank-approved appraisers and conducted in accordance with applicable state and
federal regulations. Generally, these types of loans are made for a period of
up to five to seven years, amortization may be up to 25 years, loan-to-value
ratios are 75% or less, and debt service coverage ratios are 1.20:1 or better.
As with any loan category, the creditworthiness of the borrower and a proven
track record are primary considerations in the review of all loan requests. In
general, the borrower should provide a verifiable primary source of repayment
and a viable secondary source through either personal or business cash flow, or
personal or business assets, and should be current on all outstanding debts.
Repayment on loans secured by commercial mortgages generally depends on
successful management of operations of the collateral properties. The market
value of the collateral is subject to the vagaries of the real estate market
and general economic conditions. Business Bancorp addresses these risks through
its underwriting criteria, including loan-to-value ratios and debt service
coverage ratios described above. The borrowers/guarantors must demonstrate
creditworthiness and, in general, have a credit history that is free from past
delinquencies or default. The collateral quality and type must meet Business
Bancorp's standards and, where applicable, tenant leases are reviewed and
paying capacity evaluated.
Risks associated with commercial mortgage loans will vary in accordance
with local, state and national economic vagaries and the cyclical nature of
real estate markets. Business Bancorp attempts to mitigate these risks by
utilizing underwriting criteria referenced above as well as by monitoring the
performance of the portfolio. Business Bancorp has not experienced losses on
its commercial real estate loans during the past eight quarters; however, there
can be no assurance that this will continue to be the case.
105
Real estate construction loans. Business Bancorp finances the construction
of residential, commercial and industrial properties. Business Bancorp's
construction loans typically have the following characteristics:
* First mortgages on the collateral real estate;
* Maturities of one year or less;
* A floating rate of interest based on Business Bank's prime rate;
* Minimum cash equity of 15% of project cost;
* Maximum loan-to-value of 80% on tract construction loans and 75%
on commercial/industrial loans;
* Appraisals by Bank-approved appraisers are required;
* Reserve for anticipated interest costs during construction;
* Recourse against the borrower or guarantor;
* Construction costs are verified using a Bank-approved, outside
construction cost estimator;
* Construction progress inspections are documented using a Bank-approved,
outside inspection company;
* Loan disbursements are controlled in accordance with progress inspections
and lien releases obtained.
For commercial and industrial properties, Business Bancorp typically
issues a stand-by commitment for a "take-out" mini-perm loan on the property.
Business Bancorp does not participate in joint ventures or take an equity
interest in connection with its construction lending.
Construction loans involve additional risks compared with loans secured by
existing improved real property. These include: 1) the uncertainty of value
prior to completion; 2) the inherent uncertainty in estimating construction
costs; 3) weather, municipal or other governmental-caused delays during
construction; and 4) the inherent uncertainty of the market value of the
completed project. As a result of these uncertainties, repayment is dependent,
in a large part, on the success of the ultimate project. If Business Bancorp is
forced to foreclose on a project prior to or at completion because of a
default, Business Bancorp may not be able to recover all of the unpaid balance
of, and accrued interest on, the loan as well as the related foreclosure and
holding costs. In addition, Business Bancorp may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminate period of time. Further, future local, state or national economic
conditions could have an adverse impact on the potential success of
construction projects financed by Business Bancorp and on collateral securing
these loans. Business Bancorp has not experienced losses on its real estate
construction loans in the last eight quarters; however, there can be no
assurance that this will continue to be the case.
Commercial Loans. Business Bancorp provides short-term (30 days to one
year) and long-term (up to five years) commercial loans that may be either
unsecured, partially secured or fully secured. Commercial lines of credit have
a maturity of one year or less. A complete re-analysis is required prior to
renewing a commercial line of credit. All commercial loans and lines of credit
are to businesses, professionals or individuals located in California with the
vast majority of those being in San Bernardino and Riverside counties. Borrower
income and/or cash flow is analyzed and substantiated in support of the primary
source of repayment. Business Bancorp will collateralize the loans or lines of
credit whenever appropriate to secure a secondary source of repayment.
Collateral may include cash, liens on accounts receivable and/or equipment,
marketable securities and first or junior liens on real estate. As a matter of
policy, Business Bancorp generally requires all principals of a business to
guarantee the commercial loan or line of credit. All borrowers must
demonstrate, on the basis of historical cash flow and/or the conversion of
assets, the ability to service and repay Business Bancorp debt as well as all
other outstanding debt. Business Bancorp's Small Business Administration loans
are included within its commercial loan category and are discussed in more
detail below in "--Small Business Administration loans" on page 107.
106
Risks associated with commercial loans and lines of credit may vary in
accordance with concentrations in any one or group of industries and market
locations. Business Bancorp has no material grouping or concentration of
commercial loans to any one or group of industries. However, all of Business
Bancorp's commercial loans and lines of credit are to borrowers located in
Southern California; more specifically, most are in San Bernardino and
Riverside counties. Accordingly, it is expected that an economic downturn
impacting Southern California to a greater degree than the rest of the state or
country would have a correspondingly greater impact to Business Bancorp's
commercial loan portfolio. Business Bancorp's loss experience on commercial
loans and lines of credit over the past eight quarters is .59%.
Consumer Loans. As of December 31, 2000, the total of all of Business
Bancorp's consumer loans, which are included within Business Bancorp's
"installment and all other loan" category, was $12.2 million or 6.7% of total
loans. Consumer loans may be secured or unsecured, and are extended for a
variety of purposes, including the purchase or refinance of automobiles, home
improvement, home equity lines of credit and overdraft protection. Consumer
loan underwriting standards include an examination of the applicant's credit
history and payment record on other debts and an evaluation of the borrower's
ability to meet existing obligations and payments on the proposed loan.
Although credit worthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of the security,
if any, to the proposed loan amount. For instance, Business Bancorp limits its
home equity lines of credit to a maximum total loan-to-value (including the
first mortgage) of 80% calculated on a current appraisal. New car loans are
generally advanced up to 80% of the purchase price although advances are
permitted up to 90% should the applicant meet higher underwriting standards and
for which Business Bancorp receives a premium on the interest rate. By policy,
Business Bancorp does not provide 100% financing on any consumer loans nor does
Business Bancorp engage in sub-prime lending in any way.
Consumer loans entail moderate risk, particularly loans that are unsecured
or secured by rapidly depreciating assets such as automobiles. Repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of damage to the
collateral or depreciation. The remaining deficiency may not warrant further
collection efforts against the borrower beyond obtaining a deficiency judgment.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. Over the last eight quarters, Business Bancorp's loss
experience on consumer loans has been .65%.
Small Business Administration Loans. At December 31, 2000, approximately
$18.3 million, or 10.1% of Business Bancorp's total loan portfolio, consisted
of Small Business Administration loans. Business Bancorp is a Preferred ("PLP")
Small Business Administration Lender and actively engages in making Small
Business Administration 7a loans, 504 loans, Express and 7a Low Doc loans.
Small Business Administration 7a and 504 loans made for the purchase or
refinance of commercial, retail or industrial loans may have maturities ranging
up to 25 years, fully amortized. Equipment or working capital loans will have
maturities of up to 7 or 10 years, depending upon the eligibility for the
applicable Small Business Administration loan program. Through 1999 the Small
Business Administration provided guaranties of up to 75% of the loan amount,
not to exceed $750,000 on Small Business Administration 7a loans, at January 1,
2001 this became $1.0 million. Business Bancorp's real estate collateral
position on Small Business Administration 504 loans is generally 50% LTV or
less. Small Business Administration guaranties on the Express and Low Doc loan
programs will range between 50% and 80% of the gross loan amount.
Until late 1999, Business Bancorp generally sold the guaranteed portion of
its Small Business Administration loan originations to the secondary market on
a non-recourse basis. Beginning in late 1999, the pricing in the secondary
market declined. As a result, Business Bancorp made a strategic decision to
hold more of its Small Business Administration loan originations. Consequently,
the Small Business Administration loan portfolio has grown since late 1999.
These loans are classified as held-for-sale. As a result of this strategic
decision, Loans held for sale increased from $1.7 million at December 31, 1999
to $8.9 million at December 31, 2000.
107
Risk to Business Bancorp associated with Small Business Administration
loans is greatly mitigated by the government guarantee or the low loan-to value
under the 504 loan program. Business Bancorp's historical eight-quarter loss
experience on its Small Business Administration loan portfolio at December 31,
2000 is .01%.
When a loan in any of the foregoing categories is deemed to be
uncollectible by management, it is charged off against the allowance for loan
losses. Conversely, when a previously charged-off loan is subsequently
collected, such recoveries are additions to the allowance for loan losses. The
difference between the total amount of loans charged-off and the total amount
of recoveries collected on previously charged-off loans is referred to as net
loan charge-offs (or net loan recoveries if recoveries are larger than
charge-offs). The net difference between the charged-off amount and the total
amount of recoveries is tracked quarterly by loan type (e.g., commercial
business loans, consumer loans, etc.) and is taken as a percentage of the then
existing loan portfolio. The percentage loan loss experience over the last
eight quarters by loan category as set forth above was calculated in this
manner. Because historical loan loss experience can and has been very low or
even non-existent in some loan categories, Business Bancorp has established a
minimum net loan charge-off experience percentage or "floor" to ensure a
reasonable loan loss reserve factor by loan type. For instance, a "floor"
factor of .75% exists for commercial business loans. These "floor" factors are
used should historical net loan charge-offs be below the "floor" factor in any
given quarter for a specific loan category.
Nonperforming Assets
Nonperforming assets are comprised of loans on non-accrual status, loans
90 days or more past due and still accruing interest, loans restructured where
the terms of repayment have been renegotiated resulting in a reduction or
deferral of interest or principal, and OREO. Loans are generally placed on
non-accrual status when they become 90 days past due unless Management believes
the loan is adequately collateralized and in the process of collection. Loans
may be restructured by Management when a borrower has experienced some change
in financial status, causing an inability to meet the original repayment terms,
and where Business Bancorp believes the borrower will eventually overcome those
circumstances and repay the loan in full. OREO consists of properties acquired
by foreclosure or similar means that Management intends to offer for sale.
Management's classification of a loan as non-accrual is an indication that
there is reasonable doubt as to the full collectibility of principal or
interest on the loan; at this point, Business Bancorp stops recognizing income
from the interest on the loan and reverses any uncollected interest that had
been accrued but unpaid. These loans may or may not be collateralized, but
collection efforts are continuously pursued.
Interest on performing loans is accrued and taken into income daily.
Interest received on nonaccrual loans is credited to income only upon receipt
and in certain circumstances may be applied to principal until the loan has
been repaid in full, at which time the interest received is credited to income.
At December 31, 2000 Business Bancorp had $1.7 million of nonperforming loans,
which included $999,000 of nonaccrual loans, $0 in loans past due 90 days and
still accruing and $718,000 in restructured loans.
Upon acquisition of Valley Merchants Bank Business Bancorp realized a
significant increase in its nonaccruing loan portfolio. As of December 31,
2000, Business Bancorp had total nonaccruing loans of $999,000, of which
$934,000 related to Valley Merchants Bank. Of the total nonaccruing portfolio
$264,000 is guaranteed through the Small Business Administration lending
program, thereby decreasing Business Bancorp's exposure to losses in the event
of any charge-offs. Even though Business Bancorp realized the aforementioned
increase in nonaccruing loans it was able to keep the total nonperforming
assets to total assets at .71% as compared to 1.00% for 1999. Mainly this was
the result of decreasing the OREO portfolio through sales.
OREO is carried on the books of Business Bancorp as an asset, at the
lesser of the recorded investment or the fair value less estimated selling
costs (net realizable value). Business Bancorp periodically revalues the OREO
properties and charges other expenses for any required write-downs. As of
December 31, 2000 Business Bancorp had $505,000 of OREO on its books.
108
The following table provides information with respect to the components of
Business Bancorp's nonperforming assets as of the dates indicated:
Nonperforming Assets
Amount Outstanding as of December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Nonaccrual Loans:(1)(2)
Real estate: .....................................................
Construction ................................................... $ 0 $ 0 $ 0 $ 0 $ 97
Mortgage ....................................................... 864 229 1,026 354 689
Commercial ....................................................... 135 247 196 8 555
Installment ...................................................... 0 1 13 97 86
All other loans (including overdrafts) ........................... 0 0 0 0 1
------- ------- ------- ------- -------
Total .......................................................... 999 477 1,235 459 1,428
Loans 90 days or more past due and still accruing
(as to principal or interest):
Real estate:
Construction ................................................... $ 0 $ 0 $ 0 $ 0 $ 0
Mortgage ....................................................... 0 0 0 0 0
Commercial ....................................................... 0 0 0 10 0
Installment ...................................................... 2 0 59 4
All other loans (including overdrafts) ........................... 0 5 0 0 0
------- ------- ------- ------- -------
Total .......................................................... 0 7 0 69 4
Restructured loans:(3)(4)
Real estate:
Construction ................................................... $ 38 $ 40 $ 43 $ 46 $ 49
Mortgage ....................................................... 680 683 1,026 1,123 709
Commercial ....................................................... 0 0 83 15 18
Installment ...................................................... 0 0 0 0 0
All other loans (including overdrafts) ........................... 0 0 0 0 0
------- ------- ------- ------- -------
Total .......................................................... 718 723 1,152 1,184 776
Total nonperforming loans ........................................ 1,717 1,207 2,387 1,712 2,208
------- ------- ------- ------- -------
Other real estate owned .......................................... 505 1,036 1,069 1,360 2,037
------- ------- ------- ------- -------
Total nonperforming assets ....................................... $ 2,222 $ 2,243 $ 3,456 $ 3,072 $ 4,245
======= ======= ======= ======= =======
Nonperforming loans as a percentage of total gross loans ......... .95% 1.03% 2.24% 1.68% 3.74%
Nonperforming assets as a percentage of total assets ............. .71% 1.00% 1.89% 2.01% 4.16%
Nonperforming assets as a percentage of total gross loans and
other real estate owned ......................................... 1.22% 1.90% 3.21% 2.97% 6.95%
<FN>
------------
(1) During the year ended December 31, 2000, approximately $ 36,900 of interest
income related to these loans was included in net income. Additional
interest income of approximately $ 55,500 would have been recorded if
these 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) As of December 31, 2000, approximately $933,790 of the $999,000 in
nonaccrual loans related to the VMB acquisition. Of this amount
approximately $264,000 is guaranteed through the Small Business
Administration lending program.
(3) A "restructured loan" is one where the terms of which were renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
(4) During the year ended December 31, 2000, approximately $ 75,390 of interest
income related to these loans was included in net income. No additional
interest income would have been recorded if these 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.
</FN>
109
Allowance for Loan Losses
Business Bancorp maintains an allowance for loan and lease losses ("ALLL")
at a level which, in Management's judgment, is adequate to cover the inherent
risk of loss associated with its loan portfolio. The provision for loan losses
is an expense charged against income and added to the ALLL in amounts deemed
appropriate by Management to maintain the ALLL at an adequate level.
Management's judgment of the ALLL, as discussed below, is based on the
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio credit concentrations, trends in historic loss experience,
specific impaired loans and economic conditions. It is only a judgment based on
estimates, and no assurance can be given that the judgment and estimates will
accurately predict losses in the future.
On an ongoing basis, Business Bancorp performs monthly assessments of the
ALLL to determine its adequacy. Specifically categorized and "watch list"
credits are reviewed to denote sufficiency of any specific reserves established
on such credits. Management evaluates and establishes an estimate of the loss
potential on each such loan while considering industry risk factors, economic
circumstances, and related matters. This analysis/process involves extensive
judgment and eventual losses may therefore differ from even the most recent
estimates.
Business Bancorp formally assesses the ALLL in a multi-step process on a
quarterly basis. The determination of the ALLL begins with Management reviewing
each individual classified or criticized loan in detail, evaluating, among
other things, the adequacy of collateral, payment record, current loan status
and borrower financial capacity. A loan loss reserve is assigned each
classified and criticized loan (loans categorized as "Substandard," "Doubtful"
and "Loss" as well as "Special Mention") from this quarterly review based upon
the specifics of the loan's circumstances, including updated collateral value,
borrower's or guarantor's financial capacity, payment record and recent
conversations with the borrower. Additionally, each quarter Business Bancorp
updates its eight-quarter loss migration analysis to derive a rolling, 2-year
loan loss experience percentage by loan category. Specific loan pools by type
(e.g., commercial loans, consumer loans) are assigned an appropriate reserve
factor based upon Business Bancorp's historical charge-off experience or a
minimum "floor", whichever is greater, and then factors are adjusted for
current conditions. Business Bancorp then applies the reserve factors in
determining the ALLL. These reserve factors have floors that range from 0.40%
to 0.80% depending on the particular loan category.
The ALLL can be further increased or decreased by Management's assessment
of risk. Management's risk assessment consists of a variety of factors such as:
changes in lending policies and procedures; changes in national/local economic
conditions; changes in the nature and volume of the portfolio; changes in
experience, ability and depth of lending staff, changes in past dues,
classified and non-accruals; changes in quality of loan review systems;
existence and effect of loan concentrations as well as the effect of external
factors (competition, legal, regulatory policies, etc.).
After management's assessment of risk is factored into consideration, the
resulting loan loss factor of each loan category is then applied to the
existing loan portfolio by category and added to the loan loss reserve total
from the review of the criticized and classified loans to conclude a total
ALLL. This concluded ALLL is then compared to a regulatory reasonableness test
to ensure that Business Bancorp's concluded ALLL compares favorably.
Business Bancorp applies a regulatory reasonableness test in determining
both the current provision as well as the overall allowance. The test begins by
using a three year weighted average net charge-offs to beginning total loans,
with the highest weight being placed on the most current year. The calculated
weighting is then applied to non-classified loans. Classified loans
(Substandard, Doubtful, Loss) are also risk weighted to determine an allowance
amount. The risk weighted totals for the classified and non-classified assets
are then added together to determine the regulatory reasonableness amount.
When a loan is deemed to be uncollectible by management, it is charged off
against the allowance for loan losses. Conversely, when a previously
charged-off loan is subsequently collected, such recoveries are additions to
the allowance for loan losses. The difference between the total amount of loans
charged-off and the total amount of recoveries collected on previously
charged-off loans is referred to as net loan charge-offs (or net loan
recoveries if recoveries are larger than charge-offs).
For the year ended December 31, 2000, Business Bancorp had net charge-offs
of $119,000 as compared to $377,000 and $484,000 in 1999 and 1998,
respectively.
110
The net loan charge-offs as a percentage of average loans has improved
over the past five years as management has continued to improve credit quality.
Additionally, continued economic growth and general national and local economic
conditions have led to a decrease in charge-offs.
As of December 31, 2000 the allowance for loan loss was $1.8 million or
1.02% of total loans as of that date. As of December 31, 1999, the allowance
was $1.2 million or 1.06% of total loans as of that date. The allowance was
$1.4 million or 1.35% of total loans as of December 31, 1998.
Effective January 1, 1995, Business Bancorp adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
(SFAS 114), as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures. These pronouncements provide
that when it is probable that a creditor will be unable to collect all amounts
due in accordance with the terms of the loan that such loan is deemed impaired.
Impaired loans are accounted for differently in that the amount of the
impairment is measured and reflected in the records of the creditor.
Information concerning Business Bancorp's impaired loans at December 31, 2000
and 1999 is contained in Note 3 to the Consolidated Financial Statements on
page F-15.
111
The table below 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
against earnings; and certain ratios related to the allowance for loan losses:
Allowance for Loan Losses
Amount Outstanding as of December 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ----------- ------------- ------------
(Dollars in Thousands)
Balances:
Average total loans outstanding during period ............... $ 142,970 $ 105,922 $ 97,660 $ 70,110 $ 61,966
========= ========= ========= ========= =========
Total loans outstanding at end of period .................... $ 181,447 $ 117,177 $ 106,579 $ 101,934 $ 59,000
========= ========= ========= ========= =========
Allowance for Loan Losses:
Balances at beginning of period ............................. $ 1,242 $ 1,439 $ 1,773 $ 1,298 $ 1,395
Adjustments(1) .............................................. 465 0 0 555 0
Charge-offs:
Real estate: ...............................................
Construction .............................................. 0 0 0 0 0
Mortgage .................................................. 225 10 179 169 597
Commercial ................................................. 17 482 231 389 201
Installment ................................................ 34 39 174 82 282
All other loans (including overdrafts) ..................... 0 31 51 8 9
--------- --------- --------- --------- ---------
Total .................................................... 276 562 635 648 1,089
--------- --------- --------- --------- ---------
Recoveries:
Real estate: ...............................................
Construction .............................................. 0 0 0 0 0
Mortgage .................................................. 28 2 43 39 34
Commercial ................................................. 110 166 72 18 6
Installment ................................................ 4 4 17 16 35
All other loans(including overdrafts) ...................... 15 13 19 8 0
--------- --------- --------- --------- ---------
Total .................................................... 157 185 151 81 75
--------- --------- --------- --------- ---------
Net loan charge-offs (recoveries) ........................... 119 377 484 567 1,014
Provision charged to operating expenses .................... 255 180 150 487 917
--------- --------- --------- --------- ---------
Balance at end of period ................................... $ 1,843 $ 1,242 $ 1,439 $ 1,773 $ 1,298
========= ========= ========= ========= =========
Ratios:
Net loan charge-offs to average loans ....................... .08% 0.36% 0.50% 0.81% 1.64%
Net loan charge-offs to loans at end of period .............. .07% 0.32% 0.45% 0.56% 1.72%
Allowance for loan losses to average loans .................. 1.29% 1.17% 1.47% 2.53% 2.09%
Allowance for loan losses to loans at end of period ......... 1.02% 1.06% 1.35% 1.74% 2.20%
Net loan charge-offs to allowance for loan losses at
end of period .............................................. 6.46% 30.35% 33.63% 31.98% 78.12%
Net loan charge-offs to provision charged to
operating expenses ......................................... 46.67% 209.44% 322.67% 116.43% 110.58%
<FN>
------------
(1) Acquired $555,000 in reserves in connection with acquisition of High Desert
National Bank in 1997 and $465,000 in reserves in connection with
acquisition of Valley Merchants Bank in 2000.
</FN>
112
The following table provides a breakdown of the allowance for loan losses as of
the dates indicated:
Allocation of Allowance for Loan Losses
December 31,
----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
in in in in in
Category Category Category Category Category
to to to to to
Balance at End of Total Total Total Total Total
Period Applicable to: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Real estate
Construction ................ $ 358 18.76% $ 215 21.42% $ 179 19.60% $ 115 17.59% $ 21 6.85%
Mortgage .................... 601 52.85% 326 45.52% 267 43.34% 778 45.87% 425 48.36%
Commercial .................... 611 21.69% 246 25.99% 265 28.91% 371 28.28% 611 36.15%
Installment/All other loans
(including overdrafts) ....... 273 6.70% 455 7.07% 728 8.15% 509 8.26% 241 8.64%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .................... $1,843 100.00% $1,242 100.00% $1,439 100.00% $1,773 100.00% $1,298 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Investment Portfolio
Business Bancorp's investment portfolio was $92.1 million, representing
29.6% of Business Bancorp's total assets as of December 31, 2000. The portfolio
grew by $8.8 million or 10.56% in 2000, while the portfolio as a percentage of
assets decreased by 20.0%. The decrease of investments to total assets was
mainly due to the fact that upon acquisition of Valley Merchants Bank in August
of 2000 Business Bancorp sold off Valley Merchants Bank's securities portfolio
as it did not meet the criteria of Business Bancorp's investment needs. At year
end 1999 and 1998 the investment portfolio was 37.0% and 15.0%, respectively,
of Business Bancorp's total assets at those respective dates. Business Bancorp
invests in governmental, mortgage back, municipal and corporate securities and
categorizes those securities as hold to maturity or available for sale
depending upon the circumstances in place as to Business Bancorp's intent and
ability to hold such securities. Business Bancorp invests its liquid funds in
excess of loan requirements in the investment portfolio and fed funds sold,
which is a cash equivalent. During 1999 Business Bancorp's securities portfolio
increased by $55.8 million or 203% over December 31, 1998. This increase was
the result of a shift from investing excess funds, net of loan funding, in fed
funds sold to securities (namely mortgage-backed) to realize the higher yield
on said instruments. The $55.8 million was funded through the following; (i)
$23.5 million in matured fed funds; (ii) $16.0 million in other borrowings and
(iii) the balance in deposit growth net of loan growth.
113
The following table summarizes the book value and market value and
distribution of Business Bancorp's investment securities as of the dates
indicated:
Investment Portfolio
December 31,
-----------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ---------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
--------- ---------- --------- ---------- --------- ---------
(Dollars in Thousands)
Available-for-Sale:
U. S. Treasury notes ............................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Obligations of other U. S. government
agencies .......................................... 0 0 0 0 19,339 19,351
Mortgage backed securities ......................... 61,640 62,333 69,017 68,331 21 22
Obligations of states and political subdivisions 22,058 22,995 12,648 11,963 2,330 2,320
Other securities ................................... 5,736 5,761 2,044 2,000 302 304
------- ------- ------- ------- ------- -------
Total available-for-sale ......................... $89,434 $91,089 $83,709 $82,294 $21,992 $21,997
------- ------- ------- ------- ------- -------
Held-to-Maturity:
U. S. government notes ............................. $ 1,005 $ 1,006 $ 1,012 $ 1,003 $ 501 $ 504
Obligations of other U.S. governmental
agencies .......................................... 0 0 0 0 0 0
Obligations of state and political subdivisions .... 0 0 0 0 5,041 5,256
Other securities ................................... 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Total held-to-maturity ........................... $ 1,005 $ 1,006 $ 1,012 $ 1,003 $ 5,542 $ 5,760
------- ------- ------- ------- ------- -------
Total investment securities ...................... $90,439 $92,095 $84,721 $83,297 $27,534 $27,757
======= ======= ======= ======= ======= =======
The following table summarizes the maturity of Business Bancorp's
investment securities and their weighted average yield at December 31, 2000
(yields on tax-exempt obligations have been computed on a tax equivalent
basis):
Investment Maturities and Weighted Average Yields
After One But After Five But
Within One Year Within Five Year Within Ten Years After Ten Years Total
---------------- --------------------- ------------------ ---------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ---------- ---------- ---------- ------- ------- -------- -------- ---------
(Dollars In Thousands)
Available-For-Sale:
U. S. Treasury notes ................. $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
Obligations of other U.S. government
agencies ............................ 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00
Mortgage backed securities ........... 0 0.00% 2,753 6.14% 11,368 6.48% 48,212 6.78% 62,333 6.70%
Obligations of state and political
subdivisions ........................ 101 7.23% 283 6.57% 0 0.00% 22,611 7.30% 22,995 7.29%
Other securities ..................... 0 0.00% 0 0.00% 1,119 7.76% 4,642 6.79% 5,761 6.98%
----- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total available-for-sale ........... 101 7.23% 3,036 6.18% 12,487 6.59% 75,465 6.94% 91,089 6.86%
Held-To-Maturity:
U. S. Treasury notes ................. 1,005 5.63% 0 0.00% 0 0.00% 0 0.00% 1,005 5.63%
Obligations of other U.S. government
agencies ............................ 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00
Obligations of state and political
subdivisions ........................ 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00
Other securities ..................... 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
----- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total held-to-maturity ............. 1,005 5.63% 0 0.00% 0 0.00% 0 0.00% 1,005 5.63%
----- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total investmentsecurities ......... 1,106 5.78% $ 3,036 6.18% $12,487 6.59% 75,465 6.94% $92,094 6.85%
===== ==== ======= ==== ======= ==== ====== ==== ======= ====
114
The following table summarizes the securities for which the aggregate book
value exceeds 10% of shareholder equity as of December 31, 2000.
Investments Securities Exceeding 10% of Shareholders' Equity
Issuer's Name Aggregate Book Value Market Value
------------- ---------------------- ------------
FNMA 1992-163K ................... $ 2,520,463 $ 2,538,700
AETNA NC ......................... 2,624,131 2,622,071
FHR 2223 B ....................... 2,796,106 2,797,493
FNMA #557197 ..................... 3,660,058 3,657,636
VENDEE MTG TR 1997-1 2K .......... 4,004,809 4,118,040
FHLMC CMO 2117 HD ................ 4,261,579 4,367,909
----------- -----------
Total .......................... $19,867,146 $20,101,849
=========== ===========
Deposits & Other Borrowings
Deposits are Business Bancorp's primary source of funds. At December 31,
2000 Business Bancorp had a deposit mix of 36.0% in noninterest-bearing demand
deposits, 38.8% in NOW, money market and savings deposits, and 25.2% in time
deposits. Business Bancorp's net interest income is enhanced by its large
percentage of noninterest-bearing deposits. Business Bancorp's deposits are
obtained from a cross-section of the communities it serves. Business Bancorp
has established a relationship with the State of California whereas Business
Bancorp is able to pledge a portion(110% of deposit relationship) of its
investment portfolio and in turn is able to acquire State Funds in the form of
time deposits. At December 31, 2000, Business Bancorp had $27 million in
deposits from the State of California and other government agencies. These
deposits require that Business Bancorp pledge securities with values equal to
110% of the deposit amounts as collateral. As of December 31, 2000 Business
Bancorp had one certificate of $12.0 million with a rate of 6.35%, maturing
February 5, 2001. Business Bancorp's business is not seasonal in nature.
Business Bancorp accepts deposits in excess of $100,000 from customers. Those
deposits are priced to remain competitive. As of each of the reporting periods
covered Business Bancorp had no brokered funds on deposit.
Business Bancorp is not dependent upon funds from sources outside of the
United States nor does it have any and has not made loans to any foreign
entities. Business Bancorp has not made any loans to finance leveraged buyouts
or for highly leveraged transactions.
As of December 31, 2000 Business Bancorp had total deposits of $264.9
million an increase of 41.8% or $78.1 million from December 31, 1999. Of this
increase $49.6 million or 63.5% was acquired through the Valley Merchants Bank
acquisition (August of 2000) and the residual of $28.5 million was due to $12.0
million or 15.4% of State Funds acquired (see previous paragraph) and $16.5
million or 21.1% through internal growth in operations. Total deposits at
December 31, 1999 and 1998 were $186.8 million and $163.8 million,
respectively, representing growth of 14.0% in 1999. The increase in 1999 was
due to internal growth through operations.
115
The following tables summarize the distribution of average daily deposits
and the average daily rates paid for the periods indicated:
Average Deposits & Other Borrowings
Years Ended December 31,
----------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- --------- ----------- --------- ----------- ----------
Demand, Noninterest-bearing ............... $ 82,041 0.00% $ 71,726 0.00% $ 60,398 0.00%
Money market .............................. 47,685 2.89% 28,720 2.85% 20,719 2.93%
NOW ....................................... 15,875 2.28% 21,612 2.26% 20,862 2.35%
Savings ................................... 22,575 2.69% 19,610 2.70% 17,663 2.87%
Time certificates of deposit in
denominations of $100,000 or more ........ 24,173 5.01% 12,825 4.71% 9,903 5.33%
Other time deposits ....................... 23,939 5.67% 20,611 4.49% 20,658 5.05%
-------- ----- -------- ---- -------- ----
Total deposits ......................... 216,288 2.27% 175,104 1.92% 150,203 2.12%
Other borrowings .......................... 19,659 6.39% 3,756 5.67% 0 0.00%
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures .................. 7,889 10.88% 0 0.00% 0 0.00%
-------- ----- -------- ---- -------- ----
Total deposits and borrowed funds ...... $243,836 2.88% 178,860 2.00%% 0 2.12%
-------- ----- -------- ----- -------- ----
The scheduled maturities of Business Bancorp's time deposits in
denominations of $100,000 or greater at December 31, 2000:
Maturities of Time Deposits of $100,000 or More
December 31, 2000
----------------------
(Dollars In Thousands)
Three months or less .......................... $ 27,193
Over three months through six months .......... 4,590
Over six months through twelve months ......... 3,900
Over twelve months ............................ 109
--------
Total ...................................... $ 35,792
--------
Short Term Borrowings
Due to the fact that Business Bancorp's growth in loans had exceeded its
growth in deposits, Business Bancorp began to employ short term borrowings from
the Federal Home Loan Bank during 1999. Business Bancorp was first approved to
borrow under the programs offered by the Federal Home Loan Bank in July 1999.
The terms offered to Business Bancorp by the Federal Home Loan Bank are
financing availability up to 25% of total assets, secured by acceptable
collateral, for terms less than 5 years. For terms greater than 5 years through
30 years, financing availability is limited to residential assets being pledged
as collateral.
At year-end 1999, Business Bancorp had $18.2 million in advances against
its line of credit from the Federal Home Loan Bank (Federal Home Loan Bank) due
at various times during 2000 with a weighted average rate of 5.96%. The average
balance of these term borrowings were $3.8 million with an average rate of
5.7%. As of December 31, 2000 the balance was $10.1 million, due at various
times during 2001 with a weighted average rate of 6.10% with an average balance
of $19.7 million, a high balance of $38.4 million and a weighted average rate
of 6.39% for the twelve months ended. The balance may vary by millions of
dollars on any given day depending on fluctuating demand deposit balances as of
a particular day.
116
Liquidity
Liquidity management for banks requires that funds always be available to
pay anticipated deposit withdrawals and maturing financial obligations promptly
and fully in accordance with their terms. The balance of the funds required is
generally provided by payments on loans, sale of loans, liquidation of assets
and the acquisition of additional deposit liabilities. One method banks utilize
for acquiring additional liabilities is through the acceptance of brokered
deposits, which are determined by bank regulators to include deposits that bear
interest in excess of 75 basis points over prevailing market rates. As of
December 31, 2000 Business Bancorp carried no brokered deposits in its
portfolio. Business Bancorp has not accepted nor needed to accept brokered
deposits as part of its normal operations.
In order to meet liquidity needs, Business Bancorp maintains a portion of
its funds in cash deposits in other banks, fed funds sold, and investment
securities categorized as available for sale. As of December 31, 2000 Business
Bancorp's liquidity ratio was 27.18%, defined as $16.9 million in cash and cash
equivalents and $55.1 million in investment securities available for sale (net
of those pledged to secure treasury, tax and loan items, Federal Home Loan Bank
borrowings and public monies) as a percentage of deposits of $264.9 million.
Capital Resources
In 1990, banking industry began to phase in new regulatory capital
adequacy requirements based on risk-adjusted assets. These requirements take
into consideration the risk inherent in investments, loans, and other assets
for both on-balance sheet and off-balance sheet items. Under these
requirements, the regulatory agencies have set minimum thresholds for Tier 1
capital, total capital and leverage ratios.
The risk-based guidelines are used to evaluate capital adequacy and are
based on the institution's asset risk profile and off-balance sheet exposures,
such as unused loan commitments and standby letters of credit. The guidelines
require that a portion of total capital be core, or Tier 1, capital consisting
of common shareholders' equity and noncumulative perpetual preferred stock,
less goodwill and certain other deductions, with the remaining, or Tier 2,
capital consisting of other elements, primarily certain other forms of
preferred stock, subordinated debt and mandatory convertible debt, plus the
allowance for loan losses, subject to certain limitations. The leverage ratio
is Tier 1 capital divided by adjusted average assets.
At December 31, 2000, Business Bank's and Business Bancorp's capital
exceeded all minimum regulatory requirements and Business Bank was considered
to be "well capitalized" as defined in the regulations issued by the FDIC. In
connection with the pending acquisition of Valley Merchants Bank it was
anticipated that Business Bank would require additional capitalization. On
March 21, 2000, Business Bancorp raised approximately $9.7 million in net
proceeds from an offering of $10.0 million of principal amount of 10-7/8% Fixed
Rate Capital Trust Pass-through Securities. In August of 2000, approximately
$8.7 million was contributed to Business Bank from Business Bancorp to maintain
Business Bank's capital position as "well capitalized".
As of December 31, 2000, Business Bank's regulatory total capital to
risk-weighted assets ratio was 11.7%, compared to 12.2% as of December 31,
1999. Business Bank's regulatory tier 1 capital to risk-weighted assets ratio
was 10.9% as of December 31, 2000, compared to 11.4% as of December 31, 1999;
and its regulatory tier 1 capital to average assets ratio was 7.9% as of
December 31, 2000, compared to 7.8% as of December 31, 1999.
As of December 31, 2000, Business Bancorp's regulatory total capital to
risk-weighted assets ratio was 11.8%, compared to 12.2% as of December 31,
1999. Business Bancorp's regulatory tier 1 capital to risk-weighted assets
ratio was 9.7% as of December 31, 2000 compared to 11.4% as of December
31,1999, and its regulatory tier 1 capital to average assets ratio was 7.8% as
of both December 31, 2000 and 1999.
Interest Rate Risk Management.
Information concerning Business Bancorp's interest rate risk management is
set forth above under "--Six months ended June 30, 2001 and 2000--Liquidity and
Interest Rate Risk Management" on page 94.
117
Accounting Matters
During 1997, Business Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting earnings per share ("EPS") and applies
to all entities with publicly held common stock. This statement provides a
presentation of basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing earnings available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Based on current
accounting standards, this new accounting standard is not expected to have a
material impact of Business Bank's financial statements. Business Bank adopted
this accounting standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
this new accounting standard did not have a material impact on Business Bank's
financial statement disclosures.
Impact of Inflation
The primary impact of inflation on Business Bancorp is its effect on
interest rates. Business Bancorp's primary source of income is net interest
income, which is affected by changes in interest rates. Business Bancorp
attempts to limit the impact of inflation on its net interest margin through
management of rate-sensitive assets and liabilities and the analysis of
interest rate sensitivity. The effect of inflation on premises and equipment as
well as Noninterest expenses has not been significant for the periods covered
in this joint proxy statement/prospectus.
DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL SHAREHOLDERS OF BUSINESS BANCORP
Principal Shareholders
Business Bancorp knows of no person who owned beneficially more than five
percent (5%) of the outstanding common stock of Business Bancorp as of July 31,
2001, except for Neal T. Baker and Arnold H. Stubblefield, both of whom are
directors of Business Bancorp.
118
Identification and Stock Ownership of Directors and Executive Officers.
The table below sets forth certain information as of July 31, 2001 with
respect to each of Business Bancorp's directors and executive officers, and the
directors and executive officers of Business Bancorp as a group:
Common Stock
Beneficially Owned On
July 31, 2001(1)
Year First ---------------------------------------
Elected Or Vested Percentage
Names And Offices Principal Occupation Appointed Number Option Of Shares
Held With Company For The Past Five Years Age Director of Shares(1) Shares(2) Outstanding
---------------------------------- ---------------------------------- ----- ---------------- -------------- ---------- -------------
D. William Bader ................. President/General Manager, 80 2000 71,105 15,295 4.23%(4)
Director Crest Chevrolet (1983)(3)
Neal T. Baker(5) ................. President, Neal T. Baker 77 2000 130,6086(6) 15,295 7.14%(4)
Director Enterprises, Inc. (Owner of (1983)(3)
Baker's Burgers, Inc.)
William Cozzo .................... Retired (formerly Vice 86 2000 3,688 -0- 0.18%
Director President-Director of Public (1999)(3)
Relations, Business Bank)(7)
John E. Duckworth ................ Real Estate Developer 58 2000 84,592(8) 15,295 4.89%(4)
Chairman of the Board (1983)(3)
Alan J. Lane ..................... President and Chief 38 2000 312 46,400 2.25%(4)
President, Chief Executive Officer, Business (1998)(3)
Executive Officer and Bancorp and Business Bank(9)
Director
Robert L. Nottingham ............. Senior Vice President, CHJ, Inc. 60 2000 17,414 15,295 1.60%(4)
Director (Consulting/Engineering) (1996)(3)
John L. Riddell .................. President/Founder, CHJ, Inc. 69 2000 58,386 15,295 3.61%(4)
Director and (Consulting/Engineering) (1983)(3)
Corporate Secretary
Arnold H. Stubblefield(5,10) ..... President, Stubblefield 67 2000 455,751(11) 15,295 23.07%(4)
Director Construction Company; (1992)(3)
General Partner,
Stubblefield Properties
John L. Stubblefield(10) ......... Vice President/Managing 49 2000 49,030(12) 15,295 3.15%(4)
Director Supervisor, Stubblefield (1983)(3)
Companies-California
(Real Estate Development)
James W. Andrews ................. Executive Vice President 51 n/a -0- 34,400 1.67%(4)
Executive Vice President and Chief Credit Officer,
and Chief Credit Officer Business Bank
Ruth E. Adell .................... Executive Vice President 46 n/a 7,463 15,475 1.12%(4)
Executive Vice President and Administrative Officer,
and Chief Financial Officer Business Bank(13)
Directors and
Executive Officers as a a
Group (11 in number) ............ 877,985 203,340 48.50%(4)
<FN>
------------
(1) Except as otherwise noted, may include shares held by such person's spouse
(except where legally separated) and minor children, and by any other
relative of such person who has the same home; shares held in "street
name" for the benefit of such person; shares held by a family trust as to
which such person is a trustee and primary beneficiary with sole voting
and investment power (or shared power with a spouse); or shares held in an
Individual Retirement Account or pension plan as to which such person is
the sole beneficiary and has pass-through voting rights and investment
power.
(2) Consists of shares which the applicable individual or group has the right
to acquire upon the exercise of stock options which are vested or will
vest within 60 days of July 31, 2001 pursuant to Business Bancorp's Stock
Option Plan. (See "--Stock Options" on page 122 and "--Compensation of
Directors" on page 123.)
(3) Year first elected or appointed a director of Business Bank.
(Footnotes continued on next page)
119
(Footnotes continued from previous page)
(4) The percentages are based on the total number of shares of Business
Bancorp's common stock outstanding, plus the number of option shares which
the individual or group, as applicable, has the right to acquire upon the
exercise of stock options which are vested or will vest within 60 days of
July 31, 2001 pursuant to Business Bancorp's Stock Option Plan (see
"--Stock Options" on page 122 and "Compensation of Directors" on page
123).
(5) Mr. Baker's address is 30570 Sunset Drive, Redlands, California 92373 and
Mr. Stubblefield's address is Post Office Box 327, Meridian, Idaho 83642.
(6) Includes 10,367 shares held by the Neal T. Baker Trust FBO Neal T. Baker
Enterprises, Inc., of which Mr. Baker is trustee; 51,510 shares held by
Neal T. Baker Enterprises, Inc., a corporation of which Mr. Baker is
President and sole shareholder; and 15,296 shares owned by Baker's
Burgers, Inc., a corporation of which Mr. Baker is President and sole
shareholder. Mr. Baker has sole voting and investment power as to all of
these shares.
(7) Mr. Cozzo served as Vice President-Director of Public Relations of
Business Bank from November, 1997 until December 31, 1998, when he retired
as an employee and was simultaneously appointed a director of Business
Bank. Previously, Mr. Cozzo served as Vice President-Public Relations of
Business Bank from 1996 to November, 1997.
(8) Includes 37,291 shares held by Mr. Duckworth together with certain
extended family members; and 9,072 shares held by Arr. 1865, a limited
partnership of which Mr. Duckworth is a general partner; as to all of
which shares Mr. Duckworth has shared voting and investment power.
(9) Mr. Lane was appointed President and Chief Executive Officer of Business
Bancorp on October 7, 1999 and of Business Bank on April 1, 1998.
Previously, he served as Executive Vice President and Chief Financial
Officer of Business Bank since August, 1996; and President and Chief
Executive Officer of Pacific Pride Banking Company in Escondido,
California from 1994 to 1996.
(10) Arnold H. Stubblefield and John L. Stubblefield are father and son,
respectively.
(11) Includes 39,294 shares held by the Stubblefield Construction Co. Employee
Profit Sharing Plan, of which Mr. Stubblefield is trustee; 9,318 shares
owned by Stubblefield Construction Co., a corporation of which Mr.
Stubblefield is President; 66,724 shares owned by Stubblefield Properties,
a partnership of which Mr. Stubblefield is a general partner; and 1,539
shares held by Mr. Stubblefield as custodian for his minor grandchildren
(including the shares described in footnote 12 below). Mr. Stubblefield
has sole voting and investment power as to 115,336 of such shares and
shared voting and investment power as to 1,539 of such shares.
(12) Includes 364 shares held by Arnold Stubblefield as custodian for John
Stubblefield's children, as to which shares John Stubblefield has shared
voting and investment power with Arnold Stubblefield.
(13) Ms. Adell has served as Executive Vice President and Chief Financial
Officer of Business Bancorp since October 7, 1999 and as Executive Vice
President and Chief Administrative Officer of Business Bank since April,
1998. She has worked for Business Bank in various capacities since 1984,
including Senior Vice President and Cashier from 1996 to April, 1998.
</FN>
120
Executive Compensation
The following table sets forth certain summary compensation information
with respect to the only three executive officers of Business Bancorp as of
December 31, 2000 whose total annual compensation paid, accrued or distributed
for the fiscal year ended December 31, 2000, exceeded $100,000 (the "Named
Executive Officers"):
Summary Compensation Table
Long Term
Compensation
Annual Compensation(1) Stock Options
------------------------- Granted (Number All Other
Number and Principal Position Year Salary(2) Bonus of Shares)(3) Compensation(4)
------------------------------- ------ ----------- ----------- ----------------- ----------------
Alan J. Lane .................. 2000 $202,244 $ 83,846 -0- $4,350
President and 1999 168,750 47,099 -0- 4,247
Chief Executive Officer(5) 1998 143,233 30,490 32,500 3,476
James W. Andrews .............. 2000 148,070 43,623 -0- 5,250
Executive Vice President 1999 133,792 28,539 -0- 4,954
and Chief Credit Officer 1998 128,333 26,603 12,500 5,000
Ruth E. Adell ................. 2000 101,028 41,723 -0- 5,250
Executive Vice President 1999 94,250 28,539 -0- 5,000
and Chief Financial Officer 1998 85,800 23,286 12,500 5,000
<FN>
------------
(1) Excludes the cost to Business Bancorp of personal benefits which, with
respect to the Named Executive Officers, did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported.
(2) Includes portions of these individuals' salaries which were deferred
pursuant to Business Bank's 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan permits all participants to contribute up to fifteen percent (15%) of
their annual salary on a pre-tax basis (subject to a statutory maximum),
which contributions vest immediately when made. Business Bank's policy is
to match fifty percent (50%) of employee contributions which do not exceed
six percent (6%) of such employee's annual compensation, which
contributions become vested over a period of five years at the rate of
twenty percent (20%) per year of completed employment.
(3) As adjusted to reflect a 25% stock distribution declared in July, 1999.
(4) Consists entirely of employer contributions to these individuals' accounts
pursuant to the 401(k) Plan.
(5) Mr. Lane was appointed President and Chief Executive Officer of Business
Bank on April 1, 1998. Previously, he served as Executive Vice President and
Chief Financial Officer of Business Bank since August 20, 1996.
</FN>
Employment agreements
Business Bank has entered into an Employment Agreement with Alan J. Lane,
President and Chief Executive Officer of Business Bank, for a term of six (6)
years commencing April 1, 1998 (the "Agreement"). Mr. Lane's current base
salary under the Agreement is $260,000 per annum. In addition, Mr. Lane is
entitled to receive payment of bonuses in accordance with such bonus programs
as may be approved by the board of directors from time to time. The Agreement
also calls for the issuance of stock options, reimbursement for business
expenses, the use of a Bank-owned automobile and certain insurance benefits
(see "Executive Compensation" above and "Stock Options" below). In the event of
termination without cause, Mr. Lane is entitled to receive nine (9) months'
severance pay. In the event of termination within two (2) years after a merger,
reorganization or similar transaction in which there is a change in ownership
of at least fifty-one percent (51%) except as the result of a transfer of
shares in exchange for at least eighty percent (80%) control of another
corporation, Mr. Lane will be entitled to receive two (2) years' severance pay
if Business Bank's total assets immediately prior to the transaction are $250
million or greater, and
121
nine (9) months' severance pay if Business Bank's total assets are less than
$250 million. The severance payments in the event of a merger or similar
transaction apply whether termination is by Mr. Lane or by the surviving entity
or acquiror in the transaction.
Business Bancorp has entered into an Employment Agreement with James W.
Andrews, Executive Vice President and Chief Credit Officer, for an unspecified
term commencing March 24, 1997 ("Mr. Andrews' Agreement"). Mr. Andrews' current
base salary under his agreement is $155,000 per annum. Mr. Andrews' Agreement
also calls for payment of bonuses in accordance with such bonus programs as may
be approved by the board of directors from time to time. Mr. Andrews' Agreement
also provides for the issuance of stock options, reimbursement for business
expenses, the use of a Bank-owned automobile and certain insurance benefits
(see "--Executive Compensation" on page 121 and "--Stock Options" on this
page). In the event of termination without cause, Mr. Andrews is entitled to
receive nine (9) months' severance pay. In the event of termination within two
(2) years after a merger, reorganization or similar transaction in which there
is a change in ownership of at least fifty-one percent (51%) except as the
result of a transfer of shares in exchange for at least eighty percent (80%)
control of another corporation, Mr. Andrews will also be entitled to receive
nine (9) months' severance pay.
Business Bancorp has also entered into an Employment Agreement with Ruth
E. Adell, Executive Vice President and Chief Administrative Officer, for an
unspecified term commencing April 15, 1998 ("Ms. Adell's Agreement"). Ms.
Adell's current base salary under her agreement is $115,000 per annum. Ms.
Adell's Agreement also calls for payment of bonuses in accordance with such
bonus programs as may be approved by the board of directors from time to time.
Ms. Adell's Agreement also provides for the issuance of stock options,
reimbursement for business expenses, the use of a Bank-owned automobile and
certain insurance benefits (see "--Executive Compensation" on page 121 and
"--Stock Options" immediately below). In the event of termination without
cause, Ms. Adell is entitled to receive nine (9) months' severance pay. In the
event of termination within two (2) years after a merger, reorganization or
similar transaction in which there is a change in ownership of at least
fifty-one percent (51%) except as the result of a transfer of shares in
exchange for at least eighty percent (80%) control of another corporation, Ms.
Adell will also be entitled to receive nine (9) months' severance pay.
Stock options
Business Bancorp's Stock Option Plan (the "Plan"), intended to advance the
interests of Business Bancorp and Business Bank by encouraging stock ownership
on the part of key employees, was adopted by the shareholders of Business Bank
on May 16, 1995, and amended by Business Bank's shareholders on August 20, 1997
to increase the number of shares subject thereto. As part of the holding
company reorganization effective in January, 2000, Business Bancorp assumed the
Plan from Business Bank, so that the Plan now covers authorized but unissued
shares of Business Bancorp's common stock. The Plan provides for the issuance
of both "incentive" and "non-qualified" stock options to full-time salaried
officers and employees, and "non-qualified" stock options to non-employee
directors, of Business Bancorp and its subsidiaries. All options are granted at
an exercise price of not less than 100% of the fair market value of the stock
on the date of grant.(1) Each option expires not later than ten (10) years from
the date the option was granted. Options are exercisable in installments as
provided in individual stock option agreements; provided, however, that if an
optionee fails to exercise his or her rights under the options within the year
such rights arise, the optionee may accumulate them and exercise the same at
any time thereafter during the term of the option. In addition, in the event of
a "Terminating Event," i.e., a merger or consolidation of Business Bancorp as a
result of which Business Bancorp will not be the surviving corporation, a sale
of substantially all of Business Bancorp's assets, or a change in ownership of
at least 25% of Business Bancorp's stock (subject to certain exceptions), all
outstanding options under the Plan shall become exercisable in full (subject to
certain notification requirements), and shall terminate if
------------
(1) Exercise price per share is equivalent to market price per share on the
date of grant, as determined by the board of directors of Business
Bancorp, based upon trades in Business Bancorp 's common stock known to
Business Bancorp and opening and closing prices quoted on the Nasdaq Stock
Market concerning Business Bancorp's common stock.
122
not exercised within a specified period of time, unless provision is made in
connection with the Terminating Event for assumption of such options, or
substitution of new options covering stock of a successor corporation. As of
December 31, 2000, Business Bancorp had options outstanding to purchase a total
of 354,636(1) shares of its common stock under the Plan, with an average
exercise price of $9.34 per share(1) with respect to all such options. As of
that same date, the fair market value of Business Bancorp's common stock was
approximately $9.75 per share. Prior to the closing of the merger Business
Bancorp intends to adopt a new stock option plan, subject to shareholder
approval at the first annual meeting of shareholders after the merger.
No stock options were granted to or exercised by the Named Executive
Officers during 2000. The following information is furnished with respect to
stock options held by the Named Executive Officers at December 31, 2000:
Value of Unexercised
Number of Unexercised In-the-Money Options(2)
Options at December 31, 2000(1) at December 31, 2000
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Alan J. Lane ............. 37,400 25,600 $41,580 $10,395
James W. Andrews ......... 29,400 13,600 41,580 10,395
Ruth E. Adell ............ 12,100 8,375 19,809 1,181
<FN>
------------
(1) As adjusted to reflect a 25% stock distribution in July 1999.
(2) Represents the excess of the aggregate fair market value over the aggregate
exercise price of the shares at December 31, 2000.
</FN>
Compensation of Directors
Non-employee directors of Business Bank receive $750 per board meeting
whether or not they attend the meeting, but a director is not paid for more
than three meetings per year that he has not attended. Such directors are also
paid $200 per meeting for attendance at board committee meetings. These
individuals have the option of taking such fees as immediate compensation, or
of allocating any or all of such fees to a deferred payment plan funded
entirely by the individual director's contributions. Directors currently
receive no additional compensation for their services as directors of Business
Bancorp.
No stock options were granted to any non-employee directors during 2000.
During 2000, directors Bader, Baker, Duckworth, Riddell, A. Stubblefield and
Nottingham exercised stock options covering 4,823 shares(1) each of Business
Bancorp's common stock, realizing the following values(2) upon such exercise:
Messrs. Bader, Baker and Duckworth: $5,570 each; Messrs. Riddell and
Nottingham: $2,628 each; and John Stubblefield: $506. Arnold Stubblefield
exercised stock options in 2000 covering a total of 21,898 shares,(1) realizing
$40,342 in value(2) upon such exercise. As of December 31, 2000, each
non-employee director of Business Bancorp (with the exception of Mr. Cozzo)
held stock options to purchase 15,295 shares(1) each of common stock, all at
exercise prices of $9.20 per share(1), all with expiration dates in 2007. All
of such options were fully exercisable as of December 31, 2000, and the fair
market value of Business Bancorp's common stock at that date was approximately
$9.75 per share. Information concerning stock options held by Mr. Lane, who is
also a Named Executive Officer, is set forth above under "--Stock Options" on
page 122.
Certain Transactions
Some of the executive officers and directors of Business Bank and Business
Bancorp and the companies with which they are associated have been customers
of, and have had banking transactions with, Business Bank in the ordinary
course of Business Bank's business since January 1, 2000, and Business Bank
expects to continue to have such banking transactions in the future. All loans
and commitments to lend included in such transactions have been made on
substantially the same terms, including interest
------------
(1) As adjusted to reflect a 25% stock distribution in July 1999.
(2) Represents the excess of the aggregate fair market value over the aggregate
exercise price of the shares at the time of exercise.
123
rates and collateral, as those prevailing at the time for comparable
transactions with persons of similar creditworthiness, and in the opinion of
management of Business Bancorp and Business Bank, have not involved more than
the normal risk of repayment or presented any other unfavorable features.
DESCRIPTION OF BUSINESS BANCORP STOCK
The authorized capital stock of Business Bancorp consists of 2,000,000
shares of Preferred Stock, no par value, and 10,000,000 shares of common stock,
no par value. In addition, under Proposal 2, shareholders of Business Bancorp
are being requested to approve an amendment to the Articles of Incorporation of
Business Bancorp to increase the number of authorized common and preferred
shares to 20,000,000 common shares and 20,000,000 preferred shares. As of July
31, 2001, there were issued and outstanding no shares of Business Bancorp's
Preferred Stock and 2,026,869 shares of Business Bancorp's common stock. The
Preferred Stock may be issued from time to time in one or more series. The
board of directors of Business Bancorp is authorized to determine the rights,
preferences, privileges and restrictions of each such series. No such
determination has yet been made. A summary of the rights, preferences,
privileges and restrictions of Business Bancorp's common stock is set forth
below.
Each share of common stock has the same rights, preferences, and
privileges as every other share, and is entitled to one vote at any meeting of
shareholders (except as described below). The common stock has no preemptive,
conversion or redemption rights or sinking fund provisions applicable thereto.
All of the shares of common stock outstanding are fully paid and
non-assessable. After the requirements with respect to preferential dividends
upon all classes and series of stock entitled thereto, if any, shall have been
paid or declared and set apart for payment and after Business Bancorp shall
have complied with all requirements, if any, with respect to the setting aside
of sums as a sinking fund or for a redemption account on any class of stock,
then, and not otherwise, the holders of common stock shall be entitled to
receive, subject to the applicable provisions of the California Corporations
Code, such dividends as may be declared from time to time by the board of
directors. Each share of common stock shares equally in any dividends declared
on the common stock. See "Information About Business Bancorp--Market Price and
Dividend Information for Business Bancorp" on page 125.
All voting rights are vested in the holders of the common stock. Each
holder of common stock is entitled to one vote for each share of common stock
standing in his name on the books of Business Bancorp on any matter submitted
to the vote of the shareholders, except that, currently, in connection with the
election of directors, shares are entitled to be voted cumulatively if a
candidate's name has been placed properly in nomination prior to the voting and
a shareholder present at the meeting gives notice of his or her intention to
vote cumulatively. Cumulative voting entitles a shareholder to give one nominee
as many votes as is equal to the number of directors to be elected multiplied
by the number of shares owned by such shareholder, or to distribute his or her
votes on the same principle between or among two or more nominees as he or she
deems appropriate. The candidates receiving the highest number of votes, up to
the number of directors to be elected, will be elected under cumulative voting.
As discussed under Proposal 3 on page 160, the board of directors of Business
Bancorp is recommending that the shareholders of Business Bancorp approve an
amendment to the Bylaws to eliminate cumulative voting.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the corporation, after distribution in full of the preferential
amounts to be distributed to the holders of all classes and series of stock
entitled thereto and to the holders of capital notes, if any, the holders of
the common stock shall be entitled to receive all the remaining assets of the
corporation.
California law prohibits a California state-chartered bank from lending on
the security of, or for the purpose of purchasing, its own stock and from
purchasing shares of its own or a parent company's stock unless approved in
advance by the Commissioner or unless such purchase in necessary to prevent
loss to Business Bank on debts previously contracted in good faith.
Business Bancorp utilizes U. S. Stock Transfer, Glendale, California, as
its transfer agent.
124
MARKET PRICE AND DIVIDEND INFORMATION FOR BUSINESS BANCORP
Market Information
Business Bancorp's common stock has been traded on the Nasdaq SmallCap
Market since February 27, 2001. Trading in Business Bancorp's stock has not
been extensive and such trades cannot be characterized as an active public
trading market. Management is aware of the following securities dealers which
make a market in Business Bancorp's stock: Sutro & Co., Los Angeles,
California, Western Financial Corporation, San Diego, California and Gorian
Investment Group, Inc., San Bernardino, California. The market makers have no
obligation to continue to make such a market and may discontinue making a
market at any time. Business Bancorp has filed an application to list its
common stock on the Nasdaq National Market which is expected to be approved
conditioned on and effective as of the closing of the merger, but there can be
no assurance that this will in fact occur.
The information in the following table indicates the high and low "bid"
and "asked" quotations and approximate volume of trading for the common stock
for each quarterly period since January 1, 1999 and is based upon information
provided by the ADP Quotation Services, Historical Data Base. Since Business
Bancorp did not acquire the outstanding shares of Business Bank until January,
2000, 1999 information is for the stock of Business Bank. As of the effective
date of the holding company reorganization (January 21, 2000), each outstanding
share of common stock of Business Bank was converted into one outstanding share
of common stock of Business Bancorp. Figures have been retroactively adjusted
where appropriate to give effect to the 25% stock distribution declared by
Business Bank in July, 1999. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, do not reflect actual
transactions and do not include nominal amounts traded directly by shareholders
or through other dealers and not through the market makers.
Sale Price of
Business Bancorp's
Common Stock Cash Approximate Approximate
--------------------------- Dividend Trading Number of
Calendar Quarter Ended High Low Declared Volume Transactions
---------------------------- ------------ ------------ ---------- ------------- -------------
March 31, 1999 ............. $ 12.40 $ 10.20 $ 0.00 25,500 34
June 30, 1999 .............. 11.00 9.60 $ 0.00 97,200 27
September 30, 1999 ......... 13.50 10.00 $ 0.00 26,960 14
December 31, 1999 .......... 11.00 8.00 $ 0.00 20,400 17
March 31, 2000 ............. 9.50 8.62 $ 0.00 49,500 25
June 30, 2000 .............. 9.75 8.00 $ 0.00 48,600 18
September 30, 2000 ......... 10.25 8.75 $ 0.00 116,200 17
December 31, 2000 .......... 10.25 8.25 $ 0.00 85,000 28
March 31, 2001 ............. 11.75 9.00 $ 0.00 147,208 34
June 30, 2001 .............. 12.63 11.00 $ 0.00 78,302 58
September 30, 2001 ......... 14.75 11.75 $ 0.01 113,012 150
On October 19, 2001, 300 shares were traded at $13.00 per share.
Holders
On October 18, 2001 there were approximately 283 shareholders of record of
the common stock.
Dividends
As a bank holding company which currently has no significant assets other
than its equity interest in Business Bank, Business Bancorp's ability to pay
dividends primarily depends upon the dividends it receives from Business Bank.
As with Business Bancorp, Business Bank's dividend practices will depend upon
Business Bank's earnings, financial position, current and anticipated cash
requirements and other factors deemed relevant by Business Bank's board of
directors at that time. The payment of any cash dividends by Business Bank will
also depend on Business Bank meeting certain capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Business Bancorp--Capital Resources" on page 117. In addition,
during any period in which Business Bancorp has
125
deferred payment of interest otherwise due and payable on its Subordinated Debt
Securities, Business Bancorp may not make any dividends or distributions with
respect to its capital stock.
Business Bank's ability to pay dividends to Business Bancorp is also
subject to certain legal limitations. Under California law, Business Bank may
declare a cash dividend out of Business Bank's net profits up to the lesser of
Business Bank's retained earnings or Business Bank's net income for the last
three (3) fiscal years (less any distributions made to shareholders during such
period), or, with the prior written approval of the California Commissioner, in
an amount not exceeding the greatest of (i) the retained earnings of Business
Bank, (ii) the net income of Business Bank for its last fiscal year, or (iii)
the net income of Business Bank for its current fiscal year. In addition, under
federal law, Business Bank is prohibited from paying any dividends if after
making such payment Business Bank would fail to meet any of its minimum capital
requirements. The federal regulators also have the authority to prohibit
Business Bank from engaging in any business practices which are considered to
be unsafe or unsound, and in some circumstances the regulators might prohibit
the payment of dividends on that basis even though such payments would
otherwise be permissible.
Business Bancorp's ability to pay dividends is also limited by state
corporation law. The California Corporations Code prohibits Business Bancorp
from paying dividends on the common stock unless: (i) its retained earnings,
immediately prior to the dividend payment, equals or exceeds the amount of the
dividend or (ii) immediately after giving effect to the dividend the sum of
Business Bancorp's assets (exclusive of goodwill and deferred charges) would be
at least equal to 125% of its liabilities and certain other conditions are met.
Since the 125 percent ratio translates into a minimum capital ratio of 25
percent, Business Bancorp based on its current capital ratio would be unable to
meet this last test and so must have sufficient retained earnings to fund the
proposed distribution.
For further information on legal restrictions applicable to the ability of
Business Bancorp and Business Bank to pay dividends, see "Regulation and
Supervision--Dividends."
Prior to 2001, Business Bancorp's practice had been to retain earnings to
provide funds for the operation and expansion of its business. During the third
quarter of 2001 Business Bancorp began the payment of a regular cash dividend
of $0.01 per share, which it anticipates paying quarterly in the future. The
Business Bancorp board of directors' practice is to review periodically the
advisability of paying cash dividends based upon Business Bancorp's earnings,
financial position, current and anticipated cash requirements and other factors
deemed relevant by the board of directors at that time. In making any such
assessment, the board of directors of Business Bancorp would have to consider
among other things the capital requirements of Business Bank and other factors
concerning Business Bank, including the dividend guidelines and maintenance of
an adequate allowance for loan losses.
126
INFORMATION ABOUT MCB FINANCIAL
General
MCB Financial Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. MCB Financial was incorporated
under the laws of the State of California on January 20, 1993.
On October 1, 1993, MCB Financial began operations as a bank holding
company with Metro Commerce Bank as its wholly-owned bank subsidiary. The
principal business and activity of MCB Financial is to serve as holding company
for Metro Commerce Bank and its principal source of income is dividends paid by
Metro Commerce Bank.
Metro Commerce Bank is a California state-chartered commercial bank that
is a member of the Federal Reserve System. Metro Commerce Bank was licensed by
the Office of the Comptroller of the Currency on June 12, 1989, and commenced
operations as a national banking association on December 8, 1989. On July 24,
1998, Metro Commerce Bank converted from a national banking association into a
California state bank. Metro Commerce Bank is subject to primary supervision,
examination and regulation by the California Commissioner and the Federal
Reserve Board. Metro Commerce Bank is also subject to certain federal laws and
regulations, and Metro Commerce Bank is subject to applicable provisions of
California law insofar as such provisions do not conflict with or are not
preempted by federal banking laws. The deposits of Metro Commerce Bank are
insured under the Federal Deposit Insurance Act up to the applicable limits
thereof. Metro Commerce Bank is a wholly-owned subsidiary of MCB Financial and
presently has no subsidiaries or affiliates other than MCB Statutory Trust I,
as discussed below under "Information About MCB Financial--Management's
Discussion and Analysis of Financial Condition and Results of Operations of MCB
Financial--Trust Preferred Securities."
Metro Commerce Bank is engaged in substantially all of the business
operations customarily conducted by independent commercial banks in California.
Metro Commerce Bank's banking services include checking and savings deposits,
and making commercial, construction, mortgage, real estate, small business
administration, home equity and other installment loans and term extensions of
credit. Metro Commerce Bank also offers travelers' checks, notary public and
other customary bank services to its customers. Metro Commerce Bank does not
issue credit cards, however, it offers Visa cards through one of its
correspondent banks.
Metro Commerce Bank operates a Small Business Administration Loan
Division. The Small Business Administration is an agency of the U.S. Government
that offers guaranteed loan programs for small businesses which might not
otherwise qualify for standard bank credit. The Small Business Administration
Loan Division offers various business loan programs secured by both residential
and commercial real estate and business property. Metro Commerce Bank primarily
sells the guaranteed portion of Small Business Administration loans in the
secondary market to private investors.
Metro Commerce Bank does not operate a trust department; however, it has
arranged with a correspondent institution to offer trust services to Metro
Commerce Bank's customers upon request. Metro Commerce Bank also does not offer
international banking services although such services are offered indirectly
through correspondent institutions.
Currently, Metro Commerce Bank conducts its business operations through
its head office located in San Rafael, California, and through its five branch
office locations in San Francisco, South San Francisco, Hayward, Petaluma and
Upland, California.
Metro Commerce Bank's primary service area is central Marin County along
with the cities of San Francisco, South San Francisco, Hayward, Petaluma and
Upland. Most of Metro Commerce Bank's loans and deposits originate from small
and medium sized businesses and professionals located within its primary
service area.
Metro Commerce Bank's business has little, if any, emphasis on foreign
sources and application of funds. Metro Commerce Bank's business, based upon
performance to date, does not appear to be seasonal. Metro Commerce Bank is not
dependent upon a single customer or group of related customers
127
for a material portion of its deposits, nor is a material portion of Metro
Commerce Bank's loans concentrated within a single industry or group of related
industries. Management of Metro Commerce Bank is unaware of any material effect
upon Metro Commerce Bank's capital expenditures, earnings or competitive
position as a result of federal, state or local environmental regulation.
Metro Commerce Bank holds no patents, licenses (other than licenses
obtained from bank regulatory authorities), franchises or concessions.
Competition
The banking business in California is highly competitive with respect to
both loans and deposits, and is dominated by a relatively small number of major
banks with many offices operating over a wide geographic area. Metro Commerce
Bank competes for deposits and loans principally with other commercial banks
and also with non-bank financial intermediaries, including savings and loan
associations, credit unions, thrift and loans, mortgage companies, money market
and mutual funds, finance and insurance companies and other financial and
non-financial institutions. In addition, other entities (both governmental and
private industry) seeking to raise capital through the issuance and sale of
debt or equity securities and instruments provide competition for Metro
Commerce Bank in the acquisition of deposits.
Among the advantages certain of these institutions have over Metro
Commerce Bank 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 Metro
Commerce Bank's service area offer certain services (such as international
banking and trust services) which are not offered directly by Metro Commerce
Bank. In addition, by virtue of their greater total capitalization, such banks
have substantially higher lending limits than does Metro Commerce Bank (legal
lending limits to each customer are restricted to a percentage of a bank's
capital, the exact percentage depending on the nature of the particular loan
transaction involved).
From the time Metro Commerce Bank commenced its operations, officers and
employees of Metro Commerce Bank have continually engaged in marketing
activities, including the evaluation and development of new services,
involvement in community service groups, and direct marketing in order to
retain and improve Metro Commerce Bank's competitive position in its service
areas.
Insurance
MCB Financial and Metro Commerce Bank maintain insurance at levels deemed
adequate by its board of directors to protect against certain business risks,
operational losses, and property damage. In accordance with rulings promulgated
by the California Commissioner and pursuant to MCB Financial's and Metro
Commerce Bank's Articles of Incorporation and certain contractual obligations,
the officers and directors are entitled to indemnification, under certain
circumstances, for certain expenses, liabilities and losses including, but not
limited to, costs of defense, settlements and judgments rendered against them.
However, indemnification is not authorized when a supervisory action results in
a final order assessing civil money penalties or when a supervisory action
requires affirmative action in the form of payments by an individual to Metro
Commerce Bank. MCB Financial and Metro Commerce Bank maintain directors and
officers liability insurance to cover certain costs of indemnification.
Employees
Except for its officers, MCB Financial has no full-time or part-time
employees. It is anticipated that MCB Financial will rely on its officers and
will utilize the employees of Metro Commerce Bank until it becomes actively
engaged in additional business activities. MCB Financial reimburses Metro
Commerce Bank a fair and reasonable amount for all services furnished to it.
As of June 30, 2001, Metro Commerce Bank had a total of 61 full-time
equivalent employees. The management of Metro Commerce Bank believes that its
employee relations are satisfactory.
Description of Property
Currently, MCB Financial does not own or lease any property. MCB
Financial's headquarters are located within Metro Commerce Bank's headquarters.
MCB Financial is not actively engaged in any business activities outside of the
activities of Metro Commerce Bank. Therefore, Metro Commerce
128
Bank's property is not significantly used by MCB Financial. MCB Financial will
continue to utilize the premises of Metro Commerce Bank until it becomes
actively engaged in additional business activities. MCB Financial currently
reimburses Metro Commerce Bank for a fair and reasonable amount for all
services furnished to it.
Metro Commerce Bank leases the land and the buildings at which its office
facilities are located. Metro Commerce Bank has six full-service banking
offices. The head office of Metro Commerce Bank is located at 1248 Fifth
Avenue, San Rafael, California and consists of approximately 10,000 square feet
of office space. Metro Commerce Bank occupies the premises for its head office
under a lease which will expire in June 2014, with two five-year options to
renew. Metro Commerce Bank's five branch offices in San Francisco, South San
Francisco, Hayward, Upland and Petaluma, California occupy approximately 3,600,
12,300, 3,400, 5,800 and 4,600 square feet, respectively, under leases that
expire at various dates through the year 2010.
Metro Commerce Bank believes that its existing facilities are adequate for
its current needs and anticipated growth.
Legal Proceedings
There are various legal actions pending against MCB Financial and Metro
Commerce Bank arising from the normal course of business. Management, upon the
advice of legal counsel handling such actions, believes that the ultimate
resolution of these actions will not have a material effect on the financial
position of MCB Financial.
129
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MCB FINANCIAL
This discussion presents Management's analysis of the results of
operations and financial condition of MCB Financial as of and for the six
months ended June 30, 2001 and 2000 and the years ended December 31, 2000, 1999
and 1998. As of the date of this discussion, MCB Financial's principal
subsidiary is Metro Commerce Bank. The discussion should be read in conjunction
with the financial statements of MCB Financial and the notes related thereto
presented elsewhere in this joint proxy statement/prospectus.
Six Months Ended June 30, 2001 and 2000
Results Of Operations
The following table summarizes income, income per share and key financial
ratios for the periods indicated:
Net Income
------------------------------
Six Six
Months Ended Months Ended
June 30, June 30,
2001 2000
-------------- -------------
(Dollars in thousands, except
per share amounts)
Income ......................................... $ 1,489 $ 1,414
Income per share:
Basic ....................................... $ 0.87 $ 0.69
Diluted ..................................... $ 0.83 $ 0.66
Return on average assets ....................... 1.39% 1.42%
Return on average shareholders' equity ......... 20.81% 19.00%
Dividend payout ratio .......................... 2.41% 3.03%
Our net income for the six months ended June 30, 2001 increased 5.3% to
$1,489,000, or $0.83 per diluted share, compared to net income of $1,414,000,
or $0.66 per diluted share, for the six months ended June 30, 2000. Based on
our net income for the six months ended June 30, 2001, our return on average
shareholders' equity was 20.81% and our return on average assets was 1.39%.
During the six months ended June 30, 2000, our net income resulted in a return
on average shareholders' equity of 19.00% and a return on average assets of
1.42%.
The 5.3% increase in net income for the six months ended June 30, 2001 as
compared to the six months ended June 30, 2000 was the result of growth in
loans and a decrease in the provision for loan losses partially offset by an
increase in dividends paid on trust preferred securities. The 25.8% increase in
diluted earnings per share for the six months ended June 30, 2001 as compared
to the six months ended June 30, 2000 was the result of our common stock
repurchases during the twelve months ended June 30, 2001. Due to these
repurchases, our weighted average diluted shares outstanding during the six
months ended June 30, 2001 decreased 16.6% to 1,789,346 compared to 2,146,664
during the six months ended June 30, 2000.
Net Interest Income
Net interest income increased to $6.2 million for the six months ended
June 30, 2001 as compared to $6.0 million for the six months ended June 30,
2000. This was primarily due to the $14.0 million, or 7.0%, increase in average
interest-earning assets which was offset by a 29 basis point decrease in our
net yield on interest-earning assets.
130
The following table presents, for the periods indicated, our condensed
average balance sheet information together with interest income and yields
earned on average interest-earning assets and interest expense and rates paid
on average interest-bearing liabilities. Average balances are average daily
balances.
For the Six Months Ended June 30,
-------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
Interest-Earning Assets:
Federal funds sold ................................. $ 7,216 $ 166 4.64% $ 10,625 $ 317 6.00%
Interest-bearing deposits with banks ............... 286 9 6.35% 286 8 5.63%
Investment securities:
Taxable ........................................... 26,292 740 5.68% 31,457 909 5.81%
Tax-exempt Loans(1)(2) ............................ 164,928 8,041 9.83% 142,312 7,387 10.44%
-------- ------- ---- -------- ------- -----
Total interest-earning assets .................... 198,722 8,956 9.09% 184,680 8,621 9.39%
Noninterest-earning assets ......................... 14,885 14,308
-------- --------
Total assets ..................................... $213,607 $198,988
======== ========
Interest-Bearing Liabilities:
Deposits:
Interest-bearing transaction accounts ............. $107,164 $ 1,730 3.26% $109,688 $ 1,951 3.58%
Time deposits, $100,000 or more ................... 28,174 761 5.45% 14,792 379 5.15%
Savings and other time ............................ 10,813 241 4.49% 11,378 238 4.21%
-------- ------- ---- -------- ------- -----
Total interest-bearing deposits .................. 146,151 2,732 3.77% 135,858 2,568 3.80%
-------- ------- ---- -------- ------- -----
Other borrowings ................................... 1,149 31 5.44% 615 16 5.23%
-------- ------- ---- -------- ------- -----
Total interest-bearing liabilities ............... 147,300 2,763 3.78% 136,473 2,584 3.81%
Noninterest-bearing deposits ....................... 47,395 46,086
Other noninterest-bearing liabilities .............. 1,599 1,545
Trust preferred securities ......................... 3,000
--------
Shareholders' equity ............................... 14,313 14,884
-------- --------
Total liabilities and shareholders' equity ......... $213,607 $198,988
======== ========
Net interest income ................................ $ 6,193 $ 6,037
======= =======
Interest rate spread ............................... 5.31% 5.58%
Contribution of interest free funds ................ 0.98% 0.99%
---- -----
Net yield on interest-earning assets(3) ............ 6.28% 6.57%
==== =====
<FN>
------------
(1) Nonaccrual loans are excluded in the average balance and only collected
interest on nonaccrual loans is included in the interest column.
(2) Loan fees totaling $627,000 and $579,000 are included in loan interest
income for the six months ended June 30, 2001 and June 30, 2000,
respectively.
(3) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
</FN>
131
The most significant impact on our net interest income between periods is
derived from the interaction of changes in the volume of, and rate earned or
paid on, interest-earning assets and interest-bearing liabilities. The volume
of interest-earning asset dollars in loans and investments, compared to the
volume of interest-bearing liabilities represented by deposits and borrowings,
combined with the spread, produces the changes in the net interest income
between periods. The table below sets forth, for the periods indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate).
Six Months Ended June 30, 2001
Compared With
Six Months Ended June 30, 2000
Favorable / (Unfavorable)
---------------------------------------
Volume Rate(1) Net
---------- ----------- ------------
(Dollars in Thousands)
Interest Earned on Interest-Earnings Assets
Federal funds sold ......................................... $ (102) $ (49) $(151)
Interest-bearing deposits with banks ....................... 0 1 1
Investment securities:
Taxable ................................................... (151) (18) (169)
Tax-exempt Loans .......................................... 1,162 (508) 654
------ ----- -----
Total Interest Income ................................... 909 (574) 335
------ ----- -----
Interest Expense on Interest-Bearing Liabilities
Deposits:
Interest-bearing transaction accounts ..................... 45 176 221
Time deposits, $100,000 or more............................ (340) (42) (382)
Savings and other time .................................... 12 (15) (3)
------ ----- -----
Total interest-bearing deposits ......................... (283) 119 (164)
Other borrowings ........................................... (14) (1) (15)
------ ----- -----
Total Interest Expense .................................. (297) 118 (179)
------ ----- -----
Net Increase (Decrease) in Net Interest Income ......... $ 612 $(456) $ 156
====== ===== =====
<FN>
------------
(1) The rate/volume variance has been included in the rate variance.
</FN>
The Six Months Ended June 30, 2001 Compared with the Six Months Ended June
30, 2000
Interest income for the six months ended June 30, 2001 increased to $9.0
million from $8.6 million for the six months ended June 30, 2000. This was
primarily due to the increase in average loans offset by a 29 basis point
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $14.0 million, or 7.6%, to $198.7 million for
the six months ended June 30, 2001, compared to $184.7 million in the same
period for 2000. Average loans increased $22.6 million, or 15.9%, to $164.9
million for the six months ended June 30, 2001 from $142.3 million in the same
period for 2000. Average investment securities, federal funds sold and
interest-bearing deposits with banks, decreased 20.2% to $33.8 million for the
six months ended June 30, 2001 from $42.4 million in the same period for 2000.
The average yield on interest-earning assets decreased 30 basis points to
9.09% for the six months ended June 30, 2001 from 9.39% in the same period of
2000 primarily due to a decrease in the average yield on loans. We lowered our
prime rate by 275 basis points from 9.50% at June 30, 2000 to 6.75% at June 30,
2001 in response to the Federal Open Market Committee's decision to lower the
target level for the federal funds rate by the same magnitude. Our average
yield on loans declined by 61 basis points to 9.83% for the six months ended
June 30, 2001 from 10.44% in the same period of 2000. Loans represented
approximately 83.0% of total interest-earning assets for the six months ended
June 30, 2001 compared to 77.1% for the same period in 2000.
Interest expense for the six months ended June 30, 2001 was $2.8 million
compared to $2.6 million for the same period of 2000. Lower interest rates paid
on interest-bearing transaction accounts were offset by the volume increase in
time deposits of $100,000 or more. Average interest-bearing liabilities
increased
132
7.9% to $147.3 million for the six months ended June 30, 2001 from $136.5
million in the same period for 2000. The increase was due primarily to the
efforts of our relationship managers in generating deposits from their client
relationships.
During the six months ended June 30, 2001, average noninterest-bearing
deposits increased to $47.4 million from $46.1 million in the same period of
2000.
As a result of the foregoing analyses, our interest rate spread decreased
to 5.31% for the six months ended June 30, 2001 from 5.58% in the same period
of 2000. The net yield on interest-earning assets decreased for the six months
ended June 30, 2001 to 6.28% from 6.57% in the same period of 2000.
Noninterest Income
The following table summarizes our noninterest income for the periods
indicated and expresses the amounts as a percentage of average assets (dollar
amounts in thousands):
Six Months Ended June 30,
-------------------------
2001 2000
---------- ----------
Components of Noninterest Income
Gain on sale of loans .............................. $ 39 $ 35
Service fees on deposit accounts ................... 256 245
Loan servicing fees ................................ 32 27
Loss on sale of investment securities--net ......... (2)
Other .............................................. 160 114
------- -----
Total ........................................... $ 487 $ 419
======= =====
As a Percentage of Average Assets
(Annualized)
Gain on sale of loans .............................. 0.04% 0.03%
Service fees on deposit accounts ................... 0.24% 0.25%
Loan servicing fees ................................ 0.03% 0.03%
Gain (loss) on sale of investment
securities--net ................................... 0.00%
Other .............................................. 0.15% 0.11%
------- -----
Total ........................................... 0.46% 0.42%
======= =====
133
Noninterest Expense
The following table summarizes our noninterest expenses and the associated
ratios to average assets for the periods indicated (dollar amounts in
thousands):
Six Months Ended June 30,
---------------------------
2001 2000
------------ ------------
Components of Noninterest Expense
Salaries and employee benefits ................. $ 2,238 $ 2,187
Occupancy expense .............................. 538 527
Furniture and equipment expense ................ 236 224
Professional services .......................... 120 126
Supplies ....................................... 119 121
Promotional expenses ........................... 155 148
Data processing fees ........................... 198 177
Regulatory assessments ......................... 30 30
Other .......................................... 265 283
-------- --------
Total ....................................... $ 3,899 $ 3,823
======== ========
Average full-time equivalent employees ......... 59 58
As a Percentage of Average Assets
(Annualized)
Salaries and employee benefits ................. 2.11% 2.20%
Occupancy expense .............................. 0.51% 0.53%
Furniture and equipment expense ................ 0.22% 0.22%
Professional services .......................... 0.11% 0.13%
Supplies ....................................... 0.11% 0.12%
Promotional expenses ........................... 0.15% 0.15%
Data processing fees ........................... 0.19% 0.18%
Regulatory assessments ......................... 0.03% 0.03%
Other .......................................... 0.25% 0.28%
-------- --------
Total ....................................... 3.68% 3.84%
======== ========
Income Taxes
Our effective tax rate for the six months ended June 30, 2001 was 41.0%
compared to 41.4% in the same period of the prior year.
Financial Condition
Our total assets increased by $17.0 million, or 8.1%, from the end of 2000
to reach $226.3 million at June 30, 2001.
134
Investments
The following tables set forth the amortized cost and approximate market
value of our investment securities as of the dates indicated (dollar amounts in
thousands):
June 30, 2001:
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ---------- ---------
Available for sale securities:
U.S. Treasury .......................... $24,131 $ 301 (80) $24,352 $24,352
U.S. Government agencies ............... 9,095 96 (27) 9,164 9,164
Corporate securities ................... 1,918 34 1,952 1,952
------- ----- ------- -------
Total investment securities ......... $35,144 $ 431 $ (107) $35,468 $35,468
======= ===== ======= ======= =======
December 31, 2000:
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ---------- ---------
Held to maturity securities:
U.S. Government agencies ............ 2,000 $ (1) $ 1,999 $ 2,000
----- ------ ------- -------
Total held to maturity ........... 2,000 (1) 1,999 2,000
----- ------ ------- -------
Available for sale securities:
U.S. Treasury ....................... 13,983 188 (42) 14,129 14,129
U.S. Government agencies ............ 9,108 5 (75) 9,038 9,038
Corporate securities ................ 1,929 4 1,933 1,933
------ ----- ------- -------
Total available for sale ......... 25,020 197 (117) 25,100 25,100
------ ----- ------ ------- -------
Total investment securities ............ $27,020 $ 197 $ (118) $27,099 27,100
======= ===== ====== ======= =======
June 30, 2000:
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ---------- -----------
Held to maturity securities:
U.S. Government agencies ............ $ 2,000 $ (21) $ 1,979 $ 2,000
------- ------- -------- --------
Total held to maturity ........... 2,000 (21) 1,979 2,000
------- ------- -------- --------
Available for sale securities:
U.S. Treasury ....................... 13,987 $ 27 (265) 13,749 13,749
U.S. Government agencies ............ 11,120 (546) 10,574 10,574
Corporate securities ................ 1,939 (34) 1,905 1,905
------- ------- -------- --------
Total available for sale ......... 27,046 27 (845) 26,228 26,228
------- ---- ------- -------- --------
Total investment securities ............ 29,046 $ 27 $ (866) $ 28,207 $ 28,228
======= ==== ======= ======== ========
The maturities and weighted average yields of our investment securities at
June 30, 2001 are presented in the following table (at amortized cost) (dollar
amounts in thousands):
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years Total
--------------------- ----------------------- --------------------- -----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---------- ---------- ---------- -------- ---------- ---------- ----------
U.S. Treasury and other U.S.
government agencies ......... $5,002 6.14% $24,177 4.91% $4,047 5.61% $33,226 5.18%
Corporate securities ......... 808 6.33% 1,110 6.30% 1,918 6.32%
------ ---- ------- ---- ------- ----
Total ..................... $5,810 6.16% $25,287 4.97% $4,047 5.61% $35,144 5.24%
====== ==== ======= ==== ====== ==== ======= ====
135
Loans Held For Investment
Our net loans held for investment increased by $2.7 million, or 1.7%,
during the first six months of 2001 as increases in commercial real estate,
land, home equity and loans to consumers and individuals were offset by
decreases in commercial and construction loans. The following table sets forth
the amount of our total loans outstanding by category as of the dates indicated
(dollar amounts in thousands):
June 30, December 31, June 30,
Total Loans 2001 2000 2000
-------------------------------------------- ------------ -------------- -------------
Commercial ................................. $ 24,068 $ 27,137 $ 24,043
Real estate:
Commercial .............................. 110,903 108,557 95,697
Construction ............................ 22,313 24,157 21,076
Land .................................... 5,179 1,675 3,600
Home equity ................................ 2,780 1,581 1,602
Loans to consumers and individuals ......... 2,593 1,936 1,721
--------- --------- ---------
Total ................................ 167,836 165,043 147,739
Deferred loan fees ......................... (191) (220) (112)
Allowance for loan losses .................. (2,039) (1,939) (1,742)
--------- --------- ---------
Total net loans ...................... $ 165,606 $ 162,884 $ 145,885
========= ========= =========
In the normal practice of extending credit, we accept real estate
collateral for loans which have primary sources of repayment from commercial
operations. The total amount of loans secured by real estate equaled $141.1
million, or 84% of the total portfolio as of June 30, 2001. Due to our limited
marketing areas, our real estate collateral is primarily concentrated in the
San Francisco Bay Area and Southern California. We believe that our
underwriting standards for real estate secured loans are prudent and provide an
adequate safeguard against declining real estate prices which may effect a
borrower's ability to liquidate the property and repay the loan. However, no
assurance can be given that real estate values will not decline and impair the
value of the security for loans held by us.
We focus our portfolio lending on commercial, commercial real estate, and
construction loans. These loans generally carry a higher level of risk than
conventional real estate loans; accordingly, yields on these loans are
typically higher than those of other loans. The performance of commercial and
construction loans is generally dependent upon future cash flows from business
operations (including the sale of products, merchandise and services) and the
successful completion or operation of large real estate projects. Risks
attributable to such loans can be significantly increased, often to a greater
extent than other loans, by regional economic factors, real estate prices, the
demand for commercial and retail office space, and the demand for products and
services of industries which are concentrated within our loan portfolio. As of
June 30, 2001 the two largest industry concentrations within the loan portfolio
were real estate and related services at 30.1% and the services -
personal/business industry at 22.7% of the portfolio. Because credit
concentrations increase portfolio risk, we place significant emphasis on the
purpose of each loan and the related sources of repayment. We generally limit
unsecured commercial loans to maturities of three years and secured commercial
loans to maturities of five years.
Maturities of Loans At June 30, 2001 (Dollar Amounts in Thousands):
Time Remaining to Maturity Fixed Rate Adjustable Rate Total
--------------------------------------- ------------ ----------------- -----------
One year or less ...................... $ 9,779 $ 34,748 $ 44,527
After one year to five years .......... 62,652 23,774 86,426
After five years ...................... 10,288 26,595 36,883
-------- -------- --------
Total .............................. $ 82,719 $ 85,117 $167,836
======== ======== ========
136
As of June 30, 2001, the percentage of loans held for investment with
fixed and floating interest rates was 49.3% and 50.7%, respectively.
Nonperforming Assets
We carefully monitor the quality of our loan portfolio and the factors
that affect it, including regional economic conditions, employment stability,
and real estate values. the accrual of interest on loans is discontinued when
the payment of principal or interest is considered to be in doubt, or when a
loan becomes contractually past due by 90 days or more with respect to
principal or interest, except for loans that are well secured and in the
process of collection.
As of June 30, 2001, we had nonperforming assets in the amount of $40,000.
The following table sets forth the balance of nonperforming assets as of the
dates indicated (dollar amounts in thousands):
June 30, March December 31, September 30, June 30,
Nonperforming Assets 2001 2001 2000 2000 2000
-------------------- ---- ---- ---- ---- ----
Nonaccrual loans ..................... $ 0 $ 0 $ 0 $ 0 $ 126
Loans 90 days or more past due and
still accruing ...................... 40 40 40 78 40
------- ------- ------- ------- -------
$ 40 $ 40 $ 40 $ 78 $ 166
======= ======= ======= ======= =======
As a percent of total loans .......... 0.02% 0.02% 0.02% 0.05% 0.11%
As a percent of total assets ......... 0.02% 0.02% 0.02% 0.04% 0.08%
At June 30, 2001, we had loans identified as impaired in the amount of
$40,000. At June 30, 2001, no specific allowance for loan losses was required
for these impaired loans because they were adequately collateralized.
Allowance For Loan Losses
We maintain an allowance for loan losses ("ALL") which is reduced by
credit losses and increased by credit recoveries and by the provision to the
ALL which is charged against operations. Provisions to the ALL and the total of
the ALL are based, among other factors, upon our credit loss experience,
current economic conditions, the performance of loans within the portfolio,
evaluation of loan collateral value, and the prospects or worth of respective
borrowers and guarantors.
In determining the adequacy of our ALL and after carefully analyzing each
loan individually, we segment the loan portfolio into pools of homogeneous
loans that share similar risk factors. Each pool is given a risk assessment
factor which largely reflects the expected future losses from each category.
These risk assessment factors change as economic conditions shift and actual
loan losses are recorded. As of June 30, 2001, the ALL of $2,039,000, or 1.22%
of total loans, was determined by us to be adequate against foreseable future
losses. No assurance can be given that nonperforming loans will not increase or
that future losses will not exceed the amount of the ALL.
137
The following table summarizes, for the periods indicated, loan balances
at the end of each period and average balances during the period, changes in
the ALL arising from credit losses, recoveries of credit losses previously
incurred, additions to the ALL charged to operating expense, and certain ratios
relating to the ALL (dollar amounts in thousands):
At and for At and for
the Six Months the Year Ended
Ended June 30, December 31,
2001 2000
---------------- ---------------
Balances:
Average loans during period ....................... $ 164,928 $ 149,645
Loans at end of period ............................ 167,645 168,823
Allowance for Loan Losses:
Balance at beginning of period .................... 1,939 1,492
Charge-offs:
Commercial ....................................... -- 9
Consumer ......................................... -- 1
---------- ---------
Total charge-offs .............................. 0 10
Recoveries:
Commercial ....................................... -- 37
Total recoveries ............................... 0 37
Net charge-offs (recoveries) ........................ 0 (27)
Provision charged to operating expense .............. 100 420
Balance at end of period ............................ $ 2,039 $ 1,939
---------- ---------
Ratios:
Net charge-offs (recoveries) to average loans ..... 0.00% -0.02%
Allowance for loan losses to loan at end of
period ........................................... 1.22% 1.18%
Net charge-offs (recoveries) to beginning of
period allowance for loan losses ................. 0.00% -1.81%
We did not make a provision to the allowance for loan losses during the
second quarter of 2001 as compared to a provision of $100,000 during the second
quarter of 2000. For the six months ended June 30, 2001, we provided $100,000
to the ALL as compared to $220,000 during the same period of 2000. We believe
the $100,000 provision to the ALL during the first six months of 2001 is
adequate given our net loan growth of 1.7% during that same period.
The following table sets forth the allocation of the ALL as of the dates
indicated (dollar amounts in thousands):
June 30, December 31, June 30,
2001 2000 2000
--------------------- --------------------- ----------------------
% of % of % of
Category Category Category
of Total of Total of Total
All Loans All Loans All Loans
-------- ---------- -------- ---------- -------- -----------
Commercial loans .......... $ 860 44.40% $ 793 43.34% $ 636 43.22%
Real estate loans ......... 1,000 51.69% 978 53.47% 294 53.37%
Consumer loans ............ 84 3.91% 65 3.19% 32 3.41%
Not allocated ............. 95 N/A 103 N/A 780 N/A
------ ------ ------ ------ ------ ------
Total .................. $2,039 100.00% $1,939 100.00% $1,742 100.00%
====== ====== ====== ====== ====== ======
The ALL is available to absorb losses from all loans, although allocations
have been made for certain loans and loan categories. The allocation of the ALL
as shown above should not be interpreted as an indication that charge-offs in
future periods will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends. In addition to the most recent
analysis of individual loans
138
and pools of loans, our methodology also places emphasis on historical loss
data, delinquency and nonaccrual trends by loan classification category and
expected loan maturity. This analysis, we believe, identifies potential losses
within the loan portfolio and therefore results in allocation of a large
portion of the allowance to specific loan categories.
Deposits
Our total consolidated deposits increased by $18.5 million, or 9.79%,
during the six months ended June 30, 2001.
Rates paid on deposits decreased along with market interest rates during
the six months ended June 30, 2001 as compared to the year ended December 31,
2000. The following table summarizes the distribution of average deposits and
the average rates paid for the periods indicated (dollar amounts in thousands):
Six Months Ended Year Ended Six Months Ended
June 30, 2001 December 31, 2000 June 30, 2000
---------------------- ---------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- --------- ----------- --------- ----------- ----------
Noninterest-bearing demand
deposits ............................ $ 47,395 $ 47,329 $ 46,086
Interest-bearing demand deposits
(includes money market deposit
accounts) ........................... 107,164 3.26% 108,708 3.70% 109,688 3.59%
Savings deposits ..................... 2,094 1.74% 2,146 1.95% 2,088 1.93%
Time deposits, $100,000 and over ..... 28,174 5.45% 17,730 5.46% 14,792 5.15%
Other time deposits .................. 8,719 5.16% 9,086 4.96% 9,290 4.71%
-------- ---- -------- ---- -------- ----
Total interest-bearing ............ 146,151 3.77% 137,670 3.98% 135,858 3.81%
-------- ---- -------- ---- -------- ----
Total deposits ....................... $193,546 2.85% $184,999 2.96% $181,944 2.85%
======== ==== ======== ==== ======== ====
The following table sets forth the time remaining to maturity of our time
deposits in amounts of $100,000 or more as of the dates indicated below (dollar
amounts in thousands):
June 30, December 31, June 30,
Time Remaining to Maturity 2001 2000 2000
------------------------------------------ ---------- -------------- ---------
Three months or less ..................... $20,328 $14,456 $ 8,447
After three months to six months ......... 6,108 4,519 4,594
After six months to one year ............. 2,601 5,678 2,862
After twelve months ...................... 1,600 500 410
------- ------- -------
Total ................................. $30,637 $25,153 $16,313
======= ======= =======
Liquidity
Liquidity is our ability to absorb fluctuations in deposits while
simultaneously providing for the credit needs of our borrowers. The objective
in liquidity management is to balance the sources and uses of funds. Primary
sources of liquidity for us include payments of principal and interest on loans
and investments, proceeds from the sale or maturity of loans and investments,
growth in deposits, and other borrowings. We hold overnight federal funds as a
cushion for temporary liquidity needs. During the six months ended June 30,
2001, federal funds sold averaged $7.2 million, or 3.4% of total assets. In
addition to our federal funds, we maintain various lines of credit with
correspondent banks, the Federal Reserve Bank of San Francisco, and the Federal
Home Loan Bank of San Francisco.
At June 30, 2001, we had cash, time deposits with banks, federal funds
sold, and unpledged investment securities of approximately $30.6 million, or
13.5% of total assets. This represented all available liquid assets, excluding
other assets.
Several methods are used to measure liquidity. One method is to measure
the balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more
139
reliant we become on our illiquid loan portfolio and our securities portfolio
to absorb temporary fluctuations in deposit levels. At June 30, 2001, the
loan-to-deposit ratio was 81.0% as compared to 87.4% at December 31, 2000.
Another frequently used method is the relationship between short-term
liquid assets (federal funds sold and investments maturing within one year) and
short-term liabilities (total deposits and other borrowings), or the liquidity
ratio. We target a minimum ratio of 5%. At June 30, 2001, this ratio was 6.1%
as compared to 1.3% at December 31, 2000.
As of June 30, 2001, we had no material commitments that were expected to
adversely impact liquidity.
Interest Rate Risk Management
Net Income Simulation
We utilize the results of a net income simulation model to quantify the
estimated exposure to net income of changes in interest rates. The various
products in our balance sheet are modeled to simulate their income (and cash
flow) behavior in relation to interest rates. Income for the next 12 months is
calculated for current interest rates and for immediate and sustained rate
shocks.
The income simulation model includes various assumptions regarding the
repricing relationships for each product. Many of our assets are floating rate
loans, which are assumed to reprice immediately, and to the same extent as the
change in market rates according to their contracted index. Our nonmaturity
deposit products reprice more slowly, usually changing less than the change in
market rates and at our discretion. As of June 30, 2001, the analysis indicates
that our net income for the next 12 months would increase 3% if rates increased
200 basis points, and decrease by 1% if rates decreased 200 basis points.
This analysis indicates the impact of the change in net income for a given
set of rate changes and assumptions. It assumes no growth in the balance sheet
and does not account for all the factors that impact this analysis including
changes by us to mitigate the impact of interest rate changes or secondary
impacts such as changes to our credit risk profile as interest rates change.
Furthermore loan prepayment rate estimates and spread relationships change
regularly. Interest rate changes create changes in actual loan prepayment rates
that will differ from the estimates incorporated in the analysis. In addition,
the proportion of adjustable-rate loans in the portfolio could decrease in
future periods if market interest rates remain at or decrease below current
levels. Changes that vary significantly from the assumptions may have
significant effects on our net income.
The results of this sensitivity analysis should not be relied upon as
indicative of actual future results.
Gap Analysis
In addition to the above analysis, we also perform a gap analysis as part
of the overall interest rate risk management process. Net interest income and
the net interest margin are largely dependent on our ability to closely match
interest-earning assets with interest-bearing liabilities. As interest rates
change, we must constantly balance maturing and repricing liabilities with
maturing and repricing assets. This process is called asset/liability
management and is commonly measured by the maturity/repricing gap. The
maturity/repricing gap is the dollar difference between maturing or repricing
assets and maturing or repricing liabilities at different intervals of time.
140
The following table sets forth rate sensitive interest-earning assets and
interest-bearing liabilities as of June 30, 2001, the interest rate sensitivity
gap (i.e. interest sensitive assets minus interest sensitive liabilities), the
cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio, and the cumulative interest rate sensitivity gap ratio. For the purposes
of the following table, an asset or liability is considered rate sensitive
within a specified period when it matures or can be repriced within that period
pursuant to its original contractual terms (dollar amounts in thousands):
June 30, 2001
-----------------------------------------------------------------------------
Over 90 Over 180 After One After
90 Days Days to Days to Year to Five
or Less 180 Days 365 Days Five Years Years Total
------------ -------------- ------------- ------------ ------------ ---------
Earning Assets (Rate Sensitivity)
Federal funds sold ............................... $ 0 $ 0
Interest-bearing deposits with
other banks ................................... $ 286 286
Investment securities .......................... 1,005 $ 4,805 $ 25,287 $ 4,047 35,144
Loans, excluding allowance for possible
losses ........................................ 87,723 2,117 2,548 65,160 10,288 167,836
-------- ---------- --------- --------- -------- --------
Total ....................................... 87,723 3,408 7,353 90,447 14,335 203,266
-------- ---------- --------- --------- -------- --------
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing transaction deposits .......... 50,684 64,006 114,690
Time deposits, $100,000 or more................. 20,328 6,108 2,601 1,600 30,637
Savings and other time deposits ................ 3,517 2,003 2,103 3,385 11,008
Other borrowings ............................... 750 750
Trust preferred securities ..................... 3,000 3,000
-------- --------
Total ....................................... 24,595 8,111 55,388 68,991 3,000 $160,085
-------- ---------- --------- --------- -------- --------
Period GAP ....................................... $ 63,128 $ (4,703) $ (48,035) $ 21,456 $ 11,335
======== ========== ========= ========= ========
Cumulative GAP ................................... $ 63,128 $ 58,425 $ 10,390 $ 31,846 $ 43,181
======== ========== ========= ========= ========
Interest Sensitivity GAP Ratio ................... 71.96% (138.00)% (653.27)% 23.72% 79.07%
======== ========== ========= ========= ========
Cumulative Interest Sensitivity .................. 71.96% 64.11% 10.55% 16.86% 21.24%
======== ========== ========= ========= ========
We classify our interest-bearing transaction accounts and savings accounts
into the over 180 days to 365 days time period as well as the after one year to
five years time period. This is done to adjust for the relative insensitivity
of these accounts to changes in interest rates. Although rates on these
accounts can contractually be reset at our discretion, historically these
accounts have not demonstrated strong correlation to changes in the prime rate.
Generally, a positive gap at one year indicates that net interest income and
the net interest margin will decrease if interest rates rise in the future. We
neither currently utilize financial derivatives to hedge our asset/liability
position nor do we plan to employ such strategies in the near future.
Capital Resources
Our total shareholders' equity was $13.9 million as of June 30, 2001
compared to $15.1 million at December 31, 2000. The decrease was primarily due
to the repurchase of common stock during the first six months of 2001. For the
six months ended June 30, 2001, we repurchased 263,000 shares of our common
stock at a total cost of $3.1 million. We paid dividends of $0.02 per share
during the six months ended June 30, 2001.
The ratios of average equity to average assets for the periods indicated
are set forth below.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------------ -----------------
6.70% 7.48%
141
Trust Preferred Securities
On September 7, 2000, we completed an offering of 10.60% capital
securities in an aggregate amount of $3.0 million through MCB Financial
Statutory Trust I, a wholly owned trust subsidiary formed for the purpose of
the offering. The Securities issued in the offering were sold by the trust in a
private transaction pursuant to an applicable exemption from registration under
the Securities Act. The entire proceeds of the issuance were invested by the
trust in $3,000,000 of 10.60% Junior Subordinated Deferrable Interest
Debentures due 2030 issued by us under a similar exemption from registration.
The debentures represent the sole assets of the trust. Interest on the
debentures is payable semi-annually and the principal is redeemable by us at a
premium beginning on or after September 7, 2010 through September 6, 2020 plus
any accrued and unpaid interest to the redemption date. On or after September
7, 2020, the principal is redeemable by us at 100% of the principal amount. The
trust preferred securities are subject to mandatory redemption to the extent of
any early redemption of the debentures and upon maturity of the debentures on
September 7, 2030. The debentures bear the same terms and interest rates as the
trust preferred securities.
We have guaranteed, on a subordinated basis, distributions and other
payments due on the trust preferred securities.
The debentures and related trust investment in the debentures have been
eliminated in consolidation and the trust preferred securities are reflected as
outstanding in the accompanying condensed consolidated financial statements.
Under applicable regulatory guidelines, the trust preferred securities
currently qualify as Tier 1 capital up to a maximum of 25% of Tier I capital.
As of June 30, 2001, the entire $3.0 million outstanding of trust preferred
securities qualified as Tier I capital.
Risk Based Capital
Regulatory authorities have issued guidelines to implement risk-based
capital requirements. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations.
Total capital is classified into two components: Tier 1 (primarily
shareholder's equity) and Tier 2 (supplementary capital including allowance for
possible credit losses, certain preferred stock, eligible subordinated debt,
and other qualifying instruments). The guidelines require that total capital be
8% of risk-based assets, of which at least 4% must be Tier 1 capital. As June
30, 2001, our total capital ratio was 10.56% and our Tier 1 capital ratio was
9.40%. In addition, under the guidelines established for adequately capitalized
institutions, we must also maintain a minimum leverage ratio (Tier 1 capital
divided by total assets) of 4%. As of June 30, 2001, our leverage ratio was
7.50%. It is our intention to maintain risk-based capital ratios at levels
characterized as "well-capitalized" for banking organizations: Tier 1
risk-based capital of 6 percent or above and total risk-based capital at 10
percent or above.
142
Three Years ended December 31, 2000
Overview
Earnings Summary. MCB Financial reported net income of $3,070,000, or
$1.52 per share basic and $1.45 per share diluted, for 2000 compared to net
income of $2,333,000, or $1.12 per share basic and $1.07 per share diluted, in
1999 and net income of 1,621,000, or $0.75 per share basic and $0.70 per share
diluted, in 1998.
Return on average assets for 2000 was 1.51% compared to 1.30% in 1999 and
1.03% in 1998. Return on average equity for 2000 was 19.78% compared to 17.12%
in 1999 and 12.61% in 1998.
Financial Condition
Summary. Assets increased by 6.7% during 2000 versus 15.7% and 21.2% in
1999 and 1998, respectively. The increase in assets during 2000 resulted
primarily from growth in existing operations.
Loans. Loans held for investment increased by $26.4 million, or 19.4% in
2000, as compared to an increase of $26.5 million, or 24.1%, during 1999.
Strong demand for commercial real estate resulted in the loan growth for 2000.
Strong demand for commercial real estate and construction loans resulted in the
loan growth for 1999.
In the normal practice of extending credit, Metro Commerce Bank accepts
real estate collateral on loans that have primary sources of repayment from
commercial operations. Loans secured by real estate totaled $131.1 million, or
79.4% of all loans, at December 31, 2000 versus $113.9 million, or 82.5% of all
loans, a year earlier. Due to Metro Commerce Bank's limited lending area, its
real estate collateral is primarily concentrated in the San Francisco Bay Area
and Southern California and is subject to economic uncertainties of these
economies. Management believes that its prudent underwriting standards for real
estate secured lending provide reasonable safeguards against these
uncertainties.
Metro Commerce Bank focuses its portfolio lending on commercial,
commercial real estate, and construction loans. These loans generally carry a
higher level of risk than conventional real estate loans, and accordingly,
yields on these loans are typically higher than those on other loans. The
performance of commercial and construction loans is generally dependent upon
future cash flows from business operations (including the sale of products,
merchandise and services) and the successful completion or operation of large
real estate projects. Risks attributable to such loans can be significantly
increased, often to a greater extent than on other loans, by regional economic
factors, real estate prices, the demand for commercial and retail office space,
and the demand for products and services of industries which are concentrated
within Metro Commerce Bank's loan portfolio. As of December 31, 2000, the two
largest industry concentrations within the loan portfolio were real estate and
related services at 30.2% and the business/personal service industry at 22.3%
of the portfolio. Because credit concentrations increase portfolio risk, Metro
Commerce Bank places significant emphasis on the purpose of each loan and the
related sources of repayment.
Nonperforming Assets. MCB Financial carefully monitors the quality of its
loan portfolio and the factors that affect it, including regional economic
conditions, employment stability, and real estate values. The accrual of
interest on loans is discontinued when the payment of principal or interest is
considered to be in doubt, or when a loan becomes contractually past due by 90
days or more with respect to principal or interest, except for loans that are
well secured and in the process of collection.
143
As of December 31, 2000 MCB Financial had nonperforming assets in the
amount of $40,000 which represented one loan 90 days or more past due and still
accruing. This loan is well secured and in the process of collection. The
following table sets forth the balance of nonperforming assets as of the dates
indicated (dollar amounts in thousands):
Nonperforming Assets
Nonperforming Assets at December 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ------------ ----------
Nonaccrual loans ..................... $ 79 $ 69 $ 563 $ 1,707
Loans 90 days or more past due and
still accruing ...................... 40 404 40 $ 40
------- ------- ------- -------- -------
$ 79 $ 109 $ 967 $ 1,747 $ 40
======= ======= ======= ======== =======
As a percent of total loans .......... 0.10% 0.12% 0.87% 1.27% 0.02%
As a percent of total assets ......... 0.06% 0.08% 0.57% 0.89% 0.02%
Allowance for Loan Losses. MCB Financial maintains an allowance for loan
losses (the "ALL") which is reduced by credit losses and increased by credit
recoveries and provisions to the ALL charged against operations. Provisions to
the ALL and the total of the ALL are based, among other factors, upon MCB
Financial's credit loss experience, the performance of loans within the
portfolio, evaluation of loan collateral value, and the prospects or worth of
respective borrowers and guarantors.
In determining the adequacy of its ALL, MCB Financial segments its loan
portfolio into pools of homogeneous loans that share similar risk factors. Each
pool is given a risk assessment factor that largely reflects the expected
future losses from each category. These risk assessment factors change as
economic conditions shift and actual loan losses are recorded. The ALL totaled
$1,939,000, or 1.18% of total loans, as of December 31, 2000 versus $1,492,000
or 1.08% of total loans, a year earlier. In both periods, the ALL was
determined to be an adequate allowance against foreseeable future losses. Note
3 to the consolidated financial statements provides a summary of the activity
in the ALL for the five years ended December 31, 2000.
144
The following table summarizes, for the periods indicated, loan balances
at the end of each period and average balances during the period, changes in
the allowance for loan losses arising from credit losses, recoveries of credits
losses previously incurred, additions to the allowance for loan losses charged
to operating expense, and certain ratios relating to the allowance for loan
losses:
Analysis of the Allowance for Loan Losses
Analysis of Allowance for Loan Losses
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- -------------- ------------- ------------
(Dollars in thousands)
Allowance for loan losses:
Beginning balance ........................... $ 752 $ 944 $ 1,007 $ 1,117 $ 1,492
--------- --------- ---------- --------- ---------
Provision for loan losses ................... 220 120 153 365 420
Charge-offs:
Commercial ............................... 47 105 53 62 9
Consumer ................................. 3 1
--------- --------- ---------- --------- ---------
Total charge-offs ..................... 47 108 53 62 10
--------- --------- ---------- --------- ---------
Recoveries:
Commercial ............................... 16 51 9 72 37
Consumer ................................. 3 1
--------- --------- ---------- --------- ---------
Total recoveries ...................... 19 51 10 72 37
Net charge-offs (recoveries) ................ 28 57 43 (10) (27)
--------- --------- ---------- --------- ---------
Ending balance .............................. $ 944 $ 1,007 $ 1,117 $ 1,492 $ 1,939
========= ========= ========== ========= =========
Loans outstanding at December 31 ............ $ 81,713 $ 88,186 $ 111,075 $ 137,966 $ 164,823
Average loans outstanding during
period ended December 31 ................... $ 72,393 $ 82,959 $ 100,130 $ 125,035 $ 149,645
Ratios:
Allowance to loans at end of period ......... 1.16% 1.14% 1.01% 1.08% 1.18%
Net charge-offs (recoveries) to average
loans during period ........................ 0.04% 0.07% 0.04% -0.01% -0.02%
Net charge-offs (recoveries) to
allowance at beginning of period ........... 3.72% 6.04% 4.27% -0.90% -1.81%
The following table sets forth the allocation of the allowance for loan
losses as of the dates indicated:
Allocation of the Allowance for Loan Losses (Dollars in thousands)
1996 1997 1998 1999 2000
-------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
for in Each for in Each for in Each for in Each for in Each
Loan Catergory to Loan Catergory to Loan Catergory to Loan Catergory to Loan Catergory to
Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans
--------- ------------ --------- ------------ --------- ------------ --------- ------------ --------- ------------
Commercial ..... $583 42.85% $ 570 41.79% $ 641 42.79% $ 904 47.87% $ 793 43.34%
Real Estate .... 202 50.27 245 52.39 245 53.27 260 48.98 978 53.47
Consumer ....... 48 6.88 43 5.82 38 3.94 30 3.15 65 3.19
Not Allocated .. 111 N/A 149 N/A 193 N/A 298 N/A 103 N/A
---- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........ $944 100.00% $1,007 100.00% $1,117 100.00% $1,492 100.00% $1,939 100.00%
==== ====== ====== ====== ====== ====== ====== ====== ====== ======
The allowance is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories. The
allocation of the allowance as shown above should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends. In
addition to the most recent analysis of individual
145
loans and pools of loans, management's methodology also places emphasis on
historical loss data, delinquency and nonaccrual trends by loan classification
category and expected loan maturity. This analysis, management believes,
identifies potential losses within the loan portfolio and therefore results in
allocation of a large portion of the allowance to specific loan categories.
Investments. Total investment securities decreased by $9,018,000, or 25.0%
in 2000, as compared to a decrease of $5,960,000, or 14.2% in 1999. At December
31, 2000, investment securities held to maturity remained at $2,000,000,
unchanged from December 31, 1999. Investment securities available for sale
decreased $9.0 million as MCB Financial used the proceeds of sales and
maturities to fund loan growth during the year. At December 31, 2000, $2.0
million, or 7.4% of MCB Financial's investment securities were invested in
callable government agency debentures compared to $2.0 million, or 5.5% at
December 31, 1999. These securities offer above market yields, but may be
called if interest rates fall below certain levels. If these securities are
called, MCB Financial may not be able to reinvest the proceeds to obtain the
same yield.
Deposits. Total deposits increased by $8.8 million, or 4.9%, during 2000
as compared to an increase of $24.9 million, or 16.1%, during 1999. The
increase in 2000 was primarily the result of growth in existing operations. MCB
Financial's cost of funds increased to 2.96% during 2000 from 2.73% during 1999
as MCB Financial's rates paid on deposits in 2000 increased from the rates paid
in 1999 in response to the increase in overall interest rates year over year.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated (dollar amounts in thousands):
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- --------- ----------- --------- ----------- ----------
Noninterest-bearing demand deposits ......... $ 31,371 $ 40,290 $ 47,329
Interest-bearing transaction deposits
(includes money market deposit
accounts) .................................. 88,255 3.93% 98,954 3.42% 108,708 3.70%
Savings deposits ............................ 1,845 1.92% 2,259 1.90% 2,146 1.95%
Time deposits, $100,000 and over............. 12,493 5.31% 13,477 4.85% 17,730 5.46%
Other time deposits ......................... 8,194 5.06% 8,816 4.41% 9,086 4.96%
--------- --------- ---------
Total interest-bearing ................... 110,787 4.14% 123,506 3.62% 137,670 3.98%
--------- --------- ---------
Total deposits .............................. $ 142,158 3.23% $ 163,796 2.73% $ 184,999 2.96%
========= ========= =========
Results Of Operations
Net Interest Income/Net Interest Margin. Net interest income increased by
$2,214,000, or 21.1%, during 2000 to reach $12.7 million. This compares to net
interest income of $10.5 million in 1999 and $8.6 million in 1998. The increase
in 2000 was primarily due to the growth in average loans, largely due to the
continuation of favorable economic conditions in MCB Financial's market areas.
146
The following table sets forth average assets, liabilities, and
shareholders' equity; the amount of interest income or interest expense; the
average yield or rate for each category of interest-bearing assets and
interest-bearing liabilities; and the net interest margin for the periods
indicated. Nonaccrual loans are included in the average balances and only
collected interest on nonaccrual loans is included in the interest column
(dollar amounts in thousands):
For the Years Ended December 31,
------------------------------------------------------------------------------------
1998 1999 2000
-------------------------- --------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- -------- -------- --------- --------- -------- ----------
Assets
Federal funds sold .......................... $ 9,005 $ 473 5.25% $ 10,775 $ 544 5.05% $ 10,810 $ 677 6.26%
Interest-bearing deposits with banks ........ 286 17 5.94% 286 15 5.24% 286 17 5.94%
Investment securities ....................... 36,431 2,156 5.93% 31,475 1,732 5.51% 29,440 1,713 5.82%
Loans ....................................... 100,130 10,559 10.55% 125,035 12,735 10.19% 149,645 15,838 10.58%
--------- ------- ----- -------- -------- ----- -------- ------- -----
Total Earning Assets ........................ 145,852 13,205 9.06% 167,571 15,026 8.97% 190,181 18,245 9.59%
Total Non-earning Assets .................... 10,894 12,127 13,566
--------- -------- --------
Total Assets ................................ $ 156,746 $179,698 $203,747
========= ======== ========
Liabilities & Shareholders' Equity
Demand deposits ............................. $ 31,371 $ 40,290 $ 47,329
Interest-bearing transaction accounts ....... 88,255 3,472 3.93% 98,954 3,388 3.42% 108,708 4,020 3.70%
Time deposits, $100,000 or more ............. 12,493 664 5.31% 13,477 653 4.85% 17,730 968 5.46%
Savings and other time ...................... 10,039 450 4.48% 11,075 432 3.90% 11,232 493 4.39%
--------- ------- ----- -------- -------- ----- -------- ------- -----
Total interest-bearing deposits ........... 110,787 4,586 4.14% 123,506 4,473 3.62% 137,670 5,481 3.98%
--------- ------- ----- -------- -------- ----- -------- ------- -----
Other borrowings ............................ 495 24 4.85% 793 37 4.67% 1,510 34 2.25%
--------- ------- ----- -------- -------- ----- -------- ------- -----
Total interest-bearing liabilities ........ 111,282 4,610 4.14% 124,299 4,510 3.63% 139,180 5,515 3.96%
Other liabilities ........................... 1,243 1,483 1,714
Shareholders' equity ........................ 12,850 13,626 15,524
--------- -------- --------
Total Liabilities and Shareholders' Equity $ 156,746 $179,698 $203,747
========= ======== ========
------- -------- -------
Net interest income ......................... $ 8,595 $ 10,516 $12,730
======= ======== =======
Net interest margin ......................... 5.89% 6.28% 6.69%
MCB Financial's net interest margin (net interest income divided by
average earning assets) increased to 6.69% during 2000. This compared to 6.28%
in 1999 and 5.89% in 1998. The increases were primarily attributable to growth
in average loans, which generally provide a greater return than other
interest-earning assets. The increase in average loans was largely due to the
continuation of favorable economic conditions in MCB Financial's market areas
and the acquisition of Valley Merchants Bank.
147
The following table presents the dollar amount of changes in interest
earned and interest paid for each major category of interest-earning asset and
interest-bearing liability and the amount of change attributable to average
balances (volume) fluctuations and average rate fluctuations. The variance
attributable to both balance and rate fluctuations is allocated to a combined
rate/volume variance (dollar amounts in thousands):
1999 Compared to 1998 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
-----------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------- ----------- ---------- ----------- --------- ------- ---------- ---------
Interest Income:
Federal funds sold ............................ $ 93 ($ 18) ($ 4) $ 71 $ 2 $ 131 $ 0 $ 133
Interest-bearing deposits with banks .......... 0 (2) 0 (2) 0 2 0 2
Investment securities ......................... (292) (153) 21 (424) (111) 98 (6) (19)
Loans ......................................... 2,626 (360) (90) 2,176 2,514 492 97 3,103
------ ---- --- ------ ------ ----- ----- ------
Total Interest Income ....................... 2,427 (533) (73) 1,821 2,405 723 91 3,219
------ ---- --- ------ ------ ----- ----- ------
Interest Expense:
Interest-bearing transaction accounts ......... 421 (450) (55) (84) 331 274 27 632
Time deposits, $100,000 or more ............... 52 (58) (5) (11) 207 82 26 315
Savings and other time ........................ 46 (58) (6) (18) 6 54 1 61
Other borrowings .............................. 15 (1) (1) 14 33 (19) (17) (3)
------ ---- --- ------ ------ ----- ----- ------
Total Interest Expense ...................... 534 (567) (67) (100) 577 391 37 1,005
------ ---- --- ------ ------ ----- ----- ------
Net Interest Income ........................... $1,893 $ 34 ($ 6) $1,921 $1,828 $ 332 $ 54 $2,214
====== ==== === ====== ====== ===== ===== ======
Provision for Loan Losses. MCB Financial provided $420,000 to the ALL
during 2000 compared to $365,000 in 1999 and $153,000 in 1998. The provisions
during these periods were recorded primarily due to growth in the loan
portfolio. Net credit recoveries were $27,000 in 2000, compared to net credit
recoveries of $10,000 in 1999 and net credit losses of $43,000 in 1998.
148
Noninterest Income. The following table summarizes noninterest income for
the years 1998, 1999 and 2000 and expresses these amounts as a percentage of
average assets (dollar amounts in thousands):
Years Ended December 31,
-----------------------------------------
1998 1999 2000
------------ ---------- -------------
Components of Noninterest Income
Gain on sale of Small Business Administration loans ......... $ 151 $ 87 $ 85
Service fees on deposit accounts ............................ 522 610 468
Loan servicing fees ......................................... 45 53 56
Gain on sale of investment securities ....................... 53 13 (2)
Other income ................................................ 238 225 262
-------- ------- --------
Total .................................................... $ 1,009 $ 988 $ 869
======== ======= ========
As a Percentage of Average Assets
Gain on sale of Small Business Administration loans ......... 0.10% 0.05% 0.04%
Service fees on deposit accounts ............................ 0.33% 0.34% 0.23%
Loan servicing fees ......................................... 0.03% 0.03% 0.03%
Gain on sale of investment securities ....................... 0.03% 0.01% 0.00%
Other income ................................................ 0.15% 0.12% 0.13%
-------- ------- --------
Total .................................................... $ 0.64% $ 0.55% $ 0.43%
======== ======== =========
Noninterest Expenses. The following table summarizes noninterest expenses
and the associated ratios to average assets for the years 1998, 1999 and 2000
(dollar amounts in thousands):
Years Ended December 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
Components of Noninterest Expense
Salaries and employee benefits .............................. $ 3,646 $ 4,069 $ 4,464
Occupancy expense ........................................... 864 983 1,097
Furniture and equipment expense ............................. 414 414 464
Professional services ....................................... 310 300 272
Supplies .................................................... 294 272 278
Promotional ................................................. 361 293 305
Data processing ............................................. 323 369 361
Regulatory assessments ...................................... 58 41 61
Other ....................................................... 433 428 561
-------- -------- --------
Total .................................................... $ 6,703 $ 7,169 $ 7,863
======== ======== ========
Average full-time equivalent staff .......................... 55 56 58
As a Percentage of Average Assets
Salaries and employee benefits .............................. 2.32% 2.26% 2.19%
Occupancy expense ........................................... 0.55% 0.55% 0.54%
Furniture and equipment expense ............................. 0.26% 0.23% 0.23%
Professional services ....................................... 0.20% 0.17% 0.13%
Supplies .................................................... 0.19% 0.15% 0.14%
Promotional ................................................. 0.23% 0.16% 0.15%
Data processing ............................................. 0.21% 0.21% 0.18%
Regulatory assessments ...................................... 0.04% 0.02% 0.03%
Other ....................................................... 0.28% 0.24% 0.27%
-------- -------- --------
Total .................................................... 4.28% 3.99% 3.86%
======== ======== ========
149
Income Taxes. MCB Financial's effective tax rate was 41.1% in 2000
compared to 41.2% in 1999 and 41.0% in 1998. Note 6 to the consolidated
financial statements provides a reconciliation of the statutory tax rates to
the effective tax rate for each period.
Liquidity and Asset/Liability Management. Liquidity is MCB Financial's
ability to absorb fluctuations in deposits while simultaneously providing for
the credit needs of its borrowers. The objective in liquidity management is to
balance the sources and uses of funds. Primary sources of liquidity include
payments of principal and interest on loans and investments, proceeds from the
sale or maturity of loans and investments, growth in deposits, and increases in
other borrowings. MCB Financial holds overnight federal funds as a cushion for
temporary liquidity needs. During 2000, federal funds sold averaged $10.8
million, or 5.3% of total assets. In addition to its federal funds, MCB
Financial maintains various lines of credit with correspondent banks, the
Federal Reserve Bank, and the Federal Home Loan Bank.
As of December 31, 2000, MCB Financial had cash, time deposits with banks,
federal funds sold, and unpledged investment securities of approximately $35.7
million, or 17.1% of total assets. This represented the total amount of liquid
assets available for sale and/or available to secure MCB Financial's lines of
credit.
Several methods are used to measure liquidity. One method is to measure
the balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio to absorb temporary fluctuations in
deposit levels. As of December 31, 2000, the loan-to-deposit ratio was 87.4%
compared to 76.7% a year earlier.
Another frequently used method is the relationship between short-term
liquid assets (federal funds sold and investments maturing within one year) and
short-term liabilities (total deposits and other borrowings) as measured by the
liquidity ratio. As of December 31, 2000, this ratio was 1.3% compared to 15.2%
a year earlier.
As of December 31, 2000 MCB Financial had no material commitments that
were expected to adversely impact liquidity.
Net interest income and the net interest margin are largely dependent on
MCB Financial's ability to closely match interest-earning assets with
interest-bearing liabilities. As interest rates change, MCB Financial must
constantly balance maturing and repricing liabilities with maturing and
repricing assets. This process is called asset/liability management and is
commonly measured by the maturity/repricing gap. The maturity/repricing gap is
the dollar difference between maturing or repricing assets and maturing or
repricing liabilities at different intervals of time.
150
The following table sets forth rate sensitive interest-earning assets and
interest-bearing liabilities as of December 31, 2000, the interest rate
sensitivity gap (i.e. interest sensitive assets minus interest sensitive
liabilities), the cumulative interest rate sensitivity gap, the interest rate
sensitivity gap ratio (interest sensitive assets divided by interest sensitive
liabilities) and the cumulative interest rate sensitivity gap ratio. For the
purposes of the following table, an asset or liability is considered rate
sensitive within a specified period when it matures or can be repriced within
that period pursuant to its original contractual terms (dollar amounts in
thousands):
December 31, 2000
--------------------------------------------------------------------------------
Over 90 Over 180 After One After
90 Days Days to Days to Year to Five
or Less 180 Days 365 Days Five Years Years Total
------------- ------------- -------------- ------------ ------------- ----------
Earning Assets (Rate Sensitive):
Federal funds sold ............................ $ 250 $ 250
Interest-bearing deposits with other
banks ........................................ 90 $ 196 286
Investment securities, at amortized
cost ......................................... 2,000 1,010 $ 19,960 $ 4,050 27,020
Loans, gross of allowance for possible
losses and deferred loan fees ................ 84,781 $ 1,324 1,694 59,767 17,477 165,043
--------- --------- ---------- --------- --------- --------
Total ...................................... 87,121 1,324 2,900 79,727 21,527 192,599
--------- --------- ---------- --------- --------- --------
Interest-Bearing Liabilities
(Rate Sensitive):
Interest-bearing transaction deposits ......... 45,326 59,958 105,284
Time deposits, $100,000 or more ............... 14,456 4,519 5,678 500 25,153
Savings and other time deposits ............... 2,924 2,600 1,529 3,712 10,765
Other borrowings .............................. 750 750
Trust preferred securities .................... 3,000 3,000
--------- --------- ---------- --------- --------- --------
Total ...................................... 18,130 7,119 52,533 64,170 3,000 144,952
--------- --------- ---------- --------- --------- --------
Period GAP .................................... $ 68,991 $ (5,795) $ (49,633) $ 15,557 $ 18,527
========= ========= ========== ========= =========
Cumulative GAP ................................ $ 68,991 $ 63,196 $ 13,563 $ 29,120 $ 47,647
========= ========= ========== ========= =========
Interest Sensitivity GAP Ratio ................ 79.19% (437.69%) (1711.48%) 19.51% 86.06%
========= ========= ========== ========= =========
Cumulative Interest Sensitivity ............... 79.19% 71.45% 14.85% 17.02% 24.74%
========= ========= ========== ========= =========
MCB Financial classifies its interest-bearing transaction accounts and
savings accounts into the over 180 days to 365 days time period as well as the
after one year to five years time period. This is done to adjust for the
relative insensitivity of these accounts to changes in interest rates. Although
rates on these accounts can be contractually reset at MCB Financial's
discretion, historically these accounts have not demonstrated strong
correlations to changes in the prime rate. Generally, a positive gap at one
year indicates that net interest income and the net interest margin will
increase if interest rates rise in the future. A negative gap at one year
indicates that net interest income and the net interest margin will decrease if
interest rates rise in the future. Currently, MCB Financial neither utilizes
financial derivatives to hedge its asset/liability position nor has any plans
to employ such strategies in the near future.
151
The maturities and weighted average yields of investment securities are
presented in the following table:
Maturities of Investment Securities at December 31, 2000 (At amortized
cost)
Maturities of Investment Securities at December 31, 2000 (At amortized cost)
-----------------------------------------------------------------------------------
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years Total
------------------- --------------------- ------------------- ---------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---------- ---------- ---------- -------- ---------- ---------- ----------
(Dollars in thousands)
U.S. Treasury and other U.S. government
agencies ............................. $2,010 5.32% $19,031 5.76% $4,050 5.61% $25,091 5.70%
Corporate securities .................. 1,929 6.32% 1,929 6.32%
------ ---- ------- ---- ------ ---- ------- ----
Total ............................... $2,010 5.32% $20,960 5.81% $4,050 5.61% $27,020 5.75%
====== ==== ======= ==== ====== ==== ======= ====
Time Certificates, $100,000 and Over
The following table sets forth the time remaining to maturity of MCB
Financial's time deposits in amounts of $100,000 or more (dollar amounts in
thousands):
December 31, 2000
------------------
Time Remaining To Maturity
$14,456
After three months to six months ......... 4,519
After six months to one year ............. 5,678
After twelve months ...................... 500
-------
Total ........................................... $25,153
=======
Maturities of Loans at December 31, 2000
Adjustable
Fixed Rate Rate Total
------------ ----------- ----------
Time Remaining To Maturity
One year or less ..................... $ 8,397 $ 36,118 $ 44,515
After one year to five years ......... 58,294 19,972 78,266
After five years ..................... 17,478 24,784 42,262
-------- -------- --------
Total ............................. $ 84,169 $ 80,874 $165,043
======== ======== ========
As of December 31, 2000, the percentage of loans held for investment with
fixed and floating interest rates was 51% and 49%, respectively.
The following table provides typical terms of maturity ranges offered by
MCB Financial for each loan category indicated:
Loan Category Typical Term in Years
------------- ---------------------
Commercial Loans ............................ 1 to 3
Real Estate Loans:
Commercial ............................... 5
Construction ............................. 1
Land ..................................... 1
Home Equity ................................. 5
Loans to Consumers and Individuals .......... 1 to 5
Capital Resources. Total shareholders' equity was $15.1 million as of
December 31, 2000 compared to $14.4 million a year earlier.
152
Trust Preferred Securities
On September 7, 2000, MCB Financial completed an offering of 10.60%
capital securities in an aggregate amount of $3.0 million through MCB Financial
Statutory Trust I. The securities issued in the offering were sold by the Trust
in a private transaction pursuant to an applicable exemption from registration
under the Securities Act. The entire proceeds of the issuance were invested by
the Trust in $3,000,000 of 10.60% Junior Subordinated Deferrable Interest
Debentures due 2030 issued by MCB Financial under a similar exemption from
registration. The debentures represent the sole assets of the Trust. Interest
on the debentures is payable semi-annually and the principal is redeemable by
MCB Financial at a premium beginning on or after September 7, 2010 through
September 6, 2020 plus any accrued and unpaid interest to the redemption date.
On or after September 7, 2020, the principal is redeemable by MCB Financial at
100% of the principal amount. The trust preferred securities are subject to
mandatory redemption to the extent of any early redemption of the debentures
and upon maturity of the debentures on September 7, 2030. The debentures bear
the same terms and interest rates as the trust preferred securities.
MCB Financial has guaranteed, on a subordinated basis, distributions and
other payments due on the trust preferred securities.
The debentures and related Trust investment in the debentures have been
eliminated in consolidation and the trust preferred securities are reflected as
outstanding in the accompanying consolidated financial statements.
Under applicable regulatory guidelines, the trust preferred securities
qualify as Tier 1 capital up to a maximum of 25% of Tier I capital. Any
additional portion of trust preferred securities would currently qualify as
Tier 2 capital. As of December 31, 2000, the entire $3.0 million outstanding of
trust preferred securities qualified as Tier I capital.
Stock Repurchase Plan
In October, 2000 the board of directors authorized MCB Financial to
repurchase an additional $3 million of MCB Financial's common stock in addition
to the $2 million authorized pursuant to the repurchase program announced in
February, 1999. The 1999 repurchase program was completed in November, 2000. As
of December 31, 2000, 160,815 shares had been repurchased under the 2000
repurchase program for a total purchase price of $1,768,965.
Shareholder Rights Plan
In January, 1999 MCB Financial adopted a shareholder rights plan designed
to maximize the long-term value of MCB Financial and to protect MCB Financial's
shareholders from improper takeover tactics and takeover bids that are not fair
to all shareholders.
In accordance with the plan, preferred share purchase rights were
distributed as a dividend at the rate of one right for each common share held
of record as of the close of business on February 8, 1999. The rights, which
are not immediately exercisable, entitle the holders to purchase one
one-hundredth of a share of MCB Financial's Series A Junior Participating
Preferred Stock at a price of $37.00 upon the occurrence of certain triggering
events. In the event of an acquisition not approved by the board of directors,
each right enables its holder (other than the prospective acquirer) to purchase
the Preferred Stock at 50% of the market value. Further, in the event MCB
Financial is acquired in an unwanted merger or business combination, each right
enables the holder to purchase shares of the acquiring entity at a similar
discount. Under certain circumstances, the rights may be exchanged for common
shares of MCB Financial. The board may, in its sole discretion, redeem the
rights at any time prior to any of the triggering events.
The rights can be exercised and separate rights certificates distributed
only if any of the following events occur: acquisition by a person of 10% or
more of MCB Financial's common shares; a tender offer for 10% or more of MCB
Financial's common shares; or ownership of 10% or more of MCB Financial's
common shares by a shareholder whose actions are likely to have a material
adverse impact on MCB Financial or shareholder interests. The rights will
initially trade automatically with the common shares. The rights are not deemed
by the board of directors to be presently exercisable.
153
The plan was amended to provide that entry into the merger agreement would
not trigger exercisability of the rights.
Cash Dividends
During the third quarter of 1999 MCB Financial began the payment of a
regular quarterly cash dividend of $0.01 per share. Total dividends paid in
2000 totaled $81,000.
Risk Based Capital
Regulatory authorities have established minimum capital adequacy
guidelines requiring that qualifying capital be 8% of risk-based assets, of
which at least 4% must be tier 1 capital (primarily shareholders' equity). As
of December 31, 2000 MCB Financial's qualifying capital ratio was 11.5%, of
which the tier 1 capital ratio was 10.4%. In addition, MCB Financial, under the
guidelines established for adequately capitalized institutions, must also
maintain a minimum leverage ratio (tier 1 capital divided by total assets) of
4%. As of December 31, 2000, MCB Financial's leverage ratio was 8.3%.
DESCRIPTION OF MCB FINANCIAL STOCK
The authorized capital stock of MCB Financial consists of 20,000,000
shares of common stock, no par value, and 20,000,000 shares of preferred stock.
At July 31, 2001, 1,590,505 shares of MCB Financial common stock were
outstanding. As of such date, an additional 180,516 shares of authorized common
stock were reserved for issuance to holders of outstanding stock options under
MCB Financial's two stock option plans, the MCB Financial Corporation 1999
Stock Option Plan and the Marin Community Bank, N.A. 1989 Stock Option Plan.
There are currently no shares of preferred stock outstanding.
The following summary of the terms of MCB Financial common and preferred
stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the MCB Financial Restated Articles of
Incorporation which is incorporated by reference into this joint proxy
statement/prospectus (See "Where You Can Find More Information" on page 165).
Subject to preferential rights as may be determined by the board of
directors in the future in connection with the issuance of shares of preferred
stock, holders of shares of MCB Financial common stock are entitled to (i) one
vote per share on all matters to be voted on, except that holders are entitled
to cumulate their vote in the election of directors upon compliance with
certain conditions (See "Certain Differences in Rights of Shareholders" on page
157) and (ii) receive such dividends, if any, as may be declared from time to
time by the board of directors in its discretion from funds legally available
therefore. Upon liquidation or dissolution of MCB Financial the holders of MCB
Financial common stock are entitled to receive pro rata all assets remaining
after the satisfaction in full of the prior rights of creditors and the
aggregate liquidation preference of any preferred stock then outstanding. MCB
Financial common stock has no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to said shares. All of the outstanding shares of MCB Financial common
stock are fully paid and nonassessable.
The board of directors of MCB Financial has the authority to divide the
preferred stock into one or more series and to determine and alter the rights,
preferences, privileges and restrictions of any wholly unissued series of
preferred stock and to fix the number of shares of any such series and the
designation thereof and to increase or decrease the number of shares of any
series subsequent to the issuance of that series. If and when any preferred
stock is issued, the holders of preferred stock may have a preference over
holders of MCB Financial common stock upon the payment of dividends, upon
liquidation of MCB Financial, in respect of voting rights, in the redemption of
capital stock of MCB Financial or in such other preferential rights as may be
determined by the board of directors of MCB Financial in the future in
connection with the issuance of shares of preferred stock.
154
MARKET PRICE AND DIVIDEND INFORMATION FOR MCB FINANCIAL
Market Price Information
During most of 1999, MCB Financial's common stock traded on the OTC
Bulletin Board under the symbol MCBF. On December 28, 1999, MCB Financial's
common stock began trading on the American Stock Exchange under the symbol MCB.
MCB Financial's stock transfer agent is U.S. Stock Transfer Corporation. The
following are the high and low sales prices (for 2000 and 2001) and high and
low bid prices (for 1999) as reported by the markets on which the stock was
traded for those respective periods. Over-the-counter prices reflect
inter-dealer prices which may not include retail markups, markdowns, or
commissions. Prices are adjusted to reflect stock dividends and stock splits.
Sale Price of
MCB Financial's
Common Stock Cash Approximate Approximate
------------------------- Dividend Trading Number of
Calendar Quarter Ended High Low Declared Volume Transactions
---------------------------- ----------- ----------- ---------- ------------- -------------
March 31, 1999 ............. $ 9.05 $ 7.14 $ 0.00 111,800 18
June 30, 1999 .............. 7.98 6.55 $ 0.00 79,900 26
September 30, 1999 ......... 9.25 6.67 $ 0.01 99,200 31
December 31, 1999 .......... 11.75 8.50 $ 0.01 134,400 38
March 31, 2000 ............. 11.50 7.38 $ 0.01 138,900 239
June 30, 2000 .............. 8.75 7.56 $ 0.01 142,600 184
September 30, 2000 ......... 8.69 7.75 $ 0.01 118,400 136
December 31, 2000 .......... 10.50 8.06 $ 0.01 65,300 99
March 31, 2001 ............. 13.70 10.25 $ 0.01 84,000 178
June 30, 2001 .............. 13.25 11.00 $ 0.01 41,900 75
September 30, 2001 ......... 15.50 12.28 $ 0.01 110,100 146
On October 22, 2001, 100 shares were traded at $14.00 per share.
Holders
There were approximately 340 MCB Financial shareholders of record as of
July 31, 2001.
Dividends
As a bank holding company which currently has no significant assets other
than its equity interest in Metro Commerce Bank, MCB Financial's ability to pay
dividends primarily depends upon the dividends it receives from Metro Commerce
Bank. As with MCB Financial, Metro Commerce Bank's dividend practices will
depend upon Metro Commerce Bank's earnings, financial position, current and
anticipated cash requirements and other factors deemed relevant by Metro
Commerce Bank's board of directors at that time. In addition, during any period
in which MCB Financial has deferred payment of interest otherwise due and
payable on its Subordinated Deferrable Interest Debentures, MCB Financial may
not make any dividends or distributions with respect to its capital stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MCB Financial--Liquidity and Asset/Liability Management" on page
150.
Metro Commerce Bank's ability to pay dividends to MCB Financial is also
subject to certain legal limitations. Under California law, Metro Commerce Bank
may declare a cash dividend out of Metro Commerce Bank's net profits up to the
lesser of Metro Commerce Bank's retained earnings or Metro Commerce Bank's net
income for the last three (3) fiscal years (less any distributions made to
shareholders during such period), or, with the prior written approval of the
California Commissioner, in an amount not exceeding the greatest of (i) the
retained earnings of Metro Commerce Bank, (ii) the net income of Metro Commerce
Bank for its last fiscal year, or (iii) the net income of Metro Commerce Bank
for its current fiscal year. In addition, under federal law, Metro Commerce
Bank is prohibited from paying any dividends if after making such payment Metro
Commerce Bank would fail to meet any of its minimum capital requirements. The
federal regulators also have the authority to prohibit Metro Commerce Bank from
engaging in any business practices which are considered to be unsafe or
unsound, and in some circumstances the regulators might prohibit the payment of
dividends on that basis even though such payments would otherwise be
permissible.
155
MCB Financial's ability to pay dividends is also limited by state
corporation law. The California Corporations Code prohibits MCB Financial from
paying dividends on the common stock unless: (i) its retained earnings,
immediately prior to the dividend payment, equals or exceeds the amount of the
dividend or (ii) immediately after giving effect to the dividend the sum of MCB
Financial's assets (exclusive of goodwill and deferred charges) would be at
least equal to 125% of its liabilities (not including deferred taxes, deferred
income and other deferred liabilities) and the current assets of MCB Financial
would be at least equal to its current liabilities, or, if the average of its
earnings before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of its interest expense for
the two preceding fiscal years, at least equal to 125% of the current
liabilities.
For further information on legal restrictions applicable to the ability of
MCB Financial and Metro Commerce Bank to pay dividends, see "Regulation and
Supervision--Dividends" on page 75.
During the third quarter of 1999 MCB Financial began the payment of a
regular quarterly cash dividend of $0.01 per share. Total dividends paid in
2000 totaled $81,000. The practice of MCB's board of directors is to review
periodically the advisability of paying cash dividends based upon MCB
Financial's earnings, financial position, current and anticipated cash
requirements and other factors deemed relevant by the board of directors at
that time. In making any such assessment, the board of directors of MCB
Financial would have to consider among other things the capital requirements of
Metro Commerce Bank and other factors concerning Metro Commerce Bank, including
the dividend guidelines and maintenance of an adequate allowance for loan
losses.
156
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
The following is a general discussion of the material differences between
the rights of Business Bancorp shareholders under Business Bancorp's articles
and bylaws and the rights of MCB Financial shareholders under the MCB Financial
articles and bylaws and applicable California law.
Classified Board
Article Seven of the Articles of Incorporation and Article IV, Section 2
of the Bylaws of Business Bancorp provide that directors are elected annually
at each shareholders meeting. However, at such time as Business Bancorp becomes
a listed corporation within the meaning of Section 301.5 of the California
Corporations Code the directors (other than any directors who may be elected by
the holders of any class or series of preferred stock which Business Bancorp
may issue in the future) will be divided into two classes, effective with the
first annual meeting of shareholders occurring after Business Bancorp becomes a
listed corporation. The term of office of the first class will expire at the
first annual meeting of shareholders after the first election of two classes of
directors, and the term of office of the second class will expire at the annual
meeting of shareholders one year thereafter. At each annual meeting of
shareholders, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the second succeeding
annual meeting of shareholders after their election, with each director to hold
office until his or her successor shall have been duly elected and qualified.
Each director will hold office until his or her successor has been duly elected
and qualified. As discussed below under "Additional Proposals Submitted to
Business Bancorp Special Meeting--Proposal 5--Amendment to Articles of
Incorporation of Business Bancorp to Increase Board Classes from Two to Three
and Amendment to Bylaws to Delete Classification Provision" on page 162, the
shareholders of Business Bancorp are being asked to approve an amendment to the
Articles of Incorporation of Business Bancorp to increase the number of classes
from two to three. If this proposal is adopted, then upon Business Bancorp
becoming a listed corporation, which is expected to occur on the effective date
of the merger, the three classes will be composed of two classes with four
directors each and one class of six directors, with such classification to take
effect upon the election of directors at the first annual meeting of
shareholders following the merger.
The directors of MCB Financial currently are elected annually at each
shareholders meeting.
Cumulative Voting
Prior to the merger, both Business Bancorp and MCB Financial's bylaws
provide for cumulative voting in the election of directors. Cumulative voting
entitles a shareholder to give one nominee as many votes as is equal to the
number of directors to be elected multiplied by the number of shares owned by
the shareholder, or to distribute votes on the same principle between two or
more nominees as deemed appropriate. As discussed below under "Additional
Proposals Submitted to Business Bancorp Special Meeting--Proposal 3--Amendment
to Bylaws of Business Bancorp to Eliminate Cumulative Voting" on page 160,
Business Bancorp shareholders are being asked to approve an amendment to
Business Bancorp's bylaws to eliminate cumulative voting. If this amendment is
approved, then after the merger each share will be entitled to one vote in the
election of directors, and shareholders may no longer cumulate votes.
Dissenters' Rights in Mergers and Other Reorganizations
Under the California Corporations Code, a dissenting shareholder of a
corporation participating in certain business combinations may, under varying
circumstances, receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive under
the terms of the transaction. The California Corporations Code generally does
not require dissenters' rights of appraisal with respect to shares which,
immediately prior to the merger, are listed on any national securities exchange
certified by the Commissioner of Corporations or on the Nasdaq National Market
unless at least the holders of five percent or more of the company's common
stock make a written demand for the purchase of dissenting shares. MCB
Financial common stock is listed on the American Stock Exchange, a national
securities exchange which has been certified by the Commissioner of
Corporations.
157
Business Bancorp stock is listed the Nasdaq SmallCap Market, which is not a
national securities exchange and is not the same entity as the Nasdaq National
Market. Accordingly, prior to the merger MCB Financial shareholders generally
have somewhat more limited dissenters' rights in connection with business
combinations than do Business Bancorp shareholders. Business Bancorp has
applied to list its common stock on the Nasdaq National Market effective as of
the closing date of the merger. If the application is approved, after the
merger shareholders of the combined company will have, as to any future
transactions, the same dissenters' rights as MCB Financial shareholders had
before the merger.
Notice of Nominations
Business Bancorp's bylaws provide that nominations for election of members
of the board of directors may be made by any shareholder of any outstanding
class of voting stock of Business Bancorp entitled to vote for the election of
directors. Notice of a shareholder's intention to make nominations must be
given to Business Bancorp in writing and received by the president of Business
Bancorp no more than 60 days prior to any meeting of shareholders called for
the election of directors, and no more than 10 days after the date the notice
of the meeting is sent to shareholders by Business Bancorp. If only 10 days'
notice of the meeting is given, then notice of intention to nominate must be
received by the president of Business Bancorp not later than the time stated in
the notice of the meeting for starting the meeting. The notification must
contain certain information about the proposed nominee and his or her
background, and identify the shareholder making the nomination and his or her
background. Nominations not made in accordance with these requirements may be
disregarded by the then chairman of the meeting, and the inspectors of election
are required to disregard all votes cast for that shareholder's nominee.
MCB Financial currently has no such provision in its bylaws.
158
ADDITIONAL PROPOSALS SUBMITTED TO BUSINESS BANCORP SPECIAL MEETING
Proposal 2:
Amendment to Articles of Incorporation of Business Bancorp
to Increase Number of Authorized Shares of Common and Preferred Stock
The board of directors of Business Bancorp recommends that the
shareholders of Business Bancorp approve an increase in the number of
authorized shares of common stock and preferred stock of the corporation,
contingent upon completion of the merger. Currently, the Articles of
Incorporation of Business Bancorp provide that the corporation is authorized to
issue two classes of shares designated as "common stock" and "preferred stock",
respectively. The number of shares of common stock authorized to be issued is
10,000,000, and the number of shares of preferred stock authorized to be issued
is 2,000,000. The board of directors recommends that the authorized number of
shares be increased to 20,000,000 shares of common stock and 20,000,000 shares
of preferred stock.
As of July 31, 2001, there were 2,026,869 shares of Business Bancorp
common stock outstanding and no shares of preferred stock outstanding. In
addition, there were 547,560 shares of common stock reserved for issuance under
its existing stock option plan. If the merger is approved and thereafter
completed, Business Bancorp contemplates issuing up to 1,873,370 shares of
common stock to MCB Financial shareholders. These potential issuances of common
stock will reduce the number of remaining shares available for other corporate
purposes and thereby limit Business Bancorp's flexibility in future capital
raising and initiation of additional employee benefit plans.
Also, upon completion of the merger, options for approximately 178,425
shares of MCB Financial common stock will be converted into options for 209,881
shares of Business Bancorp common stock. In addition, Business Bancorp expects
to adopt a new stock option plan to be effective at the effective time of the
merger.
The board of directors believes that the increase would provide greater
flexibility to raise capital and satisfy other corporate needs, to provide
stock-related employee benefits and to effect stock dividends. Although
Business Bancorp is not currently considering any specific acquisition
opportunities other than the merger with MCB Financial, the additional shares
would be available for Business Bancorp to issue in future acquisitions.
If the proposal is approved, generally no further shareholder approval
would be necessary for the issuance of all or any portion of the additional
shares of common stock and preferred stock, unless required by law or any rule
or regulations to which Business Bancorp is subject. The board of directors is
authorized to divide preferred stock into any number of series, determine the
designation of any series fix the number of shares in any series and may
increase or decrease the number of shares of any series subsequent to issuance.
In case of any decrease in shares, the shares constituting the decrease resume
the status of unissued shares and may be thereafter issued upon approval of the
board. Any issuance of common stock or preferred stock could have a dilutive
effect on those shareholders who paid a higher consideration per share for
their stock, depending upon the consideration per share received by Business
Bancorp.
Also, future issuances will increase the number of outstanding shares for
purposes of cash and non-cash dividends and distributions and for all other
purposes. The availability for issuance of the additional shares and any
issuance thereof, or both, may be viewed as having the effect of discouraging
an unsolicited attempt by another person or entity to acquire control of
Business Bancorp. The provisions of Business Bancorp's Articles of
Incorporation which allow the board of directors to determine the terms and
provisions of each issuance of preferred stock may have an anti-takeover
effect. As described on page 46 under "The Merger--Employee benefit plans" and
"--Shareholder rights plan," Business Bancorp plans to adopt an employee stock
ownership plan and a shareholder rights plan effective at the effective time of
the merger. These plans may also have similar anti-takeover effect.
The proposed amendment to the Articles of Incorporation are set forth in
Annex D to this joint proxy statement/prospectus. If the proposal is approved,
Business Bancorp will file a Certificate of Amendment to its Articles of
Incorporation with the California Secretary of State, as soon as practicable
after the merger is completed.
159
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Business Bancorp 's common
stock entitled to vote.
The board of directors recommends that shareholders of Business Bancorp
vote FOR this Proposal.
Proposal 3:
Amendment to Bylaws of Business Bancorp
to Eliminate Cumulative Voting
The California Corporations Code permits California corporations with
securities listed on certain exchanges or on the Nasdaq National Market to
provide for majority rule voting in electing directors in lieu of cumulative
voting, with the prior approval of the corporation's shareholders. Business
Bancorp's common stock is currently traded on the Nasdaq SmallCap Market.
Business Bancorp has applied for listing on the Nasdaq National Market, which
listing, if approved, would qualify Business Bancorp to provide for majority
rule voting assuming the shareholders of MCB Financial and Business Bancorp
approve the merger.
The board of directors of Business Bancorp believes that cumulative voting
is not an appropriate method of corporate governance for Business Bancorp.
Accordingly, the board of directors has adopted and is submitting for
shareholder approval, an amendment to Business Bancorp's Bylaws which
eliminates cumulative voting and provides for majority voting in the election
of directors, commencing with the first annual meeting of shareholders of
Business Bancorp to occur after the merger is completed. The change is
contingent upon the completion of the merger.
Cumulative voting is described above under "Certain Differences in Rights
of Shareholders" on page 157. As a consequence of cumulative voting,
shareholders representing a relatively small number of the voting shares have
the power to nominate and elect one or more directors. For example, Business
Bancorp expects to have 14 directors after the merger divided into one class
consisting of six directors and two classes each consisting of four directors.
With a class of four directors, assuming there are 3,907,439 shares outstanding
and entitled to vote a shareholder or group of shareholders holding one vote
more than 20% of the voting shares could nominate and elect one director by
cumulating and casting their 781,488 votes per share for one candidate. This is
so even if shareholders holding just under 80% of the voting shares are opposed
to the election of that candidate and cast their vote to elect other director
candidates.
With majority rule voting, a nominee could not be elected without a
majority of shareholder votes. Shareholders would be entitled to only one vote
per share in the election of directors. Consequently, only directors who
receive support from a majority of the shares voting would be elected.
The board of directors of Business Bancorp believes that every director of
a publicly-held corporation should represent the interests of all shareholders.
It believes that directors elected by a minority shareholder or group of
shareholders through cumulative voting are likely to be partisans of the
particular interest group. Directors who view themselves as representing or
answerable to a particular minority constituency could introduce an element of
discord on the board of directors, impair the ability of the directors to work
effectively and discourage qualified independent individuals from serving as
directors.
Approval of the proposed amendment may render more difficult any attempt by
a holder or group of holders of a significant number of voting shares, but less
than a majority, to change or influence the management or policies of Business
Bancorp. In addition, under certain circumstances, the proposed amendment, along
with other measures that may be viewed as having anti-takeover effects, may
discourage an unfriendly acquisition or business combination involving Business
Bancorp that a shareholder might consider to be in his or her best interest,
including an unfriendly acquisition or business combination that might result in
a premium over market price. The proposal may discourage the accumulation of
large minority shareholdings (as a prelude to an unfriendly acquisition or
business combination proposal or otherwise) by persons who would not effect that
acquisition without being assured of representation on the board of directors.
Such proxy contests and acquisitions of substantial blocks of shares tend to
increase, at least temporarily, market prices for a company's stock.
Consequently, if this proposal is approved, Business Bancorp's shareholders
could be deprived of temporary opportunities to sell their shares at higher
market prices.
160
In addition, Business Bancorp has other corporate attributes that may also
have the effect of helping Business Bancorp to resist an unfriendly
acquisition. These include existing provisions in Business Bancorp's Articles
of Incorporation and Bylaws eliminating, subject to specified exceptions, the
liability of directors for monetary damages and the proposed provision
eliminating cumulative voting; provisions in the Articles and Bylaws providing
for indemnification of directors and officers; and provisions in the Bylaws
requiring advance notice of nomination of a candidate for election to the board
of directors of Business Bancorp when the nomination is made by a person other
than the board. As described on page 46 under "The Merger--Employee benefit
plans" and "--Shareholder rights plan," Business Bancorp plans to adopt an
employee stock ownership plan and a shareholder rights plan effective with the
effective time of the merger. These plans may also have similar anti-takeover
effect.
This proposal is not in response to any attempt to acquire control of
Business Bancorp. However, the board believes that adopting this proposal is
prudent, advantageous and in the best interests of shareholders because it will
give the board more time to fulfill its responsibilities to shareholders, and
it will provide greater assurance of continuity and stability in the
composition and policies of the board of directors. The board also believes the
advantages outweigh any disadvantage relating to discouraging potential
acquirors from attempting to obtain control of Business Bancorp.
The proposed amendment to the Bylaws is set forth in Annex E to this joint
proxy statement/prospectus.
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Business Bancorp's common
stock entitled to vote.
The board of directors recommends that shareholders of Business Bancorp
vote FOR this Proposal.
Proposal 4:
Amendment to Bylaws of Business Bancorp
to Increase Number of Authorized Directors
Article IV, Section 1 of the Bylaws of Business Bancorp currently provide
that the authorized number of directors shall be not less than seven nor more
than thirteen unless changed by amendment of the Articles or by a Bylaw duly
adopted by approval of the outstanding shares. The exact number of directors is
fixed at nine until changed through a Bylaw amendment adopted either by the
board of directors or the shareholders. The board of directors recommends that
the shareholders of Business Bancorp amend Article IV, Section 1 effective as
of the closing of the merger, to provide that the authorized number of
directors shall be not less than nine nor more than seventeen, with the exact
number of directors to be fixed by the board of directors of Business Bancorp
at fourteen, until further changed by the board or the shareholders. The
purpose of the proposed amendment is to increase the size of the board so that
those individuals currently serving as directors of MCB Financial may be
appointed to the board of directors of Business Bancorp after the merger, as
required by the merger agreement.
The proposed amendment to the Bylaws is set forth in Annex E to this joint
proxy statement/prospectus.
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Business Bancorp 's common
stock entitled to vote.
The board of directors recommends that shareholders of Business Bancorp
vote FOR this Proposal.
161
Proposal 5:
Amendment to Articles of Incorporation of Business Bancorp
to Increase Board Classes from Two to Three and
Amendment to Bylaws to Delete
Classification Provision
As discussed above under "Certain Differences in Rights of Shareholders"
on page 157. Article Seven of the Articles of Incorporation of Business Bancorp
and Article IV, Section 2 of the Bylaws of Business Bancorp provide that
directors are elected annually at each shareholders meeting. However, at such
time as Business Bancorp becomes a listed corporation within the meaning of
Section 301.5 of the California Corporations Code the directors (other than any
directors who may be elected by the holders of any class or series of preferred
stock which Business Bancorp may issue in the future) will be divided into two
classes, effective with the first annual meeting of shareholders occurring
after Business Bancorp becomes a listed corporation. The term of office of the
first class will expire at the first annual meeting of shareholders after the
first election of two classes of directors, and the term of office of the
second class will expire at the annual meeting of shareholders one year
thereafter.
The board of directors of Business Bancorp recommends that the
shareholders approve an amendment to the Bylaws of Business Bancorp to increase
the number of classes to three, effective at such time as Business Bancorp
becomes a listed corporation, which is expected to occur on the effective date
of the merger. If this proposal is adopted, then the three classes will be
composed of two classes with four directors each and one class of six
directors, with such classification to take effect upon the election of
directors at the first annual meeting of shareholders following the merger.
Vacancies in the board created by any resignation, removal or other reason, or
by an increase in the size of the board, may be filled for the remainder of the
term by the vote of the majority of the directors remaining in office or by the
vote of holders of a majority of the outstanding shares of Business Bancorp's
common stock. Nomination of persons to fill director vacancies will be made by
the Nominating Committee of which the former director whose position is vacant
was a member. See "Operations Following the Merger--Director Vacancies" on page
61.
A director may be removed from office by vote of the shareholders.
However, a director may not be removed if the votes cast against removal of the
director, or not consenting in writing to removal, would be sufficient to elect
the director if voted on a cumulative basis (that is, voted as though Business
Bancorp still had cumulative voting, even though under Proposal 3 we are
proposing to eliminate cumulative voting) at an election at which the same
total number of votes were cast (or, if the action is taken by written consent,
all shares entitled to vote were voted) and either the number of directors
elected at the most recent annual meeting of shareholders, or if greater, the
number of directors for whom removal is being sought, were then being elected.
Any reduction of the authorized number of directors or amendment reducing the
number of classes of directors may not remove any director prior to the
expiration of the director's term of office. In addition, the board of
directors may declare vacant the office of a director who has been declared of
unsound mind by an order of court or convicted of a felony. Also, shareholders
holding at least 10% of the number of outstanding shares of any class may bring
an action in the appropriate California superior court to remove a director
from office in case of fraudulent or dishonest acts or gross abuse of authority
or discretion with reference to the corporation and the court may also bar the
director from reelection after removal for a period set by the court.
The board of directors believes that it is more appropriate for the
combined company to have three classes of directors than two. The addition of a
third class will make it more difficult for an outside investor who acquires
Business Bancorp stock to quickly replace incumbent directors with his or her
own board representatives, to the possible disadvantage of the shareholders as
a whole. So long as the board is classified into three classes, a minimum of
three annual meetings of shareholders would generally be required to replace
the entire board instead of two as would be the case now if Business Bancorp
were a listed corporation (absent intervening vacancies) and may have
additional anti-takeover effects as discussed under Proposal 3 on page 160.
While the proposal is not intended as a takeover-resistive measure in response
to a specific threat, it may discourage the acquisition of large blocks of
Business Bancorp's shares by delaying the ability of a person or group of
shareholders to effect a change in the
162
board. By providing additional time to the board of directors and eliminating
the possibility of rapid removal of the board, the directors of Business
Bancorp will have the necessary time to most effectively satisfy their
responsibility to shareholders to evaluate any proposal and to assess and
develop alternatives without the pressure created by the threat of imminent
removal. In addition, at any given time at least two-thirds of the members of
the board of directors will generally have had prior experience as directors of
Business Bancorp. The board believes that this will facilitate long-range
planning, strategy and policy and will have a positive impact on customer and
employee loyalty. Business Bancorp has not historically had problems with
either the continuity or stability of its board of directors. Three classes of
directors will be able to accomplish this purpose more effectively than two. In
addition, having three classes will make it administratively easier to ensure
that the former directors of MCB Financial and their successors will be
adequately represented in each board class and to ensure equal representation
by the continuing Business Bancorp directors and their successors.
The board of directors also proposes that the shareholders amend the
Bylaws to delete the classification provision in Article IV, Section 2 as
unnecessary, since a similar classification provision also appears in Article
Seven of the Articles of Incorporation.
The proposed amendment to the Articles of Incorporation is set forth in
Annex D to this joint proxy statement/prospectus. The proposed amendment to the
Bylaws is set forth in Annex E to this joint proxy statement/prospectus. If the
proposal is approved, Business Bancorp will file a Certificate of Amendment to
its Articles of Incorporation with the California Secretary of State, as soon
as practicable after the merger is completed, to effect the amendment of the
Articles of Incorporation.
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Business Bancorp 's common
stock entitled to vote.
The board of directors recommends that shareholders of Business Bancorp
vote FOR this Proposal.
163
OTHER MATTERS
Proxy holders will vote all shares represented by duly executed proxies in
accordance with the instructions in the proxies. The boards of directors of
Business Bancorp and MCB Financial know of no other matters which will be
brought before the meetings. If any new matters are properly presented, the
proxy holders will vote all proxies solicited relating to the meeting in
accordance with their judgment.
EXPERTS
The consolidated financial statements of Business Bancorp as of December
31, 2000 and 1999 and for each of the years in the three-year period ended
December 31, 2000, included in this document have been audited by Vavrinek
Trine Day & Co., LLP, independent auditors, as stated in their report which is
included in this document. Those statements have been included in reliance upon
the report of Vavrinek Trine Day & Co. LLP given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of MCB Financial Corporation as of
December 31, 2000 and 1999 and for each of the years in the three-year period
ended December 31, 2000 included in this joint proxy statement/prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is included 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
Certain legal matters with respect to Business Bancorp, including the
validity of the Business Bancorp common stock to be issued in connection with
the merger, will be passed upon for Business Bancorp by Fried, Bird &
Crumpacker, P.C., Los Angeles, California. Certain legal matters with respect
to MCB Financial will be passed upon by McCutchen, Doyle, Brown & Enersen, LLP,
San Francisco, California.
INFORMATION CONCERNING MCB FINANCIAL'S MANAGEMENT
Information concerning:
* directors and executive officers,
* executive compensation,
* principal shareholders,
* certain relationships and related transactions, and
* other related matters concerning MCB Financial,
is incorporated by reference to MCB Financial's annual report on Form 10-KSB
for the year ended December 31, 2000 and this report is incorporated by
reference into this document.
164
WHERE YOU CAN FIND MORE INFORMATION
Business Bancorp files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that Business Bancorp files at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. You may also obtain copies of this information by mail from
the Public Reference Section of the SEC, 450 5th Street, N.W., Room 1024,
Washington, DC 20545 at prescribed rates. Please call the SEC at (800) SEC-0330
for further information on the public reference rooms. The SEC also maintains
an Internet World Wide Web site at "http://www.sec.gov" at which reports, proxy
and information statements and other information regarding Business Bancorp are
available. Reports, proxy statements and other information concerning Business
Bancorp may also be inspected at the offices of the Nasdaq Stock Market, 1735 K
Street, Washington, DC 20006.
Business Bancorp has filed with the SEC a registration statement on Form
S-4 under the Securities Act relating to the shares of Business Bancorp common
stock to be issued in connection with the merger. This document also
constitutes the prospectus of Business Bancorp filed as part of the
registration statement and does not contain all the information included in the
registration statement and related exhibits. You may copy and read the
registration statement and its exhibits at the public reference facilities
maintained by the SEC at the address stated above.
The Commission allows MCB Financial to "incorporate by reference"
information into this document, which means that MCB Financial can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
deemed to be part of this document, except for any information superseded by
information contained directly in this document. This document incorporates by
reference the documents listed below that MCB Financial has previously filed
with the Commission. These documents contain important information about MCB
Financial and its financial condition.
MCB Financial Commission Filings
(File No. 001-15479) Period
Annual Report on Form 10-KSB Year ended December 31, 2000
Current Reports on Form 8-K Dated August 15 (2 reports), 2001
Quarterly Reports on form 10-QSB Quarters Ended March 31 and June 30, 2010
MCB Financial incorporates by reference any additional documents that it
may file with the Commission between the date of this document and the date of
the MCB Financial special shareholders meeting. These include periodic reports,
such as annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and
current reports on Form 8-K, as well as proxy statements. Business Bancorp has
supplied all information contained in this document relating to Business
Bancorp and MCB Financial has supplied all information contained in or
incorporated by reference in this document relating to MCB Financial.
In deciding how to vote on the merger, you should rely only on the
information contained or incorporated by reference in this document. Neither
Business Bancorp nor MCB Financial has authorized any person to provide you
with any information that is different from what is contained in this document.
This document is dated November 8, 2001. You should not assume that the
information contained in this document is accurate as of any date other than
such date, and neither the mailing to you of this document nor the issuance to
you of shares of Business Bancorp common stock will create any implication to
the contrary. This document does not constitute an offer to sell or a
solicitation of any offer to buy any securities, or the solicitation of a proxy
in any jurisdiction in which, or to any person to whom, it is unlawful.
165
BUSINESS BANCORP AND SUBSIDIARIES
Index to Financial Statements
Page
-----
Independent Auditors' Report ..................................................... F-2
Consolidated Balance Sheets December 31, 2000 and 1999 ........................... F-3
Consolidated Statements of Income
For the Years Ended December 31, 2000, 1999 and 1998 ............................ F-4
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998 ............................ F-5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998 ............................ F-6
Notes to Consolidated Financial Statements ....................................... F-8
Consolidated Balance Sheets As of June 30, 2001 (Unaudited) and December 31, 2000 F-29
Consolidated Statements of Income (Unaudited)
For the Six Months Ended June 30, 2001 and 2000 ................................. F-30
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2001 and 2000 ................................. F-31
Notes to Consolidated Financial Statements (Unaudited) ........................... F-32
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Business Bancorp
San Bernardino, California
We have audited the accompanying consolidated balance sheets of Business
Bancorp and subsidiaries (the "Bancorp") as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 2000. These consolidated financial statements are the responsibility of the
Bancorp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 Business Bancorp
and subsidiaries as of December 31, 2000 and 1999, and the results of its
operations, changes in its stockholders' equity, and its cash flows for each of
the years in the three-year period ended December 31, 2000, in conformity with
generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Company, LLP
Rancho Cucamonga, California
February 2, 2001
F-2
BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
----------------- -----------------
Assets
Cash and due from banks (Note #1D) .......................................... $ 16,921,114 $ 13,971,280
------------- -------------
Interest-bearing deposits in banks .......................................... 3,364,000
Investment securities (Notes #1F and #2)
Available-for-sale ....................................................... 91,089,294 82,294,167
Held-to-maturity, fair value of $1,005,620 in 2000 and $1,002,500 in 1999 1,005,231 1,012,076
Federal Home Loan Bank restricted stock, at cost ............................ 1,246,200 1,200,000
Loans, net of unearned income (Notes #1G and #3) ............................ 171,447,758 114,693,359
Loans held for sale (Notes #1H and #3) ...................................... 8,920,136 1,689,783
------------- -------------
Total Loans ......................................................... 180,367,894 116,383,142
Less allowance for loan losses (Notes #1I and #4) ................... (1,842,715) (1,241,733)
------------- -------------
Net Loans ........................................................... 178,525,179 115,141,409
Premises and equipment (Notes #1J and #5) ................................... 5,766,284 3,885,119
Accrued interest receivable ................................................. 2,049,766 1,440,602
Deferred tax asset (Note #7) ................................................ 447,862 1,053,000
Other real estate owned, net (Notes #1N and #18) ............................ 504,754 1,036,227
Goodwill and other intangible assets (Note #1K) ............................. 7,545,733 2,235,571
Other assets (Note # 6) ..................................................... 3,075,322 2,174,014
------------- -------------
Total Assets ........................................................... $ 311,540,739 $ 225,443,465
------------- -------------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand deposits ........................................................ 95,434,574 74,533,528
NOW deposits ........................................................... 39,521,325 27,284,559
Money market and savings deposits ...................................... 63,364,908 49,840,556
Time deposits $100,000 and over (Note #8) .............................. 35,792,373 15,274,884
Time deposits under $100,000 (Note #8) ................................. 30,814,012 19,874,439
------------- -------------
Total Deposits ...................................................... 264,927,192 186,807,966
Borrowed funds (Note #9) ................................................. 10,125,000 18,200,000
Bancorp Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures (Note #10) ................................................ 10,000,000 --
Accrued interest and other liabilities ................................... 2,945,523 1,404,086
------------- -------------
287,997,715 206,412,052
------------- -------------
Commitments and Contingencies (Note #11)
Stockholders' Equity
Serial preferred stock--no par value, 2,000,000 shares authorized but
unissued ................................................................
Common stock--no par value, authorized 10,000,000 shares, issued and
outstanding, 2,026,869 and 1,975,961 shares in 2000 and 1999,
respectively ............................................................ 6,646,626 6,256,854
Retained earnings ........................................................ 15,922,222 13,652,558
Accumulated other comprehensive income ................................... 974,176 (877,999)
------------- -------------
Total Stockholders' Equity .......................................... 23,543,024 19,031,413
------------- -------------
Total Liabilities and Stockholders' Equity .......................... $ 311,540,739 $ 225,443,465
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
F-3
BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND 1998
2000 1999 1998
-------------- -------------- --------------
Interest Income
Interest and fees on loans (Note #1G) ............... $15,701,729 $11,226,876 $10,798,298
Interest on investment securities (Note #1F)
Taxable ........................................... 4,544,567 2,424,171 768,892
Exempt from Federal taxes ......................... 1,037,126 501,619 332,783
Interest on deposits ................................ 90,049
Interest on Federal funds sold ...................... 34,885 617,758 1,433,152
----------- ----------- -----------
Total Interest Income .......................... 21,408,356 14,770,424 13,333,125
----------- ----------- -----------
Interest Expense
Interest on deposits
NOW and Money Market accounts ..................... 1,739,211 1,305,793 1,098,157
Savings ........................................... 606,364 528,636 508,693
Time deposits $100,000 and over ................... 1,356,732 604,028 527,637
Time deposits under $100,000 ...................... 1,210,610 925,486 1,043,797
Interest on Trust Preferred Securities (Note #1S) ...... 857,917
Interest on other borrowings ........................... 1,256,808 212,790 --
----------- ----------- -----------
Total Interest Expense ......................... 7,027,642 3,576,733 3,178,284
----------- ----------- -----------
Net Interest Income ............................ 14,380,714 11,193,691 10,154,841
Provision for Loan Losses .............................. 255,000 180,000 150,000
----------- ----------- -----------
Net Interest Income After Provision for Loan
Losses ........................................ 14,125,714 11,013,691 10,004,841
----------- ----------- -----------
Other Income
Service fees ........................................ 2,563,340 2,261,995 2,295,814
Gain on sale of SBA loans (Note #1L) ................ 11,967 154,246 330,855
Gain on sale of other real estate owned ............. 197,504 38,168 136,465
Gain (loss) on sale of investments .................. 43,321 (98,041) 6,822
----------- ----------- -----------
Total Other Income ............................. 2,816,132 2,356,368 2,769,956
----------- ----------- -----------
Other Expenses
Salaries and employee benefits ...................... 6,797,516 5,290,708 4,851,793
Occupancy, net ...................................... 854,444 746,684 706,058
Furniture and equipment ............................. 897,670 775,536 778,763
Other operating expenses (Note #14) ................. 5,027,752 3,775,799 3,326,745
----------- ----------- -----------
Total Other Expenses ........................... 13,577,382 10,588,727 9,663,359
----------- ----------- -----------
Income Before Income Taxes ............................. 3,364,464 2,781,332 3,111,438
----------- ----------- -----------
Income Taxes
Current ............................................. 1,447,550 1,019,999 1,256,850
Deferred ............................................ (352,750) (178,972) (2,340)
----------- ----------- -----------
1,094,800 841,027 1,254,510
----------- ----------- -----------
Net Income ............................................. $ 2,269,664 $ 1,940,305 $ 1,856,928
----------- ----------- -----------
Earnings Per Share
Basic ............................................... $ 1.14 $ 0.99 $ 0.97
=========== =========== ===========
Diluted ............................................. $ 1.13 $ 0.97 $ 0.93
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements
</FN>
F-4
BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 AND 1998
Number of
Shares Common Comprehensive
Outstanding Stock Income
------------- -------------- ---------------
Balance, January 1, 1998 ............. 1,459,657 $ 5,125,883 --
Stock options exercised .............. 93,497 516,538 --
Stock issued to 401-K Plan ........... 6,021 83,848 --
Comprehensive Income
Net income for the period .......... -- -- $ 1,856,928
Unrealized security holding losses
(net of $41,598 tax) .............. -- -- (57,445)
Reclassification adjustment for
realized gains (net of $2,865 tax
expense) .......................... -- -- (3,957)
--------- ----------- -----------
Total comprehensive income ...... -- -- $ 1,795,526
--------- ----------- -----------
Balance, December 31, 1998 ........... 1,559,175 5,726,269 --
Stock options exercised .............. 13,264 77,550 --
Stock issued to 401-K Plan ........... 11,650 142,945 --
Five-for-four stock split (Note #12) . 391,872
Cash in lieu of fractional shares .... -- -- --
Tax effect of stock options exercised
1998 ................................ -- 310,090 --
Comprehensive Income
Net income for the period .......... -- -- $ 1,940,305
Unrealized security holding losses
(net of $535,692 tax) ............. -- -- (935,989)
Reclassification adjustment for
realized losses (net of $31,471 tax
benefit) .......................... -- -- 54,988
--------- ----------- -----------
Total comprehensive income ...... -- -- $ 1,059,304
--------- ----------- -----------
Balance, December 31, 1999 ........... 1,975,961 6,256,854 --
Stock options exercised .............. 50,836 389,161 --
Stock issued to 401-K Plan ........... 72 611 --
Comprehensive Income
Net income for the period .......... -- -- $ 2,269,664
Unrealized security holding gains
(net of $1,304,866 tax) ........... -- -- 1,877,734
Reclassification adjustment for
realized gains (net of $17,762 tax
expense) .......................... -- -- (25,559)
--------- ----------- -----------
Total comprehensive income ...... -- -- $ 4,121,839
--------- ----------- -----------
Balance, December 31, 2000 ........... 2,026,869 $ 6,646,626 --
========= =========== ===========
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income Equity
-------------- --------------- ----------------
Balance, January 1, 1998 ............. $ 9,856,727 $ 64,404 $ 15,047,014
Stock options exercised .............. -- -- 516,538
Stock issued to 401-K Plan ........... -- -- 83,848
Comprehensive Income
Net income for the period .......... 1,856,928 -- 1,856,928
Unrealized security holding losses
(net of $41,598 tax) .............. -- (57,445) (57,445)
Reclassification adjustment for
realized gains (net of $2,865 tax
expense) .......................... -- (3,957) (3,957)
----------- ----------- ------------
Total comprehensive income ...... -- -- --
----------- ----------- ------------
Balance, December 31, 1998 ........... 11,713,655 3,002 17,442,926
Stock options exercised .............. -- -- 77,550
Stock issued to 401-K Plan ........... -- -- 142,945
Five-for-four stock split (Note #12) .
Cash in lieu of fractional shares .... (1,402) -- (1,402)
Tax effect of stock options exercised
1998 ................................ -- -- 310,090
Comprehensive Income
Net income for the period .......... 1,940,305 -- 1,940,305
Unrealized security holding losses
(net of $535,692 tax) ............. -- (935,989) (935,989)
Reclassification adjustment for
realized losses (net of $31,471 tax
benefit) .......................... -- 54,988 54,988
----------- ----------- ------------
Total comprehensive income ...... -- -- --
----------- ----------- ------------
Balance, December 31, 1999 ........... 13,652,558 (877,999) 19,031,413
Stock options exercised .............. -- -- 389,161
Stock issued to 401-K Plan ........... -- -- 611
Comprehensive Income
Net income for the period .......... 2,269,664 -- 2,269,664
Unrealized security holding gains
(net of $1,304,866 tax) ........... -- 1,877,734 1,877,734
Reclassification adjustment for
realized gains (net of $17,762 tax
expense) .......................... -- (25,559) (25,559)
----------- ----------- ------------
Total comprehensive income ...... -- -- --
----------- ----------- ------------
Balance, December 31, 2000 ........... $15,922,229 974,176 23,543,024
=========== =========== ============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
F-5
BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---------------- ---------------- ----------------
Cash Flows From Operating Activities
Net Income ............................................................. $ 2,269,664 $ 1,940,305 $ 1,856,928
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation and amortization of premises and equipment ............... 730,220 625,220 561,257
Amortization of intangibles ........................................... 400,845 286,942 295,716
Provision for loan losses ............................................. 255,000 180,000 150,000
Provision for losses on other real estate owned ....................... 64,586 24,415 112,768
Net (gain)/loss on sale of assets ..................................... (279,384) 78,137 (474,142)
(Increase)/decrease in accrued interest receivable .................... (609,164) (627,531) 49,375
(Increase)/decrease in deferred assets ................................ 605,138 (400,273) 72,273
Net amoritization/accretion of premiums/discounts on investment
securities .......................................................... 704,158 696,379 22,334
FHLB stock dividend ................................................... -- (99,000) (6,000)
(Increase)/decrease in other assets ................................... (1,239,928) (102,398) (8,654)
Increase in interest payable and other liabilities .................... 1,316,301 115,021 433,371
(Increase)/decrease in prepaid taxes .................................. 193,260 (383,027) 297,041
------------- ------------- -------------
Net Cash Provided By Operating Activities ........................... 4,311,696 2,427,190 3,368,267
------------- ------------- -------------
Cash Flows From Investing Activities
Proceeds from maturities of investment certificate of deposits ......... 1,586,000 -- --
Proceeds from maturities of available-for-sale securities .............. 880,000 3,301,800 10,257,417
Proceeds from maturities of held-to-maturity securities ................ -- 1,055,000 8,925,067
Purchase of investment securities available-for-sale ................... (23,922,813) (75,146,074) (33,018,186)
Purchase of investment securities held-to-maturity ..................... -- (1,513,906) (5,514,108)
Proceeds from sales of securities ...................................... 14,734,593 6,994,039 3,350,000
Purchase of Valley Merchants Bank (net of cash and cash equivalents
acquired) ............................................................. (5,554,281) -- --
Principal reduction of mortgage-backed securities ...................... 8,649,254 6,134,290 61,257
Redemption of Federal Home Loan Bank stock ............................. 52,800 -- --
Net increase in loans to customers ..................................... (28,162,762) (10,931,034) (5,742,592)
Recoveries of loans previously written-off ............................. 156,969 184,906 150,518
Capital expenditures ................................................... (1,209,282) (521,905) (561,612)
Proceeds from sale of equipment ........................................ 42,300 15,044 146,155
Proceeds from sale of other real estate owned .......................... 898,722 388,566 726,615
------------- ------------- -------------
Net Cash Used In Investing Activities ............................... (31,848,500) (70,039,274) (21,219,469)
------------- ------------- -------------
Cash Flows From Financing Activities
Net increase in demand deposits, NOW accounts, savings accounts,
and money market deposits ............................................. 7,285,511 20,704,232 23,024,696
Net increase in certificates of deposit ................................ 20,886,355 2,261,089 4,132,578
Net increase/(decrease) in FHLB borrowing .............................. (8,075,000) 18,200,000 --
Issuance of Bancorp obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior subordinated
debentures ............................................................ 10,000,000 -- --
Stock options exercised, net of tax effect ............................. 389,161 387,640 516,538
Stock issued through 401(K) plan ....................................... 611 142,945 83,848
Cash paid in lieu of fractional shares ................................. -- (1,402) --
------------- ------------- -------------
Net Cash Provided By Financing Activities ........................... 30,486,638 41,694,504 27,757,660
------------- ------------- -------------
Net (Increase)/Decrease in Cash and Cash Equivalents ..................... 2,949,834 (25,917,580) 9,906,458
Cash and Cash Equivalents, Beginning of Year ............................. 13,971,280 39,888,860 29,982,402
------------- ------------- -------------
Cash and Cash Equivalents, End of Year ................................... $ 16,921,114 $ 13,971,280 $ 39,888,860
============= ============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
F-6
BUSINESS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
2000 1999 1998
-------------- -------------- --------------
Supplemental Disclosure of Cash Flows Information
Cash paid for interest ................................................. $ 1,196,226 $ 3,598,157 $ 2,744,913
=========== =========== ===========
Cash paid for taxes .................................................... $ 1,210,000 $ 769,986 $ 1,289,245
=========== =========== ===========
Non-Cash Investing Activities
Net change in accumulated other comprehensive income ................... $ 1,852,175 $ 881,001 $ 61,402
=========== =========== ===========
Transfer from loans to OREO ............................................ $ 135,947 $ 548,758 $ 268,601
=========== =========== ===========
Origination of loans to facilitate OREO ................................ $ -- $ 175,800 $ 752,440
=========== =========== ===========
Transfer from investments held-to-maturity to available-for-sale ....... $ -- $ 1,065,000 $ --
=========== =========== ===========
Non-Cash Financing Activities
Tax effect of stock options exercised .................................. $ 25,851 $ 310,090 $ --
=========== =========== ===========
Supplemental Disclosure
Net change in assets/liabilities due to acquisition
Increase in interest-bearing deposits .................................. $ 4,950,000
===========
Increase in investments ................................................ $ 6,812,259
===========
Increase in net loans .................................................. $35,678,924
===========
Increase in premises and equipment ..................................... $ 1,414,229
===========
Increase in other real estate owned .................................... $ 90,000
===========
Increase in goodwill and other intangible assets ....................... $ 5,711,007
===========
Increase in other assets ............................................... $ 1,070,318
===========
Increase in demand, money market and saving deposits ................... $39,015,744
===========
Increase in certificates of deposits ................................... $10,570,707
===========
Increase in other liabilities .......................................... $ 586,005
===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
F-7
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Note #1--Summary of Significant Accounting Policies
The accounting and reporting policies of Business Bancorp and subsidiaries
(the "Bancorp") conform to generally accepted accounting principles and to
general practice within the banking industry. A summary of the significant
accounting and reporting policies consistently applied in the preparation of the
accompanying consolidated financial statements follows:
A. Principles of Consolidation
The consolidated financial statements include the Bancorp and it's wholly
owned subsidiaries, Business Bank of California (the "Bank") and Business
Capital Trust I. All significant intercompany balances and transactions
have been eliminated.
B. Nature of Operations
Business Bancorp, a bank holding company, was incorporated on January 21,
2000 in the State of California for the purpose of acquiring and holding
all of the outstanding stock of the Bank. Business Capital Trust I, a
statutory business trust, was incorporated on March 10, 2000 in the State
of Delaware for the purpose of issuing and selling Cumulative Trust
Preferred Securities (the "Trust Preferred Securities") and using the
proceeds to acquire the junior subordinated debentures issued by the
Bancorp. The Bank has been organized as a single operating segment and
operates eight branches in the Inland Empire region of Southern California
and provides a variety of financial services to individuals and
small-to-medium size businesses. The Bank offers a full range of commercial
banking services including the acceptance of checking and savings deposits,
and the making of various types of installment, commercial and real estate
loans.
C. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals
for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on loans
and foreclosed real estate may change.
D. Cash and Cash Equivalents
For the purpose of the statements of cash flows, cash and cash equivalents
includes cash and due from banks, cash items in transit, and Federal funds
sold balances as of the year-end. Generally, Federal funds are sold for
one-day periods.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in use or on deposit with the Federal Reserve Bank.
The Bank complied with the reserve requirements as of December 31, 2000.
F-8
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
The Bank maintains amounts due from banks that may periodically exceed
Federally insured limits. The Bank has not experienced any losses in these
accounts.
E. Interest-bearing Deposits in Banks
Interest-bearing deposits in banks mature within one year and are carried at
cost.
F. Investment Securities and Mortgage-Backed Securities
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
which addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all debt
securities, securities are classified in three categories and accounted for
as follows: debt, equity, and mortgage-backed securities that the Bank has
the positive intent and ability to hold to maturity are classified as
held-to-maturity and are measured at amortized cost; debt, equity and
mortgage backed securities bought and held principally for the purpose of
selling in the near term are classified as trading securities and are
measured at fair value, with unrealized gains and losses included in
earnings; debt, equity and mortgage-backed securities not classified as
either held-to-maturity or trading securities are deemed as
available-for-sale and are measured at fair value, with unrealized gains
and losses, net of applicable taxes, reported in a separate component of
stockholders' equity. Gains or losses on sales of investment securities and
mortgage-backed securities are determined on the specific identification
method. Premiums and discounts are amortized or accreted using the interest
method over the expected lives of the related securities.
G. Loans and Interest on Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. The Bank
recognizes loan origination fees as income over the term of the loan.
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan." The statement generally requires those
loans identified as "impaired" to be measured on the present value of
expected future cash flows discounted at the loan's effective interest
rate, except that as a practical expedient, a creditor may measure
impairment based on a 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 not be able to collect all contractual
principal and interest payments due in accordance with the terms of the
loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
H. Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market,
which is determined by the specific value in the commitments. Net
unrealized losses, if any, are required through a valuation allowance by
charges to income.
I. Provision and Allowance for Loan Losses
The allowance for loan losses (ALLL) is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based
F-9
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
on management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the
estimation process, management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in the near term.
The Bank's ALLL is established through a multi-step process that is
reviewed and updated quarterly. It begins with Management reviewing each
individual classified or criticized loan in detail, evaluating the adequacy
of collateral, payment record, current loan status and borrower financial
capacity. A loan loss reserve is assigned each classified and criticized
loan from this quarterly review based upon the specifics of the loan's
circumstances such as updated collateral value, borrower's or guarantor's
financial capacity, payment record and recent conversations with the
borrower. Additionally, each quarter the Bank updates its eight-quarter
loan loss migration analysis to derive a rolling, 2-year loan loss
experience percentage by loan category. Management's risk assessment
consists of a variety of factors. These factors are considered for all
periods and are not optional. The factors include items such as: changes in
lending policies & procedures, changes in national/local economic
conditions, changes in the nature & volume of the portfolio, changes in
experience, ability & depth of lending staff, changes in past dues,
classified & non-accruals, changes in quality of loan review systems,
existence & effect of concentrations, as well as the effect of external
factors (competition, legal, regulatory, etc.). Although all of these
factors are consistently considered and applied, the combined management
risk assessment has a relatively nominal effect on the provision and
allowance. These factors are considered and evaluated, but do not readily
determine the provision or allowance. The resulting loan loss factor of
each loan category is then applied to the existing loan portfolio by
category and added to the loan loss reserve total from the review of the
criticized and classified loans to conclude a total allowance for loan and
lease losses. The Bank also applies a regulatory reasonableness test in
determining both the current provision as well as the overall allowance.
The test begins by using a three year weighted average net charge-offs to
beginning total loans, with the highest weight being placed on the most
current year. The calculated weighting is then applied to non-classified
loans. Classified loans (Substandard, Doubtful, and Loss) are also risk
weighted to determine an allowance amount. The risk weighted totals for the
classified and non-classified assets are then added together to determine
the regulatory reasonableness amount. In summary, this is a "quick and
dirty" migration analysis that is used to test the allowance for
reasonableness. This test is not used as a "driver" of the allowance.
Specific loan pools by type are assigned an appropriate reserve factor
based upon the Bank's historical charge off experience or a minimum floor,
whichever is greater, and then factors are adjusted for current conditions.
The Bank then applies the minimum percentage reserve factors in determining
the allowance for loan losses. These reserve factors have floors that range
from 0.40% to 0.80% depending on the particular loan category. The Bank's
quarterly ALLL breaks down the Bank's total loan portfolio by component
parts (classified loans, criticized loans and pass loans) and further
differentiates by loan categories (commercial loans, consumer loans, etc.).
Specific loan circumstances are reviewed together with broader total
historical loan loss experience which may be further impacted by
Management's evaluation of internal and external factors. Accordingly,
changes in asset quality can have a beneficial impact to one component of
the ALLL without unduly influencing the other components.
F-10
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
J. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance are expensed as incurred. Depreciation is computed
on the straight-line basis over the estimated useful lives of the related
assets, which range from three to thirty years. Depreciation expense was
$730,220, $625,220 and $561,257 for the years ended December 31, 2000,
1999, and 1998, respectively.
K. Goodwill and Core Deposit Intangible Purchased
Goodwill represents the excess of the cost of assets purchased, during 2000
and 1997, over the fair value of their net assets at dates of acquisition
and is being amortized on the straight-line method over fifteen years and
ten years, respectively. Amortization expense charged to operations for
2000, 1999 and 1998 was $270,686, $156,783 and $165,557, respectively.
Core deposit intangibles purchased during 1997 and 1994 are amortized on a
straight-line method over fifteen years and ten years, respectively.
Amortization expense charged to operations was $130,159 for each of the
years in the three-year period ended December 31, 2000.
L. Loan Sales and Servicing
Gains and losses from the sale of participating interests in loans
guaranteed by the Small Business Administration (SBA) are recognized based
on the premium received or discount paid and the cost basis of the portion
of the loan sold. The cost basis of the portion of the loan sold was
arrived at by allocating the total cost of each loan between the guaranteed
portion of the loan sold and the unguaranteed portion of the loan retained,
based on their relative fair values. The book value allocated to the
unguaranteed portion of the loan, if less than the principal amount, is
recorded as a discount on the principal amount retained. The discount is
accreted to income over the remaining estimated life of the loan. The Bank
retains the servicing on the portion of the loans sold and recognizes
income on the servicing fees that are received.
M. Income Taxes
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of non-taxable income such as interest on state
and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method as
prescribed in SFAS No. 109, "Accounting for Income Taxes."
N. Other Real Estate Owned
Other real estate owned, which represents real estate acquired by
foreclosure, is recorded at the lesser of the outstanding loan balance or
the fair value less selling costs of the property at the time of
foreclosure. Any valuation adjustments required at the time of foreclosure
are charged to the allowance for loan losses. Any subsequent valuation
adjustments, operating expenses or income, and gains and losses on
disposition of such properties are recognized in current operations.
O. Advertising
Advertising costs are charged to expense during the year in which they are
incurred.
P. Earning Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects
F-11
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the Bancorp.
Q. Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Bancorp has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock. The
pro forma effects of adoption are disclosed in Note #13.
R. Comprehensive Income
Beginning in 1998, the Bank, and then upon reorganization in 2000, the
Bancorp, adopted SFAS No. 130, "Reporting Comprehensive Income," which
requires the disclosure of comprehensive income and its components. Changes
in unrealized gains (losses) on available-for-sale securities, net of
income taxes, are the only component of accumulated other comprehensive
income for the Bancorp.
S. Accounting for Business Capital Trust I
Business Capital Trust I is a statutory business trust created for the sole
purpose of issuing and selling Cumulative Trust Preferred Securities (the
"Trust Preferred Securities") and using the proceeds to acquire the junior
subordinated debentures issued by Business Bancorp.
For financial reporting purposes, Business Capital Trust I is treated as a
subsidiary of Business Bancorp and, accordingly, the accounts are included
in the consolidated financial statements of the Bancorp. The Trust
Preferred Securities are presented as a separate line item in the
consolidated balance sheet under the caption, "Bancorp Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures." For financial reporting purposes,
the Bancorp records the dividend distributions payable on the Trust
Preferred Securities as interest expense in the consolidated statement of
income.
T. Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. This new standard was
originally effective for 2000. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133." This Statement establishes
the effective date of SFAS No. 133 for 2001 and is not expected to have a
material impact on the Bancorp's consolidated financial statements.
U. Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements have
been reclassified to conform with the 2000 presentation.
F-12
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #2--Investment Securities
At December 31, 2000 and 1999, the investment securities portfolio was
comprised of securities classified as available-for-sale and held-to-maturity,
in conjunction with the adoption of SFAS No. 115, resulting in investment
securities available-for-sale being carried at fair value and investment
securities held-to-maturity being carried at cost, adjusted for amortization of
premiums and accretions of discounts.
Available-for-Sale Securities
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 2000 and 1999, were as follows:
December 31, 2000
--------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
Municipal Agencies ................. $22,058,162 $ 1,041,766 $ (105,283) $22,994,645
Mortgage backed securities ......... 61,639,744 732,000 (38,636) 62,333,108
Corporate Bonds .................... 5,735,910 46,054 (20,423) 5,761,541
----------- ----------- ----------- -----------
Total ........................... $89,433,816 $ 1,819,820 $ (164,342) $91,089,294
=========== =========== =========== ===========
December 31, 1999
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
Municipal Agencies ................. $12,647,483 $ 14,744 $ (699,438) $11,962,789
Mortgage backed securities ......... 69,017,559 93,557 (779,738) 68,331,378
Corporate Bonds .................... 2,043,988 -- (43,988) 2,000,000
----------- --------- ------------ -----------
Total ........................... $83,709,030 $ 108,301 $ (1,523,164) $82,294,167
=========== ========= ============ ===========
Held-to-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity securities
at December 31, 2000 and 1999, were as follows:
December 31, 2000
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
U.S. Treasury notes ......... $1,005,231 $ 389 $ -- $1,005,620
December 31, 1999
---------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
U.S. Treasury notes ......... $1,012,076 $ -- $ (9,576) $1,002,500
F-13
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
The amortized cost and fair values of investment securities
available-for-sale and held-to-maturity at December 31, 2000, by expected
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.
December 31, 2000
-----------------------------------------------------------------
Securities Securities
Held-To-Maturity Available-For-Sale
------------------------------- -------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Amounts maturing in
One year or less ........... $ 1,005,231 $ 1,005,620 $10,424,493 $10,542,034
After one year through five
years ..................... -- -- 45,275,631 45,786,438
After five years through ten
years ..................... -- -- 12,056,053 12,150,376
After ten years ............ -- -- 21,677,639 22,610,446
----------- ----------- ----------- -----------
$ 1,005,231 $ 1,005,620 $89,433,816 $91,089,294
=========== =========== =========== ===========
Proceeds from sales and maturities of investment securities
available-for-sale during 2000, 1999, and 1998 were $15,614,594, $4,904,367,
and $13,607,417, respectively. In 2000, gross gains and gross losses on those
sales were $81,889 and $38,568, respectively. In 1999, gross gains and gross
losses on those sales were $2,200 and $88,659, respectively. In 1998, gross
gains on those sales were $6,822; there were no gross losses. Proceeds from
principal reductions of mortgage-backed securities in 2000, 1999, and 1998 were
$8,649,254 and $6,134,290, $61,257, respectively
During 2000, there were no sales of held-to-maturity investment
securities. Proceeds from sales of held-to-maturity investment securities
during 1999 were $5,391,472. There were no sales of held-to-maturity investment
securities during 1998. Amortized cost for the held-to-maturity investment
securities sold, during 1999, were $3,838,257. In 1999, gross gains and gross
losses on those sales were $46,751 and $58,333, respectively. There were no
transfers of held-to-maturity investment securities to available-for-sale
investment securities during 2000. Amortized cost for held-to-maturity
investment securities transferred to available-for-sale investment securities
during 1999 were $1,066,043, resulting in an unrealized gain of $1,043. There
were no transfers in 1998. There were no maturities of investment securities
held-to-maturity during 2000. Proceeds from maturities of investment securities
held-to-maturity during 1999 and 1998 were $1,055,000 and $8,925,067,
respectively. There were no gains or losses recognized.
During 1999, the Bank sold off the majority of the held-to-maturity
investment securities, with the remaining investments transferred to the
available-for-sale portfolio to comply with SFAS 115. The sale and subsequent
transfer was affected by a change of the investment policy of the Bank's
management.
Included in stockholders' equity at December 31, 2000, 1999, and 1998 are
$974,176 of net unrealized gains (net of $681,302 estimated tax expense),
$877,999 of net unrealized losses (net of $536,865 estimated tax benefit), and
$3,002 of net unrealized gains (net of $2,174 estimated tax expense),
respectively, in investment securities available-for-sale.
Securities having a carrying value of $68,235,184 and $81,701,686 and a
market value of $69,623,035 and $81,236,888 at December 31, 2000 and 1999,
respectively, were pledged to secure treasury, tax and loan items and public
monies, as required by law, and for other purposes.
F-14
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #3--Loans
The composition of the loan portfolio at December 31, 2000 and 1999, was
as follows:
2000 1999
---- ----
Real Estate ........................ $ 120,832,081 $ 77,477,402
Commercial ......................... 37,448,224 29,249,502
Installment ........................ 12,703,032 7,514,696
All other (including overdrafts) ... 1,543,313 1,246,097
------------- -------------
172,526,650 115,487,697
Less: Unearned ..................... (1,078,892) (794,338)
------------- -------------
Loans, Net of Unearned Income .. $ 171,447,758 $ 114,693,359
============= =============
Loans held-for-sale ................ $ 8,920,136 $ 1,689,783
============= =============
At December 31, 2000 and 1999, the Bank had loans amounting to
approximately $999,000 and $477,000, respectively, that were specifically
classified as impaired. The allowance for loan losses related to impaired loans
amounted to approximately $0 and $141,000 at December 31, 2000 and 1999,
respectively. Average recorded investment in impaired loans amounted to
approximately $198,000 and $842,000 during 2000 and 1999, respectively. The
following is a summary of cash receipts on these loans and how they were
applied in 2000 and 1999:
2000 1999 1998
---- ---- ----
Cash receipts applied to reduce principal balance .......... $ 9,702 $147,953 $ 30,226
Cash receipts recognized as interest income ................ 269 1,717 24,861
------- -------- --------
Total Cash Receipts ..................................... $ 9,971 $149,670 $ 55,087
======= ======== ========
At December 31, 2000 and 1999, the Bank had $0 and $8,710, respectively in
loans past due 90 days or more in interest or principal and still accruing
interest.
Note #4--Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
2000 1999 1998
---- ---- ----
Balance, Beginning of Year ............ $ 1,241,733 $ 1,439,308 $ 1,773,390
Provision charged to expense .......... 255,000 180,000 150,000
Credit from merger .................... 464,825 -- --
Loans charged-off ..................... (275,812) (562,481) (634,599)
Recoveries ............................ 156,969 184,906 150,517
----------- ----------- -----------
Balance, End of Year .................. $ 1,842,715 $ 1,241,733 $ 1,439,308
=========== =========== ===========
F-15
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #5--Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
2000 1999
---- ----
Buildings and improvements ............................... $ 3,943,399 $ 2,831,799
Furniture, equipment, and software ....................... 4,279,618 3,681,696
------------ ------------
8,223,017 6,513,495
Less: accumulated depreciation and amortization .......... (4,100,058) (3,470,710)
------------ ------------
4,122,959 3,042,785
Land ..................................................... 1,643,325 842,334
------------ ------------
$ 5,766,284 $ 3,885,119
============ ============
Note #6--Other Assets
The following is a composition of other assets for the years ended
December 31:
2000 1999
---- ----
Cash surrender value of life insurance .......... $1,466,654 $ 799,673
Investment in unconsolidated affiliate .......... 379,206 157,229
Prepaid exenses ................................. 568,647 610,081
Other ........................................... 660,815 607,031
---------- ----------
$3,075,322 $2,174,014
========== ==========
On November 27, 1998, the Bank acquired a forty-nine percent equity
investment in Financial Data Solutions, Inc., an affiliate which provides a
variety of data processing services to the financial services industry. This
investment, which is accounted for using the equity method, amounted to
$379,206 at December 31, 2000. Under the equity method, the original investment
is recorded at cost and is adjusted periodically to recognize the Bank's share
of earnings or losses after the date of acquisition. The condensed results of
operations and financial position of Financial Data Solutions, Inc. at December
31, 2000, are summarized as follows:
Condensed Results of Operations
Revenues ............................ $ 1,440,299
Expenses ............................ (1,787,285)
------------
Net loss ............................ $ (346,986)
============
Condensed Financial Position
Total assets ........................ $ 1,534,844
Total liabilities ................... $ 790,955
F-16
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #7--Income Taxes
The provision for income taxes is comprised of the following current and
deferred amounts:
2000 1999 1998
---- ---- ----
Federal Income Tax
Current .................. $ 1,002,920 $ 714,270 $ 925,800
Deferred ................. (286,560) (174,739) (22,922)
----------- ---------- -----------
716,360 539,531 902,878
----------- ---------- -----------
State Franchise Tax
Current .................. 444,630 305,729 331,050
Deferred ................. (66,190) (4,233) 20,582
----------- ---------- -----------
378,440 301,496 351,632
----------- ---------- -----------
Total .................. $ 1,094,800 $ 841,027 $ 1,254,510
=========== ========== ===========
Deferred tax expense/(credits) result from timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
The sources of these differences and the tax effect of each are as follows:
2000 1999 1998
----------------------------- ----------------------------- ---------------------------
Federal State Federal State Federal State
------- ----- ------- ----- ------- -----
Tax effect of
Revenue and expenses recognized
on a different basis for book
than for tax purposes ................ $ (130,810) $ (38,210) $ (233,375) $ (23,490) $ (75,995) $ 3,661
Depreciation and amortization
computed differently on tax
returns than for financial
statements ........................... (69,050) (340) (8,540) (2,160) (43,179) (13,766)
Provision for loan loss deduction in
tax return less than amount
charged for financial statement
purposes ............................. (86,700) (27,640) 67,176 21,417 96,252 30,687
---------- ---------- ---------- ---------- ---------- ---------
$ (286,560) $ (66,190) $ (174,739) $ (4,233) $ (22,922) $ 20,582
========== ========== ========== ========== ========== =========
As a result of the following items, the total tax expense for 2000 and
1999, was different than the amount computed by applying the statutory U.S.
Federal income tax rate to income before taxes and extraordinary item:
2000 1999 1998
--------------------------- ------------------------- --------------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Federal rate ........................ $ 1,143,910 34.0% $ 945,653 34.0% $ 1,057,889 34.0%
Changes due to State Franchise tax,
net of Federal tax benefit ......... 249,770 7.4 198,987 7.1 232,077 7.5
Exempt interest ..................... (321,460) (9.6) (172,380) (6.2) (60,796) (2.0)
Other ............................... 22,580 0.7 (131,233) (4.7) 25,340 0.8
----------- ---- ---------- ---- ----------- ----
$ 1,094,800 32.5% $ 841,027 30.2% $ 1,254,510 40.3%
=========== ==== ========== ==== =========== ====
F-17
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Net deferred tax assets are determined from the following cumulative
timing differences between book and tax return recognition as of December 31,
2000 and 1999:
2000 1999
---- ----
Deferred Tax Assets ....................................... $ 270,000 $ 84,000
Allowance for loan losses .............................. 84,000 83,000
Other real estate ...................................... 380,000 327,000
Deferred income ........................................ 37,000 3,000
State taxes ............................................ 344,000 38,000
Accruals not currently deductible ...................... 13,862 4,000
Other .................................................. -- 536,000
--------- -----------
Valuation allowance for investment securities .......... 1,128,862 1,075,000
Deferred Tax Liabilities
Valuation allowance for investment securities .......... (681,000) (22,000)
--------- -----------
Net Deferred Tax Assets ............................. $ 447,862 $ 1,053,000
========= ===========
No valuation allowance has been established because, in management's
judgment, all deferred tax assets are likely to be realized.
Note #8--Certificates of Deposit
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
Year Ending
December 31,
------------
2001 ............... $ 63,902,209
2002 ............... 2,344,660
2003 ............... 296,437
2004 ............... 49,839
2005 ............... 1,184
Thereafter ......... 12,056
------------
Total .............. $ 66,606,385
============
Note #9--Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Pursuant to collateral agreements with the FHLB, advances are secured by
all capital stock in the FHLB and certain mortgage-backed securities. FHLB
advances of $10,125,000 at December 31, 2000 mature in 2000 and bear interest
at a weighted-average rate of 5.96 percent. FHLB advances of $18,200,000 at
December 31, 1999 matured in 2000 and bore interest at a weighted average rate
of 6.10 percent.
Note #10--Mandatorily Redeemable Preferred Securities of Subsidiary
On March 23, 2000, Business Capital Trust I, a wholly owned subsidiary of
Business Bancorp, issued $10,000,000 of 10.875% Cumulative Trust Preferred
Securities. Business Capital Trust I invested the gross proceeds of $10,000,000
from the offering in the junior subordinated debentures issued by Business
Bancorp. The subordinated debentures were issued concurrent with the issuance
of the Trust Preferred Securities. Business Bancorp will pay the interest on
the junior subordinated debentures to Business Capital Trust I, which
represents the majority of revenues and the primary source of dividend
distributions by Business Capital Trust I to the holders of the Trust Preferred
Securities. Business Bancorp has
F-18
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
guaranteed, on a subordinated basis, payment of Business Capital Trust I's
obligations. Business Bancorp has the right, assuming no default has occurred,
to defer payments of interest on the junior subordinated debentures at any time
for a period not to exceed ten consecutive semi-annual periods. The Trust
Preferred Securities will mature on March 23, 2030, but can be called after
March 23, 2010.
Note #11--Commitments and Contingencies
The Bank leases, from nonaffiliates, the land on which a branch building
is located through September 30, 2002, with options to extend the lease to
2022.
The lease rate is subject to adjustment proportional to changes in the
consumer price index. However, the monthly rate shall not fall below $2,200.
The Bank has also entered into leases for three additional branch buildings.
The Bank leases an administrative center from a nonaffiliate, through July 31,
2001. The Bank has entered into a ten year lease commencing June 1, 2001 which
will replace the aforementioned administrative center. The future minimum
annual rental payments (excluding property taxes and insurance) under these
leases are as follows at December 31, 2000:
Year Ending
December 31,
------------
2001 ............... $ 307,375
2002 ............... 325,185
2003 ............... 329,862
2004 ............... 313,069
2005 ............... 299,920
Thereafter ......... 1,339,594
----------
Total .............. $2,915,005
==========
The above information is given for the existing lease commitments and is
not a forecast of future rental expense. The total rental expenditure by the
Bank was $230,287, $198,596 and $185,162 for 2000, 1999 and 1998, respectively.
The Bancorp is involved in various litigation. In the opinion of
Management and the Bancorp's legal counsel, the disposition of the litigation
pending will not have a material effect on the Bancorp's consolidated financial
statements.
In the normal course of business, the Bank is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit and standby letters of credit. To varying degrees,
these instruments involve elements of credit and interest rate risk in excess
of the amount recognized in the balance sheets. The Bank's exposure to credit
loss in the event of non-performance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. At December 31,
2000, the Bank had commitments to extend credit of approximately $68,503,610
including standby letters of credit of approximately $1,277,770.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under
construction.
F-19
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Standby letters of credit are 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 loans to customers.
Note #12--Stock Split
On July 21, 1999, the Board of Directors approved a five-for-four stock
split of its common stock. For purposes of calculating earnings per share, the
stock split has been applied retroactively.
Note #13--Stock Option Plan
The Bancorp's incentive stock option and nonqualified plan ratified by the
stockholders in 1994 and amended in 1997 provides for issuance of up to 612,956
shares (after giving retroactive effect for a five-for-four stock split in 1999
and a 20% stock dividend in 1996) of the Bancorp's unissued common stock to be
granted to certain officers, key employees and directors at prices not less
than the fair market value of such shares at the dates of grant, with an
option's maximum term as ten years.
The Bancorp applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its fixed stock option plan. Had compensation costs for the plan been
determined based on the fair value at the grant dates consistent with the
method of SFAS 123, net income for 2000 would have been reduced by $72,467, net
of taxes, resulting in earnings per share of $1.10 and dilutive earnings per
share of $1.09. In 1999, net income would have been reduced by $77,826, net of
taxes, resulting in earnings per share of $.95 and dilutive earnings per share
of $.93. In 1998, net income would have been reduced by $34,797, net of taxes,
resulting in earnings per share of $.95 and dilutive earnings per share of
$.91.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
2000, 1999 and 1998, respectively; risk-free rates of 5.14%, 6.58%, and 4.63%
dividend yield of zero percent for all years, volatility of 40%, 35%, and 35%,
and expected life of seven years for all years.
A summary of the status of the Bancorp's fixed stock option plan as of
December 31, 2000, 1999 and 1998, and changes during the years ending on those
dates is presented below:
2000 1999
------------------------------------ -------------------------
Number of Shares Number of Shares
------------------------- Weighted -------------------------
Available Average Available
for Exercise for
Granting Outstanding Price Granting Outstanding
-------- ----------- ----- -------- -----------
Outstanding,
beginning of year .......... 225,070 374,222 $ 8.89 247,070 365,886
Granted ..................... (33,750) 33,750 $ 10.31 (26,875) 26,875
Exercised ................... -- (50,836) $ 7.15 -- (13,664)
Cancelled ................... 2,500 (2,500) $ 8.40 4,875 (4,875)
------- ------- -------- ------- -------
Outstanding,
end of year ................ 193,820 354,636 $ 9.34 225,070 374,222
Options exercisable
at year-end ................ 231,315 210,839
Weighted-average fair
value of options granted
during the year ............ $ 2.48 $ 3.12
1999 1998
---------- -------------------------------------
Number of Shares
Weighted ------------------------- Weighted
Average Available Average
Exercise for Exercise
Price Granting Outstanding Price
---------- ----------- ------------- -----------
Outstanding,
beginning of year .......... $ 8.55 277,949 451,878 $ 7.01
Granted ..................... $ 8.64 (89,375) 89,375 $ 11.06
Exercised ................... $ 5.68 -- (116,871) $ 8.80
Cancelled ................... $ 8.73 58,496 (58,496) $ 6.59
------- ------- -------- --------
Outstanding,
end of year ................ $ 8.77 247,070 365,886 $ 8.55
Options exercisable
at year-end ................ 218,786
Weighted-average fair
value of options granted
during the year ............ $ 2.98
F-20
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
A summary of the options outstanding and exercisable as of December 31,
2000, 1999 and 1998 is presented below:
2000
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Range of Number Average Average Number
Exercise Outstanding Life in Exercise Outstanding Average
Price 12/31/2000 Years Price 12/31/2000 Price
----- ---------- ----- ----- ---------- -----
$ 5.56 7,196 0.71 $ 5.56 7,200 $ 5.56
$ 7.80 36,000 5.77 $ 7.80 28,800 $ 7.80
$ 8.40-9.20 162,065 6.61 $ 8.93 151,065 $ 8.97
$ 10.80-11.20 88,750 7.38 $ 11.07 37,000 $ 11.06
$ 9.75-10.20 26,875 8.70 $ 9.91 7,250 $ 9.98
$ 9.55-11.00 33,750 9.56 $ 10.31 --
------- -------
354,636 7.04 $ 9.49 231,315 $ 9.08
======= =======
1999
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Weighted
Range of Number Average Average Number
Exercise Outstanding Life in Exercise Outstanding Average
Price 12/31/1999 Years Price 12/31/1999 Price
----- ---------- ----- ----- ---------- -----
$ 5.56-5.67 24,271 4.62 $ 5.63 24,271 $ 5.63
$ 7.80 36,000 6.77 $ 7.80 20,160 $ 6.77
$ 7.90-9.20 198,326 7.54 $ 8.75 147,158 $ 8.77
$ 10.80-11.20 88,750 8.39 $ 11.07 19,250 $ 11.05
$ 9.75-10.20 26,875 9.70 $ 8.64 --
------- -------
374,222 7.63 $ 9.09 210,839 $ 8.53
======= =======
1998
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Weighted
Range of Number Average Average Number
Exercise Outstanding Life in Exercise Outstanding Average
Price 12/31/1998 Years Price 12/31/1999 Price
----- ---------- ----- ----- ---------- -----
$ 5.21-5.56 18,864 3.68 $ 5.34 18,864 $ 5.34
$ 5.66 17,075 6.85 $ 5.66 17,075 $ 5.66
$ 7.80-7.90 69,757 7.99 $ 7.85 48,157 $ 7.86
$ 8.40-9.20 170,815 8.61 $ 8.90 132,565 $ 9.05
$ 10.80-11.20 89,375 9.39 $ 11.06 2,125 $ 10.86
------- -------
365,886 8.34 $ 7.50 218,786 $ 8.22
======= =======
F-21
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #14--Other Operating Expenses
The following is a composition of other operating expenses for the years
ended December 31:
2000 1999 1998
---- ---- ----
Advertising and promotion ................................. $ 489,875 $ 285,940 $ 242,090
Insurance and assessments ................................. 187,148 123,959 118,139
Data processing ........................................... 946,958 682,773 406,498
Amortization of goodwill and other intangible assets ...... 400,845 286,942 295,716
Stationery and supplies ................................... 400,855 290,847 266,282
Professional .............................................. 597,223 439,670 352,989
Office .................................................... 437,074 426,772 420,289
Administrative ............................................ 964,058 783,485 722,370
Other real estate owned ................................... 130,296 109,013 194,898
Other ..................................................... 473,420 346,398 307,474
---------- ---------- ----------
$5,027,752 $3,775,799 $3,326,745
========== ========== ==========
Note #15--Deferred Directors' Fees
The Bancorp offers an option to its directors whereby they may choose to
defer all or part of their fees into a market rate time certificate of deposit
on their behalf. The Bank has no additional commitment or funding requirement
for this arrangement.
Note #16--Earnings Per Share
The following is a reconciliation of net income and shares outstanding to
the income and number of shares used to compute EPS:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
Net Income as Reported ................. $ 2,269,664 -- $ 1,940,305 -- $ 1,856,928 --
Shares Outstanding at Year End ......... -- 2,026,869 -- 1,975,961 -- 1,948,969
Impact of Weighting Shares Purchased
During the Year ....................... -- (31,317) -- (20,287) -- (25,370)
----------- --------- ----------- --------- ----------- ---------
Used in Basic EPS ................... 2,269,664 1,995,552 1,940,305 1,955,674 1,856,928 1,923,599
Dilutive Effect of Outstanding
Stock Options ......................... -- 20,093 -- 41,592 -- 78,808
----------- --------- ----------- --------- ----------- ---------
Used in Dilutive EPS ................ $ 2,269,664 2,015,645 $ 1,940,305 1,997,266 $ 1,856,928 2,002,407
----------- --------- ----------- --------- ----------- ---------
Note #17--Profit Sharing Plan
In 1990 the Bank sponsored a defined contribution section 401(K) profit
sharing plan that covers all eligible employees. In 2000, contributions to the
plan were based upon an amount equal to 50% of each participant's eligible
contribution for the plan year not to exceed 6% of the employee's compensation.
Future contributions are at the discretion of management and the board of
directors. The Bank contributed $135,416 and $106,918 to the Plan for 2000 and
1999, respectively
F-22
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #18--Other Real Estate Owned
As discussed in Note #1N, Other Real Estate Owned is carried at the lesser
of the outstanding loan balance or estimated fair value of the real estate less
selling costs. An analysis of the transactions for the years ended December 31
is as follows:
2000 1999
---- ----
Balance, Beginning of Year ......................... $ 1,036,227 $ 1,068,987
Additions .......................................... 225,946 560,586
Sales .............................................. (692,833) (554,990)
Valuation adjustment and other reductions .......... (64,586) (38,356)
----------- -----------
Balance, End of Year ............................... $ 504,754 $ 1,036,227
=========== ===========
The balances at December 31, 2000 and 1999 are shown net of reserve.
Note #19--Reserve for Losses on Other Real Estate Owned
Transactions in the reserve for other real estate owned are summarized for
the years ended December 31:
2000 1999 1998
---- ---- ----
Balance, Beginning of Year .................. $ 203,696 $ 317,389 $ 305,797
Provision charged to other expense .......... 64,586 38,356 278,159
Charge-offs and other reductions ............ (59,617) (152,049) (266,567)
--------- ---------- ----------
Balance, End of Year ........................ $ 208,665 $ 203,696 $ 317,389
========= ========== ==========
Note #20--Transactions with Related Parties
In the ordinary course of business, the Bank has granted loans to, and
accepted deposits from, certain directors, officers, principal shareholders and
the companies with which they are associated. All such loans and deposits were
made under terms which are consistent with the Bank's normal lending and
deposit policies.
An analysis of the activity with respect to aggregate loans to related
parties during 2000 and 1999 is as follows:
2000 1999
---- ----
Outstanding Balance, beginning of year .......... $ 2,840,209 $ 1,119,866
Credit granted, including renewals .............. 1,829,814 2,695,226
Repayments ...................................... (1,305,877) (974,883)
------------ -----------
Outstanding Balance, end of year ................ $ 3,364,146 $ 2,840,209
============ ===========
Undisbursed loan amounts to related parties amounted to $1,071,888 and
$1,667,297 at December 31, 2000 and 1999, respectively.
At December 31, 2000, the Bank held deposits from related parties of
$4,427,069.
F-23
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Note #21--Servicing Assets
A summary of the changes in servicing assets follows:
2000 1999
---- ----
Balance, Beginning of Year ....................... $ 75,952 $ 65,958
Increase from loan sales ......................... 11,871 39,276
Amortization and other decreases charged to income (25,503) (29,282)
--------- ---------
Balance, End of Year ............................. $ 62,320 $ 75,952
========= =========
The estimated fair value of the servicing assets approximated book value
at December 31, 2000. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates over the expected lives of the loans being serviced.
For purposes of measuring impairment, the Bank has identified each
servicing asset with the underlying loan being serviced. A direct write down is
recorded where the fair value is below the carrying amount of a specific
servicing asset. The amount of loans being serviced by the Bank for the benefit
of others amounted to $12,600,134 and $14,406,293 for the years ended December
31, 2000 and December 31, 1999, respectively.
Note #22--Salary Continuation Plan
On August 31, 2000 and December 4, 1997, the Bancorp acquired all of the
assets and liabilities of Valley Merchants Bank and High Desert National Bank,
respectively. As a result of the acquisitions, the Bancorp has salary
continuation plans for certain key management personnel. The plans provide for
payments for ten years and thirteen years, respectively, commencing within one
month upon reaching age 69 or death. The salary continuation expense was
$24,777, $33,082, and $45,082 for the years ended December 31, 2000, 1999, and
1998, respectively. The Bancorp is committed to pay $800,000 and $520,000, (on
a future value basis) over the pay out periods on the plans.
Note #23--Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bancorp.
The following table presents the carrying amounts and fair values of
financial instruments at December 31, 2000 and 1999. SFAS 107 defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
F-24
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
2000 1999
--------------------------------- ---------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets
Cash and cash equivalents ............. $ 16,921,114 $ 16,921,114 $ 13,971,280 $ 13,971,280
Interest-bearing deposits in other
banks ................................ 3,364,000 3,364,000 -- --
Investment securities ................. 93,340,725 93,341,114 84,506,243 84,496,667
Loans ................................. 180,367,894 179,413,078 116,383,142 114,628,996
Accrued interest receivable ........... 2,049,766 2,049,766 1,440,602 1,440,602
Liabilities
Non-interest bearing deposits ......... 95,073,705 95,073,705 74,533,528 74,533,528
Interest bearing deposits ............. 169,492,618 169,285,700 112,274,438 111,707,348
Accrued interest payable .............. 1,196,226 1,196,226 387,290 387,290
Other borrowings ...................... 10,125,000 10,125,473 18,200,000 18,200,000
Bancorp obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated debentures .............. 10,000,000 9,851,750 -- --
Notional Cost to Cede Notional Cost to Cede
Amount or Assume Amount or Assume
------ --------- ------ ---------
Off-balance Sheet Instruments
Commitments to extend credit and
standby letters of credit ......... $ 69,781,380 $ 697,814 $ 45,592,000 $ 455,920
The following methods and assumptions were used by the Bancorp in
estimating fair value disclosures:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term nature
of the assets.
Investment Securities
Fair values are based upon quoted market prices, where available.
Loans
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
Deposits
The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued interest
payable approximates fair value.
F-25
BUSINESS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998 --(Continued)
Off-balance Sheet Instruments
Fair values of loan commitments and financial guarantees are based upon
fees currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
Note #24--Regulatory Matters
A. Capital Requirements
The Bancorp and Bank are subject to various regulatory capital requirements
administered by Federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bancorp must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities and certain
off-balance- sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bancorp and 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, 2000,
that the Bancorp and Bank exceed all capital adequacy requirements to which
they are subject.
As of January 12, 2001, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action (there are no
conditions or events since that notification that management believes have
changed the Bank's category). To be categorized as well capitalized, the
Bancorp must maintain minimum ratios as set forth in the table below. The
following table also sets forth the Bancorp's and the Bank's (Bank only for
1999) actual capital amounts and ratios (dollar amounts in thousands):
Amount of Capital Required
------------------------------------------------
To Be Adequately To Be
Actual Capital Capitalized Well Capitalized
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000 ........................
Total capital to risk-weighted assets
Business Bancorp ............................ $25,528 11.8% $17,246 8.0% $21,558 10.0%
Business Bank of California ................. 25,627 11.7% 17,507 8.0% 21,884 10.0%
Tier 1 capital to risk-weighted assets
Business Bancorp ............................ 21,003 9.7% 8,623 4.0% 12,935 6.0%
Business Bank of California ................. 23,784 10.9% 8,754 4.0% 13,130 6.0%
Tier 1 capital to average assets
Business Bancorp ............................ 21,003 7.8% 10,739 4.0% 13,423 5.0%
Business Bank of California ................. 23,784 7.9% 12,101 4.0% 15,126 5.0%
As of December 31, 1999
Total capital to risk-weighted assets .......... $18,490 12.2% $12,095 8.0% $15,118 10.0%
Tier 1 capital to risk-weighted assets ......... 17,248 11.4% 6,047 4.0% 9,071 6.0%
Tier 1 capital to average assets ............... 17,248 7.8% 8,793 4.0% 10,991 5.0%
F-26
BUSINESS BANCORP AND SUBSIDIARIES
B. Dividend Restrictions
The FDIC and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks under
their jurisdiction. Compliance with the standards set forth in such
guidelines limits the amount of dividends which the Bancorp and the Bank
may pay.
Note #25--Restatement of Financial Statements
The Bank restated its 1999 and 1998 financial statements for recognition
of deferred tax assets previously reserved for as originally stated. The
valuation reserve on deferred tax assets of $350,000 was recognized into a
prior period which resulted in $350,000 of additional deferred tax assets and
$350,000 of additional retained earnings for each of the reporting periods.
Note #26--Acquisition
On August 31, 2000, the Bank acquired 100% of the outstanding common stock
of Valley Merchants Bank (VMB) for $12,235,151 in cash. VMB had total assets of
$56,696,599. 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 financial statements
include the operations of VMB from the date of the acquisition. Goodwill
arising from the transaction totaled $5,711,007 and is being amortized over
fifteen years on a straight-line basis. The results of VMB's operations are
included in those reported by the Bancorp beginning on September 1, 2000.
The following unaudited pro forma combined results of operations assumes
that the acquisition occurred on January 1, 1999 and 2000, respectively (in
thousands, except per share data):
For The Year Ended
December 31,
-----------------------------
2000 1999
---- ----
Revenues ...................................... $ 27,456 $ 21,708
Net income attributable to common shareholders 2,726 2,149
Earnings per common share:
Basic ...................................... $ 1.37 $ 1.11
Diluted .................................... $ 1.35 $ 1.07
These pro forma amounts are based upon certain assumptions and estimates
which the Bancorp believes are reasonable. The pro forma consolidated results
of operations do not purport to be indicative of the results which would
actually have been obtained had the acquisition occurred on the dates indicated
or which may be obtained in the future.
F-27
BUSINESS BANCORP AND SUBSIDIARIES
NOTE #27 -- Condensed Financial Information of Parent Company Only
Condensed Balance Sheet
2000
----
Assets
Cash and cash equivalents ......................... $ 831,372
Investment in subsidiaries, equity method ......... 32,791,637
Other assets ...................................... 360,870
-----------
Total Assets ................................... $33,983,879
===========
Liabilities and Shareholders' Equity
Trust preferred securities ........................ 10,000,000
Other liabilities ................................. 440,855
Shareholders' equity .............................. 23,543,024
-----------
Total Liabilities .............................. $33,983,879
===========
Condensed Statement of Income
Equity in undistributed income of Bank ............... $ 2,840,022
Equity in undistributed income of Trust .............. 3,363
Interest on Trust Preferred Securities ............... (873,368)
Other expenses ....................................... (159,443)
-----------
Income Before Income Taxes ........................... 1,810,574
Income Tax Benefit ................................... 425,038
-----------
Net Income ........................................... $ 2,235,612
===========
Statements of Cash Flows
2000
----
Cash Flows from Operating Activities
Net income ............................................... $ 2,235,612
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in undistributed income of Bank .................. (2,840,022)
Equity in undistributed income of Trust ................. (3,363)
Net change in assets and liabilities .................... 105,835
Net cash used by operating activities ................. (501,938)
------------
Cash Flows from Investing Activities
Investment in subsidiaries ............................... (9,030,000)
Net cash used by investing activities ................. (9,030,000)
------------
Cash Flows from Financing Activities
Proceeds from sale of common stock ....................... 363,310
Proceeds from issuance of Trust Preferred Securities ..... 10,000,000
Net cash provided by financing activities ............. 10,363,310
------------
Net Increase in Cash and Cash Equivalents ................... 831,372
Cash and Cash Equivalents, Beginning of Year ................ --
Cash and Cash Equivalents, End of Year ...................... $ 831,372
============
Supplemental Cash Flow Information
Cash paid during the year for:
Interest ................................................ $ 498,438
============
Taxes ................................................... $ --
============
Supplemental Disclosures
Net change in accumulated other comprehensive income ..... $ 2,221,550
============
Tax effect of stock options exercised .................... $ 25,851
============
F-28
BUSINESS BANCORP
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31, 2000
--------------- ------------------
(Unaudited) (Audited)
(Dollars in Thousands)
Assets
Cash and due from banks ........................................ $ 21,504 $ 16,921
Federal Funds Sold ............................................. 2,000 0
--------- ---------
Cash and cash equivalents ................................ 23,504 16,921
Interest bearing deposits in banks ............................. 941 3,364
Investment securities
Available-for-sale .......................................... 113,405 91,089
Held-to-maturity ............................................ 1,002 1,005
Federal Home Loan Bank restricted stock, at cost ............... 1,517 1,246
Loans, net of unearned income .................................. 171,849 171,448
Loans held-for-sale ............................................ 11,259 8,920
--------- ---------
Total Loans .............................................. 183,108 180,368
Less allowance for loan losses ........................... (1,973) (1,843)
Net Loans ................................................ 181,135 178,525
Bank premises and equipment .................................... 5,707 5,766
Accrued interest receivable .................................... 1,937 2,050
Deferred tax asset ............................................. 0 448
Other real estate owned, net ................................... 313 505
Goodwill and other intangible assets ........................... 7,276 7,546
Other assets ................................................... 3,376 3,076
--------- ---------
Total Assets ............................................. $ 340,113 $ 311,541
--------- ---------
Liabilities and Stockholders' Equity
Deposits
Demand deposits ............................................. $ 100,410 $ 95,435
NOW deposits ................................................ 37,450 39,521
Money market and savings deposits ........................... 65,099 63,365
Time deposits under $100,000 ................................ 34,234 30,814
Time deposits $100,000 and over ............................. 45,024 35,792
--------- ---------
Total Deposits ........................................... 282,217 264,927
Borrowed Funds ................................................. 19,825 10,125
Bancorp Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures ............... 10,000 10,000
Accrued interest and other liabilities ......................... 2,641 2,946
--------- ---------
Total Liabilities ........................................ 314,683 287,998
--------- ---------
Serial preferred stock--no par value, 2,000,000 shares
Common stock--no par value, 10,000,000 shares authorized; issued
and outstanding 2,026,869 for periods ending June 30, 2001 and
December 31, 2000 ............................................. 6,647 6,647
Retained Earnings .............................................. 17,163 15,922
Accumulated other comprehensive income ......................... 1,620 974
--------- ---------
Total Stockholders' Equity ............................... 25,430 23,543
--------- ---------
Total Liabilities and Stockholders' Equity ............... $ 340,113 $ 311,541
--------- ---------
<FN>
See accompanying notes to unaudited consolidated financial statements
</FN>
F-29
BUSINESS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
June 30, 2001 and 2000
For The Six Month
Periods Ended
--------------------------------
June 30, 2001 June 30, 2000
--------------- --------------
(Dollars in Thousands)
Interest Income
Interest and fees on loans ...................... $ 9,505 $ 6,843
Interest on investment securities
Taxable ........................................ 2,553 2,230
Exempt from Federal taxes ...................... 584 452
Interest on Deposits ............................ 66 2
Interest on Federal funds sold .................. 55 24
-------- --------
Total Interest Income ........................ 12,763 9,551
-------- --------
Interest Expense
Interest expense on deposits
NOW and Money Market accounts .................. 999 799
Savings ........................................ 349 259
Time deposits under $100,000 ................... 865 478
Time deposits $100,000 and over ................ 1,161 444
Interest on Trust Preferred Securities .......... 547 302
Interest on other borrowings .................... 595 714
-------- --------
Total Interest Expense ....................... 4,516 2,996
-------- --------
Net Interest Income .......................... 8,247 6,555
Provision for Loan Losses .......................... 175 80
Net Interest Income After Provision .......... 8,072 6,475
-------- --------
Other Income
Service fees .................................... 1,501 1,260
Gain on sale of SBA loans ....................... 0 12
Gain on sale of other real estate owned ......... 41 173
Gain on sale of investment securities ........... 209 2
-------- --------
Total Other Income ........................... 1,751 1,447
-------- --------
Other Expenses
Salary and employee benefits .................... 4,145 3,147
Occupancy, net .................................. 447 376
Furniture and equipment ......................... 472 398
Other operating expenses ........................ 2,825 2,490
-------- --------
Total Other Expenses ......................... 7,889 6,411
-------- --------
Income Before Income Taxes ......................... 1,934 1,511
-------- --------
Income Taxes ....................................... 693 433
-------- --------
Net Income ......................................... $ 1,241 $ 1,078
-------- --------
Earnings Per Share
Basic ........................................... $ 0.61 $ 0.55
-------- --------
Diluted ......................................... $ 0.60 $ 0.53
-------- --------
<FN>
See accompanying notes to unaudited consolidated financial statements
</FN>
F-30
BUSINESS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
PERIODS ENDED JUNE 30,
2001 2000
------------ -------------
Cash Flows From Operating Activities
Net Income .......................................................................... $ 1,241 $ 1,078
Adjustment to reconcile net income to net cash provided by operating activities
Depreciation and amortization of premises and equipment .......................... 347 331
Amortization of intangibles ...................................................... 327 137
Provision for possible loan loss ................................................. 175 80
Writedowns on other real estate owned ............................................ 0 20
Net (gain)/loss on sales of investment securities ................................ (209) (2)
Net (gain)/loss on sale of OREO .................................................. (41) (173)
Net (gain)/loss on sale of assets ................................................ 0 (18)
Decrease/(increase) in accrued interest receivable ............................... 113 (229)
Decrease/(increase) in deferred assets ........................................... 448 443
Amortization of premium /(discount accretion) on investment securities, net ...... 665 400
Decrease/(increase) in other assets .............................................. (301) (31)
Increase/(decrease) in other liabilities ......................................... (305) 498
--------- --------
Net Cash Provided Through Operating Activities ................................. 2,460 2,534
--------- --------
Cash Flows From Investing Activities
Purchase of investment securities available-for-sale ................................ (50,994) (13,021)
Proceeds from sale of securities .................................................... 17,220 2,708
Proceeds from maturities of available-for-sale investment securities ................ 0 440
Principal reduction of mortgage-backed securities ................................... 11,237 3,544
Net decrease in interest bearing deposits in financial institutions ................. 2,432 --
Net (increase)/decrease in FHLB stock ............................................... (271) (535)
Net (increase)/decrease in loans to customers ....................................... (2,740) (17,868)
Recoveries of loans previously written off .......................................... 43 103
Capital expenditures ................................................................ 0 (832)
Proceeds from sale of equipment ..................................................... 14 20
Proceeds from sale of other real estate owned ....................................... 192 509
--------- --------
Net Cash Used In Investing Activities .......................................... (22,867) (24,932)
--------- --------
Cash Flows From Financing Activities
Net increase in demand deposits, NOW , savings and money market accounts ............ 4,638 2,954
Net increase in certificates of deposit ............................................. 12,652 2,792
Net increase/(decrease) in FHLB borrowings .......................................... 9,700 12,800
Stock options exercised, net of tax effect .......................................... 0 76
Issuance of company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures .................... 0 10,000
--------- --------
Net Cash Provided Through Financing Activities ................................. 26,990 28,622
--------- --------
Net (Decrease)/Increase In Cash And Cash Equivalents ................................. 6,583 6,224
--------- --------
Cash And Cash Equivalents, Beginning of Year ......................................... 16,921 13,971
--------- --------
Cash And Cash Equivalents, End of Period ............................................. $ 23,504 $ 20,195
--------- --------
Supplemental Disclosure Of Cash Flows Information ....................................
Cash paid for interest .............................................................. $ 12,876 $ 9,322
--------- --------
Cash paid for taxes ................................................................. $ 625 $ 330
--------- --------
Non-Cash Investing Activities
Net change in accumulated other comprehensive income ................................ $ 646 $ 151
--------- --------
<FN>
See accompanying notes to unaudited consolidated financial statements
</FN>
F-31
BUSINESS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note #1--Basis of Presentation
The interim financial statements included herein have been prepared by
Business Bancorp without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC.) The interim financial statements
include Business Bancorp and its wholly owned subsidiaries Business Bank of
California (the "Bank") and Business Capital Trust I (the "Trust"),
(collectively the "Company") as consolidated with the elimination of all
intercompany transactions. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted pursuant to such SEC rules and regulations.
Nevertheless, the Company believes that the disclosures are adequate to make
the information presented not misleading. These financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Year 2000 Form 10-KSB Annual Report, as filed with
the SEC (the "Annual Report"). In the opinion of management, all adjustments,
including normal recurring adjustments necessary to present fairly the
financial position of the Company with respect to the interim financial
statements and the results of its operations for the interim period ended June
30, 2001, have been included. Certain reclassifications may have been made to
prior year amounts to conform to the 2001 presentation. The results of
operations for interim periods are not necessarily indicative of results for
the full year.
Note #2--Investment Securities
The Company adopted SFAS 115 "Accounting for Certain Investments in Debt
and Equity Securities" on January 1, 1994, which addresses the accounting for
investments in equity securities that have readily determinable fair values and
for investments in all debt securities. Securities are classified in three
categories and accounted for as follows: debt and equity securities that the
Company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and are measured at amortized cost; debt and equity
securities bought and held principally for the purpose of selling in the near
term are classified as trading securities and are measured at fair value, with
unrealized gains and losses included in earnings; debt and equity securities
not classified as either held-to-maturity or trading securities are deemed as
available-for-sale and are measured at fair value, with unrealized gains and
losses, net of application of applicable taxes, reported in a separate
component of stockholders' equity. Any gains and losses on sales of investments
are computed on a specific identification basis. The amortized cost and
estimated fair value of investment securities at June 30, 2001 and December 31,
2000, were as follows:
Available-for-Sale Securities--(dollars in thousands)
June 30, 2001
-----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
Municipal Agencies ................. $ 22,056 $ 981 $ (46) $ 22,991
Mortgage backed securities ......... 82,882 1,667 (2) 84,547
Corporate Bonds .................... 5,713 167 (13) 5,867
-------- ------- ----- --------
Total ........................... $110,651 $ 2,815 $ (61) $113,405
======== ======= ===== ========
December 31, 2000
-----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
Municipal Agencies ................. $ 22,058 $ 1,042 $ (105) $ 22,995
Mortgage backed securities ......... 61,640 732 (39) 62,333
Corporate Bonds .................... 5,736 46 (21) 5,761
-------- ------- ------- --------
Total ........................... $ 89,434 $ 1,820 $ (165) $ 91,089
======== ======= ======= ========
F-32
Held-to-Maturity Securities--(dollars in thousands)
June 30, 2001
-----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
U.S. Treasury notes ......... $ 1,002 $ 5 $0 $ 1,007
December 31, 2000
-----------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
U.S. Treasury notes ......... $ 1,005 $ 1 $ 0 $ 1,006
Note #3 -- Loans and Reserve for Possible Loan Losses
Loan portfolio composition at June 30, 2001 and December 31, 2000, was as
follows--(dollars in thousands)
June 30, 2001 December 31, 2000
--------------- ------------------
Real Estate ............................... $ 122,004 $ 120,832
Commercial ................................ 38,724 37,448
Installment ............................... 10,478 12,703
All other (including overdrafts) .......... 1,682 1,544
--------- ---------
172,888 172,527
Less: Unearned ............................ (1,039) (1,079)
--------- ---------
Loans, Net of Unearned Income .......... $ 171,849 $ 171,448
--------- ---------
Loans Held for Sale ....................... $ 11,259 $ 8,920
--------- ---------
Concentration of Credit Risk
The Company's lending activities are concentrated primarily in Southern
California. Although the Company seeks to avoid undue concentrations of loans
to a single industry based upon a single class of collateral, real estate and
real estate associated business areas are among the principal industries in the
Company's market area. As a result, the Company's loan and collateral
portfolios are, to some degree, concentrated in those industries. The Company
evaluates each approval of credit on an individual basis and determines
collateral requirements accordingly. When real estate is taken as collateral,
advances are generally limited to a certain percentage of the appraised value
of the collateral at the time the loan is made, depending on the type of loan,
the underlying property and other factors.
F-33
Analysis of the changes in the allowance for loan losses is as
follows--(dollars in thousands):
June 30, 2001 December 31, 2000 June 30, 2000
--------------- ------------------- --------------
Balance at beginning of year ................................. $1,843 $1,242 $1,242
Adjustments (acquistition of Valley Merchants Bank) .......... 0 465 0
Charge-offs
Real estate loans
Construction ........................................... 0 0 0
Mortgage ............................................... 0 0 0
Commercial ................................................ 74 225 163
Installment ............................................... 14 34 22
All other (including overdrafts) .......................... 0 17 6
------ ------ ------
Total .................................................. 88 276 191
Recoveries
Real estate loans
Construction ........................................... 0 0 0
Mortgage ............................................... 0 28 18
Commercial ................................................ 34 110 74
Installment ............................................... 7 4 8
All other (including overdrafts) .......................... 2 15 3
------ ------ ------
Total .................................................. 43 157 103
Net loan charge-offs (recoveries) ............................ 45 119 88
Provisions charged to operating expense ................... 175 255 80
------ ------ ------
Balance at end of period ..................................... $1,973 $1,843 $1,234
------ ------ ------
At June 30, 2001, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $3.2 million and undisbursed loan
commitments in the amount of $76.1 million. The Bank makes commitments to
extend credit in the normal course of business to meet the financing needs of
its customers. Commitments to extend credit are agreements to lend to a
customer as long as there in no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
outstanding commitment amount does not necessarily represent future cash
requirements. Standby letters of credit written are 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
anticipates no losses as a result of such transactions.
The allowance for credit losses related to loans that are identified for
evaluation, in accordance with FASB Statement No. 114, is based on discounted
cash flows using the loan's initial effective interest rate or the fair value
of the collateral for certain collateral dependent loans.
Management believes that the allowance for credit losses at June 30, 2001
is prudent and warranted, based on information currently available. However, no
prediction of the ultimate level of loans charged-off in future years can be
made with any certainty.
Note #4--Earnings Per Share
Basic earnings per share are based on the weighted average number of
shares outstanding before any dilution from common stock equivalents. Diluted
earnings per share include common stock equivalents from the effect of the
exercise of stock options.
The total number of shares used for calculating basic and diluted earnings
per share for the six months ending June 30, 2001 was 2,026,869 and 2,072,473,
respectively. The total number of shares used for calculating basic and diluted
earnings per share for the six months ending June 30, 2000 was 1,977,274 and
2,019,302, respectively.
F-34
The total number of shares used for calculating basic and diluted earnings
per share for the three months ending June 30, 2001 was 2,026,869 and
2,089,340, respectively. The total number of shares used for calculating basic
and diluted earnings per share for the three months ending June 30, 2000 was
1,978,524 and 1,995,057, respectively.
Note #5--Contingencies
Because of the nature of its activities, the Company is at all times
subject to pending and threatened legal actions, which arise out of the normal
course of its business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse affect on the Company's
financial position, results of operations or liquidity.
Note #6--Formation of Holding Company
The Company was formed through a holding company reorganization of
Business Bank of California, wherein Business Bank of California became the
wholly owned subsidiary of Business Bancorp as of January 21, 2000. The
transaction was based on a one for one exchange of shares of Business Bank of
California stock for shares of common stock of Business Bancorp, and was not
considered a taxable event for Internal Revenue Service (IRS) purposes. Such
business combination was accounted for at historical cost, similar to a pooling
of interest. All references to periods prior to March 31, 2000 are references
to financial statements of the Bank.
F-35
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
Page
-----
Consolidated Balance Sheets December 31, 2000 and 1999 .............. F-37
Consolidated Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998 ............... F-38
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2000, 1999, and 1998 .............. F-39
Consolidated Statement of Changes in Shareholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998 ............... F-40
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998 ............... F-41
Notes to Consolidated Financial Statements .......................... F-42
Independent Auditors' Report ........................................ F-60
Condensed Consolidated Balance Sheets As of June 30, 2001 (Unaudited)
and December 31, 2000 .............................................. F-61
Condensed Consolidated Statements of Income (Unaudited)
For the Six Months Ended June 30, 2001 and 2000 .................... F-62
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Six Months Ended June 30, 2001 ............................. F-63
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2001 and 2000 .................... F-64
Notes to Consolidated Financial Statements (Unaudited) .............. F-65
F-36
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 and 2000
1999 2000
----------- -----------
Dollar Amounts In
Thousands
Assets
Cash and due from banks .................................................. $ 6,556 $ 12,040
Federal funds sold ....................................................... 10,400 250
-------- ---------
Total cash and cash equivalents .................................... 16,956 12,290
Interest-bearing deposits with banks ..................................... 286 286
Investment securities available for sale at fair value ................... 34,118 25,100
Investment securities held to maturity at amortized cost (fair values of
$1,979 in 1999 and $1,999 in 2000) ...................................... 2,000 2,000
Loans held for investment (net of allowance for loan losses of $1,492 in
1999 and $1,939 in 2000) ................................................ 136,474 162,884
Premises and equipment--net .............................................. 2,791 3,470
Accrued interest receivable .............................................. 1,077 1,276
Deferred income taxes .................................................... 1,068 1,019
Other assets ............................................................. 1,349 929
-------- ---------
Total assets ....................................................... $196,119 $ 209,254
======== =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing ................................................... $ 41,011 $ 47,383
Interest-bearing:
Transaction accounts ................................................. 112,742 105,284
Time certificates, $100,000 and over ................................. 14,471 25,153
Savings and other time deposits ...................................... 11,560 10,765
-------- ---------
Total interest-bearing deposits .................................... 138,773 141,202
-------- ---------
Total deposits ..................................................... 179,784 188,585
Other borrowings ...................................................... 750 750
Accrued interest payable and other liabilities ........................ 1,188 1,813
-------- ---------
Total liabilities .................................................. 181,722 191,148
-------- ---------
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding solely junior subordinated
debentures ........................................................... 3,000
Shareholders' equity:
Preferred stock, no par value: authorized 20,000,000 shares; none
issued or outstanding Common stock, no par value: authorized
20,000,000 shares; issued and outstanding 2,078,501 shares in 1999
and 1,834,877 in 2000 ................................................ 10,750 9,501
Accumulated other comprehensive (loss) income ......................... (518) 47
Retained earnings ..................................................... 4,165 5,558
-------- ---------
Total shareholders' equity ......................................... 14,397 15,106
-------- ---------
Total liabilities and shareholders' equity ............................... $196,119 $ 209,254
======== =========
<FN>
See notes to consolidated financial statements.
</FN>
F-37
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
1998 1999 2000
------------- ------------- --------------
In Thousands, Except Per Share Amounts
Interest Income:
Loans, including fees ................................................. $ 10,559 $ 12,735 $15,838
Federal funds sold .................................................... 473 544 677
Investment securities ................................................. 2,173 1,747 1,730
--------- --------- -------
Total interest income .............................................. 13,205 15,026 18,245
Interest Expense:
Interest-bearing transaction, savings and other time deposits ......... 3,922 3,820 4,513
Time certificates, $100,000 and over .................................. 664 653 968
Other interest ........................................................ 24 37 34
--------- --------- -------
Total interest expense ............................................. 4,610 4,510 5,515
--------- --------- -------
Net Interest Income ...................................................... 8,595 10,516 12,730
Provision for Loan Losses ................................................ 153 365 420
--------- --------- -------
Net Interest Income After Provision for Loan Losses ...................... 8,442 10,151 12,310
Other Income:
Gain on sale of loans ................................................. 151 87 85
Service fees on deposit accounts ...................................... 522 610 468
Loan servicing fees ................................................... 45 53 56
Gain on sale of investment securities ................................. 53 13 (2)
Other ................................................................. 238 225 262
--------- --------- -------
Total other income ................................................. 1,009 988 869
--------- --------- -------
Other Expenses:
Salaries and employee benefits ........................................ 3,646 4,069 4,464
Occupancy expense ..................................................... 864 983 1,097
Furniture and equipment expense ....................................... 414 414 464
Professional services ................................................. 310 300 272
Supplies .............................................................. 294 272 278
Promotional expenses .................................................. 361 293 305
Data processing fees .................................................. 323 369 361
Regulatory assessments ................................................ 58 41 61
Other ................................................................. 433 428 561
--------- --------- -------
Total other expenses ............................................... 6,703 7,169 7,863
--------- --------- -------
Income Before Income Taxes and Dividends Paid on Trust Preferred
Securities .............................................................. 2,748 3,970 5,316
Income Tax Provision ..................................................... 1,127 1,637 2,145
--------- --------- -------
Income Before Dividends Paid on Trust Preferred Securities ............... 1,621 2,333 3,171
Dividends paid on trust preferred securities ............................. -- -- 101
--------- --------- -------
Net Income ............................................................... $ 1,621 $ 2,333 $ 3,070
========= ========= =======
Basic Earnings Per Share ................................................. $ 0.75 $ 1.12 $ 1.52
========= ========= =======
Diluted Earnings Per Share ............................................... $ 0.70 $ 1.07 $ 1.45
========= ========= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-38
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
1998 1999 2000
---- ---- ----
In Thousands, Except Per Share Amounts
Net Income .................................................. $ 1,621 $ 2,333 $ 3,070
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(net of taxes of $110 in 1998, $(498) in 1999 and $393
in 2000) .............................................. 159 (717) 566
Less: reclassification adjustment for gains (losses)
included in net income (net of taxes of $22 in 1998, $5
in 1999 and $(1) in 2000) ............................. 31 8 (1)
------- ------- -------
Other comprehensive income (loss) ........................ 190 (709) 565
------- ------- -------
Comprehensive income ..................................... $ 1,811 $ 1,624 $ 3,635
======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-39
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
Accumulated
Other
---------------
Common Stock Comprehensive Retained
Shares Amount Income (Loss) Earnings Total
------ ------ ------------- -------- -----
Dollar Amounts in Thousands
Balance, January 1, 1998 ...................... 2,054,715 $ 10,300 $ 1 $ 1,666 $11,967
Net income ................................. -- -- -- 1,621 1,621
Other comprehensive income, net of taxes ... -- -- 190 -- 190
Common stock issued upon exercise of
stock options ............................. 26,457 115 -- -- 115
Tax benefit of stock options exercised ..... -- -- -- 36 36
Purchases of common stock .................. (92,156) (461) -- (386) (847)
--------- -------- ------ ------- -------
Balance, December 31, 1998 .................... 1,989,016 9,954 191 2,937 13,082
Net income ................................. -- -- -- 2,333 2,333
Other comprehensive income, net of taxes ... -- -- (709) -- (709)
Dividends on common stock (5%)
Cash payment .............................. -- -- -- (2) (2)
Stock issued .............................. 98,427 867 -- (867) --
Cash Dividends ............................. -- -- -- (40) (40)
Common stock issued upon exercise of
stock options ............................. 77,831 363 -- -- 363
Tax benefit of stock options exercised ..... -- -- -- 110 110
Purchases of common stock .................. (86,773) (434) -- (306) (740)
--------- -------- ------ ------- -------
Balance, December 31, 1999 .................... 2,078,501 10,750 (518) 4,165 14,397
Net income ................................. -- -- -- 3,070 3,070
Other comprehensive income, net of taxes ... -- -- 565 -- 565
Cash Dividends ............................. -- -- -- (81) (81)
Common stock issued upon exercise of
stock options ............................. 44,212 191 -- -- 191
Tax benefit of stock options exercised ..... -- -- -- 41 41
Purchases of common stock .................. (287,836) (1,440) -- (1,637) (3,077)
--------- -------- ------ ------- -------
Balance, December 31, 2000 .................... 1,834,877 $ 9,501 $ 47 $ 5,558 $15,106
========= ======== ====== ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-40
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
1998 1999 2000
---- ---- ----
Dollar Amounts in Thousands
Cash Flows From Operating Activities:
Net income .............................................................. $ 1,621 $ 2,333 $ 3,070
Adjustments to reconcile net income to net cash provided by
operating activities: .................................................
Provision for loan losses ............................................. 153 365 420
Depreciation and amortization ......................................... 479 463 428
Gain on sale of investment securities, net ............................ (53) (13) 2
Deferred income taxes ................................................. (32) (17) (352)
Changes in:
Accrued interest receivable .......................................... (82) 75 (199)
Other assets ......................................................... 124 (309) 420
Accrued interest payable and other liabilities ....................... 96 161 683
--------- -------- ---------
Net cash provided by operating activities ........................... 2,306 3,058 4,472
--------- -------- ---------
Cash Flows From Investing Activities:
Held to maturity securities:
Calls ................................................................. 21,250 4,055 --
Purchases ............................................................. (2,055) -- --
Available for sale securities:
Maturities ............................................................ 3,046 4,272 5,000
Calls ................................................................. 1,000 -- --
Purchases ............................................................. (30,642) (26,760) (6,925)
Sales ................................................................. 1,206 23,164 11,957
Decrease in interest-bearing deposits with banks
Net (increase) in loans held for investment ............................. (22,932) (26,881) (26,830)
Purchases of premises and equipment ..................................... (278) (811) (1,174)
--------- -------- ---------
Net cash used by investing activities ............................... (29,405) (22,961) (17,972)
--------- -------- ---------
Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits ..................... 9,637 2,223 6,372
Net increase in interest-bearing transaction, savings and other time
deposits .............................................................. 19,135 22,657 2,429
Net increase (decrease) in other borrowings ............................. (394) 394 --
Proceeds from Company obligated mandatorially redeemable
preferred securities of subsidiary trust holding solely junior
subordinated debentures ............................................... -- -- 3,000
Cash dividends paid ..................................................... -- (40) (81)
Cash payment for fractional shares resulting from stock dividend ........ -- (2) --
Proceeds from the exercise of stock options ............................. 115 362 191
Purchases of common stock ............................................... (847) (739) (3,077)
--------- -------- ---------
Net cash provided by financing activities ........................... 27,646 24,855 8,834
--------- -------- ---------
Net Increase in Cash and Cash Equivalents ................................ 547 4,952 (4,666)
--------- -------- ---------
Cash and Cash Equivalents:
Beginning of year ....................................................... 11,457 12,004 16,956
--------- -------- ---------
End of year ............................................................. $ 12,004 $ 16,956 $ 12,290
========= ======== =========
Cash Paid During the Year for:
Interest on deposits and other borrowings ............................... $ 4,648 $ 4,522 $ 5,361
========= ======== =========
Income taxes ............................................................ $ 976 $ 1,666 $ 2,255
========= ======== =========
Noncash Investing and Financing Activities:
Stock dividends paid on common stock .................................... $ 867
========
<FN>
See notes to consolidated financial statements.
</FN>
F-41
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCB Financial Corporation (the "Company" on a consolidated basis) is a
bank holding company with one bank subsidiary: Metro Commerce Bank (the
"Bank"). MCB Statutory Trust I (the Trust), which is a Connecticut statutory
trust formed for the exclusive purpose of issuing and selling trust preferred
securities, is also a subsidiary of the Company. The accounting and reporting
policies of the Company conform to accounting principles generally accepted in
the United States of America and general practice in the banking industry. The
Company was incorporated in California on January 20, 1993 for the purpose of
becoming a bank holding company registered under the Bank Holding Company Act
of 1956.
The following is a summary of the significant accounting policies and
reporting methods used by the Company:
Nature of Operations
The Company operates five branches in the San Francisco Bay Area and one
branch in Upland, California. The Company's primary source of revenue is
providing loans to small and middle-market businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Basis of Consolidation
The accompanying consolidated financial statements include the Company and
its wholly owned subsidiaries, the Bank and the Trust. All intercompany amounts
are eliminated in consolidation.
Cash and Due from Banks
Cash and due from banks include balances with the Federal Reserve Bank.
The Company is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve, based primarily on the Company's
average daily deposit balances. At December 31, 2000, the Company had required
balances and compensating balances with the Federal Reserve of $1,676,000.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, due from banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
Investment Securities
The Company classifies its qualifying investments as trading, available
for sale or held to maturity. Management has reviewed the securities portfolio
and classified securities as either held to maturity or available for sale. The
Company's policy of classifying investments as held to maturity is based upon
its ability and management's intent to hold such securities to maturity.
Securities expected to be held to maturity are carried at amortized historical
cost. All other securities are classified as available for sale and are carried
at fair value. Fair value is determined based upon quoted market prices.
Unrealized gains and losses on securities available for sale are included as a
component of shareholders' equity on an after-tax basis. Gains and losses on
dispositions of investment securities are included in noninterest income and
are determined using the specific identification method.
F-42
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
Loans
Loans which are held for investment are stated at the principal amount
outstanding, net of deferred loan origination fees and costs and the allowance
for possible credit losses. Interest income is recognized using methods which
approximate a level yield on principal amounts outstanding. The accrual of
interest on loans is discontinued when the payment of principal or interest is
considered to be in doubt, or when a loan becomes contractually past due by 90
days or more with respect to principal or interest, except for loans that are
well secured and in the process of collection. Loan origination fees, net of
certain related direct loan origination costs, are deferred and amortized as
yield adjustments over the contractual lives of the underlying loans.
Sale and Servicing of Small Business Administration ("SBA") Loans
The Company originates loans to customers under SBA programs that
generally provide for SBA guarantees of 70% to 90% of each loan. The Company
generally sells the guaranteed portion of the majority of the loans to an
investor and retains the unguaranteed portion and servicing rights in its own
portfolio. Funding for the SBA programs depend on annual appropriations by the
U.S.
Congress.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such
loans between the portion sold, the portion retained and a value assigned to
the right to service the loan. The difference between the adjusted carrying
value of the portion retained and the face amount of the portion retained is
amortized to interest income over the life of the related loan using a method
which approximates the interest method.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed appropriate
by management to provide for known and inherent risks in the loan portfolio and
commitments to extend credit. The allowance is based upon management's
continuing assessment of various factors affecting the collectibility of loans
and commitments to extend credit, including current and projected economic
conditions, past credit experience, the value of the underlying collateral, and
such other factors that in management's judgment deserve current recognition in
estimating potential credit losses. Loans deemed uncollectible are chargedoff
and deducted from the allowance, while subsequent recoveries are credited to
the allowance.
A loan is considered impaired when management determines that it is
probable that the Company will be unable to collect all amounts due according
to the original contractual terms of the loan agreement. Impaired loans are
carried at the estimated present value of total expected future cash flows,
discounted at the loan's effective rate, or the fair value of the collateral,
if the loan is collateral dependent, if less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount). An impairment is recognized by adjusting an
allocation of the existing allowance for loan losses.
Premises and Equipment
Premises and equipment consist of leasehold improvements, furniture and
equipment, and automobiles which are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets, primarily from three to
ten years. Leasehold improvements are amortized over the terms of the lease or
their estimated useful lives, whichever is shorter.
F-43
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
Stock-based Compensation
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
Income Taxes
The Company and the Bank file consolidated income tax returns. The Company
provides a deferred tax expense or benefit equal to the net change in deferred
tax assets and liabilities during the year. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Stock Splits and Stock Dividends
In February 1998, the Company's outstanding shares of common stock were
split four-for-three. In August 1998, outstanding shares of common stock were
split three-for-two. In September 1999, outstanding shares of common stock were
increased due to the payment of a 5% stock dividend. All shares and per share
amounts reported have been restated to reflect the splits and dividends.
Comprehensive Income
Comprehensive income is equal to net income plus the change in "other
comprehensive income" which includes income and (loss) from non-owner sources.
The only component of other comprehensive income currently applicable to the
Company is the net unrealized gain or loss on available for sale investments.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the year.
Diluted net income per common share is computed by dividing net income by the
weighted average number of common shares plus common equivalent shares
outstanding including dilutive stock options.
Segment Information
The Company operates as a single business segment--commercial banking.
Derivatives and Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for the
Company in the first quarter of the fiscal year beginning January 1, 2001. SFAS
133 as amended establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt the standard effective January 1, 2001.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the financial position or results of operations, or cash flows of the
Company.
Accounting Pronouncements
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities," was issued in September 2000. SFAS No. 140
is a replacement of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities". Most of the provisions of
SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by
the Financial Standards Board ("FASB"), and some were changed only in minor
ways. In issuing SFAS No.140, the FASB included issues and decisions that had
been addressed and determined since the original publication of
F-44
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001.
Required disclosures about securitization and collateral and for recognition
and reclassification of collateral for fiscal years ending after December 15,
2000 have been included herein. Management does not expect the adoption of SFAS
No. 140 on March 31, 2001 to have a significant impact on the financial
position or results of operations of the Company.
Reclassifications
Certain 1998 and 1999 amounts were reclassified to conform to the 2000
presentation.
2. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities
at December 31 were as follows (dollar amounts in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---- ----- ------ ----- -----
2000:
Held to maturity securities:
U.S. Government agencies .......... $ 2,000 $ (1) $ 1,999 $ 2,000
------- ----- ------- -------
Total held to maturity ........... 2,000 (1) 1,999 2,000
------- ----- ------- -------
Available for sale securities:
U.S. Treasury ....................... 13,983 188 (42) 14,129 14,129
U.S. Government agencies ............ 9,108 5 (75) 9,038 9,038
Corporate securities ................ 1,929 4 1,933 1,933
------- --- ------- -------
Total available for sale ......... 25,020 197 (117) 25,100 25,100
------- --- ----- ------- -------
Total investment securities .......... $27,020 $197 $(118) $27,099 $27,100
======= ==== ===== ======= =======
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---- ----- ------ ----- -----
1999:
Held to maturity securities:
U.S. Government agencies .......... $ 2,000 $ (21) $ 1,979 $ 2,000
------- ------ ------- -------
Total held to maturity ........... 2,000 (21) 1,979 2,000
------- ------ ------- -------
Available for sale securities:
U.S. Treasury ....................... 21,920 (320) 21,600 21,600
U.S. Government agencies ............ 11,134 (537) 10,597 10,597
Coporate securities ................. 1,950 (29) 1,921 1,921
------- ------ ------- -------
Total available for sale ......... 35,004 (886) 34,118 34,118
------- ------ ------- -------
Total investment securities .......... $37,004 $ $ (907) $36,097 $36,118
======= ======== ====== ======= =======
F-45
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---- ----- ------ ----- -----
1998:
Held to maturity securities
U.S. Government agencies .......... $ 6,055 $ 26 $ 6,081 $ 6,055
------- ---- ------- -------
Total held to maturity ........... 6,055 26 6,081 6,055
------- ---- ------- -------
Available for sale securities:
U.S. Treasury ....................... 15,206 214 $ (6) 15,414 15,414
U.S. Government agencies ............ 17,247 137 (60) 17,324 17,324
Mortage-backed securities ........... 1,172 5 1,177 1,177
Coporate securities ................. 1,971 36 2,007 2,007
Municipal bonds ..................... 100 1 101 101
------- ---- ------- -------
Total available for sale ......... 35,696 393 (66) 36,023 36,023
------- ---- ---- ------- -------
Total investment securities .......... $41,751 $419 $(66) $42,104 $42,078
======= ==== ==== ======= =======
The following table shows the amortized cost and approximate fair value of
investment securities by contractual maturity at December 31, 2000 (dollar
amounts in thousands):
Held to Maturity Available for Sale
----------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Within one year ......................... $1,000 $ 999 $ 1,010 $ 1,003
After one but within five years ......... 1,000 1,000 19,960 20,078
Over five years ......................... -- -- 4,050 4,019
------ ------ ------- -------
Total ................................ $2,000 $1,999 $25,020 $25,100
====== ====== ======= =======
The Bank carries its Federal Reserve Bank stock and Federal Home Loan Bank
stock as other assets. These securities are not covered by the provisions of
SFAS No. 115 and are recorded at historical cost. The total carrying value at
December 31, 1999 and 2000 was $791,000 and $327,000, respectively.
Securities with an amortized cost of approximately $8,062,000 as of
December 31, 1999, and $6,050,000 as of December 31, 2000, were pledged to
secure other borrowings.
In 2000, proceeds from the sale of investment securities available for
sale totaled $11,957,000. Realized net losses on these sales totaled $2,000. In
1999, proceeds from the sale of investment securities available for sale
totaled $23,164,000. Realized net gains on these sales totaled $13,000. In
1998, proceeds from sale of investment securities available for sale totaled
$1,206,000, and the realized net gains totaled $53,000.
F-46
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, consisted of the following (dollar amounts in
thousands):
1998 1999 2000
---- ---- ----
Commercial .............................. $ 22,504 $ 23,413 $ 27,137
Real estate:
Commercial ............................ 72,605 83,737 108,557
Construction .......................... 9,619 23,546 24,157
Land .................................. 2,592 4,440 1,675
Home equity ............................. 1,703 1,289 1,581
Loans to consumers and individuals ...... 2,085 1,672 1,936
-------- -------- --------
Total ......................... 111,108 138,097 165,043
======== ======== ========
Deferred loan fees ...................... (33) (131) (220)
Allowance for loan losses ............... (1,117) (1,492) (1,939)
-------- -------- --------
Total ......................... $109,958 $136,474 $162,884
======== ======== ========
The Company is principally engaged in commercial banking in the San
Francisco Bay and Greater Los Angeles Areas of California. The Company
primarily grants commercial loans, the majority of which are secured by
commercial properties. Although the Company has a diversified portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economic sector of Northern California, including the real
estate markets of the San Francisco Bay Area. Approximately 49% of the
Company's loans have interest rates that are variable and tied to the prime
rate, whereas the remaining are fixed rate loans.
Following is a schedule of the activity in the allowance for loan losses
on loans for the years ended December 31 (dollar amounts in thousands):
1998 1999 2000
---- ---- ----
Balances, January 1 ................ $1,007 $1,117 $1,492
Provision for loan losses .......... 153 365 420
Loans charged-off .................. (53) (62) (10)
Recoveries ......................... 10 72 37
------ ------ ------
Total ................... $1,117 $1,492 $1,939
====== ====== ======
At December 31, 1999 and 2000, the Company had nonperforming loans in the
amounts of $1,747,000 and $40,000, respectively. At December 31, 1999, the
nonperforming loans included nonaccrual loans totaling $1,707,000. Had these
loans performed under their contractual terms, $66,000 in additional interest
income would have been recognized during the year.
At December 31, 2000, the nonperforming loans included one loan 90 days or
more past due and still accruing totaling $40,000. This loan is well secured
and in the process of collection.
At December 31, 1999 and 2000, the Company had loans identified as
impaired, in the aggregate amounts of $1,747,000 and $40,000, respectively. The
Company provided no specific allowance for loan losses at December 31, 1999 and
2000 for these impaired loans since they were adequately collateralized.
F-47
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
4. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, are as follows
(dollar amounts in thousands):
1999 2000
---- ----
Leasehold improvements ..................................... $ 2,494 $ 2,936
Furniture and equipment .................................... 2,574 2,838
Automobiles ................................................ 274 356
Construction in progress ................................... -- 387
-------- --------
Total ................................................... 5,342 6,517
Less accumulated depreciation and amortization .......... (2,551) (3,047)
-------- --------
Premises and equipment, net ............................. $ 2,791 $ 3,470
======== ========
The amount of depreciation and amortization was $433,000 in 1998, $451,000
in 1999 and $496,000 in 2000.
5. DEPOSITS
The aggregate amount of short-term jumbo CD's, each with a minimum
denomination of $100,000, was approximately $13,714,000 and $24,653,000 in 1999
and 2000, respectively.
At December 31, 2000, the scheduled maturities of CDs are as follows:
2001 .......... $32,574
2002 .......... 654
2003 .......... 338
2004 .......... 12
2005 .......... 96
-------
Total ......... $33,674
=======
6. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31 are as follows (dollar amounts in thousands):
1998 1999 2000
---- ---- ----
Current payable (benefit):
Federal ................................. $ 867 $1,245 $1,864
State ................................... 292 409 633
------ ------- ------
Total current payable (benefit) ..... 1,159 1,654 2,497
Deferred:
Federal ................................. (37) (15) (316)
State ................................... 5 (2) (36)
------ ------- ------
Total deferred ...................... (32) (17) (352)
------ ------- ------
Total ..................................... $1,127 $1,637 $2,145
====== ======= ======
F-48
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
A reconciliation of the statutory federal income tax rates with the
Company's effective income tax rates is as follows:
1998 1999 2000
---- ---- ----
Statutory federal tax rate .......... 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit .................. 7.1 7.1 7.1
Municipal interest .................. (0.1) (0.2)
Other ............................... 0.3
---- ---- ----
Effective tax rate .................. 41.0% 41.2% 41.1%
==== ==== ====
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Temporary differences and carryforwards
which give rise to deferred tax assets and liabilities are as follows (dollar
amounts in thousands):
December 31
-------------------
1999 2000
---- ----
Deferred tax assets:
Net operating loss carryforwards .......... $ 259 $ 224
Reserves not currently deductible ......... 542 709
Unrealized loss on securities available for
sale ................................... 368
State income taxes ........................ 108 181
Other ..................................... 14 208
------ ------
Total .......................... 1,291 1,322
====== ======
Deferred tax liabilities:
Tax over book depreciation ................ 223 270
Unrealized gain on securities available for
sale ................................... 33
------ ------
Total .......................... 223 303
------ ------
Net deferred tax asset ......... $1,068 $1,019
====== ======
The Company has acquired net operating loss carryforwards ("NOL") in
connection with the acquisition of the Bank of Hayward in 1994. The utilization
of NOLs acquired through acquisition is limited by federal tax laws. The
Company has determined that the annual limitation on its ability to utilize
NOLs is $78,130 for the fifteen-year period. The following table presents the
NOLs (after limitation) at December 31, 2000, by expiration date:
Expiration Date Federal Amount
--------------- --------------
December 31, 2004 .......... $391
December 31, 2005 .......... 78
December 31, 2006 .......... 11
December 31, 2007 .......... 145
December 31, 2008 .......... 78
F-49
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
The Company reduced its 2000 federal current tax liability by
approximately $27,000 by utilizing $78,130 in net operating loss carryforwards.
7. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has made loans and
advances under lines of credit to directors and their related interests. All
such loans and advances were made under terms that are consistent with the
Company's normal lending policies.
At December 31, 2000, loans outstanding to related parties were $2,892,000
and loan commitments to related parties amounted to $3,905,000.
8. STOCK OPTION PLANS
Stock Option Plans
Under the Company's 1989 Stock Option Plan (the "1989 Plan"), a total of
499,284 stock options were authorized for grant. The 1989 Plan terminated
according to its terms in December 1999. Options granted pursuant to the 1989
Plan generally had lives of 10 years from the date of grant, subject to earlier
expiration in certain cases, such as termination of the grantee's employment.
On May 19, 1999, the Company's shareholders approved the MCB Financial
Corporation 1999 Stock Option Plan (the "Plan"). The Plan was designed to
replace the 1989 Plan which terminated in December 1999.
The Plan authorizes the Company to grant options that qualify as incentive
stock options ("ISO") under the Internal Revenue Code of 1986 and nonqualified
stock options ("NQSO") to officers and employees of the Company. Nonemployee
directors are eligible to receive only NQSOs.
The Plan has set aside 415,485 authorized, but unissued, shares of the
Company's common stock for grant at not less than the fair market value of the
Company's common stock on the date the option is granted. The term of the
options may not exceed 10 years from the date of grant, and the options
generally vest over a four year period.
Number Weighted Average
of Exercise
Shares Price
------ -----
Outstanding at January 1, 1998
(234,817 exercisable at a weighted average price of $4.18) ......... 285,070 $ 4.30
Granted (weighted average fair value of $4.39) ...................... 10,762 9.72
Exercised ........................................................... (27,779) 4.17
------- --------
Outstanding at December 31, 1998
(227,533 exercisable at a weighted average price of $4.26) ......... 268,053 4.52
Granted (weighted average fair value of $3.96) ...................... 87,147 7.59
Exercised ........................................................... (80,797) 4.48
Canceled ............................................................ (7,560) 7.27
------- --------
Outstanding at December 31, 1999
(181,080 exercisable at a weighted average price of $4.51) ......... 266,843 5.46
Granted (weighted average fair value of $4.92) ...................... 42,500 10.12
Exercised ........................................................... (44,212) 4.32
Canceled ............................................................ (12,810) 7.43
------- --------
Outstanding at December 31, 2000 .................................... 252,321 $ 6.34
======= ========
F-50
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
Additional information regarding options outstanding as of December 31,
2000 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------------- -------------------------------
Remaining Weighted Weighted
Range of Number Contractural Average Number Average
Exercise Prices Outstanding Life (Yrs.) Exercise Price Exercisable Exercise Price
--------------- ----------- ----------- -------------- ----------- --------------
$3.24--$3.98 99,436 2.0 $ 3.84 99,436 $ 3.84
4.11-- 5.61 26,123 3.8 4.74 25,021 4.71
7.62-- 8.50 88,500 8.7 7.77 32,400 7.70
9.05--11.50 38,262 8.7 10.64 11,957 10.31
------ ------
252,321 168,814
======= =======
At December 31, 2000, 341,485 options were available for future grants
under the Plan.
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation", requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 36 months
following full vesting; stock volatility, 34% in 1998, 42% in 1999 and 41% in
2000; risk free interest rates, 4.7% in 1998, 6.3% in 1999 and 4.8% in 2000; no
dividend yield in 1998, a dividend yield of 0.48% in 1999 and a dividend yield
of 0.45% in 2000. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1995 - 2000 awards had been amortized to expense
over the vesting period of the awards, pro forma net income would have been as
follows (dollar amounts in thousands, except per share amounts):
Years Ended December 31,
---------------------------------------
1998 1999 2000
---- ---- ----
Net Income:
As reported ...................... $ 1,621 $ 2,333 $ 3,070
Pro forma ........................ 1,594 2,266 2,987
Basic earnings per share:
As reported ...................... $ 0.75 $ 1.12 $ 1.52
Pro forma ........................ 0.74 1.09 1.48
Diluted earnings per share:
As reported ...................... $ 0.70 $ 1.07 $ 1.45
Pro forma ........................ 0.70 1.04 1.41
9. TRUST PREFERRED SECURITIES
On September 7, 2000, the Company completed an offering of 10.60% capital
securities in an aggregate amount of $3.0 million through MCB Statutory Trust I
(the "Trust"), a wholly owned trust
F-51
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
subsidiary formed for the purpose of the offering. The entire proceeds of the
issuance were invested by the trust in $3,000,000 of 10.60% Junior Subordinated
Deferrable Interest Debentures due 2030 issued by the Company. The debentures
represent the sole assets of the Trust. Interest on the debentures is payable
semi-annually and the principal is redeemable by the Company at a premium
beginning on or after September 7, 2010 through September 6, 2020 plus any
accrued and unpaid interest to the redemption date. On or after September 7,
2020, the principal is redeemable by the Company at 100% of the principal
amount. The trust preferred securities are subject to mandatory redemption to
the extent of any early redemption of the debentures and upon maturity of the
debentures on September 7, 2030. The debentures bear the same terms and
interest rates as the trust preferred securities.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the trust preferred securities.
The debentures and related Trust investment in the debentures have been
eliminated in consolidation and the trust preferred securities are reflected as
outstanding in the accompanying consolidated financial statements.
Under applicable regulatory guidelines, the trust preferred securities
currently qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital.
Any additional portion of trust preferred securities would currently qualify as
Tier 2 capital. As of December 31, 2000, the entire $3.0 million outstanding of
trust preferred securities qualified as Tier 1 capital.
10. COMMITMENTS AND CONTINGENCIES
The Bank leases its premises under noncancelable operating leases expiring
through June 30, 2014. Future minimum lease commitments are $611,000 in 2001,
$604,000 in 2002, $604,000 in 2003, $561,000 in 2004, $491,000 in 2005, and
$2,839,000, thereafter.
Rental expense for premises under operating leases included in occupancy
expense was $583,000, $676,000 and $744,000 in 1998, 1999 and 2000,
respectively.
There are various legal actions pending against the Company and the Bank
arising from the normal course of business. Management, upon the advice of
legal counsel handling such actions, believes that the ultimate resolution of
these actions will not have a material effect on the financial position or
results of operations of the Company.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to various financial instruments with on-balance sheet
and off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. Financial instruments include commitments to
extend credit, standby letters-of-credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters-of-credit and financial guarantees is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. The Bank controls the credit risk of these transactions
through credit approvals, credit limits and monitoring procedures.
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
F-52
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include marketable securities, accounts
receivable, inventory, property, plant and equipment.
Standby letters-of-credit and financial guarantees are written conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. Most guarantees extend for less than five years
and expire in decreasing amounts. The credit risk involved in issuing
letters-of-credit is essentially the same as that involved in extending loan
facilities to customers.
The following table summarizes these financial instruments and other
commitments and contingent liabilities at December 31 (dollar amounts in
thousands):
1999 2000
---- ----
Financial instruments whose credit risk is represented
by contract amounts:
Commitments to extend credit--loans ................... $33,750 $36,698
Standby letters-of-credit and financial guarantees 495 1,551
------- -------
Total ............................................ $34,245 $38,249
======= =======
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been
determined using the available market information and appropriate valuation
methodologies consistent with the requirements of SFAS No. 107, Disclosures
about Fair Value of Financial Instruments. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the bank could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
December 31, 2000
------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Financial assets:
Cash and due from banks ................................. $ 12,040 $ 12,040
Federal funds sold ...................................... 250 250
Interest-bearing deposits with banks .................... 286 286
Available for sale securities ........................... 25,100 25,100
Held to maturity securities ............................. 2,000 1,999
Loans, net .............................................. 162,884 161,665
Financial liabilities:
Noninterest-bearing deposits ............................ 47,383 47,383
Interest-bearing deposits ............................... 141,202 141,220
Other borrowings ........................................ 750 750
Company obligated mandatorily redeemable cumulative trust
preferred securities of subsidiary trust holding solely
junior subordinated debentures ......................... 3,000 3,000
F-53
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
December 31, 2000
------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Financial assets:
Cash and due from banks ...................... $ 6,556 $ 6,556
Federal funds sold ........................... 10,400 10,400
Interest-bearing deposits with banks ......... 286 286
Available for sale securities ................ 34,118 34,118
Held to maturity securities .................. 2,000 1,979
Loans, net ................................... 136,474 135,489
Financial liabilities:
Noninterest-bearing deposits ................. 41,011 41,011
Interest-bearing deposits .................... 138,773 138,718
Other borrowings ............................. 750 750
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Short-Term Financial Assets--This category includes cash and due from
banks, federal funds sold and interest-bearing deposits with banks. Because of
their relatively short maturities, the fair value of these financial
instruments is considered to be equal to book value.
Available-For-Sale and Held-To-Maturity Securities--Fair value is quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar instruments.
Loans--The fair value of floating rate loans is deemed to approximate book
value. The fair value of all other performing loans is determined by
discounting expected 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.
In addition to the above, the allowance for loan losses is considered a
reasonable adjustment for credit risk relating to the entire credit portfolio,
including obligations to extent credit and other offbalance- sheet
transactions.
Deposits--The fair value of demand, savings and money market deposits is
equal to the amount payable on demand at the reporting date. For other types of
deposits with fixed maturities, fair value is estimated by discounting
contractual cash flows at interest rates currently being offered on deposits
with similar characteristics and maturities. A fair value for the deposits base
is not practicable.
Other Borrowings and Trust Preferred Securities--The fair value of the
other borrowings is determined by discounting contractual cash flows at current
market interest rates for similar instruments.
Off-Balance-Sheet Financial Instruments--The Company has not estimated the
fair value of offbalance- sheet commitments to extend credit, standby letters
of credit and financial guarantees. Because of the uncertainty involved in
attempting to assess the likelihood and timing of a commitment being drawn
upon, coupled with the lack of an established market and the wide diversity of
fee structures, the Company does not believe it is practicable to provide a
meaningful estimate of fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2000. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. Management does not intend to dispose of a
significant portion of its financial instruments.
F-54
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
13. REGULATORY MATTERS
The Company and Bank are subject to various regulations issued by Federal
banking agencies, including minimum capital requirements. Failure to meet
minimum regulatory capital requirements could result in regulators requiring
prompt corrective action to be taken which could have a material effect on the
financial statements. As of December 31, 2000, both the Company and Bank
exceeded the capital adequacy requirements for a well capitalized institution.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines
that involve quantitative measures of the Company's and Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and Bank's capital amounts and
classiflcations are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Company and 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 (as
defined) to average assets (as defined).
As of December 31, 1999 and 2000, the most recent notification from the
regulators 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 risk-based, tier 1 risk-based, and tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Company and Bank's actual capital amounts and ratios are also
presented below (dollar amounts in thousands):
For Capital Required to be
Actual Adequacy Purposes Well Capitalized
----------------------- ---------------------- -----------------------
2000 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
Total Capital (to risk weighted assets)
Company ............................. $19,815 11.5% $13,790 8.0% n/a
Bank ................................ 18,080 10.5% 13,782 8.0% $17,228 10.0%
Tier 1 Capital (to risk weighted assets)
Company ............................. 17,876 10.4% 6,895 4.0% n/a
Bank ................................ 16,141 9.4% 6,891 4.0% 10,337 6.0%
Tier 1 Capital (to average assets)
Company ............................. 17,876 8.3% 8,577 4.0% n/a
Bank ................................ 16,141 7.5% 8,574 4.0% 10,717 5.0%
F-55
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 --(Continued)
For Capital Required to be
Actual Adequacy Purposes Well Capitalized
----------------------- ---------------------- -----------------------
1999 Amount Ratio Amount Ratio Amount Ratio
---- ------ ----- ------ ----- ------ -----
Total Capital (to risk weighted assets)
Company ............................. $16,190 10.9% $11,865 8.0% n/a
Bank ................................ 15,419 10.4% 11,863 8.0% $14,829 10.0%
Tier 1 Capital (to risk weighted assets)
Company ............................. 14,698 9.9% 5,932 4.0% n/a
Bank ................................ 13,927 9.4% 5,932 4.0% 8,897 6.0%
Tier 1 Capital (to average assets)
Company ............................. 14,698 7.4% 7,976 4.0% n/a
Bank ................................ 13,927 7.0% 7,976 4.0% 9,970 5.0%
Management believes, as of December 31, 2000, that the Bank meets all
capital requirements to which it is subject.
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31, 2000,
retained earnings of $4,986,000 were not restricted as to the payment of
dividends. The Bank paid $750,000 in dividends during 1999, and $1,000,000 in
dividends to the Company during 2000.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Company is prohibited from borrowing from the Bank unless the loans are
secured by speci.ed types of collateral. Such secured loans and other advances
from the Bank are limited to 10% of the Bank's shareholders' equity on a per
affiliate basis. There were no such extensions of credit by the Bank in 1999
and 2000.
14. EMPLOYEE BENEFIT PLANS
In 1999, the Company established an Employee Stock Ownership Plan (ESOP)
to provide an ownership interest in the Company and retirement benefits to
substantially all full-time employees. The amount of the annual contributions
is at the discretion of the Board of Directors. The Company contributed $90,000
in 1999 and 2000. The ESOP purchased 6,000 and 12,400 shares of Company stock
in the open market during 1999 and 2000, respectively.
The Company has a Deferred Compensation Plan for Executives. Participation
in the Plan is limited to a select group of management and other employees as
determined by the Board of Directors. Under the terms of the Plan, participants
may defer a portion of their cash compensation and receive minimum 50% matching
contributions from the Company, which vest over the employee's remaining years
of employment to retirement. The Company has guaranteed participants a certain
minimum return on their contributions and on the Company's matching
contributions. Net expenses incurred by the Company for the years ended
December 31, 1998, 1999 and 2000 were $39,000, $43,000 and $7,000,
respectively.
The Company also has a defined contribution plan covering all eligible
salaried employees. Employees may, up to prescribed limits, contribute to the
plan. The Company may also elect to make discretionary contributions to the
plan based on the Company's earnings. No contributions were made by the Company
in 1998, 1999 or 2000.
F-56
15. Earnings Per Share
The following table reconciles the numerators and the denominators of the
basic and diluted per share computations in accordance with SFAS No. 128 (in
thousands, except per share amounts):
Year Ended December 31,
------------------------------------------------------------------------------------
1998 1999
----------------------------------------- ------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numberator) (Denominator) Amount
------------- --------------- ----------- -------------- --------------- -----------
Basic EPS
Income available
to common
shareholders ........ $1,621 2,158 $ 0.75 $2,333 2,075 $ 1.12
Effect of Dilutive
Securities ..........
Stock options ........ 146 107
------ ----- ------ ------ ----- -------
Diluted EPS
Income available
to common
shareholders
plus assumed
conversions ......... $1,621 2,304 $ 0.70 $2,333 2,182 $ 1.07
====== ===== ====== ====== ===== =======
Year Ended December 31,
----------------------------------------
2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
Basic EPS
Income available
to common
shareholders ........ $3,070 2,022 $ 1.52
Effect of Dilutive
Securities ..........
Stock options ........ 99
------ ----- -------
Diluted EPS
Income available
to common
shareholders
plus assumed
conversions ......... $3,070 2,121 $ 1.45
====== ===== =======
16. Parent Company Only Condensed Financial Information
The condensed financial information for MCB Financial Corporation (parent
company only) at December 31, 1999 and 2000, and the results of its operations
and cash flows for the years then ended, is summarized as follows (dollar
amounts in thousands):
1999 2000
---- ----
Financial Condition:
Assets:
Cash and due from banks ............................... $ 702 $ 1,695
Investment in subsidiaries ............................ 13,625 16,465
Other ................................................. 70 144
-------- --------
Total ................................................. $ 14,397 $ 18,304
======== ========
Liabilities and shareholders' equity:
Other liabilities ..................................... $ -- $ 105
Subordinated debt ..................................... -- 3,093
-------- --------
Total liabilities .................................. 0 3,198
-------- --------
Shareholders' equity:
Common stock .......................................... $ 10,750 9,501
Accumulated other comprehensive (loss) income ......... (518) 47
Retained earnings ..................................... 4,165 5,558
-------- --------
Total shareholders' equity ......................... 14,397 15,106
Total .................................................... $ 14,397 $ 18,304
======== ========
F-57
1998 1999 2000
---- ---- ----
Results of Operations:
Income:
Interest income .................................................... $ 32 $ 28 $ 42
Dividend income from Bank .......................................... 500 750 1,000
------- ------- -------
Total ........................................................... 532 778 1,042
Expenses:
Interest expense ................................................... $ -- -- 105
Other expenses ..................................................... 140 102 160
------- ------- -------
Total ........................................................... 140 102 265
Income before taxes and equity in undistributed net income of Bank .... 392 676 777
Income tax benefit .................................................... 53 37 110
------- ------- -------
Income before equity in undistributed net income of Bank .............. 445 713 887
Equity in undistributed net income of Bank ............................ 1,176 1,620 2,183
------- ------- -------
Net income ......................................................... $ 1,621 $ 2,333 $ 3,070
======= ======= =======
1998 1999 2000
---- ---- ----
Cash Flows:
Cash flows from operating activities:
Net income .............................................................. $ 1,621 $ 2,333 $ 3,070
Reconciliation to cash used in operating activities:
(Increase) in equity in undistributed net income of Bank .............. (1,175) (1,621) (2,182)
Amortization .......................................................... 11 -- 2
Decrease in other assets .............................................. 29 53 (35)
Decrease in accrued interest payable and other liabilities ............ (1) 105
------- ------- -------
Cash provided by operating activities ................................ 485 765 960
Cash flows from investing activities:
Capital contribution to MCB Statutory Trust I ........................... -- -- (93)
Net (increase) decrease in loans held for investment .................... (92) 92 --
------- ------- -------
Cash (used in) provided by investing activities ....................... (92) 92 (93)
Cash flows from financing activities:
Cash dividends paid ..................................................... -- (40) (81)
Cash payment for fractional shares resulting from stock dividend ........ -- (2) --
Proceeds from the exercise of stock options ............................. 115 362 191
Proceeds from issuance of subordinated debt ............................. -- -- 3,093
Purchases of common stock ............................................... (847) (739) (3,077)
------- ------- -------
Cash (used in) provided by financing activities ....................... (732) (419) 126
Net (decrease) increase in cash and equivalents .......................... (339) 438 993
Cash and equivalents:
Beginning of period ..................................................... 603 264 702
End of period ........................................................... $ 264 $ 702 $ 1,695
17. Subsequent Events
The 2000 stock repurchase program was completed in January 2001 with the
purchase of 105,060 shares for a total purchase price of $1,231,031.
F-58
18. Summary of Quarterly Financial Information (Unaudited)
Certain amounts in the following unaudited quarterly financial information
have be reclassified to conform with the current presentation. In the opinion
of management, all adjustments necessary to fairly present the results of
operations have been made.
2000 Quarters Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share data)
Interest income ....................... $ 4,190 $ 4,431 $ 4,737 $ 4,887
Interest expense ...................... 1,256 1,328 1,416 1,515
------- ------- ------- -------
Net interest income ................... 2,934 3,103 3,321 3,372
Provision for loan losses ............. 120 100 100 100
Other income .......................... 211 237 194 227
Other expenses ........................ 1,918 1,934 1,975 2,036
------- ------- ------- -------
Income before income taxes and divi-
dends paid on trust preferred securi-
ties ................................. 1,107 1,306 1,440 1,463
Income tax provision .................. 454 545 580 566
------- ------- ------- -------
Net income before dividends paid on
trust preferred securities ........... 653 761 860 897
Dividends paid on trust preferred secu-
rities ............................... -- -- 21 80
------- ------- ------- -------
Net income ............................ $ 653 $ 761 $ 839 $ 817
======= ======= ======= =======
Basic earnings per share .............. $ 0.32 $ 0.37 $ 0.41 $ 0.41
Diluted earnings per share ............ $ 0.30 $ 0.36 $ 0.39 $ 0.39
Dividends per share ................... $ 0.01 $ 0.01 $ 0.01 $ 0.01
1999 Quarters Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ----------- -------------- ------------
(In thousands, except per share data)
Interest income .................... $ 3,436 $ 3,637 $ 3,908 $ 4,045
Interest expense ................... 1,040 1,053 1,164 1,253
------- ------- ------- -------
Net interest income ................ 2,396 2,584 2,744 2,792
Provision for loan losses .......... 90 35 120 120
Other income ....................... 291 242 245 210
Other expenses ..................... 1,815 1,743 1,781 1,830
------- ------- ------- -------
Income before income taxes ......... 782 1,048 1,088 1,052
Income tax provision ............... 321 433 448 435
------- ------- ------- -------
Net income ......................... $ 461 $ 615 $ 640 $ 617
======= ======= ======= =======
Basic earnings per share ........... $ 0.22 $ 0.30 $ 0.31 $ 0.30
Diluted earnings per share ......... $ 0.21 $ 0.29 $ 0.30 $ 0.28
Dividends per share ................ $ 0.01 $ 0.01
F-59
Independent Auditors' Report
To the Board of Directors and Shareholders of MCB Financial Corporation:
We have audited the accompanying consolidated balance sheets of MCB Financial
Corporation and Subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of MCB Financial Corporation and its
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
January 12, 2001
F-60
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Dollar amounts in thousands
Assets
Cash and due from banks ....................................................... $ 18,264 $ 12,040
Federal funds sold ............................................................ 0 250
-------- --------
Total cash and cash equivalents ......................................... 18,264 12,290
Interest-bearing deposits with banks .......................................... 286 286
Investment securities available for sale at fair value ........................ 35,468 25,100
Investment securities held to maturity at cost; fair value $1,999 in 2000 ..... -- 2,000
Loans held for investment (net of allowance for loan losses of $2,039 in
2001 and $1,939 in 2000) ..................................................... 165,606 162,884
Premises and equipment, net ................................................... 3,620 3,470
Accrued interest receivable ................................................... 1,213 1,276
Deferred income taxes ......................................................... 918 1,019
Other assets .................................................................. 905 929
-------- --------
Total assets ............................................................ $226,280 $209,254
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing ........................................................ $ 50,716 $ 47,383
Interest-bearing:
Transaction accounts ...................................................... 114,690 105,284
Time certificates, $100,000 and over ...................................... 30,637 25,153
Savings and other time deposits ........................................... 11,008 10,765
-------- --------
Total interest-bearing deposits ......................................... 156,335 141,202
-------- --------
Total deposits .......................................................... 207,051 188,585
Other borrowings ............................................................. 750 750
Accrued interest payable and other liabilities ............................... 1,624 1,813
-------- --------
Total liabilities ....................................................... 209,425 191,148
Company obligated mandatorily redeemable cumulative trust
preferred securities of subsidiary trust holding soley junior
subordinated debentures ................................................ 3,000 3,000
Shareholders' Equity
Preferred stock, no par value: authorized 20,000,000 shares; none issued
or outstanding
Common stock, no par value: authorized 20,000,000 shares; issued and
outstanding 1,633,516 shares in 2001 and 1,834,877 shares in 2000 .......... 8,431 9,501
Accumulated other comprehensive income ....................................... 189 47
Retained earnings ............................................................ 5,235 5,558
-------- --------
Total shareholders' equity .............................................. 13,855 15,106
-------- --------
Total liabilities and shareholders' equity ................................... $226,280 $209,254
<FN>
------------
See notes to condensed consolidated financial statements.
</FN>
F-61
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
JUNE 30, 2001
Six Months Ended
June 30,
----------------------------
2001 2000
---- ----
(Unaudited)
Dollar amounts in thousands,
except per share amounts
Interest Income:
Loans, including fees ................................................. $8,041 $7,387
Federal funds sold .................................................... 166 317
Investment securities ................................................. 749 917
------ ------
Total interest income ................................................. 8,956 8,621
------ ------
Interest Expense:
Interest-bearing transaction, savings and other time deposits ......... 1,971 2,189
Time certificates, $100,000 and over .................................. 761 379
Other interest ........................................................ 31 16
------ ------
Total interest expense ............................................. 2,763 2,584
------ ------
Net Interest Income ...................................................... 6,193 6,037
------ ------
Provision for Loan Losses ................................................ 100 220
------ ------
Net Interest Income After Provision for Loan Losses ...................... 6,093 5,817
------ ------
Other Income:
Gain on sale of loans ................................................. 39 35
Service fees on deposit accounts ...................................... 256 245
Loan servicing fees ................................................... 32 27
Gain (loss) on sale of investment securities .......................... (2)
Other ................................................................. 160 114
------ ------
Total other income ................................................. 487 419
------ ------
Other Expenses:
Salaries and employee benefits ........................................ 2,238 2,187
Occupancy expense ..................................................... 538 527
Furniture and equipment expense ....................................... 236 224
Professional services ................................................. 120 126
Supplies .............................................................. 119 121
Promotional expenses .................................................. 155 148
Data processing fees .................................................. 198 177
Regulatory assessments ................................................ 30 30
Other ................................................................. 265 283
------ ------
Total other expenses ............................................... 3,899 3,823
------ ------
Income Before Income Taxes and Dividends Paid on Trust Preferred
Securities .............................................................. 2,681 2,413
Income Tax Provision ..................................................... 1,034 999
------ ------
Income Before Dividends Paid on Trust Preferred Securities ............... 1,647 1,414
Dividends Paid on Trust Preferred Securities ............................. 158 --
------ ------
Net Income ............................................................... $1,489 $1,414
====== ======
Basic Earnings Per Share ................................................. $ 0.87 $ 0.69
====== ======
Diluted Earnings Per Share ............................................... $ 0.83 $ 0.66
====== ======
<FN>
------------
See notes to condensed consolidated financial statements.
</FN>
F-62
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six Months Ended
June 30,
-------------------------
2001 2000
---- ----
(Unaudited)
Dollar amounts in
thousands
Net income ................................................................ $1,489 $ 1,414
Other comprehensive income (loss)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (net of taxes of
$99 and $28 in the six months ended June 30, 2001 and 2000,
respectively) ......................................................... 142 41
Less: reclassification adjustment for gains (losses) included in net
income (net of taxes of $(1) in the six months ended June 30, 2000) (1)
------ --------
Other comprehensive income (loss) ......................................... 142 40
------ --------
Comprehensive income ...................................................... $1,631 $ 1,454
====== ========
<FN>
------------
See notes to condensed consolidated financial statements.
</FN>
F-63
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2001
For the Six Months
Ended June 30,
--------------------------
2001 2000
---- ----
(Unaudited)
Dollar amounts in thousands
Cash Flows From Operating Activities:
Net income ............................................................... $ 1,489 $ 1,414
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses .............................................. 100 220
Depreciation and amortization .......................................... 308 154
Loss on sale of investment securities, net ............................. 2
Gain on sale of loans .................................................. (39) (35)
Deferred income taxes
Changes in:
Accrued interest receivable ........................................... 63 (54)
Other assets .......................................................... 24 604
Accrued interest payable and other liabilities ........................ (175) 445
--------- --------
Net cash provided by operating activities ........................... 1,770 2,750
Cash Flows From Investing Activities:
Held to maturity securities:
Calls .................................................................. 2,000 --
Available for sale securities:
Maturities ............................................................. -- 3,000
Purchases .............................................................. (10,152) (6,925)
Sales .................................................................. -- 11,957
Net increase in loans held for investment ................................ (2,783) (9,596)
Purchases of premises and equipment, net ................................. (431) (383)
--------- --------
Net cash used in investing activities ............................... (11,366) (1,947)
Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits ...................... 3,333 7,624
Net increase (decrease) in interest-bearing transaction, savings and other
time deposits .......................................................... 15,133 (2,615)
Net decrease in other borrowings
Cash dividends paid ...................................................... (34) (41)
Proceeds from the exercise of stock options .............................. 243 12
Repurchases of common stock .............................................. (3,105) (481)
--------- --------
Net cash provided by financing activities ........................... 15,570 4,499
--------- --------
Net Increase in Cash and Cash Equivalents ................................. 5,974 5,302
Cash and Cash Equivalents:
Beginning of period ...................................................... 12,290 16,956
--------- --------
End of period ............................................................ $ 18,264 $ 22,258
========= ========
Cash Paid During the Period for:
Interest on deposits and other borrowings ................................ $ 2,624 $ 2,539
Income taxes ............................................................. $ 951 $ 825
<FN>
------------
See notes to condensed consolidated financial statements.
</FN>
F-64
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2001
1. Summary of Significant Accounting Policies
MCB Financial Corporation (the "Company" on a consolidated basis) is a
bank holding company with one bank subsidiary: Metro Commerce Bank (the
"Bank"). MCB Statutory Trust I (the "Trust"), which is a Connecticut statutory
trust formed for the exclusive purpose of issuing and selling trust preferred
securities, is also a subsidiary of the Company. The unaudited condensed
consolidated financial information included herein was prepared on the same
basis as the audited financial statements for the year ended December 31, 2000.
The interim condensed consolidated financial statements contained herein are
not audited. However, in the opinion of the Company, all adjustments,
consisting only of normal recurring items necessary for a fair presentation of
the operating results for the periods shown, have been made. The results of
operations for the six months ended June 30, 2001 should not be considered
indicative of operating results to be expected for the year ending December 31,
2001. Certain prior year and prior quarter amounts have been reclassified to
conform to current classifications. Cash and cash equivalents consists of cash,
due from banks, and federal funds sold.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
2. Earnings per share
Basic earnings per share is computed by dividing net income by the number
of weighted average common shares outstanding. Diluted earnings per share
reflects potential dilution from outstanding stock options, using the treasury
stock method. The number of weighted average shares used in computing basic and
diluted earnings per share are as follows:
Three Months Ended June 30,
----------------------------------------------------------------------------------
2001 2000
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS ...................
Income available to common
shareholders ............... $ 778 1,652 $ 0.47 $ 761 2,030 $ 0.37
Effect of Dilutive Securities
Stock options .............. -- 80 -- -- 92 --
----- ----- ------- ----- ----- -------
Diluted EPS
Income available to common
shareholders plus assumed
conversions ................ $ 778 1,732 $ 0.45 $ 761 2,122 $ 0.36
===== ===== ======= ===== ===== =======
F-65
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2001 --(Continued)
Six Months Ended June 30,
----------------------------------------------------------------------------------
2001 2000
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS ...................
Income available to common
shareholders ............... $ 1,489 1,704 $ 0.87 $ 1,414 2,042 $ 0.69
Effect of Dilutive Securities
Stock options .............. -- 85 -- -- 105 --
------- ----- ------- ------- ----- -------
Diluted EPS
Income available to common
shareholders plus assumed
lconversions ............... $ 1,489 1,789 $ 0.83 $ 1,414 2,147 $ 0.66
======= ===== ======= ======= ===== =======
3. Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was adopted by the Company
effective January 1, 2001. SFAS 133 as amended establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The adoption of SFAS No. 133 did not have
a significant impact on the financial position or results of operations, or
cash flows of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities," was adopted by the Company effective April
1, 2001. SFAS No. 140 is a replacement of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities." Most of the provisions of SFAS No. 125 were carried forward to
SFAS No. 140 without reconsideration by the Financial Standards Board ("FASB"),
and some were changed only in minor ways. In issuing SFAS No.140, the FASB
included issues and decisions that had been addressed and determined since the
original publication of SFAS No. 125. The adoption of SFAS No. 140 did not have
a significant impact on the financial position or results of operations, or
cash flows of the Company.
In June 2001, SFAS No. 142, "Accounting for Goodwill and Other Intangible
Assets," was issued. This standard is effective starting with fiscal years
beginning after December 15, 2001. This standard establishes new accounting
standards for goodwill and continues to require the recognition of goodwill as
an asset but does not permit amortization of goodwill as previously required by
the Accounting Principles Board Opinion ("APB") Opinion No. 17. The standard
also establishes a new method of testing goodwill for impairment. It requires
goodwill to be separately tested for impairment at a reporting unit level. The
amount of goodwill determined to be impaired would be expensed to current
operations. Management believes that the adoption of the statement will not
have a material effect on the Company's financial statements.
4. Subsequent Event
Pursuant to the April 2001 stock purchase agreement between the Company,
John Cavallucci and his family, on July 3, 2001, the Company repurchased the
remaining 43,011 shares of the Company's common stock owned by them at a price
of $12.00 per share. On the same date, the company repurchased an additional
10,500 shares from Mr. Cavallucci which he had acquired upon exercise of vested
options. Pursuant to the stock purchase agreement, Mr. Cavallucci resigned from
the board of directors on July 3, 2001.
F-66
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
MCB FINANCIAL CORPORATION
METRO COMMERCE BANK
AND
BUSINESS BANCORP
BUSINESS BANK OF CALIFORNIA
DATED AS OF AUGUST 15, 2001
A-1
Table of Contents
Page
-----
ARTICLE I CERTAIN DEFINITIONS A-1
ARTICLE II THE BANK MERGER A-3
2.1 The Bank Merger ................................... A-3
2.2 Effective Time .................................... A-4
2.3 Effects of the Bank Merger ........................ A-4
ARTICLE III THE MERGER A-4
3.1 The Merger ........................................ A-4
3.2 Effective Time .................................... A-4
3.3 Effects of the Merger ............................. A-4
3.4 Conversion of MCB Common Stock .................... A-4
3.5 BB Common Stock ................................... A-5
3.6 Options ........................................... A-5
3.7 Articles of Incorporation ......................... A-5
3.8 Bylaws ............................................ A-5
3.9 Tax Consequences .................................. A-5
3.10 Board of Directors ................................ A-5
3.11 Dissenting Shares ................................. A-5
ARTICLE IV CLOSING AND EXCHANGE OF SHARES A-6
4.1 Closing ........................................... A-6
4.2 BB to Make Shares Available ....................... A-6
4.3 Exchange of Shares ................................ A-6
ARTICLE V ACTIONS PENDING MERGER A-7
5.1 Ordinary Course ................................... A-7
5.2 Capital Stock ..................................... A-7
5.3 Dividends, Stock Splits, Etc ...................... A-8
5.4 Compensation; Employment Agreements; Etc .......... A-8
5.5 Benefit Plans ..................................... A-8
5.6 Acquisitions And Dispositions ..................... A-8
5.7 Amendments ........................................ A-8
5.8 Accounting Methods ................................ A-8
5.9 Adverse Actions ................................... A-9
5.10 Claims ............................................ A-9
5.11 Agreements ........................................ A-9
ARTICLE VI REPRESENTATIONS AND WARRANTIES A-9
6.1 Disclosure Schedules .............................. A-9
6.2 Standard .......................................... A-9
6.3 Representations and Warranties .................... A-9
A-2
Table of Contents
(continued)
Page
-----
ARTICLE VII COVENANTS A-16
7.1 Reasonable Best Efforts ............................................... A-16
7.2 Stockholder Approvals ................................................. A-16
7.3 Registration Statement ................................................ A-16
7.4 Press Releases ........................................................ A-17
7.5 Access; Information ................................................... A-17
7.6 Acquisition Proposals ................................................. A-18
7.7 Affiliate Agreements .................................................. A-18
7.8 Takeover Laws ......................................................... A-18
7.9 No Rights Triggered ................................................... A-18
7.10 Shares Listed ......................................................... A-18
7.11 Regulatory Applications ............................................... A-18
7.12 Indemnification; Directors' and Officers' Insurance ................... A-19
7.13 Benefits Plans ........................................................ A-20
7.14 Notification of Certain Matters ....................................... A-20
ARTICLE VIII ADDITIONAL AGREEMENTS A-21
8.1 Adoption of By-law and Articles Amendments ............................ A-21
8.2 Appointment of MCB Designees as BB Directors .......................... A-21
8.3 Resignation of Two BB Directors ....................................... A-21
8.4 Replacement Employment Agreements ..................................... A-21
8.5 Management Structure Following Reorganization ......................... A-21
8.6 ESOP Plan Adoption .................................................... A-21
8.7 Adoption of Shareholder Rights Plan ................................... A-21
8.8 Adoption of Stock Option Plan ......................................... A-21
8.9 Enforcement of Additional Agreements .................................. A-22
ARTICLE IX CONDITIONS TO CONSUMMATION OF THE REORGANIZATION A-22
9.1 Shareholder Vote ...................................................... A-22
9.2 Regulatory Approvals .................................................. A-22
9.3 Third-Party Consents .................................................. A-22
9.4 No Injunction, Etc .................................................... A-22
9.5 Representations, Warranties, Covenants and Additional Agreements of BB A-22
9.6 Representations, Warranties and Covenants of MCB ...................... A-22
9.7 Effective Registration Statement ...................................... A-23
9.8 Tax Opinion ........................................................... A-23
9.9 NASDAQ Listing ........................................................ A-23
ARTICLE X TERMINATION A-23
10.1 Termination ........................................................... A-23
10.2 Effect of Termination and Abandonment ................................. A-24
10.3 Liquidated Damages .................................................... A-24
A-3
Table of Contents
(continued)
Page
-----
ARTICLE XI MISCELLANEOUS A-24
11.1 Survival .................................................... A-24
11.2 Waiver; Amendment. .......................................... A-24
11.3 Counterparts ................................................ A-24
11.4 Governing Law ............................................... A-24
11.5 Expenses .................................................... A-24
11.6 Confidentiality ............................................. A-25
11.7 Notices ..................................................... A-25
11.8 Entire Understanding; No Third Party Beneficiaries .......... A-25
11.9 Interpretations ............................................. A-25
A-4
Table of Contents
(continued)
EXHIBITS
Exhibit A MCB Financial Corporation Stock Option Agreement ........................ A-27
Exhibit B Business Bancorp Stock Option Agreement ................................. A-37
SCHEDULES
Schedule 2.3(c) Directors of the Resulting Institution (BB Bank) ........................ A-46
Schedule 2.3(d) Offices of the Resulting Institution (BB Bank) .......................... A-47
Schedule 3.3 Effects of the Merger ................................................... A-48
Schedule 3.10 Board of Directors (BB) ................................................. A-49
Schedule 7.7(c) Support Agreements ...................................................... A-50
Schedule 8.1(a) Amendment of Bylaws--Cumulative Voting and Number of Directors .......... A-58
Schedule 8.1(b) Amendment of Bylaws--Nominating Committees and Supermajority ............ A-60
Schedule 8.1(d) Certificate of Amendment of Articles of Incorporation of BB ............. A-64
Schedule 8.4 Replacement Employment Agreements ....................................... A-66
Schedule 8.5 Management Structure Following Reorganization ........................... A-67
A-5
AGREEMENT AND PLAN OF REORGANIZATION, dated as of August 15, 2001 (this
"Agreement"), by and between MCB Financial Corporation, a California
corporation ("MCB") and Business Bancorp, a California corporation ("BB") and
their respective subsidiary banks, Metro Commerce Bank ("MCB Bank") and
Business Bank of California ("BB Bank").
WITNESSETH:
WHEREAS, the Boards of Directors of MCB and BB have determined that it is
in the best interests of their respective companies and their stockholders to
consummate the strategic business combination transaction provided for herein
in which, subject to the terms and conditions set forth herein, (i) MCB will
merge (the "Merger,") with and into BB, with BB as the surviving corporation in
the Merger; and (ii) simultaneously MCB Bankwill be merged (the "Bank Merger")
with and into BB Bank with BB Bank as the surviving corporation in the Bank
Merger (collectively, the "Reorganization"); and
WHEREAS, in connection with the execution of this Agreement, MCB and BB
will enter into a stock option agreement, with MCB as issuer and BB as grantee
(the "MCB Stock Option Agreement") in the form attached hereto as Exhibit A;
and
WHEREAS, in connection with the execution of this Agreement, BB and MCB
will enter into a stock option agreement, with BB as issuer and MCB as Grantee
(the "BB Common Stock Option Agreement," and together with the MCB Stock Option
Agreement, the "Stock Option Agreements") in the form attached hereto as
Exhibit B; and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with the Reorganization and also to prescribe
certain conditions to the Reorganization;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
"BB Common Stock" shall mean BB Common Stock.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" shall mean the Confidentiality Agreement, dated
March 21, 2001, between MCB and BB.
"Commissioner" shall mean the Commissioner of Financial Institutions for
the State of California.
"DFI" shall mean the California Department of Financial Institutions.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Federal Reserve Board" shall mean the, Board of Governors of the Federal
Reserve System.
"Financial Code" shall mean the California Financial Code.
"Liens" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"MCB Board" shall mean the board of directors of MCB as existing from the
date of this Agreement through the Effective Time, including any replacement
directors appointed by the MCB Board to fill vacancies occurring during the
aforementioned period.
A-6
"MCB ESOP Plan" shall mean that qualified Employee Stock Ownership Plan
adopted as of January 1, 1999 by MCB.
"MCB Shareholder Rights Agreement" shall mean the Shareholder Rights
Agreement, dated as of January 19, 1999, by and between MCB and U.S. Stock
Transfer Corporation, as rights agent, as amended.
"MCB Stock" shall mean MCB Common Stock.
"Material Adverse Effect" shall mean with respect to MCB or BB,
respectively, any effect that (i) is material and adverse to the financial
position, results of operations or business of MCB and its Subsidiaries taken
as a whole, or BB and its Subsidiaries taken as a whole, respectively, or (ii)
would materially impair the ability of MCB or BB, respectively, to perform its
obligations under this Agreement or otherwise materially threaten or materially
impede the consummation of the Reorganization and the other transactions
contemplated by this Agreement; provided, however, that Material Adverse Effect
shall not be deemed to include the impact of (A) changes in banking and similar
laws of general applicability or interpretations thereof by courts or
governmental authorities, (B) changes in generally accepted accounting
principles or regulatory accounting requirements applicable to banks or savings
associations and their holding companies generally, (C) actions or omissions of
MCB or BB taken with the prior written consent of MCB or BB, as applicable, in
contemplation of the transactions contemplated hereby, (D) circumstances
affecting banks or savings associations and their holding companies generally,
and (E) the effects of the Reorganization and compliance by either party with
the provisions of this Agreement on the business, financial condition or
results of operations of such party and its Subsidiaries, or the other party
and its Subsidiaries, as the case may be.
"Person" or "person" shall mean any individual, bank, corporation,
partnership, association, joint-stock company, business trust or unincorporated
organization.
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exchangeable into, or any options, calls or commitments
relating to, for, or giving any person any right to subscribe for or acquire,
or any options, calls or commitments relating to, shares of capital stock of
such person.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
"Subsidiary" and "Significant Subsidiary" shall have the meanings ascribed
to them in Rule 1-02 of Regulation S-X of the SEC.
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, goods and services, capital, transfer, franchise,
profits, license, withholding, payroll, employment, employer health, excise,
estimated, severance, stamp, occupation, property or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
Each of the following terms is defined in the Section of this Agreement
set forth opposite such term:
Term Section
---- -------
Affiliate ................................. 7.7(a)
Agreement ................................. Preamble
BB ........................................ Preamble
BB Bank ................................... Recitals
BB Meeting ................................ 7.2
BB Common Stock Option Agreement .......... Recitals
BB Common Stock ........................... 3.4(a)
Bank Merger ............................... Recitals
A-7
Term Section
---- -------
Bank Merger Effective Time ............. 2.2
BB Nominating Committee ................ 8.1 (b)
California Secretary ................... 2.2
Certificate ............................ 3.4 (b)
Claim .................................. 7.12(a)
Closing ................................ 4.1
Closing Date ........................... 4.1
Compensation and Benefit Plans ......... 6.3 (1)
CGCL ................................... 3.1
Disclosure Schedule .................... 6.1
Dissenting Shares ...................... 3.11
Effective Time ......................... 3.2
Environmental Laws ..................... 6.3 (o)
ERISA Affiliate ........................ 6.3 (1)(iii)
Exchange Agent ......................... 4.2
Exchange Fund .......................... 4.2
Exchange Ratio ......................... 3.4 (a)
GAAP ................................... 5.8
Indemnified Party ...................... 7.12(a)
Joint Proxy Statement .................. 7.3 (a)
MCB .................................... Preamble
MCB Bank ............................... Recitals
MCB Bank Common Stock .................. 2.3 (a)
MCB Common Stock ....................... 3.4 (a)
MCB Meeting ............................ 7.2
MCB Nominating Committee ............... 8.1 (b)
MCB Rights ............................. 6.3 (n)(i)
MCB Stock Option Agreement ............. Recitals
Meeting ................................ 7.2
Merger ................................. Recitals
Merger Agreement ....................... 3.2
Multiemployer Plans .................... 6.3 (1)(ii)
NASDAQ ................................. 4.3 (e)
Pension Plan ........................... 6.3 (1)(ii)
Plans .................................. 6.3 (1)(ii)
Registration Statement ................. 7.3
Regulatory Authorities ................. 6.3 (h)(i)
Reorganization ......................... Recitals
SEC Documents .......................... 6.3 (g)
Stock Option Agreements ................ Recitals
Takeover Laws .......................... 6.3 (n)
Tax Returns ............................ 6.3 (p)
ARTICLE II
THE BANK MERGER
2.1 The Bank Merger. Subject to the terms and conditions of this
Agreement, simultaneously with the Effective Time of the Merger, MCB Bank shall
be merged with and into BB Bank (the "Bank Merger Effective Time"). BB Bank
shall be the surviving corporation in the Bank Merger, and shall continue its
corporate existence under the laws of the State of California. Upon
consummation of the Bank Merger, the separate corporate existence of MCB Bank
shall terminate.
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2.2 Effective Time. The Bank Merger shall become effective as set forth in
the merger agreement which shall be filed with the DFI and the Secretary of
State of California (the "California Secretary") and the Merger Agreement which
shall be filed with the California Secretary on the Closing Date. The term
"Bank Merger Effective Time" shall be the date and time when the Bank Merger
becomes effective, as set forth by the Commissioner on the merger agreement.
2.3 Effects of the Bank Merger. At and after the Bank Merger Effective
Time, the Bank Merger shall have the effects set forth in the Financial Code,
including the following:
(a) Cancellation of MCB Bank Common Stock. At the Bank Merger Effective
Time, each share of common stock of MCB Bank ("MCB Bank Common Stock")
issued and outstanding immediately prior thereto shall, by virtue of the
Bank Merger, be canceled. No new shares of capital stock or other
securities or obligations of BB Bank shall be issued with respect to or in
exchange for such canceled shares, and such canceled shares of MCB Bank
Common Stock shall not be converted into capital stock or other securities
or obligations of BB Bank.
(b) Articles and Bylaws of the Resulting Institution. The articles of
BB Bank, as in effect immediately prior to the Bank Merger Effective Time
and the Bylaws of BB Bank as amended to be consistent with the
requirements of Article VIII hereof, shall be the articles and bylaws of
BB Bank, as the resulting institution of the Bank Merger, until either is
thereafter amended in accordance with applicable law.
(c) Directors of the Resulting Institution. The directors of BB Bank, as
the resulting institution of the Bank Merger, shall be those persons
listed in Schedule 2.3(c) to this Agreement. Such directors shall continue
in office until their successors are duly elected and qualified or
otherwise duly selected.
(d) Offices of the Resulting Institution. The home and other offices of
BB Bank, as the resulting institution of the Bank Merger, shall be as
listed in Schedule 2.3(d) to this Agreement.
ARTICLE III
THE MERGER
3.1 The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the California General Corporation Law ("CGCL"), at the
Effective Time, MCB shall merge with and into BB. BB shall be the surviving
corporation in the Merger, and shall continue its corporate existence under the
laws of the State of California. Upon consummation of the Merger, the separate
corporate existence of MCB shall terminate.
3.2 Effective Time. The Merger shall become effective as set forth in the
merger agreement (the "Merger Agreement") which shall be filed with the
California Secretary on the Closing Date. The term "Effective Time" shall be
the date and time when the Merger becomes effective, as set forth in the Merger
Agreement.
3.3 Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in Section 1107 of the CGCL. The home office
of BB as the resulting institution of the Merger, shall be as listed in
Schedule 3.3 to this Agreement.
3.4 Conversion of MCB Common Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of BB, MCB or the holder of any
of the following securities:
(a) Subject to Section 4.3(f), each share of the common stock, no par
value, of MCB (the "MCB Common Stock") issued and outstanding immediately
prior to the Effective Time shall be converted into the right to receive
1.1763 shares (the "Exchange Ratio") of BB Common Stock (the "BB Common
Stock").
(b) All of the shares of MCB Common Stock converted into the right to
receive BB Common Stock pursuant to this Article III shall no longer be
outstanding and shall automatically be canceled and shall cease to exist as
of the Effective Time, and each certificate (each a "Certificate")
previously representing any such shares of MCB Common Stock shall
thereafter represent only the right to
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receive (i) a certificate representing the number of whole shares of BB
Common Stock and (ii) cash in lieu of fractional shares into which the
shares of MCB Common Stock represented by such Certificate have been
converted pursuant to this Section 3.4 and Section 4.3(f). Certificates
previously representing shares of MCB Common Stock shall be exchanged for
certificates representing whole shares of BB Common Stock and cash in lieu
of fractional shares issued in consideration therefor upon the surrender of
such Certificates in accordance with Section 4.3, without any interest
thereon. If, prior to the Effective Time, the outstanding shares of MCB
Common Stock or BB Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares or
securities as a result of a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or
other similar change in capitalization, an appropriate and proportionate
adjustment shall be made to the Exchange Ratio.
3.5 BB Common Stock. At and after the Effective Time, each share of BB
Common Stock issued and outstanding immediately prior to the Effective Time
shall remain an issued and outstanding share of common stock of the Surviving
Corporation and shall not be affected by the Merger.
3.6 Options.
(a) At the Effective Time, each option granted by MCB to purchase shares
of MCB Common Stock which is outstanding and unexercised immediately prior
thereto shall cease to represent a right to acquire shares, of MCB Common
Stock and shall be converted automatically into an option to purchase
shares of BB Common Stock in an amount and at an exercise price determined
as provided below (and otherwise, in the case of options, subject to the
terms of the MCB Stock plans under which they were issued and the
agreements evidencing grants thereunder):
(i) The number of shares of BB Common Stock to be subject to the
new option shall be equal to the product of the number of shares of
MCB Common Stock subject to the original option immediately prior to
the Effective Time and the Exchange Ratio, provided that any
fractional shares of BB Common Stock resulting from such
multiplication shall be rounded down to the nearest whole share; and
(ii) The exercise price per share of BB Common Stock under the
new option shall be equal to the exercise price per share of MCB
Common Stock under the original option immediately prior to the
Effective Time divided by the Exchange Ratio, provided that such
exercise price shall be rounded up to the nearest whole cent.
(b) The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
and is intended to be effected in a manner which is consistent with Section
424 (a) of the Code. The duration and other terms of the new option shall
be the same as the original option except that all references to MCB shall
be deemed to be references to BB.
3.7 Articles of Incorporation. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Articles of Incorporation of BB shall be
the Articles of Incorporation of the Surviving Corporation until thereafter
amended in accordance with applicable law.
3.8 Bylaws. Subject to the terms and conditions of this Agreement and as
amended in accordance with Article VIII hereof, at the Effective Time, the
Bylaws of BB shall be the Bylaws of the Surviving Corporation until thereafter
amended in accordance with applicable law.
3.9 Tax Consequences. It is intended that the Bank Merger and the Merger
shall each constitute a "reorganization" within the meaning of Section 368(a)
of the Code, that this Agreement shall constitute a "plan of reorganization"
for the purposes of Sections 354.
3.10 Board of Directors. As of the Effective Time, the board of directors
of BB shall be determined as set forth on Schedule 3.10.
3.11 Dissenting Shares. Any shares of MCB Common Stock or BB Common Stock
held by a holder who dissents from the Merger in accordance with Section 1300
of the CGCL shall be herein called "Dissenting Shares." Notwithstanding any
other provision of this Agreement, any Dissenting Shares shall
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not, after the Effective Time, be entitled to vote for any purpose or receive
any dividends or other distributions and shall be entitled only to such rights
as are afforded in respect to Dissenting Shares pursuant to the CGCL.
ARTICLE IV
CLOSING AND EXCHANGE OF SHARES
4.1 Closing. Subject to the terms and conditions of this Agreement and the
Stock Option Agreements, the closing of the Merger (the "Closing") shall take
place at the time and on a date (the "Closing Date") and at a place to be
specified by the parties, which shall be (i) no later than five business days
after the satisfaction or waiver (subject to applicable law) of the latest to
occur of the conditions (other than those conditions to be satisfied or waived
at the Closing) set forth in Article IX hereof; or (ii) at such other time as
mutually agreed by the parties.
4.2 BB to Make Shares Available. At or prior to the Effective Time, BB
shall deposit, or shall cause to be deposited, with a bank or trust company
reasonably acceptable to each of BB and MCB (the "Exchange Agent"), for the
benefit of the holders of Certificates, for exchange in accordance with this
Article IV, certificates representing the shares of BB Common Stock, and cash
in lieu of any fractional shares (such cash and certificates for shares of BB
Common Stock, together with any dividends or distributions with respect thereto
(the "Exchange Fund"), to be issued pursuant to Section 3.4 and paid pursuant
to Section 4.3(b) in exchange for outstanding shares of MCB Stock).
4.3 Exchange of Shares.
(a) As soon as practicable after the Effective Time, and in no event
later than five business days thereafter, the Exchange Agent shall mail to
each holder of record of one or more Certificates a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
the shares of BB Common Stock and any cash in lieu of fractional shares
into which the shares of MCB Common Stock represented by such Certificate
or Certificates shall have been converted pursuant to this Agreement. Upon
proper surrender of a Certificate for exchange and cancellation to the
Exchange Agent, together with such properly completed letter of
transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor, as applicable, (i) a certificate
representing that number of whole shares of BB Common Stock to which such
holder of MCB Common Stock shall have become entitled pursuant to the
provisions of Article III and (ii) a check representing the amount of any
cash in lieu of fractional shares which such holder has the right to
receive in respect of the Certificate surrendered pursuant to the
provisions of this Article IV, and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on any cash in
lieu of fractional shares or on any unpaid dividends and distributions
payable to holders of Certificates.
(b) No dividends or other distributions declared with respect to BB
Common Stock shall be paid to the holder of any unsurrendered Certificate
until the holder thereof shall surrender such Certificate in accordance
with this Article IV. After the surrender of a Certificate in accordance
with this Article IV, the record holder thereof shall be entitled to
receive any such dividends or other distributions, without any interest
thereon, which theretofore had become payable with respect to shares of BB
Common Stock represented by such Certificate.
(c) If any certificate representing shares of BB Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance
thereof 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 issuance of a certificate representing shares of
BB Common Stock in any name other than that of 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.
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(d) After the Effective Time, there shall be no transfers on the stock
transfer books of MCB of the shares of MCB Common Stock which were issued
and outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates representing such shares are presented for
transfer to the Exchange Agent, they shall be canceled and exchanged for
certificates representing shares of BB Common Stock as provided in this
Article IV.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of BB Common Stock
shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution with respect to BB Common Stock shall be payable
on or with respect to any fractional share, and such fractional share
interests shall not entitle the owner thereof to vote or to any other
rights of a stockholder of BB. In lieu of the issuance of any such
fractional share, BB shall pay to each former stockholder of MCB who
otherwise would be entitled to receive such fractional share an amount in
cash determined by multiplying (i) the average of the closing sale prices
of BB Common Stock on NASDAQ small cap exchange (the "NASDAQ") as reported
for the five trading days immediately preceding the date of the Effective
Time by (ii) the fraction of a share (rounded to the nearest thousandth
when expressed in decimal form) of BB Common Stock to which such holder
would otherwise be entitled to receive pursuant to Section 3.4.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of MCB for 12 months after the Effective Time shall be paid to
BB. Any former stockholders of MCB who have not theretofore complied with
this Article IV shall thereafter look only to BB for payment of the shares
of BB Common Stock, cash in lieu of any fractional shares and any, unpaid
dividends and distributions on the BB Common Stock deliverable in respect
of each share of MCB Common Stock, as the case may be, such stockholder
holds as determined pursuant to this Agreement, in each case, without any
interest thereon. Notwithstanding the foregoing, none of BB, MCB, the
Exchange Agent or any other person shall be liable to any former holder of
shares of MCB Common Stock for any amount delivered in good faith to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(g) 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
reasonably required by BB, the posting by such person of a bond in such
amount as BB may determine is reasonably necessary 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 shares of BB Common Stock and any cash in lieu of
fractional shares deliverable in respect thereof pursuant to this
Agreement.
ARTICLE V
ACTIONS PENDING MERGER
From the date hereof until the Effective Time, except as expressly
contemplated by this Agreement, without the prior written consent of BB (which
consent shall not be unreasonably withheld or delayed) MCB will not, and will
cause each of its Subsidiaries not to, and (ii) without the prior written
consent of MCB (which consent shall not be unreasonably withheld or delayed) BB
will not, and will cause each of its Subsidiaries not to:
5.1 Ordinary Course. Conduct the business of it and its Subsidiaries other
than in the ordinary and usual course or, to the extent consistent therewith,
fail to use reasonable efforts to preserve intact their business organizations
and assets and maintain their rights, franchises and existing relations with
customers, suppliers, employees and business associates, or take any action
that would (i) adversely affect the ability of any party to obtain any
necessary approvals of any Regulatory Authorities required for the transactions
contemplated hereby or (ii) adversely affect its ability to perform any of its
material obligations under this Agreement.
5.2 Capital Stock. Other than (i) pursuant to Rights or other stock
options or stock Previously Disclosed in its Disclosure Schedule, (ii) pursuant
to the MCB Stock Option Agreement or the BB
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Common Stock Option Agreement, (iii) pursuant to the MCB Shareholder Rights
Agreement, (iv) trust originated preferred stock issued in the ordinary course
of business or (v) as otherwise set forth in Section 5.2 of the MCB Disclosure
Schedule or Section 5.2 of the BB Disclosure Schedule, (x) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of capital stock, any stock appreciation rights or any
Rights, (y) enter into any agreement with respect to the foregoing, or (z)
permit any additional shares of capital stock to become subject to new grants
of employee stock options, stock appreciation rights, or similar stock-based
employee rights.
5.3 Dividends, Stock Splits, Etc. (i) Adjust, split, combine or reclassify
any capital stock, (ii) make, declare or pay any dividend on or in respect of,
or declare or make any distribution on any shares of its capital stock (other
than (A) in the case of MCB, (1) quarterly one cent per share cash dividends on
MCB Common Stock and (2) dividends from greater than 95%-owned Subsidiaries to
MCB or to another greater than 95%-owned Subsidiary of MCB, as applicable, and
(B) in the case of BB, (1) quarterly one cent per share cash dividends on BB
Common Stock and (2) dividends from greater than 95%-owned Subsidiaries to MCB
or to another greater than 95%-owned Subsidiary of MCB, as applicable), or
(iii) other than (A) as Previously Disclosed in its Disclosure Schedule, or (B)
in the ordinary course pursuant to employee benefit plans, directly or
indirectly combine, redeem, reclassify, purchase or otherwise acquire, any
shares of its capital stock. After the date of this Agreement, each of BB and
MCB shall coordinate with the other the declaration of any dividends in respect
of BB Common Stock and MCB Common Stock and the record dates and payment dates
relating thereto, it being the intention of the parties hereto that holders of
BB Common Stock or MCB Common Stock shall not receive two dividends, or fail to
receive one dividend, for any single calendar quarter with respect to their
shares of BB Common Stock and/or MCB Common Stock and any shares of BB Common
Stock any such holder receives in exchange therefor in the Reorganization.
5.4 Compensation; Employment Agreements; Etc. Except as set forth on
Section 5.4 of the MCB Disclosure Schedule and Section 5.4 of the BB Disclosure
Schedule and other than as anticipated by Section 8.4 hereof, (i) enter into or
amend any written employment, severance or similar agreements or arrangements
with any of its directors or executive officers, (ii) enter into or amend any
written employment, severance or similar agreements or arrangements with any of
its officers or employees, or (iii) grant any salary or wage increase or
increase any employee benefit (including incentive or bonus payments), except
for (A) normal individual increases in compensation to employees in the
ordinary course of business consistent with past practice or (B) other changes
as are provided for herein or as may be required by law or to satisfy
contractual obligations existing as of the date hereof or additional grants of
awards to newly hired employees consistent with past practice.
5.5 Benefit Plans. Except as set forth on Section 5.5 of the MCB
Disclosure Schedule and Section 5.5 of the BB Disclosure Schedule and other
than as anticipated by Section 8.6 hereof, enter into or amend (except as may
be required by applicable law, to satisfy contractual obligations existing as
of the date hereof or amendments which, either individually or in the
aggregate, would not reasonably be expected to result in a material liability
to MCB, BB or their respective Subsidiaries) any pension, retirement, stock
option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees, including,
without limitation, taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
5.6 Acquisitions And Dispositions. Except as Previously Disclosed in its
Disclosure Schedule, dispose of or discontinue any portion of its assets,
business or properties, which is material to it and its Subsidiaries taken as a
whole, or acquire (other than by way of foreclosures or acquisitions of control
in a bona fide fiduciary capacity or in satisfaction of debts previously
contracted in good faith, in each case, in the ordinary and usual course of
business consistent with past practice) all or any portion of, the business or
property of any other entity which is material to it and its Subsidiaries taken
as a whole.
5.7 Amendments. Amend its Articles of Incorporation or Bylaws or, except
as provided in Section 6.3(n) and 7.9, amend or waive any rights under the MCB
Shareholder Rights Agreement.
5.8 Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by generally
accepted accounting principles ("GAAP").
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5.9 Adverse Actions. (i) Knowingly take any action that would, or would be
reasonably likely to, prevent or impede the Reorganization from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code; or (ii)
knowingly take any action that is intended or is reasonably likely to result in
(A) any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect at any time prior to the Effective
Time, (B) any of the conditions to the Reorganization set forth in Article IX
not being satisfied or (C) a material violation of any provision of this
Agreement except, in each case, as may be required by applicable law.
5.10 Claims. Settle any material claim, action or proceeding, except in
the ordinary course of business consistent with past practice.
5.11 Agreements. Agree or commit to do anything prohibited by Sections 5.1
through 5.10.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1 Disclosure Schedules. On or prior to the date hereof, each of BB and
MCB has delivered to the other a schedule (respectively, its "Disclosure
Schedule") setting forth, among other things, items the disclosure of which is
necessary or appropriate in relation to any or all of its representations and
warranties set forth in this Agreement; provided, that (i) no such item is
required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence is not reasonably likely to result in
the related representation or warranty being deemed untrue or incorrect under
the standard established by Section 6.2, and (ii) the mere inclusion of an item
in a Disclosure Schedule shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect.
6.2 Standard. No representation or warranty of BB or MCB contained in
Section 6.3 shall be deemed untrue or incorrect, and no party hereto shall be
deemed to have breached any such representation or warranty, as a consequence
of the existence of any fact, circumstance or event unless such fact,
circumstance or event, individually or taken together with all other facts,
circumstances or events inconsistent with any paragraph of Section 6.3, has had
or is reasonably expected to have a Material Adverse Effect.
6.3 Representations and Warranties. Subject to Sections 6.1 and 6.2 and
except as Previously Disclosed in its Disclosure Schedule, MCB hereby
represents and warrants to BB, and BB hereby represents and warrants to MCB, to
the extent applicable, in each case with respect to itself and its
Subsidiaries, as follows:
(a) Organization, Standing and Authority. Such party is a corporation
duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization. Such party is duly qualified to do
business and is in good standing in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified. It has in effect
all federal, state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on
its business as it is now conducted.
(b) Shares.
(i) As of June 30, 2001, the authorized capital stock of MCB
consists solely of 20,000,000 shares of MCB Common Stock, of which, as of
July 31, 2001, 1,590,505 shares were outstanding and 20,000,000 of
preferred stock of which none is outstanding. As of July 31, 2001, the
authorized capital stock of BB consists solely of 10,000,000 shares of BB
Common Stock, of which, as of July 31, 2001, 2,026,869 shares were
outstanding and 2,000,000 of preferred stock of which none is
outstanding. The outstanding shares of such party's capital stock are
validly issued and outstanding, fully paid and nonassessable, and subject
to no preemptive rights (and were not issued in violation of any
preemptive rights). As of the date hereof, except as Previously
Disclosed, there are no shares of such party's capital stock authorized
and reserved for issuance,
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such party does not have any Rights issued or outstanding with respect
to its capital stock, and such party does not have any commitment to
authorize, issue or sell any such shares or Rights, except pursuant to
this Agreement, the Stock Option Agreements and the MCB Shareholder
Rights Agreement, as the case may be. Since June 30, 2001, neither BB
nor MCB has issued shares of its capital stock or rights in respect
thereof or reserved any shares for such purposes except pursuant to
plans or commitments Previously Disclosed in its Disclosure Schedule.
(ii) The number of shares of MCB Common Stock which are issuable and
reserved for issuance upon exercise of stock options and other rights
(other than the MCB Stock Option Agreement) of MCB as of June 30, 2001
has been Previously Disclosed in MCB's Disclosure Schedule, and the
number of shares of BB Common Stock which are issuable and reserved for
issuance upon exercise of stock options and other rights (other than the
BB Common Stock Option Agreement) of BB as of June 30, 2001 has been
Previously Disclosed in BB's Disclosure Schedule.
(c) Subsidiaries.
(i) (A) Except as otherwise Previously Disclosed in its Disclosure
Schedule, such party has listed in its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2000 all of its Subsidiaries, (B) it
owns, directly or indirectly at least 99% of the issued and outstanding
shares of each of its Significant Subsidiaries, (C) no equity securities
of any of its Significant Subsidiaries are or may become required to be
issued (other than to it or a Subsidiary of it) by reason of any Rights,
(D) there are no contracts, commitments, understandings or arrangements
by which any of such Significant Subsidiaries is or may be bound to sell
or otherwise transfer any shares of the capital stock of any such
Significant Subsidiaries (other than to it or a Subsidiary of it), (E)
there are no contracts, commitments, understandings, or arrangements
relating to its rights to vote or to dispose of such shares (other than
to it or a Subsidiary of it), and (F) all of the shares of capital stock
of each such Significant Subsidiary held by it or its Subsidiaries are
fully paid and nonassessable and are owned by it or its Subsidiaries free
and clear of any Liens.
(ii) Each of such party's Significant Subsidiaries has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business
and in good standing in the jurisdictions where its ownership or leasing
of property or the conduct of its business requires it to be so
qualified. Each of such Significant Subsidiaries has in effect all
federal, state, local, and foreign governmental authorizations necessary
for it to own or lease its properties and assets and to carry on its
business as it is now conducted.
(iii) Except as set forth on their respective Disclosure Schedules
6.3, with respect to BB Bank, BB represents and warrants and, with
respect to MCB Bank, MCB represents and warrants (in each case a "Bank")
that: Bank is a California banking corporation, validly existing and in
good standing duly authorized to conduct its business as it is currently
conducted. All of Bank's eligible deposits are insured by the FDIC as
required under applicable law. To the best of their knowledge Bank's
allowance for loan losses as shown on the Bank's June 30, 2001 report of
condition ("Call Report") filed with the FDIC and DFI was adequate in all
respects to provide for losses, net of recoveries, on loans outstanding.
Bank's nonperforming assets are not in excess of that amount reflected on
the Bank's June 30, 2001 Call Report. Other than as Previously Disclosed,
Bank does not have any loans that have been classified by the Bank
management, the Bank's independent auditors or any regulatory authority
as "non-accrual," "watch," "other assets specially mentioned,"
"substandard," "doubtful," or "loss." The Bank received at least a
"satisfactory" rating in its most recent Community Reinvestment Act
examination.
(d) Corporate Power. Such party and each of its Significant Subsidiaries
has the corporate power and authority to carry on its business as it is
now being conducted and to own all its properties and assets; and it has
the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and the Stock Option Agreements and to
consummate the transactions contemplated hereby and thereby.
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(e) Corporate Authority. Subject, in the case of this Agreement, to
approval by the holders of a majority of the shares of MCB Common Stock
entitled to vote (in the case of MCB) and by the holders of a majority of
the shares of BB Common Stock entitled to vote (in the case of BB), each
of this Agreement and the Stock Option Agreements and the transactions
contemplated hereby and thereby have been authorized by all necessary
corporate action of it, and each of this Agreement and the Stock Option
Agreements is a legal, valid and binding agreement of it, enforceable in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
(f) No Defaults. Subject to receipt of the regulatory approvals and
expiration of the waiting periods referred to in Section 9.2 and the
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the Stock Option Agreements
and the consummation of the transactions contemplated hereby and thereby
by it do not and will not (i) constitute a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of
it or of any of its Significant Subsidiaries or to which it or any of its
Significant Subsidiaries or properties is subject or bound, (ii)
constitute a breach or violation of, or a default under, its articles or
certificate of incorporation or bylaws, or (iii) require any consent or
approval under any such law, rule, regulation, judgment, decree, order,
governmental permit or license agreement, indenture, contract, agreement
or instrument.
(g) Financial Reports and SEC Documents. Its Annual Report on Form
10-KSB, as amended through the date hereof, for the fiscal year ended
December 31, 2000, and all other reports, registration statements,
definitive proxy statements or information statements filed or to be filed
by it or any of its Subsidiaries subsequent to December 31, 1998 under the
Securities Act, or under Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act, in the form filed, or to be filed (collectively, its "SEC
Documents"), with the SEC (i) complied or will comply in all material
respects as to form with the applicable requirements under the Securities
Act or the Exchange Act, as the case may be, and (ii) did not and will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such SEC Document (including the
related notes and schedules thereto) fairly presents and will fairly
present the financial position of the entity or entities to which it
relates as of its date, and each of the statements of income and changes
in stockholders' equity and cash flows or equivalent statements in such
SEC Documents (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods to which it
relates, in each case in accordance with GAAP consistently applied during
the periods involved, except, in each case, as may be noted therein,
subject to normal year-end audit adjustments in the case of unaudited
statements.
(h) Litigation; Regulatory Action.
(i) No litigation, claim or other proceeding before any court or
governmental agency is pending against it or any of its Subsidiaries,
and, to the best of its knowledge, no such litigation, claim or other
proceeding has been threatened.
(ii) Neither it nor any of its Subsidiaries or properties is a party
to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or
similar submission to, any federal or state court or any federal or state
governmental agency or authority charged with the supervision or
regulation of financial institutions or issuers of securities or engaged
in the insurance of deposits (including, without limitation, the DFI, the
FDIC and the Federal Reserve Board) or the supervision or regulation of
it or any of its Subsidiaries (collectively, the "Regulatory
Authorities").
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(iii) Neither it nor any of its Subsidiaries has been advised by any
Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing
or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter or similar submission.
(i) Compliance With Laws. It and each of its Subsidiaries:
(i) in the conduct of its business, is in compliance with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto or to
the employees conducting such businesses, including, without limitation,
the Equal Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act, the Home Mortgage Disclosure Act and all other
applicable fair lending laws and other laws relating to discriminatory
business practices;
(ii) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit them to
conduct their businesses substantially as presently conducted, and all
such permits, licenses, certificates of authority, orders and approvals
are in full force and effect and, to the best of its knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has received, since December 31, 1998, no notification or
communication from any Regulatory Authority (A) asserting that it or any
of its Subsidiaries is not in compliance with any of the statutes,
regulations, or ordinances which such Regulatory Authority enforces, (B)
threatening to revoke any license, franchise, permit, or governmental
authorization, (C) threatening or contemplating revocation or limitation
of, or which would have the effect of revoking or limiting, federal
deposit insurance (nor, to its knowledge, do any grounds for any of the
foregoing exist) or (D) failing to approve any proposed acquisition, or
stating its intention not to approve acquisitions proposed to be effected
by it within a certain time period or indefinitely.
(j) Defaults. Neither it nor any of its Subsidiaries is and, to its best
knowledge, no counter party to a material contract is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy, or
other instrument to which it is a party, by which its respective assets,
business, of operations may be bound or affected, or under which it or its
respective assets, business, or operations receives benefits, and there
has not occurred any event that, with the lapse of time or the giving of
notice or both, would constitute such a default.
(k) No Brokers. No action has been taken by it that would give rise to
any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions
contemplated by this Agreement, excluding, in the case of MCB, fees to be
paid to Merrill, Lynch, Pierce, Fenner & Smith Incorporated and, in the
case of BB, fees to be paid to Baxter Fentriss and Co., in each case
pursuant to letter agreements which have been heretofore disclosed to the
other party.
(l) Employee Benefit Plans.
(i) Each party has made available to the other all material written
bonus, vacation, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock and stock option plans, all material
employment or severance contracts, all material medical, dental,
disability, health and life insurance plans, all other material employee
benefit and fringe benefit plans, contracts or arrangements and any
material applicable "change of control" or similar provisions in any
plan, contract or arrangement maintained or to which contributions are
made by it or any of its Subsidiaries for the benefit of officers,
employees, directors, or the beneficiaries of any of the foregoing
(collectively, "Compensation and Benefit Plans").
(ii) True and complete copies of its Compensation and Benefit Plans,
including, but not limited to, any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto
have been made available to the other party.
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(iii) Each of its Compensation and Benefit Plans has been
administered in all material respects in accordance with the terms
thereof, All "employee benefit plans" within the meaning of Section 3(3)
of ERISA, other than "multiemployer plans" within the meaning of Section
3(37) of ERISA ("Multiemployer Plans"), covering employees or former
employees of it and its Subsidiaries (its "Plans"), to the extent subject
to ERISA, are in material compliance with ERISA, the Code, the Age
Discrimination in Employment Act and other applicable laws. Each
Compensation and Benefit Plan of it or its Subsidiaries which is an
"employee pension benefit plan" within the meaning of Section 3(2) of
ERISA ("Pension Plan") and which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service, and it is not aware of any
circumstances reasonably likely to result in the revocation or denial of
any such favorable determination letter. There is no pending or, to its
knowledge, threatened litigation or governmental audit, examination or
investigation relating to the Plans.
(iv) No material liability under Title IV of ERISA has been or is
expected to be incurred by it or any of its Subsidiaries with respect to
any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(5) of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which is
considered one employer with it under Section 4001(a)(5) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Neither it nor any of its
Subsidiaries presently contributes to a Multiemployer Plan, nor have they
contributed to such a plan within the past five calendar years. No notice
of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plan of it or any of its
Subsidiaries or by any ERISA Affiliate within the past 12 months.
(v) All contributions, premiums and payments required to be, made
under the terms of any Compensation and Benefit Plan of it or any of its
Subsidiaries have been made. Neither any Pension Plan of it or any of its
Subsidiaries nor any single-employer plan of an ERISA Affiliate of it or
any of its Subsidiaries has an "accumulated funding deficiency" (whether
or not waived) within the meaning of Section 412 of the Code or Section
302 of ERISA. Neither it nor any of its Subsidiaries has provided, or is
required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29)
of the Code,
(vi) Under each Pension Plan of it or any of its Subsidiaries which
is a single-employer plan, as of the last day of the most recent plan
year ended prior to the date hereof, the actuarially determined present
value of all "benefit liabilities", within the meaning of Section
4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the Plan's most recent actuarial valuation) did
not exceed the then current value of the assets of such Plan, and there
has been no adverse change in the financial condition of such Plan (with
respect to either assets or benefits) since the last day of the most
recent Plan year.
(vii) Neither it nor any of its Subsidiaries has any obligations
under any Compensation and Benefit Plans to provide benefits, including
death or medical benefits, with respect to employees of it or its
Subsidiaries beyond their retirement or other termination of service
other than (A) coverage mandated by Part 6 of Title I of ERISA or Section
4980B of the Code, (B) retirement or death benefits under any employee
pension benefit plan (as defined under Section 3 (2) of ERISA), (C)
disability benefits under any employee welfare plan that have been fully
provided for by insurance or otherwise, or (D) benefits in the nature of
severance pay.
(viii) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (A) result in
any payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director
or any employee of it or any of its Subsidiaries under any Compensation
and Benefit Plan or otherwise from it or any of its Subsidiaries, (B)
increase any benefits otherwise payable under any Compensation and
Benefit Plan or (C) result in any acceleration of the time of payment or
vesting of any such benefit.
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(m) Labor Matters. Neither it nor any of its Subsidiaries is a party to,
or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor
is it or any of its Subsidiaries the subject of a proceeding asserting
that it or any such Subsidiaries has committed an unfair labor practice
(within the meaning of the National Labor Relations Act) or seeking to
compel it or such Subsidiaries to bargain with any labor organization as
to wages and conditions of employment.
(n) Takeover Laws; Rights Plans.
(i) It has taken all action required to be taken by it in order to
exempt this Agreement and the Stock Option Agreements and the
transactions contemplated hereby and thereby from, and this Agreement and
the Stock Option Agreements and the transactions contemplated hereby and
thereby are exempt from, the requirements of any "moratorium," "control
share," "fair price" or other anti-takeover laws and regulations
(collectively, "Takeover Laws") of the State of California.
(ii) In the case of the representations and warranties of MCB, it
has (A) duly approved an appropriate amendment to the MCB Shareholder
Rights Agreement and (B) taken all other action necessary or appropriate
so that the entering into of this Agreement, and the consummation of the
transactions contemplated hereby (including, without limitation, the
Reorganization) do not and will not result in the ability of any person
to exercise any Rights, as defined in the MCB Shareholder Rights
Agreement (the "MCB Rights"), or enable or require the MCB Rights to
separate from the shares of MCB Common Stock to which they are attached
or to be triggered or become exercisable.
(iii) In the case of the representations and warranties of MCB, no
"Distribution Date" or "Shares Acquisition Date" (as such terms are
defined in the MCB Shareholder Rights Plan) has occurred, and the "Final
Expiration Date" (as such term is defined in the MCB Rights Plan) is
January 30, 2009.
(o) Environmental Matters.
(i) As used in this Agreement, "Environmental Laws" means all
applicable local, state and federal environmental, health and safety laws
and regulations, including, without limitation, the Resource Conservation
and Recovery Act, the Comprehensive Environmental Response, Compensation,
and Liability Act, the Clean Water Act, the Federal Clean Air Act, and
the Occupational Safety and Health Act, each as amended, regulations
promulgated thereunder, and state counterparts.
(ii) Neither the conduct nor operation of such party or its
Subsidiaries nor any condition of any property presently or previously
owned, leased or operated by any of them violates or violated
Environmental Laws and no condition has existed or event has occurred
with respect to any of them or any such property that, with notice or the
passage of time, or both, is reasonably likely to result in liability
under Environmental Laws. Neither such party nor any of its Subsidiaries
has received any notice from any person or entity that it or its
Subsidiaries or the operation or condition of any property ever owned,
leased, operated, held as collateral or held as a fiduciary by any of
them are or were in violation of or otherwise are alleged to have
liability under any Environmental Law, including, but not limited to,
responsibility (or potential responsibility) for the cleanup or other
remediation of any pollutants, contaminants, or hazardous or toxic
wastes, substances or materials at, on, beneath, or originating from any
such property.
(p) Tax Matters. (i) All material returns, declarations, reports,
estimates, information returns and statements required to be filed under
federal, state, local or any foreign tax laws ("Tax Returns") with respect
to it or any of its Subsidiaries, have been timely filed, or requests for
extensions have been timely filed and have not expired; (ii) all Tax
Returns filed by it are complete and accurate in all material respects;
(iii) all Taxes shown to be due on such Tax Returns have been paid or
adequate reserves have been established for the payment of such Taxes; and
(iv) except as Previously Disclosed, there is no audit, examination,
deficiency or refund litigation or matter in controversy with respect to
any Taxes that might reasonably be expected to result in a determination,
the effect of which would be a Material Adverse Effect.
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(q) Tax Treatment. As of the date hereof, it is aware of no reason why
the Reorganization will fail to qualify as a "reorganization" under
Section 368(a) of the Code.
(r) Regulatory Approvals. The approval of the following regulatory
authorities (among others) is necessary to consummate the Reorganization:
the Federal Reserve Board, DFI, the FDIC and the regulatory authorities of
the states and foreign jurisdictions in which MCB, BB, and their
respective Subsidiaries operate. As of the date hereof, neither of MCB nor
BB is aware of any reason why the approvals of such regulatory authorities
will not be received.
(s) No Material Adverse Effect. Since December 31, 2000, except as
disclosed in its SEC Documents filed with the SEC on or before the date
hereof, (i) it and its Subsidiaries have conducted their respective
businesses in the ordinary and usual course (excluding the incurrence of
expenses related to this Agreement and the transactions contemplated
hereby) and (ii) no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and
events (described in any paragraph of this Section 6.3 or otherwise), is
reasonably likely to have a Material Adverse Effect with respect to it.
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ARTICLE VII
COVENANTS
MCB hereby covenants to and agrees with BB, and BB hereby covenants to and
agrees with MCB, that:
7.1 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, it shall use its reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
permit consummation of the Reorganization as promptly as practicable and
otherwise to enable consummation of the transactions contemplated hereby
including, without limitation, using its reasonable best efforts to obtain (and
cooperating with the other party hereto to obtain) any consent, authorization,
order or approval of, or any exemption by, any Regulatory Authority and any
other third party that is required to be obtained by MCB or BB or any of their
respective Subsidiaries in connection with the Reorganization and the other
transactions contemplated by this Agreement, and using reasonable best efforts
to lift or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions
contemplated hereby, and using reasonable best efforts to defend any litigation
seeking to enjoin, prevent or delay the consummation of the transactions
contemplated hereby or seeking material damages, and each shall cooperate fully
with the other parties hereto to that end.
7.2 Stockholder Approvals. Each of them shall take, in accordance with
applicable law, applicable stock exchange rules and its respective articles of
incorporation and bylaws, all action necessary to convene, respectively, an
appropriate meeting of shareholders of BB to consider and vote upon the
approval of this Agreement and any other matters required to be approved by BB
shareholders for consummation of the Reorganization (including any adjournment
or postponement, the "BB Meeting"), and an appropriate meeting of stockholders
of MCB to consider and vote upon the approval of this Agreement and any other
matters required to be approved by MCB's stockholders for consummation of the
Reorganization (including any adjournment or postponement, the "MCB Meeting";
and each of the BB Meeting and MCB Meeting, a "Meeting"), respectively, as
promptly as practicable after the date hereof. At the BB Meeting, its
shareholders shall also be asked to approve the amendment to its Bylaws to
increase the variable number of board numbers as set forth in Section 8.1(a),
to approve the elimination of cumulative voting as set forth in Section 8.1(c),
to approve an amendment to BB's articles of incorporation authorizing
additional BB Common Stock and BB preferred stock as set forth in Section
8.1(d) and to approve the adoption of a new stock option plan as set forth in
Section 8.8. The Board of Directors of each of BB and MCB shall recommend such
approval, and each of BB and MCB shall take all reasonable lawful action to
solicit such approval by its respective stockholders.
7.3 Registration Statement.
(a) Each of BB and MCB agrees to cooperate in the preparation of a
registration statement on Form S-4 (the "Registration Statement") to be
filed by BB with the SEC in connection with the issuance of BB Common Stock
in the Reorganization (including the joint proxy statement and prospectus
and other proxy solicitation materials of BB and MCB constituting a part
thereof (the "Joint Proxy Statement") and all related documents). MCB and
BB agree to use their reasonable best efforts to file the Registration
Statement with the SEC as promptly as practicable. Each of MCB and BB
agrees to use reasonable best efforts to cause the Registration Statement
to be declared effective under the Securities Act as promptly as reasonably
practicable after filing thereof. BB also agrees to use reasonable best
efforts to obtain all necessary state securities law or "Blue Sky" permits
and approvals required to carry out the transactions contemplated by this
Agreement.
(b) Each of MCB and BB agrees, as to itself and its Subsidiaries, that
none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (i) the Registration Statement will, at the
time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and (ii) the Joint Proxy Statement and any amendment or
supplement thereto
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will, at the date of mailing to stockholders and at the times of the BB
Meeting and MCB Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or any statement which, in
the light of the circumstances under which such statement is made, will be
false or misleading with respect to any material fact, or which will omit
to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in
any earlier statement in the Joint Proxy Statement or any amendment or
supplement thereto. Each of MCB and BB further agrees that if it shall
become aware prior to the Effective Time of any information that would
cause any of the statements in the Joint Proxy Statement to be false or
misleading with respect to any material fact, or to omit to state any
material fact necessary to make the statements therein not false or
misleading, to promptly inform the other party thereof and to take the
necessary steps to correct the Joint Proxy Statement.
(c) In the case of BB, BB will advise MCB, promptly after BB receives
notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of
any stop order or the suspension of the qualification of the BB Common
Stock for offering or sale in any jurisdiction, of the initiation or threat
of any proceeding for any such purpose, or of any request by the SEC for
the amendment or supplement of the Registration Statement or for additional
information.
7.4 Press Releases. Neither party will, without the prior approval of the
other party hereto, issue any press release or written statement for general
circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law or regulation or the rules of the NASDAQ
or the American Stock Exchange.
7.5 Access; Information.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, it shall, and shall cause its Subsidiaries to,
afford the other parties and their officers, employees, counsel,
accountants and other authorized representatives, access, during normal
business hours throughout the period prior to the Closing Date, to all of
its properties, books, contracts, commitments and records, and to its
officers, employees, accountants, counsel or other representatives, and,
during such period, it shall, and shall cause its Subsidiaries to, furnish
promptly to such other parties and representatives (i) a copy of each
material report, schedule and other document filed by it pursuant to the
requirements of federal or state securities or banking laws (other than
reports or documents that BB or MCB, or their respective Subsidiaries, as
the case may be, are not permitted to disclose under applicable law), and
(ii) all other information concerning the business, properties and
personnel of it as the other may reasonably request. The parties will each
provide adequate notice to and permit one representative of the other party
to attend all regular and special board meetings from the date hereof
through the Effective Date; provided, however, either board of directors
may exclude the representative of the other party from any discussion of
the transactions contemplated by this Agreement or from any discussion
involving matters of attorney-client privilege. Neither BB nor MCB nor any
of their respective Subsidiaries shall be required to provide access to or
to disclose information where such access or disclosure would violate or
prejudice the rights of its customers, jeopardize the attorney-client
privilege of the institution in possession or control of such information
or contravene any law, rule, regulation, order, judgment, decree, fiduciary
duty or binding agreement entered into prior to the date of this Agreement.
The parties hereto will make appropriate substitute disclosure arrangements
under the circumstances in which the restrictions of the preceding sentence
apply.
(b) It will not use any information obtained pursuant to this Section
7.5 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement and, if this Agreement is terminated, will
hold all information and documents obtained pursuant to this paragraph in
confidence (as provided in, and subject to the provisions of, the
Confidentiality Agreement, as if it were the Receiving Party (as defined
therein)). No investigation by either party of the business and affairs of
the other shall affect or be deemed to modify or waive any representation,
warranty,
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covenant or agreement in this Agreement, or the conditions to either
party's obligation to consummate the transactions contemplated by this
Agreement.
7.6 Acquisition Proposals. Without the prior written consent of the other
party hereto, it shall not, and shall cause its Subsidiaries and its
Subsidiaries' officers, directors, agents, advisors and affiliates not to,
solicit or encourage inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential information to, or have
any discussions with, any such person relating to any tender offer or exchange
offer for, or any proposal for the acquisition of a substantial equity interest
in, or a substantial portion of the assets of, or any merger or consolidation
with, it or any of its Subsidiaries.
7.7 Affiliate Agreements.
(a) Not later than the 15th day prior to the mailing of the Joint Proxy
Statement, MCB shall deliver to BB, a schedule of each person that, to the
best of its knowledge, is or is reasonably likely to be, as of the date of
the relevant Meeting, deemed to be an "affiliate" of it (each, an
"Affiliate") as that term is used in Rule 145 under the Securities Act.
(b) MCB shall use its reasonable best efforts to cause each person who
may be deemed to be an Affiliate of MCB to execute and deliver to BB on or
before the date of mailing of the Joint Proxy Statement an agreement to
comply with Rule 145 under the Securities Act.
(c) MCB and BB shall each use its respective reasonable best efforts to
cause each current director of MCB and BB, as the case may be, to execute
and deliver to MCB and BB within 15 days of the date of this Agreement an
agreement in the form attached hereto as Schedule 7.7(c) to support the
Reorganization and to vote all shares over which each director has voting
authority in favor of the Reorganization.
7.8 Takeover Laws. Neither party shall take any action that would cause
the transactions contemplated by this Agreement and the Stock Option Agreements
to be subject to requirements imposed by any Takeover Law and each of them
shall take all necessary steps within its control to exempt (or ensure the
continued exemption of) the transactions contemplated by this Agreement and the
Stock Option Agreements from, or if necessary challenge the validity or
applicability of, any applicable Takeover Law, as now or hereafter in effect of
any state that purport to apply to this Agreement, the Stock Option Agreements
or the transactions contemplated hereby or thereby.
7.9 No Rights Triggered. Each of MCB and BB shall take all steps necessary
to ensure that the entering into of this Agreement and the consummation of the
transactions contemplated hereby and any other action or combination of
actions, or any other transactions contemplated hereby, do not and will not
result in the grant of any rights to any person (i) under its articles of
incorporation or bylaws, (ii) under any material agreement to which it or any
of its Subsidiaries is a party (including, without limitation, in the case of
MCB, the MCB Shareholder Rights Agreement) or (iii) in the case of MCB, to
exercise or receive certificates for Rights, or acquire any property in respect
of Rights, under the MCB Shareholder Rights Agreement.
7.10 Shares Listed. BB and MCB shall use their reasonable best efforts to
list, prior to the Closing Date, on the NASDAQ national market system, upon
official notice of issuance, the shares of BB Common Stock to be issued in the
Reorganization.
7.11 Regulatory Applications.
(a) BB and MCB and their respective Subsidiaries shall cooperate and
use their respective reasonable best efforts (i) to prepare and execute all
documentation (including, in the case of BB, such documentation on behalf
of BB Bank as may be necessary in connection with the Bank Merger), to
effect all filings, and to obtain all permits, consents, approvals and
authorizations of all third parties and Regulatory Authorities necessary to
consummate the transactions contemplated by this Agreement, including,
without limitation, any such approvals or authorizations required by the
Federal Reserve Board, the DFI, the FDIC and the regulatory authorities of
the states and foreign jurisdictions in which MCB, BB and their respective
Subsidiaries operate, (ii) to comply with the terms and conditions of such
permits, consents, approvals and authorizations, and (iii) to cause the
Reorganization to be consummated as expeditiously as practicable. BB agrees
to use its reasonable best efforts
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to file the requisite applications to be filed by it with the Federal
Reserve Board and the regulatory authorities of the states and foreign
jurisdictions in which MCB and its Subsidiaries operate as promptly as
practicable. Each of BB and MCB shall have the right to review in advance,
and, to the extent practicable, each will consult with the other, in each
case, subject to applicable laws relating to the exchange of information,
with respect to, all material written information submitted to any third
party or any Regulatory Authorities in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of
the parties hereto agrees to act reasonably and as promptly as practicable.
Each party hereto agrees that it will consult with the other parties hereto
with respect to the obtaining of all material permits, consents, approvals
and authorizations of all third parties and Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other parties apprised of the status
of material matters relating to completion of the transactions contemplated
hereby.
(b) Each party agrees, upon request, to furnish the other party with
all information concerning itself, its Subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary or
advisable in connection with the Registration Statement, the Joint Proxy
Statement or any filing, notice or application made by or on behalf of such
other party or any of its Subsidiaries to any Regulatory Authority in
connection with the transactions contemplated hereby.
7.12 Indemnification; Directors' and Officers' Insurance.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior
to the date of this Agreement, or who becomes prior to the Effective Time,
a director, officer or employee of MCB, BB or any of their respective
Subsidiaries (the "Indemnified Parties") is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of,
or pertaining to (i) the fact that he or she is or was a director, officer
or employee of MCB, BB, their respective Subsidiaries or any of their
respective predecessors or was prior to the Effective Time serving at the
request of any such party as a director, officer, employee, fiduciary or
agent of another corporation, partnership, trust or other enterprise or
(ii) this Agreement, the Stock Option Agreements, or any of the
transactions contemplated hereby and thereby and all actions taken by an
Indemnified Party in connection herewith or therewith, whether in any case
asserted or arising before or after the Effective Time, the parties hereto
agree to cooperate and use their best efforts to defend against and respond
thereto. It is understood and agreed that after the Effective Time, BB
shall indemnify and hold harmless, as and to the fullest extent permitted
by law, each such Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including reasonable attorneys' fees and
expenses in advance of the final disposition of any claim, suit, proceeding
or investigation to each Indemnified Party to the fullest extent permitted
by law upon receipt of an undertaking from such Indemnified Party to repay
such advanced expenses if it is finally determined (with no further rights
of appeal) that such Indemnified Party was not entitled to indemnification
hereunder), judgments, fines and amounts paid in settlement in connection
with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim,
action, suit, proceeding or investigation (whether asserted or arising
before or after the Effective Time), the Indemnified Parties may retain
counsel reasonably satisfactory to them after consultation with BB;
provided, however, that (A) BB shall have the right to assume the defense
thereof and upon such assumption BB shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses
subsequently incurred by any Indemnified Party in connection with the
defense thereof, except that if BB elects not to assume such defense, or
counsel for the Indemnified Parties reasonably advises the Indemnified
Parties that there are or may be (whether or not any have yet actually
arisen) issues which raise conflicts of interest between BB and the
Indemnified Parties, the Indemnified Parties may retain counsel reasonably
satisfactory to them, and BB shall pay the reasonable fees and expenses of
such counsel for the Indemnified Parties, (B) BB shall be obligated
pursuant to this paragraph to pay for only one firm of counsel for all
Indemnified Parties, (C) BB shall not be liable for any settlement effected
without its prior written consent (which consent shall
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not be unreasonably withheld) and (D) BB shall have no obligation hereunder
to any Indemnified Party when and if a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final
and nonappealable, that indemnification of such Indemnified Party in the
manner contemplated hereby is prohibited by applicable law. Any Indemnified
Party wishing to claim indemnification under this Section 7.12, upon
learning of any such claim, action, suit, proceeding or investigation,
shall notify BB thereof, provided that the failure to so notify shall not
affect the obligations of BB under this Section 7.12 except (and only) to
the extent such failure to notify materially prejudices BB. BB's
obligations under this Section 7.12 shall continue in full force and effect
for a period of six (6) years from the Effective Time; provided, however,
that all rights to indemnification in respect of any claim (a "Claim")
asserted or made within such period shall continue until the final
disposition of such Claim.
(b) Without limiting any of the obligations under paragraph (a) of this
Section 7.12, BB agrees that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in MCB's Amended and Restated Articles of Incorporation or Bylaws
or in the similar governing documents of any of MCB's Subsidiaries as in
effect as of the date of this Agreement with respect to matters occurring
on or prior to the Effective Time shall survive the Reorganization and
shall continue in full force and effect, without any amendment thereto, for
a period of six (6) years from the Effective Time; provided, however, that
all rights to indemnification in respect of any Claim asserted or made
within such period shall continue until the final disposition of such
Claim; provided further, however, that nothing contained in this Section
7.12 shall be deemed to preclude the liquidation, consolidation or merger
of MCB or any MCB Subsidiary, in which case all of such rights to
indemnification and limitations on liability shall be deemed to so survive
and continue notwithstanding any such liquidation, consolidation or merger
and shall constitute rights which may be asserted against BB. Nothing
contained in this Section 7.12 shall be deemed to preclude any rights to
indemnification or limitations on liability provided in MCB's Amended and
Restated Articles of Incorporation or Bylaws or the similar governing
documents of any of MCB's Subsidiaries with respect to matters occurring
subsequent to the Effective Time to the extent that the provisions
establishing such rights or limitations are not otherwise amended to the
contrary.
(c) In the event BB or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of BB shall assume the obligations set forth in this Section 7.12.
(d) The provisions of this Section 7.12 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
7.13 Benefits Plans.
(a) Subject to Section 7.13(c), BB shall honor, in accordance with
their terms, all benefit obligations to, and contractual rights of, current
and former employees of BB and MCB existing as of the Effective Time, as
well as all employment or severance agreements, plans or policies of BB or
MCB.
(b) BB shall cause each employee benefit plan, program, policy or
arrangement of the combined company to take into account for purposes of
eligibility and vesting thereunder the service of employees of BB and MCB
to the same extent as such service was credited for such purpose by MCB and
BB, respectively, under comparable compensation and benefit plans.
(c) BB and MCB agree to cooperate to establish for the combined company
benefit plans which are appropriate for the nature of the combined
company's organization with respect to periods after the Effective Time.
7.14 Notification of Certain Matters. Each of MCB and BB shall give prompt
notice to the other of any fact, event or circumstance known to it that (i) is
reasonably likely, individually or taken together with all other facts, events
and circumstances known to it, to result in any Material Adverse Effect with
respect to it or (ii) would cause or constitute a material breach of any of its
representations, warranties, covenants or agreements contained herein.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Adoption of By-law and Articles Amendments. Prior to the Merger
Effective Time the BB Board of Directors shall adopt amendments to its Bylaws
and Articles to be effective at the Effective Time as follows:
(a) An amendment of the BB Bylaws to increase the variable number of
directors serving on the BB Board from the existing 7 - 13 to 9 - 17 and to
set the number of directors as of the Effective Time at 14 in the form
attached hereto as Schedule 8.1(a).
(b) An amendment of the BB Bylaws to provide for a period of two years
following the Effective Time (i) two nominating committees, one comprised
of MCB representatives (the "MCB Nominating Committee") and the other
comprised of BB representatives (the "BB Nominating Committee"), each
nominating committee to nominate one-half of the future BB Board; and (ii)
a super-majority vote of the future BB Board for certain corporate actions
in the form attached hereto as Schedule 8.1(b).
(c) An amendment of the BB Bylaws to eliminate cumulative voting in the
form attached hereto as Schedule 8.1(a).
(d) An amendment of the BB Articles to increase the number of
authorized shares of BB Common Stock from 10,000,000 to 20,000,000 and to
increase the number of authorized shares of BB preferred stock from
2,000,000 to 20,000,000 in the form attached hereto as Schedule 8.1(d).
8.2 Appointment of MCB Designees as BB Directors. Effective the Effective
Time, the BB Board of Directors shall appoint the seven current members of the
MCB Board or, in the event of one or more vacancies on the MCB Board, the
designees of the current MCB Board, as directors of BB and BB Bank.
8.3 Resignation of Two BB Directors. At the Effective Time, two members of
the current BB Board of Directors shall have resigned from the boards of
directors of BB and BB Bank.
8.4 Replacement Employment Agreements. On or before the Effective Time, BB
shall offer the MCB and BB officers identified on Schedule 8.4 hereto
employment and/or severance agreements to be effective at the Effective Time
which shall replace employment and/or severance agreements currently in
existence with either MCB or BB and which replacement employment agreement
shall include recognition of the inapplicability of existing severance or
change of control payment provisions that may have otherwise resulted from this
Reorganization; provided, however, if any officer identified in Schedule 8.4
hereto is terminated without cause within 12 months following the Effective
Time, upon termination such officer shall be entitled to receive any severance
and/or change of control payments that would have been paid to such officer
under his or her prior agreement.
8.5 Management Structure Following Reorganization. At and for a period of
at least two years after the Effective Time, the BB management structure and
responsibilities shall be as set forth on Schedule 8.5. Any changes to this
structure and responsibilities shall require the approval of at least 70% of
the authorized number of BB directors at a meeting duly held.
8.6 ESOP Plan Adoption. At the Effective Time or as soon thereafter as
reasonably practicable, BB shall adopt the existing MCB ESOP Plan or take
action to adopt an new ESOP Plan containing provisions and benefits
substantially similar to the existing MCB ESOP Plan.
8.7 Adoption of Shareholder Rights Plan. At the Effective Time or as soon
thereafter as reasonably practicable, the BB board of directors shall adopt a
shareholder rights plan substantially similar to the existing MCB Shareholder
Rights Agreement.
8.8 Adoption of Stock Option Plan. In connection with the transactions
approved by the BB stockholders related to this Agreement, the BB board of
directors shall adopt and shall submit to the stockholders for approval to be
effective at the Effective Time or as soon thereafter as reasonably
practicable, a stock option plan providing for the grant of additional options
to BB's directors and employees.
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8.9 Enforcement of Additional Agreements. From and after the Effective
Time the provisions of this Article VIII of this Agreement shall be enforceable
by the respective MCB or BB Nominating Committees. The parties hereby
stipulate, which stipulation shall be evidenced by this Agreement and may be
used in any court proceeding commenced pursuant hereto, that either the MCB
Nominating Committee or the BB Nominating Committee shall have standing to
commence an action in the name of the Corporation or in the name of the
respective Nominating Committee to enforce by way of injunction, writ or
otherwise, any obligation set forth in this Article VIII; provided, however,
any action taken by at least 70% of the authorized number of BB directors at a
meeting duly held shall not be deemed to be a violation of the provisions of
this Article VIII. Any action hereunder must be commenced within 90 days of a
corporate action giving rise to an alleged violation of the provisions of
Article VIII. In the event that a Nominating Committee commences an action
pursuant hereto and is successful in obtaining a favorable judgment of a court
or a settlement of the dispute, that Nominating Committee's legal fees and
other costs shall be paid by BB.
ARTICLE IX
CONDITIONS TO CONSUMMATION OF THE REORGANIZATION
The obligations of each of the parties to consummate the Reorganization
are conditioned upon the satisfaction at or prior to the Effective Time of each
of the following:
9.1 Shareholder Vote. Approval of the transactions contemplated by this
Agreement by the requisite votes of the stockholders of MCB and of BB,
respectively.
9.2 Regulatory Approvals. All regulatory approvals required to consummate
the transactions contemplated hereby, including, without limitation, those
specified in Section 6.3(r), shall have been obtained and shall remain in full
force and effect and all statutory waiting periods in respect thereof shall
have expired.
9.3 Third-Party Consents. All consents or approvals of all persons (other
than Regulatory Authorities) required for the consummation of the
Reorganization shall have been obtained and shall be in full force and effect,
unless the failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
MCB or BB, as the case may be.
9.4 No Injunction, Etc. No order, decree or injunction of any court or
agency of competent jurisdiction shall be in effect, and no law, statute or
regulation shall have been enacted or adopted, that enjoins, prohibits or makes
illegal consummation of any of the transactions contemplated hereby; provided,
however, that each of BB and MCB shall have used its reasonable best efforts to
prevent any such rule, regulation, injunction, decree or other order, and to
appeal as promptly as possible any injunction, decree or other order that may
be entered.
9.5 Representations, Warranties, Covenants and Additional Agreements of
BB. In the case of MCB's obligation to consummate the Reorganization: (i) each
of the representations and warranties contained herein of BB shall be true and
correct as of the date of this Agreement and upon the Closing Date with the
same effect as though all such representations and warranties had been made on
the Closing Date, except for any such representations and warranties made as of
a specified date, which shall be true and correct as of such date, in any case,
subject to the standard set forth in Section 6.2, (ii) each and all of the
agreements and covenants of BB to be performed and complied with pursuant to
this Agreement on or prior to the Closing Date shall have been duly performed
and complied with in all material respects, (iii) BB shall have appointed the
current members of the MCB Board to serve as BB directors from and after the
Effective Time, (iv) two existing BB directors shall have resigned from BB's
Board of Directors effective at the Effective Time, and (v) MCB shall have
received a certificate signed by the Chief Executive Officer of BB, dated the
Closing Date, to the effect set forth in clauses (i) through (iv) of this
Section 9.5.
9.6 Representations, Warranties and Covenants of MCB. In the case of BB's
obligation to consummate the Reorganization: (i) each of the representations
and warranties contained herein of MCB shall
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be true and correct as of the date of this Agreement and upon the Closing Date
with the same effect as though all such representations and warranties had been
made on the Closing Date, except for any such representations and warranties
made as of a specified date, which shall be true and correct as of such date,
in any case, subject to the standard set forth in Section 6.2, (ii) each and
all of the agreements and covenants of MCB to be performed and complied with
pursuant to this Agreement on or prior to the Closing Date shall have been duly
performed and complied with in all material respects, and (iii) BB shall have
received a certificate signed by the Chief Executive Officer of MCB, dated the
Closing Date, to the effect set forth in clauses (i) and (ii) of this Section
9.6.
9.7 Effective Registration Statement. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
9.8 Tax Opinion. BB and MCB shall have received an opinion from McCutchen,
Doyle, Brown & Enersen, LLP dated in each case as of the Closing Date,
substantially to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion which are consistent with the state
of facts existing at the Merger Effective Time, the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368 (a) of the Code and that accordingly:
(i) No gain or loss will be recognized by BB or MCB as a result of the
Merger;
(ii) No gain or loss will be recognized by the stockholders of MCB who
exchange all of their MCB Common Stock solely for BB Common Stock pursuant
to the Merger (except with respect to cash received in lieu of a fractional
share interest in BB Common Stock);
(iii) The aggregate tax basis of the BB Common Stock received by
stockholders who exchange all of their MCB Common Stock solely for BB
Common Stock in the Merger will be the same as the aggregate tax basis of
MCB Common Stock surrendered in exchange therefor, (reduced by any amount
allocable to a fractional share interest for which cash is received); and
In rendering such opinions, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of BB, MCB and others, reasonably satisfactory in form and substance
to such counsel.
9.9 NASDAQ Listing. The shares of BB Common Stock issuable pursuant to
this Agreement shall have been approved for listing on the NASDAQ national
market system, subject to official notice of issuance. It is specifically
provided, however, that a failure to satisfy any of the conditions set forth in
Section 9.6 shall only constitute a condition if asserted by BB, and a failure
to satisfy the condition set forth in Section 9.5 shall only constitute a
condition if asserted by MCB.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated, and the Reorganization
may be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of BB and MCB in a written instrument, if the Board of
Directors of each so determines by vote of a majority of the members of its
entire Board.
(b) Breach. At any time prior to the Effective Time, by BB or MCB
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained herein), if
its Board of Directors so determines by vote of a majority of the members
of its entire Board of Directors, in the event of either: (i) a breach by
the other party of any representation or warranty contained herein (subject
to the standard set forth in Section 6.2), which breach cannot be or has
not been cured within 45 days after the giving of written notice to the
breaching party of such breach; or (ii) a material breach by the other
party of any of the covenants or agreements contained herein, which breach
cannot be or has not been cured within 45 days after the giving of written
notice to the breaching arty of such breach.
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(c) Delay. At any time prior to the Effective Time, by BB or MCB, if
its Board of Directors so determines by vote of a majority of the members
of its entire Board, in the event that the Reorganization is not
consummated by March 31, 2002, except to the extent that the failure of the
Reorganization then to be consummated arises out of or results from the
failure of the party seeking to terminate this Agreement to perform or
observe the covenants and agreements of such party set forth herein.
(d) No Approval. By MCB or BB, if its Board of Directors so determines
by a vote of a majority of the members of its entire Board of Directors, in
the event (i) the approval of the Merger by the Federal Reserve Board or of
the Bank Merger by the FDIC and DFI required for consummation of the
Reorganization and the other transactions contemplated by the
Reorganization shall have been denied by final nonappealable action of such
Regulatory Authority or any governmental entity of competent jurisdiction
shall have issued a final nonappealable order enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement; or (ii) any stockholder approval required by Section 9.1 is not
obtained at the MCB Meeting or the BB Meeting.
10.2 Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Reorganization pursuant to this
Article X, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except (i) as set forth in Section 10.3
and 11.1 and (ii) that termination will not relieve a breaching party from
liability for any willful breach of this Agreement giving rise to such
termination.
10.3 Liquidated Damages. In the event of (i) termination of this Agreement
by a party hereto and the abandonment of the Reorganization is other than
pursuant to this Article X, or (ii) a continuing breach of this Agreement by a
party resulting in the termination of this Agreement by the non-breaching party
pursuant to Section 9.1(b) and so long as the breach of the Agreement was not
beyond the reasonable control of the breaching party, then MCB and BB agree
that damages are difficult to estimate and that, on demand, the sum of two
million dollars ($2,000,000) shall be paid to the non-breaching party by the
other party as liquidated damages for expenses incurred and the lost
opportunity cost for time devoted to the transactions contemplated by this
Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Effective Time or termination
of this Agreement if this Agreement is terminated prior to the Effective Time;
provided, however, if the Effective Time occurs, the agreements of the parties
in Articles III, IV and VIII, Sections 7.12 and 7.13, and Article XI shall
survive the Effective Time, and if this Agreement is terminated prior to the
Effective Time, the agreements of the parties in Sections 7.5(b) and 10.2, and,
Article XI, shall survive such termination.
11.2 Waiver; Amendment. Subject, to compliance with applicable law, prior
to the Effective Time, any provision of this Agreement may be (i) waived by the
party benefited by the provision, or (ii) amended or modified at any time, by
an agreement in writing between the parties hereto approved by their respective
Boards of Directors and executed in the same manner as this Agreement.
11.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
11.4 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of California, without regard to the
conflict of law principles thereof (except to the extent that mandatory
provisions of Federal law govern).
11.5 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that legal fees in connection with drafting this Agreement, certain fees owing
to Merrill Lynch & Co., printing expenses and SEC filing and registration fees
shall be shared equally between MCB and BB.
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11.6 Confidentiality. Each of the parties hereto and, their respective
agents, attorneys and accountants will maintain the confidentiality of all
information provided in connection herewith in accordance, and subject to the
limitations of, the Confidentiality Agreement.
11.7 Notices. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail
(return receipt requested) to such party at its address set forth below or such
other address as such party may specify by notice to the parties hereto.
If to BB, to:
Business Bancorp
140 S. Arrowhead Avenue
San Bernardino, California 92408
Attention: Alan J. Lane
Telecopier: (909) 885-6173
With copy to:
Fried, Bird & Crumpacker LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attention: Keith Holmes, Esq.
If to MCB, to: MCB Financial
Corporation
1248 Fifth Avenue
San Rafael, California 94901
Attention: Charles O. Hall
Telecopier: (415) 721-4808.
With copy to: McCutchen, Doyle, Brown &
Enersen, LLP
Three Embarcadero Center
18th Floor
San Francisco, California 94111
Attention: James M. Rockett, Esq.
11.8 Entire Understanding; No Third Party Beneficiaries. Except for the
Confidentiality Agreement, which shall remain in effect, and the Stock Option
Agreements, this Agreement (including the Exhibits and Schedules hereto)
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and supersedes any and all other
oral or written agreements heretofore made. Except for Section 7.12, nothing in
this Agreement, expressed or implied, is intended to confer upon any person,
other than the parties hereto or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
11.9 Interpretations. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of,
Exhibit or Schedule to, this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and are not part of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." No provision of this Agreement shall be construed to
require BB, MCB or any of their respective Subsidiaries, Affiliates, or
directors to take any action which would violate applicable law (whether
statutory or common law), rule or regulation.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
MCB FINANCIAL CORPORATION BUSINESS BANCORP
By: /s/ Charles O. Hall By: /s/ Alan J. Lane
--------------------------- ---------------------------
Name: Charles O. Hall Name: Alan J. Lane
Title: President & Chief Executive Officer Title: President & Chief Executive Officer
METRO COMMERCE BANK BUSINESS BANK OF CALIFORNIA
By: /s/ Charles O. Hall By: /s/ Alan J. Lane
--------------------------- ---------------------------
Name: Charles O. Hall Name: Alan J. Lane
Title: President & Chief Executive Officer Title: President & Chief Executive Officer
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Exhibit A
STOCK OPTION AGREEMENT
This AGREEMENT is dated as of August 15, 2001 between Business Bancorp, a
California corporation ("BB") and MCB Financial Corporation ("MCB"), a
California corporation.
W I T N E S S E T H:
WHEREAS, the Boards of Directors of MCB and BB have approved an Agreement
and Plan of Reorganization ("Plan") dated as of the date hereof which
contemplates the acquisition by BB of MCB by means of the merger of MCB with
and into BB, with BB as the entity surviving the merger;
WHEREAS, as a condition to BB's entry into the Plan and to induce such
entry, MCB has agreed to grant to BB the option set forth herein to purchase
shares of MCB's authorized but unissued common stock, no par value ("Common
Stock");
Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings ascribed to such terms in the Plan.
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth herein,
MCB hereby grants to BB an option (the "Option") to purchase up to 316,510
shares of Common Stock (the "Option Shares"), at the closing price quoted on
the American Stock Exchange on the day preceding (or, if there have been no
trades on such date, the closing price on the next preceeding date on which
trades occurred) the execution of the Plan (the "Exercise Price"); provided,
however, that in the event MCB issues or agrees to issue any shares of Common
Stock to an Acquiring Person (as that term is defined in Section 6 herein) at a
price less than the Exercise Price, the Exercise Price shall be equal to such
lesser price.
2. Exercise of Option.
(a) BB may exercise the Option, in whole or in part, in accordance with
and to the extent permitted by applicable law at any time or from time to
time but only upon or after the occurrence of a Purchase Event (as that
term is defined in Paragraph (b) below of this section); provided that to
the extent the Option shall not have been exercised, it shall terminate and
be of no further force and effect upon the earliest to occur (such earliest
date, the "Expiration Date") of (i) the termination of the Plan pursuant to
Section 10.1 (a) thereof; (ii) the date of termination pursuant to Section
10.1 (d) thereof if such date is prior to a Purchase Event; (iii) the
effective time of the acquisition of MCB by BB pursuant to the Plan, or
(iv) twelve months following the occurrence of the earliest to occur of (A)
the date of any termination of the Plan other than as described in (i) or
(ii) above or (B) the date of first occurrence of a Purchase Event.
Notwithstanding the foregoing, MCB shall not be obligated to issue the
Option Shares upon exercise of the Option (i) in the absence of any
required governmental or regulatory waiver, consent or approval necessary
for MCB to issue such Option Shares or for BB or any transferee to exercise
the Option or prior to the expiration or termination of any waiting period
required by law, or (ii) so long as any injunction or other order, decree
or ruling issued by any federal or state court of competent jurisdiction is
in effect which prohibits the sale or delivery of the Option Shares.
(b) As used herein, a "Purchase Event" shall have occurred when: (i)
MCB or any subsidiary of MCB (without the prior written consent of BB),
enters into an agreement with any person (other than BB or any of its
subsidiaries) pursuant to which such person would: (x) merge or consolidate
with, or enter into any similar transaction with MCB or any subsidiary of
MCB, (y) purchase, lease or otherwise acquire all or substantially all of
the assets of MCB or (z) purchase or otherwise acquire (by merger,
consolidation, share exchange or any similar transaction) securities
representing 10 percent or more of the voting shares of MCB (the
transactions referred to in subparagraph (x), (y) and (z) are referred to
as an "Acquisition Transaction"); (ii) any person or group of persons
acting
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in concert (other than BB or any of its subsidiaries) acquires the
beneficial ownership or the right to acquire beneficial ownership of
securities representing 24.99 percent or more of the voting shares of MCB
(the term "beneficial ownership" for purposes of this Agreement shall have
the meaning set forth in Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the regulations promulgated
thereunder); (iii) the shareholders of MCB fail to approve the business
combination between MCB and BB contemplated by the Plan at any meeting of
such shareholders which has been held for that purpose or any adjournment
or postponement thereof, the failure of such a shareholder meeting to occur
prior to termination of the Plan, or the withdrawal or modification (in a
manner adverse to BB) of the recommendation of MCB's Board of Directors of
the Merger and Plan and that the shareholders of MCB approve the Merger and
the Plan, in each case, after there shall have been a public announcement
that any person (other than BB or any of its subsidiaries), shall have (A)
made, or publicly disclosed an intention to make, a proposal to engage in
an Acquisition Transaction, (B) commenced a tender offer, as defined
herein, or filed a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to an exchange offer, as
defined herein, or (C) filed an application (or given a notice), whether in
draft or final form, with the Department of Financial Institutions of the
State of California or other federal or state bank regulatory authority,
which application or notice has been accepted for processing, for approval
to engage in an Acquisition Transaction; (iv) any person (other than BB or
other than in connection with a transaction to which BB has given its prior
written consent), shall have filed an application or notice with the
Department of Financial Institutions of the State of California or other
federal or state bank regulatory authority, which application or notice has
been accepted for processing, for approval to engage in an Acquisition
Transaction, exchange offer or tender offer; (v) MCB shall have willfully
breached any covenant or obligation contained in the Plan in anticipation
of engaging in a Purchase Event, and following such breach BB would be
entitled to terminate the Plan (whether immediately or after the giving of
notice or passage of time or both); or (vi) a public announcement by MCB of
the authorization, recommendation or endorsement by MCB of an Acquisition
Transaction, exchange offer or tender offer or a public announcement by MCB
of an intention to authorize, recommend or announce an Acquisition
Transaction, exchange offer or tender offer; provided however, that none of
the foregoing proposed transactions shall be a Purchase Event if the terms
and provisions thereof envision the pursuit and ultimate consummation of
the Plan as a condition to such proposed transaction (each such excluded
transaction an "Excluded Event"). If a Purchase Event has occurred, the
Option shall continue to be exercisable until its termination in accordance
with Section 2(a) hereof. MCB shall notify BB promptly in writing upon
learning of the occurrence of a Purchase Event, it being understood that
the giving of such notice by MCB shall not be a condition to the right of
BB to transfer or exercise the Option. As used in this Agreement, "person"
shall have the same meaning set forth in the Plan. As used in this
paragraph "tender offer" or "exchange offer" shall mean, respectively, the
commencement (as such term is defined in Rule 14d-2 promulgated under the
Exchange Act) by any person (other than BB or any subsidiary of BB) of, or
the filing by any person (other than BB or any subsidiary of BB) of a
registration statement or a tender offer schedule under, the Securities Act
or the Exchange Act with respect to, a tender offer or exchange offer,
respectively, to purchase shares of Common Stock such that, upon
consummation of such offer, such person would own or control 10 percent or
more of the then-outstanding shares of Common Stock.
(c) In the event a Purchase Event occurs, BB may elect to exercise the
Option. If BB wishes to exercise the Option, it shall send to MCB a written
notice (the date of which shall be referred to herein as the "Notice Date")
which specifies (i) the total number of Option Shares to be purchased, and
(ii) a place and date not earlier than two business days nor later than ten
business days from the Notice Date for the closing (the "Closing") of such
purchase (the "Closing Date"); provided however, that if prior notification
to or approval of the Department of Financial Institutions of the State of
California or any other regulatory agency is required in connection with
such purchase, the Holder, as defined below, shall promptly file the
required notice or application for approval, shall promptly notify MCB of
such filing, and shall expeditiously process the same and the period of
time that otherwise would run pursuant to this sentence shall run instead
from the date on which any required
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notification periods have expired or been terminated or such approvals have
been obtained and any requisite waiting period or periods shall have
passed. Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto, subject to receipt of any required regulatory
approvals.
3. Payment and Delivery of Certificates; MCB Representation.
(a) If BB elects to exercise the Option, then at the Closing, BB shall
pay to MCB the aggregate purchase price for the Option Shares purchased
pursuant to the exercise of the Option in immediately available funds by a
wire transfer to a bank designated by MCB.
(b) At such Closing, simultaneously with the delivery of the purchase
price for the Option Shares as provided in Paragraph (a) hereof, MCB shall
deliver to BB a certificate or certificates, registered in the name of BB
or its designee, representing the number of Option Shares purchased by BB.
Such certificates may be endorsed with any legend required pursuant to any
permit or exemption granted by the Department of Financial Institutions of
the State of California or any other regulatory agency, as well as the
following legend:
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF
AND THE ISSUER, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE ISSUER. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE
HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A REQUEST
THEREFOR.
Any such legend shall be removed by delivery of a substitute certificate
without such legend if BB shall have delivered to MCB an opinion of counsel, in
form and substance satisfactory to MCB, that such legend is not required for
purposes of assuring compliance with applicable securities or other law or with
this Agreement.
(c) Except as otherwise provided herein, BB hereby represents and
warrants to MCB that the Option is being, and any Option Shares issued upon
exercise of the Option will be, acquired by BB for its own account and not
with a view to any distribution thereof, and BB will not sell any Option
Shares purchased pursuant to exercise of the Option except in compliance
with applicable securities and other laws.
4. Representations. MCB hereby represents and warrants to BB as follows:
(a) MCB has all requisite corporate power and authority to enter into
and perform all of its obligations under this Agreement. The execution,
delivery and performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of MCB. This Agreement has been duly executed and
delivered by MCB and constitutes a valid and binding agreement of MCB,
enforceable against MCB in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting the rights of creditors generally or by
equitable principles, whether such enforcement is sought in law or equity.
(b) The execution and delivery by MCB of this Agreement and the
consummation of the transactions herein contemplated do not and will not
violate or conflict with MCB's Articles of Incorporation or Bylaws, any
statute, regulation, judgment, order, writ, decree or injunction applicable
to MCB (other than as may be effected by BB's ownership of Common Stock
exceeding certain limits set forth by statute or regulation) or its
properties or assets and do not and will not violate, conflict with, result
in a breach of, constitute a default (or an event which with due notice
and/or lapse of time would constitute a default) under, result in a
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of MCB under the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, or loan agreement or other agreement, instrument or obligation to
which MCB is a party, or by which MCB or any of its properties or assets
may be bound or affected.
A-34
(c) MCB has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms,
will have reserved for issuance upon the exercise of the Option a number of
shares of Common Stock sufficient to satisfy the exercise of the Option in
full, all of which Common Stock, upon issuance pursuant hereto, shall be
duly authorized, validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all claims, liens, encumbrances, security
interests and preemptive rights.
5. Adjustment Upon Changes in Capitalization.
(a) In the event of any stock dividend, stock split, split-up,
recapitalization, reclassification, combination, exchange of shares or
similar transaction or event with respect to Common Stock, the type and
number of shares or securities subject to the Option and the Exercise Price
therefor, shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that BB shall receive,
upon exercise of the Option, the number and class of shares or other
securities or property that BB would have received in respect of Common
Stock if the Option had been exercised immediately prior to such event, or
the record date thereof, as applicable. If any shares of Common Stock are
issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 5(a)), the number of shares
of Common Stock subject to the Option shall be adjusted so that, after such
issuance, it, together with any shares of Common Stock previously issued to
BB pursuant hereto, equals 19.9 percent of the number of shares of Common
Stock then issued and outstanding, without giving effect to any shares
subject to or issued pursuant to this Option.
(b) Except in the case of an Excluded Event, in the event that MCB,
shall, prior to the Expiration Date, enter into an agreement: (i) to
consolidate with or merge into any person, other than BB or one of its
subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any person, other than BB or
one of its subsidiaries, to merge into MCB and MCB shall be the continuing
or surviving corporation, but, in connection with such merger, the then
outstanding shares of Common Stock shall be changed into or exchanged for
stock or other securities of MCB or any other person or cash or any other
property or the outstanding shares of Common Stock immediately prior to
such merger shall after such merger represent less than 50 percent of the
outstanding shares and share equivalents of the merged company; or (iii) to
sell or otherwise transfer all or substantially all of its assets to any
person, other than BB or one of its subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provisions
so that the Option shall, upon the consummation of any such transaction and
upon the terms and conditions set forth herein, be converted into, or
exchanged for, an option (the "Substitute Option"), at the election of BB,
of either (x) the Succeeding Corporation (as defined below), (y) any person
that controls the Succeeding Corporation, or (z) in the case of a merger
described in clause (ii), MCB (in each case, such person being referred to
as the "Substitute Option Issuer.")
(c) The Substitute Option shall have the same terms as the Option,
provided, that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to BB. The Substitute Option
Issuer shall also enter into an agreement with the then-holder or holders
of the Substitute Option in substantially the form as this Agreement, which
shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of the Substitute Common Stock (as hereinafter defined) as is equal
to the Assigned Value (as hereinafter defined) multiplied by the number of
shares of Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price
of the Substitute Option per share of the Substitute Common Stock (the
"Substitute Option Price") shall then be equal to the Exercise Price
multiplied by a fraction in which the numerator is the number of shares of
the Common Stock for which the Option was theretofore exercisable and the
denominator is the number of shares for which the Substitute Option is
exercisable.
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(e) The following terms have the meanings indicated:
(i) "Succeeding Corporation" shall mean (x) the continuing or
surviving corporation of a consolidation or merger with MCB (if other
than MCB), (y) MCB in a merger in which MCB is the continuing or
surviving person, and (z) the transferee of all or any substantial part
of MCB assets (or the assets of its subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per
share of Common Stock at which a tender offer or exchange offer
therefor has been made by any person (other than BB or its
subsidiaries) (y) the price per share of Common Stock to be paid by any
person (other than BB or any of its subsidiaries) pursuant to an
agreement with MCB, and (z) the highest closing sales price per share
of Common Stock as quoted on the Nasdaq National Market (or if Common
Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by BB) within the six-month period immediately
preceding the agreement referred to in (y), or if the Common Stock is
not publicly traded, then the price per share as determined by a
nationally recognized investment banking firm mutually selected by BB
and MCB (or if applicable, the Succeeding Corporation), provided that
if a mutual selection cannot be made as to such investment banking
firm, it shall be selected by BB; provided, that in the event of a sale
of less than all of MCB's assets, the Assigned Value shall be the sum
of the price paid in such sale for such assets and the current market
value of the remaining assets of MCB as determined by a nationally
recognized investment banking firm selected by BB and reasonably
acceptable to MCB, divided by the number of shares of Common Stock
outstanding at the time of such sale. In the event that an exchange
offer is made for Common Stock or an agreement is entered into for a
merger or consolidation involving consideration other than cash, the
value of the securities or other property issuable or deliverable in
exchange for the Common Stock shall be determined by a nationally
recognized investment banking firm mutually selected by BB and MCB (or
if applicable, the Succeeding Corporation), provided that if a mutual
selection cannot be made as to such investment banking firm, it shall
be selected by BB.
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher
than the closing price of the shares of the Substitute Common Stock on
the day preceding such consolidation, merger or sale, provided that if
MCB is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by MCB, the
person merging into MCB or by any company which controls or is
controlled by such merging person, as BB may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9 percent of the
aggregate of the shares of the Substitute Common Stock outstanding
immediately prior to exercise of the Substitute Option. In the event that
the Substitute Option would be exercisable for more than 19.9 percent of
the aggregate of the shares of Substitute Common Stock but for this clause
(f), the Substitute Option Issuer shall make a cash payment to BB equal to
the excess of (i) the value of the Substitute Option without giving effect
to the limitation in this clause (f) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by BB and the Substitute Option Issuer.
(g) MCB shall not enter into any transaction described in subsection
(b) of this Section 5 unless the Succeeding Corporation and any person that
controls the Succeeding Corporation assume in writing all the obligations
of MCB hereunder and take all other actions that may be necessary so that
the provisions of this Agreement, including but not limited to this Section
5, are given full force and effect (including, without limitation, any
action that may be necessary so that the shares of Substitute
A-36
Common Stock are in no way distinguishable from or have lesser economic
value than other shares of common stock issued by the Substitute Option
Issuer).
6. Purchase of Option Shares and Options by MCB.
(a) From and after the first date a transaction specified in Section
5(b) herein is consummated (the "Repurchase Event"), and subject to
applicable regulatory restrictions, BB or a holder or former holder of any
Options (a "Holder") who has exercised the Options in whole or in part
shall have the right to require MCB to purchase some or all of the Option
Shares at a purchase price per share (the "Purchase Price") equal to the
highest of (i) 100 percent of the Exercise Price, (ii) the highest price
paid or agreed to be paid for shares of Common Stock by an Acquiring Person
(as defined in Paragraph (b) of this Section) in any tender offer, exchange
offer or other transaction or series of related transactions involving the
acquisition of 10 percent or more of the outstanding shares of Common Stock
during the one-year period immediately preceding the Purchase Date (as
defined in Paragraph (d) of this Section) and (iii) in the event of a sale
of all or substantially all of MCB's assets, (x) the sum of the price paid
in such sale for such assets and the current market value of the remaining
assets of MCB as determined by a recognized investment banking firm jointly
selected by such Holder and MCB, each acting in good faith, divided by (y)
the number of shares of Common Stock then outstanding. In the event that
any of the consideration paid or agreed to be paid by an Acquiring Person
for any shares of Common Stock or for any of MCB's assets consists in whole
or in part of securities, the value of such securities for purposes of
determining the Purchase Price shall be determined (i) if there is an
existing public trading market therefor, by the average of the last sales
prices for such securities on the ten trading days ending three trading
days prior to the payment of such consideration (if such consideration has
been paid) or prior to the date of determination (if such consideration has
not yet been paid) and (ii) if there is no existing public trading market
for such securities, by a recognized investment banking firm jointly
selected by the Holder and MCB, each acting in good faith. The Holder's
right to require MCB to purchase some or all of the Option Shares under
this Section shall expire on the day which is one year following the
Repurchase Event; provided, that if MCB is prohibited under applicable
regulations from purchasing Common Stock as to which a Holder has given
notice hereunder, then the Holder's right to require MCB to purchase such
shares shall expire on the date which is one year following the date on
which MCB no longer is prohibited from purchasing such shares: provided
further, that MCB shall use its best efforts to obtain any consent or
approval and make any filing required for MCB to consummate as quickly as
possible the purchase of the Common Stock contemplated hereunder.
(b) For purposes of this Agreement, "Acquiring Person" shall mean a
person or group (as such terms are defined in the Exchange Act and the
rules and regulations thereunder) other than BB or a subsidiary of BB who
on or after the date of this Agreement engages in a transaction which gives
rise to a Purchase Event.
(c) Subject to applicable regulatory restrictions, from and after a
Repurchase Event or after MCB receives official notice that an approval of
the Department of Financial Institutions of the State of California, or any
other regulatory authority, required for the exercise of the Option and
purchase of the Option Shares will not be issued or granted, a Holder shall
have the right to require MCB to purchase some or all of the Options held
by such Holder at a price equal to the Purchase Price minus the Exercise
Price on the Purchase Date (as defined in Paragraph (d) of this Section)
multiplied by the number of shares of Common Stock that may be purchased on
the Purchase Date upon the exercise of the Options elected to be purchased.
Notwithstanding the termination date of the Options, the Holder's right to
require MCB to purchase some or all of the Options under this Section shall
expire on the day which is one year following the Repurchase Event;
provided, that if MCB is prohibited under applicable regulations from
purchasing the Options as to which a Holder has given notice hereunder,
then the Holder's right to require MCB to purchase such Options shall
expire on the day which is one year following the date on which MCB no
longer is prohibited from purchasing such Options; provided further, that
MCB shall use its best efforts to obtain any consent or approval and make
any filing required for MCB to consummate as quickly as possible the
purchase of the Options contemplated hereunder.
A-37
(d) A Holder may exercise its right to require MCB to purchase the
Common Stock or Options (collectively, "Securities") pursuant to this
Section by surrendering for such purpose to MCB, at its principal office or
at such other office or agency maintained by MCB for that purpose, within
the period specified above, the certificates or other instruments
representing the Securities to be purchased accompanied by a written notice
stating that it elects to require MCB to purchase all or a specified number
of such Securities. Within five business days after the surrender of such
certificates or instruments and the receipt of such notice relating
thereto, to the extent it is legally permitted to do so, MCB shall deliver
or cause to be delivered to the Securities Holder (i) a bank cashier's or
certified check payable to the Securities Holder in an amount equal to the
applicable purchase price therefor, and (ii) if less than the full number
of Securities evidenced by the surrendered instruments are being purchased,
a new certificate or instrument, for the number of Securities evidenced by
such surrendered certificates or other instruments less the number of
Securities purchased. Such purchases shall be deemed to have been made at
the close of business on the date (the "Purchase Date") of the receipt of
such notice and of such surrender of the certificates or other instruments
representing the Securities to be purchased and the rights of the
Securities Holder, except for the right to receive the applicable purchase
price therefor in accordance herewith, shall cease on the Purchase Date.
7. Demand Registration Rights. As promptly as practicable upon BB's
request after a Purchase Event, MCB agrees to prepare and file not more than
two registration statements, prospectuses or permit or exemption applications
("Registration Event") as appropriate, under federal and any applicable state
securities laws, with respect to any proposed sale of any warrants, options or
other securities representing any of BB's rights under this Agreement or
proposed dispositions by BB of any or all of the Option Shares, if such
registrations or filings are required by law or regulation, and to use its best
efforts to cause any such registration statements or prospectuses to become
effective, or to have any permit or exemption granted, as expeditiously as
possible and to keep such registration statement, prospectus, permit or
exemption effective for a period of not less than 180 days unless, in the
written opinion of counsel to MCB, addressed to BB and satisfactory in form and
substance to BB and its counsel, registration (or filing of a prospectus, or
grant of a permit or exemption) is not required for such proposed transactions.
All fees, expenses and charges of any kind or nature whatsoever incurred in
connection with any registration of, or the preparation of any registration
statement, prospectus or permit or exemption application relating to, the
Options or the Option Shares pursuant to this Section 7 shall be borne and paid
by MCB; provided, however, that in no event shall this Section 7 be construed
to require MCB to bear the expense of any change of control notice or similar
regulatory filing made by any purchaser or acquiror of Option Shares issued to
BB pursuant to this Agreement. In the event BB exercises its registration
rights under this Section 7, MCB shall provide BB, its affiliates, each of
their respective officers and directors and any underwriters used by BB, with
indemnifications, representations and warranties and shall cause its attorneys
and accountants to deliver to BB and any such underwriters attorneys' opinions
and "comfort letters", all of a type customarily provided or delivered in
connection with public underwritten offerings of securities. In the event MCB
effects a registration of Common Stock for its own account or for any other
shareholder of MCB, it shall allow BB to participate in such registration.
Notwithstanding the foregoing, MCB shall have the right to delay (a "Delay
Right") a Registration Event for a period of up to thirty (30) days, in the
event it receives a request from BB to effect a Registration Event, if MCB (i)
is involved in a material transaction, or (ii) determines, in the good faith
exercise of its reasonable business judgment, that such registration and
offering could adversely effect or interfere with bona fide material financing
plans of MCB or would require disclosure of information, the premature
disclosure of which could materially adversely affect MCB or any transaction
under active consideration by MCB. For purposes of this Agreement, the term
"material transaction" shall mean a transaction which, if MCB were subject to
the reporting requirements under the Exchange Act, would require MCB to file a
current report on Form 8-K with the Securities Exchange Commission. MCB shall
have the right to exercise two Delay Rights in any eighteen (18) month period.
8. Listing.
If Common Stock or any other securities to be acquired upon exercise of
the Option are then authorized for quotation or trading or listing on the
Nasdaq National Market or any other securities
A-38
exchange or automated quotation system, MCB, or any successor thereto, upon the
request of the holder of the Option, will promptly file an application, if
required, to authorize for listing or trading or quotation the shares of Common
Stock or other securities to be acquired upon exercise of the Option on the
Nasdaq National Market or any other securities exchange or automated quotation
system and will use its best efforts to obtain approval, if required, of such
listing or quotation as soon as possible.
9. Miscellaneous.
(a) Expenses. Each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein,
this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors and assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided herein.
(c) Assignment. At any time after a Purchase Event occurs, BB may sell,
assign or otherwise transfer its rights and obligations hereunder, in whole
or in part, by issuing Options or otherwise, to any person or group of
persons, subject to applicable law, rule or regulation. In order to
effectuate the foregoing, BB (or any direct or indirect assignee or
transferee of BB) shall be entitled to surrender this Agreement to MCB in
exchange for two or more Agreements entitling the holders thereof to
purchase in the aggregate the same number of shares of Common Stock as may
be purchasable hereunder.
A-39
(d) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally or by confirmed facsimile transmission or sent by registered or
certified mail or overnight courier, postage prepaid, with return receipt
requested, addressed as follows:
If to BB, to:
Business Bancorp
140 S. Arrowhead Avenue
San Bernardino, California 92408
Attention: Alan J. Lane
Telecopier: (909) 885-6173
With a copy to:
Fried, Bird & Crumpacker LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attention: Jack Fried, Esq.
If to MCB, to:
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, California 94901
Attention: Charles O. Hall
Telecopier: (415) 721-4808.
With a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
Three Embarcadero Center
18th Floor
San Francisco, California 94111
Attention: James M. Rockett, Esq.
A party may change its address for notice purposes by written notice to
the other party hereto.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties hereto agree that irreparable
harm would occur in the event that any of the provisions of this Agreement
were not performed by them in accordance with their specific terms or
conditions or were otherwise breached and that money damages are an
inadequate remedy for breach of this Agreement because of the difficulty of
ascertaining the amount of damage that will be suffered by the parties in
the event that this Agreement is not performed in accordance with its terms
or conditions or otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement by the parties and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which it
is entitled at law or in equity.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(h) Best Efforts. Each of MCB and BB will use its best efforts to make
all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation applying to
the Department of Financial Institutions of the State of California for
approval to acquire or issue the shares issuable hereunder.
A-40
(i) Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, as of the day and year first written above.
BUSINESS BANCORP
By
-------------------------------
President & Chief Executive Officer
MCB FINANCIAL CORPORATION
By
-------------------------------
President & Chief Executive Officer
A-41
Exhibit B
STOCK OPTION AGREEMENT
This AGREEMENT is dated as of August 15, 2001 between MCB Financial
Corporation ("MCB"), a California corporation, and Business Bancorp, a
California corporation ("BB").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of MCB and BB have approved an Agreement
and Plan of Reorganization ("Plan") dated as of the date hereof which
contemplates the acquisition by BB of MCB by means of the merger of MCB with
and into BB, with BB as the entity surviving the merger;
WHEREAS, as a condition to MCB's entry into the Plan and to induce such
entry, BB has agreed to grant to MCB the option set forth herein to purchase
shares of BB's authorized but unissued common stock, no par value ("Common
Stock");
Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings ascribed to such terms in the Plan.
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth herein,
BB hereby grants to MCB an option (the "Option") to purchase up to 403,347
shares of Common Stock (the "Option Shares"), at the closing price quoted on
the NASDAQ small capitalization exchange on the day preceding (or, if there
have been no trades on such date, the closing price on the next preceeding date
on which trades occurred) the execution of the Plan (the "Exercise Price");
provided, however, that in the event BB issues or agrees to issue any shares of
Common Stock to an Acquiring Person (as that term is defined in Section 6
herein) at a price less than the Exercise Price, the Exercise Price shall be
equal to such lesser price.
2. Exercise of Option.
(a) MCB may exercise the Option, in whole or in part, in accordance
with and to the extent permitted by applicable law at any time or from time
to time but only upon or after the occurrence of a Purchase Event (as that
term is defined in Paragraph (b) below of this section); provided that to
the extent the Option shall not have been exercised, it shall terminate and
be of no further force and effect upon the earliest to occur (such earliest
date, the "Expiration Date") of (i) the termination of the Plan pursuant to
Section 10.1 (a) thereof; (ii) the date of termination pursuant to Section
10.1 (d), thereof if such date is prior to a Purchase Event; (iii) the
effective time of the acquisition of MCB by BB pursuant to the Plan, or
(iv) twelve months following the occurrence of the earliest to occur of (A)
the date of any termination of the Plan other than as described in (i) or
(ii) above or (B) the date of first occurrence of a Purchase Event.
Notwithstanding the foregoing, BB shall not be obligated to issue the
Option Shares upon exercise of the Option (i) in the absence of any
required governmental or regulatory waiver, consent or approval necessary
for BB to issue such Option Shares or for MCB or any transferee to exercise
the Option or prior to the expiration or termination of any waiting period
required by law, or (ii) so long as any injunction or other order, decree
or ruling issued by any federal or state court of competent jurisdiction is
in effect which prohibits the sale or delivery of the Option Shares.
(b) As used herein, a "Purchase Event" shall have occurred when: (i) BB
or any subsidiary of BB (without the prior written consent of MCB), enters
into an agreement with any person (other than MCB or any of its
subsidiaries) pursuant to which such person would: (x) merge or consolidate
with, or enter into any similar transaction with BB or any subsidiary of
BB, (y) purchase, lease or otherwise acquire all or substantially all of
the assets of BB or (z) purchase or otherwise acquire (by merger,
consolidation, share exchange or any similar transaction) securities
representing 10 percent or more of the voting shares of BB (the
transactions referred to in subparagraph (x), (y) and (z) are referred to
as an "Acquisition Transaction"); (ii) any person or group of persons
acting in concert
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(other than MCB or any of its subsidiaries) acquires the beneficial
ownership or the right to acquire beneficial ownership of securities
representing 24.99 percent or more of the voting shares of BB (the term
"beneficial ownership" for purposes of this Agreement shall have the
meaning set forth in Section 13(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the regulations promulgated
thereunder); (iii) the shareholders of BB fail to approve the business
combination between BB and MCB contemplated by the Plan at any meeting of
such shareholders which has been held for that purpose or any adjournment
or postponement thereof, the failure of such a shareholder meeting to occur
prior to termination of the Plan, or the withdrawal or modification (in a
manner adverse to MCB) of the recommendation of BB's Board of Directors of
the Merger and Plan and that the shareholders of BB approve the Merger and
the Plan, in each case, after there shall have been a public announcement
that any person (other than MCB or any of its subsidiaries), shall have (A)
made, or publicly disclosed an intention to make, a proposal to engage in
an Acquisition Transaction, (B) commenced a tender offer, as defined
herein, or filed a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to an exchange offer, as
defined herein, or (C) filed an application (or given a notice), whether in
draft or final form, with the Department of Financial Institutions of the
State of California or other federal or state bank regulatory authority,
which application or notice has been accepted for processing, for approval
to engage in an Acquisition Transaction; (iv) any person (other than MCB or
other than in connection with a transaction to which MCB has given its
prior written consent), shall have filed an application or notice with the
Department of Financial Institutions of the State of California or other
federal or state bank regulatory authority, which application or notice has
been accepted for processing, for approval to engage in an Acquisition
Transaction, exchange offer or tender offer; (v) BB shall have willfully
breached any covenant or obligation contained in the Plan in anticipation
of engaging in a Purchase Event, and following such breach MCB would be
entitled to terminate the Plan (whether immediately or after the giving of
notice or passage of time or both); or (vi) a public announcement by BB of
the authorization, recommendation or endorsement by BB of an Acquisition
Transaction, exchange offer or tender offer or a public announcement by BB
of an intention to authorize, recommend or announce an Acquisition
Transaction, exchange offer or tender offer. If a Purchase Event has
occurred, the Option shall continue to be exercisable until its termination
in accordance with Section 2(a) hereof. BB shall notify MCB promptly in
writing upon learning of the occurrence of a Purchase Event, it being
understood that the giving of such notice by BB shall not be a condition to
the right of MCB to transfer or exercise the Option. As used in this
Agreement, "person" shall have the same meaning set forth in the Plan. As
used in this paragraph "tender offer" or "exchange offer" shall mean,
respectively, the commencement (as such term is defined in Rule 14d-2
promulgated under the Exchange Act) by any person (other than MCB or any
subsidiary of MCB) of, or the filing by any person (other than MCB or any
subsidiary of MCB) of a registration statement or a tender offer schedule
under, the Securities Act or the Exchange Act with respect to, a tender
offer or exchange offer, respectively, to purchase shares of Common Stock
such that, upon consummation of such offer, such person would own or
control 10 percent or more of the then-outstanding shares of Common Stock.
(c) In the event a Purchase Event occurs, MCB may elect to exercise the
Option. If MCB wishes to exercise the Option, it shall send to BB a written
notice (the date of which shall be referred to herein as the "Notice Date")
which specifies (i) the total number of Option Shares to be purchased, and
(ii) a place and date not earlier than two business days nor later than ten
business days from the Notice Date for the closing (the "Closing") of such
purchase (the "Closing Date"); provided however, that if prior notification
to or approval of the Department of Financial Institutions of the State of
California or any other regulatory agency is required in connection with
such purchase, the Holder, as defined below, shall promptly file the
required notice or application for approval, shall promptly notify BB of
such filing, and shall expeditiously process the same and the period of
time that otherwise would run pursuant to this sentence shall run instead
from the date on which any required notification periods have expired or
been terminated or such approvals have been obtained and any requisite
waiting period or periods shall have passed. Any exercise of the Option
shall be deemed to occur on the Notice Date relating thereto, subject to
receipt of any required regulatory approvals.
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3. Payment and Delivery of Certificates; MCB Representation.
(a) If MCB elects to exercise the Option, then at the Closing, MCB
shall pay to BB the aggregate purchase price for the Option Shares
purchased pursuant to the exercise of the Option in immediately available
funds by a wire transfer to a bank designated by BB.
(b) At such Closing, simultaneously with the delivery of the purchase
price for the Option Shares as provided in Paragraph (a) hereof, BB shall
deliver to MCB a certificate or certificates, registered in the name of MCB
or its designee, representing the number of Option Shares purchased by MCB.
Such certificates may be endorsed with any legend required pursuant to any
permit or exemption granted by the Department of Financial Institutions of
the State of California or any other regulatory agency, as well as the
following legend:
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF
AND THE ISSUER, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE ISSUER. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE
HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A REQUEST
THEREFOR.
Any such legend shall be removed by delivery of a substitute certificate
without such legend if MCB shall have delivered to BB an opinion of counsel, in
form and substance satisfactory to BB, that such legend is not required for
purposes of assuring compliance with applicable securities or other law or with
this Agreement.
(c) Except as otherwise provided herein, MCB hereby represents and
warrants to BB that the Option is being, and any Option Shares issued upon
exercise of the Option will be, acquired by MCB for its own account and not
with a view to any distribution thereof, and MCB will not sell any Option
Shares purchased pursuant to exercise of the Option except in compliance
with applicable securities and other laws.
4. Representations. BB hereby represents and warrants to MCB as follows:
(a) BB has all requisite corporate power and authority to enter into
and perform all of its obligations under this Agreement. The execution,
delivery and performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of BB. This Agreement has been duly executed and
delivered by BB and constitutes a valid and binding agreement of BB,
enforceable against BB in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting the rights of creditors generally or by
equitable principles, whether such enforcement is sought in law or equity.
(b) The execution and delivery by BB of this Agreement and the
consummation of the transactions herein contemplated do not and will not
violate or conflict with BB's Articles of Incorporation or Bylaws, any
statute, regulation, judgment, order, writ, decree or injunction applicable
to BB (other than as may be effected by MCB's ownership of Common Stock
exceeding certain limits set forth by statute or regulation) or its
properties or assets and do not and will not violate, conflict with, result
in a breach of, constitute a default (or an event which with due notice
and/or lapse of time would constitute a default) under, result in a
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of BB under the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, or loan agreement or other agreement, instrument or obligation to
which BB is a party, or by which BB or any of its properties or assets may
be bound or affected.
(c) BB has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms,
will have reserved for issuance upon the exercise of the Option a number of
shares of Common Stock sufficient to satisfy the exercise of the Option in
full, all of which Common Stock,
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upon issuance pursuant hereto, shall be duly authorized, validly issued,
fully paid and nonassessable, and shall be delivered free and clear of all
claims, liens, encumbrances, security interests and preemptive rights.
5. Adjustment Upon Changes in Capitalization.
(a) In the event of any stock dividend, stock split, split-up,
recapitalization, reclassification, combination, exchange of shares or
similar transaction or event with respect to Common Stock, the type and
number of shares or securities subject to the Option and the Exercise Price
therefor, shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that MCB shall
receive, upon exercise of the Option, the number and class of shares or
other securities or property that MCB would have received in respect of
Common Stock if the Option had been exercised immediately prior to such
event, or the record date thereof, as applicable. If any shares of Common
Stock are issued after the date of this Agreement (other than pursuant to
an event described in the first sentence of this Section 5(a)), the number
of shares of Common Stock subject to the Option shall be adjusted so that,
after such issuance, it, together with any shares of Common Stock
previously issued to MCB pursuant hereto, equals 19.9 percent of the number
of shares of Common Stock then issued and outstanding, without giving
effect to any shares subject to or issued pursuant to this Option.
(b) In the event that BB, shall, prior to the Expiration Date, enter
into an agreement: (i) to consolidate with or merge into any person, other
than MCB or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than MCB or one of its subsidiaries, to merge into BB and BB
shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of BB or any other person
or cash or any other property or the outstanding shares of Common Stock
immediately prior to such merger shall after such merger represent less
than 50 percent of the outstanding shares and share equivalents of the
merged company; or (iii) to sell or otherwise transfer all or substantially
all of its assets to any person, other than MCB or one of its subsidiaries,
then, and in each such case, the agreement governing such transaction shall
make proper provisions so that the Option shall, upon the consummation of
any such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at
the election of MCB, of either (x) the Succeeding Corporation (as defined
below), (y) any person that controls the Succeeding Corporation, or (z) in
the case of a merger described in clause (ii), BB (in each case, such
person being referred to as the "Substitute Option Issuer.")
(c) The Substitute Option shall have the same terms as the Option,
provided, that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to MCB. The Substitute Option
Issuer shall also enter into an agreement with the then-holder or holders
of the Substitute Option in substantially the form as this Agreement, which
shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of the Substitute Common Stock (as hereinafter defined) as is equal
to the Assigned Value (as hereinafter defined) multiplied by the number of
shares of Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price
of the Substitute Option per share of the Substitute Common Stock (the
"Substitute Option Price") shall then be equal to the Exercise Price
multiplied by a fraction in which the numerator is the number of shares of
the Common Stock for which the Option was theretofore exercisable and the
denominator is the number of shares for which the Substitute Option is
exercisable.
(e) The following terms have the meanings indicated:
(i) "Succeeding Corporation" shall mean (x) the continuing or
surviving corporation of a consolidation or merger with BB (if other
than BB), (y) BB in a merger in which BB is the continuing or surviving
person, and (z) the transferee of all or any substantial part of BB
assets (or the assets of its subsidiaries).
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(ii) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per
share of Common Stock at which a tender offer or exchange offer
therefor has been made by any person (other than MCB or its
subsidiaries) (y) the price per share of Common Stock to be paid by any
person (other than MCB or any of its subsidiaries) pursuant to an
agreement with BB, and (z) the highest closing sales price per share of
Common Stock as quoted on the Nasdaq National Market (or if Common
Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by MCB) within the six-month period
immediately preceding the agreement referred to in (y), or if the
Common Stock is not publicly traded, then the price per share as
determined by a nationally recognized investment banking firm mutually
selected by MCB and BB (or if applicable, the Succeeding Corporation),
provided that if a mutual selection cannot be made as to such
investment banking firm, it shall be selected by MCB; provided, that in
the event of a sale of less than all of BB's assets, the Assigned Value
shall be the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of BB as determined by a
nationally recognized investment banking firm selected by MCB and
reasonably acceptable to BB, divided by the number of shares of Common
Stock outstanding at the time of such sale. In the event that an
exchange offer is made for Common Stock or an agreement is entered into
for a merger or consolidation involving consideration other than cash,
the value of the securities or other property issuable or deliverable
in exchange for the Common Stock shall be determined by a nationally
recognized investment banking firm mutually selected by MCB and BB (or
if applicable, the Succeeding Corporation), provided that if a mutual
selection cannot be made as to such investment banking firm, it shall
be selected by MCB.
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher
than the closing price of the shares of the Substitute Common Stock on
the day preceding such consolidation, merger or sale, provided that if
BB is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by BB, the
person merging into BB or by any company which controls or is
controlled by such merging person, as MCB may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9 percent of the
aggregate of the shares of the Substitute Common Stock outstanding
immediately prior to exercise of the Substitute Option. In the event that
the Substitute Option would be exercisable for more than 19.9 percent of
the aggregate of the shares of Substitute Common Stock but for this clause
(f), the Substitute Option Issuer shall make a cash payment to MCB equal to
the excess of (i) the value of the Substitute Option without giving effect
to the limitation in this clause (f) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by MCB and the Substitute Option Issuer.
(g) BB shall not enter into any transaction described in subsection (b)
of this Section 5 unless the Succeeding Corporation and any person that
controls the Succeeding Corporation assume in writing all the obligations
of BB hereunder and take all other actions that may be necessary so that
the provisions of this Agreement, including but not limited to this Section
5, are given full force and effect (including, without limitation, any
action that may be necessary so that the shares of Substitute Common Stock
are in no way distinguishable from or have lesser economic value than other
shares of common stock issued by the Substitute Option Issuer).
6. Purchase of Option Shares and Options by BB.
(a) From and after the first date a transaction specified in Section
5(b) herein is consummated (the "Repurchase Event"), and subject to
applicable regulatory restrictions, MCB or a holder or
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former holder of any Options (a "Holder") who has exercised the Options in
whole or in part shall have the right to require BB to purchase some or all
of the Option Shares at a purchase price per share (the "Purchase Price")
equal to the highest of (i) 100 percent of the Exercise Price, (ii) the
highest price paid or agreed to be paid for shares of Common Stock by an
Acquiring Person (as defined in Paragraph (b) of this Section) in any
tender offer, exchange offer or other transaction or series of related
transactions involving the acquisition of 10 percent or more of the
outstanding shares of Common Stock during the one-year period immediately
preceding the Purchase Date (as defined in Paragraph (d) of this Section)
and (iii) in the event of a sale of all or substantially all of BB's
assets, (x) the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of BB as determined by a
recognized investment banking firm jointly selected by such Holder and BB,
each acting in good faith, divided by (y) the number of shares of Common
Stock then outstanding. In the event that any of the consideration paid or
agreed to be paid by an Acquiring Person for any shares of Common Stock or
for any of BB's assets consists in whole or in part of securities, the
value of such securities for purposes of determining the Purchase Price
shall be determined (i) if there is an existing public trading market
therefor, by the average of the last sales prices for such securities on
the ten trading days ending three trading days prior to the payment of such
consideration (if such consideration has been paid) or prior to the date of
determination (if such consideration has not yet been paid) and (ii) if
there is no existing public trading market for such securities, by a
recognized investment banking firm jointly selected by the Holder and BB,
each acting in good faith. The Holder's right to require BB to purchase
some or all of the Option Shares under this Section shall expire on the day
which is one year following the Repurchase Event; provided, that if BB is
prohibited under applicable regulations from purchasing Common Stock as to
which a Holder has given notice hereunder, then the Holder's right to
require BB to purchase such shares shall expire on the date which is one
year following the date on which BB no longer is prohibited from purchasing
such shares: provided further, that BB shall use its best efforts to obtain
any consent or approval and make any filing required for BB to consummate
as quickly as possible the purchase of the Common Stock contemplated
hereunder.
(b) For purposes of this Agreement, "Acquiring Person" shall mean a
person or group (as such terms are defined in the Exchange Act and the
rules and regulations thereunder) other than MCB or a subsidiary of MCB who
on or after the date of this Agreement engages in a transaction which gives
rise to a Purchase Event.
(c) Subject to applicable regulatory restrictions, from and after a
Repurchase Event or after MCB receives official notice that an approval of
the Department of Financial Institutions of the State of California, or any
other regulatory authority, required for the exercise of the Option and
purchase of the Option Shares will not be issued or granted, a Holder shall
have the right to require BB to purchase some or all of the Options held by
such Holder at a price equal to the Purchase Price minus the Exercise Price
on the Purchase Date (as defined in Paragraph (d) of this Section)
multiplied by the number of shares of Common Stock that may be purchased on
the Purchase Date upon the exercise of the Options elected to be purchased.
Notwithstanding the termination date of the Options, the Holder's right to
require BB to purchase some or all of the Options under this Section shall
expire on the day which is one year following the Repurchase Event;
provided, that if BB is prohibited under applicable regulations from
purchasing the Options as to which a Holder has given notice hereunder,
then the Holder's right to require BB to purchase such Options shall expire
on the day which is one year following the date on which BB no longer is
prohibited from purchasing such Options; provided further, that BB shall
use its best efforts to obtain any consent or approval and make any filing
required for BB to consummate as quickly as possible the purchase of the
Options contemplated hereunder.
(d) A Holder may exercise its right to require BB to purchase the
Common Stock or Options (collectively, "Securities") pursuant to this
Section by surrendering for such purpose to BB, at its principal office or
at such other office or agency maintained by BB for that purpose, within
the period specified above, the certificates or other instruments
representing the Securities to be purchased accompanied by a written notice
stating that it elects to require BB to purchase all or a specified
A-47
number of such Securities. Within five business days after the surrender of
such certificates or instruments and the receipt of such notice relating
thereto, to the extent it is legally permitted to do so, BB shall deliver
or cause to be delivered to the Securities Holder (i) a bank cashier's or
certified check payable to the Securities Holder in an amount equal to the
applicable purchase price therefor, and (ii) if less than the full number
of Securities evidenced by the surrendered instruments are being purchased,
a new certificate or instrument, for the number of Securities evidenced by
such surrendered certificates or other instruments less the number of
Securities purchased. Such purchases shall be deemed to have been made at
the close of business on the date (the "Purchase Date") of the receipt of
such notice and of such surrender of the certificates or other instruments
representing the Securities to be purchased and the rights of the
Securities Holder, except for the right to receive the applicable purchase
price therefor in accordance herewith, shall cease on the Purchase Date.
7. Demand Registration Rights. As promptly as practicable upon MCB's
request after a Purchase Event, BB agrees to prepare and file not more than two
registration statements, prospectuses or permit or exemption applications
("Registration Event") as appropriate, under federal and any applicable state
securities laws, with respect to any proposed sale of any warrants, options or
other securities representing any of MCB's rights under this Agreement or
proposed dispositions by MCB of any or all of the Option Shares, if such
registrations or filings are required by law or regulation, and to use its best
efforts to cause any such registration statements or prospectuses to become
effective, or to have any permit or exemption granted, as expeditiously as
possible and to keep such registration statement, prospectus, permit or
exemption effective for a period of not less than 180 days unless, in the
written opinion of counsel to BB, addressed to MCB and satisfactory in form and
substance to MCB and its counsel, registration (or filing of a prospectus, or
grant of a permit or exemption) is not required for such proposed transactions.
All fees, expenses and charges of any kind or nature whatsoever incurred in
connection with any registration of, or the preparation of any registration
statement, prospectus or permit or exemption application relating to, the
Options or the Option Shares pursuant to this Section 7 shall be borne and paid
by BB; provided, however, that in no event shall this Section 7 be construed to
require BB to bear the expense of any change of control notice or similar
regulatory filing made by any purchaser or acquiror of Option Shares issued to
MCB pursuant to this Agreement. In the event MCB exercises its registration
rights under this Section 7, BB shall provide MCB, its affiliates, each of
their respective officers and directors and any underwriters used by MCB, with
indemnifications, representations and warranties and shall cause its attorneys
and accountants to deliver to MCB and any such underwriters attorneys' opinions
and "comfort letters", all of a type customarily provided or delivered in
connection with public underwritten offerings of securities. In the event BB
effects a registration of Common Stock for its own account or for any other
shareholder of BB, it shall allow MCB to participate in such registration.
Notwithstanding the foregoing, BB shall have the right to delay (a "Delay
Right") a Registration Event for a period of up to thirty (30) days, in the
event it receives a request from MCB to effect a Registration Event, if BB (i)
is involved in a material transaction, or (ii) determines, in the good faith
exercise of its reasonable business judgment, that such registration and
offering could adversely effect or interfere with bona fide material financing
plans of BB or would require disclosure of information, the premature
disclosure of which could materially adversely affect BB or any transaction
under active consideration by BB. For purposes of this Agreement, the term
"material transaction" shall mean a transaction which, if BB were subject to
the reporting requirements under the Exchange Act, would require BB to file a
current report on Form 8-K with the Securities Exchange Commission. BB shall
have the right to exercise two Delay Rights in any eighteen (18) month period.
8. Listing.
If Common Stock or any other securities to be acquired upon exercise of
the Option are then authorized for quotation or trading or listing on the
Nasdaq National Market or any other securities exchange or automated quotation
system, BB, or any successor thereto, upon the request of the holder of the
Option, will promptly file an application, if required, to authorize for
listing or trading or quotation the shares of Common Stock or other securities
to be acquired upon exercise of the Option on the Nasdaq National Market or any
other securities exchange or automated quotation system and will use its best
efforts to obtain approval, if required, of such listing or quotation as soon
as possible.
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9. Miscellaneous.
(a) Expenses. Each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein,
this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors and assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided herein.
(c) Assignment. At any time after a Purchase Event occurs, MCB may
sell, assign or otherwise transfer its rights and obligations hereunder, in
whole or in part, by issuing Options or otherwise, to any person or group
of persons, subject to applicable law, rule or regulation. In order to
effectuate the foregoing, MCB (or any direct or indirect assignee or
transferee of MCB) shall be entitled to surrender this Agreement to BB in
exchange for two or more Agreements entitling the holders thereof to
purchase in the aggregate the same number of shares of Common Stock as may
be purchasable hereunder.
(d) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally or by confirmed facsimile transmission or sent by registered or
certified mail or overnight courier, postage prepaid, with return receipt
requested, addressed as follows:
If to MCB, to:
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, California 94901
Attention: Charles O. Hall
Telecopier: (415) 721-4808.
With a copy to:
McCutchen, Doyle, Brown & Enersen, LLP
Three Embarcadero Center
18th Floor
San Francisco, California 94111
Attention: James M. Rockett, Esq.
If to BB, to:
Business Bancorp
140 S. Arrowhead Avenue
San Bernardino, California 92408
Attention: Alan J. Lane
Telecopier: (909) 885-6173
With a copy to:
Fried, Bird & Crumpacker LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attention: Jack Fried, Esq.
A party may change its address for notice purposes by written notice to the
other party hereto.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
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(f) Specific Performance. The parties hereto agree that irreparable
harm would occur in the event that any of the provisions of this Agreement
were not performed by them in accordance with their specific terms or
conditions or were otherwise breached and that money damages are an
inadequate remedy for breach of this Agreement because of the difficulty of
ascertaining the amount of damage that will be suffered by the parties in
the event that this Agreement is not performed in accordance with its terms
or conditions or otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement by the parties and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which it
is entitled at law or in equity.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(h) Best Efforts. Each of MCB and BB will use its best efforts to make
all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation applying to
the Department of Financial Institutions of the State of California for
approval to acquire or issue the shares issuable hereunder.
(i) Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, as of the day and year first written above.
BUSINESS BANCORP
By
---------------------------
President and Chief Executive Officer
MCB FINANCIAL CORPORATION
By
---------------------------
President and Chief Executive Officer
A-50
SCHEDULE 2.3(c)
DIRECTORS OF THE RESULTING INSTITUTION (BB BANK)
Neal T. Baker Charles O. Hall
D. William Bader Timothy J. Jorstad
John E. Duckworth Catherine H. Munson
Alan J. Lane Patrick E. Phelan
John L. Riddell Gary T. Ragghianti
Arnold H. Stubblefield Edward P. Tarrant
John L. Stubblefield Randall J. Verrue
A-51
SCHEDULE 2.3(d)
OFFICES OF THE RESULTING INSTITUTION (BB BANK)
Primary Bank Headquarters
Business Bank of California
321 E. Sixth Street
Corona, CA 92879
Northern Administrative Offices
Business Bank of California
1248 Fifth Avenue
San Rafael, CA 94901
A-52
SCHEDULE 3.3
EFFECTS OF THE MERGER
Home office of BB (Primary Holding Company Headquarters)
Business Bancorp
1248 Fifth Avenue
San Rafael, CA 94901
Southern Administrative Offices
Business Bancorp
321 E. Sixth Street
Corona, CA 92879
A-53
SCHEDULE 3.10
BOARD OF DIRECTORS (BB)
Neal T. Baker Charles O. Hall
D. William Bader Timothy J. Jorstad
John E. Duckworth Catherine H. Munson
Alan J. Lane Patrick E. Phelan
John L. Riddell Gary T. Ragghianti
Arnold H. Stubblefield Edward P. Tarrant
John L. Stubblefield Randall J. Verrue
A-54
Schedule 7.7(c)BB
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT ("Agreement") is made and entered into as of , 2001,
by and between the undersigned director of Business Bancorp, a California
corporation ("BB"), and MCB Financial Corporation, a California corporation
("MCB").
BB and MCB have entered into an Agreement and Plan of Reorganizationr,
dated as of August 15, 2001 (the "Merger Agreement"). The Merger Agreement
generally provides for the merger of MCB into BB (the "Merger") and the
conversion of the issued and outstanding shares of the common stock of MCB ("MCB
Stock") into shares of the common stock of BB ("BB Stock"). The Merger Agreement
is subject to the affirmative vote of the holders of a majority of the
outstanding shares of MCB Stock, the affirmative vote of the holders of a
majority of the outstanding shares of BB Stock, the receipt of certain
regulatory approvals, and the satisfaction of other conditions.
The undersigned is a member of the Board of Directors of BB and is the
owner of the number of shares of BB Stock (the "Owned Shares") and has rights by
option or otherwise to acquire the number of additional shares of BB Stock (the
"Options", together with the Owned Shares, the "Shares") as set forth on Exhibit
A attached hereto. In order to induce MCB to enter into the Merger Agreement,
the undersigned is entering into this Agreement with MCB to set forth certain
terms and conditions governing the actions to be taken by the undersigned solely
in his capacity as a stockholder of BB with respect to the Shares until
consummation of the Merger.
NOW, THEREFORE, in consideration of the transactions contemplated by the
Merger Agreement and the mutual promises and covenants contained herein, the
parties agree as follows:
1. Without the prior written consent of MCB, which consent shall not be
unreasonably withheld, the undersigned shall not transfer, sell, assign, convey,
or encumber (except for such encumbrances that are made with recourse) any of
the Shares during the term of this Agreement except for transfers (i) by
operation of law, by will, or pursuant to the laws of descent and distribution,
or (ii) in which the transferee shall agree in writing to be bound by the
provisions of paragraphs 1, 2, and 3 of this Agreement as fully as the
undersigned, or (iii) in the exercise of any Option. Without limiting the
generality of the foregoing, the undersigned shall not grant to any party any
option or right to purchase the Shares or any interest therein.
2. The undersigned intends to, and will, vote (or cause to be voted) all of
the Shares over which the undersigned has voting authority (other than in a
fiduciary capacity) in favor of the Merger Agreement and the Merger at any
meeting of stockholders of BB called to vote on the Merger Agreement or the
Merger or the adjournment thereof or in any other circumstance upon which a
vote, consent, or other approval with respect to the Merger Agreement or the
Merger is sought. The undersigned hereby waives any rights of appraisal, or
rights to dissent from the Merger, that the undersigned may have.
3. Except as otherwise provided in this Agreement, at any meeting of
stockholders of BB or at any adjournment thereof or any other circumstances upon
which their vote, consent, or other approval is sought, the undersigned will
vote (or cause to be voted) all of the Shares over which the undersigned has
voting authority (other than in a fiduciary capacity) against (i) any merger
agreement, share exchange, or merger (other than the Merger Agreement and the
Merger), consolidation, combination, sale of substantial assets, merger,
recapitalization, dissolution, liquidation, or winding-up of or by BB or (ii)
any amendment of BB's Articles of Incorporation or Bylaws or other proposal or
transaction involving BB or any of its subsidiaries, which amendment or other
proposal or transaction would in any manner impede, frustrate, prevent, or
nullify the Merger, the Merger Agreement, or any of the other transactions
contemplated thereby.
A-55
4. The undersigned acknowledges and agrees that MCB could not be made whole
by monetary damages in the event of any default by the undersigned of the terms
and conditions set forth in this Agreement. It is accordingly agreed and
understood that MCB, in addition to any other remedy which it may have at law or
in equity, shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and specifically to enforce the terms and provisions hereof in
any action instituted in any state or federal court having appropriate
jurisdiction located in California.
5. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
6. The covenants and obligations set forth in this Agreement shall expire
and be of no further force and effect upon termination of the Merger Agreement
under Section 10.1 thereof.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the undersigned as of the day and year first above written.
As to the undersigned,
signed in the presence of:
------------------------------- --------------------------------
Name: __________________________
(Please print or type)
MCB Financial Corporation
By: _____________________________
Name:
Position:
A-57
Exhibit A
Name: ___________________________
Owned Shares: ______ shares of Common Stock
Options: ______ shares of Common Stock
A-58
Schedule 7.7(c)MCB
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT ("Agreement") is made and entered into as of
, 2001, by and between the undersigned director of MCB Financial
Corporation, a California corporation ("MCB"), and Business Bancorp, a
California corporation ("BB").
BB and MCB have entered into an Agreement and Plan of Reorganization,
dated as of August 15, 2001 (the "Merger Agreement"). The Merger Agreement
generally provides for the merger of MCB into BB (the "Merger") and the
conversion of the issued and outstanding shares of the common stock of MCB
("MCB Stock") into shares of the common stock of BB ("BB Stock"). The Merger
Agreement is subject to the affirmative vote of the holders of a majority of
the outstanding shares of MCB Stock, the affirmative vote of the holders of a
majority of the outstanding shares of BB Stock, the receipt of certain
regulatory approvals, and the satisfaction of other conditions.
The undersigned is a member of the Board of Directors of MCB and is the
owner of the number of shares of MCB Stock (the "Owned Shares") and has rights
by option or otherwise to acquire the number of additional shares of MCB Stock
(the "Options", together with the Owned Shares, the "Shares") as set forth on
Exhibit A attached hereto. In order to induce BB to enter into the Merger
Agreement, the undersigned is entering into this Agreement with BB to set forth
certain terms and conditions governing the actions to be taken by the
undersigned solely in his capacity as a stockholder of MCB with respect to the
Shares until consummation of the Merger.
NOW, THEREFORE, in consideration of the transactions contemplated by the
Merger Agreement and the mutual promises and covenants contained herein, the
parties agree as follows:
1. Without the prior written consent of BB, which consent shall not be
unreasonably withheld, the undersigned shall not transfer, sell, assign,
convey, or encumber (except for such encumbrances that are made with recourse)
any of the Shares during the term of this Agreement except for transfers (i) by
operation of law, by will, or pursuant to the laws of descent and distribution,
or (ii) in which the transferee shall agree in writing to be bound by the
provisions of paragraphs 1, 2, and 3 of this Agreement as fully as the
undersigned, or (iii) to BB pursuant to the terms of the Merger Agreement, or
(iv) in the exercise of any Option. Without limiting the generality of the
foregoing, the undersigned shall not grant to any party any option or right to
purchase the Shares or any interest therein.
2. The undersigned intends to, and will, vote (or cause to be voted) all
of the Shares over which the undersigned has voting authority (other than in a
fiduciary capacity) in favor of the Merger Agreement and the Merger at any
meeting of stockholders of MCB called to vote on the Merger Agreement or the
Merger or the adjournment thereof or in any other circumstance upon which a
vote, consent, or other approval with respect to the Merger Agreement or the
Merger is sought. Further, the undersigned intends to, and will, surrender the
certificate or certificates representing the Owned Shares and shares of MCB
Stock issued to the undersigned upon exercise of any of the Options, over which
the undersigned has dispositive authority to BB upon consummation of the Merger
as described in the Merger Agreement and hereby waives any rights of appraisal,
or rights to dissent from the Merger, that the undersigned may have. The
undersigned agrees that at the Effective Time, the Options shall be cancelled
and no longer valid.
3. Except as otherwise provided in this Agreement, at any meeting of
stockholders of MCB or at any adjournment thereof or any other circumstances
upon which their vote, consent, or other approval is sought, the undersigned
will vote (or cause to be voted) all of the Shares over which the undersigned
has voting authority (other than in a fiduciary capacity) against (i) any
merger agreement, share exchange, or merger (other than the Merger Agreement
and the Merger), consolidation, combination, sale of substantial assets,
merger, recapitalization, dissolution, liquidation, or winding-up of or by MCB
or (ii) any amendment of MCB's Articles of Incorporation or Bylaws or other
proposal or transaction involving MCB or any of its subsidiaries, which
amendment or other proposal or transaction would in any manner impede,
frustrate, prevent, or nullify the Merger, the Merger Agreement, or any of the
other transactions contemplated thereby.
A-59
4. The undersigned acknowledges and agrees that BB could not be made whole
by monetary damages in the event of any default by the undersigned of the terms
and conditions set forth in this Agreement. It is accordingly agreed and
understood that BB, in addition to any other remedy which it may have at law or
in equity, shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and specifically to enforce the terms and provisions
hereof in any action instituted in any state or federal court having
appropriate jurisdiction located in California.
5. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
6. The covenants and obligations set forth in this Agreement shall expire
and be of no further force and effect upon termination of the Merger Agreement
under Section 10.1 thereof.
A-60
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the undersigned as of the day and year first above written.
As to the undersigned,
signed in the presence of:
------------------------------- --------------------------------
Name: __________________________
(Please print or type)
Business Bancorp
By: ____________________________
Name:
Position:
A-61
Exhibit A
Name: ___________________________
Owned Shares: ______ shares of Common Stock
Options: ______ shares of Common Stock
A-62
Schedule 8.1(a)
SECRETARY'S CERTIFICATE
The undersigned, Secretary of Business Bancorp, a California corporation,
hereby certifies that the following is a true and correct copy of certain
amendments to the Bylaws of said corporation which were approved by the Board
of Directors of said corporation on , 2001 at a meeting duly held at
which a quorum was present, and in the case of the amendments in Article III,
Section 10(b) and Article IV, Sections 1(a) and 2 by the shareholders of said
corporation on , 2001 at a meeting duly called and held at which a
quorum was present, which amendments to become effective on the closing date of
the merger between the corporation and MCB Financial Corporation.
Amendment of Bylaws
1. Article III, Section 10 of the Bylaws of the corporation is amended in
its entirety to read as follows, effective only when the corporation becomes a
listed corporation within the meaning of Section 301.5 of the California
Corporations Code:
"Section 10. Voting for Election of Directors.
(a) The affirmative vote of the majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required
quorum) shall be the act of the shareholders, unless the vote of a greater
number is required by law or the Articles of Incorporation.
(b) No holder of any class of stock of the corporation shall be
entitled to cumulate votes at any election of directors of the corporation.
This provision shall become effective only when the corporation becomes a
listed corporation within the meaning of Section 301.5 of the California
Corporations Code.
(c) Elections for directors may be by voice vote or by ballot unless
any shareholder entitled to vote demands election by ballot at the meeting
prior to the voting, in which case the vote shall be by ballot.
(d) In any election of directors, the candidates receiving the highest
number of affirmative votes of the shares entitled to be voted for them up
to the number of directors to be elected by such shares are elected as
directors."
2. Article IV, Section 1 of the Bylaws of the corporation is hereby
amended in its entirety to read as follows, in the case of the amendment in
Section 1 (a), effective upon the approval of the shareholders:
"Section 1. Number of Directors
(a) The authorized number of directors shall be not less than nine (9)
nor more than seventeen (17) unless changed by amendment of the Articles or
by a Bylaw duly adopted by approval of the outstanding shares;
(b) The exact number of directors shall be fixed, within the limits
specified, by amendment of the next sentence duly adopted either by the
Board or the shareholders. The exact number of directors shall be fourteen
(14) until changed as provided in this Section 1(b)." 3. Article IV,
Section 2 of the Bylaws of the corporation is hereby amended in its
entirety to read as follows, effective upon the approval of the
shareholders:
"Section 2. Election of Directors.
The directors shall be elected as provided n the Articles of Incorporation
of the Company and as provided in the California Corporations Code."
4. Article IV, Sections 5(b) and 5(c) of the Bylaws of the corporation are
amended in their entirety to read as follows, which amendments shall become
effective only when the corporation becomes a listed corporation within the
meaning of Section 301.5 of the California Corporations Code: "
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(b) Any or all of the directors may be removed without cause if such
removal is approved by a majority of the outstanding shares entitled to
vote; provided, however, that no director may be removed if the votes cast
against removal of the director, or not consenting in writing to such
removal, would be sufficient to elect such director if voted cumulatively
(without regard to whether shares may otherwise be voted cumulatively) at
an election at which the same total number of votes were cast (or, if such
action is taken by written consent, all shares entitled to vote were voted)
and either the number of directors elected at the most recent annual
meeting of shareholders, or if greater, the number of directors for whom
removal is being sought, were then being elected.
(c) Any reduction of the authorized number of directors or amendment
reducing the number of classes of directors does not remove any director
prior to the expiration of the director's term of office."
Date: _________________________________ By: __________________________________
Name: _______________________________
Title: Secretary
A-64
SCHEDULE 8.1(b)
SECRETARY'S CERTIFICATE
The undersigned, Secretary of Business Bancorp, a California corporation,
hereby certifies that the following is a true and correct copy of certain
amendments to the Bylaws of said corporation which were approved by the Board
of Directors of said corporation on , 2001 at a meeting duly held at which
a quorum was present, which amendments to become effective on the closing date
of the merger between the corporation and MCB Financial Corporation (the
"Effective Date").
Amendment of Bylaws
1. The following Article IV, Section 9 is hereby appended to the end of
Article IV:
"Section 9. Nominating Committees.
(a) Initial Appointments. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate two
nominating committees (the "Nominating Committees"), to be designated
"Nominating Committee 1" and "Nominating Committee 2," and appoint the
members of the Nominating Committees so that each member of the Board of
Directors shall be a member of one of the Nominating Committees and the
size of the Nominating Committees shall be equal. Upon creation of the
Nominating Committees, the Board of Directors shall initially appoint those
directors who were formerly directors of MCB Financial Corporation to
Nominating Committee 1, and those directors who were formerly directors of
Business Bancorp immediately prior to its merger with MCB Financial
Corporation to Nominating Committee 2. Following such initial appointments,
new members of the Nominating Committees shall be deemed appointed as
provided in Section 9(g) hereof.
(b) In the event that the Board of Directors designates two Nominating
Committees as provided in Section 9(a), such Nominating Committees shall
have the powers and shall follow the procedures set forth in this Section
9, and the powers herein delegated to the Nominating Committees shall not
be exercised by the full Board of Directors unless and until this Section 9
has been amended in accordance with the procedure for amendment set forth
in Article VI, Section 10 hereof.
(c) Vacancies in the Board of Directors. If a vacancy or vacancies in
the board are deemed to exist from time to time by virtue of the provisions
of Article IV, Section 4 hereof, then each Nominating Committee shall have
the power to nominate candidates to fill such vacancies on the terms and
conditions set forth below. The Board of Directors shall promptly consider
and act upon each candidate nominated by a Nominating Committee.
(i) If the vacancy was created by the death, resignation, or removal
of a director (the "Former Director"), then the Nominating Committee of
which the Former Director was a member (the "Acting Committee") shall
have the sole right to nominate a candidate or candidates to fill such
vacancy. In such event, the other Nominating Committee (the "Non-Acting
Committee") shall have no right to nominate a candidate.
Notwithstanding the foregoing, the Acting Committee shall not nominate
a candidate to fill such a vacancy in the Board of Directors unless
twenty (20) business days shall have elapsed since the occurrence of
the event giving rise to such vacancy and no director who is a member
of the Non-Acting Committee shall have resigned from the Board of
Directors during such period. In the event that a director who is a
member of the Non-Acting Committee does resign during such period, the
Board of Directors may then vote to eliminate both vacancies by
reducing the number of authorized directors by two.
(ii) If the vacancy was created due to an increase in the authorized
number of directors, then each Nominating Committee shall have the
right to nominate candidates until its candidates have been elected to
fill one-half of the vacancies so created.
(iii) If the vacancy was created because the stockholders failed, at
any annual or special meeting of stockholders at which any director or
directors are nominated for election, to elect the full authorized
number of directors to be voted for at that meeting, then:
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(A) If the Nominating Committees are at that time of unequal size, the
Nominating Committee with the smaller number of members shall have the
right to nominate candidates to fill such vacancies until the sum of its
number of members plus the number of its candidates elected to the board
equals the number of members of the other Nominating Committee. (For
example, if Nominating Committee 1 has seven members and Nominating
Committee 2 has nine members, Nominating Committee 1 will have the right to
nominate candidates until two of its candidates have been elected as
directors.) Thereafter, each Nominating Committee shall have the right to
nominate candidates until its candidates have been elected to fill one-half
of the remaining vacancies; or
(B) If the Nominating Committees are at that time of equal size, then each
Nominating Committee shall have the right to nominate candidates until its
candidates have been elected to fill one-half of such vacancies.
(d) Nominations for Election to the Board of Directors. At any annual
or special meeting of stockholders at which any director or directors are
to be elected, each Nominating Committee shall have the right to nominate
candidates as follows:
(i) If the Nominating Committees are at that time of unequal size,
the Nominating Committee with the smaller number of members shall have
the right to nominate candidates until the sum of its candidates plus
the number of its members is equal to the number of members of the
other Nominating Committee. Thereafter, each Nominating Committee shall
have the right to nominate candidates for one-half of the remaining
board positions for which the election is to be held.
(ii) If the Nominating Committees are at that time of equal size,
each Nominating Committee shall have the right to nominate candidates
for one-half of the board positions for which the election is to be
held.
(e) Nominations to fill Vacancies in Board Committees. If there is a
vacancy in such board committees as the Board may designate pursuant to
Article V, Section 1 (each, a "Board Committee"), then the Nominating
Committees may nominate candidates in accordance with the provisions set
forth below. The Board of Directors shall promptly consider and act upon
each candidate nominated by a Nominating Committee.
(i) If the vacancy in a Board Committee was created by the death,
resignation, or removal of a member of the Board Committee, then the
Nominating Committee of which such person was a member shall have the
sole right to nominate a candidate or candidates for appointment to
fill such vacancy.
(ii) If the vacancies were created due to an increase in the
authorized number of members of the Board Committee, then each
Nominating Committee shall have the right to nominate candidates until
its candidates have been appointed to fill one-half of the vacancies so
created.
(f) Nominations for Appointment to Board Committees. Except as provided
in Section 9(e) hereof, at any meeting of the Board of Directors at which
any members of a Board Committee are to be appointed, each Nominating
Committee shall have the right to nominate candidates for appointment until
the number of members of the Board Committee nominated by each Nominating
Committee shall be equal. The Board of Directors shall promptly consider
and act upon each candidate nominated by a Nominating Committee.
(g) Vacancies. Vacancies in the Nominating Committees shall be filled
as follows: without the need for any further action by the Board of
Directors or either Nominating Committee, each new director shall
automatically be deemed for all purposes a member of the Nominating
Committee which nominated him for election to the Board of Directors, on
and from the date of his or her election.
(h) Term of Office. The term of office of each member of the Nominating
Committees shall commence on the day of appointment to the Nominating
Committee or election to the Board of Directors, as appropriate, and shall
continue until death, resignation or removal from the Board of Directors.
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(i) Voting. Every act or decision done or made by a majority of the
members of a Nominating Committee present at a meeting duly held at which a
quorum is present shall be regarded as the act of such Nominating
Committee.
(j) Quorum. A majority of the number of members of a Nominating
Committee shall be necessary to constitute a quorum for the transaction of
business, except to adjourn as hereinafter provided.
(k) Adjournment. A majority of the members of a Nominating Committee
present at any meeting of such Nominating Committee may adjourn to meet
again at a stated day and hour.
(l) Classes. If the Board of Directors is divided into classes pursuant
to these Bylaws or the Articles of Incorporation, then each Nominating
Committee shall appoint half the directors of each class or as nearly half
as reasonably possible.
(m) Expiration. Without further action of the Board of Directors or the
shareholders, this Article IV, Section 9 will expire at the close of
business on the date which is two years after the effective date of the
merger between the corporation and MCB Financial Corporation."
2. Article V, Section 1, is hereby amended in its entirety to read as
follows:
"Section 1. Designation of Committees. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors. On
the date which is two years after the effective date of the merger between the
corporation and MCB Financial Corporation, the previous sentence shall be
replaced with the following two sentences: The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate (1) one or more committees, each consisting of two or more directors
and (2) one or more directors as alternate members of any committee, who may
replace any absent member at any meeting thereof. Any member or alternate
member of a committee shall serve at the pleasure of the Board."
3. Article VI, Section 6(a), is hereby amended in its entirety to read as
follows:
"(a) A majority of the authorized number of directors shall constitute
a quorum for the transaction of business. Every act or decision done or
made by a majority of the directors present is the act of the Board of
Directors, unless action by a greater proportion of the directors is
required by Section 10, by law or by the Articles of Incorporation."
4. The following Article VI, Section 10 is hereby appended to the end of
Article VI:
"Section 10. Voting By Board.
(a) Majority Vote. Except as provided in Section 10(b), every act or
decision done or made by the Board of Directors shall require the approval
of a majority of the directors present at a meeting duly held at which a
quorum is present.
(b) Supermajority Requirement. Notwithstanding the foregoing, the Board
of Directors shall take no action with regard to the following matters
unless such action has been approved by at least seventy percent (70%) of
the authorized number of directors, rounded up to the next whole number of
directors:
(i) amend the Articles of Incorporation;
(ii) adopt an agreement of merger or consolidation;
(iii) recommend to the stockholders, or adopt any agreement for, the
sale, lease, assignment, encumbrance for other disposition of all or
substantially all of the Corporation's property or assets;
(iv) recommend to the stockholders, or adopt any agreement for, the
sale, lease, assignment, encumbrance for other disposition of all or
substantially all of the property or assets of a subsidiary of the
Corporation;
A-67
(v) recommend to the stockholders a dissolution of the Corporation
or a revocation of dissolution;
(vi) close or enter into an agreement with another depository
institution for the purchase and assumption of the assets and
liabilities of one or more branches;
(vii) dismiss senior executives, other than for cause under any
applicable employment agreement;
(viii) change the responsibilities or structure of the Corporation's
executive management;
(ix) following the designation of the Nominating Committees, the
determination to cancel, limit or in any way revoke the authority of
the Nominating Committees; or
(x) the removal of any member of a Board Committee or any member of
either of the Nominating Committees."
(c) Expiration. Without further action of the Board of Directors or the
shareholders, this Article VI, Section 10 will expire at the close of
business on the date which is two years after the effective date of the
merger between the corporation and MCB Financial Corporation."
5. Except as hereby amended, the Bylaws of Business Bancorp shall remain
in full force and effect.
Date: _________________________________ By: __________________________________
Name: _______________________________
Title: Secretary
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SCHEDULE 8.1(d)
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF
BUSINESS BANCORP
Alan J. Lane and John L. Riddell certify that:
1. They are the President and Secretary, respectively, of Business
Bancorp, a California corporation (the "Corporation").
2. Article FOUR of the Corporation's Articles of Incorporation is hereby
amended and restated to read in full:
"Four: The corporation is authorized to issue two classes of shares
designated as "Common Stock" and "Preferred Stock", respectively. The
number of shares of Common Stock authorized to be issued is 20,000,000, and
the number of shares of Preferred Stock authorized to be issued is
20,000,000.
The board of directors of this corporation is authorized to designate
that the Preferred Stock be divided into any number of series, and it is
authorized to determine the designation of any such series and to fix the
number of shares in any such series and may, as to any such series, within
the limits and restrictions stated in any resolution or resolutions of the
board of directors originally fixing the number of shares constituting any
series, increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any such series subsequent
to the issue of the shares of that series. In case the number of shares of
any series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares in such series. The board
of directors of this corporation may determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock."
2. Article Seven of the Corporation's Articles of Incorporation is hereby
amended and restated to read in full:
"Seven: A. The number of directors on the Board of Directors shall be
fixed from time to time by the Board of Directors pursuant to a resolution
adopted by the Board of Directors within the range set forth in the by-laws
of the Corporation, which shall in no event be fewer than nine directors.
The directors shall be divided into three classes, each as close an
approximation as possible to one-third of the directors, with the term of
office of the first class to expire at the annual meeting of shareholders
one year thereafter, the term of office of the second class to expire at
the annual meeting of shareholders two years thereafter, and the term of
office of the third class to expire at the annual meeting of shareholders
three years thereafter, with each director to hold office until his or her
successor shall have been duly elected and qualified. Beginning with the
first annual meeting after directors are first elected to classes and
continuing with each annual meeting of shareholders thereafter, directors
elected to succeed those directors whose terms expire shall at each such
meeting be elected for a term of office thereafter to expire at the third
succeeding annual meeting of shareholders after their election, with each
director to hold office until his or her successor shall have been duly
elected and qualified.
B. The newly created directorships resulting from any increase in the
authorized number of directors, or any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal
from office or other cause, may be filled in accordance with the provisions
of the Bylaws and Section 305 of the California Corporations Code, and
directors so chosen shall hold office for a term expiring at the annual
meeting of shareholders at which the term of office of the class to which
they have been chosen expires. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
C. This Article Seven shall become effective only when the Corporation
becomes a listed corporation within the meaning of Section 301.5 of the
Corporations Code."
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4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
5. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Sections 902
and 903 of the Corporations Code. The total number of outstanding shares of the
Corporation is . The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required was more
than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth herein are true and correct and of our
own knowledge.
Executed in San Bernardino, California on , 2001.
---------------------------
Alan J. Lane, President
---------------------------
John L. Riddell, Secretary
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SCHEDULE 8.4
REPLACEMENT EMPLOYMENT AGREEMENTS
Officers receiving replacement employment and/or severance agreements:
Alan J. Lane
Charles O. Hall
Patrick E. Phelan
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SCHEDULE 8.5
MANAGEMENT STRUCTURE FOLLOWING REORGANIZATION
Business Bancorp Management Structure:
Chairman: Timothy J. Jorstad
Vice Chairman: John E. Duckworth
Chief Executive Officer: Alan J. Lane
President & Chief Operating Officer: Charles O. Hall
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
Business Bank of California Management Structure:
Chairman: Timothy J. Jorstad
Vice Chairman: John E. Duckworth
Chief Executive Officer: Alan J. Lane
President & Chief Operating Officer: Charles O. Hall
Executive Vice President & Chief Financial Officer: Patrick E. Phelan
Description of Duties:
Charles Hall: Alan Lane:
Lending Activities M&A/Corporate Strategy
Credit Administration Investor Relations
Legal/Regulatory Compliance Marketing/Training
Efficiency Program Branch System
Patrick Phelan reports through Chief Operating Officer to Chief Executive
Officer.
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ANNEX B-1
Opinion of Baxter Fentriss and Company
August 15, 2001
The board of directors
Business Bancorp
140 South Arrowhead Avenue
San Bernardino, California 92408
Dear Members of the Board:
Business Bancorp, San Bernardino, California ("Business Bancorp") and MCB
Financial Corporation, San Rafael, California ("MCB") have entered into an
agreement providing for the merger of MCB with and into Business Bancorp (the
"Merger"). The terms of the Merger are set forth in the Agreement and Plan of
Reorganization (the "Agreement").
The terms of the Merger provide that, with possible exception of those
shares as to which dissenter's rights may be perfected, each issued and
outstanding common share of MCB will be converted into the right to receive
1.1763 shares of Business Bancorp common stock, provided, however, that no
fractional shares of Business Bancorp common stock will be issued as a result
of the Merger, but cash shall be paid in lieu thereof.
You have asked our opinion as to whether the Exchange Ratio is fair to the
respective shareholders of Business Bancorp from a financial point of view.
In rendering our opinion, we have reviewed certain publicly available
business and financial information relating to Business Bancorp and MCB, as
well the drafts of the Agreement. We have also reviewed certain other
information, including financial forecasts, provided to us by Business Bancorp
and MCB, and have discussed the business and prospects of Business Bancorp and
MCB with management, as well as other matters that may be relevant.
In addition, we have, among other things: (a) to the extent deemed
relevant, analyzed selected public information of certain other financial
institutions and compared Business Bancorp and MCB from a financial point of
view to the other financial institutions; (b) compared the terms of the Merger
with the terms of certain other comparable transactions to the extent
information concerning such acquisitions was publicly available; (c) made such
other analyses and examinations as we deemed necessary.
We have not independently verified the financial and other information
concerning Business Bancorp or MCB. We have assumed the accuracy and
completeness of all such information; however, we have no reason to believe
that such information is not accurate and complete. Our conclusion is rendered
on the basis of securities market conditions prevailing as of the date hereof
and on the conditions and prospects, financial and otherwise, of Business
Bancorp and MCB as they exist and are known to us as of March 31, 2001.
We have acted as financial advisor to the board of directors of Business
Bancorp in connection with the Merger and will receive from Business Bancorp a
fee for our services, none of which is contingent upon the consummation of the
Merger.
It is understood that this opinion may be included in its entirety in any
communication by Business Bancorp or the board of directors to the stockholders
of Business Bancorp. The opinion may not, however, be summarized, excerpted
from or otherwise publicly referred to without our prior written consent.
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Based on the foregoing, and subject to the limitations described above, we
are of the opinion that the Exchange Ratio is fair to the shareholders of
Business Bancorp from a financial point of view.
Sincerely,
/s/ Baxter Fentriss and Company
Baxter Fentriss and Company
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ANNEX B-2
Investment Banking
Corporate and
Institutional
Client Group
Merrill Lynch
World Financial Center
North Tower
New York, New York
10281-1326
212 449 1000
August 15, 2001
Board of Directors
MCB Financial Corporation
1248 Fifth Avenue
San Rafael, CA 94901
Members of the Board:
We understand that MCB Financial Corporation, Inc. ("MCB"), Business
Bancorp ("BB") and their respective subsidiary banks, propose to enter into an
Agreement and Plan of Reorganization, dated as of August 15, 2001 (the
"Agreement"), pursuant to which, among other things, MCB is to be merged with
and into BB, with BB being the surviving corporation in the transaction (the
"Merger"). Pursuant to the Merger, each outstanding share of MCB common stock,
no par value (the "MCB Shares"), other than certain excluded shares specified
in the Agreement, will be converted into the right to receive 1.1763 shares
(the "Exchange Ratio") of the common stock, no par value of BB (the "BB
Shares"), all as more fully set forth in the Agreement.
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view to the holders of the MCB Shares.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to BB and MCB that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the respective businesses, earnings, assets, liabilities and
prospects of BB and MCB furnished to us by senior management of BB and
MCB, as well as the amount and timing of the cost savings, revenue
enhancements and related expenses expected to result from the Merger
(the "Expected Synergies") furnished to us by senior management of MCB;
(3) Conducted discussions with members of senior management and
representatives of BB and MCB concerning the matters described in
clauses (1) and (2) above, as well as their respective businesses and
prospects before and after giving effect to the Merger and the Expected
Synergies;
(4) Reviewed the market prices and valuation multiples for the BB Shares
and the MCB Shares and compared them with those of certain publicly
traded companies;
(5) Reviewed the respective publicly reported financial condition and
results of operations of BB and MCB and compared them with those of
certain publicly traded companies;
(6) Participated in certain discussions and negotiations among
representatives of BB and MCB and their respective financial and legal
advisors with respect to the Merger;
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(7) Reviewed the potential pro forma impact of the Merger;
(8) Reviewed a draft of the Agreement and a draft of the related stock
option agreement provided to us; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of the assets or liabilities
of BB or MCB or been furnished with any such evaluation or appraisal. We are
not experts in the evaluation of allowances for loan losses, and we have
neither made an independent evaluation of the adequacy of the allowances for
loan losses of BB or MCB, nor have we reviewed any individual credit files of
BB or MCB or been requested to conduct such a review, and, as a result, we have
assumed that the respective allowances for loan losses for BB and MCB are
adequate to cover such losses and will be adequate on a pro forma basis for the
combined entity. In addition, we have not assumed any obligation to conduct,
nor have we conducted, any physical inspection of the properties or facilities
of BB or MCB. With respect to the financial and operating information,
including without limitation, financial forecasts, valuations of contingencies,
projections regarding under-performing or non-performing assets, net
charge-offs, adequacy of reserves, future economic conditions, and the Expected
Synergies, furnished to or discussed with us by BB or MCB, we have assumed that
all such information has been reasonably prepared and reflect the best
currently available estimates and judgments of the senior management of BB and
MCB as to the future financial and operating performance of BB, MCB or the
combined entity, as the case may be, and the Expected Synergies. We have also
assumed the final form of the Agreement and the final form of the related stock
option agreement will be substantially similar to the last drafts reviewed by
us.
Our opinion is necessarily based upon market, economic and other
conditions as in effect on, and on the information made available to us as of,
the date hereof. For the purposes of rendering this opinion, we have assumed
that the Merger will be consummated substantially in accordance with the terms
set forth in the Agreement, including in all respects material to our analysis,
that the representations and warranties of each party in the Agreement and in
all related documents and instruments (collectively, the "Documents") that are
referred to therein are true and correct, that each party to the Documents will
perform all of the covenants and agreements required to be performed by such
party under such Documents and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof. We have also assumed that, in
the course of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Merger, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the future results of operations or
financial condition of BB, MCB, or the combined entity, as the case may be, or
on the contemplated benefits of the Merger, including the Expected Synergies.
We have further assumed that the Merger will qualify as a tax-free
reorganization for U.S. Federal income tax purposes.
We have been retained by the Board of Directors of MCB to act as financial
advisor to MCB in connection with the Merger and will receive a fee from MCB
for our services, a significant portion of which is contingent upon the
consummation of the Merger. In addition, MCB has agreed to indemnify us for
certain liabilities arising out of our engagement.
In the ordinary course of our business, we may actively trade the MCB
Shares and other securities of MCB as well as the BB Shares and other
securities of BB, for our own account and for the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
This opinion is for the use and benefit of the Board of Directors of MCB.
Our opinion does not address the relative merits of the underlying decision by
MCB to engage in the Merger as compared to other business strategies that may
be available or the effect of any other transaction in which MCB might engage,
and it does not constitute a recommendation to any shareholder of MCB as to how
such shareholder should vote on the proposed Merger or any other matter related
thereto.
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We are not expressing any opinion herein with respect to, the prices at
which BB Shares or MCB Shares will trade following the announcement or the
consummation of the Merger, as the case may be.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Ratio is fair, from a financial point of
view, to the holders of the MCB Shares.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
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ANNEX C
Chapter 13 of the California Corporations Code
1300. (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 National Market System of the NASDAQ
Stock Market, 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.
1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to 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
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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.
1302. 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.
1303. (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.
1304. (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. (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.
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(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).
1306. 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.
1307. 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.
1308. 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.
1309. 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.
1310. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
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1311. 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.
1312. (a) No shareholder of a corporation who has a right under this
chapter to demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the
shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, the shareholder shall not
thereafter have any right to demand payment of cash for the shareholder's
shares pursuant to this chapter. The court in any action attacking the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder
or the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack
the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to
a reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that
the transaction is just and reasonable as to the shareholders of the
controlled party, and (2) a person who controls two or more parties to a
reorganization shall have the burden of proving that the transaction is
just and reasonable as to the shareholders of any party so controlled.
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ANNEX D
TEXT OF PROPOSED AMENDMENTS TO THE ARTICLES
OF INCORPORATION OF BUSINESS BANCORP
ARTICLE FOUR: The corporation is authorized to issue two classes of shares
designated as "Common Stock" and "Preferred Stock", respectively. The number of
shares of Common Stock authorized to be issued is 20,000,000, and the number of
shares of Preferred Stock authorized to be issued is 20,000,000.
The board of directors of this corporation is authorized to designate that
the Preferred Stock be divided into any number of series, and it is authorized
to determine the designation of any such series and to fix the number of shares
in any such series and may, as to any such series, within the limits and
restrictions stated in any resolution or resolutions of the board of directors
originally fixing the number of shares constituting any series, increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of the shares
of that series, in case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number
of shares in such series. The board of directors of this corporation may
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock.
ARTICLE SEVEN: A. The number of directors on the Board of Directors shall
be fixed from time to time by the Board of Directors pursuant to a resolution
adopted by the Board of Directors within the range set forth in the by-laws of
the Corporation, which shall in no event be fewer than nine directors. The
directors shall be divided into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class to expire at
the annual meeting of shareholders one year after this provision becomes
effective, the term of office of the second class to expire at the annual
meeting of shareholders two years after this provision becomes effective, and
the term of office of the third class to expire at the annual meeting of
shareholders three years after this provision becomes effective, with each
director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of shareholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of shareholders after their election, with each
director to hold office until his or her successor shall have been duly elected
and qualified.
B. The newly created directorships resulting from any increase in the
authorized number of directors, or any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, may be filled in accordance with the provisions of the
Bylaws and Section 305 of the Corporations Code, and directors so chosen shall
hold office for a term expiring at the annual meeting of shareholders at which
the term of office of the class to which they have been chosen expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
C. This Article SEVEN shall become effective only when the Corporation
becomes a listed corporation within the meaning of Section 301.5 of the
Corporations Code.
D-1
ANNEX E
TEXT OF PROPOSED AMENDMENT TO BYLAWS OF BUSINESS BANCORP
Article III, Section 10(b). Voting for Election of Directors.
***
(b) No holder of any class of stock of the corporation shall be entitled
to cumulate votes at any election of directors of the corporation. This
provision shall become effective only when the corporation becomes a listed
corporation within the meaning of Section 301.5 of the Corporations Code.
Article IV, Section 1 (a). Number of Directors
***
(a) The authorized number of Directors shall be not less than nine (9) nor
more than seventeen (17) unless changed by amendment of the Articles or by a
Bylaw duly adopted by approval of the outstanding shares
Article IV, Section 2. Election of Directors
Section 2. Election of Directors. The directors shall be elected as
provided in the Articles of Incorporation of the Company and as provided in the
California Corporations Code.
E-1
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PROXY MCB FINANCIAL CORPORATION PROXY
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 10, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Messrs. Timothy J. Jorstad, Edward P. Tarrant
and Randall J. Verrue, and each of them, the attorneys, agents and proxies of
the undersigned, with full powers of substitution to each, to attend and act as
proxy or proxies of the undersigned at the Special Meeting of Shareholders of
MCB Financial Corporation to be held at MCB Financial Corporation, 1248 Fifth
Avenue, San Rafael, California 94901, on Monday, December 10, 2001, at 5:30
p.m. or any adjournment thereof, and to vote as specified herein the number of
shares which the undersigned, if personally present, would be entitled to vote.
1. Proposal to approve the merger agreement between Business Bancorp and MCB
Financial Corporation, as stated in the joint proxy statement/prospectus
dated November 8, 2001
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Other Business. To transact such other business as may properly come before
the Special Meeting of Shareholders and any adjournments thereof.
This proxy will be voted as directed by the Shareholder or, if no instructions
are given by the Shareholder, the proxy holders will vote "FOR" Proposal 1 and
as recommended by the board of directors of MCB Financial on all other matters
as may properly come before the meeting.
Important--Please Sign on Other Side
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ATTENTION: PLEASE NOTE THAT THIS BOX WILL NOT BE PRINTED. IT IS TO
SHOW THE TEXT POSITION ON THE FRONT OF THIS PROXY CARD.
--------------------------------------------------------------------------------
Please Sign and Date Below
The board of directors recommends a vote "FOR" Proposal 1. The proxy confers
authority to vote and shall be voted in accordance with such recommendations
unless a contrary instruction is indicated, in which case the shares represented
by the proxy will be voted in accordance with such instruction. If no
instruction is specified with respect to a matter, the shares represented by the
proxy will be voted in accordance with the recommendations of the board of
directors. If any other business is presented at the meeting, this proxy confers
authority to and shall be voted in accordance with the discretion of the
proxies.
______________________________
(Number of Shares)
______________________________
Dated
______________________________
(Please Print Name)
______________________________
(Signature of Shareholder)
______________________________
(Please Print Name)
______________________________
(Signature of Shareholder)
(Please date this Proxy and
sign your name as it appears
on your stock certificates.
Executors, administrators,
trustees, etc., should give
their full titles. All joint
owners should sign.)
Please indicate if you are
planning to attend the
Meeting.
I (We) do [ ] do not [ ]
expect to attend the Meeting.
Number of Persons__
THIS PROXY MAY BE REVOKED PRIOR TO ITS EXERCISE BY FILING, WITH THE CORPORATE
SECRETARY OF MCB FINANCIAL CORPORATION, A DULY EXECUTED PROXY BEARING A LATER
DATE OR AN INSTRUMENT REVOKING THIS PROXY, OR BY ATTENDING THE MEETING AND
ELECTING TO VOTE IN PERSON.
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ATTENTION: PLEASE NOTE THAT THIS BOX WILL NOT BE PRINTED. IT IS TO
SHOW THE TEXT POSITION ON THE BACK OF THIS PROXY CARD.