As filed with the Securities and Exchange Commission on March , 2002
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4EF
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PACIFIC STATE BANCORP
(Exact name of registrant as specified in its charter)
California 6711 61-1407606
(State or other (Primary (I.R.S.
jurisdiction of incorporation Standard Industrial Employer
or organization) Classification Code No.) Identification No.)
1889 W. March Lane, Stockton, California 95207
(Address of principal executive offices, including Zip Code)
(209) 870-3200
(Registrant's telephone number, including area code)
Steven A. Rosso Copy to:
President and Chief Executive Officer John W. Carr, Esq.
Pacific State Bancorp Shapiro Buchman Provine Patton LLP
1889 W. March Lane 1333 N. California Blvd., Suite 350
Stockton, California 95207 Walnut Creek, California 94596
(209) 870-3200 (925) 944-9700
(Name, address and telephone number of agent for service of process)
Approximate date of commencement of the proposed sale to the public: The
date of mailing the enclosed Proxy Statement/Prospectus to the shareholders of
Pacific State Bank.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: |_|
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
Title of each class of Proposed maximum Proposed maximum
securities to be Amount to be offering price per aggregate offering Amount of
registered registered (1) share price(2) registration fee
- ------------------------------------------------------------------------------------------------------------------
Common Stock 893,012 shares $12.34 $11,019,768 $1,013.82
- ------------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of shares of the Registrant's Common Stock
to be issued in connection with the Merger described herein.
(2) Estimated pursuant to Rule 457(f)(2) solely for the purpose of calculating
the registration fee based on the book value of the securities to be
received by the Registrant as determined on December 31, 2001.
PACIFIC STATE BANCORP
Cross-Reference Sheet Pursuant to Item 501 of Regulation S-K
Item of Form S-4 Caption in Prospectus/Proxy Statement
PART I - INFORMATION REQUIRED IN THE PROSPECTUS
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Facing page of Registration Statement;
Front Cover Page of Prospectus...................... Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges Summary; Front Cover Page of Prospectus;
and Other Information............................... Selected Condensed Financial Data; Market
Information Concerning the Bank's and
Bancorp's Common Stock
4. Terms of the Transaction............................ Summary; The Merger; Capital Stock of
Bancorp and the Bank; Legal Matters
5. Pro Forma Financial Information..................... Not Applicable
6. Material Contracts with the Company Being Acquired.. Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters....... Not Applicable
8. Interest of Named Experts and Counsel............... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...... Indemnification
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants......... Not Applicable
11. Incorporation of Certain Information by Reference... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants.. Not Applicable
13. Incorporation of Certain Information by Reference... Not Applicable
14. Information with Respect to Registrants Pacific State Bank; Pacific State
Other Than S-3 or S-2 Registrants................... Bancorp; Market Information Regarding the
Bank's and Bancorp's Common Stock
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies........... Not Applicable
16. Information with Respect to S-2 or S-3 Companies.... Not Applicable
17. Information with Respect to Companies Pacific State Bank; Market Information
Other than S-3 or S-2 Companies..................... Regarding the Bank's and Bancorp's Common
Stock; Selected Condensed Financial Date
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Summary; General Information; The Merger;
Authorizations are to be Solicited.................. Proposal One: Election of Directors;
Pacific State Bancorp; Pacific State Bank
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer................................... Not Applicable
PACIFIC STATE BANK
6 South El Dorado
Stockton, California 95202
Dear Shareholder: April 15, 2002
The Annual Meeting of Shareholders of Pacific State Bank (the "Bank") will
be held at the main office of the Bank, 6 South El Dorado, Stockton, California,
at 4:30 p.m. on Thursday, May 9, 2002.
The enclosed Proxy Statement/Prospectus explains the items of business
scheduled for consideration by the shareholders. You are cordially invited to
attend this year's Annual Meeting in person; however, a form of proxy and
pre-addressed envelope are enclosed for your convenience in voting by proxy.
At the Annual Meeting you will be asked to approve a Plan of
Reorganization and Merger Agreement, dated as of March 12, 2002 (the
"Reorganization Agreement"). This agreement was entered into by the Bank,
Pacific State Bancorp, which is a newly-formed bank holding company ("Bancorp")
and PSB Merger Corporation, which is a wholly-owned subsidiary of Bancorp (the
"Subsidiary"). The Reorganization Agreement provides for a merger (the "Merger")
of the Subsidiary and the Bank, pursuant to which the Bank will become the
wholly-owned subsidiary of Bancorp. If the Reorganization Agreement and Merger
are approved, your Bank stock will be converted into stock of Bancorp on a
share-for-share basis. Your current stock certificates will represent shares in
Bancorp, and it will not be necessary for you to exchange stock certificates,
although you may do so if you wish. A detailed explanation of the Merger is
contained in the accompanying Notice of Annual Meeting and Proxy
Statement/Prospectus.
Management believes that the formation of a holding company will enhance
the ability of the Bank to compete with major banks in our marketing area, many
of which have been similarly reorganized, and will provide a broader range of
business alternatives with respect to growth and access to additional capital.
Your Board of Directors has determined that the Reorganization Agreement and the
Merger are in the best interests of the Bank and its shareholders. YOUR BOARD OF
DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND MERGER AND
RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE REORGANIZATION AGREEMENT AND MERGER
AT THE ANNUAL MEETING.
At the Annual Meeting, you will also be asked to elect directors of the
Bank and to consider and act upon any other matters which may properly be
brought before the Annual Meeting. We suggest you read carefully the
accompanying Notice of Annual Meeting and Proxy Statement/Prospectus which
describes these matters in detail.
We urge you to complete and return your proxy, whether or not you plan to
attend the Annual Meeting. This will ensure the voting of your shares if you are
unable to attend. If you do attend the Annual Meeting, you may, if you choose,
withdraw your proxy and vote in person.
Your continuing interest in the business of the Bank is appreciated.
Sincerely yours,
Steven A. Rosso Harold Hand, M.D.
President and Chief Executive Officer Chairman of the Board
PACIFIC STATE BANK
6 South El Dorado
Stockton, California 95202
NOTICE OF 2002 ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN TO SHAREHOLDERS that the 2002 Annual Meeting of
Shareholders of Pacific State Bank (the "Bank") will be held Thursday, May 9,
2002, at the main office of the Bank, 6 South El Dorado, Stockton, California,
at 4:30 p.m. for the following purposes:
1. To elect ten (10) directors of the Bank for the ensuing year. See
"PROPOSAL ONE: ELECTION OF DIRECTORS."
2. To approve a Plan of Reorganization and Merger Agreement, dated as of
March 12, 2002 (the "Reorganization Agreement"), entered into by the Bank,
Pacific State Bancorp, a newly formed bank holding company ("Bancorp") and PSB
Merger Corporation, a wholly-owned subsidiary of Bancorp (the "Subsidiary"),
which provides for the merger (the "Merger") of the Subsidiary and the Bank,
pursuant to which the Bank will become the wholly-owned subsidiary of Bancorp.
See "PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT."
The directors of Bancorp are the same as the directors of the Bank. All of
these directors of Bancorp have held office since shortly after its
incorporation. They will hold office until the next Annual Meeting of
shareholders of Bancorp or until their successors are duly elected and
qualified. See "PACIFIC STATE BANCORP -- Management of Bancorp."
3. To transact any other business which may properly come before the
Annual Meeting and any postponement or adjournment thereof.
Section 16 of the By-Laws of the Bank provides for the nomination of
Directors in the following manner:
"Nomination for election of members of the Board of Directors may be made
by the Board of Directors or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Notice of intention to make any nominations shall be made in writing and shall
be delivered or mailed to the President of the corporation not less than 21 days
nor more than 60 days prior to any meeting of stockholders called for the
election of directors; provided however, that if less than 21 days notice of the
meeting is given to shareholders, such notice of intention to nominate shall be
mailed or delivered to the President of the corporation not later than the close
of business on the tenth day following the day on which the notice of meeting
was mailed; provided further, that if notice of such meeting is sent by
third-class mail as permitted by Section 6 of these By-Laws, no notice of
intention to make nominations shall be required. Such notification shall contain
the following information to the extent known to the notifying shareholder: (a)
the name and address of each proposed nominee; (b) the principal occupation of
each proposed nominee; (c) the number of shares of capital stock of the
corporation owned by each proposed nominee; (d) the name and residence address
of the notifying shareholder; and (e) the number of shares of capital stock of
the corporation owned by the notifying shareholder. Nominations not made in
accordance herewith may, in the discretion of the Chairman of the meeting, be
disregarded and upon the Chairman's instructions, the inspectors of election can
disregard all votes cast for each such nominee."
Only those shareholders of record at the close of business on March 18,
2002, will be entitled to notice of and to vote at the Annual Meeting.
Dated: April 15, 2002 By Order of the Board of Directors
Steven J. Kikuchi, Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POST-PAID ENVELOPE.
Mailed to shareholders on
or about April 15, 2002
PACIFIC STATE BANK
PROXY STATEMENT
PACIFIC STATE BANCORP
PROSPECTUS
1889 W. March Lane
Stockton, California 95207
Telephone (209) 870-3200
INFORMATION CONCERNING THE SOLICITATION
Pacific State Bank (the "Bank") is providing this Proxy
Statement/Prospectus to solicit proxies for use at the 2002 Annual Meeting of
Shareholders (the "Meeting") to be held on Thursday, May 9, 2002, at 4:30 p.m.
at 6 South El Dorado, Stockton, California, and at any and all postponements or
adjournments thereof. Only shareholders of record on March 18, 2002 (the "Record
Date"), will be entitled to notice of and to vote at the meeting. At the close
of business on that date, the Bank had outstanding and entitled to be voted
806,437 shares of its no par value Common Stock (the "Common Stock").
The matters to be considered and voted upon at the Annual Meeting will be:
1. Election of Directors. Election of ten (10) directors to serve until
the next Annual Meeting of Shareholders and until their successors are elected
and qualified. See "PROPOSAL ONE: ELECTION OF DIRECTORS."
2. Approval of Plan of Reorganization and Merger Agreement. A proposal to
approve a Plan of Reorganization and Merger Agreement, dated as of March 12,
2002 (the "Reorganization Agreement"), entered into by the Bank, Pacific State
Bancorp, a newly formed bank holding company ("Bancorp") and PSB Merger
Corporation, a wholly-owned subsidiary of Bancorp (the "Subsidiary"), which
provides for the merger (the "Merger") of the Subsidiary and the Bank, pursuant
to which the Bank will become the wholly-owned subsidiary of Bancorp. See
"PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT."
The directors of Bancorp are the same as the directors of the Bank. All of
these directors of Bancorp have held office since shortly after its
incorporation. They will hold office until the next Annual Meeting of
shareholders of Bancorp or until their successors are duly elected and
qualified. See "PACIFIC STATE BANCORP -- Management of Bancorp."
3. Other Matters. Such other matters as may properly come before the
Annual Meeting and at any and all postponements or adjournments thereof.
This Proxy Statement/Prospectus also constitutes a prospectus of Bancorp
with respect to up to 893,012 shares of Common Stock of Bancorp which will be
issued in connection with the Merger. This number includes 806,437 shares
issuable to holders of the 806,437 shares of Bank Common Stock presently issued
and outstanding and 86,575 shares issuable to the holders of outstanding options
under the Bank's 1987 and 1997 Stock Option Plans. After the Merger, each
outstanding share of Bank Common Stock (including shares acquired by the
exercise of stock options prior to the Effective Date of the Merger) will be
converted into one share of Bancorp Common Stock. See "THE MERGER."
1
THE SHARES OF BANCORP COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE FEDERAL RESERVE BOARD OR BY ANY STATE REGULATOR OF
SECURITIES, NOR HAS THE COMMISSION OR THE FEDERAL RESERVE BOARD OR ANY SUCH
STATE REGULATOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK, BANCORP OR THE SUBSIDIARY.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THE
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE BANK, BANCORP OR THE SUBSIDIARY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
SUCH DATE.
The date of this Proxy Statement/Prospectus is April 15, 2002
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION.............................................................................................. 1
SUMMARY............................................................................................................ 2
The Parties............................................................................................... 2
Meeting Information....................................................................................... 2
The Merger................................................................................................ 3
SELECTED CONDENSED FINANCIAL DATA.................................................................................. 5
MARKET INFORMATION CONCERNING THE BANK'S AND BANCORP'S COMMON STOCK................................................ 6
GENERAL INFORMATION................................................................................................ 6
Annual Report to Shareholders............................................................................. 6
Revocability of Proxies................................................................................... 7
Solicitation of Proxies................................................................................... 7
Voting Securities......................................................................................... 7
PRINCIPAL SHAREHOLDERS............................................................................................. 7
PROPOSAL ONE: ELECTION OF DIRECTORS OF THE BANK.................................................................... 8
Information Concerning Directors.......................................................................... 8
Stock Ownership of Management............................................................................. 9
The Board of Directors and Committees .................................................................... 10
AUDIT COMMITTEE REPORT............................................................................................. 10
COMPENSATION AND CERTAIN TRANSACTIONS.............................................................................. 11
Summary Compensation Table................................................................................ 11
Stock Option Plan......................................................................................... 12
Option Grants, Exercises and Year-End Values for 2001..................................................... 13
Retirement Plan .......................................................................................... 13
Director Compensation..................................................................................... 13
Transactions With Management ............................................................................. 14
Section 16a Beneficial Ownership Reporting Compliance..................................................... 14
PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT.............................................. 14
THE MERGER......................................................................................................... 14
General................................................................................................... 14
Conversion of Options..................................................................................... 15
Recommendation and Reasons................................................................................ 15
Conversion of Shares and Exchange of Certificates......................................................... 16
Required Approvals........................................................................................ 16
i
TABLE OF CONTENTS
(Continued)
Page
----
Conditions and Effective Date; Amendment; Termination..................................................... 16
Federal Income Tax Consequences........................................................................... 17
No Dissenters' Rights..................................................................................... 18
No Insider Interests in the Proposed Transaction.......................................................... 18
Restrictions on Sale of Bank and Bancorp Common Stock by Affiliates....................................... 18
DIVIDENDS.......................................................................................................... 19
The Bank.................................................................................................. 19
Bancorp................................................................................................... 19
CAPITALIZATION..................................................................................................... 19
BOOK VALUE OF BANK'S COMMON STOCK.................................................................................. 20
PACIFIC STATE BANK................................................................................................. 20
General................................................................................................... 20
Recent Acquisition ....................................................................................... 20
Markets and Competition................................................................................... 21
Patents, Trademarks, Etc.................................................................................. 22
Research Activities....................................................................................... 22
Employees................................................................................................. 22
Properties................................................................................................ 22
Legal Proceedings......................................................................................... 23
Management................................................................................................ 23
PACIFIC STATE BANCORP.............................................................................................. 23
General................................................................................................... 23
Management of Bancorp..................................................................................... 23
SUPERVISION AND REGULATION......................................................................................... 24
General................................................................................................... 24
Capital Adequacy.......................................................................................... 25
Prompt Corrective Action.................................................................................. 26
Deposit Insurance Assessments............................................................................. 26
Limitations on Dividends.................................................................................. 26
Impact of Monetary Policies............................................................................... 27
Recent Legislation and Other Changes...................................................................... 27
CAPITAL STOCK OF BANCORP AND THE BANK.............................................................................. 29
INDEMNIFICATION.................................................................................................... 31
Page
----
California Legislation.................................................................................... 31
Directors' and Officers' Liability Insurance.............................................................. 32
Commission Position on Indemnification.................................................................... 32
INDEPENDENT PUBLIC ACCOUNTANTS..................................................................................... 32
SHAREHOLDERS' PROPOSALS............................................................................................ 32
OTHER MATTERS...................................................................................................... 33
APPENDIX A: PLAN OF REORGANIZATION AND MERGER AGREEMENT
AVAILABLE INFORMATION
Bancorp has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-4EF under
the Securities Act of 1933, as amended, with respect to the securities being
offered. This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information, please see the Registration Statement and the exhibits filed with
it. The Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies of the Registration Statement may be
viewed and obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 upon payment of
fees at prescribed rates. Copies also may be viewed and downloaded from the
Internet at the Commission's web site maintained at
http://www.sec.gov/edgar/searchedgar/webusers.htm.
The Bank is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and files reports and other
information with the Federal Reserve Board ("FRB"), 20th Street and Constitution
Avenue, N.W., Washington, D.C. 20551, including proxy statements, annual reports
and quarterly reports. The Bank has designated its Annual Report to Shareholders
as its Annual Disclosure Statement. Copies are available upon request. Copies of
reports and information filed by the Bank with the FRB may be obtained from the
FRB by written request addressed as above.
1
SUMMARY
The following Summary is not complete and is qualified by the full text of
this Proxy Statement/Prospectus. This Proxy Statement/Prospectus includes
forward-looking statements within the meaning of the Exchange Act. These
statements are based on management's beliefs and assumptions and information
currently available. Forward-looking statements include principally the
information concerning the anticipated effect of the Reorganization Agreement on
the Bank and its Shareholders. Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used. The Bank's
actual future results and shareholder values may differ materially from those
anticipated and expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Bank's
ability to control or predict. Shareholders are cautioned not to put undue
reliance on any forward-looking statements.
The Parties
Pacific State Bank (the "Bank") is a California state-chartered bank which
since 1987 has engaged in a general commercial banking business in Stockton,
California, and surrounding areas, primarily San Joaquin county. See "PACIFIC
STATE BANK - General."
Pacific State Bancorp ("Bancorp") was recently incorporated for the
principal purpose of engaging in activities permitted for a bank holding
company. Bancorp has not yet commenced active operations. After the Merger,
Bancorp will act as a holding company for the Bank and will be a legal entity
separate and distinct from the Bank. See "PACIFIC STATE BANCORP."
PSB Merger Corporation (the "Subsidiary") was recently incorporated for
the purpose of facilitating the reorganization of the Bank as a Subsidiary of
Bancorp. The Subsidiary will merge with and into the Bank, at which time it will
cease to exist as a separate entity.
Meeting Information
Date, Time and Place. May 9, 2002, at 4:30 p.m. at the Bank's main office
located at 6 S. El Dorado, Stockton, California.
Purposes. The matters to be considered and voted upon at the Annual
Meeting will be:
1. Election of Directors. Election of ten directors to serve until the
next Annual Meeting of Shareholders of the Bank and until their successors are
elected and qualified.
2. Approval of Plan of Reorganization and Merger Agreement. A proposal to
approve the Plan of Reorganization and Merger Agreement, dated March 12, 2002,
entered into by the Bank, Bancorp and the Subsidiary, which provides for the
merger (the "Merger") of the Subsidiary and the Bank, pursuant to which the Bank
will become the wholly-owned subsidiary of Bancorp.
3. Other Matters. Such other matters as may properly come before the
Annual Meeting and at any and all postponements or adjournments thereof.
Record Date. Only shareholders of record at the close of business on March
18, 2002, will be entitled to vote at the Annual Meeting.
Vote Required/Security Ownership. The affirmative vote at the Annual
Meeting of the holders of at least a majority of the total outstanding shares of
Bank Common Stock is required to approve the Merger. In connection with the
election of directors of the Bank, shareholders are entitled to cumulate their
votes. See "PROPOSAL ONE: ELECTION OF DIRECTORS - Cumulative Voting."
2
The Merger
The Merger. The Reorganization Agreement provides that the Subsidiary will
merge with and into the Bank, so that the Bank will become a wholly-owned
subsidiary of Bancorp. At the effective date (the "Effective Date") of the
Merger, each outstanding share of Bank Common Stock will be converted into, and
may be exchanged for, one share of Bancorp Common Stock. The currently
outstanding options to purchase up to an aggregate of 86,575 shares of the
Bank's Common Stock will be converted into Bancorp options to purchase the same
number of shares of Bancorp Common Stock on the same terms and conditions as
currently are in effect. See "THE MERGER -- Conversion of Options." The Merger
is planned to occur as soon as possible after all necessary conditions,
including shareholder and regulatory approvals, have been obtained.
A copy of the Reorganization Agreement is attached as Appendix A to this
Proxy Statement/Prospectus and is incorporated by this reference. No change in
the management of the Bank will result from the Merger, and the directors and
executive officers of the Bank also will serve as the directors and executive
officers of Bancorp. See "THE MERGER -- Description of Merger."
Recommendations and Reasons. The Bank's Board of Directors has unanimously
approved the Reorganization Agreement and recommends its approval by the
shareholders of the Bank. The Board believes that a bank holding company
structure offers certain advantages in comparison to the Bank's present
corporate structure. These advantages include additional flexibility in
expansion of the Bank's business through the acquisition of other financial
institutions, in the raising of additional capital through borrowing (if
needed), in the ability to repurchase its securities (subject to applicable
regulatory requirements), and flexibility in acquiring or establishing other
businesses related to banking. The Board of Directors does not believe that
there are any significant disadvantages to implementing a holding company
structure for the Bank, and believes that the incremental additional costs, if
any, of operating under such a structure will not be material. See "THE MERGER
- -- Recommendations and Reasons."
Required Regulatory Approvals. The Merger must be approved by the
California Commissioner of Financial Institutions (the "Commissioner"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Board of Governors of
the Federal Reserve System (the "FRB"). Applications for these approvals either
have been filed and are pending or will soon be filed. Bancorp and the Bank
believe that all such approvals will be obtained. See "THE MERGER -- Required
Approvals."
Conditions and Effective Date. In addition to required regulatory
approvals and approval by the Bank's shareholders, the Merger is also subject to
other conditions set forth in the Reorganization Agreement. See "THE MERGER --
Conditions and Effective Date; Amendment; Termination" and Appendix A.
Expenses. The expenses of the Merger are estimated to be approximately
$75,000. These expenses will be apportioned between Bancorp and the Bank in
accordance with applicable laws, regulations and principles of accounting. See
"THE MERGER - Conditions and Effective Date; Amendment; Termination."
Federal Income Tax Consequences. It is intended that the Merger and the
conversion of the outstanding shares of Bank Common Stock into shares of Bancorp
Common Stock qualify as a tax-free reorganization for federal income tax
purposes, with no gain or loss being recognized by the Bank's shareholders whose
shares of Bank Common Stock are converted into and exchanged for shares of
Bancorp Common Stock. The Bank expects to receive an opinion from its
independent public accountants substantially to that effect. See "THE MERGER --
Federal Income Tax Consequences."
No Dissenters' Rights. Shareholders of the Bank will have any dissenters'
rights in connection with the Merger. See "THE MERGER -- No Dissenters' Rights."
Regulation and Supervision. After the Merger, Bancorp will be regulated as
a bank holding company by the FRB and will be subject to its rules and
regulations. See "SUPERVISION AND REGULATION." The Bank will continue to exist
as a California banking corporation subject to regulation by the Commissioner
and the FRB; the Bank's deposits will continue
3
to be insured by the FDIC to the maximum amount permitted by law; and the Bank
will continue to engage in substantially the same business and activities in
which it is presently engaged. See "PACIFIC STATE BANK -- General."
Certain Changes in Shareholders' Rights. Shareholders of the Bank will
become shareholders of Bancorp. There are certain differences under California
law between the rights of shareholders of Bancorp as opposed to the Bank. See
"CAPITAL STOCK OF BANCORP AND THE BANK."
4
SELECTED CONDENSED FINANCIAL DATA
The Selected Condensed Financial Data set forth below for the five years
ended December 31, 2001, have been derived from the Bank's audited financial
statements. The Selected Condensed Financial Data set forth below as of December
31, 1999, 1998, and for 1997, have been derived from the Bank's historical
financial statements not included in this report. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Bank's audited
financial statements and notes thereto, included in the Annual Report to
Shareholders provided with this Proxy Statement/Prospectus.
(Dollars in thousands, except share data) Year Ended December 31,
--------------------------------------------------------------------------------
Statements of Income: 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total Interest Income $ 9,195 $ 9,720 $ 7,586 $ 6,428 $ 5,962
Net Interest Income 5,614 5,735 4,693 4,127 3,437
Provision for Loan Losses 383 300 330 228 225
Total Other Income 1,259 748 1,180 762 648
Net Income 1,036 1,009 743 476 276
Balance Sheets:
Total Assets 121,247 113,809 104,264 81,557 77,612
Total Loans 98,280 83,644 71,853 50,915 45,265
Allowance for Loan Losses
(ALLL) 1,172 1,001 796 568 391
Total Deposits 111,104 104,747 96,586 75,184 71,852
Shareholders' Equity $ 9,378 $ 8,047 $ 6,165 $ 5,783 $ 5,180
Performance Ratios:
Return on Average Assets .87% .92% .80% .64% .40%
Return on Average Equity 12.04% 13.93% 12.02% 8.88% 5.53%
Average Equity to Average
Assets 7.24% 6.57% 6.64% 7.16% 7.14%
Tier 1 Risk-Based Capital 9.15% 9.06% 8.40% 9.10% 8.60%
Total Risk-Based Capital 10.29% 10.20% 9.40% 10.00% 9.30%
Net Interest Margin 5.15% 5.66% 5.57% 6.23% 5.57%
Earning Assets to Total Assets 91.74% 90.80% 90.70% 86.10% 90.00%
Nonperforming Assets to
Total Assets .63% .79% .34% 1.25% .50%
ALLL to Total Loans 1.19% 1.20% 1.10% 1.10% .83%
Nonperforming Loans to ALLL 65.41% 74.33% 7.91% 15.85% 98.97%
Share Data (Common
Shares Outstanding) 759,694 731,299 656,523 643,242 619,540
Book Value Per Share $ 12.34 $ 11.00 $ 9.39 $ 8.99 $ 8.36
Basic Earnings Per Share $ 1.40 $ 1.41 $ 1.14 $ 0.76 $ 0.45
Diluted Earnings Per Share $ 1.32 $ 1.35 $ 1.08 $ 0.69 $ 0.41
5
MARKET INFORMATION CONCERNING
THE BANK'S AND BANCORP'S COMMON STOCK
There is only a limited trading market for the Bank's Common stock, which
is not listed on any exchange. Hoefer & Arnett (San Francisco) is the Bank's
primary market maker. Trading information is available via the World Wide Web
NASDAQ OTC Electronic Bulletin Board, under the symbol PSSF.
The following table, which summarizes trading activity during the Bank's
last two fiscal years, is based on information provided by Yahoo.com Historical
Quotes. The quotations reflect the price that would be received by the seller
without retail mark-up, mark-down or commissions and may not have represented
actual transactions.
Sales Price
------------------------
Quarter Ended: High Low Volume
-------------- ------- ------- ------
March 31, 2001 $10.750 $10.250 7,600
June 30, 2001 $11.000 $10.440 60,300
September 30, 2001 $15.650 $10.850 11,200
December 31, 2001 $15.120 $13.050 28,200
March 31, 2000 $10.000 $ 8.625 19,100
June 30, 2000 $10.500 $ 9.750 54,300
September 30, 2000 $10.625 $10.125 34,700
December 31, 2000 $10.750 $10.250 14,200
As of March 1, 2002, there were approximately 400 holders of record of the
common stock of the Bank.
Bancorp was formed by the Bank for the sole purpose of becoming the Bank's
parent bank holding company. Consequently, there is no established market for
Bancorp Common Stock that will be issued in connection with the Merger. It is
expected that Bancorp Common Stock will be traded in the over-the-counter
Bulletin Board as the Bank Common Stock is now traded. After the Merger, all
shares of Bank Common Stock will be owned by Bancorp, and trading in the Bank's
Common Stock will cease.
GENERAL INFORMATION
Annual Report to Shareholders
The Bank's (1) audited balance sheets as of December 31, 2001 and 2000 and
related audited statements of income, shareholders' equity and cash flows for
each of the three years ended December 31, 2001, prepared in conformity with
generally accepted accounting principles,(2) report of independent public
accountants, (3) management's discussion and analysis of financial condition and
results of operations, and (4) five-year selected financial data are set forth
in the Bank's 2001 Annual Report to Shareholders. A copy of the 2001 Annual
Report to Shareholders is being provided to shareholders along with this Proxy
Statement/Prospectus.
No historical financial information is available for Bancorp since it is a
newly formed California corporation.
6
Revocability of Proxies
Any person giving a proxy in the form accompanying this Proxy
Statement/Prospectus has the power to revoke that proxy prior to its exercise.
The proxy may be revoked prior to the Annual Meeting by delivering to the
Secretary of the Bank either a written instrument revoking the proxy or a duly
executed proxy bearing a later date. The proxy may also be revoked by the
shareholder by attending and voting at the Annual Meeting. The proxy will be
voted as directed by the shareholder giving the proxy and if no directions are
given on the proxy, the proxy will be voted "FOR" the nominees of the Board of
Directors as described in this Proxy Statement/Prospectus, "FOR" approval of the
Plan of Reorganization and Merger, and, at the proxy holders' discretion, on
such other matters, if any, which may come before the meeting (including any
proposal to adjourn the Annual Meeting).
Solicitation of Proxies
The Bank and Bancorp will bear the cost of preparing, assembling, printing
and mailing this Proxy Statement/Prospectus to shareholders. Copies will be
furnished to brokerage houses, fiduciaries and custodians to be forwarded to the
beneficial owners of the Common Stock. In addition to the solicitation of
proxies by use of the mail, some of the officers, directors and regular
employees of the Bank may (without additional compensation) solicit proxies by
telephone or personal interview, the costs of which will be borne by the Bank.
Voting Securities
The Bank is authorized to issue 12,000,000 shares of Common Stock, no par
value, of which 806,437 shares are issued and outstanding as of March 18, 2002
(the "Record Date"). All common shares are voting shares, but only those
shareholders of record as of the Record Date will be entitled to notice of and
to vote at the Annual Meeting and at any and all postponements or adjournments
thereof. The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote at the Annual Meeting will constitute a
quorum for the purpose of transacting business at the Annual Meeting.
Each common share is entitled to one vote at the Annual Meeting, except
with respect to the election of directors. In elections for directors,
California law provides that a shareholder of a California corporation, or the
shareholder's proxy, may cumulate votes. Cumulation of votes means that each
shareholder has a number of votes equal to the number of shares owned by the
shareholder, multiplied by the number of directors to be elected, and a
shareholder may cumulate such votes for a single candidate or distribute such
votes among as many candidates as the shareholder deems appropriate. However, a
shareholder may cumulate votes only for a candidate or candidates whose names
have been placed in nomination prior to the voting, and only if the shareholder
has given notice at the Annual Meeting, prior to the voting, of the
shareholder's intention to cumulate votes. If any one shareholder has given such
notice, all shareholders may cumulate their votes for the candidates in
nomination. Prior to voting, an opportunity will be given for shareholders or
their proxies at the Annual Meeting to announce their intention to cumulate
their votes. The proxy holders are given discretionary authority to cumulate
votes represented by shares for which they are named in the proxy.
In an election of directors, California law provides that the nominees
receiving the highest number of affirmative votes of the shares entitled to vote
for them up to the number of directors to be elected by such shares are elected;
votes against the director and votes withheld shall have no effect.
PRINCIPAL SHAREHOLDERS
Management of the Bank knows of no person who owned, as of the Record
Date, beneficially or of record, either individually or together with
associates, five percent (5%) or more of the outstanding shares of the Common
Stock of the Bank, except as set forth in the table below.
7
=========================================================================================================
Amount and Nature of Beneficial
Name and Address Ownership(1) Percentage of Ownership
- ---------------------------------------------------------------------------------------------------------
Maxwell M. Freeman
1818 Grand Canal Boulevard
Stockton, CA 95207 76,500 (0) 9.49%
- ---------------------------------------------------------------------------------------------------------
Hot Creek Capital, L.L.C.
144 Summit Ridge Way
Gardnerville, Nevada 89410-3178 72,398 8.98%
- ---------------------------------------------------------------------------------------------------------
Harold Hand, M.D.
36 W. Yokuts, Suite 2
Stockton, CA 95207 65,932 (2,576) 8.18%
- ---------------------------------------------------------------------------------------------------------
Steven A. Rosso
1889 W. March Lane
Stockton, CA 95207 45,858 (20,910) 5.69%
=========================================================================================================
(1) The first number in this column indicates the total number of shares
beneficially owned, including (as specified by the number in parenthesis) the
numbers of shares which could be acquired by options exercisable within 60 days
of the Record Date.
PROPOSAL ONE:
ELECTION OF DIRECTORS OF THE BANK
The Bylaws of the Bank provide that the number of directors of the Bank
shall be fixed within the range of nine and seventeen. The exact number of
directors is set at ten (10) until changed by resolution of the Board of
Directors or Bylaw amendment duly adopted by the Bank's shareholders or the
Board of Directors.
Information Concerning Directors
The table below sets forth information concerning the persons nominated by
the Board of Directors for election as directors of the Bank. The persons named,
all of whom are currently members of the Board of Directors, will be nominated
for election as directors at the Meeting to serve until the 2003 annual meeting
of shareholders and until their successors are elected and have qualified.
Unless otherwise directed, votes will be cast by the proxy holders in such a way
to effect, if possible, the election of the ten nominees named herein. The ten
nominees receiving the most votes will be elected directors. In the event that
any nominee should be unable to serve as a director, it is intended that the
proxy will be voted for the election of such substitute nominee, if any, as
shall be designated by the Board of Directors. The Board of Directors has no
reason to believe that any of the nominees named below will be unable to serve
if elected. Additional nominations for director may only be made by complying
with the nomination procedures that are included in the Notice of Annual Meeting
of Shareholders accompanying this Proxy Statement/Prospectus.
8
====================================================================================================================
Director
Name and Title Age Since Principal Occupation
- --------------------------------------------------------------------------------------------------------------------
Michael L. Dalton, C.P.A. 55 1987 Certified Public Accountant, Certified Financial
Planner and Registered Investment Adviser.
- --------------------------------------------------------------------------------------------------------------------
Maxwell M. Freeman 64 2000 Attorney - Freeman, D'Aiuto, Pierce & Gurev,
Stockton, California
- --------------------------------------------------------------------------------------------------------------------
Harold Hand, M.D. 64 1987 Physician practicing ophthalmology. Owner and
operator of the Stockton Eye Surgery Center.
Staff member of Dameron Hospital and St. Joseph's
Hospital of Stockton.
- --------------------------------------------------------------------------------------------------------------------
Patricia A. Hatton, M.D 52 1988 Physician practicing obstetrics and gynecology.
- --------------------------------------------------------------------------------------------------------------------
Steven J. Kikuchi 44 1987 Registered landscape architect, contractor and
certified nurseryman.
- --------------------------------------------------------------------------------------------------------------------
Yoshikazu Mataga 59 1987 Owner and operator of Tracy Pontiac-Cadillac and
GMC Truck and Stockton Cadillac-Oldsmobile and
GMC dealerships.
- --------------------------------------------------------------------------------------------------------------------
Steven A. Rosso 47 1990 President and Chief Executive Officer of the Bank.
- --------------------------------------------------------------------------------------------------------------------
Gary A. Stewart 52 1998 Executive Vice President and Chief Credit Officer
of the Bank
- --------------------------------------------------------------------------------------------------------------------
Kathleen M. Verner 59 1988 Co-owner and Vice President of Verner
Construction Company (residential and commercial
development firm).
- --------------------------------------------------------------------------------------------------------------------
Philip B. Wallace 84 1987 Chairman of Western Empire Management Company.
====================================================================================================================
Stock Ownership of Management
The table on the following page sets forth, as of the Record Date, the
number and percentage of shares of Common Stock beneficially owned, directly or
indirectly, by each of the Bank's directors and nominees and by the directors
and principal officers of the Bank as a group. The table does not include 26,723
shares held beneficially by Bank officers as administrators of the Pacific State
Bank Retirement Plus 3 401(k) Plan.
9
=================================================================================================================
Percent of
Beneficial Owner Amount and Nature of Beneficial Ownership(1) Class
- -----------------------------------------------------------------------------------------------------------------
Michael L. Dalton 23,911 (6,289) 480 2.97%
- -----------------------------------------------------------------------------------------------------------------
Maxwell M. Freeman 76,500 -- 9.49%
- -----------------------------------------------------------------------------------------------------------------
Harold Hand, M.D. 65,932 (2,756) 4,920 8.18%
- -----------------------------------------------------------------------------------------------------------------
Patricia A. Hatton, M.D. 33,380 3,000 4.14%
- -----------------------------------------------------------------------------------------------------------------
Steven J. Kikuchi 19,847 (4,000) -- 2.46%
- -----------------------------------------------------------------------------------------------------------------
Yoshikazu Mataga 24,317 14,531 3.02%
- -----------------------------------------------------------------------------------------------------------------
Steven A. Rosso 45,858 (20,910) 1,295 5.69%
- -----------------------------------------------------------------------------------------------------------------
Gary A. Stewart 15,528 (9,200) -- 1.93%
- -----------------------------------------------------------------------------------------------------------------
Kathleen M. Verner 34,510 -- 4.28%
- -----------------------------------------------------------------------------------------------------------------
Philip B. Wallace 36,368 (3,500) -- 4.51%
- -----------------------------------------------------------------------------------------------------------------
All directors, nominees and
principal officers as a group
(11 in all) (2) 376,151 (48,655) 46.64%
=================================================================================================================
(1) The first number in the first subcolumn indicates the total number of shares
beneficially owned, including (as specified by the number in the parenthesis)
the number of shares that could be acquired pursuant to stock options
exercisable within 60 days of the Record Date. Numbers in the second subcolumn
indicate the number of shares (out of the total number of shares beneficially
owned) as to which the person or group shares voting and/or investment power.
(2) Principal officers included are the President and Chief Executive Officer,
Executive Vice President and Chief Credit Officer, and Executive Vice President,
Chief Operating Officer and Chief Financial Officer.
The Board of Directors and Committees
The Bank's Board of Directors held 13 meetings during 2001. In addition to
meeting as a group to review the Bank's business, members of the board of
directors served on certain standing committees. During 2001, no nominee for
director of the Bank attended less than 75% of the aggregate of the number of
meetings held by the board of directors and of all committee meetings on which
he or she served.
The Nominating Committee held one meeting during 2001. The Committee
consists of the entire Board of Directors. The Nominating Committee is
responsible for nominating persons to be directors of the Bank.
The Personnel Committee held two meetings during 2001. Its members include
Dr. Harold Hand, Michael L. Dalton, Steven Kikuchi, Steven A. Rosso and Kathleen
M. Verner. The Personnel Committee is responsible for determining and/or
recommending to the Board the compensation of officers of the Bank.
AUDIT COMMITTEE REPORT
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE BANK'S
PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE THIS PROXY STATEMENT OR FUTURE
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM, IN WHOLE OR IN PART, THE FOLLOWING REPORT SHALL NOT
BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILING.
The Audit Committee held six meetings during 2001. The Audit Committee
consists of the following members of the Bank's Board of Directors: Michael A.
Dalton, Chairman, Dr. Harold Hand, Steven Kikuchi and
10
Yoshikazu Mataga. Each of the members of the Committee is independent as defined
under the National Association of Securities Dealers' listing standards, and
each member of the committee is free of any relationship that, in the opinion of
the Board of Directors, would interfere with his individual exercise of
independent judgment. The Board has not adopted a written charter to govern the
Committee's operations.
The Committee's responsibilities include providing advice with respect to
the Bank's financial matters and assisting the Board of Directors in discharging
its responsibilities regarding corporate accounting. The Committee's primary
responsibilities are to: (1) serve as an independent and objective party to
monitor the Bank's financial reporting process and internal control system; (2)
review and evaluate the audit efforts of the Bank's independent accountants and
internal auditor; (3) evaluate the Bank's quarterly financial performance as
well as its compliance with laws and regulations; (4) oversee management's
establishment and enforcement of financial policies and business practices; and
(5) facilitate communication among the independent accountants, financial and
senior management, counsel, the internal auditor and the Board of Directors.
The Committee has reviewed and discussed the audited financial statements
of the Bank for the fiscal year ended December 31, 2000 with the Bank's
management. The Committee has discussed with Perry-Smith LLP, the Bank's
independent public accountants, the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Committee has also received the written disclosures and the letter from
Perry-Smith LLP required by Independence Standards Board Standard No. 1
(Independence Discussion with Audit Committees) and the Committee has discussed
the independence of Perry-Smith LLP with that firm.
Based on the Committee's review and discussions noted above, the Committee
recommended to the Board of Directors that the Bank's audited financial
statements be included in the Bank's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 for filing with the Board of Governors.
The aggregate fees billed by Perry-Smith LLP ("Perry-Smith") for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal year ended December 31, 2001 and for the reviews of
the financial statements included in the Company's Quarterly Reports on Form
10-Q for that fiscal year were $67,500.
Perry-Smith did not render any professional services for information
technology services relating to financial information systems design and
implementation for the fiscal year ended December 31, 2001.
The aggregate fees billed by Perry-Smith for services rendered to the
Company, other than the audit services described above, for the fiscal year
ended December 31, 2001 were $ 12,700.
The audit committee has considered whether the provision of non-audit
services is compatible with maintaining the principal accountant's independence.
Submitted by:
Michael A. Dalton, Chairman
Dr. Harold Hand
Steven Kikuchi
Yoshikazu Mataga
COMPENSATION AND CERTAIN TRANSACTIONS
Summary Compensation Table
The following table provides information concerning compensation of the
chief executive officer, the only officer of the Bank who received, during any
of the periods indicated, annual salary and bonus exceeding $100,000.
11
======================================================================================================================
Annual Compensation
--------------------------- Other Annual All Other
Year Salary Bonus Compensation Compensation(2)
---- -------- ------- ------------ ---------------
Steven A. Rosso 2001 $142,667 $16,000 (1) $9,439
2000 $135,462 $ 8,000 (1) $4,166
1999 $127,750 -0- (1) $3,720
======================================================================================================================
======================================================================================================================
Annual Compensation
--------------------------- Other Annual All Other
Year Salary Bonus Compensation Compensation(2)
---- -------- ------- ------------ ---------------
Gary A. Stewart 2001 $106,527 $10,000 (1) $7,333
2000 $ 96,895 $ 5,000 (1) $5,917
1999 $ 85,429 -0- (1) $4,156
======================================================================================================================
======================================================================================================================
Annual Compensation
--------------------------- Other Annual All Other
Year Salary Bonus Compensation Compensation(2)
---- -------- ------- ------------ ---------------
Carmela D. 2001 $109,441 $10,000 (1) $7,200
Johnson(3) 2000 $ 72,913 $ -0- (1) $3,300
1999 -0- -0- -0- -0-
======================================================================================================================
(1) Includes calculated value of personal use of bank automobile and personal
benefit derived from club memberships. The total dollar value of such benefits
to Mr. Rosso did not exceed ten percent of the reported annual salary in any one
year.
(2) Includes matching contributions to the Bank's Retirement Plan.
(3) Carmela Johnson joined Pacific State Bank on March 15, 2000
Mr. Rosso currently serves under an employment agreement dated October 26,
1999, at an annual salary of $129,000 (plus a minimum of $5,000 which must be
deferred), for a term extending through September 1, 2005. The agreement also
provides for five weeks annual vacation (non-use of which may not be carried
over), use of a Bank automobile, and payment by the Bank of various service and
social club memberships. Mr. Rosso's employment may be terminated at will by the
Bank, in which case he is entitled to severance pay equal to one year's annual
salary, continuation of all health and welfare benefits for a period of one year
following termination, and distribution of all deferred salary items within six
months of termination. The agreement provides for payments in the event of
disability and for the payment of incentive compensation as determined in the
discretion of the Board of Directors. In the event of a change of control of the
Bank in which the Bank is not the surviving corporation, and provided Mr. Rosso
does not assume the post of president and chief executive office of the new or
reorganized entity, the employment agreement terminates, Mr. Rosso's outstanding
options to purchase shares of common stock of the Bank become fully exercisable,
and Mr. Rosso is entitled to be paid one year's salary upon the closing of the
sale or transfer of control of the Bank. Also in the event of a sale of control
of the Bank, the Bank is required by the agreement to create a pool equal to
five percent of the total sale price of the Bank in excess of book value and
consisting of cash or stock of the acquiring entity, to be distributed among the
Bank's senior management with not less than 60% of the pool to be distributed to
Mr. Rosso. Disputes under the agreement are required to be arbitrated under the
California Arbitration Act, with the cost of arbitration to be apportioned as
the arbitrators shall decide.
Stock Option Plan
As of the Record Date, options for a total of 86,575 shares (including
director options for 23,617 shares and employee options for 62,958 shares)
remain outstanding and exercisable by officers and directors of the Bank under
12
the Bank's 1987 and 1997 Stock Option Plans (the "1987 Plan" and the "1997
Plan"). No grants of options under the 1987 Plan have been permitted, since
adoption of the Bank's 1997 Plan. Currently the 1997 Plan permits the granting
of options for a total number of 266,343 shares (including the options
outstanding under the 1987 Plan and less options which have been exercised under
either plan since the 1997 Plan became effective). Please see the table below
for information concerning options held as of December 31, 2001, or exercised
during 2001 by the executive officer's named in the Summary Compensation Table
above. One officer listed in the table, Carmela D. Johnson was granted an option
for 2,500 shares in 2001; the option expires 2011 and is exercisable at $10.00
per share. The total present value of the option as of the date of grant,
assuming that the market price of the underlying stock appreciates in value from
the date of grant to the expiration of the option at an annualized rate of 5%,
was $11,250.
Option Exercises and Year-End Values for 2001
The following table sets forth, with respect to the executive officer
named in the Summary Compensation Table above, the estimated value of options
exercised during 2001 and the estimated 2001 year-end value of all unexercised
in-the-money options held by such executive officer.
==========================================================================================================================
Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Shares Options (FY-End) Options (FY-End)
Acquired on Value --------------------------- ---------------------------
Name Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ------------------ ----------- -------- --------------------------- ---------------------------
Steven A. Rosso -0- N/A 20,910 / -0- $272,754
Gary A. Stewart 4,000 $34,7001(1) 9,200 / 6,300 $93,215 / $51,360
Carmela D. Johnson -0- N/A 2,000 / 8,000 $17,200 / $55,350
==========================================================================================================================
(1) Represents the difference between the market value and the exercise price of
the shares acquired by exercise.
Retirement Plan
The Pacific State Bank Retirement Plus 3 401(k) Plan (the "Retirement
Plan") is a qualified plan under the Internal Revenue Code which provides
profit-sharing benefits to eligible Bank employees at least 21 years of age with
not less than one year of service with the Bank. Participating employees may
elect to defer up to 15% of salary each pay period as a contribution to the
Retirement Plan, and may make voluntary non-deductible contributions in amounts
not to exceed 10% of the employee's aggregate compensation since the employee's
date of entry into the Retirement Plan. Federal law limits the amounts which can
be contributed annually by individual participants; the Bank is required by the
Retirement Plan to make matching contributions equal to one-half of employee
deferrals up to the first 6% of such deferrals, and in addition may declare
year-end bonus and certain other discretionary contributions to all eligible
participants. During 2001, the Bank's contributions to the Retirement Plan
totaled approximately $32,266. Bank contributions pursuant to the Retirement
Plan in 2001 for the benefit of the named individual executive officer of the
Bank are included in the Summary Compensation Table above.
Director Compensation
Members of the Board of Directors of the Bank accrued attendance fees of
$500 per Board meeting and $200 per committee meeting attended during 2001. A
total of $57,500 in directors' fees was paid during 2001. The Bank's current
practice is to pay directors' fees during the quarter following the quarter for
which they are accrued.
13
Transactions with Management
Some of the directors and officers of the Bank and the companies with
which those directors and officers are associated are customers of, and have had
banking transactions with, the Bank in the ordinary course of the Bank's
business, and the Bank expects to have banking transactions with such persons in
the future. In the opinion of the Bank's management, all loans and commitments
to lend in such transactions were made in compliance with applicable laws and on
substantially the same terms, including interest rates and collateral, as those
prevailing for comparable transactions with other persons of similar
creditworthiness and did not involve more than a normal risk of collectibility
or present other unfavorable features.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Bank's
directors, executive officers and ten percent or more shareholders of the Bank's
equity securities, to file with the Board of Governors of the Federal Reserve
System reports of ownership and reports of changes of ownership of the Bank's
equity securities. Officers, directors and ten percent or more shareholders are
required by regulation to furnish the Bank with copies of all Section 16(a)
forms they file. To the Bank's knowledge, based solely on review of the copies
of such reports furnished to the Bank and written representations that no other
reports were required, during the fiscal year ended December 31, 2001, all
Section 16(a) filing requirements applicable to the Bank's directors, executive
officers, and beneficial owners of 10% or more of the Bank's equity securities
appear to have been met.
PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION
AND MERGER AGREEMENT
THE MERGER
General
Shareholders of the Bank are being asked to consider and vote upon a
proposal to approve a Plan of Reorganization and Merger Agreement, dated as of
March 12, 2002 (the "Reorganization Agreement"), pursuant to which the business
of the Bank will be conducted as a wholly-owned subsidiary of Pacific State
Bancorp ("Bancorp"). Bancorp is a California corporation formed by the Bank and
at the direction of the Bank's Board of Directors for the specific purpose of
becoming the bank holding company for the Bank. The Bank also formed PSB Merger
Corporation (the "Subsidiary") as a California corporation. Bancorp owns all of
the issued and outstanding shares of capital stock of the Subsidiary. Assuming
all requisite approvals are obtained and certain other conditions are satisfied
or waived, upon consummation of the Merger, the Subsidiary will be merged with
and into the Bank, all outstanding shares of Bank Common Stock held by the
Bank's shareholders will be converted into and exchanged for shares of Bancorp
Common Stock on a share-for-share basis, the Bank's shareholders will become the
shareholders of Bancorp, and Bancorp will become the sole shareholder and parent
holding company of the Bank.
Following the Merger,: (i) the Bank will continue to exist as a California
banking corporation and to be regulated by the Commissioner of Financial
Institutions (the "Commissioner") and the Board of Governors of the Federal
Reserve System (the "FRB"), (ii) the Bank's deposits will continue to be insured
by the Federal Deposit Insurance Corporation ("FDIC") to the maximum amount
permitted by law; (iii) the Bank will continue to be managed by its current
Board of Directors and management; and (iv) the Bank will continue to engage in
substantially the same business and activities in which it is presently engaged
at all of its presently established branch offices. See "PACIFIC STATE BANK --
General."
The Board of Directors of the Bank has unanimously approved the proposed
Merger and recommends that the shareholders vote "For" the proposal.
14
The terms of the Merger are set forth in the Reorganization Agreement, a
copy of which is attached as Appendix A.
Conversion of Options
There currently are outstanding under the Bank's 1987 and 1997 Plans
options to purchase an aggregate of 86,575 shares of the Bank's authorized but
unissued Common Stock at prices ranging between $4.00 and $14.90 per share which
expire between the years 2003 and 2012. In accordance with the terms of the
Reorganization Agreement, upon consummation of the Merger, the 1997 Plan will be
administered in an appropriate manner to reflect the Merger and any outstanding
options to purchase shares of Common Stock of the Bank will be converted into
options to purchase the same numbers of shares of Bancorp Common Stock on the
same terms and conditions as currently are in effect.
Recommendation and Reasons
In the opinion of the Bank's Board of Directors, a bank holding company
structure will provide the Bank with certain advantages in comparison to the
Bank's present corporate structure. These advantages include additional
flexibility in expansion of the Bank's business through the acquisition of other
financial institutions, in the raising of additional capital through borrowing
(if needed), subject to applicable regulatory requirements, the ability to
repurchase its securities, and flexibility in acquiring or establishing other
businesses related to banking.
Recent legislation, economic conditions and actions by financial
institution regulators have combined to result in a period of consolidation in
the bank and thrift industry, and the Board of Directors believes the Bank may
have opportunities to expand its business and geographic markets through the
acquisition of other financial institutions or of branch offices of other
institutions. A bank holding company form of organization will provide the Bank
with the greatest amount of flexibility in responding quickly to expansion
opportunities. For instance, the Bank is not permitted to own a separate bank or
thrift institution. In a holding company structure, on the other hand, a
financial institution could be acquired and operated as a separate entity if it
was desirable to do so. While the Bank and Bancorp might in the future consider
making acquisitions, neither the Bank nor Bancorp is presently conducting
discussions with any potential candidate for acquisition.
A bank holding company structure may provide more alternatives in the
raising of funds required by the Bank, or other subsidiaries of the holding
company, particularly under changing conditions in financial and monetary
markets. Indeed, if a subsidiary of the holding company required additional
capital, the holding company might raise that capital by relying on its own
borrowing capacity reflecting all of its subsidiaries, thereby eliminating the
need to sell additional equity capital. While there currently are no plans for
Bancorp to borrow funds for the use of or to contribute to the capital of the
Bank (nor is the Bank presently in need of additional capital funds to meet the
capital adequacy requirements of federal and state regulatory authorities),
management believes that the added borrowing flexibility provided by a holding
company structure is desirable. There can be no assurance, however, as to the
method or type of financing arrangements that will be available to Bancorp if
the Reorganization Agreement is approved.
The Bank may not repurchase shares of its own capital stock except after
application and receipt of specific approval by the Commissioner and the FRB.
Consequently, if situations arose where the Board of Directors considered a
repurchase of shares to be in the Bank's best interests, the Bank's ability to
respond would be subject to such conditions. Assuming that the Bank continues to
be well-capitalized, however (see "SUPERVISION AND REGULATION - Capital
Standards" below), Bancorp under current regulations of the FRB would probably
qualify to repurchase its shares without FRB or other regulatory approval,
provided that Bancorp's capital exceeds the standards for a "well-capitalized"
bank both before and after any such repurchases, its FRB examination results in
a rating of "1" or "2," and there are no unresolved supervisory issues with
respect to Bancorp.
A holding company structure also will provide flexibility in engaging in
other financial services activities through newly formed subsidiaries or through
the acquisition of existing companies. Bancorp does not expect to engage in any
activities other than the operation of the Bank in the reasonably foreseeable
future. Under a holding company structure, however, Bancorp will be positioned
to do so (subject to required regulatory approvals) in the event that, in
15
the future, such a course of action would be considered to be in Bancorp's best
interests. See "SUPERVISION AND REGULATION."
Conversion of Shares and Exchange of Certificates
Upon consummation of the Merger, the shares of Common Stock of the
respective corporate parties to the Reorganization Agreement shall be converted
as follows:
(i) Each share of Bank Common Stock held of record by the Bank's
shareholders automatically will be converted into one share of Bancorp Common
Stock (such Bancorp Common Stock having the equivalent number of votes per share
as the shares of Bank Common Stock being surrendered). Thereafter, the Bank's
shareholders will be entitled to receive, upon the surrender by them to Bancorp
of all certificates representing shares of Bank Common Stock held by them on the
Effective Date ("Old Certificates"), a certificate or certificates representing
the number of shares of Bancorp Common Stock to which they are entitled; and,
until so surrendered, each Old Certificate will be deemed for all corporate
purposes to evidence the ownership of the same number of shares of Bancorp
Common Stock. Shareholders whose Old Certificates have been lost or are missing
may be required to make certain special arrangements in order to receive their
certificates representing Bancorp Common Stock, including the furnishing to
Bancorp or its stock transfer agent of certain affidavits and/or a bond or other
form of indemnification.
(ii) The Subsidiary will disappear, the shares of the Subsidiary's Common
Stock outstanding immediately prior to the Effective Date of the Merger will be
converted into shares of the Bank, and all the outstanding shares of Bank Common
Stock will then be owned by Bancorp.
(iii) The shares of Bancorp Common Stock outstanding immediately prior to
the Effective Date of the Merger will be repurchased by Bancorp for the amount
paid for such shares. Such shares upon repurchase will be canceled.
Required Approvals
The affirmative vote at the Annual Meeting of the holders of at least a
majority of the total outstanding shares of Bank Common Stock is required to
approve the Merger. All proxies will be voted for the proposal to approve the
Merger, unless a vote against the Merger or an abstention is noted. Abstentions
will be counted for purposes of determining the number of shares entitled to
vote on the proposal and will have the effect of a vote against the proposal.
Broker non-votes (shares held by brokers or nominees which are present in person
or represented by proxy at the meeting but as to which voting instructions have
not been received from the beneficial owners or persons entitled to vote such
shares and the broker or nominee does not have discretionary voting power under
applicable New York Stock Exchange rules or other rules applicable to brokers)
with respect to Proposal Two will be counted to determine the presence or
absence of a quorum, and will also have the effect of a vote against the
proposal.
In addition, the Merger is subject to the approval of the Commissioner,
the FDIC and the FRB. Applications for all such required regulatory approvals
either have been filed and currently are pending or will soon be filed. Although
no assurances are or can be given, Bancorp and the Bank have no reason to
believe that such regulatory approvals will not be obtained.
After final regulatory approvals are received, a thirty-day waiting period
is required prior to consummation of the Merger to allow the United States
Department of Justice to review the transaction for antitrust considerations.
Receipt and continued effectiveness of all necessary regulatory approvals are
conditions of the Merger.
Conditions and Effective Date; Amendment; Termination
The Merger is subject to various conditions described in the
Reorganization Agreement, including, without limitation: (i) approval of the
Reorganization Agreement and the Merger by the shareholders of the Bank; (ii)
receipt of required regulatory approvals; and (iii) receipt (unless waived by
the Bank, Bancorp and the Subsidiary) of the
16
favorable opinion of the Bank's independent certified public accountants or
legal counsel with respect to Federal income tax consequences of the Merger.
Subject to the fulfillment of all conditions described in the Reorganization
Agreement, the Merger will become effective on the date on which the
Reorganization Agreement is filed with the Secretary of State of the State of
California.
The Reorganization Agreement may be amended, modified or supplemented by
the Bank and Bancorp at any time prior to consummation of the Merger, and
whether before or after approval by the Bank's shareholders. Following approval
of the Reorganization Agreement by the Bank's shareholders, however, no such
amendment may change the ratio of conversion of Bank Common Stock into Bancorp
Common Stock without shareholder approval of such change.
The Reorganization Agreement may be terminated, whether before or after
shareholder approval, upon the mutual consent of the Bank and Bancorp, or by
either the Bank or Bancorp if, among other things: (i) any suit or proceeding is
instituted or threatened in which it is sought to restrain or prohibit the
Merger; (ii) the Merger is not approved by the Bank's shareholders at the Annual
Meeting; or (iii) either party determines that consummation of the Merger is not
in the best interests of the Bank or its shareholders.
The expenses of the Merger are estimated to be approximately $75,000. Such
expenses will be apportioned and adjusted between the Bank and Bancorp as
required by applicable law, regulation or rules of accounting. Bancorp currently
pays its expenses out of the proceeds of a loan made by a correspondent bank
which is personally guaranteed by directors of the Bank. Some or all of the
funds used by Bancorp to repay this loan will be paid from dividends received by
Bancorp from the Bank in the future.
Federal Income Tax Consequences
The following discussion summarizes certain of the federal income tax
consequences of the Merger pursuant to the Internal Revenue Code ("Code"), as
set forth in a tax opinion that Bancorp and the Bank expect to obtain from their
independent public accountants, and is included for general information only.
The following discussion assumes that shares of Bank Common Stock
converted into shares of Bancorp Common Stock pursuant to the Merger will not be
subject to any liability at the time they are so converted and that no
liabilities of any shareholder of the Bank will be assumed by the Bank in
connection with the Merger. The discussion does not cover the consequences of
the Merger under state, local or other tax laws, or special tax consequences to
particular shareholders having special situations. In addition, the Internal
Revenue Service is not being asked to provide a Tax Ruling as to the federal
income tax consequences of the Merger, and is not obligated to accept the
position set forth herein in the event that the matter were placed at issue.
Accordingly, shareholders are urged to consult with their own tax advisors
regarding the effect of the Merger on them personally. Also, this discussion
does not cover the tax consequences of the conversion of the outstanding options
to purchase shares of Bank Common Stock into Bancorp options. Holders of the
Bank's outstanding options should consult with their own tax advisors regarding
the effect of the Merger and conversion.
Subject to the foregoing assumptions, and based on certain representations
made by the Bank and Bancorp, Bancorp and the Bank are advised that, for federal
income tax purposes:
(a) The Merger of the Subsidiary into the Bank and the issuance of Bancorp
Common Stock in connection with the Merger will constitute a tax-free
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code;
(b) No gain or loss will be recognized by the holders of Bank Common Stock
upon the conversion of such stock into shares of Bancorp Common Stock in
connection with the Merger;
(c) The tax basis of Bancorp Common Stock received by the shareholders of
the Bank pursuant to the Merger will be the same as the tax basis of the shares
of Bank Common Stock converted; and
17
(d) The holding period of the shares of Bancorp Common Stock received by
the shareholders of the Bank will include the holding period of the shares of
Bank Common Stock converted into such Bancorp shares, provided that Bank Common
Stock is held by the shareholder as a capital asset on the date of consummation
of the Merger.
Shareholders are advised to consult their own tax advisers in order to
make a personal evaluation of the federal income tax consequences, and any state
or local tax consequences, of the Merger.
No Dissenters' Rights
Under the laws of California, no shareholder of the Bank will have any
dissenter's rights in connection with the Merger. The dissenter's rights of
shareholders of the Bank and Bancorp are identical under California law.
No Insider Interests in the Proposed Transaction
No consideration, monetary or otherwise, has been given or offered to any
shareholder, officer, or director, or any member of their immediate families, of
the Bank, the Subsidiary or Bancorp in connection with the Merger. The directors
and executive officers of the Bank are also the directors and executive officers
of Bancorp.
Restrictions on Sale of Bank and Bancorp Common Stock
The shares of Bancorp Common Stock proposed to be issued to the Bank's
shareholders in the Merger have been registered under the Securities Act of
1933, as amended (the "1933 Act"). However, certain restrictions will apply to
the resale of shares issued to certain persons. Under Federal securities laws,
any person who is an "affiliate" of the Bank at the time the Merger is submitted
to a vote of the Bank's shareholders may not resell or transfer shares of
Bancorp Common Stock received by him or her during a period of three years
following the date of consummation of the Merger unless: (i) such person's offer
and sale of those shares has been registered under the 1933 Act; (ii) such
person's offer and resale is made in compliance with Rule 145 promulgated under
the 1933 Act (which permits limited sales under certain circumstances); or (iii)
another exemption from registration is available.
Persons who are considered "affiliates" of Bancorp following the Merger
also will be subject to certain restrictions on sales by them of any shares of
Bancorp Common Stock. Any such sale by a Bancorp affiliate will require: (i) the
registration under the 1933 Act of the shares to be sold; (ii) compliance with
Rule 144 promulgated under the 1933 Act (which permits limited sales under
certain circumstances); or (iii) the availability of another exemption from
registration.
An "affiliate" of the Bank or Bancorp, as defined by the rules promulgated
pursuant to the 1933 Act, is a person who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control with
the Bank or Bancorp. The above restrictions are expected to apply to the
directors and executive officers of the Bank and Bancorp (and to any relative or
spouse of any such person or any relative of any such spouse, any of whom live
in the same home as such person, and any trusts, estates, corporations or other
entities in which such persons have a 10% or greater beneficial or equity
interest), and may apply to any current shareholder of the Bank (or, following
the Merger, any shareholder of Bancorp) that owns an amount of stock sufficient
to be considered to "control" the Bank or Bancorp or that otherwise is an
"affiliate" of the Bank or Bancorp. Stock transfer instructions will be given by
Bancorp to its stock transfer agent with respect to Bancorp Common Stock to be
received by persons deemed by Bancorp to be subject to these restrictions, and
the certificates for such stock may be appropriately legended. However,
individual shareholders should consult with their own counsel regarding the
application of the above restrictions to their Bancorp Common Stock.
This Proxy Statement/Prospectus does not apply to any resales of Bancorp
Common Stock received by any person in connection with the Merger, and no person
is authorized to make use of this Proxy Statement/Prospectus in connection with
any such resale. SHAREHOLDERS SHOULD CONSULT LOCAL SECURITIES PROFESSIONALS WITH
REGARD TO THE RESALE OF SHARES OF BANCORP COMMON STOCK WHICH THEY RECEIVE IN THE
MERGER AND ANY CONDITIONS OR PROCEDURES WHICH MAY APPLY.
18
DIVIDENDS
The Bank
Holders of Bank Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "SUPERVISION AND REGULATION -- Limitations on
Dividends." No cash or stock dividends have been paid by the Bank. Whether or
not dividends will be paid in the future will be determined by the Board of
Directors after consideration of various factors. The Bank's profitability and
regulatory capital ratios in addition to other financial conditions will be key
factors considered by the Board of Directors in making such determinations
regarding the payment of dividends by the Bank. In any event, after the Merger,
any dividends paid by the Bank will be paid to Bancorp.
Bancorp
Holders of Bancorp Common Stock will be entitled to receive such dividends
as may be declared by the Board of Directors of Bancorp out of funds legally
available therefor. See "SUPERVISION AND REGULATION -- Limitations on
Dividends." While Bancorp will not be subject to certain restrictions on
dividends and stock redemptions and repurchases applicable to the Bank, the
ability of Bancorp to pay dividends to the holders of its stock will depend to a
large extent upon the amount of dividends paid by the Bank to Bancorp. The
ability of the Bank to pay dividends in the future will depend upon the earnings
and financial condition of the Bank. As a newly organized corporation, Bancorp
has no dividend policy.
CAPITALIZATION
Set forth below is the capitalization of the Bank at December 31, 2001,
the capitalization of Bancorp and the Subsidiary immediately prior to the Merger
and the pro forma capitalization of Bancorp after giving effect to the Merger,
assuming that no stock options are exercised prior to the Merger. The
presentation of this information is unaudited.
- -------------------------------------------------------------------------------------------------------------
Pro Forma
Bank Subsidiary (1) Bancorp (2) (Bancorp)(3)
- -------------------------------------------------------------------------------------------------------------
Common Stock $6,192,138 $1,000 $1,000 $6,193,138
Retained Earnings $3,241,458 -0- -0- $3,241,458
Accumulated other comprehensive
loss (4) ($55,707) -- -- --
Total $9,377,939 1,000 1,000 $9,378,939
Common Stock:
Authorized 12,000,000 12,000,000 12,000,000 12,000,000
Outstanding 806,437 100 100 806,437
- -------------------------------------------------------------------------------------------------------------
(1) Funds to capitalize the Subsidiary were obtained by issuing 100 shares of
its Common Stock to Bancorp for a total of $1,000. At the Effective Date of the
Merger, the shares of the Subsidiary will be converted into shares of the Bank.
(2) In order to organize Bancorp, 100 shares of its Common Stock were issued to
Steven A. Rosso, President and Chief Executive Officer of the Bank, for a total
of $1,000. On the Effective Date of the Merger, such shares will be repurchased
and canceled by Bancorp at a cash price equal to that paid by Mr. Rosso.
(3) Estimated total expenses of the Merger, including legal and accounting fees,
of $75,000 are not reflected in the table.
(4) Represents net unrealized losses on available-for-sale investment securities
of $86,419, net of $30,712 in tax benefits.
19
BOOK VALUE OF BANK'S COMMON STOCK
The table below shows the per share book value of the Bank's Common Stock
on an undiluted basis as of December 31, 2000 and 2001.
Book Value
----------
December 31, 2000 $10.03
December 31, 2001 $12.34
PACIFIC STATE BANK
General
The Bank is a California state-chartered bank which since 1987 has engaged
in a general commercial banking business, primarily in Stockton and San Joaquin
County, and offers commercial banking services to residents and employers of
businesses in the Bank's service area, including professional firms and small to
medium sized retail and wholesale businesses and manufacturers. The Bank as of
January 28, 2002 had 56 employees, including 25 officers. The Bank does not
engage in any non-bank lines of business. The business of the Bank is not to any
significant degree seasonal in nature. The Bank has no operations outside
California and has no material amount of loans or deposits concentrated among
any one or few persons, groups or industries. However, about 61% of the Bank's
loan portfolio is concentrated in real estate loans which are secured by
commercial or residential real estate. The Bank is a member of the Federal
Reserve System.
The focus of the Bank's business plan is to attract "middle market"
accounts, but not to the exclusion of any other business which the Bank can
reasonably and profitably attract. In order to provide a level of service to
attract such customers, the Bank has structured its specific services and
charges on a basis which management believes to be profitable, taking into
consideration other aspects of the account relationship. The Bank offers a range
of banking services to its customers intended to attract the following specific
types of accounts: relatively large consumer accounts; professional group and
association accounts, including the accounts of groups or firms of physicians,
dentists, attorneys, real estate developers and accountants; and accounts of
small to medium-sized businesses engaged in retail, wholesale, light industrial
and service activities.
The Bank's main office is located at 6 S. El Dorado Street; additional
branches are located elsewhere in Stockton and in the communities of Angels
Camp, Arnold, Groveland, Modesto and Tracy, California. Executive offices are
located at 1889 W. March Lane, adjacent to the Bank's second Stockton branch.
Total deposits of $111.1 million as of December 31, 2001, were held by the Bank,
$25.8 million (23.2%) in the Main Office, $32.0 million (28.8%) in the March
Lane (Stockton) branch, $17.5 million (15.8%) in the Modesto branch, $10.7
million (9.6%) in the Angels Camp branch, $5.9 million (5.3%) in the Arnold
branch, $7.8 million (7.0%) in the Groveland branch and $11.4 million (10.3%) in
the Tracy branch.
Recent Acquisition
On December 6, 2001 the Bank entered into agreement with California Bank &
Trust, San Diego, ("CBT") to purchase assets and liabilities of CBT consisting
chiefly of loans and deposits located at CBT's branch office (the "Branch")
located at 4603 N. Pershing Avenue in Stockton (the "P&A Transaction"). The P&A
Transaction closed on March 15, 2002, at which time CBT closed the Branch and
all assets and liabilities acquired by the Bank were relocated to the Bank's
March Lane office. Included in the transfer of assets and liabilities were
approximately $7.9 million in loans, approximately $22.4 million in deposits,
safe deposit boxes and the ATM located at the Branch, and all related CBT
records. Under the agreement with CBT, the Bank agreed to offer probationary
employment (for at least 90 days) to all employees of the Branch upon terms and
conditions substantially identical to those in effect at CBT. In addition, CBT
agreed that it would not, for a period of 18 months after the closing, seek to
20
establish a new branch within the geographic area served by the Branch. CBT also
agreed to limitations on its ability to solicit deposits, loans or other
business from depositors or borrowers at the Branch as of the date the agreement
was entered into.
The purchase price of the assets acquired by the Bank in the P&A
Transaction was approximately $1,221,590, including (1) a "premium" equal to 5%
of the average daily balances of the assumed deposits for the 10 business days
ending on the last business day prior to the closing date of the P&A
Transaction, (2) the aggregate amount of cash on hand at the Branch as of the
closing, and (3) the aggregate unpaid principal balance of the acquired loans,
including accrued interest. The purchase price is subject to adjustment within
60 days in order to allow the parties time to verify their closing statements;
during the same period, the Bank may put back to CBT any loan acquired, with an
appropriate adjustment to the final purchase price.
The closing of the P&A Transaction was subject to and received the
approval of the Commissioner of Financial Institutions and of a majority of the
outstanding shares of the Bank. At the closing of the P&A Transaction, CBT
exercised its option, granted in the agreement with the Bank, to acquire 37,000
shares, or approximately 4.9% of the outstanding shares, of the Bank's Common
Stock at the price of $13.00 per share.
The P&A Transaction had no federal income tax consequences for customers,
depositors or shareholders of the Bank. With respect to the Bank, the
acquisition will be treated as a purchase of assets for income tax purposes. A
portion of the purchase price will be allocated to each asset purchased. The
allocated purchase price will be the tax basis of the respective assets and will
be capitalized, depreciated, amortized or expensed according to the nature of
the asset. Personal property will be depreciated using the various asset lives
and depreciation methods prescribed by the tax law. For tax purposes only, the
deposit premium will be amortized over 15 years on a straight-line basis.
Markets and Competition
The basic marketing strategy of the Bank is to retain the Bank's initial
market share and to increase the Bank's penetration of the market over the long
term via an East and West expansion plan in small to medium sized communities.
The Bank attempts to accomplish this by providing a full range of personalized
banking services to small and medium size businesses, professionals and
individuals within Calaveras, San Joaquin, Stanislaus and Tuolumne Counties.
The Bank's marketing plan aims to provide for strong continuity in
banker-customer relationships, a high degree of convenience for customers, a
prompt response in the handling of loan requests, and personal attention to
problems of individual customers. The marketing plan also includes a commitment
to lend the Bank's deposits back into the areas from which they are derived,
thereby assisting in the building activity, population growth and other changes,
which are occurring in the market area. By focusing the Bank's relationship
toward its community the Bank attempts to establish strong continuity with its
customers.
The Directors of the Bank are active in business development through
personal contacts and personal participation in local activities. The Directors
of the Bank have a strong commitment to community banking. They believe in
business development by actively participating in community events.
Local advertising and publicity in local papers also are used to attract
business and to acquaint potential customers with the Bank's services.
The Bank's service area consists of Calaveras, San Joaquin, Stanislaus and
Tuolumne Counties. The banking business in California generally, and
specifically in the Bank's primary market area, is highly competitive with
respect to both loans and deposits. The banking business is dominated by a
relatively small number of major banks, which have many offices operating over
wide geographic areas. Many of the major commercial banks offer certain services
(such as international, trust and securities brokerage services), which are not
offered directly by the Bank. By virtue of their greater total capitalization,
such banks have substantially higher lending limits than the Bank and
substantial advertising and promotional budgets.
21
In the past, an independent bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money-market funds, which also compete with banks. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
To compete with major financial institutions in its service area, the Bank
relies upon specialized services, responsive handling of customer needs, local
promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, which compete primarily by rate
and location of branches. For customers whose loan demands exceed the Bank's
lending limits, the Bank seeks to arrange funding for such loans on a
participation basis with its correspondent banks or other independent commercial
banks.
Patents, Trademarks, Etc.
The Bank holds no patents, registered trademarks, licenses (other than
licenses required to be obtained from appropriate banking regulatory agencies),
franchises or concessions.
Research Activities
Officers and employees of the Bank have engaged continually in marketing
activities, including the evaluation of development of new services, to enable
the Bank to retain and improve its competitive position in its service area. The
cost to the Bank for these marketing activities cannot be calculated with any
degree of certainty, although it is not considered to be material to the Bank's
operations.
Employees
As of January 28, 2002, the Bank employed 56 persons, including 25
officers. None of the Bank's employees is presently represented by a union or
covered under a collective bargaining agreement. Management of the Bank believes
that its employee relations are excellent.
Properties
The Bank owns its March Lane (Stockton), Modesto and Arnold branch
facilities. The Bank purchased the March Lane office for $866,700 in 1992. The
Bank's executive officers and support staff were relocated to the March Lane
building in 1997. During 2001 the Bank purchased an adjacent building to the
March Lane office, for $747,000, in order to expand its administrative
functions. The executive offices, finance department, central operations and
data processing will be moving into these offices. The Bank repossessed the
Modesto building and converted it to a banking branch in 1996. The Modesto land
was purchased in 1999 for $524,000. The Bank purchased the Arnold Branch for
$600,000 as part of its 1997 expansion into branches acquired from Valliwide
Bank. A portion of the building, located at 1013 Blagen Road, is leased to First
American Title. The lease is expected to generate $9,000 in 2002. During 2000
the Bank purchased a lot in Groveland and purchased a lot in Angels Camp in
order to build and relocate the current Branch offices. The new sites in both
locations will offer the Bank better visibility and demonstrate commitment to
the communities we serve. The Groveland property was purchased for $148,000, and
the Angels Camp property for $200,000. Both offices should be completed by the
third quarter 2002.
All other Bank premises are leased. The Bank's total rentals for
premises and equipment for fiscal year 2001 were approximately $267,000, and its
minimum future commitments under lease payments as of December 31, 2001, totaled
$1,723,000.
22
The Bank is currently in the eleventh year of a sixteen-year gross
level lease for its main office located at 6 South El Dorado Street in downtown
Stockton. The lease cost is $0.70 per square foot per month over the life of the
lease. The Bank's projected lease expense in 2002 will be approximately $169,000
per year.
The Bank in 1997 entered into a 5-year lease for the 3,500 square
foot building located at 358 N. Main Street, Angels Camp, California. The base
annual rental for the Angels Camp branch is $31,500. The lease expires June 30,
2002.
The Bank in 1997 assumed an existing lease for the Groveland branch,
located at 18687 Main Street, Suite B, Groveland, California. The annual rent on
the 1,392 square foot building is $17,016. The lease expired January 31, 2000
and is currently on a month-to-month basis.
In 1999, the Bank entered into a 10-year lease with two options to extend
for an additional 5 years each for the 3,861 square foot building in Tracy. The
Tracy office is located at 2850 Tracy Boulevard. The annual rent on the Tracy
office is $69,498 for the first five years at which time it will increase
annually at a rate of 3% per year.
Legal Proceedings
At times, the Bank is a defendant in legal proceedings in the ordinary
course of its business. It is the opinion of management of the Bank that the
resolution of any such proceedings pending will not have a material adverse
effect on the financial condition or results of operations of the Bank.
Management
For information regarding the Bank's management, including share ownership
of management and executive compensation, see "PROPOSAL ONE: ELECTION OF
DIRECTORS."
PACIFIC STATE BANCORP
General
Bancorp was recently incorporated for the purpose of engaging in
activities permitted for a bank holding company. Bancorp has not yet commenced
active operations. After consummation of the Merger, Bancorp will act as a
holding company for the Bank and will be a legal entity separate and distinct
from the Bank. The operations of Bancorp will be conducted at the same location
and in the same facilities as the operations of the Bank. Bancorp does not
expect to engage in activities other than the operation of the Bank in the
reasonably foreseeable future. At the present time, it is not intended that, for
the reasonably foreseeable future, the Bank will be compensated by Bancorp for
the use of its facilities or that employees, officers or directors of Bancorp
will be separately compensated by Bancorp for their services except with respect
to the issuance of Bancorp stock options in replacement of outstanding Bank
stock options. Bancorp expects to receive all of its income initially from
dividends paid to it by the Bank, and may also receive management fees if it
provides management services to the Bank.
After the Merger, the activities of Bancorp will be subject to the
supervision of the FRB. Bancorp may engage, directly or through subsidiary
corporations, in those activities closely related to banking which are
specifically permitted by law. See "SUPERVISION AND REGULATION."
Management of Bancorp
The directors of Bancorp are the same as the directors of the Bank,
namely: Michael L. Dalton, Maxwell M. Freeman, Harold Hand, M.D., Patricia A.
Hatton, M.D., Steven J. Kikuchi, Yoshikazu Mataga, Steven A. Rosso, Gary A.
Stewart, Kathleen M. Verner, and Philip B. Wallace.
23
The executive officers of Bancorp are also the same as the executive
officers of the Bank, namely: Steven A. Rosso, President and Chief Executive
Officer; Carmela D. Johnson, Executive Vice President, Chief Operating Officer
and Chief Financial Officer; and Gary Stewart, Executive Vice President and
Chief Credit Officer.
All of the above-named directors and executive officers have held their
respective offices since shortly after the incorporation of Bancorp. They will
hold office until the next annual meeting of shareholders of Bancorp or until
their successors are duly elected and qualified. No arrangements or
understandings exist between any of the directors or any other persons pursuant
to which any of the above persons have been selected as directors.
SUPERVISION AND REGULATION
General
Bancorp. Upon completion of the reorganization, Bancorp will become a bank
holding company within the meaning of the Bank Holding Company Act, and will
become subject to the supervision and regulation of the FRB. A notice
application for prior approval to become a bank holding company will be filed by
Bancorp with the FRB.
As a bank holding company, Bancorp will be required to register with the
FRB within 180 days after the reorganization is completed, and, thereafter, to
file annual reports and other information concerning its business operations and
those of its subsidiaries as the FRB may require. The FRB also has the authority
to examine Bancorp and each of its respective subsidiaries, as well as any
arrangements between Bancorp and any of its respective subsidiaries, with the
cost of any such examination to be borne by Bancorp.
In the future, Bancorp will be required to obtain the prior approval of
the FRB before it may acquire all or substantially all of the assets of any
bank, or ownership or control of voting securities of any bank if, after giving
effect to such acquisition, Bancorp would own or control more than 5 percent of
the voting shares of such bank.
A bank holding company and its subsidiaries are also prohibited from
engaging in certain tie-in arrangements in connection with extensions of credit,
leases, sales, or the furnishing of services. For example, the Bank will
generally be prohibited from extending credit to a customer on the condition
that the customer also obtain other services furnished by Bancorp, or any of its
subsidiaries, or on the condition that the customer promise not to obtain
financial services from a competitor. Bancorp and its subsidiaries will also be
subject to certain restrictions with respect to engaging in the underwriting,
public sale and distribution of securities.
Bancorp and any subsidiaries which it may acquire or organize after the
reorganization will be deemed affiliates of Bancorp within the meaning of the
Federal Reserve Act. Loans by the Bank to affiliates, investments by Bancorp in
affiliates' stock, and taking affiliates' stock by the Bank as collateral for
loans to any borrower will be limited to 10 percent of the Bank's capital, in
the case of each affiliate, and 20 percent of the Bank's capital, in the case of
all affiliates. In addition, these transactions must be on terms and conditions
that are consistent with safe and sound banking practices and, in particular, a
bank and its subsidiaries generally may not purchase from an affiliate a
low-quality asset, as that term is defined in the Federal Reserve Act. Such
restrictions also prevent a bank holding company and its other affiliates from
borrowing from a banking subsidiary of the bank holding company unless the loans
are secured by marketable collateral of designated amounts.
A bank holding company is also prohibited from itself engaging in or
acquiring direct or indirect ownership or control of more than 5 percent of the
voting shares of any company engaged in nonbanking activities. One of the
principal exceptions to this prohibition is for activities found by the FRB by
order or regulation to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making these
determinations, the FRB considers whether the performance of such activities by
a bank holding company or a bank holding company subsidiary would offer
advantages to the public which outweigh possible adverse effects.
FRB Regulation Y sets out those activities which are regarded as closely
related to banking or managing or controlling banks, and thus, are permissible
activities that may be engaged in by bank holding companies subject to approval
in certain cases by the FRB. The Gramm-Leach-Bliley Act allows for a new type of
bank holding company
24
under the Bank Holding Company Act. The new bank holding company is allowed to
engage in insurance and securities underwriting, merchant banking and insurance
company portfolio investment activities. GLBA also allows bank holding companies
to engage in any activity considered "financial" in nature or incidental to such
financial activities.
Although Bancorp has no present plans, agreements or arrangements to
engage in any nonbanking activities, Bancorp may consider in the future engaging
in one or more of the above activities, subject to the approval of the FRB.
The Bank. The Bank, as a California state-chartered member bank, is
subject to the supervision and regulation of the Commissioner of Financial
Institutions and the FRB. The Bank's deposits are insured up to the maximum
legal limits by the FDIC. Various requirements and restrictions of these
agencies affect the operations of the Bank. Federal regulations include
requirements to maintain reserves against deposits and limitations on the nature
and amount of loans which may be made and borrowings.
Under federal law, no person, acting directly or indirectly or through or
in concert with one or more persons, may acquire control of any insured
depository institution such as the Bank, unless the FDIC has been given 60 days'
prior written notice of the proposed acquisition and within that time period the
FDIC has not issued a notice disapproving the proposed acquisition, or extended
the period of time during which a disapproval may be issued. See "THE MERGER --
Required Approvals." For purposes of these provisions, "control" is defined as
the power, directly or indirectly, to direct the management or policies of an
insured depository institution or to vote 25% or more of any class of voting
securities of an insured depository institution. The purchase, assignment,
transfer, pledge or other disposition of voting stock through which any person
will acquire ownership, control or the power to vote 10% or more of a class of
voting securities of the Bank would be presumed to be an acquisition of control.
An acquiring person may request an opportunity to contest any such presumption
of control. California law has a similar provision requiring the approval of the
Commissioner to the acquisition of control of a state-chartered bank, such as
the Bank.
Capital Adequacy
Capital adequacy is a measure of the amount of capital needed to sustain
asset growth and act as a cushion for losses. Capital protects depositors and
the FDIC deposit insurance fund from potential losses and is a source of funds
for the investments the Bank needs to remain competitive. Historically, capital
has been generated principally from the retention of earnings.
Overall capital adequacy is monitored on a day-to-day basis by the Bank's
management and reported to the Bank's Board of Directors on a quarterly basis.
The Bank's regulators measure capital adequacy by using a risk-based capital
framework and by monitoring compliance with minimum leverage ratio guidelines.
Under the risk-based capital standard, assets reported on the Bank's balance
sheet and certain off-balance sheet items are assigned to risk categories, each
of which is assigned a risk weight.
This standard characterizes an institution's capital as being "Tier 1"
capital (defined as principally comprising shareholders' equity) and "Tier 2"
capital (defined as principally comprising the qualifying portion of the
allowance for loan and lease losses ("ALLL")
The minimum ratio of total risk-based capital to risk-adjusted assets,
including certain off-balance sheet items, is 8%. At least one-half (4%) of the
total risk-based capital is to be comprised of Tier 1 capital; the balance may
consist of debt securities and a limited portion of the ALLL.
The most recent notification by the Federal Reserve Bank of San Francisco
categorized the Bank as "well capitalized." To be categorized as well
capitalized, the Bank must meet the minimum ratios set forth below. There are no
conditions or events since that notification that management believes have
changed the Bank's classification.
The following table sets forth the Bank's risk-based capital ratios for
the periods indicated.
25
For Bank to be well
December 31, 2001 December 31, 2000 capitalized
----------------- ----------------- -------------------
Total Risk-Based Capital 10.3% 10.2% > 10.00%
Tier 1 Capital to Risk-Based Assets 9.2% 9.1% > 6.00%
Tier 1 Capital to Average Assets 7.8% 6.8% > 5.00%
(Leverage ratio)
Prompt Corrective Action
Prompt Corrective Action Regulations (the "PCA Regulations") of the
federal bank regulatory agencies establish five capital categories in descending
order (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized). Assignment of a bank to one
of these classifications depends upon the institution's total risk-based capital
ratio, Tier 1 risk-based capital ratio, and leverage ratio. Institutions
classified in one of the three undercapitalized categories are subject to
certain mandatory and discretionary supervisory actions, which include increased
monitoring and review, implementation of capital restoration plans, asset growth
restrictions, limitations upon expansion and new business activities,
requirements to augment capital, restrictions upon deposit gathering and
interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as a well-capitalized bank since adoption of the PCA Regulations. Bancorp will
not be subject to the PCA Regulations, but the Bank will continue to be subject
to the PCA Regulations after the Merger.
Deposit Insurance Assessments.
The Bank's deposit insurance by the FDIC was $18,565 for the year 2001;
the Bank estimates that its deposit insurance assessment for 2002 will increase
(but by an immaterial amount) due to its acquisition of an additional $___
million in deposits from California Bank & Trust. See "Recent Acquisition"
above.
Limitations on Dividends
Bancorp. Under California law, shareholders of Bancorp may receive
dividends when and as declared by its Board of Directors out of funds legally
available therefor. With certain exceptions, a California corporation may not
pay a dividend to its shareholders unless its retained earnings equal at least
the amount of the proposed dividend. California law further provides that, in
the event that sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets the following two generally stated conditions: (i) the
corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the
corporation's current assets equal at least its current liabilities or, if the
average of the corporation's earnings before taxes on income and before interest
expense for the two preceding fiscal years was less than the average of the
corporation's interest expense for such fiscal years, then the corporation's
current assets must equal at least 1 1/4 times its current liabilities.
FRB policy prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowings or other arrangements that
might adversely affect the holding company's financial position. The policy
further declares that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition. Other FRB policies forbid the payment by the bank subsidiaries to
their parent companies of management fees which are unreasonable in amount or
exceed the fair market value of the services rendered (or, if no market exists,
actual cost plus a reasonable profit).
The Bank. The Bank's ability to pay dividends is subject to certain
regulatory requirements. The California Financial Code restricts the total
dividend payment of any bank in any calendar year to the lesser of (1) the
bank's
26
retained earnings or (2) the bank's net income for its last three fiscal years,
less distributions made to shareholders' during the same three-year period. The
Bank is also subject to similar restrictions imposed by Federal law. As of
December 31, 2001, the Bank had $2,787,000 in retained earnings available for
dividends to shareholders'.
Impact of Monetary Policies
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by the Bank on its deposits
and other borrowings, and the interest rate earned by the Bank on loans,
securities and other interest-earning assets comprises the major source of the
Bank's earnings. The Bank's business is also affected by general economic
conditions and by the monetary and fiscal policies of the United States. These
policies influence, for example, the FRB's open market operations in U.S.
government securities, the reserve requirements imposed upon commercial banks,
the discount rates applicable to borrowings from the Federal Reserve System by
member banks, and other similar matters which impact the growth of the Bank's
loans, investments and deposits and the interest rates which the Bank charges
and pays. The nature and timing of any future changes in such policies and their
impact on the Bank cannot be predicted. In addition, adverse economic conditions
could make a higher provision for loan losses a prudent course and could cause
higher loan loss charge-offs, thus adversely affecting the Bank's net earnings.
Recent Legislation and Other Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank regulatory agencies. Certain of the potentially significant changes which
have been enacted recently and others which are currently under consideration by
Congress or various regulatory agencies are discussed below.
The FRB and the Secretary of the Treasury in January 2001 jointly adopted
a final rule governing merchant banking investments made by financial holding
companies. The rule implements provisions of the Gramm-Leach-Bliley Act
discussed below that permit financial holding companies to make investments as
part of a bona fide securities underwriting or merchant or investment banking
activity. The rule provides that a financial holding company may not, without
FRB approval, directly or indirectly acquire any additional shares, assets or
ownership interests or make any additional capital contribution to any company
the shares, assets or ownership interests of which are held by the financial
holding company subject to the rule if the aggregate carrying value of all
merchant banking investments held by the financial holding company exceeds:
o 30 percent of the Tier 1 capital of the financial holding company,
or
o after excluding interests in private equity funds, 20 percent of the
Tier 1 capital of the financial holding company.
A separate final rule will establish the capital charge of merchant banking
investments for the financial holding company.
The Gramm-Leach-Bliley Act ("GLBA") was enacted in late 1999. GLBA, among
other things, repeals the Glass-Steagall Act. The Glass-Steagall Act enacted in
the depression era prohibited banks from affiliating with securities firms. In
addition, GLBA allows for a new type of bank holding company under the Bank
Holding Company Act. The new bank holding company will be allowed to engage in
insurance and securities underwriting, merchant banking and insurance company
portfolio investment activities. Prior to GLBA, bank holding companies were
strictly limited in the amount of insurance and securities underwriting
activities in which they may engage.
GLBA also allows bank holding company companies to engage in any activity
considered "financial" in nature or incidental to such financial activities.
Under prior law, incidental activities are limited to those that are "banking"
in nature or incidental to such banking activities.
27
Financial activities include, as well as lending, providing insurance as
an agent, broker or as principal, issuing annuities, underwriting, and dealing
in or making a market in securities. All insurance activities that are to be
conducted must be conducted in compliance with applicable state laws. In
connection with insurance sales the United States Supreme Court case of Barnett
Bank of Marion County N.A. v. Nelson, 116 S. Ct. 1103 (1996) is followed by
GLBA, and GLBA further provides that "no state may, by statute, regulation,
order, interpretation, or other action, prevent or significantly interfere with
the ability of an insured depository institution, or a subsidiary or affiliate
thereof, to engage, directly or indirectly, either by itself or in conjunction
with a subsidiary, affiliate, or any other party, in any insurance sales,
solicitation, or cross-marketing activity."
The Community Reinvestment Act provisions in GLBA require that any new
bank holding company that is formed meet the conditions that all of the
company's insured depository institutions are well capitalized and well managed
and received at least a satisfactory rating in the most recent Community
Reinvestment Act examination.
Other key aspects of GLBA include the following:
o streamlining bank holding company supervision by defining the roles
of the FRB and other federal and state regulators;
o prohibiting FDIC assistance to affiliates and subsidiaries of banks
and thrifts;
o providing that securities activities conducted by a bank subsidiary
will be subject to regulation by the Securities and Exchange
Commission;
o providing that insurance activities conducted by a bank subsidiary
will be subject to regulation by the applicable state insurance
authority;
o replacing broker-dealer exemptions allowed to banks with limited
exemptions;
o adopting new privacy provisions which allow customers to "opt out"
of sharing nonpublic personal information with nonaffiliated third
parties, subject to certain exceptions;
o requiring ATM's which impose a fee on noncustomers to disclose on
the ATM screen the amount of the fee prior to a transaction becoming
irrevocable on the ATM;
o providing regulatory relief to smaller banks with less than $250
million in total assets with respect to the frequency of CRA
examinations. The time between examinations may be as long as five
years for small banks and savings and loans; and
o requiring plain language for federal banking agency regulations.
On October 1, 1998, the FDIC adopted two new rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first rule makes risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and requires different amounts of capital for
different risk positions in asset securitization transactions. The second rule
permits limited amounts of unrealized gains on equity securities to be
recognized for risk-based capital purposes.
In August 1997, Assembly Bill 1432 ("AB1432") was signed into law, which
provides for certain changes in the banking laws of California. Effective
January 1, 1998 AB1432 eliminated the provisions regarding impairment of
contributed capital and the assessment of shares when there is an impairment of
capital. AB1432 now allows the California Department of Financial Institutions
to close a bank, if the Department of Financial Institutions finds that the
bank's tangible shareholders' equity is less than the greater of 3% of the
bank's total assets or $1 million. AB1432 also moved administration of the Local
Agency Program from the California Department of Financial Institutions to the
California State Treasurer's office.
28
The Economic Growth and Regulatory Paperwork Reduction Act as part of the
Omnibus Appropriations Bill, was enacted on September 30, 1996 and includes many
banking related provisions. Lender liability under the Superfund is eliminated
for lenders who foreclose on property that is contaminated, provided that the
lenders were not involved with the management of the entity that contributed to
the contamination. There is a five year sunset provision for the elimination of
civil liability under the Truth in Savings Act. The Federal Reserve Board and
Department of Housing and Urban Development are to develop a single format for
Real Estate Settlement Procedures Act and Truth in Lending Act ("TILA")
disclosures. TILA disclosures for adjustable mortgage loans are to be
simplified. Significant revisions are made to the Fair Credit Reporting Act
("FCRA") including requiring that entities which provide information to credit
bureaus conduct an investigation if a consumer claims the information to be in
error. Regulatory agencies may not examine for FCRA compliance unless there is a
consumer complaint investigation that reveals a violation or where the agency
otherwise finds a violation. In the area of the Equal Credit Opportunity Act,
banks that self-test for compliance with fair lending laws will be protected
from the results of the test provided that appropriate corrective action is
taken when violations are found.
It is impossible to predict what effect the above-mentioned legislation
will have on the Bank and on the financial institutions industry in general.
Moreover, it is likely that other bills affecting the business of banks may be
introduced in the future by the United States Congress or California
legislature.
CAPITAL STOCK OF BANCORP AND THE BANK
Upon consummation of the Merger, the holders of Bank Common Stock will
become shareholders of Bancorp and receive one share of Bancorp Common Stock for
each of their shares of Bank Common Stock. Immediately following the Merger, the
Bank's shareholders will hold all of the outstanding shares of Bancorp Common
Stock and be the only shareholders of Bancorp. While the classes of authorized,
and the number of outstanding, shares of stock are the same for Bank and
Bancorp, there are certain differences under California law between the rights
of shareholders of Bancorp as opposed to the Bank. Shareholders should consider
carefully the differences in Bancorp Common Stock and Bank Common Stock under
California law.
Authorized Capital. The Bank currently has an authorized capitalization of
12,000,000 shares of no par value Common Stock and 2,000,000 shares of Preferred
Stock. As of March 18, 2002, 806,437 shares of Bank Common Stock were issued and
outstanding, 175,584 shares of Common Stock were reserved for issuance upon
exercise of options pursuant to the Bank's 1987 and 1997 Plans, and no shares of
Preferred Stock were outstanding.
Bancorp currently has an authorized capitalization of 12,000,000 shares of
no par value Common Stock and 2,000,000 shares of Preferred Stock. Of such
authorized shares, 100 shares of Bancorp Common Stock are currently issued and
outstanding (and will be repurchased by Bancorp upon consummation of the
Merger).
Pursuant to the terms of the Reorganization Agreement, Bancorp will issue
806,437 shares of its Common Stock in exchange for all of the outstanding shares
of Bank Common Stock. An additional 86,575 shares of Bancorp Common Stock will
be reserved for issuance pursuant to the 1987 and 1997 Plans to be assumed by
Bancorp. See "THE MERGER -- Conversion of Options." The balance of Bancorp's
authorized capital stock will be available to be issued when and as the Board of
Directors of Bancorp determines it advisable to do so. Such shares of capital
stock could be issued for the purpose of raising additional capital, in
connection with acquisitions of other businesses, or for other appropriate
purposes. The Board of Directors of Bancorp has the authority to issue shares of
Common Stock to the extent of the number of authorized unissued shares without
obtaining the approval of existing holders of Common Stock. The issuance of
additional shares of Bancorp Common Stock could adversely affect the voting
power of holders of Common Stock.
Voting Rights. Holders of Bank Common Stock are entitled to, and holders
of Bancorp Common Stock will be entitled to, one vote for each share held,
except that in the election of directors each shareholder has cumulative voting
rights. See "GENERAL -- Voting Securities."
29
Assessment of Shares. The outstanding shares of Bank Common Stock are
fully paid and nonassessable. The Common Stock of Bancorp is not subject to
assessment, as its Articles of Incorporation do not confer upon its Board of
Directors the authority to order such assessment.
The Bank may not repurchase shares of its own capital stock except after
application and receipt of specific approval by the Commissioner and the FRB.
Consequently, if situations arose where the Board of Directors considered a
repurchase of shares to be in the Bank's best interests, the Bank's ability to
respond would be subject to such conditions. Assuming that the Bank continues to
be well-capitalized, however (see "SUPERVISION AND REGULATION - Capital
Adequacy" above), Bancorp under current regulations of the FRB would probably
qualify to repurchase its shares without FRB or other regulatory approval,
provided that Bancorp's capital exceeds the standards for a "well-capitalized"
bank both before and after any such repurchases, its FRB examination results in
a rating of "1" or "2," and there are no unresolved supervisory issues with
respect to Bancorp.
Bylaws. The Bylaws of the Bank and of Bancorp are identical in all
material respects (including with respect to the number of authorized
directors), except with respect to provisions in the Bank's Bylaws required by
the California Financial Code and applicable only to banks. The most significant
difference is that the Commissioner may order the call of a meeting of the Board
of Directors of the Bank, but neither the Superintendent nor any other
regulatory authority has such authority with respect to Bancorp.
Articles of Incorporation. The Articles of Incorporation of the Bank and
Bancorp are substantially identical, except that the Bank's Articles of
Incorporation authorize it to engage in the commercial banking business and
Bancorp's Articles of Incorporation forbid it to engage in the banking or trust
company business or the practice of a profession permitted to be incorporated
under the California Corporations Code. Under California law, amendments to the
Bank's Articles of Incorporation require the Commissioner's approval in addition
to any shareholder approvals which may be required, and must be filed with the
California Secretary of State before they may take effect. Amendments to
Bancorp's Articles of Incorporation do not require the approval of the
Commissioner or any other regulatory authority, although shareholder approval is
required for certain amendments and all such amendments also must be filed with
the California Secretary of State before they may take effect.
Copies of the Articles of Incorporation of the Bank and Bancorp are
available at the Bank's executive office at 1889 W. March Lane, Stockton,
California 95207, to be inspected and copied during regular business hours by
any interested shareholder.
Applicability of Securities Laws. The securities of the Bank, unlike those
of Bancorp, are exempt from the registration requirements of the 1933 Act and
the California Corporate Securities Law of 1968, as amended (the "CSL"). The
effect on the Bank of such exemptions is to allow the Bank to sell its
securities without registration under such laws, although the Bank must obtain a
permit from the Commissioner to offer and sell its securities otherwise than
pursuant to employee stock option plans. In contrast to the Bank, the public
sale by Bancorp of its securities must be registered under the 1933 Act and the
CSL, unless an exemption from registration is available. The requirement that
Bancorp register its securities for public sale could increase the cost of the
sale of such securities.
Dividends. The shareholders of the Bank are entitled to dividends when and
as declared by the Bank's Board of Directors out of funds legally available
therefor, subject to the restrictions set forth in the California Financial
Code. See "SUPERVISION AND REGULATION -- Limitations on Dividends." The
shareholders of Bancorp will be entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available therefor,
subject to the restrictions set forth in the California General Corporation Law.
See "SUPERVISION AND REGULATION -- Limitations on Dividends."
Subject to the restrictions on payment of cash dividends as described
above, Bancorp may pay cash dividends depending upon the earnings of Bancorp,
management's assessment of the future capital needs of the Bank, and other
factors; however, no assurance can be given as to whether or when Bancorp may
begin paying cash or stock dividends. Dividends from the Bank are the only
source of funds available from which Bancorp in turn can pay dividends, except
to the extent that Bancorp receives management fees for any management services
it may provide to the Bank or engages
30
in other permitted income-producing activities. The ability of the Bank to pay
dividends to Bancorp is restricted by statute as described above. See
"SUPERVISION AND REGULATION -- Limitations on Dividends."
Preemptive Rights. Holders of Bank Common Stock do not, and holders of
Bancorp Common Stock will not, have preemptive rights. Bank Common Stock and
Bancorp Common Stock do not have any conversion rights, redemption rights or
sinking fund provisions applicable thereto.
Liquidation Rights. Upon liquidation of the Bank, the shareholders of Bank
Common Stock have the right to receive their pro rata portion of the assets of
the Bank distributable to shareholders. The holders of Bancorp Common Stock will
also be entitled to receive their pro rata share of the assets of Bancorp
distributable to shareholders upon liquidation.
Deregistration of Bank Common Stock. The Bank is subject to the periodic
reporting requirements of the 1934 Act, and in accordance with that statute
files reports and proxy statements with the FRB. After the Merger, the only
shares of Bank Common Stock outstanding will be owned by Bancorp. Accordingly,
after the Merger, the Bank will deregister its Common Stock and thereby
terminate its obligations to file such reports and proxy statements with the
FRB. Also after the Merger, there will no longer be any trading in Bank Common
Stock. Bancorp Common Stock, however, will be traded in the over-the-counter
market, and Bancorp will be subject to the periodic reporting requirements of
the Securities Exchange Act of 1934 and will file such reports with the
Securities Exchange Commission. See "MARKET INFORMATION REGARDING THE BANK'S AND
BANCORP'S COMMON STOCK."
INDEMNIFICATION
California Legislation
The Bank and Bancorp are subject to the California General Corporation Law
(the "CGCL"), which provides a detailed statutory framework covering limitation
of liability of directors in certain instances and indemnification of any
officer, director or other agent of a corporation who is made or threatened to
be made a party to any legal proceeding by reason of his or her service on
behalf of such corporation.
With respect to limitation of liability, the CGCL permits a California
corporation to adopt a provision in its articles of incorporation reducing or
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the fiduciary duty of care, provided that
such liability does not arise from certain proscribed conduct (including
intentional misconduct and breach of the duty of loyalty). The CGCL in this
regard relates only to actions brought by shareholders on behalf of the
corporation (i.e., "derivative actions") and does not apply to claims brought by
outside parties.
With respect to indemnification, the CGCL provides that to the extent any
officer, director or other agent of a corporation is successful "on the merits"
in defense of any legal proceeding to which such person is a party or is
threatened to be made a party by reason of his or her service on behalf of such
corporation or in defense of any claim, issue, or matter therein, such agent
shall be indemnified against expenses actually and reasonably incurred by the
agent in connection therewith, but does not require indemnification in any other
circumstance. The CGCL also provides that a corporation may indemnify any agent
of the corporation, including officers and directors, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in a third party proceeding against such person by reason of his or her services
on behalf of the corporation, provided the person acted in good faith and in a
manner he or she reasonably believed to be in the best interests of such
corporation. The CGCL further provides that in derivative suits a corporation
may indemnify such a person against expenses incurred in such a proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation and its shareholders.
Indemnification is not available in derivative actions (i) for amounts paid or
expenses incurred in connection with a matter that is settled or otherwise
disposed of without court approval or (ii) with respect to matters for which the
agent shall have been adjudged to be liable to the corporation unless the court
shall determine that such person is entitled to indemnification.
31
The CGCL permits the advancing of expenses incurred in defending any
proceeding against a corporate agent by reason of his or her service on behalf
of the corporation upon the giving of a promise to repay any such sums in the
event it is later determined that such person is not entitled to be indemnified.
Finally, the CGCL provides that the indemnification provided by the statute is
not exclusive of other rights to which those seeking indemnification may be
entitled, by bylaw, agreement or otherwise, to the extent additional rights are
authorized in a corporation's articles of incorporation. The law further permits
a corporation to procure insurance on behalf of its directors, officers and
agents against any liability incurred by any such individual, even if a
corporation would not otherwise have the power under applicable law to indemnify
the director, officer or agent for such expenses.
The Articles of Incorporation and Bylaws of the Bank and Bancorp implement
the applicable statutory framework by limiting the personal liability of
directors for monetary damages for a breach of a directors' fiduciary duty of
care and allowing the Bank and Bancorp to expand the scope of their
indemnification of directors, officers and other agents to the fullest extent
permitted by California law. The Articles of the Bank and Bancorp, pursuant to
the applicable provisions of the CGCL, also include a provision allowing the
Bank and Bancorp to include in their bylaws, and in agreements between the Bank
and Bancorp and their directors, officers and other agents, provisions expanding
the scope of indemnification beyond that specifically provided under California
law. The Bank has no such agreements in force, and no such agreements are
planned for the directors, officers or other agents of Bancorp.
Directors' and Officers' Liability Insurance.
The Bank presently maintains a policy of directors' and officers'
liability insurance. There is no assurance, however, that such coverage will
continue to be available with such breadth of coverage as the Bank deems
advisable and at reasonable expense. It is intended that the coverage provided
by the insurance be made available to the officers and directors of Bancorp
after the Merger.
Commission Position on Indemnification
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling Bancorp pursuant to
the foregoing provisions, Bancorp has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is therefore unenforceable.
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of Perry-Smith & Co. ("Perry-Smith"), certified public
accountants, serves the Bank as its auditors at the direction of the board of
directors and Audit Committee of the Bank. It is anticipated that a
representative of Perry-Smith will be present at the Annual Meeting with the
opportunity to make a statement if he or she desires to do so and will be
available to answer appropriate questions.
During 2001, the Bank paid Perry-Smith $12,700 in fees for non-audit
services, including tax advice and preparation. This amount represented
approximately 15.8% of the total fees paid to Perry-Smith during the period.
Before each professional service provided by Perry-Smith was rendered to the
Bank, such service was approved by, and its effect upon Perry-Smith's
independence was considered by, the Audit Committee.
SHAREHOLDERS' PROPOSALS
Next year's Annual Meeting of Shareholders of the Bank (and, if the Merger
occurs, Bancorp), will be held on May 8, 2003. Any shareholder desiring to
submit a proposal for action at the 2003 Annual Meeting of Shareholders which is
desired to be presented in the Bank's (or Bancorp's) Proxy Statement with
respect to such meeting, should mail such proposal by certified mail, return
receipt requested, to Pacific State Bank, 1889 W. March Lane, Stockton,
California 95207, Attention: Dr. Harold Hand, Chairman of the Board. All such
proposals must be received by the Bank not later than January 8, 2003.
Management of the Bank will have discretionary authority to vote proxies
obtained by it in connection with any shareholder proposal not submitted on or
before the deadline. Matters pertaining to such
32
proposals, including the number and length thereof, eligibility of persons
entitled to have such proposals included, and other aspects, are regulated by
the Securities Exchange Act of 1934, and regulations adopted thereunder.
OTHER MATTERS
Management is not aware of any other matters to come before the Meeting.
If any other matter not mentioned in this Proxy Statement/Prospectus is brought
before the Meeting, the persons named in this enclosed form of proxy will have
discretionary authority to vote all proxies with respect thereto in accordance
with the recommendations of management.
Stockton, California
April 15, 2002 PACIFIC STATE BANK
A COPY OF THE BANK'S ANNUAL DISCLOSURE STATEMENT WILL BE MAILED FREE OF
CHARGE TO ANY SHAREHOLDER UPON REQUEST. REQUESTS MAY BE MADE BY TELEPHONE AT
(209) 870-3200 OR BY LETTER ADDRESSED TO PACIFIC STATE BANK, 1889 W. MARCH LANE,
STOCKTON, CALIFORNIA 95207.
33
Appendix A
PLAN OF REORGANIZATION
AND
MERGER AGREEMENT
AMONG
PACIFIC STATE BANK,
PACIFIC STATE BANCORP
AND
PSB MERGER CORPORATION
MARCH, 2002
PLAN OF REORGANIZATION AND MERGER AGREEMENT
This Plan of Reorganization and Merger Agreement (the "Merger Agreement")
is entered into as of March 12, 2002 by and among Pacific State Bank (the
"Bank"), PSB Merger Corporation (the "Subsidiary"), and Pacific State Bancorp
(the "Holding Company").
RECITALS AND UNDERTAKINGS
A. The Bank is a California state-chartered bank with its principal office
in the City of Stockton, County of San Joaquin, State of California. The
Subsidiary and the Holding Company are corporations duly organized and existing
under the laws of the State of California with their principal offices in the
City of Stockton, County of San Joaquin, State of California.
B. As of the date hereof, the Bank has 12,000,000 shares of common stock
and 2,000,000 shares of preferred stock authorized and 806,437 shares of common
stock issued and outstanding and no shares of preferred stock issued or
outstanding.
C. As of the date hereof, the Subsidiary has 12,000,000 shares of common
stock and 2,000,000 shares of preferred stock authorized. Immediately prior to
the Effective Date (as such term is defined below), 100 shares of such common
stock and no shares of preferred stock will be issued and outstanding, all of
which shares will be owned by the Holding Company.
D. As of the date hereof, the Holding Company has 12,000,000 shares of
common stock and 2,000,000 shares of preferred stock authorized. Immediately
prior to the Effective Date, 100 shares of the Holding Company's common stock
and no shares of its preferred stock will be issued and outstanding.
E. The Boards of Directors of the Bank, the Holding Company and the
Subsidiary, respectively, have approved this Merger Agreement and authorized its
execution.
AGREEMENT
Section 1. General
1.1 The Merger. On the Effective Date, the Subsidiary shall be merged with
and into the Bank, with the Bank being the surviving corporation. The Bank shall
thereafter be a subsidiary of the Holding Company, and its name shall be
"Pacific State Bank."
1.2 Effective Date. The merger described herein shall become effective at
the close of business on the day (the "Effective Date") upon which an executed
counterpart of this Merger Agreement shall have been filed with the Secretary of
State of the State of California in accordance with Section 1103 of the
California General Corporation Law.
1.3 Articles of Incorporation and Bylaws. On the Effective Date, the
Articles of Incorporation of the Bank, as in effect immediately prior to the
Effective Date, shall remain the Articles of Incorporation of the Bank until
amended; the Bylaws of the Bank, as in effect
2
immediately prior to the Effective Date, shall remain the Bylaws of the Bank
until amended; the certificate of authority of the Bank issued by the
Commissioner of Financial Institutions of the State of California shall remain
the certificate of authority of the Bank; and the Bank's deposit insurance
coverage by the Federal Deposit Insurance Corporation shall remain the deposit
insurance of the Bank.
1.4 Directors and Officers. On the Effective Date, the directors and
officers of the Bank immediately prior to the Effective Date shall remain the
directors and officers of the Bank. The directors of the Bank shall serve until
the next annual meeting of shareholders of the Bank or until such time as their
successors are elected and have been qualified.
1.5 Effect of the Merger.
(a) Assets and Rights. On the Effective Date and thereafter, all
rights, privileges, franchises and property of the Subsidiary and all debts and
liabilities due or to become due to the Subsidiary including choses in action
and every interest or asset of conceivable value or benefit, shall be deemed
fully and finally and without any right of reversion vested in the Bank without
further act or deed; and the Bank shall have and hold the same in its own right
as fully as the same was possessed and held by the Subsidiary.
(b) Liabilities. On the Effective Date and thereafter, all debts,
liabilities and obligations due or to become due of, and all claims and demands
for any cause existing against, the Subsidiary shall be and become the debts,
liabilities or obligations of, or the claims or demands against, the Bank in the
same manner as if the Bank had itself incurred or become liable for them.
(c) Creditors' Rights and Liens. On the Effective Date and
thereafter, all rights of creditors of the Subsidiary and all liens upon the
property of the Subsidiary shall be preserved unimpaired, and shall be limited
to the property affected by such liens immediately prior to the Effective Date.
(d) Pending Actions. On the Effective Date and thereafter, any
action or proceeding pending by or against the Subsidiary shall not be deemed to
have abated or been discontinued, but may be pursued to judgment with full right
to appeal or review. Any such action or proceeding may be pursued as if the
merger described herein had not occurred, or with the Bank substituted in place
of the Subsidiary as the case may be.
1.6 Further Assurances. The Subsidiary agrees that at any time, or from
time to time, as and when requested by the Bank, or by its successors or
assigns, it will execute and deliver, or cause to be executed and delivered, in
its name by its last acting officers, or by the corresponding officers of the
Bank, all such conveyances, assignments, transfers, deeds and other instruments,
and will take or cause to be taken such further or other action as the Bank, or
its successors or assigns, may deem necessary or desirable in order to carry out
the vesting, perfecting, confirming, assignment, devolution or other transfer of
the interests, property, privileges, powers, immunities, franchises and other
rights transferred to the Bank in this Section 1, or otherwise to carry out the
intent and purposes of this Merger Agreement.
3
Section 2. Stock
2.1 Stock of the Subsidiary. On the Effective Date, each share of common
stock of the Subsidiary issued and outstanding immediately prior to the
Effective Date shall, by virtue of the merger described herein, be deemed to be
exchanged for and converted into one share of fully paid and nonassessable
common stock of the Bank.
2.2 Stock of the Holding Company. On the Effective Date, each share of
common stock of the Holding Company issued and outstanding immediately prior to
the Effective Date shall be repurchased by the Holding Company for the amount
paid for such shares upon their original issuance.
2.3 Stock of the Bank. On the Effective Date, each share of common stock
of the Bank issued and outstanding immediately prior to the Effective Date
shall, by virtue of the merger described herein, be deemed to be exchanged for
and converted into one share of fully paid and nonassessable common stock of the
Holding Company, in accordance with the provisions of Paragraph 2.4 hereof.
2.4 Exchange of Stock by Shareholders of the Bank. On the Effective Date
or as soon as practicable thereafter, the following actions shall be taken to
effectuate the exchange and conversion specified in Paragraph 2.3 hereof:
(a) The shareholders of the Bank of record immediately prior to the
Effective Date shall be allocated and entitled to receive for each share of
common stock of the Bank then held by them respectively one share of common
stock of the Holding Company.
(b) Subject to the provisions of Paragraph 2.4(c) hereof, the
Holding Company shall issue to the shareholders of the Bank the shares of common
stock of the Holding Company which said shareholders are entitled to receive.
(c) Thereafter, outstanding certificates representing shares of
common stock of the Bank shall represent shares of the common stock of the
Holding Company, and such certificates may, but need not, be exchanged by the
holders thereof for new certificates for the appropriate number of shares of the
Holding Company.
2.5 Other Rights to Stock.
(a) On the Effective Date and thereafter, the Bank's 1997 Stock
Option Plan shall be administered in an appropriate manner to reflect the merger
described herein; any outstanding options to purchase shares of common stock of
the Bank shall be deemed to be options granted by the Holding Company upon the
same terms and conditions, except that appropriate adjustments shall be deemed
to be made to such terms and conditions to reflect the merger described herein;
and any options thereafter granted pursuant to the 1997 Stock Option Plan, shall
be deemed to be options granted by the Holding Company.
4
(b) From time to time as and when required by the provisions of any
agreement to which the Bank or the Holding Company shall become a party after
the date hereof that provides for the issuance of shares of common stock or
other securities, either debt or equity, of the Bank or the Holding Company in
connection with a merger into the Bank of any other banking institution or the
acquisition by the Bank of the assets or stock of any other banking institution
or other corporation, the Holding Company shall issue in accordance with the
terms of any such agreement shares of its common stock or other debt or equity
securities as required by such agreement or in substitution for the shares of
common stock or other debt or equity securities of the Bank required to be
issued by such agreement, as the case may be, which the shareholders of any
other such banking institution or other corporation shall be entitled to receive
by virtue of any such agreement.
Section 3. Approvals
3.1 Shareholder Approval. This Merger Agreement shall be submitted to the
shareholder(s) of the Holding Company, the Subsidiary and the Bank for
ratification and confirmation to the extent required by, and in accordance with,
applicable provisions of law.
3.2 Regulatory Approvals. Each of the parties hereto shall proceed
expeditiously and cooperate fully in procuring all other consents and approvals,
and in satisfying all other requirements, prescribed by law or otherwise,
necessary or desirable for the merger described herein to be consummated,
including without limitation the consents and approvals referred to in
Paragraphs 4.1(b), 4.1(c) and 4.1(d) hereof.
Section 4. Conditions Precedent, Termination and Payment of Expenses
4.1 Conditions Precedent to the Merger. Consummation of the merger
described herein is conditioned upon the following:
(a) Approval of this Merger Agreement by the shareholders of the
Holding Company, the Subsidiary and the Bank in accordance with applicable
provisions of law;
(b) Procuring all other consents and approvals and satisfying all
other requirements, prescribed by law or otherwise, which are necessary for the
merger described herein to be consummated, including without limitation: (i)
approval of the Federal Deposit Insurance Corporation, the Commissioner of
Financial Institutions of the State of California, and the Board of Governors of
the Federal Reserve System; (ii) qualification (or exemption from qualification)
by the California Commissioner of Corporations under the California Corporate
Securities Law of 1968, and securities administrators of other applicable
jurisdictions, with respect to the securities of the Holding Company to be
issued upon consummation of the merger, and (iii) the declaration by the
Securities and Exchange Commission of the effectiveness of a registration
statement under the Securities Act of 1933 with respect to the securities of the
Holding Company to be issued upon consummation of the merger or the automatic
effectiveness of such registration statement;
5
(c) Receipt (unless waived by each of the parties hereto) of an
opinion of counsel and/or accountants with respect to the tax consequences to
the parties and their shareholders of the merger described herein;
(d) Procuring all consents or approvals, governmental or otherwise,
which in the opinion of counsel for the Bank are or may be necessary to permit
or to enable the Bank to conduct, upon and after the merger described herein,
all or any part of the businesses and other activities that the Bank engages in
immediately prior to such merger, in the same manner and to the same extent that
the Bank engaged in such businesses and other activities immediately prior to
such merger; and
(e) Performance by each of the parties hereto of all obligations
under this Merger Agreement which are to be performed prior to the consummation
of the merger described herein.
4.2 Termination of the Merger. In the event that any condition specified
in Paragraph 4.1 hereof cannot be fulfilled, or prior to the Effective Date the
Board of Directors of any of the parties hereto reaches any of the following
determinations:
(a) The number of shares of common stock of the Bank voting against
the merger described herein makes consummation of such merger inadvisable; or
(b) Any action, suit, proceeding or claim relating to the merger
described herein, whether initiated or threatened, makes consummation of such
merger inadvisable; or
(c) Consummation of the merger described herein is inadvisable for
any other reason;
then this Merger Agreement shall terminate. Upon termination, this Merger
Agreement shall be void and have no further effect, and there shall be no
liability by reason of this Merger Agreement or the termination hereof on the
part of any of the parties hereto or their respective directors, officers,
employees, agents or shareholders.
4.3 Expenses of the Merger. All of the expenses of the merger described
herein, including without limitation filing fees, printing costs, mailing costs,
accountant's fees and legal fees, shall be apportioned and adjusted between the
Bank and the Holding Company as shall be required by applicable law, regulation
or rules of accounting, provided that, nothing herein shall forbid the Bank from
paying (after consummation of the merger) any dividend to the Holding Company
which the Holding Company may use for the payment of any such expenses.
6
IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement
to be executed by their duly authorized officers as of the day and year first
above written.
PACIFIC STATE BANK
By: /s/ Steven A. Rosso
-------------------------------------------------------
Steven A. Rosso, President and Chief Executive Officer
By: /s/ Steven J. Kikuchi
-------------------------------------------------------
Steven J. Kikuchi, Secretary
PSB MERGER CORPORATION
By: /s/ Steven A. Rosso
-------------------------------------------------------
Steven A. Rosso, President and Chief Executive Officer
By: /s/ Steven J. Kikuchi
-------------------------------------------------------
Steven J. Kikuchi, Secretary
PACIFIC STATE BANCORP
By: /s/ Steven A. Rosso
-------------------------------------------------------
Steven A. Rosso, President and Chief Executive Officer
By: /s/ Steven J. Kikuchi
-------------------------------------------------------
Steven J. Kikuchi, Secretary
7
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
California Legislation
The Bank and Bancorp are subject to the California General Corporation Law
(the "CGCL"), which provides a detailed statutory framework covering limitation
of liability of directors in certain instances and indemnification of any
officer, director or other agent of a corporation who is made or threatened to
be made a party to any legal proceeding by reason of his or her service on
behalf of such corporation.
With respect to limitation of liability, the CGCL permits a California
corporation to adopt a provision in its articles of incorporation reducing or
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the fiduciary duty of care, provided that
such liability does not arise from certain proscribed conduct (including
intentional misconduct and breach of the duty of loyalty). The CGCL in this
regard relates only to actions brought by shareholders on behalf of the
corporation (i.e., "derivative actions") and does not apply to claims brought by
outside parties.
With respect to indemnification, the CGCL provides that to the extent any
officer, director or other agent of a corporation is successful "on the merits"
in defense of any legal proceeding to which such person is a party or is
threatened to be made a party by reason of his or her service on behalf of such
corporation or in defense of any claim, issue, or matter therein, such agent
shall be indemnified against expenses actually and reasonably incurred by the
agent in connection therewith, but does not require indemnification in any other
circumstance. The CGCL also provides that a corporation may indemnify any agent
of the corporation, including officers and directors, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in a third party proceeding against such person by reason of his or her services
on behalf of the corporation, provided the person acted in good faith and in a
manner he or she reasonably believed to be in the best interests of such
corporation. The CGCL further provides that in derivative suits a corporation
may indemnify such a person against expenses incurred in such a proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation and its shareholders.
Indemnification is not available in derivative actions (1) for amounts paid or
expenses incurred in connection with a matter that is settled or otherwise
disposed of without court approval or (ii) with respect to matters for which the
agent shall have been adjudged to be liable to the corporation unless the court
shall determine that such person is entitled to indemnification.
The CGCL permits the advancing of expenses incurred in defending any
proceeding against a corporate agent by reason of his or her service on behalf
of the corporation upon the giving of a promise to repay any such sums in the
event it is later determined that such person is not entitled to be indemnified.
Finally, the CGCL provides that the indemnification provided by the statute is
not exclusive of other rights to which those seeking indemnification may be
entitled, by bylaw, agreement or otherwise, to the extent additional rights are
authorized in a corporation's articles of incorporation. The law further permits
a corporation to procure insurance on behalf of its directors, officers and
agents against any liability incurred by any such individual, even if a
corporation would not otherwise have the power under applicable law to indemnify
the director, officer or agent for such expenses.
The Articles of Incorporation and Bylaws of the Bank and Bancorp implement
the applicable statutory framework by limiting the personal liability of
directors for monetary damages for a breach of a directors' fiduciary duty of
care and allowing the Bank and Bancorp to expand the scope of their
indemnification of directors, officers and other agents to the fullest extent
permitted by California law. The Articles of the Bank and Bancorp, pursuant to
the applicable provisions of the CGCL, also include a provision allowing the
Bank and Bancorp to include in their bylaws, and in agreements between the Bank
and Bancorp and their directors, officers and other agents, provisions expanding
the scope of indemnification beyond that specifically provided under California
law.
Directors' and Officers' Liability Insurance
The Bank presently maintains a policy of directors' and officers'
liability insurance. There is no assurance, however, that such coverage will
continue to be available with such breadth of coverage as the Bank deems
advisable and at reasonable expense. It is intended that the coverage provided
by the insurance be made available to the officers and directors of Bancorp upon
consummation of the Merger.
Item 21. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed as part of this Registration
Statement:
2 Plan of Reorganization and Merger Agreement
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Specimen form of certificate for Bancorp Common Stock
5 Opinion and consent of Shapiro Buchman Provine Patton LLP as
to the validity of the securities to be registered
8 Opinion and consent of Perry-Smith & Co. with respect to tax
matters
10.1 Lease Agreement for Main Office
10.2 Lease Agreement, Angels Camp Branch
10.3 Lease Agreement, Tracy Branch Office
10.4 Employment Agreement (Steven A. Rosso)
10.5 Pacific State Bank 1987 Stock Option Plan
10.6 Pacific State Bank 1997 Stock Option Plan
10.7 Pacific State Bank Closing Escow Statements on 1899 March Lane
10.8 Purchase and Assumption Agreement dated December 6, 2001
13 The portions of the Pacific State Bank 2001 Annual Report to
Shareholders which have been incorporated by reference herein
are filed with the Commission. The portions which have not
been incorporated herein are provided for information purposes
only
23.1 Consent of Shapiro Buchman Provine Patton LLP (contained in
its opinion included as Exhibit 5 hereto)
23.2 Consent of Perry-Smith & Co. (contained in its opinion
included as Exhibit 8 hereto)
24 Power of Attorney
99 Form of Proxy to be utilized in connection with the Annual
Meeting of Shareholders of the Bank
II-5
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan o
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8 and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
Prospectus which is a part of this Registration Statement by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering Prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters in addition to the
information called for by other Items of the applicable form.
The Registrant undertakes that every Prospectus (i) that is filed pursuant to
Paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Registrant hereby undertakes to respond to requests for information that is
incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
duly caused this Registration Statement on Form S-4 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stockton, State of
California, on March 26, 2002.
PACIFIC STATE BANCORP
By: /s/ Steven A. Rosso
-----------------------------------------
Steven A. Rosso
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: March 26, 2002 /s/ Steven A. Rosso
-----------------------------------------
Steven A. Rosso, President and
Chief Executive Officer
Date: March 26, 2002 /s/ Carmela Johnson
--------------------------------------------
Carmela Johnson, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
II-7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven A. Rosso and Carmela Johnson, and each or
any one of them, his true and lawful attorney-in-fact and agent, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Date: March 12, 2002 /s/ Michael L. Dalton
--------------------------------------------------
Michael L. Dalton, Director
Date: March 13, 2002 /s/ Maxwell M. Freeman
--------------------------------------------------
Maxwell M. Freeman, Director
Date: March 12, 2002 /s/ Harold Hand
--------------------------------------------------
Harold Hand, Director and Chairman
Date: March 12, 2002 /s/ Patricia A. Hatton
--------------------------------------------------
Patricia A. Hatton, Director
Date: March 14, 2002 /s/ Steven J. Kikuchi
--------------------------------------------------
Steven J. Kikuchi, Director and Secretary
Date: March 12, 2002 /s/ Yoshikazu Mataga
--------------------------------------------------
Yoshikazu Mataga, Director
Date: March 12, 2002 /s/ Steven A. Rosso
--------------------------------------------------
Steven A. Rosso, Director
Date: March 12, 2002 /s/ Gary A, Stewart
--------------------------------------------------
Gary A. Stewart, Director
Date: March 12, 2002 /s/ Kathleen M. Verner
--------------------------------------------------
Kathleen M. Verner, Director
Date: March 12, 2002 /s/ Philip B. Wallace
--------------------------------------------------
Philip B. Wallace, Director
II-8
Exhibit Sequential
No. Exhibit Name Page No.
- ------- ------------ ----------
2 Plan of Reorganization and Merger Agreement
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Specimen form of certificate for Bancorp Common Stock
5 Opinion and consent of Shapiro Buchman Provine Patton LLP
as to the validity of the securities to be registered
8 Opinion and consent of Perry-Smith & Co. with respect
to tax matters
10.1 Lease Agreement for Main Office
10.2 Lease Agreement, Angels Camp Branch
10.3 Lease Agreement, Tracy Branch Office
10.4 Employment Agreement (Steven A. Rosso)
10.5 Pacific State Bank 1987 Stock Option Plan
10.6 Pacific State Bank 1997 Stock Option Plan
10.7 Pacific State Bank Closing Escow Statements on
1899 March Lane
10.8 Purchase and Assumption Agreement dated December 6, 2001
13 The portions of the Pacific State Bank 2001 Annual Report to
Shareholders which have been incorporated by reference herein
are filed with the Commission. The portions which have not
been incorporated herein are provided for information purposes
only
23.1 Consent of Shapiro Buchman Provine Patton LLP (contained in
its opinion included as Exhibit 5 hereto)
23.2 Consent of Perry-Smith & Co. (contained in its opinion
included as Exhibit 8 hereto)
24 Power of Attorney
99 Form of Proxy to be utilized in connection with the Annual
Meeting of Shareholders of the Bank